PART I
Company Background
Since our founding in 1995, Silicon Image, Inc. has been a leader in digital connectivity and interface solutions and
standards, playing a key role in the global transition to high-definition (HD) equipment and interfaces. Our history is a story of innovation, pioneering new technologies for the consumer electronics and personal computing markets and more recently
the large and expanding global mobile market.
Silicon Image is a leading provider of connectivity
solutions that enable the reliable distribution and presentation of HD content for mobile, consumer electronics (CE) and personal computer (PC) markets. We deliver our technology via semiconductor and intellectual property (IP) products that are
compliant with global industry standards and feature market-leading Silicon Image innovations such as InstaPort and InstaPrevue. Silicon Images products are deployed by the worlds leading electronics manufacturers in
devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc players, audio-video receivers, digital cameras, as well as desktop and notebook PCs. Silicon Image has driven the creation of the highly successful
High-Definition Multimedia Interface (HDMI
®
), the latest HD standard for mobile devicesMobile
High-Definition Link (MHL
®
), Digital Visual Interface (DVI) industry standards and the leading 60GHz
wireless video standardWirelessHD
®
. Via its wholly-owned subsidiary, Simplay Labs LLC, Silicon Image
offers manufacturers comprehensive product interoperability and standards compliance testing.
We are a Delaware corporation
headquartered in Sunnyvale, California.
Mission and Business Strategy
Our mission is to be the leader in advanced HD connectivity solutions.
We are committed to delivering HD Connectivity That Just Works. We believe in creating innovative solutions that allow
consumers and businesses to seamlessly connect their HD devices anywhere and anytime. Our business strategy is to define and deliver new standards and technologies enabling advanced audio and video connectivity and interoperability among HD
devices. The available markets for our products and IP solutions are increased through the development, introduction and promotion of market leading connectivity products based on these industry standards that also include Silicon Image technology
innovations that are of added value to our customers. This standards plus strategy involves leveraging our unique ability to create innovative connectivity solutions and to promote the adoption of these solutions through the
creation and evolution of new standards and new markets. We look to continually evolve these standards and further develop Silicon Image innovations.
Given our strategy, we believe that continual investment in research and development and marketing activities is critical to our success. These investments are targeted at and highlight our
commitment to advancing connectivity through facilitating the broad market adoption of industry standards and the interoperability of our solutions throughout our target markets. We have historically demonstrated our ability to execute
successfully to this strategy through the creation of the DVI and HDMI standards. We continue to execute on this strategy with the creation of the MHL standard for mobile products and wireless connectivity for all devices through the WirelessHD
standard. As we continue to expand on our connectivity technology roadmap, our strategy also includes making strategic investments and opportunistic acquisitions of both businesses and technologies to broaden our connectivity product offerings
and to expand or create opportunities within our existing and new markets, respectively. We are committed to executing our strategy and delivering on our mission.
1
Markets
We sell our products and services primarily into three markets: mobile, CE and PC. During 2012, our mobile business was the primary growth driver, increasing to approximately 48% of our total revenue
by the end of the year as compared to 30% by the end of 2011.
Mobile Market
The consumption of HD content has
evolved from being solely an in-home entertainment and personal experience to one that is increasingly on-the-go. A growing number of mobile devices, including smartphones and tablets, now support the storage and viewing of HD video
content, offering consumers new and convenient ways to share and experience mobile HD content, even if the viewing experience is limited due to the small form factor. Smartphones have become more entertaining to use as well as more practical
for business, and are taking a central role in how consumers stay connected and productive. Tablets have been introduced with mobile broadband access that can browse the Internet anywhere there is cellular reception, and cameras are now built into
many portable gaming devices. According to market research firm Parks Associates, the number of smartphones users is expected to quadruple, exceeding 1 billion worldwide by 2014. Therefore the mobile market represents our fastest growing
market. From the initial device shipment of our mobile MHL transmitter products in 2011, we have shipped over 190 million MHL-enabled mobile products.
CE Market
From DTVs to cable boxes to Blu-ray Disc and DVD players, gaming consoles and DVRs, set boxes bring in the content that fuels the home entertainment experience. Since its
introduction in 2003, HDMI technology has become the de-facto worldwide standard for the transmission of HD content. The HDMI Consortium has over 1300 licensed HMDI adopters that have cumulatively shipped over 3 billion HDMI enabled devices
globally. The CE market is undergoing a significant shift as more DTVs are adopting MHL. We anticipate up to one-third of all DTVs could incorporate the MHL technology bringing not only mobile connectivity to DTVs, but also an AV port that
simultaneously provides power. In 2012, we saw the introduction of the Roku Streaming Stick, which brings internet HD video streaming services to any MHL-enabled DTV in a small form factor. MHL provides the HD audio/video connection, enables control
via the DTV remote, and delivers power to the stick which eliminates the need for a separate power adapter. With the continued growth of MHL, we expect to see more products like the Roku Streaming Stick come to market. In addition, DTVs are
beginning to transition to 4Kx2K resolutions and as well as incorporate built-in Internet access. While our technology serves the entire CE market through our participation in the MHL and HDMI standards, our product focus continues to be in the DTV
and AVR space where we maintain a strong share of the market as we sell into most of the Tier One DTV manufactures.
PC
Market
While the PC market is expected to continue to grow with the introduction of Ultrabooks, there is an increasing blurring of the line between mobile and PC devices. In either case, consumers of these devices demand the highest
video quality and resolution. Our MHL and HDMI technologies are utilized in various PC devices, and we expect our 60GHz WirelessHD to be a key technology as well in the coming years.
Automotive Market
We expect that the automotive market will be the next to adopt MHL technology, with manufacturers such as
Hyundai, JVC-Kenwood and Pioneer viewing MHL as a compelling technology to integrate into the car infotainment experience. Not only can consumers connect their MHL-enabled devices to the big screen to watch HD videos, play video games or make
presentations, but they can now access all of their content while on the road.
In the markets we serve, we provide advanced
connectivity solutions that enhance the consumer experience. In the mobile space, our MHL products provide low pin count, connector agnostic solutions delivering full HD video and audio connectivity while enabling the continuous charging of the
connected mobile device from the display. Our CE solutions provide the first dual standard products resulting in fast switching and live picture-in-picture video previewing of each connected device, making switching between source devices
simple, intuitive and fast. Our 60GHz WirelessHD-compliant solutions provide the closest cable-like experience possible without wires, allowing extreme PC gamers to interact with a big screen display wirelessly and with no latency. The markets we
serve will continue to evolve and connectivity is certain to be a key in enabling devices to talk to one another, whether it is a mobile device, a CE device or a PC device.
2
Over the past three years, our product revenues from the mobile, CE and PC markets and our
licensing revenues were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Mobile
|
|
$
|
120,936
|
|
|
$
|
65,789
|
|
|
$
|
10,525
|
|
Consumer Electronics
|
|
|
62,236
|
|
|
|
87,922
|
|
|
|
118,192
|
|
Personal Computers
|
|
|
20,315
|
|
|
|
20,523
|
|
|
|
24,124
|
|
Licensing
|
|
|
48,877
|
|
|
|
46,775
|
|
|
|
38,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
252,364
|
|
|
$
|
221,009
|
|
|
$
|
191,347
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Prior to January 1, 2011, we reported our product revenue under the following three market
categories: 1) CE, 2) PC and 3) Storage. Effective January 1, 2011, we updated our report on product revenue to consist of the following categories: 1) Mobile, 2) CE and 3) PC. As a result of this change, our mobile category now incorporates
all mobile-related activities, including both mobile HDMI and MHL. Our CE product category now consists of DTV and Home Theater markets and PC consists of all PC, Storage and other activities.
Standards Activity
We
have been directly involved and instrumental in the following standards efforts:
Mobile High-Definition Link
(MHL) Consortium
In 2010, Nokia, Samsung, Silicon Image, Sony, and Toshiba formed the MHL
Consortium to develop technology and create an industry standard for an audio/video interface for mobile devices such as smartphones and tablets. MHL technology is a low pin count, connector agnostic HD audio and video serial link specifically
defined for connecting mobile devices to HD displays. MHL technology is based on our proprietary Transition-Minimized Differential Signaling (TMDS
®
) technology, the same technology used in the DVI and HDMI specifications, while only requiring a single TMDS data pair to transmit video to MHL enabled DTVs at
resolutions up to 1080p. As a result, MHL technology requires only 5 pins, making it compatible with existing low pin-count connectors in mobile devices. Reduced pin-count connectors are critical in mobile devices given the greatly limited
connector space compared to standard consumer electronic devices such as Blu-Ray players and set top boxes. MHL technology also enables the charging of the mobile device when connected to a display, preserving the devices battery life.
Silicon Image shipped over 140 million mobile MHL products in 2012 as compared to 50 million mobile MHL products shipped in 2011. In addition, 150 companies around the world have become MHL adopters as of December 31, 2012.
MHL, LLC, our wholly-owned subsidiary, is the agent for overseeing and administering the adoption, licensing, and promotion
of the MHL Specification.
High-Definition Multimedia Interface (HDMI) Consortium
In 2002, we formed a consortium with Sony, Matsushita Electric Industrial Co. (Panasonic), Philips, Thomson (Technicolor), Hitachi and
Toshiba to develop the HDMI specification, a next-generation digital interface for consumer electronics. The HDMI specification is based on our TMDS technology, the same technology underlying DVI, the predecessor to the HDMI specification,
which we also developed. The HDMI specification combines uncompressed high-definition video, multi-channel audio, and data into a single digital interface to provide crystal-clear digital quality over a single cable. HDMI technology is fully
backward compatible with PCs, displays and consumer electronics devices incorporating the DVI standard. As an HDMI founder, we have actively participated in the evolution of the HDMI specification, and we expect to continue our involvement in
this and in other digital interface connectivity standards.
3
For CE manufacturers, HDMI technology is a low-cost, standardized means of interconnecting
CE devices that enables them to provide customers with feature-rich products delivering a true home theater entertainment experience. For PC and monitor manufacturers, HDMI technology enables a PC to connect to DTVs and monitors at HD-quality
levels. The market research firm In-Stat estimates that over 800 million HDMI-enabled products shipped worldwide in 2012, contributing to an installed base of over 3 billion HDMI-enabled products. As of December 31, 2012, 1313 companies
around the world were HDMI adopters representing growth of 13% year over year and further strengthening the specifications position as the worldwide standard for high-definition digital connectivity. According to market researcher In-Stat, the
HDMI specification has become widely adopted and has moved from an emerging standard to a prevalent connectivity standard used in many consumer applications.
In October 2011, the HDMI Forum was established to foster broader industry participation in the development of future versions of the HDMI specification and providing for HDMI technology to extend into an
increasingly wider array of devices, applications and industries, including PC, automotive, hospitality, IT, visual signage, airlines and others. We believe that the HDMI Forum will finalize and publish the next version of the HDMI specification
during the coming year.
HDMI Licensing, LLC, our wholly-owned subsidiary, is the agent responsible for licensing the HDMI
specification, promoting the HDMI standard and educating Adopters, retailers and consumers on the benefits of the HDMI specification.
WirelessHD Consortium
Formed in 2006 to create the
industrys first technical specification for multi-gigabit-per-second wireless transmission of high quality, lossless high-definition (HD) video, multi-channel audio, and data for consumer electronics, PC and portable products, the
WirelessHD Consortium is led by, LG Electronics, Panasonic, Samsung, Silicon Image, Sony, TP Vision and Toshiba. The WirelessHD specification, available since January 2008, has been architected and optimized for wireless display connectivity,
achieving in its first generation implementations high-speed rates up to 4Gbps at ten meters for the consumer electronics, personal computing and portable device products. Its core technology, based on the 60GHz millimeter wave frequency band,
promotes theoretical data rates as high as 28Gbps, permitting it to scale to higher resolutions including 4K and beyond.
Digital Visual Interface (DVI)
In 1998, together with Intel, Compaq, IBM, Hewlett-Packard, NEC and Fujitsu, Silicon Image announced the formation of the Digital Display Working Group (DDWG), and in 1999, published the DVI 1.0
specification. Today, in many applications, DVI is being replaced by the more feature-rich MHL/HDMI interface or DisplayPort, a digital display interface standard promoted by the Video Electronics Standards Association (VESA).
Serial Advanced Technology Attachment (SATA)
We have been a contributor to the SATA standard and a supplier of discrete SATA solutions including controllers, storage processors, port multipliers and bridges. Based on serial signaling technology, the
SATA standard specifies a computer bus technology for connecting hard disk drives and other devices and was formed by Intel, Dell, Maxtor, Seagate and Vitesse in 1999.
Products
Mobile
Mobile MHL and HDMI Transmitters.
Our mobile MHL and HDMI transmitter products have been optimized for small-form factor and
low-power and are targeted for mobile devices, such as smartphones, and
4
tablets. MHL transmitters convert digital video into the MHL format enabling mobile devices to connect to DTVs and displays with MHL inputs, or alternatively, to connect to DTVs and displays
with HDMI inputs via an MHL-to-HDMI adapter. In 2011, we introduced the SiI8332, SiI8336, and SiI8334 MHL transmitters targeted for mobile devices, including smartphones and tablets. The SiI8332 and SiI8336 feature MIPI DSI input and
integrate a high-speed switch to reduce system bill-of-materials (BOM) cost. The SiI8334 features an HDMI input, and integrates a high-speed switch. Mobile HDMI transmitters convert digital video into the HDMI format.
MHL-to-HDMI Bridges
. Our MHL-to-HDMI bridge products are targeted for docking stations and adapters, connecting new MHL
mobile products with existing HDMI-enabled DTVs and displays. The SiI9292 is an MHL-to-HDMI bridge which is integral to the design of low-power, MHL-to-HDMI accessory devices such as docking stations, converters and adapters, enabling HD video
and audio connectivity between MHL-ready mobile devices and DTVs and displays with legacy HDMI inputs.
60GHz WirelessHD Transmitters.
In December 2012, we introduced our first 60GHz WirelessHD transmitter
the UltraGig
6400, targeted for integration into mobile devices such as smartphones and tablets. This product
was optimized for small form-factor and low-power and is designed to provide near-zero latency between the mobile device and the HD display. The UltraGig 6400 includes the 60GHz WirelessHd baseband processor, RF, antennas, and MHL transmitter in a
small 10x7mm package.
CE (DTV & Home Theater)
Dual Standard Port Processors.
Our dual standard port processors featuring MHL and HDML functionality are targeted for CE products,
such as DTVs, AV receivers, sound bars and Home-Theater-In-a-Box (HTIB). Our port processors support the latest version of the MHL and HDMI specifications and provide the ability to seamlessly interface to MHL-enabled mobile devices, such
as smartphones and tablets. In addition, our port processors can quickly switch between up to six HDMI inputs using our InstaPort technology. With InstaPort technology, switching time between various HDMI devices attached to a DTV is reduced
from approximately 5 seconds to approximately 1 second. In 2011, we introduced our new InstaPrevue technology. InstaPrevue technology makes TVs and AV receivers easier to use by taking the guesswork out of switching between
HDMI sources. Instead of having to remember what is playing on the connected devices, InstaPrevue provides a live picture-in-picture video preview of each connected device, making it simple and intuitive to switch between the cable box, the disc
player, the gaming console, and any other HDMI-connected source.
HDMI Transmitters.
Our dual standard transmitter
products are targeted for CE products, such as Blu-Ray players, STBs, and AV receivers (AVRs). HDMI transmitters convert digital video and audio into HDMI format enabling products to connect to DTVs and other display that have HDMI
inputs. In 2011, we introduced a new HDMI transmitter, the SiI9136-3, targeted at home theater applications, such as Blu-ray players and AVRs. The SiI9136-3 converts digital video into HDMI 1.4 format with speeds up to 300MHz, enabling support
for 4Kx2K, 1080p120, and 1080p60 3D.
Dual Standard Receivers.
Our dual standard receiver products are targeted for
high-definition displays, such as projectors and PC monitors, as well as AV receivers (AVRs) and enables MHL mobile devices such as smartphones and tablets to easily connect to these receiving devices. These dual standard receivers convert an
incoming encrypted serialized stream to digital video and audio, which is then processed by a television or PC monitor for display.
WirelessHD Transmitters and Receivers.
Our WirelessHD transmitter and receiver products are targeted for CE products, such as HDMI extenders, HDMI cable replacement, and HD projectors. WirelessHD
transmitters send HD audio and video using 60GHz wireless technology at high-quality with near-zero latency. Our Gen3 transmitter and receiver products were released into production during 2012.
5
PC
MHL/HDMI-to-HDMI Bridges.
Our MHL/HDMI-to-HDMI bridge products are targeted for high-definition displays, such as PC monitors and DTVs, enabling added support for MHL. The SiI1292 is an
MHL/HDMI-to-HDMI bridge designed to enable single port displays such as HDTVs, PC monitors, multi-function monitors or HD projectors, to connect to MHL-enabled mobile devices via an MHL cable.
Simplay Labs, LLC
We
believe Simplay Labs LLC, our wholly owned subsidiary, has further enhanced our reputation for quality, reliable products and leadership in the CE and Mobile markets. The Simplay HD Interoperability Program offers one of the most robust and
comprehensive testing engagements to manufacturers as device interoperability and consumer quality of experience are of significant concern to manufacturers, retailers and consumers. Devices that pass Simplays Authorized Testing Centers
(ATCs) and enhanced interoperability testing requirements are verified to meet HDMI and MHL technology interface compliance specifications, and have also demonstrated interoperability through empirical testing against peer devices
maintained by Simplay Labs. Simplay Labs has service centers operating in the U.S., South Korea and China providing compliance, interoperability, quality of experience and performance testing at global testing centers. Simplay Labs also verifies MHL
devices for standards compliance and interoperability. A number of products have used the SimplayHD logo on product packaging, within product literature and on website promotions.
Simplay Labs also offers test system to manufacturers in supporting their efforts to quickly bring high quality and compliant products to
market. The Simplay test system products portfolio includes the Simplay Labs Explorer HDMI-CEC test system and protocol analyzer, which was approved as an official HDMI Authorized Test Center (ATC) test tool in 2009. The first HDMI-CEC R&D
tool of its kind for CE manufacturers, the Simplay CEC Explorer sets a higher standard for development of HDMI CEC features and enables manufacturers to bring products to market faster. The Simplay Labs Universal Test System (UTS) is a new
generation test system that utilizes an industry standard shelf-based modular slot approach to support many HD standards, interfaces and function within a single chassis. The UTS is the first test system of its kind to offer both HDMI and MHL
system test capabilities within a single platform.
Customers
We focus our sales and marketing efforts on achieving design wins with original equipment manufacturers (OEMs) of mobile, CE and PC
products. A small number of customers and distributors have generated and are expected to continue to generate a significant portion of our total revenue. Our top five customers, which include distributors, generated 64.4%, 61.4% and 58.3%, of our
total revenue in 2012, 2011 and 2010, respectively. For the year ended December 31, 2012, total revenue from Samsung Electronics and our distributor Edom Technology accounted for 35.0% and 10.3% of our total revenue, respectively. For the year
ended December 31, 2011, total revenue from Samsung Electronics and our distributors Edom Technology and Weikeng accounted for 23.4%, 13.8% and 10.2% of our total revenue, respectively. For the year ended December 31, 2010, total revenue
from Samsung Electronics and our distributors Microtek Corporation and Innotech Corporation accounted for 17.0%, 11.0% and 11.3% of our total revenue, respectively.
A significant percentage of our revenue was generated through distributors. Our revenue generated through distributors was 38.4% of our total revenue in 2012, a decrease from 50.1% and 61.1% of our total
revenue in 2011 and 2010, respectively. Please refer to the section of this report titled Risk Factors for a discussion of risks associated with the sell-through arrangement with our distributors.
A substantial portion of our business is conducted outside the United States; therefore, we are subject to foreign business, political
and economic risks. For the years ended December 31,2012, 2011 and 2010, approximately 57.4%, 67.1% and 78.9% of our total revenue, respectively, was generated from customers and distributors located outside of North America, primarily in
Asia.
6
Research and Development
Our research and development efforts continue to focus on innovative technologies standards, and products featuring higher-bandwidth and lower-power links, efficient algorithms, architectures and
feature-rich implementations for mobile, CE and PC applications. By utilizing our patented technologies and optimized architectures, we believe our products can scale with advances in semiconductor manufacturing process technology, simplify system
design and provide innovative solutions for our customers. As of December 31, 2012, we had been issued 448 United States and International patents and had 514 United States and International patent applications pending. Our U.S. issued
patents have expiration dates which range from 2015 to 2030 subject to our payment of periodic maintenance fees. Our policy is to seek to protect our intellectual property rights throughout the world by filing counterparts or our US patent
applications in select foreign jurisdictions. A discussion of risks related to our intellectual property is set forth in the section of this report titled Risk Factors.
We have extensive experience in the areas of high-speed interconnect architecture, circuit design, logic design/verification,
firmware/software, digital audio/video systems and wireless baseband and radio frequency (RF) technology and architecture. We have invested and expect that we will continue to invest, significant funds for research and development activities. Our
research and development expenses were approximately $77.4 million, $66.5 million and $55.3 million in 2012, 2011 and 2010, respectively, including stock-based compensation expense of $3.6 million, $3.8 million and $2.6 million for 2012,
2011 and 2010, respectively.
Sales and Marketing
We sell our products using direct sales support and marketing field offices located in North America, Europe, Taiwan, China, Japan and Korea and through a network of distributors located throughout North
America, Asia and Europe. Our sales strategy for all products is to achieve design wins with key industry companies in order to grow the markets in which we participate and to promote and accelerate the adoption of industry standards that we support
or are developing.
Our sales are primarily made through standard purchase orders for delivery of products. We follow industry
practice that allows customers to cancel, change or defer orders with limited advance notice prior to shipment. Given this practice, we do not believe that backlog is a reliable indicator of future revenue levels.
We are mainly affected by the seasonal trends of the CE and mobile markets. The impacts of seasonality are to some extent dependent on
product and market mix of products shipped. The third quarter is normally our strongest quarter for revenue as manufacturers prepare for the major holiday selling season.
Manufacturing
Wafer Fabrication
Our semiconductor products are designed using standard, complementary metal oxide semiconductor processes, which permit us to use
independent wafer foundries to fabricate them. By outsourcing the manufacture of our semiconductor products, we are able to avoid the high cost of owning and operating a semiconductor wafer fabrication facility and to take advantage of our contract
manufacturers high-volume economies of scale. Outsourcing our manufacturing also gives us direct and timely access to various process technologies. This allows us to focus our resources on the innovation, design and quality of our products.
We rely almost entirely on Taiwan Semiconductor Manufacturing Company (TSMC) to manufacture all of our semiconductor
products. Our semiconductor products are currently fabricated using 0.35, 0.25, 0.18, 0.13, 0.065 and .055 micron processes. We continuously evaluate the benefits, primarily the improved performance, costs and feasibility, of migrating our products
to smaller geometry process technologies. Because of the cyclical nature of the semiconductor industry, capacity availability can change quickly and significantly. We discuss the risks related to our sole sourcing of the manufacturing of our
products in the section of this report titled Risk Factors.
7
Assembly and Test
Our semiconductor products are designed to use low-cost standard packages and to be tested with widely available semiconductor test
equipment. We outsource all of our packaging and our test requirements. This enables us to take advantage of high-volume economies of scale and supply flexibility and gives us direct and timely access to advanced packaging and test technologies.
Since the fabrication yields of our products have historically been high and the costs of our packaging have historically been low, we test our products after they are assembled. This testing method has not caused us to experience unacceptable
failures or yields. Our operations personnel closely review the process and control and monitor information provided to us by our foundries. To ensure quality, we have established firm guidelines for rejecting wafers that we consider unacceptable.
However, lack of testing prior to assembly could have adverse effects if there are significant problems with wafer processing. Additionally, for newer products and products for which yield rates have not stabilized, we may conduct bench testing
using our personnel and equipment, which is more expensive than fully automated testing.
Quality Assurance
We focus on product quality through all stages of the design and manufacturing process. Our designs are subjected to
in depth circuit simulation at temperature, voltage and processing extremes before being fabricated. We also subject pre-production parts to extensive characterization and reliability testing. We also sample early production parts to ensure we are
getting the same results as we did during pre-production. We pre-qualify each of our subcontractors through an audit and analysis of the subcontractors quality system and manufacturing capability. We also participate in quality and reliability
monitoring through each stage of the production cycle by reviewing data from our wafer foundries and assembly subcontractors. We closely monitor wafer foundry production to ensure consistent overall quality, reliability and yields. Our independent
foundries and our assembly and test subcontractors have achieved International Standards Organization (ISO) 9001 certification.
Competition
The
markets in which we participate are intensely competitive and are characterized by rapid technological change, evolving standards, short product life cycles and decreasing prices. We believe that some of the key factors affecting competition in our
markets are levels of product integration, compliance with industry standards, time-to-market, cost, product capabilities, system design costs, intellectual property, customer support, quality and reputation.
In addition, the competitive landscape includes other connectivity solutions such as Wi-Fi
®
, Bluetooth
®
and AirPlay. These solutions provide our customers with alternative technologies for solving their various connectivity requirements.
Mobile
In the mobile market, our products are designed into a variety of devices, including smartphones, tablets,
digital still cameras, and camcorders. Our products compete against discrete HDMI and MHL products offered by companies such as Analog Devices, Analogix, Parade, and Explore. Our products also face competition from companies integrating
HDMI or MHL transmit functionality into system-on-a-chip (SoCs), such as Broadcom, Intel, Qualcomm, Texas Instruments, NVIDIA, Marvell, ST Ericsson, and MediaTek. In addition, we also compete in some instances against in-house semiconductor
solutions designed by large consumer electronics OEMs. We also face competition from alternative HD connectivity technologies, such as Mobility DisplayPort (MYDP) which is a mobile version of DisplayPort that was released during 2012 that is being
offered as an alternative to MHL and is being promoted by Analogix. MiraCast (or Wi-Fi Display) is a wireless video technology being offered as another alternative to both MHL and WirelessHD, and is being promoted by Qualcomm and Cavium.
CE
In the consumer electronics market, our products are designed into a variety of devices, including
DTVs, STBs, Blu-ray players, AV receivers, soundbars, and home theater in a box (HTIBs). Our products compete against discrete HDMI products offered by companies such as Analog Devices, Analogix
8
Semiconductor, Parade Technologies and Explore. Our products face competition from companies integrating HDMI or MHL receive or transmit functionality into SoCs, such as Broadcom,
Intel, MediaTek, Mstar, Sigma and Marvell. We also compete in some instances against in-house semiconductor solutions designed by large consumer electronics OEMs.
PC
In the PC market, Intel, AMD, NVIDIA and other competitors have integrated HDMI and/or DVI into their PC processor and chips sets. Our HDMI and DVI products also
face competition from products based on the DisplayPort standard, which is a digital display interface standard being put forth by the Video Electronics Standards Association (VESA) that defines a digital audio/video interconnect intended to be used
primarily between a computer and a display. DisplayPort is increasingly replacing DVI as the default standard for PC digital video interconnects technology. WiGig is a 60GHz wireless standard being offered as an alternative to wired connectivity and
to WirelessHD, and is being promoted by Wilocity and Intel.
Employees
As of December 31, 2012, we had a total of 623 full-time employees, including 279 located outside of the United States. None of our
employees are represented by a collective bargaining agreement. We have never experienced any work stoppages. We consider our relations with our employees to be good. We depend on the continued service of our key technical, sales and senior
management personnel and our ability to attract and retain additional qualified personnel.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are filed with the U.S. Securities and Exchange Commission (the SEC). We are subject to the informational requirements of the
Exchange Act and file or furnish reports, proxy statements, and other information with the SEC. Such reports and other information filed by us with the SEC are available free of charge on the investor relations section of our website at
http://ir.siliconimage.com when such reports are available on the SECs website. The public may read and copy any materials filed by us with the SEC at the SECs Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements and other information regarding issuers
that file electronically with the SEC at http://www.sec.gov. We are not including the information contained on our website as a part of, or incorporating it by reference into our annual report on Form 10-K.
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.
9
Our success depends on our ability to develop and bring to market innovative new
technologies and semiconductor products as well as continued growth in consumer and customer demand for these new technologies and semiconductor products. We may not be able to develop and bring to market such technologies and products in a
timely manner because the process of developing high-performance semiconductor products is complex and costly.
Our
future growth and success depends on
the continued growth in market acceptance and the consumer and customer demand for our mobile technologies and semiconductor products, especially our MHL enabled products. Growth in the demand
for our MHL enabled products accounted for a significant portion of our revenue growth in 2012. If we cannot continue to increase consumer awareness of and demand for MHL enabled products, our customers demand for our MHL enabled
semiconductor products may not continue to grow as rapidly as has been the case and may even decrease. This could have a negative impact on our business and results of operations.
Our future growth and success also depends on our ability to continuously develop and bring to market new and innovative semiconductor
products on a timely basissuch as semiconductor products supporting the MHL and WirelessHD standards. 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 incorporate the innovations, features or functionality at the price points necessary to achieve a desired level of market acceptance in the anticipated timeframes. There is no way to make certain that
any such new or future products will contribute significantly to our revenue. We face significant competition from startups having the resources, flexibility and ability to innovate faster than we can. We also face competition from established
companies with more significant financial resources and greater breadth of product line than we have, providing them with a competitive advantage in the marketplace. If we cannot continue to innovate and to develop and market new products could
negatively affect our business and results of operations could be negatively affected.
The development of new semiconductor
products is highly complex. On several occasions in the past, we have experienced delays, some of which exceeded one year, in the development and introduction of our new semiconductor products. As our products integrate new, more advanced functions
and transition to smaller geometries, they become more complex and increasingly difficult to design, manufacture and debug.
Our ability to successfully develop and introduce new products also depends on a number of factors, including, but not limited to:
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our ability to accurately predict market trends and requirements, the establishment and adoption of new standards in the market and the evolution of
existing standards and connectivity technologies, including enhancements or modifications to existing standards such as HDMI, MHL and WirelessHD;
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our ability to identify customer and consumer market 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;
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our ability to develop advanced technologies and capabilities and new products and solutions that satisfy customer and consumer market demands;
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how quickly our competitors and customers integrate the innovation and functionality of our new products into their semiconductor products, putting
pressure on us to continue to develop and introduce innovative products with new features and functionality;
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our ability to complete and introduce new product designs on a timely basis, while accurately anticipating the market windows for our products and
bringing them to market within the required time frames;
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our ability to manage product life cycles;
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our ability to transition our product designs to leading-edge foundry processes in response to market demands, while achieving and maintaining of high
manufacturing yields and low testing costs;
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the consumer electronics markets acceptance of our new technologies, architectures products and other connectivity solutions; and
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consumers shifting preferences for how they purchase and consume HD content, which may not be met by our products.
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Accomplishing what we need to do to be successful is extremely challenging, time-consuming, and expensive; and there is no assurance that
we will succeed. We may experience product development delays from unanticipated engineering complexities, commercial deployment of new connectivity standards changing market or competitive product requirements or specifications, difficulties in
overcoming resource constraints, our inability to license third-party technology and other factors. Also our competitors and customers may integrate the innovation and functionality of our products into their own products, thereby reducing demand
for our products. If we are not able to develop and introduce new and innovative products and solutions successfully and in a timely manner, our costs could increase or our revenue could decrease, both of which would adversely affect our operating
results. Even if we are successful in our product development efforts, it is possible that failures in our commercialization may result in delays or failure in generating revenue from these new products.
In addition, we must work with semiconductor foundries and potential customers to complete new product development and to validate
manufacturing methods and processes to support volume production and potential re-work. These steps may involve unanticipated difficulties, which could delay product introductions and reduce market acceptance of our products. These difficulties and
the increasing complexity of our products may further result in the introduction of products that contain defects or that do not perform as expected, which would harm our relationships with customers and market acceptance of our new products. There
can be no assurance that we will be able to achieve design wins for our 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.
We have made acquisitions of companies and intangible assets in the past and expect to continue to make such acquisitions in the
future as we look to develop and bring to market new and innovative semiconductor and products and technologies on a timely basis. Acquisitions of companies or intangible assets involve numerous risks and uncertainties.
Our growth depends on the growth of the markets we serve and our ability to enter new markets. We are also dependent on our ability to
enhance our existing products and technologies and to introduce new products and technologies for existing and new markets on a timely basis. The acquisition of companies or intangible assets is a strategy we have used in the past and will continue
to use to develop new technologies and products enhance our existing products portfolio and to enter new markets. Acquisitions involve numerous risks, including, but not limited to, the following:
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the inability to find acquisition opportunities that are suitable to our needs available in the time frame necessary for us to take advantage of market
opportunities or available at a price that we can afford;
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the difficulty and increased costs of integrating the operations and employees of the acquired business, including our possible inability to keep and
retain key employees of the acquired business;
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the disruption to our ongoing business of the acquisition process itself and subsequent integration;
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the risk of undisclosed liabilities of the acquired businesses and potential legal disputes with founders or stockholders of acquired companies;
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the inability to successfully commercialize acquired products and technologies;
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the inability to retain the customers and suppliers of the acquired business;
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the need to take impairment charges or write-downs with respect to acquired assets and technologies; and
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the risk that the future business potential as projected may not be realized and as a result, we that we may be required to take a charge to earnings
that would impact our profitability.
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We cannot assure you 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. Our failure to manage growth effectively and to successfully integrate acquisitions made by us could
materially harm our business and operating results.
In January 2007, for example 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.
We have made and continue to make strategic investments in and enter into strategic partnerships
with third parties. The anticipated benefits of these investments and partnerships may never materialize.
We
have made and will continue to make strategic investments in and enter into strategic partnerships with third parties with the goal of acquiring or gaining access to new and innovative semiconductor products and technologies on a timely
basis. Negotiating and performing under these arrangements involves significant time and expense, and we cannot assure you that the anticipated benefits of these arrangements will ever materialize or that the products or technologies
involved will ever be commercialized or that, as a result, we will not have write down a portion or all of our investment.
For example, on July 13, 2011, we purchased a 17.5% equity ownership interest in a U.S. based privately-held company for $7.5
million in cash. In July 2012, we invested an additional $2.75 million in the form of convertible secured promissory notes. As of September 30, 2012, we concluded that these investments are impaired, and that such impairment is other than
temporary. In reaching this conclusion, we considered all available evidence, including that (i) the privately-held company had not achieved forecasted revenue or operating results, (ii) the privately-held company had limited liquidity or
capital resources as of September 30, 2012, and (iii) the overall progress the privately-held company has made towards its business objectives, including the acquisition of home theater wireless speaker customers, has not progressed as
previously expected. As a result of our analysis of these factors, we believed that the possibility was remote that we would exercise our call option on the investments or that we would realize any other value from these investments. As a result, we
recorded a non-cash impairment charge of $7.5 million representing the carrying value of the investments in the quarter ended September 30, 2012.
In 2011, we converted $8.5 million of secured promissory notes from a third-party company into advances for intellectual properties. In the fourth quarter of 2011 and again subsequent to our year ended
December 31, 2011, we assessed our advances for intellectual properties for impairment. We concluded that the intangible assets related to these advances were fully impaired as of December 31, 2011, and have written
them off. This conclusion was based on our determination that certain of the technologies was no longer aligned with our product roadmap due to a change in strategic focus and therefore, would not be used. The remaining technologies were
impaired due to an adverse change in the extent and manner in which the technology was expected to be utilized by a strategic customer, as well as the competitive environment in which the technology was intended for use. In connection with this
assessment, we recognized an impairment charge of $8.5 million in our 2011 consolidated statement of operations.
Negotiation
and integration of acquisitions or strategic investments could divert managements attention and other company resources. Any of the following risks associated with past or future acquisitions or investments could impair our ability to grow our
business, develop new products and sell our products and ultimately could harm our growth or financial results:
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difficulty in combining the technology, products, operations or workforce of the acquired business with our business;
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difficulties in entering into new markets in which we have limited or no experience and where competitors have stronger positions;
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loss of, or impairment of relationships with, any of our key employees, vendors or customers;
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difficulty in operating in new and potentially disperse locations;
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disruption of our ongoing businesses or the ongoing business of the company we invest in or acquire;
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failure to realize the potential financial or strategic benefits of the transaction;
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difficulty integrating the accounting, management information, human resources and other administrative systems of the acquired business;
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disruption of or delays in ongoing research and development efforts and release of new products to market;
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diversion of capital and other resources;
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assumption of liabilities;
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issuance of equity securities that may be dilutive to our existing stockholders;
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diversion of resources and unanticipated expenses resulting from litigation arising from potential or actual business acquisitions or investments;
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failure of the due diligence processes to identify significant issues with product quality, technology and development, or legal and financial issues,
among other things;
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incurring one-time charges, increased contingent liabilities, adverse tax consequences, depreciation or deferred compensation charges, amortization of
intangible assets or impairment of goodwill, which could harm our results of operations; and
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potential delay in customer purchasing decisions due to uncertainty about the direction of our product offerings or those of the acquired business.
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Mergers and acquisitions of high-technology companies are inherently risky and subject to many factors
outside of our control and no assurance can be given that our previous or future acquisitions will be successful, will deliver the intended benefits of such acquisition, and will not materially harm our business, operating results or financial
condition. Failure to manage and successfully integrate acquisitions could materially harm our business and operating results.
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, including
without limitation:
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our ability to manage product introductions and transitions, develop necessary sales and marketing channels and manage our entry into new market
segments;
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our ability to manage sales into multiple markets such as mobile, CE and PC, which may involve additional research and development, marketing or other
costs and expenses;
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our ability to enter into licensing transactions when expected and make timely deliverables and milestones on which recognition of revenue often
depends;
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our ability to develop customer solutions that adhere to industry standards in a timely and cost-effective manner;
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our ability to achieve acceptable manufacturing yields and develop automated test programs within a reasonable time frame for our new products;
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our ability to manage joint ventures and projects, design services and our supply chain partners;
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our ability to monitor the activities of our licensees to ensure compliance with license restrictions and remittance of royalties;
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our ability to structure our organization to enable achievement of our operating objectives and to meet the needs of our customers and markets;
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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
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our ability to successfully maintain certain structural and various compliance activities in support of our global structure which is designed to
result in certain operational benefits as well as an overall lower tax rate and which, if not maintained, may result in us losing these operational and tax benefits; and
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Our ability to effectively manage our business.
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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 fluctuate significantly in the future based on a number of factors many of which
we have little or no control over. These factors include, but are not limited to:
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the growth, evolution and rate of adoption of industry standards in our key markets, including mobile, CE and PCs;
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the completion of a few key licensing transactions in any given period on which our anticipated licensing revenue and profits are highly dependent, and
the timing of which is not always predictable and is especially susceptible to delay beyond the period in which completion is expected and we depend on a few licensees in any period for substantial portions of our anticipated licensing revenue and
profits;
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our licensing revenue has been uneven and unpredictable over time and is expected to continue to be uneven and unpredictable in the future, resulting
in considerable fluctuation in the amount of revenue recognized in a particular quarter;
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the impact on our operating results of the results of the royalty compliance audits which we regularly perform;
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competitive pressures, such as the ability of our competitors to offer or introduce products that are more cost-effective or that offer greater
functionality than our products;
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average selling prices and gross margins of our products, which are influenced by competition and technological advancements, among other factors;
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government regulations impacting the industry standards in our key markets or our products;
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the availability or continued viability of other semiconductors or key components required for a customer solution where we supply one or more of the
necessary components;
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the cost to manufacture our products, including the cost of gold, and prices charged by the third parties who manufacture, assemble and test our
products; and
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fluctuations in market demand, one-time sales opportunities and sales goals, which sometimes result in heightened sales efforts during a given period
that may adversely affect our sales in future periods.
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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. For example, in January 2013, we announced a
reduction in our revenue guidance for the fourth quarter of 2012 as a result of the rescheduling of certain orders by a large customer.
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Our business has been and may continue to be significantly impacted by the
deterioration in worldwide economic conditions and 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 disruptions, and may continue to experience disruptions in the future, including
national debt and fiscal concerns, diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, and continued uncertainty about economic stability. 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 mobile and CE product revenue, which comprised approximately 72.6%, 69.5% and
67.3% of total revenue for the years ended December 31, 2012, 2011 and 2010, respectively, is dependent on continued demand for consumer electronics, including but not limited to, DTVs, STBs, AV receivers, tablets, digital still cameras, and
smartphones. Demand for consumer electronics is a function of the health of the economies in the United States, Japan and around the world. As a result of the recent global recession, as well as the European sovereign debt crisis, the overall
demand for consumer electronics has been and may continue to be adversely affected. As a result, the demand for our mobile, CE and PC products and our operating results have in the past and may in the future 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 mobile, CE and PC 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 our business risk and market volatility.
Our business strategy
includes licensing our IP to companies that incorporate it into their respective technologies that address markets in which we do not directly participate or compete and we license into markets where we do participate and to compete. There can be no
assurance that these customers will continue to be interested in licensing our technology on commercially favorable terms or at all. Our licensing revenue can be impacted by the introduction of new technologies by customers in place of the
technologies used by them based on our IP. There also can be no assurance that our licensing customers 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 or will maintain the confidentiality of our proprietary information. Our IP licensing agreements are complex and depend upon many factors
including completion of milestones, allocation of values to delivered items and customer acceptances. Many of these require significant judgments.
Our licensing revenue fluctuates, sometimes significantly, from period to period because it is heavily dependent on a few key transactions being completed in a given period, the timing of which is
difficult to predict and may not match our expectations. Because of its high margin, the licensing revenue portion of our overall revenue can have a disproportionate impact on gross profit and profitability. Generating revenue from IP licenses
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is a lengthy and complex process that may last beyond the period in which our efforts begin and, once an agreement is in place, the timing of revenue recognition may be dependent on the 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. The accounting rules governing the recognition of revenue from IP
licensing transactions are increasingly complex and subject to interpretation. As a result, 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 and gross margins from sales of our products and
losses.
The markets in which we operate are intensely competitive and characterized by rapid technological change,
evolving standards, short product life cycles and declining selling prices. We expect competition to increase, as industry standards become more widely adopted, new industry standards are introduced, competitors reduce prices and offer products with
greater levels of integration, and new competitors enter the markets we serve.
Our products face competition from companies
selling similar discrete products and from companies selling products such as chipsets and system-on-a-chip (SoC) solutions with integrated functionality. Our competitors include semiconductor companies that focus on the mobile, CE and PC markets,
as well as major diversified semiconductor companies and we expect that new competitors will enter our markets.
Some of our
current or potential customers, including our own licensees, have their own internal semiconductor capabilities or other semiconductor suppliers or relationships, and may also develop solutions integrating the innovations, features
and functionality of our products for use in their own products rather than purchasing products from us. Some of our competitors have already established supplier or joint development relationships with some of our current or potential
customers and may be able to leverage these relationships to discourage these customers from purchasing products from us or to 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 therefore may be able to adapt more
quickly to new or emerging technologies and customer requirements, or to devote greater resources to the promotion and sale of their products. Our competitors in the CE market include Analog Devices, Analogix Semiconductor, Parade Technologies,
Explore, Broadcom, Intel, MediaTek, Mstar, Sigma and Marvell and our competitors in the Mobile market include Analogix, Parade, Explore, Broadcom, Intel, Qualcomm, Texas Instrument, NVIDIA, Marvell, ST Ericsson and MediaTek. Mergers and acquisitions
are very common in our industry and 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, technologies 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 new products. In addition, new standards that compete with standards that we promote have been and likely will continue to be introduced, 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 challenges, our results of operations could be negatively affected.
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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 geometries. This requires
us to change 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 180 nanometer, 130 nanometer, 65 nanometer and 55 nanometer geometry processes. We are now
designing new products in 40 nanometer process technologies. In the past, we have experienced some difficulties in shifting to smaller geometry process technologies or new manufacturing processes, resulting in reduced manufacturing yields, delays in
product deliveries and increased expenses. The transition to 40 nanometer geometry process technologies has and will continue to 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 relationship with our foundry 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 products are not commercially successful.
Our products are generally incorporated into our
customers products at the customers design stage. We rely on OEMs in the markets we serve to select our products to be designed into their products. Without having our products designed into our customers products (we refer to such
design integration as design wins), it is very difficult to sell our products. We often incur significant expenditures on the development of a new product under the hope for such design wins without any assurance that a
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
competitors and, accordingly, may not supply this information to us on a timely basis, if at all. Once a manufacturer designs a competitors 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 a 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 sales of 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 products 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.
Our customers typically test and evaluate our products prior to deciding to design our product into their own products. This evaluation
period generally lasts from three to over six months to test, followed by an additional
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three to over nine months to begin volume production of products incorporating our products. This lengthy sales cycle may cause us to experience significant delays and to incur additional
inventory costs until we generate revenue from our products. It is possible that we may never generate any revenue from products after incurring significant expenditures. Even if we achieve a design win with a customer, there is no assurance that
the customer will successfully market and sell its products with our integrated components. The length of our sales cycle increases the risk that a customer will decide to cancel or change its product plans, which would 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, from time to time,
our product sales and marketing efforts may not generate sufficient revenue requiring that we write off excess and obsolete inventory. If we incur significant marketing expenses and investments in inventory in the future that we are not able to
recover or otherwise compensate for 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 our 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 customers need 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 and gross margins and adversely affect our results of operations.
Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue and we may not
be able to diversify our customer and/or distributor base. For the year ended December 31, 2012, total revenue from Samsung Electronics and our distributor Edom Technology accounted for 35.0% and 10.3% of our total revenue,
respectively. For the year ended December 31, 2011, total revenue from Samsung Electronics and our distributors Edom Technology and Weikeng accounted for 23.4 %, 13.8% and 10.2% of our total revenue, respectively. For the
year ended December 31, 2010, total revenue from Samsung Electronics and our distributors Innotech Corporation and Microtek, Inc. accounted for 17.0%, 11.3% and 11.0% of our total revenue, respectively. In addition, an OEM
customer of ours may buy our products through multiple distributors, contract manufacturers and /or directly from us, which could mean an even greater concentration of revenue in such a customer. 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 or products incorporating our products and generate revenue for us. As a result of this concentration of revenue
in few customers, our results of operations could be adversely affected if any of the following occurs:
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one or more of our customers or distributors becomes insolvent or goes out of business;
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one or more of our key customers or distributors significantly reduces, delays or cancels orders; and/or
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one or more significant customers selects products manufactured by one of our competitors for inclusion in their future product generations.
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While our participation in multiple markets has broadened our customer base, we remain dependent on a small
number of customers or, in some cases, a single customer for a significant portion of our revenue in any given quarter, the loss of which could adversely affect our operating results.
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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 OEMs rely on third-party manufacturers or distributors to provide inventory management and purchasing functions. Distributors
generated 38.4%, 50.1% and 61.1% of our total revenue for the years ended December 31, 2012, 2011 and 2010, respectively. Selling through distributors reduces our ability to forecast sales and increases the complexity of our business, requiring
us to:
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manage a more complex supply chain;
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monitor the level of inventory of our products at each distributor;
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estimate the impact of credits, return rights, price protection and unsold inventory at distributors; and
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monitor the financial condition and credit-worthiness of our distributors, many of which are located outside of the United States and not publicly
traded.
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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 OEMs 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.
We are dependent upon suppliers for a portion of raw materials used in the manufacturing of our products and new regulations
related to conflict free minerals could require us to incur additional expenses in connection with procuring these raw materials.
The Securities and Exchange Commission has recently adopted additional disclosure requirements related to certain minerals, so called conflict minerals, sourced from the Democratic Republic of
Congo and adjoining countries for which such conflict minerals are necessary to the functionality of a product manufactured, or contracted to be manufactured. These regulations also require a reporting company to disclose efforts to prevent the
use of such minerals.
In our industry, such conflict minerals are most commonly found in metals. Some of our products
use certain metals, such as gold, silicon and copper, as part of the manufacturing process. Although we have not yet determined whether the gold, silicon or copper used in the manufacture of our products would be considered conflict minerals,
if such a determination is made, we may not be able to obtain alternative supplies for such metals due to the limited number of sources of non conflict metals. If we are required to use alternative supplies, the price we pay for such metals may
increase. Additionally, our reputation with our customers could be harmed if we cannot certify that our products do not contain conflict metals.
Governmental action against companies located in offshore jurisdictions may lead to a reduction in the demand for our common shares.
Federal and state legislation have been proposed in the past, and similar legislation may be proposed in the future which, if enacted,
could have an adverse tax impact on both us and our stockholders. For example, the ability to defer taxes as a result of permanent investments offshore could be limited, thus raising our effective tax rate.
The cyclical nature of the semiconductor industry may create constraints in our foundry, test and assembly capacities and strain
our management and resources.
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
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assembly capacity of third-party suppliers. During periods of increased demand and constraints in manufacturing capacity, production capacity for our semiconductors may be subject to allocation,
in which case not all of our production requirements may 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.
The cyclicality of the semiconductor industry may also strain our management and resources. To manage these industry cycles effectively, we must:
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improve operational and financial systems;
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train and manage our employee base;
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successfully integrate operations and employees of businesses we acquire or have acquired;
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attract, develop, motivate and retain qualified personnel with relevant experience; and
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adjust spending levels according to prevailing market conditions.
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If we cannot manage industry cycles effectively, our business could be seriously harmed.
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 foundry 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 an independent foundry and assembly and
test facilities involves a number of significant risks, including, but not limited to:
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reduced control over delivery schedules, quality assurance, manufacturing yields and production costs;
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lack of guaranteed production capacity or product supply, potentially resulting in higher inventory levels; and
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lack of availability of, or delayed access to, next-generation or key process technologies.
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For example, in the fourth quarter of fiscal 2012, we recorded the write down of certain unsalable inventory amounting to $6.2 million
due to defects in the material used by one of our assembly vendors in the packaging process.
We do not have a long-term
supply agreement with our third party semiconductor foundry or many of our other subcontractors and instead obtain these 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 or multi month quote. Our requirements represent a small portion of the total production capacity
of our outside foundry, 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. We may elect to have our suppliers move or expand production of our products to different facilities under their control, even in different locations, which may be time consuming, costly and
difficult, have an adverse effect on quality, yields and costs and require us and/or our customers to re-qualify our products, which could open up design wins to competition and result in the loss of design wins. If our subcontractors are unable or
unwilling to continue manufacturing, assembling or testing our products in the required volumes, at acceptable quality, yields and costs and in a timely manner, our business will be substantially harmed. In this event, we would have to identify
and qualify substitute sub-contractors, which would be time-consuming, costly and difficult; and we cannot guarantee that we would be able to identify and
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qualify such substitute sub-contractors 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. 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 can reduce yields and prevent identification of problems until well into the production cycle or, in some cases, until 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. For example, in January 2013, we announced that we took a charge to reflect the write down of certain unsalable inventory due to defects in the material used by one of our
assembly vendors in the packaging process. 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 and replacement costs, 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 and because we have employees in research and development centers and sales offices throughout the world.
A substantial portion of our business is conducted outside of the United States and we have a significant portion of our workforce in
research and development centers and sales offices throughout the world. 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 years ended
December 31, 2012, 2011 and 2010, approximately 57.4%, 67.1% and 78.9% of our total revenue respectively, was generated from customers and distributors located outside of North America, 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 to our
headquarters in Sunnyvale, California, we maintain research and development centers in Shanghai, China, and Hyderabad, India, and undertake sales and marketing activities through regional offices in several other countries. As we grow, we intend to
continue to expand our international business activities.
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Accordingly, we are subject to a variety of risks associated with the conduct of business
outside the United States. These risks include, but are not limited to:
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political, social and economic instability;
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the operational challenges of conducting our business in several geographic regions around the world, especially in the face of different business
practices, social norms and legal standards that differ from those to which we are accustomed and held to as a publicly traded company in the United States, particularly with respect to the protection and enforcement of intellectual property rights
and the conduct of business generally;
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policies, laws, regulations and social pressures in foreign countries that favor and promote their own local, domestic companies over non-domestic
companies, and additional trade and travel restrictions;
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natural disasters and public health emergencies;
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nationalization of business and blocking of cash flows;
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changing raw material, energy and shipping costs;
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the imposition of governmental controls and restrictions;
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burdens of complying with a variety of foreign laws;
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import and export license requirements and restrictions of the United States and each other country in which we operate;
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unexpected changes in regulatory requirements;
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foreign technical standards;
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changes in taxation and tariffs, including potentially adverse tax consequences;
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difficulties in staffing and managing international operations;
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fluctuations in currency exchange rates;
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cultural and language differences;
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difficulties in collecting receivables from foreign entities or delayed revenue recognition;
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expense and difficulties in protecting our intellectual property in foreign jurisdictions;
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exposure to possible litigation or claims in foreign jurisdictions; and,
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potentially adverse tax consequences.
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Any of the factors described above may have a material adverse effect on our ability to increase or maintain our foreign sales or conduct our business generally.
Also OEMs 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 their competitiveness in the marketplace. This in turn could lead to a reduction in our sales and profits.
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Our success depends on our investment of significant amount of resources in research
and development. We may have to invest more resources in research and development than anticipated, which could increase our operating expenses and negatively impact our operating results.
Our success depends on us investing significant amounts of resources into research and development. Our research and development
expenses as a percent of our total revenue were 30.7%, 30.1% and 28.9% for the year ended December 2012, 2011 and 2010, respectively. We expect to have to continue to invest heavily in research and development in the future in order to continue
to innovate and come to market with new products in a timely manner and increase our revenue and profitability. If we have to invest more resources in research and development than we anticipate, we could see an increase in our operating
expenses which may negatively impact our operating results. Also, if we are unable to properly manage and effectively utilize our research and development resources, we could see adverse effects on our business, financial condition and operating
results.
In addition, if new competitors, technological advances by existing competitors, our entry into new markets, or
other competitive factors require us to invest significantly greater resources than anticipated in our research and development efforts, our operating expenses would increase. If we are required to invest significantly greater resources than
anticipated in research and development efforts without a corresponding increase in revenue, our operating results could decline. Research and development expenses are likely to fluctuate from time to time to the extent we make periodic incremental
investments in research and development and these investments may be independent of our level of revenue which could negatively impact our financial results. In order to remain competitive, we anticipate that we will continue to devote substantial
resources to research and development, and we expect these expenses to increase in absolute dollars in the foreseeable future due to the increased complexity and the greater number of products under development.
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 confidential and proprietary technologies and information. Our success depends on our ability to adequately protect such intellectual property. With respect to our patents, we have been issued patents and have a number
of pending patent applications. However, we cannot assume that any pending patents applications will be issued or, if issued, that any claims allowed will protect our technology. Recent and proposed changes to U.S. patent laws and rules may also
affect our ability to protect and enforce our intellectual property rights. For example, the recently passed Leahy-Smith America Invents Act would transition the manner in which patents are issued and change the way in which issued patents are
challenged. The long-term impact of these changes are unknown, but this law could cause a certain degree of uncertainty surrounding the enforcement and defense of our issued patents, as well as greater costs concerning new and existing patent
applications. In addition, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. Furthermore, it is possible that our existing or future patents may be challenged, invalidated or
circumvented.
With respect to our copyright and trademark intellectual property, it may be possible for a third-party,
including our licensees, to misappropriate such proprietary technology. It is possible that copyright, trademark and trade secret protection and enforcement effective in the US may be unavailable or limited in foreign countries. Additionally, with
respect to all of our intellectual property, 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.
Despite our efforts and expenses, for the
foregoing reasons and others, 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.
Assertion of intellectual property rights often
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results in counterclaims for perceived violations of the defendants 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
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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 consortiums for the development and promotion of industry standards in our target markets, including the HDMI,
MHL and WirelessHD standards, requires us to license some of our intellectual property for free or under specified terms and conditions, which makes it easier for others to compete with us in such markets.
A key element of our business strategy includes participating in consortiums to establish industry standards in our target markets,
promoting and enhancing specifications and developing and marketing products based on such specifications and future enhancements. We have in the past and will continue to participate in consortiums that develop and promote the HDMI, MHL
and WirelessHD specifications. In connection with our participation in these consortiums, we make certain commitments regarding our intellectual property, in each case with the effect of making our intellectual property available to others,
including our competitors, desiring to implement the specification in question. For example, as a founder of the HDMI Consortium, we must license specific elements of our intellectual property to others for use in implementing the HDMI
specification, including enhancements thereof, as long as we remain part of the consortium. Also, as a promoter of the MHL specification, we must agree not to assert certain necessary patent claims against other members of the MHL Consortium,
even if such members may infringed upon such claims in implementing the MHL specification.
Accordingly, certain companies
that implement these specifications in their products can use specific elements of our intellectual property to compete with us. Although in the case of the HDMI and MHL Consortiums, there are annual fees and royalties associated with the
adopters use of the technology, there can be no assurance that our shares of such annual fees and royalties will adequately compensate us for having to license or refrain from asserting our intellectual property.
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Through our wholly-owned subsidiary, HDMI Licensing, LLC, we act as agent of the HDMI
specification and are responsible for promoting and administering the specification. We receive all the license fees paid by adopters of the HDMI specification to cover the costs we incur to promote and administer the HDMI
specification. There can be no assurance that, going forward, we will continue to act as agent of the HDMI specification and/or receive all the license fees paid by HDMI adopters. After an initial period during which we received all of the
royalties paid by HDMI adopters, in 2007, the HDMI founders reallocated the royalties to reflect each founders relative contribution of intellectual property to the HDMI specification, and following this reallocation, our portion of HDMI
royalties was reduced to approximately 62%. In 2010, HDMI founders again reviewed the allocation of HDMI royalties and agreed on an allocation formula that reduced the portion of HDMI royalties received by us in 2012 to approximately 40% to
50%. We expect the HDMI founders to continue to review the allocation of HDMI royalties from time to time and we cannot provide any assurance regarding the portion of HDMI royalties received by us in the future.
Through our wholly-owned subsidiary, MHL, LLC, we act as agent of the MHL specification and are responsible for promoting and
administering the specification. As agent, we are entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us for the costs we incur to promote and administer the specification. Given the limited
number of MHL adopters to date, we do not believe that the license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to
reimburse us the cost we incur as agent of the specification.
We intend to promote and continue to be involved and actively
participate in other standard setting initiatives. For example, through our acquisition of SiBEAM, Inc. in May 2011, we achieved SiBEAMs prior position as founder and chair of the WirelessHD Consortium. Accordingly, we may likely 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 compensate us adequately.
Our business may be adversely impacted as a result of the adoption of competing standards and technologies by the
broader market.
The success of our business to date has depended on our participation in standard setting
organizations, such as the HDMI and MHL Consortiums, and the widespread adoption and success of those standards. From time to time, competing standards have been established which negatively impact the success of existing standards or jeopardize the
creation of new standards. DisplayPort is an example of a competing standard on a different technology base which has been created as an alternative high definition connectivity solution in the PC space. The DisplayPort standard has been adopted by
many large PC manufacturers. While currently not as widely recognized as the HDMI standard, DisplayPort does represent a viable alternative to the HDMI or MHL technologies. If DisplayPort should gain broader adoption, especially with non-PC consumer
electronics, our HDMI or MHL businesses could be negatively impacted and our revenues could be reduced. WiGig is an example of a competing 60GHz standard which has been created as an alternative high-bandwidth wireless connectivity solution for the
PC industry. While the WiGig standard has not been in the market as long as the WirelessHD standard, it does represent a viable alternative to WirelessHD for 60GHz connectivity. If WiGig should gain broader adoption before WirelessHD is adopted, it
could negatively impact us.
Our current and future business is dependent on the continued adoption and widespread
implementation of the HDMI and MHL specifications and the new implementation and adoption of the WirelessHD specifications.
Our future success is largely dependent upon the continued adoption and widespread implementation of the HDMI, MHL and WirelessHD specifications. In 2012, more than 80% of our total revenue was derived
from the
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sale of HDMI and MHL enabled products and the licensing of our HDMI and MHL technology. Our leadership in the market for HDMI and MHL-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 and MHL-enabled products and intellectual property
or to continue to drive innovation in the HDMI and MHL specifications could have an adverse impact on our business going forward.
With our acquisition of SiBEAM, Inc. in May 2011, we acquired 60GHz wireless technology that we hope will be made widely available and adopted by the marketplace through the efforts of the WirelessHD
Consortium and incorporated into certain of our future products. As was and is the case with our HDMI and MHL products and intellectual property, our success with this technology will depend on our ability to introduce first-to-market,
WirelessHD-enabled semiconductor and IP solutions to our customers and to continue to innovate within the WirelessHD standard. There can be no guarantee that this wireless technology will be adopted by the marketplace and our inability to do this
could have an adverse impact on our business going forward.
Additionally, if competing digital interconnect technologies are
developed, our ability to sell our products and license our intellectual property could be adversely affected and our revenues could decrease.
As the agent for the HDMI specification, we derive revenue from the license fees paid by adopters, and as a founder we derive revenue from the 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. The allocation of license fees and royalty revenue among the HDMI founders is reviewed and discussed by
the founders from time to time. There can be no assurance that going forward we will continue to act as agent of the HDMI specification or 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. Refer to the previously discussed risk factor above which also discusses the sharing of HDMI royalty revenues among various founders.
We act as agent of the MHL specification and are responsible for promoting and administering the specification. As agent, we are
entitled to receive license fees paid by adopters of the MHL specification sufficient to reimburse us the costs we incur to promote and administer the specification. Given the limited number of MHL adopters to date, we do not believe that the
license fees paid by such adopters will be sufficient to reimburse us for these costs and there can be no assurance that the license fees paid by MHL adopters will ever be sufficient to reimburse us the cost we incur as agent of the specification.
We have granted Intel Corporation certain 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,
Intels 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.
New Releases of Microsoft Windows
®
, Apple Mac OS
®
, Apple iOS and
Google Android operating systems may render our chips inoperable.
ICs targeted to PC or mobile
designs, laptop, or notebook designs often require device driver software to operate. This software is difficult to produce and may require various certifications such as Microsofts Windows
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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 OS providers and may damage our reputation as a quality supplier of products in the eyes of end consumers.
We may become engaged in 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 managements
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:
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stop selling products or using technology that contains the allegedly infringing intellectual property;
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attempt to obtain a license to the relevant intellectual property, which license may not be available on reasonable terms or at all; and
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attempt to redesign products that contain the allegedly infringing intellectual property.
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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. Our results of operations could be adversely affected by the use of cross-license or beneficiary of a non-assertion agreement of all our patents and/or certain
other intellectual property.
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We indemnify certain of our customers against infringement.
We indemnify certain of our 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. 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 locations throughout the world. 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. New regulations could 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.
We have experienced transitions in our management team and our board of directors in
the past and we 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 the past and we may experience additional transitions in our board of directors and management
in the future. Any such future transitions could result in disruptions in our operations and require additional costs.
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 Financial Officer, does not expect
that our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how
28
well designed and operated, can provide only reasonable, not absolute, assurance that the control systems 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 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 foundry and third-party assembly and test
subcontractors are located in areas susceptible to natural disasters, the occurrence of which could adversely impact our supply of product, revenues, gross margins and results of operations.
Our operations are headquartered in the San Francisco Bay Area, which is susceptible to earthquakes. TSMC, our outside foundry that
manufactures almost all 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.
In addition, the operations of certain of our significant customers are located in Japan and
Taiwan. For the years ended December 31, 2012, 2011 and 2010 customers and distributors located in Japan generated 14.5%, 19.7% and 29.9% of our total revenue based on billing location, respectively, and customers and distributors located in
Taiwan generated 22.3%, 26.2% and 22.5% of our total revenue based on billing location, respectively.
Taiwan and Japan are
susceptible to earthquakes, typhoons and other natural disasters.
Our supply of product and our revenues, gross margins and
results of operations generally would be adversely affected if any of the following were to occur:
|
|
|
an earthquake or other disaster in the San Francisco Bay area were to damage our facilities or disrupt the supply of water or electricity to
our headquarters;
|
|
|
|
an earthquake, typhoon or other natural disaster in Taiwan were to damage the facilities or equipment of TSMC, SPIL, ASE or Amkor or were to result in
shortages of water, electricity or transportation, which occurrences would limit the production capacity of our outside foundry and/or the ability of our third party contractors to provide assembly and test services;
|
29
|
|
|
an earthquake, typhoon or other natural disaster in Taiwan or Japan were to damage the facilities or equipment of our customers or distributors or were
to result in shortages of water, electricity or transportation, which occurrences would result in reduced purchases of our products, adversely affecting our revenues, gross margins and results of operations; or
|
|
|
|
an earthquake, typhoon or other disaster in Taiwan or Japan were to disrupt the operations of suppliers to our Taiwanese or Japanese customers, outside
foundries or our third party contractors providing assembly and test services, which in turn disrupted the operations of these customers, foundries or third party contractors, resulting in reduced purchases of our products or shortages in our
product supply.
|
In March 2011, Japan experienced a 9.0-magnitude earthquake which triggered extremely
destructive tsunami waves. The earthquake and tsunami significantly impacted the Japanese people and the overall economy of Japan resulting to reduced consumer spending in Japan and supply chain issues, which adversely affected our
revenues and results of operations in 2011.
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 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 OEMs 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 additional 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;
|
30
|
|
|
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;
|
|
|
|
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 1B.
|
Unresolved Staff Comments
|
None.
Our current
headquarters are located in Sunnyvale, California, consisting of approximately 128,154 square feet of space, which we lease through June 30, 2018. We lease 40,789 square feet of office space in Shanghai, China, which is being leased
through June 30, 2015. These facilities house our corporate offices, the majority of our engineering team, as well as a portion of our sales, marketing, operations and corporate services organizations.
In addition, we also lease facilities in Japan, Korea, Taiwan, India and an additional facility in China. We believe that our existing
properties are in good condition and suitable for the conduct of our business.
Item 3.
|
Legal Proceedings
|
Information with respect to this item may be found in Note 10 in our notes to the consolidated financial statements included in
Item 15(a) of this report.
Item 4.
|
Mine Safety Disclosures
|
Not applicable.
31
PART II
Item 5.
|
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
Our common shares are traded on the NASDAQ Stock Market under the symbol SIMG. The following table summarizes the high and low
closing prices for our common shares as reported by the NASDAQ Stock Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
4.97
|
|
|
$
|
4.10
|
|
Third Quarter
|
|
|
5.31
|
|
|
|
3.66
|
|
Second Quarter
|
|
|
6.04
|
|
|
|
3.92
|
|
First Quarter
|
|
|
6.00
|
|
|
|
4.38
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
Fourth Quarter
|
|
$
|
6.93
|
|
|
$
|
4.20
|
|
Third Quarter
|
|
|
7.22
|
|
|
|
4.55
|
|
Second Quarter
|
|
|
8.51
|
|
|
|
5.86
|
|
First Quarter
|
|
|
9.80
|
|
|
|
6.67
|
|
As of February 14, 2013, we had approximately 86 holders of record of our common stock and the
closing price of our common stock was $4.89. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
32
Stock Performance Graph
The following graph shows a comparison of cumulative total stockholder return, calculated on a dividend reinvested basis, for our common stock, the NASDAQ Composite Stock Market Index (US) and the S&P
Information Technology Index. The graph assumes that $100 was invested in our common stock, the NASDAQ Composite Stock Market (US) and the S&P Information Technology Index from December 31, 2007 through December 31, 2012. No cash
dividends have been declared on our common stock. Note that historic stock price performance is not necessarily indicative of future stock price performance.
Dividend Policy
We have never declared or paid cash dividends on shares of our capital stock. We intend to retain any future earnings to finance growth and do not anticipate paying cash dividends.
Securities Authorized for Issuance under Equity Compensation Plans
Information regarding securities authorized for issuance under equity compensation plans is incorporated by reference to our Proxy Statement for the 2013 Annual Meeting of Stockholders.
Unregistered Securities Sold During the Year Ended December 31, 2012
We did not sell any unregistered securities during the year ended December 31, 2012.
Issuer Purchases of Equity Securities
In April 2012, our Board of Directors authorized a $50 million stock repurchase program. The repurchases of our common stock may occur from time to time in the open market or in privately negotiated
transactions. The
33
timing and amount of any repurchase of shares will be determined by our management, based on our evaluation of market conditions, cash on hand and other factors and may be made under a stock
repurchase plan. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The program does not obligate us to acquire any particular amount of stock and
purchases under the program may be commenced or suspended at any time, or from time to time, without prior notice. Further, the stock repurchase program may be modified, extended or terminated by our Board at any time.
On November 9, 2012, we entered into an accelerated share repurchase (ASR) agreement with Barclays Capital, Inc. (Barclays) to
repurchase an aggregate of $30.0 million of our common stock. Pursuant to the ASR agreement, we paid $30.0 million in November 2012 and received an initial share delivery of 5,072,463 shares of our common stock. The initial share delivery was valued
at $21.0 million and was recorded as treasury stock in the consolidated balance sheet as of December 31, 2012. The remaining balance of $9.0 million was recorded as additional paid-in capital in the consolidated balance sheet as of
December 31, 2012. The ASR Agreement is scheduled to extend for approximately three to seven months but may conclude earlier at Barclays option and may be terminated early upon the occurrence of certain events. Barclays may deliver
additional shares to us at or prior to maturity of the ASR Agreement, which is subject to an adjustment based on the average daily volume weighted average price of our common stock during the term of the ASR Agreement. Under certain circumstances,
we may be required to return to the Barclays a portion of the shares received or, at our option, make an additional cash payment to Barclays.
In addition to the ASR program detailed above, during the year ended December 31, 2012, we repurchased a total of 2,193,372 shares of our common stock at a total cost of $9.7 million with an average
price per share of $4.42 under the stock repurchase program.
The table below summarizes information about our purchases of
equity securities registered pursuant to Section 12 of the Exchange Act during the three months ended December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Total Number
of Shares
Purchased
|
|
|
Average Price
Paid per Share
|
|
|
Total Number
of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
|
|
|
Approximate Dollar
Value of Shares
that May Yet Be
Purchased Under
the Plans
or
Programs
|
|
October 1, 2012 to October 31, 2012
|
|
|
338,322
|
|
|
$
|
4.49
|
|
|
|
338,322
|
|
|
$
|
42,102,620
|
|
November 1, 2012 to November 30, 2012
|
|
|
5,485,129
|
|
|
|
4.15
|
|
|
|
5,485,129
|
|
|
|
19,349,123
|
|
December 1, 2012 to December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,349,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
5,823,451
|
|
|
|
4.17
|
|
|
|
5,823,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For securities authorized for issuance under equity compensation plans, please see Note 11
in our notes to consolidated financial statements included in Item 15(a) of this report.
34
Item 6.
|
Selected Financial Data
|
The following selected financial data should be read in connection with our consolidated financial statements and notes thereto and
Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report on Form 10-K. Historical results of operations are not necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except employees and per share data)
|
|
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
252,364
|
|
|
$
|
221,009
|
|
|
$
|
191,347
|
|
|
$
|
150,589
|
|
|
$
|
274,415
|
|
Cost of revenue (1)
|
|
|
110,441
|
|
|
|
90,829
|
|
|
|
77,749
|
|
|
|
69,786
|
|
|
|
113,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
141,923
|
|
|
|
130,180
|
|
|
|
113,598
|
|
|
|
80,803
|
|
|
|
160,689
|
|
% of revenue
|
|
|
56.2
|
%
|
|
|
58.9
|
%
|
|
|
59.4
|
%
|
|
|
53.7
|
%
|
|
|
58.6
|
%
|
Research and development (2)
|
|
$
|
77,372
|
|
|
$
|
66,533
|
|
|
$
|
55,313
|
|
|
$
|
68,229
|
|
|
$
|
84,819
|
|
% of revenue
|
|
|
30.7
|
%
|
|
|
30.1
|
%
|
|
|
28.9
|
%
|
|
|
45.3
|
%
|
|
|
30.9
|
%
|
Selling, general and administrative (3)
|
|
$
|
57,446
|
|
|
$
|
55,277
|
|
|
$
|
46,710
|
|
|
$
|
55,000
|
|
|
$
|
71,719
|
|
% of revenue
|
|
|
22.8
|
%
|
|
|
25.0
|
%
|
|
|
24.4
|
%
|
|
|
36.5
|
%
|
|
|
26.1
|
%
|
Restructuring expense (4)
|
|
$
|
110
|
|
|
$
|
2,269
|
|
|
$
|
3,259
|
|
|
$
|
22,907
|
|
|
$
|
5,858
|
|
% of revenue
|
|
|
0.0
|
%
|
|
|
1.0
|
%
|
|
|
1.7
|
%
|
|
|
15.2
|
%
|
|
|
2.1
|
%
|
Amortization of acquisition-related intangible assets
|
|
$
|
599
|
|
|
$
|
1,585
|
|
|
$
|
149
|
|
|
$
|
4,478
|
|
|
$
|
6,348
|
|
% of revenue
|
|
|
0.2
|
%
|
|
|
0.7
|
%
|
|
|
0.1
|
%
|
|
|
3.0
|
%
|
|
|
2.3
|
%
|
Impairment of intangible assets
|
|
$
|
|
|
|
$
|
8,500
|
|
|
$
|
|
|
|
$
|
28,296
|
|
|
$
|
|
|
% of revenue
|
|
|
0.0
|
%
|
|
|
3.8
|
%
|
|
|
|
|
|
|
18.8
|
%
|
|
|
|
|
Impairment of goodwill
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
19,210
|
|
|
$
|
|
|
% of revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.8
|
%
|
|
|
|
|
Income (loss) from operations
|
|
$
|
6,396
|
|
|
$
|
(3,984
|
)
|
|
$
|
8,167
|
|
|
$
|
(117,317
|
)
|
|
$
|
(8,055
|
)
|
Net income (loss)
|
|
$
|
(11,192
|
)
|
|
$
|
(11,643
|
)
|
|
$
|
8,182
|
|
|
$
|
(129,109
|
)
|
|
$
|
10,063
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.11
|
|
|
$
|
(1.72
|
)
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.10
|
|
|
$
|
(1.72
|
)
|
|
$
|
0.13
|
|
Weighted average sharesbasic
|
|
|
81,872
|
|
|
|
80,603
|
|
|
|
76,957
|
|
|
|
74,912
|
|
|
|
75,570
|
|
Weighted average sharesdiluted
|
|
|
81,872
|
|
|
|
80,603
|
|
|
|
78,277
|
|
|
|
74,912
|
|
|
|
76,626
|
|
Consolidated Balance Sheet and Other Data as of Year End:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
29,069
|
|
|
$
|
37,125
|
|
|
$
|
29,942
|
|
|
$
|
29,756
|
|
|
$
|
95,414
|
|
Short-term investments
|
|
$
|
78,398
|
|
|
$
|
124,301
|
|
|
$
|
160,538
|
|
|
$
|
120,866
|
|
|
$
|
89,591
|
|
Working capital
|
|
$
|
122,802
|
|
|
$
|
161,923
|
|
|
$
|
184,746
|
|
|
$
|
163,482
|
|
|
$
|
186,112
|
|
Total assets
|
|
$
|
226,742
|
|
|
$
|
266,073
|
|
|
$
|
250,619
|
|
|
$
|
225,438
|
|
|
$
|
326,541
|
|
Other long-term liabilities
|
|
$
|
16,827
|
|
|
$
|
14,815
|
|
|
$
|
13,356
|
|
|
$
|
9,573
|
|
|
$
|
8,064
|
|
Total stockholders equity
|
|
$
|
167,100
|
|
|
$
|
204,516
|
|
|
$
|
191,196
|
|
|
$
|
171,519
|
|
|
$
|
278,947
|
|
Regular full-time employees
|
|
|
623
|
|
|
|
521
|
|
|
|
432
|
|
|
|
526
|
|
|
|
610
|
|
(1) Includes stock-based compensation expense
|
|
$
|
523
|
|
|
$
|
670
|
|
|
$
|
558
|
|
|
$
|
986
|
|
|
$
|
1,445
|
|
(2) Includes stock-based compensation expense
|
|
$
|
3,585
|
|
|
$
|
3,774
|
|
|
$
|
2,631
|
|
|
$
|
6,252
|
|
|
$
|
7,134
|
|
(3) Includes stock-based compensation expense
|
|
$
|
5,096
|
|
|
$
|
5,076
|
|
|
$
|
4,152
|
|
|
$
|
10,863
|
|
|
$
|
10,893
|
|
(4) Includes stock-based compensation expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14
|
|
35
Item 7.
|
Managements Discussion and Analysis of Financial Condition and Results of Operations
|
Overview
Silicon Image is a leading provider of
connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for mobile, consumer electronics (CE), and personal computing (PC) markets. We deliver our technology via semiconductor and intellectual
property (IP) products that are compliant with global industry standards and feature market leading Silicon Image innovations such as InstaPort and InstaPrevue. Silicon Images products are deployed by the worlds leading
electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc players, audio-video receivers, digital cameras, as well as desktop and notebook PCs. Silicon Image has driven the creation of the
highly successful High-Definition Multimedia Interface (HDMI
®
), the latest standard for mobile
devicesMobile High-Definition Link (MHL
®
), Digital Visual Interface (DVI) industry standards and the
leading 60GHz wireless HD video standardWirelessHD
®
. Via its wholly-owned subsidiary, Simplay Labs,
Silicon Image offers manufacturers comprehensive standards interoperability and compliance testing services.
Silicon Image
was founded in 1995. We are a Delaware corporation headquartered in Sunnyvale, California, with regional engineering and sales offices in China, Japan, Korea, Taiwan and India. Our Internet website address is www.siliconimage.com.
Our mission is to be the leader in advanced HD connectivity solutions for mobile, CE, and PC markets to enhance the consumer experience.
Our standards plus business strategy is to grow the available market for our products and IP solutions through the development, introduction and promotion of market leading products which are based on industry standards but also include
Silicon Image innovations that our customers value. We believe that our innovation around our core competencies, establishing industry standards and building strategic relationships, positions us to continue to drive change in the emerging
world of high quality digital media storage, distribution and presentation.
Our customers are product manufacturers in each
of our target markets mobile, CE, and PC. Because we leverage our technologies across different markets, certain of our products may be incorporated into our customers products used in multiple markets. We sell our products to original
product manufacturers (OEMs) throughout the world using a direct sales force and through a network of distributors and manufacturers representatives. Our revenue is generated principally by sales of our semiconductor products, with other
revenues derived from IP core/design licensing and royalty and adopter fees from our standards licensing activities. We maintain relationships with the eco-system of companies that make the products that drive digital content creation, distribution
and consumption, including major Hollywood studios, service providers, consumer electronics companies and retailers. Through these and other relationships, we have formed a strong understanding of the requirements for 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 technologies and standards and entering
new markets. We collaborated with other companies to jointly develop the DVI and HDMI standards. Our first DVI products addressed the PC market. We then introduced products for a variety of CE market segments, including the set top box (STB), game
console and DTV markets. In 2011, we began selling products in the mobile device market using our innovative interconnect core technology. In May 2011, we acquired SiBEAM, Inc., a provider of high-speed wireless communication products for
uncompressed HD video in consumer electronics and personal computer applications. With this acquisition, we became a promoter of the WirelessHD standard for transmitting HD content using 60GHz wireless technology. SiBEAMs 60GHz wireless
technology enables us to rapidly bring the highest quality of wirelessly transmitted HD video and audio to market.
36
Critical Accounting Policies and Estimates
Preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (GAAP) requires management to make
estimates and assumptions that affect amounts reported in our 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 accounting policies discussed below 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.
Revenue Recognition
We recognize revenue when the earnings process is complete, as evidenced by an agreement with the customer, delivery or performance has
occurred, pricing is fixed or determinable and collectability is reasonably assured.
Product Revenue
Sell-In
Product revenue is generally recognized at the time of shipment to customers not
eligible for price concessions and rights of return (including shipments to direct customers and certain shipments to distributors). Revenue from products sold to distributors with agreements allowing for stock rotations, but not price protection,
is generally recognized upon shipment. Reserves for stock rotations are estimated based primarily on historical experience and provided for at the time of shipment, and are not significant.
Sell-Through
Product revenue is recognized only when the distributor reports that it has sold the product to its
end customer. This method of product revenue recognition is used for products sold to distributors with agreements allowing for price concessions and stock rotation or product return rights, as the sales price is not fixed or determinable at the
time of shipment to the distributor. Our recognition of such distributor sell-through is based on point of sales reports received from the distributor which establish a customer, quantity and final price. Price concessions are recorded when
incurred, which is generally at the time the distributor sells the product to its customer. Once we receive the point of sales reports from the distributor, our sales price for the products sold to end customers is fixed, as any product returns,
stock rotation and price concession rights for that product lapse upon the sale to the end customer.
From time to time, at
our distributors request, we enter into conversion agreements to convert certain products, which are designated for a specific end customer, from sell-through to sell-in products. The effect of these
conversions is to eliminate any price protection or return rights on such products. Revenue for such conversions is recorded at the time such conversion agreements are signed, as it is at that point that the distributor ceases to have any price
protection or return rights for such products.
At the time of shipment to distributors for which revenue is recognized on a
sell-through basis, we record a trade receivable for the selling price (since there is a legally enforceable right to payment), we relieve inventory for the carrying value of goods shipped (since legal title has passed to the distributor) and, until
revenue is recognized, we record the gross margin in deferred margin on sale to distributors, a component of current liabilities in our consolidated balance sheet. However, the amount of gross margin we recognize in future periods will
be less than the originally recorded deferred margin on sales to distributor as a result of negotiated price concessions. We sell each item in our product price book to all of our sell-through distributors worldwide at a relatively
uniform list price. However, distributors resell our products to end customers at a very broad range of individually negotiated price points based on customer, product, quantity, geography, competitive pricing and other factors. The majority of our
distributors resales are priced at a discount from the list price. Often, under these circumstances, we remit back to the distributor a portion of their original purchase price after the resale transaction is completed. Thus, a portion of the
deferred margin on the sale to distributor balance represents a portion of distributors original purchase price that will be remitted back to the distributor in the future. The wide
37
range and variability of negotiated price concessions granted to the distributors does not allow us to accurately estimate the portion of the balance in the deferred margin on the sale to
distributors that will be remitted back to the distributors. In addition to the above, we also reduce the deferred margin by anticipated or determinable future price protections based on revised price lists, if any.
Licensing Revenue
We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee and revenue earned under
such agreements is classified as licensing revenue. Our IP licensing agreements generally include multiple elements, which may include one or more off-the-shelf and/or customized IP licenses bundled with support services covering a fixed period of
time, usually one year.
During 2010, we followed the guidance in Financial Accounting Standard Board (FASB) Accounting
Standards Codification (ASC) No. 605-25-25,
Multiple-Element Arrangements Revenue Recognition
, to determine whether there was more than one unit of accounting. To the extent that the deliverables were separable into multiple
units of accounting, we allocated the total fee on such arrangements to the individual units of accounting using the residual method, if objective and reliable evidence of fair value did not exist for delivered elements. We then recognized revenue
for each unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting in accordance with the revenue recognition criteria. Beginning in the year ended December 31, 2011, for such multiple element IP
licensing arrangements, we follow the guidance in FASB Accounting Standards Update (ASU) No. 2009-13,
Revenue Recognition (ASC Topic 605)Multiple-Deliverable Revenue Arrangements.
, to determine whether there is more
than one unit of accounting.
For multiple-element arrangements, we allocate revenue to all deliverables based on their
relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of
selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. ESPs reflect our best estimates of what
the selling prices of elements would be if they were sold regularly on a stand-alone basis. For the elements of IP licensing agreements we concluded that VSOE exists only for our support services based on periodic stand-alone renewals. For all other
elements in IP licensing agreements, we concluded that no VSOE or TPE exists because these elements are almost never sold on a stand-alone basis by us or our competitors.
Our process for determining ESP for deliverables without VSOE or TPE considers multiple factors that may vary depending upon the unique facts and circumstances related to each deliverable. The key factors
considered by us in developing the ESPs include prices charged by us for similar offerings, if any, our historical pricing practices, the nature and complexity of different technologies being licensed.
Amounts allocated to the delivered off-the-shelf IP licenses are recognized at the time of sale provided the other conditions for revenue
recognition have been met. Amounts allocated to the support services are deferred and recognized on a straight-line basis over the support period, usually one year.
Certain licensing agreements provide for royalty payments based on agreed upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue we
recognize is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units shipped by the customer. To determine the number of units shipped, we rely upon actual royalty reports from our customers when
available and rely upon estimates in lieu of actual royalty reports when we have a sufficient history of receiving royalties to enable us to make a reliable estimate of the amount of royalties owed to us. These estimates for royalties necessarily
involve the application of management judgment. As a result of our use
38
of estimates, period-to-period numbers are trued-up in the following period to reflect actual units shipped per the royalty reports ultimately received from the customer. In
cases where royalty reports and other information are not available to allow us to estimate royalty revenue, we recognize revenue only when royalty reports are received. We also perform compliance audits for our licenses and any additional royalties
as a result of the compliance audits are recorded as revenue in the period when the compliance audits are settled and the customers agrees to pay the amounts due.
For contracts related to licenses of our technology that involve significant modification, customization or engineering services, we recognize revenue in accordance with the provisions of FASB ASC
No. 605-35-25,
Construction-Type and Production-Type Contracts Revenue Recognition.
Revenues derived from such license contracts are accounted for using the percentage-of-completion method.
We determine progress to completion based on input measures using labor-hours incurred by our engineers. The amount of revenue recognized
is based on the total contract fees and the percentage of completion achieved. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are reviewed and
updated regularly by management. The estimates for labor-hours have not been significantly different as compared to actual labor-hours. If there is significant uncertainty about customer acceptance, or the time to complete the development or the
deliverables by either party, we apply the completed contract method. The contract is considered substantially complete upon customer acceptance. If application of the percentage-of-completion method results in recognizable revenue prior to an
invoicing event under a customer contract, we recognize the revenue and record an unbilled receivable assuming collectability is reasonably assured. Amounts invoiced to our customers in excess of recognizable revenues are recorded as deferred
revenue.
Stock-based Compensation
We account for stock-based compensation in accordance with the provisions of ASC No. 718-10-30,
Stock Compensation Initial Measurement,
which requires the measurement and
recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options, restricted stock units (RSUs), performance share awards and employee stock purchases under our Employee Stock Purchase
Plan (ESPP) based on estimated fair values. Following the provisions of ASC No. 718-50-25,
Employee Share Purchase Plans Recognition,
our ESPP is considered a compensatory plan, therefore, we are required to recognize
compensation cost for grants made under the ESPP. We estimate the fair value of stock options granted using the Black-Scholes-Merton (BSM) option-pricing model and a single option award approach. The BSM model requires various highly subjective
assumptions including volatility, expected option life, and risk-free interest rate. Management estimates volatility for a given option grant by evaluating the historical volatility of the period immediately preceding the option grant date that is
at least equal in length to the options expected term. Consideration is also given to unusual events (either historical or projected) or other factors that might suggest that historical volatility will not be a good indicator of future
volatility. The expected life of an award is based on historical experience and on the terms and conditions of the stock awards granted to employees, as well as the potential effect from options that had not been exercised at the time. In accordance
with ASC No. 718-10-35
, Subsequent Measurement of Stock Compensation,
we recognize stock-based compensation expense, net of estimated forfeitures, on a ratable basis for all share-based payment awards over the requisite
service periods of the awards, which is generally the vesting period or the remaining service (vesting) period.
The
assumptions used in calculating the fair value of share-based payment awards represent managements best estimates. These estimates involve inherent uncertainties and the application of managements judgment. If factors change and we use
different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and recognize expense only for those shares expected-to-vest. If our
actual forfeiture rate is materially different from our estimate, our recorded stock-based compensation expense could be different.
39
The fair value of market-based RSUs has been determined by management, with the assistance
of an independent valuation firm using the Monte Carlo Simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of
assumptions, including the expected volatility of our common stock, and a risk-free interest rate. Compensation expense related to awards that are expected to vest with a market-based condition is recognized on a straight-line basis regardless of
whether the market condition is satisfied, provided that the requisite service has been achieved. The amount of expense attributed to market-based RSUs is based on the estimated forfeiture rate, which is updated according to our actual forfeiture
rates. The financial statements include amounts that are based on our best estimates and judgments.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts, when appropriate, for estimated losses resulting from the inability of
our customers to make required payments. If the financial condition of our customers were to deteriorate, our actual losses may exceed our estimates, and additional allowances would be required. To date, our actual results have not been materially
different than our estimates.
Inventories and Inventory Valuation
We record inventories at the lower of actual cost, or market value. Market value is based upon an estimated average selling price reduced
by the estimated costs of disposal. The determination of market value involves numerous judgments including estimating average selling prices based up recent sales, industry trends, existing customer orders, and other factors. Should actual market
conditions differ from our estimates, our future results of operations could be materially affected.
Provisions are recorded
for excess and obsolete inventory and are estimated based on a comparison of the quantity and cost of inventory on hand to our forecast of customer demand. Customer demand is dependent on many factors and requires us to use significant judgment in
our forecasting process. We also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six
months forecasted demand are written down to zero (unless specific facts and circumstances warrant no write-down or a write-down to a different value) and the related provision is recorded as a cost of sales. Once a provision is established, it is
maintained until the product to which it relates is sold or otherwise disposed of, even if in subsequent periods we forecast demand for the product. To the extent our demand forecast for specific products is less than the combination of our product
on-hand and our non-cancelable orders from suppliers, we could be required to record additional inventory reserves, which would have a negative impact on our gross margin. If we ultimately sell inventory that we have previously written down, our
gross margins in future periods will be positively impacted.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill
We test long-lived assets, including intangible assets with finite lives for impairment whenever events or
circumstances suggest that such assets may not be recoverable. An impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than the carrying value of the asset we are
testing for impairment. If the forecasted cash flows are less than the carrying value, then we must write down the carrying value to its estimated fair value based primarily upon forecasted discounted cash flows. These forecasted discounted cash
flows include estimates and assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and determination of appropriate market
comparables. If future forecasts are revised, they may indicate or require future impairment charges. We base our fair value estimates on assumptions we believe to be reasonable but that are unpredictable and inherently uncertain. Actual future
results may differ from those estimates.
40
We amortize our intangible assets with finite lives over their estimated useful lives. We
are currently amortizing our acquired intangible assets with definite lives over periods ranging from two to six years.
Goodwill is tested for impairment on an annual basis (on September 30th) using a two-step model. The first step, identifying a
potential impairment, compares the fair value of the reporting unit with its carrying amount. Management has determined that we have one reporting unit. If the carrying value of the reporting unit exceeds its fair value, the second step would need
to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of
the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. In each period presented the fair value of the reporting unit exceeded its
carrying value, thus the we were not required to perform the second step of the analysis, and no goodwill impairment charges were recorded
Investments in Privately Held Companies
Investments in privately-held companies are reviewed on a quarterly basis to determine if their values have been impaired and adjustments are recorded as necessary. We assess the potential impairment of
these investments by considering available evidence such as the investees historical and projected operating results, progress towards meeting business milestones, ability to meet expense forecasts, and the prospects for industry or market in
which the investee operates. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses. Declines in value that are judged to be other-than-temporary are
reported in interest income and other, net in the accompanying consolidated statements of operations.
Income Taxes
Income tax expense is an estimate of current income taxes payable or refundable in the current fiscal year based on reported income before
income taxes. Deferred income taxes reflect the effect of temporary differences and carry-forwards that are recognized for financial reporting and income tax purposes.
We account for income taxes under the provisions of ASC 740,
Income Taxes
. Under the provisions of ASC 740, deferred tax assets and liabilities are recognized based on the differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. We recognize valuation allowances to reduce any deferred tax assets to the amount that we estimate will more likely than not be realized based on available evidence and managements judgment. In addition, the
calculation of liabilities for uncertain tax positions involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations
could have a material impact on our results of operations and financial position.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of
loss or impairment of an asset, or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss, in determining loss contingencies. An estimated loss contingency is accrued when it is probable that an asset has
been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. We record a charge equal to the minimum estimated liability for litigation costs or a loss contingency only when both of the following conditions are
met: (i) information available prior to issuance of our consolidated financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the
range of loss can be reasonably estimated and
41
no point within the range of probable loss is more likely than other points within the range. We regularly evaluate current information available to us to determine whether such accruals should
be adjusted and whether new accruals are required.
From time to time, we are involved in disputes, litigation, and other
legal actions. We are aggressively defending our current litigation matters. However, there are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation and/or
substantial settlement charges. In addition, the resolution of any future intellectual property litigation may require us to make royalty payments, which could adversely affect gross margins in future periods. If any of those events were to occur,
our business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, which could result in the need to adjust our liability and
record additional expenses.
Certain of our licensing agreements indemnify our customers for expenses or liabilities resulting
from claimed infringements of patent, trademark or copyright by third parties related to the intellectual property content of our 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, we have not paid any such claims or been required to defend any lawsuits with respect to a claim.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU
No. 2011-11,
Disclosures about Offsetting Assets and Liabilities.
ASU 2011-11 will require us to disclose information about offsetting related arrangements to enable users of our financial statements to understand the
effect of those arrangements on our financial position. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required are to be
applied retrospectively for all comparative periods presented. We do not expect that this standard will materially impact our disclosures included in condensed consolidated financial statements.
Annual Results of Operations
Revenue by product line was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Mobile
|
|
$
|
120,936
|
|
|
|
83.8
|
%
|
|
$
|
65,789
|
|
|
|
525.1
|
%
|
|
$
|
10,525
|
|
Consumer Electronics
|
|
|
62,236
|
|
|
|
-29.2
|
%
|
|
|
87,922
|
|
|
|
-25.6
|
%
|
|
|
118,192
|
|
Personal Computers
|
|
|
20,315
|
|
|
|
-1.0
|
%
|
|
|
20,523
|
|
|
|
-14.9
|
%
|
|
|
24,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
$
|
203,487
|
|
|
|
16.8
|
%
|
|
$
|
174,234
|
|
|
|
14.0
|
%
|
|
$
|
152,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
80.6
|
%
|
|
|
|
|
|
|
78.8
|
%
|
|
|
|
|
|
|
79.9
|
%
|
Licensing revenue
|
|
$
|
48,877
|
|
|
|
4.5
|
%
|
|
$
|
46,775
|
|
|
|
21.5
|
%
|
|
$
|
38,506
|
|
Percentage of total revenue
|
|
|
19.4
|
%
|
|
|
|
|
|
|
21.2
|
%
|
|
|
|
|
|
|
20.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
252,364
|
|
|
|
14.2
|
%
|
|
$
|
221,009
|
|
|
|
15.5
|
%
|
|
$
|
191,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product Revenue
The increase in product revenue was primarily due to increased demand for our mobile products offset in part by lower CE and PC revenue. The increase in our mobile products from 2011 to 2012 was primarily
due to the continued success of our MHL product line. These products were introduced in the latter part of fiscal year 2010. Since then, we have seen increased shipments of MHL products quarter over quarter. For the fourth quarter, mobile revenue
grew 42.4% year over year and represented over 64.3% of our total product revenue. For the year, our mobile revenue grew 83.8 % and represented over 59.4% of total product revenue up from 37.8% a
42
year ago. Our MHL products represent the majority of our mobile revenue. The decrease in our CE revenue from 2011 to 2012 was primarily the result of a broad-based market shift to lower-end DTV
products that incorporate our semiconductor products less frequently. Our PC revenue continued to decline in 2012 as we did not make any investments in these legacy products in prior years. However, our MHL and HDMI technologies are applied in
various PC devices, and we also expect our 60GHz WirelessHD to be a key technology in the coming years
Revenue from our
mobile products increased from 2010 to 2011 primarily due to the successful launch of our newest MHL transmitter product. The revenue growth in our mobile market was partially offset by the decrease in revenue in our CE market. Revenue from our CE
market decreased from 2010 to 2011 primarily due to global macro-economic pressures that drove consumers to purchase lower priced CE products, and the 9.0 magnitude earthquake and subsequent tsunami that hit Japan in March 2011, which has
affected both demand in Japan and the global supply chain for CE products. High-end DTVs with the latest features and capabilities (the market segment where we typically deliver our latest CE innovations) have been particularly affected by this
trend. The earthquake in Japan had a two-fold impact. First, it reduced demand for higher-end TVs in the domestic Japanese market. Secondly, as a result of damage to the production facilities, the Japanese OEM manufacturers shifted a
portion of their TV production to original design manufacturers (ODMs) outside of Japan which typically supply the lower-end to mid-range DTV market. Our revenue from Japan for the year ended December 31, 2011 was 19.7% as compared to
29.9% for the same period in 2010.
Licensing Revenue
Our licensing activity is complementary to our product sales and helps us to monetize our intellectual property and accelerate market
adoption curves associated with our technology and standards. The increase in licensing revenue from 2011 to 2012 was primarily the result of increased in MHL adopter base due to the continued success of our MHL product adoption in various
segments and an increase in royalty revenues. Our licensing revenue may fluctuate year over year as a result of the timing of completion of IP license arrangements.
Licensing revenue increased from 2010 to 2011 primarily due to increase in new IP licenses sold by us during 2011, increase in HDMI licensing and increase in royalties. HDMI LLC revenue was higher mainly
due to increase in HDMI product shipment activity reported by adopters in 2011 as compared to 2010.
Revenue by
Geography Based on Customers Headquarters
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Asia Pacific
|
|
$
|
216,389
|
|
|
|
15.9
|
%
|
|
$
|
186,712
|
|
|
|
14.4
|
%
|
|
$
|
163,164
|
|
United States
|
|
|
18,686
|
|
|
|
-2.8
|
%
|
|
|
19,226
|
|
|
|
21.6
|
%
|
|
|
15,810
|
|
Europe
|
|
|
16,138
|
|
|
|
19.1
|
%
|
|
|
13,555
|
|
|
|
20.8
|
%
|
|
|
11,225
|
|
Others
|
|
|
1,151
|
|
|
|
-24.1
|
%
|
|
|
1,516
|
|
|
|
32.1
|
%
|
|
|
1,148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
252,364
|
|
|
|
14.2
|
%
|
|
$
|
221,009
|
|
|
|
15.5
|
%
|
|
$
|
191,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in revenues in Asia-Pacific or APAC, which includes Japan and Korea, from 2011 to 2012, was
primarily due to increased demand for our MHL products by our customers who have their headquarters in APAC. The increase in revenues in Europe from 2011 to 2012 was primarily due to increase demand for our legacy control module business, which is
part of our PC category. Revenues in the United States decreased from 2011 to 2012 due to more of our customers moving their manufacturing offshore.
The increase in revenue for APAC and Europe from 2010 to 2011 was primarily due to the Companys entry into the mobile market with the introduction of HDMI transmitter products. Revenue for the
United States increased from 2010 to 2011 primarily due to additional revenues relating to the acquisitions of SiBEAM and ABT.
43
COST OF REVENUE AND GROSS MARGIN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Cost of product revenue (1)
|
|
$
|
109,815
|
|
|
|
22.0
|
%
|
|
$
|
90,035
|
|
|
|
16.2
|
%
|
|
$
|
77,480
|
|
Product gross profit
|
|
|
93,672
|
|
|
|
11.3
|
%
|
|
|
84,199
|
|
|
|
11.7
|
%
|
|
|
75,361
|
|
Product gross profit margin
|
|
|
46.0
|
%
|
|
|
|
|
|
|
48.3
|
%
|
|
|
|
|
|
|
49.3
|
%
|
(1) Includes stock-based compensation expense
|
|
$
|
523
|
|
|
|
|
|
|
$
|
670
|
|
|
|
|
|
|
$
|
558
|
|
Cost of licensing revenue
|
|
$
|
626
|
|
|
|
-21.2
|
%
|
|
$
|
794
|
|
|
|
195.2
|
%
|
|
$
|
269
|
|
Licensing gross profit
|
|
|
48,251
|
|
|
|
4.9
|
%
|
|
|
45,981
|
|
|
|
20.3
|
%
|
|
|
38,237
|
|
Licensing gross profit margin
|
|
|
98.7
|
%
|
|
|
|
|
|
|
98.3
|
%
|
|
|
|
|
|
|
99.3
|
%
|
Total cost of revenue
|
|
$
|
110,441
|
|
|
|
21.6
|
%
|
|
$
|
90,829
|
|
|
|
16.8
|
%
|
|
$
|
77,749
|
|
Total gross profit
|
|
|
141,923
|
|
|
|
9.0
|
%
|
|
|
130,180
|
|
|
|
14.6
|
%
|
|
|
113,598
|
|
Total gross profit margin
|
|
|
56.2
|
%
|
|
|
|
|
|
|
58.9
|
%
|
|
|
|
|
|
|
59.4
|
%
|
Cost of Revenue
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. Total cost of revenue increased from 2011 to 2012 primarily due to the growth in revenue volume and a $6.2 million write down of
unusable parts as a result of defective material used by one of our vendors. We are seeking compensation for this loss from our supplier, but no assurance can be provided regarding the amount of such compensation, if any.
Total cost of revenue increased from 2010 to 2011 primarily due to the growth in revenue volume during the same comparative
periods.
Product Gross Profit Margin
Our product gross profit margin decreased from 2011 to 2012 primarily due to the decrease in average selling price (ASP) per unit from $1.23 in 2011 to $1.03 in 2012, which was primarily driven by the
increase in mobile revenuewhich carries a lower ASPas a share of total revenue and a $6.2 million write down of unusable parts as a result of defective material used by one of our vendors, partially offset by decreases in wafer,
assembly, packaging and testing costs, improved freight and warehouse efficiencies, better absorption of fixed and semi-variable overheads as a result of increased revenue and lower depreciation expense due to fully depreciated testers. Product
mix is a major factor in the changes in our overall ASP for products.
Product gross profit margin decreased from 2010 to 2011
primarily due to the decrease in ASP per unit from $1.45 in 2010 to $1.23 in 2011, partially offset by decrease in wafer, testing and assembly cost in 2011 than in 2010 and better overhead absorption due to the increase in volume.
Licensing Gross Profit Margin
Licensing gross profit margin was comparable in 2012 and 2011.
Licensing gross
profit margin decreased from 2010 to 2011 primarily due to higher mix of IP customization projects during 2011.
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Research and development(1)
|
|
$
|
77,372
|
|
|
|
16.3
|
%
|
|
$
|
66,533
|
|
|
|
20.3
|
%
|
|
$
|
55,313
|
|
Percentage of total revenue
|
|
|
30.7
|
%
|
|
|
|
|
|
|
30.1
|
%
|
|
|
|
|
|
|
28.9
|
%
|
(1) Includes stock-based compensation expense
|
|
|
3,585
|
|
|
|
|
|
|
|
3,774
|
|
|
|
|
|
|
|
2,631
|
|
44
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 increased from 2011 to 2012 primarily due to an
increase in compensation related expenses as a result of the SiBEAM acquisition in May 2011 of $3.6 million, higher mask-set costs and project related expenses of approximately $5.9 million and $2.0 million of additional costs as a result of our
expansion in India. Our R&D headcount as of December 31, 2012 was 350 employees as compared to 257 employees as of December 31, 2011 primarily due to the expansion of our R&D capabilities in India.
R&D expense increased from 2010 to 2011 primarily due to the increase in compensation related expenses as a result of the two
acquisitions that we completed in 2011, increase in project related expenses and increase in stock-based compensation expense. R&D expense for the year ended December 31, 2011 included stock-based compensation expense of $3.8 million, as
compared to $2.6 million for the year ended December 31, 2010. Our R&D headcount as of December 31, 2011 was 257 employees as compared to 207 employees as of December 31, 2010 with the increase primarily due to the acquisitions of
SiBEAM and ABT.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Selling, general and administrative (1)
|
|
$
|
57,446
|
|
|
|
3.9
|
%
|
|
$
|
55,277
|
|
|
|
18.3
|
%
|
|
$
|
46,710
|
|
Percentage of total revenue
|
|
|
22.8
|
%
|
|
|
|
|
|
|
25.0
|
%
|
|
|
|
|
|
|
24.4
|
%
|
(1) Includes stock-based compensation expense
|
|
|
5,096
|
|
|
|
|
|
|
|
5,076
|
|
|
|
|
|
|
|
4,152
|
|
Selling, general and administrative (SG&A).
SG&A expense consists primarily of
compensation, including stock-based compensation expense, sales commissions, professional fees, and marketing and promotional expenses. SG&A expense increased from 2011 to 2012 primarily due to an increase in consultant expense of approximately
$1.5 million. Our SG&A headcount as of December 31, 2012 were 198 employees as compared to 187 employees as of December 31, 2011.
SG&A expense increased from 2010 to 2011 primarily due to the increase in compensation related expenses of approximately $2.7 million, additional marketing activities of approximately $2.8 million,
stock-based compensation expense of approximately $0.9 million and transaction expenses of approximately $1.0 million in relation to the two business acquisitions that we completed during the year ended December 31, 2011. Our SG&A headcount
as of December 31, 2011 was 187 employees as compared to 156 employees as of December 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Restructuring expense
|
|
$
|
110
|
|
|
|
-95.2
|
%
|
|
$
|
2,269
|
|
|
|
-30.4
|
%
|
|
$
|
3,259
|
|
Percentage of total revenue
|
|
|
0.0
|
%
|
|
|
|
|
|
|
1.0
|
%
|
|
|
|
|
|
|
1.7
|
%
|
Restructuring.
The total restructuring expense for the year ended December 31, 2012 primarily
related to adjustments to previously established accrual for facility exit costs.
The total restructuring expense for the
year ended December 31, 2011 consisted primarily of $0.9 million related to severance benefits and exit costs we incurred as a result of SiBEAM acquisition, $0.4 million related to our storage business restructuring, $0.3 million relating to
operating lease termination costs and $0.7 million related to severance benefits for the headcount reduction in the fourth quarter of 2011.
The total restructuring expense for the year ended December 31, 2010 consisted primarily of $2.0 million related to contract termination cost, a charge of $0.9 million relating to operating lease
termination costs and a charge of $0.3 million related to retirement of certain fixed assets. During 2010, we were in the process of transitioning certain R&D work from Europe to Asia and as a result of this transition, we decided to cease using
45
the services of certain European engineers which resulted in an accrual of future costs of $2.0 million payable under the related contract without any future economic benefit to us. We recorded
such future costs as restructuring expense in 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of acquisition-related intangible assets
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Amortization of acquisition-related intangible assets
|
|
$
|
599
|
|
|
|
-62.2
|
%
|
|
$
|
1,585
|
|
|
|
963.8
|
%
|
|
$
|
149
|
|
Percentage of total revenue
|
|
|
0.2
|
%
|
|
|
|
|
|
|
0.7
|
%
|
|
|
|
|
|
|
0.1
|
%
|
Amortization of acquisition-related intangible assets.
The decrease in amortization expense from
2011 to 2012 was primarily due to the reversal of amortization expense related to the trademark acquired in the SiBEAM acquisition of $825,000 and correcting the useful life of the core technology acquired in the ABT acquisition from three to five
years of approximately $355,000. See Note 1 to our consolidated financial statements for further discussion of these out-of-periods adjustments.
The increase in the amortization of intangible assets for the year ended December 31, 2011 as compared to the same period in 2010 was primarily due to amortization of the intangible assets acquired
from the two acquisitions completed during 2011.
Impairment of intangible assets.
In the fourth quarter of 2011, we
assessed our advances to a third party for intellectual properties for impairment. We concluded that the intangible assets related to these advances amounting to $8.5 million were fully impaired as of December 31, 2011, and recorded an
impairment charge for the full amount in 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income and others, net
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Interest income
|
|
$
|
1,654
|
|
|
|
-13.9
|
%
|
|
$
|
1,920
|
|
|
|
-17.8
|
%
|
|
$
|
2,335
|
|
Impairment of investment in an unconsolidated affiliate
|
|
|
(7,467
|
)
|
|
|
0.0
|
%
|
|
|
|
|
|
|
0.0
|
%
|
|
|
|
|
Reversal of a subsidiarys accumulated currency translation adjustment
|
|
|
|
|
|
|
100.0
|
%
|
|
|
(132
|
)
|
|
|
-109.7
|
%
|
|
|
1,366
|
|
Other income (expense), net
|
|
|
7
|
|
|
|
-94.6
|
%
|
|
|
130
|
|
|
|
268.8
|
%
|
|
|
(77
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,806
|
)
|
|
|
-402.7
|
%
|
|
$
|
1,918
|
|
|
|
-47.1
|
%
|
|
$
|
3,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage of total revenue
|
|
|
-2.3
|
%
|
|
|
|
|
|
|
0.9
|
%
|
|
|
|
|
|
|
1.9
|
%
|
Interest income decreased from 2011 to 2012 primarily due to the decrease in our short-term investments
as a result of the cash used in the repurchase of treasury stock.
Interest income decreased from 2010 to 2011 primarily due
to the decrease in our short-term investments as a result of the cash used in business acquisitions.
In 2012, we recorded a
non-cash impairment charge of $7.5 million representing the carrying value of our investment in a U.S. based privately-held company. See Note 5 to our consolidated financial statements for further discussion of this impairment of investment in
privately-held company.
In 2010, we recognized as income the accumulated foreign currency translation adjustment of our
wholly owned subsidiary in Germany whose facilities and offices had been substantially liquidated during 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Provision for income taxes
|
|
$
|
9,979
|
|
|
|
16.3
|
%
|
|
$
|
8,583
|
|
|
|
137.8
|
%
|
|
$
|
3,609
|
|
Percentage of total revenue
|
|
|
3.9
|
%
|
|
|
|
|
|
|
3.9
|
%
|
|
|
|
|
|
|
1.9
|
%
|
46
Provision for income taxes.
For the year ended December 31, 2012, we recorded an
income tax provision of $10.0 million, as compared to income tax provision of $8.6 million and $3.6 million in 2011 and 2010, respectively. Our effective income tax rate was 1,691% in 2012. In 2012, the primary reconciling items between our
effective tax rate and the U.S. statutory tax rate of 35% included approximately $6.7 million of income tax expense primarily due to foreign withholding taxes and foreign income inclusions. In addition, we provided approximately $10.3 million
for an increase to the valuation allowance to offset deferred tax assets which are not more likely than not to be realized and approximately $1.0 million for stock based compensation. The primary benefit provided was for approximately $6.6
million related to the use of foreign tax credits.
Our effective income tax rate was (415.4%) in 2011. In 2011, the
primary reconciling items between our effective tax rate and the U.S. statutory tax rate of 35% included approximately $8.9 million of income tax expense primarily due to foreign withholding taxes and foreign income inclusions. In addition, we
provided approximately $ 8.2 million for an increase to the valuation allowance to offset deferred tax assets which are not more likely than not to be realized and approximately $1.0 million for stock based compensation. The primary
benefit provided was for approximately $6.8 million related to the use of foreign tax credits and R&D tax credits.
Our
effective income tax rate was 30.6% in 2010. In 2010, the difference between the expense for income taxes and the income tax expense determined by applying the statutory federal income tax rate of 35% was due primarily to foreign withholding taxes
and changes in the valuation allowance.
Liquidity and Capital Resources
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).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
Change
|
|
|
2011
|
|
|
Change
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Cash and cash equivalents
|
|
$
|
29,069
|
|
|
$
|
(8,056
|
)
|
|
$
|
37,125
|
|
|
$
|
7,183
|
|
|
$
|
29,942
|
|
Short term investments
|
|
|
78,398
|
|
|
|
(45,903
|
)
|
|
|
124,301
|
|
|
|
(36,237
|
)
|
|
|
160,538
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash, cash equivalents and short term investments
|
|
$
|
107,467
|
|
|
$
|
(53,959
|
)
|
|
$
|
161,426
|
|
|
$
|
(29,054
|
)
|
|
$
|
190,480
|
|
Percentage of total assets
|
|
|
47.4
|
%
|
|
|
|
|
|
|
60.7
|
%
|
|
|
|
|
|
|
76.0
|
%
|
Total current assets
|
|
$
|
165,617
|
|
|
$
|
(43,048
|
)
|
|
$
|
208,665
|
|
|
$
|
(22,148
|
)
|
|
$
|
230,813
|
|
Total current liabilities
|
|
|
(42,815
|
)
|
|
|
3,927
|
|
|
|
(46,742
|
)
|
|
|
(675
|
)
|
|
|
(46,067
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
122,802
|
|
|
$
|
(39,121
|
)
|
|
$
|
161,923
|
|
|
$
|
(22,823
|
)
|
|
$
|
184,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, $12.1 million of the cash and cash equivalents and short term investments
was held by foreign subsidiaries. Local government regulations may restrict our ability to move cash balances from our foreign subsidiaries to meet cash needs under certain circumstances; however, any current restrictions are not material. We do not
currently expect such regulations and restrictions to impact our ability to pay vendors and conduct operations. If these funds are needed for our operations in the U.S., we may be required to accrue and pay U.S. taxes to repatriate these funds.
However, our intent is to indefinitely reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.
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.
47
The net decrease in current assets at December 31, 2012 as compared to
December 31, 2011 was primarily due to a $54.0 million decrease in total cash and cash equivalents and short-term investments, partially offset by $10.5 million increase in accounts receivable. The net change in the Companys cash position
on a year over year basis was primarily the results of cash used for share repurchases, long term strategic investments and working capital coverage. The increase in accounts receivable was primarily due to timing of invoicing relative to the
quarter end over collections during the year ended December 31, 2012.
The net decrease in current liabilities at
December 31, 2012 as compared to December 31, 2011 was mainly due to a $3.6 million decrease in accrued and other current liabilities, partially offset by a $2.5 million increase in deferred margin on sales to distributors. The increase in
deferred margin on sales to distributors was mainly due to the increasing activities with our distributors driven by the acceleration of demand for our products while the decrease in accrued and other current liabilities was mainly attributable to
the payment of 2011 bonus accrued at the end of 2011 and paid in the first quarter of 2012, product rebates and payment of milestone to ABT.
Summary of Cash Flows.
The table below summarizes the cash and cash equivalents provided by (used in) in our operating, investing and financing
activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands)
|
|
Cash provided by operating activities
|
|
$
|
4,676
|
|
|
$
|
7,458
|
|
|
$
|
46,494
|
|
Cash provided by (used in) investing activities
|
|
|
24,076
|
|
|
|
(4,762
|
)
|
|
|
(50,725
|
)
|
Cash provided by (used in) financing activities
|
|
|
(36,788
|
)
|
|
|
4,501
|
|
|
|
3,954
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
(20
|
)
|
|
|
(14
|
)
|
|
|
463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
$
|
(8,056
|
)
|
|
$
|
7,183
|
|
|
$
|
186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Activities
Cash provided by operating activities is generated by net income (loss) adjusted for certain non-cash items and changes in assets and
liabilities.
During the year ended December 31, 2012, we incurred a net loss of $11.2 million which included non-cash
charges of approximately $28.5 million (primarily related to stock based compensation, depreciation and amortization, and impairment charges). Changes in assets and liabilities that generated cash were primarily prepaid expenses and other current
assets and deferred margin on sales to distributors. These increases were offset by changes in operating assets and liabilities that used cash, primarily accounts receivable, inventories and accrued and other liabilities.
During the year ended December 31, 2011, we incurred a net loss of $11.6 million which included non-cash charges of approximately
$30.2 million (primarily related to stock based compensation, depreciation and amortization, and impairment charges). Changes in assets and liabilities that generated cash were primarily inventories and accrued and other liabilities. These increases
were offset by changes in operating assets and liabilities that used cash, primarily accounts receivable, prepaid expenses and other current assets, accounts payable, deferred margin on sales to distributors and deferred license revenue.
During the year ended December 31, 2010, we had a net income of $8.2 million which included non-cash charges of approximately $14.0
million (primarily related to stock based compensation, depreciation and amortization, and impairment charges). Changes in assets and liabilities that generated cash were primarily prepaid expense and other current assets, accounts payable, deferred
license revenue and deferred margin on sales to distributors. These increases were offset by changes in operating assets and liabilities that used cash, primarily accounts receivable, inventories and accrued and other liabilities.
48
Investing Activities
Cash provided by investing activities during the year ended December 31, 2012 was primarily a result of $44.2 million net proceeds
from the sales and maturities of short-term investments, partially offset by $8.9 million used for capital expenditures, $10.0 million used for various strategic business investments and $1.2 million used for purchases of intellectual
properties. During the year ended December 31, 2012, we sold $104.8 million and purchased $60.6 million of short-term investments.
Cash used in our investing activities during the year ended December 31, 2011 was due primarily to $15.9 million used in connection with our business acquisitions, $7.5 million used to make an
investment in an unconsolidated affiliate, $7.2 million used for advances for intellectual properties, net of repayments of secured notes and $7.8 million net investment in property and equipment, partially offset by $33.7 million net proceeds
from the sales and maturities of short-term investments. During the year ended December 31, 2011, we sold $147.0 million and purchased $113.3 million of short-term investments.
Cash used in investing activities during the year ended December 31, 2010 was due primarily to net purchases of short-term
investments of approximately $42.8 million, net investment in property and equipment of approximately $4.7 million and other investing activities amounting to approximately $3.2 million. During the year ended December 31, 2010, we purchased
$166.9 million and sold $124.1 million of short-term investments.
We are not a capital-intensive business. Our purchases of
property and equipment in 2012, 2011 and 2010 related mainly to testing equipment, leasehold improvements and information technology infrastructure.
Financing Activities
Cash used in our financing activities
during the year ended December 31, 2012 was primarily due to $39.7 million used to repurchase our common stock, $2.2 million used to repurchase restricted stock units for minimum statutory income tax withholding and $1.1 million cash paid to
settle contingent consideration liabilities, partially offset by the proceeds from stock option exercises and purchases under our employee stock purchase program of approximately $5.6 million.
Cash generated from our financing activities during the year ended December 31, 2011 was primarily due to the proceeds from
stock option exercises and purchases under our employee stock purchase program of approximately $6.2 million and to the excess tax benefits from employee stock-based transactions of approximately $2.1 million, partially offset by $3.3 million used
to repurchase restricted stock units for minimum statutory income tax withholding and $0.5 million used to pay a line of credit assumed from business acquisition.
Cash generated from our financing activities during the year ended December 31, 2010 was primarily due to the proceeds from stock option exercises and purchases under our employee stock purchase
program totaling approximately $5.6 million and to the excess tax benefits from employee stock-based transactions of approximately $0.8 million, partially offset by payments to vendor of financed purchases of software and intangibles of
approximately $1.2 million and cash to repurchase restricted stock units for income tax withholding of approximately $1.2 million.
Cash Requirements and Commitments
In addition to our normal
operating cash requirements, our principal future cash requirements will be to fund capital expenditures, share repurchases and any strategic investments or acquisitions, in addition we have approximately $13.9 million in commitments for fiscal
years including and beyond 2013 as disclosed in the contractual obligations section below.
49
Contractual Obligations
Our contractual obligations as of December 31, 2012 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due In
|
|
Contractual Obligations:
|
|
Total
|
|
|
Less Than
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
More Than
5 Years
|
|
Operating lease obligations
|
|
$
|
12,933
|
|
|
$
|
3,115
|
|
|
$
|
5,058
|
|
|
$
|
3,837
|
|
|
$
|
923
|
|
Contingent payment to acquire additional preferred stock
|
|
|
1,000
|
|
|
|
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,933
|
|
|
$
|
3,115
|
|
|
$
|
6,058
|
|
|
$
|
3,837
|
|
|
$
|
923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On December 21, 2012, we signed a Securities Purchase Agreement and agreed to purchase a 17.7%
equity ownership interest in a privately-held company for $3.5 million in cash. We have paid $2.5 million in 2012 and the remaining $1.0 million is in the form of contingent payment to acquire additional preferred stock in the privately-held
Company, over a period of time based on achievement of certain milestones by the privately-held company.
The amounts above
exclude liabilities under FASB ASC 740-10,
Income Taxes Recognition section
amounting to approximately $27.2 million as of December 31, 2012 as we are unable to reasonably estimate the ultimate amount or timing of
settlement. See Note 12, Income Taxes, in our notes to consolidated financial statements included in Item 15(a) of this report for further discussion.
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.
Item 7A.
|
Quantitative and Qualitative Disclosures About Market Risk
|
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
December 31, 2012, we had an investment portfolio of securities as reported in short-term investments, including those classified as cash equivalents of approximately $97.3 million. A sensitivity analysis was performed on our investment
portfolio as of December 31, 2012. 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%
|
$ 284,000
|
|
$ 568,000
|
|
$ 852,000
|
As of December 31, 2011, we had an investment portfolio of securities as reported in short-term
investments, including those classified as cash equivalents of approximately $149.1 million. These securities are
50
subject to interest rate fluctuations. The following represents the potential change to the value of our investments given a shift in the yield curve used in our sensitivity analysis.
|
|
|
|
|
0.5%
|
|
1.0%
|
|
1.5%
|
$ 483,000
|
|
$ 965,000
|
|
$ 1,448,000
|
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 Chinese Yuan, the Japanese Yen and the Indian Rupee.
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.
We assessed the risk of loss in fair values from the impact of hypothetical changes in
foreign currency exchange rates. For foreign currency exchange rate risk, a 10% increase or decrease of foreign currency exchange rates against the U.S. dollar with all other variables held constant would have resulted in a $2.6 million change in
the value of our foreign currency cash accounts.
As of December 31, 2012, we did not have any material derivative
transactions.
Item 8.
|
Financial Statements and Supplementary Data
|
The Financial Statements and Supplemental Data required by this item are set forth at the pages indicated at Item 15(a).
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
Item 9A.
|
Controls and Procedures
|
Evaluation of
Disclosure Controls and Procedures
Management is required to evaluate our disclosure controls and procedures, as defined
in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). Disclosure controls and procedures are controls and other procedures designed to ensure that information required to be disclosed in our
reports filed under the Exchange Act, such as this Annual Report on Form 10-K, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure
controls and procedures include controls and procedures designed to ensure that such
51
information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer as appropriate to allow timely decisions regarding required
disclosure. Our disclosure controls and procedures include components of our internal control over financial reporting, which consists of control processes designed to provide reasonable assurance regarding the reliability of our financial reporting
and the preparation of financial statements in accordance with generally accepted accounting principles in the U.S. To the extent that components of our internal control over financial reporting are included within our disclosure controls and
procedures, they are included in the scope of our periodic controls evaluation. Based on our managements 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 at the reasonable assurance level to ensure that information required to be disclosed by us in the reports filed and submitted under the Securities Exchange Act of 1934 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.
Managements Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting,
as defined in Rule 13a-15(f) under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a
material effect on the financial statements.
|
Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and
breakdowns resulting from human failures. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
Management conducted an assessment of our internal control over financial reporting as of December 31, 2012 based on the framework
established by the Committee of Sponsoring Organization (COSO) of the Treadway Commission in Internal ControlIntegrated Framework. Based on this assessment, management concluded that, as of December 31, 2012, our internal control over
financial reporting was effective.
The effectiveness of our internal control over financial reporting as of December 31,
2012 has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There were no changes
in our internal controls over financial reporting during the fourth quarter of our 2012 fiscal year that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Silicon Image, Inc.
We have audited the internal control over financial reporting of Silicon Image, Inc. and subsidiaries (the Company) as of December 31, 2012, based on criteria established in
Internal
ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles.
A companys internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could
have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness
of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2012, based on the criteria established in
Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
financial statements of the Company as of and for the year ended December 31, 2012 and our report dated February 25, 2013 expressed an unqualified opinion on those consolidated financial statements.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
February 25, 2013
53
Item 9B.
|
Other Information
|
Not
applicable.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
Silicon Image, Inc. (referred to herein as we, our, the Company, or Silicon Image), a Delaware corporation, was incorporated on June 11, 1999. Silicon
Image is a leading provider of connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for mobile, consumer electronics (CE) and personal computer (PC) markets. The Company delivers its
technology via semiconductor and intellectual property (IP) products that are compliant with global industry standards and feature market leading Silicon Image innovations such as InstaPort and InstaPrevue. Silicon Images
products are deployed by the worlds leading electronics manufacturers in devices such as smartphones, tablets, digital televisions (DTVs), Blu-ray Disc players, audio-video receivers, digital cameras, as well as desktop and notebook
PCs. Silicon Image has driven the creation of the highly successful High-Definition Multimedia Interface
(HDMI
®
), the latest standard for mobile devicesMobile High-Definition Link (MHL
®
), Digital Visual Interface (DVI) industry standards and the leading 60GHz wireless HD video
standardWirelessHD
®
. Via its wholly-owned subsidiary, Simplay Labs LLC, Silicon Image offers
manufacturers comprehensive product interoperability and standards compliance testing.
Out-of-Period Adjustments
On May 16, 2011, the Company recorded intangible assets of $3.0 million related to a trademark acquired through the SiBEAM acquisition
(Note 6), and began amortizing this trademark over its estimated useful life of 5 years. During the fourth quarter of 2012, the Company determined that the trademark had been abandoned by SiBEAM prior to the acquisition, and thus no value should
have been allocated to the trademark. Goodwill recorded in connection with this acquisition should have been increased by $3.0 million. This error resulted in an overstatement of amortization expense of $375,000 in 2011 and $450,000 in the first
nine months of 2012. In addition, during the fourth quarter of 2012, the Company determined that core technology acquired in the ABT acquisition (Note 6) was being amortized over an incorrect useful life during 2011 and the first nine months of
2012. This error resulted in an overstatement of amortization expense of $196,000 in 2011 and $159,000 in the first nine months of 2012. These errors were corrected through an out-of-period adjustment in the fourth quarter of 2012, resulting in a
$3.0 million increase in goodwill, a $3.0 million decrease in the gross carrying value of intangible assets, and a $1,180,000 decrease in intangible amortization expense. Management believes that the impact of these errors is immaterial,
individually and in aggregate, to the consolidated financial statements of prior periods and to the year ended December 31, 2012.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. The consolidated financial statements also
include the results of companies acquired by the Company from the date of each acquisition.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates
and assumptions that affect the amounts reported in the financial statements and accompanying notes. Areas where significant judgment and estimates are applied include revenue recognition, stock-based compensation, valuation, impairment and fair
value hierarchy of short-term investments, inventory reserves, impairment of goodwill and long-lived assets, income taxes, deferred tax assets and legal matters. Actual results could differ materially from these estimates.
61
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Revenue Recognition
The Company recognizes revenue when the earnings process is complete, as evidenced by an agreement with the customer, delivery or
performance has occurred, pricing is fixed or determinable and collectability is reasonably assured.
Product Revenue
Sell-in
Product revenue is generally recognized at the time of shipment to customers not
eligible for price concessions and rights of return (including shipments to direct customers and certain shipments to distributors). Revenue from products sold to distributors with agreements allowing for stock rotations, but not price protection,
is generally recognized upon shipment. Reserves for stock rotations are estimated based primarily on historical experience and provided for at the time of shipment, and are not significant.
Sell-through
Product revenue is recognized only when the distributor reports that it has sold the product to its
end customer. This method of product revenue recognition is used for products sold to distributors with agreements allowing for price concessions and stock rotation or product return rights, as the sales price is not fixed or determinable at the
time of shipment to the distributor. The Companys recognition of such distributor sell-through is based on point of sales reports received from the distributor which establishes a customer, quantity and final price. Price concessions are
recorded when incurred, which is generally at the time the distributor sells the product to its customer. Once the Company receives the point of sales reports from the distributor, the Companys sales price for the products sold to end
customers is fixed, as any product returns, stock rotation and price concession rights for that product lapse upon the sale to the end customer.
From time to time, at its distributors request, the Company enters into conversion agreements to convert certain products, which are designated for a specific end customer, from
sell-through to sell-in products. The effect of these conversions is to eliminate any price protection or return rights on such products. Revenue for such conversions is recorded at the time such conversion agreements are
signed, as it is at that point that the distributor ceases to have any price protection or return rights for such products.
At
the time of shipment to distributors, for which revenue is recognized on a sell-through basis, the Company records a trade receivable for the selling price (since there is a legally enforceable right to payment), relieves inventory for the carrying
value of goods shipped (since legal title has passed to the distributor) and, until revenue is recognized, records the gross margin in deferred margin on sale to distributors, a component of current liabilities in its consolidated
balance sheet. However, the amount of gross margin the Company recognizes in future periods will be less than the originally recorded deferred margin on sales to distributor as a result of negotiated price concessions. The Company sells each item in
its product price book to all of its sell-through distributors worldwide at a relatively uniform list price. However, distributors resell the Companys products to end customers at a very broad range of individually negotiated price
points based on customer, product, quantity, geography, competitive pricing and other factors. The majority of the Companys distributors resale is priced at a discount from the list price. Often, under these circumstances, the Company
remits back to the distributor a portion of their original purchase price after the resale transaction is completed. Thus, a portion of the deferred margin on the sale to distributor balance represents a portion of distributors
original purchase price that will be remitted back to the distributor in the future. The wide range and variability of negotiated price concessions granted to the distributors does not allow the Company to accurately estimate the portion of the
balance in the deferred margin on the sale to distributors that will be remitted back to the distributors. In addition to the above, the Company also reduces the deferred margin by anticipated or determinable future price protections based on
revised price lists, if any.
62
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Licensing Revenue
The Company enters into IP licensing agreements that generally provide licensees the right to incorporate its IP components in their
products with terms and conditions that vary by licensee and revenue earned under such agreements is classified as licensing revenue. The Companys IP licensing agreements generally include multiple elements, which may include one or more
off-the-shelf and/or customized IP licenses bundled with support services covering a fixed period of time, usually one year.
During 2010, the Company followed the guidance in Financial Accounting Standard Board (FASB) Accounting Standard Codification (ASC)
No. 605-25-25,
Multiple-Element Arrangements Revenue Recognition,
to determine whether there was more than one unit of accounting. To the extent that the deliverables were separable into multiple units of accounting, the
Company allocated the total fee on such arrangements to the individual units of accounting using the residual method, if objective and reliable evidence of fair value did not exist for delivered elements. The Company then recognized revenue for each
unit of accounting depending on the nature of the deliverable(s) comprising the unit of accounting in accordance with the revenue recognition criteria. Beginning in the year ended December 31, 2011, for such multiple element IP licensing
arrangements, the Company follows the guidance in FASB Accounting Standard Update (ASU) No. 2009-13,
Revenue Recognition (ASC Topic 605)Multiple-Deliverable Revenue Arrangements,
to determine whether there is more than
one unit of accounting.
For multiple-element arrangements the Company allocates revenue to all deliverables based on their
relative selling prices. In such circumstances, the Company uses a hierarchy to determine the selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party
evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when the Company sells the deliverable separately and is the price actually charged by the Company for that deliverable. ESPs
reflect the Companys best estimates of what the selling prices of elements would be if they were sold regularly on a stand-alone basis. For the elements of IP licensing agreements the Company concluded that VSOE exists only for its support
services based on periodic stand-alone renewals. For all other elements in IP licensing agreements, the Company concluded that no VSOE or TPE exists because these elements are almost never sold on a stand-alone basis by the Company or its
competitors.
The Companys process for determining its ESP for deliverables without VSOE or TPE considers multiple
factors that may vary depending upon the unique facts and circumstances related to each deliverable. The key factors considered by the Company in developing the ESPs include prices charged by the Company for similar offerings, if any, the
Companys historical pricing practices, the nature and complexity of different technologies being licensed.
Amounts
allocated to the delivered off-the-shelf IP licenses are recognized at the time of sale provided the other conditions for revenue recognition have been met. Amounts allocated to the support services are deferred and recognized on a straight-line
basis over the support period, usually one year.
Certain licensing agreements provide for royalty payments based on agreed
upon royalty rates. Such rates can be fixed or variable depending on the terms of the agreement. The amount of revenue the Company recognizes is determined based on a time period or on the agreed-upon royalty rate, extended by the number of units
shipped by the customer. To determine the number of units shipped, the Company relies upon actual royalty reports from its customers when available and relies upon estimates in lieu of actual royalty reports when it has a sufficient history of
receiving royalties to enable the Company to make a reliable estimate of the amount of royalties owed to the Company. These estimates for royalties necessarily involve the application of management judgment. As a result of the Companys use of
estimates, period-to-period numbers are trued-up in the
63
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
following period to reflect actual units shipped per the royalty reports ultimately received from the customer. In cases where royalty reports and other information are not available to allow the
Company to estimate royalty revenue, the Company recognizes revenue only when royalty reports are received. The Company also performs compliance audits for its licenses and any additional royalties as a result of the compliance audits are generally
recorded as revenue in the period when the compliance audits are settled and the customer agrees to pay the amounts due.
For
contracts related to licenses of the Companys technology that involve significant modification, customization or engineering services, the Company recognizes revenue in accordance with the provisions of FASB ASC No. 605-35-25,
Construction-Type and Production-Type Contracts Revenue Recognition.
Revenues derived from such license contracts are accounted for using the percentage-of-completion method.
The Company determines progress to completion based on input measures using labor-hours incurred by its engineers. The amount of revenue
recognized is based on the total contract fees and the percentage of completion achieved. Estimates of total project requirements are based on prior experience of customization, delivery and acceptance of the same or similar technology and are
reviewed and updated regularly by management. The estimates for labor-hours have not been significantly different as compared to actual labor-hours. If there is significant uncertainty about customer acceptance, or the time to complete the
development or the deliverables by either party, the Company applies the completed contract method. The contract is considered substantially complete upon customer acceptance. If application of the percentage-of-completion method results in
recognizable revenue prior to an invoicing event under a customer contract, the Company recognizes the revenue and records an unbilled receivable assuming collectability is reasonably assured. Amounts invoiced to the Companys customers in
excess of recognizable revenues are recorded as deferred revenue.
Stock-based Compensation
The Company accounts for stock-based compensation in accordance with the provisions of FASB ASC No. 718-10-30,
Stock
Compensation Initial Measurement,
which requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors including employee stock options, restricted stock units (RSUs),
performance share awards and employee stock purchases under our Employee Stock Purchase Plan (ESPP) based on estimated fair values. Following the provisions of FASB ASC No. 718-50-25,
Employee Share Purchase Plans
Recognition,
our ESPP is considered a compensatory plan, therefore, we are required to recognize compensation cost for grants made under the ESPP. The Company estimates the fair value of stock options granted using the
Black-Scholes-Merton (BSM) option-pricing model and a single option award approach. The BSM model requires various highly subjective assumptions including volatility, expected option life, and risk-free interest rate. Management estimates volatility
for a given option grant by evaluating the historical volatility of the period immediately preceding the option grant date that is at least equal in length to the options expected term. Consideration is also given to unusual events (either
historical or projected) or other factors that might suggest that historical volatility will not be a good indicator of future volatility. The expected life of an award is based on historical experience and on the terms and conditions of the stock
awards granted to employees, as well as the potential effect from options that had not been exercised at the time. In accordance with FASB ASC No. 718-10-35,
Subsequent Measurement of Stock Compensation,
the Company
generally recognizes stock-based compensation expense, net of estimated forfeitures, on a ratable basis for all share-based payment awards over the requisite service periods of the awards, which is generally the vesting period or the remaining
service (vesting) period.
The assumptions used in calculating the fair value of share-based payment awards represent
managements best estimates. These estimates involve inherent uncertainties and the application of managements judgment. If
64
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
factors change and the Company uses different assumptions, the stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and recognize expense only for those shares expected-to-vest. If the actual forfeiture rate is materially different from the estimate, the recorded stock-based compensation expense could be different.
The fair value of market-based RSUs has been determined by management, with the assistance of an independent valuation firm using the
Monte Carlo Simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of assumptions, including the expected
volatility of the Companys common stock, and a risk-free interest rate. Compensation expense related to awards that are expected to vest with a market-based condition is recognized on a straight-line basis regardless of whether the market
condition is satisfied, provided that the requisite service has been achieved. The amount of expense attributed to market-based RSUs is based on the estimated forfeiture rate, which is updated according to the Companys actual forfeiture rates.
The financial statements include amounts that are based on the Companys best estimates and judgments.
Concentration of Credit
Risk
The Companys customer base for its products is concentrated with a small number of end users and
distributors. Financial instruments, which potentially subject the Company to concentrations of credit risk, are primarily accounts receivable, cash equivalents and short-term investments. The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no collateral from its customers. The allowance for doubtful accounts is based upon the expected collectability of all accounts receivable. The Company places its cash equivalents and
short-term investments in investment-grade, highly liquid debt instruments and limits the amount of credit exposure to any one issuer.
Concentration of Other Risk
The semiconductor industry is characterized by rapid technological change, competitive pricing pressures, and cyclical market patterns. The Companys results of operations are affected by a wide
variety of factors, including general economic conditions, both domestically and abroad; economic conditions specific to the semiconductor industry; demand for the Companys products; the timely introduction of new products; implementation of
new manufacturing technologies; manufacturing capacity; the ability to manufacture efficiently; the availability and cost of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving
market; and reliance on assembly and wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future operating results due to the
factors mentioned above or other factors.
Financial Instruments
All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. The
Companys debt and marketable equity securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of such securities at the time of purchase and reevaluates such classification as
of each balance sheet date. The Company classifies its marketable debt securities as short-term investments because the Companys intention to sell the securities within a relatively short period of time. Unrealized gains and losses on these
investments are reported as a separate component of accumulated other comprehensive income (loss). The investments are adjusted for amortization of premiums and discounts to maturity and such amortization is included in interest income. The Company
periodically assesses whether its investments with unrealized loss positions are other than temporarily
65
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
impaired. Other-than-temporary impairment charges exists when the entity has the intent to sell the security, it will more likely than not be required to sell the security before anticipated
recovery or it does not expect to recover the entire amortized cost basis of the security. Other than temporary impairments are determined based on the specific identification method and are reported in the consolidated statements of operations.
Fair Value Measurements
The Company applies fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a
recurring basis. The Company defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value
measurements for assets and liabilities, which are required to be recorded at fair value, the Company considers the principal or most advantageous market in which the Company would transact and the market-based risk measurements or assumptions that
market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
FASBs fair value measurement standard establishes a consistent framework for measuring fair value whereby inputs used in valuation
techniques are assigned a hierarchical level. The assignment to a level is based on whether the market participant assumptions used in determining fair value are obtained from independent sources (observable inputs) or reflect the
Companys own assumptions of market participant valuation (unobservable inputs). Categorization within the fair value hierarchy is determined by the lowest level of input that is significant to the fair value measurement. The following are
the hierarchical levels of inputs to measure fair value:
|
|
|
|
|
|
|
Level 1
|
|
Quoted prices in active markets that are unadjusted and accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
|
|
|
Level 2
|
|
Quoted prices for identical assets and liabilities in markets that are inactive; quoted prices for similar assets and liabilities in active markets; or significant inputs that
are observable, either directly or indirectly; or
|
|
|
|
|
|
Level 3
|
|
Prices or valuations that require inputs that are both unobservable and significant to the fair value measurement.
|
The Company considers an active market to be one in which transactions for the asset or liability occur
with sufficient frequency and volume to provide pricing information on an ongoing basis, and views an inactive market as one in which there are few transactions for the asset or liability, the prices are not current, or price quotations vary
substantially either over time or among market makers.
A financial instruments level within the fair value hierarchy is
based on the lowest level of any input that is significant to the fair value measurement.
Allowance for Doubtful Accounts
The Company maintains allowances for doubtful accounts, when appropriate, for estimated losses resulting from the
inability of its customers to make required payments. If the financial condition of its customers were to deteriorate, the Companys actual losses may exceed its estimates, and additional allowances would be required. To date, its actual
results have not been materially different than the estimates.
66
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The table below presents the changes in the allowance for doubtful accounts for the
years ended December 31, 2012, 2011 and 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
|
|
In thousands
|
|
Balance at January 1
|
|
$
|
1,382
|
|
|
$
|
1,620
|
|
|
$
|
1,428
|
|
Provision for doubtful accounts, net of reversals and recoveries
|
|
|
(65
|
)
|
|
|
(115
|
)
|
|
|
301
|
|
Write offs
|
|
|
(54
|
)
|
|
|
(123
|
)
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
1,263
|
|
|
$
|
1,382
|
|
|
$
|
1,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories and Inventory Valuation
The Company records inventories at the lower of actual cost, or market value. Market value is based upon an estimated average selling
price reduced by the estimated costs of disposal. The determination of market value involves numerous judgments including estimating average selling prices based up recent sales, industry trends, existing customer orders, and other factors. Should
actual market conditions differ from the Companys estimates, its future results of operations could be materially affected. The Company uses standard costs, which approximated actual cost. Standard costs are determined based on the
Companys estimate of material costs, manufacturing yields, costs to assemble, test and package its products and allocable indirect costs. The Company records differences between standard costs and actual costs as variances. These variances are
analyzed and are either included in the value of inventory on the consolidated balance sheet or expensed on the consolidated statements of operations in order to state the inventories at actual costs on a first-in-first-out basis. Standard
costs are updated quarterly.
Provisions are recorded for excess and obsolete inventory and are estimated based on a
comparison of the quantity and cost of inventory on hand to the Companys forecast of customer demand. Customer demand is dependent on many factors and requires the Company to use significant judgment in its forecasting process. The Company
must also make assumptions regarding the rate at which new products will be accepted in the marketplace and at which customers will transition from older products to newer products. Generally, inventories in excess of six months forecasted demand
are written down to zero (unless specific facts and circumstances warrant no write-down or a write-down to a different value) and the related provision is recorded as a cost of sales. Once a provision is established, it is maintained until the
product to which it relates is sold or otherwise disposed of, even if in subsequent periods the Company forecasts demand for the product. To the extent its demand forecast for specific products is less than the combination of product on-hand and
non-cancelable orders from suppliers, the Company could be required to record additional inventory reserves, which would have a negative impact on its gross margin. If the Company ultimately sells inventory that it has previously written down, its
gross margins in future periods will be positively impacted.
Valuation of Long-Lived Assets, Intangible Assets and Goodwill
The Company tests long-lived assets, including intangible assets with finite lives for impairment whenever events or
circumstances suggest that such assets may not be recoverable. An impairment is only deemed to have occurred if the sum of the forecasted undiscounted future cash flows related to the assets are less than the carrying value of the asset that the
Company is testing for impairment. If the forecasted cash flows are less than the carrying value, then the Company must write down the carrying value to its estimated fair value based primarily upon forecasted discounted cash flows. These forecasted
discounted cash flows include estimates and assumptions related to revenue growth rates and operating margins, risk-adjusted discount rates based on our weighted average cost of capital, future economic and market conditions and determination of
appropriate market
67
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
comparables. If future forecasts are revised, they may indicate or require future impairment charges. The Company bases its fair value estimates on assumptions that are believe to be reasonable
but that are unpredictable and inherently uncertain. Actual future results may differ from those estimates.
Goodwill is
tested for impairment on an annual basis (on September 30th) using a two-step model. The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. Management has determined that the
Company has one reporting unit. If the carrying value of the reporting unit exceeds its fair value, the second step would need to be conducted; otherwise, no further steps are necessary as no potential impairment exists. The second step, measuring
the impairment loss, compares the implied fair value of the goodwill with the carrying amount of that goodwill. Any excess of the goodwill carrying value over the respective implied fair value is recognized as an impairment loss, and the carrying
value of goodwill is written down to fair value. In each period presented the fair value of the reporting unit exceeded its carrying value, thus the we were not required to perform the second step of the analysis, and no goodwill impairment charges
were recorded
The Company assigns the following useful lives to its fixed assetsthree years for computers and software,
one to five years for equipment and five to seven years for furniture and fixtures. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful life, which ranges from two to five years.
Investments in Privately Held Companies
Investments in privately-held companies are reviewed on a quarterly basis to determine if their values have been impaired and adjustments are recorded as necessary. The Company assesses the potential
impairment of these investments by considering available evidence such as the investees historical and projected operating results, progress towards meeting business milestones, ability to meet expense forecasts, and the prospects for industry
or market in which the investee operates. Upon disposition of these investments, the specific identification method is used to determine the cost basis in computing realized gains or losses. Declines in value that are judged to be
other-than-temporary are reported in interest income and other, net in the accompanying consolidated statements of operations.
Income
Taxes
Income tax expense is an estimate of current income taxes payable or refundable in the current fiscal year based
on reported income before income taxes. Deferred income taxes reflect the effect of temporary differences and carry-forwards that are recognized for financial reporting and income tax purposes.
The Company accounts for income taxes under the provisions of ASC 740,
Income Taxes
. Under the provisions of
ASC 740, deferred tax assets and liabilities are recognized based on the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, utilizing the tax rates that are expected
to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company recognizes valuation allowances to reduce any deferred tax assets to the amount that it estimates will more likely than
not be realized based on available evidence and managements judgment. In addition, the calculation of liabilities for uncertain tax positions involves significant judgment in estimating the impact of uncertainties in the application of complex
tax laws. Resolution of these uncertainties in a manner inconsistent with the Company expectations could have a material impact on its results of operations and financial position.
68
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Indemnifications and Warranty Liabilities
Certain of the Companys licensing agreements indemnify its customers for expenses or liabilities resulting from claimed
infringements of patent, trademark or copyright by third parties related to the intellectual property content of the Companys 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 a claim.
At the time of revenue recognition, the Company provides an accrual for estimated costs (included in accrued liabilities in the
accompanying consolidated balance sheets) to be incurred pursuant to its warranty obligation. The Companys estimate is based primarily on historical experience. The accrual and the related expense for known issues were not significant during
the periods presented. Due to product testing and the short time typically between product shipment and the detection and correction of product failures, and considering the historical rate of payments on indemnification claims, the accrual and
related expense for estimated incurred but unidentified issues were not significant during the periods presented.
Foreign Currency
Translation and Re-measurement
The Company determines the functional currency for its foreign subsidiaries by
reviewing the currencies in which their respective operating activities occur. For the Companys foreign subsidiaries where the local countrys currency is the functional currency, the Company translates the assets and liabilities of its
non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using the average exchange rates during the period. Gains and
losses from these translations are credited or charged to foreign currency translation adjustments, included in accumulated other comprehensive income (loss) in stockholders equity. The Companys subsidiaries that use the U.S. dollar as
their functional currency re-measure monetary assets and liabilities denominated in currencies other than the U.S. dollar at exchange rates in effect at the end of each period, and inventories, property, and nonmonetary assets and liabilities at
historical rates. Any adjustments arising from re-measurements are included in other income (expense) in the consolidated statements of operations. Upon substantial liquidation of a subsidiary, the balance of accumulated foreign currency
translation adjustment of such subsidiary which is included in accumulated other comprehensive income in stockholders equity is transferred to the statement of operations.
Research and development expenses
Research and development expenses
are expensed as incurred.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU No. 2011-11,
Disclosures about Offsetting Assets and Liabilities.
ASU
2011-11 will require the Company to disclose information about offsetting related arrangements to enable users of the Company financial statements to understand the effect of those arrangements on its financial position. The new guidance is
effective for the Company beginning January 1, 2013. The disclosures required are to be applied retrospectively for all comparative periods presented. The Company does not expect that this standard will materially impact its financial
statements disclosures.
69
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Adopted Accounting Standards
Effective January 1, 2012, the Company adopted ASU No. 2011-04,
Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).
The adoption of ASU 2011-04 did not have a significant impact on the Companys consolidated financial position or results of operations.
Effective January 1, 2012, the Company adopted ASU No. 2011-05,
Presentation of Comprehensive
Income
and ASU No. 2011-12,
Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update
No. 2011-05.
The adoption of ASU 2011-05 and 2011-12 concerns presentation and disclosure only and did not have an impact on the Companys consolidated financial position or results of operations.
NOTE 2NET INCOME (LOSS) PER SHARE
Basic net income (loss) per common share is computed by dividing the net income (loss) available to common stockholders
by the weighted-average number of shares of common stock outstanding during the period. Diluted income (loss) per common share is computed by dividing net income (loss) available to common stockholders by the weighted-average number of shares of
common stock outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include
outstanding stock options, shares to be purchased under the employee stock purchase plan and unvested RSUs. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury stock
method. Under the treasury stock method, an increase in the fair market value of the Companys common stock can result in a greater dilutive effect from potentially dilutive securities.
The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(11,192
|
)
|
|
$
|
(11,643
|
)
|
|
$
|
8,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average outstanding shares used to compute basic net income (loss) per share
|
|
|
81,872
|
|
|
|
80,603
|
|
|
|
76,957
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
1,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average oustanding shares used to compute diluted net income (loss) per share
|
|
|
81,872
|
|
|
|
80,603
|
|
|
|
78,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per sharebasic
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per sharediluted
|
|
$
|
(0.14
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the net loss for the years ended December 31, 2012 and 2011, approximately
5.5 million common stock equivalents for both the years ended December 31, 2012 and 2011, were excluded from the computation of diluted net loss per share because their effect would have been anti-dilutive. For the year ended
December 31, 2010, approximately 7.2 million common stock equivalents were excluded from the calculation of diluted net income per share, respectively, because their inclusion would have been anti-dilutive.
70
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 3CONSOLIDATED BALANCE SHEET COMPONENTS
Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2012 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Estimated
Fair Value
|
|
Classified as current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,191
|
|
|
$
|
|
|
|
$
|
10,191
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
18,878
|
|
|
|
|
|
|
|
18,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
29,069
|
|
|
$
|
|
|
|
$
|
29,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
$
|
10,525
|
|
|
$
|
|
|
|
$
|
10,525
|
|
Municipal securities
|
|
|
52,347
|
|
|
|
166
|
|
|
|
52,513
|
|
Corporate securities
|
|
|
15,283
|
|
|
|
77
|
|
|
|
15,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
78,155
|
|
|
|
243
|
|
|
|
78,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
107,224
|
|
|
$
|
243
|
|
|
$
|
107,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For investments in securities classified as available-for-sale, market value and the amortized cost of
debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2012.
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Market
Value
|
|
|
|
(In thousands)
|
|
Contractual maturity
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
50,235
|
|
|
$
|
50,328
|
|
1-3 years
|
|
|
27,920
|
|
|
|
28,070
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,155
|
|
|
$
|
78,398
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2011
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Estimated
Fair Value
|
|
Classified as current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
12,344
|
|
|
$
|
|
|
|
$
|
12,344
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
|
24,781
|
|
|
|
|
|
|
|
24,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
37,125
|
|
|
$
|
|
|
|
$
|
37,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
$
|
10,114
|
|
|
$
|
|
|
|
$
|
10,114
|
|
Municipal securities
|
|
|
83,978
|
|
|
|
179
|
|
|
|
84,157
|
|
Corporate securities
|
|
|
21,975
|
|
|
|
28
|
|
|
|
22,003
|
|
United States government agencies
|
|
|
8,004
|
|
|
|
23
|
|
|
|
8,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
124,071
|
|
|
|
230
|
|
|
|
124,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents and short-term investments
|
|
$
|
161,196
|
|
|
$
|
230
|
|
|
$
|
161,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
For investments in securities classified as available-for-sale, market value and the
amortized cost of debt securities have been classified in accordance with the following maturity groupings based on the contractual maturities of those securities as of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Market
Value
|
|
|
|
(In thousands)
|
|
Contractual maturity
|
|
|
|
|
|
|
|
|
Less than 1 year
|
|
$
|
76,247
|
|
|
$
|
76,402
|
|
1-3 years
|
|
|
47,824
|
|
|
|
47,899
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
124,071
|
|
|
$
|
124,301
|
|
|
|
|
|
|
|
|
|
|
Components of inventory, prepaid expenses and other current assets and property and equipment consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
4,036
|
|
|
$
|
5,104
|
|
Work in process
|
|
|
1,874
|
|
|
|
1,071
|
|
Finished goods
|
|
|
5,358
|
|
|
|
3,887
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,268
|
|
|
$
|
10,062
|
|
|
|
|
|
|
|
|
|
|
Prepaid expense and other current assets:
|
|
|
|
|
|
|
|
|
Prepaid software maintenance
|
|
$
|
3,542
|
|
|
$
|
2,625
|
|
Other prepaid expenses (*)
|
|
|
3,056
|
|
|
|
2,371
|
|
Income tax receivable
|
|
|
56
|
|
|
|
1,012
|
|
Others (*)
|
|
|
1,451
|
|
|
|
3,093
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,105
|
|
|
$
|
9,101
|
|
|
|
|
|
|
|
|
|
|
Property and equipment:
|
|
|
|
|
|
|
|
|
Computers and software
|
|
$
|
22,272
|
|
|
$
|
21,233
|
|
Equipment
|
|
|
37,735
|
|
|
|
32,932
|
|
Furniture and fixtures
|
|
|
1,535
|
|
|
|
2,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,542
|
|
|
|
56,892
|
|
Less: accumulated depreciation
|
|
|
(46,702
|
)
|
|
|
(44,120
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
14,840
|
|
|
$
|
12,772
|
|
|
|
|
|
|
|
|
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Investment in privately-held companies (Note 5)
|
|
$
|
6,000
|
|
|
$
|
|
|
Warrant to purchase preferred stock of a privately-held company (Note 5)
|
|
|
1,690
|
|
|
|
|
|
Investment in an unconsolidated affiliate (Note 5)
|
|
|
|
|
|
|
6,520
|
|
Advances for intellectual properties
|
|
|
379
|
|
|
|
1,848
|
|
Others (*)
|
|
|
974
|
|
|
|
1,001
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,043
|
|
|
$
|
9,369
|
|
|
|
|
|
|
|
|
|
|
72
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In the fourth quarter of fiscal 2012, the Company increased its provision for excess and
obsolete inventory to reflect the write down of certain unsalable inventory amounting to $6.2 million due to defects in the material used by one of our assembly vendors in the packaging process. The Company is seeking compensation for this loss from
its supplier, but no assurance can be provided regarding the amount of such compensation, if any.
(*)
|
Prior year balances have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the total balance of prepaid expense and
other current assets or other assets, nor did they have any impact on any other element of the consolidated financial statements.
|
The components of accrued liabilities and other long-term liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
Accrued and other current liabilities:
|
|
|
|
|
|
|
|
|
Accrued payroll and related expenses
|
|
$
|
7,317
|
|
|
$
|
8,540
|
|
Accrued royalties
|
|
|
6,203
|
|
|
|
5,926
|
|
Accrued product rebate
|
|
|
1,063
|
|
|
|
2,389
|
|
Payable in connection with business acquisition (Note 6)
|
|
|
|
|
|
|
1,304
|
|
Accrued restructuring (Note 8)
|
|
|
|
|
|
|
910
|
|
Accrued payables
|
|
|
3,080
|
|
|
|
5,522
|
|
Others
|
|
|
1,937
|
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,600
|
|
|
$
|
26,116
|
|
|
|
|
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
Non-current liability for uncertain tax positions
|
|
$
|
14,410
|
|
|
$
|
12,480
|
|
Others (*)
|
|
|
2,417
|
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,827
|
|
|
$
|
14,815
|
|
|
|
|
|
|
|
|
|
|
(*)
|
Prior year balances have been reclassified to conform to the current year presentation. Such reclassifications had no impact on the total balance of other long-term
liabilities, nor did they have any impact on any other element of the consolidated financial statements.
|
NOTE 4FAIR VALUE MEASUREMENTS
The Company records its financial instruments that are accounted for under FASB Accounting Standards Codification (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 DisclosuresSubsequent 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, in the most advantageous market for such asset or liability. The carrying value of the Companys financial instruments including cash and cash equivalents and
short-term investments 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 Companys cash equivalents and short term investments are generally 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.
73
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Companys Level 1 assets consist of money market fund securities and U.S.
government and agency securities. These instruments are generally classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.
The Companys Level 2 assets include certificate of deposits, corporate securities and municipal securities and are valued by using
a multi-dimensional relational model, the inputs, when available, are primarily benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market
research publications.
The Companys Level 3 assets relate to warrants to purchase preferred stock of a private company,
and Level 3 liabilities consist of contingent consideration in connection with a business acquisition. The Company determines the value of the warrants to purchase preferred stock using the Black-Scholes option pricing model with the following
assumptions: contractual term of 5 years; estimated volatility of 55.2%, risk-free rate of 0.7%, and no expected dividends. The Company makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at
the end of each reporting period until the contingency is resolved. The fair value of this arrangement is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market,
including the probability of achieving the milestone, revenue projections and discount rates. The fair value of the contingent consideration will increase or decrease according to the movement of the inputs. The Company does not expect the changes
in these inputs to have a material impact on the Companys consolidated financial statements.
The Company measures
certain assets, including its cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques
using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is
determined to be other-than-temporary. Other than as described in Note 5 related to an equity method impairment, the Company did not record any other-than-temporary impairments on those financial assets required to be measured at fair value on a
nonrecurring basis in any period presented.
For certain of the Companys financial instruments, including cash held in
banks, accounts receivable and accounts payable, the carrying amounts approximate fair value due to their short maturities.
The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis as of
December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
measurements using
|
|
|
Assets (Liabilities)
at
fair value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
18,878
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
18,878
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
$
|
|
|
|
$
|
10,525
|
|
|
$
|
|
|
|
$
|
10,525
|
|
Municipal securities
|
|
|
|
|
|
|
52,513
|
|
|
|
|
|
|
|
52,513
|
|
Corporate securities
|
|
|
|
|
|
|
15,360
|
|
|
|
|
|
|
|
15,360
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
|
|
|
$
|
78,398
|
|
|
$
|
|
|
|
$
|
78,398
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant to purchase preferred stock (Note 5)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,690
|
|
|
$
|
1,690
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations in connection with a business acquisition (Note 6)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(108
|
)
|
|
$
|
(108
|
)
|
74
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The cash equivalents in the above table exclude $10.2 million in cash held by the
Company or in its accounts or with investment fund managers as of December 31, 2012.
The following table presents the
fair value of our financial instruments that are measured at fair value on a recurring basis as of December 31, 2011.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
measurements using
|
|
|
Assets (Liabilities)
at
fair value
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
24,781
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
24,781
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificate of deposits
|
|
$
|
|
|
|
$
|
10,114
|
|
|
$
|
|
|
|
$
|
10,114
|
|
United States government agencies
|
|
|
8,027
|
|
|
|
|
|
|
|
|
|
|
|
8,027
|
|
Municipal securities
|
|
|
|
|
|
|
84,157
|
|
|
|
|
|
|
|
84,157
|
|
Corporate securities
|
|
|
|
|
|
|
22,003
|
|
|
|
|
|
|
|
22,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$
|
8,027
|
|
|
$
|
116,274
|
|
|
$
|
|
|
|
$
|
124,301
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent considerations in connection with a business acquisition (Note 6)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(1,304
|
)
|
|
$
|
(1,304
|
)
|
The cash equivalents in the above table exclude $12.3 million in cash held by the Company or in its
accounts or with investment fund managers as of December 31, 2011.
The following table presents the changes in the
Companys Level 3 liabilities, which are measured at fair value on a recurring basis, for the year ended December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Fair Value
Measurement Using
Significant
Unobservable Inputs
|
|
|
|
Asset
|
|
|
Liabilities
|
|
Balance at January 1, 2011
|
|
$
|
|
|
|
$
|
|
|
Contingent considerations on business acquisition
|
|
|
|
|
|
|
(1,481
|
)
|
Adjustment to fair value recorded during the period (Note 6)
|
|
|
|
|
|
|
177
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
|
|
|
|
|
(1,304
|
)
|
Acquisition of warrant to purchase preferred stock (Note 5)
|
|
|
1,500
|
|
|
|
|
|
Milestone payment
|
|
|
|
|
|
|
1,180
|
|
Adjustment to fair value recorded during the period (Note 5 and 6)
|
|
|
190
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
1,690
|
|
|
$
|
(108
|
)
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2012 and 2011, the Company held no direct investments in auction
rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities. There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the year ended December 31, 2012 and
2011.
75
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 5INVESTMENTS
Equity Method Investment
On July 13, 2011, the Company purchased a 17.5% equity ownership interest in a U.S. based privately-held company for $7.5 million in cash. The privately-held company develops and designs wireless
audio semiconductor chips for home theater speakers that operate wirelessly in the 5GHz band. The Company accounts for this investment under the equity method. From July 13, 2011 through September 30, 2012, the Company reduced the value of
its investment by an aggregate of $2.8 million ($1.8 million during the year ended December 31, 2012) representing the Companys proportionate share of the privately-held companys net loss during this period.
Concurrently with the equity investment, the Company entered into the following agreements with the privately-held company: (a) a
call option agreement whereby the Company can acquire the privately-held company for $35.0 million in cash plus earn-out payments; (b) a sales representative agreement whereby the privately-held company appointed the Company as its sole
and exclusive independent representative for the purposes of soliciting orders for and promoting its products to the Companys prospects as listed in the agreement; and (c) a technology and IP license agreement granting the Company a
license to certain technology of the privately-held company upon occurrence of certain future events. The Companys option to purchase the privately held company had an original expiration date of April 2012. The Company was able to extend
the expiration of the call option until January 2013 with an additional investment of $2.75 million in July 2012 in the form of convertible secured promissory notes (the Notes). The Notes bear interest at a rate of 3% per annum and are payable
in full in July 2014. The Notes are collateralized by a security interest in all of the assets of the privately-held company. In addition, at any time prior to the time the Notes are paid in full, the Company may convert all or a portion of the
outstanding balance of the Notes into a current class of units of the privately-held company at a price of $2.329 per unit or into units issued at the next financing of the private company at the price per unit sold in such financing.
As of September 30, 2012, the Company concluded that these investments are impaired, and that such impairment is other than
temporary. In reaching this conclusion, the Company considered all available evidence, including that (i) the privately-held company had not achieved forecasted revenue or operating results, (ii) the privately-held company had limited
liquidity or capital resources as of September 30, 2012, and (iii) the overall progress the privately-held company has made towards its business objectives, including the acquisition of home theater wireless speaker customers, has not
progressed as previously expected. As a result of the Companys analysis of these factors, the Company believes that the possibility is remote that the Company will exercise its call option on the investments or that the Company will realize
any other value from these investments. Hence, the Company recorded a non-cash impairment charge of $7.5 million representing the carrying value of the investments. This impairment charge was recorded in the line item impairment of investments in an
unconsolidated affiliate in the consolidated statements of operations.
The following table presents summary financial data
for the privately-held company as of December 31, 2012 and 2011 and for the years ended December 31, 2012 and 2011 (in thousands):
Statement of Operation Data:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(unaudited)
|
|
Revenues
|
|
$
|
299
|
|
|
$
|
2,505
|
|
Gross profit
|
|
|
(2,038
|
)
|
|
|
487
|
|
Net loss
|
|
|
(12,486
|
)
|
|
|
(10,203
|
)
|
76
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
(unaudited)
|
|
Current assets
|
|
$
|
1,645
|
|
|
$
|
3,322
|
|
Non-current assets
|
|
|
16,640
|
|
|
|
18,879
|
|
Current liabilities
|
|
|
4,444
|
|
|
|
2,374
|
|
Non-current liabilities
|
|
|
17,317
|
|
|
|
10,824
|
|
Total stockholders equity
|
|
|
(3,476
|
)
|
|
|
9,003
|
|
Cost Method Investments
Investment in privately-held company A
In February 2012, the
Company paid $3.5 million in cash to purchase a minority interest in a privately held company which designs and develops wireless semiconductor chips. This investment is accounted for using the cost method as the Companys ownership
percentage is minor and the Company does not exert significant influence over the investee.
Investment in privately-held company B
On December 21, 2012, the Company entered into Securities Purchase Agreement and agreed to purchase a 17.7%
equity ownership interest in a privately-held company that designs connectivity related software. The Company accounted for this investment under the cost method as the Companys ownership percentage is minor and the Company does not have the
ability to exert significant influence over the investee. During 2012, the Company paid $2.5 million and the remaining $1.0 million will be paid over a period of time based on the achievement of various milestones by the investee. Concurrently with
the equity investment, the Company entered into the following agreements with the privately-held company: (a) call option agreement whereby the Company can acquire the privately-held company at a purchase price between $14.0 million and $20.0
million by fiscal 2014 plus earn-out payments of up to $10.75 million paid by fiscal 2016 subject to certain conditions; (b) a sales representative agreement; and (c) technology and IP license agreement.
This privately-held company is a variable interest entity (VIE) and the Companys 17.7% equity ownership represents a
variable interest in the VIE. The Company concluded that it should not consolidate the VIE because it is not the VIEs primary beneficiary. Significant judgments in this conclusion were based on identification of the activities that most
significantly impact the economic performance of the VIE and that the Company is not the party directing such activities. The Companys risks associated with the involvement with this VIE are limited to the Companys current and future
committed investments in the VIE. At December 31, 2012 the Companys maximum exposure to the VIE was the balance of its investment in the VIE of $2.5 million. The ongoing impact of involvement with the VIE on the Companys financial
position, financial performance, and cash flows is based on its review for impairment on a quarterly basis.
Investment in
privately-held company C
In October 2012, the Company entered into an asset purchase agreement with a privately held
entity for the purchase of certain intangible assets for $1.5 million, of which $1.2 million was paid on the signing date and the remaining $300,000 will be paid in the first quarter of 2013. The Company may also be required to pay up to $16.5
million additional cash consideration over two years if certain revenue levels are achieved and certain
77
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
financial or operational performance conditions are met. The Company believes that the likelihood that it would be required to pay the additional cash consideration is remote.
Concurrently, the Company also executed a warrant purchase agreement pursuant to which the Company received a warrant to purchase
5.3 million shares of the entitys preferred stock at $0.717 per share. In allocating the purchase price between the warrant and the technology assets, the Company first measured the full value of the warrant and then assigned any residual
amount of the price to the other assets (as the warrant was determined to be an available-for-sale security and thus is required to be carried at fair value). Management determined that the full purchase price was allocable to the warrants, and as
such no value was assigned to the intangible assets. The estimated fair value of the warrant as of the acquisition date and December 31, 2012, was determined using the Black-Scholes option pricing model with the following assumptions:
contractual term of 5 years; estimated volatility of 55.2%, risk-free rate of 0.7%, and no expected dividends. The Company recorded an unrealized gain of $190,000 as a component of other comprehensive loss related to the difference between the
purchase price and the fair value of this warrant at December 31, 2012. The warrant will continue to be measured at fair value on a periodic basis and any changes in fair value will be recorded as an unrealized gain or loss in other
comprehensive income until realized.
NOTE 6ACQUISITIONS
SiBEAM, Inc.
On May 16, 2011, the Company completed its acquisition of SiBEAM, Inc. (SiBEAM) pursuant to an Agreement and Plan of Merger dated April 13, 2011. SiBEAM is a privately-held, fabless
semiconductor company headquartered in Sunnyvale, California and is a provider of high-speed wireless communication products for uncompressed HD video in consumer electronics and personal computer applications. The acquisition of SiBEAM supports the
Companys mission to be the leader in advanced video connectivity solutions. SiBEAMs results of operations and the estimated fair value of assets acquired and liabilities assumed were included in the Companys unaudited consolidated
financial statements beginning May 16, 2011. The revenue and net loss of SiBEAM from the period May 16, 2011 through December 31, 2011 was approximately $2.2 million and $7.9 million, respectively. Acquisition costs, which were
expensed as incurred, were approximately $920,000 for the year ended December 31, 2011.
The fair value of the purchase
price consideration consisted of the following (in thousands):
|
|
|
|
|
Cash
|
|
$
|
14,540
|
|
Fair value of shares of stock issued
|
|
|
10,429
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
24,969
|
|
|
|
|
|
|
As part of the consideration, the Company issued 1,300,369 shares of its common stock to the former
SiBEAM stockholders. The total fair value of the shares of stock issued of $10.4 million was determined based on the closing price of the Companys stock on May 16, 2011 of $8.02 per share.
78
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The preliminary purchase consideration was allocated to the tangible and intangible
assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Companys allocation of the total purchase price is as follows (in thousands):
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
Assets acquired:
|
|
|
|
|
Cash
|
|
$
|
546
|
|
Accounts receivable
|
|
|
564
|
|
Inventories
|
|
|
1,353
|
|
Other current assets
|
|
|
260
|
|
Fixed assets and other long-term assets
|
|
|
336
|
|
Intangible assets
(1)
|
|
|
8,500
|
|
Goodwill
(1)
|
|
|
18,483
|
|
|
|
|
|
|
Total assets acquired
|
|
|
30,042
|
|
|
|
|
|
|
Current liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
|
(546
|
)
|
Accrued liabilities
|
|
|
(3,465
|
)
|
Line of credit
|
|
|
(523
|
)
|
Deferred license revenue
|
|
|
(417
|
)
|
|
|
|
|
|
Total current liabilities assumed
|
|
|
(4,951
|
)
|
Deferred income tax liability, non-current
|
|
|
(122
|
)
|
|
|
|
|
|
Total liabilities assumed
|
|
|
(5,073
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
24,969
|
|
|
|
|
|
|
(1)
|
As described in Note 1, the Company subsequently corrected these values in 2012, reducing the value of intangible assets by $3.0 million and increasing
goodwill by a corresponding amount.
|
The following table presents details of the intangible assets
acquired through the acquisition of SiBEAM ($ in thousands):
|
|
|
|
|
|
|
|
|
Asset Life
in Years
|
|
Fair Value
|
|
In-process research and development
|
|
indefinite
|
|
$
|
4,500
|
|
Customer relationship
|
|
5
|
|
|
1,000
|
|
Trademark
(1)
|
|
5
|
|
|
3,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,500
|
|
|
|
|
|
|
|
|
(1)
|
As described in Note 1, the Company subsequently corrected these values in 2012, reducing the value of intangible assets by $3.0 million and increasing
goodwill by a corresponding amount.
|
The Company does not believe there is any significant residual value
associated with these intangible assets. The Company amortizes the intangible assets straight-line over their estimated useful lives. The Companys management determined the fair values of the intangible assets with the assistance of a
valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors, estimates of
future revenues and costs.
79
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Goodwill
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The
goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill is not amortized, but is tested
instead for impairment annually or more frequently if certain indicators of impairment are present. Goodwill is not tax deductible for income tax purposes.
Unaudited Pro Forma Financial Information
The unaudited pro forma
financial information in the table below summarizes the combined results of operations for the Company and SiBEAM as if the merger occurred on January 1, 2010. The pro forma financial information for all periods presented also includes the
business combination accounting effects resulting from this acquisition including the amortization charges from acquired intangible assets, the stock-based compensation expense recognized for equity awards granted to SiBEAM employees who joined the
Company after the acquisition, acquisition related costs and nonrecurring expense related to the fair value adjustment to acquisition date inventory, as though the acquisition was completed on January 1, 2010. The pro forma financial
information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2010.
The unaudited pro forma financial information for the year ended December 31, 2011 represent (a) the historical results of the
Company for the year ended December 31, 2011, (b) the historical results of SiBEAM for the year ended December 31, 2011, and (c) adjustment to the pro forma net loss (i) to exclude $920,000 of acquisition related costs
incurred in 2011 and $358,000 of nonrecurring expense related to the fair value adjustment to acquisition date inventory; (ii) to include $300,000 of amortization charges from acquired intangible assets and $636,000 of stock-based
compensation expense recognized for equity awards granted to SiBEAM employees who joined the Company after the acquisition.
The unaudited pro forma financial information for the year ended December 31, 2010 represent (a) the historical results of the
Company for the year ended December 31, 2010, (b) the historical results of SiBEAM for the year ended December 31, 2010 and (c) adjustment to the pro forma net loss to include $920,000 of acquisition related costs incurred in
2011, $358,000 of nonrecurring expense related to the fair value adjustment to acquisition date inventory, $800,000 of amortization charges from acquired intangible assets and $1.4 million of stock-based compensation expense recognized for
equity awards granted to SiBEAM employees who joined the Company after the acquisition.
|
|
|
|
|
|
|
|
|
|
|
(unaudited) Year Ended
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
(Dollars in thousands,
except per share amounts)
|
|
Total revenues
|
|
$
|
221,958
|
|
|
$
|
194,038
|
|
Net loss
|
|
$
|
(18,453
|
)
|
|
$
|
(18,121
|
)
|
Basic and diluted net loss per share
|
|
$
|
(0.23
|
)
|
|
$
|
(0.23
|
)
|
The pro forma adjustments did not have significant impact on the pro forma combined provision for income
taxes for the years ended December 31, 2011 and 2010 due to net loss positions and/or valuation allowances on deferred income tax assets in those periods.
80
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Anchor Bay Technology
On February 2, 2011, the Company purchased the net assets Anchor Bay Technology (ABT), a San Jose, California based company involved
in developing certain technology that is consistent with the Companys long-term business strategy, for a total consideration of approximately $3.6 million in cash, subject to certain contingent milestone and earn-out payments as further
described below. ABT designs and manufactures video processing semiconductor and system-level solutions. ABT offers advanced video processing chips for de-interlacing and format conversion applications, and video scaling chips for Blu-Ray
players, HD set-top box, and AV receiver applications. Acquisition costs, which were expensed as incurred, were approximately $90,000 for the year ended December 31, 2011.
The total fair value of the purchase consideration for this acquisition consists of the following (in thousands):
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
Cash consideration
|
|
$
|
1,916
|
|
Contingent payments:
|
|
|
|
|
First milestone
|
|
|
529
|
|
Second milestone
|
|
|
525
|
|
Earn-out payments
|
|
|
427
|
|
Settlement of pre-existing arrangements
|
|
|
249
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
3,646
|
|
|
|
|
|
|
Contingent Considerations
First milestone
The Company would pay the former stockholders of ABT $590,000 in cash upon the successful release on or before
March 31, 2012 of product samples being developed by the Company which incorporate certain of ABTs technologies. The acquisition-date fair value of the first milestone payment was approximately $529,000. The first milestone was
achieved and the Company paid $590,000 to the former stockholders of ABT in April 2012.
Second milestone
The
Company would pay the former stockholders of ABT $590,000 in cash upon the successful release on or before November 30, 2012 of production units being developed by the Company which incorporate certain of ABTs technologies. The
acquisition-date fair value of the second milestone payment was approximately $525,000. The second milestone was achieved and the Company paid $590,000 to the former stockholders of ABT in November 2012.
Earn-out Payments
The former stockholders of ABT are entitled to (i) 50% of net licensing revenue to be derived from
each initial ABT IP license entered into by the Company during the first 18 months from the acquisition date and (ii) 50% of support fees collected by the Company on ABTs IP licenses in excess of 200% of the costs of providing the support
services during the first 18 months from the acquisition date. The acquisition-date fair value of the earn-out payments was approximately $427,000.
The Company had considered the acquisition-date fair values of the milestone and earn-out payments as part of the purchase price. The Companys management determined the fair values of the contingent
payments with the assistance of a valuation firm. The estimation of the fair value of the contingent payments required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as
present value factors and the probability of the achievement of the factors on which the contingency is based.
81
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company re-evaluated the fair value of the earn-out payments as of December 31,
2012 and 2011 and determined that the revised fair value was approximately $108,000 and $250,000, respectively. The Company recognized the $142,000 and $177,000 reduction in the fair value of the earn-out consideration as a reduction in selling,
general and administrative expense during the years ended December 31, 2012 and 2011 respectively.
Prior to this
acquisition, the Company entered into an IP License Agreement with ABT in 2010 for the use of certain of its intellectual property in exchange for a payment of $249,000, which was included in Other Assets in the Companys
consolidated balance sheet as of December 31, 2010. The Companys acquisition of ABT in February 2011 resulted in the acquisition of the IP licensed in this IP License Agreement and the effective settlement of that agreement. There was no
gain or loss on such effective settlement. As a result, the payment made to ABT in connection with this IP License Agreement was considered part of the acquisition-date fair value of the total consideration transferred.
The allocation of the purchase consideration of this acquisition is summarized as follows (in thousands):
|
|
|
|
|
|
|
Estimated
Fair
Value
|
|
Intangible assets acquired
|
|
$
|
5,000
|
|
Goodwill
|
|
|
163
|
|
Net liabilities assumed
|
|
|
(1,517
|
)
|
|
|
|
|
|
|
|
$
|
3,646
|
|
|
|
|
|
|
The Company allocated $163,000 of the purchase price to goodwill which is deductible for tax purposes.
The goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company as part of the acquisition.
The accompanying consolidated financial statements for the year ended December 31, 2011 include the operations of the aforementioned
acquisition, commencing on February 2, 2011, the acquisition date. No supplemental pro-forma information is presented for this acquisition due to the immaterial effect of the acquisition on the Companys results of operations.
The following table presents details of the intangible assets acquired through the acquisition of ABT (in thousands, except years):
|
|
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
|
Estimated Useful
Life (in Years)
|
Intellectual property
|
|
$
|
1,600
|
|
|
6
|
Core technology
(1)
|
|
|
1,600
|
|
|
3
|
Trade name
|
|
|
600
|
|
|
Indefinite
|
Customer relationship
|
|
|
500
|
|
|
2
|
System technology
|
|
|
400
|
|
|
3
|
In-process research and development
|
|
|
300
|
|
|
Indefinite
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As described in Note 1, the Company subsequently corrected the amortization period for core technology from three years to five years.
|
82
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company does not believe there is any significant residual value associated with
these intangible assets. The Company amortizes the intangible assets straight-line over their estimated useful lives. The Companys management determined the fair values of the intangible assets with the assistance of a valuation firm. The
estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors, estimates of future revenues and
costs.
NOTE 7GOODWILL AND INTANGIBLE ASSETS
Goodwill
The table below summarizes the Companys goodwill
activities (in thousands):
|
|
|
|
|
|
|
December 31, 2012
|
|
Gross amount of goodwill
|
|
$
|
37,856
|
|
Accumulated impairment
|
|
|
(19,210
|
)
|
Out-of-period adjustment related to SiBEAM acquistion
|
|
|
3,000
|
|
|
|
|
|
|
Carrying value at end of year
|
|
$
|
21,646
|
|
|
|
|
|
|
There were no goodwill impairment charges recorded in the years ended December 31, 2012, 2011 and
2010.
Purchased Intangible Assets
The following table presents the Companys purchased intangible assets, including those arising from business acquisitions, as of December 31, 2012 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
Useful Life
(years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Intangible assets with finite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property
|
|
6
|
|
$
|
1,600
|
|
|
$
|
(511)
|
|
|
$
|
1,089
|
|
Core Technology
|
|
5
|
|
|
1,600
|
|
|
|
(613
|
)
|
|
|
987
|
|
System Technology
|
|
3
|
|
|
400
|
|
|
|
(256
|
)
|
|
|
144
|
|
Developed Technology
|
|
3-5
|
|
|
4,800
|
|
|
|
(425
|
)
|
|
|
4,375
|
|
Customer Relationship
|
|
2-5
|
|
|
1,500
|
|
|
|
(804
|
)
|
|
|
696
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related intangible assets
|
|
|
|
|
9,900
|
|
|
|
(2,609
|
)
|
|
|
7,291
|
|
Licensed Technology
|
|
5
|
|
|
3,867
|
|
|
|
(306
|
)
|
|
|
3,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
|
|
|
13,767
|
|
|
|
(2,915
|
)
|
|
|
10,852
|
|
Intangible assets with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
indefinite
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with indefinite lives
|
|
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased intangible assets
|
|
|
|
$
|
14,367
|
|
|
$
|
(2,915)
|
|
|
$
|
11,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
Useful Life
(years)
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Intangible assets with finite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intellectual Property
|
|
6
|
|
$
|
1,600
|
|
|
$
|
(245)
|
|
|
$
|
1,355
|
|
Core Technology
|
|
3
|
|
|
1,600
|
|
|
|
(489
|
)
|
|
|
1,111
|
|
Trademark
|
|
5
|
|
|
3,000
|
|
|
|
(375
|
)
|
|
|
2,625
|
|
System Technology
|
|
3
|
|
|
400
|
|
|
|
(122
|
)
|
|
|
278
|
|
Customer Relationship
|
|
2-5
|
|
|
1,500
|
|
|
|
(354
|
)
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with finite lives
|
|
|
|
|
8,100
|
|
|
|
(1,585
|
)
|
|
|
6,515
|
|
Intangible assets with indefinite lives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade Name
|
|
indefinite
|
|
|
600
|
|
|
|
|
|
|
|
600
|
|
In-process research and development
|
|
indefinite
|
|
|
4,800
|
|
|
|
|
|
|
|
4,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets with indefinite lives
|
|
|
|
|
5,400
|
|
|
|
|
|
|
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total purchased intangible assets
|
|
|
|
$
|
13,500
|
|
|
$
|
(1,585)
|
|
|
$
|
11,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were no impairment charges with respect to the acquisition-related intangible assets in any period
presented.
The development of in-process research and development was completed during the quarter ended September 30,
2012 and transferred to the developed technology category. The Company amortizes these technologies over their estimated useful lives.
For intangible assets that are subject to amortization, the Company recorded amortization expense on the consolidated statements of operation as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Cost of product revenue
|
|
$
|
425
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
307
|
|
|
|
|
|
|
|
|
|
Amortization of acquisition-related intangible assets
|
|
|
599
|
|
|
|
1,585
|
|
|
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,331
|
|
|
$
|
1,585
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The annual expected amortization expense of intangible assets with finite lives is as follows (in
thousands):
|
|
|
|
|
Year ending December 31,
|
|
Amount
|
|
2013
|
|
$
|
2,747
|
|
2014
|
|
|
2,604
|
|
2015
|
|
|
2,543
|
|
2016
|
|
|
1,868
|
|
Thereafter
|
|
|
1,090
|
|
|
|
|
|
|
Total
|
|
$
|
10,852
|
|
|
|
|
|
|
84
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Other Intangible Assets
There were no other intangible asset impairment charges recorded in the year ended December 31, 2012 and 2010.
In the fourth quarter of 2011, the Company assessed its advances to a third party for intellectual properties for impairment. The Company
concluded that the intangible assets related to these advances amounting to $8.5 million were fully impaired as of December 31, 2011, and recorded an impairment charge for the full amount in 2011.
NOTE 8RESTRUCTURING CHARGES
For the years ended December 31, 2012, 2011 and 2010, the Company recorded restructuring expense of approximately
$110,000, $2.3 million and $3.3 million, respectively. The restructuring expense recorded for the year ended December 31, 2012 consisted of the sublease portion of rent payments on an exited facility, offset by the reversal of accrued severance
and benefits resulting from a change in estimates of costs incurred for prior restructuring activities.
The restructuring
expense recorded for the year ended December 31, 2011 consisted of severance and benefits of terminated employees and cost relating to operating lease commitments on exited facilities associated with SiBEAM acquisition as well as cost relating
to operating lease commitments from prior exited facilities.
The restructuring expense recorded for the year ended
December 31, 2010 was primarily related to (i) $2.0 million cost for the termination of the services of a certain R&D engineering services firm, (ii) $1.0 million cost relating to operating lease commitments on exited facilities
and (iii) $0.3 million impairment of certain fixed assets.
The table below presents the restructuring activities for the
years ended December 31, 2012, 2011 and 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Severance
and
Benefits
|
|
|
Operating
Lease and
Other
Agreements
Cancellation
|
|
|
Fixed
Assets
and
Other
Assets
Impaired
|
|
|
Total
|
|
Accrued restructuring balance as of January 1, 2010
|
|
|
17,052
|
|
|
|
261
|
|
|
|
|
|
|
|
17,313
|
|
Additional accruals/adjustments
|
|
|
126
|
|
|
|
2,831
|
|
|
|
302
|
|
|
|
3,259
|
|
Cash payments
|
|
|
(16,138
|
)
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
(17,381
|
)
|
Noncash charges and adjustments
|
|
|
|
|
|
|
|
|
|
|
(302
|
)
|
|
|
(302
|
)
|
Foreign currency changes
|
|
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance as of December 31, 2010
|
|
|
|
|
|
|
1,849
|
|
|
|
|
|
|
|
1,849
|
|
Additional accruals/adjustments
|
|
|
1,638
|
|
|
|
631
|
|
|
|
|
|
|
|
2,269
|
|
Cash payments
|
|
|
(852
|
)
|
|
|
(2,390
|
)
|
|
|
|
|
|
|
(3,242
|
)
|
Foreign currency changes
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance as of December 31, 2011
|
|
|
786
|
|
|
|
124
|
|
|
|
|
|
|
|
910
|
|
Additional accruals/adjustments
|
|
|
(146
|
)
|
|
|
256
|
|
|
|
|
|
|
|
110
|
|
Cash payments
|
|
|
(628
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
(1,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring balance as of December 31, 2012
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 9LEASE OBLIGATIONS
Operating Leases
On January 6, 2011, the Company entered into a seven-year lease agreement (the Lease) with Christensen Holdings, L.P., a California limited partnership. Pursuant to the Lease, the
Company leases an office building in Sunnyvale, California consisting of approximately 128,154 square feet, together with the non-exclusive right to use parking facilities and other amenities. The monthly base rent payment for the first year of
the Lease is $108,931, with annual increases of 4% in the second, third and fourth years of the Lease and with an annual increases of 9%, 8% and 7% in the fifth, sixth and seventh years of the Lease, respectively. This facility is the Companys
corporate headquarters, which the Company began occupying in July 2011.
The Company also leases office spaces in China, Japan,
Korea, India and Taiwan.
The Companys future operating lease commitments at December 31, 2012 were as follows (in
thousands):
|
|
|
|
|
Year ending December 31,
|
|
Operating Lease
Obligations
|
|
2013
|
|
$
|
3,115
|
|
2014
|
|
|
2,820
|
|
2015
|
|
|
2,238
|
|
2016
|
|
|
1,857
|
|
2017
|
|
|
1,980
|
|
Thereafter
|
|
|
923
|
|
|
|
|
|
|
Total
|
|
$
|
12,933
|
|
|
|
|
|
|
NOTE 10LEGAL PROCEEDINGS
On December 7, 2001, the Company and certain of its officers and directors were named as defendants along with the
Companys underwriters in a securities class action lawsuit, captioned Gonzalez v. Silicon Image, Inc. The lawsuit alleges that the defendants participated in a scheme to inflate the price of the Companys stock in the
Companys 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 Courts determination that six focus cases could be certified as a class action. 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. The class certification motion is not expected to be resolved until after April, 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 Companys insurance
carrier has agreed to assume the Companys entire payment obligation under the terms of
86
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
the settlement. On June 10, 2009 the District Court granted preliminary approval of the proposed settlement agreement. After September 10, 2009 hearing, the District Court gave
final approval to the settlement on October 5, 2009, Several objectors have filed notices of appeal to the United States Court of Appeals for the Second Circuit from the district courts October 5, 2009 order approving the
settlement. All but two of the objectors withdrew their appeals, and Plaintiff moved to dismiss the remaining appeals, one for violation of the Second Circuits rules and one for lack of standing. On May 17, 2011, the Second
Circuit granted the motion to dismiss one objectors appeal for violations of the Courts rules and remanded the other appeal to the District Court to determine whether objector Hayes was a class member. On August 25, 2011, the
District Court issued its decision determining that Hayes was not a class member. On September 30, 2011, objector Hayes filed a notice of appeal from the District Courts decision. On January 9, 2012, objector Hayes
dismissed his appeal with prejudice. No other appeals are pending, the order approving the settlement is final, and the matter is now concluded.
On July 31, 2007, the Company received a demand letter dated July 31, 2007, demanding on behalf of alleged shareholder Vanessa Simmonds that the Companys board of directors prosecute a
claim against the underwriters of the Companys initial public offering, in addition to certain unidentified officers, directors and principal shareholders as identified in the Companys 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 Companys initial
public offerings, captioned Vanessa Simmonds v. Credit Suisse Group, et al. 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 the Company. 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 the lawsuit with prejudice. On April 10, 2009, the plaintiff filed a notice of
appeal of the District Courts order, and thereafter the underwriter defendants filed a cross appeal to a portion of the District Courts order that dismissed thirty (30) of the cases without prejudice following the moving
issuers motion to dismiss. On June 22, 2009 the Ninth Circuit issued an order granting the parties joint motion to consolidate the 54 appeals and 30 cross-appeals. Oral argument was heard in the Ninth Circuit on
October 5, 2010, and the Court issued its written opinion on December 2, 2010. The Ninth Circuit affirmed the District Courts decision that the demand letters submitted to the other 24 issues (including the Company) were
sufficiently similar as also to require dismissal with prejudice. The Ninth Circuit reversed the District Courts decision in favor of the underwriter defendants on the statute of limitations grounds. On December 16, 2010,
plaintiff and the underwriter defendants separately petitioned for a rehearing and a rehearing en banc, which petitions were denied on January 18, 2011. On January 25 and 26, 2011, the Ninth Circuit granted the motions of the
underwriter defendants and of the plaintiff to stay the issuance of the courts mandate pending those parties respective petitions for writ of certiorari to the United States Supreme Court. On April 5 and 15, 2011, respectively,
plaintiff and the underwriter defendants filed their petitions for review in the Supreme Court. On June 27, 2011, the Supreme Court granted the petition of the underwriter defendants and denied the petition of the plaintiff. On
November 29, 2011 the Supreme Court heard oral argument. On March 26, 2012 the Supreme Court reversed the Ninth Circuits ruling that plaintiffs claim was not barred by the applicable statute of limitations, and remanded further
proceedings on plaintiffs alternative claim that the statute of limitations was extended by the doctrine of equitable tolling. Upon remand to the District Court, on June 11, 2012, plaintiff filed a notice of voluntary dismissal, thereby
concluding the matter.
87
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In the fourth quarter of 2011, the Company was notified that a customers product
incorporating one of the Companys chipsets did not pass compliance testing in connection with certain technology implemented in the Companys product. The Company is in discussions regarding this matter with the customer and the
entity responsible for the licensing and administration (including compliance testing) of the technology at issue. As no claim has been made against the Company, it is premature to form a conclusion as to the potential outcome of such a claim,
if made, or the range of possible loss to the Company.
From time to time the Company has been named as a defendant in a
number of judicial and administrative proceedings incidental to its business. Moreover, from time to time, the Company receives notices from licensees of its technology and from adopters of the standards for which the Company serves as agent
disputing the payment of royalties and sometimes requesting a refund of royalties allegedly overpaid.
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 Companys results of operations, financial position or cash flows.
Indemnifications
Certain of the Companys 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 such claim.
NOTE 11STOCKHOLDERS EQUITY
1999 Equity Incentive Plan (the 1999 Plan)
In October 1999, the Board of Directors adopted the 1999 Equity Incentive Plan (the 1999 Plan) which provides for the granting
of incentive stock options (ISOs) and non-qualified stock options (NSOs) to employees, directors and consultants. In accordance with the 1999 Plan, the stated exercise price shall not be less than 100% of the fair market value of the Companys
common stock on the date of grant for ISOs and NSOs. The number of shares reserved for issuance under the 1999 Plan increased automatically on January 1 of each year by an amount equal to 5% of the Companys total outstanding common shares
as of the immediately preceding December 31. The plan expired in October 2009.
In June and July 2001, in connection with
the CMD Technology, Inc. (CMD) and Silicon C Communication Lab, Inc. (SCL) acquisitions, the Company assumed all outstanding options and options available for issuance under the CMD 1999 Stock Incentive Plan and SCL 1999 Stock Option Plan. In April
2004, in connection with the TransWarp acquisition, the Company assumed all outstanding options and options available for issuance under the TransWarp Stock Option Plan. The terms of these Plans are very similar to those of the 1999 Plan. The
Companys assumption of the CMD, SCL and TransWarp Plans and the outstanding options did not require the approval of and was not approved by, the Companys stockholders.
Options granted under the above mentioned stock option plans are exercisable over periods not to exceed ten years and vest over periods
ranging from one to five years and generally vest annually as to 25% of the shares subject to the options, although stock option grants to members of the Companys Board of Directors vest monthly, over periods not to exceed four years. Some
options provide for accelerated vesting if certain identified
88
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
milestones are achieved. Effective in May 2008, the board of directors determined that no further options would be granted under the 1999 Plan, and all outstanding options would continue to be
governed and remain outstanding in accordance with their existing terms.
2008 Equity Incentive Plan (the 2008
Plan)
In April 2008, the board of directors adopted the 2008 Equity Incentive Plan
(the 2008
Plan)
, and in May 2008, the 2008 Plan was approved by the stockholders, as a replacement for the 1999 Stock Option Plan (the 1999 Plan). The 2008 Plan provides for the grant of non-qualified and incentive stock options,
restricted stock awards, stock bonus awards, stock appreciation rights, restricted stock unit awards and performance stock awards to employees, directors and consultants, under the direction of the compensation committee of the board of directors or
those persons to whom administration of the 2008 Plan, or part of the 2008 Plan, has been delegated or permitted by law.
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. Options generally expire no later than seven years after the date of grant, subject to earlier termination upon an
optionees cessation of employment or 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. These awards are granted under various programs, all of which are approved by the stockholders. The
exercise price for incentive stock options and stock appreciation rights is generally at least 100% of the fair market value of the underlying shares on the date of grant. Under this stock plan, as of the approval date, the original maximum
number of shares authorized for issuance was 4.0 million.
During the Companys 2010 Annual Meeting of Stockholders
held on May 19, 2010, the Companys stockholders approved an increase of 9 million shares to the number of shares that can be issued under the 2008 Plan and also approved an increase of up to 2 million additional shares that the
Company could only use for the stockholder-approved Stock Option Exchange Program (the
Exchange Program
). The Company completed the Exchange Program in September 2010 and 1.7 million of the 2 million maximum issuable
shares for the Exchange Program were used. During the Companys 2012 Annual Meeting of Stockholders held on May 16, 2012, the Companys stockholders approved an increase of 7 million shares to the number of shares that can
be issued under the 2008 Plan. As of December 31, 2012, the 2008 Plan had 8.7 million shares available for issuance. Please see related discussion below about the Exchange Program.
Non-plan Stock Options
As inducement to the Companys chief executive officer who joined the Company in January 2010, the Company granted him an option to purchase 1 million shares of the Companys common
stock. The options exercise price was equal to the closing price of the common stock on January 15, 2010. The option will vest as follows subject to the chief executive officers continued employment with the Company:
(a) 10% of the shares subject to the option vested on January 1, 2011; (b) an additional 20% of the shares subject to the option vested on January 1, 2012; (c) an additional 30% of the shares subject to the option shall vest
on January 1, 2013; and (d) an additional 40% of the shares subject to the option shall vest on January 1, 2014. The stock option was an inducement option granted outside of the Companys 2008 Equity Incentive Plan and without
shareholder approval pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A). The stock option is exercisable for a term of 10 years and will expire on January 15, 2020. There were no options granted outside of the Companys 2008 Equity
Incentive Plan in 2009 and 2008.
89
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Determining Fair Value
Valuation and amortization method
The Company estimates the fair value of stock options granted using the Black-Scholes-Merton
option valuation model and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
The fair value of market-based RSUs has been determined by management, with the assistance of an independent valuation firm using the
Monte Carlo Simulation method which takes into account multiple input variables that determine the probability of satisfying the market conditions stipulated in the award. This method requires the input of assumptions, including the expected
volatility of the Companys common stock, and a risk-free interest rate. Compensation expense related to awards that are expected to vest with a market-based condition is recognized on a straight-line basis regardless of whether the market
condition is satisfied, provided that the requisite service has been achieved. The amount of expense attributed to market-based RSUs is based on the estimated forfeiture rate, which is updated according to the Companys actual forfeiture rates.
The financial statements include amounts that are based on the Companys best estimates and judgments.
Expected
Life
The expected life of the options represents the estimated period of time until exercised and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules, and expectations of
future employee behavior. The expected term for the ESPP is based on the term of the purchase period.
Expected
Volatility
The volatility rate is based on the Companys historical common stock volatility derived from historical stock price data for historical periods commensurate with the options expected life.
Risk-Free Interest Rate
The risk-free interest rate is based on the implied yield currently available on United States
Treasury zero-coupon issues with a term equal to the expected life at the date of grant of the options.
Expected
Dividend
The expected dividend is based on the Companys history and expected dividend payouts. The expected dividend yield is zero as the Company has historically paid no dividends and does not anticipate dividends to be paid in the
future.
As required by FASB ASC 718-10-35,
Subsequent Measurement of Stock Compensation,
management makes
an estimate of expected forfeitures and is recognizing stock-based compensation expense only for those equity awards expected to vest.
90
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Employee Stock Options Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
4
|
|
|
|
4
|
|
|
|
4.2
|
|
Expected volatility
|
|
|
70.5
|
%
|
|
|
69.8
|
%
|
|
|
64.4
|
%
|
Risk-free interest rate
|
|
|
0.5
|
%
|
|
|
1.4
|
%
|
|
|
1.8
|
%
|
Expected dividends
|
|
|
none
|
|
|
|
none
|
|
|
|
none
|
|
Weighted average grant date fair value
|
|
$
|
2.24
|
|
|
$
|
3.55
|
|
|
$
|
1.67
|
|
Employee Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life in years
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected volatility
|
|
|
63.0
|
%
|
|
|
71.3
|
%
|
|
|
60.2
|
%
|
Risk-free interest rate
|
|
|
0.1
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
Expected dividends
|
|
|
none
|
|
|
|
none
|
|
|
|
none
|
|
Weighted average grant date fair value
|
|
$
|
1.74
|
|
|
$
|
2.28
|
|
|
$
|
0.96
|
|
As of December 31, 2012, the Company had $6.9 million of total unrecognized compensation expense
related to RSUs and $4.6 million related to stock options, after estimated forfeitures. The unamortized compensation expense will generally be recognized on a ratable basis over the weighted average estimated remaining life of 2.34 years and 2.39
years, respectively, and will be adjusted if necessary, in subsequent periods, if actual forfeitures differ from those estimates.
At December 31, 2012, the total stock-based compensation expense related to options to purchase common shares under the ESPP but not yet recognized was approximately $303,000. This expense will be
recognized in the first quarter of 2013.
For the years ended December 31, 2012, 2011 and 2010, the Company recorded $0.5
million, $2.1 million and $0.8 million of excess tax benefits from equity-based compensation plans, respectively, as a financing cash inflow.
Stock Option Exchange Program
On August 4, 2010, the Company
launched a voluntary stockholder-approved Exchange Program to permit the Companys eligible employees to exchange some or all of their outstanding stock options to purchase the Companys common stock with an exercise price greater than or
equal to $6.64 per share, whether vested or unvested, for a lesser number of new RSUs. Non-employee members of the Board of Directors and the Companys named executive officers, including its chief financial officer, were not eligible to
participate in the Exchange Program.
In accordance with the terms and conditions of the Exchange Program, on
September 1, 2010 (the Grant Date), the Company accepted outstanding options to purchase an aggregate of 3,988,947 shares of the Companys common stock and issued, in exchange, an aggregate of 1,130,623 new RSUs. Of the
1,130,623 new RSUs, 1,039,393 vested on the first anniversary of the Grant Date on September 1, 2011 and 91,230 will vest on the second anniversary of the Grant Date. Each RSU granted in the Exchange Program represents the right to receive one
share of the Companys common stock upon vesting of the RSU. The new RSUs were issued from the Companys 2008 Equity Incentive Plan. In accordance with the guidelines of the 2008 Plan, each RSU award
91
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
granted from the 2008 Plan will reduce the number of shares available for issuance by 1.5 shares. As such, the equivalent shares of the 1,130,623 new RSUs issued under the Exchange Program that
was taken out from the shares available for issuance were 1,695,934. Please see the rollforward schedule of shares available for issuance under the 2008 Plan below. Pursuant to the provisions of the Exchange Program, the stock options cancelled
under the program were not returned to the respective equity plans.
The expense was fully recognized in the third quarter of
2011. For the years ended December 31, 2011 and 2010, the Company recorded stock-based compensation expense of $1.3 million and $178,000, respectively, related to the Exchange Program.
Stock Options and Awards Activity
Stock Options
The following table summarizes the Companys options outstanding with respect to its Stock Option
Plans, excluding restricted stock units (RSUs) (in thousands except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
Underlying
Options
|
|
|
Weighted
Average
Exercise
Price per
Share
|
|
|
Weighted
Average
Remaining
Contractual
Terms in Years
|
|
|
Aggregate
Intrinsic
Value
|
|
At January 1, 2010
|
|
|
9,644
|
|
|
$
|
8.51
|
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
1,906
|
|
|
|
3.29
|
|
|
|
|
|
|
|
|
|
Forfeitures and cancellations
|
|
|
(1,815
|
)
|
|
|
8.26
|
|
|
|
|
|
|
|
|
|
Options cancelled in the Exchange Program
|
|
|
(3,989
|
)
|
|
|
10.73
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(781
|
)
|
|
|
3.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010
|
|
|
4,965
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,041
|
|
|
|
6.71
|
|
|
|
|
|
|
|
|
|
Forfeitures and cancellations
|
|
|
(325
|
)
|
|
|
6.67
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(744
|
)
|
|
|
4.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011
|
|
|
5,937
|
|
|
|
6.05
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,489
|
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
Forfeitures and cancellations
|
|
|
(580
|
)
|
|
|
6.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(412
|
)
|
|
|
3.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
6,434
|
|
|
$
|
5.78
|
|
|
|
4.86
|
|
|
$
|
4,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2012
|
|
|
5,827
|
|
|
$
|
5.88
|
|
|
|
4.74
|
|
|
$
|
3,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2012
|
|
|
3,156
|
|
|
$
|
7.00
|
|
|
|
3.71
|
|
|
$
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option
holders would have received had all option holders exercised their options on December 31, 2012. The aggregate intrinsic value is the difference between the Companys closing stock price on the last trading day of the year ended
December 31, 2012 and the exercise price, multiplied by the number of outstanding or exercisable in-the-money options. The aggregate intrinsic value excludes the effect of stock options that have a zero or negative intrinsic value. The total
pre-tax intrinsic value of options exercised, representing the difference between the market value of the Companys common stock on the date of the exercise and the exercise price of each option; for the years ended December 31, 2012, 2011
and 2010 was $0.6 million, $3.0 million and $2.0 million, respectively. The total grant date fair value of the options which vested during the years ended December 31, 2012, 2011 and 2010 was $3.6 million, $1.4 million and $4.9 million,
respectively.
92
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted Stock Units
The RSUs that the Company grants to its employees typically vest ratably over a certain period of time, subject to the employees
continuing service to the Company over that period. RSUs granted to non-executive employees typically vest over a four-year period. RSUs granted to executives typically vest over a period of between one and four years.
RSUs are converted into shares of the Companys common stock upon vesting on a one-for-one basis. The cost of the RSUs is determined
using the fair value of the Companys 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 shares available for issuance by 1.5 shares.
A summary of the RSUs outstanding as of
December 31, 2012 was as follows: (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Number of
Units
|
|
|
Weighted-Average
Grant Date
Fair
Value Per Share
|
|
Outstanding at January 1, 2010
|
|
|
2,719
|
|
|
$
|
3.45
|
|
Granted
|
|
|
763
|
|
|
|
3.36
|
|
Granted in the Exchange Program
|
|
|
1,131
|
|
|
|
3.82
|
|
Vested
|
|
|
(1,201
|
)
|
|
|
3.74
|
|
Forfeitures and cancellations
|
|
|
(693
|
)
|
|
|
3.28
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2010
|
|
|
2,719
|
|
|
$
|
3.49
|
|
Granted
|
|
|
2,148
|
|
|
|
6.83
|
|
Vested
|
|
|
(1,561
|
)
|
|
|
3.62
|
|
Forfeitures and cancellations
|
|
|
(323
|
)
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2011
|
|
|
2,983
|
|
|
$
|
5.59
|
|
Granted
|
|
|
1,416
|
|
|
|
4.44
|
|
Vested
|
|
|
(1,305
|
)
|
|
|
4.86
|
|
Forfeitures and cancellations
|
|
|
(300
|
)
|
|
|
5.53
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
2,794
|
|
|
$
|
5.36
|
|
|
|
|
|
|
|
|
|
|
The total grant date fair value of the RSUs that vested during the years ended December 31, 2012,
2011 and 2010 was $6.3 million, $5.6 million and $4.5 million, respectively. Of the 2,794,081 RSUs outstanding as of December 31, 2012, approximately 2,190,959 units are expected to vest after considering the applicable forfeiture rate.
In August 2012, the Company granted 331,500 RSUs with market-based vesting criteria to executives and certain key employees
pursuant to 2008 Plan. These market-based awards vest over four years with 25% of the total number of shares vesting on each anniversary of the grant date. Whether or not they vest is determined by a comparison of the price of the Companys
common stock and the price set by the Company, which ranged from $4.52 to $5.39 over the vesting period. The grant-date fair value of these awards was $1.2 million, estimated using a Monte Carlo simulation method which takes into account the
probability that the market conditions of these awards will be achieved. Compensation costs related to these awards will be recognized over the vesting period regardless of whether the market conditions are satisfied, provided that the requisite
service has been provided.
93
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
During the years ended December 31, 2012, 2011 and 2010, the Company repurchased
449,848, 538,268 and 443,829 shares of stock, respectively, for an aggregate value of $2.2 million, $3.3 million and $1.2 million, respectively, from employees upon the vesting of their RSUs that were granted under the Companys 2008 Equity
Incentive Plan to satisfy such 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.
The table summarizes the securities available for future issuance with respect to the Companys 2008
Equity Incentive Plan (in thousands):
|
|
|
|
|
|
|
2008 Plan
|
|
Available at January 1, 2010
|
|
|
1,136
|
|
Authorized
|
|
|
9,000
|
|
Authorized for the Exchange Progam
|
|
|
1,696
|
|
Granted
|
|
|
(2,050
|
)
|
Granted in the Exchange Program
|
|
|
(1,696
|
)
|
Canceled
|
|
|
963
|
|
|
|
|
|
|
Available at December 31, 2010
|
|
|
9,049
|
|
Authorized
|
|
|
|
|
Granted
|
|
|
(5,263
|
)
|
Canceled
|
|
|
741
|
|
|
|
|
|
|
Available at December 31, 2011
|
|
|
4,527
|
|
Authorized
|
|
|
7,000
|
|
Granted
|
|
|
(3,614
|
)
|
Canceled
|
|
|
811
|
|
|
|
|
|
|
Available at December 31, 2012
|
|
|
8,724
|
|
|
|
|
|
|
Employee Stock Purchase Plan
In October 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the Purchase Plan) and reserved
500,000 shares of common stock for issuance under the Purchase Plan. The Purchase Plan authorizes the granting of stock purchase rights to eligible employees during two-year offering periods with exercise dates every six months. Shares are
purchased using employee payroll deductions at purchase prices equal to 85% of the lesser of the fair market value of the Companys common stock at either the first day of each offering period or the date of purchase. In June 2007, the
Companys Board of Directors approved amendments to the Purchase Plan primarily to extend coverage of the plan to eligible employees of its participating subsidiaries including the adoption of a Sub-Plan for employees in the United Kingdom.
Additionally, the offering periods were amended to begin on February 16 and August 16 of each year from February 1 and August 1 previously. On December 13, 2006, the Companys Board of Directors approved amendments to
the Purchase Plan, which included the following changes: (i) provide that participants may effect only one decrease and no increases in payroll contribution percentages during an offering period, (ii) provide that if the Registrant is
dissolved or liquidated, the Compensation Committee of the Board has discretion to either designate a new date on which to conduct a purchase prior to such time or terminate all offerings and refund contributions to participants without conducting a
purchase, (iii) provide that in the event of certain specified change in control transactions, the Compensation Committee of the Board will designate a final purchase date for all offerings in lieu of keeping the ESPP in place after the closing
of such a transaction and (iv) provide that the purchase date of an offering period is delayed if the Purchase Plan must be submitted for stockholder approval with respect to shares that are to be made available
94
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
for purchase in that offering period, provided that if as a result a purchase date would occur more than twenty-seven months after commencement of the offering period to which it relates, then
such offering period will terminate without the purchase of shares and participants in such offering period will be refunded their contributions. In May 2008, the Purchase Plan was amended by the Companys stockholders to extend the term of the
Purchase Plan to August 15, 2018. The Companys stockholders approved an increase of 3 million shares to the number of shares that can be issued under the Purchase Plan during the Companys 2011 Annual Meeting of
Stockholders held on May 18, 2011.
In 2012, 2011 and 2010, 932,537, 811,413 and 1,233,976 shares of common stock,
respectively, were sold under the Purchase Plan at average prices of $4.47, $3.80 and $2.11 per share, respectively. As at December 31, 2012, a total of approximately 146,000 shares were reserved for future issuance. The number of shares
reserved for issuance under the Purchase Plan is increased automatically on January 1 of each year by an amount equal to 1% of the Companys total outstanding common shares as of the immediately preceding December 31.
Stock Repurchase Program
In April 2012, the Companys Board of Directors authorized a $50 million stock repurchase program. The repurchases may occur from
time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Companys management, based on its evaluation of market conditions, cash on hand and other
factors and may be made under a stock repurchase plan. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The program does not obligate the Company to
acquire any particular amount of stock and purchases under the program may be commenced or suspended at any time, or from time to time, without prior notice. Further, the stock repurchase program may be modified, extended or terminated by the Board
at any time.
On November 9, 2012, the Company entered into an accelerated share repurchase (ASR) agreement with Barclays
Capital, Inc. (Barclays) to repurchase an aggregate of $30.0 million of its common stock. Pursuant to the ASR agreement, the Company paid $30.0 million in November 2012 and received an initial share delivery of 5,072,463 shares of its common stock.
The initial share delivery was valued at $21.0 million and was recorded as treasury stock in the consolidated balance sheets as of December 31, 2012. The remaining balance of $9.0 million was recorded as additional paid-in capital in the
consolidated balance sheets as of December 31, 2012. The ASR Agreement is scheduled to extend for approximately three to seven months but may conclude earlier at Barclays option and may be terminated early upon the occurrence of certain
events. Barclays then may deliver additional shares to the Company at or prior to maturity of the ASR Agreement, which is subject to an adjustment based on the average daily volume weighted average price of its common stock during the term of the
ASR Agreement. Under certain circumstances, the Company may be required to return to the Barclays a portion of the shares received or, at the Companys option, make an additional cash payment to Barclays in lieu of delivering shares.
In addition to the shares repurchased under the ASR, during the year ended December 31, 2012, the Company repurchased a
total of 2,193,372 shares of its common stock at a total cost of $9.7 million with an average price per share of $4.42.
95
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 12INCOME TAXES
Income (loss) before income taxes and the income tax provision consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Income (loss) before provision for income taxes and equity in net loss of an unconsolidated affilate:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
(11,668
|
)
|
|
$
|
(1,956
|
)
|
|
$
|
1,574
|
|
Non U.S.
|
|
|
12,258
|
|
|
|
(110
|
)
|
|
|
10,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before provision for income taxes and equity in net loss of an unconsolidated affilate
|
|
$
|
590
|
|
|
$
|
(2,066
|
)
|
|
$
|
11,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Provision for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
332
|
|
|
$
|
(498
|
)
|
|
$
|
(615
|
)
|
State
|
|
|
(461
|
)
|
|
|
(25
|
)
|
|
|
35
|
|
Foreign
|
|
|
9,253
|
|
|
|
6,561
|
|
|
|
6,572
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current provision
|
|
|
9,124
|
|
|
|
6,038
|
|
|
|
5,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(83
|
)
|
|
|
196
|
|
|
|
(2,914
|
)
|
State
|
|
|
560
|
|
|
|
3
|
|
|
|
3
|
|
Foreign
|
|
|
(120
|
)
|
|
|
221
|
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred provision (benefit)
|
|
$
|
357
|
|
|
$
|
420
|
|
|
$
|
(3,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge in lieu of taxes attributable to employee stock-based plans
|
|
|
498
|
|
|
|
2,125
|
|
|
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
9,979
|
|
|
$
|
8,583
|
|
|
$
|
3,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The charge in lieu of taxes represents the tax provision from deductions for employee stock transactions,
net of related amounts reported for financial reporting purposes, that is recorded as a direct increase to additional paid-in capital instead of a decrease to the income tax provision.
The Companys effective tax rate differs from the federal statutory rate due to the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Tax provision (benefit) at federal statutory rate
|
|
$
|
207
|
|
|
$
|
(723
|
)
|
|
$
|
4,127
|
|
Foreign income and withholding taxes
|
|
|
6,741
|
|
|
|
8,887
|
|
|
|
6,269
|
|
Stock-based compensation expense
|
|
|
1,048
|
|
|
|
939
|
|
|
|
3,216
|
|
State income taxes
|
|
|
(1,075
|
)
|
|
|
(1,077
|
)
|
|
|
184
|
|
Non-deductible expenses
|
|
|
64
|
|
|
|
183
|
|
|
|
43
|
|
Tax credits
|
|
|
(6,571
|
)
|
|
|
(6,767
|
)
|
|
|
(5,035
|
)
|
Impact of valuation allowance
|
|
|
10,266
|
|
|
|
8,217
|
|
|
|
(4,598
|
)
|
Federal exempt interest income
|
|
|
(308
|
)
|
|
|
(345
|
)
|
|
|
(530
|
)
|
Tax (benefit) on loss of an unconsolidated affiliate
|
|
|
(631
|
)
|
|
|
(347
|
)
|
|
|
|
|
Other
|
|
|
238
|
|
|
|
(384
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
9,979
|
|
|
$
|
8,583
|
|
|
$
|
3,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Deferred income tax assets reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The components of net deferred income tax assets were (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
Net operating loss carryforwards
|
|
$
|
14,562
|
|
|
$
|
14,664
|
|
Tax credits
|
|
|
40,867
|
|
|
|
33,072
|
|
Stock-based compensation expense
|
|
|
5,256
|
|
|
|
4,476
|
|
Accruals and other reserves
|
|
|
3,580
|
|
|
|
3,768
|
|
Inventory valuation
|
|
|
4,025
|
|
|
|
1,893
|
|
Depreciable and amortizable items
|
|
|
3,771
|
|
|
|
1,023
|
|
Capitalized research and development
|
|
|
12,106
|
|
|
|
12,577
|
|
Other items not currently deductible
|
|
|
3,395
|
|
|
|
1,893
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
87,562
|
|
|
$
|
73,366
|
|
Less: valuation allowance
|
|
|
(82,577
|
)
|
|
|
(67,952
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
4,985
|
|
|
$
|
5,414
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
Deferred income taxes, current
|
|
|
841
|
|
|
|
708
|
|
Deferred income taxes, non-current
|
|
|
4,144
|
|
|
|
4,706
|
|
|
|
|
|
|
|
|
|
|
Net deferred taxes
|
|
$
|
4,985
|
|
|
$
|
5,414
|
|
|
|
|
|
|
|
|
|
|
The Company has recorded a $82.6 million valuation allowance (including $59.8 million for federal
deferred tax assets and $22.8 million for state and foreign deferred tax assets) as a result of uncertainties related to the realization of its net deferred tax assets at December 31, 2012. The valuation allowance increased by $14.6 million and
$22.9 million during 2012 and 2011, respectively. The valuation allowance was established as a result of weighing all positive and negative evidence, including the Companys cumulative loss over the past three years and the difficulty of
forecasting sufficient future taxable income. 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 Companys financial position and results of operations.
As of December 31, 2012, the Company had federal net operating loss carryforward of approximately $16.5 million which will start
expire in 2025 if not utilized and state net operating loss carryforwards of approximately $57.7 million, which will start to expire in 2017 if not utilized. As of December 31, 2012, the Company also had research credit carryforwards for
federal and state purposes of approximately $10.4 million and $25.9 million, respectively. The federal credits will begin to expire in 2025, while the state credits do not expire.
In the event the Company was to experience a future cumulative ownership change of greater than 50% pursuant to Internal Revenue Code
sections 382 and 383 or similar state and foreign rules, the Companys ability to utilize the credit carryforwards may be limited.
The Company did not record federal R&D credit for the current year given the lapsed extension of the credit in 2012. The applicable R&D credit available for 2012, estimated to be approximately
$1.5 million, will be considered in 2013 because the American Taxpayer Relief Act of 2012 was signed into law on January 2, 2013. No financial statement benefit is expected as the Company will record a valuation allowance against the credit
generated.
97
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
As of December 31, 2012, 2011 and 2010, the Company had gross tax effected
unrecognized tax benefits of $27.2 million, $26.6 million and $23.8 million, of which $11.8 million, $9.6 million and $8.5 million, respectively, if recognized, would affect the effective tax rate. It is possible that the amount of unrecognized
tax benefits will change within the next 12 months; however, an estimate of the range of change cannot be made at this time.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Balance as of January 1
|
|
$
|
26,555
|
|
|
$
|
23,771
|
|
|
$
|
20,270
|
|
Tax positions related to the current period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross increase
|
|
|
2,888
|
|
|
|
3,530
|
|
|
|
3,174
|
|
Tax positions related to the prior period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross increase
|
|
|
455
|
|
|
|
|
|
|
|
647
|
|
Settlements
|
|
|
(2,687
|
)
|
|
|
(708
|
)
|
|
|
(320
|
)
|
Lapse of statute of limitations
|
|
|
(36
|
)
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31
|
|
$
|
27,175
|
|
|
$
|
26,555
|
|
|
$
|
23,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to include interest and penalties related to unrecognized tax benefits
within the provision for income taxes. During the years ended December 31, 2012, 2011 and 2010, the Company accrued approximately $221,000, $209,000 and $155,000, respectively of additional interest related to unrecognized tax benefits. The
Company conducts business globally and, as a result, it 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. The Company remains subject to federal and state examination for all years from 1996 and forward by virtue of
the tax attributes carrying forward from those years. The Company also remains subject to examination in most foreign jurisdictions for all years since 2006 or the year it began operations in those countries, if later. The Companys examination
in the state of California for the 2006 and 2007 tax years was completed in the first quarter of fiscal 2012.
NOTE 13SEGMENT 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 Companys Chief Executive Officer, who is considered to be the Companys chief operating decision maker, reviews financial information presented on one operating segment
basis for purposes of making operating decisions and assessing financial performance.
98
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Revenue
Revenue by geographic area based on bill to location was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
United States
|
|
$
|
106,154
|
|
|
$
|
71,390
|
|
|
$
|
40,405
|
|
Taiwan
|
|
|
56,320
|
|
|
|
57,854
|
|
|
|
43,042
|
|
Japan
|
|
|
36,677
|
|
|
|
43,463
|
|
|
|
57,217
|
|
China
|
|
|
19,465
|
|
|
|
17,653
|
|
|
|
15,229
|
|
Europe
|
|
|
16,131
|
|
|
|
13,746
|
|
|
|
15,516
|
|
Korea
|
|
|
15,946
|
|
|
|
15,028
|
|
|
|
18,515
|
|
Other
|
|
|
1,671
|
|
|
|
1,875
|
|
|
|
1,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
252,364
|
|
|
$
|
221,009
|
|
|
$
|
191,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic area based on customers headquarters location was as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Korea
|
|
$
|
102,107
|
|
|
$
|
66,800
|
|
|
$
|
40,892
|
|
Taiwan
|
|
|
61,626
|
|
|
|
57,854
|
|
|
|
42,157
|
|
Japan
|
|
|
37,467
|
|
|
|
44,156
|
|
|
|
65,361
|
|
United States
|
|
|
18,686
|
|
|
|
19,226
|
|
|
|
15,810
|
|
Europe
|
|
|
16,138
|
|
|
|
13,555
|
|
|
|
11,225
|
|
China
|
|
|
14,912
|
|
|
|
17,553
|
|
|
|
14,533
|
|
Other
|
|
|
1,428
|
|
|
|
1,865
|
|
|
|
1,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
252,364
|
|
|
$
|
221,009
|
|
|
$
|
191,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys revenue by its primary markets was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Mobile
|
|
$
|
120,936
|
|
|
$
|
65,789
|
|
|
$
|
10,525
|
|
Consumer Electronics
|
|
|
62,236
|
|
|
|
87,922
|
|
|
|
118,192
|
|
Personal Computers
|
|
|
20,315
|
|
|
|
20,523
|
|
|
|
24,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total product revenue
|
|
|
203,487
|
|
|
|
174,234
|
|
|
|
152,841
|
|
Licensing
|
|
|
48,877
|
|
|
|
46,775
|
|
|
|
38,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
252,364
|
|
|
$
|
221,009
|
|
|
$
|
191,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers representing more than 10% of total revenue were as follows (in percentage):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2010
|
|
Samsung Electronics
|
|
|
35.0
|
%
|
|
|
23.4
|
%
|
|
|
17.0
|
%
|
Edom Technology
|
|
|
10.3
|
%
|
|
|
13.8
|
%
|
|
|
|
|
Weikeng
|
|
|
|
|
|
|
10.2
|
%
|
|
|
|
|
Innotech Corporation
|
|
|
|
|
|
|
|
|
|
|
11.3
|
%
|
Microtek Corporation
|
|
|
|
|
|
|
|
|
|
|
11.0
|
%
|
99
SILICON IMAGE, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(Continued)
At December 31, 2012, one customer represented 24.0% of net accounts receivable. At
December 31, 2011, two customers represented 17.7% and 11.9% of net accounts receivable. The Companys top five customers, including distributors, generated 64.4%, 61.4% and 58.3% of the Companys revenue in 2012, 2011 and 2010,
respectively.
Property and Equipment
The table below presents the net book value of the property and equipment by their physical location (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
6,519
|
|
|
$
|
7,114
|
|
China
|
|
|
4,834
|
|
|
|
3,184
|
|
Taiwan
|
|
|
1,586
|
|
|
|
1,912
|
|
India
|
|
|
1,509
|
|
|
|
256
|
|
Others
|
|
|
392
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
Net book value
|
|
$
|
14,840
|
|
|
$
|
12,772
|
|
|
|
|
|
|
|
|
|
|
NOTE 14UNAUDITED SELECTED QUARTERLY FINANCIAL DATA
The following table sets forth the Companys consolidated statements of operations data for the eight quarters
ended December 31, 2012. This unaudited quarterly information has been prepared on the same basis as the Companys audited consolidated financial statements and, in the opinion of management, includes all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of this data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter (1)
|
|
|
|
(in thousands, except per share amounts)
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
55,003
|
|
|
$
|
63,838
|
|
|
$
|
73,919
|
|
|
$
|
59,604
|
|
Gross Profit
|
|
$
|
31,779
|
|
|
$
|
37,805
|
|
|
$
|
43,060
|
|
|
$
|
29,279
|
|
Net Loss
|
|
$
|
(9,576
|
)
|
|
$
|
(943
|
)
|
|
$
|
(408
|
)
|
|
$
|
(265
|
)
|
Net Loss Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
$
|
48,999
|
|
|
$
|
53,553
|
|
|
$
|
59,724
|
|
|
$
|
58,733
|
|
Gross Profit
|
|
$
|
28,727
|
|
|
$
|
31,186
|
|
|
$
|
34,508
|
|
|
$
|
35,759
|
|
Net Income (Loss)
|
|
$
|
(820
|
)
|
|
$
|
(1,286
|
)
|
|
$
|
680
|
|
|
$
|
(10,217
|
)
|
Net Income (Loss) Per Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.12
|
)
|
(1)
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As described in Note 1, the results for the fourth quarter of 2012 include an out-of-period adjustment to reduce intangible amortization expense by $1.2 million to
correct certain prior period errors.
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100