NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. The condensed
consolidated financial statements should be read in conjunction with the
financial statements included with our annual report on Form 10-K for the
fiscal
year ended March 31, 2007. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present fairly
the financial position of California Micro Devices Corporation (the “Company”,
“CMD”, “we”, “us” or “our”) as of September 30, 2007, and the results of
operations for the three and six month periods ended September 30, 2007 and
2006, and cash flows for the six month periods ended September 30, 2007 and
2006. Results for the three and six month periods are not necessarily
indicative of the results that may be expected for any other interim period
or
for the full fiscal year ending March 31, 2008. Certain prior year
amounts in the financial statements and notes thereto have been reclassified
to
conform to the current 2008 presentation.
The
unaudited condensed consolidated financial statements include the accounts
of
CMD and its wholly owned subsidiary. Intercompany accounts and transactions
have
been eliminated.
2.
Use of Estimates
The
preparation of financial statements in conformity with U.S GAAP requires
management to make estimates and assumptions that affect the reported amounts
of
assets and liabilities, and disclosure of contingent assets and liabilities
at
the date of the financial statements and the reported amounts of revenues
and
expenses during the reporting period. Our estimates are based on historical
experience, input from sources outside of the company, and other relevant
facts
and circumstances. Actual results could differ from those estimates, and
such
differences could be material.
3.
Recent Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, "
Fair Value
Measurements
" (“FAS 157”). FAS 157 defines fair value, establishes a
framework and gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We are
currently assessing the impact that FAS 157 will have on our results of
operations and financial position.
In
February 2007, the FASB issued Statement No. 159, “
The Fair Value
Option for Financial Assets and Financial Liabilities
” (“FAS 159”)
which permits entities to choose to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. FAS 159 is effective for fiscal years beginning after November
15, 2007. We are currently evaluating the impact, if any, of adopting
FAS 159 on our financial position and results of operations.
4.
Cash, Cash Equivalents and Short-Term Investments
Cash
and
cash equivalents represent cash and money market funds as follows (in
thousands);
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Cash
|
|
$
|
41
|
|
|
$
|
-
|
|
Money
market funds
|
|
|
1,984
|
|
|
|
1,908
|
|
Cash
and cash equivalents
|
|
$
|
2,025
|
|
|
$
|
1,908
|
|
Short-term
investments represent investments in certificates of deposits and debt
securities with remaining maturities less than 360 days. We invest our excess
cash in high quality financial instruments. We have classified our marketable
securities as available for sale securities. Our available for sale securities
are carried at fair value, with unrealized gains and losses reported in a
separate component of shareholders’ equity. Realized gains and losses and
declines in value judged to be other than temporary, if any, on available
for
sale securities are included in interest income. Interest on securities
classified as available for sale is also included in interest and other income,
net. The cost of securities sold is based on the specific identification
method.
Short-term
investments were as follows
(in thousands):
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Commercial
paper
|
|
$
|
25,440
|
|
|
$
|
31,327
|
|
Corporate
bonds
|
|
|
12,890
|
|
|
|
9,280
|
|
Asset-backed
securities
|
|
|
5,959
|
|
|
|
4,009
|
|
U.S.
Agency notes
|
|
|
3,111
|
|
|
|
-
|
|
Certificate
of deposits
|
|
|
-
|
|
|
|
2,500
|
|
Total
short-term investments
|
|
$
|
47,400
|
|
|
$
|
47,116
|
|
5.
Goodwill and Other Intangible Assets
Goodwill
Goodwill
as of September 30, 2007, relates entirely to our purchase of Arques Technology,
Inc. in April 2006. In accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets: ("SFAS
142") goodwill is tested for impairment on annual basis, or earlier if
indicators of impairment exist. We perform our annual test for impairment
of goodwill during our fourth fiscal quarter.
Intangible
Assets
In
connection with the Arques acquisition, $590,000 of the purchase consideration
was allocated to intangible assets. The components of intangible
assets as of September 30, 2007 were as follows (in thousands):
|
|
Developed
and
Core
Technology
|
|
|
Distributor
Relationships
|
|
|
Total
|
|
Gross
carrying amount at September 30, 2007
|
|
$
|
520
|
|
|
$
|
70
|
|
|
$
|
590
|
|
Accumulated
amortization
|
|
|
190
|
|
|
|
51
|
|
|
|
241
|
|
Net
carrying amount at September 30, 2007
|
|
$
|
330
|
|
|
$
|
19
|
|
|
$
|
349
|
|
The
amortization expense for developed and core technology and distributor
relationships was $41,000 and $82,000 for the three and six months ended
September 30, 2007, respectively, as compared to $42,000 and $76,000 for
the
same periods a year ago. Based on intangible assets recorded at September
30,
2007, and assuming no subsequent additions to, or impairment of, the underlying
assets, the future estimated amortization expense is approximately $83,000,
$131,000 and $135,000 in the remainder of 2008, 2009 and 2010,
respectively.
In
assessing the recoverability of goodwill and intangible assets, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. It is reasonably possible that these
estimates, or their related assumptions, may change in the future, in which
case
we may be required to record additional impairment charges for these
assets.
6. Balance
Sheet Components
Balance
sheet components were as follows (in thousands):
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Inventories:
|
|
|
|
Work
in process
|
|
$
|
1,909
|
|
|
$
|
2,161
|
|
Finished
goods
|
|
|
2,601
|
|
|
|
3,011
|
|
|
|
$
|
4,510
|
|
|
$
|
5,172
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
9,165
|
|
|
$
|
7,904
|
|
Less
allowance for doubtful accounts
|
|
|
(3
|
)
|
|
|
(320
|
)
|
Less
sales allowances and return reserves
|
|
|
(311
|
)
|
|
|
(70
|
)
|
|
|
$
|
8,851
|
|
|
$
|
7,514
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
11,215
|
|
|
$
|
8,971
|
|
Computer
equipment and related software
|
|
|
4,011
|
|
|
|
3,805
|
|
Construction
in progress
|
|
|
358
|
|
|
|
1,008
|
|
|
|
$
|
15,584
|
|
|
$
|
13,784
|
|
Less:
accumulated depreciation and amortization
|
|
|
(9,798
|
)
|
|
|
(8,944
|
)
|
|
|
$
|
5,786
|
|
|
$
|
4,840
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Accrued
salaries and benefits
|
|
$
|
1,053
|
|
|
$
|
1,366
|
|
Other
accrued liabilities
|
|
|
1,108
|
|
|
|
1,903
|
|
|
|
$
|
2,161
|
|
|
$
|
3,269
|
|
7.
Capital Lease Obligations
In
October 2006, we entered into a three-year software lease agreement with
Synopsys. The capitalized amount associated with the lease is
$362,000. Concurrently, we also entered into a three-year software
lease agreement with Applied Wave Research, for which the capitalized amount
is
$34,000. The imputed interest rate for each of these leases is
approximately 8% and lease payments aggregating to $132,000 per year. The
outstanding capital lease obligation as of September 30, 2007 and March 31,
2007
was $264,000. Interest expense on the lease during six months ended
September 30, 2007 was $6,000.
Total
fixed assets purchased under capital leases and the associated accumulated
amortization was as follows (in thousands):
|
|
September
30,
|
|
|
March
31,
|
|
|
|
2007
|
|
|
2007
|
|
Capitalized
cost
|
|
$
|
396
|
|
|
$
|
396
|
|
Accumulated
amortization
|
|
|
(121
|
)
|
|
|
(55
|
)
|
Net
book value
|
|
$
|
275
|
|
|
$
|
341
|
|
Amortization
expense for fixed assets purchased under capital leases is included in the
line
item titled “depreciation and amortization” on our condensed consolidated
statements of cash flows.
8.
Employee Stock Benefit Plans
Our
equity incentive program is a long-term retention program that is intended
to
attract and retain qualified management and technical employees and align
shareholder and employee interests. Under our current equity incentive program,
stock options have varying vesting periods typically over four years and
are
generally exercisable for a period of ten years from the date of issuance
and
are granted at prices equal to the fair market value of the Company’s common
stock at the grant date. These plans are described fully in the Notes to
Consolidated Financial Statements included in our Annual Report on Form 10-K
for
the year ended March 31, 2007.
Stock
Options
Stock
option activity for the six months ended September 30, 2007, is as follows
(in
thousands, except share prices):
|
|
Shareholder
Approved
Plans
|
|
|
Non-Sharholder
Approved
Plan
|
|
|
All
Plans
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
(in
years)
|
|
|
Aggregate
Intrinsic
Value
|
Balance
at March 31, 2007
|
|
|
3,493
|
|
|
$
|
5.96
|
|
|
|
818
|
|
|
$
|
7.42
|
|
|
|
4,311
|
|
|
$
|
6.24
|
|
|
|
|
|
Granted
|
|
|
1,009
|
|
|
|
3.79
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,009
|
|
|
|
3.79
|
|
|
|
|
|
Exercised
|
|
|
(5
|
)
|
|
|
2.75
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
2.75
|
|
|
|
|
|
Canceled
|
|
|
(128
|
)
|
|
|
5.63
|
|
|
|
(170
|
)
|
|
|
7.81
|
|
|
|
(298
|
)
|
|
|
6.87
|
|
|
|
|
|
Balance
at September 30, 2007
|
|
|
4,369
|
|
|
$
|
5.48
|
|
|
|
648
|
|
|
$
|
7.31
|
|
|
|
5,017
|
|
|
$
|
5.71
|
|
7.67
|
|
$
|
956
|
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on options with an exercise price less than the Company’s
closing stock price of $4.39 as of September 28, 2007, which would have been
received by the option holders had all option holders with in-the-money options
exercised their options as of that date.
Net
cash
proceeds from the exercise of stock options for the three and six months
ended
September 30, 2007 were $14,000 compared to $57,000 and $415,000 respectively,
for the same periods a year ago.
The
following table summarizes the ranges of the exercise prices of outstanding
and
exercisable options at September 30, 2007:
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Range of Exercise Prices
|
|
Number
Outstanding
(thousands)
|
|
|
Average
|
|
|
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
2.75
|
|
|
|
-
|
|
|
$
|
4.00
|
|
|
|
1,245
|
|
|
|
9.26
|
|
|
$
|
3.64
|
|
|
|
173
|
|
|
$
|
3.28
|
|
|
4.01
|
|
|
|
-
|
|
|
|
6.00
|
|
|
|
1,743
|
|
|
|
7.91
|
|
|
|
4.91
|
|
|
|
769
|
|
|
|
5.25
|
|
|
6.01
|
|
|
|
-
|
|
|
|
8.00
|
|
|
|
1,604
|
|
|
|
6.67
|
|
|
|
6.79
|
|
|
|
1,072
|
|
|
|
6.75
|
|
|
8.01
|
|
|
|
-
|
|
|
|
10.00
|
|
|
|
272
|
|
|
|
6.12
|
|
|
|
8.69
|
|
|
|
272
|
|
|
|
8.69
|
|
|
10.01
|
|
|
|
-
|
|
|
|
22.50
|
|
|
|
153
|
|
|
|
5.35
|
|
|
|
15.19
|
|
|
|
153
|
|
|
|
15.19
|
|
$
|
2.75
|
|
|
|
-
|
|
|
$
|
22.50
|
|
|
|
5,017
|
|
|
|
7.67
|
|
|
$
|
5.71
|
|
|
|
2,439
|
|
|
$
|
6.78
|
|
Employee
Stock Purchase Plan (ESPP)
Our
ESPP
provides that eligible employees may contribute up to 15% of their eligible
earnings, through accumulated payroll deductions, toward the semi-annual
purchase of our common stock at 85% of the fair market value of the common
stock
at certain defined points in the plan offering periods. We issued 49,007
shares
under the ESPP during the six months ended September 30, 2007, compared to
34,038 for the same period a year ago. Net cash proceeds from the
ESPP were $185,000 for the six months ended September 30, 2007, compared
to
$206,000 for the same period a year ago. There was no ESPP issuance during
three
months ended September 30, 2007 and 2006.
Shares
Available for Future Issuance under Employee Benefit
Plans
As
of
September 30, 2007, 882,000 shares were available for future issuance, which
included 394,000 shares of common stock available for issuance under our
ESPP,
22,000 under our UK Sub-Plan and 466,000 under our 2004 Omnibus Incentive
Compensation Plan.
Stock-Based
Compensation Expense
The
following table sets forth the total stock-based compensation expense for
the
three and six months ended September 30, 2007 and 2006 resulting from employee
stock options and ESPP included in our Condensed Consolidated Statements
of
Operations in accordance with FAS 123(R) (in thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Cost
of sales
|
|
$
|
85
|
|
|
$
|
103
|
|
|
$
|
179
|
|
|
$
|
233
|
|
Research
and development
|
|
|
128
|
|
|
|
160
|
|
|
|
297
|
|
|
|
348
|
|
Selling,
general and administrative
|
|
|
300
|
|
|
|
469
|
|
|
|
685
|
|
|
|
995
|
|
Stock-based
compensation expense before income taxes
|
|
|
513
|
|
|
|
732
|
|
|
|
1,161
|
|
|
|
1,576
|
|
Tax
benefit
|
|
|
-
|
|
|
|
-
|
|
|
|
6
|
|
|
|
-
|
|
Stock-based
compensation expense, net of tax
|
|
$
|
513
|
|
|
$
|
732
|
|
|
$
|
1,155
|
|
|
$
|
1,576
|
|
The
effect of recording employee stock-based compensation expense for the three
and
six months ended September 30, 2007 and 2006 was as follows (in thousands,
except per share amounts):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Impact
on income / loss before income taxes
|
|
$
|
513
|
|
|
$
|
732
|
|
|
$
|
1,161
|
|
|
$
|
1,576
|
|
Impact
on net income / loss
|
|
|
513
|
|
|
|
732
|
|
|
|
1,155
|
|
|
|
1,576
|
|
Impact
on basic and diluted net income / loss per share
|
|
$
|
0.02
|
|
|
$
|
0.03
|
|
|
$
|
0.05
|
|
|
$
|
0.07
|
|
Income
tax benefit of $0 and $6,000 was realized from ESPP purchases during the
three
and six months ended September 30, 2007, respectively, whereas no such benefit
was realized during the same periods a year ago.
The
fair
value of stock-based awards was estimated using the Black-Scholes model with
the
following weighted average assumptions for the three and six months ended
September 30, 2007 and 2006, respectively:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Employee
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
4.11
|
|
|
|
4.06
|
|
|
|
4.11
|
|
|
|
4.02
|
|
Volatility
|
|
|
0.64
|
|
|
|
0.71
|
|
|
|
0.64
|
|
|
|
0.70
|
|
Risk-free
interest rate
|
|
|
4.36
|
%
|
|
|
4.78
|
%
|
|
|
4.38
|
%
|
|
|
4.83
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Volatility
|
|
|
0.38
|
|
|
|
0.49
|
|
|
|
0.38
|
|
|
|
0.49
|
|
Risk-free
interest rate
|
|
|
4.99
|
%
|
|
|
5.02
|
%
|
|
|
4.99
|
%
|
|
|
5.02
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
We
currently estimate our forfeiture rate to be 17%, which is based on an analysis
of expected forfeiture data using our current demographics and probabilities
of
employee turnover.
As
of
September 30, 2007, we had $2.6 million of total unrecognized compensation
expense, net of estimated forfeitures, related to stock options that will
be
recognized over the weighted average period of 3.3 years.
9.
Stock Issuances
During
the three and six months ended September 30, 2007 and 2006, we issued the
following shares of common stock under our employee stock option and employee
stock purchase plans:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Shares
purchased
|
|
|
5,000
|
|
|
|
17,800
|
|
|
|
54,000
|
|
|
|
153,808
|
|
Aggregate
purchase price
|
|
$
|
14,000
|
|
|
$
|
57,000
|
|
|
$
|
199,000
|
|
|
$
|
621,000
|
|
10.
Net Income (Loss) Per Share
The
following table sets forth the computation of basic and diluted income (loss)
per share (in thousands, except per share data):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$
|
557
|
|
|
$
|
1,377
|
|
|
$
|
(499
|
)
|
|
$
|
(698
|
)
|
Weighted
average common shares outstanding used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
calculation of net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Shares
|
|
|
23,202
|
|
|
|
23,006
|
|
|
|
23,191
|
|
|
|
22,953
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
32
|
|
|
|
74
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive
shares
|
|
|
23,234
|
|
|
|
23,080
|
|
|
|
23,191
|
|
|
|
22,953
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
Basic
income (loss) per share was computed using the net income (loss) and weighted
average number of common shares outstanding during the period. Diluted earnings
per common share incorporate the additional shares issuable upon the assumed
exercise of stock options.
Due
to
our net loss for the six months ended September 30, 2007 and 2006, all of
our
outstanding options were excluded from the diluted loss per share calculation
because their inclusion would have been anti-dilutive. If we had earned a
profit
during the six months ended September 30, 2007 and 2006, we would have added
44,002 and 173,005 common equivalent shares respectively, to our basic
weighted-average shares outstanding to compute the diluted weighted-average
shares outstanding.
Options
to purchase 4,417,732 and 3,827,079 shares of common stock were outstanding
during the three months ended September 30, 2007 and 2006, but were not
included in the computation of diluted earnings per share because the effect
was
antidilutive. Employee stock options are antidilutive for a profitable company
when the exercise price of the securities is greater than the average market
price of the common shares for the period.
11.
Comprehensive Income (Loss)
Comprehensive
income (loss) is principally comprised of net income (loss) and unrealized
gain on our available for sale securities. Comprehensive income (loss) for
the three and six months ended September 30, 2007 and 2006 was as follows
(in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Net
income (loss)
|
|
$
|
557
|
|
|
$
|
1,377
|
|
|
$
|
(499
|
)
|
|
$
|
(698
|
)
|
Unrealized
gain on available for sale securities
|
|
|
24
|
|
|
|
4
|
|
|
|
4
|
|
|
|
11
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
(4
|
)
|
Comprehensive
income (loss)
|
|
$
|
581
|
|
|
$
|
1,378
|
|
|
$
|
(495
|
)
|
|
$
|
(691
|
)
|
12.
Income Taxes
Effective
at the beginning of the first quarter of fiscal 2008, we adopted the Financial
Accounting Standards Board Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”
(“FIN 48”). FIN 48 prescribes a recognition threshold of more-likely-than-not to
be sustained upon examination, specifies how tax benefits for uncertain tax
positions are to be recognized, measured, and derecognized in financial
statements; requires certain disclosures of uncertain tax matters; specifies
how
reserves for uncertain tax positions should be classified on the balance
sheet;
and provides transition and interim period guidance, among other
provisions.
As
a
result of the implementation of FIN 48, we recognized a $149,000 increase
in the
liability for unrecognized tax benefits related to tax positions taken in
prior
periods. This increase was accounted for as a cumulative effect of a change
in
accounting principle that resulted in an increase to accumulated
deficit.
The
amount of unrecognized tax benefits as of April 1, 2007 after the FIN 48
adjustment was $175,000. For the six months ended September 30, 2007, there
was
no significant change to the liability for unrecognized tax benefits booked
at
the beginning of the year.
Our
policy is to include interest and penalties accrued on any unrecognized tax
benefits as a component of income tax expense. As of the date of adoption
of FIN
48, the amount of any accrued interest or penalties associated with any
unrecognized tax positions was $49,000. The additional amount of interest
and
penalties for the six months ended September 30, 2007 was
insignificant.
We
estimated that it is more likely than not that approximately $2.3 million
and
$2.2 million, respectively, of the deferred tax assets as of September 30,
2007
and March 31, 2007 will be realized in the following year. As of September
30, 2007, a valuation allowance of approximately $21.4 million was recorded
against the net deferred tax assets. The valuation allowance is decreased
by
approximately $0.8 million during the six months ended September 30, 2007
primarily due to revisions in estimates of our ability to realize deferred
tax
assets.
We
file
income tax returns in the U.S. federal jurisdiction and in several states
and
foreign jurisdictions. As of September 30, 2007, the federal returns for
the
years ended March 31, 2004 through the current period and certain state returns
for the years ended March 31, 2003 through the current period are still open
to
examination. However, due to the fact the Company had net operating losses
and
credits carried forward in most jurisdictions, certain items attributable
to
technically closed years are still subject to adjustment by the relevant
taxing
authority through an adjustment to tax attributes carried forward to open
years.
13.
Segment Information
Our
operations are classified into one operating segment. A significant portion
of
our net sales is derived from a relatively small number of customers. For
the three and six months ended September 30, 2007 and September 30, 2006,
two
original equipment manufacturer (OEM) customers each represented more than
10%
of our net sales. In addition, two distributors each represented more than
10%
of our net sales for the three and six months ended September 30, 2007 and
one
distributor represented more than 10% of our net sales for the three and
six
months ended September 30, 2006.
Net
sales
to geographic regions reported below are based on the customers’ ship to
locations (amounts in thousands):
|
|
Three
Months Ended September 30
|
|
|
Six
Months Ended September 30
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
China
|
|
$
|
4,275
|
|
|
|
27
|
%
|
|
$
|
8,210
|
|
|
|
44
|
%
|
|
$
|
7,573
|
|
|
|
26
|
%
|
|
$
|
15,798
|
|
|
|
45
|
%
|
Korea
|
|
|
5,875
|
|
|
|
36
|
%
|
|
|
4,028
|
|
|
|
22
|
%
|
|
|
10,728
|
|
|
|
37
|
%
|
|
|
7,630
|
|
|
|
22
|
%
|
Taiwan
|
|
|
2,888
|
|
|
|
18
|
%
|
|
|
2,858
|
|
|
|
15
|
%
|
|
|
5,647
|
|
|
|
19
|
%
|
|
|
5,099
|
|
|
|
15
|
%
|
Singapore
|
|
|
1,337
|
|
|
|
8
|
%
|
|
|
2,242
|
|
|
|
12
|
%
|
|
|
2,360
|
|
|
|
8
|
%
|
|
|
3,384
|
|
|
|
10
|
%
|
Japan
and others
|
|
|
186
|
|
|
|
1
|
%
|
|
|
109
|
|
|
|
1
|
%
|
|
|
260
|
|
|
|
1
|
%
|
|
|
281
|
|
|
|
1
|
%
|
Total
Asia Pacific
|
|
|
14,561
|
|
|
|
90
|
%
|
|
|
17,447
|
|
|
|
93
|
%
|
|
|
26,568
|
|
|
|
91
|
%
|
|
|
32,192
|
|
|
|
92
|
%
|
United
States
|
|
|
1,125
|
|
|
|
7
|
%
|
|
|
1,008
|
|
|
|
5
|
%
|
|
|
1,821
|
|
|
|
6
|
%
|
|
|
1,973
|
|
|
|
6
|
%
|
Mexico
and Brazil
|
|
|
176
|
|
|
|
1
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
275
|
|
|
|
1
|
%
|
|
|
116
|
|
|
|
0
|
%
|
Total
Americas
|
|
|
1,301
|
|
|
|
8
|
%
|
|
|
1,008
|
|
|
|
5
|
%
|
|
|
2,096
|
|
|
|
7
|
%
|
|
|
2,089
|
|
|
|
6
|
%
|
Europe
|
|
|
260
|
|
|
|
2
|
%
|
|
|
278
|
|
|
|
1
|
%
|
|
|
581
|
|
|
|
2
|
%
|
|
|
524
|
|
|
|
2
|
%
|
Total
net sales
|
|
$
|
16,122
|
|
|
|
100
|
%
|
|
$
|
18,733
|
|
|
|
100
|
%
|
|
$
|
29,245
|
|
|
|
100
|
%
|
|
$
|
34,805
|
|
|
|
100
|
%
|
14.
Contingencies
Environmental
We
have
been subject to a variety of federal, state and local regulations in connection
with the discharge and storage of certain chemicals used in our manufacturing
processes, which are now fully outsourced to independent contract manufacturers.
We have obtained all necessary permits for such discharges and storage, and
we
believe that we have been in substantial compliance with the applicable
environmental regulations. Industrial waste generated at our facilities was
either processed prior to discharge or stored in double-lined barrels until
removed by an independent contractor. With the completion of our Milpitas
site
remediation and the closure of our Tempe facility during fiscal 2005, we
now
expect our environmental compliance costs to be minimal.
Guarantees
We
enter
into certain types of contracts from time to time that require us to indemnify
parties against third party claims. These contracts primarily relate to (1)
certain agreements with our directors and officers under which we may be
required to indemnify them for the liabilities arising out of their efforts
on
behalf of the company; and (2) agreements under which we have agreed to
indemnify our contract manufacturers and customers for claims arising from
intellectual property infringement or in some instances from product defects
or
other issues. The conditions of these obligations vary and generally
a maximum obligation is not explicitly stated. Because the obligated amounts
under these types of agreements often are not explicitly stated, the overall
maximum amount of the obligations cannot be reasonably estimated. We have
not
recorded any associated obligations at September 30, 2007 and March 31,
2007. We carry coverage under certain insurance policies to protect
ourselves in the case of any unexpected liability; however, this coverage
may
not be sufficient.
Product
Warranty
We
typically provide a one-year warranty that our products will be free from
defects in material and workmanship and will substantially conform in all
material respects to our most recently published applicable specifications
although sometimes we provide shorter or longer warranties, especially to
some
of our larger OEM customers. We have experienced minimal warranty claims
in the
past, and we accrue for such contingencies in our sales allowances and return
reserve.
IT
EM
2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
In
this
discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices
Corporation. All trademarks appearing in this discussion are the property
of
their respective owners. This discussion should be read in conjunction with
the
other financial information and financial statements and related notes contained
elsewhere in this report.
Forward
Looking
Statements
This
report contains forward-looking statements within the meaning of Section
27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Act of
1934, as amended. Such forward-looking statements are made pursuant to the
safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
These
forward-looking statements are not historical facts and are based on current
expectations, estimates, and projections about our industry; our beliefs
and
assumptions; and our goals and objectives. Words such as “anticipates,”
“expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and
variations of these words and similar expressions are intended to identify
forward-looking statements. Examples of the kinds of forward-looking statements
in this report include statements regarding the following: (1) our expectation
that our ASP (“Average Selling Prices”) for similar products will decline
approximately 15% per year; (2) our having a target gross margin of 39% to
41%; (3) our expectation that our future environmental compliance
costs will be minimal; (4) our anticipation that our existing cash, cash
equivalents and short-term investments will be sufficient to meet our
anticipated cash needs over the next 12 months; (5) our expectation not to
pay
dividends in the foreseeable future; (6) our plan to examine goodwill we
recorded from our acquisition of Arques Technology for impairment on or before
the end of fiscal 2008; (7) our having a long term target for research and
development expenses of 9% to 10% of sales; (8) our having a long term target
for selling, general and administrative expenses of 15% to 16% of sales;
(9) the
future impact of the ASMC wafer fab shut-down; and (10) our expectation of
further cost reductions of our products in future. These statements are only
predictions, are not guarantees of future performance, and are subject to
risks,
uncertainties, and other factors, some of which are beyond our control, are
difficult to predict, and could cause actual results to differ materially
from
those expressed or forecasted in the forward-looking statements. These risks
and
uncertainties include, but are not limited to, whether our core markets continue
to experience their forecasted growth and whether such growth continues to
require the devices we supply; whether we will be able to increase our market
penetration; whether our product mix changes, our unit volume decreases
materially, we experience price erosion due to competitive pressures, or
our
contract manufacturers and assemblers raise their prices to us or we experience
lower yields from them or we are unable to realize expected cost savings
in
certain manufacturing and assembly processes; whether there will be any changes
in tax accounting rules; whether we will be successful developing new products
which our customers will design into their products and whether design wins
and
bookings will translate into orders; whether we encounter any unexpected
environmental clean-up issues with our former Tempe facility; whether we
discover any further contamination at our former Topaz Avenue Milpitas facility;
whether ASMC will be able to resume processing wafers when expected and whether
some of our customers will seek to replace us with an alternate source of
supply; and whether we will have large unanticipated cash requirements, as
well
as other risk factors detailed in this report, especially under Item 1A,
Risk
Factors. Except as required by law, we undertake no obligation to update
any
forward-looking statement, whether as a result of new information, future
events, or otherwise.
Executive
Overview
We
design
and sell application specific protection devices and display electronics
devices
for high volume applications in the mobile handset, digital consumer electronics
and personal computer markets. We are a leading supplier of protection devices
for mobile handsets that provide Electromagnetic Interference (EMI) filtering
and Electrostatic Discharge (ESD) protection and of low capacitance ESD
protection devices for digital consumer electronics and personal
computers. Both types of protection devices are typically used to
protect various interfaces, both external and internal, used in our customers’
products. Our protection products are built using our proprietary
silicon manufacturing process technology and provide the function of multiple
discrete passive components in a single silicon chip. They occupy
significantly less space, cost our customers less on a total cost of ownership
basis, offer higher performance and are more reliable than traditional solutions
based on discrete passive components. Some of these devices also
include active circuit analog elements that provide additional
functionality.
We
also
offer application specific display electronic devices for the mobile handset
display market that include high speed serial interface display controllers
and
white light emitting diode (LED) drivers. Our serial interface display
controller products features the industry’s smallest solution form factor and
unique audio and video features. Our white LED drivers provide an optimal
voltage and current to illuminate white LEDs employed in mobile handsets
as
liquid crystal display (LCD) backlights and camera flash applications. Our
display electronics devices are designed using industry standard active analog
and mixed signal process technology.
End
customers for our semiconductor products are original equipment manufacturers
(OEMs). We sell to some of these end customers through original design
manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use
a
direct sales force, manufacturers’ representatives and distributors to sell our
products.
We
are
completely fabless, using independent providers of wafer fabrication services.
We have one operating segment and most of our physical assets are located
outside the United States. Assets located outside the United States include
product inventories and manufacturing equipment consigned to our contract
wafer
manufacturers, assemblers and test houses.
At
the
end of October, one of our wafer fab partners, ASMC of Shanghai, experienced
a
power failure which impacted some of its in-process wafers, including some
for
us, and its wafer fab lines, including some lines which make product for
us and
in some cases are our only current source for such product. ASMC has
informed us that it expects to complete repairs to damaged equipment and
resume
processing wafers within the next four to six weeks. We are taking steps
to try to minimize the effect of this temporary shut-down on our customers
and
on ourselves. We expect that the revenue decline in the quarter ending
December 31, 2007, will materially reduce our net income for the quarter.
Although no assurance can be given, we believe that some of the revenue
and net
income that we lose in the December quarter due to the ASMC shut-down will
be
deferred to the quarter ending March 31, 2008, rather than forgone
permanently.
Second
Quarter Key Financial Highlights
The
following are key financial highlights of second quarter of fiscal
2008:
Net
Sales of $16.1 Million:
Our net sales were $16.1 million in second quarter
of fiscal 2008, down 14% from $18.7 million in the same period a year
ago.
Gross
Margin of $5.3 Million:
Our gross margin was $5.3 million (33% of our net
sales) in the second quarter of fiscal 2008 as compared to gross margin of
$7.5
million (40% of our net sales) in the same period a year ago.
Net
Income of $0.02 per Share:
Our net income per share, basic and diluted, was
$0.02 in the second quarter of fiscal 2008 compared to net income per
share, basic and diluted, of $0.06 in the same period a year ago.
Cash
Provided by Operating Activities of $1.8 Million:
We generated operating
cash inflow of $1.8 million during six months ended September 30, 2007 as
compared to $5.5 million in the same period a year ago.
Cash
*
Position:
We ended the second quarter of fiscal 2008 with a cash
position of $49.4 million as compared to $49.0 million, as of March 31,
2007.
*
Cash = Cash and cash equivalents + Short-term
investments
Results
of Operations
The
table
below shows our net sales, cost of sales, gross margin, expenses and net
income
(loss), both in dollars and as a percentage of net sales, for the three and
six
months ended September 30, 2007 and 2006 (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
Six
Months Ended September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
sales
|
|
$
|
16,122
|
|
|
|
100
|
%
|
|
$
|
18,733
|
|
|
|
100
|
%
|
|
$
|
29,245
|
|
|
|
100
|
%
|
|
$
|
34,805
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
10,853
|
|
|
|
67
|
%
|
|
|
11,228
|
|
|
|
60
|
%
|
|
|
19,890
|
|
|
|
68
|
%
|
|
|
21,217
|
|
|
|
61
|
%
|
Gross
margin
|
|
|
5,269
|
|
|
|
33
|
%
|
|
|
7,505
|
|
|
|
40
|
%
|
|
|
9,355
|
|
|
|
32
|
%
|
|
|
13,588
|
|
|
|
39
|
%
|
Research
and development
|
|
|
1,573
|
|
|
|
10
|
%
|
|
|
2,171
|
|
|
|
12
|
%
|
|
|
3,410
|
|
|
|
12
|
%
|
|
|
4,226
|
|
|
|
12
|
%
|
Selling,
general and administrative
|
|
|
3,721
|
|
|
|
23
|
%
|
|
|
4,067
|
|
|
|
22
|
%
|
|
|
7,638
|
|
|
|
26
|
%
|
|
|
8,261
|
|
|
|
24
|
%
|
In-process
research and development
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
2,210
|
|
|
|
6
|
%
|
Amortization
of intangible assets
|
|
|
41
|
|
|
|
0
|
%
|
|
|
42
|
|
|
|
0
|
%
|
|
|
82
|
|
|
|
0
|
%
|
|
|
76
|
|
|
|
0
|
%
|
Other
income, net
|
|
|
642
|
|
|
|
4
|
%
|
|
|
617
|
|
|
|
3
|
%
|
|
|
1,283
|
|
|
|
4
|
%
|
|
|
1,156
|
|
|
|
3
|
%
|
Income
(loss) before income taxes
|
|
|
576
|
|
|
|
4
|
%
|
|
|
1,842
|
|
|
|
10
|
%
|
|
|
(492
|
)
|
|
|
(2
|
%)
|
|
|
(29
|
)
|
|
|
(0
|
%)
|
Income
taxes
|
|
|
19
|
|
|
|
0
|
%
|
|
|
465
|
|
|
|
2
|
%
|
|
|
7
|
|
|
|
0
|
%
|
|
|
669
|
|
|
|
2
|
%
|
Net
income (loss)
|
|
$
|
557
|
|
|
|
3
|
%
|
|
$
|
1,377
|
|
|
|
7
|
%
|
|
$
|
(499
|
)
|
|
|
(2
|
%)
|
|
$
|
(698
|
)
|
|
|
(2
|
%)
|
Net
sales
Net
sales
by market for three months ended September 30, 2007 and 2006 were as follows
(in
millions):
|
|
Three
months ended September 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
As
%
of
Total
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mobile
handset
|
|
$
|
10.7
|
|
|
|
66
|
%
|
|
$
|
13.5
|
|
|
|
72
|
%
|
|
$
|
(2.8
|
)
|
|
|
(21
|
%)
|
Digital
consumer electronics and personal computers
|
|
|
5.4
|
|
|
|
34
|
%
|
|
|
5.2
|
|
|
|
28
|
%
|
|
|
0.2
|
|
|
|
4
|
%
|
Total
|
|
$
|
16.1
|
|
|
|
100
|
%
|
|
$
|
18.7
|
|
|
|
100
|
%
|
|
$
|
(2.6
|
)
|
|
|
(14
|
%)
|
Our
net
sales declined to $16.1 million during the three months ended September 30,
2007
from $18.7 million during the same period a year ago. The decline in our
product
sales in mobile handset market was primarily due to two factors a) lower
sales to a major customer as a result of share shifts in the mobile handset
market and competition as well as b) price decreases of our products. These
declines were partially offset by increases in sales to other
customers. Sales from products for the personal computer and digital
consumer market increased slightly during three months ended September 30,
2007
compared to same period a year ago.
Total
units sold during the three months ended September 30, 2007 decreased to
approximately 199 million units from approximately 233 million units during
the
same period a year ago.
Net
sales
by market for six months ended September 30, 2007 and 2006 were as follows
(in
millions):
|
|
Six
months ended September 30,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
Amount
|
|
|
|
|
|
$
Change
|
|
|
%
Change
|
|
Mobile
handset
|
|
$
|
19.1
|
|
|
|
65
|
%
|
|
$
|
24.7
|
|
|
|
71
|
%
|
|
$
|
(5.6
|
)
|
|
|
(23
|
%)
|
Digital
consumer electronics and personal computers
|
|
|
10.1
|
|
|
|
35
|
%
|
|
|
10.1
|
|
|
|
29
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Total
|
|
$
|
29.2
|
|
|
|
100
|
%
|
|
$
|
34.8
|
|
|
|
100
|
%
|
|
$
|
(5.6
|
)
|
|
|
(16
|
%)
|
Our
net
sales declined to $29.2 million during the six months ended September 30,
2007
from $34.8 million during the same period a year ago. The decline in our
product
sales in mobile handset market was primarily due to two factors a) lower
sales
to a major customer as a result of share shifts in the mobile handset market,
competition and inventory adjustments as well as b) price decreases of our
products. These declines were partially offset by increases in sales to other
customers.
Total
units sold during the six months ended September 30, 2007 decreased to
approximately 361 million units from approximately 430 million units during
the
same period a year ago.
Gross
Margin
Gross
margin decreased by $2.2 million and $4.2 million for the three and six months
ended September 30, 2007 compared to the three and six months ended September
30, 2006, respectively, due to the following reasons:
Gross
margin increase (decrease) compared to prior periods (in
millions):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
Price
change of products based on a constant mix for core
markets
|
|
$
|
(2.5
|
)
|
|
$
|
(4.7
|
)
|
Volume,
mix and other factors
|
|
|
(1.2
|
)
|
|
|
(3.0
|
)
|
Cost
reductions of our products on a constant mix
|
|
|
1.5
|
|
|
|
3.5
|
|
|
|
$
|
(2.2
|
)
|
|
$
|
(4.2
|
)
|
The
gross
margin decrease was primarily driven by a decrease in prices and volume of
our
products as well as change in our product mix partially offset by product
cost
reductions. Consistent with our expectations, our ASP declined 14%
based on a constant mix of products in the second quarter of fiscal 2008
as
compared to the same period a year ago. In the future we expect our ASP for
similar products based on a constant mix of products to continue to decline
at a
rate of approximately 15% per year. Units sold in mobile handset market
decreased by 21% and units sold in digital consumer electronics and personal
computer markets increased by 11% during quarter ended September 30, 2007
as
compared to the same quarter a year ago. The cost reductions of our products
were primarily due to outsourcing with lower cost subcontractors and continued
improvement in our assembly and testing processes.
As
a
percentage of sales, gross margin decreased to 33% and 32% for the three
and six
months ended September 30, 2007, compared to 40% and 39% for the three and
six
months ended September 30, 2006, respectively. Our long-range gross margin
target remains 39% to 41%. However, our gross margin could fail to achieve
this
target range or could decline.
Research
and Development
Research
and development expenses consist primarily of compensation and related costs
for
employees, prototypes, masks and other expenses for the development of new
products, process technology and packages. The decrease in research and
development expenses for the three and six months ended September 30, 2007,
compared to the three and six months ended September 30, 2006, respectively, was
due to the following reasons:
Expense
increase (decrease) compared to prior periods (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
Engineering
supplies
|
|
$
|
(431
|
)
|
|
$
|
(424
|
)
|
Product
related costs
|
|
|
(215
|
)
|
|
|
(140
|
)
|
Salaries
and benefits, outside services and other costs
|
|
|
48
|
|
|
|
(252
|
)
|
|
|
$
|
(598
|
)
|
|
$
|
(816
|
)
|
Research
and development expenses decreased by $0.6 and $0.8 million during three
and six
months ended September 30, 2007, respectively, as compared with the same
periods
a year ago, primarily due to the timing of our projects. Research and
development expenses decreased primarily due to higher expenses, related
to
development of our initial serial interface display controller product,
incurred during our last fiscal year. This decline is considered temporary
as
the serial interface display controller and ASIP developments will begin
to ramp
up during the remainder of fiscal year 2008.
As
a
percentage of sales, research and development expenses decreased to 10%
during the three months ended September 30, 2007 from 12% during the same
period a year ago. Research and development expenses remained at a
consistent level of 12% of net sales during six months ended September 30,
2007
and 2006. Our long term target for research and development expenses is 9%
to
10% of sales. However, research and development expenses may exceed our target
range and represent more than 10% of sales.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of compensation and
related costs for employees, sales commissions, marketing expenses, legal,
accounting, other professional fees and information technology expenses.
The
decrease in selling, general, and administrative expenses for the three and
six
months ended September 30, 2007 compared to three and six months ended September
30, 2006, respectively, was due to the following reasons:
Expense
decrease compared to prior periods (in
thousands):
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
September
30, 2007
|
|
|
September
30, 2007
|
|
Employee
stock based compensation expense
|
|
$
|
(163
|
)
|
|
$
|
(301
|
)
|
Commissions,
salaries and benefits
|
|
|
(73
|
)
|
|
|
(211
|
)
|
Outside
services and other expenses
|
|
|
(110
|
)
|
|
|
(111
|
)
|
|
|
$
|
(346
|
)
|
|
$
|
(623
|
)
|
Selling,
general and administrative expenses decreased by approximately $0.3 million
and
$0.6 million during the three and six months ended September 30, 2007,
respectively, as compared with same periods a year ago primarily due to a
decrease in sales commissions, bonus, employee stock based compensation expense
as well as reduced spending for marketing communications.
As
a
percentage of sales, selling, general and administrative expenses increased
to
23% and 26% during three and six months ended September 30, 2007 from 22%
and
24% during the same periods a year ago mainly due to a decrease in our sales.
Our long term target for selling, general and administrative expenses is
15% to
16% of sales. However, selling, general and administrative expenses will
continue to exceed our target range and represent more than 16% of sales
until
our sales increase substantially.
Amortization
of Intangible Assets
Amortization
of intangible assets of $41,000 and $82,000 during the three and six months
ended September 30, 2007 as compared to $42,000 and $76,000 during the same
periods a year ago, respectively, was related to the Arques
acquisition. For additional information regarding intangible assets,
see Note 5 to the Consolidated Financial Statements.
In-Process
Research and Development (IPR&D)
There
was
no IPR&D expense incurred during the three months ended September 30, 2007
and 2006. IPR&D expense for the six months ended September 30, 2007 and
September 30, 2006 was $0 and $2.2 million, respectively. The IPR&D expense
was related to the Arques acquisition. IPR&D was expensed upon acquisition
because technological feasibility had not been established and no future
alternative uses existed. We do not expect future IPR&D expenses related to
the Arques acquisition.
Other
Income, Net
Other
income, net mainly includes interest income, interest expense and other
expenses.
The
increase in other income is primarily due to an increase in interest income
from
$0.6 and $1.2 million for the three and six months ended September 30, 2006
to
$0.7 and $1.3 million for the three and six months ended September 30, 2007,
respectively. The increase in interest income resulted from increased interest
rate and our having more cash as a result of positive cash flow from operations
in the intervening year and issuance of common stock under our employee stock
option and employee stock purchase plans reduced by the cash outlay for the
purchase of manufacturing equipment and final Arques escrow
payment.
Income
Taxes
During
second quarter of fiscal 2008, we recorded an income tax provision of $19,000
as
compared with tax provision of $465,000 for same period last year. Our income
tax provision decreased in the second quarter of fiscal 2008 compared to
corresponding quarter of fiscal 2007, primarily as a result of our estimates
in
our ability to utilize loss carryforwards, and the valuation allowance of
the
deferred tax assets. See “Note 12: Income Taxes” in the Notes to Condensed
Consolidated Financial Statements of this Form 10-Q for further
discussion.
Critical
Accounting Policies and Estimates
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 financial statements and
accompanying notes. We base our estimates on historical experience and the
known
facts and circumstances that we believe are relevant. Actual results may
differ
materially from our estimates. Our significant accounting policies are described
in Note 2 of Notes to Consolidated Financial Statements in our Form 10-K
for
fiscal 2007. The significant accounting policies that we believe are critical,
either because they relate to financial statement captions that are key
indicators of our financial performance (e.g., revenue) or because their
application requires significant management judgment, are described in the
following paragraphs.
Revenue
Recognition
We
recognize revenue when persuasive evidence of an arrangement exists, delivery
or
customer acceptance, where applicable, has occurred, the fee is fixed or
determinable, and collection is reasonably assured.
Revenue
from product sales to end user customers, or to distributors that do not
receive
price concessions and do not have return rights, is recognized upon shipment
and
transfer of risk of loss, if we believe collection is reasonably assured
and all
other revenue recognition criteria are met. We assess the probability of
collection based on a number of factors, including past transaction history
and
the customer’s creditworthiness. If we determine that collection of a receivable
is not probable, we defer recognition of revenue until the collection becomes
probable, which is generally upon receipt of cash. Reserves for sales returns
and allowances from end user customers are estimated based on historical
experience and management judgment, and are provided for at the time of
shipment. The sufficiency of the reserves for sales return and allowances
is
assessed at the end of each reporting period.
Revenue
from sales of our standard products to distributors whose terms provide for
price concessions or for product return rights is recognized when the
distributor sells the product to an end customer. For our end of life products,
if we believe that collection is probable, we recognize revenue upon shipment
to
the distributor, because our contractual arrangements provide for no right
of
return or price concessions for those products.
When
we
sell products to distributors, we defer our gross selling price of the product
shipped and its related cost and reflect such net amounts on our balance
sheet
as a current liability entitled “deferred margin on shipments to
distributors”.
Inventory
Forecasting
customer demand is the factor in our inventory policy that involves significant
judgments and estimates. We estimate excess and obsolete inventory based
on a
comparison of the quantity and cost of inventory on hand to management’s
forecast of customer demand for the next twelve months. In forecasting customer
demand, we make estimates as to, among other things, the timing of sales,
the
mix of products sold to customers, the timing of design wins and related
volume
purchases by new and existing customers, and the timing of existing customers’
transition to new products. We also use historical trends as a factor in
forecasting customer demand, especially that from our distributors. We review
our excess and obsolete inventory on a quarterly basis considering the known
facts. Once inventory is written down, it is valued as such until it is sold
or
otherwise disposed of. To the extent that our forecast of customer demand
materially differs from actual demand, our cost of sales and gross margin
could
be impacted.
Impairment
of long lived assets
SFAS 142
prohibits the amortization of goodwill and intangible assets with indefinite
useful lives and requires that these assets be reviewed for impairment at
least
annually and more frequently whenever events indicate that their carrying
value
may not be recoverable. An impairment loss is recognized if the sum of the
expected undiscounted cash flows from the use of the asset is less than the
carrying value of the asset. The amount of impairment loss is measured as
the
difference between the carrying value of the assets and their estimated fair
value. The process for evaluating the potential impairment of goodwill is
highly
subjective and requires significant judgment at many points during the analysis.
Should actual results differ from our estimates, revisions to the recorded
amount of goodwill could be required. We cannot predict the occurrence of
future
events that might lead to impairment nor the impact such events might have
on
these reported asset values. We plan to examine goodwill we recorded from
our
acquisition of Arques for impairment on or before our fiscal year
end.
Stock-based
Compensation
Under
the
fair value recognition provisions of FAS 123(R), stock-based compensation
cost
is estimated at the grant date based on the fair value of the award and is
recognized as expense on a graded vesting schedule over the requisite service
period of the award.
We
estimate the value of employee stock options on the date of grant using a
Black-Scholes model. The determination of fair value of stock-based payment
awards on the date of grant using an option-pricing model is affected by
our
stock price as well as assumptions regarding a number of highly complex and
subjective variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the awards and actual and
projected employee stock option exercise behaviors. The use of a Black-Scholes
model requires the use of extensive actual employee exercise behavior data
and a
number of complex assumptions including expected volatility, risk-free interest
rate and expected dividends.
Our
computation of expected volatility is based on a combination of historical
and
market-based implied volatility. Our computation of expected life is based
on a
combination of historical exercise patterns and certain assumptions regarding
the exercise life of unexercised options adjusted for job level and
demographics. The interest rate for periods within the contractual life of
the
award is based on the U.S. Treasury yield curve in effect at the time of
grant.
The dividend yield assumption is based on our history and expectation of
dividend payouts.
As
stock-based compensation expense recognized in the condensed consolidated
statements of operations for three and six months ended September 30, 2007
and
September 30, 2006 is based on awards ultimately expected to vest, it has
been
reduced for estimated forfeitures. FAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. Forfeitures were estimated
based on an average of historical forfeitures. The expense that we recognize
in
future periods could differ significantly from the current period and/or
our
forecasts due to adjustments in assumed forfeiture rates or change in our
assumptions.
Accounting
for Income Taxes
We
account for income taxes under the asset and liability method; which requires
significant judgments in making estimates for determining certain tax
liabilities and recoverability of certain deferred tax assets, including
the tax
effects attributable to net operating loss carryforwards and temporary
differences between the tax and financial statement recognition of revenue
and
expenses, as well as the interest and penalties relating to these uncertain
tax
positions.
On
a
quarterly basis, we evaluate our ability to recover our deferred tax assets,
including but not limited to our past operating results, the existence of
cumulative losses in the most recent fiscal years, and our forecast of future
taxable income on a jurisdiction by jurisdiction basis. In the event that
actual
results differ from our estimates in the future, we will adjust the amount
of
the valuation allowance, resulting in a decrease or increase in income tax
expense in those periods.
In
the
first quarter of fiscal 2008, we adopted Financial Accounting Standards Board
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an
interpretation of FASB Statement No. 109” (FIN 48). As a result of the
implementation of FIN 48, we recognize liabilities for uncertain tax positions
based on a two-step process prescribed within the interpretation. The first
step
is to evaluate the tax position for recognition by determining if the weight
of
available evidence indicates that it is more likely than not that the position
will be sustained on examination, including resolution of any related appeals
or
litigation processes, if any. The second step requires us to estimate and
measure the tax benefit as the largest amount that is more than 50% likely
of
being realized upon ultimate settlement.
It
is
inherently difficult and subjective to estimate such amounts, as this requires
us to determine the probability of various possible outcomes. We will evaluate
these uncertain tax positions on a quarterly basis. A change in recognition
or
measurement in the future may result in the recognition of a tax benefit
or an
additional charge to the tax provision in the period.
See
“Note
12: Income Taxes” in the Notes to Condensed Consolidated Financial Statements of
this Form 10-Q for further discussion.
Litigation
We
are a
party to lawsuits, claims, investigations, and proceedings, including commercial
and employment matters, which are being addressed in the ordinary course
of
business. We review the current status of any pending or threatened proceedings
with our outside counsel on a regular basis and, considering all the known
relevant facts and circumstances, we recognize any loss that we consider
probable and estimable as of the balance sheet date. For these purposes,
we
consider settlement offers we may make to be indicative of such a loss under
certain circumstances. As of September 30, 2007, we had accrued
$20,000 for our litigation-related matters.
Liquidity
and Capital Resources
We
have
historically financed our operations through a combination of debt and equity
financing and cash generated from operations. As highlighted in the consolidated
statement of cash flows, our liquidity and available capital resources are
impacted by following key components: (i) cash, cash equivalents and short-term
investments, (ii) operating activities, (iii) investing activities, and (iv)
financing activities.
|
|
Six
Months Ended September 30,
|
|
(In
thousands)
|
|
2007
|
|
|
2006
|
|
Cash
provided by operating activities
|
|
$
|
1,756
|
|
|
$
|
5,504
|
|
Cash
provided by (used in) investing activities
|
|
|
(1,844
|
)
|
|
|
667
|
|
Cash
provided by financing activities
|
|
|
205
|
|
|
|
621
|
|
Net
increase in cash and cash equivalents
|
|
$
|
117
|
|
|
$
|
6,792
|
|
Cash,
cash equivalents and short-term investments
Total
cash, cash equivalents and short-term investments as of September 30, 2007
were
$49.4 million compared to $49.0 million as of March 31, 2007, a increase
of $0.4
million mainly due to positive operating cash flow and net proceeds from
the
issuance of common stock under our ESPP partially offset by cash payments
for
the purchase of manufacturing equipment and final Arques escrow
payment.
Operating
activities
Cash
provided by operating activities consists of net loss adjusted for certain
non-cash items and changes in operating assets and liabilities.
Cash
provided by operating activities was $1.8 million during the six months ended
September 30, 2007. The net loss of $0.5 million for the six months ended
September 30, 2007, included non-cash items such as employee stock based
compensation expense of $1.2 million and depreciation and amortization of
$0.9
million.
Accounts
receivable increased to $8.9 million at September 30, 2007 compared to $7.5
million at March 31, 2007, primarily as a result of increased
shipments. Receivables days of sales outstanding were 51 days and 44
days as of quarters ended September 30, 2007 and March 31, 2007, respectively.
Net inventory was $4.5 million as of September 30, 2007, compared to $5.2
million as of March 31, 2007. Annualized inventory turns were 8.2 at
September 30, 2007 as compared to 8.0 at March 31, 2007. Accounts payable
and
accrued liabilities totaled $8.2 million at September 30, 2007 compared to
$7.9
million at March 31, 2007.
Cash
provided by operating activities was $5.5 million during the six months ended
September 30, 2006. Receivables days of sales outstanding were 50 days and
55
days as of September 30, 2006 and March 31, 2006, respectively. The
net loss for six months ended September 30, 2006 included non-cash charges
comprised principally of IPR&D of $2.2 million, employee stock based
compensation expense of $1.6 million and depreciation and amortization of
$0.7
million.
Investing
activities
The
most
significant components of the our investing activities during six months
ended
September 30, 2007 and 2006 include: (i) purchases and sales of short-term
investments, (ii) payments for the acquisition of Arques, and (iii) capital
expenditures.
Investing
activities during the six months ended September 30, 2007 used $1.8 million
of
cash, primarily reflecting our payment towards the purchase of manufacturing
capital equipment and the final Arques escrow payment.
Investing
activities during the six months ended September 30, 2006 provided $0.7
million of cash, primarily due to net redemption of short-term investments
partially offset by the purchase of Arques Technology and our capital
expenditures.
Financing
activities
The
most
significant components of the our financing activities during the six months
ended September 30, 2007 and 2006 include proceeds from employees stock
compensation plans.
Net
cash
provided by financing activities for the six months ended September 30, 2007
was
$0.2 million and was primarily the result of net proceeds from the issuance
of
common stock under our ESPP.
Net
cash
provided by financing activities for the six months ended September 30,
2006 was $0.6 million and was the result of net proceeds from the issuance
of
common stock under our stock option plans and the ESPP.
The
following table summarizes our contractual obligations as of September 30,
2007:
|
|
Payment
due by period
|
|
(in
thousands)
|
|
|
|
|
Fiscal
2009
|
|
|
Fiscal
2010
|
|
|
Fiscal
2011
|
|
|
Beyond
Fiscal
2011
|
|
|
Total
|
|
Capital
lease obligations
|
|
$
|
132
|
|
|
$
|
132
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
264
|
|
Operating
lease obligations
|
|
|
183
|
|
|
|
377
|
|
|
|
283
|
|
|
|
193
|
|
|
|
-
|
|
|
|
1,036
|
|
Purchase
obligations
|
|
|
796
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
796
|
|
|
|
$
|
1,111
|
|
|
$
|
509
|
|
|
$
|
283
|
|
|
$
|
193
|
|
|
$
|
-
|
|
|
$
|
2,096
|
|
We
expect to fund all of
these obligations with cash on hand or cash provided from
operations.
We
anticipate that our existing cash, cash equivalents and short-term investments
will be sufficient to meet our anticipated cash needs for the next 12 months.
Should we desire to expand our level of operations more quickly, either through
increased internal development or through the acquisition of product lines
from
other entities, we may need to raise additional funds through public or private
equity or debt financing. The funds may not be available to us, or if available,
we may not be able to obtain them on terms favorable to us.
Off-Balance
Sheet Arrangements
We
do not
have off balance sheet arrangements that have, or are reasonably likely to
have,
a current or future effect upon our financial condition, revenues, expenses,
results of operations, liquidity, capital expenditures or capital resources
that
are material to our investors, other than operating leases and purchase
obligations shown above.
PA
RT
II. OTHER INFORMATION
IT
EM
1. Legal Proceedings
None
A
revised
description of the risk factors associated with our business is set forth
below.
This description includes any material changes to and supersedes the description
of the risk factors associated with our business previously disclosed in
Part I,
Item 1A of our Form 10-Q for the quarter ended June 30, 2007. Because of
these risk factors, as well as other factors affecting the Company’s business
and operating results and financial condition, including those set forth
elsewhere in this report, our actual future results could differ materially
from
the results contemplated by the forward-looking statements contained in this
report and our past financial performance should not be considered to be
a
reliable indicator of future performance, so that investors should not use
historical trends to anticipate results or trends in future
periods.
Our
operating results may fluctuate significantly because of a number of factors,
many of which are beyond our control and are difficult to predict. These
fluctuations may cause our stock price to decline.
Our
operating results may fluctuate significantly for a variety of reasons,
including some of those described in the risk factors below, many of which
are
difficult to control or predict. While we believe that quarter to quarter
and
year to year comparisons of our revenue and operating results are not
necessarily meaningful or accurate indicators of future performance, our
stock
price historically has been susceptible to large swings in response to short
term fluctuations in our operating results. Should our future operating results
fall below our guidance or the expectations of securities analysts or investors,
the likelihood of which is increased by the fluctuations in our operating
results, the market price of our common stock may decline.
We
had losses in three out of the last six most recent fiscal quarters, including
the fourth quarter of fiscal 2007 and first quarter of fiscal 2008, although
overall we were almost breakeven in fiscal 2007 and were profitable during
the
second quarter of fiscal 2008. We may not be able to attain or
sustain profitability in the future.
We
were
profitable for the four quarters during fiscal 2006 until we sustained a
substantial loss of nine cents per share during the first quarter of fiscal
2007. This loss would have been a one cent per share profit but for
the one time in-process research and development charge we incurred due to
our
acquisition of Arques Technology, Inc. We returned to profitability
during the second and third quarters of fiscal 2007, followed by losses during
fourth quarter of fiscal 2007 and first quarter of fiscal 2008. We were then
profitable during the second quarter of fiscal 2008. There are many factors
that
affect our ability to sustain profitability including the health of the mobile
handset, digital consumer electronics and personal computer markets on which
we
focus, continued demand for our products from our key customers, availability
of
capacity from our manufacturing subcontractors, ability to reduce manufacturing
costs faster than price decreases thereby attaining a healthy gross margin,
continued product innovation and design wins, competition, and our continued
ability to manage our operating expenses. In order to obtain and sustain
profitability in the long term, we will need to continue to grow our business
in
our core markets and to reduce our product costs rapidly enough to maintain
our
gross margin. The semiconductor industry has historically been cyclical,
and we
may be subject to such cyclicality, which could lead to our incurring losses
again.
We
currently rely heavily upon a few customers for a large percentage of our
net
sales. Our revenue would suffer materially were we to lose any one of these
customers or lose market share.
Our
sales
strategy has been to focus on customers with large market share in their
respective markets. As a result, we have several large customers. During
the
second quarter of fiscal 2008, two customers primarily in the mobile handset
market represented 46% of our net sales. There can be no assurance that these
two customers will purchase our products in the future in the quantities
we have
forecasted, or at all.
During
the second quarter of fiscal 2008, two distributors represented 24% of our
net
sales. If we were to lose these distributors, we might not be able to obtain
other distributors to represent us or the new distributors might not have
sufficiently strong relationships with the current end customers to maintain
our
current level of net sales. Additionally, the time and resources involved
with
the changeover and training could have an adverse impact on our business
in the
short term.
We
currently rely heavily upon a few target markets for the bulk of our sales.
If
we are unable to further penetrate the mobile handset, digital consumer
electronics and personal computer markets, our revenues could stop growing
and
might decline leading us to reduce our investment in research and development
and marketing.
Our
revenues in recent periods have been derived from sales to manufacturers
of
mobile handsets, digital consumer electronics and personal computers and
peripherals. In order for us to be successful, we must continue to penetrate
the
mobile handset, digital consumer electronics and personal computer markets,
both
by obtaining more business from our current customers and by obtaining new
customers. Due to our narrow market focus, we are susceptible to materially
lower revenues due to material adverse changes to one of these markets. For
example, should growth not occur in the markets we have penetrated, our future
revenues could be adversely impacted.
During
the second quarter of fiscal 2008, 66% of our revenue was from sales to the
mobile handset market. If sales of mobile handsets decline, and in
particular if sales by our mobile handset customers decline, our future revenues
could stop growing and might decline. This might cause us to choose
to cut our spending on research and development and marketing to reduce our
loss
or to avoid operating at a loss which could further adversely affect our
future
prospects.
We
currently depend on our circuit protection devices for almost all of our
revenue. Should the need for such devices decline, for example
because of changes in input and output circuitry, our revenues could stop
growing and might decline.
Our
revenues in recent periods have been derived almost exclusively from sales
of
circuit protection devices. For example, during the second quarter of
fiscal 2008, 99% of our revenue was derived from such sales. With the
acquisition of Arques and its product line of LED drivers and the introduction
of our new serial interface display controller, we have several products
which
could help us reduce our dependence upon circuit protection devices, although
for the next several years we expect most of our revenues to derive from
circuit
protection devices. Should the need for such devices decline, for
example because of changes in input and output circuitry, our revenues could
stop growing and might decline.
The
fastest growing market for our products has been the mobile handset market.
A
slowdown in the adoption of protection devices by mobile handset manufacturers
would reduce our future growth in that market.
Much
of
our revenue growth over the past three years has been in the mobile handset
market where more complex mobile handsets have meant increased adoption of
and
demand for protection devices. Should the rate of adoption of protection
devices
decelerate in the mobile handset market, our planned rate of increase in
penetration of that market would also decrease, thereby reducing our future
growth in that market.
The
markets in which we participate are intensely competitive and our products
are
not sold pursuant to long term contracts, enabling our customers to replace
us
with our competitors if they choose.
Our
core
markets are intensely competitive. Our ability to compete successfully in
our
core markets depends upon our being able to offer attractive, high quality
products to our customers that are properly priced and dependably supplied.
Our
customer relationships do not generally involve long term binding commitments
making it easier for customers to change suppliers and making us more vulnerable
to competitors. Our customer relationships instead depend upon our past
performance for the customer, their perception of our ability to meet their
future need, including price and delivery and the timely development of new
devices, the lead time to qualify a new supplier for a particular product,
and
interpersonal relationships and trust. Furthermore, many of our
customers are striving to limit the number of vendors they do business with
and
because of our small size and limited product portfolio they could decide
to
stop doing business with us.
Because
we operate in different semiconductor product markets, we generally encounter
different competitors in our various market areas. With respect to the
protection devices for the mobile handset, digital consumer electronics and
personal computer markets, we compete with ON Semiconductor Corporation,
NXP,
Semtech Corporation and STMicroelectronics, N.V. For EMI filter devices used
in
mobile handsets, we also compete with ceramic devices based on high volume
Multi-Layer Ceramic Capacitor (MLCC) technology from companies such as Amotek
Company, Ltd., AVX Corporation, Innochip Technology, Inc., Murata Manufacturing
Co., Ltd., and TDK Corp. MLCC devices are generally low cost and our revenues
would suffer if their features and performance meet the requirements of our
customers and we are unable to reduce the cost of our protection products
sufficiently to be competitive. We have seen ceramic filters obtain significant
design wins for low end applications in the mobile handset market. We have
also
seen the use of higher performance ceramic filters and if we are not able
to
demonstrate superior performance at an acceptable price with our devices
then
our revenues would also suffer. With respect to serial interface display
controllers, our competitors include Toshiba Corporation, Samsung, Sharp
Electronics Corporation, Renesas Technology, and Solomon Systech. Many of
our
competitors are larger than we are, have substantially greater financial,
technical, marketing, distribution and other resources than we do and have
their
own facilities for the production of semiconductor components.
Deficiencies
in our internal controls could cause us to have material errors in our
financial
statements, which could require us to restate them. Such restatement could
have
adverse consequences on our stock price, potentially limiting our access
to
financial markets.
As
of
March 31, 2005, management identified, and the auditors attested to, material
weaknesses in the Company’s internal control over financial reporting in the
operating effectiveness within a portion of the revenue cycle and in the
controls over the proper recognition of subcontractor invoices related to
inventory and accounts payable. Although management believed it had
subsequently remediated these material weaknesses, it was later discovered
that
they continued through the third quarter of fiscal 2006. Management
subsequently assessed and determined, and the auditors attested, that these
material weaknesses had been remediated as of March 31, 2006, and 2007. However,
should we or our auditors discover that we have a material weakness in our
internal control over financial reporting at another time in the future,
especially considering that we have had material weaknesses in the past which
we
incorrectly believed had been remediated, investors could lose confidence
in the
accuracy and completeness of our financial reports, which could have an adverse
effect on our stock price.
Within
the past five years, we have also had to restate our financial statements
twice
because of these material weaknesses. In part due to our new ERP system,
and new personnel and training regimen, we believe that we will not have
a
material weakness in our internal control over financial reporting which
would
lead to material errors in our financial statements. Nonetheless, there
can be no assurance that we will not have errors in our financial
statements. Such errors, if material, could require us to restate our
financial statements, having adverse effects on our stock price, potentially
causing additional expense, and could limit our access to financial
markets.
Our
competitors have in the past and may in the future reverse engineer our most
successful products and become second sources for our customers, which could
decrease our revenues and gross margins.
Our
most
successful products are not covered by patents and have in the past and may
in
the future be reverse engineered. Thus, our competitors can become second
sources of these products for our customers or our customers’ competitors, which
could decrease our unit sales or our ability to increase unit sales and also
could lead to price competition. This price competition could result in lower
prices for our products, which would also result in lower revenues and gross
margins. Certain of our competitors have announced products that are pin
compatible with some of our most successful products, especially in the mobile
handset market, where many of our largest revenue generating products have
been
second sourced. To the extent that the revenue secured by these competitors
exceeds the expansion in market size resulting from the availability of second
sources, this decreases the revenue potential for our products. Furthermore,
should a second source vendor attempt to increase its market share by dramatic
or predatory price cuts for large revenue products, our revenues and margins
could decline materially.
In
the future our revenues will become increasingly subject to macroeconomic
cycles
and more likely to decline if there is an economic
downturn.
As
mobile
handset protection devices penetration increases, our revenues will become
increasingly susceptible to macroeconomic cycles because our revenue growth
may
become more dependent on growth in the overall market rather than primarily
on
increased penetration, as has been the case in the past.
Our
reliance on foreign customers could cause fluctuations in our operating
results.
During
the second quarter of fiscal 2008, international sales accounted for 93%
of our
net sales. International sales include sales to U.S. based customers if the
product was delivered outside the United States.
International
sales subject us to the following risks:
|
•
|
|
changes
in regulatory requirements;
|
|
•
|
|
tariffs
and other barriers;
|
|
•
|
|
timing
and availability of export
licenses;
|
|
•
|
|
political
and economic instability;
|
|
•
|
|
the
impact of regional and global illnesses such as severe acute respiratory
syndrome infections (SARS);
|
|
•
|
|
difficulties
in accounts receivable collections;
|
|
•
|
|
difficulties
in staffing and managing foreign
operations;
|
|
•
|
|
difficulties
in managing distributors;
|
|
•
|
|
difficulties
in obtaining foreign governmental approvals, if those approvals
should
become required for any of our
products;
|
|
•
|
|
limited
intellectual property protection;
|
|
•
|
|
foreign
currency exchange fluctuations;
|
|
•
|
|
the
burden of complying with and the risk of violating a wide variety
of
complex foreign laws and treaties;
and
|
|
•
|
|
the
burden of complying with and the risk of violating a wide variety
of
complex foreign laws and treaties;
and
|
|
•
|
|
potentially
adverse tax consequences.
|
Because
sales of our products have been denominated in United States dollars, increases
in the value of the U.S. dollar could increase the relative price of our
products so that they become more expensive to customers in the local currency
of a particular country. Furthermore, because some of our customer purchase
orders and agreements are influenced, if not governed, by foreign laws,
we may
be limited in our ability to enforce our rights under these agreements
and to
collect damages, if awarded.
If
our distributors experience financial difficulty and become unable to pay
us or
choose not to promote our products, our business could be
harmed.
During
the second quarter of fiscal 2008, 39% of our sales were through distributors,
primarily in Asia. Our distributors could reduce or discontinue sales of
our
products or sell our competitors’ products. They may not devote the resources
necessary to sell our products in the volumes and within the time frames
that we
expect. In addition, we are dependent on their continued financial viability,
and some of them are small companies with limited working capital. If our
distributors experience financial difficulties and become unable to pay our
invoices, or otherwise become unable or unwilling to promote and sell our
products, our business could be harmed.
Our
dependence on a limited number of foundry partners and assembly and test
subcontractors, and the limited capacity for plastic assembly and test
subcontractors, exposes us to a risk of manufacturing disruption or uncontrolled
price changes.
Given
the
current size of our business, we believe it is impractical for us to use
more
than a limited number of foundry partners and assembly and test subcontractors
as it would lead to significant increases in our costs. Currently, we have
five
foundry partners and rely on limited number of subcontractors. Some
of our products are sole sourced at one of our foundry partners in China,
Japan
or Taiwan. There is also a limited capacity of plastic assembly and test
contractors, especially for Thin Dual Flat No-Lead Plastic Package (TDFN)
and
Ultra-Thin Dual Flat No-Lead Plastic Package (UDFN), for which customer demand
is increasing. Our ability to secure sufficient plastic assembly and
test capacity, especially the fast ramping TDFN and UDFN offerings, may
limit our ability to satisfy our customers’ demand. If the operations
of one or more of our partners or subcontractors should be disrupted, or
if they
should choose not to devote capacity to our products in a timely manner,
our
business could be adversely impacted as we might be unable to manufacture
some
of our products on a timely basis. In addition, the cyclicality of the
semiconductor industry has periodically resulted in shortages of wafer
fabrication, assembly and test capacity and other disruption of supply. We
may
not be able to find sufficient capacity at a reasonable price or at all if
such
disruptions occur. As a result, we face significant risks, including:
|
•
|
|
reduced
control over delivery schedules and
quality;
|
|
•
|
|
the
impact of regional and global illnesses such as SARS or Avian flu
pandemic;
|
|
•
|
|
the
potential lack of adequate capacity during periods when industry
demand
exceeds available capacity;
|
|
•
|
|
difficulties
finding and integrating new
subcontractors;
|
|
•
|
|
limited
warranties on products supplied to
us;
|
|
•
|
|
potential
increases in prices due to capacity shortages, currency exchange
fluctuations and other factors; and
|
|
•
|
|
potential
misappropriation of our intellectual
property.
|
In
these
regards, one of our wafer fab partners, ASMC of Shanghai, experienced a
power
failure at the end of October which impacted some of its in-process wafers,
including some for us, and its wafer fab lines, including some lines which
make
product for us and in some cases are our only current source for such
product. While ASMC has informed us that it expects to complete repairs to
damaged equipment and resume processing wafers within the next four to
six
weeks, there can be no assurance that it will not take ASMC a longer period
of
time. Although we are taking steps to try to minimize the effect of ASMC's
shut-down on our customers and on ourselves, there can be no assurance
that some
of our customers will not replace us with an alternate source of supply for
some or all of the products they currently purchase from us and/or that
we
will not lose a material amount revenue and net income as a result of
ASMC's shut-down.
We
have outsourced our wafer fabrication, and assembly and test operations and
may
encounter difficulties in expanding our capacity.
We
have
adopted a fabless manufacturing model that involves the use of foundry partners
and assembly and test subcontractors to provide our production capacity.
We
chose this model in order to reduce our overall manufacturing costs and thereby
increase our gross margin, reduce the impact of fixed costs when volume is
low,
provide us with upside capacity in case of short term demand increases and
provide us with access to newer process technology, production facilities
and
equipment. During the past four years we have outsourced our wafer manufacturing
and assembly and test operations overseas in Asia and we continue to seek
additional foundry and assembly and test capacity to provide for growth.
If we
experience delays in securing additional or replacement capacity at the time
we
need it, we may not have sufficient product to fully meet the demand of our
customers.
Our
reliance upon foreign suppliers exposes us to risks associated with
international operations.
We
use
foundry partners and assembly and test subcontractors in Asia, primarily
in
China, Japan, India, Thailand, and Taiwan for our products. Our dependence
on
these foundries and subcontractors involves the following substantial
risks:
|
•
|
|
political
and economic instability;
|
|
•
|
|
changes
in our cost structure due to changes in local currency values relative
to
the U.S. dollar;
|
|
•
|
|
potential
difficulty in enforcing agreements and recovering damages for their
breach;
|
|
•
|
|
inability
to obtain and retain manufacturing capacity and priority for our
business,
especially during industry-wide times of capacity
shortages;
|
|
•
|
|
exposure
to greater risk of misappropriation of intellectual
property;
|
|
•
|
|
disruption
to air transportation from Asia;
and
|
|
•
|
|
changes
in tax laws, tariffs and freight
rates.
|
These
risks may lead to delayed product delivery or increased costs, which would
harm
our profitability, financial results and customer relationships. In addition,
we
maintain significant inventory at our foreign subcontractors that could be
at
risk.
We
also
drop ship product from some of these foreign subcontractors directly to
customers. This increases our exposure to disruptions in operations that
are not
under our direct control and may require us to enhance our computer and
information systems to coordinate this remote activity.
We
have consigned substantial equipment at our foreign subcontractors in order
to
obtain price concessions. We are at risk for this equipment should
the foreign subcontractor go out of business.
In
order
to obtain price concessions, we have consigned substantial equipment at our
foreign contractors. For example, we have $2.2 million of test and
packaging equipment on consignment in India and $1.3 million of test equipment
on consignment in Thailand as of September 30, 2007. Should our
business relationship with these partners cease, whether due to our switching
to
alternate lower cost suppliers, quality or capacity issues with our current
partners, or if they experience a natural disaster or financial difficulty,
we
may have trouble repossessing this equipment. Even if we are able to
repossess this equipment, it may not be in good condition and we may not
be able
to realize the dollar value of this equipment then recorded on our
books. Any such inability to repossess consigned equipment or to
realize its recorded value on our books would reduce our assets.
Our
markets are subject to rapid technological change. Therefore, our success
depends on our ability to develop and introduce new
products.
The
markets for our products are characterized by:
|
•
|
|
rapidly
changing technologies;
|
|
•
|
|
changing
customer needs;
|
|
•
|
|
evolving
industry standards;
|
|
•
|
|
frequent
new product introductions and
enhancements;
|
|
•
|
|
increased
integration with other functions;
and
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rapid
product obsolescence.
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Our
competitors or customers may offer new products based on new technologies,
industry standards or end user or customer requirements, including products
that
have the potential to replace or provide lower cost or higher performance
alternatives to our products. The introduction of new products by our
competitors or customers could render our existing and future products obsolete
or unmarketable. In addition, our competitors and customers may introduce
products that eliminate the need for our products. Our customers are constantly
developing new products that are more complex and miniature, increasing the
pressure on us to develop products to address the increasingly complex
requirements of our customers’ products in environments in which power usage,
lack of interference with neighboring devices and miniaturization are
increasingly important.
To
develop new products for our core markets, we must develop, gain access to,
and
use new technologies in a cost effective and timely manner, and continue
to
expand our technical and design expertise. In addition, we must have our
products designed into our customers’ future products and maintain close working
relationships with key customers in order to develop new products that meet
their changing needs.
We
may
not be able to identify new product opportunities, to develop or use new
technologies successfully, to develop and bring to market new products, or
to
respond effectively to new technological changes or product announcements
by our
competitors. There can be no assurance even if we are able to do so that
our
customers will design our products into their products or that our customers’
products will achieve market acceptance. Our pursuit of necessary technological
advances may require substantial time and expense and involve engineering
risk.
Failure in any of these areas could harm our operating results.
It
is possible that a significant portion our research and development expenditures
will not yield products with meaningful future revenue.
We
are
attempting to develop one or more new mixed signal integrated circuit products
as well as PhotonIC® products resulting from our acquisition of Arques,
which have a higher development cost than our protection device products.
This
limits how many of such products we can undertake at any one time increasing
our
risk that such efforts will not result in a working product for which there
is a
substantial demand at a price which will yield good margins. We are becoming
increasingly engaged with third parties to assist us with these developments
and
have also added personnel with new skills to our engineering group. These
third
parties and new personnel may not be successful and we have less control
over
outsourced personnel. These new product developments involve technology in
which
we have less expertise which also increases the risk of failure. On the other
hand, we believe that the potential payoff from these products makes it
reasonable for us to take such risks. Even if our devices work as planned,
we may not have success with them in the market. This risk is greater than
with our protection device products because many of these new devices are
product types for which we don't have material customer traction or market
experience.
We
may be unable to reduce the costs associated with our products quickly enough
for us to meet our margin targets or to retain market
share.
In
the
mobile handset market our competitors have been second sourcing many of our
products and as a result this market has become more price competitive. We
are
seeing the same trend develop in our low capacitance ESD devices for digital
consumer electronics, personal computers and peripherals. We need to be able
to
reduce the costs associated with our products in order to achieve our target
gross margins. We have in the past achieved and may attempt in the future
to
achieve cost reductions by obtaining reduced prices from our manufacturing
subcontractors, using larger sized wafers, adopting simplified processes,
and
redesigning parts to require fewer pins or to make them smaller. There can
be no
assurance that we will be successful in achieving cost reductions through
any of
these methods, in which case we will experience lower margins and/or we will
experience lower sales as our customers switch to our competitors.
Our
future success depends in part on the continued service of our key engineering
and management personnel and our ability to identify, hire and retain additional
personnel. In the finance area, we have had significant recent
turnover and lack of continuity which could be detrimental in the short-term
to
our business decision-making capability and to consistency in our financial
reporting.
There
is
intense competition for qualified personnel in the semiconductor industry,
in
particular for the highly skilled design, applications and test engineers
involved in the development of new analog integrated circuits. Competition
is
especially intense in the San Francisco Bay area, where our corporate
headquarters and engineering group is located. We may not be able to continue
to
attract and retain engineers or other qualified personnel necessary for the
development of our business or to replace engineers or other qualified personnel
who may leave our employ in the future. This is especially true for analog
chip
designers since competition is fierce for experienced engineers in this
discipline. Growth is expected to place increased demands on our resources
and
will likely require the addition of management and engineering personnel,
and
the development of additional expertise by existing management personnel.
The
loss of services and/or changes in our management team, in particular our
CEO,
or our key engineers, or the failure to recruit or retain other key technical
and management personnel, could cause additional expense, potentially reduce
the
efficiency of our operations and could harm our business.
When
we acquired Arques Technology, Inc. in April, 2006, we recorded approximately
$5.3 million as goodwill on our balance sheet. We may incur an
impairment charge to the extent we determine that we no longer have
substantial goodwill as an enterprise.
When
we
acquired Arques Technology, Inc. in April, 2006, we recognized approximately
$5.3 million as goodwill on our balance sheet. We will need to incur
an impairment charge to the extent we determine that we no longer have
substantial goodwill as an enterprise, which would be the case
if our market capitalization no longer materially exceeded the book value
of our assets and could be the case if our product development and sales
effort
of Arques products and Arques-derived products is discontinued. Our
ability to realize revenue from the Arques assets is dependent upon our
ability
to successfully market and sell the products we acquired and completed
(or in
one case are still continuing to port to another manufacturing process)
to our
existing and new customers and to develop new products we can sell using
the
Arques personnel or based on the Arques intellectual property. Should
we not be successful in developing or selling these products, either because
of
a lack of market for the products given their price and performance,
difficulties in the ongoing port or development of new products, for example
due
to a loss of the Arques personnel, or our inability to penetrate the key
accounts, we would not realize expected revenue from the Arques assets,
including its intellectual property and personnel, which could cause us
to
write-off the good will we recorded on our books. We are required to make
such
an assessment of our enterprise goodwill at least
annually. Any such impairment charge will correspondingly decrease
our profitability and could lead to a decline in our stock
price.