United
States
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
__________________
FORM
10-Q
__________________
(Mark
One)
x
|
Quarterly Report Pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934
|
For
the Quarterly Period Ended December 31, 2008
Or
¨
|
Transition Report Pursuant to
Section 10 or 15(d) of the Securities Exchange Act of
1934
|
For The Transition Period from
to
Commission
File Number 0-15449
__________________
CALIFORNIA
MICRO DEVICES CORPORATION
(Exact
name of registrant as specified in its charter)
__________________
|
|
|
Delaware
|
|
94-2672609
|
(State
or other jurisdiction of
incorporation
or organization)
|
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(I.R.S.
Employer
Identification
No.)
|
|
|
|
490
N. McCarthy Boulevard #100 Milpitas, California
|
|
95035
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(408)
263-3214
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address, and former fiscal year if changed since last
report)
__________________
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
x
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting
company. See definition of “accelerated filer, large accelerated
filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
¨
|
Accelerated
filer
x
|
Non-accelerated
filer
¨
|
Smaller
reporting company
¨
|
|
|
(Do
not check if a smaller reporting company)
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes
¨
No
x
The number of shares of the
registrant’s common stock, $0.001 par value, outstanding as of January 30, 2009
was 23,553,019.
Form
10-Q for the Quarter Ended December 31, 2008
INDEX
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Page
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Item 1.
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3
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3
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4
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5
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6
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Item
2.
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18
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Item
3.
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30
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Item
4.
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30
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Item
1.
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31
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Item
1A.
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31
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Item
2.
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45
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Item
3.
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45
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Item
4.
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45
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Item
5.
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45
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Item
6.
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46
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48
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PART
I. FINANCIAL INFORMATION
California
Micro Devices Corporation
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share amounts)
(Unaudited)
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Three
Months Ended
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Nine
Months Ended
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December
31,
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December
31,
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2008
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2007
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2008
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2007
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Net
sales
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$
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9,659
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$
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14,955
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$
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40,101
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$
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44,201
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Cost
of sales
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7,184
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10,105
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27,779
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29,995
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Gross
margin
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2,475
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4,850
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12,322
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14,206
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Operating
expenses:
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Research
and development
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2,668
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1,670
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7,838
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5,080
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Selling,
general and administrative
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3,509
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3,533
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11,205
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11,170
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Goodwill
Impairment
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5,258
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-
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5,258
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-
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Amortization/Impairment
of intangible assets
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71
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41
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127
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124
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Total
operating expenses
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11,506
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5,244
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24,428
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16,374
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Operating
loss
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(9,031
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)
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(394
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)
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(12,106
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)
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(2,168
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)
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Other
income, net
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130
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628
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1,617
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1,911
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Income
(loss) before income taxes
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(8,901
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)
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234
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(10,489
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)
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(257
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)
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Provision
for income taxes
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10
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4
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1,305
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12
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Net
income (loss)
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$
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(8,911
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)
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$
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230
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$
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(11,794
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)
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$
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(269
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)
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Net
income (loss) per share–basic
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$
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(0.38
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)
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$
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0.01
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$
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(0.51
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)
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$
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(0.01
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)
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Weighted
average common shares outstanding–basic
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23,260
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23,252
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23,339
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23,212
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Net
income (loss) per share–diluted
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$
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(0.38
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)
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$
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0.01
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$
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(0.51
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)
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$
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(0.01
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)
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Weighted
average common shares and share equivalents
outstanding–diluted
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23,260
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23,283
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23,339
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23,212
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See Notes
to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share data)
(Unaudited)
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December
31,
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March
31,
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2008
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2008
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ASSETS
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Current
assets:
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Cash
and cash equivalents
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$
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33,945
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$
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32,925
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Short-term
investments
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14,502
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18,671
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Accounts
receivable, net
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3,245
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6,155
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Inventories
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7,889
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6,434
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Deferred
tax assets
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261
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1,508
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Prepaid
expenses and other current assets
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687
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1,188
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Total
current assets
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60,529
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66,881
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Property,
plant and equipment, net
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4,059
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5,596
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Goodwill
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-
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5,258
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Intangible
assets, net
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29
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267
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Other
long-term assets
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93
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83
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TOTAL
ASSETS
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$
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64,710
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$
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78,085
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$
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4,674
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$
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6,120
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Accrued
liabilities
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1,505
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2,165
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Deferred
margin on shipments to distributors
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1,430
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1,904
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Current
maturities of capital lease obligations
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-
|
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132
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Total
current liabilities
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7,609
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|
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10,321
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Other
long-term liabilities
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313
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350
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Total
liabilities
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7,922
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10,671
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Commitments
and contingencies
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Stockholders'
equity:
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Preferred
stock - 10,000,000 shares authorized; none issued
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and
outstanding as of December 31, 2008 and March 31, 2008
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-
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-
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Common
stock and additional paid-in capital - $0.001 par value;
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50,000,000
shares authorized; 23,553,019 shares issued and
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23,097,994
shares outstanding as of December 31, 2008 and
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23,302,274
shares issued and outstanding as of March 31, 2008
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119,965
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117,806
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Accumulated
other comprehensive income
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|
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15
|
|
|
|
48
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Accumulated
deficit
|
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|
(62,234
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)
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(50,440
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)
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Total
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|
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57,746
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|
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67,414
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Treasury
stock, at cost; 455,025 shares as of December 31, 2008
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and
none as of March 31, 2008
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(958
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)
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|
-
|
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Total
stockholders' equity
|
|
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56,788
|
|
|
|
67,414
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TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
64,710
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|
|
$
|
78,085
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|
See Notes
to Condensed Consolidated Financial Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
(Unaudited)
|
|
Nine
Months Ended December 31,
|
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|
|
2008
|
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,794
|
)
|
|
$
|
(269
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,848
|
|
|
|
1,497
|
|
Accretion
of investment purchase discounts
|
|
|
(72
|
)
|
|
|
(1,036
|
)
|
Amortization
of intangible assets
|
|
|
72
|
|
|
|
124
|
|
Goodwill
impairment
|
|
|
5,258
|
|
|
|
-
|
|
Impairment
of intangible assets
|
|
|
55
|
|
|
|
-
|
|
Stock-based
compensation
|
|
|
1,627
|
|
|
|
1,746
|
|
Tax
benefit from stock-based payment arrangement
|
|
|
-
|
|
|
|
(22
|
)
|
(Gain)
loss on sale of fixed assets and intangible assets
|
|
|
(960
|
)
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
2,910
|
|
|
|
1,619
|
|
Inventories
|
|
|
(1,455
|
)
|
|
|
(1,804
|
)
|
Deferred
tax assets
|
|
|
1,247
|
|
|
|
(68
|
)
|
Accounts
payable and other current liabilities
|
|
|
(2,169
|
)
|
|
|
1,715
|
|
Deferred
margin on shipments to distributors
|
|
|
(475
|
)
|
|
|
637
|
|
Other
assets and liabilities
|
|
|
546
|
|
|
|
(375
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(3,362
|
)
|
|
|
3,764
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of short-term investments
|
|
|
(22,411
|
)
|
|
|
(104,154
|
)
|
Sales
and maturities of short-term investments
|
|
|
26,619
|
|
|
|
104,577
|
|
Proceeds
from sale of fixed assets and intangible assets
|
|
|
1,146
|
|
|
|
-
|
|
Payment
related to acquisition
|
|
|
-
|
|
|
|
(1,031
|
)
|
Capital
expenditures
|
|
|
(414
|
)
|
|
|
(1,906
|
)
|
Net
cash provided by (used in) investing activities
|
|
|
4,940
|
|
|
|
(2,514
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from employee stock compensation plans
|
|
|
532
|
|
|
|
458
|
|
Repayments
of capital lease obligations
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Repurchase
of outstanding common stock
|
|
|
(958
|
)
|
|
|
-
|
|
Tax
benefit from stock-based payment arrangement
|
|
|
-
|
|
|
|
22
|
|
Net
cash provided by (used in) financing activities
|
|
|
(558
|
)
|
|
|
348
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
1,020
|
|
|
|
1,598
|
|
Cash
and cash equivalents at beginning of period
|
|
|
32,925
|
|
|
|
1,908
|
|
Cash
and cash equivalents at end of period
|
|
$
|
33,945
|
|
|
$
|
3,506
|
|
See Notes
to Condensed Consolidated Financial Statements.
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, 2008. 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 December 31, 2008, and the results of
operations for the three and nine month periods ended December 31, 2008 and
2007, and cash flows for the nine month periods ended December 31, 2008 and
2007. Results for the three or nine 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, 2009. Certain prior year
amounts in the financial statements and notes thereto have been reclassified to
conform to the current 2009 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 accounting principles
generally accepted in the United States of America 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.
3.
Recent Accounting Pronouncements
In December 2007, the FASB issued
Statement No. 141(R), “
Business
Combinations
” (SFAS
141(R)) which expands the definition of transactions and events that qualify as
business combinations; requires that the acquired
assets and liabilities, including
contingencies, be recorded at the fair value determined on the acquisition date
and changes thereafter reflected in earnings, not goodwill; changes the
recognition timing for restructuring costs; and requires acquisition costs to be
expensed as incurred. In addition, acquired in-process research and development
(IPR&D) is capitalized as an intangible asset and amortized over its
estimated useful life. Adoption of SFAS 141(R) is required for fiscal years
beginning after December 15, 2008. Early adoption and retroactive
application of SFAS 141(R) to fiscal years preceding the effective date are
not permitted. We believe that there is no impact of SFAS 141(R) on our
financial position and results of operations.
In
December 2007, the FASB issued Statement No. 160, “
Noncontrolling Interest in
Consolidated Financial Statements”
(SFAS 160) which re-characterizes
minority interests in consolidated subsidiaries as non-controlling interests and
requires the classification of minority interests as a component of equity.
Under SFAS 160, a change in control will be measured at fair value, with any
gain or loss recognized in earnings. The effective date for SFAS 160 is for
annual periods beginning on or after December 15, 2008. Early adoption and
retroactive application of SFAS 160 to fiscal years preceding the effective date
are not permitted. We believe that there is no impact of SFAS 160 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);
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
Cash
|
|
$
|
684
|
|
|
$
|
602
|
|
Money
market funds
|
|
|
33,261
|
|
|
|
32,323
|
|
Total
cash and cash equivalents
|
|
$
|
33,945
|
|
|
$
|
32,925
|
|
Short-term
investments represent investments in U.S Treasury bills, U.S. Agency notes,
Asset-backed securities and Commercial papers 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 stockholders’ 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):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
U.S.
Treasury bills
|
|
$
|
12,500
|
|
|
$
|
-
|
|
U.S.
Agency notes
|
|
|
2,002
|
|
|
|
12,061
|
|
Asset-backed
securities
|
|
|
-
|
|
|
|
5,124
|
|
Commercial
papers
|
|
|
-
|
|
|
|
1,486
|
|
Total
short-term investments
|
|
$
|
14,502
|
|
|
$
|
18,671
|
|
5. Fair Value
On April
1, 2008, we adopted Statement of Financial Accounting Standards 157, “
Fair Value Measurements
,”
(SFAS No. 157). SFAS No. 157 defines fair value as the price that
would be received from selling an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. When
determining the fair value measurements for assets and liabilities required or
permitted to be recorded at fair value, we consider the principal or most
advantageous market in which we would transact and we consider assumptions that
market participants would use when pricing the asset or liability, such as
inherent risk, transfer restrictions, and risk of
nonperformance.
Fair Value
Hierarchy
SFAS
No. 157 discusses valuation techniques, such as the market approach
(comparable market prices), the income approach (present value of future income
or cash flow), and the cost approach (cost to replace the service capacity of an
asset or replacement cost). SFAS No. 157 establishes a fair value hierarchy
that requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value. A financial
instrument’s categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. SFAS
No. 157 establishes three levels of inputs that may be used to measure fair
value:
Level 1 -
Valuation is based upon quoted prices for identical instruments traded in active
markets.
Level 2 -
Valuation is based upon quoted prices for similar instruments in active markets,
quoted prices for identical or similar instruments in markets that are not
active, and model-based valuation techniques for which all significant
assumptions are observable in the market.
Level
3
- Valuation is
generated from model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions reflect own estimates
of assumptions that market participants would use in pricing the asset or
liability. Valuation techniques include use of option pricing models, discounted
cash flows models and similar techniques.
Determination
of Fair Value
The
Company’s cash and investment instruments are classified within Level 1 or Level
2 of the fair value hierarchy because they are valued using quoted market
prices, broker or dealer quotations, market prices received from industry
standard pricing data providers or alternative pricing sources with reasonable
levels of price transparency. Money market funds and U.S. Treasury bills are
classified as Level 1 because these securities are valued based on unadjusted
quoted market prices in active markets for identical securities. U.S. Agency
notes are classified as Level 2 because markets for these securities are less
active or valuations for such securities utilize significant inputs which are
directly or indirectly observable.
The table
below presents the balances of assets measured at fair value on a recurring
basis (in thousands):
|
|
As
of December 31, 2008
|
|
Assets
|
|
Total
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Money
market funds
|
|
$
|
33,261
|
|
|
$
|
33,261
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Available
for sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Treasury bills
|
|
|
12,500
|
|
|
|
12,500
|
|
|
|
-
|
|
|
|
-
|
|
U.S.
Agency notes
|
|
|
2,002
|
|
|
|
-
|
|
|
|
2,002
|
|
|
|
-
|
|
|
|
$
|
47,763
|
|
|
$
|
45,761
|
|
|
$
|
2,002
|
|
|
$
|
-
|
|
6.
Goodwill and Other Intangible Assets
Goodwill
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 events or circumstances indicate the carrying value may not
be recoverable. We usually perform our annual test for impairment of goodwill
during our fourth fiscal quarter. During the quarter ended December 31, 2008,
the Company saw indicators of potential impairment of goodwill, including the
current economic environment, our operating results, and the sustained decline
in our market valuation, which caused the Company to perform an interim goodwill
impairment analysis. The analysis indicated that the estimated fair value is
less than the corresponding carrying amount and the full amount of goodwill is
no longer recoverable. Our entity is deemed as a single reporting unit for our
impairment analysis. The fair value was estimated using present value of
estimated future cash flows which was consistent with a market-based
approach. As such, we determined that goodwill of $5.3 million is
fully impaired.
Intangible
Assets
The
components of intangible assets, net were as follows (in
thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
Developed
and core technology:
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
260
|
|
|
$
|
520
|
|
Less
accumulated amortization
|
|
|
(231
|
)
|
|
|
(255
|
)
|
Net
carrying amount
|
|
$
|
29
|
|
|
$
|
265
|
|
|
|
|
|
|
|
|
|
|
Distributor
relationships:
|
|
|
|
|
|
|
|
|
Gross
carrying amount
|
|
$
|
-
|
|
|
$
|
70
|
|
Less
accumulated amortization
|
|
|
-
|
|
|
|
(68
|
)
|
Net
carrying amount
|
|
$
|
-
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
$
|
29
|
|
|
$
|
267
|
|
Developed
and core technology and distributor relationships were amortized on a
straight-line basis over their estimated useful lives of four years and two
years, respectively. The amortization expense for intangible assets was $16,000
and $72,000 for the three and nine months ended December 31, 2008, respectively
as compared to $41,000 and $124,000 for the three and nine months ended December
31, 2007, respectively.
During
third quarter of fiscal 2009, we have performed an annual review of our
intangible assets to determine if facts and circumstances exist which indicate
that the useful life is shorter than originally estimated or that the carrying
amount of assets may not be recoverable. We have assessed the recoverability of
intangible assets by comparing the projected undiscounted net cash flows
associated with the related assets over their remaining lives against their
respective carrying amounts. The review indicated that the estimated
fair value is less than its corresponding carrying amount. Therefore, we
recognized $55,000 impairment charges during the three months ended December 31,
2008. 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.
Based on
intangible assets recorded at December 31, 2008, and assuming no subsequent
additions to, or impairment of, the underlying assets, the future estimated
amortization expense is approximately $6,000, $23,000 in remainder of fiscal
2009 and fiscal 2010, respectively.
7.
Balance Sheet Components
Balance
sheet components were as follows (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
Accounts
receivable, net:
|
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
3,342
|
|
|
$
|
6,265
|
|
Less
allowance for doubtful accounts
|
|
|
(5
|
)
|
|
|
(19
|
)
|
Less
sales allowances and return reserves
|
|
|
(92
|
)
|
|
|
(91
|
)
|
|
|
$
|
3,245
|
|
|
$
|
6,155
|
|
|
|
|
|
|
|
|
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Work
in process
|
|
$
|
3,128
|
|
|
$
|
1,819
|
|
Finished
goods
|
|
|
4,761
|
|
|
|
4,615
|
|
|
|
$
|
7,889
|
|
|
$
|
6,434
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment:
|
|
|
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
11,387
|
|
|
$
|
11,370
|
|
Computer
equipment and related software
|
|
|
4,708
|
|
|
|
4,518
|
|
Construction
in progress
|
|
|
144
|
|
|
|
405
|
|
|
|
|
16,239
|
|
|
|
16,293
|
|
Less:
accumulated depreciation and amortization
|
|
|
(12,180
|
)
|
|
|
(10,697
|
)
|
|
|
$
|
4,059
|
|
|
$
|
5,596
|
|
|
|
|
|
|
|
|
|
|
Accrued
liabilities:
|
|
|
|
|
|
|
|
|
Accrued
salaries and benefits
|
|
$
|
951
|
|
|
$
|
1,183
|
|
Other
accrued liabilities
|
|
|
554
|
|
|
|
982
|
|
|
|
$
|
1,505
|
|
|
$
|
2,165
|
|
8.
Capital Lease Obligations
In
October 2006, we entered into three year software lease agreements with two
vendors for which the capitalized amounts were $362,000 and $34,000,
respectively. The imputed interest rate for each of these leases is
approximately 8%. Both leases have three year durations, with three annual lease
payments in October 2006, October 2007 and October 2008, totaling to $132,000
annually. Interest expense on these leases during the three and nine months
ended December 31, 2008 and 2007 was immaterial. There were no capital lease
obligations as of December 31, 2008.
Total
fixed assets purchased under capital leases and the associated accumulated
amortization is classified in computer equipment and related software and was as
follows (in thousands):
|
|
December
31,
|
|
|
March
31,
|
|
|
|
2008
|
|
|
2008
|
|
Capitalized
cost
|
|
$
|
396
|
|
|
$
|
396
|
|
Accumulated
amortization
|
|
|
(286
|
)
|
|
|
(187
|
)
|
Net
book value
|
|
$
|
110
|
|
|
$
|
209
|
|
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.
9.
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
stockholder 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, 2008.
Stock
Options
Stock
option activity for the nine months ended December 31, 2008, is as
follows:
|
|
Stockholder
|
|
|
Non-Stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approved
Plans
|
|
|
Approved
Plan
|
|
|
All
Plans
|
|
|
|
Shares
(in thousands)
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
(in thousands)
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
(in thousands)
|
|
|
Weighted
Average Exercise Price
|
|
|
Weighted
Average Remaining Contractual Term (in years)
|
|
|
Aggregate
Intrinsic Value
|
|
Balance
at March 31, 2008
|
|
|
4,229
|
|
|
$
|
5.48
|
|
|
|
717
|
|
|
$
|
6.43
|
|
|
|
4,946
|
|
|
$
|
5.61
|
|
|
|
|
|
|
|
Granted
|
|
|
1,086
|
|
|
|
3.02
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,086
|
|
|
|
3.02
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
Canceled/Forfeited/Expired
|
|
|
(355
|
)
|
|
|
4.94
|
|
|
|
(191
|
)
|
|
|
8.71
|
|
|
|
(546
|
)
|
|
|
6.26
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
|
4,960
|
|
|
$
|
4.98
|
|
|
|
526
|
|
|
$
|
5.60
|
|
|
|
5,486
|
|
|
$
|
5.04
|
|
|
|
7.02
|
|
|
$
|
4,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,031
|
|
|
$
|
6.11
|
|
|
|
5.57
|
|
|
$
|
0
|
|
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 $1.86 as of December 31, 2008, which would have been
received by the option holders had all option holders with in-the-money options
exercised and sold their options as of that date.
There
were no exercises of stock options during the three and nine months ended
December 31, 2008. Net cash proceeds from the exercise of stock options were
$9,000 and $22,000 during the three and nine months ended December 31, 2007,
respectively.
The
following table summarizes the ranges of the exercise prices of outstanding and
exercisable options at December 31, 2008:
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercisable
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
(thousands)
|
|
|
Life
|
|
|
Price
|
|
|
(thousands)
|
|
|
Price
|
|
$
|
1.78
|
|
|
|
-
|
|
|
$
|
4.00
|
|
|
|
2,400
|
|
|
|
8.87
|
|
|
$
|
3.35
|
|
|
|
492
|
|
|
$
|
3.56
|
|
|
4.01
|
|
|
|
-
|
|
|
|
6.00
|
|
|
|
1,458
|
|
|
|
6.47
|
|
|
|
4.96
|
|
|
|
1,080
|
|
|
|
5.14
|
|
|
6.01
|
|
|
|
-
|
|
|
|
8.00
|
|
|
|
1,337
|
|
|
|
5.03
|
|
|
|
6.69
|
|
|
|
1,168
|
|
|
|
6.67
|
|
|
8.01
|
|
|
|
-
|
|
|
|
10.00
|
|
|
|
147
|
|
|
|
3.17
|
|
|
|
8.27
|
|
|
|
147
|
|
|
|
8.27
|
|
|
10.01
|
|
|
|
-
|
|
|
|
22.50
|
|
|
|
144
|
|
|
|
4.04
|
|
|
|
15.29
|
|
|
|
144
|
|
|
|
15.29
|
|
$
|
2.75
|
|
|
|
-
|
|
|
$
|
22.50
|
|
|
|
5,486
|
|
|
|
7.02
|
|
|
$
|
5.04
|
|
|
|
3,031
|
|
|
$
|
6.11
|
|
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 144,000 and
251,000 shares under the ESPP during the three and nine months ended December
31, 2008, respectively as compared to 77,000 and 126,000 shares issued under the
ESPP during the three and nine months ended December 31, 2007, respectively. Net
cash proceeds from the ESPP were $261,000 and $533,000 for the three and nine
months ended December 31, 2008, respectively as compared to cash proceeds of
$251,000 and $436,000 for the three and nine months ended December 31, 2007,
respectively.
Shares
Available for Future Issuance under Employee Benefit Plans
As of
December 31, 2008, 1,092,000 shares were available for future issuance, which
included 266,000 shares of common stock available for issuance under our ESPP,
9,000 under our UK Sub-Plan and 817,000 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 nine months ended December 31, 2008 and 2007 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
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Cost
of sales
|
|
$
|
66
|
|
|
$
|
83
|
|
|
$
|
267
|
|
|
$
|
262
|
|
Research
and development
|
|
|
120
|
|
|
|
144
|
|
|
|
437
|
|
|
|
441
|
|
Selling,
general and administrative
|
|
|
285
|
|
|
|
359
|
|
|
|
923
|
|
|
|
1,043
|
|
Stock-based
compensation expense before income taxes
|
|
|
471
|
|
|
|
586
|
|
|
|
1,627
|
|
|
|
1,746
|
|
Tax
benefit
|
|
|
-
|
|
|
|
16
|
|
|
|
-
|
|
|
|
22
|
|
Stock-based
compensation expense, net of tax
|
|
$
|
471
|
|
|
$
|
570
|
|
|
$
|
1,627
|
|
|
$
|
1,724
|
|
The
effect of recording employee stock-based compensation expense for the three and
nine months ended December 31, 2008 and 2007 was as follows (in thousands,
except per share amounts):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Impact
on income (loss) before income taxes
|
|
$
|
(471
|
)
|
|
$
|
(586
|
)
|
|
$
|
(1,627
|
)
|
|
$
|
(1,746
|
)
|
Impact
on net income (loss)
|
|
|
(471
|
)
|
|
|
(570
|
)
|
|
|
(1,627
|
)
|
|
|
(1,724
|
)
|
Impact
on basic and diluted net income (loss) per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.07
|
)
|
No income
tax benefit was realized from ESPP purchases during the three and nine months
ended December 31, 2008, as compared to income tax benefit of $16,000 and
$22,000 from ESPP purchases during the three and nine months ended December 31,
2007, respectively.
The fair
value of stock-based awards was estimated using the Black-Scholes model with the
following weighted average assumptions for the three and nine months ended
December 31, 2008 and 2007:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Employee
Stock Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
4.39
|
|
|
|
4.11
|
|
|
|
4.36
|
|
|
|
4.11
|
|
Volatility
|
|
|
63
|
%
|
|
|
64
|
%
|
|
|
63
|
%
|
|
|
64
|
%
|
Risk-free
interest rate
|
|
|
1.70
|
%
|
|
|
3.49
|
%
|
|
|
2.82
|
%
|
|
|
4.28
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESPP:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
life in years
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Volatility
|
|
|
47
|
%
|
|
|
59
|
%
|
|
|
53
|
%
|
|
|
48
|
%
|
Risk-free
interest rate
|
|
|
0.91
|
%
|
|
|
3.64
|
%
|
|
|
1.33
|
%
|
|
|
4.32
|
%
|
Dividend
Yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
We
currently estimate our forfeiture rate to be 19%, which is based on an analysis
of expected forfeiture data using our current demographics and probabilities of
employee turnover. The weighted average fair value of employee stock options
granted during the three and nine months ended December 31, 2008 was $0.90 and
$1.50, respectively as compared to the weighted average fair value of $1.93 and
$1.87 of employee stock options granted during the three and nine months ended
December 31, 2007, respectively.
As of
December 31, 2008, we had $1.5 million of total unrecognized compensation
expense, net of estimated forfeitures, related to stock options that will be
recognized over the weighted average period of 2 years.
10.
Stock Issuances
During
the three and nine months ended December 31, 2008 and 2007, we issued the
following shares of common stock under our employee stock option plan and ESPP
(in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Shares
issued
|
|
|
144
|
|
|
|
77
|
|
|
|
251
|
|
|
|
126
|
|
Total
proceeds
|
|
$
|
261
|
|
|
$
|
251
|
|
|
$
|
533
|
|
|
$
|
436
|
|
11.
Stock Repurchase Program; Treasury Shares
In the second quarter of
fiscal 2009, the company announced that its board of directors had authorized a
program to repurchase up to 1 million shares of its outstanding common stock,
the exact amount and timing of which will be subject to market conditions, legal
requirements and management's judgment as well as other factors. The repurchase
transactions may take place in the open market or via private negotiations. The
repurchase program may be modified, extended or terminated by the board of
directors at any time. During the three and nine months ended
December 31, 2008
, we repurchased 358,000 and
455,000 shares under this program for $661,000 and $958,000
respectively.
12.
Net Income (Loss) Per Share
The
following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share data):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
(8,911
|
)
|
|
$
|
230
|
|
|
$
|
(11,794
|
)
|
|
$
|
(269
|
)
|
Weighted
average common shares outstanding used in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
the
calculation of net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Shares
|
|
|
23,260
|
|
|
|
23,252
|
|
|
|
23,339
|
|
|
|
23,212
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
-
|
|
|
|
31
|
|
|
|
-
|
|
|
|
-
|
|
Dilutive
shares
|
|
|
23,260
|
|
|
|
23,283
|
|
|
|
23,339
|
|
|
|
23,212
|
|
Net
income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.38
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.38
|
)
|
|
$
|
0.01
|
|
|
$
|
(0.51
|
)
|
|
$
|
(0.01
|
)
|
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 three and nine months ended December 31, 2008, all of our
stock options outstanding to purchase 5,486,000 of the company’s common stock
were excluded from the diluted net loss per share calculation because their
inclusion would have been anti-dilutive.
During
the three and nine months ended December 31, 2007, options to purchase 4,827,000
shares of company’s common stock were excluded in the computation of diluted
earnings per share because the effect was anti-dilutive.
13.
Comprehensive Income (Loss)
Comprehensive
income (loss) is comprised of net income (loss) and unrealized gain or loss on
our available for sale securities. Comprehensive income (loss) for the three and
nine months ended December 31, 2008 and 2007 was as follows (in
thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Net
income (loss)
|
|
$
|
(8,911
|
)
|
|
$
|
230
|
|
|
$
|
(11,794
|
)
|
|
$
|
(269
|
)
|
Unrealized
gain (loss) on available for sale securities
|
|
|
(4
|
)
|
|
|
(3
|
)
|
|
|
(33
|
)
|
|
|
1
|
|
Comprehensive
income (loss)
|
|
$
|
(8,915
|
)
|
|
$
|
227
|
|
|
$
|
(11,827
|
)
|
|
$
|
(268
|
)
|
14.
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, 2008 was $218,000, including
interest. For the nine months ended December 31, 2008, we recorded an additional
$44,000 of unrecognized tax benefits, including interest.
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 amount of interest and penalties as
of April 1, 2008 was $51,000. The additional amount of interest and penalties
for the nine months ended December 31, 2008 was $16,000.
We
estimated that it is more likely than not that approximately $0.0 million and
$1.2 million of the deferred tax assets as of December 31, 2008 and
March 31, 2008, respectively, will be realized in the following year. As of
December 31, 2008, a valuation allowance of approximately $27.6 million was
recorded against the deferred tax assets. The valuation allowance is increased
by approximately $4.6 million during the nine months ended December 31, 2008
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 December 31, 2008, the federal returns for the
years ended March 31, 2006 through the current period and certain state returns
for the years ended March 31, 2004 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.
15.
Concentration and 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. Our
net sales from customers and distributors, individually representing more than
10% of total net sales during the three and nine months ended December 31, 2008
and 2007 were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Original
Equipment Manufacturers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
A
|
|
|
17
|
%
|
|
|
22
|
%
|
|
|
20
|
%
|
|
|
25
|
%
|
Customer
B
|
|
|
26
|
%
|
|
|
17
|
%
|
|
|
22
|
%
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributor
A
|
|
|
*
|
|
|
|
15
|
%
|
|
|
11
|
%
|
|
|
13
|
%
|
Distributor
B
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
*
|
|
|
|
12
|
%
|
*
Distributor accounted for less than 10% of total net sales during the
period.
Net sales
to geographic regions reported below are based on the customers’ ship to
locations (amounts in millions):
|
|
Three
Months Ended December 31,
|
|
|
Nine
Months Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
|
Amount
|
|
|
Total
|
|
United
States
|
|
$
|
1.0
|
|
|
|
10
|
%
|
|
$
|
1.7
|
|
|
|
11
|
%
|
|
$
|
4.8
|
|
|
|
12
|
%
|
|
$
|
3.5
|
|
|
|
8
|
%
|
China
|
|
|
4.1
|
|
|
|
42
|
%
|
|
|
4.5
|
|
|
|
30
|
%
|
|
|
14.2
|
|
|
|
36
|
%
|
|
|
12.0
|
|
|
|
27
|
%
|
Korea
|
|
|
2.0
|
|
|
|
21
|
%
|
|
|
4.2
|
|
|
|
28
|
%
|
|
|
9.4
|
|
|
|
24
|
%
|
|
|
15.0
|
|
|
|
34
|
%
|
Taiwan
|
|
|
1.5
|
|
|
|
16
|
%
|
|
|
2.9
|
|
|
|
19
|
%
|
|
|
6.9
|
|
|
|
17
|
%
|
|
|
8.6
|
|
|
|
19
|
%
|
Singapore
|
|
|
0.4
|
|
|
|
4
|
%
|
|
|
1.0
|
|
|
|
7
|
%
|
|
|
2.2
|
|
|
|
6
|
%
|
|
|
3.3
|
|
|
|
8
|
%
|
Others
|
|
|
0.7
|
|
|
|
7
|
%
|
|
|
0.7
|
|
|
|
5
|
%
|
|
|
2.5
|
|
|
|
6
|
%
|
|
|
1.8
|
|
|
|
4
|
%
|
Total net sales
|
|
$
|
9.7
|
|
|
|
100
|
%
|
|
$
|
15.0
|
|
|
|
100
|
%
|
|
$
|
40.0
|
|
|
|
100
|
%
|
|
$
|
44.2
|
|
|
|
100
|
%
|
All
Property and equipment including equipment on consignment are stated at cost and
depreciated over their estimated useful lives using the straight-line method.
For equipment on consignment, the Company also requires an agreement with
the consignee. A detailed list of the consigned equipment, if any, must be
included with the agreement. As of December, 31, 2008, we have 1.3 million of
test and packaging equipment on consignment in India and $0.6 million of test
equipment on consignment in Thailand.
Property,
plant and equipment by geographic location are summarized as follows (in
millions):
|
|
|
Net
Book Value as of,
|
|
|
|
|
December
31, 2008
|
|
|
March
31, 2008
|
|
United
States
|
|
$
|
1.7
|
|
|
$
|
2.0
|
|
India
|
|
|
|
1.3
|
|
|
|
1.9
|
|
Thailand
|
|
|
0.6
|
|
|
|
1.2
|
|
Others
|
|
|
0.5
|
|
|
|
0.5
|
|
Total
|
|
|
$
|
4.1
|
|
|
$
|
5.6
|
|
16.
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 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.
Indemnification
Obligations
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,
product recalls 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 December 31, 2008
and March 31, 2008. 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
reserves.
ITEM
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, based on a
constant mix of products, will decline at the rate of 12% to 15% per year; (2)
our having a target gross margin of 38% to 40%; (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
having a long term target for research and development expenses of 9% to 10% of
sales but such expenses representing more than 20% of sales especially during
the balance of fiscal 2009 driven by continuing development efforts for our
serial interface display controller line of products and declines in
sales; (6) our having a long term target for selling, general and
administrative expenses of 15% to 16% of sales but expecting to exceed this
target until our sales increase substantially; (7) our belief that due to the
short duration and investment grade credit ratings of our investment portfolio,
there is no material exposure to interest rate risk in our investment portfolio
and (9) our expectation of future interest income to continue to be at a reduced
level or even decline unless interest rates increase materially in the near
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 target 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; 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 as well as application specific protection devices
in diversified markets such as high brightness light emitting diodes (HBLED),
communication and industrial. These protection devices provide Electromagnetic
Interference (EMI) filtering and Electrostatic Discharge (ESD) protection. The
display electronic devices include serial interface display controllers. 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. Our manufacturing is completely outsourced and we use merchant
foundries to fabricate our wafers and subcontractors to do backend processing
and to ship to our customers. 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 wafer foundries and backend subcontractors.
Third
Quarter Key Financial Highlights
The
following are key financial highlights of third quarter of fiscal
2009:
Net Sales:
Our net sales were
$9.7 million in the third quarter of fiscal 2009, down 35% from
$15.0 million in the same period a year ago.
Gross Margin:
Our gross
margin was $2.5 million (26% of our net sales) in the third quarter of fiscal
2009 as compared to gross margin of $4.9 million (32% of our net sales) in the
same period a year ago.
Net Income or Loss per Share:
Our net loss per share, basic and diluted, was $0.38 in the third quarter of
fiscal 2009 as compared to net income per share, basic and diluted, of $0.01 in
the same period a year ago.
Cash Provided by or Used in
Operating Activities:
We used $3.4 million of cash in operating
activities during the nine months ended December 31, 2008 as compared to $3.8
million of cash generated by operating activities in the same period a year
ago.
Cash
*
Position:
We ended the third
quarter of fiscal 2009 with a cash position of $48.4 million as compared to
$51.6 million, as of March 31, 2008.
* 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 loss,
both in dollars and as a percentage of net sales, for the three and nine months
ended December 31, 2008 and 2007 (amounts in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
|
|
Net
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
Net
sales
|
|
$
|
9,659
|
|
|
|
100
|
%
|
|
$
|
14,955
|
|
|
|
100
|
%
|
|
$
|
40,101
|
|
|
|
100
|
%
|
|
$
|
44,201
|
|
|
|
100
|
%
|
Cost
of sales
|
|
|
7,184
|
|
|
|
74
|
%
|
|
|
10,105
|
|
|
|
68
|
%
|
|
|
27,779
|
|
|
|
69
|
%
|
|
|
29,995
|
|
|
|
68
|
%
|
Gross
margin
|
|
|
2,475
|
|
|
|
26
|
%
|
|
|
4,850
|
|
|
|
32
|
%
|
|
|
12,322
|
|
|
|
31
|
%
|
|
|
14,206
|
|
|
|
32
|
%
|
Research
and development
|
|
|
2,668
|
|
|
|
28
|
%
|
|
|
1,670
|
|
|
|
11
|
%
|
|
|
7,838
|
|
|
|
20
|
%
|
|
|
5,080
|
|
|
|
11
|
%
|
Selling,
general and administrative
|
|
|
3,509
|
|
|
|
36
|
%
|
|
|
3,533
|
|
|
|
24
|
%
|
|
|
11,205
|
|
|
|
28
|
%
|
|
|
11,170
|
|
|
|
25
|
%
|
Goodwill
impairment
|
|
|
5,258
|
|
|
|
54
|
%
|
|
|
-
|
|
|
|
0
|
%
|
|
|
5,258
|
|
|
|
13
|
%
|
|
|
-
|
|
|
|
0
|
%
|
Amortization
of intangible assets
|
|
|
71
|
|
|
|
1
|
%
|
|
|
41
|
|
|
|
0
|
%
|
|
|
127
|
|
|
|
0
|
%
|
|
|
124
|
|
|
|
0
|
%
|
Operating
loss
|
|
|
(9,031
|
)
|
|
|
(93
|
%)
|
|
|
(394
|
)
|
|
|
(3
|
%)
|
|
|
(12,106
|
)
|
|
|
(30
|
%)
|
|
|
(2,168
|
)
|
|
|
(5
|
%)
|
Other
income, net
|
|
|
130
|
|
|
|
1
|
%
|
|
|
628
|
|
|
|
4
|
%
|
|
|
1,617
|
|
|
|
4
|
%
|
|
|
1,911
|
|
|
|
4
|
%
|
Income
(loss) before income taxes
|
|
|
(8,901
|
)
|
|
|
(92
|
%)
|
|
|
234
|
|
|
|
2
|
%
|
|
|
(10,489
|
)
|
|
|
(26
|
%)
|
|
|
(257
|
)
|
|
|
(1
|
%)
|
Provision
(benefit) for income taxes
|
|
|
10
|
|
|
|
0
|
%
|
|
|
4
|
|
|
|
0
|
%
|
|
|
1,305
|
|
|
|
3
|
%
|
|
|
12
|
|
|
|
0
|
%
|
Net
income (loss)
|
|
$
|
(8,911
|
)
|
|
|
(92
|
%)
|
|
$
|
230
|
|
|
|
2
|
%
|
|
$
|
(11,794
|
)
|
|
|
(29
|
%)
|
|
$
|
(269
|
)
|
|
|
(1
|
%)
|
Net
sales
Net sales
by market for the three months ended December 31, 2008 and 2007 were as follows
(amounts in millions):
|
|
Three
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
As
% of
|
|
|
|
|
|
As
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
$
Change
|
|
|
%
Change
|
|
Mobile
handset
|
|
$
|
6.2
|
|
|
|
64
|
%
|
|
$
|
9.0
|
|
|
|
60
|
%
|
|
$
|
(2.8
|
)
|
|
|
(31
|
%)
|
Digital
consumer electronics and personal computers
|
|
|
2.4
|
|
|
|
25
|
%
|
|
|
4.4
|
|
|
|
29
|
%
|
|
|
(2.0
|
)
|
|
|
(45
|
%)
|
Diversified
|
|
|
1.1
|
|
|
|
11
|
%
|
|
|
1.6
|
|
|
|
11
|
%
|
|
|
(0.5
|
)
|
|
|
(31
|
%)
|
Total
|
|
$
|
9.7
|
|
|
|
100
|
%
|
|
$
|
15.0
|
|
|
|
100
|
%
|
|
$
|
(5.3
|
)
|
|
|
(35
|
%)
|
Net sales
for third quarter of fiscal 2009 were $9.7 million, a decrease of $5.3 million
or 35% from $15.0 million of net sales in the same period a year ago. Lower
sales were experienced across all product lines largely as a result of the weak
global economy. Sales from products for the mobile handset market decreased by
$2.8 million or 31% in third quarter of fiscal 2009 as compared to the same
period a year ago. Sales from products for the digital consumer electronics and
personal computer market decreased to $2.4 million in the third quarter of
fiscal 2009 from $4.4 million in the same period a year ago, down $2.0 million
or 45%. The decreases in sales for above product lines were driven by lower
shipments and price declines.
Sales from products for
the diversified market decreased to $1.1 million in the third quarter of fiscal
2009 from $1.6 million in the same period a year ago, down $0.5 million or 31%,
which was primarily driven by inventory adjustment at a major
customer.
Net sales
by market for the nine months ended December 31, 2008 and 2007 were as follows
(amounts in millions):
|
|
Nine
Months Ended December 31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
As
% of
|
|
|
|
|
|
As
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Sales
|
|
|
Amount
|
|
|
Sales
|
|
|
$
Change
|
|
|
%
Change
|
|
Mobile
handset
|
|
$
|
24.8
|
|
|
|
62
|
%
|
|
$
|
27.9
|
|
|
|
63
|
%
|
|
$
|
(3.1
|
)
|
|
|
(11
|
%)
|
Digital
consumer electronics and personal computers
|
|
|
10.2
|
|
|
|
25
|
%
|
|
|
12.4
|
|
|
|
28
|
%
|
|
|
(2.2
|
)
|
|
|
(18
|
%)
|
Diversified
|
|
|
5.1
|
|
|
|
13
|
%
|
|
|
3.9
|
|
|
|
9
|
%
|
|
|
1.2
|
|
|
|
31
|
%
|
Total
|
|
$
|
40.1
|
|
|
|
100
|
%
|
|
$
|
44.2
|
|
|
|
100
|
%
|
|
$
|
(4.1
|
)
|
|
|
(9
|
%)
|
Net sales
for nine months ended December 31, 2008 were $40.1 million, a decrease of $4.1
million or 9% from $44.2 million of net sales in the same period a year ago.
Sales from products for the mobile handset market decreased by $3.1 million or
11% during nine months ended December 31, 2008, as compared to the same period a
year ago. Sales from products for the digital consumer electronics and personal
computer market decreased to $10.2 million during nine months ended December 31,
2008 from $12.4 million in the same period a year ago, down $2.2 million or 18%.
Sales from products for the diversified market increased to $5.1 million during
nine months ended December 31, 2008 from $3.9 million in the same period a
year ago, up $1.2 million primarily benefited from increasing sales of our HBLED
ESD products.
Gross
Margin
Gross
margin decreased by $2.4 million during the three months ended December 31,
2008, as compared to the same period a year ago due to the following
reasons:
Gross
margin increase (decrease) compared to prior period (in
millions):
|
|
|
|
Price
change of products based on a constant mix for target
markets
|
|
$
|
(1.5
|
)
|
Cost
reductions of our products on a constant mix
|
|
|
0.6
|
|
Volume,
mix and other factors
|
|
|
(1.5
|
)
|
|
|
$
|
(2.4
|
)
|
The gross
margin decrease was primarily driven by lower shipments, price declines of our
products and a $238,000 inventory write off, partially offset by product cost
reductions. Our ASP declined 13% based on a constant mix of products in the
third quarter of fiscal 2009 as compared to the same period a year ago. The cost
reductions of our products were primarily due to outsourcing with lower cost
subcontractors.
As a
percentage of sales, gross margin decreased to 26% for the three months ended
December 31, 2008, compared to 32% for the same period a year ago.
Gross
margin decreased by $1.9 million during the nine months ended December 31, 2008,
as compared to the same period a year ago due to the following
reasons:
Gross
margin increase (decrease) compared to prior period (in
millions):
|
|
|
|
Price
change of products based on a constant mix for target
markets
|
|
$
|
(4.6
|
)
|
Cost
reductions of our products on a constant mix
|
|
|
3.2
|
|
Volume,
mix and other factors
|
|
|
(0.5
|
)
|
|
|
$
|
(1.9
|
)
|
The gross
margin decrease was primarily driven by price declines of our products and lower
shipments partially offset by cost reductions and change in our product
mix. Our ASP declined 11% based on a constant mix of products in the nine
months ended December 31, 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 decline at the rate of 12% to 15% per year. The cost reductions of
our products were primarily due to outsourcing with lower cost
subcontractors.
As a
percentage of sales, gross margin decreased to 31% for the nine months ended
December 31, 2008, compared to 32% for the same period a year ago. Our
long-range gross margin target remains 38% to 40%. 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 increase in research and
development expenses for the three and nine months ended December 31, 2008,
compared to the same periods a year ago, was due to the following
reasons:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
Expense
increase compared to prior period (in thousands):
|
|
December
31, 2008
|
|
|
December
31, 2008
|
|
Outside
services
|
|
$
|
160
|
|
|
$
|
901
|
|
Salaries
and benefits and other costs
|
|
|
28
|
|
|
|
201
|
|
Engineering
supplies and product related costs
|
|
|
810
|
|
|
|
1,656
|
|
|
|
$
|
998
|
|
|
$
|
2,758
|
|
Research
and development expenses increased by $1.0 million and $2.8 million,
respectively during the three and nine months ended December 31, 2008, as
compared to the same periods a year ago, primarily due to increased spending for
the serial interface display controller line of products which is anticipated to
continue during the remainder of fiscal 2009.
As a
percentage of sales, research and development expenses increased to 28% and 20%,
respectively during the three and nine months ended December 31, 2008 from
11% during the same periods a year ago. Our long term target
for research and development expenses is 9% to 10% of sales. However, research
and development expenses will continue to exceed our target range and represent
more than 20% of sales especially during the balance of fiscal 2009 driven by
continuing development efforts for our serial interface display controller line
of products and declines in sales.
Selling,
General and Administrative
Selling,
general and administrative expenses consist primarily of compensation and other
employee related costs, sales commissions, marketing expenses, legal,
accounting, other professional fees and information technology expenses. The
increase in selling, general, and administrative expenses for the three and nine
months ended December 31, 2008, compared to the same periods a year ago, is as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
Expense
increase (decrease) compared to prior period (in
thousands):
|
|
December
31, 2008
|
|
|
December
31, 2008
|
|
Salaries
and benefits
|
|
$
|
71
|
|
|
$
|
203
|
|
Sales
Commissions
|
|
|
(110
|
)
|
|
|
(205
|
)
|
Other
expenses
|
|
|
15
|
|
|
|
37
|
|
|
|
$
|
(24
|
)
|
|
$
|
35
|
|
Selling,
general and administrative expenses decreased by $24,000 and increased by
$35,000 during the three and nine months ended December 31, 2008, respectively,
as compared to the same periods a year ago primarily driven by reduction in
sales commission partially offset by increase in employee salaries and
benefits.
As a
percentage of sales, selling, general and administrative expenses were 36% and
28% during the three and nine months ended December 31, 2008 as compared to
24% and 25% during the same periods a year ago. 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.
Goodwill
Impairment
Goodwill
impairment was $5.3 million during the three months ended December 31,
2008. As a result of current economic environment, our operating
results, and the sustained decline in our market valuation, we performed an
interim goodwill analysis during the third quarter ended December 31,
2008. The analysis indicated that the estimated fair value is less
than the corresponding carrying amount and the full amount of goodwill is no
longer recoverable. Our entity is deemed as a single reporting unit
for our impairment analysis. The fair value was estimated using present value of
estimated future cash flows which was consistent with a market-based approach.
For additional information regarding goodwill, see Note 6 in the notes to
condensed financial statement of the Form 10-Q.
Amortization
and Impairment of Intangible Assets
Amortization
of intangible assets was $16,000 and $72,000, respectively during the three and
nine months ended December 31, 2008 as compared to $41,000 and $124,000
respectively during the same periods a year ago. The intangible assets were
related to the Arques acquisition in fiscal 2007. The decrease in amortization
expense was primarily due to the sale of intangible assets, related to our line
of LED Drivers in the second quarter of fiscal 2009. An impairment charge of
$55,000 was recorded during the third quarter of fiscal 2009. For additional
information regarding intangible assets, see Note 6 in the notes to condensed
consolidated financial statements of this Form 10-Q.
Other
Income, Net
Other
income, net, mainly includes interest income, interest expense, gain/loss on
sale of intangibles and fixed assets and other expenses.
The
decrease in other income is primarily driven by decline in interest rates this
year in part due to our moving the bulk of our short-term investments into
treasury bills. Interest income decreased by $0.6 million and $1.3
million during the three and nine months ended December 31, 2008, respectively
as compared to the same periods a year ago. We expect interest
income, in the near future, to remain at this reduced level or even decline
unless interest rates increase materially or we change the instruments in which
we invest.
Income
Taxes
During
the three and nine months ended December 31, 2008, income tax provision was
$10,000 and 1.3 million, respectively, as compared to $5,000 and $12,000,
respectively, during the same periods a year ago. Our income tax provision
increased during the three and nine months ended December 31, 2008 compared to
the same periods a year ago, primarily as a result of the decrease in our
estimates to utilize loss carryforwards, and the resulting increase in the
valuation allowance of the deferred tax assets. See Note 14 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 U.S. 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.
We have not made any material change in the accounting methodology used to
establish our estimates and assumptions during the third quarter of fiscal
2009. We do not believe there is a reasonable likelihood that there will be
a material change in the accounting methodology used to establish our
estimates or assumptions.
However, 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
Annual Report on Form 10-K for fiscal 2008. The significant accounting policies
that we believe are critical, either because they relate to financial line items
that are key indicators of our financial performance such as 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 custom products and
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”.
We receive periodic reports from our distributors of their inventory of our
products and when we test our inventory in order to determine the extent, if
any, to which we have excess or obsolete inventory, we also test the inventory
held by our distributors.
We
typically have written agreements with our distributors which provide that (1)
if we lower our distributor list price, our distributors may request
for a limited time period a credit for the differential of
eligible product in the distributor's inventory and (2) periodically, our
distributors have the right to return eligible product to us, provided
that the amount returned must be limited to a certain
agreed percentage of the value of our shipments to them during such
period. Product over a certain age may not be returned and there is a restocking
charge if the distributor has not placed a recent commensurate replacement
stocking order.
Inventories
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
Long
lived assets are reviewed for impairment 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.
We have
accounted for goodwill and other intangible assets in accordance with Statement
of Financial Accounting Standards No. 142 “Goodwill and Other Intangible
Assets” (“SFAS 142”). SFAS 142 prohibits the amortization of goodwill
and intangible assets with indefinite useful lives and requires that these
assets be reviewed for impairment at the reporting unit level at least annually
and more frequently if there are indicators of impairment. The amount of
impairment loss is measured as the difference between the carrying value of the
assets and their estimated fair value. An impairment loss for an intangible
asset 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. Significant
judgment required to estimate the fair value of an intangible asset includes
estimating future cash flows and other assumptions. Changes in these estimates
and assumptions could materially affect the determination of fair
value.
Impairment
of goodwill is tested at the reporting unit level by comparing the reporting
unit’s carrying amount, including goodwill, to the fair value of the reporting
unit. The fair value was estimated using present value of estimated future cash
flows which was consistent with a market-based approach. If the carrying amount
of the reporting unit exceeds its fair value, goodwill is considered impaired
and a second step is performed to measure the amount of impairment loss, if any.
Because the Company has one reporting unit under SFAS No. 142, it utilizes
the entity-wide approach to assess goodwill for impairment. Due to the current
economic environment, our operating results, and the sustained decline in our
market valuation, we have performed an interim goodwill impairment analysis
during the third quarter of fiscal 2009 pursuant to the steps and requirements
under SFAS No. 142. The analysis indicated that the estimated fair value of
the reporting unit is less than the corresponding carrying amount and the
goodwill is no longer recoverable. Therefore, we determined that goodwill is
fully impaired.
Stock-based
Compensation
In
accordance with the fair value recognition provisions of SFAS 123(R), we
estimate the stock-based compensation cost at the grant date based on the fair
value of the award and recognize it as an 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 the
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 the 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 the three and nine months ended December 31, 2008
and 2007 is based on awards ultimately expected to vest, it has been reduced for
estimated forfeitures. SFAS 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.
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 that may result 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
14 in the notes to condensed consolidated financial statements of this Form 10-Q
for further discussion.
Litigation
We are,
on occasion, 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 December 31, 2008,
there was no accrual for 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 condensed
consolidated statements of cash flows, the Company’s liquidity and available
capital resources are impacted by the following key components: (i) cash and
cash equivalents, (ii) operating activities, (iii) investing activities, and
(iv) financing activities.
|
|
Nine
Months Ended December 31,
|
|
(In
thousands)
|
|
2008
|
|
|
2007
|
|
Cash
provided by (used in) operating activities
|
|
$
|
(3,362
|
)
|
|
$
|
3,764
|
|
Cash
provided by (used in) investing activities
|
|
|
4,940
|
|
|
|
(2,514
|
)
|
Cash
provided by (used in) financing activities
|
|
|
(558
|
)
|
|
|
348
|
|
Net
increase in cash and cash equivalents
|
|
$
|
1,020
|
|
|
$
|
1,598
|
|
Cash,
cash equivalents and short-term investments
Total
cash, cash equivalents and short-term investments were $48.4 million as of
December 31, 2008 compared to $51.6 million as of March 31, 2008, a decrease of
$3.2 million primarily due to cash used in operating activities and repurchase
of company’s outstanding common stock under the stock repurchase program
partially offset by proceeds from the sale of LED Driver assets including
patents, related fixed assets and inventory and proceeds from the issuance of
common stock under our employee stock benefit plans.
Operating
activities
Cash
provided by operating activities consists of net loss adjusted for certain
non-cash items and changes in assets and liabilities.
During
nine months ended December 31, 2008, cash used in operating activities was $3.4
million. The net loss of $11.8 million during the nine months ended December 31,
2008 included non-cash items, such as employee stock-based compensation expense
of $1.6 million, goodwill impairment loss of $5.3 million and depreciation of
fixed assets and amortization of intangible assets aggregating to $1.9 million.
Accounts receivable decreased to $3.2 million at December 31, 2008 compared to
$6.2 million at March 31, 2008, mainly attributable to lower
shipments. Receivables days of sales outstanding were 31 days and 38 days
at December 31, 2008 and March 31, 2008, respectively. Net inventory was $7.9
million as of December 31, 2008, compared to $6.4 million as of March 31,
2008 also mainly attributable to lower shipments. Annualized inventory turns
decreased to 5.2 at December 31, 2008 as compared to 6.8 at March 31, 2008
resulted from lower sales of our products. Accounts payable and accrued
liabilities totaled $6.2 million at December 31, 2008 compared to $8.3 million
at March 31, 2008. Annualized days payable outstanding decreased to 42 at
December 31, 2008 from 50 at March 31, 2008. Deferred margin on shipments to
distributors decreased to $0.5 million as of December 31, 2008 from $1.9 million
as of March 31, 2008.
Cash
provided by operating activities was $3.8 million during the nine months ended
December 31, 2007. The net loss of $0.3 million for the nine months ended
December 31, 2007, included non-cash items such as employee stock based
compensation expense of $1.7 million and depreciation and amortization of $1.5
million. Accounts receivable decreased to $5.9 million at December 31, 2007
compared to $7.5 million at March 31, 2007, mainly as a result of faster
collections and change in our customer mix. Receivables days of sales
outstanding were 36 days and 44 days as of quarters ended December 31, 2007 and
March 31, 2007, respectively. Net inventory was $7.0 million as of December 31,
2007, compared to $5.2 million as of March 31, 2007. Annualized inventory
turns were 6.6 at December 31, 2007 as compared to 8.0 at March 31, 2007.
Accounts payable and accrued liabilities totaled $8.8 million at December 31,
2007 compared to $7.9 million at March 31, 2007.
Investing
activities
Investing
activities during the nine months ended December 31, 2008 provided $4.9 million
of cash, primarily due to net maturities of short-term investments and $1.2
million of proceeds from the sale of LED Driver intellectual property and
related fixed assets partially offset by payment towards capital
expenditures.
Investing
activities during the nine months ended December 31, 2007 used $2.5 million of
cash, mainly due to our payment towards the purchase of manufacturing capital
equipment and the final Arques escrow payment.
Financing
activities
Net cash
used in financing activities for the nine months ended December 31, 2008 was
$0.6 million, primarily as a result of repurchase of $1.0 million of company’s
outstanding common stock under the stock repurchase program partially offset by
proceeds from the issuance of common stock under the ESPP.
Net cash
provided by financing activities for the nine months ended December 31, 2007 was
$0.3 million and was the result of net proceeds from the issuance of common
stock under our employee stock benefit plans partially offset by the repayment
of capital lease obligations.
Contractual
Obligations and Cash Requirements
The
following table summarizes our contractual obligations as of December 31, 2008
(in thousands):
|
|
Payments
due by period
|
|
|
|
Remainder
of
|
|
|
Fiscal
|
|
|
Fiscal
|
|
|
Beyond
|
|
|
|
|
|
|
Fiscal
2009
|
|
|
2010
|
|
|
2011
|
|
|
2011
|
|
|
Total
|
|
Operating
lease obligations
|
|
|
175
|
|
|
|
385
|
|
|
|
194
|
|
|
|
-
|
|
|
|
754
|
|
Purchase
obligations
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
|
|
$
|
375
|
|
|
$
|
385
|
|
|
$
|
194
|
|
|
$
|
-
|
|
|
$
|
954
|
|
Effective
April 1, 2007, we adopted the provisions of FIN 48 as described in Note 14 of
notes to condensed consolidated financial statements in this Form 10-Q. As of
December 31, 2008, the liability for uncertain tax positions was approximately
$195,000 in addition to the interest and tax penalties of $67,000, of which none
is expected to be paid within one year. We are unable to estimate when cash
settlement with a taxing authority may occur.
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
of $48.4 million as of December 31, 2008 will be sufficient to meet our
anticipated cash needs for the next twelve 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.
Recent
Accounting Pronouncements
Refer to
Note 3 in the notes to condensed consolidated financial statements in this Form
10-Q for a discussion of the expected impact of recently issued accounting
pronouncements.
Off-Balance
Sheet Arrangements
We do not
have off balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC
Regulation S-K that have, or are reasonably likely to have, a current or future
effect upon our financial condition, revenue, expenses, results of operations,
liquidity, capital expenditures or capital resources that are material to our
investors, other than contractual obligations shown above.
ITEM
3. Quantitative and Qualitative Disclosures about Market Risk
As of
December 31, 2008 we held $14.5 million of investments in short term, liquid
debt securities. Due to the short duration and investment grade credit ratings
of these instruments, we do not believe that there is a material exposure to
interest rate risk in our investment portfolio. We do not own derivative
financial instruments nor do we own auction rate securities.
We have
evaluated the estimated fair value of our financial instruments. The amounts
reported as cash and cash equivalents, accounts receivable and accounts payable
approximate fair value due to their short term maturities. Historically, the
fair values of our short-term investments are estimated based on quoted market
prices.
We have
little exposure to foreign currency risk as all our sales are denominated in US
dollars as is most of our spending.
ITEM
4. Controls and Procedures
(a)
Disclosure Controls and Procedures.
(i)
Disclosure
Controls and Procedures
.
We
maintain disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e) that are designed to ensure that information required to
be disclosed by us in reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure.
(ii)
Limitations
on the Effectiveness of Disclosure Controls.
In designing and
evaluating our disclosure controls and procedures, management recognized that
disclosure controls and procedures, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met, taking into account the totality of
the circumstances. Our disclosure controls and procedures have been designed to
meet the reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions.
(iii)
Evaluation
of Disclosure Controls and Procedures.
Our principal
executive officer and principal financial officer have evaluated our disclosure
controls and procedures as of December 31, 2008, and have determined that they
were effective at the reasonable assurance level.
(b)
Changes in Internal Control over Financial Reporting
Our
internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) is designed to provide reasonable assurance regarding
the reliability of our financial reporting and preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles. There was no change in our internal control
over financial reporting identified in connection with the evaluation described
in Item 4(a)(iii) above that occurred during our third quarter of fiscal 2009
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
None
ITEM 1A. Risk
Factors
A revised
description of the risk factors associated with our business is set forth below.
This description supersedes the description of the risk factors associated with
our business previously disclosed in Part II, Item 1A of our Form 10-Q for
the quarter ended September 30, 2008. 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 seven out of the last eleven most recent fiscal quarters,
including the first quarters of fiscal 2009, 2008 and 2007 and fourth quarters
of fiscal 2008 and 2007, and second and third quarter of fiscal 2009,
although we were profitable during the second and third quarters of fiscal 2008
and 2007. 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 (IPR&D) 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
followed by a loss during fourth quarter of fiscal 2008 and first, second and
third quarters of fiscal 2009. 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 target 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 are concentrated in terms of product types (protection devices),
markets (mobile handsets), and customers (certain top tier OEMs). Our
revenue could suffer materially if the demand or price for protection devices
decreases, if the market for mobile handsets stops growing, or if our key
customers lose market share.
Our
revenues in recent periods have been derived almost exclusively from sales of
circuit protection devices. For example, during the third quarter of
fiscal 2009, 83% of our revenue was derived from such sales. With 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 to derive most of our
revenues from circuit protection devices. Should the need for such
devices decline, for example because of changes in input and output circuitry,
our revenues could decline.
During
the third quarter of fiscal 2009, 64% of our revenue was from sales to the
mobile handset market, with the balance coming from digital consumer electronics
and personal computers and peripherals and diversified market. In
order for us to be successful, we must continue to penetrate these 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, particularly the mobile handset
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.
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 2009, two customers primarily in the mobile handset
market represented 43% of our net sales and in the future we expect to increase
net sales to a top five OEM customer we begun selling to during the second half
of fiscal 2008. There can be no assurance that these customers will purchase our
products in the future in the quantities we have forecasted, or at
all.
During
the third quarter of fiscal 2009, one distributor represented 10% of our net
sales. If we were to lose the distributor, 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.
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. In addition, 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
target markets are intensely competitive. Our ability to compete successfully in
our target 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.
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.
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 and we focused on high end
applications as a result. However, we have also begun to see 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, 2007 and 2008.
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.
Adverse
and uncertain global economic conditions make forecasting demand difficult and
may harm our business
Unfavorable
global economic conditions, including the recession and recent disruptions to
the credit and financial markets, could cause consumer and capital spending to
continue to slow down, which may decrease demand for our customers’ products and
hence our products and our revenues would be adversely affected. In addition,
during challenging economic times, our customers may face issues gaining timely
access to sufficient credit, which may impair the ability of our customers to
pay for products they have purchased which could cause us to increase our
allowance for doubtful accounts and write-offs of accounts
receivable. Furthermore, the uncertainty in when the global
economy will recover means uncertain demand for our products which makes it more
difficult to manage inventories so that we can timely respond to our customers
if and when their demand for our products increases and may lead to greater
write-offs of inventory. In addition, such uncertainty in demand
makes planning more difficult and subject to error which could impact our
decision-making and have a material adverse effect on our business, results of
operations, financial condition and cash flows.
Our
revenues are subject to macroeconomic cycles and therefore are more likely to
decline if there is an economic downturn.
As our
mobile handset protection devices penetration have increased, our revenues have
become increasingly susceptible to macroeconomic cycles because our revenue
growth has become more dependent on growth in the overall market rather than
primarily on increased penetration, as had been the case in the
past.
Our
reliance on foreign customers could cause fluctuations in our operating
results.
During
the third quarter of fiscal 2009, international sales accounted for 90% 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 2009, 38% 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.
We
have outsourced our wafer fabrication, and assembly and test
operations. Due to our size, we depend on a limited number of foundry
partners and assembly and test subcontractors and there is limited available
capacity for plastic assembly and test contractors which limits our
choices. As a result, we are exposed to a risk of manufacturing
disruption or uncontrolled price changes and we 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.
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
rely upon foreign suppliers and have consigned substantial equipment at our
foreign subcontractors in order to obtain price concessions. This
exposes us to risks associated with international operations, including the risk
of losing this equipment should the foreign subcontractor go out of
business.
We use
foundry partners and assembly and test subcontractors in Asia, primarily in
China, India, Japan, Korea, Philippines, Taiwan and Thailand 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 continue to enhance our computer
and information systems to coordinate this remote activity.
In order
to obtain price concessions, we have consigned substantial equipment at our
foreign contractors. For example, we have $1.3 million of test and
packaging equipment on consignment in India and $0.8 million of test equipment
on consignment in Thailand as of December 31, 2008. 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. It is possible that a significant portion our
research and development expenditures will not yield products with meaningful
future revenue.
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 target 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.
We are
attempting to develop one or more new display controller products which are
mixed signal integrated circuit products 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, in particular through our India
design center, 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 in a remote location. 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.
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 a portion of our engineering group is
located. For that reason, in part, we have opened a design
center in India focused on VLSI products and in Phoenix focused on protection
devices. 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, or the employment of our India design center 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. We also recruited a new Vice President of Sales during the
fourth quarter of fiscal 2008 and whether he is well-suited for the position and
performs well will be critical to our success as well.
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 and we
may be harmed by litigation involving our intellectual property
rights.
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.
As a
general matter, the semiconductor and related industries are characterized by
substantial litigation regarding intellectual property rights, and in
particular patents. 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
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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 for dollar amounts significantly higher than the revenues
and profits we receive from the sale of 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. We are sometimes
not able to limit our liability contractually as much as we desire and believe
is reasonable and there can be no assurances 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 our insurers will handle any claims on the
basis we desire, 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 or the discovery of
contaminants at our prior manufacturing sites 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. Should contaminants be found at either of our
prior manufacturing sites at a future date, a government agency or future owner
could attempt to hold us responsible, which could result in material
expenses.
Earthquakes,
other natural disasters and shortages, or man-caused disasters such as future
terrorist activity, 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 and a wafer fabrication contractor of
ours in China experienced a power outrage during 2007. We cannot assure that if
power interruptions or shortages occur in the future, they will not adversely
affect 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 or war could similarly adversely impact our
business.
Implementation
of the new FASB rules 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 which
caused us to recognize an expense associated with our
employee equity awards that decreased our
earnings. There may be other future changes in FASB
rules or 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 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
stockholders 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.
|
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 stockholder 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
stockholder 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 stockholder 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 stockholders, 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 stockholders. 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 stockholder 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 stockholders.
Further,
our stockholders 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 stockholders in connection with the previous year’s
annual meeting to nominate a candidate for director or present a proposal to our
stockholders at a meeting. These notice requirements could inhibit a takeover by
delaying stockholder action.
Our
largest stockholder has requested that the Company’s board of directors take
actions which the board does not believe are in the Company’s best interests.
This could lead to a more active dispute, such as for example a proxy
fight, which could detract management time and attention from the business of
the Company, which could cost the Company substantial monies to resolve,
and which , if successful, could result in the
Company being compelled to take actions which the Board currently does not
believe are in the Company’s best interests.
Our
largest stockholder, funds managed by Dialectic Capital Management, LLC
(“Dialectic”), made an SEC filing in which it expressed its displeasure with the
Company’s management and board of directors and requested that the Company pay a
substantial cash dividend and then engage an investment banker to sell the
Company. Dialectic also requested that the Board restructure management’s
economic incentives to be more aligned with the interests of all of the
Company's stockholders. The Company’s board of directors has responded
that it believes the Company should retain its cash and that now is not the time
to explore a sale of the Company when the stock market and its stock price is
close to its low point over the past several years and when the Company has
solid plans for growth, driven by new products under development and potentially
by acquisition of synergistic product lines or companies. The Company’s
management has met with representatives of Dialectic and has been unable to
resolve their differences of opinion. Dialectic in its SEC filing reserved the
right, based on all relevant factors and subject to applicable law, to take such
actions as Dialectic saw fit to implement plans or a proposal with respect to
its requested actions. Potential Dialectic actions could include by way of
example a proxy fight or encouraging third parties to make hostile offers to
acquire the Company. Because our board of directors believes it
would not be in the interests of the Company or its stockholders to pursue the
courses of action recommended by Dialectic, we would expect to vigorously
contest any such efforts by Dialectic to further its agenda. Any
such actions by Dialectic therefore could detract management time and
attention from the business of the Company, could cost the Company substantial
monies to resolve, and , if successful, could result in the
Company being compelled to take actions which its board of directors currently
does not believe are in the Company’s best interests.
We
may incur increased costs as a result of future changes in laws and regulations
relating to corporate governance matters and public disclosure.
There
have been and continue to be 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. These often have in the past and may in the future
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 have invested
substantial resources to comply with evolving standards and may be required to
do so in the future. Any such future 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 2008,
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 expect
to take steps to comply with future enacted laws and regulations and accounting
pronouncements 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.
In
the future we may make strategic acquisitions of technology, product lines, or
companies and any future acquisitions and strategic alliances may harm our
operating results or cause us to incur debt or assume contingent
liabilities.
We may in
the future acquire, or form strategic alliances relating to, other businesses,
product lines or 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 successful 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 connection with future acquisitions and alliances, we may
not only acquire assets which need to be expensed or 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.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
Total
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Purchased as
|
|
|
Maximum
Number of
|
|
|
|
|
|
|
|
|
|
Part
of Publicly
|
|
|
Shares
that May Yet be
|
|
|
|
Total
Number of
|
|
|
Average
Price
|
|
|
Announced
Plans or
|
|
|
Purchased
Under the
|
|
Period
|
|
Shares
Purchased (1)
|
|
|
Paid
Per Share
|
|
|
Programs
|
|
|
Plans
or Programs
|
|
10/01/08
- 10/31/08
|
|
|
53,055
|
|
|
$
|
2.66
|
|
|
|
53,055
|
|
|
|
850,000
|
|
11/01/08
- 11/30/08
|
|
|
114,755
|
|
|
$
|
1.72
|
|
|
|
114,755
|
|
|
|
735,245
|
|
12/01/08
- 12/31/08
|
|
|
190,270
|
|
|
$
|
1.69
|
|
|
|
190,270
|
|
|
|
544,975
|
|
|
|
|
358,080
|
|
|
$
|
2.11
|
|
|
|
358,080
|
|
|
|
544,975
|
|
(1)
|
Our
current share repurchase program, under which we repurchased 358,080 and
455,025 shares during the three and nine months ended December 31, 2008,
respectively, has been in place since August 21, 2008, when it was adopted
by our board of directors and was publicly announced. These shares were
purchased in open market transactions. This repurchase program
has no expiration date, other than, unless extended, when an aggregate of
1,000,000 shares have been repurchased. Neither this program nor any other
repurchase program or plan has expired during the third fiscal quarter
ended December 31, 2008 nor have we decided to terminate any repurchase
plan or program prior to expiration. There are no existing repurchase
plans or programs under which we do not intend to make further
purchases.
|
ITEM
3. Defaults upon Senior Securities
None.
None.
ITEM
5. Other Information
None.
The
following documents are filed as Exhibits to this report:
10.33
|
|
Lease
with The Irvine Company dated May 13, 2005
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive
Officer
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial
Officer
|
|
|
32.1
|
|
Section
1350 Certification of Principal Executive Officer
|
|
|
32.2
|
|
Section
1350 Certification of Principal Financial Officer
|
|
|
|
The
following documents are hereby incorporated by reference as Exhibits to this
report:
Exhibit
Number
|
|
Description
|
|
Incorporated
by reference from
|
3(i)
|
|
Amended
and Restated Certificate of Incorporation as most recently amended on
September 15, 2006.
|
|
Exhibit
3.1 to our Current Report on Form 8-K dated September 15, 2006, filed on
September 21, 2006.
|
|
|
|
3(ii)
|
|
Amended
and Restated By-laws as most recently amended on August 21,
2008.
|
|
Exhibit
3.3 to our Current Report on Form 8-K dated August 21, 2008, filed on
August 28, 2008
|
|
|
|
4.1*
|
|
1995
Employee Stock Option Plan and 1995 Non-Employee
Directors’
Stock Option Plan, both as most recently amended
August
8, 2003 and August 7, 2002, respectively.
|
|
Exhibit
4.1 to Registration Statement on Form S-8, filed on September 2,
2003.
|
|
|
|
4.2*
|
|
1995
Employee Stock Purchase Plan, as most recently
amended
August 21, 2008
|
|
Appendix
B to Definitive Proxy Statement on Schedule 14A, filed on July 2,
2008.
|
|
|
|
4.3
|
|
Sample
Common Stock Certificate of Registrant
|
|
Exhibit
4.1 to our Current Report on Form 8-K dated April 27, 2004, filed on April
28, 2004.
|
|
|
|
4.4*
|
|
2004
Omnibus Incentive Compensation Plan as most recently amended on August 21,
2008
|
|
Exhibit
10.32 to our Current Report on Form 8-K dated August 21, 2008, filed on
August 28, 2008.
|
|
|
|
10.12
|
|
Wafer
Manufacturing Agreement between the Company and Advanced Semiconductor
Manufacturing Corporation, dated February 20, 2002.**
|
|
Exhibit
10.12 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2002 filed on June 25, 2002.
|
|
|
|
10.18
|
|
Wafer
Manufacturing Agreement with Sanyo Electric Co., Ltd. Semiconductor
Company**
|
|
Exhibit
10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30,
2004, filed on August 6, 2004.
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated
by reference from
|
|
|
|
10.25*
|
|
Memo
to Employees and Consultants, including David Casey and David Sear,
Accelerating Their Underwater Unvested Options and Imposing Resale
Restrictions.
|
|
Exhibit
10.25 to our Current Report on Form 8-K dated March 28, 2006, filed on
April 3, 2006.
|
|
|
|
10.26*
|
|
Letter
Agreement dated as of July 7, 2006, between Registrant and Kevin
Berry.
|
|
Exhibit
10.26 to our Current Report on Form 8-K dated July 7, 2006, filed on July
10, 2006.
|
|
|
10.27*
|
|
Supplemental
Employment Terms Agreement during
November
2006 between Registrant and an employee
of
the registrant
|
|
Exhibit
10.27 to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2006, filed on February 9, 2007
|
|
|
|
10.28*
|
|
Executive
Severance Plan dated November 9, 2006
|
Exhibit
10.28 to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2006, filed on February 9, 2007
|
|
|
|
|
10.29**
|
Equipment
Acquisition Agreement, as amended, and Post-Consignment Services Pricing
Agreement, with SPEL
|
Exhibit
10.29 to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2007 filed on November 9, 2007
|
|
|
|
10.30*
|
Amendment
to Supplemental Employment Terms Agreement dated February 6,
2008
|
Exhibit
10.30 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2008 filed on June 11, 2008
|
|
|
|
10.31*
|
Amended
and Restated Executive Severance Plan dated February 6,
2008
|
Exhibit
10.31 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2008 filed on June 11, 2008
|
|
|
|
_________-
*
|
Denotes
a management contract or compensatory plan or
arrangement.
|
**
|
Portions
were omitted pursuant to a request for confidential
treatment.
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
|
|
|
|
|
|
CALIFORNIA
MICRO DEVICES CORPORATION
|
|
|
(Registrant)
|
|
|
|
Date:
February 9, 2009
|
|
By:
|
|
/S/
ROBERT V. DICKINSON
__________________________________________
|
|
|
|
|
Robert
V. Dickinson, President and Chief Executive Officer (Principal Executive
Officer)
|
|
|
|
|
|
|
|
/S/
KEVIN J. BERRY
__________________________________________
|
|
|
|
|
Kevin
J. Berry, Chief Financial Officer
|
|
|
|
|
(Principal
Financial and Accounting Officer)
|
Exhibit
Index
Exhibit
Number
|
|
Description
|
|
Incorporated
by reference from
|
3(i)
|
|
Amended
and Restated Certificate of Incorporation as most recently amended on
September 15, 2006.
|
|
Exhibit
3.1 to our Current Report on Form 8-K dated September 15, 2006, filed on
September 21, 2006.
|
|
|
|
3(ii)
|
|
Amended
and Restated By-laws, as most recently amended on August 21,
2008.
|
|
Exhibit
3.3 to our Current Report on Form 8-K dated August 21, 2008, filed on
August 28, 2008.
|
|
|
|
4.1*
|
|
1995
Employee Stock Option Plan and 1995 Non-Employee Directors’ Stock Option
Plan, both as most recently amended August 8, 2003 and August 7, 2002,
respectively.
|
|
Exhibit
4.1 to Registration Statement on Form S-8, filed on September 2,
2003.
|
|
|
|
4.2*
|
|
1995
Employee Stock Purchase Plan, as most recently amended August 21,
2008
|
|
Appendix
B to Definitive Proxy Statement on Schedule 14A, filed on July 2,
2008.
|
|
|
|
4.3
|
|
Sample
Common Stock Certificate of Registrant
|
|
Exhibit
4.1 to our Current Report on Form 8-K dated April 27, 2004, filed on April
28, 2004.
|
|
|
|
4.4*
|
|
2004
Omnibus Incentive Compensation Plan, as most recently amended on August
21, 2008.
|
|
Exhibit
10.32 to our Current Report on Form 8-K dated August 21, 2008, filed on
August 28, 2008.
|
|
|
|
10.12
|
|
Wafer
Manufacturing Agreement between the Company and Advanced Semiconductor
Manufacturing Corporation, dated February 20, 2002.**
|
|
Exhibit
10.12 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2002 filed on June 25, 2002.
|
|
|
|
10.18
|
|
Wafer
Manufacturing Agreement with Sanyo Electric Co., Ltd. Semiconductor
Company**
|
|
Exhibit
10.18 to our Quarterly Report on Form 10-Q for the quarter ended June 30,
2004, filed on August 6, 2004.
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated
by reference from
|
|
|
|
10.25*
|
|
Memo
to Employees and Consultants, including David Casey and David Sear,
Accelerating Their Underwater Unvested Options and Imposing Resale
Restrictions.
|
|
Exhibit
10.25 to our Current Report on Form 8-K dated March 28, 2006, filed on
April 3, 2006.
|
|
|
|
10.26*
|
|
Letter
Agreement dated as of July 7, 2006, between Registrant and Kevin
Berry.
|
|
Exhibit
10.26 to our Current Report on Form 8-K dated July 7, 2006, filed on July
10, 2006.
|
|
|
10.27*
|
|
Supplemental
Employment Terms Agreement during
November
2006 between Registrant and an employee
of
the registrant
|
|
Exhibit
10.27 to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2006, filed on February 9, 2007
|
|
|
|
10.28*
|
|
Executive
Severance Plan dated November 9, 2006
|
Exhibit
10.28 to our Quarterly Report on Form 10-Q for the quarter ended December
31, 2006, filed on February 9, 2007
|
|
|
|
|
|
|
10.29**
|
|
Equipment
Acquisition Agreement, as amended, and Post-Consignment Services Pricing
Agreement, with SPEL
|
Exhibit
10.29 to our Quarterly Report on Form 10-Q for the quarter ended September
30, 2007 filed on November 9, 2007
|
|
|
|
|
|
|
10.30*
|
|
Amendment
to Supplemental Employment Terms Agreement dated February 6,
2008
|
Exhibit
10.30 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2008 filed on June 11, 2008
|
|
|
|
|
|
|
10.31*
|
|
Amended
and Restated Executive Severance Plan dated February 6,
2008
|
Exhibit
10.31 to the Company’s Annual Report on Form 10-K for the year ended March
31, 2008 filed on June 11, 2008
|
|
10.33
|
|
Lease
with The Irvine Company dated May 13, 2005, is filed
herewith.
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Executive Officer is filed
herewith.
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer is filed
herewith.
|
|
|
32.1
|
|
Section
1350 Certification of Principal Executive Officer is filed
herewith.
|
|
|
32.2
|
|
Section
1350 Certification of Principal Financial Officer is filed
herewith.
|
|
|
|
__________
*
|
Denotes
a management contract or compensatory plan or
arrangement.
|
**
|
Portions
were omitted pursuant to a request for confidential
treatment.
|
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