XNAS:SIMG Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:SIMG (): Fair Value Estimate
Premium
XNAS:SIMG (): Consider Buying
Premium
XNAS:SIMG (): Consider Selling
Premium
XNAS:SIMG (): Fair Value Uncertainty
Premium
XNAS:SIMG (): Economic Moat
Premium
XNAS:SIMG (): Stewardship
Premium
 

 
 

 
 
 



 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended: March 31, 2012
 
OR
   
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                            to                           
 
Commission File Number: 000-26887
 
Silicon Image, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0396307
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer I.D. Number)
 
1140 East Arques Avenue, Sunnyvale, California 94085
 (Address of principal executive office)(Zip Code)
 
(408) 616-4000
(Registrant’s telephone number, including area code)
 
N/A
 (Former name, former address and former fiscal year,
if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer    o
Accelerated filer   x
   
Non-accelerated filer   o
Smaller reporting company   o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Shares Outstanding at April 25, 2012
Common Stock, $0.001 par value
 
83,248,756
 
 
 
 


 
 
 

 

 

 
SILICON IMAGE, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2012


   
 Part I FINANCIAL INFORMATION
 
  3
  3
  4
  5
  6
  7
  22
  28
  29
Part II OTHER INFORMATION
  29
  29
       Item 1A Risk Factors
  29
  46
  46
  46
  46
       Item 6 Exhibits
  47
       Signature
  48

 

 
 
 
2

 
 
 
 
Part I. FINANCIAL INFORMATION


SILICON IMAGE, INC.
(in thousands, except share and per share amounts)
(unaudited)

 
   
March 31, 2012
   
December 31, 2011
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 34,471     $ 37,125  
Short-term investments
    116,842       124,301  
Accounts receivable, net of allowances for doubtful accounts of  $1,362 at March 31, 2012 and $1,382 at December 31, 2011
    37,288       27,368  
Inventories
    12,223       10,062  
Prepaid expenses and other current assets
    7,900       9,101  
Deferred income taxes
    739       708  
Total current assets
    209,463       208,665  
Property and equipment, net
    13,074       12,772  
Deferred income taxes, non-current
    4,066       4,706  
Intangible assets, net (Note 7)
    11,419       11,915  
Goodwill (Note 7)
    18,646       18,646  
Other assets
    13,349       9,369  
Total assets
  $ 270,017     $ 266,073  
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 17,322     $ 10,133  
Accrued and other current liabilities
    22,204       26,116  
Deferred margin on sales to distributors
    11,251       7,809  
Deferred license revenue
    3,599       2,684  
Total current liabilities
    54,376       46,742  
Other long-term liabilities
    15,844       14,815  
Total liabilities
    70,220       61,557  
Commitments and contingencies (Note 9)
               
Stockholders’ Equity:
               
Convertible preferred stock, par value $0.001; 5,000,000 shares authorized; no shares issued or outstanding
    -       -  
Common stock, par value $0.001; 150,000,000 shares authorized; shares issued and outstanding: 83,131,329 at March 31, 
          2012 and 82,069,472 at December 31, 2011
    98       98  
Additional paid-in capital
    511,276       505,191  
Treasury stock, 17,918,244 shares at March 31, 2012 and 17,614,441 shares at December 31, 2011
    (112,514 )     (111,049 )
Accumulated deficit
    (199,176 )     (189,600 )
Accumulated other comprehensive income (loss)
    113       (124 )
Total stockholders’ equity
    199,797       204,516  
Total liabilities and stockholders’ equity
  $ 270,017     $ 266,073  


See accompanying Notes to Condensed Consolidated Financial Statements.
 

 
 
 
3

 

 
 
SILICON IMAGE, INC.
(in thousands, except per share amounts)
(unaudited)


   
Three Months Ended March 31,
 
   
2012
   
2011
 
Revenue:
           
Product
  $ 43,024     $ 38,057  
Licensing
    11,979       10,942  
Total revenue
    55,003       48,999  
Cost of revenue and operating expenses:
               
Cost of product revenue (1)
    23,099       19,872  
Cost of licensing revenue
    125       400  
Research and development (2)
    21,707       15,243  
Selling, general and administrative (3)
    16,137       13,051  
Amortization of intangible assets
    496       197  
Restructuring expense (Note 8)
    5       365  
Total cost of revenue and operating expenses
    61,569       49,128  
Loss from operations
    (6,566 )     (129 )
Interest income and other, net
    538       377  
Income (loss) before provision for income taxes and equity in net loss of an unconsolidated affiliate
    (6,028 )     248  
Income tax expense
    2,948       1,068  
Equity in net loss of an unconsolidated affiliate
    600       -  
Net loss
  $ (9,576 )   $ (820 )
                 
Net loss per share – basic and diluted
  $ (0.12 )   $ (0.01 )
Weighted average shares – basic and diluted
    82,722       78,724  
                 
(1) Includes stock-based compensation expense
  $ 218     $ 180  
(2) Includes stock-based compensation expense
  $ 1,160     $ 573  
(3) Includes stock-based compensation expense
  $ 1,910     $ 1,132  

 
See accompanying Notes to Condensed Consolidated Financial Statements.
 

 
 
 
4

 

 
 
SILICON IMAGE, INC.
(in thousands)
(unaudited)
 
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Net loss
  $ (9,576 )   $ (820 )
                 
Foreign currency translation adjustments, net of tax
    48       143  
Fair value of effective cashflow hedges, net of tax
    15       71  
Change in unrealized net gain (loss) on available-for-sale investments, net of tax
    174       (9 )
          Other comprehensive income
    237       205  
                 
Comprehensive loss
  $ (9,339 )   $ (615 )
 

See accompanying Notes to Condensed Consolidated Financial Statements.

 
 
 
 
5

 
 

 
SILICON IMAGE, INC.
(in thousands)
(unaudited)
 
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Cash flows from operating activities:
           
Net loss
  $ (9,576 )   $ (820 )
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation
    1,591       1,659  
Stock-based compensation expense
    3,288       1,885  
Amortization of investment premium
    509       806  
Tax benefits from employee stock-based transactions
    310       923  
Amortization of intangible assets
    496       197  
Excess tax benefits from employee stock-based transactions
    (310 )     (923 )
Realized gain on sale of short-term investments
    (45 )     (39 )
Equity in net loss of unconsolidated affiliate
    600       -  
Others
    358       162  
Changes in assets and liabilities:
               
Accounts receivable
    (9,967 )     (4,261 )
Inventories
    (2,161 )     (758 )
Prepaid expenses and other assets
    969       (827 )
Accounts payable
    6,483       (1,548 )
Accrued and other liabilities
    (1,847 )     (4,322 )
Deferred margin on sales to distributors
    3,442       5,224  
Deferred license revenue
    858       (725 )
Cash used in operating activities
    (5,002 )     (3,367 )
Cash flows from investing activities:
               
Proceeds from maturities and sales of short-term investments
    23,031       35,457  
Purchases of short-term investments
    (15,797 )     (30,076 )
Cash used in business acquisitions
    -       (1,915 )
Purchases of property and equipment
    (2,191 )     (1,924 )
Investment in a privately held company
    (3,500 )     -  
Advances for intellectual properties
    -       (4,750 )
Other investing activities
    (500 )     -  
Cash  provided by (used in) investing activities
    1,043       (3,208 )
Cash flows from financing activities:
               
Proceeds from issuances of common stock
    2,486       4,047  
Excess tax benefits from employee stock-based transactions
    310       923  
Repurchases of restricted stock units for income tax withholding
    (1,465 )     (1,069 )
Cash provided by financing activities
    1,331       3,901  
Effect of exchange rate changes on cash and cash equivalents
    (26 )     (4 )
Net decrease in cash and cash equivalents
    (2,654 )     (2,678 )
Cash and cash equivalents — beginning of period
    37,125       29,942  
Cash and cash equivalents — end of period
  $ 34,471     $ 27,264  
Supplemental cash flow information:
               
Cash payment for income taxes
  $ (209 )   $ (1,625 )
Restricted stock units vested
  $ 3,929     $ 2,735  
Property and equipment and other assets purchased but not paid for
  $ 1,150     $ 626  
Unrealized gain (loss) on short term investments
  $ 174     $ (9 )
 

See accompanying Notes to Condensed Consolidated Financial Statements.
 
 
 
 
 
6

 

 
 
SILICON IMAGE, INC.
(UNAUDITED)


NOTE 1.  BASIS OF PRESENTATION
 
  In the opinion of management, the accompanying unaudited condensed consolidated financial statements of Silicon Image, Inc. (the “Company”, “Silicon Image”, “we” or “our”) included herein have been prepared on a basis consistent with our December 31, 2011 audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary to fairly state the condensed consolidated balance sheets of Silicon Image and our subsidiaries as of March 31, 2012 and December 31, 2011 and the related condensed consolidated statements of operations for the three months ended March 31, 2012 and 2011, condensed consolidated statements of comprehensive income (loss) for three months ended March 31, 2012 and 2011, and the related condensed consolidated statements of cash flows for the three months ended March 31, 2012 and 2011. All significant intercompany accounts and transactions have been eliminated. These interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. Financial results for the three months ended March 31, 2012 are not necessarily indicative of future financial results.

Use of Estimates

 The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from these estimates. Areas where significant judgment and estimates are applied include revenue recognition, stock-based compensation, short-term investments related to fair value hierarchy, inventory reserves, realization of long-lived assets, including goodwill and intangibles, income taxes, deferred tax assets and legal matters. The condensed consolidated financial statements include the accounts of Silicon Image, Inc. and its subsidiaries after elimination of all intercompany balances and transactions.

Summary of Significant Accounting Policies
 
               There have been no changes to the Company significant accounting policies during the three months ended March 31, 2012 as compared to the significant accounting policies described in the Company audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Recent Accounting Pronouncements

Recently Issued Accounting Pronouncements
 
In December 2011, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11, “Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 will require the Company to disclose information about offsetting related arrangements to enable users of the Company financial statements to understand the effect of those arrangements on its financial position. The new guidance is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The disclosures required are to be applied retrospectively for all comparative periods presented. The Company does not expect that this standard will materially impact its disclosures included in condensed consolidated financial statements.

Recently Adopted Accounting Standards
 
Effective January 1, 2012, the Company adopted ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS).” The adoption of ASU 2011-04 did not have a significant impact on the Company’s consolidated financial position or results of operations.
 
Effective January 1, 2012, the Company adopted ASU No. 2011-05, “Presentation of Comprehensive Income” and ASU No. 2011-12, “Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The adoption of ASU 2011-05 and 2011-12 concern presentation and disclosure only and did not have an impact on the Company’s consolidated financial position or results of operations.
 
 
 
 
7

 
 
 
 
NOTE 2.  NET LOSS PER SHARE

    Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period, excluding shares subject to repurchase and diluted net loss per share is computed using the weighted-average number of common shares and dilutive equivalents outstanding during the period, if any, determined using the treasury stock method. There are no dilutive securities for the three months ended March 31, 2012 and 2011 due to the Company’s net losses. The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share amounts):
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Numerator:
           
Net loss
  $ (9,576 )   $ (820 )
Denominator:
               
Weighted average outstanding shares used to compute basic and diluted net loss per share
    82,722       78,724  
                 
Net loss per share:  – basic and diluted
  $ (0.12 )   $ (0.01 )
 
As a result of the net loss for the three months ended March 31, 2012 and 2011, approximately 5.1 million and 5.6 million common stock equivalents for the three months ended March 31, 2012 and 2011, respectively, were excluded in the computation of diluted net loss per share because their effect would have been anti-dilutive.
 
NOTE 3.  BALANCE SHEET COMPONENTS

The components of inventory, prepaid expenses and other current assets, property and equipment and other assets consisted of the following:
 
   
March 31, 2012
   
December 31, 2011
 
   
(In thousands)
 
Inventories:
           
Raw materials
  $ 5,298     $ 5,104  
Work in process
    2,636       1,071  
Finished goods
    4,289       3,887  
    $ 12,223     $ 10,062  
                 
                 
Prepaid expense and other current assets:
               
Prepaid software maintenance
  $ 1,871     $ 2,625  
Interest receivable
    1,051       910  
Income tax receivable
    210       1,012  
Others
    4,768       4,554  
    $ 7,900     $ 9,101  
                 
                 
Property and equipment:
               
Computers and software
  $ 21,574     $ 21,233  
Equipment
    33,985       32,932  
Furniture and fixtures
    2,926       2,727  
      58,485       56,892  
Less: accumulated depreciation
    (45,411 )     (44,120 )
Total property and equipment, net
  $ 13,074     $ 12,772  
                 
                 
Other assets:
               
Investment in an unconsolidated affiliate (Note 5)
  $ 5,920     $ 6,520  
Investment in a privately-held company (Note 5)
    3,500       -  
Advances for intellectual properties
    2,412       1,848  
Others
    1,517       1,001  
    $ 13,349     $ 9,369  


 
 
 
8

 

 
 
The components of accrued liabilities and other long-term liabilities were as follows: 
 
   
March 31, 2012
   
December 31, 2011
 
   
(In thousands)
 
Accrued and other current liabilities:
           
Accrued payroll and related expenses
  $ 4,378     $ 8,540  
Accrued royalties
    8,582       5,926  
Accrued product rebate
    2,404       2,389  
Contingent consideration in connection with a business acquisition (Note 6)
    1,304       1,304  
Accrued restructuring (Note 8)
    427       910  
Accrued payables
    3,362       5,522  
Others
    1,747       1,525  
    $ 22,204     $ 26,116  
                 
Other long-term liabilities:
               
Non-current liability for uncertain tax positions
  $ 13,508     $ 12,480  
Non-current deferred license revenue
    1,185       1,242  
Others
    1,151       1,093  
    $ 15,844     $ 14,815  

NOTE 4.  FAIR VALUE MEASUREMENTS

The Company records its financial instruments that are accounted for under FASB Accounting Standard Codification (ASC) No. 320-10-25, “Recognition of Investments in Debt and Equity Securities,” and derivative contracts under FASB ASC No. 815, “Derivatives and Hedging,” at fair value. The determination of fair value is based upon the fair value framework established by FASB ASC No. 820-10-35, “Fair Value Measurements and Disclosures – Subsequent Measurement” (ASC 820-10-35). ASC 820-10-35 provides that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for such asset or liability. The carrying value of the Company’s financial instruments including cash and cash equivalents and short-term investments approximates fair market value due to the relatively short period of time to maturity. The fair value of investments is determined using quoted market prices for those securities or similar financial instruments.

The Company’s cash equivalents and short term investments are generally classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

The Company’s Level 1 assets consist of money market fund securities and U.S. government and agency securities. These instruments are generally classified within Level 1 of the fair value hierarchy because they are valued based on quoted market prices in active markets.

The Company’s Level 2 financial assets include certificate of deposits, corporate securities and municipal securities and are valued by using a multi-dimensional relational model, the inputs, when available, are primarily benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications.

The Company’s Level 3 liabilities consist of contingent consideration in connection with a business acquisition. The Company makes estimates regarding the fair value of contingent consideration liabilities on the acquisition date and at the end of each reporting period until the contingency is resolved. The fair value of this arrangement is determined by calculating the net present value of the expected payments using significant inputs that are not observable in the market, including the probability of achieving the milestone, revenue projections and discount rates. The fair value of the contingent consideration will increase or decrease according to the movement of the inputs. The amounts will vary based on the probability of the milestone achievement, the timing of the projected revenues, the timing of the expected payments and the discount rate used to calculate the present value of the expected payments. The Company does not expect the changes in these inputs to have a material impact on the Company’s consolidated financial statements.

 The Company measures certain assets, including its cost and equity method investments, at fair value on a nonrecurring basis when they are deemed to be other-than-temporarily impaired. The fair values of these investments are determined based on valuation techniques using the best information available, and may include quoted market prices, market comparables, and discounted cash flow projections. An impairment charge is recorded when the cost of the investment exceeds its fair value and this condition is determined to be other-than-temporary. During the three months ended March 31, 2012 and 2011, the Company did not record any other-than-temporary impairments on those financial assets required to be measured at fair value on a nonrecurring basis.
 
 
 
 
9

 
 
 
The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis as of March 31, 2012:
 
   
Fair value measurements using
   
Assets (Liabilities)
 
   
Level 1
   
Level 2
   
Level 3
   
at fair value
 
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 17,916     $ -     $ -     $ 17,916  
Corporate securities
    -       9,324       -       9,324  
Total cash equivalents
  $ 17,916     $ 9,324     $ -     $ 27,240  
Short-term investments:
                               
Certificate of deposits
  $ -     $ 10,261     $ -     $ 10,261  
Municipal securities
    -       79,589       -       79,589  
Corporate securities
    -       26,992       -       26,992  
Total short-term investments
  $ -     $ 116,842     $ -     $ 116,842  
Liabilities:
                               
Contingent consideration in connection with a business acquisition (Note 6)
  $ -     $ -     $ (1,304 )   $ (1,304 )
 
The cash equivalents in the above table exclude $7.2 million in cash held by the Company or in its accounts or with investment fund managers as of March 31, 2012.

The following table presents the fair value of our financial instruments that are measured at fair value on a recurring basis as of December 31, 2011:
 
   
Fair value measurements using
   
Assets (Liabilities)
 
   
Level 1
   
Level 2
   
Level 3
   
at fair value
 
Assets:
                       
Cash equivalents:
                       
Money market funds
  $ 24,781     $ -     $ -     $ 24,781  
                                 
Short-term investments:
                               
Certificate of deposits
  $ -     $ 10,114     $ -     $ 10,114  
United States government agencies
    8,027       -       -       8,027  
Municipal securities
    -       84,157       -       84,157  
Corporate securities
    -       22,003       -       22,003  
Total short-term investments
  $ 8,027     $ 116,274     $ -     $ 124,301  
Liabilities:
                               
Contingent consideration in connection with a business acquisition (Note 6)
  $ -     $ -     $ (1,304 )   $ (1,304 )
 
The cash equivalents in the above table exclude $12.3 million in cash held by the Company or in its accounts or with investment fund managers as of December 31, 2011.

The following table presents the changes in the Company’s Level 3 liabilities, which are measured at fair value on a recurring basis, during the three months ended March 31, 2012 and 2011 (in thousands):
 
   
Fair Value Measurement Using Significant Unobservable Inputs
 
   
Liabilities
 
   
2012
   
2011
 
Beginning balance at January 1,
  $ (1,304 )   $ -  
Addition of contingent consideration from business acquisition (Note 6)
            (1,481 )
Adjustment in the fair value of contingent consideration
    -       -  
Ending balance at March 31,
  $ (1,304 )   $ (1,481 )
 
No gains or losses from these liabilities were recognized during the three months ended March 31, 2012 and 2011.

There were no transfers between Level 1, Level 2 and Level 3 fair value hierarchies during the quarter ended March 31, 2012. 

 
 
 
 
10

 
 
 
 
NOTE 5.  INVESTMENTS
 
Equity Method Investment

On July 13, 2011, the Company purchased a 17.5% equity ownership interest in a privately-held company for $7.5 million in cash. The privately-held company develops and designs wireless video and audio semiconductor chips. The Company accounts for this investment under the equity method. To date, the Company had recorded $1.6 million of its proportionate share of the privately-held company’s net loss. As of March 31, 2012 and December 31, 2011, the remaining balance of this investment was $5.9 million and $6.5 million, respectively.

Concurrently with the equity investment, the Company entered into the following with the privately-held company: (a) call option agreement whereby the Company can acquire the privately-held company at $35.0 million plus earn-out payments on or before April 2012 or until January 2013 subject to certain conditions; (b) sales representative agreement  whereby the privately-held company appointed the Company as sole and exclusive independent representative for the purposes of soliciting orders for and promoting  their product to the Company’s prospects as listed in the agreement; and (c) technology and IP license agreement granting the Company a license to certain technology of the privately-held company upon occurrence of certain events in the future. The Company has not exercised its call option and discussions are ongoing.

The Company assesses the potential impairment of the equity method investment by considering available evidence such as the investee’s actual and forecasted operating results, liquidity and capital resources, the market for the investee’s products and services, and the overall progress the investee has made towards its business objectives. The Company has not recognized any impairment losses on this investment. There were no additional contributions made or dividends or distributions received in the three months ended March 31, 2012.

Cost Method Investment

In February 2012, the Company paid $3.5 million of cash to purchase a minority interest in a privately held company which designs and develops wireless semiconductor chips.  This investment is accounted for using the cost method as the Company’s ownership percentage is minor and the Company does not exert significant influence over the investee.

NOTE 6.  ACQUISITION
 
SiBEAM, Inc.

On May 16, 2011, the Company completed its acquisition of SiBEAM, Inc. (SiBEAM) pursuant to an Agreement and Plan of Merger dated April 13, 2011.  SiBEAM is a privately-held, fabless semiconductor company headquartered in Sunnyvale, California and is a provider of high-speed wireless communication products for uncompressed HD video in consumer electronics and personal computer applications. The acquisition of SiBEAM supports the Company’s mission to be the leader in advanced video connectivity solutions. SiBEAM’s results of operations and the estimated fair value of assets acquired and liabilities assumed were included in the Company’s unaudited consolidated financial statements beginning May 16, 2011.  The revenue and net loss of SiBEAM for the three months ended March 31, 2012 was approximately $0.6 million and $3.0 million, respectively.  The acquisition costs, which were expensed as incurred, were approximately $920,000.

The fair value of the purchase price consideration consisted of the following (in thousands):
 
Cash
 
$
14,540
 
Fair value of shares of stock issued
   
10,429
 
Total purchase price
 
$
24,969
 

As part of the consideration, the Company issued 1,300,369 shares of its common stock to the former SiBEAM stockholders. The total fair value of the shares of stock issued of $10.4 million was determined based on the closing price of the Company’s stock on May 16, 2011 of $8.02 per share.

The preliminary purchase consideration was allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on the acquisition date. The Company’s allocation of the total purchase price is as follows (in thousands):

 
 
 
 
11

 
 
 
 
   
Estimated Fair Value
 
Assets acquired:
     
Cash
 
$
546
 
Accounts receivable
   
564
 
Inventories
   
1,353
 
Other current assets
   
260
 
Fixed assets and other long-term assets
   
336
 
Intangible assets
   
8,500
 
Goodwill
   
18,483
 
Total assets acquired
   
30,042
 
Current liabilities assumed:
       
Accounts payable
   
(546
)
Accrued liabilities
   
(3,465
)
Line of credit
   
(523
)
Deferred license revenue
   
(417
)
Total current liabilities assumed
   
(4,951
)
Deferred income tax liability, non-current
   
(122
)
Total liabilities assumed
   
(5,073
)
Total purchase price
 
$
24,969
 

The following table presents details of the intangible assets acquired through the acquisition of SiBEAM (in thousands, except years):

   
Asset Life in Years
   
Fair Value
 
In-process research and development
 
indefinite
   
$
4,500
 
Customer relationship
   
5
     
1,000
 
Trademark
   
5
     
3,000
 
           
$
8,500
 

The Company does not believe there is any significant residual value associated with these intangible assets. The Company amortizes the intangible assets straight-line over their estimated useful lives. The Company’s management determined the fair values of the intangible assets with the assistance of a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors, estimates of future revenues and costs.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and intangible assets. The goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company after the acquisition. Goodwill is not amortized, but is tested instead for impairment annually or more frequently if certain indicators of impairment are present. Goodwill is not expected to be tax deductible for income tax purposes.

Anchor Bay Technology

On February 2, 2011, the Company purchased the net assets Anchor Bay Technology (ABT), a San Jose, California based company involved in developing certain technology that is consistent with the Company’s long-term business strategy, for a total consideration of approximately $3.6 million in cash, subject to certain contingent milestone and earn-out payments as further described below. ABT designs and manufactures video processing semiconductor and system-level solutions. ABT offers advanced video processing chips for de-interlacing and format conversion applications, and video scaling chips for Blu-Ray players, HD set-top box, and AV receiver applications. The acquisition costs, which were expensed as incurred, were approximately $90,000.

 
 
 
 
12

 
 

 
 The total fair value of the purchase consideration for this acquisition consists of the following (in thousands):
 
   
Estimated Fair Value
 
Cash consideration
 
$
1,916
 
Contingent payments:
       
     First milestone
   
529
 
     Second milestone
   
525
 
     Earn-out payments
   
427
 
Settlement of pre-existing arrangements
   
249
 
            Total purchase price
 
$
3,646
 

Contingent Considerations

First milestone – The Company will pay the former stockholders of ABT $590,000 in cash upon the successful release on or before March 31, 2012 of product samples being developed by the Company which incorporate certain of ABT’s technologies.  The acquisition-date fair value of the first milestone payment was approximately $529,000.
 
Second milestone – The Company will pay the former stockholders of ABT $590,000 in cash upon the successful release on or before November 30, 2012 of production units being developed by the Company which incorporate certain of ABT’s technologies. The acquisition-date fair value of the second milestone payment was approximately $525,000.
 
Earn-out Payments – The former stockholders of ABT are entitled to (i) 50% of net licensing revenue to be derived from each initial ABT IP license entered into by the Company during the first 18 months from the acquisition date and (ii) 50% of support fees collected by the Company on ABT’s IP licenses in excess of 200% of the costs of providing the support services during the first 18 months from the acquisition date.  The acquisition-date fair value of the earn-out payments was approximately $427,000.
 
The Company had considered the acquisition-date fair values of the milestone and earn-out payments as part of the purchase price. The Company’s management determined the fair values of the contingent payments with the assistance of a valuation firm. The estimation of the fair value of the contingent payments required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors and the probability of the achievement of the factors on which the contingency is based.
 
The Company re-evaluated the fair value of the earn-out payments from the date of acquisition and at the end of each reporting period until the contingency is resolved. The Company re-evaluated the fair values of the milestone considerations and earn-out payments for the three months ended March 31, 2012 and no changes to fair value of such contingent considerations were identified. The Company met the first milestone and paid $590,000 to former stockholders of ABT in April 2012.

Prior to this acquisition, the Company entered into a IP License Agreement with ABT in 2010 for the use of certain of its intellectual property in exchange for a payment of $249,000, which was included in “Other Assets” in the Company’s consolidated balance sheet as of December 31, 2010. The Company’s acquisition of ABT in February 2011 resulted in the acquisition of the IP licensed in this IP License Agreement and the effective settlement of that agreement. There was no gain or loss on such effective settlement.  As a result, the payment made to ABT in connection with this IP License Agreement was considered part of the acquisition-date fair value of the total consideration transferred.
  
The allocation of the purchase consideration of this acquisition is summarized as follows (in thousands):
 
   
Estimated Fair Value
 
Intangible assets acquired
 
$
5,000
 
Goodwill
   
163
 
Net liabilities assumed
   
(1,517
)
   
$
3,646
 
 
                The Company allocated $163,000 of the purchase price to goodwill which is deductible for tax purposes. The goodwill recognized in this acquisition was derived from expected benefits from future technology, cost synergies and knowledgeable and experienced workforce who joined the Company as part of the acquisition.
 
                The accompanying condensed consolidated financial statements for the three months ended March 31, 2011 include the operations of the aforementioned acquisition, commencing on February 2, 2011, the acquisition date. No supplemental pro-forma information is presented for this acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.
 
 
 
 
13

 
 
 
 
                The following table presents details of the intangible assets acquired through the acquisition of ABT (in thousands, except years):
 
   
Estimated Fair
   
Estimated Useful
 
   
Value
   
Life (in Years)
 
Intellectual property
 
$
1,600
     
6
 
Core technology
   
1,600
     
3
 
Trade name
   
600
   
indefinite
 
Customer relationship
   
500
     
2
 
System technology
   
400
     
3
 
In-process research and development
   
300
   
indefinite
 
            Total
 
$
5,000
         

The Company does not believe there is any significant residual value associated with these intangible assets. The Company amortizes the intangible assets straight-line over their estimated useful lives. The Company’s management determined the fair values of the intangible assets with the assistance of a valuation firm. The estimation of the fair value of the intangible assets required the use of valuation techniques and entailed consideration of all the relevant factors that might affect the fair value, such as present value factors, estimates of future revenues and costs.

NOTE 7.  GOODWILL AND INTANGIBLE ASSETS
 
Goodwill
 
The table below summarizes the Company's goodwill activities (in thousands): 
 
   
March 31, 2012
   
December 31, 2011
 
Gross amount of goodwill
  $ 37,856     $ 37,856  
Accumulated impairment
    (19,210 )     (19,210 )
Carrying value at end of quarter
  $ 18,646     $ 18,646  

There were no additions or impairments of goodwill during the three months ended March 31, 2012.

Purchased Intangible Assets

The following table presents the Company’s purchased intangible assets as of March 31, 2012 (in thousands):
 
         
Gross Carrying Amount
   
Accumulated Amortization
   
Net
 
   
Useful Life
   
Dec 31,
         
Mar 31,
   
Dec 31,
         
Mar 31,
   
Mar 31,
   
Dec 31,
 
   
(years)
   
2011
   
Addition
   
2012
   
2011
   
Addition
   
2012
   
2012
   
2011
 
Intangible assets with finite lives
                                                     
     Intellectual Property
    6     $ 1,600     $ -     $ 1,600     $ (245 )   $ (67 )   $ (312 )   $ 1,288     $ 1,355  
     Core Technology
    3       1,600       -       1,600       (489 )     (133 )     (622 )     978       1,111  
     Trademark
    5       3,000       -       3,000       (375 )     (150 )     (525 )     2,475       2,625  
     System Technology
    3       400       -       400       (122 )     (33 )     (155 )     245       278  
     Customer Relationship
    2-5       1,500       -       1,500       (354 )     (113 )     (467 )     1,033       1,146  
Total intangible assets with finite lives
            8,100       -       8,100       (1,585 )     (496 )     (2,081 )     6,019       6,515  
                                                                         
Intangible assets with indefinite lives
            -               -                                          
     Trade Name
 
indefinite
      600       -       600       -       -       -       600       600  
     In-process R&D
 
indefinite
      4,800       -       4,800       -       -       -       4,800       4,800  
Total intangible assets with
indefinite lives
      5,400       -       5,400       -       -       -       5,400       5,400  
Total purchased intangible assets
          $ 13,500     $ -     $ 13,500     $ (1,585 )   $ (496 )   $ (2,081 )   $ 11,419     $ 11,915  

Amortization of purchased intangible assets which was presented as “Amortization of intangible assets” in the consolidated statements of operations for the three months ended March 31, 2012 and 2011 was $496,000 and $197,000, respectively.

There were no impairment charges with respect to the purchased intangible assets arising from business acquisitions during the three months ended March 31, 2012 and 2011.
 
 
 
 
 
14

 
 
 
 
The intangible assets related to the in-process research and development will be amortized over the estimated useful life of the technology upon completion of its development.  After initial recognition, acquired in-process research and development assets are accounted for as indefinite-lived intangible assets until the completion of the related development. Development costs incurred after acquisition on acquired development projects are expensed as incurred. Upon completion of development, acquired in-process research and development assets are considered amortizable finite-lived assets. If the in-process research and development project is abandoned, the Company will record an impairment charge in the period in which it is abandoned.  As of March 31, 2012, the related in-process research development projects were not yet completed.
 
The estimated future amortization expense of purchased intangible assets with finite lives for future periods is as follows (in thousands):
 
Year ending December 31,
 
Amount
 
2012 (remaining 9 months)
  $ 1,488  
2013
    1,754  
2014
    1,122  
2015
    1,067  
2016
    567  
Thereafter
    21  
Total
  $ 6,019  

NOTE 8.  RESTRUCTURING CHARGES
 
For the three months ended March 31, 2012, the Company recorded and paid restructuring expense of approximately $97,000 related to the sublease portion of quarterly rent payments on an exited facility. This charge was offset by the reversal of accrued severance and benefits of $92,000 resulting from a change in estimates of costs incurred for prior restructuring activities.

For the three months ended March 31, 2011, the Company recorded restructuring expense of approximately $365,000 which consisted of $268,000 of severance and benefits for terminated employees and $97,000 related to operating lease commitments on exited facilities.

The table below summarizes the Company’s restructuring activities for the three months ended March 31, 2012 (in thousands): 

   
Employee Severance and Benefits
   
Operating Lease
   
Total
 
Accrued restructuring balance as of January 1, 2012
  $ 786     $ 124     $ 910  
Additional accruals/adjustments
    (92 )     97       5  
Cash payments
    (345 )     (143 )     (488 )
Accrued restructuring balance as of March 31, 2012
  $ 349     $ 78     $ 427  

As of March 31, 2012, the restructuring plan for the Company’s storage business is substantially complete. Operating lease commitment relating to SiBEAM acquisition will expire in September 2012.

 NOTE 9.  COMMITMENTS AND CONTINGENCIES
 
Legal Proceedings
 
On December 7, 2001, the Company and certain of its officers and directors were named as defendants along with the Company’s underwriters in a securities class action lawsuit, captioned “Gonzalez v. Silicon Image, Inc.”  The lawsuit alleges that the defendants participated in a scheme to inflate the price of the Company’s stock in the Company’s initial public offering and in the aftermarket through a series of misstatements and omissions associated with the offering.  The lawsuit is one of several hundred similar cases pending in the Southern District of New York that have been consolidated by the Court.  In February 2003, the District Court issued an order denying a motion to dismiss by all defendants on common issues of law.  In July 2003, the Company, along with over 300 other issuers named as defendants, agreed to a settlement of this litigation with plaintiffs.  While the parties’ request for court approval of the settlement was pending, in December 2006 the United States Court of Appeals for the Second Circuit reversed the District Court’s determination that six focus cases could be certified as a class action.  In April 2007, the Second Circuit denied plaintiffs’ petition for rehearing, but acknowledged that the District Court might certify a more limited class.  At a June 26, 2007 status conference, the Court terminated the proposed settlement as stipulated among the parties.  Plaintiffs filed an amended complaint on August 14, 2007.  On September 27, 2007, plaintiffs filed a motion for class certification in the six focus cases.  The class certification motion is not expected to be resolved until after April, 2008.  On November 13, 2007, defendants in the six focus cases filed a motion to dismiss the complaint for failure to state a claim, which the District Court denied in March 2008. Plaintiffs, the issuer defendants (including the Company), the underwriter defendants, and the insurance carriers for the defendants, have engaged in mediation and settlement negotiations. The parties have reached a settlement agreement, which was submitted to the District Court for preliminary approval on April 2, 2009. As part of this settlement, the Company’s insurance carrier has agreed to assume the Company’s entire payment obligation under the terms of the settlement. On June 10, 2009 the District Court granted preliminary approval of the proposed settlement agreement.  After September 10, 2009 hearing, the District Court gave final approval to the settlement on October 5, 2009,  Several objectors have filed notices of appeal to the United States Court of Appeals for the Second Circuit from the district court’s October 5, 2009 order approving the settlement.  All but two of the objectors withdrew their appeals, and Plaintiff moved to dismiss the remaining appeals, one for violation of the Second Circuit’s rules and one for lack of standing.  On May 17, 2011, the Second Circuit granted the motion to dismiss one objector’s appeal for violations of the Court’s rules and remanded the other appeal to the District Court to determine whether objector Hayes was a class member.  On August 25, 2011, the District Court issued its decision determining that Hayes was not a class member.  On September 30, 2011, objector Hayes filed a notice of appeal from the District Court’s decision.  On January 9, 2012, objector Hayes dismissed his appeal with prejudice.  No other appeals are pending, the order approving the settlement is final, and the matter is now concluded.
 

 
 
15

 
 
 
 
On July 31, 2007, the Company received a demand letter dated July 31, 2007, demanding on behalf of alleged shareholder Vanessa Simmonds that the Company’s board of directors prosecute a claim against the underwriters of the Company’s initial public offering, in addition to certain unidentified officers, directors and principal shareholders as identified in the Company’s IPO prospectus, for violations of sections 16(a) and 16(b) of the Securities Exchange Act of 1934. In October 2007, a lawsuit was filed in the United States District Court for the Western District of Washington by Ms. Simmonds against certain of the underwriters of the Company’s initial public offerings, captioned “Vanessa Simmonds v. Credit Suisse Group, et al.” The plaintiff alleges that the underwriters engaged in short-swing trades and seeks disgorgement of profits in amounts to be proven at trial from the underwriters. On February 25, 2008, Ms. Simmonds filed an amended complaint. The suit names the Company as a nominal defendant, contains no claims against the Company and seeks no relief from the Company. This lawsuit is one of more than fifty similar actions filed in the same court. On July 25, 2008, the underwriter defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. In addition, certain issuer defendants in the various actions filed a joint motion to dismiss the complaints for failure to state a claim. The parties entered into a stipulation, entered as an order by the Court that the Company is not required to answer or otherwise respond to the amended complaint. Accordingly, the Company did not join the motion to dismiss filed by certain issuers. On March 12, 2009, the court dismissed the complaint in the lawsuit with prejudice.  On April 10, 2009, the plaintiff filed a notice of appeal of the District Court’s order, and thereafter the underwriter defendants’ filed a cross appeal to a portion of the District Court’s order that dismissed thirty (30) of the cases without prejudice following the moving issuers’ motion to dismiss.  On June 22, 2009 the Ninth Circuit issued an order granting the parties’ joint motion to consolidate the 54 appeals and 30 cross-appeals.  Oral argument was heard in the Ninth Circuit on October 5, 2010, and the Court issued its written opinion on December 2, 2010.  The Ninth Circuit affirmed the District Court’s decision that the demand letters submitted to the other 24 issues (including the Company) were sufficiently similar as also to require dismissal with prejudice.  The Ninth Circuit reversed the District Court’s decision in favor of the underwriter defendants on the statute of limitations grounds.  On December 16, 2010, plaintiff and the underwriter defendants separately petitioned for a rehearing and a rehearing en banc, which petitions were denied on January 18, 2011.  On January 25 and 26, 2011, the Ninth Circuit granted the motions of the underwriter defendants and of the plaintiff to stay the issuance of the courts’ mandate pending those parties’ respective petitions for writ of certiorari to the United States Supreme Court.  On April 5 and 15, 2011, respectively, plaintiff and the underwriter defendants filed their petitions for review in the Supreme Court.  On June 27, 2011, the Supreme Court granted the petition of the underwriter defendants and denied the petition of the plaintiff. On November 29, 2011 the Supreme Court heard oral argument. On March 26, 2012 the Supreme Court reversed the Ninth Circuit’s ruling that plaintiff’s claim was not barred by the applicable statute of limitations, and remanded further proceedings on plaintiff’s alternative claim that the statute of limitations was extended by the doctrine of equitable tolling. The District Court had determined that equitable tolling did not apply, but the Ninth Circuit had not considered that issue.

In the fourth quarter 2011, the Company was notified that a customer’s product incorporating one of the Company’s chipsets did not pass compliance testing in connection with certain technology implemented in the Company’s product.  The Company is in discussions regarding this matter with the customer and the entity responsible for the licensing and administration (including compliance testing) of the technology at issue.  As no claim has been made against the Company, it is premature to form a conclusion as to the potential outcome of such a claim, if made, or the range of possible loss to the Company.

In addition, the Company has been named as a defendant in a number of judicial and administrative proceedings incidental to its business and may be named again from time to time.  Moreover, from time to time, the Company receive notices from licensees of its technology and adopters of the standards for which the Company serve as agent disputing the payment of royalties and sometimes requesting a refund of royalties allegedly overpaid.

The Company intends to defend the above matters vigorously and although adverse decisions or settlements may occur in one or more of such cases, the final resolution of these matters, individually or in the aggregate, is not expected to have a material adverse effect on the Company’s results of operations, financial position or cash flows.
 

 
 
 
16

 
 
 
 
Guarantees
 
Certain of the Company’s licensing agreements indemnify its customers for any expenses or liabilities resulting from claimed infringements of third party patents, trademarks or copyrights by its products. Certain of these indemnification provisions are perpetual from execution of the agreement and, in some instances; the maximum amount of potential future indemnification is not limited. To date, the Company has not paid any such claims or been required to defend any lawsuits with respect to any such claim.
 
Contractual Obligations and Off-Balance Sheet Arrangements

Operating Leases
  
 The Company’s future operating lease commitments at March 31, 2012 were as follows (in thousands):
 
Year ending December 31,
 
Amount
 
2012 (remaining 9 months)
  $ 1,996  
2013
    2,104  
2014
    1,785  
2015
    1,535  
2016
    1,661  
Thereafter
    2,707  
Total
  $ 11,788  

NOTE 10.  STOCK-BASED COMPENSATION
 
    The Company has a share-based compensation program that provides its Board of Directors with broad discretion in creating equity incentives for employees, officers and non-employee board members. This program includes incentive and non-statutory stock option grants and restricted stock units (RSUs) for employees, and an automatic grant program for non-employee board members pursuant to which such individuals will receive grants at designated intervals over their period of board service. These awards are granted under the stockholder approved 2008 Equity Incentive Plan. Grants under the discretionary grant program generally vest as follows: 25% of the shares vest on the first anniversary of the vesting commencement date and the remaining 75% vest proportionately each month over the next 36 months of continued service. Stock option grants to non-employee members of our board vest monthly, over periods not to exceed four years. Some options provide for accelerated vesting if certain identified milestones are achieved, upon a termination of employment or upon a change in control of the Company. RSU grants generally vest over a one to four-year period. Additionally, our Employee Stock Purchase Plan (ESPP) that allows employees to purchase shares of common stock at the lower of 85% of the fair market value on the commencement date of the six-month offering period or on the last day of the six-month offering period. 

Valuation and Expense Information Under Stock-based Compensation
 
    The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions:
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Employee stock option plans:
           
Expected life in years
    4.0       4.0  
Expected volatility
    70.4 %     69.4 %
Risk-free interest rate
    0.6 %     1.6 %
Expected dividends
 
none
   
none
 
Weighted average fair value
  $ 2.43     $ 3.75  
                 
Employee Stock Purchase Plan:
               
Expected life in years
    0.5       0.5  
Expected volatility
    68.3 %     71.1 %
Risk-free interest rate
    0.1 %     0.2 %
Expected dividends
 
none
   
none
 
Weighted average fair value
  $ 1.85     $ 3.04  
 
 
 
 
17

 
 
Amortization method — The value of options and RSUs are amortized to expense, net of estimated forfeitures, on a straight line basis over the vesting period.

Expected Life — The expected life of the options represents the estimated period of time until exercised and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules, and expectations of future employee behavior. The expected term for the ESPP is based on the term of the purchase period.

Expected Volatility — The volatility rate is based on the Company’s historical common stock volatility derived from historical stock price data for historical periods commensurate with the options’ expected life.

Risk-Free Interest Rate —The risk-free interest rate is based on the implied yield currently available on United States Treasury zero-coupon issues with a term equal to the expected life at the date of grant of the options.

Expected Dividend — The expected dividend is based on our history and expected dividend payouts. The expected dividend yield is zero as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.
 
For the three months ended March 31, 2012 and 2011, 517,610 and 514,111 shares of common stock were purchased under the ESPP program, respectively. At March 31, 2012, the Company had $570,000 of total unrecognized compensation expense, net of estimated forfeitures under the ESPP program. The unamortized compensation expense will be amortized on a straight-line basis over a remaining period of approximately 4.5 months.
 
Stock Option Activity
 
 The following is a summary of activity under the Company’s stock option plans during the three months ended March 31, 2012, excluding RSUs (in thousands, except weighted average exercise price and contractual term):
 
         
Weighted
   
Weighted
       
         
Average
   
Average
       
         
Exercise
   
Remaining
   
Aggregate
 
   
Number of
   
Price per
   
Contractual
   
Intrinsic
 
   
Shares
   
Share
   
Terms in Years
   
Value
 
At January 1, 2012
    5,937     $ 6.05              
Granted
    75       4.64              
Forfeitures and cancellations
    (77 )     6.45              
Exercised
    (32 )     4.16              
At March 31, 2012
    5,903     $ 6.04       5.01     $ 6,321  
Vested and expected to vest at March 31, 2012
    5,330     $ 6.13       4.87     $ 5,631  
Exercisable at March 31, 2012
    3,218     $ 6.84       3.93     $ 2,879  
 
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that option holders would have received had all option holders exercised their options on March 31, 2012. The aggregate intrinsic value is the difference between the Company's closing stock price on the last trading day of the quarter ended March 31, 2012 and the exercise price, multiplied by the number of outstanding or exercisable in-the-money options. The aggregate intrinsic value excludes the effect of stock options that have a zero intrinsic value. The total pre-tax intrinsic value of options exercised, representing the difference between the fair market value of the Company’s common stock on the date of the exercise and the exercise price of each option, for the three months ended March 31, 2012 and 2011 was $51,000 and $2.3 million, respectively, respectively.  
 
At March 31, 2012, the total unrecognized pre-tax stock-based compensation expense related to stock options, which the Company expects to recognize over the remaining weighted-average vesting period of 2.56 years, was $4.5 million, net of estimated forfeitures.
 
 Restricted Stock Units
 
 The RSUs that the Company grants to its employees typically vest ratably over a certain period of time, subject to the employee’s continuing service to the Company over that period. RSUs granted to non-executive employees typically vest over a four-year period. RSUs granted to executive officers typically vest over a period of between one and four years.
 
 RSUs are converted into shares of the Company’s common stock upon vesting on a one-for-one basis. The cost of the RSUs is determined using the fair value of the Company’s common stock on the date of the grant. Compensation is recognized on a straight-line basis over the requisite service period of each grant adjusted for estimated forfeitures. Each RSU award granted from the Company’s 2008 Equity Incentive Plan will reduce the number of options available for issuance by 1.5 shares.
 
 
 
 
 
 A summary of activity with respect to the Company’s RSUs during the three months ended March 31, 2012 is as follows: (in thousands):
 
   
Number of Units
   
Weighted- Average Grant Date Fair Value Per Share
 
Outstanding at January 1, 2012
    2,983     $ 5.59  
Granted
    131     5.16  
Vested
    (816 )   4.88  
Forfeitures and cancellations
    (65 )   6.04  
Outstanding at March 31, 2012
    2,233     $ 5.81  
 
Of the 2,233,023 RSUs outstanding as of March 31, 2012, approximately 1,743,598 units are expected to vest after considering the applicable forfeiture rate.
 
At March 31, 2012, the total unrecognized pre-tax stock-based compensation expense related to non-vested RSUs, which the Company expects to recognize over the remaining weighted-average vesting period of 2.32 years, was $7.3 million, net of estimated forfeitures.
 
 During the three months ended March 31, 2012 and 2011, the Company repurchased 303,803 and 121,637 shares of stock, respectively, for an aggregate value of $1.5 million and $1.1 million, respectively, from the employees upon the vesting of their RSUs to satisfy the employees’ minimum statutory tax withholding requirement. The Company will continue to repurchase shares of stock from employees as their RSUs vest to satisfy the employees’ minimum statutory tax withholding requirement.

NOTE 11.  DERIVATIVE INSTRUMENTS
 
Silicon Image is a global company that is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company has operations in the United States, Europe and Asia, however, a majority of its revenue, costs of revenue, expense and capital purchasing activities are being transacted in U.S. Dollars. As a corporation with international as well as domestic operations, the Company is exposed to changes in foreign exchange rates. These exposures may change over time and could have a material adverse impact on the Company’s financial results. Periodically, the Company uses foreign currency forward contracts to hedge certain forecasted foreign currency transactions relating to operating expenses. The Company does not enter into derivatives for speculative or trading purposes. The Company uses derivative instruments primarily to manage exposures to foreign currency fluctuations on forecasted cash flows and balances primarily denominated in Chinese Yuan. The Company’s primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. These derivatives are designated as cash flow hedges and have maturities of less than one year.
 
The Company accounts for derivative instruments in accordance with the provisions of FASB ASC No. 815-20-25, “Derivatives and Hedging – Hedging Recognition.” The Company recognizes derivative instruments as either assets or liabilities and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The Company’s derivatives are designated as cash flow hedges. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain  or loss is initially reported as a component of accumulated other comprehensive income and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain (loss) is reported immediately in other income (expense) on the Company’s consolidated statements of operations.

The derivatives expose the Company to credit and non performance risks to the extent that the counterparties may be unable to meet the terms of the agreement. The Company seeks to mitigate such risks by limiting the counterparties to major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect material losses as a result of defaults by counterparties.
 
The amount of net gain recognized in other comprehensive income (OCI) on effective cash flow hedges as of March 31, 2012 and December 31, 2011 was insignificant. The amount of gain or loss reclassified from accumulated OCI to operating expenses for the three months ended March 31, 2012 and 2011, and the amount of gain or loss recognized in income on ineffective cash flow hedges for the three months ended March 31, 2012 and 2011 were insignificant. The fair value of the cash flow hedges as of March 31, 2012 and December 31, 2011 was insignificant.

 As of March 31, 2012 and December 31, 2011, the outstanding foreign currency forward contracts had a total notional value of approximately $4.5 million and $3.6 million, respectively.
 
 
 
 
19

 
 
 
NOTE 12.  PROVISION FOR INCOME TAXES
 
The Company recorded an income tax expense of $2.9 million for the three months ended March 31, 2012.  The effective tax rates for the three months ended March 31, 2012 was (48.9%). The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign taxes (including foreign withholding taxes), a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital, and state taxes.
 
The Company continued to maintain a valuation allowance as a result of uncertainties related to the realization of its net deferred tax assets at March 31, 2012.  The valuation allowance was established as a result of weighing all positive and negative evidence, including the Company’s cumulative loss over the past three years. The valuation allowance reflects the conclusion of management that it is more likely than not that benefits from certain deferred tax assets will not be realized. If actual results differ from these estimates or these estimates are adjusted in future periods, the valuation allowance may require adjustment which could materially impact the Company’s financial position and results of operations.
 
The Company recorded an income tax expense of $1.1 million for the three months ended March 31, 2011. The effective tax rate for the three months ended March 31, 2011 was 431% and was based on the Company’s projected taxable income for 2011, plus certain discrete items recorded during the quarter. The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to state taxes, foreign taxes and a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital.

    The Company’s policy is to include interest and penalties related to unrecognized tax benefits within the provision for income taxes. The Company had interest and penalties of $53,000 and $51,000 for the three months ended March 31, 2012 and 2011, respectively.  The Company conducts business globally and, as a result, the Company and its subsidiaries file income tax returns in various jurisdictions throughout the world including with the U.S. federal and various U.S. state jurisdictions as well as with various foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities throughout the world.

NOTE 13.  CUSTOMER AND GEOGRAPHIC INFORMATION
 
The Company operates in one reportable operating segment, semiconductors and IP solutions for the secure storage, distribution and presentation of high-definition content.  The Company’s Chief Executive Officer, who is considered to be the Company’s chief operating decision maker, reviews financial information presented on one operating segment basis for purposes of making operating decisions and assessing financial performance. The Company had only one operating segment in each of the three months ended March 31, 2012 and 2011 and it operates in only one reportable operating segment, semiconductor and IP solutions for high-definition content.

Revenue

 Revenue by geographic area based on bill to location was as follows (in thousands):

   
Three Months Ended March 31,
 
   
2012
   
2011
 
United States
  $ 21,046     $ 10,777  
Taiwan
    12,173       12,382  
Japan
    9,462       15,512  
Europe
    3,975       2,820  
China
    3,928       4,507  
Korea
    4,014       2,513  
Others
    405       488  
Total revenue
  $ 55,003     $ 48,999  
 
 

 
 
20

 
 
 
 
 
Revenue by geographic area based on customers’ headquarters location was as follows (in thousands):
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Korea
  $ 22,022     $ 9,760  
Taiwan
    12,179       12,382  
Japan
    9,462       15,938  
Europe
    3,975       2,629  
China
    3,917       4,407  
United States
    3,048       3,404  
Others
    400       479  
Total revenue
  $ 55,003     $ 48,999  
 
                The Company’s revenue by its primary markets was as follows (in thousands):
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Mobile
  $ 22,256     $ 6,171  
Consumer Electronics
    16,511       26,255  
Personal Computers
    4,257       5,631  
Total product revenue
    43,024       38,057  
Licensing
    11,979       10,942  
Total revenue
  $ 55,003     $ 48,999  
 
 The Company’s revenue by customers was as follows (in percentage):
 
   
Three Months Ended March 31,
 
   
2012
   
2011
 
Customer A
    34.3 %     13.1 %
Customer B
            13.4 %
Customer C
            10.8 %
Customer D
            10.5 %
Customer E
            10.0 %
 
At March 31, 2012, four customers each represented 18.3%, 16.0%, 13.2% and 12.1% of net accounts receivable. At March 31, 2011, three customers each represented 20.8%, 15.0% and 13.7% of net accounts receivable. The Company’s top five customers, including distributors, generated 62.8% and 57.7% of the Company’s revenue for three months ended March 31, 2012 and 2011, respectively.
 
Property and Equipment

The table below presents the net book value of the property and equipment by their physical location (in thousands):
 
   
March 31, 2012
   
December 31, 2011
 
United States
  $ 6,431     $ 7,114  
China
    3,797       3,184  
Taiwan
    1,565       1,912  
Others
    1,281       562  
          Net book value
  $ 13,074     $ 12,772  
                 
 
 NOTE 14.  SUBSEQUENT EVENT
 
In April 2012, the Company’s Board of Directors authorized a $50 million stock repurchase program. The repurchases may occur from time to time in the open market or in privately negotiated transactions. The timing and amount of any repurchase of shares will be determined by the Company's management, based on its evaluation of market conditions, cash on hand and other factors and may be made under a stock repurchase plan. The authorization will stay in effect until the authorized aggregate amount is expended or the authorization is modified by the Board of Directors. The program does not obligate the Company to acquire any particular amount of stock and purchases under the program may be commenced or suspended at any time, or from time to time, without prior notice. Further the stock repurchase program may be modified, extended or terminated by the Board at any time. No repurchases have been made through May 2, 2012
 
 

 
 
 
21

 
 
 

 
 
   This report contains forward-looking statements within the meaning of Section 21E of the Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-Q entitled “Risk Factors,” that may cause actual results to differ materially from those discussed in, or implied by, such forward-looking statements. Forward-looking statements within this Form 10-Q are identified by words such as “believes,” “anticipates,” “expects,” “intends,” “estimates,” “may,” “will” and variations of such words and other similar expressions. However, these words are not the only means of identifying such statements. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances occurring subsequent to the filing of this Form 10-Q with the SEC. Our actual results could differ materially from those anticipated in, or implied by, forward-looking statements as a result of various factors, including the risks outlined elsewhere in this report. Readers are urged to carefully review and consider the various disclosures made by Silicon Image,  Inc. in this report and in our other reports filed with the SEC that attempt to advise interested parties of the risks and factors that may affect our business.
 
    Silicon Image and the Silicon Image logo are trademarks, registered trademarks or service marks of Silicon Image, Inc. in the United States and other countries. All other trademarks and registered trademarks are the property of their respective owners.

Company Overview
 
Silicon Image is a leading provider of wireless and wired connectivity solutions that enable the reliable distribution and presentation of high-definition (HD) content for mobile, consumer electronics (CE) and personal computing (PC) markets. We deliver our technology via semiconductor and intellectual property (IP) products and services that are compliant with global industry standards and feature market leading Silicon Image innovations such as InstaPort™ and InstaPrevue™. Silicon Image’s products are deployed by the world’s leading electronics manufacturers in devices such as smart  phones, tablets, digital televisions (DTVs), Blu-ray Disc™ players, audio-video receivers, as well as desktop and notebook PCs. Silicon Image’s current growth is being driven by its mobile solutions supporting the latest mobile HD video connectivity standard, Mobile High-Definition Link (MHL™). Silicon Image has also driven the creation of the highly successful High-Definition Multimedia Interface (HDMI®) and Digital Visual Interface (DVI™) industry standards. We have also established Serial Port Memory Technology (SPMT™), a memory interface standard for mobile devices and are actively involved with the standard for 60GHz wireless HD video/ audio – WirelessHD®. Via its wholly-owned subsidiary, Silicon Image offers manufacturers comprehensive product interoperability and standards compliance testing services from Simplay Labs, LLC.  Founded in 1995, we are headquartered in Sunnyvale, California, with regional engineering and sales offices in China, Japan, Korea, Taiwan and India.

We are a Delaware corporation headquartered in Sunnyvale, California. Our Internet website address is www.siliconimage.com.

Our mission is to be the leader in advanced HD connectivity solutions for mobile, CE, and PC markets to enhance the consumer experience. Our “standards plus” business strategy is to grow the available market for our products and IP solutions through the development, introduction and promotion of market leading products which are based on industry standards but also include Silicon Image innovations that our customers value. We believe that our innovation around our core competencies, establishing industry standards and building strategic relationships, positions us to continue to drive change in the emerging world of high quality digital media storage, distribution and presentation.
 
Our customers are product manufacturers in each of our target markets —mobile, CE, and PC. Because we leverage our technologies across different markets, certain of our products may be incorporated into our customers’ products used in multiple markets. We sell our products to original product manufacturers (OEMs) throughout the world using a direct sales force and through a network of distributors and manufacturer’s representatives. Our revenue is generated principally by sales of our semiconductor products, with other revenues derived from IP core/design licensing and royalty and adopter fees from our standards licensing activities. We maintain relationships with the eco-system of companies that make the products that drive digital content creation, distribution and consumption, including major Hollywood studios, service providers, consumer electronics companies and retailers. Through these and other relationships, we have formed a strong understanding of the requirements for distributing and presenting HD digital video and audio in the home and mobile environments. We have also developed a substantial IP base for building the standards and products necessary to promote opportunities for our products.
     
Historically, we have grown our business by introducing and promoting the adoption of new technologies and standards and entering new markets. We collaborated with other companies to jointly develop the DVI and HDMI standards. Our first DVI products addressed the PC market. We then introduced products for a variety of CE market segments, including the set top box (STB), game console and DTV markets. In 2011, we began selling products in the mobile device market using our innovative interconnect core technology. In May 2011, we acquired SiBEAM, Inc., a provider of high-speed wireless communication products for uncompressed HD video in consumer electronics and personal computer applications.  With this acquisition, we became a promoter of the WirelessHD standard for transmitting HD content using 60GHz wireless technology. SiBEAM’s 60GHz wireless technology enables us to rapidly bring the highest quality of wirelessly transmitted HD video and audio to market.  
 
 
 
 
22

 
 
 
 
Concentrations
 
Historically, a relatively small number of customers and distributors have generated a significant portion of our revenue. For instance, our largest customer generated 34.3% of our first quarter revenues. In addition, our top five customers, including distributors, generated 62.8% and 57.7% of our revenue for the three months ended March 31, 2012 and 2011, respectively. Additionally, the percentage of revenue generated through distributors tends to be significant, since many OEMs rely upon third party manufacturers or distributors to provide purchasing and inventory management services. For the three months ended March 31, 2012 and 2011, 36.2% and 58.5% of our revenue, respectively, was generated through distributors. Our licensing revenue is not generated through distributors, and to the extent licensing revenue increases faster than product revenue, we would expect a decrease in the percentage of our total revenue generated through distributors.

 Critical Accounting Policies
 
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect amounts reported in our condensed consolidated financial statements and accompanying notes. For a discussion of the critical accounting estimates, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

REVENUE

   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Product revenue
                 
Mobile
  $ 22,256       6,171       260.7 %
Consumer Electronics
    16,511     $ 26,255       -37.1 %
Personal Computers
    4,257       5,631       -24.4 %
Total product revenue
    43,024       38,057       13.1 %
Percentage of total revenue
    78.2 %     77.7 %        
Licensing revenue
    11,979       10,942       9.5 %
Percentage of total revenue
    21.8 %     22.3 %        
Total revenue
  $ 55,003     $ 48,999       12.3 %

Product Revenue
 
Our consolidated total revenue for the three months ended March 31, 2012 was $55.0 million, an increase of $6.0 million, or 12.3%, from the same period in 2011. The increase in product revenue was primarily due to increased demand for our mobile products offset in part by lower CE and PC revenue. Revenue from our mobile products during the three months ended March 31, 2012 increased by $16.1 million or 260.7% as compared to the same period in 2011. The increase in our mobile products was primarily due to the successful launch of our MHL product line. These products were introduced in the latter part of fiscal year 2010. Since then, we have seen increased shipments of these products quarter after quarter for these products. Our MHL products have represent the majority of our mobile revenue mix. Revenue from our CE market for the three months ended March 31, 2012 decreased by $9.7 million or 37.1% compared to the CE revenue generated in the same period in 2011. The decrease in our CE revenue was primarily the result of a broad-based decrease in demand for both DTV and HT products sold in this end market. Revenue from our PC market for the three months ended March 31, 2012 decreased by $1.4 million or 24.4% as compared to the same period in 2011. Our PC revenues continue to decline as we are no longer making any investments in these legacy products.

Licensing Revenue
 
Our licensing activity is complementary to our product sales and helps us to monetize our intellectual property and accelerate market adoption curves associated with our technology.  Revenue from licensing accounted for 21.8% and 22.3% of our total revenue for the three months ended March 31, 2012 and 2011, respectively. Licensing revenue during the three months ended March 31, 2012 increased by $1.0 million or 9.5% when compared to the same period in 2011. The increase in IP revenues are primarily the result of increased royalty revenues earned and collected in the quarter.
 


 
 
 
23

 

 
 
COST OF REVENUE AND GROSS PROFIT
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Cost of product revenue (1)
  $ 23,099     $ 19,872       16.2 %
Product gross profit
    19,925       18,185       9.6 %
Product gross profit margin
    46.3 %     47.8 %        
                         
(1) Includes stock-based compensation expense
  $ 218     $ 180          
                         
Cost of licensing revenue
  $ 125     $ 400       -68.8 %
Licensing gross profit
    11,854       10,542       12.4 %
Licensing gross profit margin
    99.0 %     96.3 %        
                         
Total cost of revenue
  $ 23,224     $ 20,272       14.6 %
Total gross profit
    31,779       28,727       10.6 %
Total gross profit margin
    57.8 %     58.6 %        
 
Cost of revenue consists primarily of costs incurred to manufacture, assemble and test our products, and to license our technology which involves modification, customization or engineering services, as well as other overhead costs relating to the aforementioned costs, including stock-based compensation expense. Total cost of revenue for the three months ended March 31, 2012 increased by $3.0 million or 14.6%, when compared to the total cost of revenue in the same periods in 2011. The increase in the total cost of revenue was primarily due to the growth in revenue volume during the same comparative periods. 

Product Gross Margin

 Our product gross profit as a percentage of product revenue for the three months ended March 31, 2012 was 46.3%, compared to 47.8% for the same period in 2011. Product gross profit margin for the three months ended March 31, 2012 was 1.5% lower than the product gross profit margin in the same period in 2011 primarily the result of unfavorable production variance, partially offset by favorable production scrap, favorable purchase variance and lower operation overhead due to lower depreciation expense from fully depreciated testers.

Licensing Gross Margin
 
Our licensing gross profit margin for the three months ended March 31, 2012 was 99.0%, compared to 96.3% for the three months ended March 31, 2011.  Licensing gross margin during the three months ended March 31, 2012 increased by 2.7%, compared to the same period in 2011 primarily due to higher revenue and lower mix of IP customization projects during the three months ended March 31, 2012 compared to the same period in 2011.
 
OPERATING EXPENSES

Research and Development (R&D)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Research and development (1)
  $ 21,707     $ 15,243       42.4 %
Percentage of total revenue
    39.5 %     31.1 %        
                         
(1) Includes stock-based compensation expense
  $ 1,160     $ 573          
    
R&D expense consists primarily of employee compensation and benefits, including stock-based compensation, fees for independent contractors, the cost of software tools used for designing and testing our products and costs associated with prototype materials. R&D expense for the three months ended March 31, 2012 increased by $6.5 million, or 42.4%, when compared to the same period in 2011, primarily due to an increase in compensation related expenses of $2.4 million as a result of the SiBEAM acquisition in May 2011 and annual merit increases given to employees during the three months ended March 31, 2012, hiring fees paid to hire 75 engineers in India of approximately $1.5 million, an increase in the tape out and project related expenses of approximately $1.2 million and an increase in stock-based compensation expense of approximately $0.6 million.
 

 
 
24

 
 
 
 
Selling, General and Administrative (SG&A)
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Selling, general and administrative (1)
  $ 16,137     $ 13,051       23.6 %
Percentage of total revenue
    29.3 %     26.6 %        
                         
(1) Includes stock-based compensation expense
  $ 1,910     $ 1,132          
 
    SG&A expense consists primarily of compensation and benefits, including stock-based compensation, sales commissions, professional fees, and marketing and promotional expenses. SG&A expense during the three months ended March 31, 2012 was $16.1 million or 23.6% higher than what was incurred in the same period in 2011 primarily due to an increase in compensation related expenses of $1.5 million driven by the annual merit increases given during the three months ended March 31, 2012, an increase in stock-based compensation expense of approximately $0.8 million, and an increase in consulting, travel legal and accounting expenses of approximately $1.2 million, partially offset by lower commission and facilities expenses.

Amortization of Intangible Assets
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Amortization of intangible assets
  $ 496     $ 197       151.8 %
Percentage of total revenue
    0.9 %     0.4 %        
 
The increase in the amortization of intangible assets was primarily due to amortization of the intangible assets acquired from the acquisition of SiBEAM in May 2011.

Restructuring Expense
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Restructuring expense
  $ 5     $ 365       -98.6 %
Percentage of total revenue
    0.0 %     0.7 %        
 
For the three months ended March 31, 2012, we recorded and paid restructuring expense of approximately $97,000 related to the sublease portion of quarterly rent payments on an exited facility, offset by the reversal of accrued severance and benefits of $92,000 resulting from a change in estimates of costs incurred for prior restructuring activities. For the three months ended March 31, 2011, we recorded storage business restructuring expenses and the sublease portion of quarterly rent payments on exited facilities.
 
Interest Income and Other, net
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Interest income and other, net
  $ 538     $ 377       42.7 %
Percentage of total revenue
    1.0 %     0.8 %        
 
The interest and other income for the three months ended March 31, 2011 includes an unfavorable foreign currency translation adjustment from our wholly owned subsidiary in Germany whose facilities and offices had been substantially liquidated of $132,000. There were no such expenses for the three months ended March 31, 2012.
 

 
 
 
 
25

 

 
Provision for Income Taxes
 
   
Three Months Ended March 31,
 
   
2012
   
2011
   
Change
 
   
(dollars in thousands)
       
Income tax expense
  $ 2,948     $ 1,068       176.0 %
Percentage of total revenue
    5.4 %     2.2 %        
 
We recorded income tax expense of $2.9 million for the three months ended March 31, 2012. The effective tax rates for the three months ended March 31, 2012 was (48.9%). The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to foreign taxes (including foreign withholding taxes), a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital, and state taxes.

We recorded income tax expense of $1.1 million for the three months ended March 31, 2012. The effective tax rate for the three months ended March 31, 2011 was 431% and was based on our projected taxable income for 2011, plus certain discrete items recorded during the quarter. The difference between the effective tax rate and the income tax determined by applying the statutory federal income tax rate of 35% was due primarily to state taxes, foreign taxes and a provision for charges in lieu of income taxes related to employee stock plans where the windfall benefit is charged to tax expense with the benefit to additional paid-in capital.
  
Recent Accounting Pronouncements
 
    See Note 1, “Recent Accounting Pronouncements” in the Notes to Condensed Consolidated Financial Statements under Part I Item 1 of this report.

LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
 
    The following sections discuss the effects of changes in our balance sheet and cash flows, contractual obligations and other commitments on our liquidity and capital resources.
 
Cash and Cash Equivalents, Short-term Investments and Working Capital. The table below summarizes our cash and cash equivalents, investments and working capital and the related movements (in thousands).
 
   
March 31, 2012
   
December 31, 2011
   
Change
 
Cash and cash equivalents
  $ 34,471     $ 37,125     $ (2,654 )
Short term investments
    116,842       124,301       (7,459 )
Total cash, cash equivalents and short term investments
  $ 151,313     $ 161,426     $ (10,113 )
Percentage of total assets
    56.0 %     60.7 %