<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 QUARTER ENDED SEPTEMBER 30, 2000
OR
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
COMMISSION FILE NUMBER 000-31123
---------------
INTRINSIX CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Massachusetts 04-2891898
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
33 Lyman Street
Westboro, Massachusetts 01581
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES & ZIP CODE)
Registrant's telephone number, including area code: (508) 836-4100
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 November 14, 2000, there were outstanding 10,545,699 shares of the
Registrant's Common Stock, no par value per share.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets............................... 3
Condensed Consolidated Statements of Operations..................... 4
Condensed Consolidated Statements of Cash Flows..................... 5
Notes to Condensed Condensed Consolidated Financial Statements...... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 15
Item 2. Changes in Securities and Use of Proceeds........................... 15
Item 6. Exhibits and Reports on Form 8-K.................................... 16
SIGNATURES............................................................................ 17
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTRINSIX CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
---------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 231,302 $ 415,904
Accounts receivable, net of allowance for doubtful accounts of
$133,000 and $235,000 in 1999 and 2000,
respectively................................................... 3,329,033 7,113,098
Unbilled accounts receivable..................................... 888,836 659,401
Prepaid expenses and other current assets........................ 401,108 1,906,462
---------- -----------
Total current assets........................................... 4,850,279 10,094,865
Property and equipment, net....................................... 1,349,525 2,006,762
Other assets...................................................... 59,062 154,153
Goodwill, net..................................................... 1,374,547 1,223,148
---------- -----------
Total assets................................................... $7,633,413 $13,478,928
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 359,212 $ 362,861
Line of credit................................................... -- 2,500,000
Accounts payable................................................. 983,402 1,810,422
Accrued compensation and benefits................................ 952,937 1,839,090
Accrued income taxes............................................. 529,106 269,451
Other accrued expenses........................................... 334,148 779,439
Deferred tax liabilities......................................... 55,657 55,657
---------- -----------
Total current liabilities...................................... 3,214,462 7,616,920
---------- -----------
Long-term debt, less current portion.............................. 1,015,689 793,077
---------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, no par value, 70,000,000 shares authorized;
11,755,253 shares issued in 1999 and 2000........................ 272,798 982,587
Retained earnings................................................. 3,324,235 4,095,717
Treasury stock, 1,713,446 and 1,216,785 shares at cost in
1999 and 2000, respectively...................................... (193,771) --
Accumulated other comprehensive loss.............................. -- (9,373)
---------- -----------
Total stockholders' equity..................................... 3,403,262 5,068,931
---------- -----------
Total liabilities and stockholders' equity................... $7,633,413 $13,478,928
========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
INTRINSIX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- --------------------------------
1999 2000 1999 2000
--------------- ------------- ------------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................................... $ 7,721,905 $12,485,029 $22,546,428 $33,857,887
Cost of revenues (includes stock-based
compensation of $0 and $157,850
for the three months ended
September 30, 1999 and 2000, respectively
and $0 and $452,966 for the
nine months ended September 30, 1999 and
2000, respectively)................................. 4,496,433 6,429,451 13,675,380 18,564,450
----------- ----------- ----------- -----------
Gross profit........................................... 3,225,472 6,055,578 8,871,048 15,293,437
Operating expenses:
Research and development expenses..................... 196,118 606,789 733,946 1,311,214
Selling, general and administrative
expenses (includes stock-based compensation of
$0 and $60,973 for the three months ended
September 30, 1999 and 2000, respectively,
and $0 and $174,968 for the nine months ended
September 30, 1999 and 2000, respectively).......... 2,360,421 4,602,537 6,834,973 12,090,402
----------- ----------- ----------- -----------
Total operating expenses............................ 2,556,539 5,209,326 7,568,919 13,401,616
----------- ----------- ----------- -----------
Operating income....................................... 668,933 846,252 1,302,129 1,891,821
Other income (expense):
Other income.......................................... 3,503 9,424 13,541 9,424
Interest expense...................................... (4,822) (103,942) (29,889) (193,309)
----------- ----------- ----------- -----------
Total other expense................................. (1,319) (94,518) (16,348) (183,885)
Income before income tax provision..................... 667,614 751,734 1,285,781 1,707,936
Income tax provision................................... 271,854 405,432 523,108 936,453
----------- ----------- ----------- -----------
Net income............................................. $ 395,760 $ 346,302 $ 762,673 $ 771,483
=========== =========== =========== ===========
Basic earnings per share............................... $0.04 $0.03 $0.08 $0.07
=========== =========== =========== ===========
Diluted earnings per share............................. $0.03 $0.03 $0.06 $0.06
=========== =========== =========== ===========
Shares for basic computation........................... 9,941,506 10,442,963 9,902,836 10,290,184
=========== =========== =========== ===========
Shares for diluted computation......................... 12,170,062 13,652,442 11,896,202 13,568,062
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
INTRINSIX CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
Cash flows from operating activities:
Net income ................................ $ 762,672 $ 771,483
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization............ 449,612 817,796
Bad debt expense......................... 86,081 103,309
Gain on disposal of assets............... 48,666 --
Stock-based compensation................. -- 627,934
Deferred income taxes.................... (120,850) --
Changes in assets and liabilities (net
of effect from acquisitions):
Accounts receivable.................... (1,290,350) (3,887,374)
Unbilled accounts receivable........... 15,726 229,435
Prepaid expenses and other current
assets................................ 14,002 (1,600,447)
Accounts payable....................... 165,193 827,020
Accrued expenses....................... 448,670 1,331,444
Accrued income taxes................... 376,665 (259,655)
----------- -----------
Net cash provided by (used for)
operating activities................ 956,087 (1,039,055)
Cash flows from investing activities -
Purchase of property and equipment......... (431,302) (1,323,636)
Cash flows from financing activities:
Net increase (decrease) in line of
credit................................... (350,000) 2,500,000
Repayments of long-term debt............... (47,394) (218,963)
Issuance of common stock from treasury
for cash................................. 17,900 275,629
----------- -----------
Net cash (used in) provided by financing
activities................................ (379,494) 2,556,666
Effect of exchange rate changes on cash..... -- (9,373)
----------- -----------
Net increase in cash........................ 145,291 184,602
Cash and cash equivalents, beginning of
period..................................... 235,504 231,302
----------- -----------
Cash and cash equivalents, end of period.... $ 380,795 $ 415,904
=========== ===========
Supplemental cash flow information:
Cash paid for interest..................... $ 29,536 $ 194,042
=========== ===========
Cash paid for income taxes................. $ 274,213 $ 1,192,567
=========== ===========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
INTRINSIX CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Intrinsix Corp. and its subsidiaries, together referred to as the
"Company," are providers of advanced electronic design services to systems
original equipment manufacturers and semiconductor companies. The Company
designs semiconductor devices, as well as the accompanying system-level hardware
and software that comprise advanced electronic products. The Company operates
primarily in the United States of America, and has recently opened facilities in
Canada and Europe.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The information set forth in these statements is unaudited and may be
subject to normal year-end adjustments. The information reflects all
adjustments that, in the opinion of management, are necessary to present a fair
statement of the results of operations of the Company for the periods indicated.
Results of operations for the interim period ended September 30, 2000 are not
necessarily indicative of the results of operations for the full fiscal year.
Certain information in footnote disclosure normally included in financial
statements has been condensed or omitted in accordance with the rules and
regulation of the Securities and Exchange Commission. These statements should
be read in conjunction with the Company's audited financial statements for the
year ended December 31, 1999 included in its Registration Statement (File No.
333-33920) on Form S-1.
Stock Split--The accompanying financial statements reflect a 3-for-2 split
of the Company's common stock which was effected on April 19, 2000. All share
and per share information herein has been retroactively restated to reflect this
split.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates--The preparation of financial statements in accordance
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition--Revenues from design services are recognized as the
services are provided, provided that no significant obligations remain and
collection of the receivable is considered probable. Generally, contracts call
for billings on a time and materials basis; however, in instances when a fixed
fee contract is signed, revenue is recognized on a percentage-of-completion
basis based on labor costs expended relative to total expected labor costs to
complete the contract. Revenues recognized in excess of billed amounts are
accumulated as unbilled receivables, and are generally billed in accordance with
prearranged schedules negotiated with the client. Billings in excess of revenues
earned would be accumulated as deferred revenue; however, to date, revenues
recognized on fixed fee contracts have exceeded amounts billed. None of the
fixed fee contracts entered into by the Company requires retainage or holdbacks
of any portion of the agreed fee. In the event that costs to complete a given
contract would exceed the related revenues, a loss would be recognized for those
excess costs when such a loss is determined to have occurred; to date, there
have been no losses on fixed fee contracts.
6
<PAGE>
Major Customers-- Major customers accounted for the following percentages
of the Company's revenues and accounts receivable as follows:
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------------
1999 2000
---------- -------------------------
ACCOUNTS
REVENUES REVENUES RECEIVABLE
---------- ---------- ------------
Customer A....... 24% 22% 30%
Customer B....... 14% 7% 18%
Customer C....... 4% 8% 21%
No other customers accounted for more than 10% of revenue or accounts
receivable in any of the periods presented.
Earnings Per Share--Net income per share has been computed using the
weighted-average number of shares of common stock outstanding during each
period. Diluted amounts per share include the impact of the Company's
outstanding options.
The following is a reconciliation of shares used in the basic computation
to shares used in the diluted computation:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used in basic computation....... 9,941,506 10,442,963 9,902,836 10,290,184
Potential common shares from options... 2,228,556 3,209,476 1,993,366 3,277,878
---------- ---------- ---------- ----------
Shares used in diluted computation..... 12,170,062 13,652,442 11,896,202 13,568,062
========== ========== ========== ==========
</TABLE>
Newly Issued Accounting Standards--During 1998, SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," was issued by the Financial
Accounting Standards Board. This statement is effective for fiscal years
beginning after June 15, 2000. Adoption of SFAS No. 133 is not expected to have
a material effect on financial position or the results of operations, as the
Company has not utilized such instruments to date.
In December 1999, the Securities and Exchange Commission ("SEC") released
Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements," which sets forth the SEC's views on appropriate revenue
recognition practices. The Company believes that its current revenue recognition
practices are in accordance with accounting principles generally accepted in the
United States of America.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All forward-looking
statements included in this report are based on information available to us, up
to and including, the date of this document, and we assume no obligation to
update any such forward-looking statements. Our actual results could differ
significantly from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below, under "Certain
Factors that May Affect Our Business" and elsewhere in this report.
7
<PAGE>
COMPARATIVE RESULTS OF OPERATIONS FOR THE QUARTER AND NINE MONTHS ENDED
SEPTEMBER 30, 2000 WITH THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Results of Operations. We are an independent provider of advanced
electronic design services to systems OEMs and semiconductor companies. We
design semiconductor devices, as well as the accompanying system-level hardware
and software that comprise advanced electronics products. We deliver these
design services through three engagement models. In our outsourcing model,
employees perform services at our design centers, with limited interaction or
collaboration with our customers. In our insourcing model, employees perform
services at our customers' facilities with daily interaction with out customers.
In our E sourcing model, we use Internet technology to allow our design
engineers to collaborate with our customers remotely from our design centers.
We sell our services primarily though our direct sales force. As of September
30, 2000, we employed 209 highly skilled design engineers.
We generate revenues principally from providing electronic design services
which are typically billed on a time and materials basis and, in limited
instances, on a milestone-based fixed price basis. Revenues are recognized upon
provision of the services under time and materials contracts. Revenues under
long-term fixed-price contracts are recognized using the percentage-of-
completion method based on labor costs expended relative to total expected labor
costs to complete a contract. Revenues recognized in excess of billed amounts
are accumulated as unbilled receivables and are generally billed in accordance
with prearranged schedules negotiated with the customer. Billings in excess of
revenues earned would be accumulated as deferred revenue; however, to date,
revenues recognized on fixed fee contracts have exceeded amounts billed. Our
cost of revenues is primarily comprised of compensation paid to our design
engineers. Other components of our cost of revenues include engineering
management compensation, software design tools, technical training, and
compensation paid to a limited number of contract design engineers.
Revenues. During the three months ended September 30, 1999 and 2000,
revenues increased from $7.7 million to $12.5 million, respectively. For the
nine months ended September 30, 1999 and 2000, revenues increased from $22.5
million to $33.9 million, respectively. The principal reasons for the revenue
growth were an increase in the number of engineers engaged on billable projects
from 134 at September 30, 1999 to 209 at September 30, 2000, and an increase in
the average billings per engineer during the three-month and nine-month periods
ended September 30, 2000.
Cost of Revenues and Gross Profit. For the three months ended September
30, 1999 and 2000, gross profit increased by 87.7%, from $3.2 million to $6.1
million, respectively. This resulted in gross margin of 41.8% and 48.5% in the
three months ended September 30, 1999 and 2000, respectively. For the nine
months ended September 30, 1999 and 2000, gross profit increased by 72.4%, from
$8.9 million to $15.3 million, respectively. This resulted in gross margin of
39.3% and 45.2% in the nine months ended September 30, 1999 and 2000,
respectively. The increase in the gross profit for both the three-month and
nine-month periods was due to hiring additional design engineers. The principal
reason for the increase in gross margin for both the three-month and nine-month
periods was an increase in the average billable rates of 12.3% and 10.2%,
respectively.
Research and Development Expenses. Research and development expenses
result from the development of our proprietary software tools and design
methodologies. Research and development expenses increased from $196,118 to
$606,789 in the three months ended September 30, 1999 and 2000, respectively.
For the nine months ended September 30, 1999 and 2000, research and development
expenses increased from $733,946 to $1,311,214, respectively. The increase in
research and development expenses and the increase as a percentage of revenues
for both the three-month and nine-month periods in 2000 was primarily a result
of the increase in expenditures on staff dedicated to or participating in
research and development efforts.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses include accounting and finance department expenses,
sales and marketing expenses, recruiting expenses, corporate management
expenses, and facilities and infrastructure-related expenses. Selling, general
and administrative expenses increased from $2.4 million to $4.6 million in the
three months ended September 30, 1999 and 2000, respectively. For the nine
months ended September 30, 1999 and 2000, selling, general and administrative
expenses increased from $6.8 million to $12.1 million in the nine months ended
September 30, 1999 and 2000, respectively. This increase was primarily due to an
increase in selling, general and administrative staff from 38 to 56 people for
the periods ended September 30, 1999 and 2000, respectively.
Other Income (Expense). Other income or expense consists primarily of
interest earned on invested cash and interest payments related to long-term
debt. Interest expense increased from $4,822 to $103,942 in the three
8
<PAGE>
months ended September 30, 1999 and 2000, respectively. For the nine months
ended September 30, 1999 and 2000, interest expense increased from $29,889 to
$193,309, respectively, as a result of borrowings on our lines of credit.
Income Tax Provision. Our effective income tax rates increased from 40.7%
to 53.9% in the three months ended September 30, 1999 and 2000, respectively.
For the nine months ended September 30, 1999 and 2000, our effective income tax
rates increased from 40.7% to 54.8%, respectively. This increase in our
effective tax rate for both the three months and nine months periods was caused
by an increase in stock-based compensation, which is generally nondeductible
for tax purposes.
Liquidity and Capital Resources
Since 1986, our primary source of funding has been cash generated from
operations. In December 1999, we borrowed $1.2 million from a bank for use in
financing the purchase of the assets of the Design Division of Telexis
Corporation.
At September 30, 2000, our primary sources of liquidity consisted of cash of
approximately $415,904 and accounts receivable, both billed and unbilled, of
approximately $7.8 million. In addition, we have a credit agreement with a bank
under which the amounts outstanding at September 30, 2000 were $2.5 million. The
line of credit provides for borrowings of up to $2.5 million, based on eligible
accounts receivable. In addition, we have a term loan with the bank with a
principal balance of $1.0 million at September 30, 2000. Amounts outstanding
under the term loan are repayable in monthly installments of $25,000, plus
interest, at the bank's prime rate plus 0.5% through 2004. Borrowings under the
line of credit and term loan agreement are collateralized by all of our assets.
The agreement contains financial performance requirements related to minimum
levels of defined cash flow and quarterly net profit, and maximum amounts of
total leverage. Under the terms of the agreement, we are precluded from paying
cash dividends. The line of credit facility contained in the agreement expires
in May 2001. We are required to repay any outstanding borrowings under the
credit agreement with a portion of the proceeds of our proposed stock offering.
Our operating activities have generated or used cash of $956,087 and
$(1,039,055) in the nine months ended September 30, 1999 and 2000, respectively.
Cash generated by operations was primarily attributable to our net income before
depreciation and amortization during those periods, offset by an increase in
accounts receivable. The increase in accounts receivable was due to increased
revenue growth during the periods presented. Our stated terms extended to all
customers require payment of invoiced amounts within 30 days. Some larger
customers may, as part of their cash management strategies, delay payment for
short periods beyond these terms. As a result, depending on when revenue is
recognized during a quarter, our collection experience may either improve or
deteriorate slightly. Over time, however, we do not expect our collection
experience to differ materially from that we have enjoyed in the past. The cash
used by operations in the first nine months of 2000 was primarily attributable
to the continued increase in accounts receivable offset by our net income before
depreciation and amortization during those periods.
Cash used in investing activities was $431,302 and $1,323,636 for the nine
months ended September 30, 1999 and 2000, respectively. This use of cash was
principally for additions of computer equipment and furniture needed to equip
our engineers in the field.
Cash used by or provided in financing activities was $(379,494) and $2,556,666
for the nine months ended September 30, 1999 and 2000, respectively. These cash
inflows are primarily attributable to borrowings on available lines of credit,
net, which are used to fund the working capital growth required by our continued
expansion of the business and our revenues.
We anticipate that cash generated by operations, supplemented by our available
line of credit and the expected net proceeds of our proposed stock offering,
will be sufficient to meet our anticipated cash needs for at least the next 12
months.
9
<PAGE>
CERTAIN FACTORS THAT MAY AFFECT OUR BUSINESS
WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS DUE TO A NUMBER OF
FREQUENTLY CHANGING BUSINESS CONDITIONS, WHICH MAY CAUSE OUR STOCK PRICE TO
DECLINE.
We experience fluctuations in our operating results due to a variety of factors,
including:
. the timing and size of engagements with our customers, including
cancellations and reschedulings;
. the gain or loss of significant customers, including as a result of industry
consolidation;
. the gain or loss of engineers or other significant employees;
. increases in personnel and other costs;
. the cyclical nature of some of our target markets;
. the seasonality in revenue generation due to employee and customer vacations;
. unanticipated delays in our ability to complete customer engagements;
. changes in the mix of services we provide;
. changes in demand by the end users of our customers' products;
. market acceptance of our current and future services;
. variability of our customers' product life cycles;
. cancellations, changes or delays of deliveries to us by our suppliers,
including workstation manufacturers, software tool providers, semiconductor
manufacturers and intellectual property providers; and
. general economic conditions.
As a result of the factors listed above and our dependence on relatively few
customers whose order cycles vary significantly, our operating results could
fluctuate significantly.
We cannot accurately forecast all of the above factors. As a result, we believe
that period-to-period comparisons of our financial results are not indicative of
our future performance. Our operating results in a future quarter or
quarters may fall below the expectations of public market analysts or investors.
If this were to occur, the price of our common stock could decline.
THE FAILURE TO HIRE AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD IMPAIR OUR
ABILITY TO DEVELOP AND MARKET OUR SERVICES.
Competition for highly skilled engineering, sales and management personnel in
the electronic design services industry is intense, and we may not succeed in
attracting and retaining these personnel. We experience competition from a wide
variety of other technology companies. Many of these companies have
substantially greater ability, either through cash or equity, to attract, retain
and compensate qualified people. If we lose key personnel or are unable to
attract key personnel we will not be able to maintain our position in the market
or expand our business.
THE LOSS OF KEY MANAGEMENT COULD AFFECT OUR ABILITY TO RUN OUR BUSINESS.
Our success depends to a significant degree upon the continued contributions of
our key management, particularly James A. Gobes, Jr., our Chief Executive
Officer, and Mark A. Beal, our Chief Technical Officer. The loss of any of our
key management could adversely affect our business. We do not have employment
contracts with our key personnel.
10
<PAGE>
OUR REVENUES AND PROFITS MAY DECREASE IF WE LOSE ANY OF OUR SIGNIFICANT
CUSTOMERS.
Historically, a relatively small number of customers have accounted for a
significant portion of our revenues in any particular period. The loss of any
significant customer could cause our revenues or profits to decline. In the nine
months ended September 30, 1999 and 2000, our six largest customers accounted
for 54.2% and 48.4% of our revenues, respectively, of which Texas Instruments
represented 23.7% and 22.4%, respectively. We anticipate that sales of our
services to relatively few customers will continue to account for a significant
portion of our revenues. We do not have any long-term purchase commitments with
our significant customers. Therefore, these customers could cancel design
services contracts with limited notice and with little or no penalty.
Our dependence on a small number of customers increases the risks associated
with our potential loss of customers resulting from business combinations or
consolidations. If a customer or potential customer were acquired or combined
with another company, the resulting company could cancel development efforts or
purchase orders as part of the integration process. Although no major project
has been cancelled to date for this reason, it could occur in the future as
technology companies consolidate regularly.
OUR FAILURE TO PROVIDE SERVICES INCORPORATING CURRENT TECHNOLOGIES COULD IMPAIR
OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS.
The electronic design services industry is characterized by rapidly changing
technology, ongoing demands for greater speed and functionality, evolving
industry standards and changing customer needs. Therefore, to be competitive, we
must:
. identify emerging technological trends and industry standards in our target
markets;
. quickly and effectively incorporate leading edge technologies in our
services;
. develop new and innovative services and enhance our current services in ways
that differentiate our services from those of our competitors;
. bring services to market on a timely basis at competitive prices;
. respond effectively to technological changes or new service offerings by
others; and
. market and sell our services.
We cannot assure you that we will be able to meet the development and market
introduction schedules for our new services or enhancements to our existing
services or that these services will achieve market acceptance.
WE FACE INTENSE COMPETITION IN THE MARKET FOR ELECTRONIC DESIGN SERVICES.
Competition in the market for electronic design services is intense, and we
expect it to increase in the future. We face competition from:
. internal design service groups of electronic design automation, or EDA,
companies such as Avant!, Cadence, Mentor Graphics and Synopsys, electronic
manufacturing services, or EMS, companies such as Flextronics and Solectron,
application specific integrated circuit, or ASIC, companies such as Actel,
LSI Logic and Philips, and intellectual property and embedded software
companies such as ARM, Artisan, SiCAN and Wind River Systems; and
. independent design services companies such as Accent Design, Advanced Digital
Design, ASIC Alliance, ASIC International, First Pass, I2P and Qualis.
Furthermore, many of our existing and potential customers have the resources and
capability to internally perform electronic design services. If these customers
decided to expand and focus on the development of their internal electronic
design services, we would lose sales opportunities.
Many of the companies with internal design services groups, as well as potential
new competitors, may have longer operating histories, greater brand recognition,
larger customer bases or greater financial and marketing resources
11
<PAGE>
than we do. They may therefore be able to respond more quickly than we can to
new or emerging technologies and changes in customer requirements. They may also
be able to devote greater resources than we can to developing and promoting
their technologies and services. In addition, we may face competition from low-
cost design services groups internationally.
OUR FAILURE TO PROTECT OUR PROPRIETARY RIGHTS, OR THE COSTS OF PROTECTING THESE
RIGHTS, MAY HARM OUR ABILITY TO COMPETE.
We depend upon a combination of trademark laws, license agreements, non-
disclosure and other contractual provisions to protect proprietary rights in our
methodologies and other confidential information. Our failure to adequately
protect those rights could result in others offering similar capabilities,
potentially resulting in the loss of a competitive advantage and decreased
revenues. In addition, we attempt to protect our proprietary information through
confidentiality and license agreements with our employees and others. However,
we may not have an adequate remedy in the event these agreements are breached,
or any remedy, if our trade secrets are independently developed by others.
Despite our efforts to protect our proprietary rights, existing intellectual
property laws afford only limited protection. In addition, the laws of some
foreign countries provide only limited proprietary rights protection.
Litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. This litigation could result in substantial
costs and diversion of resources.
WE COULD BE SUBJECT TO CLAIMS OF INFRINGEMENT OF THIRD-PARTY INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSE AND LOSS OF INTELLECTUAL
PROPERTY RIGHTS.
The electronic design services industry is characterized by uncertain and
conflicting intellectual property claims and frequent intellectual property
litigation, especially regarding patent rights. From time to time, third parties
assert patent, copyright, trademark and other intellectual property rights to
technologies that are important to our business. We may receive notices of
claims that the solutions we have developed infringe or may infringe the rights
of third parties. Any litigation to determine the validity of these claims,
including claims arising through our contractual indemnification of our
customers, regardless of their merit or resolution, would likely be costly and
divert the efforts and attention of our management and technical personnel. We
cannot assure you that we would prevail in this litigation given the complex
technical issues and inherent uncertainties in intellectual property litigation.
If this litigation resulted in an adverse ruling, we could be required to:
. pay substantial damages to our customers or third parties;
. cease the use or sale of infringing services;
. discontinue the use of certain technology; or
. obtain a license under the intellectual property rights of the third party
claiming infringement, which license may not be available on reasonable
terms, or at all.
In addition, our business often involves the development of software
applications, hardware components and methodologies for specific client
engagements. We generally retain the right to use any intellectual property that
is developed during a client engagement that is of general applicability and is
not specific to the client's project. We also develop software applications for
our own internal use and we retain ownership of these applications. There can be
no assurance that clients will not demand assignment of ownership or
restrictions on our use of the work that we produce for clients in the future.
Issues relating to the ownership of rights to use software can be complicated
and there can be no assurance that disputes will not arise that affect our
ability to reuse this software which could harm our business results.
12
<PAGE>
IF WE FAIL TO SATISFY THE EXPECTATIONS OF OUR CUSTOMERS, OUR BUSINESS REPUTATION
WILL BE HARMED, AND WE MAY INCUR SIGNIFICANT UNEXPECTED EXPENSES AND LOSE SALES
OPPORTUNITIES.
Our services may prove to be inadequate or ineffective, or be based upon design
imperfections or flawed methodologies. If this happens, we may experience:
. injury to our reputation;
. project cancellations and loss of sales;
. diversion of engineering, management and financial resources; or
. increased project costs.
In addition, because our services relate to critical products, systems and
services, we may be subject to significant liability claims. Our customer
engagements restrict our ability to disclose or use proprietary information of
our customers. If we violate these restrictions, we could be subject to
significant liability claims. Our agreements with customers typically contain
provisions intended to limit our exposure to liability claims. These limitations
may not, however, preclude all potential claims from being made. Although we
have liability insurance, this coverage may not be sufficient to cover claims
sought against us. Liability claims could require us to spend significant time
and money in litigation or to pay significant damages. As a result, any of these
claims, whether or not successful, could seriously damage our reputation and our
business.
OUR LENGTHY SALES CYCLE MAKES IT DIFFICULT FOR US TO PREDICT IF OR WHEN A SALE
WILL BE MADE.
The timing of our sales may be difficult to predict because of the length of the
sales cycle and the variability of the duration of the engagements for our
services. While potential customers are evaluating our services and before they
commit a project to us, we may incur sales and marketing expenses and expend
significant management effort. Often customers can cancel an ongoing engagement
on short notice without penalty. The cancellation or reduction of our services
could cause our revenues or profits to decline.
IF WE FAIL TO ESTABLISH AND MAINTAIN OUR RELATIONSHIPS WITH KEY PARTICIPANTS IN
OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY MARKETING OUR SERVICES.
It is important to our success to establish and maintain relationships with
companies that are key technology suppliers to our customers. We believe that we
need to work closely with these suppliers to gain valuable insights into market
demands for new services and to identify and gain access to the latest
semiconductor technologies, the most advanced software tools and methodologies
and advanced intellectual property offerings. We do not have written agreements
ensuring the continued existence of these relationships. If we fail to establish
and maintain these relationships, it would become more difficult for us to
develop and market services required by our customers.
OUR RAPID GROWTH HAS STRAINED OUR RESOURCES, AND WE MAY NOT BE ABLE TO MANAGE
FUTURE GROWTH.
We have experienced a period of rapid growth and expansion, which has placed,
and continues to place, a significant strain on our resources. This growth has
required us to increase the number of our employees from 87 as of December 31,
1997 to 265 as of September 30, 2000 and the number of our design centers from
six as of December 31, 1997 to 19 as of September 30, 2000. This expansion has
resulted in increased responsibilities for our management and the need to
implement additional controls over our operations, some of which are still in
the process of being implemented. If we continue to expand our operations, we
may significantly strain our management, financial, information systems and
other resources. Moreover, we cannot be certain that our systems, procedures,
controls and existing physical facilities will be adequate to support our
operations.
AS WE ESTABLISH INTERNATIONAL OPERATIONS, WE WILL FACE NEW BUSINESS RISKS THAT
WE HAVE NOT ENCOUNTERED PREVIOUSLY.
Historically, we have not derived a significant portion of our revenues from
sales to customers outside the United States. We have one design center in
Canada. Over the next several years, we plan to establish design centers and
operations in Europe and Asia, including Germany, Israel, India and Japan. This
expansion will require additional resources and management attention and will
subject us to new regulatory, economic and political risks. Given our limited
experience in international markets, we cannot be sure that our international
expansion will be successful. In
13
<PAGE>
addition, we will face new risks in doing business internationally. These risks
could reduce demand for our services, lower the prices at which we can sell our
services, or otherwise have an adverse effect on our operating results. Among
the risks we believe are most likely to affect us are:
. longer payment cycles and problems in collecting accounts receivable;
. adverse changes in trade and tax regulations;
. the absence or significant lack of legal protection for intellectual property
rights;
. the adoption of data privacy laws or regulations;
. increase in seasonality of revenues;
. political and economic instability; and
. foreign currency exchange rate fluctuations.
WE MAY ENGAGE IN ACQUISITIONS THAT MAY HARM OUR OPERATING RESULTS, DILUTE OUR
STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
As part of our business strategy, we may make investments in complementary
companies, services or technologies that we believe would be advantageous to the
development of our business. If we acquire a company, we could have difficulty
in assimilating that company's personnel and operations. In addition, the key
personnel of the acquired company may decide not to become our employees. If we
make other types of acquisitions, we could have difficulty in assimilating the
acquired services and technologies into our operations. These difficulties could
disrupt our ongoing business, distract our management and employees and increase
our expenses. Furthermore, we may issue equity securities to pay for any future
acquisitions, which could be dilutive to our existing stockholders. We may also
incur debt or assume contingent liabilities in connection with acquisitions,
which could harm our operating results.
IF WE FAIL TO INTEGRATE OUR RECENTLY COMPLETED ACQUISITIONS EFFECTIVELY, IT
COULD ADVERSELY AFFECT OUR OPERATING EXPENSES AND COULD CAUSE US TO FAIL TO
ACHIEVE THE BENEFITS WE EXPECTED.
In 1999, we merged with Seva Technologies of Fremont, California and acquired
the assets of the Design Division of Telexis Corporation of Kanata, Ontario. The
integration of these entities may be disruptive, divert management time and
attention and result in a failure to realize the expected benefits of these
acquisitions. The problems may be accentuated since both of these entities are
located far from our headquarters and since one company is a foreign entity. If
we do not integrate these acquisitions effectively, we could fail to achieve the
benefits we expected and our business may be adversely affected.
THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY IMPACT OUR OPERATING RESULTS.
Our industry is highly dependent on the growth and performance of the
semiconductor industry which is highly cyclical and subject to rapid
technological change. From time to time, the semiconductor industry has
experienced significant economic downturns, characterized by diminished product
demand, rapid price drops and excess production capacity. This likely would
affect customers' demands for our services. Accordingly, our operating results
may vary significantly as a result of general conditions in the semiconductor
industry.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH OF THE GLOBAL COMMUNICATIONS
INFRASTRUCTURE, INCLUDING THE INTERNET.
We derive a significant portion of our revenues by providing electronic design
services to electronics and semiconductor companies whose primary markets are in
telecommunications, data communications and the Internet. We depend on the
continued growth of these markets, which largely dictates the demand for the
electronic components, devices and subsystems to which our services relate. The
continued growth of this global communications infrastructure depends on various
factors, nearly all of which are outside our control. Related risks include
that:
. this infrastructure may not be able to support the demands placed on it;
14
<PAGE>
. the performance and reliability of the networks in this infrastructure may
decline as usage grows; and
. privacy, security and authentication concerns with respect to the
transmission of confidential information over the Internet may result in
decreased usage.
Although our target markets have experienced significant growth in recent years,
they may not continue to grow as rapidly or at all. If they fail to grow, grow
more slowly than expected or decline, our operating results could be harmed.
In addition, we rely on the Internet to deliver services to many of our
customers. If the ability of our engineers to communicate and collaborate with
our customers using Internet technology diminishes, our operating results could
suffer.
YEAR 2000 IMPACT
We have not experienced any problems with our computer systems relating to such
systems being unable to recognize appropriate dates related to the year 2000. We
are also not aware of any material problems with our clients or vendors.
Accordingly, we do not anticipate incurring material expenses or experiencing
any material operational disruptions as a result of any year 2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not currently utilize any type of derivative instrument which would
subject us to significant amounts of market risk. We do utilize a line of
credit for seasonal funding of working capital, which bears interest at a bank's
prime rate plus 0.5%. The impact of a 10% increase or decrease in interest
rates during the interim period ended September 30, 2000 would have resulted in
an insignificant change in interest expense due to limited amounts of debt
outstanding during 2000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Intrinsix is subject to various legal proceedings and claims, either
asserted or unasserted, which arise in the ordinary course of business. While
the outcome of these claims cannot be predicted with certainty, management does
not believe that the outcome of any of these legal matters will have a
significant adverse effect on our consolidated results of operations or
consolidated financial position.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) Recent Sales of Unregistered Securities.
During the three months ended September 30, 2000, we issued an aggregate
of 227,300 shares of our common stock to employees of ours upon exercise of
options granted under our 2000 stock incentive plan at exercise prices ranging
from $9.00 to $9.90. We issued these securities pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
(d) Use of Proceeds.
On August 9, 2000, the Securities and Exchange Commission declared the
Registration Statement on Form S-1 (File No. 333-33920) effective (the
"Registration Statement"). On September 7, 2000 we filed a Post-Effective
Amendment No. 1 to the Registration Statement, on September 27, 2000, we filed a
Post-Effective Amendment No. 2 to the Registration Statement and on October 4,
2000, we filed a Post-Effective Amendment No. 3 to the Registration Statement.
The managing underwriters in the proposed offering are CIBC World Markets Corp.,
Robertson Stephens, Inc. and Adams Harkness & Hill, Inc. As of September 30,
2000, we had not commenced the initial public offering of shares of our common
stock due to unanticipated market conditions resulting in insufficient interest
to sell the shares being offered. Consequently no shares have been sold in the
proposed offering, and we have received no proceeds from the proposed offering.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit 27.1 Financial Data Schedule
(B) REPORTS ON FORM 8-K
None
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTRINSIX CORP.
----------------------------
(Registrant)
Dated: November 14, 2000 /s/ Brian C. Meeks
----------------------------
Brian C. Meeks
Chief Financial Officer
(Principal Financial and
Accounting Officer)
17
<PAGE>
INTRINSIX CORP.
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
18
