form_10-q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
|
For
quarterly period ended: March 31, 2010
|
|
OR
|
|
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For
the transition period from
to
Commission
File Number: 000-26887
Silicon
Image, Inc.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
77-0396307
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer I.D. Number)
|
|
|
|
1060
East Arques Avenue, Sunnyvale, California 94085
(Address
of principal executive office)(Zip Code)
(408)
616-4000
(Registrant’s
telephone number, including area code)
N/A
(Former
name, former address and former fiscal year,
if
changed since last report)
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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o No x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company.
See the definitions of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer x
|
|
|
Non-accelerated
filer o
|
Smaller
reporting company o
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No x
CLASS
|
|
OUTSTANDING
AT March 31, 2010
|
Common
Stock, $0.001 par value
|
|
76,631,556
|
Silicon
Image, Inc.
Form
10-Q for the quarter ended March 31, 2010
|
|
Part I Financial Information
(Unaudited)
|
3
|
|
3
|
|
3
|
|
4
|
|
5
|
|
6
|
|
19
|
|
28
|
|
30
|
|
30
|
|
30
|
|
30
|
|
48
|
|
48
|
|
48
|
|
48
|
|
48
|
|
49
|
Part
I. Financial Information
Item
1. Financial Statements (Unaudited)
Silicon
Image, Inc.
Condensed Consolidated Balance
Sheets
(in
thousands)
(unaudited)
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
31,036 |
|
|
$ |
29,756 |
|
Short-term
investments
|
|
|
132,241 |
|
|
|
120,866 |
|
Accounts
receivable, net of allowances for doubtful accounts
$1,348
at March 31, 2010 and $1,428 at December 31, 2009
|
|
|
17,572 |
|
|
|
21,664 |
|
Inventories,
net
|
|
|
6,519 |
|
|
|
7,746 |
|
Prepaid
expenses and other current assets
|
|
|
6,225 |
|
|
|
27,512 |
|
Deferred
income taxes
|
|
|
284 |
|
|
|
284 |
|
Total
current assets
|
|
|
193,877 |
|
|
|
207,828 |
|
Property
and equipment, net
|
|
|
13,207 |
|
|
|
14,449 |
|
Deferred
income taxes, non-current
|
|
|
2,336 |
|
|
|
2,336 |
|
Intangible
and other assets, net
|
|
|
815 |
|
|
|
825 |
|
Total
assets
|
|
$ |
210,235 |
|
|
$ |
225,438 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
11,078 |
|
|
$ |
10,141 |
|
Accrued
and other current liabilities
|
|
|
16,008 |
|
|
|
28,150 |
|
Deferred
license revenue
|
|
|
3,227 |
|
|
|
3,111 |
|
Deferred
margin on sales to distributors
|
|
|
3,706 |
|
|
|
2,944 |
|
Total
current liabilities
|
|
|
34,019 |
|
|
|
44,346 |
|
Other
long-term liabilities
|
|
|
9,260 |
|
|
|
9,573 |
|
Total
liabilities
|
|
|
43,279 |
|
|
|
53,919 |
|
Commitments
and contingencies (See Note 9)
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
94 |
|
|
|
93 |
|
Additional
paid-in capital
|
|
|
466,647 |
|
|
|
463,189 |
|
Treasury
stock
|
|
|
(107,583 |
) |
|
|
(106,562 |
) |
Accumulated
deficit
|
|
|
(193,381 |
) |
|
|
(186,139 |
) |
Accumulated
other comprehensive income
|
|
|
1,179 |
|
|
|
938 |
|
Total
stockholders’ equity
|
|
|
166,956 |
|
|
|
171,519 |
|
Total
liabilities and stockholders’ equity
|
|
$ |
210,235 |
|
|
$ |
225,438 |
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
Silicon
Image, Inc.
Condensed Consolidated Statements of
Operations
(in
thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Revenue:
|
|
|
|
|
|
|
Product
|
|
$ |
26,293 |
|
|
$ |
34,595 |
|
Licensing
|
|
|
8,016 |
|
|
|
5,917 |
|
Total
revenue
|
|
|
34,309 |
|
|
|
40,512 |
|
Cost
of revenue and operating expenses:
|
|
|
|
|
|
|
|
|
Cost
of product revenue (1)
|
|
|
14,822 |
|
|
|
18,219 |
|
Cost
of license revenue
|
|
|
23 |
|
|
|
196 |
|
Research
and development (2)
|
|
|
13,137 |
|
|
|
17,734 |
|
Selling,
general and administrative (3)
|
|
|
12,030 |
|
|
|
13,715 |
|
Restructuring
expense (Note 5)
|
|
|
585 |
|
|
|
759 |
|
Amortization
of intangible assets
|
|
|
37 |
|
|
|
1,473 |
|
Impairment
of goodwill
|
|
|
- |
|
|
|
19,210 |
|
Total
cost of revenue and operating expenses
|
|
|
40,634 |
|
|
|
71,306 |
|
Loss
from operations
|
|
|
(6,325 |
) |
|
|
(30,794 |
) |
Interest
income and other, net
|
|
|
604 |
|
|
|
939 |
|
Loss
before provision for income taxes
|
|
|
(5,721 |
) |
|
|
(29,855 |
) |
Provision
for income taxes
|
|
|
1,521 |
|
|
|
3,474 |
|
Net
loss
|
|
$ |
(7,242 |
) |
|
$ |
(33,329 |
) |
|
|
|
|
|
|
|
|
|
Net
loss per share – basic and diluted
|
|
$ |
(0.10 |
) |
|
$ |
(0.45 |
) |
Weighted
average shares – basic and diluted
|
|
|
76,013 |
|
|
|
74,421 |
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based compensation expense
|
|
$ |
184 |
|
|
$ |
199 |
|
(2)
Includes stock-based compensation expense
|
|
|
645 |
|
|
|
1,374 |
|
(3)
Includes stock-based compensation expense
|
|
|
1,331 |
|
|
|
1,992 |
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
Silicon
Image, Inc.
Condensed Consolidated Statements of Cash
Flows
(in
thousands)
(unaudited)
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,242 |
) |
|
$ |
(33,329 |
) |
Adjustments
to reconcile net loss to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
2,160 |
|
|
|
3,565 |
|
Depreciation
|
|
|
2,098 |
|
|
|
2,281 |
|
Amortization
of investment premium
|
|
|
610 |
|
|
|
829 |
|
Asset impairment
due to restructuring
|
|
|
132 |
|
|
|
- |
|
Provision
for doubtful accounts
|
|
|
59 |
|
|
|
27 |
|
Amortization
of intangible assets
|
|
|
37 |
|
|
|
1,473 |
|
Realized
loss (gain) on sale of short-term investments
|
|
|
(61 |
) |
|
|
15 |
|
Impairment
of goodwill
|
|
|
- |
|
|
|
19,210 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
9,022 |
|
Loss
on disposal of property and equipment
|
|
|
- |
|
|
|
199 |
|
Tax
deficiency from employee stock-based compensation plans
|
|
|
- |
|
|
|
(580 |
) |
Excess
tax benefits from employee stock-based transactions
|
|
|
- |
|
|
|
(8 |
) |
Gain
on derivative transactions
|
|
|
- |
|
|
|
(22 |
) |
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
4,034 |
|
|
|
(11,648 |
) |
Inventories
|
|
|
1,227 |
|
|
|
526 |
|
Prepaid
expenses and other assets
|
|
|
21,260 |
|
|
|
(6,081 |
) |
Accounts
payable
|
|
|
1,439 |
|
|
|
2,720 |
|
Accrued
and other liabilities
|
|
|
(12,588 |
) |
|
|
(1,141 |
) |
Deferred
license revenue
|
|
|
116 |
|
|
|
1,182 |
|
Deferred
margin on sales to distributors
|
|
|
762 |
|
|
|
(3,754 |
) |
Cash
provided by (used in) operating activities
|
|
|
14,043 |
|
|
|
(15,514 |
) |
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from sales of short-term investments
|
|
|
17,123 |
|
|
|
34,460 |
|
Purchases
of short-term investments
|
|
|
(29,168 |
) |
|
|
(93,453 |
) |
Purchases
of property and equipment
|
|
|
(1,401 |
) |
|
|
(491 |
) |
Proceeds
from sale of property and equipment
|
|
|
- |
|
|
|
97 |
|
Cash
used in investing activities
|
|
|
(13,446 |
) |
|
|
(59,387 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuances of common stock, net
|
|
|
1,299 |
|
|
|
1,627 |
|
Repurchase
of restricted stock units for income tax withholding
|
|
|
(1,021 |
) |
|
|
(224 |
) |
Payments
for vendor financed software and intangibles purchased
|
|
|
- |
|
|
|
(625 |
) |
Excess
tax benefits from employee stock-based transactions
|
|
|
- |
|
|
|
8 |
|
Cash
provided by financing activities
|
|
|
278 |
|
|
|
786 |
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
405 |
|
|
|
(200 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
1,280 |
|
|
|
(74,315 |
) |
Cash
and cash equivalents — beginning of period
|
|
|
29,756 |
|
|
|
95,414 |
|
Cash
and cash equivalents — end of period
|
|
$ |
31,036 |
|
|
$ |
21,099 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Restricted
stock units vested
|
|
$ |
2,569 |
|
|
$ |
625 |
|
Refund
(cash payment) for income taxes
|
|
$ |
21,500 |
|
|
$ |
(655 |
) |
Unrealized
net gain (loss) on short-term investments
|
|
$ |
(121 |
) |
|
$ |
169 |
|
Property
and equipment purchased but not paid for
|
|
$ |
367 |
|
|
$ |
323 |
|
See
accompanying Notes to Condensed Consolidated Financial Statements.
Silicon
Image, Inc.
Notes to Condensed Consolidated Financial
Statements
March
31, 2010
(unaudited)
1.
Basis of Presentation
In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements of Silicon Image, Inc. (the “Company”, “Silicon Image”,
“we” or “our”) included herein have been prepared on a basis consistent with our
December 31, 2009 audited financial statements and include all adjustments,
consisting of normal recurring adjustments, necessary to fairly state the
condensed consolidated balance sheets of Silicon Image and our subsidiaries as
of March 31, 2010 and December 31, 2009 and the related consolidated
statements of operations and cash flows for the three months ended March 31,
2010 and 2009. All significant intercompany accounts and transactions have been
eliminated. These interim financial statements should be read in conjunction
with the audited financial statements and notes thereto included in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2009. Financial
results for the three months ended March 31, 2010 are not necessarily indicative
of future financial results.
2.
Recent Accounting Pronouncements
In
October 2009, the Financial Accounting Standards Board (FASB) issued
Accounting Standards Update (ASU) No. 2009-14, Software (Accounting Standards
Codification (ASC) Topic 985) - Certain Revenue Arrangements That Include
Software Elements, a consensus of the FASB Emerging Issues Task
Force. This guidance modifies the scope of ASC subtopic 965-605, Software-Revenue Recognition
to exclude from its requirements (a) non-software components of tangible
products and (b) software components of tangible products that are sold,
licensed, or leased with tangible products when the software components and
non-software components of the tangible product function together to deliver the
tangible product’s essential functionality This update is effective for fiscal
years beginning on or after June 15, 2010. However, early adoption is
allowed. The Company is currently evaluating the impact of adopting this
update on its consolidated results of operations and financial
position.
In
October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605)
- Multiple-Deliverable Revenue Arrangements, a consensus of the FASB
Emerging Issues Task Force. This guidance modifies the fair value
requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element
Arrangements by allowing the use of the “best estimate of selling price”
in addition to vendor-specific objective evidence (VSOE) and verifiable
objective evidence (VOE) (now referred to as TPE standing for third-party
evidence) for determining the selling price of a deliverable. A vendor is now
required to use its best estimate of the selling price when VSOE or TPE of the
selling price cannot be determined. In addition, the residual method of
allocating arrangement consideration is no longer permitted. This update is
effective for fiscal years beginning on or after June 15, 2010. However,
early adoption is allowed. The Company is currently evaluating the impact
of adopting this update on its consolidated results of operations and financial
position.
In
January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and
Disclosures (ASC Topic 820) — Improving Disclosures About Fair
Value Measurements. The ASU requires new disclosures about transfers into
and out of Levels 1 and 2 and separate disclosures about purchases, sales,
issuances, and settlements relating to Level 3 measurements. It also clarifies
existing fair value disclosures about the level of disaggregation and about
inputs and valuation techniques used to measure fair value. The new disclosures
and clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the roll forward of
activity in Level 3 fair value measurements. Those disclosures are effective for
fiscal years beginning after December 15, 2010, and for interim periods within
those fiscal years. Other than requiring additional disclosures, the
adoption of this new guidance will not have a material impact on the Company’s
consolidated results of operations and financial position.
3.
Significant Accounting Policies
The
preparation of financial statements in conformity with generally accepted
accounting principles requires us to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results could differ materially from these estimates. Areas where significant
judgment and estimates are applied include revenue recognition, stock based
compensation, short-term investments, allowance for doubtful accounts, inventory
valuation, realization of long lived assets, including goodwill and intangibles,
income taxes, deferred tax assets, accrued liabilities, guarantees,
indemnifications and warranty liabilities, foreign currency, and legal matters.
The condensed consolidated financial statements include the accounts of Silicon
Image, Inc. and its subsidiaries after elimination of all intercompany balances
and transactions.
For a
discussion of the significant accounting policies, see Significant Accounting
Policies in our Annual Report on Form 10-K for the year ended December 31,
2009.
4.
Stock-Based Compensation
The
Company has a share-based compensation program that provides its Board of
Directors with broad discretion in creating equity incentives for employees,
officers and non-employee board members. This program includes incentive and
non-statutory stock option grants, restricted stock units (RSUs) and an
automatic grant program for non-employee board members pursuant to which such
individuals will receive option grants/RSUs at designated intervals over their
period of board service. These awards are granted under various plans, all of
which are stockholder approved. Stock option grants under the discretionary
grant program generally vest as follows: 25% of the shares vest on the first
anniversary of the vesting commencement date and the remaining 75% vest
proportionately each month over the next 36 months of continued service. Stock
option grants to non-employee members of our board vest monthly, over periods
not to exceed four years. Some options provide for accelerated vesting if
certain identified milestones are achieved, upon a termination of employment or
upon a change in control of the Company. RSU grants generally vest over a one to
four-year period and certain of the RSU grants also have performance based
vesting criteria. Additionally, our Employee Stock Purchase Plan (ESPP) that
allows employees to purchase shares of common stock at the lower of 85% of the
fair market value on the commencement date of the six-month offering period or
on the last day of the six-month offering period.
Valuation
and Expense Information Under Stock-based Compensation
Share-based
compensation expense recognized under FASB ASC No. 718-10-30, Initial Measurement of Stock
Compensation, consists primarily of expenses for the share-based awards
discussed above.
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes- Merton option valuation model and the straight-line attribution
approach with the following assumptions:
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Employee
stock option plans:
|
|
|
|
|
|
|
Expected
life in years
|
|
|
4.2 |
|
|
|
4.7 |
|
Expected
volatility
|
|
|
63.9 |
% |
|
|
64.8 |
% |
Risk-free
interest rate
|
|
|
2.0 |
% |
|
|
1.9 |
% |
Expected
dividends
|
|
none
|
|
|
none
|
|
Weighted
average fair value
|
|
$ |
1.41 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
0.5 |
|
|
|
0.5 |
|
Expected
volatility
|
|
|
51.7 |
% |
|
|
96.0 |
% |
Risk-free
interest rate
|
|
|
0.2 |
% |
|
|
1.2 |
% |
Expected
dividends
|
|
none
|
|
|
none
|
|
Weighted
average fair value
|
|
$ |
0.71 |
|
|
$ |
1.31 |
|
As required
by FASB ASC 718-10-35, Subsequent Measurement of Stock
Compensation, management made an estimate of expected forfeitures and is
recognizing stock-based compensation expense only for those equity awards
expected to vest. For the three months ended March 31, 2010 and 2009, 596,485
and 544,629 shares were purchased under the ESPP program, respectively. At March
31, 2010, the Company had $308,000 of total unrecognized compensation expense,
net of estimated forfeitures under the ESPP program. The unamortized
compensation expense will be amortized on a straight-line basis over a period of
approximately 0.4 year.
Stock
Options Activity
The following
is a summary of activity under the Company’s stock option plans during the three
months ended March 31, 2010, excluding RSUs (in thousands, except weighted
average exercise price):
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term in Years
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2010
|
|
|
9,644 |
|
|
$ |
8.51 |
|
|
|
5.30 |
|
|
$ |
433 |
|
Granted
|
|
|
1,013 |
|
|
|
2.79 |
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6 |
) |
|
|
1.14 |
|
|
|
|
|
|
|
|
|
Forfeitures
and cancellations
|
|
|
(276 |
) |
|
|
7.85 |
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2010
|
|
|
10,375 |
|
|
$ |
7.97 |
|
|
|
5.20 |
|
|
$ |
963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and expected to vest at March 31, 2010
|
|
|
9,467 |
|
|
|
|
|
|
|
4.90 |
|
|
$ |
848 |
|
Exercisable
at March 31, 2010
|
|
|
8,167 |
|
|
|
|
|
|
|
4.35 |
|
|
$ |
654 |
|
At March 31,
2010, the total unrecognized compensation expense related to options granted to
employees under our share-based compensation plans was approximately $5.0
million, net of estimated forfeitures. The unamortized compensation expense will
be amortized on a straight-line basis over a weighted average period of
approximately 2.7 years.
Restricted
Stock Units
The RSUs that
the Company grants to its employees typically vest ratably over a certain period
of time, subject to the employee’s continuing service to the Company over that
period. RSUs granted to non-executive employees typically vest over a period of
between two to four years. RSUs granted to executive officers typically vest
over a period of between one and four years.
RSUs are
converted into shares of the Company’s common stock upon vesting on a
one-for-one basis. The cost of the RSUs is determined using the fair value of
the Company’s common stock on the date of the grant. Compensation is recognized
on a straight-line basis over the requisite service period of each grant
adjusted for estimated forfeitures. Each RSU award granted from the 2008 Plan
will reduce the number of reserves available for issuance by 1.5
shares.
A summary of
activity with respect to the Company’s RSUs during the three months ended March
31, 2010 is as follows: (in thousands):
|
|
Number
of shares
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2010
|
|
|
2,719 |
|
|
$ |
6,798 |
|
Granted
|
|
|
448 |
|
|
|
|
|
Vested
|
|
|
(1,011 |
) |
|
|
|
|
Forfeitures
and cancellations
|
|
|
(316 |
) |
|
|
|
|
Outstanding
at March 31, 2010
|
|
|
1,840 |
|
|
$ |
5,558 |
|
|
|
|
|
|
|
|
|
|
Ending
vested and expected to vest at March 31, 2010
|
|
|
1,185 |
|
|
$ |
3,580 |
|
As of March
31, 2010, the Company had $4.0 million of total unrecognized compensation
expense, net of estimated forfeitures, related to RSUs. The unamortized
compensation expense will be recognized on a straight-line basis, and the
weighted average estimated remaining life is 2.2 years.
During the
three months ended March 31, 2010 and 2009, the Company repurchased 400,909 and
71,045 shares of stock for an aggregate value of $1.0 million and $0.2 million,
respectively, from the employees upon the vesting of their RSUs that were
granted under the Company’s 2008 Equity Incentive Plan to satisfy the
employees’ minimum statutory tax withholding requirement. The Company
will continue to repurchase shares of stock from employees as their RSUs vest to
satisfy the employees’ minimum statutory tax withholding
requirement.
Stock-based
Compensation Expense
The table
below shows total stock-based compensation expense included in the Condensed
Consolidated Statements of Operations for the three months ended March 31, 2010
and 2009 (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cost
of sales
|
|
$ |
184 |
|
|
$ |
199 |
|
Research
and development
|
|
|
645 |
|
|
|
1,374 |
|
Selling,
general and administrative
|
|
|
1,331 |
|
|
|
1,992 |
|
Income
tax benefit
|
|
|
- |
|
|
|
(613 |
) |
|
|
$ |
2,160 |
|
|
$ |
2,952 |
|
5.
Restructuring Charges and Exit Costs
Restructuring
Activities
For the three
months ended March 31, 2010, the Company recorded restructuring expense of
approximately $0.6 million, which was primarily related to the future lease
commitments on exited facilities, net of estimated sublease income,
impairment of certain fixed assets, and legal and other restructuring related
costs which were recorded as incurred.
Fiscal 2009
Restructuring Programs
In June and
October 2009, the Company’s management approved and announced restructuring
programs, which primarily included a reduction in force, to realign and focus
the Company’s resources on its core competencies and to better align its
revenues and expenses.
As of March
31, 2010, approximately $5.3 million of the costs associated with this
restructuring program remained unpaid. We expect that the severance-related
charges and other costs associated with the 2009 restructuring programs will be
substantially paid during the second quarter of fiscal year 2010 and the
facilities-related lease payments will be substantially paid by November
2012.
Fiscal 2008
Restructuring Program
As of March
31, 2010, approximately $0.2 million of the costs associated with the
restructuring plan announced in December 2008 remained unpaid. The outstanding
liability under the 2008 restructuring program represents costs associated with
exited facilities. We expect these facilities-related lease payments
to be substantially paid by July 2011.
The table
below summarizes the Company’s restructuring activities for the three
months ended March 31, 2010 (in thousands):
|
|
Employee
Severance and Benefits
|
|
|
Operating
Lease Termination
|
|
|
Fixed
Assets Impaired
|
|
|
Total
|
|
Accrued
restructuring balance as of January 1, 2010
|
|
$ |
17,052 |
|
|
$ |
261 |
|
|
$ |
- |
|
|
$ |
17,313 |
|
Additional
accruals/adjustments
|
|
|
30 |
|
|
|
423 |
|
|
|
132 |
|
|
|
585 |
|
Cash
payments
|
|
|
(11,366 |
) |
|
|
(162 |
) |
|
|
- |
|
|
|
(11,528 |
) |
Noncash
charges and adjustments
|
|
|
- |
|
|
|
- |
|
|
|
(132 |
) |
|
|
(132 |
) |
Foreign
currency changes
|
|
|
(757 |
) |
|
|
- |
|
|
|
- |
|
|
|
(757 |
) |
Accrued
restructuring balance as of March 31, 2010
|
|
$ |
4,959 |
|
|
$ |
522 |
|
|
$ |
- |
|
|
$ |
5,481 |
|
6.
Comprehensive Loss
The
components of comprehensive loss, net of related taxes, were as follows (in
thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net
loss
|
|
$ |
(7,242 |
) |
|
$ |
(33,329 |
) |
Change
in unrealized value of investments
|
|
|
(121 |
) |
|
|
169 |
|
Gain
(loss) from foreign currency hedges
|
|
|
(43 |
) |
|
|
46 |
|
Foreign
currency translation adjustments
|
|
|
405 |
|
|
|
(262 |
) |
Total
comprehensive loss
|
|
$ |
(7,001 |
) |
|
$ |
(33,376 |
) |
7.
Net Loss Per Share
Basic net
loss per share is computed using the weighted-average number of common shares
outstanding during the period, excluding shares subject to repurchase and
diluted net income per share is computed using the weighted-average number of
common shares and diluted equivalents outstanding during the period, if any,
determined using the treasury stock method. The following table sets forth the
computation of basic and diluted net loss per share (in thousands, except per
share amounts):
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Numerator:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(7,242 |
) |
|
$ |
(33,329 |
) |
Denominator:
|
|
|
|
|
|
|
|
|
Weighted
average shares – basic and diluted
|
|
|
76,013 |
|
|
|
74,421 |
|
Net
loss per share – basic and diluted
|
|
$ |
(0.10 |
) |
|
$ |
(0.45 |
) |
The
securities that were anti-dilutive and excluded from the net loss per share
calculations were approximately 11.4 million and 13.9 million for the three
months ended March 31, 2010 and 2009, respectively.
8.
Balance Sheet Components
The table
below shows the components of the Company’s inventories, property and equipment,
prepaid expense and other current assets, accrued and other current liabilities
and other long-term liabilities (in thousands).
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Inventories:
|
|
|
|
|
|
|
Raw
materials
|
|
$ |
1,971 |
|
|
$ |
2,800 |
|
Work
in process
|
|
|
1,315 |
|
|
|
916 |
|
Finished
goods
|
|
|
3,233 |
|
|
|
4,030 |
|
Total
inventories
|
|
$ |
6,519 |
|
|
$ |
7,746 |
|
|
|
|
|
|
|
|
|
|
Prepaid
expense and other current assets:
|
|
|
|
|
|
|
|
|
Income
tax receivable
|
|
$ |
- |
|
|
$ |
21,405 |
|
Others
|
|
|
6,225 |
|
|
|
6,107 |
|
|
|
$ |
6,225 |
|
|
$ |
27,512 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
|
|
|
|
|
|
Computers
and software
|
|
$ |
21,850 |
|
|
$ |
21,614 |
|
Equipment
|
|
|
27,558 |
|
|
|
27,050 |
|
Furniture
and fixtures
|
|
|
2,317 |
|
|
|
2,564 |
|
|
|
|
51,725 |
|
|
|
51,228 |
|
Less:
accumulated depreciation
|
|
|
(38,518 |
) |
|
|
(36,779 |
) |
Total
property and equipment, net
|
|
$ |
13,207 |
|
|
$ |
14,449 |
|
|
|
|
|
|
|
|
|
|
Accrued
and other current liabilities:
|
|
|
|
|
|
|
|
|
Accrued
restructuring
|
|
$ |
5,481 |
|
|
$ |
17,313 |
|
Accrued
payroll and related expenses
|
|
|
2,534 |
|
|
|
2,826 |
|
Accrued
and other liabilities
|
|
|
7,993 |
|
|
|
8,011 |
|
Total
accrued and other current liabilities
|
|
$ |
16,008 |
|
|
$ |
28,150 |
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
Non-current
liability for uncertain tax positions
|
|
$ |
9,123 |
|
|
$ |
9,344 |
|
Other
liabilities
|
|
|
137 |
|
|
|
229 |
|
Total
other long-term liabilities
|
|
$ |
9,260 |
|
|
$ |
9,573 |
|
9.
Commitments and Contingencies
Legal
Proceedings
On December
7, 2001, the Company and certain of its officers and directors were named as
defendants, along with the underwriters of the Company’s initial public
offering, in a securities class action lawsuit. The lawsuit alleges that the
defendants participated in a scheme to inflate the price of the Company’s stock
in its initial public offering and in the aftermarket through a series of
misstatements and omissions associated with the offering. The lawsuit is one of
several hundred similar cases pending in the Southern District of New York that
have been consolidated by the court. In February 2003, the District Court issued
an order denying a motion to dismiss by all defendants on common issues of law.
In July 2003, the Company, along with over 300 other issuers named as
defendants, agreed to a settlement of this litigation with plaintiffs. While the
parties’ request for court approval of the settlement was pending, in December
2006 the United States Court of Appeals for the Second Circuit reversed the
District Court’s determination that six focus cases could be certified as class
actions. In April 2007, the Second Circuit denied plaintiffs’ petition for
rehearing, but acknowledged that the District Court might certify a more limited
class. At a June 26, 2007 status conference, the Court terminated the proposed
settlement as stipulated among the parties. Plaintiffs filed an amended
complaint on August 14, 2007. On September 27, 2007, plaintiffs filed a motion
for class certification in the six focus cases, which was withdrawn on October
10, 2008. On November 13, 2007 defendants in the six focus cases filed a motion
to dismiss the complaint for failure to state a claim, which the district court
denied in March 2008. Plaintiffs, the issuer defendants (including the Company),
the underwriter defendants, and the insurance carriers for the defendants, have
engaged in mediation and settlement negotiations. The parties have reached a
settlement agreement, which was submitted to the District Court for preliminary
approval on April 2, 2009. As part of this settlement, the Company’s insurance
carrier has agreed to assume the Company’s entire payment obligation under the
terms of the settlement. On June 10, 2009, the District Court granted
preliminary approval of the proposed settlement agreement. After a September 10,
2009 hearing, the District Court gave final approval to the settlement on
October 5, 2009. Several objectors to the settlement have filed notices of
appeal to the United States Court of Appeal for the Second Circuit from the
District Court’s order granting final approval of the settlement. Although the
District Court has granted final approval of the settlement agreement, there can
be no guarantee that it will not be reversed on appeal. The Company believes
that it has meritorious defenses to these claims. If the settlement is not
implemented and the litigation continues against the Company, the Company would
continue to defend against this action vigorously.
On July 31,
2007, the Company received a demand on behalf of alleged shareholder Vanessa
Simmonds that its board of directors prosecute a claim against the underwriters
of its initial public offering, in addition to certain unidentified officers,
directors and principal shareholders as identified in our IPO prospectus, for
violations of sections 16(a) and 16(b) of the Securities Exchange Act of 1934.
In October 2007, a lawsuit was filed in the United States District Court for the
Western District of Washington by Ms. Simmonds against certain of the
underwriters of the Company’s initial public offering. The plaintiff alleges
that the underwriters engaged in short-swing trades and seeks disgorgement of
profits in amounts to be proven at trial from the underwriters. On February 25,
2008, Ms. Simmonds filed an amended complaint. The suit names the Company as a
nominal defendant, contains no claims against the Company and seeks no relief
from it. This lawsuit is one of more than fifty similar actions filed in the
same court. On July 25, 2008, the underwriter defendants in the various actions
filed a joint motion to dismiss the complaints for failure to state a claim. In
addition, certain issuer defendants in the various actions filed a joint motion
to dismiss the complaints for failure to state a claim. The parties entered into
a stipulation, entered as an order by the court that the Company is not required
to answer or otherwise respond to the amended complaint. Accordingly, the
Company did not join the motion to dismiss filed by certain issuers. On March
12, 2009, the court dismissed the complaint in this lawsuit with prejudice. On
April 10, 2009, the plaintiff filed a notice of appeal of the District Court’s
order, and thereafter the underwriter defendants’ filed a cross appeal to a
portion of the District Court’s order that dismissed thirty (30) of the cases
without prejudice following the moving issuers’ motion to dismiss. On May 27,
2009, the Ninth Circuit issued an order stating that the cases were not selected
for inclusion in the mediation program, and on May 22, 2009 issued an order
granting the parties’ joint motion filed on May 22, 2009 to consolidate the 54
appeals and 30 cross-appeals. Briefing on the appeals and cross-appeals was
completed on November 17, 2009. No date has been set for oral argument in the
Ninth Circuit.
In addition,
the Company has been named as defendants in a number of judicial and
administrative proceedings incidental to its business and may be named again
from time to time.
The Company
intends to defend the above matters vigorously and although adverse decisions or
settlements may occur in one or more of such cases, the final resolution of
these matters, individually or in the aggregate, is not expected to have a
material adverse effect on the Company’s results of operations, financial
position or cash flows.
Guarantees
Certain of
the Company’s licensing agreements indemnify its customers for any expenses or
liabilities resulting from claimed infringements of third party patents,
trademarks or copyrights by its products. Certain of these indemnification
provisions are perpetual from execution of the agreement and, in some instances;
the maximum amount of potential future indemnification is not limited. To date,
the Company has not paid any such claims or been required to defend any lawsuits
with respect to any claim.
Contractual
Obligations and Off-Balance Sheet Arrangements
Our future
operating lease commitments, R&D engineering services commitments and
computer licensing commitments at March 31, 2010 are as follows (in
thousands):
|
|
Payments
Due In
|
|
|
|
Total
|
|
|
Less
Than
1
Year
|
|
|
1-3
Years
|
|
|
3-5
Years
|
|
|
More
Than
5
Years
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Engineering
services commitments
|
|
$ |
7,618 |
|
|
$ |
5,270 |
|
|
$ |
2,348 |
|
|
$ |
- |
|
|
$ |
- |
|
Operating
lease obligations
|
|
|
3,285 |
|
|
|
2,454 |
|
|
|
831 |
|
|
|
- |
|
|
|
- |
|
Computer
licensing commitments
|
|
|
534 |
|
|
|
178 |
|
|
|
356 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
11,437 |
|
|
$ |
7,902 |
|
|
$ |
3,535 |
|
|
$ |
- |
|
|
$ |
- |
|
Future
minimum lease payments under operating leases have not been reduced by expected
sub lease rental income from exited facilities. The amount of
restructuring accrual that relates to the exited facilities, however, has been
appropriately deducted from the future minimum lease payments.
In December
2009, the Company entered into an R&D Engineering Services Agreement with an
engineering services firm. The Company will pay the R&D engineering services
firm a total of 6 million Euros over a two-year period from December 2009 to
December 2011. As of March 31, 2010, the Company has outstanding commitments of
4.5 million Euros ($6.1 million) under this agreement.
In March
2010, the Company entered into an engineering consulting agreement with an
engineering consulting firm. The Company will pay this
engineering consulting firm a total of $1.6 million over a two-year period from
March 2010 to December 2011 based on project milestones. As of March 31, 2010,
the Company has outstanding commitments of approximately $1.5 million under this
agreement.
In February
2010, the Company agreed to obtain software licenses for its computer desktops
with a certain computer licensing company. The licensing term is for a
three-year period starting from March 2010. The Company is committed to pay an
annual license fee of $178,000 over a three-year term.
The amounts
above exclude liabilities under FASB ASC 740-10, “Income Taxes – Recognition
section,” as the Company is unable to reasonably estimate the ultimate
amount or timing of settlement.
10.
Customer and Geographic Information
The Company
operates in one reportable operating segment, semiconductors and IP solutions
for the secure storage, distribution and presentation of high-definition
content. The Company’s Chief Executive Officer, who is considered to be the
Company’s chief operating decision maker, reviews financial information
presented on one operating segment basis for purposes of making operating
decisions and assessing financial performance.
Revenue
Revenue by
geographic area was as follows (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
United
States
|
|
$ |
10,763 |
|
|
$ |
7,188 |
|
Japan
|
|
|
7,880 |
|
|
|
10,111 |
|
Taiwan
|
|
|
6,540 |
|
|
|
10,718 |
|
Europe
|
|
|
4,678 |
|
|
|
5,662 |
|
Korea
|
|
|
1,671 |
|
|
|
227 |
|
China
|
|
|
1,307 |
|
|
|
976 |
|
Hong
Kong
|
|
|
1,178 |
|
|
|
3,245 |
|
Other
|
|
|
292 |
|
|
|
2,385 |
|
Total
revenue
|
|
$ |
34,309 |
|
|
$ |
40,512 |
|
The Company
determines the geographic distribution of revenue using the customers’ “bill to
address” location as specified in the customers’ agreements.
Revenue by
product line was as follows (in thousands):
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Consumer
Electronics
|
|
$ |
23,154 |
|
|
$ |
27,576 |
|
Personal
Computer
|
|
|
1,665 |
|
|
|
3,468 |
|
Storage
|
|
|
1,474 |
|
|
|
3,551 |
|
Licensing
|
|
|
8,016 |
|
|
|
5,917 |
|
Total
revenue
|
|
$ |
34,309 |
|
|
$ |
40,512 |
|
For the three
months ended March 31, 2010, two customers each represented 19.7% and 10.0%
of the Company’s revenue. At March 31, 2010, two customers each represented
26.3% and 11.4% of gross accounts receivable.
For the three
months ended March 31, 2009, three customers each represented 13.5%, 13.4%
and 10.0% of the Company’s revenue. At March 31, 2009, two customers each
represented 26.5% and 15.2% of gross accounts receivable.
Property
and Equipment
Approximately
76.8% of the Company’s consolidated property and equipment are located in
the US.
11.
Provision for Income Taxes
For the three
months ended March 31, 2010, the Company recorded a provision for income taxes
of $1.5 million. The effective tax rate for the three months ended March 31,
2010 was (26.6%) and was based on our projected taxable income for 2010, plus
certain discrete items recorded during the quarter. The difference between the
provision for income taxes and the income tax determined by applying the
statutory federal income tax rate of 35% was due primarily to state taxes and
foreign taxes, partially offset by a benefit of the carryback of the current
year federal net operating loss adjusted for certain discrete items recorded
during the quarter.
The Company
continued to maintain a valuation allowance as a result of uncertainties related
to the realization of its net deferred tax assets at March 31,
2010. The valuation allowance was established as a result of weighing
all positive and negative evidence, including the Company’s cumulative loss over
the past three years. The valuation allowance reflects the conclusion of
management that it is more likely than not that benefits from certain deferred
tax assets will not be realized. If actual results differ from these estimates
or these estimates are adjusted in future periods, the valuation allowance may
require adjustment which could materially impact the Company’s financial
position and results of operations.
For the three
months ended March 31, 2009, the Company recorded a provision for income taxes
of $3.5 million. The effective tax rate for the three months ended March 31,
2009 was (11.6%) and was based on the Company’s projected taxable income for
2009, plus certain discrete items recorded during the quarter. As of March 31,
2009, the Company had gross tax affected unrecognized tax benefits of $18.6
million of which $3.0 million, if recognized, would affect the effective tax
rate. The difference between the provision for income taxes and the income tax
determined by applying the statutory federal income tax rate of 35% was due
primarily to various forecasted items including tax exempt income, state taxes
and foreign taxes, adjusted for certain discrete items recorded during the
quarter.
The Company’s
policy is to include interest and penalties related to unrecognized tax benefits
within the provision for income taxes. The Company had interest and penalties of
$94,000 and $85,000 for the three months ended March 31, 2010 and 2009,
respectively. The Company conducts business globally and, as a result, the
Company and its subsidiaries file income tax returns in various jurisdictions
throughout the world including with the U.S. federal and various U.S. state
jurisdictions as well as with various foreign jurisdictions. In the normal
course of business, the Company is subject to examination by taxing authorities
throughout the world.
12.
Fair Value Measurements
The Company
records its financial instruments that are accounted for under FASB ASC No.
320-10-25, Recognition of
Investments in Debt and Equity Securities, and derivative contracts under
FASB ASC No. 815, Derivatives
and Hedging, at fair value. The determination of fair value is based upon
the fair value framework established by FASB ASC No. 820-10-35, Fair Value Measurements and
Disclosures – Subsequent Measurement (“ASC 820-10-35”). ASC 820-10-35
provides that a fair value measurement assumes that the transaction to sell an
asset or transfer a liability occurs in the principal market for the asset or
liability or, in the absence of a principal market, the most advantageous market
for the asset or liability. The carrying value of the Company’s financial
instruments including cash and cash equivalents, accounts receivable, prepaid
expenses and other current assets, accounts payable, accrued compensation, and
other accrued liabilities, approximates fair market value due to the relatively
short period of time to maturity. The fair value of investments is determined
using quoted market prices for those securities or similar financial
instruments.
The Company’s
valuation techniques used to measure the fair value of money market funds and
certain marketable equity securities were derived from quoted prices in active
markets, broker or dealer quotations for identical assets. The valuation
techniques used to measure the fair value of all other financial instruments,
all of which have counterparties with high credit ratings, were valued based on
quoted market prices or model driven valuations using significant inputs derived
from or corroborated by observable market data.
The Company’s
cash equivalents and short term investments are classified within Level 1
or Level 2 of the fair value hierarchy because they are valued using quoted
market prices, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency.
The types of
instruments valued based on quoted market prices in active markets include most
U.S. government and agency securities and most money market fund securities.
Such instruments are generally classified within Level 1 of the fair value
hierarchy.
The types of
instruments valued based on quoted prices in markets that are not active, broker
or dealer quotations, or alternative pricing sources with reasonable levels of
price transparency include most investment-grade corporate bonds, and state,
municipal and provincial obligations. Such instruments are generally classified
within level 2 of the fair value hierarchy.
There were no
transfers between Level 1 and 2 fair value hierarchy during the three months
ended March 31, 2010.
The table
below sets forth the Company’s cash equivalents and short-term investments as of
March 31, 2010, which are measured at fair value on a recurring basis by level
within the fair value hierarchy. As required by ASC 820-10-35, these are
classified based on the lowest level of input that is significant to the fair
value measurement.
|
|
Fair
value measurements using
|
|
|
Assets/(Liability)
|
|
(dollars
In thousands)
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
at
fair value
|
|
Cash
equivalents
|
|
$ |
525 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
525 |
|
Short-term
investments
|
|
|
12,065 |
|
|
|
120,176 |
|
|
|
- |
|
|
|
132,241 |
|
Total
|
|
$ |
12,590 |
|
|
$ |
120,176 |
|
|
$ |
- |
|
|
$ |
132,766 |
|
Cash
equivalents and short term investments in the above table excludes $30.5 million
in cash held by the Company or in its accounts with investment fund managers as
of March 31, 2010. During the three months ended March 31, 2010, the Company
held no direct investments in auction rate securities, collateralized debt
obligations, structured investment vehicles or mortgage-backed
securities.
As of March
31, 2010, the Company did not hold financial assets and liabilities which were
recorded at fair value in the Level 3 category.
13. Derivative
Instruments
The Company
accounts for derivative instruments in accordance with the provisions of FASB
ASC No. 815-20-25, Derivatives
and Hedging – Hedging Recognition. The Company recognizes derivative
instruments as either assets or liabilities and measures those instruments at
fair value. The accounting for changes in the fair value of a derivative depends
on the intended use of the derivative and the resulting designation. The
Company’s derivatives are designated as cash flow hedges. For a derivative
instrument designated as a cash flow hedge, the effective portion of the
derivative’s gain or loss is initially reported as a component of
accumulated other comprehensive income and subsequently reclassified into
earnings when the hedged exposure affects earnings. The ineffective portion of
the gain (loss) is reported immediately in other income (expense) on the
Company’s consolidated statement of operations.
Silicon Image
is a global company that is exposed to foreign currency exchange rate
fluctuations in the normal course of its business. The Company has operations in
the United States, Europe and Asia, however, a majority of its revenue, costs of
revenue, expense and capital purchasing activities are being transacted in U.S.
Dollars. As a corporation with international as well as domestic operations, the
Company is exposed to changes in foreign exchange rates. These exposures may
change over time and could have a material adverse impact on the Company’s
financial results. Periodically, the Company uses foreign currency forward
contracts to hedge certain forecasted foreign currency transactions relating to
operating expenses. The Company does not enter into derivatives for speculative
or trading purposes. The Company uses derivative instruments primarily to manage
exposures to foreign currency fluctuations on forecasted cash flows and balances
primarily denominated in Euro. The Company’s primary objective in holding
derivatives is to reduce the volatility of earnings and cash flows associated
with changes in foreign currency exchange rates. These derivatives are
designated as cash flow hedges and have maturities of less than one
year.
The
derivatives expose the Company to credit and non performance risks to the
extent that the counterparties may be unable to meet the terms of the agreement.
The Company seeks to mitigate such risks by limiting the counterparties to major
financial institutions. In addition, the potential risk of loss with any one
counterparty resulting from this type of credit risk is monitored. Management
does not expect material losses as a result of defaults by
counterparties.
The amount of
gain recognized in other comprehensive income (“OCI”) on effective cashflow
hedges as of March 31, 2010 and 2009, the amount of gain reclassified from
accumulated OCI to operating expenses for the three months ended March 31, 2010
and 2009, and the amount of gain recognized in income on ineffective cashflow
hedges for the three months ended March 31, 2010 and 2009 were
insignificant.
As of March
31, 2010, the outstanding foreign currency forward contracts had a notional
value of approximately $2.3 million. The unrealized gain relating to the
effective cashflow hedges recorded in accumulated other comprehensive income as
part of stockholders' equity and accrued and other current
liabilities in the condensed consolidated balance sheet as of March 31,
2010 was insignificant.
This report contains
forward-looking statements within the meaning of Section 21E of the Exchange Act and
Section 27A of the Securities Act of 1933. These forward-looking statements
involve a number of risks and uncertainties, including those identified in the
section of this Form 10-Q entitled “Factors Affecting Future Results,” that may
cause actual results to differ materially from those discussed in, or implied
by, such forward-looking statements. Forward-looking statements within
this Form 10-Q are identified by words such as “believes,” “anticipates,”
“expects,” “intends,” “estimates,” “may,” “will” and variations of such words and
other similar expressions. However, these words are not the only means of
identifying such statements. In addition, any statements that refer to
expectations, projections or other characterizations of future events or circumstances
are forward-looking statements. We undertake no obligation to publicly release
the results of any revisions to these forward-looking statements that may be
made to reflect events or circumstances occurring subsequent to the filing of
this Form 10-Q with the SEC. Our actual results could differ materially from
those anticipated in, or implied by, forward-looking statements as a result of
various factors, including the risks outlined elsewhere in this
report. Readers are urged to carefully review and consider the various
disclosures made by Silicon Image, Inc. in this report and in our
other reports filed with the SEC that attempt to advise interested parties of
the risks and factors that may affect our business.
Silicon Image and
Simplay HD are trademarks, registered trademarks or service marks of Silicon Image, Inc.
in the United States and other countries. HDMI™ and High-Definition Multimedia
Interface are trademarks or registered trademarks of HDMI Licensing, LLC in
the United States and other countries, and are used under license from HDMI
Licensing, LLC. All other trademarks and registered trademarks are the
property of their respective owners.
Company
Overview
Silicon
Image, Inc. is a technology innovator and a global leader developing
high-bandwidth semiconductor and intellectual property (IP) solutions based on
our innovative, digital interconnect technology. Our goal is to be the leader in
the innovation, design, development and implementation of semiconductors and IP
solutions for the secure storage, distribution and presentation of
high-definition (HD) content in home and mobile environments. We are dedicated
to the development and promotion of technologies, standards and products that
facilitate the movement of digital content between and among digital devices
across the consumer electronics (CE), personal computer (PC), mobile and storage
markets.
We sell
integrated and discrete semiconductor products as well as license IP solutions
to consumer electronics, computing, display, storage and mobile manufacturers.
Our product and IP portfolio includes solutions for high-definition television
(HDTV), high-definition set-top boxes (STBs), high-definition Blu-ray players,
mobile devices, high-definition game systems, consumer and enterprise storage
products and PC display products.
We have
worked with industry leaders to create industry standards such as the
High-Definition Multimedia Interface (HDMITM) and
Digital Visual Interface (DVITM)
specifications for digital content delivery. We have been, and are likely to be
in the future, significant contributors to broader standards specifications such
as the Serial Advanced Technology Attachment (SATA) specification for PC &
Enterprise storage applications. We actively promote and participate in working
groups and consortiums to develop new standards such as the recently announced
Mobile High-Definition Interconnect (MHDI) working group chartered with creating
a new HD mobile video standard and the Serial Port Memory Technology (SPMT)
consortium which is working on serial connection standards for dynamic random
access memory (DRAM). We capitalize on our leadership position through
first-to-market, standards-based semiconductor and IP solutions. Our portfolio
of IP solutions that we license to third parties for consumer electronics, PCs,
multimedia, communications, mobile, networking and storage devices further
leverages our expertise in these markets. In addition, through Simplay Labs,
LLC, our wholly owned subsidiary, we offer one of the most robust and
comprehensive test platforms in the consumer electronics industry. We utilize
independent foundries and third-party subcontractors to develop, manufacture,
assemble and test all of our semiconductor products.
Our customers
are equipment manufacturers in each of our target markets — Consumer
Electronics, Personal Computer, Mobile and Storage. Because we leverage our
technologies across different markets, certain of our products may be
incorporated into equipment used in multiple markets. We sell our products to
original equipment manufacturers (OEMs) throughout the world using a direct
sales force and through a network of distributors and manufacturer’s
representatives. Our net revenue is generated principally by sales of our
semiconductor products, with other revenues derived from IP core/design
licensing and royalty fees from our patent licensing activities. We maintain
relationships with the eco-system of companies that provide the products that
drive digital content creation and consumption, including the major Hollywood
studios, consumer electronics companies, retailers and service providers. To
that end, we have developed relationships with Hollywood studios such as
Universal, Warner Brothers, Disney and Fox and with major consumer electronics
companies such as Nokia, Panasonic, Phillips, Samsung, Sharp, Sony and Toshiba.
Through these and other relationships, we have formed a strong understanding of
the requirements for storing, distributing and presenting HD digital video and
audio in the home and mobile environments. We have also developed a substantial
IP base for building the standards and products necessary to promote
opportunities for our products.
Historically,
we have grown our business by introducing and promoting the adoption of new
standards and entering new markets. We collaborated with other companies and
jointly developed the DVI and HDMI standards. Our first products addressed the
PC market. Subsequently, we introduced products for a variety of CE market
segments, including STB, game console and digital television (DTV) markets. More
recently, we have focused our research and development activities and are
developing products based on our innovative digital interconnect core technology
for the mobile device market, including digital still cameras, HD camcorders,
portable media players and smart phones.
Concentrations
Historically,
a relatively small number of customers and distributors have generated a
significant portion of our revenue. For instance, our top five customers,
including distributors, generated 50.0% of our revenue for the three months
ended March 31, 2010 and 52.0% of our revenue for the three months ended March
31, 2009. Additionally, the percentage of revenue generated through distributors
tends to be significant, since many OEMs rely upon third party manufacturers or
distributors to provide purchasing and inventory management services. For the
three months ended March 31, 2010 and 2009, 44.4% and 61.9% of our revenue,
respectively, was generated through distributors.
A significant
portion of our revenue is generated from products sold overseas. Sales to
customers in Asia, including distributors, represented 55.0% of our revenue for
the three months ended March 31, 2010 and 68.4% for the three months ended March
31, 2009. The reason for the geographical concentration in Asia is that most of
our products are components of consumer electronics, computer and storage
products, the majority of which are manufactured in Asia. The percentage of our
revenue derived from any country is dependent upon where our end customers
choose to manufacture their products. Accordingly, variability in our geographic
revenue is not necessarily indicative of any geographic trends, but rather is
the combined effect of new design wins and changes in customer manufacturing
locations. Primarily all revenue to date has been denominated in
U.S. dollars.
Critical
Accounting Policies
The
preparation of financial statements in conformity with generally accepted
accounting principles (GAAP) requires management to make estimates and
assumptions that affect amounts reported in our condensed consolidated financial
statements and accompanying notes. We base our estimates on historical
experience and all known facts and circumstances that we believe are relevant.
Actual results may differ materially from our estimates. We believe the
following accounting policies to be most critical to an understanding of our
financial condition and results of operations because they require us to make
estimates, assumptions and judgments about matters that are inherently
uncertain. Our critical accounting estimates include those regarding (1) revenue
recognition, (2) allowance for doubtful accounts receivable, (3) inventories,
(4) goodwill and intangible assets, (5) income taxes, (6) accrued liabilities,
(7) stock-based compensation expense, and (8) legal matters. For a discussion of
the critical accounting estimates, see “Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations — Critical Accounting
Policies” in our Annual Report on Form 10-K for the year ended December 31,
2009.
Results
of Operations
REVENUE
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Product
revenue
|
|
$ |
26,293 |
|
|
$ |
34,595 |
|
|
|
(24.0 |
)% |
Licensing
|
|
|
8,016 |
|
|
|
5,917 |
|
|
|
35.5 |
% |
Total
revenue
|
|
$ |
34,309 |
|
|
$ |
40,512 |
|
|
|
(15.3 |
)% |
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Consumer
Electronics (1)
|
|
$ |
30,482 |
|
|
$ |
33,476 |
|
|
|
(8.9 |
)% |
Personal
Computers (1)
|
|
|
1,733 |
|
|
|
3,207 |
|
|
|
(46.0 |
)% |
Storage
(1)
|
|
|
2,094 |
|
|
|
3,829 |
|
|
|
(45.3 |
)% |
Total
revenue
|
|
$ |
34,309 |
|
|
$ |
40,512 |
|
|
|
(15.3 |
)% |
___________
(1)
Includes development, licensing and royalty revenue
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Consumer
Electronics
|
|
$ |
23,154 |
|
|
$ |
27,576 |
|
|
|
(16.0 |
)% |
Personal
Computers
|
|
|
1,665 |
|
|
|
3,468 |
|
|
|
(52.0 |
)% |
Storage
|
|
|
1,474 |
|
|
|
3,551 |
|
|
|
(58.5 |
)% |
Licensing
|
|
|
8,016 |
|
|
|
5,917 |
|
|
|
35.5 |
% |
Total
revenue
|
|
$ |
34,309 |
|
|
$ |
40,512 |
|
|
|
(15.3 |
)% |
Total revenue
for the three months ended March 31, 2010 was $34.3 million and represented a
decline of 15.3% or $6.2 million when compared to the total revenue in the
same period last year. Revenues during the three months ended March 31, 2010
from Consumer Electronics (“CE”), Personal Computers (“PC”), and storage
decreased by 16.0%, 52.0% and 58.5%, respectively, when compared to the revenues
generated in these product lines in the same period in 2009. Revenues from our
product lines decreased by $8.3 million or 24.0% from $34.6 million during the
three months ended March 31, 2009 to $26.3 million during the three months ended
March 31, 2010. Product shipments during the three months ended March 31, 2010
decreased by approximately 15.4% and average selling price declined by
approximately 13.0% when compared to the shipments and average selling price
during the three months ended March 31, 2009, primarily due to the continued
effects of our ongoing product transition as customers transition from HDMI
receivers to more cost effective Port Processors. To a lesser
extent, increased competition and product mix changes in the DTV
market also contributed to the decreases in revenue from CE, PC and
storage.
Licensing
revenue increased 35.5% or $2.1 million during the three months ended March 31,
2010 as compared to the licensing revenue generated in the same period in 2009.
Our licensing activity is complementary to our product sales and it helps us to
monetize our intellectual property and accelerate market adoption curves
associated with our technology. Most of the intellectual property we license
includes a field of use restriction that prevents the licensee from building
products that directly compete with ours in those market segments we have chosen
to pursue. IP licensing continues to represent an important part of
our overall business. Revenue from licensing accounted for 23.4% and
14.6% of our total revenue for the three months ended March 31, 2010 and
2009, respectively. The significant increase in licensing revenue during the
three months ended March 31, 2010 as compared to the same period in 2009 was due
primarily to the increase in demand for our new IP cores for video decoders and
image signal processors. We have started to generate revenues from IP cores we
developed and announced in 2009. During 2009, we announced our cineramIC™ 4K and
3D H.264 digital video decoder core, the camerIC-18 18 megapixel (MP) image
signal processing (ISP) core, and new HDMI 1.4 transmit and receive
cores.
From time to
time, we enter into “direct
agreements” for certain of our products for certain identified end
customers with our distributors who previously had the rights for price
concessions and product returns. The “direct agreements” convert
the previously existing distributor relationship for these products and
identified customers into a direct customer whereby the distributor does not
have price protection or return rights. Revenue for such sales is recorded at
the time of shipment. For the three months ended March 31, 2010 and
2009, we recorded $6.7
million and $4.1 million in revenue under such direct arrangements,
respectively.
Starting in
fiscal year 2009, as part of our strategic realignment of our distributor
relationships, we entered into “sell- in agreements” with
some of our distributors for certain products for identified end customers.
These “sell-in
agreements” do not provide for price protection, but allow limited stock
rotation rights. Additionally, at the time of entering into the “sell- in agreements”, the
distributors are allowed to convert products which had been previously shipped
under the distributor agreement into products under the “sell- in agreements”. As a
result of such conversion, the distributors sacrifice the right of price
protection, therefore resulting in the price for such products becoming fixed.
Products sold to the distributors under the sell-in agreements are recorded as
revenue upon shipment (or, in the case of a conversion to sell-in, upon
conversion) with an appropriate reserve for expected stock rotation returns
recorded at the time of shipment (or at the time of conversion for conversions
to sell-in). The primary reason for the strategic realignment of our
distributor relationships towards a direct revenue model and away from the
distributor model was to leverage the benefits of the direct model, such as
better risk management and increased operational and transactional processing
efficiencies. For the three months ended March 31, 2010, we recorded
$3.5 million in revenue under sell-in arrangements. We did not have revenue
under the sell-in agreements for the three months ended March 31,
2009.
COST OF REVENUE AND GROSS
PROFIT
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Cost
of product revenue (1)
|
|
$ |
14,822 |
|
|
$ |
18,219 |
|
|
|
(18.6 |
)% |
Cost
of licensing revenue
|
|
|
23 |
|
|
|
196 |
|
|
|
(88.3 |
)% |
Total
cost of revenue
|
|
$ |
14,845 |
|
|
$ |
18,415 |
|
|
|
(19.4 |
)% |
Total
gross profit
|
|
$ |
19,464 |
|
|
$ |
22,097 |
|
|
|
(11.9 |
)% |
Gross
profit margin
|
|
|
56.7 |
% |
|
|
54.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based compensation expense
|
|
$ |
184 |
|
|
$ |
199 |
|
|
|
|
|
Cost of
revenue consists primarily of costs incurred to manufacture, assemble and test
our products, and costs to license our technology which involves modification,
customization or engineering services, as well as other overhead costs relating
to the aforementioned costs including stock-based compensation expense. Gross
margin, as a percentage of revenue was 56.7% and 54.5% for the three months
ended March 31, 2010 and 2009, respectively. Lower revenue volume and
product mix during the three months ended March 31, 2010 were the primary
reasons for the decrease in the total cost of revenue. The
increase in our overall gross margin, on the other hand, was primarily due to
the higher mix of IP license revenue as compared to the product revenue for the
three months ended March 31, 2010 compared to the three months ended March 31,
2009. Our IP license gross margin was 99.7% and 96.7% in the quarters
ended March 31, 2010 and 2009, respectively and our product revenue gross margin
was 43.6% and 47.3% in the quarters ended March 31, 2010 and 2009,
respectively. We expect our overall gross margin to be within the
54%-55% range in the second quarter of
2010.
OPERATING
EXPENSES
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Research
and development (1)
|
|
$ |
13,137 |
|
|
$ |
17,734 |
|
|
|
(25.9 |
)% |
Percentage
of total revenue
|
|
|
38.3 |
% |
|
|
43.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based compensation expense
|
|
$ |
645 |
|
|
$ |
1,374 |
|
|
|
|
|
Research and
Development (R&D). R&D expense consists primarily of employee
compensation and benefits, fees for independent contractors, the cost of
software tools used for designing and testing our products and costs associated
with prototype materials. R&D expense for the three months ended March 31,
2010 included a stock-based compensation expense of $0.6 million as compared to
$1.4 million for the same period in 2009. R&D expense for the three months
ended March 31, 2010 decreased by 25.9% or $4.6 million when compared to the
same quarter in prior year. The
decrease in R&D expense was primarily attributable from our cost savings
from the closure of our two R&D sites associated with the Germany
restructuring in the fourth quarter of 2009. The said restructuring was done
with the objective of realigning our resources to our core
competencies. Our R&D head count as of March 31, 2010 was 213
employees compared to the head count of 288 employees as of March 31,
2009. We expect R&D expenses to remain relatively flat in the
second quarter of 2010.
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Selling,
general and administrative (1)
|
|
$ |
12,030 |
|
|
$ |
13,715 |
|
|
|
(12.3 |
)% |
Percentage
of total revenue
|
|
|
35.1 |
% |
|
|
33.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Includes stock-based compensation expense
|
|
$ |
1,331 |
|
|
$ |
1,992 |
|
|
|
|
|
Selling, General and
Administrative (SG&A). SG&A expense consists primarily of
compensation, including stock-based compensation, sales commissions,
professional fees, and marketing and promotional expenses. SG&A expense
during the three months ended March 31, 2010 was $1.7 million or 12.3% lower
than what was incurred in the same period in the prior year, primarily due to
lower compensation related expenses attributed to the decrease in head
count because of the reduction in forces implemented in 2008 and
2009. Our head
count in our SG&A departments was 160 employees and 180 employees as of
March 31, 2010 and 2009, respectively. We expect SG&A expenses to
remain relatively flat in the second quarter of 2010.
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Impairment
of goodwill
|
|
$ |
- |
|
|
$ |
19,210 |
|
|
|
(100.0 |
)% |
Percentage
of total revenue
|
|
|
0.0 |
% |
|
|
47.4 |
% |
|
|
|
|
Impairment of
Goodwill. During the three months ended March 31, 2009,
we assessed goodwill for impairment and noted indicators of impairment including
a sustained and significant decline in our stock price, depressed market
conditions and declining industry trends. Our stock price had been in a period
of sustained decline and the business climate had deteriorated substantially in
light of the economic crisis. Based on the result of the impairment analysis
that we performed, we determined that the goodwill was impaired. As such, we
wrote off the entire goodwill balance and recognized goodwill impairment charge
of approximately $19.2 million in the consolidated statement of operations under
operating expense, “Impairment of Goodwill”.
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Amortization
of intangible assets
|
|
$ |
37 |
|
|
$ |
1,473 |
|
|
|
(97.5 |
)% |
Percentage
of total revenue
|
|
|
0.1 |
% |
|
|
3.6 |
% |
|
|
|
|
Amortization of
Intangible Assets. The decrease in the amortization of intangible assets
was primarily due to the impairment of the investment in Sunplus IP in 2009 and
to the full amortization of certain intangible assets related to the sci-worx
acquisition.
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Interest
income and other, net
|
|
$ |
604 |
|
|
$ |
939 |
|
|
|
(35.7 |
)% |
Percentage
of total revenue
|
|
|
1.8 |
% |
|
|
2.3 |
% |
|
|
|
|
Interest Income and other, net.
The net amount of interest income and other principally includes interest
income. The decrease was primarily driven by the lower average total cash
balances and due to lower interest rates.
|
|
Three
months ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
|
(dollars
in thousands)
|
|
|
|
|
Provision
for income taxes
|
|
$ |
1,521 |
|
|
$ |
3,474 |
|
|
|
(56.2 |
)% |
Percentage
of total revenue
|
|
|
4.4 |
% |
|
|
8.6 |
% |
|
|
|
|
Provision for Income Taxes.
For the three months ended March 31, 2010, we recorded a provision for
income taxes of $1.5 million. The effective tax rate for the three months ended
March 31, 2010 was (26.6%) and was based on our projected taxable income for
2010, plus certain discrete items recorded during the quarter. The difference
between the provision for income taxes and the income tax determined by applying
the statutory federal income tax rate of 35% was due primarily to state taxes
and foreign taxes, partially offset by a benefit of the carryback of the current
year federal net operating loss adjusted for certain discrete items recorded
during the quarter.
For the three
months ended March 31, 2009, we recorded a provision for income taxes of
$3.5 million. The effective tax rate for the three months ended March 31,
2009 was (11.6%) and was based on our projected taxable income for 2009, plus
certain discrete items recorded during the quarter. The difference between the
provision for income taxes and the income tax determined by applying the
statutory federal income tax rate of 35% was due primarily to various forecasted
items including tax exempt income, state taxes and foreign taxes, adjusted for
certain discrete items recorded during the quarter.
Recent
Accounting Pronouncements
See Note 2,
“Recent Accounting Pronouncements” in the Notes to Condensed Consolidated
Financial Statements under Part I Item I of this report.
LIQUIDITY,
CAPITAL RESOURCES AND FINANCIAL CONDITION
The following
sections discuss the effects of changes in our balance sheet and cash flows,
contractual obligations and other commitments on our liquidity and capital
resources.
Cash and Cash
Equivalents, Short-term Investments and Working Capital. The table below
summarizes our cash and cash equivalents, investments and working
capital and the related movements (in thousands).
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
|
Amount
Change
|
|
Cash
and cash equivalents
|
|
$ |
31,036 |
|
|
$ |
29,756 |
|
|
$ |
1,280 |
|
Short-term
investments
|
|
|
132,241 |
|
|
|
120,866 |
|
|
|
11,375 |
|
Total
cash, cash equivalents and short-term investments
|
|
$ |
163,277 |
|
|
$ |
150,622 |
|
|
$ |
12,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$ |
193,877 |
|
|
$ |
207,828 |
|
|
$ |
(13,951 |
) |
Total
current liabilities
|
|
|
(34,019 |
) |
|
|
(44,346 |
) |
|
$ |
10,327 |
|
Working
capital
|
|
$ |
159,858 |
|
|
$ |
163,482 |
|
|
$ |
(3,624 |
) |
At
March 31, 2010, we had $159.9 million of working capital including
$163.3 million of cash, cash equivalents and short-term investments. Cash
and cash equivalents and short-term investments increased by $12.7 million
from $150.6 million as of December 31, 2009 to $163.3 million as of March 31,
2010 primarily due to income tax refund of $21.5 million, partially offset by
the $11.5 million cash used to pay our restructuring liability during the three
months ended March 31, 2010.
The
significant components of our working capital are cash and cash equivalents,
short-term investments, accounts receivable, inventories and prepaid
expenses and other current assets, reduced by accounts payable, accrued and
other current liabilities, deferred license revenue, and deferred margin on
sales to distributors. Working capital at March 31, 2010 decreased by
approximately $3.6 million when compared to the working capital at December 31,
2009 primarily due to the $13.9 million decrease in operating assets, primarily
due to the decrease in prepaid expenses and other current assets, partially
offset by the $10.3 million decrease in operating liabilities, primarily due to
the decrease in accrued and other current liabilities. The significant decrease
in prepaid expenses and other current assets was primarily driven by the income
tax refund previously mentioned, while the significant decrease in accrued and
other current liabilities was primarily due to the payment of restructuring
liability amounting to approximately $11.5 million.
We believe
that our current cash, cash equivalents and short-term investment balances will
be sufficient to meet our liquidity requirements for at least the next twelve
months.
Summary of Cash
Flows. The table below summarizes the cash and cash equivalents provided
by (used in) in our operating, investing and financing activities (in
thousands).
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Amount
Change
|
|
Cash
provided by (used in) operating activities
|
|
$ |
14,043 |
|
|
$ |
(15,514 |
) |
|
$ |
29,557 |
|
Cash
used in investing activities
|
|
|
(13,446 |
) |
|
|
(59,387 |
) |
|
|
45,941 |
|
Cash
provided by financing activities
|
|
|
278 |
|
|
|
786 |
|
|
|
(508 |
) |
Effect
of exchange rate changes on cash & cash equivalents
|
|
|
405 |
|
|
|
(200 |
) |
|
|
605 |
|
Net
increase (decrease) in cash and cash equivalents
|
|
$ |
1,280 |
|
|
$ |
(74,315 |
) |
|
$ |
75,595 |
|
During the
three months ended March 31, 2010, cash and cash equivalents increased by
$1.3 million. This increase was primarily the result of the cash generated
from our operating and financing activities of $14.0 million and $0.3 million,
respectively, partially offset by the cash used for our investing activities of
approximately $13.4 million.
Operating
Activities
The $14.0
million cash generated from our operating activities during the three months
ended March 31, 2010 was primarily due to the decrease in operating assets,
such as accounts receivable, inventories and prepaid expenses and other current
assets and increase in accounts payable, partially offset by the decrease in
accrued and other current liabilities.
Net accounts
receivable decreased by approximately $4.1 million from $21.7 million at
December 31, 2009 to $17.6 million at March 31, 2010 primarily due to higher
collection than invoicing during the three months ended March 31, 2010.
Inventory decreased by $1.2 million primarily due to our tighter and effective
inventory management. Prepaid expenses and other current assets decreased by
approximately $21.3 million primarily due to income tax refund of approximately
$21.5 million. Accounts payable increased by $1.4 million mainly because of the
timing of vendor invoices and payments. Accrued and other current liabilities
decreased by $12.1 million primarily due to the $11.5 million payment of
restructuring liability.
Investing
Activities
The $13.4
million cash used in investing activities during the three months ended
March 31, 2010 was due primarily to net purchases of short-term investments
of approximately $12.0 million and net investment in property and equipment of
approximately $1.4 million. During the three months ended March 31, 2010, we
purchased $29.1 million and sold $17.1 million short-term
investments.
We held no
direct investments in auction rate securities, collateralized debt obligations,
structured investment vehicles or mortgage-backed securities. We are not a
capital-intensive business. Our purchases of property and equipment relate
mainly to testing equipment, leasehold improvements and information technology
infrastructure.
Financing
Activities
The $0.3
million cash generated from our financing activities during the three
months ended March 31, 2010 was primarily due to the proceeds from
issuances of common stock of approximately $1.3 million, partially offset by the
cash used to repurchase restricted stock units for minimum statutory income tax
withholding of approximately $1.0 million.
Commitments
and Contractual Obligations
See Note 9,
“Commitments and Contingencies,” in the Notes to Condensed Consolidated
Financial Statements under Part I Item I of this report.
We purchase
components from a variety of suppliers and use several contract manufacturers to
provide manufacturing services for our products. During the normal course of
business, in order to manage manufacturing lead times and help ensure adequate
component supply, we enter into agreements with contract manufacturers and
suppliers that either allow them to procure inventory based upon criteria as
defined by us or that establish the parameters defining our requirements. In
certain instances, these agreements allow us the option to cancel, reschedule,
and adjust our requirements based on our business needs prior to firm orders
being placed. Consequently, only a portion of our reported purchase commitments
arising from these agreements are firm, non-cancelable, and unconditional
commitments.
Liquidity
and Capital Resource Requirements
Based on our
estimated cash flows, we believe our existing cash and cash equivalents and
short-term investments are sufficient to meet our capital and operating
requirements for at least the next 12 months. Our future operating and capital
requirements depend on many factors, including the levels at which we generate
product revenue and related margins, the extent to which we generate cash
through stock option exercises and proceeds from sales of shares under our
employee stock purchase plan, the timing and extent of development, licensing
and royalty revenue, investments in inventory and accounts receivable, the cost
of securing access to adequate manufacturing capacity, our operating expenses,
including legal and patent assertion costs, and general economic conditions. In
addition, cash may be required for future acquisitions should we choose to
pursue any. To the extent existing resources and cash from operations are
insufficient to support our activities; we may need to raise additional funds
through public or private equity or debt financing. These funds may not be
available, or if available, we may not be able to obtain them on terms favorable
to us.
Interest
Rate Risk
The primary
objective of our investment activities is to preserve principal while at the
same time maximizing the income we receive from our investments without
significantly increasing risk. To achieve this objective, we maintain our
portfolio of cash equivalents and short-term investments in a variety of
securities, including government and corporate securities and money market
funds. These securities are classified as available for sale and consequently
are recorded on the balance sheet at fair value with unrealized gains or losses
reported as a separate component of accumulated other comprehensive income
(loss). We also limit our exposure to interest rate and credit risk by
establishing and monitoring clear policies and guidelines of our fixed income
portfolios. The guidelines also establish credit quality standards, limits on
exposure to any one issuer and limits on exposure to the type of instrument. Due
to the limited duration and credit risk criteria established in our guidelines
we do not expect the exposure to interest rate risk and credit risk to be
material. If interest rates rise, the market value of our investments may
decline, which could result in a realized loss if we are forced to sell an
investment before its scheduled maturity. As of March 31, 2010, we had an
investment portfolio of securities as reported in short-term investments,
including those classified as cash and cash equivalents of approximately
$163.3 million. A sensitivity analysis was performed on our investment
portfolio as of March 31, 2010. This sensitivity analysis was based on a
modeling technique that measures the hypothetical market value changes that
would result from a parallel shift in the yield curve of plus 50, 100, or
150 basis points over a twelve-month time horizon.
|
0.5% |
|
|
|
1.0% |
|
|
|
1.5% |
|
$ |
525,000 |
|
|
$ |
1,051,000 |
|
|
$ |
1,576,000 |
|
Financial
instruments that potentially subject us to significant concentrations of credit
risk consist primarily of cash equivalents and short-term investments and
accounts receivable. A majority of our cash and investments are maintained with
a major financial institutions headquartered in the United States. As part of
our cash and investment management processes, we perform periodic evaluations of
the credit standing of the financial institutions and we have not sustained any
credit losses from investments held at these financial institutions. The
counterparties to the agreements relating to our investment securities consist
of various major corporations and financial institutions of high credit
standing.
We perform
on-going credit evaluations of our customers’ financial condition and may
require collateral, such as letters of credit, to secure accounts receivable if
deemed necessary. We maintain an allowance for potentially uncollectible
accounts receivable based on our assessment of collectability.
Foreign
Currency Exchange Risk
A majority of
our revenue, expense, and capital purchasing activities are transacted in
U.S. dollars. However, certain operating expenditures and capital purchases
are incurred in or exposed to other currencies, primarily the British Pound, the
Chinese Yuan, Euro, Japanese Yen, the South Korean Won and Taiwan Dollar.
Additionally, many of our foreign distributors price our products in the local
currency of the countries in which they sell. Therefore, significant
strengthening or weakening of the U.S. dollar relative to those foreign
currencies could result in reduced demand or lower U.S. dollar prices or
vice versa, for our products, which would negatively affect our operating
results. Cash balances held in foreign countries are subject to local banking
laws and may bear higher or lower risk than cash deposited in the United States.
The following represents the potential impact of a change in the value of
the U.S. dollar compared to the foreign currencies which we use in
our operations. As of March 31, 2010 and 2009, cash held in
foreign countries was approximately $6.2 million and $3.5 million,
respectively. The following represents the potential impact of a change in
the value of the U.S. dollar compared to the British Pound, Chinese Yuan, Euro,
Japanese Yen, South Korean Won and Taiwan Dollar for the three months ended
March 31, 2010 and 2009. This sensitivity analysis aggregates our
annual activity in these currencies, translated to U.S. dollars, and applies
a change in the U.S. dollar value of 5%, 7.5% and
10%.
March
31, 2010
|
5.0% |
|
|
|
7.5% |
|
|
|
10.0% |
|
$ |
579,000 |
|
|
$ |
869,000 |
|
|
$ |
1,158,000 |
|
March
31, 2009
|
5.0% |
|
|
|
7.5% |
|
|
|
10.0% |
|
$ |
408,000 |
|
|
$ |
612,000 |
|
|
$ |
816,000 |
|
Derivative
Instruments
We have
operations in the United States, Europe and Asia, however, a majority of our
revenue, costs of sales, expense and capital purchasing activities are being
transacted in U.S. Dollars. As a corporation with international as well as
domestic operations, we are exposed to changes in foreign exchange rates. These
exposures may change over time and could have a material adverse impact on our
financial results. Periodically, we use foreign currency forward contracts to
hedge certain forecasted foreign currency transactions relating to operating
expenses. We do not enter into derivatives for speculative or trading
purposes. We use derivative instruments primarily to manage exposures to foreign
currency fluctuations on forecasted cash flows and balances primarily
denominated in Euro. Our primary objective in holding derivatives is to reduce
the volatility of earnings and cash flows associated with changes in foreign
currency exchange rates. These derivatives are designated as cash flow hedges
and have maturities of less than one year. The effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated
other comprehensive income and, upon occurrence of the forecasted transaction,
is subsequently reclassified into the line item in the consolidated statements
of operations to which the hedged transaction relates. We record any
ineffectiveness of the hedging instruments in other income (expense) on our
consolidated statements of operations.
Our
derivatives expose us to credit and non performance risks to the extent that the
counterparties may be unable to meet the terms of the agreement. We seek to
mitigate such risks by limiting the counterparties to major financial
institutions. In addition, the potential risk of loss with any one counterparty
resulting from this type of credit risk is monitored. Management does not expect
material losses as a result of defaults by counterparties.
As of March
31, 2010, the outstanding foreign exchange contracts had a total notional value
of $2.3 million and a fair value of $48,000. See Note 13 to the
Consolidated Financial Statements.
Item 4. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
Based on our
management’s evaluation (with the participation of our principal executive
officer and principal financial officer), as of the end of the period covered by
this report, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended,
(the “Exchange Act”)) are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms and is accumulated and
communicated to our management, including our principal executive officer and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes
in Internal Control over Financial Reporting
There was no
change in our internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during our first quarter of
fiscal 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Item 1. Legal Proceedings
Please refer
to Note 9 to our financial statements under Part I Item I financials
statements.
A description
of the risk factors associated with our business is set forth below. You should
carefully consider the following risk factors, together with all other
information contained or incorporated by reference in this filing, before you
decide to purchase shares of our common stock. These factors could cause our
future results to differ materially from those expressed in or implied by
forward-looking statements made by us. Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also harm our
business. The trading price of our common stock could decline due to any of
these risks and you may lose all or part of your investment.
Our
success depends on demand for our new products.
Our future
growth and success depends on our ability to develop and bring to market on a
timely basis new products, such as our HDMI port processors and products based
on our new Mobile High-Definition Link Technology. There can be no assurance
that we will be successful in developing and marketing these new or other future
products. Moreover, there is no assurance that our new or future products will
achieve the desired level of market acceptance in the anticipated timeframes or
that any such new or future products will contribute significantly to our
revenue. Our new products face significant competition from established
companies that have been selling competitive products for longer periods of time
than we have.
Our
success depends on the development and introduction of new products, which we
may not be able to do in a timely manner because the process of developing
high-speed semiconductor products is complex and costly.
The
development of new products is highly complex and we have experienced delays,
some of which exceeded one year, in the development and introduction of new
products on several occasions in the past. We have recently introduced new
products and will continue to introduce new products in the future. As our
products integrate new, more advanced functions, they become more complex and
increasingly difficult to design, manufacture and debug. Successful product
development and introduction depends on a number of factors, including, but not
limited to:
·
|
accurate
prediction of market requirements and the establishment of market
standards and the evolution of existing standards, including enhancements
or modifications to existing standards such as HDMI, HDCP, DVI, SATA and
SPMT and the development of new standards, such as MHDI and
SPMT;
|
·
|
identification
of customer needs where we can apply our innovation and skills to create
new standards or areas for product differentiation that improve our
overall competitiveness either in an existing market or in a new
market;
|
·
|
development
of advanced technologies and capabilities and new products that satisfy
customer requirements;
|
·
|
competitors’
and customers’ integration of the functionality of our products into their
products, which puts pressure on us to continue to develop and introduce
new products with new
functionality;
|
·
|
timely
completion and introduction of new product designs; correctly anticipating
the market windows that will maximize acceptance of our products and then
delivering the products to the markets within the required
windows;
|
·
|
management
of product life cycles;
|
·
|
use
of leading-edge foundry processes, when use of such processes are required
and achievement of high manufacturing yields and low cost
testing;
|
·
|
market
acceptance of new products; and
|
·
|
market
acceptance of new architectures such as our input
processors.
|
Accomplishing
all of this is extremely challenging, time-consuming and expensive and there is
no assurance that we will succeed. Product development delays may result from
unanticipated engineering complexities, changing market or competitive product
requirements or specifications, difficulties in overcoming resource constraints,
the inability to license third-party technology or other factors. Competitors
and customers may integrate the functionality of our products into their own
products, thereby reducing demand for our products. If we are not able to
develop and introduce our products successfully and in a timely manner, our
costs could increase or our revenue could decrease, both of which would
adversely affect our operating results. In addition, it is possible that we may
experience delays in generating revenue from these products or that we may never
generate revenue from these products. We must work with a semiconductor foundry
and with potential customers to complete new product development and to validate
manufacturing methods and processes to support volume production and potential
re-work. Each of these steps may involve unanticipated difficulties, which could
delay product introduction and reduce market acceptance of the product. In
addition, these difficulties and the increasing complexity of our products may
result in the introduction of products that contain defects or that do not
perform as expected, which would harm our relationships with customers and our
ability to achieve market acceptance of our new products. There can be no
assurance that we will be able to achieve design wins for our planned new
products, that we will be able to complete development of these products when
anticipated, or that these products can be manufactured in commercial volumes at
acceptable yields, or that any design wins will produce any revenue. Failure to
develop and introduce new products, successfully and in a timely manner, may
adversely affect our results of operations.
Our
annual and quarterly operating results may fluctuate significantly and are
difficult to predict, particularly given adverse domestic and global economic
conditions.
Our annual
and quarterly operating results are likely to vary significantly in the future
based on a number of factors many of which we have little or no control. These
factors include, but are not limited to:
·
|
the
growth, evolution and rate of adoption of industry standards for our key
markets, including consumer electronics, digital-ready PCs and displays
and storage devices and systems;
|
·
|
the
fact that our licensing revenue is heavily dependent on a few key
licensing transactions being completed for any given period, the timing of
which is not always predictable and is especially susceptible to delay
beyond the period in which completion is expected and our concentrated
dependence on a few licensees in any period for substantial portions of
our expected licensing revenue and
profits;
|
·
|
the
fact that our licensing revenue has been uneven and unpredictable over
time and is expected to continue to be uneven and unpredictable for the
foreseeable future, resulting in considerable fluctuation in the amount of
revenue recognized in a particular
quarter;
|
·
|
competitive
pressures, such as the ability of competitors to successfully introduce
products that are more cost-effective or that offer greater functionality
than our products, including integration into their products of
functionality offered by our products, the prices set by competitors for
their products and the potential for alliances, combinations, mergers and
acquisitions among our competitors;
|
·
|
average
selling prices of our products, which are influenced by competition and
technological advancements, among other
factors;
|
·
|
government
regulations regarding the timing and extent to which digital content must
be made available to consumers;
|
·
|
the
availability of other semiconductors or other key components that are
required to produce a complete solution for the customer; usually, we
supply one of many necessary
components;
|
·
|
the
cost of components for our products and prices charged by the third
parties who manufacture, assemble and test our products;
and
|
·
|
fluctuations
in market demand, one-time sales opportunities and sales goals, sometimes
results in heightened sales efforts during a given period that may
adversely affect our sales in future
periods.
|
Because we
have little or no control over these factors and/or their magnitude, our
operating results are difficult to predict. Any substantial adverse change in
any of these factors could negatively affect our business and results of
operations.
Our
annual and quarterly operating results are highly dependent upon how well we
manage our business.
Our annual
and quarterly operating results are highly dependent upon and may fluctuate
based on how well we manage our business. Some of these factors include the
following:
·
|
our
ability to manage product introductions and transitions, develop necessary
sales and marketing channels and manage other matters necessary to enter
new market segments;
|
·
|
our
ability to successfully manage our business in multiple markets such as
CE, PC and storage, which may involve additional research and development,
marketing or other costs and
expenses;
|
·
|
our
ability to enter into licensing deals when expected and make timely
deliverables and milestones on which recognition of revenue often
depends;
|
·
|
our
ability to engineer customer solutions that adhere to industry standards
in a timely and cost-effective
manner;
|
·
|
our
ability to achieve acceptable manufacturing yields and develop automated
test programs within a reasonable time frame for our new
products;
|
·
|
our
ability to manage joint ventures and projects, design services and our
supply chain partners;
|
·
|
our
ability to monitor the activities of our licensees to ensure compliance
with license restrictions and remittance of
royalties;
|
·
|
our
ability to structure our organization to enable achievement of our
operating objectives and to meet the needs of our customers and
markets;
|
·
|
the
success of the distribution and partner channels through which we choose
to sell our products and
|
·
|
our
ability to manage expenses and inventory levels;
and
|
·
|
our
ability to successfully maintain certain structural and various compliance
activities in support of our global structure which in the long run, will
result in certain operational benefits as well as achieve an overall lower
tax rate.
|
If we fail to
effectively manage our business, this could adversely affect our results of
operations.
Our
business has been and may continue to be significantly impacted by the
deterioration in worldwide economic conditions, and the current uncertainty in
the outlook for the global economy makes it more likely that our actual results
will differ materially from expectations.
Global credit
and financial markets have experienced in the past and may experience in the
future disruptions, including diminished liquidity and credit availability,
declines in consumer confidence, declines in economic growth, increases in
unemployment rates, and continued uncertainty about economic stability. Despite
signs of improvement, there can be no assurance that there will not be renewed
deterioration in credit and financial markets and confidence in economic
conditions. These economic uncertainties affect businesses such as ours in a
number of ways, making it difficult to accurately forecast and plan our future
business activities. The continued or further tightening of credit in financial
markets may lead consumers and businesses to postpone spending, which may cause
our customers to cancel, decrease or delay their existing and future orders with
us. In addition, financial difficulties experienced by our suppliers or
distributors could result in product delays, increased accounts receivable
defaults and inventory challenges. The volatility in the credit markets has
severely diminished liquidity and capital availability. Our CE product revenue,
which comprised approximately 67.5% and 68.1% of total revenue for the three
months ended March 31, 2010 and 2009, respectively, is dependent on continued
demand for consumer electronics, including but not limited to, DTVs, STBs, DVDs
and game consoles. Demand for consumer electronics business is a function of the
health of the economies in the United States and around the world. As a result
of the recent recession experience by the US economy and other economies around
the world, the demand for overall consumer electronics has been and may continue
to be adversely affected. As a result, the demand for our CE, PC and storage
products and our operating results have been and may continue to be adversely
affected as well. We cannot predict the timing, strength or duration of any
economic disruption or subsequent economic recovery, worldwide, in the United
States, in our industry, or in the consumer electronics market. These and other
economic factors have had and may continue to have a material adverse effect on
demand for our CE, PC and storage products and on our financial condition and
operating results.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates. We may suffer losses in principal
if we are forced to sell securities that decline in market value due to changes
in interest rates. Recent adverse events in the global economy and in the credit
markets could negatively impact our return on investment for these debt
securities and thereby reduce the amount of cash and cash equivalents and
investments on our balance sheet.
The
licensing component of our business strategy increases business risk and
volatility.
Part of our
business strategy is to license intellectual property (IP) through agreements
with companies whereby companies incorporate our IP into their respective
technologies that address markets in which we do not want to directly
participate. There can be no assurance that additional companies will be
interested in purchasing our technology on commercially favorable terms or at
all. We also cannot ensure that companies who purchase our technology will
introduce and sell products incorporating our technology, will accurately report
royalties owed to us, will pay agreed upon royalties, will honor agreed upon
market restrictions, will not infringe upon or misappropriate our intellectual
property and will maintain the confidentiality of our proprietary information.
The IP agreements are complex and depend upon many factors including completion
of milestones, allocation of values to delivered items and customer acceptances.
Many of these factors require significant judgments. Licensing revenue could
fluctuate significantly from period to period because it is heavily dependent on
a few key deals being completed in a particular period, the timing of which is
difficult to predict and may not match our expectations. Because of its high
margin content, the licensing mix of our revenue can have a disproportionate
impact on gross profit and profitability. Also, generating revenue from these
arrangements is a lengthy and complex process that may last beyond the period in
which efforts begin and once an agreement is in place, the timing of revenue
recognition may be dependent on customer acceptance of deliverables, achievement
of milestones, our ability to track and report progress on contracts, customer
commercialization of the licensed technology and other factors. Licensing that
occurs in connection with actual or contemplated litigation is subject to risk
that the adversarial nature of the transaction will induce non-compliance or
non-payment. The accounting rules associated with recognizing revenue from these
transactions are increasingly complex and subject to interpretation. Due to
these factors, the amount of license revenue recognized in any period may differ
significantly from our expectations.
We
face intense competition in our markets, which may lead to reduced revenue from
sales of our products and increased losses.
The CE, PC
and storage markets in which we operate are intensely competitive. These markets
are characterized by rapid technological change, evolving standards, short
product life cycles and declining selling prices. We expect competition for many
of our products to increase, as industry standards become widely adopted, as
competitors reduce prices and offer products with greater levels of integration,
and as new competitors enter our markets.
Our products
face competition from companies selling similar discrete products and from
companies selling products such as chipsets and system-on-a-chip solutions with
integrated functionality. Our competitors include semiconductor companies that
focus on the CE, display or storage markets, as well as major diversified
semiconductor companies and we expect that new competitors will enter our
markets. Current or potential customers, including our own licensees, may also
develop solutions that could compete with us, including solutions that integrate
the functionality of our products into their solutions. In addition, current or
potential OEM customers may have internal semiconductor capabilities and may
develop their own solutions for use in their products rather than purchasing
them from companies such as us. Some of our competitors have already established
supplier or joint development relationships with current or potential customers
and may be able to leverage their existing relationships to discourage these
customers from purchasing products from us or persuade them to replace our
products with theirs. Many of our competitors have longer operating histories,
greater presence in key markets, better name recognition, access to larger
customer bases and significantly greater financial, sales and marketing,
manufacturing, distribution, technical and other resources than we do and as a
result, they may be able to adapt more quickly to new or emerging technologies
and customer requirements, or devote greater resources to the promotion and sale
of their products. In particular, well-established semiconductor companies, such
as Analog Devices, NXP, Broadcom, Intel, National Semiconductor and Texas
Instruments and CE manufacturers, such as Panasonic, Sony, Samsung and Toshiba,
may compete against us in the future. Some of our competitors could merge, which
may enhance their market presence. Existing or new competitors may also develop
technologies that more effectively address our markets with products that offer
enhanced features and functionality, lower power requirements, greater levels of
integration or lower cost. Increased competition has resulted in and is likely
to continue to result in price reductions and loss of market share in certain
markets. We cannot assure you that we can compete successfully against current
or potential competitors, or that competition will not reduce our revenue and
gross margins.
We
operate in rapidly evolving markets, which makes it difficult to evaluate our
future prospects.
The markets
in which we compete are characterized by rapid technological change, evolving
customer needs and frequent introductions of new products and standards. As we
adjust to evolving customer requirements and technological advances, we may be
required to further reposition our existing offerings and to introduce new
products and services. We may not be successful in developing and marketing such
new offerings, or we may experience difficulties that could delay or prevent the
development and marketing of such new offerings. Moreover, new standards that
compete with standards that we promote have been and in the future may be
introduced from time to time, which could impact our success. Accordingly, we
face risks and difficulties frequently encountered by companies in new and
rapidly evolving markets. If we do not successfully address these risks and
difficulties, our results of operations could be negatively
affected.
We
may experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration, which may
result in reduced manufacturing yields, delays in product deliveries and
increased expenses.
To remain
competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to
modify the manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit designs that we
may use in multiple products. We periodically evaluate the benefits, on a
product-by-product basis, of migrating to smaller geometry process technologies
to reduce our costs. Currently most of our products are manufactured in .18
micron and .13 micron, geometry processes. We are now designing a new product in
65 nanometer process technology and planning for the transition to smaller
process geometries. In the past, we have experienced some difficulties in
shifting to smaller geometry process technologies or new manufacturing
processes, which resulted in reduced manufacturing yields, delays in product
deliveries and increased expenses. The transition to 65 nanometer geometry
process technology will result in significantly higher mask and prototyping
costs, as well as additional expenditures for engineering design tools and
related computer hardware. We may face similar difficulties, delays and expenses
as we continue to transition our products to smaller geometry
processes.
We are
dependent on our relationships with our foundry subcontractors to transition to
smaller geometry processes successfully. We cannot assure you that the foundries
that we use will be able to effectively manage the transition in a timely
manner, or at all, or that we will be able to maintain our existing foundry
relationships or develop new ones. If any of our foundry subcontractors or we
experience significant delays in this transition or fail to efficiently
implement this transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of which could harm our
relationships with our customers and our results of operations.
We
will have difficulty selling our products if customers do not design our
products into their product offerings or if our customers’ product offerings are
not commercially successful.
Our products
are generally incorporated into our customers’ products at the design stage. As
a result, we rely on equipment manufacturers to select our products to be
designed into their products. Without these “design wins,” it is very difficult
to sell our products. We often incur significant expenditures on the development
of a new product without any assurance that an equipment manufacturer will
select our product for design into its own product. Additionally, in some
instances, we are dependent on third parties to obtain or provide information
that we need to achieve a design win. Some of these third parties may be our
competitors and, accordingly, may not supply this information to us on a timely
basis, if at all. Once an equipment manufacturer designs a competitor’s product
into its product offering, it becomes significantly more difficult for us to
sell our products to that customer because changing suppliers involves
significant cost, time, effort and risk for the customer. Furthermore, even if
an equipment manufacturer designs one of our products into its product offering,
we cannot be assured that its product will be commercially successful or that we
will receive any revenue from that product. Sales of our products largely depend
on the commercial success of our customers’ products. Our customers generally
can choose at any time to stop using our products if their own products are not
commercially successful or for any other reason. We cannot assure you that we
will continue to achieve design wins or that our customers’ equipment
incorporating our products will ever be commercially successful.
Our
products typically have lengthy sales cycles. A customer may decide to cancel or
change its product plans, which could cause us to lose anticipated sales. In
addition, our average product life cycles tend to be short and, as a result, we
may hold excess or obsolete inventory that could adversely affect our operating
results.
After we have
developed and delivered a product to a customer, the customer will usually test
and evaluate our product prior to designing its own equipment to incorporate our
product. Our customers generally need three months to over six months to test,
evaluate and adopt our product and an additional three months to over nine
months to begin volume production of equipment that incorporates our product.
Due to this lengthy sales cycle, we may experience significant delays from the
time we incur operating expenses and make investments in inventory until the
time that we generate revenue from these products. It is possible that we may
never generate any revenue from these products after incurring such
expenditures. Even if a customer selects our product to incorporate into its
equipment, we have no assurances that the customer will ultimately market and
sell its equipment or that such efforts by our customer will be successful. The
delays inherent in our lengthy sales cycle increase the risk that a customer
will decide to cancel or change its product plans. Such a cancellation or change
in plans by a customer could cause us to lose sales that we had anticipated. In
addition, anticipated sales could be materially and adversely affected if a
significant customer curtails, reduces or delays orders during our sales cycle
or chooses not to release equipment that contains our products. Further, the
combination of our lengthy sales cycles coupled with worldwide economic
conditions could have a compounding negative impact on the results of our
operations.
While our
sales cycles are typically long, our average product life cycles tend to be
short as a result of the rapidly changing technology environment in which we
operate. As a result, the resources devoted to product sales and marketing may
not generate material revenue for us and from time to time, we may need to write
off excess and obsolete inventory. If we incur significant marketing expenses
and investments in inventory in the future that if we are not able to recover
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions but still hold higher cost products in
inventory, our operating results would be harmed.
Our
customers may not purchase anticipated levels of products, which can result in
excess inventories.
We generally
do not obtain firm, long-term purchase commitments from our customers and, in
order to accommodate the requirements of certain customers, we may from time to
time build inventory that is specific to that customer in advance of receiving
firm purchase orders. The short-term nature of our customers’ commitments and
the rapid changes in demand for their products reduce our ability to accurately
estimate the future requirements of those customers. Should the customer’s needs
shift so that they no longer require such inventory, we may be left with
excessive inventories, which could adversely affect our operating
results.
We
depend on a few key customers and the loss of any of them could significantly
reduce our revenue.
Historically,
a relatively small number of customers and distributors have generated a
significant portion of our revenue. For the three months ended March 31, 2010,
shipments to Samsung Electronics and Innotech Corporation generated 19.7% and
10.0% of our revenue, respectively. For the three months ended March 31, 2009,
shipments to Weikeng Industrial, World Peace Industrial and Microtek, Inc.
generated 13.5%, 13.4% and 10.0% of our revenue, respectively. In addition, an
end-customer may buy our products through multiple distributors, contract
manufacturers and /or directly, which could create an even greater
concentration. We cannot be certain that customers and key distributors that
have accounted for significant revenue in past periods, individually or as a
group, will continue to sell our products and generate revenue. As a result of
this concentration of our customers, our results of operations could be
negatively affected if any of the following occurs:
· one or
more of our customers, including distributors, becomes insolvent or goes out of
business;
· one or
more of our key customers or distributors significantly reduces, delays or
cancels orders; and/or
· one or
more significant customers selects products manufactured by one of our
competitors for inclusion in their future product
generations.
While our
participation in multiple markets, has broadened our customer base, as product
mix fluctuates from quarter to quarter, we may become more dependent on a small
number of customers or a single customer for a significant portion of our
revenue in a particular quarter, the loss of which could adversely affect our
operating results.
We
sell our products through distributors, which limits our direct interaction with
our end customers, therefore reducing our ability to forecast sales and
increasing the complexity of our business.
Many original
equipment manufacturers (“OEMs”) rely on third-party manufacturers or
distributors to provide inventory management and purchasing functions.
Distributors generated 44.4% of our revenue for the three months ended March 31,
2010 and 61.9% of our revenue for the three months ended March 31, 2009. Selling
through distributors reduces our ability to forecast sales and increases the
complexity of our business, requiring us to:
· manage a
more complex supply chain;
· monitor
and manage the level of inventory of our products at each
distributor;
· estimate
the impact of credits, return rights, price protection and unsold inventory at
distributors; and
· monitor
the financial condition and credit-worthiness of our distributors, many of which
are located outside of the United States and the majority of which are not
publicly traded.
Since we have
limited ability to forecast inventory levels at our end customers, it is
possible that there may be significant build-up of inventories in the
distributor channel, with the OEM or the OEM’s contract manufacturer. Such a
buildup could result in a slowdown in orders, requests for returns from
customers, or requests to move out planned shipments. This could adversely
impact our revenues and profits.
Any failure
to manage these challenges could disrupt or reduce sales of our products and
unfavorably impact our financial results.
Governmental
action against companies located in offshore jurisdictions may lead to a
reduction in the demand for our common shares.
Recent
federal and state legislation has been proposed, and additional legislation may
be proposed in the future which, if enacted, could have an adverse tax impact on
both us and our shareholders. For example, the ability to defer taxes as a
result of permanent investments offshore could be limited, thus raising our
effective tax rate.
We
have made acquisitions in the past and may make acquisitions in the future, and
these acquisitions involve numerous risks.
Our growth
depends upon market growth and our ability to enhance our existing products and
introduce new products on a timely basis. Acquisitions of companies or
intangible assets is a strategy we may use to develop new products and enter new
markets. We may acquire additional companies or technologies in the future.
Acquisitions involve numerous risks, including, but not limited to, the
following:
· difficulty
and increased costs in assimilating employees, including our possible inability
to keep and retain key employees of the acquired
business;
· disruption
of our ongoing business;
· discovery
of undisclosed liabilities of the acquired companies and legal disputes with
founders or shareholders of acquired companies;
· inability
to commercialize acquired technology; and
· the need
to take impairment charges or write-downs with respect to acquired
assets.
No
assurance can be given that our prior acquisitions or our future acquisitions,
if any, will be successful or provide the anticipated benefits, or that they
will not adversely affect our business, operating results or financial
condition. Failure to manage growth effectively and to successfully integrate
acquisitions made by us could materially harm our business and operating
results.
For example,
in January 2007, we completed the acquisition of sci-worx, now Silicon Image,
GmbH. In 2009, because of our decision to focus on discrete semiconductor
products and related intellectual property, we decided to restructure our
research and development operations resulting in the closure of our two sites in
Germany.
Industry
cycles may strain our management and resources.
Cycles of
growth and contraction in our industry may strain our management and resources.
To manage these industry cycles effectively, we must:
· improve
operational and financial systems;
· train and
manage our employee base;
· successfully
integrate operations and employees of businesses we acquire or have
acquired;
· attract,
develop, motivate and retain qualified personnel with relevant experience;
and
· adjust
spending levels according to prevailing market conditions.
If we
cannot manage industry cycles effectively, our business could be seriously
harmed.
The
cyclical nature of the semiconductor industry may create constrictions in our
foundry, test and assembly capacity.
The
semiconductor industry is characterized by significant downturns and wide
fluctuations in supply and demand. This cyclicality has led to significant
fluctuations in product demand and in the foundry, test and assembly capacity of
third-party suppliers. Production capacity for fabricated semiconductors is
subject to allocation, whereby not all of our production requirements would be
met. This may impact our ability to meet demand and could also increase our
production costs and inventory levels. Cyclicality has also accelerated
decreases in average selling prices per unit. We may experience fluctuations in
our future financial results because of changes in industry-wide conditions. Our
financial performance has been and may in the future be, negatively impacted by
downturns in the semiconductor industry. In a downturn situation, we may incur
substantial losses if there is excess production capacity or excess inventory
levels in the distribution channel.
We
depend on third-party sub-contractors to manufacture, assemble and test nearly
all of our products, which reduce our control over the production
process.
We do not own
or operate a semiconductor fabrication facility. We rely on one third party
semiconductor company overseas to produce substantially all of our semiconductor
products. We also rely on outside assembly and test services to test all of our
semiconductor products. Our reliance on independent foundries, assembly and test
facilities involves a number of significant risks, including, but not limited
to:
·
|
reduced
control over delivery schedules, quality assurance, manufacturing yields
and production costs;
|
·
|
lack
of guaranteed production capacity or product supply, potentially resulting
in higher inventory levels; and
|
· lack of
availability of, or delayed access to, next-generation or key process
technologies.
We do not
have a long-term supply agreement with all of our subcontractors and instead
obtain production services on a purchase order basis. Our outside
sub-contractors have no obligation to manufacture our products or supply
products to us for any specific period of time, in any specific quantity or at
any specific price, except as set forth in a particular purchase order. Our
requirements represent a small portion of the total production capacity of our
outside foundries, assembly and test facilities and our sub-contractors may
reallocate capacity on short notice to other customers who may be larger and
better financed than we are, or who have long-term agreements with our
sub-contractors, even during periods of high demand for our products. These
foundries may allocate or move production of our products to different foundries
under their control, even in different locations, which may be time consuming,
costly and difficult, have an adverse affect on quality, yields and costs and
require us and/or our customers to re-qualify the products, which could open up
design wins to competition and result in the loss of design wins and design-ins.
If our subcontractors are unable or unwilling to continue manufacturing our
products in the required volumes, at acceptable quality, yields and costs and in
a timely manner, our business will be substantially harmed. As a result, we
would have to identify and qualify substitute sub-contractors, which would be
time-consuming, costly and difficult; there is no guarantee that we would be
able to identify and qualify such substitute subcontractors on a timely
basis or obtain commercially reasonable terms from them. This qualification
process may also require significant effort by our customers and may lead to
re-qualification of parts, opening up design wins to competition and loss of
design wins and design-ins. Any of these circumstances could substantially harm
our business. In addition, if competition for foundry, assembly and test
capacity increases, our product costs may increase and we may be required to pay
significant amounts or make significant purchase commitments to secure access to
production services.
The
complex nature of our production process, which can reduce yields and prevent
identification of problems until well into the production cycle or, in some
cases, after the product has been shipped.
The
manufacture of semiconductors is a complex process and it is often difficult for
semiconductor foundries to achieve acceptable product yields. Product yields
depend on both our product design and the manufacturing process technology
unique to the semiconductor foundry. Since low yields may result from either
design or process difficulties, identifying problems can often only occur well
into the production cycle, when an actual product exists that can be analyzed
and tested.
Further, we
only test our products after they are assembled, as their high-speed nature
makes earlier testing difficult and expensive. As a result, defects often are
not discovered until after assembly. This could result in a substantial number
of defective products being assembled and tested or shipped, thus lowering our
yields and increasing our costs. These risks could result in product shortages
or increased costs of assembling, testing or even replacing our
products.
Although we
test our products before shipment, they are complex and may contain defects and
errors. In the past we have encountered defects and errors in our products.
Because our products are sometimes integrated with products from other vendors,
it can be difficult to identify the source of any particular problem. Delivery
of products with defects or reliability, quality or compatibility problems, may
damage our reputation and our ability to retain existing customers and attract
new customers. In addition, product defects and errors could result in
additional development costs, diversion of technical resources, delayed product
shipments, increased product returns, warranty and product liability claims
against us that may not be fully covered by insurance. Any of these
circumstances could substantially harm our business.
We
face foreign business, political and economic risks because a majority of our
products and our customers’ products are manufactured and sold outside of the
United States.
A substantial
portion of our business is conducted outside of the United States. As a result,
we are subject to foreign business, political and economic risks. Nearly all of
our products are manufactured in Taiwan or elsewhere in Asia. For the three
months ended March 31, 2010 and 2009 approximately 68.6% and 82.2% of our total
revenue respectively, was generated from customers and distributors located
outside of United States, primarily in Asia. We anticipate that sales outside of
the United States will continue to account for a substantial portion of our
revenue in future periods. In addition, we undertake various sales and marketing
activities through regional offices in several other countries and we have
significantly expanded our research and development operations outside of the
United States. We intend to continue to expand our international business
activities. Accordingly, we are subject to international risks, including, but
not limited to:
· political,
social and economic instability;
· exposure
to different business practices and legal standards, particularly with respect
to intellectual property;
· natural
disasters and public health emergencies;
· nationalization
of business and blocking of cash flows;
· trade and
travel restrictions;
· the
imposition of governmental controls and restrictions;
· burdens
of complying with a variety of foreign laws;
· import
and export license requirements and restrictions of the United States and each
other country in which we operate;
· unexpected
changes in regulatory requirements;
· foreign
technical standards;
· changes
in taxation and tariffs;
· difficulties
in staffing and managing international operations;
· fluctuations
in currency exchange rates;
· difficulties
in collecting receivables from foreign entities or delayed revenue
recognition;
· expense
and difficulties in protecting our intellectual property in foreign
jurisdictions;
· exposure
to possible litigation or claims in foreign jurisdictions;
and
· potentially
adverse tax consequences.
Any of the
factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales. In addition, original equipment
manufacturers that design our semiconductors into their products sell them
outside of the United States. This exposes us indirectly to foreign risks.
Because sales of our products are denominated exclusively in United States
dollars, relative increases in the value of the United States dollar will
increase the foreign currency price equivalent of our products, which could lead
to a change in the competitive nature of these products in the marketplace. This
in turn could lead to a reduction in sales and profits.
Closure
of our R&D sites in Germany may impact our product development
efforts.
In 2009, we
decided to restructure our research and development operations resulting in the
closure of our two R&D sites in Germany. The decision to close these sites
may have an unanticipated adverse impact on our product development efforts and
product roadmap in the short- to mid-term as we transition these R&D
engineering resources to new geographies. Such an impact could include adverse
effects on our business, financial condition and operating results.
The
success of our business depends upon our ability to adequately protect our
intellectual property.
We rely on a
combination of patent, copyright, trademark, mask work and trade secret laws, as
well as nondisclosure agreements and other methods, to protect our proprietary
technologies. We have been issued patents and have a number of pending patent
applications. However, we cannot assure you that any patents will be issued as a
result of any applications or, if issued, that any claims allowed will protect
our technology. In addition, we do not file patent applications on a worldwide
basis, meaning we do not have patent protection in some jurisdictions. It may be
possible for a third-party, including our licensees, to misappropriate our
copyrighted material or trademarks. It is possible that existing or future
patents may be challenged, invalidated or circumvented and effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
in foreign countries. It may be possible for a third-party to copy or otherwise
obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents in the United States and
in other jurisdictions. It is also possible that some of our existing or new
licensing relationships will enable other parties to use our intellectual
property to compete against us. Legal actions to enforce intellectual property
rights tend to be lengthy and expensive and the outcome often is not
predictable. As a result, despite our efforts and expenses, we may be unable to
prevent others from infringing upon or misappropriating our intellectual
property, which could harm our business. In addition, practicality also limits
our assertion of intellectual property rights. Patent litigation is expensive
and its results are often unpredictable. Assertion of intellectual property
rights often results in counterclaims for perceived violations of the
defendant’s intellectual property rights and/or antitrust claims. Certain
parties after receipt of an assertion of infringement will cut off all
commercial relationships with the party making the assertion, thus making
assertions against suppliers, customers and key business partners risky. If we
forgo making such claims, we may run the risk of creating legal and equitable
defenses for an infringer.
We generally
enter into confidentiality agreements with our employees, consultants and
strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy, disclose, obtain or
use our products, services or technology without our authorization. Also,
current or former employees may seek employment with our business partners,
customers or competitors, and we cannot assure you that the confidential nature
of our proprietary information will be maintained in the course of such future
employment. Additionally, current, departing or former employees or third
parties could attempt to penetrate our computer systems and networks to
misappropriate our proprietary information and technology or interrupt our
business. Because the techniques used by computer hackers and others to access
or sabotage networks change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate, counter or ameliorate
these techniques. As a result, our technologies and processes may be
misappropriated, particularly in countries where laws may not protect our
proprietary rights as fully as in the United States.
Our products
may contain technology provided to us by other parties such as contractors,
suppliers or customers. We may have little or no ability to determine in advance
whether such technology infringes the intellectual property rights of a third
party. Our contractors, suppliers and licensors may not be required to indemnify
us in the event that a claim of infringement is asserted against us, or they may
be required to indemnify us only up to a maximum amount, above which we would be
responsible for any further costs or damages. In addition, we may have little or
no ability to correct errors in the technology provided by such contractors,
suppliers and licensors, or to continue to develop new generations of such
technology. Accordingly, we may be dependent on their ability and willingness to
do so. In the event of a problem with such technology, or in the event that our
rights to use such technology become impaired, we may be unable to ship our
products containing such technology, and may be unable to replace the technology
with a suitable alternative within the time frame needed by our
customers.
Our
participation in working groups for the development and promotion of industry
standards in our target markets, including the Digital Visual Interface and HDMI
specifications, requires us to license some of our intellectual property for
free or under specified terms and conditions, which may make it easier for
others to compete with us in such markets.
A key element
of our business strategy includes participation in working groups to establish
industry standards in our target markets, promote and enhance specifications and
develop and market products based on such specifications and future
enhancements. We are a promoter of the Digital Display Working Group (DDWG),
which published and promotes the DVI specification and a founder in the working
group that develops and promotes the HDMI specification. In connection with our
participation in such working groups:
·
|
we
must license for free specific elements of our intellectual property to
others for use in implementing the DVI specification; and we may license
additional intellectual property for free as the DDWG promotes
enhancements to the DVI specification;
and
|
·
|
we
must license specific elements of our intellectual property to others for
use in implementing the HDMI specification and we may license additional
intellectual property as the HDMI founders group promotes enhancements to
the HDMI specification.
|
Accordingly,
certain companies that implement the DVI and HDMI specifications in their
products can use specific elements of our intellectual property to compete with
us, in certain cases for free. Although in the case of the HDMI specification,
there are annual fees and royalties associated with the adopters’ agreements,
there can be no assurance that such annual fees and royalties will adequately
compensate us for having to license our intellectual property. Fees and
royalties received during the early years of adoption of HDMI will be used to
cover costs we incur to promote the HDMI standard and to develop and perform
interoperability tests; in addition, after an initial period during which we
received all of the royalties associated with HDMI adopters’ agreements, in
2007, the HDMI founders reallocated the royalties to reflect each founder’s
relative contribution of intellectual property to the HDMI specification. Our
subsidiary no longer recognizes 100% of the HDMI adopter royalty
revenues.
We intend to
promote and continue to be involved and actively participate in other standard
setting initiatives. For example, we also recently joined the Serial Port Memory
Technology Working Group (SPMTWG) to develop and promote a new memory
technology. Accordingly, we may license additional elements of our intellectual
property to others for use in implementing, developing, promoting or adopting
standards in our target markets, in certain circumstances at little or no cost.
This may make it easier for others to compete with us in such markets. In
addition, even if we receive license fees and/or royalties in connection with
the licensing of our intellectual property, there can be no assurance that such
license fees and/or royalties will adequately compensate us for having to
license our intellectual property.
Our
success depends in part on our relationships with strategic partners and use of
technologies
We have
entered into and expect to continue to enter into strategic partnerships with
third parties. Negotiating and performing under these strategic partnerships
involves significant time and expense; we may not realize anticipated increases
in revenue, standards adoption or cost savings; and these strategic partnerships
may make it easier for the third parties to compete with us; any of which may
have a negative effect our business and results of operations.
Strategic
partnerships that we enter into with third parties may not result in the
anticipated results. For example, in February 2007, we entered into a licensing
agreement with Sunplus Technology Co., Ltd. (Sunplus), which granted us the
rights to use and further develop advanced IP technology. Previously, we
believed that the IP licensed under this agreement enhanced our ability to
develop DTV technology and other related consumer product offerings. Based on
the Company’s product strategy as of October 2009, we realized the IP obtained
through the Sunplus agreement did not align with our product roadmap and during
October 2009, we decided to write off our investment in Sunplus IP. This
decision was prompted by a change in our product strategy due to market place
and related competitive dynamics.
Our
business may be impacted as a result of the adoption of competing standards and
technologies by the broader market
The success
of our business has been significantly related to our participation in standard
setting organizations. From time to time, competing standards have been
established which negatively impact the success of existing standards or
jeopardize the creation of a new standard. DisplayPort is an example of a
competing standard on a different technology base which has created an
alternative high definition connectivity methodology in the PC space. This
standard has been adopted by several large PC manufactures. While currently not
as widely recognized as the HDMI standard, DisplayPort does represent a viable
alternative to the HDMI standard. If DisplayPort should gain broader adoption,
our HDMI business could be negatively impacted and our revenues could be
reduced.
Our
business is dependent on the continued adoption and widespread implementation of
the HDMI specification.
Our success
is largely dependent upon the continued adoption and widespread implementation
of the HDMI specification. More than 75% of our revenue is derived from the sale
of HDMI enabled products and the licensing of our HDMI technology. Our
leadership in the market for HDMI-enabled products and intellectual property has
been based on our ability to introduce first-to-market semiconductor and IP
solutions to our customers and to continue to innovate within the standard.
Therefore, our inability to be first to market with our HDMI enabled products
and intellectual property or to continue to drive innovation in the HDMI
specification could have an adverse impact on our business going forward. In
addition, the establishment and adoption by the markets we sell into of a
competing digital interconnect technology could have an adverse impact on our
ability to sell our products and license our intellectual property and therefore
our revenues and business.
We also
derive revenue from the license fees and royalties paid by the adopters of the
HDMI technology. Any development that has the effect of lowering the number of
adopters of the HDMI standard will negatively impact these license fees and
royalties. Also, when the HDMI consortium was first formed, we received 100% of
the royalties collected from HDMI adopters. During 2007, at a founders meeting,
the founders decided to share the HDMI adopter’s royalty revenues among the
various founders, such that we no longer receive all of the royalties. The
allocation of license fees and royalty revenue among the HDMI founders is an
issue that is reviewed and discussed by the founders from time to time. There
can be no assurance that going forward we will continue to receive the share of
HDMI license fees and royalties that we currently receive. If our share of these
license fees and royalties is reduced, this decision will have a negative impact
on our revenues.
Our
success depends on managing our relationship with Intel.
Intel has a
dominant role in many of the markets in which we compete, such as PC and storage
and is a growing presence in the CE market. We have a multi-faceted relationship
with Intel that is complex and requires significant management attention,
including:
· Intel and
Silicon Image have been parties to business cooperation agreements;
· Intel and
Silicon Image are parties to a patent cross-license;
· Intel and
Silicon Image worked together to develop HDCP;
· an Intel
subsidiary has the exclusive right to license HDCP, of which we are a
licensee;
· Intel and
Silicon Image were two of the promoters of the DDWG;
· Intel is
a promoter of the SATA working group, of which we are a
contributor;
· Intel is
a supplier to us and a customer for our products;
· we
believe that Intel has the market presence to drive adoption of SATA by making
it widely available in its chipsets and motherboards, which could affect demand
for our products;
· we
believe that Intel has the market presence to affect adoption of HDMI by either
endorsing complementary technology or promulgating a competing standard, which
could affect demand for our products;
· Intel may
potentially integrate the functionality of our products, including SATA, DVI, or
HDMI into its own chips and chipsets, thereby displacing demand for some of our
products;
· Intel may
design new technologies that would require us to re-design our products for
compatibility, thus increasing our R&D expense and reducing our
revenue;
· Intel’s
technology, including its 845G and later chipsets, may lower barriers to entry
for other parties who may enter the market and compete with us;
and
· Intel may
enter into or continue relationships with our competitors that can put us at a
relative disadvantage.
Our
cooperation and competition with Intel can lead to positive benefits, if managed
effectively. If our relationship with Intel is not managed effectively, it could
seriously harm our business, negatively affect our revenue and increase our
operating expenses.
New
Releases of Microsoft Windows® and Apple Mac OS® operating systems may render
our chips inoperable
ICs targeted
to PC, laptop, or netbook designs (whether running Microsoft Windows ®, Apple
Mac OS® or Linux operating systems) often require device driver software to
operate. This software is difficult to produce and requires various
certifications such as Microsoft’s Windows Hardware Quality Labs (WHQL) before
being released. Each new revision of an operating system may require a new
software driver and associated testing/certification. Failure to produce this
software can have a negative impact on our relation with Microsoft and/or Apple
and may damage our reputation as a quality supplier of SATA and HDMI products in
the eyes of end consumers.
We
have granted Intel rights with respect to our intellectual property, which could
allow Intel to develop products that compete with ours or otherwise reduce the
value of our intellectual property.
We entered
into a patent cross-license agreement with Intel in which each of us granted the
other a license to use the patents filed by the grantor prior to a specified
date, except for identified types of products. We believe that the scope of our
license to Intel excludes our current products and anticipated future products.
Intel could, however, exercise its rights under this agreement to use our
patents to develop and market other products that compete with ours, without
payment to us. Additionally, Intel’s rights to our patents could reduce the
value of our patents to any third-party who otherwise might be interested in
acquiring rights to use our patents in such products. Finally, Intel could
endorse competing products, including a competing digital interface, or develop
its own proprietary digital interface. Any of these actions could substantially
harm our business and results of operations.
We
may become engaged in additional intellectual property litigation that could be
time-consuming, may be expensive to prosecute or defend and could adversely
affect our ability to sell our product.
In recent
years, there has been significant litigation in the United States and in other
jurisdictions involving patents and other intellectual property rights. This
litigation is particularly prevalent in the semiconductor industry, in which a
number of companies aggressively use their patent portfolios to bring
infringement claims. In addition, in recent years, there has been an increase in
the filing of so-called “nuisance suits,” alleging infringement of intellectual
property rights. These claims may be asserted as counterclaims in response to
claims made by a company alleging infringement of intellectual property rights.
These suits pressure defendants into entering settlement arrangements to quickly
dispose of such suits, regardless of merit. In addition, as is common in the
semiconductor industry, from time to time we have been notified that we may be
infringing certain patents or other intellectual property rights of others.
Responding to such claims, regardless of their merit, can be time consuming,
result in costly litigation, divert management’s attention and resources and
cause us to incur significant expenses. As each claim is evaluated, we may
consider the desirability of entering into settlement or licensing agreements.
No assurance can be given that settlements will occur or that licenses can be
obtained on acceptable terms or that litigation will not occur. In the event
there is a temporary or permanent injunction entered prohibiting us from
marketing or selling certain of our products, or a successful claim of
infringement against us requiring us to pay damages or royalties to a
third-party and we fail to develop or license a substitute technology, our
business, results of operations or financial condition could be materially
adversely affected.
Any potential
intellectual property litigation against us or in which we become involved may
be expensive and time-consuming and may divert our resources and the attention
of our executives. It could also force us to do one or more of the
following:
·
|
stop
selling products or using technology that contains the allegedly
infringing intellectual property;
|
·
|
attempt
to obtain a license to the relevant intellectual property, which license
may not be available on reasonable terms or at all;
and
|
· attempt
to redesign products that contain the allegedly infringing intellectual
property.
If we take
any of these actions, we may be unable to manufacture and sell our products. We
may be exposed to liability for monetary damages, the extent of which would be
very difficult to accurately predict. In addition, we may be exposed to customer
claims, for potential indemnity obligations and to customer dissatisfaction and
a discontinuance of purchases of our products while the litigation is pending.
Any of these consequences could substantially harm our business and results of
operations.
We
have entered into and may again be required to enter into, patent or other
intellectual property cross-licenses.
Many
companies have significant patent portfolios or key specific patents, or other
intellectual property in areas in which we compete. Many of these companies
appear to have policies of imposing cross-licenses on other participants in
their markets, which may include areas in which we compete. As a result, we have
been required, either under pressure of litigation or by significant vendors or
customers, to enter into cross licenses or non-assertion agreements relating to
patents or other intellectual property. This permits the cross-licensee, or
beneficiary of a non-assertion agreement, to use certain or all of our patents
and/or certain other intellectual property for free to compete with
us.
We
indemnify certain of our licensing customers against infringement.
We indemnify
certain of our licensing agreements customers for any expenses or liabilities
resulting from third-party claims of infringements of patent, trademark, trade
secret, or copyright rights by the technology we license. Certain of these
indemnification provisions are perpetual from execution of the agreement and, in
some instances; the maximum amount of potential future indemnification is not
limited. To date, we have not paid any such claims or been required to defend
any lawsuits with respect to any claim. In the event that we were required to
defend any lawsuits with respect to our indemnification obligations, or to pay
any claim, our results of operations could be materially adversely
affected.
We
must attract and retain qualified personnel to be successful and competition for
qualified personnel is increasing in our market.
Our success
depends to a significant extent upon the continued contributions of our key
management, technical and sales personnel, many of who would be difficult to
replace. The loss of one or more of these employees could harm our business.
Although we have entered into a limited number of employment contracts with
certain executive officers, we generally do not have employment contracts with
our key employees. Our success also depends on our ability to identify, attract
and retain qualified technical, sales, marketing, finance and managerial
personnel. Competition for qualified personnel is particularly intense in our
industry and in our location. This makes it difficult to retain our key
personnel and to recruit highly qualified personnel. We have experienced and may
continue to experience, difficulty in hiring and retaining candidates with
appropriate qualifications. To be successful, we need to hire candidates with
appropriate qualifications and retain our key executives and employees.
Replacing departing executive officers and key employees can involve
organizational disruption and uncertain timing.
The
volatility of our stock price has had an impact on our ability to offer
competitive equity-based incentives to current and prospective employees,
thereby affecting our ability to attract and retain highly qualified technical
personnel. If these adverse conditions continue, we may not be able to hire or
retain highly qualified employees in the future and this could harm our
business. In addition, regulations adopted by The NASDAQ Stock Market requiring
shareholder approval for all stock option plans, as well as regulations adopted
by the New York Stock Exchange prohibiting NYSE member organizations from giving
a proxy to vote on equity compensation plans unless the beneficial owner of the
shares has given voting instructions, could make it more difficult for us to
grant options to employees in the future. In addition, FASB ASC No. 718-10,
Stock Compensation,
requires us to record compensation expense for options granted to
employees. To the extent that new regulations make it more difficult or
expensive to grant options to employees, we may incur increased cash
compensation costs or find it difficult to attract, retain and motivate
employees, either of which could harm our business.
If
our internal control over financial reporting or disclosure controls and
procedures are not effective, there may be errors in our financial statements
that could require restatement or our filings may not be timely and investors
may lose confidence in our reported financial information, which could lead to a
decline in our stock price. While we have not identified any material weaknesses
in the past three years, we cannot assure you that a material weakness will not
be identified in the future.
Section 404
of the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of
our internal control over financial reporting as of the end of each year and to
include a management report assessing the effectiveness of our internal control
over financial reporting in each Annual Report on Form 10-K. Section 404 also
requires our independent registered public accounting firm to report on, our
internal control over financial reporting.
Our
management, including our Chief Executive Officer and Chief Accounting Officer,
does not expect that our internal control over financial reporting will prevent
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system’s objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints and the benefits of
controls must be considered relative to their costs. Controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the controls. Over time, controls may
become inadequate because changes in conditions or deterioration in the degree
of compliance with policies or procedures may occur. Because of the inherent
limitations in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
As a result,
we cannot assure you that significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future.
Any failure to maintain or implement required new or improved controls, or any
difficulties we encounter in their implementation, could result in significant
deficiencies or material weaknesses, cause us to fail to timely meet our
periodic reporting obligations, or result in material misstatements in our
financial statements. Any such failure could also adversely affect the results
of periodic management evaluations and annual auditor attestation reports
regarding disclosure controls and the effectiveness of our internal control over
financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002
and the rules promulgated thereunder. The existence of a material weakness could
result in errors in our financial statements that could result in a restatement
of financial statements, cause us to fail to timely meet our reporting
obligations and cause investors to lose confidence in our reported financial
information, leading to a decline in our stock price.
We
have experienced transitions in our management team, our board of directors in
the past and may continue to do so in the future, which could result in
disruptions in our operations and require additional costs.
We have
experienced a number of transitions with respect to our board of directors and
executive officers in recent quarters, including the following:
· In
January 2007, Edward Lopez was appointed as our chief legal
officer.
·
|
In
February 2007, David Hodges advised our board of directors of his decision
to retire and he did not stand for reelection to our board of directors
when his term expired at our 2007 Annual Meeting of
Stockholders.
|
·
|
In
April 2007, Rob Valiton resigned from his position as vice president of
worldwide sales and Sal Cobar was appointed as his
successor.
|
·
|
In
July 2007, Paul Dal Santo was appointed as chief operating
officer.
|
·
|
In
October 2007, Robert Freeman resigned from his position as chief financial
officer.
|
·
|
In
October 2007, Harold L. Covert was appointed as chief financial
officer.
|
·
|
In
December 2008, Dale Zimmerman resigned from his position as vice president
of worldwide marketing.
|
·
|
In
March 2009, Paul Dal Santo resigned from his position as chief operating
officer.
|
·
|
In
September 2009, Steve Tirado resigned from his positions as chief
executive officer and director and Hal Covert was appointed as president
and chief operating officer.
|
·
|
In
January 2010, Camillo Martino was appointed as chief executive officer and
director.
|
·
|
In
January 2010, Harold Covert agreed to continue in his capacity as our
president (but to no longer serve as chief financial officer or chief
operating officer) during a transitional period through September 2010 and
was also elected to the Board of Directors, to serve through September
2010.
|
·
|
In
March 2010, J. Duane Northcutt resigned
from his position as chief technology
officer.
|
·
|
In
April 2010, Sal Cobar resigned
from his position as Vice President of Worldwide
Sales.
|
Any future
transitions may result in disruptions in our operations and require additional
costs.
We
have been and may continue to become the target of securities class action suits
and derivative suits which could result in substantial costs and divert
management attention and resources.
Securities
class action suits and derivative suits are often brought against companies,
particularly technology companies, following periods of volatility in the market
price of their securities. Defending against these suits, even if meritless, can
result in substantial costs to us and could divert the attention of our
management.
Our
operations and the operations of our significant customers, third-party wafer
foundries and third-party assembly and test subcontractors are located in are as
susceptible to natural disasters.
Our
operations are headquartered in the San Francisco Bay area, which is susceptible
to earthquakes. TSMC, the outside foundry that produces the majority of our
semiconductor products, is located in Taiwan. Siliconware Precision Industries
Co. Ltd., or SPIL, Advanced Semiconductor Engineering, or ASE, and Amkor Taiwan
are subcontractors located in Taiwan that assemble and test our semiconductor
products. For the three months ended March 31, 2010 and 2009 customers and
distributors located in Japan generated 23.0% and 25.0% of our revenue,
respectively, and customers and distributors located in Taiwan generated 19.1%
and 26.5% of our revenue, respectively. Both Taiwan and Japan are susceptible to
earthquakes, typhoons and other natural disasters.
Our
business, including a potential reduction of revenues, would be negatively
affected if any of the following occurred:
·
|
an
earthquake or other disaster in the San Francisco Bay area or the Los
Angeles area damaged our facilities or disrupted the supply of water or
electricity to our headquarters or our Irvine
facility;
|
·
|
an
earthquake, typhoon or other disaster in Taiwan or Japan resulted in
shortages of water, electricity or transportation, limiting the production
capacity of our outside foundries or the ability of ASE to provide
assembly and test services;
|
·
|
an
earthquake, typhoon or other disaster in Taiwan or Japan damaged the
facilities or equipment of our customers and distributors, resulting in
reduced purchases of our products;
or
|
·
|
an
earthquake, typhoon or other disaster in Taiwan or Japan disrupted the
operations of suppliers to our Taiwanese or Japanese customers, outside
foundries or ASE, which in turn disrupted the operations of these
customers, foundries or ASE and resulted in reduced purchases of our
products or shortages in our product
supply.
|
Terrorist
attacks or war could lead to economic instability and adversely affect our
operations, results of operations and stock price.
The United
States has taken and continues to take, military action against terrorism and
currently has troops in Iraq and in Afghanistan. In addition, the current
tensions regarding nuclear arms in North Korea and Iran could escalate into
armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or
result in instability in the general economy and financial markets and in
consumer demand for the OEM’s products that incorporate our products.
Disruptions and instability in the general economy could reduce demand for our
products or disrupt the operations of our customers, suppliers, distributors and
contractors, many of whom are located in Asia, which would in turn adversely
affect our operations and results of operations. Disruptions and instability in
financial markets could adversely affect our stock price. Armed hostilities or
war in South Korea could disrupt the operations of the research and development
contractors we utilize there, which would adversely affect our research and
development capabilities and ability to timely develop and introduce new
products and product improvements.
Changes
in environmental rules and regulations could increase our costs and reduce our
revenue.
Several
jurisdictions have implemented rules that would require that certain products,
including semiconductors, be made “green,” which means that the products need to
be lead free and be free of certain banned substances. All of our products are
available to customers in a green format. While we believe that we are generally
in compliance with existing regulations, such environmental regulations are
subject to change and the jurisdictions may impose additional regulations which
could require us to incur costs to develop replacement products. These changes
will require us to incur cost or may take time or may not always be economically
or technically feasible, or may require disposal of non-compliant inventory. In
addition, any requirement to dispose or abate previously sold products would
require us to incur the costs of setting up and implementing such a
program
Provisions
of our charter documents and Delaware law could prevent or delay a change in
control and may reduce the market price of our common stock.
Provisions
of our certificate of incorporation and bylaws may discourage, delay or prevent
a merger or acquisition that a stockholder may consider favorable. These
provisions include:
· authorizing
the issuance of preferred stock without stockholder approval;
· providing
for a classified board of directors with staggered, three-year
terms;
· requiring
advance notice of stockholder nominations for the board of
directors;
· providing
the board of directors the opportunity to expand the number of directors without
notice to stockholders;
· prohibiting
cumulative voting in the election of directors;
· requiring
super-majority voting to amend some provisions of our certificate of
incorporation and bylaws;
· limiting
the persons who may call special meetings of stockholders;
and
· prohibiting
stockholder actions by written consent.
Provisions
of Delaware law also may discourage delay or prevent someone from acquiring or
merging with us.
The
price of our stock fluctuates substantially and may continue to do
so.
The stock
market has experienced extreme price and volume fluctuations that have affected
the market valuation of many technology companies, including Silicon Image.
These factors, as well as general economic and political conditions, may
materially and adversely affect the market price of our common stock in the
future. The market price of our common stock has fluctuated significantly and
may continue to fluctuate in response to a number of factors, including, but not
limited to:
· actual or
anticipated changes in our operating results;
· changes
in expectations of our future financial performance;
· changes
in market valuations of comparable companies in our markets;
· changes
in market valuations or expectations of future financial performance of our
vendors or customers;
· changes
in our key executives and technical personnel; and,
· announcements
by us or our competitors of significant technical innovations, design wins,
contracts, standards or acquisitions.
Due to these
factors, the price of our stock may decline. In addition, the stock market
experiences volatility that is often unrelated to the performance of particular
companies. These market fluctuations may cause our stock price to decline
regardless of our performance.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds (in thousands, except per share
amounts)
None
Not
applicable.
None.
(a)
Exhibits
1010.01*
|
Employment offer letter with
Camillo Martino dated December 23, 2009 (Incorporated by reference to
Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on
January 8, 2010).
|
10.02*
|
Transitional
Employment and Separation Agreement between Harold Covert and the
Registrant dated January 6, 2010 (Incorporated by reference to Exhibit
10.02 to the Registrant’s current report on Form 8-K filed on January 8,
2010).
|
3131.01
|
Certification
of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
2002
|
3131.02
|
Certification
of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
2002
|
3232.01**
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
3232.02**
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
___________
*
|
This
exhibit is a management contract or compensatory plan or
arrangement.
|
|
|
**
|
This
exhibit is being furnished, rather than filed, and shall not be deemed
incorporated by reference into any filing of the registrant, in accordance
with Item 601 of Regulation S-K.
|
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.
Dated:
April 28, 2010
|
Silicon Image,
Inc.
|
|
Chief Accounting
Officer (Principal Financial
Officer)
|
Exhibit Index
1010.01*
|
Employment offer letter with
Camillo Martino dated December 23, 2009 (Incorporated by reference to
Exhibit 10.01 to the Registrant’s current report on Form 8-K filed on
January 8, 2010).
|
10.02*
|
Transitional
Employment and Separation Agreement between Harold Covert and the
Registrant dated January 6, 2010 (Incorporated by reference to Exhibit
10.02 to the Registrant’s current report on Form 8-K filed on January 8,
2010).
|
3131.01
|
Certification
of Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of
2002
|
3131.02
|
Certification
of Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of
2002
|
3232.01**
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
3232.02**
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
____________
*
|
This
exhibit is a management contract or compensatory plan or
arrangement.
|
|
|
**
|
This
exhibit is being furnished, rather than filed, and shall not be deemed
incorporated by reference into any filing of the registrant, in accordance
with Item 601 of Regulation S-K.
|