Zoran 10-Q 2010
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Commission File No. 0-27246
(Exact name of registrant as specified in its charter)
1390 Kifer Road
Sunnyvale, California 94086
(Address of principal executive offices, including zip code)
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether 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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
As of August 4, 2010, there were outstanding 49,662,390 shares of the registrants Common Stock, par value $0.001 per share.
For the Quarter Ended June 30, 2010
(in thousands, except share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Zoran Corporation and its subsidiaries (Zoran or the Company) have been prepared in conformity with accounting principles generally accepted in the United States of America. Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). In the opinion of management, the condensed consolidated financial statements reflect all necessary adjustments, consisting only of normal recurring adjustments, for a fair statement of the consolidated financial position, operating results and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2009, included in the Companys 2009 Annual Report on Form 10-K filed with the SEC.
Recent accounting pronouncements
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended June 30, 2010, as compared to the recent accounting pronouncements described in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance to the Company.
In April, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-13, Compensation-Stock Compensation (Topic 718)Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Tradesa consensus of the FASB Emerging Issues Task Force (ASU 2010-13). ASU 2010-13 provides amendments to Topic 718 to further clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entitys equity securities trades should classify such an award as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.
In March, 2010, the FASB issued ASU No. 2010-11, Derivative and Hedging (Topic 815)Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11). ASU 2010-11 provides amendments to Subtopic 815-15 to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk in the form of subordination of one financial instrument to another. An entity must ensure that an impairment analysis of the investment has been performed before the initial adoption of the amendment in this update. This update is effective for fiscal quarter beginning after June 15, 2010. The Company is currently assessing the future impact of this new accounting update to its consolidated financial statements.
2. Stock-based compensation
Stock Option Plans
As of June 30, 2010, the Company had outstanding options for the purchase of 7,920,531 shares of common stock held by employees and directors under the Companys 2005 Equity Incentive Plan (the 2005 Plan), 2005 Outside Directors Equity Plan, 2000 Non-statutory Stock Option Plan, 1995 Outside Directors Stock Option Plan, 1993 Stock Option Plan and various other plans the Company assumed as a result of acquisitions. At its annual stockholders meeting held on June 25, 2010, the maximum number of shares available for option and award grant purpose that may be issued under the Companys 2005 plan was increased by 3,600,000 shares. As of June 30, 2010, 5,451,946 shares remained available for future grants and awards under the 2005 Plan and the 2005 Outside Directors Equity Plan. Options and stock appreciation rights granted under the 2005 Plan must have exercise prices per share not less than the fair market value of the Companys common stock on the date of grant and may not be repriced without stockholder approval. Such awards will vest and become exercisable upon conditions established by the Compensation Committee and may not have a term exceeding 10 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes the stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock unit grants for the three and six months ended June 30, 2010 and 2009 (in thousands):
The income tax benefit for share-based compensation expense was $360,000 and $632,000 for the three and six months ended June 30, 2010. The income tax benefit for share-based compensation expense was $372,000 and $666,000 for the three and six months ended June 30, 2009.
The Company estimates the fair value of stock options using the Black-Scholes option pricing model with the following weighted-average assumptions:
Expected Term: The expected term represents the period that the Companys stock-based awards are expected to be outstanding and was determined based on the Companys historical experience with similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.
Expected Volatility: The Company uses historical volatility in deriving its volatility assumption. Management believes that historical volatility appropriately reflects the markets expectations of future volatility.
Risk-Free Interest Rate: Management bases its assumptions regarding the risk-free interest rate on U.S. Treasury zero-coupon issues with an equivalent remaining term.
Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Stock Option Activity
The following is a summary of stock option activities:
Significant option groups outstanding as of June 30, 2010, and the related weighted average exercise price and contractual life information, are as follows:
Of the 7,920,531 stock options outstanding as of June 30, 2010, the Company estimates that approximately 7,662,849 will fully vest over the remaining contractual term. As of June 30, 2010, these options had a weighted average remaining contractual life of 5.78 years, a weighted average exercise price of $14.55 and aggregate intrinsic value of $1.6 million.
The weighted average grant date fair value of options granted during the three and six months ended June 30, 2010 was $4.93 per share. The weighted average grant date fair value of options granted during the three and six months ended June 30, 2009 was $4.70 and $4.55 per share, respectively.
The aggregate intrinsic value of options outstanding and exercisable in the table above represents the total pretax intrinsic value, based on the Companys closing stock price of $9.54 as of June 30, 2010, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares of common stock underlying in-the-money options exercisable as of June 30, 2010 was 556,350. The total intrinsic value of options exercised during the three and six months ended June 30, 2010 was $6,000 and $59,000, respectively. There was no excess tax benefit realized by the Company for the three and six months ended June 30, 2010 and 2009 for option exercises.
As of June 30, 2010, the Company had $13.7 million of unrecognized stock-based compensation cost related to stock options after estimated forfeitures, which are expected to be recognized over the weighted average remaining term of 2.80 years.
The Company settles employee stock option exercises with newly issued common shares.
Restricted Shares and Restricted Stock Units
Restricted shares and restricted stock units are granted under the 2005 Plan. As of June 30, 2010, there was $6.8 million of total unrecognized stock-based compensation cost related to restricted shares and restricted stock units, which are expected to be recognized over the weighted average remaining term of 3.02 years.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following is a summary of restricted shares and restricted stock units activities:
Employee Stock Purchase Plan
The Companys 1995 Employee Stock Purchase Plan (ESPP) was adopted by the Companys Board of Directors in October 1995 and approved by its stockholders in December 1995. The ESPP enables employees to purchase shares through payroll deductions at approximately 85% of the lesser of the fair value of common stock at the beginning of a 24-month offering period or the end of each six-month segment within such offering period. The ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the U.S. Internal Revenue Code. During the three month period ended June 30, 2010, 433,906 shares were purchased by employees under the terms of the plan agreements at a weighted average price of $6.93 per share. As of June 30, 2010, 3,055,176 shares were reserved and available for issuance under the ESPP.
Stock Repurchase Program
In March 2008, the Companys Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $100.0 million of outstanding shares of Company common stock. The amount and timing of specific repurchases under this program are subject to market conditions, applicable legal requirements and other factors, including managements discretion. Repurchases may be in open-market transactions or through privately negotiated transactions, and the repurchase program may be modified, extended or terminated by the Board of Directors at any time. There is no guarantee of the exact number of shares that will be repurchased under the program.
As of June 30, 2010 and 2009, the authorized amount that remained available under the Companys stock repurchase program was $60.2 million and $90.0 million, respectively. The Company retires all shares repurchased under the stock repurchase program. The purchase price for the repurchased shares of the Companys common stock is reflected as a reduction of common stock and additional paid-in capital.
Stock repurchase activities during the three and six months ended June 30, 2010 and the year ended December 31, 2009 were as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
3. Comprehensive Loss
The following table presents the calculation of comprehensive loss. The components of comprehensive loss, net of tax, are as follows (in thousands):
The components of accumulated other comprehensive income are unrealized gains on marketable securities, net of related taxes.
4. Marketable Securities
The Companys portfolio of available for sale and trading securities as of June 30, 2010 was as follows (in thousands):
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Companys portfolio of available for sale and trading securities as of December 31, 2009 was as follows (in thousands):
The following table summarizes the maturities of the Companys fixed income securities, including auction rate securities (ARS) classified as trading securities, as of June 30, 2010 (in thousands):
The table below shows the fair value of investments in available for sale securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of June 30, 2010 (in thousands):
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The table below shows the fair value of investments in available for sale securities that have been in an unrealized loss position for less than 12 months or for 12 months or longer as of December 31, 2009 (in thousands):
5. Fair Value
When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact purchases and sales of such asset or liability and it considers assumptions that market participants would use when pricing the asset or liability.
The Company values its investments based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table represents the Companys fair value hierarchy for its financial assets (investments) measured at fair value on a recurring basis as of June 30, 2010 (in thousands):
At June 30, 2010 and December 31, 2009, the Company held ARS with a par value of $13.7 million and $34.9 million, respectively. The Companys ARS are high grade, long-term debt instruments backed by student loans which are guaranteed by the United States government. All of the Companys ARS have credit ratings of AAA or AA, and none are mortgage-backed debt obligations. The Company also holds Series C-2 Auction Rate Securities Rights (ARS Rights) that entitle the Company to sell its eligible ARS to UBS or its affiliates during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In exchange for the issuance of the ARS Rights, the UBS or its affiliates have the discretionary right to sell the Companys eligible ARS on the Companys behalf, without prior notification, at any time during a two-year period beginning June 30, 2010. On July 1, 2010, the Company exercised its right and redeemed the $13.7 million ARS at par value.
The enforceability of the ARS Rights results in a put option and should be recognized as a free standing asset separate from the related ARS. The Company measures the ARS Rights at fair value under the Financial Instruments-Overall-Scope Section of the Accounting Standard Codification (ASC), which permits an entity to elect the fair value option for recognized financial assets, in order to match the changes in the fair value of the related ARS. As a result, unrealized gains and losses are included in earnings in future periods. The Company exercised its right and redeemed the ARS on July 1, 2010.
The reconciliation of beginning and ending balances for ARS measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period was as follows (in thousands):
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):
7. Goodwill and Other Intangible Assets
The Company monitors the recoverability of goodwill recorded in connection with acquisitions by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company conducted its most recent annual impairment test of goodwill as of September 30, 2009.
As of September 30, 2009, the Company determined that the fair value of its Imaging segment reporting unit exceeded the carrying value and therefore no goodwill impairment charge was recorded. In the second quarter of 2010, the Company reviewed the significant assumptions and key estimates used in the September 30, 2009 impairment analysis and concluded the judgments used in the analysis remained appropriate. In addition, there were no triggering events or indicators of impairment during the first half of 2010 that would lead the Company to believe goodwill had been impaired as of June 30, 2010.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Components of Acquired Intangible Assets (in thousands):
Estimated future intangible amortization expense, based on current balances, as of June 30, 2010 is as follows (in thousands):
Components of Goodwill (in thousands):
Changes in the carrying amount of goodwill for the six months ended June 30, 2010 and the year ended December 31, 2009 are as follows (in thousands):
8. Other Long-Term Liabilities
The following is a summary of other long term liabilities as of June 30, 2010 and December 31, 2009 (in thousands):
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Severance obligations represent a liability for the Companys employees in Israel. Under Israeli law, the Company is required to make severance payments to its retired, dismissed, and certain other Israeli employees. The Companys severance pay liability to its Israeli employees, which is calculated based on the salary of each employee multiplied by the years of such employees employment, is reflected in the Companys balance sheet in other long-term liabilities on an accrual basis, and is partially funded by the purchase of insurance policies in the name of the employees. The surrender value of the insurance policies is recorded in other assets.
The severance pay detail is as follows (in thousands):
9. Income Taxes
The Company follows the asset and liability method of accounting for income taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.
The Company assesses, on a quarterly basis, the realizability of its deferred tax assets by evaluating all available evidence, both positive and negative, including: (1) the cumulative results of operations in recent years, (2) the source of recent losses, (3) estimates of future taxable income and (4) the length of operating loss carryforward periods. Throughout 2009 and for the first two quarters of 2010, the Company reported a rolling three year cumulative loss in multiple foreign jurisdictions. The cumulative three-year loss was considered significant negative evidence which was objective and verifiable and thus was heavily weighted. Additional negative evidence the Company considered included projections of future losses, the historical volatility of the semiconductor industry and the highly competitive nature of the DTV, DVD and Mobile markets in which the Company operates. Positive evidence considered by the Company in its assessment included lengthy operating loss carryforward periods, and a lack of unused expired operating loss carryforwards in the Companys history. After considering both the positive and negative evidence, the Company determined that it was still more-likely-than-not that it would not realize the full value of certain foreign jurisdiction deferred tax assets. As a result, the Company continues to record a valuation allowance against those deferred tax assets to reduce them to their estimated net realizable value with a corresponding non-cash charge. It is possible that the Company will remove or record a valuation allowance on these or other jurisdictions in the near future dependent primarily on the actual and projected results in each jurisdiction.
The calculation of the Companys tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company records liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes may be due. Actual tax liabilities may be different than the recorded estimates and could result in an additional charge or benefit to the tax provision in the period when the ultimate tax assessment is determined. As of December 31, 2009, the Company had $35.0 million of unrecognized tax benefits which have not materially changed during the current period and all of which would benefit the Companys tax expense if realized in the future.
The Companys worldwide tax expense is highly dependent upon the geographic distribution of its worldwide earnings or losses, the tax regulations and tax holiday benefits in certain jurisdictions, and the effectiveness of its tax planning strategies. The Companys Israel based subsidiary is an Approved Enterprise under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of the Companys operations in Israel. The Companys U.S. federal net operating losses expire at various times between 2010 and 2024, and the benefits from the Companys subsidiarys Approved Enterprise status expire at various times beginning in 2011.
As of June 30, 2010 the Company has determined that the effective tax rate method for computing the Zoran group tax provision does not provide meaningful results because of the uncertainty in reliably estimating our 2010 annual effective tax rate. As a result, the provision for income taxes for the three and six months ended June 30, 2010 reflects the sum of the estimated tax expense in each of our profitable jurisdictions for their year to date profits.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
10. Segment Reporting
The Companys products consist of highly integrated application-specific integrated circuits and system-on-a-chip solutions as well as licenses of certain software and other intellectual property. Operating segments are defined as components of an enterprise about which separate financial information is available, which the chief operating decision-maker evaluates regularly in determining allocation of resources and assessing performance. The Company aggregates its operating segments into two reportable segments, Consumer and Imaging based on the guidance within ASC 280.
The Consumer group provides products for use in DVD and Multimedia Player products, standard and high definition digital televisions, set-top boxes, digital cameras and multimedia mobile phones. The Imaging group provides products used in digital copiers, laser and inkjet printers and multifunction peripherals.
Information about reported segment income or loss is as follows for the three and six months ended June 30, 2010 and 2009 (in thousands):
A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and six months ended June 30, 2010 and 2009 is as follows (in thousands):
The Company maintains operations in China, France, India, Israel, Japan, Korea, Sweden, Taiwan, the United Kingdom and the United States. Activities in Israel and the United States consist of corporate administration, product development, logistics and worldwide sales management. Other foreign operations consist of sales, product development and technical support.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The geographic distribution of total revenues for the three and six months ended June 30, 2010 and 2009 was as follows (in thousands):
For the three months ended June 30, 2010, four customers accounted for 14%, 13%, 11% and 11% of total revenues, respectively. For the six months ended June 30, 2010, four customers accounted for 15%, 13%, 11% and 11% of total revenues, respectively. For the three months ended June 30, 2009, three customers accounted for 22%, 11% and 10% of total revenues, respectively. For the six months ended June 30, 2009, three customers accounted for 19%, 11% and 11% of total revenues, respectively.
As of June 30, 2010, three customers accounted for approximately 26%, 24% and 15% of the net accounts receivable balance, respectively, and as of December 31, 2009, five customers accounted for approximately 23%, 15%, 13%, 13% and 10% of the net accounts receivable balance, respectively.
11. Net Loss Per Share
The following table provides a reconciliation of the components of the basic and diluted net loss per share computations (in thousands, except per share data):
For the three and six months ended June 30, 2010 and 2009, outstanding options and restricted stock units were excluded from the computation of diluted net loss per share as the inclusion of such shares would have had an anti-dilutive effect.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)
12. Commitments and Contingencies
Xpoint Technologies, Inc. v. Zoran Corporation
On September 18, 2009, Xpoint Technologies, Inc. filed an amended complaint against the Company and 43 other defendants in the United States District Court for the District of Delaware. The complaint alleges that the Companys manufacture and sale of digital camera processors, including its Coach 9, Coach 10 and Coach 12 lines of processors, infringe one or more of the claims of United States Patent No. 5,913,028. Since filing the amended complaint, Xpoint has identified the Companys Coach 8 line of processors as additional allegedly infringing products. The complaint seeks unspecified damages, a preliminary and permanent injunction against further infringement, a finding of willful infringement, enhanced damages, attorneys fees and costs. The Company filed an answer and a counterclaim. The Companys counterclaim seeks an order declaring that it did not infringe the patent and that the patent is invalid. The case is in its early stages. Discovery has just recently commenced, and the Companys potential loss, if any, is not reasonably estimable at this time. The Company intends to vigorously defend itself against the allegations made by Xpoint in this lawsuit. However, the Company cannot provide any assurance that the ultimate outcome of the action will not have a material adverse effect on the Companys business, financial condition, results of operations or cash flows for a particular period or on the trading price of the Companys Common Stock.
The Companys Amended and Restated Bylaws require the Company to indemnify its directors and authorize the Company to indemnify its officers to the fullest extent permitted by the Delaware General Corporation Law (the DGCL). In addition, each of the Companys current directors and officers has entered into a separate indemnification agreement with the Company. The Companys Restated Certificate of Incorporation limits the liability of directors to the Company or its stockholders to the fullest extent permitted by the DGCL. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters.
Other Legal Matters
The Company is named from time to time as a party to lawsuits in the normal course of its business, such as the matter described above. Litigation in general and intellectual property litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. The Company accrues for contingent liabilities when it determines that it is probable that a liability had been incurred at the date of the financial statements and that the amount of such liability can be reasonably estimated. During the three months and six months ended June 30, 2010, the Company incurred $0 and $1.1 million of costs, respectively, in connection with settlement of disputes.
This report includes a number of forward-looking statements which reflect our current views with respect to future events and financial performance. In this report, the words anticipates, believes, expects, intends, future and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. These forward-looking statements are subject to many risks and uncertainties, including those discussed in Part II, Item 1A. Risk Factors below.
We provide integrated circuits, software and platforms for digital televisions, digital cameras, set-top boxes, DVD and HD media players, and digital imaging products, consisting of semiconductor hardware and software that enable printing, scanning, processing and transmission of documents to computer peripherals that perform printing functions. Our products are used by original equipment manufacturers (OEMs) for consumer and commercial applications.
In 2009, our revenues were harmed by the poor macroeconomic environment which had the effect of reducing consumer spending. As a result of those macroeconomic conditions, we continued several cost containment programs including realigning our resources to focus on our key priorities, reducing investments in certain areas and scaling back travel, as well as other measures. In addition, we continued our focus on maintaining a strong balance sheet, and in particular, managing our cash and inventory balances very closely.
While the global economic downturn continues to affect consumer spending, we are seeing some indications that it may be stabilizing. In the first half of 2010, we saw growth in our digital camera product line as a result of increased demand for low to mid-range models. However, we also saw instability in demand of our DTV products due to loss of market shares by our key customers.
While we have seen some recent strength in demand for certain of our products, consumer spending has not yet reached previous levels and we are continuing some of the cost containment measures as well as continuing our focus on maintaining a strong balance sheet.
We derive most of our revenues from the sale of our integrated circuit and system-on-a-chip (SOC) products. Historically, average selling prices for our products, consistent with average selling prices for products in the semiconductor industry generally, have decreased over time. Average selling prices for our products have fluctuated substantially from period to period, reflecting changes in our mix of product sold and transitions from low-volume to high-volume production. In the past, we have periodically reduced the prices of some of our products in order to better penetrate the consumer market. We believe that as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty.
We also derive revenues from licensing our software and other intellectual property. Licensing revenues include one-time license fees and royalties based on the number of units sold by the licensee. Quarterly licensing revenues can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues. Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective evidence of fair value. In instances where we are unable to determine the fair value of our maintenance obligations, revenue for the entire arrangement is recognized ratably over the term of the arrangement. We recognize maintenance and support revenue ratably over the term of the arrangement. We also receive royalty revenues based on per unit shipments of products that include our software, which we recognize upon receipt of a royalty report from the customer, typically one quarter after the sales are made by our licensee.
We also generate a portion of our revenues from development contracts, primarily with key customers. Revenues from development contracts are generally recognized as the services are performed based on the specific deliverables outlined in each contract. Amounts received in advance of performance under contracts are recorded as deferred revenue and are generally recognized within one year from receipt.
Cost of Hardware Product Revenues
Our cost of hardware product revenues consists primarily of fabrication costs, assembly and test costs, the cost of materials and overhead from operations and allocable facilities costs. If we are unable to reduce our cost of hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease. We expect both product and customer mix to continue to fluctuate in future periods, causing fluctuations in margins.
Research and Development
Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities, costs of engineering materials and supplies and allocable facilities costs. We believe that significant investments in research and development are required for us to remain competitive, and we expect to continue to devote significant resources to product development, although such expenses as a percentage of total revenues may fluctuate.
Selling, General and Administrative
Our selling, general and administrative expenses consist primarily of employee-related expenses, sales commissions, product promotion, other professional services and allocable facilities costs.
Our global effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses as our statutory tax rate varies significantly by jurisdiction. Our current tax expense reflects taxes expected to be owed in our profitable jurisdictions. In addition, we identified certain foreign jurisdictions where it is more likely than not that we will not fully utilize our deferred tax assets, and we continue to record a valuation allowance on the portion of those deferred tax assets for which future income is uncertain. The determination of when to record or remove a valuation allowance is highly subjective and is done for each jurisdiction. We rely primarily on an analysis of cumulative earnings or losses and projected future earnings or losses. It is possible that we will remove or record a valuation allowance on these or other jurisdictions in the near future dependent primarily on the actual and projected results in each jurisdiction.
Our Israeli subsidiary is an Approved Enterprise under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel. Our U.S. federal net operating losses expire at various times between 2010 and 2024, and the benefits from our subsidiarys Approved Enterprise status expire at various times beginning in 2011.
Our products consist of application-specific integrated circuits, or ASICs and SOC products. We also license certain software and other intellectual property. We have two reportable operating segments Consumer and Imaging. The Consumer group provides products for use in DVD and Multimedia Player products, standard and high definition digital televisions, set-top boxes, digital cameras and multimedia mobile phones. The Imaging group provides products used in digital copiers, laser and inkjet printers, and multifunction peripherals.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
Results of Operations
The following table summarizes selected consolidated statement of operations data and changes for the periods presented (amounts in thousands, except for percentages):
Hardware product revenues for the three months ended June 30, 2010 were $82.7 million, compared to $92.2 million for the same period of 2009. Hardware product revenues decreased $11.0 million, or 12.2%, in the Consumer segment, partially offset by an increase of $1.5 million, or 63.6%, in the Imaging segment. The average selling price for products in the Consumer segment decreased by 17.3%, partially offset by an increase of 6.1% in total units shipped compared to the same period of prior year. Within the Consumer segment, hardware product revenues for DTV products decreased by $14.7 million, or 36.2%, and hardware product revenues for Multimedia Player products decreased by $3.4 million, or 23.9%. The decrease was partially offset by an increase of $7.1 million, or 20.5%, in hardware product revenue for Mobile products. Total units shipped for DTV and Multimedia Player products decreased by 12.0% and 19.6%, respectively, compared to the same period of the prior year. Average selling price for DTV products decreased by 27.5% compared to the same period of the prior year. The increase in Mobile and Imaging hardware product revenues was primarily due to 33.4% and 34.1% increase in unit shipments, respectively, attributable to an overall increase in demand as a result of the economic recovery.
Hardware product revenues for the six months ended June 30, 2010 were $161.8 million, compared to $148.1 million for the same period of 2009. Hardware product revenues increased $10.6 million, or 7.4%, in the Consumer segment and $3.0 million, or 61.4%, in the Imaging segment. Total units shipped for products in the Consumer segment increased by 29.6%, partially offset by a decrease in average selling price by 17.1% compared to the same period of the prior year. Within the Consumer segment, hardware product revenues for Mobile products increased by $26.9 million, or 47.5%, partially offset by a decrease of $14.7 million, or 22.8%, in hardware product revenues for DTV products and a decrease of $1.5 million, or 6.9%, in hardware product revenues for Multimedia Player products. Total units shipped for Mobile products increased by 64.8%, partially offset by a decrease in average selling price by 10.5% compared to the same period of the prior year. The units shipped for DTV products increased by 1.5% offset by a decrease in average selling price by 23.9% compared to the same period of prior year. The increase in Imaging hardware product revenues was primarily due to a 47.2% increase in unit shipments attributable to an overall increase in demand as a result of the economic recovery. The recovery in the economy continues to be uncertain and although we expect revenue growth for the remainder of 2010, it most likely will not reach levels of revenue growth previously seen.
Software and other revenues for the three months ended June 30, 2010 remained relatively flat compared with the same period of 2009. Software and other revenues were $22.1 million for the six months ended June 30, 2010, compared to $23.1 million for the same period of 2009. Software and other revenues for the Consumer segment decreased by $0.7 million, or 48.3%, and software and other revenues for the Imaging segment decreased by $0.3 million during the six months ended June 30, 2010. The decrease was primarily due to timing of new license agreements signed.
Cost of Hardware Product Revenues
Cost of hardware product as a percentage of hardware revenues decreased to 54.6% for the three months ended June 30, 2010 from 58.9% for the same period of 2009. The decrease was primarily due to change in product mix and improvement of our cost structure.
Cost of hardware product as a percentage of hardware revenues decreased to 55.0% for the six months ended June 30, 2010 from 61.0% for the same period of 2009. This decrease was primarily due to a change in product mix as well as improved cost structure for certain products.
Research and Development
Research and development expenses were $29.0 million for the three months ended June 30, 2010, compared to $27.5 million for the same period of 2009. The increase of $1.6 million or 5.7% was primarily due to fluctuations based on the timing of tape-outs which include mask sets and engineering wafers as well as our ongoing investments in research and development activities across our various segments.
Research and development expenses were $55.2 million for the six months ended June 30, 2010, compared to $57.0 million for the same period of 2009. This decrease is a result of the closing of our facilities in Netanya, Israel and Toronto, Canada in March, 2009.
Selling, General and Administrative
Selling, general and administrative expenses were $24.9 million for the three months ended June 30, 2010, compared to $36.9 million for the same period of 2009, resulting in a decrease of $12.0 million or 32.5%. The decrease was primarily due to a one time expense recorded during the quarter ended June 30, 2009 of $11.0 million attributable to the settlement of intellectual property licensing disputes. Legal expenses also tend to fluctuate throughout the year due to the timing of various litigation activities.
Selling, general and administrative expenses were $49.0 million for the six months ended June 30, 2010, compared to $61.5 million for the same period of 2009, resulting in a decrease of $12.4 million or 20.3%. This decrease was also primarily due to the one time expense of $11.0 million incurred during the quarter ended June 30, 2009 in connection with the settlement of intellectual property licensing disputes and the timing of legal expenses throughout the year.
Amortization of Intangible Assets
Amortization expense for the three and six months ended June 30, 2010 remained consistent with the same period of 2009. At June 30, 2010, we had approximately $0.4 million in net intangible assets acquired through the Let It Wave acquisition, which we will continue to amortize on a straight line basis through 2011.
Interest and Other Income
Interest and other income for the three months ended June 30, 2010 remained relatively flat compared with the same period of 2009. Interest and other income was $4.4 million for the six months ended June 30, 2010, compared to $5.6 million for the same period of 2009. The decrease was primarily due to a reduction in interest income as a result of declining interest rates offset by fluctuations in the value of the U.S. dollar in comparison to currencies in countries in which we operate and lower average interest earned on our cash and short term investment balances.
Provision for Income Taxes
We recorded a tax provision of $2.9 million and $0 for the three months ended June 30, 2010 and 2009. The tax provision for the six months ended June 30, 2010 and 2009 was $5.6 million and $2.7 million, respectively. The tax provision for the three months and six months ended June 30, 2010 reflects the sum of the estimated tax expense in each of our profitable jurisdictions for their year to date profits, adjusted for discrete items which are fully recognized in the period they occur. The tax provision for the three months and six months ended June 30, 2009 reflects the estimated annual tax rate applied to the year to date net income for our profitable jurisdictions, adjusted for discrete items which are fully recognized in the period they occur.
The income tax provision for these periods was affected by the geographic distribution of our worldwide earnings and losses, the impact of recording or removing the valuation allowance relating to deferred tax assets, non-deductible expenses such as ASC 718 Compensation-Stock Compensation, as well as the accrual of liabilities associated with unrecognized tax benefits. Our Israel based subsidiary is an Approved Enterprise under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel.
Liquidity and Capital Resources
At June 30, 2010, we had $74.4 million of cash and cash equivalents, and $304.8 million of short term investments. At June 30, 2010, we had $390.1 million of working capital.
Our operating activities generated cash of $0.6 million during the six months ended June 30, 2010. While we recorded a net loss of $10.6 million, this loss included non-cash items such as amortization of intangible assets of $0.2 million, depreciation of $3.1 million, stock-based compensation expense of $4.6 million and deferred income taxes of $5.5 million. Cash decrease in assets and liabilities was primarily due to increases in accounts receivable by $7.3 million due to the timing of shipments, inventory by $9.0 million to meet an increase in demand for the future quarter and prepaid expenses, other current assets and other assets by $1.9 million due to the timing of payments made. These changes were partially offset by an increase in accounts payable, accrued expenses and other liabilities totaling $16.5 million due to timing of payments.
Cash provided by investing activities was $1.1 million during the six months ended June 30, 2010. Proceeds from sales and maturities of investments of $113.2 million were offset by purchases of $109.3 million and $2.9 million used for purchases of property and equipment.
Cash used in financing activities was $16.7 million during the six months ended June 30, 2010. Cash used to repurchase common stock of $20.1 million under our Stock Repurchase Program was offset by $3.3 million in proceeds from issuances of common stock through sale of stock under our employee stock purchase plan.
At June 30, 2009, we had $98.3 million of cash and cash equivalents, $251.7 million of short term investments and $37.3 million of long- term investments. At June 30, 2009, we had $365.8 million of working capital.
Cash used in operating activities was $16.2 million during the first six months of 2009. While we recorded a net loss of $34.9 million, this loss included non-cash items such as depreciation of $3.7 million, amortization of $0.2 million and stock-based compensation expense of $6.0 million. Cash from changes in assets and liabilities was primarily due to an increase in accounts payable, accrued expenses and other liabilities totaling $18.7 million primarily due to increase in purchases and a decrease in prepaid expenses, other current assets and other assets by $4.7 million due to timing of payments. These changes were partially offset by an increase in accounts receivable by $10.5 million due to increase in shipments in the current quarter and increase in inventories by $4.4 million to meet the expected increase in demand.
Cash provided by investing activities was $0.6 million during the six months ended June 30, 2009, principally reflecting the proceeds from sales and maturities of investments, net of purchases, of $1.5 million. This was partially offset by $0.9 million used for purchases of property and equipment.
Cash provided by financing activities during the six months ended June 30, 2009 was $3.3 million and consisted of proceeds from sale of stock under our employee stock purchase plan and issuances of common stock through exercises of employee stock options.
At June 30, 2010 and 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
We believe that our current balances of cash, cash equivalents and short-term investments, and anticipated cash flows from operations, will satisfy our anticipated working capital and capital expenditure requirements at least through the next 12 months. Nonetheless, our future capital requirements may vary materially from those now planned and will depend on many factors including, but not limited to:
In addition, we may require an increase in the level of working capital to accommodate planned growth, hiring and infrastructure needs.
To the extent that our existing resources and cash generated from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private financings or borrowings. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. We cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain any additional financing, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and operating results.
At June 30, 2010 we held ARS with a par value of $13.7 million. See Note 5 to the Condensed Consolidated Financial Statements.
Our investment policy focuses on three objectives: to preserve capital, to meet liquidity requirements and to maximize total return. Our investment policy establishes minimum ratings for each classification of investment and investment concentration is limited in order to minimize risk, and the policy also limits the final maturity on any investment and the overall duration of the portfolio. We regularly review our investment portfolio to ensure adherence to our investment policy and to monitor individual investments for risk analysis and proper valuation.
We hold our marketable securities as trading and available-for-sale and mark them to market. We expect to realize the full value of our marketable securities upon maturity or sale, as we have the intent and believe we have the ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge that could adversely impact our financial results.
The following is a summary of fixed payments related to certain contractual obligations as of June 30, 2010 (in thousands):
We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.
We maintain an investment portfolio of various holdings, types, and maturities. See Note 4 to the Condensed consolidated Financial Statements. We hold our marketable securities, other than the ARS held with UBS, as available-for-sale and mark them to market. We expect to realize the full value of all our marketable securities upon maturity or sale, as we have the intent and believe that we have the ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge that could adversely impact our financial results.
We consider various factors in determining whether we should recognize an impairment charge for our fixed income securities and publicly traded equity securities, including the length of time and extent to which the fair value has been less than our cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
Interest Rate Risk
We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. We do not maintain derivative financial instruments. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines.
All of our cash equivalents and marketable securities other than our ARS with UBS are treated as available-for-sale. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate 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 or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we generally classify our debt securities as available-for-sale no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other than temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders equity, net of tax.
Due mainly to the short-term nature of the major portion of our investment portfolio, the fair value of our investment portfolio or related income would not be significantly impacted by either a 10% increase or decrease in interest rates. Actual future gains and losses associated with our investments may differ from the sensitivity analyses performed as of June 30, 2010 due to the inherent limitations associated with predicting the changes in the timing and level of interest rates and our actual exposures and positions.
Exchange Rate Risk
We have direct exposure to foreign exchange rate fluctuations. We recorded an exchange gain of $56,000 and an exchange loss of $413,000 for the three months ended June 30, 2010 and 2009. We recorded an exchange loss of $0.2 million and a gain of $0.6 million for the six months ended June 30, 2010 and 2009. These fluctuations were primarily due to foreign currency remeasurement as a result of changes in the value of the US dollar in comparison to currencies in countries in which we operate.
Currently, sales and supply arrangements with third-party manufacturers provide for pricing and payment in United States dollars and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States dollar relative to other currencies could result in our suppliers raising their prices as a condition to their continuing to do business with us.
A portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, Asia and Europe, are transacted in foreign currencies. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Significant fluctuations in currency exchange rates could impact our business in the future. However, we do not believe that a hypothetical 10% favorable or unfavorable change in foreign currency exchange rates would not have a material impact on our financial position or results of operations.
Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.
Changes to Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II. OTHER INFORMATION
The information required by this Item is incorporated by reference to the discussion in Part I, Item 1, Note 12.
Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below. The following risk factors update and supersede in their entirety the risk factors set forth in our annual report on Form 10-K for the fiscal year ended December 31, 2009 and Part II, Item 1A of our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2010.
Our annual revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the price of our common stock
Our historical operating results have varied significantly from period to period due to a number of factors, including:
We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:
Our operating results could also be harmed by:
These factors are difficult or impossible to forecast. We place orders with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand. If anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology or market change that could render our or one of our customers products obsolete, expense and inventory levels could be disproportionately high and we may incur charges for excess inventory, which would harm our gross margins and financial results. If anticipated license revenues in any quarter are canceled, do not occur, or are lower than anticipated, our gross margins and financial results may be harmed.
A significant portion of our expenses are relatively fixed, and the timing of increases in expenses is based in large part on our forecast of future revenues. As a result, if revenues do not meet our expectations, we may be unable to quickly adjust expenses to levels appropriate for our actual revenues, which could harm our operating results.
Our customers sales fluctuate due to product cycles and seasonality.
Because the markets that our customers serve are characterized by numerous new product introductions and rapid product enhancements and obsolescence, our operating results may vary significantly from quarter to quarter. During the final production of a mature product, our customers typically exhaust their existing inventories of our products. Consequently, orders for our products may decline in those circumstances, even if our products are incorporated into both our customers mature products and replacement products. A delay in a customers transition to commercial production of a replacement product would delay our ability to recover the lost sales from the discontinuation of the related mature product. Our customers also experience significant seasonality in the sales of their consumer products, which affects their orders of our products. Typically, the second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of our sales. We expect these seasonal sales fluctuations to continue for the foreseeable future and any further or continuing economic slowdown could increase the seasonal decline in sales that we typically see in the first half of the calendar year or mitigate the typical increase in sales in the second half of the calendar year.
Our ability to match production mix with the product mix needed to fill current orders and orders to be delivered in a given quarter may affect our ability to meet that quarters revenue forecast and can lead to excess inventory write-offs. In addition, we manufacture products based on forecasts of customers demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory causing us to lose revenue or take write-offs that would reduce our profit margins, either of which would harm our results of operations and financial condition.
We derive most of our revenue from sales to a small number of customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, or we are unable to collect from them, our revenues would be reduced and our financial results would suffer.
Our largest customers account for a substantial percentage of our revenues. For the six months ended June 30, 2010, four customers accounted for 15%, 13%, 11% and 11% of total revenues while sales to our ten largest customers accounted for 75% of our total revenues. Sales to these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter. We may not be able to retain our key customers, or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. Any substantial decrease or delay in sales to one or more of our key customers would harm our sales and financial results. In addition, any difficulty in collecting amounts due from one or more key customers could harm our operating result and financial condition. As of June 30, 2010, three customers accounted for approximately 26%, 24% and 15% of our net accounts receivable balance, respectively.
Our products generally have long sales cycles and implementation periods, which increase our costs in obtaining orders and reduce the predictability of our operating results.
Our products are technologically complex. Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems. As a result, our sales processes are often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products, depending on our product line, typically range from three to twelve months. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue. We incur costs related to such sales prior to, and even if we do not succeed in, making any sale to a customer.
Long sales cycles also subject us to other risks, including customers budgetary constraints or insolvency, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers purchase decisions, which could harm our financial results.
The time required for our customers to incorporate our products into their own can vary significantly and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.
We are not protected by long-term contracts with our customers.
We generally do not enter into long-term purchase contracts with our customers, and we cannot be certain as to future order levels from our customers. Customers generally purchase our products subject to cancelable short-term purchase orders. We cannot predict whether our current customers will continue to place orders, whether existing orders will be canceled, or whether customers who have ordered products will pay invoices for delivered products. Even when we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. Termination or reduction in orders by one of our major customers would harm our financial results.
The global economic downturn and other adverse economic factors has reduced our sales and revenues, increased our expenses and hurt our profitability, results of operations, financial condition and may continue to adversely impact us.
The current global economic downturn has reduced consumer spending on products offered by our customers. Other factors, such as high unemployment levels, inflation, deflation, increased fuel and energy costs, as well as increased consumer debt levels, interest rates and tax rates, may also reduce overall consumer spending or shift consumer spending to products other than those offered by our customers. Reduced sales by our customers harm our business by reducing demand for our products. Moreover, if our customers are not successful in generating sufficient revenue or cannot secure financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Lower net sales of our products and reduced payment capacity of our customers reduces our current and future revenues. In addition, our expenses could increase due to, among other things, fluctuations of the value of the United States dollar, changes in interest and tax rates, decreased inventory turnover, increases in vendor prices, and reduced vendor output. Such reduction of our revenues and increase of our expenses hurts our profitability and harms our results of operations and financial condition. In preparing our financial statements, we are required to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes, and some of those estimates are based on our forecasts of future results. The current volatility in the global economy increases the risk that our actual results will differ materially from our forecasts, requiring adjustments in future financial statements.
Trends in global credit markets could result in insolvency of our key suppliers or customers, and customer inability to finance purchases of our products.
The credit market crisis, including uncertainties with respect to financial institutions and the global capital markets, and other macro-economic challenges currently affecting the global economy may adversely affect our customers and suppliers. As a result of these conditions, our customers may experience cash flow problems, may not be able to obtain credit to finance their purchases and may modify, delay or cancel plans to purchase our products or lengthen payment terms. If our customers are unable to finance purchases of our products, our sales will be harmed.
Similarly, current economic and credit conditions may cause our suppliers to increase their prices, tighten payment terms or reduce their output, which could increase our expenses, make it harder or more expensive to obtain required supply and impair our sales. Moreover, if one of our key suppliers becomes insolvent, we may not be able to find a suitable substitute in a timely manner and our cost of production may increase. If economic and credit conditions in the United States and other key markets deteriorate further or do not show improvement, our business and operating results may be harmed.
Our products are characterized by average selling prices that typically decline over relatively short time periods; if we are unable to reduce our costs or introduce new products with higher average selling prices, our financial results will suffer.
Average selling prices for our products typically decline over relatively short time periods, while many of our manufacturing costs are fixed. When our average selling prices decline, our revenues decline unless we are able to sell more units and our gross margins decline unless we are able to reduce our manufacturing costs by a commensurate amount. In addition, we must continue to introduce new products with high average selling prices to compensate for our older products that may have declining average selling prices. Our operating results suffer when gross margins decline. We have experienced these problems, and we expect to continue to experience them in the future, although we cannot predict when they may occur or how severe they will befor example, we have experienced declines in average selling prices in the first half of 2010 compared to the same period of 2009.
Our operating results may be harmed by cyclical and volatile conditions in the markets we address. As a result, our business, financial condition and results of operations could be harmed.
We operate in the semiconductor industry, which is cyclical and from time to time has experienced significant downturns. Downturns in the industry often occur in connection with, or in anticipation of, maturing product cycles for semiconductor companies and their customers, and declines in general economic conditions. These downturns can cause abrupt fluctuations in product demand, production over-capacity and accelerated average selling price declines. The current global economic downturn and the downturn in our industry have harmed our revenue and our results of operations. This downturn may continue and the recovery may be slow, which may continue to harm our revenues, gross margins and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our revenues if we are unable to ship enough products to meet customer demand.
The current global economic downturn makes it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. This downturn has delayed and lengthened our sales cycles by causing U.S. and foreign businesses to slow or postpone spending on our products and services. We cannot predict the timing, strength or duration of the economic slowdown or the economic recovery, global, or in the semiconductor industry. The combination of our lengthy sales cycle coupled with challenging macroeconomic conditions continue to have a compounding negative impact on our results of operations.
Our success depends on our ability to develop and market new products in new markets. 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.
Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers changing demands. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration and smaller process geometries. We must constantly compete to ensure that our products are designed into our customers new products, which are rapidly evolving. Our past sales and profitability have resulted, to a large extent, from our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products incorporating the new standards and technologies. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or our customers products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards.
Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the digital television and set-top box markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control. If new markets do not develop as we anticipate, or if our products or those of our customers do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be harmed. The emergence of new markets for our products is also dependent in part upon third parties developing and marketing content in a format compatible with commercial and consumer products that incorporate our products. If this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.
Our financial performance is highly dependent on the timely and successful introduction of new and enhanced products.
Our financial performance depends in large part on our ability to successfully develop and market next-generation and new products in a rapidly changing technological environment. If we fail to successfully identify new product opportunities and timely develop and introduce new products, obtain design wins, and achieve market acceptance, we may lose our market share and our future revenues and earnings may suffer.
In the consumer electronics market, our performance has been dependent on our successful development and timely introduction of integrated circuits for DVD players, digital cameras, digital televisions, multimedia accelerators for mobile phones, set-top boxes and digital imaging products. These markets are characterized by the incorporation of a steadily increasing level of integration and features on a chip at the same or lower system cost, enabling OEMs to continually improve the features or reduce the prices of the systems they sell. If we are unable to continually develop and introduce integrated circuits with increasing levels of integration and new features at competitive prices, our operating results will suffer.
In the Imaging market, our performance has been dependent on our successful development and timely introduction of integrated circuits for printers and multi-function peripherals. These markets are characterized by the incorporation of a steadily increasing level of integration and higher speeds on a chip at the same or lower system cost, enabling OEMs to improve the performance and features or reduce the prices of the systems they sell. If we are unable to develop and introduce integrated circuits with increasing levels of integration, performance and new features at competitive prices, our operating results will suffer. The performance of our imaging software licensing business is dependent on our ability to develop, introduce and sell new releases of our software, incorporating new or enhanced printing and performance standards required by our OEM customers. If we are unable to develop and sell versions of our software supporting required standards and offering enhanced performance, our operating results will be harmed.
We face competition or potential competition from companies with greater resources than ours, and if we are unable to compete effectively with these companies, our market share would decline and our business would be harmed.
The markets in which we compete are intensely competitive and are characterized by rapid technological change, declining average selling prices and rapid product obsolescence. We expect competition to increase in the future from existing competitors and from other companies that may enter our existing or future markets with solutions that may be less costly or provide higher performance or more desirable features than our products. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.
Our existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, marketing, personnel, technological, market, distribution and other resources. These competitors may also have broader product lines and longer standing relationships with customers and suppliers than we have. Many of our competitors are located in countries where our customers are located, such as China, Japan, Korea and Taiwan, which may give them an advantage in securing business from these customers.
Some of our principal competitors maintain their own semiconductor foundries and may therefore benefit from capacity, cost and technical advantages. Our principal competitors in the integrated audio and video devices for DVD applications include MediaTek and Sunplus Technology Co. Ltd. In the digital camera market, our principal competitors are in-house solutions developed and used by major Japanese OEMs, as well as products sold by Ambarella, Fujitsu, Novatech, SunPlus Inc. and Texas Instruments, Inc. In the market for multimedia acceleration for mobile phones, our principal competitors include Broadcom Corp., CoreLogic, MtekVision Co. Ltd., nVidia and Telechips Inc. Our principal competitors for digital semiconductor devices in the digital television market include Broadcom Corp., M-Star, MediaTek, ST Microelectronics and Trident Microsystems, Inc. Competitors in the printer and multifunction peripheral space include Adobe, Conexant Systems, Inc., Global Graphics, Marvell Semiconductor, Inc. and in-house captive suppliers.
The DVD player market has slowed, and continued competition will lead to further price reductions and reduced profit margins. We also face significant competition in the DTV, set-top box, digital imaging and digital camera markets. The future growth of these markets is highly dependent on OEMs continuing to outsource chip supply and an increasing portion of their product development work rather than doing it in-house. Many of our existing competitors, as well as OEM customers that are expected to compete with us in the future, have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than we have. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.
Our new frame rate conversion technology is in the early stages of commercialization and our financial results and ability to compete could be harmed.
Through our acquisition of Let It Wave in June 2008, we acquired a frame rate conversion technology, for which we completed development in June 2009. Our competitors may develop a superior performance image processing technology. If we cannot successfully market and sell our frame rate conversion technology, we will not be able to recoup our costs of acquiring Let It Wave or our development costs for this technology and we will not obtain the intended benefits from the acquisition and our financial results and ability to compete would be harmed.
We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, and the failure of any of these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.
We do not own or operate an assembly, fabrication or test facility. We rely on independent foundries to manufacture substantially all of our products. These independent foundries fabricate products for other companies and may also produce products of their own design. Availability of foundry capacity has at times in the past been, and may in the future be, reduced due to strong demand. Additionally, due to the recent global economic environment it is possible that our foundry subcontractors could experience financial difficulties that would impede their ability to operate effectively. If we are unable to secure sufficient capacity at our existing foundries, or in the event of a closure at any of these foundries, our product revenue, cost of product revenue and results of operations would be negatively impacted.
We do not have long-term supply contracts with any of our suppliers, including our principal supplier, TSMC, and our principal assembly houses. Therefore, TSMC and our other suppliers are not obligated to manufacture products for us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.
Our reliance on independent foundries involves a number of risks, including:
In addition, TSMC and some of our other foundries are located in areas of the world that are subject to natural disasters such as earthquakes. While the 1999 and 2010 earthquake in Taiwan did not have a material impact on our independent foundries, a similar event centered near TSMCs facility and other foundries could severely reduce TSMCs ability to manufacture our integrated circuits. The loss of any of our manufacturers as a supplier, our inability to expand the supply of their products in response to increased demand, or our inability to obtain timely and adequate deliveries from our current or future suppliers due to a natural disaster or any other reason could delay or reduce shipments of our products. Any of these circumstances could damage our relationships with current and prospective customers and harm our sales and financial results.
We also rely on a limited number of independent contractors for the assembly and testing of our products. Our reliance on independent assembly and testing houses limits our control over delivery schedules, quality assurance and product cost. Disruptions in the services provided by our assembly or testing houses or other circumstances that would require us to seek alternative sources of assembly or testing could lead to supply constraints or delays in the delivery of our products. These constraints or delays could damage our relationships with current and prospective customers and harm our financial results.
Because foundry capacity is limited from time to time, we may be required to enter into costly long-term supply arrangements to secure foundry capacity.
If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our sales would be reduced. In order to secure additional foundry capacity, we have considered, and may in the future need to consider, various arrangements with suppliers, which could include, among other things:
We may not be able to make any such arrangement in a timely fashion or at all, and such arrangements, if any, may be expensive and may not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to utilize all of that capacity or incur penalties. Excess capacity could lead to write downs of excess inventory, which could harm our financial results. Such penalties may be expensive and could harm our financial results.
If our independent foundries do not achieve satisfactory yields, our relationships with our customers may be harmed.
The fabrication of silicon wafers is a complex process. Small levels of contaminants in the manufacturing environment, defects in photo masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial portion of the integrated circuits on a wafer to be non-functional. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. As a result, foundries often experience problems achieving acceptable yields, which are represented by the number of good integrated circuits as a proportion of the number of total integrated circuits on any particular wafer. Poor yields from our independent foundries would reduce our ability to deliver our products to customers, harm our relationships with our customers and harm our business.
We are dependent upon our international sales and operations; economic, political or military events in a country where we make significant sales or have significant operations could interfere with our success or operations there and harm our business.
During 2009 and 2008, 93% of our total revenues were derived outside of North America. We anticipate that international sales will continue to account for a substantial majority of our total revenues for the foreseeable future. Substantially all of our semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors.
We are subject to a variety of risks inherent in doing business internationally, including:
A material amount of our research and development personnel and facilities and a portion of our marketing personnel are located in Israel. Political, economic and military conditions in Israel directly affect our operations. For example, increased violence or armed conflict in Israel or the Palestinian territories may disrupt travel and communications in the region, harming our operations there. Furthermore, some of our employees in Israel are obligated to perform up to 36 days of military reserve duty annually and may be called to active duty in a time of crisis. The absence of these employees for significant periods may cause us to operate inefficiently during these periods.
Our operations in China are subject to the economic and political uncertainties affecting that country. For example, the Chinese economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors and may not be sustained. If Asia, particularly China, fails to continue its recent growth, or even contracts, this could harm our OEM and ODM customers based in Asia and cause them to purchase fewer products from us for shipment to China, the rest of Asia and globally. In addition, Asia consumers may purchase fewer products sold by our OEM customers containing our products, and we may experience disruptions in our operations in Asia, which could harm our business and financial results.
We also maintain offices in France, India, Japan, Korea, Sweden, Taiwan and the United Kingdom, and our operations are subject to the economic and political uncertainties affecting these countries as well.
The significant concentration of our manufacturing activities with third party foundries in Taiwan exposes us to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and China. We have several significant OEM customers in Japan, Korea and other parts of Asia. Adverse economic circumstances in Asia could affect these customers willingness or ability to do business with us in the future or their success in developing and launching devices containing our products.
The complexity of our international operations may increase our operating expenses and disrupt our revenues and business.
We transact business and have operations worldwide. For example, international transactions account for a substantial majority of our sales and our semiconductor products are manufactured, assembled and tested outside of the United States. Our global operations involve significant complexity and difficulties, including:
Managing international operations is expensive and complex. If we are unable to manage the complexity of our global operations successfully and cost effectively, our financial performance and operating results could suffer.
Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.
Our success and ability to compete depend in large part upon protection of our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. Monitoring unauthorized use of our intellectual property is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely in these countries. If competitors are able to use our technology, our ability to compete effectively could be harmed.
The protection offered by patents is uncertain. For example, our competitors may be able to effectively design around our patents, or the patents may be challenged, invalidated or circumvented. Those competitors may also independently develop technologies that are substantially equivalent or superior to our technology and may obtain patents that restrict our business. Moreover, while we hold, or have applied for, patents relating to the design of our products, some of our products are based in part on standards, for which we do not hold patents or other intellectual property rights.
We have generally limited access to and distribution of the source and object code of our software and other proprietary information. With respect to our page description language software, system-on-a-chip platform firmware and drivers for the digital office market and in limited circumstances with respect to firmware and platforms for our DTV products, we grant licenses that give our customers access to and restricted use of the source code of our software. This access increases the likelihood of misappropriation or misuse of our technology.
Claims and litigation regarding intellectual property rights and breach of contract claims could seriously harm our business and require us to incur significant costs.
In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the past, we have been subject to claims and litigation regarding alleged infringement of other parties intellectual property rights, and we have been party to a number of patent-related lawsuits, both as plaintiff and defendant. We could become subject to additional litigation in the future, either to protect our intellectual property or as a result of allegations that we infringe others intellectual property rights or have breached our contractual obligations to others. Claims that our products infringe proprietary rights or that we have breached contractual obligations would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement or breach. Future litigation against us, if successful, could subject us to significant liability for damages, restrict or prohibit the sale of our products or invalidate our proprietary rights. These lawsuits, regardless of their success, are time-consuming and expensive to resolve and require significant management time and attention. Our costs and potential liability are increased to the extent we have to indemnify or otherwise defend our customers. Future intellectual property and breach of contract litigation could force us to do one or more of the following:
Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our customers and a license is not made available to us on commercially reasonable terms, we are restricted in or prevented from selling our products or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially harmed.
If necessary licenses of third-party technology are not available to us or are expensive, our products could become obsolete.
From time to time, we may be required to license technology from third parties to develop new products or product enhancements. Third-party licenses may not be available on commercially reasonable terms or at all. If we are unable to obtain any third-party license required to develop new products and product enhancements or to continue selling our current products, we may have to obtain substitute technology of lower quality or performance standards or at greater cost or discontinue selling or developing certain products, which could seriously harm the competitiveness of our products.
We rely on licenses to use various technologies that are material to our products. We do not own the patents that underlie these licenses. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our abiding by the terms of the licenses. Under the license agreements we must fulfill confidentiality obligations and pay royalties. If we fail to abide by the terms of the license, we would be unable to sell and market the products under license. In addition, we do not control the prosecution of the patents subject to this license or the strategy for determining when such patents should be enforced. As a result, we are dependent upon our licensor to determine the appropriate strategy for prosecuting and enforcing those patents.
Our business may be impacted by foreign exchange fluctuations.
Foreign currency fluctuations may affect the prices of our products. Prices for our products are currently denominated in United States dollars for sales to our customers throughout the world. If there is a significant devaluation of the currency in a specific country, the prices of our products will increase relative to that countrys currency; our products may be less competitive in that country and our revenues may be adversely affected. Also, we cannot be sure that our international customers will continue to be willing to place orders denominated in United States dollars. If they do not, our revenue and operating results will be subject to foreign exchange fluctuations, which we may not be able to successfully manage.
A portion of the cost of our operations, relating mainly to our personnel and facilities is incurred in foreign currencies. As a result, we bear the risk that the rate of inflation in those foreign countries or the decline in value of the United States dollar compared to those foreign currencies will increase our costs as expressed in United States dollars. To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the United States dollar against foreign currencies. These measures may not adequately protect us from the impact of inflation or currency fluctuation in foreign countries.
Because we have significant operations in Israel, our business and future operating results could be harmed by terrorist activity or military conflict.
We conduct a significant portion of our research and development and engineering activities at our design center in Haifa, Israel, a 109,700 square foot facility where we employ approximately 350 people. We also conduct a portion of our sales and marketing operations at our Haifa facility.
Any conflict affecting Israel could greatly disrupt our Israeli operations locally and, as a result, hinder our business generally by delaying product development or interfering with global marketing efforts. For example, as a result of the heightened military operations in Gaza, some of our employees were conscripted for several weeks ending in January 2009. Additional employees may be called to active duty in the future. Extended absences could disrupt our operations and delay product development cycles.
In addition, military conflict or terrorist activities in the Middle East or elsewhere could harm our business as a result of a disruption in commercial activity affecting international commerce or a general economic slowdown and reduced demand for consumer electronic products.
Changes in, or different interpretations of, tax rules and regulations may adversely affect our effective tax rates.
Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by changes in the geography of our income or losses, or by changes in the valuation of our deferred tax assets and liabilities. The ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our operating results and financial position.
If we are not able to apply our net operating losses against taxable income in future periods, our financial results will be harmed.
Our future net income and cash flow will be affected by our ability to apply our net operating loss carryforwards, or (NOLs), against taxable income in future periods. Our NOLs totaled approximately $162.0 million for federal, $39.0 million for state and $143.0 million for foreign tax reporting purposes as of December 31, 2009. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. Changes in federal, state or foreign tax laws may further limit our ability to utilize our NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.
Our products could contain defects, which could reduce sales of those products or result in claims against us.
We develop complex and evolving products. Despite testing by us, our manufacturers and customers, errors may be found in existing or new products. This could result in, among other things, a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and harm our relationships with our customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to customers or could damage market acceptance of such products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.
Regulation of our customers products may slow the process of introducing new products and could impair our ability to compete.
The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television and mobile phone business. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of regulation on our customers or the industries in which our customers operate may in turn harm our business. In addition, our digital television and digital camera businesses may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business.
Any acquisitions we make could disrupt our business and severely harm our financial condition.
We have made investments in, and acquisitions of other complementary companies, products and technologies, and we may acquire additional businesses, products or technologies in the future. In the event of any future acquisitions, we could:
Our operation of acquired business will also involve numerous risks, including:
We may not be able to successfully complete the integration of acquired in-process products, technologies or personnel and any failure to do so could disrupt our business, cause us to not achieve the intended benefits of the acquisition, and seriously harm our financial condition.
If we fail to manage our future growth, if any, our business would be harmed.
We anticipate that our future growth, if any, will require us to recruit and hire a substantial number of new engineering, managerial, sales and marketing personnel. Our ability to manage growth successfully will also require us to expand and improve administrative, operational, management and financial systems and controls. Many of our key functions, including a material portion of our research and development, product operations and a significant portion of our marketing, sales and administrative operations are located in Israel. A majority of our sales and marketing and certain of our research and development and administrative personnel, including our President and Chief Executive Officer and other officers, are based in the United States. The geographic separation of these operations places additional strain on our resources and our ability to manage growth effectively. If we are unable to manage growth effectively, our business will be harmed.
We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.
At June 30, 2010, we had $379.1 million in cash, cash equivalents and short-term investments. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities (ARS) and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.
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 or if the decline in fair value of our publicly traded equity investments and debt instruments is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as available-for-sale, generally no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. Recent events in the subprime mortgage market and with ARS could negatively impact our return on investment for these debt securities and thereby reduce the amount of cash and cash equivalents and long-term investments on our balance sheet.
We rely on the services of our executive officers and other key personnel, whose knowledge of our business and industry would be extremely difficult to replace.
Our success depends to a significant degree upon the continuing contributions of our senior management. We do not have employment contracts with any of our key employees. Management and other employees may voluntarily terminate their employment with us at any time upon short or no notice. The loss of key personnel could delay product development cycles or otherwise harm our business. We believe that our future success will also depend in large part on our ability to attract, integrate and retain highly-skilled engineering, managerial, sales and marketing personnel, located in the United States and overseas. Competition for such personnel is intense, and we may not be successful in attracting, integrating and retaining such personnel. Failure to attract, integrate and retain key personnel could harm our ability to carry out our business strategy and compete with other companies.
Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions:
Our stock price has fluctuated and may continue to fluctuate widely.
The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2010 and June 30, 2010, the sale prices of our common stock, as reported on the Nasdaq Stock Market, ranged from a low of $8.95 to a high of $12.23. The market price of our common stock may be subject to significant fluctuations in the future in response to a variety of factors, including:
From time to time, the stock market experiences extreme price and volume fluctuations that have particularly affected the market prices for semiconductor companies or technology companies generally and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may reduce the future market price of our common stock.
We repurchased 2.1 million shares of our equity securities during the three months and six months ended June 30, 2010. See Note 2 to the Condensed Consolidated Financial Statements.
The information required by this Item is incorporated by reference to the Exhibit Index which follows the signature page of this report.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.