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Silicon Image 10-K 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549>
Form 10-K
For
the fiscal year ended December 31, 2009
OR
Commission
file number 000-26887
(Exact
name of registrant as specified in its charter)
1060
East Arques Avenue
Sunnyvale,
CA 94085
(Address of principal
executive offices)
(Zip
Code)
(408) 616-4000
(Registrant’s telephone
number, including area code)
Securities
registered pursuant to section 12(b) of the Act:
Common
Stock, $0.001 par value per share
Securities
registered pursuant to section 12(g) of the Act:
None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes No>þ
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes No>þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ No Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the
preceding 12 months (or for such shorter period that the Registrant was
required to submit and post such files). Yes No>þ
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Indicate
by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes No>þ
The
aggregate market value of the Registrant’s Common Stock held by non-affiliates
of the Registrant was approximately $170,972,511 as of the last business day of
Registrant’s most recently completed second fiscal quarter, based upon the
closing sale price on the Nasdaq National Market reported on such
date.
As of
January 31, 2010, there were 75,443,625 shares of the Registrant’s Common
Stock issued and outstanding.
Portions
of the Definitive Proxy Statement for the 2010 Annual Meeting of Stockholders to
be filed with the Securities and Exchange Commission no later than 120 days
after the end of the fiscal year covered by this report, are incorporated by
reference in Part III of this Form 10-K.
This Annual Report on Form 10-K
contains forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934 and Section 27A of the Securities
Act of 1933. These forward-looking statements involve a number of risks and
uncertainties, including those identified in the section of this Annual Report on
Form 10-K entitled “Factors Affecting Future Results,” that may cause
actual results to differ materially from those discussed in, or implied by, such
forward-looking statements. Forward-looking statements within this Annual Report
on Form 10-K are identified by words such as “believes,” “anticipates,”
“expects,” “intends,” “may,” “will”, “can”, “should”, “could”, “estimate”, based
on”, “intended”, “would”, “projected”, “forecasted” and other similar
expressions. However, these words are not the only means of identifying such
statements. In addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. We undertake no obligation to publicly release the results of any updates
or revisions to these forward-looking statements that may be made to reflect events
or circumstances occurring subsequent to the filing of this Form 10-K with
the Securities and Exchange Commission (SEC). Our actual results could differ
materially from those anticipated in, or implied by, forward-looking statements as a
result of various factors, including the risks outlined elsewhere in this report.
Readers are urged to carefully review and consider the various disclosures made by us
in this report and in our other reports filed with the SEC that attempt to advise
interested parties of the risks and factors that may affect our
business.
Item 1. Business
General
Silicon
Image, Inc. is a technology innovator and a global leader developing
high-bandwidth semiconductor and intellectual property (IP) solutions based on
our innovative, digital interconnect technology. Our goal is to be the leader in
the innovation, design, development and implementation of semiconductors and IP
solutions for the secure storage, distribution and presentation of
high-definition (HD) content in home and mobile environments. We are dedicated
to the development and promotion of technologies, standards and products that
facilitate the movement of digital content between and among digital devices
across the consumer electronics (CE), personal computer (PC), mobile and storage
markets.
We sell
integrated and discrete semiconductor products as well as license IP solutions
to consumer electronics, computing, display, storage and mobile manufacturers.
Our product and IP portfolio includes solutions for high-definition television
(HDTV), high-definition set-top boxes (STBs), high-definition Blu-ray players,
mobile devices, high-definition game systems, consumer and enterprise storage
products and PC display products.
We have
worked with industry leaders to create industry standards such as the
High-Definition Multimedia Interface (HDMI™) and Digital Visual Interface (DVI™)
specifications for digital content delivery. We have been, and are likely to be
in the future, significant contributors to broader standards specifications such
as the Serial Advanced Technology Attachment (SATA) specification for PC &
Enterprise storage applications. We actively promote and participate
in working groups and consortiums to develop new standards such as the recently
announced Mobile High-Definition Interconnect (MHDI) working group chartered
with creating a new HD mobile video standard and the Serial Port Memory
Technology (SPMT) consortium which is working on serial connection standards for
dynamic random access memory (DRAM). We capitalize on our leadership position
through first-to-market, standards-based semiconductor and IP solutions. Our
portfolio of IP solutions that we license to third parties for consumer
electronics, PCs, multimedia, communications, mobile, networking and storage
devices further leverages our expertise in these markets. In addition, through
Simplay Labs, LLC, our wholly owned subsidiary, we offer one of the most robust
and comprehensive test platforms in the consumer electronics industry. We
utilize independent foundries and third-party subcontractors to manufacture,
assemble and test all of our semiconductor products.
Our customers
are equipment manufacturers in each of our target markets — Consumer
Electronics, Personal Computer, Mobile and Storage. Because we leverage our
technologies across different markets, certain of our products may be
incorporated into equipment used in multiple markets. We sell our products to
original equipment manufacturers (OEMs) throughout the world using a direct
sales force and through a network of distributors and manufacturer’s
representatives. Our net revenue is generated principally by sales of our
semiconductor products, with other revenues derived from IP core licensing and
royalty fees from our standards activities. We maintain relationships with the
eco-system of companies that provide the products that drive digital content
creation and consumption, including the major Hollywood studios, consumer
electronics companies, retailers and service providers. To that end, we have
developed relationships with Hollywood studios such as Universal, Warner
Brothers, Disney and Fox and with major consumer electronics companies such as
Nokia, Panasonic, Phillips, Samsung, Sharp, Sony and Toshiba. Through these and
other relationships, we have formed a strong understanding of the requirements
for storing, distributing and presenting HD digital video and audio in the home
and mobile environments. We have also developed a substantial IP base for
building the standards and products necessary to promote opportunities for our
products.
Historically, we have grown our
business by introducing and promoting the adoption of new standards and entering
new markets. We collaborated with other companies and jointly developed the DVI
and HDMI standards. Our first products addressed the PC market. Subsequently, we
introduced products for a variety of CE market segments, including STB, game
console and digital television (DTV) markets. More recently, we have focused our
research and development activities and are developing products based on our
innovative digital interconnect core technology for the mobile device market,
including digital still cameras, HD camcorders, portable media players and smart
phones.
We are a Delaware
corporation headquartered in Sunnyvale, California. Our Internet website address
is www.SiliconImage.com.
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We are
not including the information contained on our website as a part of, or
incorporating it by reference into, the Annual Report on Form 10-K. We make
available through our Internet website - free of charge - our Annual Report on
Form 10-K quarterly reports on Form 10-Q current reports on
Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable, after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
Strategy
and Core Technologies
Our mission
is to develop interoperable products and technologies that deliver digital
content anywhere on any device. Our business strategy is to grow the
available market for our products and IP solutions through the development,
introduction and promotion of industry standards such as HDMI, DVI and SATA in
our core technology areas, which are as follows:
Transition
Minimized Differential Signaling (TMDS)
TMDS is a
technology for transmitting high-speed serial data. It is used by the DVI and
HDMI video interfaces, as well as other digital communication
interfaces. TMDS devices are based on a transmitter/receiver pair.
The transmitter incorporates an advanced coding algorithm which has reduced
electromagnetic interference over copper cables and enables robust clock
recovery at the receiver to achieve high skew tolerance for driving longer cable
lengths as well as shorter low cost/quality cables.
Internal TMDS
(iTMDS)
iTMDS defines
a video-only link, using a protocol that is a superset of DVI, for connecting
video paths within a DTV. This protocol handles not only standard 8-bit
DVI, but also 10-, 12-, and 16-bit color depths. The protocol embeds an
indicator of the current color depth within the TMDS stream allowing the iTMDS
receiver to automatically switch to the correct format without any support
microcontroller or software.
Serial
Advanced Technology Attachment (SATA)
SATA is a
computer bus primarily designed for the transfer of data between a computer and
mass storage devices such as hard disk drives, optical drives and flash based
storage subsystems. The main advantages over the older parallel ATA
interface are faster data transfer, the ability to remove or add devices while
operating (hot swapping), native command queuing (NCQ) and out of order data
retrieval, thinner cables that let air cooling work more efficiently, and more
reliable operation with tighter data integrity checks.
SATA was
designed as a successor to the Advanced Technology Attachment standard (ATA),
and has largely replaced the older technology (retroactively renamed Parallel
ATA or PATA). Serial ATA adapters and devices communicate over a high-speed
serial cable. The current SATA specification supports data transfer rates
as high as 6.0 gigabits per second (Gbps) per device.
There is a
special connector (eSATA) specified for external devices, and an optionally
implemented provision for clips to hold internal connectors firmly in
place.
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LiquidHDTM
LiquidHDTM is
a set of protocols designed to network consumer electronic equipment.
Protocols are a set of rules governing how data flows through the network. The
protocol suite is comprised of resource discovery, control messaging, streaming
media, security and remote user interface components that are designed to be
incorporated in a discrete or an integrated semiconductor chip without the need
for general purpose microprocessors thus allowing extremely cost effective and
interoperable integrated circuit (IC) implementations. LiquidHD protocols
incorporate a content protection scheme suitable for distribution of
entertainment content and provide auto federation and interoperability for
networked CE devices.
LiquidHD
protocols are designed to operate over IP networks, therefore, they are suitable
for any physical layer with the requisite speed and latency characteristics
including MoCA, Ethernet, WiFi and power line. Using these protocols it is
possible to stream media and data without the need for complex software (XML,
HTML, Web Browsers, Java, etc.) in the receiver device.
Mobile
High-Definition Link (MHL) Technology
Our MHL
technology is a low pin count HD audio and video serial link specifically
defined for connecting mobile devices to HDTVs. MHL is based on the same
technology used in DVI and HDMI but only requires a single TMDS data pair to
transmit video to MHL enabled TVs at resolutions up to 1080p. MHL uses 5 signal
pins that can be used with a small low pin count in mobile devices. Reduced pin
count connectors are critical in small mobile devices because the available
connector space is greatly limited compared to standard consumer electronic
devices such as Blu-Ray players and set top boxes. The MHL specification
also includes a provision to provide power to the mobile device when connected
thus preserving battery life.
Serial Port Memory
Technology (SPMT)
SPMT is a new
memory interface technology that Silicon Image and other leading semiconductor
companies are currently promoting. SPMT is initially targeted for DRAM chips
that employ a serial interface architecture rather than a parallel interface
architecture as commonly found in current memory offerings. This new
architecture will enable greater bandwidth and flexibility, significantly
reduced pin count, and lower power requirements resulting in savings on overall
system cost.
InstaPort™
Technology
Instaport™
technology was developed by Silicon Image to reduce HDMI port switch time from
5-7 seconds to about 1 second. InstaPort is now featured in port
processor products from Silicon Image that have implemented HDMI 1.3 or HDMI
1.4.
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Standards
Activity
We have been
directly involved in the following standards efforts:
Mobile
High-Definition Interconnect (MHDI) Working Group
On September
28, 2009 Nokia, Samsung, Silicon Image, Sony, and Toshiba, announced the
formation of the Mobile High-Definition Interface Working Group (MHDI) that
intends to create an industry standard for an audio/video interface to connect
mobile phones or portable consumer electronics (CE) devices directly to
high-definition televisions (HDTVs) and displays. This new mobile connectivity
standard, based on Silicon Image’s Mobile High-Definition Link (MHL™)
technology, will be defined, promoted and marketed by the Working Group as an
industry standard open to anyone desiring to be an adopter and enable the
development of mobile products that adhere to this new standard across a broad
connectivity ecosystem.
The Working
Group’s vision for the next generation of mobile connectivity is to provide an
easy and cost-effective implementation for manufacturers while offering
consumers a simple and reliable mobile connectivity experience. A single-cable
with a low pin count interface will be able to support up to 1080p
high-definition (HD) digital video and HD audio in addition to delivering power
to a portable device.
The Working
Group is expected to organize a Consortium of founding members who will develop
a mobile connectivity technology standard specification that governs
transmission and reception of high-definition content between portable devices
and display devices, to support connectivity in accordance with the new
specification.
Serial Port
Memory Technology (SPMT) Consortium
SPMT is a
first-of-its-kind memory standard for dynamic random access memory (DRAM). SPMT
will enable extended battery life, bandwidth flexibility, reduced pin count, and
lower power demand for mobile and portable devices. Demand by mobile
service providers for solutions enabling them to give consumers more
data-intensive, media-rich capabilities drove the formation of the SPMT
Consortium. The SPMT consortium was established by Silicon Image,
ARM, Hynix Semiconductor, LG Electronics, and Samsung Electronics in
2009.
High-Definition
Multimedia Interface (HDMI) Consortium
In 2002, we
entered into a Founder’s Agreement with Sony, Matsushita Electric Industrial Co.
(Panasonic), Philips, Thomson, Hitachi and Toshiba, under which we formed a
working group to develop the HDMI specification, a next-generation digital
interface for consumer electronics. The HDMI specification is based on our
market-proven TMDS technology, the same technology underlying the HDMI
specification’s predecessor specification, DVI, which we also developed. As an
HDMI founder, we have actively participated in the evolution of the HDMI
specification and we anticipate that our involvement in this and in other
digital interface connectivity standards will continue.
Our
leadership in the market for HDMI-enabled products has been based on our ability
to introduce first-to-market semiconductor and IP solutions to manufacturers and
to continue the cycle of innovation within the standard. We introduced the
industry’s first products for each new version of the HDMI standard, providing a
time-to-market advantage to our customers.
For CE
manufacturers, HDMI is a low-cost, standardized means of interconnecting CE
devices, which enables these manufacturers to build feature-rich products that
deliver a true home theater entertainment experience. For PC and monitor
manufacturers, HDMI enables a PC connection to digital TVs and monitors at HD
quality levels. The market research firm In-Stat estimates that approximately
400 million HDMI-enabled products shipped worldwide in 2009 contributing to
an installed base of over 1 billion HDMI enabled products. In addition,
approximately 900 companies around the world have become HDMI
adopters.
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. The DVI 1.0 standard defines a
high-speed serial data communication link between computers and digital
displays. According to In-Stat, over 152 million DVI-enabled products were
expected to ship in 2009. Today, in many applications, DVI is being replaced by
the more feature-rich HDMI interface. In the PC market, DVI faces competition
from DisplayPort, 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
its display monitor, or a computer and a home-theater system. A number of
companies have introduced products based on the DisplayPort standard including
Apple, Dell, AMD, ST and nVidia.
Serial
Advanced Technology Attachment (SATA)
We have been
a contributor to the SATA standard and a leading 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. We sell SATA
semiconductors primarily to merchant motherboard suppliers, computer OEMs and
external drive manufacturers.
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Products
and Services
We sell our
products and services primarily into three markets: consumer electronics,
personal computers and storage. Our product and IP revenues from the CE, PC and
storage markets were as follows:
CE
(DTV & Mobile)
In 2009,
HDMI specification revision 1.4 (HDMI 1.4) was released. We were the first
company to introduce full-featured HDMI 1.4 products with a full complement of
advanced HDMI 1.4 features such as the HDMI Ethernet Channel (HEC), Audio Return
Channel (ARC), 3D, advanced audio formats and content bits. These
features allow our customers to design truly differentiated products while also
simplifying the end consumer experience by reducing the number of cables
necessary to interconnect CE devices. In 2009, we launched the SiI938x family of
port processors that includes five HDMI 1.4 ports, support for HEC (HDMI
Ethernet Channel), 3D, and ARC (Audio Return Channel) and also
includes support for MHL technology, and Instaport™. Our SiI938x family of port
processors expands the number of HDMI ports available to consumers and augments
the HDMI functionality with quick, high-definition port switching. We
expect volume shipments of SiI938x HDIM 1.4 port processors to begin in
2010.
During
2009, we also began volume shipments of our first port processor with InstaPort™
technology, the SiI9287. This port processor has been designed-in to many
tier-1 DTV manufacturers. We believe the SiI9287 delivers outstanding HDMI
audio/video quality coupled with the industry leading innovation of InstaPort
fast switching between any of its 4 HDMI ports.
All of
our solutions are complemented by the advanced interoperability testing
performed by Simplay Labs, and these new products offer rapid time-to-market
solutions allowing OEMs to significantly reduce cross-platform compatibility
issues.
Our HDMI
products have been selected by many of the world’s CE companies.
Transmitters. Our
HDMI transmitter products reside in CE and PC products, such as DVD players and
recorders, Blu-Ray players, HD game consoles, STBs, digital camcorders, A/V
receivers and digital video recorders (DVRs). HDMI transmitters convert digital
video and audio into a multi-gigabit per second encrypted serialized stream and
transmit the secure content to an HDMI receiver that is built into televisions
and A/V receivers.
HDMI
Receivers. Our HDMI receiver products reside in display
systems, such as DTVs, projectors, PC monitors as well as A/V receivers (AVR’s).
HDMI receivers convert an incoming encrypted serialized stream to digital video
and audio, which is then processed by a television or PC monitor for
display.
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PC
While the
PC market has become an increasingly smaller portion of our business, the growth
of DTVs with HDMI inputs provides a source of demand for our PC products as
consumers increasingly seek to connect their PCs to their DTVs to play games,
watch high-definition DVDs and view photos.
Because
HDMI is backward compatible with the DVI standard, HDMI-enabled PCs can also
connect directly to the enormous installed base of PC monitors with DVI
inputs.
Storage
Through
several SATA generations, we have introduced higher levels of SATA integration,
driving higher SATA performance and functionality and delivering a family of
SATA system-on-a-chip (SoC) solutions for the consumer electronics environment.
SATA may also serve as an external interface (eSATA) providing
advanced storage features and ultra high speed for external
drives.
SteelVine Storage
Controllers — We provide a full line of SATA controllers used in PC,
DVR and network attached storage (NAS) applications. The current generation of
SteelVine controllers provides the SATA Gen II features including eSATA
signal levels, 3.0 Gbps, native command queuing (NCQ), hot-plug and port
multiplier support.
SteelVine Bridges — Our
bridge products such as the SiI3811 provide PC OEMs with a solution that
connects legacy PATA optical drives to the current generation of motherboard
chip sets and are used primarily in desktop and laptop PC
applications.
SteelVine Storage
Processors — We introduced our SteelVine storage processor
architecture in 2004. SteelVine integrates the capabilities of a complex
redundant array of independent disks (RAID) controller into a single-chip
architecture. SteelVine storage processors deliver enterprise-class features
such as virtualization, RAID, hot-plug and hot spare, in a single very low cost
SoC. These unique SoCs allow system builders to produce appliance-like solutions
that are simple, reliable, affordable and scalable without the need for host
software. Storage processors are currently shipping in PC motherboards as well
as external storage solutions.
In 2009
we introduced the third generation of SteelVine Storage processors, the SiI5823,
specifically targeted at mainstream PC motherboards. This third
generation provides a 30% performance increase over previous generations while
simultaneously reducing the overall Bill of Materials cost of the solution by
over 40%.
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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 HDMI market. The
Simplay HD Testing Program offers one of the most robust and comprehensive
testing platforms in the consumer electronics industry as device
interoperability and consumer quality of experience are of significant concern
to retailers and consumers in the HD market. Devices that pass the Simplay HD
testing program are verified to meet HDMI and HDCP specifications and have
demonstrated interoperability through empirical testing against “peer” devices
maintained by Simplay Labs. We have service centers operating in the US, South
Korea and China, providing interoperability, quality of experience and
performance global testing centers. By December 31, 2009, more than 500
product lines have been Simplay HD-verified and 100 manufacturers and retailers
have participated in the Simplay HD Testing Program, enabling a higher level of
consumer trust that their products are fully interoperable with other HDMI
products. A number of products use the SimplayHD logo on product labels, within
product literature and on website promotions.
In
November of 2009, the Simplay Explorer HDMI-CEC R&D development tool was
approved as an official HDMI Authorized Test Center (ATC) test tool. 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.
HDMI
Licensing, LLC
HDMI
Licensing, LLC, a wholly-owned subsidiary of Silicon Image, is the agent
responsible for licensing the HDMI specification, promoting the HDMI standard
and providing education on the benefits of HDMI technology to retailers and
consumers. The HDMI specification continues to experience rapid growth in the
consumer electronics and PC markets, as manufacturers meet consumer demand for
multimedia convergence and continue to drive higher performance in their product
offerings. In 2009, the HDMI consortium launched version 1.4 of the HDMI
specification into the marketplace. Moreover, in 2009, there was an
increase in adopters as well as an increase in HDMI-enabled products as the HDMI
specification continues to make its way into more products.
As of
December 31, 2009, 898 manufacturing companies were licensees of the HDMI
specification from the HDMI Licensing, LLC. The adoption of HDMI
specifications by additional manufacturers during 2009 further strengthens the
specification’s 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-Stat estimated
that approximately 405 million HDMI-enabled devices would be shipped in
2009, with over 474 million devices expected to ship in 2010 and an
installed base of nearly 1.5 billion HDMI-enabled devices projected by the
end of 2010.
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Markets
and Customers
We focus
our sales and marketing efforts on achieving design wins with original equipment
manufacturers (OEMs) of CE, PC Mobile and storage products. Historically, a
relatively small number of customers and distributors have generated a
significant portion of our revenue. Our top five customers, including
distributors, generated 44.2%, 55.1% and 57.7%, of our revenue in 2009, 2008 and
2007, respectively. For the year ended December 31, 2009, shipments to
Microtek, Inc. generated 11.9% of our revenue and shipments to Weikeng
Industrial generated 10.3% of our revenue. The percentage of revenue generated
through distributors tends to be significant, since many OEMs rely upon
third-party manufacturers or distributors to provide purchasing and inventory
management functions. Our revenue generated through distributors was 59.9%,
60.2% and 60.2% of our total revenue in 2009, 2008 and 2007,
respectively.
A
substantial portion of our business is conducted outside the United States;
therefore, we are subject to foreign business, political and economic risks.
Nearly all of our products are manufactured offshore, primarily in Asia and for
the years ended December 31, 2009, 2008 and 2007, approximately 79.4%,
83.4% and 79.8% of our total revenue respectively, was generated from customers
and distributors located outside of North America, primarily in Asia. 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.
Research
and Development
Our
research and development efforts continue to focus on innovative technologies
and standards, higher-bandwidth, lower-power links, efficient algorithms,
architectures and feature-rich implementations for CE (including DTV), PC,
mobile and storage 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, 2009, we
had been issued more than 140 United States patents and had in excess of 70
United States patent applications pending. Our U.S. issued patents expire
in 2025 or later, subject to our payment of periodic maintenance fees. 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, digital audio-visual (A/V) processor architecture, storage
architecture, logic design/verification, firmware/software, flat panel displays,
digital audio/video systems and storage systems. 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
$68.2 million, $84.8 million and $78.0 million, in 2009, 2008 and
2007, respectively, including stock-based compensation expense of
$6.3 million, $7.1 million and 8.4 million for 2009, 2008 and
2007, respectively.
Sales
and Marketing
We sell
our products using a 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.
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Manufacturing
Wafer
Fabrication
Our
semiconductor products are designed using standard, complementary metal oxide
semiconductor (CMOS) 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.
Our
semiconductor products are currently fabricated using 0.35, 0.25, 0.18 and 0.13
micron processes. We continuously evaluate the benefits, primarily the improved
performance, costs and feasibility, of migrating our products to smaller
geometry process technologies. We have conducted certain development projects
for some of our customers, involving smaller geometries, namely 90 nm and
65 nm designs. We rely almost entirely on Taiwan Semiconductor
Manufacturing Company (TSMC) to produce all of our semiconductor products.
Because of the cyclical nature of the semiconductor industry, capacity
availability can change quickly and significantly. We attempt to optimize wafer
availability by continuing to use less advanced wafer geometries, such as 0.35,
0.25, 0.18 and 0.13 micron, for which foundries generally have more available
capacity.
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 the majority of 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. We test a
small portion of our products in-house. 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 pre-qualify each of our
subcontractors through an audit and analysis of the subcontractor’s 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.
-11 -
CE
In the
consumer electronics market, our digital interface products are used to connect
a variety of devices to DTVs including set-top boxes, A/V receivers, game
consoles, digital/personal video recorders (DVR), DVD and Blu-Ray players and a
growing number of mobile devices such as smart phones, camcorders and cameras.
These products incorporate DVI, HDMI or Mobile High-Definition Link technology
optionally with HDCP support. Companies competing for sales of HDMI and DVI
solutions include among others, Analog Devices, Analogix, Broadcom,
STMicroelectronics, Mstar, NXP, Texas Instruments and Trident. We also compete
in some instances against in-house semiconductor solutions designed by large
consumer electronics OEMs.
PC
In the PC
market, our products face competition from a number of sources. We offer a
number of HDMI and DVI solutions to the PC market and we compete against
companies such as Analog Devices, Broadcom, National Semiconductor, nVidia,
Pixelworks, SIS, ST and Texas Instruments. In addition, Intel and other
competitors may have integrated HDMI into their PC chips sets. Our HDMI products
may also face competition from DisplayPort, 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 its display monitor, or a computer and a home-theater
system. Other companies have introduced products based on the DisplayPort
including Apple, Dell, AMD, ST and nVidia. DisplayPort is
increasingly challenging DVI as the default standard for digital video
interconnect technology.
Storage
Our SATA
products compete with similar products from Atmel, J-Micron, Marvell Technology,
Promise Technology, Silicon Integrated Systems and VIA Technologies. In
addition, other companies, such as Intel and LSI Logic, have developed, or
announced intentions to develop, SATA products. We also compete against AMD,
Intel, nVidia, Silicon Integrated Systems, VIA Technologies and other
motherboard chip-set makers, which have integrated SATA functionality into their
chipsets.
Many of
our competitors have longer operating histories and greater presence in key
markets, greater name recognition, access to larger customer bases and
significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do. In particular,
well-established semiconductor companies such as Analog Devices, Intel, National
Semiconductor and Texas Instruments and consumer electronics manufacturers, such
as Panasonic, Sony and Toshiba, may compete against us in the future. We cannot
assure that we can compete successfully against current or potential
competitors, or that competition will not seriously harm our
business.
Employees
As of
December 31, 2009, we had a total of 526 employees, including 218
located outside of the United States. None of our employees are represented by a
collective bargaining agreement, except, as is customary, our employees in
Germany are represented by a works council. 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.
As part
of our restructuring plans announced in the last quarter of 2009, 121 employees
will be terminated in the first half of 2010. Excluding these 121 employees, our
effective head count is 405. The 121 employees have been informed of the
restructuring plan prior to December 31, 2009.
Item 1A. Risk
Factors
A description of the risk factors
associated with our business is set forth below. You should carefully consider the
following risk factors, together with all other information contained or
incorporated by reference in this filing, before you decide to purchase shares of our common
stock. These factors could cause our future results to differ materially from those
expressed in or implied by forward-looking statements made by us. Additional risks and
uncertainties not presently known to us or that we currently deem immaterial may also
harm our business. The trading price of our common stock could decline due to any of
these risks and you may lose all or part of your investment.
Our annual and
quarterly operating results may fluctuate significantly and are difficult to
predict, particularly given adverse domestic and global economic
conditions.>
Our
annual and quarterly operating results are likely to vary significantly in the
future based on a number of factors many of which we have little or no control.
These factors include, but are not limited to:
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.
-13 -
Our
annual and quarterly operating results are highly dependent upon how well we
manage our business.
Our annual
and quarterly operating results are highly dependent upon and may fluctuate
based on how well we manage our business. Some of these factors include the
following:
If we fail to
effectively manage our business, this could adversely affect our results of
operations.
Our
business has been and may continue to be significantly impacted by the
deterioration in worldwide economic conditions, and the current uncertainty in
the outlook for the global economy makes it more likely that our actual results
will differ materially from expectations.
Global credit
and financial markets continue to experience disruptions, including diminished
liquidity and credit availability, declines in consumer confidence, declines in
economic growth, increases in unemployment rates, and continued uncertainty
about economic stability. Despite signs of improvement, there can be no
assurance that there will not be renewed deterioration in credit and financial
markets and confidence in economic conditions. These economic
uncertainties affect businesses such as ours in a number of ways, making it
difficult to accurately forecast and plan our future business activities. The
continued or further tightening of credit in financial markets may lead
consumers and businesses to postpone spending, which may cause our customers to
cancel, decrease or delay their existing and future orders with us. In addition,
financial difficulties experienced by our suppliers or distributors could result
in product delays, increased accounts receivable defaults and inventory
challenges. The volatility in the credit markets has severely diminished
liquidity and capital availability. Our CE product revenue, which
comprised approximately 68.0%, 61.1% and 66.4% of total revenue for the years
ended December 31, 2009, 2008 and 2007, respectively, is dependent on continued
demand for consumer electronics, including but not limited to, DTVs, STBs, DVDs
and game consoles. Demand for consumer electronics business is a function of the
health of the economies in the United States and around the world. As a result
of the recent recession experience by the US economy and other economies around
the world, the demand for overall consumer electronics has been and may continue
to be adversely affected. As a result, the demand for our CE, PC and storage
products and our operating results have been and may continue to be adversely
affected as well. We cannot predict the timing, strength or duration of any
economic disruption or subsequent economic recovery, worldwide, in the United
States, in our industry, or in the consumer electronics market. These and other
economic factors have had and may continue to have a material adverse effect on
demand for our CE, PC and storage products and on our financial condition and
operating results.
Investments
in both fixed rate and floating rate interest earning instruments carry a degree
of interest rate risk. Fixed rate debt securities may have their market value
adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall. Due in
part to these factors, our future investment income may fall short of
expectations due to changes in interest rates. We may suffer losses in principal
if we are forced to sell securities that decline in market value due to changes
in interest rates. Recent adverse events in the global economy and in the credit
markets could negatively impact our return on investment for these debt
securities and thereby reduce the amount of cash and cash equivalents and
investments on our balance sheet.
Part of our
business strategy is to license intellectual property (IP) through agreements
with companies whereby companies incorporate our IP into their respective
technologies that address markets in which we do not want to directly
participate. There can be no assurance that additional companies will be
interested in purchasing our technology on commercially favorable terms or at
all. We also cannot ensure that companies who purchase our technology will
introduce and sell products incorporating our technology, will accurately report
royalties owed to us, will pay agreed upon royalties, will honor agreed upon
market restrictions, will not infringe upon or misappropriate our intellectual
property and will maintain the confidentiality of our proprietary information.
The IP agreements are complex and depend upon many factors including completion
of milestones, allocation of values to delivered items and customer acceptances.
Many of these factors require significant judgments. Licensing revenue could
fluctuate significantly from period to period because it is heavily dependent on
a few key deals being completed in a particular period, the timing of which is
difficult to predict and may not match our expectations. Because of its high
margin content, the licensing mix of our revenue can have a disproportionate
impact on gross profit and profitability. Also, generating revenue from these
arrangements is a lengthy and complex process that may last beyond the period in
which efforts begin and once an agreement is in place, the timing of revenue
recognition may be dependent on customer acceptance of deliverables, achievement
of milestones, our ability to track and report progress on contracts, customer
commercialization of the licensed technology and other factors. Licensing that
occurs in connection with actual or contemplated litigation is subject to risk
that the adversarial nature of the transaction will induce non-compliance or
non-payment. The accounting rules associated with recognizing revenue from these
transactions are increasingly complex and subject to interpretation. Due to
these factors, the amount of license revenue recognized in any period may differ
significantly from our expectations.
We face intense
competition in our markets, which may lead to reduced revenue from sales of our
products and increased losses.>
The CE, PC
and storage markets in which we operate are intensely competitive. These markets
are characterized by rapid technological change, evolving standards, short
product life cycles and declining selling prices. We expect competition for many
of our products to increase, as industry standards become widely adopted, as
competitors reduce prices and offer products with greater levels of integration,
and as new competitors enter our markets.
Our products
face competition from companies selling similar discrete products and from
companies selling products such as chipsets and SoCs with integrated
functionality. Our competitors include semiconductor companies that focus on the
CE, display or storage markets, as well as major diversified semiconductor
companies and we expect that new competitors will enter our markets. Current or
potential customers, including our own licensees, may also develop solutions
that could compete with us, including solutions that integrate the functionality
of our products into their solutions. In addition, current or potential OEM
customers may have internal semiconductor capabilities and may develop their own
solutions for use in their products rather than purchasing them from companies
such as us. Some of our competitors have already established supplier or joint
development relationships with current or potential customers and may be able to
leverage their existing relationships to discourage these customers from
purchasing products from us or persuade them to replace our products with
theirs. Many of our competitors have longer operating histories, greater
presence in key markets, better name recognition, access to larger customer
bases and significantly greater financial, sales and marketing, manufacturing,
distribution, technical and other resources than we do and as a result, they may
be able to adapt more quickly to new or emerging technologies and customer
requirements, or devote greater resources to the promotion and sale of their
products. In particular, well-established semiconductor companies, such as
Analog Devices, NXP, Broadcom, Intel, National Semiconductor and Texas
Instruments and CE manufacturers, such as Panasonic, Sony, Samsung and
Toshiba, may compete against us in the future. Some of our competitors could
merge, which may enhance their market presence. Existing or new competitors may
also develop technologies that more effectively address our markets with
products that offer enhanced features and functionality, lower power
requirements, greater levels of integration or lower cost. Increased competition
has resulted in and is likely to continue to result in price reductions and loss
of market share in certain markets. We cannot assure you that we can compete
successfully against current or potential competitors, or that competition will
not reduce our revenue and gross margins.
We operate in
rapidly evolving markets, which makes it difficult to evaluate our future
prospects.>
The markets
in which we compete are characterized by rapid technological change, evolving
customer needs and frequent introductions of new products and standards. As we
adjust to evolving customer requirements and technological advances, we may be
required to further reposition our existing offerings and to introduce new
products and services. We may not be successful in developing and marketing such
new offerings, or we may experience difficulties that could delay or prevent the
development and marketing of such new offerings. Moreover, new standards that
compete with standards that we promote have been and in the future may be
introduced from time to time, which could impact our success. Accordingly, we
face risks and difficulties frequently encountered by companies in new and
rapidly evolving markets. If we do not successfully address these risks and
difficulties, our results of operations could be negatively
affected.
-
15 -
Our
success depends on demand for our new products.
Our future
growth and success depends on our ability to develop and bring to market on a
timely basis new products, such as our HDMI port processors and products based
on our new Mobile High-Definition Link Technology. There can be
no assurance that we will be successful in developing and marketing these new or
other future products. Moreover, there is no assurance that our new or future
products will achieve the desired level of market acceptance in the anticipated
timeframes or that any such new or future products will contribute significantly
to our revenue. Our new products face significant competition from established
companies that have been selling competitive products for longer periods of time
than we have.
We
may experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration, which may
result in reduced manufacturing yields, delays in product deliveries and
increased expenses.
To remain
competitive, we expect to continue to transition our semiconductor products to
increasingly smaller line width geometries. This transition requires us to
modify the manufacturing processes for our products and to redesign some
products as well as standard cells and other integrated circuit designs that we
may use in multiple products. We periodically evaluate the benefits, on a
product-by-product basis, of migrating to smaller geometry process technologies
to reduce our costs. Currently most of our products are manufactured in .18
micron and .13 micron, geometry processes. We are now designing a new
product in 65 nanometer process technology and planning for the transition to
smaller process geometries. In the past, we have experienced some difficulties
in shifting to smaller geometry process technologies or new manufacturing
processes, which resulted in reduced manufacturing yields, delays in product
deliveries and increased expenses. The transition to 65 nanometer geometry
process technology will result in significantly higher mask and prototyping
costs, as well as additional expenditures for engineering design tools and
related computer hardware. We may face similar difficulties, delays and expenses
as we continue to transition our products to smaller geometry
processes.
We are
dependent on our relationships with our foundry subcontractors to transition to
smaller geometry processes successfully. We cannot assure you that the foundries
that we use will be able to effectively manage the transition in a timely
manner, or at all, or that we will be able to maintain our existing foundry
relationships or develop new ones. If any of our foundry subcontractors or we
experience significant delays in this transition or fail to efficiently
implement this transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of which could harm our
relationships with our customers and our results of operations.
We will have
difficulty selling our products if customers do not design our products
into their
product offerings or if our customers’ product offerings are not commercially
successful.>
Our products
are generally incorporated into our customers’ products at the design stage. As
a result, we rely on equipment manufacturers to select our products to be
designed into their products. Without these “design wins,” it is very difficult
to sell our products. We often incur significant expenditures on the development
of a new product without any assurance that an equipment manufacturer will
select our product for design into its own product. Additionally, in some
instances, we are dependent on third parties to obtain or provide information
that we need to achieve a design win. Some of these third parties may be our
competitors and, accordingly, may not supply this information to us on a timely
basis, if at all. Once an equipment manufacturer designs a competitor’s product
into its product offering, it becomes significantly more difficult for us to
sell our products to that customer because changing suppliers involves
significant cost, time, effort and risk for the customer. Furthermore, even if
an equipment manufacturer designs one of our products into its product offering,
we cannot be assured that its product will be commercially successful or that we
will receive any revenue from that product. Sales of our products largely depend
on the commercial success of our customers’ products. Our customers generally
can choose at any time to stop using our products if their own products are not
commercially successful or for any other reason. We cannot assure you that we
will continue to achieve design wins or that our customers’ equipment
incorporating our products will ever be commercially successful.
-
16 -
Our products
typically have lengthy sales cycles. A customer may decide to cancel or
change its
product plans, which could cause us to lose anticipated sales. In addition, our
average product life cycles tend to be short and, as a result, we may
hold excess
or obsolete inventory that could adversely affect our operating
results.>
After we have
developed and delivered a product to a customer, the customer will usually test
and evaluate our product prior to designing its own equipment to incorporate our
product. Our customers generally need three months to over six months to test,
evaluate and adopt our product and an additional three months to over nine
months to begin volume production of equipment that incorporates our product.
Due to this lengthy sales cycle, we may experience significant delays from the
time we incur operating expenses and make investments in inventory until the
time that we generate revenue from these products. It is possible that we may
never generate any revenue from these products after incurring such
expenditures. Even if a customer selects our product to incorporate into its
equipment, we have no assurances that the customer will ultimately market and
sell its equipment or that such efforts by our customer will be successful. The
delays inherent in our lengthy sales cycle increase the risk that a customer
will decide to cancel or change its product plans. Such a cancellation or change
in plans by a customer could cause us to lose sales that we had anticipated. In
addition, anticipated sales could be materially and adversely affected if a
significant customer curtails, reduces or delays orders during our sales cycle
or chooses not to release equipment that contains our products. Further, the
combination of our lengthy sales cycles coupled with worldwide economic
conditions could have a compounding negative impact on the results of our
operations.
While our
sales cycles are typically long, our average product life cycles tend to be
short as a result of the rapidly changing technology environment in which we
operate. As a result, the resources devoted to product sales and marketing may
not generate material revenue for us and from time to time, we may need to write
off excess and obsolete inventory. If we incur significant marketing expenses
and investments in inventory in the future that if we are not able to recover
and we are not able to compensate for those expenses, our operating results
could be adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions but still hold higher cost products in
inventory, our operating results would be harmed.
Our customers may
not purchase anticipated levels of products, which can result in excess
inventories.>
We generally
do not obtain firm, long-term purchase commitments from our customers and, in
order to accommodate the requirements of certain customers, we may from time to
time build inventory that is specific to that customer in advance of receiving
firm purchase orders. The short-term nature of our customers’ commitments and
the rapid changes in demand for their products reduce our ability to accurately
estimate the future requirements of those customers. Should the customer’s needs
shift so that they no longer require such inventory, we may be left with
excessive inventories, which could adversely affect our operating
results.
- 17 -
We
depend on a few key customers and the loss of any of them could significantly
reduce our revenue.
Historically,
a relatively small number of customers and distributors have generated a
significant portion of our revenue. For the year ended December 31, 2009,
shipments to Microtek, Inc. and Weikeng Industrial generated 11.9% and
10.3% of our revenue, respectively. For the year ended December 31,
2008, shipments to World Peace Industrial generated 14.6% of our revenue,
shipments to Microtek, Inc. generated 11.8% of our revenue, shipments to Weikeng
Industrial generated 11.5% of our revenue and shipments to Innotech Corporation
generated 10.5% of our revenue. In addition, an end-customer may buy
our products through multiple distributors, contract manufacturers and /or
directly, which could create an even greater concentration. We cannot be certain
that customers and key distributors that have accounted for significant revenue
in past periods, individually or as a group, will continue to sell our products
and generate revenue. As a result of this concentration of our customers, our
results of operations could be negatively affected if any of the following
occurs:
While our
participation in multiple markets, has broadened our customer base, as product
mix fluctuates from quarter to quarter, we may become more dependent on a small
number of customers or a single customer for a significant portion of our
revenue in a particular quarter, the loss of which could adversely affect our
operating results.
We
sell our products through distributors, which limits our direct interaction with
our end customers, therefore reducing our ability to forecast sales and
increasing the complexity of our business.
Many original
equipment manufacturers (“OEMs”) rely on third-party manufacturers or
distributors to provide inventory management and purchasing
functions. Distributors generated 59.9% of our revenue for the year
ended December 31, 2009, 60.2% of our revenue for the years ended December 31,
2008 and 2007. Selling through distributors reduces our ability to forecast
sales and increases the complexity of our business, requiring us
to:
Since we have
limited ability to forecast inventory levels at our end customers, it is
possible that there may be significant build-up of inventories in the
distributor channel, with the OEM or the OEM’s contract manufacturer. Such a
buildup could result in a slowdown in orders, requests for returns from
customers, or requests to move out planned shipments. This could adversely
impact our revenues and profits.
Any failure
to manage these challenges could disrupt or reduce sales of our products and
unfavorably impact our financial results.
-
18 -
Our success
depends on the development and introduction of new products, which we may
not be able
to do in a timely manner because the process of developing high-speed
semiconductor
products is complex and costly.>
The
development of new products is highly complex and we have experienced delays,
some of which exceeded one year, in the development and introduction of new
products on several occasions in the past. We have recently introduced new
products and will continue to introduce new products in the future. As our
products integrate new, more advanced functions, they become more complex and
increasingly difficult to design, manufacture and debug. Successful product
development and introduction depends on a number of factors, including, but not
limited to:
Accomplishing
all of this is extremely challenging, time-consuming and expensive and there is
no assurance that we will succeed. Product development delays may result from
unanticipated engineering complexities, changing market or competitive product
requirements or specifications, difficulties in overcoming resource constraints,
the inability to license third-party technology or other factors. Competitors
and customers may integrate the functionality of our products into their own
products, thereby reducing demand for our products. If we are not able to
develop and introduce our products successfully and in a timely manner, our
costs could increase or our revenue could decrease, both of which would
adversely affect our operating results. In addition, it is possible that we may
experience delays in generating revenue from these products or that we may never
generate revenue from these products. We must work with a semiconductor foundry
and with potential customers to complete new product development and to validate
manufacturing methods and processes to support volume production and potential
re-work. Each of these steps may involve unanticipated difficulties, which could
delay product introduction and reduce market acceptance of the product. In
addition, these difficulties and the increasing complexity of our products may
result in the introduction of products that contain defects or that do not
perform as expected, which would harm our relationships with customers and our
ability to achieve market acceptance of our new products. There can be no
assurance that we will be able to achieve design wins for our planned new
products, that we will be able to complete development of these products when
anticipated, or that these products can be manufactured in commercial volumes at
acceptable yields, or that any design wins will produce any revenue. Failure to
develop and introduce new products, successfully and in a timely manner, may
adversely affect our results of operations.
-
19 -
There
are risks to our global strategy.
We maintain
operations in various countries around the world where we realize certain
operational benefits from our global strategy and our overall tax rate has
benefited favorably. The effectiveness of the strategy requires, in addition to
maintaining and increasing profitability, continued maintenance of a certain
corporate structure and various compliance activities required by foreign
jurisdictions in support of the structure. Should management fail to adhere to
these compliance requirements or fail to maintain supportive processes, our
ability to continue to realize the benefits of our global strategy may be
jeopardized, which may adversely affect our business, operating results or
financial condition.
Governmental
action against companies located in offshore jurisdictions may lead to a
reduction in the demand for our common shares.
Recent
federal and state legislation has been proposed, and additional legislation may
be proposed in the future which, if enacted, could have an adverse tax impact on
both us and our shareholders. For example, the ability to defer taxes as a
result of permanent investments offshore could be limited, thus raising our
effective tax rate.
We
have made acquisitions in the past and may make acquisitions in the future, and
these acquisitions involve numerous risks.
Our growth
depends upon market growth and our ability to enhance our existing products and
introduce new products on a timely basis. Acquisitions of companies or
intangible assets is a strategy we may use to develop new products and enter new
markets. We may acquire additional companies or technologies in the future.
Acquisitions involve numerous risks, including, but not limited to, the
following:
No assurance
can be given that our prior acquisitions or our future acquisitions, if any,
will be successful or provide the anticipated benefits, or that they will not
adversely affect our business, operating results or financial condition. Failure
to manage growth effectively and to successfully integrate acquisitions made by
us could materially harm our business and operating
results.
For example,
in January 2007, we completed the acquisition of sci-worx, now Silicon Image,
GmbH. In 2009, because of our decision to focus on discrete
semiconductor products and related intellectual property, we decided to
restructure our research and development operations resulting in the closure of
our two sites in Germany.
-
20 -
Industry
cycles may strain our management and resources.
Cycles of
growth and contraction in our industry may strain our management and resources.
To manage these industry cycles effectively, we must:
If we cannot
manage industry cycles effectively, our business could be seriously
harmed.
The
cyclical nature of the semiconductor industry may create constrictions in our
foundry, test and assembly capacity.
The
semiconductor industry is characterized by significant downturns and wide
fluctuations in supply and demand. This cyclicality has led to significant
fluctuations in product demand and in the foundry, test and assembly capacity of
third-party suppliers. Production capacity for fabricated semiconductors is
subject to allocation, whereby not all of our production requirements would be
met. This may impact our ability to meet demand and could also increase our
production costs and inventory levels. Cyclicality has also accelerated
decreases in average selling prices per unit. We may experience fluctuations in
our future financial results because of changes in industry-wide conditions. Our
financial performance has been and may in the future be, negatively impacted by
downturns in the semiconductor industry. In a downturn situation, we may incur
substantial losses if there is excess production capacity or excess inventory
levels in the distribution channel.
We
depend on third-party sub-contractors to manufacture, assemble and test nearly
all of our products, which reduce our control over the production
process.
We do not own
or operate a semiconductor fabrication facility. We rely on one third party
semiconductor company overseas to produce substantially all of our semiconductor
products. We also rely on outside assembly and test services to
test all of our semiconductor products. Our reliance on independent foundries,
assembly and test facilities involves a number of significant risks, including,
but not limited to:
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21 -
We do not have a long-term
supply agreement with all of our subcontractors and instead obtain production
services on a purchase order basis. Our outside sub-contractors have no
obligation to manufacture our products or supply products to us for any specific
period of time, in any specific quantity or at any specific price, except as set
forth in a particular purchase order. Our requirements represent a small portion
of the total production capacity of our outside foundries, assembly and test
facilities and our sub-contractors may reallocate capacity on short notice to
other customers who may be larger and better financed than we are, or who have
long-term agreements with our sub-contractors, even during periods of high
demand for our products. These foundries may allocate or move production of our
products to different foundries under their control, even in different
locations, which may be time consuming, costly and difficult, have an adverse
affect on quality, yields and costs and require us and/or our customers to
re-qualify the products, which could open up design wins to competition and
result in the loss of design wins and design-ins. If our subcontractors are
unable or unwilling to continue manufacturing our products in the required
volumes, at acceptable quality, yields and costs and in a timely manner,
our business will be substantially harmed. As a result, we would have to
identify and qualify substitute sub-contractors, which would be time-consuming,
costly and difficult; there is no guarantee that we would be able to identify
and qualify such substitute 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 and
design-ins. Any of these circumstances could substantially harm our business. In
addition, if competition for foundry, assembly and test capacity increases, our
product costs may increase and we may be required to pay significant amounts or
make significant purchase commitments to secure access to production
services.
The
complex nature of our production process, which can reduce yields and prevent
identification of problems until well into the production cycle or, in some
cases, after the product has been shipped.
The
manufacture of semiconductors is a complex process and it is often difficult for
semiconductor foundries to achieve acceptable product yields. Product yields
depend on both our product design and the manufacturing process technology
unique to the semiconductor foundry. Since low yields may result from either
design or process difficulties, identifying problems can often only occur well
into the production cycle, when an actual product exists that can be analyzed
and tested.
Further, we
only test our products after they are assembled, as their high-speed nature
makes earlier testing difficult and expensive. As a result, defects often are
not discovered until after assembly. This could result in a substantial number
of defective products being assembled and tested or shipped, thus lowering our
yields and increasing our costs. These risks could result in product shortages
or increased costs of assembling, testing or even replacing our
products.
Although we
test our products before shipment, they are complex and may contain defects and
errors. In the past we have encountered defects and errors in our products.
Because our products are sometimes integrated with products from other vendors,
it can be difficult to identify the source of any particular problem. Delivery
of products with defects or reliability, quality or compatibility problems, may
damage our reputation and our ability to retain existing customers and attract
new customers. In addition, product defects and errors could result in
additional development costs, diversion of technical resources, delayed product
shipments, increased product returns, warranty and product liability claims
against us that may not be fully covered by insurance. Any of these
circumstances could substantially harm our business.
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We
face foreign business, political and economic risks because a majority of our
products and our customers’ products are manufactured and sold outside of the
United States.
A substantial
portion of our business is conducted outside of the United States. As a result,
we are subject to foreign business, political and economic risks. Nearly all of
our products are manufactured in Taiwan or elsewhere in Asia. For the years
ended December 31, 2009, 2008 and 2007, approximately 79.4%, 83.4% and
79.8% of our total revenue respectively, was generated from customers and
distributors located outside of United States, primarily in Asia. We anticipate
that sales outside of the United States will continue to account for a
substantial portion of our revenue in future periods. In addition, we undertake
various sales and marketing activities through regional offices in several other
countries and we have significantly expanded our research and development
operations outside of the United States. We intend to continue to expand our
international business activities. Accordingly, we are subject to international
risks, including, but not limited to:
Any of the
factors described above may have a material adverse effect on our ability to
increase or maintain our foreign sales. In addition, original equipment
manufacturers that design our semiconductors into their products sell them
outside of the United States. This exposes us indirectly to foreign risks.
Because sales of our products are denominated exclusively in United States
dollars, relative increases in the value of the United States dollar will
increase the foreign currency price equivalent of our products, which could lead
to a change in the competitive nature of these products in the marketplace. This
in turn could lead to a reduction in sales and
profits.
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The
success of our business depends upon our ability to adequately protect our
intellectual property.
We rely on a
combination of patent, copyright, trademark, mask work and trade secret laws, as
well as nondisclosure agreements and other methods, to protect our proprietary
technologies. We have been issued patents and have a number of pending patent
applications. However, we cannot assure you that any patents will be issued as a
result of any applications or, if issued, that any claims allowed will protect
our technology. In addition, we do not file patent applications on a worldwide
basis, meaning we do not have patent protection in some jurisdictions. It may be
possible for a third-party, including our licensees, to misappropriate our
copyrighted material or trademarks. It is possible that existing or future
patents may be challenged, invalidated or circumvented and effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
in foreign countries. It may be possible for a third-party to copy or otherwise
obtain and use our products or technology without authorization, develop similar
technology independently or design around our patents in the United States and
in other jurisdictions. It is also possible that some of our existing or new
licensing relationships will enable other parties to use our intellectual
property to compete against us. Legal actions to enforce intellectual property
rights tend to be lengthy and expensive and the outcome often is not
predictable. As a result, despite our efforts and expenses, we may be unable to
prevent others from infringing upon or misappropriating our intellectual
property, which could harm our business. In addition, practicality also limits
our assertion of intellectual property rights. Patent litigation is expensive
and its results are often unpredictable. Assertion of intellectual property
rights often results in counterclaims for perceived violations of the
defendant’s intellectual property rights and/or antitrust claims. Certain
parties after receipt of an assertion of infringement will cut off all
commercial relationships with the party making the assertion, thus making
assertions against suppliers, customers and key business partners risky. If we
forgo making such claims, we may run the risk of creating legal and equitable
defenses for an infringer.
We generally
enter into confidentiality agreements with our employees, consultants and
strategic partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy, disclose, obtain or
use our products, services or technology without our authorization. Also,
current or former employees may seek employment with our business partners,
customers or competitors, and we cannot assure you that the confidential nature
of our proprietary information will be maintained in the course of such future
employment. Additionally, current, departing or former employees or third
parties could attempt to penetrate our computer systems and networks to
misappropriate our proprietary information and technology or interrupt our
business. Because the techniques used by computer hackers and others to access
or sabotage networks change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate, counter or ameliorate
these techniques. As a result, our technologies and processes may be
misappropriated, particularly in countries where laws may not protect our
proprietary rights as fully as in the United States.
Our products
may contain technology provided to us by other parties such as contractors,
suppliers or customers. We may have little or no ability to determine in advance
whether such technology infringes the intellectual property rights of a third
party. Our contractors, suppliers and licensors may not be required to indemnify
us in the event that a claim of infringement is asserted against us, or they may
be required to indemnify us only up to a maximum amount, above which we would be
responsible for any further costs or damages. In addition, we may have little or
no ability to correct errors in the technology provided by such contractors,
suppliers and licensors, or to continue to develop new generations of such
technology. Accordingly, we may be dependent on their ability and willingness to
do so. In the event of a problem with such technology, or in the event that our
rights to use such technology become impaired, we may be unable to ship our
products containing such technology, and may be unable to replace the technology
with a suitable alternative within the time frame needed by our
customers.
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Our
participation in working groups for the development and promotion of industry
standards in our target markets, including the Digital Visual Interface and HDMI
specifications, requires us to license some of our intellectual property for
free or under specified terms and conditions, which may make it easier for
others to compete with us in such markets.
A key element
of our business strategy includes participation in working groups to establish
industry standards in our target markets, promote and enhance specifications and
develop and market products based on such specifications and future
enhancements. We are a promoter of the Digital Display Working Group (DDWG),
which published and promotes the DVI specification and a founder in the working
group that develops and promotes the HDMI specification. In connection with our
participation in such working groups:
Accordingly,
certain companies that implement the DVI and HDMI specifications in their
products can use specific elements of our intellectual property to compete with
us, in certain cases for free. Although in the case of the HDMI specification,
there are annual fees and royalties associated with the adopters’ agreements,
there can be no assurance that such annual fees and royalties will adequately
compensate us for having to license our intellectual property. Fees and
royalties received during the early years of adoption of HDMI will be used to
cover costs we incur to promote the HDMI standard and to develop and perform
interoperability tests; in addition, after an initial period during which we
received all of the royalties associated with HDMI adopters’ agreements, in
2007, the HDMI founders reallocated the royalties to reflect each founder’s
relative contribution of intellectual property to the HDMI specification. Our
subsidiary no longer recognizes 100% of the HDMI adopter royalty
revenues.
We intend to
promote and continue to be involved and actively participate in other standard
setting initiatives. For example, we also recently joined the Serial Port Memory
Technology Working Group (SPMTWG) to develop and promote a new memory
technology. Accordingly, we may license additional elements of our
intellectual property to others for use in implementing, developing, promoting
or adopting standards in our target markets, in certain circumstances at little
or no cost. This may make it easier for others to compete with us in such
markets. In addition, even if we receive license fees and/or royalties in
connection with the licensing of our intellectual property, there can be no
assurance that such license fees and/or royalties will adequately compensate us
for having to license our intellectual property.
Our
success depends in part on our relationships with strategic partners and use of
technologies
We have
entered into and expect to continue to enter into strategic partnerships with
third parties. Negotiating and performing under these strategic
partnerships involves significant time and expense; we may not realize
anticipated increases in revenue, standards adoption or cost savings; and these
strategic partnerships may make it easier for the third parties to compete with
us; any of which may have a negative effect our business and results of
operations.
Strategic
partnerships that we enter into with third parties may not result in the
anticipated results. For example, in February 2007, we entered into a
licensing agreement with Sunplus Technology Co., Ltd. (Sunplus), which granted
us the rights to use and further develop advanced IP technology. Previously, we
believed that the IP licensed under this agreement enhanced our ability to
develop DTV technology and other related consumer product offerings. Based on
the Company’s product strategy as of October 2009, we realized the IP obtained
through the Sunplus agreement did not align with our product roadmap and during
October 2009, we decided to write off our investment in Sunplus IP. This
decision was prompted by a change in our product strategy due to market place
and related competitive dynamics. Please also refer to Note 12 in our
consolidated financial statements.
Our
business may be impacted as a result of the adoption of competing standards and
technologies by the broader market
The success
of our business has been significantly related to our participation
in standard setting organizations. Specifically, HDMI related revenues
amounted to more than 75% of our total revenues for 2009. From
time to time, competing standards have been established which negatively
impact the success of existing standards or jeopardize the creation of a new
standard. DisplayPort is an example of a competing standard on a different
technology base which has created an alternative high definition connectivity
methodology in the PC space. This standard has been adopted by several large PC
manufactures. While currently not as widely recognized as the HDMI standard,
DisplayPort does represent a viable alternative to the HDMI standard. If
DisplayPort should gain broader adoption, our HDMI business could be negatively
impacted and our revenues could be reduced.
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Our business is
dependent on the continued adoption and widespread implementation of
the HDMI specification.>
Our success is largely dependent
upon the continued adoption and widespread implementation of the HDMI
specification. More than 75% of our revenue is derived from the sale of HDMI
enabled products and the licensing of our HDMI technology. Our leadership in the
market for HDMI-enabled products and intellectual property has been based on our
ability to introduce first-to-market semiconductor and IP solutions to our
customers and to continue to innovate within the standard. Therefore, our
inability to be first to market with our HDMI enabled products and intellectual
property or to continue to drive innovation in the HDMI specification could have
an adverse impact on our business going forward. In addition, the establishment
and adoption by the markets we sell into of a competing digital
interconnect technology could have an adverse impact on our ability to sell our
products and license our intellectual property and therefore our revenues and
business.
We also derive revenue from the
license fees and royalties paid by the adopters of the HDMI technology. Any
development that has the effect of lowering the number of adopters of the HDMI
standard will negatively impact these license fees and royalties. Also, when the
HDMI consortium was first formed, we received 100% of the royalties collected
from HDMI adopters. During 2007, at a founders meeting, the founders decided to
share the HDMI adopter’s royalty revenues among the various founders, such that
we no longer receive all of the royalties. The allocation of license fees and
royalty revenue among the HDMI founders is an issue that is reviewed and
discussed by the founders from time to time. There can be no assurance that
going forward we will continue to receive the share of HDMI license fees and
royalties that we currently receive. If our share of these license fees and
royalties is reduced, this decision will have a negative impact on our
revenues.
Our
success depends on managing our relationship with Intel.
Intel has a
dominant role in many of the markets in which we compete, such as PC and storage
and is a growing presence in the CE market. We have a multi-faceted relationship
with Intel that is complex and requires significant management attention,
including:
Our
cooperation and competition with Intel can lead to positive benefits, if managed
effectively. If our relationship with Intel is not managed effectively, it could
seriously harm our business, negatively affect our revenue and increase our
operating expenses.
New
Releases of Microsoft Windows® and Apple Mac OS® operating systems may render
our chips inoperable
ICs targeted
to PC, laptop, or netbook designs (whether running Microsoft Windows ®, Apple
Mac OS® or Linux operating systems) often require device driver software to
operate. This software is difficult to produce and requires various
certifications such as Microsoft’s Windows Hardware Quality Labs (WHQL) before
being released. Each new revision of an operating system may require
a new software driver and associated testing/certification. Failure
to produce this software can have a negative impact on our relation with
Microsoft and/or Apple and may damage our reputation as a quality supplier of
SATA and HDMI products in the eyes of end consumers.
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26 -
We
have granted Intel rights with respect to our intellectual property, which could
allow Intel to develop products that compete with ours or otherwise reduce the
value of our intellectual property.
We entered
into a patent cross-license agreement with Intel in which each of us granted the
other a license to use the patents filed by the grantor prior to a specified
date, except for identified types of products. We believe that the scope of our
license to Intel excludes our current products and anticipated future products.
Intel could, however, exercise its rights under this agreement to use our
patents to develop and market other products that compete with ours, without
payment to us. Additionally, Intel’s rights to our patents could reduce the
value of our patents to any third-party who otherwise might be interested in
acquiring rights to use our patents in such products. Finally, Intel could
endorse competing products, including a competing digital interface, or develop
its own proprietary digital interface. Any of these actions could substantially
harm our business and results of operations.
We
may become engaged in additional intellectual property litigation that could be
time-consuming, may be expensive to prosecute or defend and could adversely
affect our ability to sell our product.
In recent
years, there has been significant litigation in the United States and in other
jurisdictions involving patents and other intellectual property rights. This
litigation is particularly prevalent in the semiconductor industry, in which a
number of companies aggressively use their patent portfolios to bring
infringement claims. In addition, in recent years, there has been an increase in
the filing of so-called “nuisance suits,” alleging infringement of intellectual
property rights. These claims may be asserted as counterclaims in response to
claims made by a company alleging infringement of intellectual property rights.
These suits pressure defendants into entering settlement arrangements to quickly
dispose of such suits, regardless of merit. In addition, as is common in the
semiconductor industry, from time to time we have been notified that we may be
infringing certain patents or other intellectual property rights of others.
Responding to such claims, regardless of their merit, can be time consuming,
result in costly litigation, divert management’s attention and resources and
cause us to incur significant expenses. As each claim is evaluated, we may
consider the desirability of entering into settlement or licensing agreements.
No assurance can be given that settlements will occur or that licenses can be
obtained on acceptable terms or that litigation will not occur. In the event
there is a temporary or permanent injunction entered prohibiting us from
marketing or selling certain of our products, or a successful claim of
infringement against us requiring us to pay damages or royalties to a
third-party and we fail to develop or license a substitute technology, our
business, results of operations or financial condition could be materially
adversely affected.
Any potential
intellectual property litigation against us or in which we become involved may
be expensive and time-consuming and may divert our resources and the attention
of our executives. It could also force us to do one or more of the
following:
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.
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We
have entered into and may again be required to enter into, patent or other
intellectual property cross-licenses.
Many
companies have significant patent portfolios or key specific patents, or other
intellectual property in areas in which we compete. Many of these companies
appear to have policies of imposing cross-licenses on other participants in
their markets, which may include areas in which we compete. As a result, we have
been required, either under pressure of litigation or by significant vendors or
customers, to enter into cross licenses or non-assertion agreements relating to
patents or other intellectual property. This permits the cross-licensee, or
beneficiary of a non-assertion agreement, to use certain or all of our patents
and/or certain other intellectual property for free to compete with
us.
We indemnify certain of our licensing customers against infringement. We indemnify
certain of our licensing agreements customers for any expenses or liabilities
resulting from third-party claims of infringements of patent, trademark, trade
secret, or copyright rights by the technology we license. Certain of these
indemnification provisions are perpetual from execution of the agreement and, in
some instances; the maximum amount of potential future indemnification is not
limited. To date, we have not paid any such claims or been required to defend
any lawsuits with respect to any claim. In the event that we were required to
defend any lawsuits with respect to our indemnification obligations, or to pay
any claim, our results of operations could be materially adversely
affected.
We
must attract and retain qualified personnel to be successful and competition for
qualified personnel is increasing in our market.
Our success
depends to a significant extent upon the continued contributions of our key
management, technical and sales personnel, many of who would be difficult to
replace. The loss of one or more of these employees could harm our business.
Although we have entered into a limited number of employment contracts with
certain executive officers, we generally do not have employment contracts with
our key employees. Our success also depends on our ability to identify, attract
and retain qualified technical, sales, marketing, finance and managerial
personnel. Competition for qualified personnel is particularly intense in our
industry and in our location. This makes it difficult to retain our key
personnel and to recruit highly qualified personnel. We have experienced and may
continue to experience, difficulty in hiring and retaining candidates with
appropriate qualifications. To be successful, we need to hire candidates with
appropriate qualifications and retain our key executives and employees.
Replacing departing executive officers and key employees can involve
organizational disruption and uncertain timing.
The
volatility of our stock price has had an impact on our ability to offer
competitive equity-based incentives to current and prospective employees,
thereby affecting our ability to attract and retain highly qualified technical
personnel. If these adverse conditions continue, we may not be able to hire or
retain highly qualified employees in the future and this could harm our
business. In addition, regulations adopted by The NASDAQ Stock Market requiring
shareholder approval for all stock option plans, as well as regulations adopted
by the New York Stock Exchange prohibiting NYSE member organizations from giving
a proxy to vote on equity compensation plans unless the beneficial owner of the
shares has given voting instructions, could make it more difficult for us to
grant options to employees in the future. In addition, FASB ASC No. 718-10,
Stock Compensation,
requires us to record compensation expense for options granted to employees. To
the extent that new regulations make it more difficult or expensive to grant
options to employees, we may incur increased cash compensation costs or find it
difficult to attract, retain and motivate employees, either of which could harm
our business.
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If
our internal control over financial reporting or disclosure controls and
procedures are not effective, there may be errors in our financial statements
that could require restatement or our filings may not be timely and investors
may lose confidence in our reported financial information, which could lead to a
decline in our stock price. While we have not identified any material
weaknesses in the past three years, we cannot assure you that a material
weakness will not be identified in the future.
Section 404 of
the Sarbanes-Oxley Act of 2002 requires us to evaluate the effectiveness of our
internal control over financial reporting as of the end of each year and to
include a management report assessing the effectiveness of our internal control
over financial reporting in each Annual Report on Form 10-K.
Section 404 also requires our independent registered public accounting firm
to report on, our internal control over financial reporting.
Our
management, including our Chief Executive Officer
and Chief Accounting Officer, does not expect that our internal
control over financial reporting will prevent all error and all fraud. A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be met.
Further, the design of a control system must reflect the fact that there are
resource constraints and the benefits of controls must be considered relative to
their costs. Controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
controls. Over time, controls may become inadequate because changes in
conditions or deterioration in the degree of compliance with policies or
procedures may occur. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be
detected.
As a result,
we cannot assure you that significant deficiencies or material weaknesses in our
internal control over financial reporting will not be identified in the future.
Any failure to maintain or implement required new or improved controls, or any
difficulties we encounter in their implementation, could result in significant
deficiencies or material weaknesses, cause us to fail to timely meet our
periodic reporting obligations, or result in material misstatements in our
financial statements. Any such failure could also adversely affect the results
of periodic management evaluations and annual auditor attestation reports
regarding disclosure controls and the effectiveness of our internal control over
financial reporting required under Section 404 of the Sarbanes-Oxley Act of
2002 and the rules promulgated thereunder. The existence of a material weakness
could result in errors in our financial statements that could result in a
restatement of financial statements, cause us to fail to timely meet our
reporting obligations and cause investors to lose confidence in our reported
financial information, leading to a decline in our stock price.
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29 -
We
have experienced transitions in our management team, our board of directors in
the past and may continue to do so in the future, which could result in
disruptions in our operations and require additional costs.
We have
experienced a number of transitions with respect to our board of directors and
executive officers in recent quarters, including the following:
Any future
transitions may result in disruptions in our operations and require additional
costs.
We
have been and may continue to become the target of securities class action suits
and derivative suits which could result in substantial costs and divert
management attention and resources.
Securities
class action suits and derivative suits are often brought against companies,
particularly technology companies, following periods of volatility in the market
price of their securities. Defending against these suits, even if meritless, can
result in substantial costs to us and could divert the attention of our
management.
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Our
operations and the operations of our significant customers, third-party wafer
foundries and third-party assembly and test subcontractors are located in are as
susceptible to natural disasters.
Our
operations are headquartered in the San Francisco Bay Area, which is
susceptible to earthquakes. TSMC, the outside foundry that produces the majority
of our semiconductor products, is located in Taiwan. Siliconware
Precision Industries Co. Ltd., or SPIL, Advanced Semiconductor Engineering, or
ASE, and Amkor Taiwan are subcontractors located in Taiwan that assemble and
test our semiconductor products. For the years ended December 31, 2009,
2008 and 2007 customers and distributors located in Japan generated 27.1%, 24.0%
and 35.3%,of our revenue, respectively, and customers and distributors located
in Taiwan generated 25.2%, 19.8% and 16.7% of our revenue, respectively. Both
Taiwan and Japan are susceptible to earthquakes, typhoons and other natural
disasters.
Our business,
including a potential reduction of revenues, would be negatively affected
if any of the following occurred:
Terrorist
attacks or war could lead to economic instability and adversely affect our
operations, results of operations and stock price.
The United
States has taken and continues to take, military action against terrorism and
currently has troops in Iraq and in Afghanistan. In addition, the current
tensions regarding nuclear arms in North Korea and Iran could escalate into
armed hostilities or war. Acts of terrorism or armed hostilities may disrupt or
result in instability in the general economy and financial markets and in
consumer demand for the OEM’s products that incorporate our products.
Disruptions and instability in the general economy could reduce demand for our
products or disrupt the operations of our customers, suppliers, distributors and
contractors, many of whom are located in Asia, which would in turn adversely
affect our operations and results of operations. Disruptions and instability in
financial markets could adversely affect our stock price. Armed hostilities or
war in South Korea could disrupt the operations of the research and development
contractors we utilize there, which would adversely affect our research and
development capabilities and ability to timely develop and introduce new
products and product improvements.
Changes
in environmental rules and regulations could increase our costs and reduce our
revenue.
Several
jurisdictions have implemented rules that would require that certain products,
including semiconductors, be made “green,” which means that the products need to
be lead free and be free of certain banned substances. All of our products are
available to customers in a green format. While we believe that we are generally
in compliance with existing regulations, such environmental regulations are
subject to change and the jurisdictions may impose additional regulations which
could require us to incur costs to develop replacement products. These changes
will require us to incur cost or may take time or may not always be economically
or technically feasible, or may require disposal of non-compliant inventory. In
addition, any requirement to dispose or abate previously sold products would
require us to incur the costs of setting up and implementing such a
program.
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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:
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:
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.
Not
applicable.
Our principal
operating facility, consisting of approximately 126,686 square feet of
space in Sunnyvale, California, is leased through July 31, 2011, of which
we ceased to use 33,766 square feet in 2010. We have approximately
25,981 square feet of space in Irvine, California, which is leased through
November 30, 2012, which we creased to use in 2009 and 29,404 square
feet of space in two locations in Shanghai, China, which are leased through
April 30, 2010 and June 30, 2010. We also have approximately 5,603 square
feet of space in Germany which is leased through December 31, 2009. 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.
We also lease
facilities in Japan, Korea, and Taiwan. We believe that our existing
properties are in good condition and suitable for the conduct of our
business.
Information
with respect to this item may be found in Note 7 to the Consolidated
Financial Statements in Item 8, which is incorporated herein by
reference.
Not
applicable.
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities>
Our common
shares have been traded on the NASDAQ Stock Market since our initial public
offering on October 6, 1999. Our common shares trade under the symbol
“SIMG”. Our shares are not listed on any other markets or exchanges. The
following table shows the high and low closing prices for our common shares as
reported by the NASDAQ Stock Market:
As
January 29, 2010, we had approximately 89 holders of record of our common
stock and the closing price of our common stock was $2.41. 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.
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.
In February
2007, our Board of Directors authorized a stock repurchase program under which
we were authorized to purchase up to $100.0 million of common stock, on the open
market, or in negotiated or block transactions, over a 36 month period. As of
December 31, 2007, we had repurchased a total of 5.0 million shares at a total
cost of $38.1 million. In February 2008, our Board of Directors authorized an
additional $100.0 million stock repurchase program, under which shares may be
repurchased over a period of three years, to commence following completion of
our accelerated stock repurchase plan (“ASR”) (see below). Purchases under this
program may be increased, decreased or discontinued at any time without prior
notice.
In February
2008, we entered into an ASR with Credit Suisse International (Credit Suisse),
to purchase shares of common stock for an aggregate purchase price of
approximately $62.0 million paid in February 2008. We received
11.5 million shares under the agreement, based on a predetermined price, which
was subject to an adjustment based on the volume weighted average price during
the term of the ASR. In accordance with the ASR agreement, on June 25, 2008, we
chose to settle the arrangement in cash (rather than shares) and made a final
payment of approximately $6.2 million for the purchase of shares. The
ASR terminated on June 30, 2008 with final settlement taking place in July 2008
(“settlement date”). On the settlement date, Credit Suisse returned
approximately $1.0 million based on the volume weighted average share price
during the period. In accordance with the relevant accounting guidance, we
reflected the 11.5 million shares repurchased and the $68.2 million paid to
Credit Suisse as treasury stock and recorded the $1.0 million received as part
of other income in the consolidated statement of income in the second and third
quarters of 2008.
With the
repurchase, we completed our original stock repurchase program announced on
February 2007 and repurchased approximately $5.0 million of our stock under the
new $100.0 million stock repurchase program approved by the Board of Directors
in February 2008.
For
Securities authorized for issuance under equity compensation plans please See
Note 5 of our Notes to Consolidated Financial Statements included in
Item 15(a) of this report.
Item 6. Selected Financial
Data
The
following selected financial data should be read in connection with our
consolidated financial statements and notes thereto and “Management’s 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.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of
Operations>
Overview
Silicon
Image, Inc. is a leading provider of semiconductor and intellectual property
products for the secure storage, distribution and presentation of
high-definition content in home and mobile environments. With a rich
history of technology innovation that includes creating industry standards such
as DVI and HDMI, our solutions facilitate the use of digital content
amongst consumer electronics, personal computer (PC) and storage devices, with
the goal to securely deliver digital content anytime, anywhere and on any
device. Founded in 1995, we are headquartered in Sunnyvale,
California, with regional engineering and sales offices in China, Germany,
Japan, Korea, and Taiwan.
Our vision is
digital content everywhere. Our mission is to be the leader in the innovation,
design, development and implementation of semiconductors and IP solutions for
the secure storage, distribution and presentation of high-definition content in
the home and mobile environments. We are dedicated to the development and
promotion of technologies, standards and products that facilitate the movement
of digital content between and among digital devices across the consumer
electronics (CE), personal computer (PC) and storage markets. We believe 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.
Critical
Accounting Policies
The
preparation of financial statements in conformity with generally accepted
accounting principles 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 persuasive evidence of an arrangement exists, delivery or
performance has occurred, the sales price is fixed or determinable and
collectability is reasonably assured.
Revenue from
products sold directly to end-users, or to distributors that are not entitled to
price concessions and rights of return, is generally recognized when title and
risk of loss has passed to the buyer which typically occurs upon shipment. All
shipping costs are charged to cost of product revenue.
Revenue from
products sold to distributors with agreements allowing for stock
rotations are generally recognized upon shipment. Reserves for
stock rotations are estimated based primarily on historical experience and
provided for at the time of shipment.
For products
sold to distributors with agreements allowing for price concessions and stock
rotation rights/product returns, we recognize revenue based on when the
distributor reports that it has sold the product to its customer. Our
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. Revenue is not recognized upon our shipment of product to the
distributor, since, due to certain forms of price concessions, the sales price
is not substantially fixed or determinable at the time of shipment. Price
concessions are recorded when incurred, which is generally at the time the
distributor sells the product to its customer. Additionally, these distributors
have stock rotation rights permitting them to return products to us, up to a
specified amount for a given period of time. When the distributor reports that
it has sold product to its customer, our sales price to the distributor is
fixed. Once we receive the point of sales reports from a distributor, it has
satisfied all the requirements for revenue recognition with respect to the
product reported as sold and any product returns/stock rotation and price
concession rights that the distributor has under its distributor agreement with
Silicon Image lapsed at that time. Pursuant to our distributor agreements,
older, end-of-life and certain other products are generally sold with no right
of return and are not eligible for price concessions. For these products,
revenue is recognized upon shipment and title transfer assuming all other
revenue recognition criteria are met.
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At the time
of shipment to distributors, we record a trade receivable for the selling price
since there is a legally enforceable right to payment, relieve inventory for the
carrying value of goods shipped since legal title has passed to the distributor
and, until revenue is recognized, record the gross margin in “deferred margin on
sale to distributors,” a component of current liabilities in our consolidated
balance sheets. Deferred margin on the sale to distributor effectively
represents the gross margin on the sale to the distributor. 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
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’ resale
is priced at a discount from 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 range and variability of negotiated price concessions granted to
distributors does not allow us to accurately estimate the portion of the balance
in the deferred margin on the sale to distributors line item 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.
We derive
revenue from license of its internally developed intellectual property (IP). 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. Revenue earned under contracts with our licensees is
classified as licensing revenue. Our license fee arrangements generally include
multiple deliverables and for multiple deliverable arrangements, we follow the
guidance in Financial Accounting Standards Board (FASB) Accounting Standards
Codification No. 605-25-25, Multiple-Element Arrangements
Recognition, previously discussed in Emerging Issues Task Force
(EITF) 00-21, Revenue
Arrangements with Multiple Deliverables, to determine
whether there is more than one unit of accounting. To the extent that the
deliverables are separable into multiple units of accounting, we allocate the
total fee on such arrangements to the individual units of accounting using the
residual method, if objective and reliable evidence of fair value does not exist
for delivered elements. We then recognize revenue for each unit of accounting
depending on the nature of the deliverable(s) comprising the unit of accounting
in accordance with the revenue criteria mentioned above.
The IP
licensing agreements generally include a nonexclusive license for the underlying
IP. Fees under these agreements generally include (a) license fees relating
to our IP, (b) support, typically for one year; and (c) royalties
payable following the sale by our licensees of products incorporating the
licensed technology. The license of our IP has standalone value and can be used
by the licensee without support. Further, objective and reliable evidence of
fair value exists for support. Accordingly, license and support fees are each
treated as separate units of accounting.
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 from a specific customer for us to make an estimate based on available
information from the licensee such as quantities held, manufactured and other
information. These estimates for royalties necessarily involve the application
of management judgment. As a result of our use of estimates, period-to-period
numbers are “trued-up” in the following period to reflect actual units shipped.
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.
For contracts
related to licenses of our technology that involve significant modification,
customization or engineering services, we recognize revenue in accordance the
provisions of FASB ASC No. 605-35-25, Construction-Type and
Production-Type Contracts Recognition, previously discussed in Statement
Of Position (SOP) 81-1, Accounting for Performance
of Construction-Type and
Certain Production-Type Contracts. 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. 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. 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.
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Financial
Instruments
We account
for our investments in debt securities under FASB ASC No. 320-10-25, Investments in Debt and Equity
Securities Recognition, previously discussed in Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments
in Debt and Equity Securities. Management determines the appropriate
classification of such securities at the time of purchase and reevaluates such
classification as of each balance sheet date. The investments are adjusted for
amortization of premiums and discounts to maturity and such amortization is
included in interest income. We adopted the guidance provided by FASB ASC No.
320-10-65, Transition Related
to Recognition and Presentation of Other-Than-Temporary Impairments, previously referred to
as FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments effective April 1, 2009 and use the
guidance therein to assess whether our investments with unrealized loss
positions are other than temporarily 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.
The longer
the duration of our investment securities, the more susceptible they are to
changes in market interest rates and bond yields. As yields increase, those
securities purchased with a lower yield-at-cost show a mark-to-market unrealized
loss. Historically, unrealized losses have been due to changes in interest rates
and bond yields. Due to the high credit quality of such investments,
we expect to realize the full value of all these investments upon maturity or
sale.
The
classification of our investments into cash equivalents and short term
investments is in accordance with FASB ASC No. 305-10-20, Cash and Cash Equivalents
Glossary, previously discussed in SFAS No. 95, Statement of Cash Flows. Cash
equivalents consist of short-term, highly liquid financial instruments with
insignificant interest rate risk that are readily convertible to cash and have
maturities of three months or less from the date of purchase. Short-term
investments consist of taxable commercial paper, United States government agency
obligations, corporate/municipal notes and bonds with high-credit quality and
money market preferred stock. These securities have maturities greater than
three months from the date of purchase.
We believe
all of the financial instruments’ recorded values approximate current fair
values because of their nature and respective durations. The fair value of
marketable securities is determined using quoted market prices for those
securities or similar financial instruments.
Derivative
Instruments
We recognize
derivative instruments as either assets or liabilities and measures those
instruments at fair value. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. We account for derivative instruments in accordance with FASB ASC
No. 815-20-25, Derivatives and
Hedging Recognition, previously discussed in SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. For a derivative instrument
designated as a cash flow hedge, the effective portion of the derivative’s gain
or loss is initially reported as a component of accumulated other comprehensive
income and subsequently reclassified into earnings when the hedged exposure
affects earnings. The ineffective portion of the derivative gain (loss) is
reported in each reporting period in other income (expense) on the Company’s
consolidated statement of operations.
Allowance
for Doubtful Accounts
We review
collectability of accounts receivable on an on-going basis and provide an
allowance for amounts we estimate will not be collectible. During our review, we
consider our historical experience, the age of the receivable balance, the
credit-worthiness of the customer and the reason for the delinquency. Delinquent
account balances are written-off after management has determined that the
likelihood of collection is remote. While we endeavor to accurately estimate the
allowance, we may record unanticipated write-offs in the future.
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Inventories
We record
inventories at the lower of actual cost, determined on a first-in first-out
(FIFO) basis, or market. Actual cost approximates standard cost, adjusted for
variances between standard and actual. Standard costs are determined based on
our estimate of material costs, manufacturing yields, costs to assemble, test
and package our products and allocable indirect costs. We record differences
between standard costs and actual costs as variances. These variances are
analyzed and are either included on the consolidated balance sheet or the
consolidated statement of operations in order to state the inventories at actual
costs on a FIFO basis. Standard costs are evaluated at least
annually.
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 management’s
forecast of customer demand. Customer demand is dependent on many factors and
requires us to use significant judgment in our forecasting process. We 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 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 revenue. 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.
Goodwill,
Intangible and Long-lived Assets
Goodwill is
recorded as the difference, if any, between the aggregate consideration paid for
a business acquisition and the fair value of the tangible and intangible assets
acquired.
We
periodically review the carrying value of intangible assets not subject to
amortization, including goodwill, to determine whether impairment may exist.
FASB ASC No. 350-20-35, Subsequent Measurement of
Goodwill, and FASB ASC No. 350-30-35, Subsequent Measurement of General
Intangibles Other Than Goodwill (“ASC 350-30-35”), whose provisions were
previously discussed in SFAS No. 142, Goodwill and Other Intangible
Assets, require that goodwill be assessed annually for impairment using
fair value measurement techniques. Specifically, goodwill impairment is
determined using a two-step process. The first step of the goodwill impairment
test is used to identify potential impairment by comparing the fair value of a
reporting unit with its carrying amount, including goodwill. We have
determined based on the criteria of FASB ASC No. 280-10-50, Segment Reporting Disclosure,
previously discussed in SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, that we have one reporting unit. If
the carrying amount of a reporting unit exceeds its fair value, the second step
of the goodwill impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test compares the
implied fair value of the reporting unit’s goodwill with the carrying amount of
that goodwill. We generally determine the fair value of the reporting unit using
generally accepted valuation methodology which considers market capitalization
and market premiums. If the carrying amount of the reporting unit’s goodwill
exceeds the implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
For certain
long-lived assets, primarily fixed assets and identifiable intangible assets,
for example the IP we acquired from Sunplus (refer to Note 12 below), we are
required to estimate the useful life of its asset and recognize the cost as an
expense over the estimated useful life. We use the straight-line method to
depreciate long-lived assets. We evaluate the recoverability of our long-lived
assets in accordance with FASB ASC No. 360-10-35, Subsequent Measurement of Property,
Plant and Equipment, paragraphs 15-49, Impairment or Disposal of
Long-Lived Assets, previously discussed in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived
Assets. Whenever events or circumstances indicate that the carrying
amount of long-lived assets may not be recoverable, we compare the carrying
amount of long-lived assets to our projection of future undiscounted cash flows
attributable to such assets. In the event that the carrying amount exceeds the
future undiscounted cash flows, we record an impairment charge to our statement
of operations equal to the excess of the carrying amount over the asset’s fair
value. Predicting future cash flows attributable to a particular asset is
difficult and requires the use of significant judgment.
We amortize
purchased intangible assets over their estimated useful lives unless these lives
are determined to be indefinite. Significant assumptions are inherent and highly
subjective in this process.
We assign the
following useful lives to its fixed assets — three years for computers and
software, one to five years for equipment and five to seven years for furniture
and fixtures. Leasehold improvements and assets held under capital leases 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. Depreciation expense
was $9.0 million, $10.3 million and $9.5 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
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Income
Taxes
We account
for income taxes in accordance with the FASB ASC No. 740 (“ASC 740”), previously
discussed in SFAS No. 109, Accounting for Income
Taxes.
We make
certain estimates and judgments in determining income tax expense for financial
statement purposes. These estimates and judgments occur in the calculation of
tax credits, tax benefits and deductions and in the calculation of certain tax
assets and liabilities, which arise from differences in the timing of
recognition of revenue and expense for tax and financial statement purposes.
Significant changes to these estimates may result in an increase or decrease to
our tax provision in the subsequent period when such a change in estimate
occurs.
We use an
asset and liability approach, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in our financial statements, but have not been reflected in our
taxable income. In general, a valuation allowance is established to reduce
deferred tax assets to their estimated realizable value, if based on the weight
of available evidence, it is more likely than not that some portion, or all, of
the deferred tax asset will not be realized. We evaluate the realization of the
deferred tax assets quarterly and will continue to assess the need for valuation
allowances. In accordance with ASC 740, we determine whether a tax position is
more likely than not to be sustained upon examination, including resolution of
any related appeals or litigation processes, based on the technical merits of
the position. The provisions under ASC 740 were previously discussed in FIN 48,
Accounting for Uncertainty in
Income Taxes — an Interpretation of FASB Statement
No. 109.
Legal
Matters
We are
subject to various legal proceedings and claims, either asserted or unasserted.
We evaluate, among other factors, the degree of probability of an unfavorable
outcome and reasonably estimate the amount of the loss. Significant judgment is
required in both the determination of the probability and as to whether an
exposure can be reasonably estimated. When we determine that it is probable that
a loss has been incurred, the effect is recorded promptly in the consolidated
financial statements. Although the outcome of these claims cannot be predicted
with certainty, we do not believe that any of the existing legal matters will
have a material adverse effect on our financial condition and results of
operations. However, significant changes in legal proceedings and claims or the
factors considered in the evaluation of those matters could have a material
adverse effect on our business, financial condition and results of
operations.
Guarantees,
Indemnifications and Warranty Liabilities
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.
At the time
of revenue recognition, we provide an accrual for estimated costs (included in
accrued liabilities in the accompanying consolidated balance sheets) to be
incurred pursuant to our warranty obligation. Our estimate is based primarily on
historical experience.
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Restructuring
Expenses
We record
provisions for workforce reduction costs and exit costs when they are probable
and estimable. Severance paid under ongoing benefit arrangements is recorded in
accordance with FASB ASC No. 712-10-25, Nonretirement Postemployment
Benefits Recognition, previously discussed in SFAS No. 112, Employers’ Accounting for
Postemployment Benefits. One-time termination benefits and contract
settlement and lease costs are recorded in accordance with FASB ASC No.
420-10-25, Exit or Disposal
Cost Obligations Recognition, previously discussed in SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. At each reporting date, we evaluate our
accruals related to workforce reduction charges, contract settlement and lease
costs and plant and equipment write downs to ensure that these accruals are
still appropriate. Restructuring expense accruals related to future lease
commitments on exited facilities included estimates, primarily related to
sublease income over the lease terms and other costs for vacated properties.
Increases or decreases to the accruals for changes in estimates are classified
as restructuring expenses in the consolidated statement of
operations.
Adjustments
to workforce reduction accruals may be required when employees previously
identified for separation do not receive severance payments because they are no
longer employed by us or were redeployed due to circumstances not foreseen when
the original plan was initiated. In these cases, we reverse any related accrual
to earnings when it is determined it is no longer required. Alternatively, in
certain circumstances, we may determine that certain accruals are insufficient
as new events occur or as additional information is obtained. In these cases, we
would increase the applicable existing accrual with the offset recorded against
earnings. Increases or decreases to the accruals for changes in estimates are
classified as restructuring expenses in the consolidated statement of
operations.
Commitments,
Contingencies and Concentrations
Historically,
a relatively small number of customers and distributors have generated a
significant portion of our revenue. For instance, our top five customers,
including distributors, generated 44.2%, 55.1% and 57.7% of our revenue in 2009,
2008 and 2007, respectively. The percentage of revenue generated through
distributors tends to be significant, since many OEMs rely upon third-party
manufacturers or distributors to provide purchasing and inventory management
functions. In 2009, 59.9% of our revenue was generated through distributors,
compared to 60.2% in 2008 and 2007. Microtek comprised 11.9%, 11.8% and 14.2% of
our revenue in 2009, 2008 and 2007, respectively. Weikeng Industrial generated
10.3% and 11.5% of our revenue in 2009 and 2008,
respectively. Revenue from World Peace Inc. comprised 14.6% and 13.6%
of our revenue in 2008 and 2007, respectively. Innotech Corporation
comprised 10.5% and 15.6% of our revenue in 2008 and 2007,
respectively.
We have been named as defendants in a number of judicial and administrative proceedings incidental to its business and may be named again from time to time, 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 our results of operations, financial position or cash flows. A significant
portion of our revenue is generated from products sold overseas. Sales
(including licensing) to customers in Asia, including distributors, generated
67.3%, 71.2% and 71.7% of our revenue in 2009, 2008 and 2007, respectively. The
reason for our geographical concentration in Asia is that most of our products
are incorporated into flat panel displays, graphic cards and motherboards, the
majority of which are manufactured in Asia. The percentage of our revenue
derived from any country is dependent upon where our end customers choose to
manufacture their products. Accordingly, variability in our geographic revenue
is not necessarily indicative of any geographic trends, but rather is the
combined effect of new design wins and changes in customer manufacturing
locations. Primarily all revenue to date has been denominated in
U.S. dollars.
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Recent
Accounting Pronouncements
In June 2009,
the Financial Accounting Standards Board (“FASB”) issued Accounting Standard
Codification (“ASC”) No. 105, Generally Accepted Accounting
Principles (“GAAP”) (“ASC 105” or “FASB Codification”), previously
referred to as Statement of Financial Accounting Standard (“SFAS”)
No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles - a replacement of FASB Statement No 162
(“SFAS 168”). The effective date for
use of the FASB Codification is for interim and annual periods ending after
September 15, 2009. Companies should account for the adoption of the
guidance on a prospective basis. Effective July 1, 2009, the Company adopted the
FASB Codification and its adoption did not have a material impact on its
consolidated financial statements. The Company has appropriately updated its
disclosures with the appropriate FASB Codification references for the year
ended December 31, 2009. As such, all the notes to the condensed
consolidated financial statements as well as the critical accounting policies in
the Management’s Discussion and Analysis section have been updated with the
appropriate FASB Codification references.
In December
2007, the FASB issued ASC No. 805, Business Combinations (“ASC
805”), previously referred to as SFAS 141 (revised 2007), Business Combinations. ASC 805 will
significantly change current practices regarding business combinations. Among
the more significant changes, ASC 805 expands the definition of a business and a
business combination; requires the acquirer to recognize the assets acquired,
liabilities assumed and noncontrolling interests (including goodwill), measured
at fair value at the acquisition date; requires acquisition-related expenses and
restructuring costs to be recognized separately from the business combination;
and requires in-process research and development to be capitalized at fair value
as an indefinite-lived intangible asset. ASC 805 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. The
Company adopted the provisions of ASC 805 on January 1, 2009 and the
adoption did not have a significant impact on the Company’s consolidated
financial statements. However, if the Company enters into material business
combinations in the future, a transaction may significantly impact the Company’s
consolidated financial statements as compared to the Company’s previous
acquisitions accounted for under prior GAAP requirements, due to the changes
described above.
In December
2007, the FASB issued ASC No. 810-10-65, Transition Related to Noncontrolling
Interests in Consolidated Financial Statement (“ASC 810-10-65”),
previously referred to as SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements — an amendment of Accounting Research Bulletin
(“ARB”) No. 51. ASC 810-10-65 is effective for financial statements
issued for fiscal years beginning after December 15, 2008. The Company adopted
provisions under ASC 810-10-65 on January 1, 2009. The Company
does not currently have any non-controlling interests in its subsidiaries, and
accordingly the adoption of this standard did not have a material impact on the
Company’s consolidated financial statements.
In March
2008, the FASB issued ASC No. 815-10-65, Transition Related to Disclosures
about Derivative Instruments and Hedging Activities (“ASC 815-10-65”),
previously referred to as SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement
No. 133, which requires additional disclosures about the objectives
of using derivative instruments, the method by which the derivative instruments
and related hedged items are accounted for under ASC No. 815, Derivatives and Hedging (“ASC
815”), previously referred to as FASB Statement No.133 and its related
interpretations, and the effect of derivative instruments and related hedged
items on financial position, financial performance, and cash flows. ASC 815 also
requires disclosure of the fair values of derivative instruments and their gains
and losses in a tabular format. Per ASC 815-10-65, the additional disclosures
about derivatives and hedging activities mentioned above are required for
financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early adoption
encouraged. The Company adopted the provisions mentioned above
effective January 1, 2009 and its adoption did not have a material
impact on its consolidated financial statements.
In April
2009, the FASB issued ASC No. 320-10-65, Transition Related to Recognition
and Presentation of Other-Than-Temporary Impairments (“ASC 320-10-65”),
previously referred to as FASB Staff Position (“FSP”) FAS 115-2 and
FAS 124-2, Recognition and
Presentation of Other-Than-Temporary Impairments. ASC 320-10-65 amends
the other-than-temporary impairment guidance for debt securities to make the
guidance more operational and to improve the presentation and disclosure of
other-than-temporary impairments in the financial statements. The most
significant change ASC 320-10-65 brings is a revision to the amount of
other-than-temporary loss of a debt security recorded in earnings. ASC 320-10-65
is effective for interim and annual reporting periods ending after June 15,
2009. The Company adopted this FSP effective April 1, 2009 and the Company’s
adoption did not have a material impact on its consolidated financial
statements.
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In April 2009, the FASB
issued ASC No. 820-10-35, Fair
Value Measurements and Disclosures – Subsequent Measurement (“ASC
820-10-35”), which discusses the provisions related to the determination
of fair value when the volume and level of activity for the asset or liability
have significantly decreased, which was previously discussed in FSP SFAS 157-4,
Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly. ASC
820-10-35 provides additional guidance for estimating fair value when the volume
and level of activity for the asset or liability have significantly decreased.
ASC 820-10-35 also includes guidance on identifying circumstances that indicate
a transaction is not orderly. ASC 820-10-35 emphasizes that even if there has
been a significant decrease in the volume and level of activity for the asset or
liability and regardless of the valuation technique(s) used, the objective of a
fair value measurement remains the same. Fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction (that is, not a forced liquidation or distressed sale) between
market participants at the measurement date under current market conditions. In
accordance with FASB ASC No. 820-10-65, Transition Related to FASB Statement
No. 157-4,” the above provisions are effective for interim and annual
reporting periods ending after June 15, 2009, and is applied
prospectively. The Company adopted the provisions relating to
determining the fair value when the volume and level of activity for the asset
or liability have significantly decreased and identifying transactions that are
not orderly under ASC 820-10-35 effective April 1, 2009 and its
adoption did not have a material impact on its consolidated financial
statements.
In April
2009, the FASB issued ASC No. 805-10-35, Business Combinations Subsequent
Measurement (“ASC 805-10-35”), which discusses the accounting for assets
acquired and liabilities assumed in a business combination that arise from
contingencies, which was previously discussed in FSP FAS 141(R)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies. ASC 805-10-35 addresses application issues on initial
recognition and measurement, subsequent measurement and accounting, and
disclosure of assets and liabilities arising from contingencies in a business
combination. The provisions under ASC 805-10-35 relating to assets acquired and
liabilities assumed in a business combination that arise from contingencies are
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. The Company adopted the provisions of ASC 805 on
January 1, 2009 and the adoption did not have a significant impact on the
Company’s consolidated financial statements. However, if the Company enters into
material business combinations in the future, a transaction may significantly
impact the Company’s consolidated financial statements as compared to the
Company’s previous acquisitions, accounted for under prior GAAP requirements,
due to the changes described above.
In May 2009,
the FASB issued ASC No. 855, Subsequent Events (“ASC
855”), previously referred to as SFAS No. 165, Subsequent Events. ASC 855
should be applied to the accounting for and disclosure of subsequent events.
This Statement does not apply to subsequent events or transactions that are
within the scope of other applicable GAAP that provide different guidance on the
accounting treatment for subsequent events or transactions. ASC 855
would apply to both interim financial statements and annual financial
statements. The objective of ASC 855 is to establish general standards of
accounting for and disclosures of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In
particular, this Statement sets forth: 1) The period after the balance sheet
date during which management of a reporting entity should evaluate events or
transactions that may occur for potential recognition or disclosure in the
financial statements; 2) The circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date in its
financial statements; and, 3) The disclosures that an entity should make about
events or transactions that occurred after the balance sheet date. ASC 855 is
effective for interim or annual financial periods ending after June 15, 2009.
The Company adopted this standard effective April 1, 2009 and the Company’s
adoption did not have a material impact on its consolidated financial
statements.
In October
2009, the FASB issued Accounting Standard Update No. 2009-13 on Topic 605, Revenue Recognition– Multiple
Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues Task
Force. The objective of this Update is to address the accounting for
multiple-deliverable arrangements to enable vendors to account for products or
services (deliverables) separately rather than as a combined unit. Vendors often
provide multiple products or services to their customers. Those deliverables
often are provided at different points in time or over different time periods.
This Update provides amendments to the criteria in Subtopic 605-25 for
separating consideration in multiple-deliverable arrangements. The amendments in
this Update establish a selling price hierarchy for determining the selling
price of a deliverable. The selling price used for each deliverable will be
based on vendor specific objective evidence if available, third-party evidence
if vendor-specific objective evidence is not available, or estimated selling
price if neither vendor specific objective evidence nor third-party evidence is
available. The amendments in this Update also will replace the term fair value
in the revenue allocation guidance with selling price to clarify that the
allocation of revenue is based on entity-specific assumptions rather than
assumptions of a marketplace participant. This update is effective for fiscal
years beginning on or after June 15, 2010. The Company is currently
evaluating the impact of this new accounting update on its consolidated
financial statements.
In November
2009, FASB issued Accounting Standard Update No. 2009-14 on Topic 985, Certain Revenue Arrangements That
Include Software Elements, previously included in American Iinstitute of
Certified Public Accountants SOP No. 97-2, Software Revenue
Recognition. Topic 985 focuses on determining which
arrangements are within the scope of the software revenue guidance and which are
not. This topic removes tangible products from the scope of the software revenue
guidance if the products contain
both software and nonsoftware components that function together to deliver a
product’s essential functionality and provides guidance on determining whether
software deliverables in an arrangement that includes a tangible product are
within the scope of the software revenue guidance. This update is effective for
fiscal years beginning on or after June 15, 2010. The Company is
currently evaluating the impact of this new accounting update on its
consolidated financial statements.
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Annual
Results of Operations
Revenue by
product line was as follows:
Revenue (including development, licensing and royalty revenues (collectively, “licensing revenue”), by product line):
Total revenue
for 2009 was $150.6 million and represented a decline of 45.1% from 2008
levels. Revenue from all our product lines in 2009 decreased when compared to
revenues generated in 2008. Revenues in 2009 from Consumer Electronics (“CE”),
Personal Computers (“PC”), storage and licensing decreased by 38.9%, 77.8%,
55.3% and 32.3%, respectively, when compared to the revenues generated in these
product lines in 2008. Revenues from our product lines decreased by $110.5
million or 47.4% from $233.2 million in 2008 to $122.7 million in 2009. Product
shipments in 2009 decreased by approximately 31.1% and average selling
price declined by approximately 24.8% when compared to the shipments and
average selling prices in 2008, primarily due to the ongoing global recession,
increased competition, product mix changes in the DTV market and our ongoing
product transition as customers transition from HDMI receivers to more cost
effective Port Processors. Another factor that caused the unit shipments
to decrease from fiscal year 2008 to 2009 was the HDMI and SATA integration into
PC chip sets.
We also
experienced significant declines in our licensing revenues for the year ended
December 31, 2009 as compared to the licensing revenues generated in 2008. Our
licensing activity is complementary to our product sales and it helps us to
monetize our intellectual property and accelerate market adoption curves
associated with our technology. Most of the intellectual property we license
includes a field of use restriction that prevents the licensee from building
products that directly compete with ours in those market segments we have chosen
to pursue. Revenue from licensing accounted for 18.5%, 15.0% and 15.0% of our
total revenues for the years ended December 31, 2009, 2008 and 2007,
respectively. The decrease in licensing revenues in 2009 as compared to 2008 was
due primarily to the overall softening of demand for consumer products as a
result of the deterioration of the global economic climate.
During the
first quarter of fiscal year 2010, we expect our revenues to decrease
sequentially.
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From time to
time, we enter into “direct
agreements” for certain of our products for certain identified end
customers with our distributors who previously had the rights for price
concessions and product returns. The “direct agreements” convert
the previously existing distributor relationship for these products and
identified customers into a direct customer whereby the distributor does not
have price protection or return rights. Revenue for such sales is recorded at
the time of shipment. For the years ended December 31, 2009, December
31, 2008 and December 31, 2007, we recorded $40.1
million, $21.2 million and $31.0 million in revenue
under such direct arrangements, respectively.
Also during
the year 2009, as part of our strategic realignment of our distributor
relationships, we entered into “sell- in agreements” with
some of our distributors for certain products for identified end customers.
These “sell-in
agreements” do not provide for price protection, but allow limited stock
rotation rights. Additionally, at the time of entering into the “sell- in agreements”, the
distributors are allowed to convert products which had been previously shipped
under the distributor agreement into products under the “sell- in agreements”. As a
result of such conversion, the distributors sacrifice the right of price
protection, therefore resulting in the price for such products becoming fixed.
Products sold to the distributors under the sell-in agreements are recorded as
revenue upon shipment (or, in the case of a conversion to sell-in, upon
conversion) with an appropriate reserve for expected stock rotation returns
recorded at the time of shipment (or at the time of conversion for conversions
to sell-in). The primary reason for the strategic realignment of our
distributor relationships towards a direct revenue model and away from the
distributor model was to leverage the benefits of the direct model, such as
better risk management and increased operational and transactional processing
efficiencies. For the year ended December 31, 2009, we recorded $5.6
million in revenue under sell in arrangements.
Total revenue for 2008 was $274.4 million and represented a decline of 14.4% from 2007 levels and was primarily driven by declines in sales of our Consumer Electronics products and our licensing revenues, offset partially by an increase in revenues from our Personal Computers (“PC”) products. In 2008 our customers were transitioning to our newer products, this transition period resulted in lower 2008 revenue compared to 2007. In addition to our product transition, the unfavorable global economic environment impacted product revenue primarily in the fourth quarter of 2008. Revenue for 2007 included approximately $6.7 million of product revenue and cost of revenue included approximately $2.6 million related to distributor sales for the month of December 2007. Historically, the Company had deferred the recognition of sell-through revenue from distributor sales for the third month of a quarter until the following quarter due to the unavailability of reliable sell-through information in a timely manner. As a result of improved business processes, the Company was able to eliminate this delay beginning with the fourth quarter of 2007, resulting in fiscal year 2007 revenue including an additional month of product revenue from distributor sales in December 2007. -
45 -
COST
OF REVENUE AND GROSS MARGIN
Cost of
revenue consists primarily of costs incurred to manufacture, assemble and test
our products, and costs to license our technology which involves modification,
customization or engineering services, as well as other overhead costs relating
to the aforementioned costs including stock-based compensation expense.
Gross margin was 53.7%, 58.6% and 56.2% for the years ended December 31, 2009,
2008 and 2007, respectively. Product mix, unfavorable variances and
the impact of fixed overhead with lower revenue volume during the year
ended December 31, 2009 were the primary reasons for the decrease in cost of
revenue and the decrease in gross margin as percentage of revenue.
Increased competition in all business lines as reflected in the decline in the
average selling price also contributed to the overall decrease in the gross
margin in 2009 when compared to 2008.
The 19.0%
decrease in cost of revenue in 2008 as compared with 2007 was primarily due to a
decrease in revenue, lower manufacturing and outside processing costs through
negotiation, increased use of our testing equipment, improved supply chain
efficiencies and better inventory control offset by higher shipping and
warehousing fees as a result of an increase in fuel prices.
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OPERATING
EXPENSES
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, including stock-based compensation
expense, was $68.2 million, or 45.3% of revenue for 2009 compared to
$84.8 million, or 30.9% of revenue for 2008 and $78.0 million, or
24.3% of revenue for 2007. R&D expense for the year ended December 31, 2009
included stock-based compensation expense of approximately $6.3 million as
compared to $7.1 million for the same period in 2008. For the year ended
December 31, 2009, approximately $1.1 million of the $6.3 million stock-based
compensation expense was related to the cumulative adjustment pertaining to the
errors we identified with respect to the stock-based compensation expense as
calculated by our third-party software (refer to discussion in Note 5 of our
Notes to Consolidated Financial Statements under Item 1 of Part
IV).
R&D
expenses decreased by $16.6 million or 19.6% in the year ended December 31, 2009
as compared to the comparable period in 2008, primarily due to lower
compensation related expenses as a result of lower headcount due to
restructuring activities and lower R&D project related and tape-out
expenses, partially offset by the $1.1 million stock-based compensation
cumulative adjustment previously mentioned.
R&D
expenses increased $6.8 million or 8.8% in the twelve months ended December 31,
2008 as compared to the comparable period in 2007, due to higher compensation
and related expenses and an overall increase in other R&D activities during
the year, which resulted in higher tape-out expenses, higher depreciation
expenses, which were offset partially by a decline in stock-based compensation
expense.
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Selling, general and administrative
(SG&A). SG&A expense consists primarily of employee
compensation, including stock-based compensation expense, sales commissions,
professional fees, marketing and promotional expenses. SG&A expense,
including stock-based compensation expense, was $55.0 million, or 36.5% of
revenue for 2009 compared to $71.7 million, or 26.1% of revenue for 2008
and $70.3 million, or 21.9% of revenue for 2007. SG&A expense for the
years ended December 31, 2009 and 2008 included stock-based compensation expense
of approximately $10.9 million. For the year ended December 31, 2009,
approximately $2.8 million of the $10.9 million stock-based compensation expense
was related to the cumulative adjustment pertaining to the errors we identified
with respect to the stock-based compensation expense as calculated by our
third-party software (refer to discussion in Note 5 of our Notes to Consolidated
Financial Statements under Item 1 of Part IV). SG&A expense for the year
ended December 31, 2009 also included $2.0 million professional fees associated
with a potential strategic acquisition which we evaluated but decided
not to pursue and $1.2 million compensation package provided to the Chief
Executive Officer (“CEO”) upon his resignation
SG&A
expense for the year ended December 31, 2009 was $16.7 million or 23.3% lower
than in the year ended December 31, 2008 due to lower compensation related
expenses and legal expenses, partially offset by the $2.8 million stock-based
compensation cumulative adjustment, $2.0 million professional fees and $1.2
million compensation given to the CEO. Had it not been for these one time
expenses, SG&A expense for the year ended December 31, 2009 could have been
lower by $22.7 million or 31.7% when compared to the SG&A expense for the
same period in 2008. The decrease in SG&A expense was mainly attributable to
the decrease in head count because of the reduction in forces completed in 2009
and 2008.
The increase
in SG&A expenses of $1.4 million in 2008 as compared to 2007 was primarily
due to increased compensation expenses as a result of higher headcount, an
increase in stock-based compensation expense as a result of the granting of
restricted stock units to employees and executives, higher bad debt expenses
partially offset by lower expenses incurred on use of consultants.
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Amortization of intangible
assets. Amortization of intangible assets was $4.5 million for
the year ended December 31, 2009, as compared to $6.3 million for the same
period in 2008. The decrease in the amortization of intangible assets was
primarily due to the complete amortization of certain intangible assets related
to the sci-worx acquisition in 2007 and write-off of the investment in an
intellectual property (refer to the impairment discussion in Note 12 of our
Notes to Consolidated Financial Statements under Item 1 of Part
IV).
Amortization
of intangible assets was $6.3 million for the year ended December 31, 2008, as
compared to $3.5 million for the same period in 2007. The increase in the
amortization of intangible assets was primarily caused by the commencement of
amortization of the investment in an intellectual property in the fourth quarter
of 2007 (see further discussion about this investment in Note 12 of our
Notes to Consolidated Financial Statements under Item I of Part
IV).
In
June and October 2009, we announced restructuring plans to realign and
focus our resources on our core competencies and in order to better align its
revenues and expenses. The restructuring expense for the year ended December 31,
2009, consists primarily of $22.1 million related to employee severance and
benefit arrangements primarily due to the closure of the two Germany sites, a
charge of $0.6 million relating to retirement of certain assets and a charge of
$0.2 million relating to operating lease termination costs. In October 2009, we
decided to restructure our research and development operations resulting in the
planned closure of our two sites in Germany (see more discussion about our
restructuring activities in Note 10 of our Notes to Consolidated Financial
Statements under Item I of Part IV).
In
July 2008 and December 2008, we announced restructuring plans to improve
the effectiveness and efficiency of our operating model as part of our program
to pursue continuous improvement. The restructuring expense for the year ended
December 31, 2008, consists primarily of $4.6 million related to employee
severance and benefit arrangements due to the termination of 57 employees, a
charge of $1.1 million relating to retirement of certain assets and a charge of
$0.2 million relating to operating lease termination costs. We did not have any
restructuring charges in the prior fiscal years (see more discussion about
our restructuring activities in Note 10 of our Notes to Consolidated
Financial Statements under Item I of Part IV).
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49 -
Impairment of intangible
assets. On October 18, 2009, we determined that, in light of
certain changes to out product strategy, the intellectual property licensed from
Sunplus Technology Co., Ltd in February 2007 (the “Sunplus IP”) no longer
aligned with our product roadmap and therefore would not be used. In connection
with the decision to discontinue the use of the Sunplus IP, the Company
wrote-off the unamortized balance of the investment in Sunplus IP of $28.3
million and recognized a pre-tax impairment charge of $28.3 million in the
consolidated statement of operations under operating expense, “Impairment of
Intangible Assets.” See more discussion about this impairment
in Note 12 of our Notes to Consolidated Financial Statements under Item I
of Part IV).
Impairment of
Goodwill. During the three months ended March 31, 2009,
we assessed goodwill for impairment and noted indicators of impairment including
a sustained and significant decline in our stock price, depressed market
conditions and declining industry trends. Our stock price had been in a period
of sustained decline and the business climate had deteriorated substantially in
light of the economic crisis. Based on the result of the impairment analysis
that we performed, we determined that the goodwill was impaired. As such, we
wrote off the entire goodwill balance and recognized goodwill impairment charge
of approximately $19.2 million in the consolidated statement of operations under
operating expense, “Impairment of Goodwill.” See more discussion about this
impairment in Note 13 of our Notes to Consolidated Financial Statements
under Item I of Part IV).
Interest income and other,
net. Interest income and other, net, which principally
includes interest income, in 2009 decreased by 51.9% when compared to the same
period in 2008. Interest income and other decreased by 45.2% for the year ended
December 31, 2008 when compared to the same period in 2007. The decrease in
interest income from 2007 to 2008 and 2008 to 2009 was primarily driven by the
lower average total cash balances as a result of the cash used in operations in
2009 and the stock repurchase payments made during the first nine months
of 2008. The decline in interest rates also contributed to the sequential
decrease in interest income.
Provision (benefit) for income
taxes. For the year ended December 31, 2009, we recorded
an income tax provision of $14.8 million, compared to income tax benefit of
$11.9 million in 2008 and income tax provision of $20.6 million in
2007. Our effective income tax rate was 13% in 2009. In 2009, the difference
between the expense for income taxes and the income tax benefit determined by
applying the statutory federal income tax rate of 35% was due primarily to the
following items: (1) $43.0 million of tax expense related to a
valuation allowance being recorded to offset deferred taxes recorded on the
balance sheet, (2) $3.8 million of expense associated with the geographic and
tax jurisdictional mix of earnings within the Company’s global business
structure, (3) $7.6 million of tax expense associated with stock-based
compensation expense being reversed for tax purposes, (4) $5.3 million expense
of foreign unbenefited losses, and (5) $3.8 million tax expense
associated with non-deductible goodwill write-off for book
purposes. Offsetting these expenses are benefits of: (1) $5.6 million
related to a worthless stock deduction for its investment in the Company’s
German subsidiary, and (2) $3.2 million related to federal and state research
and development tax credits generated during 2009.
For the year
ended December 31, 2008, we recorded an income tax benefit of
$11.9 million, compared to income tax expense of $20.6 million in
2007. Our effective income tax rate was 656% in 2008. In 2008, the difference
between the benefit for income taxes and the income tax determined by applying
the statutory federal income tax rate of 35% was due primarily to the following
items: (1) $5.0 million of tax benefits related to the geographic and tax
jurisdictional mix of earnings within the Company’s global business structure,
(2) $4.2 million of tax benefits associated with research and development tax
credits and related FIN 48 reserves re-evaluated by the Company during the
fourth quarter of 2008 upon completion of a study of credits claimed through
2007, (3) $1.6 million of tax benefits related to federal and state research and
development tax credits generated during 2008, and (4) $0.9 million of tax
benefits associated with tax exempt interest income.
For the year
ended December 31, 2007, we recorded income tax expense of $20.6 million. Our
effective income tax rate was 52% in 2007. The difference between the provision
for income taxes and the income tax determined by applying the statutory federal
income tax rate of 35% was due primarily to the following items:
(1) $3.1 million of tax benefits related to tax credits generated
during 2007, (2) $2.8 million of additional tax charges associated
with the certain foreign income and withholding taxes and
(3) $5.1 million of additional tax charges related to foreign
unbenefited losses associated with the implementation of our global business
structure. The tax charges related to unbenefited foreign losses represent
expenses for sharing in the costs of our ongoing research and development
efforts as well as licensing commercial rights to exploit pre-existing
intangibles to better align with customers outside the Americas. The new global
strategy is designed to better align asset ownership and business functions with
our expectations related to the sources, timing and amounts of future revenues
and profits.
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Liquidity
and Capital Resources
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