ITEM
1
. Legal Proceedings
None
ITEM
1A.
Risk
Factors
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 September 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 seven 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 and third quarters 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 and third quarters 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,
interest rates 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
third quarter of fiscal 2008, two customers primarily in the mobile handset
market represented 39% 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 third quarter of fiscal 2008, two distributors represented 27% 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 third quarter of fiscal 2008, 61% 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 third quarter of
fiscal 2008, 98% 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.
During
the past several years the largest market for our products has been the mobile
handset market. A slowdown in the adoption of protection devices by mobile
handset manufacturers or a reduction in our market share of
the protection devices sold into that market would reduce our
future revenue growth in that market and could even lead to declining
revenue from that market.
We
expect
much of our future revenue growth to be 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. In addition, a reduction in our market share of
protection devices sold into that market would also decrease our future
growth and could even lead to declining revenue from 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 as well as other smaller
companies. 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
controller
s
,
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 third quarter of fiscal 2008, international sales accounted for 89% 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:
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changes
in regulatory requirements;
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tariffs
and other barriers;
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timing
and availability of export
licenses;
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political
and economic instability;
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the
impact of regional and global illnesses such as severe acute respiratory
syndrome infections (SARS);
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difficulties
in accounts receivable collections;
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difficulties
in staffing and managing foreign
operations;
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difficulties
in managing distributors;
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difficulties
in obtaining foreign governmental approvals, if those approvals
should
become required for any of our
products;
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limited
intellectual property protection;
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foreign
currency exchange fluctuations;
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the
burden of complying with and the risk of violating a wide variety
of
complex foreign laws and treaties;
and
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potentially
adverse tax consequences.
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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 third quarter of fiscal 2008, 44% 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:
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reduced
control over delivery schedules and
quality;
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the
impact of regional and global illnesses such as SARS or Avian flu
pandemic;
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the
potential lack of adequate capacity during periods when industry
demand
exceeds available capacity;
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difficulties
finding and integrating new
subcontractors;
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limited
warranties on products supplied to
us;
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potential
increases in prices due to capacity shortages, currency exchange
fluctuations and other factors; and
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potential
misappropriation of our intellectual
property.
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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 and
lower cost. 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, Korea, India, Thailand, and Taiwan for our products. Our
dependence on these foundries and subcontractors involves the following
substantial risks:
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political
and economic instability;
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changes
in our cost structure due to changes in local currency values relative
to
the U.S. dollar;
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potential
difficulty in enforcing agreements and recovering damages for their
breach;
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inability
to obtain and retain manufacturing capacity and priority for our
business,
especially during industry-wide times of capacity
shortages;
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exposure
to greater risk of misappropriation of intellectual
property;
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disruption
to air transportation from Asia;
and
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changes
in tax laws, tariffs and freight
rates.
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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 $2.0 million of test and
packaging equipment on consignment in India and $1.1 million of test equipment
on consignment in Thailand as of December 31, 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:
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rapidly
changing technologies;
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changing
customer needs;
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evolving
industry standards;
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frequent
new product introductions and
enhancements;
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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 display controller products which are
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 employment 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 goodwill 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.
Due
to the volatility of demand for our products, our inventory may from time
to
time be in excess of our needs, which could cause write downs of our inventory
or of inventory held by our distributors.
Generally
our products are sold pursuant to short term releases of customer purchase
orders and some orders must be filled on an expedited basis. Our backlog
is
subject to revisions and cancellations and anticipated demand is constantly
changing. Because of the short life cycles involved with our customers’
products, the order pattern from individual customers can be erratic, with
inventory accumulation and liquidation during phases of the life cycle for
our
customers’ products. We face the risk of inventory write-offs if we manufacture
products in advance of orders. However, if we do not make products in advance
of
orders, we may be unable to fulfill some or all of the demand to the detriment
of our customer relationships because we have insufficient inventory on hand
and
at our distributors to fill unexpected orders and because the time required
to
make the product may be longer than the time that certain customers will
wait
for the product.
We
typically plan our production and our inventory levels, and the inventory
levels
of our distributors, based on internal forecasts of customer demand, which
are
highly unpredictable and can fluctuate substantially. Therefore, we often
order
materials and at least partially fabricate product in anticipation of customer
requirements. Furthermore, due to long manufacturing lead times, in order
to
respond in a timely manner to customer demand, we may also make products
or have
products made in advance of orders to keep in our inventory, and we may
encourage our distributors to order and stock products in advance of orders
that
are subject to their right to return them to us.
In
the
last few years, there has been a trend toward vendor managed inventory among
some large customers. In such situations, we do not recognize revenue until
the
customer withdraws inventory from stock or otherwise becomes obligated to
retain
our product. This imposes the burden upon us of carrying additional inventory
that is stored on or near our customers’ premises and is subject in many
instances to return to our premises if not used by the customer.
We
value
our inventories on a part by part basis to appropriately consider excess
inventory levels and obsolete inventory primarily based on backlog and
forecasted customer demand, and to consider reductions in sales price. For
the
reasons described above, we may end up carrying more inventory than we need
in
order to meet our customers’ orders, in which case we may incur charges when we
write down the excess inventory to its net realizable value, if any, should
our
customers for whatever reason not order the product in our
inventory.
Our
design wins may not result in customer products utilizing our devices and
our
backlog may not result in future shipments of our devices. During a typical
quarter, a substantial portion of our shipments are not in our backlog at
the
start of the quarter, which limits our ability to forecast in the near
term.
We
count
as a design win each decision by one of our customers to use one of our parts
in
one of their products that, based on their projected usage, will generate
more
than $100,000 of sales annually for us when their product is in production.
Not
all of the design wins that we recognize will result in revenue as a customer
may cancel an end product for a variety of reasons or subsequently decide
not to
use our part in it. Even if the customer’s end product does go into production
with our part, it may not result in annual product sales of $100,000 by us
and
the customer’s product may have a shorter life than expected. In addition, the
length of time from design win to production will vary based on the customer’s
development schedule. Finally, the revenue from design wins varies
significantly. Consequently, the number of design wins we obtain is not a
quantitative indicator of our future sales.
Due
to
possible customer changes in delivery schedules and cancellations of orders,
our
backlog at any particular point in time is not necessarily indicative of
actual
sales for any succeeding period. A reduction of backlog during any particular
period, or the failure of our backlog to result in future shipments, could
harm
our business. Much of our revenue is based upon orders placed with us that
have
short lead time until delivery or sales by our distributors to their customers
(in most cases, we do not recognize revenue on sales to our distributors
until
the distributor sells the product to its customers). As a result, our ability
to
forecast our future shipments and our ability to increase manufacturing capacity
quickly may limit our ability to fulfill customer orders with short lead
times.
The
majority of our operating expenses cannot be reduced quickly in response
to
revenue shortfalls without impairing our ability to effectively conduct
business.
The
majority of our operating expenses are labor related and therefore cannot
be
reduced quickly without impairing our ability to effectively conduct business.
Much of the remainder of our operating costs such as rent is relatively fixed.
Therefore, we have limited ability to reduce expenses quickly in response
to any
revenue shortfalls. Consequently, our operating results will be harmed if
our
revenues do not meet our projections. We may experience revenue shortfalls
for
the following and other reasons:
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significant
pricing pressures that occur because of competition or customer
demands;
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sudden
shortages of raw materials or fabrication, test or assembly capacity
constraints that lead our suppliers to allocate available supplies
or
capacity to other customers and, in turn, harm our ability to meet
our
sales obligations; and
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rescheduling
or cancellation of customer orders due to a softening of the demand
for
our customers’ products, replacement of our parts by our competitors or
other reasons.
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We
may not be able to protect our intellectual property rights
adequately.
Our
ability to compete is affected by our ability to protect our intellectual
property rights. We rely on a combination of patents, trademarks, copyrights,
mask work registrations, trade secrets, confidentiality procedures and
nondisclosure and licensing arrangements to protect our intellectual property
rights. Despite these efforts, the steps we take to protect our proprietary
information may not be adequate to prevent misappropriation of our technology,
and our competitors may independently develop technology that is substantially
similar or superior to our technology.
To
the
limited extent that we are able to seek patent protection for our products
or
processes, our pending patent applications or any future applications may
not be
approved. Any issued patents may not provide us with competitive advantages
and
may be challenged by third parties. If challenged, our patents may be found
to
be invalid or unenforceable, and the patents of others may have an adverse
effect on our ability to do business. Furthermore, others may independently
develop similar products or processes, duplicate our products or processes,
or
design around any patents that may be issued to us.
We
could be harmed by litigation involving patents and other intellectual property
rights.
As
a
general matter, the semiconductor and related industries are characterized
by
substantial litigation regarding patent and other intellectual property rights.
We may be accused of infringing the intellectual property rights of third
parties. Furthermore, we may have certain indemnification obligations to
customers with respect to the infringement of third party intellectual property
rights by our products. Infringement claims by third parties or claims for
indemnification by customers or end users of our products resulting from
infringement claims may be asserted in the future and such assertions, if
proven
to be true, may harm our business.
Any
litigation relating to the intellectual property rights of third parties,
whether or not determined in our favor or settled by us, would at a minimum
be
costly and could divert the efforts and attention of our management and
technical personnel. In the event of any adverse ruling in any such litigation,
we could be required to pay substantial damages, cease the manufacturing,
use
and sale of infringing products, discontinue the use of certain processes
or
obtain a license under the intellectual property rights of the third party
claiming infringement. A license might not be available on reasonable terms,
or
at all.
By
supplying parts in the past which were used in medical devices that help
sustain
human life, we are vulnerable to product liability claims.
We
have
in the past supplied products predominantly to Guidant and to a much lesser
extent to Medtronic for use in implantable defibrillators and pacemakers,
which
help sustain human life. While we have not sold products into the Medical
market
since fiscal year 2005, large numbers of our products are or will be used
in
implanted medical devices, which could fail and expose us to claims. Should
our
products cause failure in the implanted devices, we may be sued and ultimately
have liability, although under federal law Guidant and Medtronic would be
required to defend and take responsibility in such instances until their
liability was established, in which case we could be liable for that part
of
those damages caused by our willful misconduct or, in the case of Medtronic
only, our negligence.
If
our products contain defects, fail to achieve industry reliability standards,
or
infringe third party intellectual rights or if there are delays in delivery
or
other unforeseen events which lead to our customers incurring damages, then
our
reputation may be harmed, and we may incur significant unexpected expenses
and
lose sales
.
We
face
an inherent business risk of exposure to claims in the event that our products
fail to perform as warranted or expected or if we are late in delivering
them.
Our customers might seek to recover from us any perceived losses, both direct
and indirect, which could include their lost sales or profit, a recall of
their
products, or defending them against third party intellectual property claims.
Such claims might be significantly higher than the revenues and profits we
receive from our products involved as we are usually a component supplier
with
limited value content relative to the value of the ultimate end-product.
We
attempt to protect ourselves through a combination of quality controls,
contractual provisions, business insurance, and self insurance. There is
no
assurance that we will always be able to limit our liability contractually
or
that any such limits that we negotiate will be enforceable. There can be
no
assurance that we will obtain the insurance coverage we seek, both in terms
of
dollar amount insured or scope of exclusions to the coverage, or that the
self
insured claims will not be larger than we expect. A successful claim against
us
could have material adverse effects on our results of operations and financial
condition. Beyond the potential direct cost, loss of confidence by major
customers could cause sales of our other products to drop significantly and
harm
our business.
Our
failure to comply with environmental regulations could result in substantial
liability to us.
We
are
subject to a variety of federal, state and local laws, rules and regulations
relating to the protection of health and the environment. These include laws,
rules and regulations governing the use, storage, discharge, release, treatment
and disposal of hazardous chemicals during and after manufacturing, research
and
development and sales demonstrations, as well as the maintenance of healthy
and
environmentally sound conditions within our facilities. If we fail to comply
with applicable requirements, we could be subject to substantial liability
for
cleanup efforts, property damage, personal injury and fines or suspension
or
cessation of our operations. In these regards, during the closure of our
Milpitas facility in fiscal 2003, residual contaminants from our operations
were
detected in concrete and soil samples which were remediated under a work
plan
approved the State Department of Toxic Substances Control (“DTSC”). The DTSC
informed us in a letter dated February 3, 2005, that they had determined
that
the site does not pose significant threat to public health and the environment.
However, if other contaminants should later be found at the site, the DTSC
or
owner could attempt to hold us responsible. Similarly, our Tempe facility,
which
we closed in December 2004, is located in an area of documented regional
groundwater contamination. While we have no reason to believe that our
operations at the facility have contributed to this regional contamination,
we
can give no assurance that this is the case. In connection with our closure
of
this facility, we have conducted environmental studies at the site that did
not
identify any issues but should contaminants be found at the site at a later
date
a government agency or the new owner could attempt to hold us responsible.
Under
the agreement, we retain liability for any environmental issues that arise
due
to the condition of the property at the time of closing.
Earthquakes,
other natural disasters and shortages may damage our business.
Our
California facilities and some of our suppliers are located near major
earthquake faults that have experienced earthquakes in the past. In the event
of
a major earthquake or other natural disaster near our headquarters, our
operations could be harmed. Similarly, a major earthquake or other natural
disaster near one or more of our major suppliers, like the ones that occurred
in
Taiwan in September 1999 and in Japan in October 2004, could disrupt the
operations of those suppliers, limit the supply of our products and harm
our
business. The October 2004 earthquake in Japan temporarily shut down operations
at one of the wafer fabrication facilities at which our products were being
produced. We have since transferred that capacity to other fabs. Power shortages
have occurred in California in the past. We cannot assure that if power
interruptions or shortages occur in the future, they will not adversely affect
our business.
Future
terrorist activity, or threat of such activity, could adversely impact our
business.
The
September 11, 2001 attack may have adversely affected the demand for our
customers’ products, which in turn reduced their demand for our products. In
addition, terrorist activity interfered with communications and transportation
networks, which adversely affected us. Future terrorist activity could similarly
adversely impact our business.
Implementation
of the new FASB rules for the accounting of employee equity and the issuance
of
new laws or other accounting regulations, or reinterpretation of existing
laws
or regulations, could materially impact our business or stated
results.
From
time
to time, the government, courts and financial accounting boards issue new
laws
or accounting regulations, or modify or reinterpret existing
ones. For example, starting with the first quarter of fiscal 2007, we
implemented Financial Accounting Standards Board (“FASB”) financial accounting
standard 123(R) for the accounting for share based payments. These
regulations cause us to recognize an expense associated with our employee
and
director stock options and our employee stock purchase plan which will decrease
our earnings. We have chosen to have lower earnings rather than not to use
options as widely for our employees, which we believe would adversely impact
our
ability to hire and retain key employees. There may be other future changes
in
laws, interpretations or regulations that would affect our financial results
or
the way in which we present them. Additionally, changes in the laws or
regulations could have adverse effects on hiring and many other aspects of
our
business that would affect our ability to compete, both nationally and
internationally.
Our
stock price may continue to be volatile, and our trading volume may continue
to
be relatively low and limit liquidity and market efficiency. Should significant
shareholders desire to sell their shares within a short period of time, our
stock price could decline.
The
market price of our common stock has fluctuated significantly. In the future,
the market price of our common stock could be subject to significant
fluctuations due to general market conditions and in response to quarter
to
quarter variations in:
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our
anticipated or actual operating
results;
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announcements
or introductions of new products by us or our
competitors;
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decreased
market share of our major
customers;
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technological
innovations or setbacks by us or our
competitors;
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conditions
in the semiconductor and passive components
markets;
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the
commencement of litigation;
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changes
in estimates of our performance by securities
analysts;
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announcements
of merger or acquisition transactions;
and
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general
economic and market conditions.
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In
addition, the stock market in recent years has experienced extreme price
and
volume fluctuations that have affected the market prices of many high technology
companies, particularly semiconductor companies, that have often been unrelated
or disproportionate to the operating performance of the companies. These
fluctuations, as well as general economic and market conditions, may harm
the
market price of our common stock. Furthermore, our trading volume is often
small, meaning that a few trades have disproportionate influence on our stock
price. In addition, someone seeking to liquidate a sizable position in our
stock
may have difficulty doing so except over an extended period or privately
at a
discount. Thus, if a shareholder were to sell or attempt to sell a large
number
of its shares within a short period of time, this sale or attempt could cause
our stock price to decline. Our stock is followed by a relatively small number
of analysts and any changes in their rating of our stock could cause significant
swings in its market price.
Our
shareholder rights plan, together with the anti-takeover provisions of our
certificate of incorporation, may delay, defer or prevent a change of
control.
Our
board
of directors adopted a shareholder rights plan in autumn 2001 to encourage
third
parties interested in acquiring us to work with and obtain the support of
our
board of directors. The effect of the rights plan is that any person who
does
not obtain the support of our board of directors for its proposed acquisition
of
us would suffer immediate dilution upon achieving ownership of more than
15% of
our stock. Under the rights plan, we have issued rights to purchase shares
of
our preferred stock that are redeemable by us prior to a triggering event
for a
nominal amount at any time and that accompany each of our outstanding common
shares. These rights are triggered if a third party acquires more than 15%
of
our stock without board of director approval. If triggered, these rights
entitle
our shareholders, other than the third party causing the rights to be triggered,
to purchase shares of the company’s preferred stock at what is expected to be a
relatively low price. In addition, these rights may be exchanged for common
stock under certain circumstances if permitted by the board of
directors.
In
addition, our board of directors has the authority to issue up to 10,000,000
shares of preferred stock and to determine the price, rights, preferences
and
privileges and restrictions, including voting rights of those shares without
any
further vote or action by our shareholders. The rights of the holders of
common
stock will be subject to, and may be harmed by, the rights of the holders
of any
shares of preferred stock that may be issued in the future, including the
preferred shares covered by the shareholder rights plan. The issuance of
preferred stock may delay, defer or prevent a change in control. The terms
of
the preferred stock that might be issued could potentially make more difficult
or expensive our consummation of any merger, reorganization, sale of
substantially all of our assets, liquidation or other extraordinary corporate
transaction. In addition, the issuance of preferred stock could have a dilutive
effect on our shareholders.
Further,
our shareholders must give written notice delivered to our executive offices
no
less than 120 days before the one year anniversary of the date our proxy
statement was released to shareholders in connection with the previous year’s
annual meeting to nominate a candidate for director or present a proposal
to our
shareholders at a meeting. These notice requirements could inhibit a takeover
by
delaying shareholder action.
We
will incur increased costs as a result of recently enacted and proposed changes
in laws and regulations relating to corporate governance matters and public
disclosure.
Recently
enacted and proposed changes in the laws and regulations affecting public
companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules
adopted or proposed by the SEC and by the NASDAQ National Market and new
accounting pronouncements will result in increased costs to us as we evaluate
the implications of these laws, regulations and standards and respond to
their
requirements. To maintain high standards of corporate governance and public
disclosure, we intend to invest substantial resources to comply with evolving
standards. This investment may result in increased general and administrative
expenses and a diversion of management time and attention from strategic
revenue
generating and cost management activities. For example, we spent approximately
an incremental $800,000 versus our prior financial audit only fees on internal
control documentation, testing, and auditing to complete our first annual
review
associated with filing of 10-K for the year ended March 31, 2005 to comply
with
section 404 of the Sarbanes-Oxley Act. We also spent a significant
but not separately determinable amount in fiscal 2007 and fiscal 2006 in
internal control documentation, testing, and auditing. In addition,
these new laws and regulations could make it more difficult or more costly
for
us to obtain certain types of insurance, including director and officer
liability insurance, and we may be forced to accept reduced policy limits
and
coverage or incur substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more difficult for
us to
attract and retain qualified persons to serve on our board of directors,
on our
board committees or as executive officers. We are taking steps to comply
with
the recently enacted laws and regulations in accordance with the deadlines
by
which compliance is required, but cannot predict or estimate the amount or
timing of additional costs that we may incur to respond to their
requirements.
Our
acquisition of Arques Technology and any future acquisitions and strategic
alliances may harm our operating results or cause us to incur debt or assume
contingent liabilities.
In
April,
2006, we acquired Arques Technology, Inc. and we may in the future acquire,
or
form strategic alliances relating to, other businesses, products and
technologies. Successful acquisitions and alliances in the semiconductor
industry are difficult to accomplish because they require, among other things,
efficient integration and alignment of product offerings and manufacturing
operations and coordination of sales and marketing and research and development
efforts. We have no recent experience in making such acquisitions or alliances.
The difficulties of integration and alignment may be increased by the necessity
of coordinating geographically separated organizations, the complexity of the
technologies being integrated and aligned and the necessity of integrating
personnel with disparate business backgrounds and combining different corporate
cultures. The integration and alignment of operations following an acquisition
or alliance requires the dedication of management resources that may distract
attention from the day to day business, and may disrupt key research and
development, marketing or sales efforts.
In
the
case of Arques, for sixteen quarters, we will incur expenses of $32,500 as
we
amortize the acquired developed and core technology and for eight quarters
we
will incur expense of $8,800 as we amortize the acquired distributor
relationships. In connection with future acquisitions and alliances,
we may not only acquire assets which need to be amortized, but we may also
incur
debt or assume contingent liabilities which could harm our operating results.
Without strategic acquisitions and alliances we may have difficulty meeting
future customer product and service requirements.
A
decline in our stock price could result in securities class action litigation
against us which could divert management attention and harm our
business.
In
the
past, securities class action litigation has often been brought against public
companies after periods of volatility in the market price of their securities.
Due in part to our historical stock price volatility, we could in the future
be
a target of such litigation. Securities litigation could result in substantial
costs and divert management’s attention and resources, which could harm our
ability to execute our business plan.