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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 June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission File Number 000-31081
TRIPATH TECHNOLOGY INC.
(Exact name of registrant as specified in its charter)
Delaware 77-0407364
(State or other jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
2560 Orchard Parkway
San Jose, California 95131
(Address of Principal Executive Office including (Zip Code)
(408) 750-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
("Exchange Act") 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 an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
43,287,944 shares of the Registrant's common stock were outstanding as of August
4, 2003.
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1
TABLE OF CONTENTS
PART I. Financial Information
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at June 30, 2003 and December 31, 2002
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2003 and 2002
Notes to Condensed Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signature
Exhibit Index
2
PART I. Financial Information
Item 1. Financial Statements
TRIPATH TECHNOLOGY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Unaudited
June 30, December 31,
2003 2002
---------- ------------
Current assets:
Cash and cash equivalents $ 8,116 $ 10,112
Restricted cash -- 486
Accounts receivable, net 2,302 1,471
Inventories 3,659 5,252
Prepaid expenses and other current assets 153 706
---------- ----------
Total current assets 14,230 18,027
Property and equipment, net 1,891 2,474
Other assets 72 184
---------- ----------
Total assets $ 16,193 $ 20,685
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,615 $ 2,395
Current portion of capital lease obligations 275 225
Accrued expenses 740 1,070
Deferred distributor revenue 1,211 626
---------- ----------
Total current liabilities
3,841 4,316
Long term liabilities 1,140 933
Commitments and contingencies (see Note 11)
Stockholders' equity:
Common stock, $0.001 par value, 100,000,000 shares authorized;
43,234,942 and 41,326,760 shares issued and outstanding 43 41
Additional paid-in capital 188,126 187,835
Deferred stock-based compensation (315) (91)
Accumulated deficit (176,642) (172,349)
---------- ----------
Total stockholders' equity 11,212 15,436
---------- ----------
Total liabilities and stockholders' equity $ 16,193 $ 20,685
========= ==========
The accompanying notes are an integral part of these condensed interim consolidated financial statements.
3
TRIPATH TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Revenue......................................... $ 3,139 $ 6,052 $ 6,091 $ 10,607
Cost of revenue................................. 2,220 5,242 4,427 13,796
--------- --------- -------- ---------
Gross profit (loss)............................. 919 810 1,664 (3,189)
--------- --------- -------- ---------
Operating expenses:
Research and development..................... 1,625 3,328 3,603 6,877
Selling, general and administrative.......... 1,113 1,547 2,359 3,354
--------- --------- -------- ---------
Total operating expenses........................ 2,738 4,875 5,962 10,231
--------- --------- -------- ---------
Loss from operations............................ (1,819) (4,065) (4,298) (13,420)
Interest and other income, net.................. 3 52 5 100
--------- --------- -------- ---------
Net loss........................................ $ (1,816) $ (4,013) $ (4,293) $ (13,320)
========== ========== ========= ==========
Beneficial conversion feature on issuance of
Preferred Stock........................... - - - (14,952)
--------- --------- -------- ---------
Net loss applicable to common stockholders...... $ (1,816) $ (4,013) $ (4,293) $ (28,272)
========== ========== ========= ==========
Basic and diluted net loss per share applicable
to common stockholders $ (0.04) $ (0.10) $ (0.10) $ (0.78)
========== ========== ========= ==========
Number of shares used in computing basic and
diluted net loss per share......................... 42,631 41,308 41,999 36,278
========== ========== ========= ==========
Stock-based compensation included in:
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Cost of revenue................................. $ 1 $ 10 $ 3 $ 23
Research and development........................ 17 148 34 360
Selling, general and administrative............. 26 83 (29) 205
---------- ------- -------- --------
Total stock-based compensation.................. $ 44 $ 241 $ 8 $ 588
=========== ========= ======== ========
The accompanying notes are an integral part of these condensed
interim consolidated financial statements.
4
TRIPATH TECHNOLOGY INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Six months ended
June 30,
2003 2002
---- ----
Cash flows from operating activities:
Net loss............................................................ $ (4,293) $ (13,320)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................... 634 737
Allowance for doubtful accounts................................. - 127
Provision for excess inventory.................................. - 4,977
Stock-based compensation........................................ 8 588
Deferred rent................................................ 356 -
Changes in assets and liabilities:
Accounts receivable........................................ (831) (4,450)
Inventories............................................. 1,593 3,064
Prepaid expenses and other assets............................ 665 477
Accounts payable............................................. (780) (1,439)
Accrued expenses............................................. (330) 275
Deferred distributor revenue................................. 585 201
-------------- -----------
Net cash used in operating activities....................... (2,393) (8,763)
-------------- -----------
Cash flows from investing activities:
Sale of short-term investments..................................... - 1,100
Purchase of property and equipment................................. (52) (243)
Restricted Cash.................................................... 486 -
-------------- -----------
Net cash provided by investing activities................... 434 857
-------------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net................................ 55 19,708
Proceeds from issuance of common stock through ESPP 6 -
Principal payments on capital lease obligations.................... (98) (175)
-------------- -----------
Net cash used in/provided by financing activities........... (37) 19,533
-------------- -----------
Net (decrease)increase in cash and cash equivalents.................... (1,996) 11,627
Cash and cash equivalents, beginning of period......................... 10,112 3,997
-------------- -----------
Cash and cash equivalents, end of period............................... $ 8,116 $ 15,624
============= ==========
The accompanying notes are an integral part of these condensed
interim consolidated financial statements.
5
Tripath Technology Inc.
Notes to Condensed Interim Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The unaudited condensed interim consolidated financial statements included
herein have been prepared by Tripath Technology Inc. (the "Company") in
accordance with accounting principles generally accepted in the United States of
America and reflect all adjustments, consisting of normal recurring adjustments,
which in the opinion of management are necessary to state fairly the Company's
financial position, results of operations and cash flows for the periods
presented. These interim financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K, as amended, for the year ended December
31, 2002. The Company's fiscal year-end and fourth quarter ends on December 31,
whereas the Company's first, second and third quarter ends on the Sunday closest
to the calendar month end date. For presentation purposes, the Company has
indicated that its second quarter ended on June 30, whereas in fact, the
Company's second quarter of fiscal 2003 ended on June 29, 2003. The Company's
second quarter of fiscal 2002 ended on June 30, 2002. The results of operations
for the three and six months ended June 30, 2003 are not necessarily indicative
of the results to be expected for any subsequent quarter or for the entire year.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates, and such differences
may be material to the financial statements.
The unaudited condensed interim consolidated financial statements include the
accounts of the Company and its wholly-owned Japanese subsidiary, which was
incorporated in January 2001. All significant intercompany balances and
transactions have been eliminated in consolidation. The U.S. dollar is the
functional currency for the Company's Japanese wholly-owned subsidiary. Assets
and liabilities that are not denominated in the functional currency are
remeasured into U.S. dollars and the resulting gains or losses are included in
"Interest and other income, net." Such gains or losses have not been material
for any period presented.
The Company's unaudited condensed interim consolidated financial statements have
been prepared on the basis of a going concern, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company's former independent accountants included an
explanatory paragraph in their audit report on the Company's consolidated
financial statements for the fiscal year ended December 31, 2002, which
indicates that the Company has suffered recurring losses from operations and has
an accumulated deficit that raises substantial doubt about the Company's ability
to continue as a going concern.
To conserve cash, the Company has implemented cost cutting measures, and in
August 2001, implemented a restructuring program. In addition, on January 24,
2002, the Company completed a financing in which it raised $21 million in gross
proceeds through a private equity placement and in July 2002, the Company
entered into a credit agreement with a financial institution that provided for a
one-year revolving credit facility of up to $10 million, subject to certain
restrictions in the borrowing base based on eligibility of receivables. The
credit agreement expired on June 30, 2003 and has not been renewed.
If liquidity problems should arise, the Company will, as a last resort, take
measures to reduce operating expenses such as reducing headcount or canceling
research and development projects. However, the Company may need to raise
additional funds to finance its activities next year and beyond through public
or private equity or debt financings, the formation of strategic partnerships or
alliances with other companies or through bank borrowings with existing or new
banks. The Company may not be able to obtain additional funds on terms that
would be favorable to its stockholders and the Company, or at all.
The Company believes, based on its ability to implement the aforementioned
measures, if needed, that it will have liquidity sufficient to meet its
operating, working capital and financing needs for the next twelve months and
perhaps beyond. The Company has not made any adjustment to its consolidated
financial statements as a result of the outcome of the uncertainty described
above.
2. Revenue recognition
The Company recognizes revenue from product sales upon shipment to original
equipment manufacturers and end users, net of sales returns and allowances. The
Company's sales to distributors are made under arrangements allowing limited
rights of return, generally under product warranty provisions, stock rotation
rights and price protection on products unsold by the distributor. In addition,
the distributor may request special pricing and allowances which may be granted
subject to approval by the Company. As a result of these returns rights and
potential pricing adjustments, except in very limited circumstances, the Company
defers recognition on sales to distributors until products are resold by the
distributor to the end user. Revenue may be recognized when sold to a
distributor when the distributor has no right of return.
6
3. Net loss per share
Basic net loss per share is computed by dividing the net loss available to
common stockholders for the period by the weighted average number of common
stock outstanding during the period. Diluted net loss per share is computed
based on the weighted average number of common stock and dilutive potential
common stock outstanding. The calculation of diluted net loss per share excludes
potential common stock if the effect is anti-dilutive. Potential common stock
consist of incremental common stock issuable upon the exercise of stock options,
shares issuable upon conversion of convertible preferred stock and common stock
issuable upon the exercise of common stock warrants.
Total potential common stock of 10,145,000 and 10,027,000 shares were not
included in the diluted net loss per share calculation for the three and
six-month periods ended June 30, 2003, respectively, because to do so would be
anti-dilutive. For the three and six month periods ended June 30, 2002,
7,886,000 and 7,284,000 shares of potential common stock were excluded from the
calculation of diluted net loss per share because they were anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per
share for the periods presented (in thousands, except per share amounts):
Three months ended Six months ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Numerator:
Net loss $ (1,816) $ (4,013) $ (4,293) $ (28,272)
============ ========== ========= ===========
Denominator:
Weighted average common stock 42,631 41,308 41,999 36,278
============ ========== ========= ===========
Net loss per share:
Basic and diluted $ (0.04) $ (0.10) $ (0.10) $ (0.78)
============ ========== ========= ===========
7
4. Deferred stock-based compensation
In connection with certain employee stock option grants and issuance of
restricted stock to an officer made since January 1998, the Company recognized
deferred stock-based compensation, which is being amortized over the vesting
periods of the related options and stock, generally four years, using an
accelerated basis. The fair value per share used to calculate deferred
stock-based compensation was derived by reference to the convertible preferred
stock issuance prices. Future compensation charges are subject to reduction for
any employee who terminates employment prior to such employee's option vesting
date.
The Company has granted options to purchase shares of common stock to
consultants in exchange for services. The Company determined the value of the
options granted to consultants based on the Black-Scholes option pricing model.
The following table sets forth, for each of the periods presented, the deferred
stock-based compensation recorded and the amortization of deferred stock-based
compensation (in thousands):
Three months ended Six months ended
June 30 June 30
------- -------
2003 2002 2003 2002
---- ---- ---- ----
Deferred stock-based compensation $ 320 $ (135) $ 232 $ (169)
Amortization of deferred stock-based compensation $ 44 $ 241 $ 8 $ 588
Unamortized deferred stock-based compensation at June 30, 2003 and
December 31, 2002 was $ 315,000 and $91,000 respectively.
5. Accounting for stock-based compensation
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations. No stock-based employee
compensation cost is reflected in net income for the periods ended June 30, 2003
and 2002, as all options granted under those plans had an exercise price no less
than the market value of the underlying common stock on the date of grant.
The following table illustrates the effect on net loss and loss per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, "Accounting for Stock-Based Compensation" to stock-based
employee compensation.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
Net loss applicable to common stockholders, as reported.................. (1,816) (4,013) (4,293) (28,272)
Total stock-based employee compensation expense included in the net loss,
determined under the recognition and measurement principles of APB
Opinion No. 25, net of related tax effects............................ 44 240 8 588
Total stock-based employee compensation expense determined under fair
value based method for all awards, net of related tax effects.......... (162) (787) (256) (2,396)
------- -------- -------- -------
Pro forma net loss applicable to common stockholders..................... $ (1,934) $ (4,560) $ (4,541) $ (30,080)
========= ========= ======== =========
As reported..............................................................
$ (0.04) $ (0.10) $ (0.10) $ (0.78)
=========== ========== ======== =========
Pro forma................................................................
$ (0.05) $ (0.11) $ (0.11) $ (0.83)
=========== ========== ========== =========
8
6. Cash, cash equivalents and restricted cash
The Company considers all highly liquid investments with a maturity of three
months or less from the date of purchase to be cash equivalents. Cash and cash
equivalents consist of cash on deposit with banks, money market funds and
commercial paper, bonds and notes, the fair value of which approximates cost.
The Company categorizes short-term investments as available-for-sale.
Accordingly these investments are carried at fair value. The Company had no
short-term investments as of June 30, 2003 or December 31, 2002.
The Company had a credit facility with a financial institution that had certain
restrictions in the borrowing base. The amount by which the aggregate face
amount of all outstanding stand-by letters of credit exceeded the borrowing
base, as determined by eligible receivables, represented the amount of
restricted cash necessary to secure the letters of credit. At June 30, 2003, the
Company had no restricted cash. The credit agreement expired on June 30, 2003
and has not been renewed.
7 . Concentration of credit risk and significant customers
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents and short-term
investments. Substantially all of the Company's cash and cash equivalents are
invested in highly-liquid money market funds and commercial securities with
major financial institutions. Short-term investments consist of U.S. government
and commercial bonds and notes. The Company sells its products principally to
original equipment manufacturers and distributors. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
credit losses, as considered necessary by management. Credit losses to date have
been consistent with management's estimates. During the quarters ended June 30,
2003 and 2002, the Company had minimal bad debts write-offs.
The following table summarizes sales to end customers comprising 10% or more of
the Company's total revenue for the periods indicated:
% of Revenue for the Three % of Revenue for the Six
Months Ended June 30 Months Ended June 30
-------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Customer A 10% 1% 7% 0%
Customer B 12% 28% 19% 29%
Customer C 20% 3% 20% 2%
Customer D 11% 2% 11% 3%
The Company's accounts receivable were concentrated with four customers at June
30, 2003 representing 29%, 16%, 11% and 10% of aggregate gross receivables, four
customers at June 30, 2002 representing 25%, 17%, 15% and 11% of aggregate gross
receivables.
8. Inventories
Inventories are stated at the lower of cost or market. This policy requires the
Company to make estimates regarding the market value of the Company's inventory,
including an assessment of excess or obsolete inventory. The Company determines
excess and obsolete inventory based on an estimate of the future demand and
estimated selling prices for the Company's products within a specified time
horizon, generally 12 months. The estimates the Company uses for expected demand
are also used for near-term capacity planning and inventory purchasing and are
consistent with the Company's revenue forecasts. Actual demand and market
conditions may be different from those projected by the Company's management. If
the Company's unit demand forecast is less than the Company's current inventory
levels and purchase commitments during the specified time horizon, or if the
estimated selling price is less than the Company's inventory value, the Company
will be required to take additional excess inventory charges or write-downs to
net realizable value which will decrease the Company's gross margin and net
operating results in the future. During the quarter ended March 31, 2002, the
Company recorded a provision for excess inventory of approximately $5 million
related to excess inventory for the Company's TA2022 product as a result of a
decrease in forecasted sales for this product.
9
Inventories are comprised of the following (in thousands):
June 30, December 31,
2003 2002
------------ ------------
Raw materials $ 166 $ 1,868
Work-in-process 580 551
Finished goods 2,234 2,409
Inventory held by distributors 679 424
------------ ------------
Total $ 3,659 $ 5,252
============ ============
9. Segment and geographic information
The Company has determined that it has one reportable business segment: the
design, license and marketing of integrated circuits.
The following is a geographic breakdown of the Company's sales by shipping
destination for the following periods:
Three Months Ended Six Months Ended
June 30 June 30
---------------------------------------- -------------------------------------------
2003 2002 2003 2002
------------ --------- ---------- -----------
Europe $ 353 $ 62 $ 507 $ 96
Korea 610 532 967 1,128
United States 282 186 470 258
Japan 1,261 710 2,500 2,079
Singapore 207 1,547 512 1,884
Taiwan 184 853 618 1,906
China 238 2,162 513 3,256
Rest of World 4 -- 4 --
------------ --------- ---------- -----------
$ 3,139 $ 6,052 $ 6,091 $ 10,607
============ ========= ========== ===========
Approximately 77% and 63% of the Company's total revenue for the three months
ended June 30, 2003 and June 30, 2002, respectively, were derived from sales
directly to end customers based outside the United States. Similarly, for the
six months ended June 30, 2003 and June 30, 2002, respectively, sales directly
to end customers based outside the United States were approximately 73% and 63%.
10. Line of credit
On July 12, 2002, the Company entered into a credit agreement with a financial
institution that provided for a one-year revolving credit facility in an amount
of up to $10 million, subject to certain restrictions in the borrowing base
based on eligibility of receivables. The credit agreement expired on June 30,
2003 and has not been renewed.
The credit agreement was used to issue stand-by letters of credit totaling $0.7
million to collateralize the Company's obligations to a third party for the
purchase of inventory and to provide a security deposit for the lease of new
office space. Upon the expiration of the credit agreement on June 30, 2003, the
Company entered into a Pledge and Security Agreement to provide collateral for
the outstanding standby letters of credit, which totaled $0.7 million at June
30, 2003.
10
11. Commitments and contingencies
Lease commitments: The Company leases office space and equipment under
non-cancelable operating leases. The Company also has a capital lease for
research and development related software.
Our total potential commitments on our operating leases and inventory purchases
as of June 30, 2003, were as follows (in thousands):
As of June 30, 2003 Operating Leases Capital Lease Inventory
Purchase
Commitments
----------------- ----------------- -----------------
2003 $ 316 $ 160 $ 2,699
2004 932 406 --
2005 1,083 408 --
2006 1,046 -- --
2007 270 -- --
--------------- --------------- ---------------
Total minimum lease payments $ 3647 $ 974 $ 2,699
=============== ===============
Less: amount representing interest (110)
---------------
Present value of minimum lease payments 864
Less: current portion of capital lease obligations (275)
---------------
Long-term capital lease obligations $ 589
===============
Contingencies: From time to time, in the normal course of business, various
claims could be made against the Company. At June 30, 2003, there were no
pending claims the outcome of which is expected to result in a material adverse
effect on the financial position or results of operations of the Company.
12. Guarantees
In November 2002, the FASB issued FIN No. 45 "Guarantor's Accounting and
Disclosure Requirements for Guarantees, including Indirect Guarantees of
Indebtedness of Others -- an interpretation of FASB Statements No. 5, 57 and 107
and rescission of FIN 34." The following is a summary of the Company's
agreements that the Company has determined are within the scope of FIN 45.
The Company provides a limited warranty for up to one year for any defective
products. During the quarter ended June 30, 2003 and for the year ended December
31, 2002, warranty expense was insignificant. The Company has a reserve for
warranty costs of $30,000, which has not changed in the past quarter.
On June 30, 2003, the Company entered into a Pledge and Security Agreement to
provide collateral for outstanding standby letters of credit totaling $0.7
million at June 30, 2003.
Pursuant to its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director serving in such capacity. The term of the indemnification period is
for the officer's or director's lifetime. To date, the Company has not incurred
any costs as there have been no lawsuits or claims that would invoke these
indemnification agreements. Accordingly, the Company has no liabilities recorded
for these agreements as of June 30, 2003.
The Company enters into indemnification provisions under (i) its agreements with
other companies in its ordinary course of business, typically with business
partners, contractors and customers, its sublandlord and (ii) its agreements
with investors. Under these provisions the Company has agreed to generally
indemnify and hold harmless the indemnified party for losses suffered or
incurred by the indemnified party as a result of the Company's activities or, in
some cases, as a result of the indemnified party's activities under the
agreement. These indemnification provisions often include indemnifications
relating to representations made by the Company with regard to intellectual
property rights. These indemnification provisions generally survive termination
of the underlying agreement. The maximum potential amount of future payments the
Company could be required to make under these indemnification provisions is
unlimited. To date, the Company has not incurred any costs as there have been no
lawsuits or claims related to these indemnification agreements. Accordingly, the
Company has no liabilities recorded for these agreements as of June 30, 2003.
11
13. Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company adopted FIN 46 on
January 1, 2003. The adoption of this standard did not have a material impact on
the Company's consolidated financial statements.
In June 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." ("SFAS 149") SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. The Company anticipates that the adoption of this statement
will not have a material impact on the company's consolidated financial
statements.
In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." ("SFAS 150")
SFAS 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company anticipates the adoption of
this statement and will not have a material impact on the Company's consolidated
financial statements.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This report contains forward looking statements (as such term is defined in
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934) and information relating to us that are based on the
beliefs of our management as well as assumptions made by and information
currently available to our management. In addition, when used in this report,
the words "likely," "will," "suggests," "target," "may," "would," "could,"
"anticipate," "believe," "estimate," "expect," "intend," "plan," "predict," and
similar expressions and their variants, as they relate to us or our management,
may identify forward looking statements. Such statements reflect our judgment as
of the date of this quarterly report on Form 10-Q with respect to future events,
the outcome of which are subject to certain known and unknown risks and
uncertainties, including the factors discussed under the caption "Risk Factors,"
and those discussed elsewhere in this quarterly report on Form 10-Q, which may
have a significant impact on our business, operating results or financial
condition. Investors are cautioned that these forward looking statements are
inherently uncertain. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results or
outcomes may vary materially from those described herein. Although we believe
that the expectations reflected in these forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of these forward looking
statements. All forward looking statements included in this report are based on
information available to us as of the date of this report. We undertake no
obligation to update or revise any forward looking statements, whether as a
result of new information, future events or otherwise, unless we are required to
do so by law.
The following discussion and analysis should be read in connection with the
condensed consolidated financial statements and the notes thereto included in
Item 1 in this quarterly report and our annual report on Form 10-K, as amended
on April 30, 2003, for the year ended December 31, 2002.
Critical Accounting Policies
Use of Estimates: Management's discussion and analysis of financial condition
and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to product returns, warranty obligations, bad
debts, inventories, accruals, stock options, warrants, and income taxes
(including the valuation allowance for deferred taxes). We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. Material differences may
occur in our results of operations for any period if we made different judgments
or utilized different estimates.
Revenue Recognition: We recognize revenue from product sales upon shipment to
original equipment manufacturers and end users, net of reserves for estimated
returns and allowances, provided that persuasive evidence of an arrangement
exists, the price is fixed, title has transferred, collectibility of resulting
receivables is reasonably assured, there are no acceptance requirements and
there are no remaining significant obligations. Sales to distributors are made
under arrangements allowing limited rights of return, generally under product
warranty provisions, stock rotation rights and price protection on products
unsold by the distributor. In addition, the distributor may request special
pricing and allowances which may be granted subject to approval by us. As a
result of these returns rights and potential pricing adjustments, except in very
limited circumstances we defer recognition on sales to distributors until
products are resold by the distributor to the end user. Revenue may be
recognized when sold to a distributor when the distributor has no rights of
return.
Inventories: Inventories are stated at the lower of cost or market. This policy
requires us to make estimates regarding the market value of our inventory,
including an assessment of excess or obsolete inventory. We determine excess and
obsolete inventory based on an estimate of the future demand and estimated
selling prices for our products within a specified time horizon, generally 12
months. The estimates we use for expected demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue
forecasts. Actual demand and market conditions may be different from those
projected by our management. If our unit demand forecast is less than our
current inventory levels and purchase commitments during the specified time
horizon, or if the estimated selling price is less than our inventory value, we
will be required to take additional excess inventory charges or write-downs to
net realizable value, which will decrease our gross margin and net operating
results in the future. During the quarter ended March 31, 2002, we recorded a
provision for excess inventory of approximately $5 million related to excess
inventory for our TA2022 product as a result of a decrease in forecasted sales
for this product.
13
Three months ended June 30, 2003 and 2002
Revenue. Revenue for the three months ended June 30, 2003 was $3.1 million, a
decrease of $3 million or 49% from revenues of $6.1 million for the three months
ended June 30, 2002. The decrease in revenue resulted primarily from a decrease
in sales of our TA1101 and 2024 products to Apple Computer and decreased sales
of our TA2020, TA2022 and TA3020 digital audio amplifiers primarily in China due
to decreased demand in the low-end DVD receiver market.
Sales to Apple Computer and Kyoshin Technosonic Co., Ltd., (KTS) accounted for
approximately 12% and 20%, respectively, of revenue in the three months ended
June 30, 2003 and 28% and 3%, respectively, in the corresponding prior year
quarter. Sales to our five largest customers represented approximately 60% of
revenue in the three months ended June 30, 2003 and 82% of revenue in the three
months ended June 30, 2002.
Gross Profit (Loss). Gross profit for the three months ended June 30, 2003 was
$919,000 (including stock-based compensation expense of $1,000), compared with a
gross profit of $810,000 (including stock-based compensation expense of $10,000)
for the three months ended June 30, 2002. The increase in the gross profit for
the three months ended June 30, 2003 reflects ongoing product cost reduction
efforts as well as improved pricing.
Research and Development. Research and development expenses for the three months
ended June 30, 2003 were $1.6 million (including stock-based compensation
expense of $17,000), a decrease of $1.7 million or 52% from $3.3 million
(including stock-based compensation expense of $148,000) for the three months
ended June 30, 2002. The year over year decrease for the three month periods
resulted from a decrease in personnel costs, a decrease in product development
expenses and lower expenses related to rent and overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2003 were $1.1
million (including stock-based compensation expense of $26,000) a decrease of
$400,000 from $1.5 million (including stock-based compensation expense of
$83,000) for the three months ended June 30, 2002. Selling general and
administrative expenses decreased year over year due to decreased headcount and
related costs and lower expenses related to rent, insurance and bad debts.
Six months ended June 30, 2003 and 2002
Revenue. Revenue for the six months ended June 30, 2003 was $6.1 million, a
decrease of $4.5 million or 42% from revenues of $10.6 million for the six
months ended June 30, 2002. The decrease in revenue resulted primarily from a
decrease in sales of our TA1101 and TA 2024 products to Apple Computer, and
decreased sales of TA2020, TA2022 and TA3020 digital audio amplifiers primarily
in China due to decreased demand in the low-end DVD receiver market.
Sales to Apple Computer and Kyoshin Technosonic Co., Ltd., (KTS) accounted for
approximately 19% and 20%, respectively, of revenue in the six months ended June
30, 2003 and 29% and 2%, respectively, in the corresponding six month period.
Sales to our five largest customers represented approximately 60% of revenue in
the six months ended June 30, 2003 and 83% of revenue in the six months ended
June 30, 2002.
Gross Profit (Loss). Gross profit for the six months ended June 30, 2003 was
$1.7 million (including stock-based compensation expense of $3,000), compared
with a gross loss of $3.2 million (including stock-based compensation expense of
$23,000) for the six months ended June 30, 2002. The increase in the gross
profit for the three months ended June 30, 2003 reflects ongoing product cost
reduction efforts, improved pricing and due to a $5 million provision for excess
and obsolete inventory (TA 2022), recorded during the first quarter of 2002.
Research and Development. Research and development expenses for the six months
ended June 30, 2003 were $3.6 million (including stock-based compensation
expense of $34,000), a decrease of $3.3 million or 48% from $6.9 million
(including stock-based compensation expense of $360,000) for the six months
ended June 30, 2002. The year over year decrease for the six month periods
resulted from a decrease in personnel costs, a decrease in product development
expenses and lower expenses related to rent and overhead.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 2003 were $2.4 million
(including stock-based compensation benefit of $29,000) a decrease of $1.0
million from $3.4 million (including stock-based compensation expense of
$205,000) for the six months ended June 30, 2002. Selling general and
administrative expenses decreased year over year due to decreased headcount and
related costs and lower expenses related to rent insurance and bad debts.
14
Liquidity and Capital Resources
Since our inception, we have financed our operations through the private sale of
our equity securities, primarily the sale of preferred stock, through our
initial public offering on August 1, 2000 and through a private placement in
January 2002. Net proceeds to us as a result of our initial public offering and
our private placement were approximately $45.4 million and $19.9 million,
respectively.
Net cash used in operating activities decreased from $8.8 million for the six
months ended June 30, 2002 to $2.4 million for the six months ended June 30,
2003. The $6.4 million decrease was primarily due to a $9.0 million reduction in
net loss, which was net of a provision for excess inventory of $5.0 million
during the six months ended June 30, 2002, plus lower levels of accounts
receivable, inventories, accounts payable and other working capital items. Under
the current building lease agreement we did not pay any cash during the first
seven months of 2003. However, beginning August 1, 2003 we will be required to
pay approximately $42,000 per month.
Net cash provided by investing activities decreased to $0.4 million for the six
months ended June 30, 2003 as compared to $0.9 million for the six months ended
June 30, 2002. The decrease was due to a decrease in sale of short-term
investments offset by an increase in restricted cash.
Cash used in financing activities for the six months ended June 30, 2003 was
$37,000 as compared to $19.5 million cash provided by for the six months ended
June 30, 2002. We completed a financing in January 2002 and raised $21 million
in gross proceeds through a private placement.
At June 30, 2003, we had approximately $8.1 million in cash and net working
capital of approximately $10.4 million with which to fund current operations.
We entered into a credit agreement with a financial institution that provided
for a one year revolving credit facility in an amount of up to $10 million
subject to certain restrictions in the borrowing base based on eligibility of
receivables. The credit agreement expired on June 30, 2003 and has not been
renewed.
Our total potential commitments on our operating leases and inventory purchases
as of June 30, 2003, were as follows (in thousands):
As of June 30, 2003 Operating Leases Capital Lease Inventory
Purchase
Commitments
----------------- ---------------- -----------------
2003 $ 316 $ 160 $ 2,699
2004 932 406 --
2005 1,083 408 --
2006 1,046 -- --
2007 270 -- --
--------------- ---------------- ---------
Total minimum lease payments $ 3,647 $ 974 $ 2,699
=============== ==========
Less: amount representing interest (110)
----------------
Present value of minimum lease payments 864
Less: current portion of capital lease obligations
(275)
-----------------
$ 589
=================
We expect our future liquidity and capital requirements will fluctuate depending
on numerous factors including: market acceptance and demand for current and
future products, the timing of new product introductions and enhancements to
existing products, the success of on-going efforts to reduce our manufacturing
costs as well as operating expenses and need for working capital for such items
as inventory and accounts receivable.
If future revenues and gross margins do not meet our forecasts, we may take
measures to reduce our operating expenses, such as reducing headcount or
canceling research and development projects. However, we may need to raise
additional funds to finance our activities next year and beyond through public
or private equity or debt financings, the formation of strategic partnerships or
alliances with other companies or through bank borrowings with existing or new
banks. We may not be able to obtain additional funds on terms that would be
favorable to us and our stockholders, or at all.
15
We believe, based on our ability to implement the aforementioned measures, if
needed, that we will have liquidity sufficient to meet our operating, working
capital and financing needs for the next twelve months and perhaps beyond. We
have not made any adjustment to our consolidated financial statements as a
result of the outcome of the uncertainty described above. Our former independent
accountants included an explanatory paragraph in their audit report on our
consolidated financial statements for the fiscal year ended December 31, 2002
which indicates that we have suffered recurring losses from operations and have
an accumulated deficit that raises substantial doubt about our ability to
continue as a going concern.
Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. FIN 46 is effective
immediately for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We adopted FIN 46 on January 1,
2003. The adoption of this standard did not have a material impact on our
consolidated financial statements.
In June 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and
clarifies financial accounting and reporting for derivative instruments and for
hedging activities. SFAS 149 is effective for contracts entered into or modified
after June 30, 2003. We anticipate that the adoption of this statement will not
have a material impact on our consolidated financial statements.
In June 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (`SFAS 150')."
SFAS 150 establishes standards for how an issue classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. We anticipate the adoption of this
statement will not have a material impact on our consolidated financial
statements.
Risk Factors
Set forth below and elsewhere in this quarterly report and in the other
documents we file with the Securities and Exchange Commission are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward looking statements contained in this
quarterly report. Prospective and existing investors are strongly urged to
carefully consider the various cautionary statements and risks set forth in this
quarterly report and our other public filings.
Risks Related to Our Business
We have a history of losses, expect future losses and may never achieve or
sustain profitability.
As of June 30, 2003, we had an accumulated deficit of $176.7 million. We
incurred net losses of approximately $4.3 million in the six months ended June
30, 2003, $13.3 million (before accretion on preferred stock of $14.9 million)
in 2002 and $27.0 million in 2001. We may continue to incur net losses and these
losses may be substantial. Furthermore, we may continue to generate significant
negative cash flow in the future. We will need to generate substantially higher
revenue to achieve and sustain profitability and positive cash flow. Our ability
to generate future revenue and achieve profitability will depend on a number of
factors, many of which are described throughout this section. If we are unable
to achieve or maintain profitability, we will be unable to build a sustainable
business. In this event, our share price and the value of your investment would
likely decline and the Company might be unable to continue as a going concern.
We may need to raise additional capital to continue to grow our business, which
may not be available to us.
Because we have had losses, we have funded our operating activities to date from
the sale of securities, including our most recent financing in January 2002.
However, to grow our business significantly, we will need additional capital. We
cannot be certain that any such financing will be available on acceptable terms,
or at all. Moreover, additional equity financing, if available, would likely be
dilutive to the holders of our common stock, and debt financing, if available,
would likely involve restrictive covenants. If we cannot raise sufficient
additional capital, it would adversely affect our ability to achieve our
business objectives and to continue as a going concern.
16
Our former independent accountants have included a going concern explanatory
paragraph in their report on our consolidated financial statements.
Our former independent accountants have included an explanatory paragraph in
their audit report on our consolidated financial statements for the fiscal year
ended December 31, 2002, which indicates that we have suffered recurring losses
from operations and have an accumulated deficit that raises substantial doubt
about our ability to continue as a going concern. The inclusion of a going
concern explanatory paragraph in our independent auditor's audit report on our
consolidated financial statements for the fiscal year ended December 31, 2002
could have a detrimental effect on our stock price, and our ability to raise new
capital.
Our quarterly operating results are likely to fluctuate significantly and may
fail to meet the expectations of securities analysts and investors, which may
cause our share price to decline.
Our quarterly operating results have fluctuated significantly in the past and
are likely to continue to do so in the future. The many factors that could cause
our quarterly results to fluctuate include, in part:
- level of sales;
- mix of high and low margin products;
- availability and pricing of wafers;
- timing of introducing new products, including lower cost versions of
existing products, fluctuations in manufacturing yields and other
problems or delays in the fabrication, assembly, testing or delivery of
products; and
- rate of development of target markets.
A large portion of our operating expenses, including salaries, rent and capital
lease expenses, are fixed. If we experience a shortfall in revenues relative to
our expenses, we may be unable to reduce our expenses quickly enough to off-set
the reduction in revenues during that accounting period, which would adversely
affect our operating results. Fluctuations in our operating results may also
result in fluctuations in our common stock price. If the market price of our
stock is adversely affected, we may experience difficulty in raising capital or
making acquisitions. In addition, we may become the object of securities class
action litigation. As a result, we do not believe that period-to-period
comparisons of our revenues and operating results are necessarily meaningful.
One should not rely on the results of any one quarter as an indication of future
performance.
Our stock price may be subject to significant volatility.
The stock prices for many technology companies have recently experienced large
fluctuations, which may or may not be directly related to the operating
performance of the specific companies. Broad market fluctuations as well as
general economic conditions may cause our stock price to decline. We believe
that fluctuations of our stock price may continue to be caused by a variety of
factors, including:
- announcements of developments related to our business;
- fluctuations in our financial results;
- general conditions in the stock market or around the world,
terrorism or developments in the semiconductor and capital
equipment industry and the general economy;
- sales or purchases of our common stock in the marketplace;
- announcements of our technological innovations or new products or
enhancements or those of our competitors;
- developments in patents or other intellectual property rights;
- developments in our relationships with customers and suppliers;
- a shortfall or changes in revenue, gross margins or earnings or
other financial results from analysts' expectations or an outbreak
of hostilities or natural disasters; or
- acquisition or merger activity and the success in implementing
such acquisitions.
17
Our customers may cancel or defer product orders, which could result in excess
inventory.
Our sales are generally made pursuant to individual purchase orders that may be
canceled or deferred by customers on short notice without significant penalty.
Thus, orders in backlog may not result in future revenue. In the past, we have
had cancellations and deferrals by customers. Any cancellation or deferral of
product orders could result in us holding excess inventory, which could
seriously harm our profit margins and restrict our ability to fund our
operations. For example, during the quarter ended March 31, 2002, we recorded a
provision for excess inventory of approximately $5.0 million. We recognize
revenue upon shipment of products to the end customer. Although we have not
experienced customer refusals to accept shipped products or material
difficulties in collecting accounts receivable, such refusals or collection
difficulties are possible and could result in significant charges against
income, which could seriously harm our revenues and our cash flow.
Industry-wide overcapacity has caused and may continue to cause our results to
fluctuate, and such shifts could result in significant inventory write-downs and
adversely affect our relationships with our suppliers.
We must build inventory well in advance of product shipments. The semiconductor
industry is highly cyclical and in light of the current downturn, which has
resulted in excess capacity and overproduction, there is a risk that we could
continue to forecast inaccurately and produce excess inventories of our
products. As a result of such inventory imbalances, large future inventory
write-downs may occur due to excess inventory or inventory obsolescence. In
addition, any adjustment in our ordering patterns resulting from increased
inventory may adversely affect our suppliers' willingness to meet our demand, if
our demand increases in the future.
Our product shipment patterns make it difficult to predict our quarterly
revenues.
As is common in our industry, we frequently ship more products in the third
month of each quarter than in either of the first two months of the quarter, and
shipments in the third month are higher at the end of that month. We believe
this pattern is likely to continue. The concentration of sales in the last month
of the quarter may cause our quarterly results of operations to be more
difficult to predict. Moreover, if sufficient business does not materialize or a
disruption in our production or shipping occurs near the end of a quarter, our
revenues for that quarter could be materially reduced.
We rely on a small number of customers for most of our revenue and a decrease in
revenue from these customers could seriously harm our business.
A relatively small number of customers have accounted for most of our revenues
to date. Any reduction or delay in sales of our products to one or more of these
key customers could seriously reduce our sales volume and revenue and adversely
affect our operating results. In particular, sales to three large customers,
including Apple Computer Inc., Kyoshin Technosonic Co., Ltd., (KTS) and Samsung
Electronics Co., Ltd., accounted for approximately 19%, 20% and 11%,
respectively, of revenue for the six months ended June 30, 2003 and 29%, 2% and
3% respectively, in the corresponding six months ended June 30, 2002. Moreover,
sales to our five largest end customers represented approximately 60% revenue in
the six months ended June 30, 2003 and 83% of revenue in the six months ended
June 30, 2002. We expect that we will continue to rely on the success of our
largest customers and on our success in selling our existing and future products
to those customers in significant quantities. However, we cannot be sure that we
will retain our largest customers or that we will be able to obtain additional
key customers or replace key customers we may lose or who may reduce their
purchases.
We currently rely on sales of six products for a significant portion of our
revenue, and the failure of these products to be successful in the future could
substantially reduce our sales.
We currently rely on sales of our TA0105, TA1101B, TA2020, TA2024, TK2050 and
TLD4012 digital audio amplifiers to generate a significant portion of our
revenue. Sales of these products amounted to 90% of our revenue for the six
months ended June 30, 2003, 69% of our revenue in 2002 and 70% of our revenue in
2001. We have developed additional products and plan to introduce more products
in the future, but there can be no assurance that these products will be
commercially successful. Consequently, if our existing products are not
successful, our sales could decline substantially.
Our lengthy sales cycle makes it difficult for us to predict if or when a sale
will be made, to forecast our revenue and to budget expenses, which may cause
fluctuations in our quarterly results.
Because of our lengthy sales cycles, we may continue to experience a delay
between incurring expenses for research and development, sales and marketing and
general and administrative efforts, as well as incurring investments in
inventory, and the generation of revenue, if any, from such expenditures. In
addition, the delays inherent in such a lengthy sales cycle raise additional
risks of customer decisions to cancel or change product plans, which could
result in our loss of anticipated sales. Our new products are generally
incorporated into our customers' products or systems at the design stage. To try
and have our products selected for design into new products of current and
potential customers, commonly referred to as design wins, often requires
significant expenditures by us without any assurance of success. Once we have
achieved a design win, our sales cycle will start with the test and evaluation
of our products by the potential customer and design of the customer's equipment
to incorporate our products. Generally, different parts
18
have to be redesigned to incorporate our devices successfully into our
customers' products. The sales cycle for the test and evaluation of our products
can range from a minimum of three to six months, and it can take a minimum of an
additional six to nine months before a customer commences volume production of
equipment that incorporates our products. Achieving a design win provides no
assurance that such customer will ultimately ship products incorporating our
products or that such products will be commercially successful. Our revenue or
prospective revenue would be reduced if a significant customer curtails, reduces
or delays orders during our sales cycle, or chooses not to release products
incorporating our products.
The current general economic downturn in the semiconductor industry has lead and
may continue to lead to decreased revenue.
During 2001 and 2002, slowing worldwide demand for semiconductors has resulted
in significant inventory buildups for semiconductor companies. Presently, we
cannot predict with any degree of certainty how long the semiconductor industry
downturn will last or how severe the downturn will be. If the downturn continues
or worsens, we may experience greater levels of cancellations and/or push-outs
of orders for our products in the future, which could adversely affect our
business and operating results, including the possibility of additional
inventory write-downs, over a prolonged period of time. In addition, we reduced
our workforce since June 30, 2002 by approximately 28%, or about 22 people. If
we continue to reduce our workforce, it may adversely impact our ability to
respond rapidly to any renewed growth opportunities in the future.
We may experience difficulties in the introduction of new or enhanced products
that could result in significant, unexpected expenses or delay their launch,
which would harm our business.
Our failure or our customers' failure to develop and introduce new products
successfully and in a timely manner would seriously harm our ability to generate
revenues. Consequently, our success depends on our ability to develop new
products for existing and new markets, introduce such products in a timely and
cost-effective manner and to achieve design wins. The development of these new
devices is highly complex, and from time to time we have experienced delays in
completing the development and introduction of new products. The successful
introduction of a new product may currently take up to 18 months. Successful
product development and introduction depends on a number of factors, including:
- accurate prediction of market requirements and evolving standards;
- accurate new product definition;
- timely completion and introduction of new product designs;
- availability of foundry capacity;
- achieving acceptable manufacturing yields;
- market acceptance of our products and our customers' products; and
- market competition.
We cannot guarantee success with regard to these factors.
If we are unable to retain key personnel, we may not be able to operate our
business successfully.
We may not be successful in retaining executive officers and other key
management and technical personnel. A high level of technical expertise is
required to support the implementation of our technology in our existing and new
customers' products. In addition, the loss of the management and technical
expertise of Dr. Adya S. Tripathi, our founder, president and chief executive
officer, could seriously harm us. We do not have any employment contracts with
our employees.
The facilities of several of our key manufacturers and the majority of our
customers, are located in geographic regions with increased risks of natural
disasters and labor strikes.
Several key manufacturers and a majority of customers are located in the Pacific
Rim region. The risk of earthquakes in this region, particularly in Taiwan, is
significant due to the proximity of major earthquake fault lines. Earthquakes,
fire, flooding and other natural disasters in the Pacific Rim region likely
would result in the disruption of our foundry partners' assembly and testing
capacity and the ability of our customers to purchase our products. Labor
strikes or political unrest in these regions would likely also disrupt
operations of our foundries and customers. Any disruption resulting from such
events could cause significant delays in shipments of our products until we are
able to shift our manufacturing, assembly and testing from the affected
contractor to another third party vendor.
19
We cannot be sure that such alternative capacity could be obtained on favorable
terms, if at all. Moreover, any such disruptions could also cause significant
decreases in our sales to these customers until our customers resume normal
purchasing volumes.
Stockholders will incur additional dilution upon the exercise of warrants, and
management will have sole discretion to use the proceeds received from exercise
of these warrants.
To the extent that the warrants issued in connection with the January 2002
Series A financing are exercised, there will be additional dilution to your
shares. The warrants have a three year term and are exercisable at $1.95 per
share. If all of the warrants are exercised, we will be required to issue an
additional 3,328,760 shares of common stock, or approximately 8% of the common
stock outstanding as of June 30, 2003. If all of the warrants are exercised in
full, we would receive approximately $6.4 million in proceeds. Our management
will have sole discretion over use of these proceeds and may spend the proceeds
in ways with which our stockholders may not agree.
We may not be able to transfer our stock from the Nasdaq SmallCap Market to the
Nasdaq National Market which could have an adverse effect on the liquidity of
our common stock and our ability to sell additional common stock.
On August 13, 2002, we received a deficiency notice from the Nasdaq Stock
Market, or Nasdaq, for failing to maintain the Nasdaq National Market's minimum
$1 bid price requirement for continued listing for 30 consecutive trading days.
As we were unable to meet this requirement, we submitted an application to
Nasdaq and were subsequently granted approval to transfer to Nasdaq's SmallCap
Market. Stock trading on the Nasdaq SmallCap Market is typically less liquid and
usually involves larger variations between the bid and ask price than stock
trading on the Nasdaq National Market.
To remain listed on the Nasdaq SmallCap Market, we were required to meet the
minimum listing requirement that the bid price of our common stock close at
$1.00 per share or higher for a minimum of 10 consecutive trading days. On July
25, 2003, the Company regained compliance with the Nasdaq SmallCap Market
minimum listing requirement, as our common stock had closed at or above $1.00
per share for 10 consecutive trading days.
To transfer back to the Nasdaq National Market, the Company is required to meet
the initial listing criteria and undergo an initial listing review by the Nasdaq
Listing Qualifications Department. Alternatively, the Company may request a
hearing to transfer back to the National Market. There is no assurance that the
Company will meet the initial listing criteria or be approved by the Nasdaq
Listing Qualifications Department, or if a hearing on this issue is requested by
us and granted by Nasdaq, that we will be successful in our request to transfer
back to the National Market.
We believe that the current price of our common stock has reduced its effective
marketability because of the reluctance of many leading brokerage firms to
recommend low-priced stock to their clients. Certain investors view low-priced
stock as speculative and unattractive. In addition, a variety of brokerage house
policies and practices tend to discourage individual brokers within those firms
from dealing in low-priced stock. Such policies and practices pertain to the
payment of broker's commissions and to time-consuming procedures that make the
handling of low-priced stocks unattractive to brokers from an economic
standpoint.
In addition, because brokerage commissions on low-priced stock generally
represent a higher percentage of the stock price than commissions on
higher-priced stock, the current share price of our common stock can result in
individual stockholders paying transaction costs (commissions, markups or
markdowns) that represent a higher percentage of their total share value than
would be the case if the share price were substantially higher. This factor also
may limit the willingness of institutions to purchase our common stock at its
current low share price.
Terrorist attacks and threats, and government responses thereto, may negatively
impact all aspects of our operations, revenues, costs and stock price.
The threat of terrorist attacks involving the United States, the instability in
the Middle East, a decline in consumer confidence and continued economic
weakness and geo-political instability have had a substantial adverse impact on
the economy. If consumer confidence does not recover, our revenues may be
adversely impacted for fiscal 2003 and beyond. Moreover, any further terrorist
attacks involving the U.S., or any additional U.S. military actions overseas may
disrupt our operations or those of our customers and suppliers. These events
have had and may continue to have an adverse impact on the U.S. and world
economy in general and consumer confidence and spending in particular, which
could harm our sales. Any of these events could increase volatility in the U.S.
and world financial markets which could harm our stock price and may limit the
capital resources available to us and our customers or suppliers. This could
have a significant impact on our operating results, revenues and costs and may
result in increased volatility in the market price of our common stock.
20
We are subject to anti-takeover provisions that could delay or prevent an
unfriendly acquisition of our company.
Provisions of our restated certificate of incorporation, equity incentive plans,
bylaws and Delaware law may discourage transactions involving an unfriendly
change in corporate control. In addition to the foregoing, the stockholdings of
our officers, directors and
persons or entities that may be deemed affiliates and the ability of our board
of directors to issue preferred stock without further stockholder approval could
have the effect of delaying, deferring or preventing a third party from
acquiring us and may adversely affect the voting and other rights of holders of
our common stock.
Risks Related to Manufacturing
We depend on three outside foundries for our semiconductor device manufacturing
requirements.
We do not own or operate a fabrication facility, and substantially all of our
semiconductor device requirements are currently supplied by three outside
foundries, United Microelectronics Corporation, in Taiwan, STMicroelectronics
Group in Europe and Mitsubishi, in Japan. Although we primarily utilize these
three outside foundries, most of our components are not manufactured at these
foundries at the same time. As a result, each foundry is a sole source for
certain products. There are significant risks associated with our reliance on
outside foundries, including:
- the lack of guaranteed wafer supply;
- limited control over delivery schedules, quality assurance and
control, manufacturing yields and production costs; and
- the unavailability of or delays in obtaining access to key process
technologies.
In addition, the manufacture of integrated circuits is a highly complex and
technologically demanding process. Although we work closely with our foundries
to minimize the likelihood of reduced manufacturing yields, our foundries have
from time to time experienced lower than anticipated manufacturing yields,
particularly in connection with the introduction of new products and the
installation and start-up of new process technologies.
We provide our foundries with continuous forecasts of our production
requirements; however, the ability of each foundry to provide us with
semiconductor devices is limited by the foundry's available capacity. In many
cases, we place our orders on a purchase order basis, and foundries may allocate
capacity to the production of other companies' products while reducing the
deliveries to us on short notice. In particular, foundry customers that are
larger and better financed than us or that have long-term agreements with our
foundries may cause such foundries to reallocate capacity in a manner adverse to
us.
If we use a new foundry, several months would be typically required to complete
the qualification process before we can begin shipping products from the new
foundry. In the event either of our current foundries suffers any damage or
destruction to their respective facilities, or in the event of any other
disruption of foundry capacity, we may not be able to qualify alternative
manufacturing sources for existing or new products in a timely manner. Even our
current outside foundries would need to have certain manufacturing processes
qualified in the event of disruption at another foundry, which we may not be
able to accomplish in a timely enough manner to prevent an interruption in
supply of the affected products.
If we encounter shortages or delays in obtaining semiconductor devices for our
products in sufficient quantities when required, delivery of our products could
be delayed, resulting in customer dissatisfaction and decreased revenues.
We depend on third-party subcontractors for most of our semiconductor assembly
and testing requirements and any unexpected interruption in their services could
cause us to miss scheduled shipments to customers and to lose revenues.
Semiconductor assembly and testing are complex processes, which involve
significant technological expertise and specialized equipment. As a result of
our reliance on third-party subcontractors for assembly and testing of our
products, we cannot directly control product delivery schedules, which has in
the past, and could in the future, result in product shortages or quality
assurance problems that could increase the costs of manufacture, assembly or
testing of our products. Almost all of our products are assembled and tested by
one of five subcontractors: AMBIT Microsystems Corporation in Taiwan, Amkor
Technology, Inc. in the Philippines, ASE in Korea, Malaysia and Taiwan, SGS in
China, and ST Assembly Test Services Ltd. in Singapore. We do not have long-term
agreements with any of these suppliers and retain their services on a per order
basis. The availability of assembly and testing services from these
subcontractors could be adversely affected in the event a subcontractor suffers
any damage or destruction to their respective facilities, or in the event of any
other disruption of assembly and testing capacity. Due to the amount of time
normally required to qualify assemblers and testers, if we are required to find
alternative manufacturing assemblers or testers of our components, shipments
could be delayed. Any problems associated with the delivery, quality or cost of
our products could seriously harm our business.
Failure to transition our products to more effective and/or increasingly smaller
semiconductor chip sizes and packaging could cause us to lose our competitive
advantage and reduce our gross margins.
21
We evaluate the benefits, on a product-by-product basis, of migrating to smaller
semiconductor process technologies in order to reduce costs and have commenced
migration of some products to smaller semiconductor processes. We believe that
the transition of our products to increasingly smaller semiconductor processes
will be important for us to reduce manufacturing costs and to remain
competitive. Moreover, we are dependent on our relationships with our foundries
to migrate to smaller semiconductor processes successfully. We cannot be sure
that our future process migrations will be achieved without difficulties, delays
or increased expenses. Our gross margins would be seriously harmed if any such
transition is substantially delayed or inefficiently implemented.
Our international operations subject us to risks inherent in doing business on
an international level that could harm our operating results.
We currently obtain almost all of our manufacturing, assembly and test services
from suppliers located outside the United States and may expand our
manufacturing activities abroad. Approximately 77% of our total revenue for the
three months ended June 30, 2003 was derived from sales to end customers based
outside the United States. In 2002 and 2001, 63% and 59%, respectively, of our
total revenue was derived from sales to end customers based outside of the
United States. In addition, we often ship products to our domestic customers'
international manufacturing divisions and subcontractors.
Accordingly, we are subject to risks inherent in international operations, which
include:
- political, social and economic instability;
- trade restrictions and tariffs;
- the imposition of governmental controls;
- exposure to different legal standards, particularly with respect to
intellectual property;
- import and export license requirements;
- unexpected changes in regulatory requirements; and
- difficulties in collecting receivables.
All of our international sales to date have been denominated in U.S. dollars. As
a result, an increase in the value of the U.S. dollar relative to foreign
currencies could make our products less competitive in international markets.
Conversely, a decrease in the value of the U.S. dollar relative to foreign
currencies would increase the cost of our overseas manufacturing, which would
reduce our gross margins.
Risks Related to Our Product Lines
Our ability to achieve revenue growth will be harmed if we are unable to
persuade electronic systems manufacturers to adopt our new amplifier technology.
We face difficulties in persuading manufacturers to adopt our products using our
new amplifier technology. Traditional amplifiers use design approaches developed
in the 1930s. These approaches are still used in most amplifiers and engineers
are familiar with these design approaches. To adopt our products, manufacturers
and engineers must understand and accept our new technology. To take advantage
of our products, manufacturers must redesign their systems, particularly
components such as the power supply and heat sinks. Manufacturers must work with
their suppliers to obtain modified components and they often must complete
lengthy evaluation and testing. In addition, our amplifiers are often more
expensive as components than traditional amplifiers. For these reasons,
prospective customers may be reluctant to adopt our technology.
22
We currently depend on consumer audio markets that are typically characterized
by aggressive pricing, frequent new product introductions and intense
competition.
A substantial portion of our current revenue is generated from sales of products
that address the consumer audio markets, including home theater, computer audio
and the automotive audio markets. These markets are characterized by frequent
new product introductions, declining prices and intense competition. Pricing in
these markets is aggressive, and we expect pricing pressure to continue. In the
computer audio segment, our success depends on consumer awareness and acceptance
of existing and new products by our customers and consumers, in particular, the
elimination of externally-powered speakers. In the automotive audio segment, we
face pressure from our customers to deliver increasingly higher-powered
solutions under significant engineering limitations due to the size constraints
in car dashboards. In addition, our ability to obtain prices higher than the
prices of traditional amplifiers will depend on our ability to educate
manufacturers and their customers about the benefits of our products. Failure of
our customers and consumers to accept our existing or new products will
seriously harm our operating results.
If we are not successful in developing and marketing new and enhanced products
for the DSL high speed communications markets that keep pace with technology and
our customers' needs, our operating results will suffer.
The market for our DSL products is new and emerging, and is characterized by
rapid technological advances, intense competition and a relatively small number
of potential customers. This will likely result in price erosion on existing
products and pressure for cost-reduced future versions. We recently started to
ship our TA4012 DSL line driver in volume and are in the sampling phase of our
new dual channel line driver. Implementation of our products require
manufacturers to accept our technology and redesign their products. If potential
customers do not accept our technology or experience problems implementing our
devices in their products, our products could be rendered obsolete and our
business would be harmed. If we are unsuccessful in introducing future products
with enhanced performance, our ability to achieve revenue growth will be
seriously harmed.
We may experience difficulties in the development and introduction of a new
amplifier product for use in the cellular phone market, which could result in
significant expenses or delay in its launch.
We are currently developing an amplifier product for use in the cellular phone
market. We currently have no design wins or customers for this product. We may
not introduce our amplifier product for the cellular phone market on time, and
this product may never achieve market acceptance. Furthermore, competition in
this market is likely to result in price reductions, shorter product life
cycles, reduced gross margins and longer sales cycles compared with what we have
experienced to date with our other products.
Intense competition in the semiconductor industry and in the consumer audio and
communications markets could prevent us from achieving or sustaining
profitability.
The semiconductor industry and the consumer audio and communications markets are
highly competitive. We compete with a number of major domestic and international
suppliers of semiconductors in the audio and communications markets. We also may
face competition from suppliers of products based on new or emerging
technologies. Many of our competitors operate their own fabrication facilities
and have longer operating histories and presence in key markets, greater name
recognition, access to larger customer bases and significantly greater
financial, sales and marketing, manufacturing, distribution, technical and other
resources than us. As a result, such competitors may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements or
devote greater resources to the promotion and sale of their products than us.
Current and potential competitors have established or may establish financial or
strategic relationships among themselves or with existing or potential
customers, resellers or other third parties. Accordingly, it is possible that
new competitors or alliances among competitors could emerge and rapidly acquire
significant market share. In addition, existing or new competitors may in the
future develop technologies that more effectively address the transmission of
digital information through existing analog infrastructures at a lower cost or
develop new technologies that may render our technology obsolete. There can be
no assurance that we will be able to compete successfully in the future against
our existing or potential competitors, or that our business will not be harmed
by increased competition.
Our products are complex and may have errors and defects that are detected only
after deployment in customers' products, which may harm our business.
Products such as those that we offer may contain errors and defects when first
introduced or as new versions are released. We have in the past experienced such
errors and defects, in particular in the development stage of a new product.
Delivery of products with production defects or reliability, quality or
compatibility problems could significantly delay or hinder market acceptance of
such products, which could damage our reputation and seriously harm our ability
to retain our existing customers and to attract new customers. Moreover, such
errors and defects could cause problems, interruptions, delays or a cessation of
sales to our customers. Alleviating such problems may require substantial
redesign, manufacturing and testing which would result in significant
expenditures of capital and resources. Despite testing conducted by us, our
suppliers and our customers, we cannot be sure that errors and defects will not
be found in new products after commencement of commercial production. Such
errors and defects could result in additional development costs, loss of, or
delays in, market acceptance, diversion of technical and other resources from
our other development efforts, product repair or replacement costs, claims by
our customers or others against us or the loss of credibility with our current
and prospective customers. Any such event could result in the delay or loss of
market acceptance of our products and would likely harm our business.
23
Downturns in the highly cyclical semiconductor industry and rapid technological
change could result in substantial period-to-period fluctuations in wafer
supply, pricing and average selling prices, which make it difficult to predict
our future performance.
We provide semiconductor devices to the audio, personal computer and
communications markets. The semiconductor industry is highly cyclical and
subject to rapid technological change and has been subject to significant
economic downturns at various times, characterized by diminished product demand,
accelerated erosion of average selling prices and production overcapacity. The
semiconductor industry also periodically experiences increased demand and
production capacity constraints. As a result, we have experienced and may
experience in the future substantial period-to-period fluctuations in our
results of operations due to general semiconductor industry conditions, overall
economic conditions or other factors, many of which are outside our control. Due
to these risks, you should not rely on period-to-period comparisons to predict
our future performance.
Risks Related to Our Intellectual Property
Our intellectual property and proprietary rights may be insufficient to protect
our competitive position.
Our business depends, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws to protect our proprietary technologies. We cannot be sure that such
measures will provide meaningful protection for our proprietary technologies and
processes. As of June 30, 2003, we have 27 issued United States patents, and 15
additional United States patent applications which are pending. In addition, we
have 15 international patents issued and an additional 59 international patents
pending. We cannot be sure that any patent will issue as a result of these
applications or future applications or, if issued, that any claims allowed will
be sufficient to protect our technology. In addition, we cannot be sure that any
existing or future patents will not be challenged, invalidated or circumvented,
or that any right granted thereunder would provide us meaningful protection. The
failure of any patents to provide protection to our technology would make it
easier for our competitors to offer similar products. In connection with our
participation in the development of various industry standards, we may be
required to agree to license certain of our patents to other parties, including
our competitors, that develop products based upon the adopted standards.
We also generally enter into confidentiality agreements with our employees and
strategic partners, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, develop similar
technology independently or design around our patents. In addition, effective
copyright, trademark and trade secret protection may be unavailable or limited
in certain foreign countries. Some of our customers have entered into agreements
with us pursuant to which such customers have the right to use our proprietary
technology in the event we default in our contractual obligations, including
product supply obligations, and fail to cure the default within a specified
period of time.
We may be subject to intellectual property rights disputes that could divert
management's attention and could be costly.
The semiconductor industry is characterized by vigorous protection and pursuit
of intellectual property rights. From time to time, we may receive in the future
notices of claims of infringement, misappropriation or misuse of other parties'
proprietary rights. We cannot be sure that we will prevail in these actions, or
that other actions alleging infringement by us of third-party patents,
misappropriation or misuse by us of third-party trade secrets or the invalidity
of one or more patents held by us will not be asserted or prosecuted against us,
or that any assertions of infringement, misappropriation or misuse or
prosecutions seeking to establish the invalidity of our patents will not
seriously harm our business. For example, in a patent or trade secret action, an
injunction could be issued against us requiring that we withdraw particular
products from the market or necessitating that specific products offered for
sale or under development be redesigned. We have also entered into certain
indemnification obligations in favor of our customers and strategic partners
that could be triggered upon an allegation or finding of our infringement,
misappropriation or misuse of other parties' proprietary rights. Irrespective of
the validity or successful assertion of such claims, we would likely incur
significant costs and diversion of our management and personnel resources with
respect to the defense of such claims, which could also seriously harm our
business. If any claims or actions are asserted against us, we may seek to
obtain a license under a third party's intellectual property rights. We cannot
be sure that under such circumstances a license would be available on
commercially reasonable terms, if at all. Moreover, we often incorporate the
intellectual property of our strategic customers into our designs, and we have
certain obligations with respect to the non-use and non-disclosure of such
intellectual property.
We cannot be sure that the steps taken by us to prevent our, or our customers',
misappropriation or infringement of intellectual property will be successful.
24
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk of loss. Some of the securities that we
may acquire in the future may be subject to market risk for changes in interest
rates. To mitigate this risk, we plan to maintain a portfolio of cash
equivalents and short-term investments in a variety of securities, which may
include commercial paper, money market funds, government and non- government
debt securities. We manage the sensitivity of our results of operations to these
risks by maintaining a conservative portfolio, which is comprised solely of
highly-rated, short-term investments. We do not hold or issue derivative,
derivative commodity instruments or other financial instruments for trading
purposes. Currently we are exposed to minimal market risks. Due to the
short-term and liquid nature of our portfolio, fluctuations in interest rates
within historical norms would not materially affect its value nor our financial
condition.
Item 4. Controls and Procedures
Introduction. Rules promulgated under the Securities Exchange Act of 1934, as
amended, (the "Act") define "disclosure controls and procedures" to mean
controls and procedures that are designed to ensure that information required to
be disclosed by public companies in the reports filed or submitted under the Act
is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms ("Disclosure Controls"). New rules
promulgated under the Act define "internal control over financial reporting" to
mean a process designed by, or under the supervision of, a public company's
principal executive and principal financial officers, or persons performing
similar functions, and effected by such company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles ("GAAP"),
including those policies and procedures that (i) pertain to the maintenance of
records that in reasonable detail accurately and fairly reflect the transactions
and dispositions of the assets of the company, (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial
statements in accordance with GAAP, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company and (iii) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the company's assets that could have a material effect on the financial
statements ("Internal Controls").
We have designed our Disclosure Controls and Internal Controls to provide
reasonable assurances that their objectives will be met. A control system, no
matter how well designed and operated, can provide only reasonable, but not
absolute, assurance that its objectives will be met. All control systems are
subject to inherent limitations, such as resource constraints, the possibility
of human error and the possibility of intentional circumvention of these
controls. Furthermore, the design of any control system is based in part upon
assumptions about the likelihood of future events, which assumptions may
ultimately prove to be incorrect. As a result, we cannot assure you that our
control system will detect every error or instance of fraudulent conduct.
Evaluation of disclosure controls and procedures. Based on their evaluation as
of June 30, 2003, our chief executive officer and chief financial officer, with
the participation of management, have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934) were effective to ensure that the information required to
be disclosed by us in this quarterly report on Form 10-Q was recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and Form 10-Q.
Changes in internal controls. There were no changes in our internal controls
over financial reporting during the quarter ended June 30, 2003, that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.
25
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
..
The Company's Annual Meeting of Stockholders was held on June 16, 2003 in Santa
Clara, California. At the Annual Meeting, the stockholders were asked to vote on
six items. The results of the matters presented at the Annual Meeting, based on
the presence in person or by proxy of holders of 39,719,386 shares of common
stock or approximately 92% of the total outstanding shares as follows:
1. Dr. Tripathi and Messrs. Acharya, Jasuja and Fu were elected as directors of
Tripath until the 2004 Annual Meeting of Stockholders as follows:
Votes For Votes Withheld
Dr. Adya S. Tripathi.................... 38,970,931 748,455
A.K. Acharya............................ 38,847,401 871,985
Andy Jasuja............................. 39,017,278 702,108
Y.S. Fu................................. 38,885,235 834,151
2. The stockholders approved an amendment to the 2000 Stock Plan to increase the
number of shares of common stock reserved for issuance thereunder to
19,300,000. The proposal received 37,959,342 affirmative votes, 1,663,976
negative votes, and 96,068 abstentions.
3. The stockholders approved amendments to the Company's Amended and Restated
Certificate of Incorporation to effect a reverse stock-split. The proposal
received 37,852,309 affirmative votes, 1,781,859 negative votes, and 85,213
abstentions.
4. The stockholders approved the appointment of BDO Seidman LLP as independent
accountants of the Company for the fiscal year 2003. The proposal received
38,931,590 affirmative votes, 516,635 negative votes, and 271,161
abstentions.
5. Insufficient votes were received to approve an amendment to the Company's
Amended and Restated Certificate of Incorporation to provide for cumulative
voting. Approval of the amendment would have required the affirmative vote of
a majority of the shares outstanding. The proposal received 16,804,239
affirmative votes, 906,919 negative votes and 127,984 abstentions. The broker
non-vote totaled 21,880,244.
6. Insufficient votes were received to approve amendment to the Company's
Amended and Restated Certificate of Incorporation to allow for the removal of
directors in compliance with California corporate law. Approval of the
Certificate would have required the affirmative vote from at least 66 2/3% of
the shares outstanding. The proposal received 17,342,210 affirmative votes,
449,239 negative votes and 47,693 abstentions. The broker non-vote totaled
21,880,244.
In November 2002, the listing of our common stock was moved from the Nasdaq
National Market to the Nasdaq SmallCap Market. This transfer caused us to lose
our automatic exemption from certain sections of California corporate law
pursuant to Section 2115 of the California General Corporation Law ("CGCL").
Under Section 2115, certain corporations not organized under California law,
which have significant contacts with California and which are not otherwise
exempt from Section 2115 are subject to a number of key provisions of the CGCL.
Because the Company had significant contacts with California during the period
specified in Section 2115, the Company believes that it may be currently subject
to Section 2115.
Among other things, Section 2115 requires non-exempt companies operating within
the State of California to provide for cumulative voting for the election of
directors and to provide for the removal of directors only in the manner
prescribed in Section 303 of the CGCL. Accordingly, at the Annual Meeting we
sought to amend the Certificate to comply with these requirements. Although our
management voted in favor of both proposals, neither proposal was passed. If, at
the time of the 2004 Annual Meeting of Stockholders, the Company believes that
it remains subject to Section 2115, the Company will again present these
proposals to our stockholders.
26
Item 5. Other Information
Availability of this Report
The Company intends to make this quarterly report on Form 10-Q publicly
available on its web site (www.tripath.com) without charge immediately following
the filing of this report with the Securities and Exchange Commission. The
Company assumes no obligation to update or revise any forward-looking statements
in this quarterly report on Form 10-Q, whether as a result of new information,
future events or otherwise, unless it is required to do so by law.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index below.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the second quarter
of fiscal 2003:
(i) On August 1, 2003, we filed an amendment to our current report on Form
8-K under Item 12, originally filed on July 29, 2003, describing and
furnishing the script used in a conference call discussing our
financial results for the quarter ended June 30, 2003.
(ii) On July 29, 2003, we filed a current report on Form 8-K under Item 12,
describing and furnishing the press release announcing our earnings
for the quarter ended June 30, 2003, which press release included our
condensed consolidated balance sheets and statements of operations for
the period.
(iii) On May 15, 2003, we filed a current report on Form 8-K under Item 9
(furnishing information pursuant to Item 12), describing and
furnishing the press release announcing our earnings for the quarter
ended March 31, 2003, which press release included our condensed
consolidated balance sheets and statements of operations for the
period.
(iv) On May 9, 2003, we filed a current report on Form 8-K under Item 4,
announcing the appointment of BDO Seidman, LLP as the Company's
independent accountants.
(v) On April 17, 2003, we filed a current report on Form 8-K under Items 4
and 7, announcing the resignation of PricewaterhouseCoopers, LLP as
our independent accountants and filing the letter of
PricewaterhouseCoopers, LLP confirming the statements in the report.
27
SIGNATURE
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
undersigned, thereunto duly authorized.
Tripath Technology Inc.
Date: August 8, 2003
By: /s/ David P. Eichler
-------------------------------------
David P. Eichler
Vice President Finance and
Chief Financial Officer
Principal Financial and Accounting Officer
28
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1(1) Restated Certificate of Incorporation of Tripath Technology Inc.
3.2(1) Bylaws of Tripath Technology Inc.
3.3(2) Certificate of Designation of Preferences and Rights of Series A Preferred Stock.
4.1(1) Specimen Common Stock Certificate.
31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(a).
31.2 Certification required by Rule 13a-14(a) or Rule 15d-14(a).
32.1* Certification of the Chief Executive Officer and the Chief
Financial Officer of the Company, as required by Rule 13a-14(b)
or Rule 15d-14(b) and Section 1350 of Chapter 63 of Title 18 of
the United States Code (18 U.S.C. 1350).
- ----------------
* This certification accompanies the Form 10-Q to which it relates, is not
deemed filed with the SEC and is not to be incorporated by reference into
any filing of the Company under the Securities Act of 1933, as amended or
the Securities Exchange Act of 1934, as amended (whether made before or
after the date of the Form 10-Q), irrespective of any general
incorporation language contained in such filing.
(1) Incorporated by reference to the Registrant's Registration Statement
on Form S-1, registration number 333-35028, as amended.
(2) Incorporated by reference and the Registrant's Form 8-K filed on
January 30, 2002.
29
Exhibit 31.1
CERTIFICATIONS
I, Dr. Adya S. Tripathi, Ph.D., certify that:
1. I have reviewed this report on Form 10-Q of Tripath Technology Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
..
Date: August 8, 2003 /s/ Adya S. Tripathi
---------------------------------------
Adya S. Tripathi, Ph.D.
President and Chief Executive Officer
30
Exhibit 31.2
CERTIFICATIONS
I, David P. Eichler, certify that:
1. I have reviewed this report on Form 10-Q of Tripath Technology Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the
design or operation of internal controls over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal control over financial reporting.
..
Date: August 8, 2003 /s/ David P. Eichler
---------------------------------------
David P. Eichler
Vice President Finance and Chief
Financial Officer
31
Exhibit 32.1
CERTIFICATION
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.ss.1350, as
adopted), Dr. Adya S. Tripathi, Chief Executive Officer of Tripath Technology
Inc. (the "Company"), and David P. Eichler, Chief Financial Officer of the
Company, each hereby certify that, to the best of their knowledge:
1. The Company's quarterly report on Form 10-Q for the period ended June 30,
2003, to which this Certification is attached as Exhibit 32.1 (the "Periodic
Report") fully complies with the requirements of Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934; as amended and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition of the Company at the end of the
periods covered by the Periodic Report and the results of operations of the
Company for the periods covered by the Periodic Report.
In Witness Whereof, the undersigned have set their hands hereto as of the 8th
day of August, 2003.
/s/ Adya S. Tripathi /s/ David P. Eichler
------------------------ ---------------------------
Adya S. Tripathi, Ph. D. David P. Eichler
President and Chief Vice President Finance
Executive Officer and Chief Financial Officer
32