California Micro Devices 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: March 31, 2009
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES >EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-15449
CALIFORNIA MICRO DEVICES CORPORATION
(Exact name of registrant as specified in its charter)
Registrant’s telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or smaller reporting company. See the definitions of “accelerated filer", "large accelerated filer" and "smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes ¨ No x
The approximate aggregate market value of the registrant’s common stock held by non-affiliates as of September 30, 2008 (the last business day of the registrant’s most recently completed second fiscal quarter) was $69.4 million based on the closing price for the common stock on the NASDAQ National Market on such date. As of September 30, 2008, the number of shares of the registrant’s common stock outstanding held by non-affiliates was 23.2 million. For purposes of this disclosure, common stock held by persons who hold more than 10% of the outstanding voting shares and common stock held by executive officers and directors of the registrant have been excluded in that such persons may be deemed to be “affiliates” as that term is defined under the rules and regulations promulgated under the Securities Act of 1933. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of May 31, 2009, the number of shares of the registrant’s common stock, $0.001 par value, outstanding was 22,917,914.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement in connection with its 2009 Annual Meeting of Shareholders are incorporated by reference into Part III to the extent stated in Part III.
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This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products, based on a constant mix of products, will decline at the rate of 12% to 15% per year; (2) our having a target gross margin of 38% to 40%; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our having a long term target for research and development expenses of 9% to 10% of sales but expecting to exceed this target especially in the first half of fiscal 2010 driven by continuing development efforts for our products until sales increase substantially; (6) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially especially in the first half of fiscal 2010; (7) our expectation of future interest income to continue to be at a reduced level or even decline unless interest rates increase materially or we change the instruments in which we invest; (8) the size forecast by iSuppli Corporation for 2011 of the three markets we focus on; (9) our objective to be a leading supplier of protection devices for the mobile handset, digital consumer electronics and personal computer as well as high brightness light emitting diodes (HBLED) markets and of serial interface display electronics for the mobile handset market and our strategy to accomplish that objective; (10) our belief that the fiscal 2010 demand picture is beginning to improve as we believe revenue has bottomed and is likely to begin growing again in the second quarter of fiscal 2010 assuming increasing economic stability and seasonal growth in end demand ; (11) our expectation that our international sales will continue to represent a majority of our sales in the foreseeable future; and (12) our expectation that we will not pay within one year any of our liability for uncertain tax positions or associated interest and tax penalties. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our target markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful in developing new products which our customers will design into their products and whether our bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; whether we will incur any large unanticipated expenses; and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
In this report, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this report are the property of their respective owners.
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FORM 10-K FOR THE FISCAL YEAR ENDED MARCH 31, 2009
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ITEM 1. Business.
We design and sell application specific circuit protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets as well as application specific protection devices in the high brightness light emitting diodes (HBLED) market. These protection devices provide Electromagnetic Interference (EMI) filtering and/or Electrostatic Discharge (ESD) protection. Both types of protection devices are typically used to protect various interfaces, both external and internal, used in our customers’ products. Our protection products are built using our proprietary silicon manufacturing process technology and provide the function of multiple discrete passive components in a single silicon chip. They occupy significantly less space, cost our customers less on a total cost of ownership basis, offer higher performance and are more reliable than traditional solutions based on discrete passive components. Some of these devices also include active circuit analog elements that provide additional functionality.
We also offer serial interface display electronic devices for the mobile handset market. Our serial interface display controller products offer the industry’s smallest form factor plus unique audio and video features. Our display controllers are designed using industry standard complementary metal oxide semiconductor (CMOS) process technology.
End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products.
Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers.
We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.
We were incorporated in California in 1980 and have been a public company since 1986. On September 15, 2006, we reincorporated in Delaware.
Circuit protection devices are widely used in mobile handsets, digital consumer electronics and personal computers. The two most important protection functions are filtering out electromagnetic interference (EMI) and protecting against electrostatic discharge (ESD). The need for robust circuit protection has increased as data rates and processing speeds have increased resulting in the generation of increased levels of EMI and integrated circuits have become more susceptible to damage from ESD strikes as they have migrated to increasingly advanced process technologies. In addition, as the number of external and internal interfaces in these products has increased, the number of protection devices required has correspondingly increased.
The design of protection devices requires significant system design expertise and application knowledge combined with extensive circuit, device and process design skills. We have been developing and marketing EMI filters and ESD protection devices since the early 1990s and have introduced a number of major innovations in their design and application.
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As mobile handsets have incorporated increasingly higher resolution displays to enhance their multimedia capabilities, the traditional parallel data interface between the central processing unit or CPU and the display has become larger, consumed more power and generated more EMI. High speed serial interfaces solve many of these issues by reducing the number of electrical connections from as many as thirty to as few as four, making the display interface cable significantly smaller and less expensive. Additionally, by utilizing low voltage differential signaling, power consumption is dramatically reduced and EMI is effectively eliminated. High speed serial interfaces, including the Video Electronics Standard Association’s (VESA) Mobile Display Digital Interface (MDDI) standard for Code Division Multiple Access (CDMA) and Wideband CDMA (WCDMA) handsets and the Mobile Industry Processor Interface (MIPI) Alliance Display Serial Interface (DSI) standard for Global System for Mobile communications (GSM) handsets, are expected to replace traditional parallel interfaces for high resolution displays in mobile handsets.
We began to develop high speed serial interface display controllers for mobile handsets in 2004. We introduced our first product, based on the MDDI standard in October 2006. In December 2008, we introduced a MDDI to MIPI bridge controller that allows customers using a MDDI based CPU to interface to a MIPI based display module. Products in development include a serial interface display controller for the MIPI standard. Our products feature the industry’s smallest footprint, unique audio and video features and support for the control of other components in the display subsystem such as white LED backlight drivers and touch screen controllers.
Our Target Markets
The three high volume markets on which we focus are as follows, with all market size date from iSuppli Corporation:
The two major protection challenges facing designers of products for these markets are:
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In mobile handsets, both EMI filtering and ESD protection are commonly required for external interfaces while EMI filtering is commonly required for internal interfaces such as parallel interfaces between the baseband processor with the display and camera. The filtering requirements for the latter are especially stringent because of the high data rates employed.
In digital consumer electronics products and personal computers and peripherals, ESD protection featuring very low capacitance and matched impedance levels is essential due to the use of high speed digital interfaces such as HDMI, Display Port and USB 2.0 to interconnect them.
Our objective is to be a leading supplier of protection devices for the mobile handset, digital consumer electronics and personal computer as well as high brightness light emitting diodes (HBLED) markets and of serial interface display electronics for the mobile handset market. Our strategy includes the following key elements:
Develop Innovative Application Specific Products.> We identify specific applications that are important to our customers and develop products that are optimized for those applications based on leading edge technology.
Focus on Industry Leaders in Our Target Markets.> We target market and technology leaders in our target markets since we believe that products developed to meet their needs will be adopted by other customers as well and that doing business with the leaders will enhance our credibility as a supplier.
Broaden Product Offerings in Our Target Markets.> We plan to develop and/or acquire additional product lines for the markets we serve in order to leverage the customer relationships and channels that we have established. An example of this is our serial interface display controller product line which we developed internally.
Leverage Benefits of CSP.> Wherever applicable we plan to offer our products in CSP to provide our customers with solutions that have lower cost, smaller footprints and, in many cases, superior electrical performance.
Provide Superior Service to our Customers. >Because of our relatively small size and our tight market and customer focus, we believe that we can be more responsive to customer needs from product definition to delivery schedules than our larger competitors.
Outsource Manufacturing and Relentlessly Reduce Product Cost.> We believe that by outsourcing our manufacturing to partners who are specialists we can achieve greater flexibility and lower costs than our competitors who choose to invest in captive manufacturing capabilities. This is particularly true for wafer fabrication but applies to backend processing as well.
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EMI Filters with ESD Protection for Mobile Handsets.> We offer a broad portfolio of protection devices for the mobile handset market that combine EMI filtering with ESD protection. Consistent with our application specific approach, they are optimized for specific applications including: display interfaces, imager interfaces, and speaker, headphone and microphone interfaces; smart card interfaces, including Secure Digital (SD) and Multimedia Card (MMC), and subscriber identification module (SIM) card interfaces; and USB 2.0 interfaces. In order to meet the range of filter requirements represented by these applications, we offer a broad line of filters that are optimized for filter performance at different data rates and at different cost points. For example, our Praetorian® family of inductor based filters is designed to address the most demanding filtering requirements of high speed interfaces for high resolution color LCD displays and high resolution imager modules.
ESD Protection Devices for Mobile Handsets.> In addition to EMI filters with ESD protection, we also offer a line of ESD only protection devices for mobile handsets. These protection products provide ESD protection for a variety of applications including high speed serial data interfaces such as USB 2.0, MDDI and MIPI, keypad interfaces, battery terminals and antenna switches.
Standard ESD Protection Devices for Personal Computers.> We offer a broad portfolio of standard ESD protection devices that provide robust protection for a number of standard data interfaces found on desktop and notebook computers. Our standard ESD protection devices are typically designed with our CenturionTM zener architecture and provide high levels of ESD protection at lower levels of capacitance than traditional zener ESD protection devices. These products protect data interfaces such as USB, IEEE 1284 or parallel port, smart card interfaces and audio ports. In addition to data interfaces, we also provide devices that protect the keyboard, battery terminals and user interface devices such as buttons. Our products are available in traditional plastic packages as well as small form factor chipscale packaging.
Low Capacitance ESD Protection Devices for Digital Consumer Electronics and Personal Computers.> Our PicoGuardTM family of low capacitance ESD protection devices provides robust ESD protection without compromising signal integrity for high speed data interfaces such as USB 2.0, gigabit Ethernet, DisplayPort and Serial ATA. Our XtremeESDTM family of low capacitance protection devices including the PicoGuard XPTM and the PicoGuard XSTM architectures include devices with industry leading ESD protection and signal integrity. Our MediaGuardTM family of HDMI video port protector devices integrates PicoGuardTM low capacitance ESD protection with active analog components that provide voltage level shifting, backdrive and overcurrent protection. These devices protect HDMI interfaces in digital televisions, DVD players and recorders and digital set top boxes. Our MediaGuardTM and PicoGuard XSTM devices also offer significant advantages over discrete solutions in achieving HDMI compliance.
ESD Protection Devices for High Brightness Light Emitting Diodes (HBLEDs).> We offer a full portfolio of LuxGuardTM ESD protection devices that provide high levels of ESD protection for high brightness LEDs. High brightness LEDs are increasingly being utilized in a variety of lighting applications including: LCD display backlighting, automotive headlamps and cockpit lighting, wide area electronic signs and commercial and residential interior lighting. High power and high brightness LEDs are highly susceptible to damage from ESD strikes. In addition to ESD protection, our products can also provide a sub-mount for the LED within the lighting sub-assembly that can provide benefits of ease of handling in a manufacturing environment and improved thermal dissipation.
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Serial Interface Display Controllers. >The CM5100, our first serial interface display controller, based upon the MDDI standard, was introduced in October 2006. In 2008, we introduced CM5160, the industry’s first MDDI to MIPI bridge and display controller. The device enables advanced handsets that utilize CPUs and application processors with on-chip MDDI compatible hosts to interface with liquid crystal display (LCD) modules that feature either MDDI or MIPI™ compatible clients. Products in development include a serial interface display controller that will support the MIPI Alliance standard.
We target market and technology leaders in each of our markets. In fiscal 2009, 60% of our net sales came from the sale of our products directly to OEMs, ODMs and CEMs; and 40% came from the sale of our products through distributors. In fiscal 2009, two OEM customers, Samsung and Motorola, and one distributor, RSL Microelectronics Co. Ltd., each contributed more than 10% of our net sales.
Sales and Marketing
Our sales channels consist of a small direct sales force and a larger network of independent regional sales representatives and distributors managed by our sales force. Our direct sales force is headquartered in Milpitas, California with regional sales offices in the United States, Europe and Asia. Major mobile handset customers primarily buy our devices directly.
International sales, based on the location where we shipped the product, accounted for 87% of net sales in fiscal 2009. We use independent foreign sales representatives and distributors to provide international sales support, along with our employees based abroad. We expect that international sales will continue to represent a majority of our sales for the foreseeable future. Our sales are denominated in U.S. dollars. Refer to Item 7 of this Form 10-K for information related to sales by geographic region.
We are completely fabless and use several wafer foundries in Asia. We use third party independent subcontractors to perform CSP ball drop and the assembly and test of packaged products. These partners are located in China, India, Philippines, Taiwan and Thailand. Our LuxGuardTM ESD protection products for HBLED lighting applications typically ship to customers in wafer form.
As of March 31, 2009, we had $1.2 million of test and packaging equipment on consignment in India and $0.5 million of test equipment on consignment in Thailand. In addition, the majority of our inventory was also located in Asia as of March 31, 2009.
Research and Development
Our research and development programs consist primarily of developing new products and processes in response to identified market needs. Additionally, we redesign existing products to reduce costs and enhance their capabilities and performance, or to make them capable of being produced in multiple foundries. The majority of our design activity is conducted at our headquarters in Milpitas, California. We also use contract engineering services for certain specialized design work. In November 2007, we opened a small design center in India in collaboration with GDA Technologies, a strategic ASIC design partner. The design center’s activities are focused on development of our serial interface controller products. In April 2008, we opened a design center in Phoenix, Arizona to focus on products for the HBLED market.
We spent $10.3, $7.1 and $8.0 million on research and development activities in fiscal 2009, 2008 and 2007, respectively.
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We rely on trade secrets, close customer relationships and being designed into our customers’ products to protect our market position. Our policy is to apply for patent protection for our unique products and manufacturing processes where that protection is warranted. As of March 31, 2009, we had been granted 44 U.S. and foreign patents, a substantial portion of which relate to current and planned protection devices. Our patents are generally of limited importance to us, due in part to the variety of our products versus the limited scope of our patents, the limited lifespan of certain of our products and the ability of our competitors to design around our patents. Process technologies are more often designated as trade secrets. We protect our trade secrets by having our employees sign confidentiality and non-disclosure agreements as part of our personnel policy. We selectively register our mask works. It is not our intention to rely solely on protection of intellectual property rights to deter competition. However, when and where appropriate, we have taken aggressive action to protect our intellectual property rights. CMD, ASIP, Centurion, LuxGuard, MediaGuard and OptiGuard are our trademarks and Praetorian, PicoGuard, PicoGuard XP, PicoGuard XS, XtremeESD and our corporate logo are our registered trademarks.
Competition is based on a number of factors, including product performance, price, form factor, time to market, established customer relationships, manufacturing capabilities, product development and customer support. We face different competitors in each of the target markets we serve. With respect to the protection devices for the mobile handset, digital consumer electronics, personal computer and HBLED markets, we compete primarily with NXP, ON Semiconductor Corporation, Semtech Corporation, STMicroelectronics, N.V. and Texas Instruments as well as other smaller companies. For EMI filter devices used in mobile handsets, we also compete with ceramic devices based on high volume Multi-Layer Ceramic Capacitor (MLCC) technology from companies such as Amotek Company, Ltd., AVX Corporation, Innochip Technology, Inc., Murata Manufacturing Co., Ltd., and TDK Corp. With respect to serial interface display controllers, our competitors include Renesas Technology, Samsung, Sharp Electronics Corporation, Solomon Systech, Texas Instruments and Toshiba Corporation.
Our target markets are intensely competitive. Our products are generally not sold pursuant to long term contracts, enabling our customers to switch suppliers if they choose and making us more vulnerable to competitors. Our customers select vendors and products based on a number of factors including product specifications, breadth of product offering, price and the ability of a vendor to reliably provide high quality product in high volume on a timely basis. The weighting of these factors varies depending on the specific needs of a customer at any given point in time. Most of our competitors are larger, more vertically integrated and more diversified than we are and, in some cases, may have a lower cost structure than we do. We compete primarily on the basis of product innovation and responsiveness to changing needs of customers, including both product specifications and delivery requirements. Also, since our manufacturing is completely outsourced we believe that, in many cases, we are able to move more quickly in adopting new manufacturing processes and in moving production to low cost locations. In addition, since we do not own our own manufacturing facilities we are not faced with their fixed costs when demand is low.
At March 31, 2009, our backlog amounted to $5.6 million, compared with backlog of $11.0 million at March 31, 2008. Our backlog on a specific date represents firm orders received from customers for delivery within six months of that date. Our backlog at any particular time is not necessarily indicative of actual sales for any succeeding period because our customers can cancel their orders or change delivery dates at little or no cost to them. A reduction of backlog during any particular period, or the failure of our backlog to result in future revenue, could harm our business.
With the global economic downturn, during the second half of our last fiscal year, customers have reduced their inventories and so customer backlog has declined and customer demand has become more difficult to predict.
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Inventory, Right of Return and Seasonality
Our practice is to carry a reasonable amount of inventory located at sub-contractors and at customers’ hubs and to require our distributors to carry sufficient inventory in order to meet our customers’ delivery requirements in a manner consistent with industry standards. We typically plan our production and our inventory levels, and the inventory levels of our distributors, based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Therefore, we often order materials and at least partially complete products in anticipation of customer requirements.
In the last few years, there has been a trend toward vendor managed inventory among many large customers. This imposes the burden upon us of carrying additional inventory that is stored on or near our customers’ premises and is subject in many instances to return to our premises if not used by the customer.
We permit customer and distributor returns under certain circumstances in order to remain competitive with current industry practices.
Our target markets, mobile handsets, digital consumer electronics and personal computers, are typically subject to seasonal demand patterns. Demand for our products is typically strongest in our second and third fiscal quarters.
Since we have been completely fabless for the past few years, our environmental compliance costs are minimal.
As of March 31, 2009, we had 103 full-time and part-time employees, including 36 in sales and marketing, 21 in research and development activities, 29 in production operations and 17 in administration. None of our employees is subject to a collective bargaining agreement. We consider our relations with our employees to be good.
Website Access to Company Reports
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge on our website at www.cmd.com as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Also, copies of our annual report will be made available, free of charge, upon written request. The content on any website referred to in this Form 10-K is not incorporated by reference into this Form 10-K unless expressly noted.
You may also read or copy any materials that we file with the SEC at their Public Reference Room at 100 Fifth Street, NE, Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. Additionally, you will find these materials on the SEC Internet site at http://www.sec.gov that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC.
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ITEM 1A. Risk Factors
A revised description of the risk factors associated with our business is set forth below. This description supersedes the description of the risk factors associated with our business previously disclosed in Part II, Item 1A of our Form 10-Q for the quarter ended December 31, 2008. Because of these risk factors, as well as other factors affecting the Company’s business and operating results and financial condition, including those set forth elsewhere in this report, our actual future results could differ materially from the results contemplated by the forward-looking statements contained in this report and our past financial performance should not be considered to be a reliable indicator of future performance, so that investors should not use historical trends to anticipate results or trends in future periods.
Our operating results may fluctuate significantly because of a number of factors, many of which are beyond our control and are difficult to predict. These fluctuations may cause our stock price to decline.
Our operating results may fluctuate significantly for a variety of reasons, including some of those described in the risk factors below, many of which are difficult to control or predict. While we believe that quarter to quarter and year to year comparisons of our revenue and operating results are not necessarily meaningful or accurate indicators of future performance, our stock price historically has been susceptible to large swings in response to short term fluctuations in our operating results. Should our future operating results fall below our guidance or the expectations of securities analysts or investors, the likelihood of which is increased by the fluctuations in our operating results, the market price of our common stock may decline.
We had losses in eight out of the last twelve most recent fiscal quarters. We may not be able to attain or sustain profitability in the future.
There are many factors that affect our ability to sustain profitability including the health of the mobile handset, digital consumer electronics and personal computer markets on which we focus, continued demand for our products from our key customers, availability of capacity from our manufacturing subcontractors, ability to reduce manufacturing costs faster than price decreases thereby attaining a healthy gross margin, continued product innovation and design wins, competition, interest rates and our continued ability to manage our operating expenses. In order to obtain and sustain profitability in the long term, we will need to continue to grow our business in our target markets and to reduce our product costs rapidly enough to maintain our gross margin. The semiconductor industry has historically been cyclical, and we may be subject to such cyclicality, which could lead to our incurring losses again.
We currently are concentrated in terms of product types (protection devices), markets (mobile handsets), and customers (certain top tier OEMs). Our revenue could suffer materially if the demand or price for protection devices decreases, if the market for mobile handsets stops growing, or if our key customers lose market share.
Our revenues in recent periods have been derived primarily from sales of circuit protection devices. For example, during fiscal 2009, 88% of our revenue was derived from such sales. With the introduction of our new serial interface display controller, we have several products which could help us reduce our dependence upon circuit protection devices; although for the next several years we expect to derive most of our revenues from circuit protection devices. Should the need for such devices decline, for example because of changes in input and output circuitry, or integration of circuit protection functionality into other circuit elements, our revenues could decline.
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During fiscal 2009, 61% of our revenue was from sales to the mobile handset market, with the balance coming from digital consumer electronics and personal computers and peripherals and HBLED markets. In order for us to be successful, we must continue to penetrate these markets, both by obtaining more business from our current customers and by obtaining new customers. Due to our narrow market focus, we are susceptible to materially lower revenues due to material adverse changes to one of these markets, particularly the mobile handset market. We expect much of our future revenue growth to be in the mobile handset market where more complex mobile handsets have meant increased adoption of and demand for protection devices. Should the rate of adoption of protection devices decelerate in the mobile handset market, our planned rate of increase in penetration of that market would also decrease, thereby reducing our future growth in that market. In addition, a reduction in our market share of protection devices sold into that market would also decrease our future growth and could even lead to declining revenue from that market.
Our sales strategy has been to focus on customers with large market share in their respective markets. As a result, we have several large customers. During fiscal 2009, two customers primarily in the mobile handset market represented 40% of our net sales and in the future we expect to increase net sales to a top five OEM customer we began selling to during the second half of fiscal 2008. There can be no assurance that these customers will purchase our products in the future in the quantities we have forecasted, or at all.
During fiscal 2009, one distributor represented 11% of our net sales. If we were to lose the distributor, we might not be able to obtain other distributors to represent us or the new distributors might not have sufficiently strong relationships with the current end customers to maintain our current level of net sales. Additionally, the time and resources involved with the changeover and training could have an adverse impact on our business in the short term.
The markets in which we participate are intensely competitive and our products are not sold pursuant to long term contracts, enabling our customers to replace us with our competitors if they choose. In addition, our competitors have in the past and may in the future reverse engineer our most successful products and become second sources for our customers, which could decrease our revenues and gross margins.
Our target markets are intensely competitive. Our ability to compete successfully in our target markets depends upon our being able to offer attractive, high quality products to our customers that are properly priced and dependably supplied. Our customer relationships do not generally involve long term binding commitments making it easier for customers to change suppliers and making us more vulnerable to competitors. Our customer relationships instead depend upon our past performance for the customer, their perception of our ability to meet their future need, including price and delivery and the timely development of new devices, the lead time to qualify a new supplier for a particular product, and interpersonal relationships and trust. Furthermore, many of our customers are striving to limit the number of vendors they do business with and because of our small size and limited product portfolio they could decide to stop doing business with us.
Our most successful products are not covered by patents and have in the past and may in the future be reverse engineered. Thus, our competitors can become second sources of these products for our customers or our customers’ competitors, which could decrease our unit sales or our ability to increase unit sales and also could lead to price competition. This price competition could result in lower prices for our products, which would also result in lower revenues and gross margins. Certain of our competitors have announced products that are pin compatible with some of our most successful products, especially in the mobile handset market, where many of our largest revenue generating products have been second sourced. To the extent that the revenue secured by these competitors exceeds the expansion in market size resulting from the availability of second sources, this decreases the revenue potential for our products. Furthermore, should a second source vendor attempt to increase its market share by dramatic or predatory price cuts for large revenue products, our revenues and margins could decline materially.
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Because we operate in different semiconductor product markets, we generally encounter different competitors in our various market areas. With respect to the protection devices for the mobile handset, digital consumer electronics and personal computer markets as well as HBLED market, we compete primarily with NXP, ON Semiconductor Corporation, Semtech Corporation, STMicroelectronics, N.V. and Texas Instruments as well as other smaller companies. For EMI filter devices used in mobile handsets, we also compete with ceramic devices based on high volume Multi-Layer Ceramic Capacitor (MLCC) technology from companies such as Amotek Company, Ltd., AVX Corporation, Innochip Technology, Inc., Murata Manufacturing Co., Ltd., and TDK Corp. MLCC devices are generally low cost and our revenues would suffer if their features and performance meet the requirements of our customers and we are unable to reduce the cost of our protection products sufficiently to be competitive. We have seen ceramic filters obtain significant design wins for low end applications in the mobile handset market and we focused on high end applications as a result. However, we have also begun to see the use of higher performance ceramic filters and if we are not able to demonstrate superior performance at an acceptable price with our devices then our revenues would also suffer. With respect to serial interface display controllers, our competitors include Renesas Technology, Samsung, Sharp Electronics Corporation, Solomon Systech, Texas Instruments and Toshiba Corporation. Many of our competitors are larger than we are, have substantially greater financial, technical, marketing, distribution and other resources than we do and have their own facilities for the production of semiconductor components.
Deficiencies in our internal controls could cause us to have material errors in our financial statements, which could require us to restate them. Such restatement could have adverse consequences on our stock price, potentially limiting our access to financial markets.
Management assessed and determined, and the auditors attested, that there was no material weakness in our internal control over financial reporting as of March 31, 2007, 2008 and 2009. However, should we or our auditors discover that we have a material weakness in our internal control over financial reporting at another time in the future, investors could lose confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.
We believe that we will not have a material weakness in our internal control over financial reporting which would lead to material errors in our financial statements. Nonetheless, there can be no assurance that we will not have errors in our financial statements. Such errors, if material, could require us to restate our financial statements, having adverse effects on our stock price, potentially causing additional expense, and could limit our access to financial markets.
Adverse and uncertain global economic conditions make forecasting demand difficult and may harm our business.
Unfavorable global economic conditions, including the recession and recent disruptions to the credit and financial markets, could cause consumer and capital spending to continue to slow down, which may decrease demand for our customers’ products and hence our products and our revenues would be adversely affected. In addition, during challenging economic times, our customers may face issues gaining timely access to sufficient credit, which may impair the ability of our customers to pay for products they have purchased which could cause us to increase our allowance for doubtful accounts and write-offs of accounts receivable. Furthermore, the uncertainty in when the global economy will recover means uncertain demand for our products which makes it more difficult to manage inventories so that we can timely respond to our customers if and when their demand for our products increases and may lead to greater write-offs of inventory. In addition, such uncertainty in demand makes planning more difficult and subject to error which could impact our decision-making and have a material adverse effect on our business, results of operations, financial condition and cash flows.
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Our revenues are subject to macroeconomic cycles and therefore are more likely to decline if the current economy worsens or if there is another economic downturn.
As our mobile handset protection devices penetration have increased, our revenues have become increasingly susceptible to macroeconomic cycles because our revenue growth has become more dependent on growth in the overall market rather than primarily on increased penetration, as had been the case in the past.
Our reliance on foreign customers could cause fluctuations in our operating results.
During fiscal 2009, international sales accounted for 87% of our net sales. International sales include sales to U.S. based customers if the product was delivered outside the United States.
International sales subject us to the following risks:
Because sales of our products have been denominated in United States dollars, increases in the value of the U.S. dollar could increase the relative price of our products so that they become more expensive to customers in the local currency of a particular country. Furthermore, because some of our customer purchase orders and agreements are influenced, if not governed, by foreign laws, we may be limited in our ability to enforce our rights under these agreements and to collect damages, if awarded.
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If our distributors experience financial difficulty and become unable to pay us or choose not to promote our products, our business could be harmed.
During fiscal 2009, 40% of our sales were through distributors, primarily in Asia. Our distributors could reduce or discontinue sales of our products or sell our competitors’ products. They may not devote the resources necessary to sell our products in the volumes and within the time frames that we expect. In addition, we are dependent on their continued financial viability, and some of them are small companies with limited working capital. If our distributors experience financial difficulties and become unable to pay our invoices, or otherwise become unable or unwilling to promote and sell our products, our business could be harmed.
We have outsourced our wafer fabrication, and assembly and test operations. Due to our size, we depend on a limited number of foundry partners and assembly and test subcontractors and there is limited available capacity for plastic assembly and test contractors which limits our choices. As a result, we are exposed to a risk of manufacturing disruption or uncontrolled price changes and we may encounter difficulties in expanding our capacity.
We have adopted a fabless manufacturing model that involves the use of foundry partners and assembly and test subcontractors to provide our production capacity. We chose this model in order to reduce our overall manufacturing costs and thereby increase our gross margin, reduce the impact of fixed costs when volume is low, provide us with upside capacity in case of short-term demand increases and provide us with access to newer process technology, production facilities and equipment. During the past four years we have outsourced our wafer manufacturing and assembly and test operations overseas in Asia and we continue to seek additional foundry and assembly and test capacity to provide for growth and lower cost. If we experience delays in securing additional or replacement capacity at the time we need it, we may not have sufficient product to fully meet the demand of our customers.
Given the current size of our business, we believe it is impractical for us to use more than a limited number of foundry partners and assembly and test subcontractors as it would lead to significant increases in our costs. Currently, we have five foundry partners and rely on limited number of subcontractors. Some of our products are sole sourced at one of our foundry partners in China, Japan or Taiwan. There is also a limited capacity of plastic assembly and test contractors, especially for Thin Dual Flat No-Lead Plastic Package (TDFN) and Ultra-Thin Dual Flat No-Lead Plastic Package (UDFN), for which customer demand is increasing. Our ability to secure sufficient plastic assembly and test capacity, especially the fast ramping TDFN and UDFN offerings, may limit our ability to satisfy our customers’ demand. If the operations of one or more of our partners or subcontractors should be disrupted, or if they should choose not to devote capacity to our products in a timely manner, our business could be adversely impacted as we might be unable to manufacture some of our products on a timely basis. In addition, the cyclicality of the semiconductor industry has periodically resulted in shortages of wafer fabrication, assembly and test capacity and other disruption of supply. We may not be able to find sufficient capacity at a reasonable price or at all if such disruptions occur. As a result, we face significant risks, including:
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We rely upon foreign suppliers and have consigned substantial equipment at our foreign subcontractors in order to obtain price concessions. This exposes us to risks associated with international operations, including the risk of losing this equipment should the foreign subcontractor go out of business.
We use foundry partners and assembly and test subcontractors in Asia, primarily in China, India, Japan, Korea, Philippines, Taiwan and Thailand for our products. Our dependence on these foundries and subcontractors involves the following substantial risks:
These risks may lead to delayed product delivery or increased costs, which would harm our profitability, financial results and customer relationships. In addition, we maintain significant inventory at our foreign subcontractors that could be at risk.
We also drop ship product from some of these foreign subcontractors directly to customers. This increases our exposure to disruptions in operations that are not under our direct control and may require us to continue to enhance our computer and information systems to coordinate this remote activity.
In order to obtain price concessions, we have consigned substantial equipment at our foreign contractors. For example, we have $1.2 million of test and packaging equipment on consignment in India and $0.5 million of test equipment on consignment in Thailand as of March 31, 2009. Should our business relationship with these partners cease, whether due to our switching to alternate lower cost suppliers, quality or capacity issues with our current partners, or if they experience a natural disaster or financial difficulty, we may have trouble repossessing this equipment. Even if we are able to repossess this equipment, it may not be in good condition and we may not be able to realize the dollar value of this equipment then recorded on our books. Any such inability to repossess consigned equipment or to realize its recorded value on our books would reduce our assets.
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Our markets are subject to rapid technological change. Therefore, our success depends on our ability to develop and introduce new products. It is possible that a significant portion our research and development expenditures will not yield products with meaningful future revenue.
The markets for our products are characterized by:
Our competitors or customers may offer new products based on new technologies, industry standards or end user or customer requirements, including products that have the potential to replace or provide lower cost or higher performance alternatives to our products. The introduction of new products by our competitors or customers could render our existing and future products obsolete or unmarketable. In addition, our competitors and customers may introduce products that eliminate the need for our products. Our customers are constantly developing new products that are more complex and miniature, increasing the pressure on us to develop products to address the increasingly complex requirements of our customers’ products in environments in which power usage, lack of interference with neighboring devices and miniaturization are increasingly important.
To develop new products for our target markets, we must develop, gain access to, and use new technologies in a cost effective and timely manner, and continue to expand our technical and design expertise. In addition, we must have our products designed into our customers’ future products and maintain close working relationships with key customers in order to develop new products that meet their changing needs.
We may not be able to identify new product opportunities, to develop or use new technologies successfully, to develop and bring to market new products, or to respond effectively to new technological changes or product announcements by our competitors. There can be no assurance even if we are able to do so that our customers will design our products into their products or that our customers’ products will achieve market acceptance. Our pursuit of necessary technological advances may require substantial time and expense and involve engineering risk. Failure in any of these areas could harm our operating results.
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We are attempting to develop one or more new display controller products which are mixed signal integrated circuit products which have a higher development cost than our protection device products. This limits how many of such products we can undertake at any one time increasing our risk that such efforts will not result in a working product for which there is a substantial demand at a price which will yield good margins. We are becoming increasingly engaged with third parties to assist us with these developments, in particular through our India design center, and have also added personnel with new skills to our engineering group. These third parties and new personnel may not be successful and we have less control over outsourced personnel in a remote location. These new product developments involve technology in which we have less expertise which also increases the risk of failure. On the other hand, we believe that the potential payoff from these products makes it reasonable for us to take such risks. Even if our devices work as planned, we may not have success with them in the market. This risk is greater than with our protection device products because many of these new devices are product types for which we don't have material customer traction or market experience.
We may be unable to reduce the costs associated with our products quickly enough for us to meet our margin targets or to retain market share.
In the mobile handset market our competitors have been second sourcing many of our products and as a result this market has become more price competitive. We are seeing the same trend develop in our low capacitance ESD devices for digital consumer electronics, personal computers and peripherals. We need to be able to reduce the costs associated with our products in order to achieve our target gross margins. We have in the past achieved and may attempt in the future to achieve cost reductions by obtaining reduced prices from our manufacturing subcontractors, using larger sized wafers, adopting simplified processes, and redesigning parts to require fewer pins or to make them smaller. There can be no assurance that we will be successful in achieving cost reductions through any of these methods, in which case we will experience lower margins and/or we will experience lower sales as our customers switch to our competitors.
Our future success depends in part on the continued service of our key engineering and management personnel and our ability to identify, hire and retain additional personnel.
There is intense competition for qualified personnel in the semiconductor industry, in particular for the highly skilled design, applications and test engineers involved in the development of new analog integrated circuits. Competition is especially intense in the San Francisco Bay area, where our corporate headquarters and a portion of our engineering group is located. For that reason, in part, we have opened a design center in India focused on VLSI products and in Phoenix focused on protection devices. We may not be able to continue to attract and retain engineers or other qualified personnel necessary for the development of our business or to replace engineers or other qualified personnel who may leave our employment, or the employment of our India design center in the future. This is especially true for analog chip designers since competition is fierce for experienced engineers in this discipline. Growth is expected to place increased demands on our resources and will likely require the addition of management and engineering personnel, and the development of additional expertise by existing management personnel. The loss of services and/or changes in our management team, in particular our CEO, or our key engineers, or the failure to recruit or retain other key technical and management personnel, could cause additional expense, potentially reduce the efficiency of our operations and could harm our business.
Due to the volatility of demand for our products, our inventory may from time to time be in excess of our needs, which could cause write downs of our inventory or of inventory held by our distributors.
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Generally our products are sold pursuant to short-term releases of customer purchase orders and some orders must be filled on an expedited basis. Our backlog is subject to revisions and cancellations and anticipated demand is constantly changing. Because of the short life cycles involved with our customers’ products, the order pattern from individual customers can be erratic, with inventory accumulation and liquidation during phases of the life cycle for our customers’ products. We face the risk of inventory write-offs if we manufacture products in advance of orders. However, if we do not make products in advance of orders, we may be unable to fulfill some or all of the demand to the detriment of our customer relationships because we have insufficient inventory on hand and at our distributors to fill unexpected orders and because the time required to make the product may be longer than the time that certain customers will wait for the product.
We typically plan our production and our inventory levels, and the inventory levels of our distributors, based on internal forecasts of customer demand, which are highly unpredictable and can fluctuate substantially. Therefore, we often order materials and at least partially fabricate product in anticipation of customer requirements. Furthermore, due to long manufacturing lead times, in order to respond in a timely manner to customer demand, we may also make products or have products made in advance of orders to keep in our inventory, and we may encourage our distributors to order and stock products in advance of orders that are subject to their right to return them to us.
In the last few years, there has been a trend toward vendor managed inventory among some large customers. In such situations, we do not recognize revenue until the customer withdraws inventory from stock or otherwise becomes obligated to retain our product. This imposes the burden upon us of carrying additional inventory that is stored on or near our customers’ premises and is subject in many instances to return to our premises if not used by the customer.
We value our inventories on a part by part basis to appropriately consider excess inventory levels and obsolete inventory primarily based on backlog and forecasted customer demand, and to consider reductions in sales price. For the reasons described above, we may end up carrying more inventory than we need in order to meet our customers’ orders, in which case we may incur charges when we write down the excess inventory to its net realizable value, if any, should our customers for whatever reason not order the product in our inventory.
Our design wins may not result in customer products utilizing our devices and our backlog may not result in future shipments of our devices. During a typical quarter, a substantial portion of our shipments are not in our backlog at the start of the quarter, which limits our ability to forecast in the near term.
Not all of our design wins will result in revenue as a customer may cancel an end product for a variety of reasons or subsequently decide not to use our part in it. Even if the customer’s end product does go into production with our part, it may not result in material annual product sales by us and the customer’s product may have a shorter life than expected. In addition, the length of time from design win to production will vary based on the customer’s development schedule. Finally, the revenue from design wins varies significantly.
Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular point in time is not necessarily indicative of actual sales for any succeeding period. A reduction of backlog during any particular period, or the failure of our backlog to result in future shipments, could harm our business. Much of our revenue is based upon orders placed with us that have short lead time until delivery or sales by our distributors to their customers (in most cases, we do not recognize revenue on sales to our distributors until the distributor sells the product to its customers). As a result, our ability to forecast our future shipments and our ability to increase manufacturing capacity quickly may limit our ability to fulfill customer orders with short lead times.
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The majority of our operating expenses cannot be reduced quickly in response to revenue shortfalls without impairing our ability to effectively conduct business.
The majority of our operating expenses are labor related and therefore cannot be reduced quickly without impairing our ability to effectively conduct business. Much of the remainder of our operating costs such as rent is relatively fixed. Therefore, we have limited ability to reduce expenses quickly in response to any revenue shortfalls. Consequently, our operating results will be harmed if our revenues do not meet our projections. We may experience revenue shortfalls for the following and other reasons:
We may not be able to protect our intellectual property rights adequately and we may be harmed by litigation involving our intellectual property rights.
Our ability to compete is affected by our ability to protect our intellectual property rights. We rely on a combination of patents, trademarks, copyrights, mask work registrations, trade secrets, confidentiality procedures and nondisclosure and licensing arrangements to protect our intellectual property rights. Despite these efforts, the steps we take to protect our proprietary information may not be adequate to prevent misappropriation of our technology, and our competitors may independently develop technology that is substantially similar or superior to our technology.
To the limited extent that we are able to seek patent protection for our products or processes, our pending patent applications or any future applications may not be approved. Any issued patents may not provide us with competitive advantages and may be challenged by third parties. If challenged, our patents may be found to be invalid or unenforceable, and the patents of others may have an adverse effect on our ability to do business. Furthermore, others may independently develop similar products or processes, duplicate our products or processes, or design around any patents that may be issued to us.
As a general matter, the semiconductor and related industries are characterized by substantial litigation regarding intellectual property rights, and in particular patents. We may be accused of infringing the intellectual property rights of third parties. Furthermore, we may have certain indemnification obligations to customers with respect to the infringement of third party intellectual property rights by our products. Infringement claims by third parties or claims for indemnification by customers or end users of our products resulting from infringement claims may be asserted in the future and such assertions, if proven to be true, may harm our business.
Any litigation relating to the intellectual property rights of third parties, whether or not determined in our favor or settled by us, would at a minimum be costly and could divert the efforts and attention of our management and technical personnel. In the event of any adverse ruling in any such litigation, we could be required to pay substantial damages, cease the manufacturing, use and sale of infringing products, discontinue the use of certain processes or obtain a license under the intellectual property rights of the third party claiming infringement. A license might not be available on reasonable terms, or at all.
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By supplying parts in the past which were used in medical devices that help sustain human life, we are vulnerable to product liability claims.
We have in the past supplied products predominantly to Guidant and to a much lesser extent to Medtronic for use in implantable defibrillators and pacemakers, which help sustain human life. While we have not sold products into the Medical market since fiscal year 2005, large numbers of our products are or will be used in implanted medical devices, which could fail and expose us to claims. Should our products cause failure in the implanted devices, we may be sued and ultimately have liability, although under federal law Guidant and Medtronic would be required to defend and take responsibility in such instances until their liability was established, in which case we could be liable for that part of those damages caused by our willful misconduct or, in the case of Medtronic only, our negligence.
If our products contain defects, fail to achieve industry reliability standards, or infringe third party intellectual rights or if there are delays in delivery or other unforeseen events which lead to our customers incurring damages, then our reputation may be harmed, and we may incur significant unexpected expenses and lose sales.
We face an inherent business risk of exposure to claims in the event that our products fail to perform as warranted or expected or if we are late in delivering them. Our customers might seek to recover from us any perceived losses, both direct and indirect, which could include their lost sales or profit, a recall of their products, or defending them against third party intellectual property claims. Such claims might be for dollar amounts significantly higher than the revenues and profits we receive from the sale of our products involved as we are usually a component supplier with limited value content relative to the value of the ultimate end-product.
We attempt to protect ourselves through a combination of quality controls, contractual provisions, business insurance, and self insurance. We are sometimes not able to limit our liability contractually as much as we desire and believe is reasonable and there can be no assurances that any such limits that we negotiate will be enforceable. There can be no assurance that we will obtain the insurance coverage we seek, both in terms of dollar amount insured or scope of exclusions to the coverage, or that our insurers will handle any claims on the basis we desire, or that the self insured claims will not be larger than we expect. A successful claim against us could have material adverse effects on our results of operations and financial condition. Beyond the potential direct cost, loss of confidence by major customers could cause sales of our other products to drop significantly and harm our business.
Our failure to comply with environmental regulations or the discovery of contaminants at our prior manufacturing sites could result in substantial liability to us.
We are subject to a variety of federal, state and local laws, rules and regulations relating to the protection of health and the environment. These include laws, rules and regulations governing the use, storage, discharge, release, treatment and disposal of hazardous chemicals during and after manufacturing, research and development and sales demonstrations, as well as the maintenance of healthy and environmentally sound conditions within our facilities. If we fail to comply with applicable requirements, we could be subject to substantial liability for cleanup efforts, property damage, personal injury and fines or suspension or cessation of our operations. Should contaminants be found at either of our prior manufacturing sites at a future date, a government agency or future owner could attempt to hold us responsible, which could result in material expenses.
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Earthquakes, other natural disasters and shortages, or man-caused disasters such as future terrorist activity, may damage our business.
Our California facilities and some of our suppliers are located near major earthquake faults that have experienced earthquakes in the past. In the event of a major earthquake or other natural disaster near our headquarters, our operations could be harmed. Similarly, a major earthquake or other natural disaster near one or more of our major suppliers, like the ones that occurred in Taiwan in September 1999 and in Japan in October 2004, could disrupt the operations of those suppliers, limit the supply of our products and harm our business. The October 2004 earthquake in Japan temporarily shut down operations at one of the wafer fabrication facilities at which our products were being produced. We have since transferred that capacity to other fabs. Power shortages have occurred in California in the past and a wafer fabrication contractor of ours in China experienced a power outrage during 2007. We cannot assure that if power interruptions or shortages occur in the future, they will not adversely affect our business. The September 11, 2001 attack may have adversely affected the demand for our customers’ products, which in turn reduced their demand for our products. In addition, terrorist activity interfered with communications and transportation networks, which adversely affected us. Future terrorist activity or war could similarly adversely impact our business.
Implementation of the new FASB rules and the issuance of new laws or other accounting regulations, or reinterpretation of existing laws or regulations, could materially impact our business or stated results.
From time to time, the government, courts and financial accounting boards issue new laws or accounting regulations, or modify or reinterpret existing ones. For example, starting with the first quarter of fiscal 2007, we implemented Financial Accounting Standards Board (“FASB”) financial accounting standard 123(R) for the accounting for share based payments which caused us to recognize an expense associated with our employee equity awards that decreased our earnings. There may be other future changes in FASB rules or in laws, interpretations or regulations that would affect our financial results or the way in which we present them. Additionally, changes in the laws or regulations could have adverse effects on our business that would affect our ability to compete, both nationally and internationally.
Our stock price may continue to be volatile, and our trading volume may continue to be relatively low and limit liquidity and market efficiency. Should significant stockholders desire to sell their shares within a short period of time, our stock price could decline.
The market price of our common stock has fluctuated significantly. In the future, the market price of our common stock could be subject to significant fluctuations due to general market conditions and in response to quarter to quarter variations in:
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In addition, the stock market in recent years has experienced extreme price and volume fluctuations that have affected the market prices of many high technology companies, particularly semiconductor companies, that have often been unrelated or disproportionate to the operating performance of the companies. These fluctuations, as well as general economic and market conditions, may harm the market price of our common stock. Furthermore, our trading volume is often small, meaning that a few trades have disproportionate influence on our stock price. In addition, someone seeking to liquidate a sizable position in our stock may have difficulty doing so except over an extended period or privately at a discount. Thus, if a stockholder were to sell or attempt to sell a large number of its shares within a short period of time, this sale or attempt could cause our stock price to decline. Our stock is followed by a relatively small number of analysts and any changes in their rating of our stock could cause significant swings in its market price.
Our stockholder rights plan, together with the anti-takeover provisions of our certificate of incorporation, may delay, defer or prevent a change of control.
Our board of directors adopted a stockholder rights plan in autumn 2001 to encourage third parties interested in acquiring us to work with and obtain the support of our board of directors. The effect of the rights plan is that any person who does not obtain the support of our board of directors for its proposed acquisition of us would suffer immediate dilution upon achieving ownership of more than 15% of our stock. Under the rights plan, we have issued rights to purchase shares of our preferred stock that are redeemable by us prior to a triggering event for a nominal amount at any time and that accompany each of our outstanding common shares. These rights are triggered if a third party acquires more than 15% of our stock without board of director approval. If triggered, these rights entitle our stockholders, other than the third party causing the rights to be triggered, to purchase shares of the Company’s preferred stock at what is expected to be a relatively low price. In addition, these rights may be exchanged for common stock under certain circumstances if permitted by the board of directors.
In addition, our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges and restrictions, including voting rights of those shares without any further vote or action by our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future, including the preferred shares covered by the stockholder rights plan. The issuance of preferred stock may delay, defer or prevent a change in control. The terms of the preferred stock that might be issued could potentially make more difficult or expensive our consummation of any merger, reorganization, sale of substantially all of our assets, liquidation or other extraordinary corporate transaction. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders.
Further, our stockholders must give written notice delivered to our executive offices no less than 120 days before the one year anniversary of the date our proxy statement was released to stockholders in connection with the previous year’s annual meeting to nominate a candidate for director or present a proposal to our stockholders at a meeting. These notice requirements could inhibit a takeover by delaying stockholder action.
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After our board of directors refused to take actions suggested by one of our larger stockholders, that stockholder nominated four persons for election to our currently six-member board. This could lead to a costly and distracting proxy fight and, depending on the results, a board which is divided and less effective or which favors actions the current board does not believe are in our best interests.
One of our largest stockholders, funds managed by Dialectic Capital Management, LLC (“Dialectic”), made two SEC filings in which it expressed its displeasure with the Company’s management and board of directors and requested that the Company pay a substantial cash dividend and then engage an investment banker to sell the Company. Dialectic also requested that the Board restructure management’s economic incentives to be more aligned with the interests of all of the Company's stockholders. The Company’s board of directors responded in January that it believes the Company should retain its cash and that it was not the time to explore a sale of the Company when the stock market and its stock price is close to its low point over the past several years and when the Company has solid plans for growth, driven by new products under development and potentially by acquisition of synergistic product lines or companies. The Company’s management has met with representatives of Dialectic and has been unable to resolve their differences of opinion. Dialectic subsequently has nominated four persons for election as directors at our upcoming annual stockholders meeting. Unless our board chooses to nominate these persons as well, which is unlikely because our board of directors believes it would not be in the interests of the Company or its stockholders to pursue the courses of action recommended by Dialectic and presumably its nominees, we would expect a proxy fight and to vigorously contest any such efforts by Dialectic to further its agenda. A proxy fight would detract management time and attention from the business of the Company and would cost the Company substantial monies to contest. If Dialectic is successful as to all four directors, it could result in the Company being compelled to take actions which its board of directors currently does not believe are in the Company’s best interests and if Dialectic is successful as to between one and three directors, it could lead to a less effective Board.
We may incur increased costs as a result of future changes in laws and regulations relating to corporate governance matters and public disclosure.
There have been and continue to be changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, rules adopted or proposed by the SEC and by the NASDAQ National Market and new accounting pronouncements. These often have in the past and may in the future result in increased costs to us as we evaluate the implications of these laws, regulations and standards and respond to their requirements. To maintain high standards of corporate governance and public disclosure, we have invested substantial resources to comply with evolving standards and may be required to do so in the future. Any such future investment may result in increased general and administrative expenses and a diversion of management time and attention from strategic revenue generating and cost management activities. In addition, these new laws and regulations could make it more difficult or more costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on our board committees or as executive officers. We expect to take steps to comply with future enacted laws and regulations and accounting pronouncements in accordance with the deadlines by which compliance is required, but cannot predict or estimate the amount or timing of additional costs that we may incur to respond to their requirements.
In the future we may make strategic acquisitions of technology, product lines, or companies and any future acquisitions and strategic alliances may harm our operating results or cause us to incur debt or assume contingent liabilities.
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We may in the future acquire, or form strategic alliances relating to, other businesses, product lines or technologies. Successful acquisitions and alliances in the semiconductor industry are difficult to accomplish because they require, among other things, efficient integration and alignment of product offerings and manufacturing operations and coordination of sales and marketing and research and development efforts. We have no recent successful experience in making such acquisitions or alliances. The difficulties of integration and alignment may be increased by the necessity of coordinating geographically separated organizations, the complexity of the technologies being integrated and aligned and the necessity of integrating personnel with disparate business backgrounds and combining different corporate cultures. The integration and alignment of operations following an acquisition or alliance requires the dedication of management resources that may distract attention from the day to day business, and may disrupt key research and development, marketing or sales efforts. In connection with future acquisitions and alliances, we may not only acquire assets which need to be expensed or amortized, but we may also incur debt or assume contingent liabilities which could harm our operating results. Without strategic acquisitions and alliances we may have difficulty meeting future customer product and service requirements.
A decline in our stock price could result in securities class action litigation against us which could divert management attention and harm our business.
In the past, securities class action litigation has often been brought against public companies after periods of volatility in the market price of their securities. Due in part to our historical stock price volatility, we could in the future be a target of such litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could harm our ability to execute our business plan.
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ITEM 1B. Unresolved Staff Comments.
ITEM 2. Properties.
We currently lease our headquarters, approximately 26,800 square feet of office and lab space in Milpitas, California, pursuant to a sixty-three month lease agreement we entered into with the Irvine Company that started on September 1, 2005 for a current monthly rent payment of $23,000 plus operating expenses. We also rent office facilities for our domestic and international sales offices and design center. We believe that our existing facilities are adequate for our current and foreseeable future needs.
ITEM 3. Legal Proceedings.
We are, on occasion, a party to lawsuits, claims, investigations and proceedings, including commercial and employment matters, which are being handled and defended in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the other known relevant facts and circumstances, recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances.
ITEM 4. Submission of Matters to a Vote of Security Holders.
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ITEM 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
Our common stock trades on the NASDAQ Global Market tier of The NASDAQ Stock Market under the symbol “CAMD”. The following table shows the high and low closing prices for our common stock as reported by the NASDAQ Stock Market:
No dividends were paid in fiscal 2009 or 2008. We expect to continue that policy in the foreseeable future although we currently have no restrictions against paying dividends. As of May 31, 2009 there were 1,359 holders of record of our common shares and a substantially greater number of beneficial owners.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The table below shows purchases of equity securities by us during the fourth quarter of fiscal 2009:
(1) Our current share repurchase program, under which we repurchased 218,298 and 673,323 shares during the three and twelve months ended March 31, 2009, respectively, has been in place since August 21, 2008, when it was adopted by our board of directors and was publicly announced. These shares were purchased in open market transactions. This repurchase program has no expiration date, other than, unless extended, when an aggregate of 1,000,000 shares have been repurchased. Neither this program nor any other repurchase program or plan has expired during the fourth fiscal quarter ended March 31, 2009 nor have we decided to terminate any repurchase plan or program prior to expiration. There are no existing repurchase plans or programs under which we do not intend to make further purchases.
We did not issue any securities that had not been registered under the Federal Securities Act of 1933, as amended, during fourth quarter of fiscal 2009.
Securities Authorized for Issuance under Equity Compensation Plans
The information required by this Item is included under Item 12 of Part III of this Annual Report on Form 10-K.
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Stock Performance Graph
The following graph compares the cumulative 5-year total return provided shareholders on California Micro Devices Corporation's common stock relative to the cumulative total returns of the NASDAQ Composite index and the S & P 500 index. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common stock and in each of the indexes on March 31, 2004 and its relative performance is tracked through March 31, 2009. (California Micro Devices has not historically paid dividends.)
* $100 invested on March 31, 2004 in stock or index including re-investment of dividends.
Fiscal year ended March 31.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
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The information contained in this Item 5 under the heading “Performance Graph” (i) is being furnished and shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section, and (ii) shall not be incorporated by reference into any registration statement or other document pursuant to the Securities Exchange Act of 1934, as amended, or the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing to this Item 5 Performance Graph information.
ITEM 6. Selected Financial Data.
The selected financial data set forth below should be read in connection with our financial statements and notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. Historical results are not necessarily indicative of future results.
(1) Includes $2.0 million, $2.3 million and $3.1 million of employee stock based compensation expense in fiscal 2009, 2008 and 2007, respectively.
(2) Includes $5.3 million of goodwill impairment.
(3) Includes $2.2 million of In-process research and development (IPR&D) expense.
(4) Includes $1.3 million, $0.7 million and $0.5 million of additional valuation allowance against deferred tax assets in fiscal 2009, 2008 and 2007, respectively and $2.7 million of partial release of valuation allowance against deferred tax assets in fiscal 2006.
(5) Includes $1.3 million of restructuring and asset impairment charges.
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ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not historical facts and are based on current expectations, estimates, and projections about our industry; our beliefs and assumptions; and our goals and objectives. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” and “estimates,” and variations of these words and similar expressions are intended to identify forward-looking statements. Examples of the kinds of forward-looking statements in this report include statements regarding the following: (1) our expectation that our ASP (“Average Selling Prices”) for similar products, based on a constant mix of products, will decline at the rate of 12% to 15% per year; (2) our having a target gross margin of 38% to 40%; (3) our expectation that our future environmental compliance costs will be minimal; (4) our anticipation that our existing cash and cash equivalents will be sufficient to meet our anticipated cash needs over the next 12 months; (5) our having a long term target for research and development expenses of 9% to 10% of sales but expecting to exceed this target especially in the first half of fiscal 2010 driven by continuing development efforts for our products until sales increase substantially; (6) our having a long term target for selling, general and administrative expenses of 15% to 16% of sales but expecting to exceed this target until our sales increase substantially especially in the first half of fiscal 2010; (7) our expectation of future interest income to continue to be at a reduced level or even decline unless interest rates increase materially or we change the instruments in which we invest; (8) the size forecast by iSuppli Corporation for 2011 of the three markets we focus on; (9) our objective to be a leading supplier of protection devices for the mobile handset, digital consumer electronics and personal computer as well as high brightness light emitting diodes (HBLED) markets and of serial interface display electronics for the mobile handset market and our strategy to accomplish that objective; (10) our belief that the fiscal 2010 demand picture is beginning to improve as we believe revenue has bottomed and is likely to begin growing again in the second quarter of fiscal 2010 assuming increasing economic stability and seasonal growth in end demand; (11) our expectation that our international sales will continue to represent a majority of our sales in the foreseeable future; and (12) our expectation that we will not pay within one year any of our liability for uncertain tax positions or associated interest and tax penalties. These statements are only predictions, are not guarantees of future performance, and are subject to risks, uncertainties, and other factors, some of which are beyond our control, are difficult to predict, and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. These risks and uncertainties include, but are not limited to, whether our target markets continue to experience their forecasted growth and whether such growth continues to require the devices we supply; whether we will be able to increase our market penetration; whether our product mix changes, our unit volume decreases materially, we experience price erosion due to competitive pressures, or our contract manufacturers and assemblers raise their prices to us or we experience lower yields from them or we are unable to realize expected cost savings in certain manufacturing and assembly processes; whether there will be any changes in tax accounting rules; whether we will be successful in developing new products which our customers will design into their products and whether design wins and bookings will translate into orders; whether we encounter any unexpected environmental clean-up issues with our former Tempe facility; whether we discover any further contamination at our former Topaz Avenue Milpitas facility; whether we will incur any large unanticipated expenses; and whether we will have large unanticipated cash requirements, as well as other risk factors detailed in this report, especially under Item 1A, Risk Factors. Except as required by law, we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise.
In this discussion, “CMD,” “we,” “us” and “our” refer to California Micro Devices Corporation. All trademarks appearing in this discussion are the property of their respective owners. This discussion should be read in conjunction with the other financial information and financial statements and related notes contained elsewhere in this report.
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We design and sell application specific protection devices and display electronics devices for high volume applications in the mobile handset, digital consumer electronics and personal computer markets as well as application specific protection devices in the high brightness light emitting diodes (HBLED) market. These protection devices provide Electromagnetic Interference (EMI) filtering and Electrostatic Discharge (ESD) protection. The display electronic devices include serial interface display controllers. End customers for our semiconductor products are original equipment manufacturers (OEMs). We sell to some of these end customers through original design manufacturers (ODMs) and contract electronics manufacturers (CEMs). We use a direct sales force, manufacturers’ representatives and distributors to sell our products. Our manufacturing is completely outsourced and we use merchant foundries to fabricate our wafers and subcontractors to do backend processing and to ship to our customers. We have one operating segment and most of our physical assets are located outside the United States. Assets located outside the United States include product inventories and manufacturing equipment consigned to our wafer foundries and backend subcontractors.
The semiconductor industry is characterized by rapid technological change, intense competitive pressure, price erosion, periodic oversupply conditions, occasional shortages of materials, volatile demand patterns, capacity constraints, variation in manufacturing efficiencies and significant expenditures for capital equipment and product development. Market disruptions caused by economic downturn, new technologies, entry of new competitors into markets we serve and other factors introduce volatility into our operating performance and cash flow from operations.
Fiscal 2009 key financial highlights
The following are key financial highlights;
Net Sales: Our net sales were $49.3 million in 2009, down 17% from $59.2 million a year ago.
Gross Margin: Our gross margin was $14.8 million (30% of our net sales) in fiscal 2009 as compared to gross margin of $19.6 million (33% of our net sales) a year ago.
Net Loss per Share - Basic and Diluted: Our net loss, basic and diluted, was $0.65 per share in fiscal 2009 whereas our net loss per share, basic and diluted, was $0.06 a year ago.
Cash Provided by or Used in Operating Activities: We used operating cash of $5.7 million in fiscal 2009 compared to cash provided by operations of $4.4 million a year ago.
Net Cash* Position: We ended the fiscal year 2009 with a net cash position of $45.6 million as compared to $51.6 million a year ago.
*Net Cash = Cash and cash equivalents + Short-term investments
Major Accomplishments in Fiscal 2009
Fiscal 2009 was certainly a challenging business environment due to the world-wide economic downturn. However, we accomplished a number of important things during the year that will help to strengthen our position going forward.
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In the last fiscal year, adverse economic conditions around the world impacted many customers and consumers and resulted in lower total demand in the markets we serve. However, as we look forward into fiscal 2010, we see the demand picture beginning to improve. Orders in the fourth quarter of fiscal 2009 were well above the depressed levels of third quarter of fiscal 2009 and orders so far in the first quarter of fiscal 2010 are running well ahead of fourth quarter of fiscal 2009. From what we can tell, most of our customers are no longer aggressively liquidating inventory but are still taking a cautious approach with respect to adding inventory. We believe that revenue has bottomed and is likely to begin growing again in the second quarter of fiscal 2010 assuming increasing economic stability and seasonal growth in end demand.
Results of Operations
The table below shows our net sales, cost of sales, gross margin, expenses and net loss, both in dollars and as a percentage of net sales, for fiscal 2009, 2008 and 2007 (in thousands):
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Fiscal 2009 versus 2008
Net sales by market were as follows (in millions):
Net sales for fiscal 2009 were $49.3 million, a decrease of $9.9 million or 17% from $59.2 million of net sales in fiscal 2008. During fiscal 2009, sales from products for the mobile handset market decreased by $7.1 million or 19% and sales from products for the digital consumer electronics and personal computer market decreased by 3.9 million or 21% as compared to a year ago. Lower sales of both product lines were primarily driven by the weak global economy during the second half of the fiscal year. Sales from products for the HBLED market increased to $4.3 million during fiscal 2009 from $3.2 million in the same period a year ago, up $1.1 million or 34%. Net sales during the first half of fiscal 2009 were approximately 4% greater than the net sales during the first half of fiscal 2008 while net sales during the second half of fiscal 2009 were down approximately 37% compared to net sales during the second half of fiscal 2008.
In fiscal 2009, the total number of units sold decreased to 613 million units from 757 million units in fiscal 2008.
Fiscal 2008 versus 2007
Net sales by market were as follows (in millions):
Net sales for fiscal 2008 were $59.2 million, a decrease of $8.8 million or 13% from $68.0 million of net sales in fiscal 2007. Sales from products for the mobile handset market decreased by $10.8 million or 22% for fiscal 2008, as compared to fiscal 2007, primarily due to two factors: a) lower sales to a major customer as a result of share shifts in the mobile handset market and competition as well as b) price decreases of our products. These declines were partially offset by increases in unit sales to other customers. Sales from products for the digital consumer electronics and personal computer market increased marginally to $18.7 million in fiscal 2008 from $18.6 million in fiscal 2007, up $0.1 million or 1%. Sales from products for the HBLED market increased to $3.2 million during fiscal 2008 from $1.3 million in the same period a year ago, up $1.9 million or 146%.
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In fiscal 2008 the total number of units sold decreased to 757 million units from 907 million units in fiscal 2007.
Sales by Region
Net sales by geographic region were as follows (in millions), based on where we ship our products rather than where the customers’ headquarters are located:
Fiscal 2009 versus 2008
International sales decreased from 91% of our net sales in fiscal 2008 to 87% of our net sales in fiscal 2009. The decrease in revenue is primarily coming from the Korea region which is partially offset by increase in demand from China region as compared to a year ago. We expect that our international sales will continue to represent a majority of our sales in the foreseeable future.
Fiscal 2008 versus 2007
International sales decreased from 94% of our net sales in fiscal 2007 to 91% in fiscal 2008. In fiscal 2008, revenue from the China region was 27% of our total sales as compared to 42% a year ago, primarily as a result of lower demand from one of our major customers.
Fiscal 2009 versus 2008
Gross margin decreased by $4.8 million in fiscal 2009 to $14.8 million from $19.6 million in fiscal 2008 due to the following reasons:
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The gross margin decrease was primarily driven by price declines of our products and lower shipments, partially offset by product cost reductions. Our ASP declined 10% based on a constant mix of products in fiscal 2009 as compared to a year ago. In the future we expect our ASP for similar products, based on a constant mix of products, to decline at the rate of 12% to 15% per year. The cost reductions of our products were primarily driven by outsourcing with lower cost subcontractors, migrating from 6" to 8" wafer size and continued improvement in our assembly and testing processes.
Gross margin as a percentage of net sales decreased to 30% in fiscal 2009 as compared to 33% in fiscal 2008. Our long-range gross margin target remains 38% to 40%. However, our gross margin could fail to achieve this target range or could decline.
Fiscal 2008 versus 2007
Gross margin decreased by $5.6 million in fiscal 2008 to $19.6 million from $25.2 million in fiscal 2007 due to the following reasons:
The gross margin decrease was primarily driven by decreases in prices and volume of our products as well as change in our product mix, partially offset by product cost reductions. Our ASP declined 12% based on a constant mix of products in fiscal 2008 as compared to a year ago. Units sold in mobile handset market decreased by 27% and units sold in digital consumer electronics and personal computer markets increased by 15% during fiscal 2008 as compared to a year ago. The cost reductions of our products were primarily due to outsourcing with lower cost subcontractors, migration of low capacitance ESD products to the lower cost sinker process and continued improvement in our assembly and testing processes.
Gross margin as a percentage of net sales decreased to 33% in fiscal 2008 as compared to 37% in fiscal 2007.
Research and Development
Research and development expenses consist primarily of compensation and related costs for employees, prototypes, masks and other expenses for the development of new products, process technology and packages. The changes in research and development expenses for fiscal 2009 compared to fiscal 2008, and for fiscal 2008 compared to fiscal 2007, were as follows:
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Fiscal 2009 versus 2008
Research and development expenses increased by $3.2 million, or 45%, during fiscal 2009 as compared with fiscal 2008, primarily due to increased spending for our serial interface display controller line of products.
As a percentage of sales, research and development expenses increased from 12% in fiscal 2008 to 21% in fiscal 2009. Our long term target for research and development expenses is 9% to 10% of sales. However, research and development expenses will continue to exceed our target range and represent more than 20% of sales until sales increase substantially, driven by continuing development efforts for our products, especially during the first half of fiscal 2010.
Fiscal 2008 versus 2007
Research and development expenses decreased by $0.9 million, or 11%, during fiscal 2008 as compared with fiscal 2007, primarily due to the timing of our new product development projects in both our serial interface display controller product and protection devices. This decline of research and development expenses during fiscal 2008 was temporary as serial interface display controller and protection devices development activity ramped up during fiscal 2009.
As a percentage of sales, research and development expenses were flat at 12% in fiscal 2008 as compared to a year ago primarily due to decrease in our sales.
Selling, General and Administrative
Selling, general and administrative expenses consist primarily of compensation and other employee related costs, sales commissions, marketing expenses, legal, accounting, and information technology expenses. The changes in selling, general and administrative expense for fiscal 2009 compared to fiscal 2008, and for fiscal 2008 compared to fiscal 2007, were as follows:
Fiscal 2009 versus 2008
Selling, general and administrative expenses decreased by $0.6 million, or 4%, in fiscal 2009 as compared with a year ago, primarily due to a decrease in sales commissions, employee stock-based compensation expense, professional services and travel expenses. Decrease in sales commission was due to reduced sales during fiscal 2009 as compared with a year ago and decrease in travel expenses, professional services and marketing samples was the result of cost cutting measures taken by the Company to reduce discretionary spending.
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As a percentage of sales, selling, general and administrative expenses increased from 26% in fiscal 2008 to 30% in fiscal 2009, primarily as a result of lower sales. Our long term target for selling, general and administrative expenses is 15% to 16% of sales. However, selling, general and administrative expenses will continue to exceed our target range and represent more than 16% of sales until our sales increase substantially, especially during the first half of fiscal 2010.
Fiscal 2008 versus 2007
Selling, general and administrative expenses decreased by $1.5 million, or 9%, in fiscal 2008 as compared with a year ago, primarily due to a decrease in employee stock-based compensation expense, professional services, and sales commissions as a result of reduced sales. Others factors included reduced spending for marketing samples and reduction in legal charges incurred during fiscal 2008 as compared with a year ago.
As a percentage of sales, selling, general and administrative expenses increased from 25% in fiscal 2007 to 26% in fiscal 2008, primarily as a result of reduced sales.
Goodwill impairment was $5.3 million during fiscal 2009. As a result of adverse economic conditions, our operating results, and the sustained decline in our market valuation, we performed an interim goodwill analysis during our third fiscal quarter ended December 31, 2008. The analysis indicated that the estimated fair value was less than the corresponding carrying amount and the full amount of goodwill was no longer recoverable and fully impaired. Our entity is deemed as a single reporting unit for our impairment analysis. The fair value was estimated using present value of estimated future cash flows which was consistent with a market-based approach. For additional information regarding goodwill, see Note 5 of Notes to Consolidated Financial Statements in this Form 10-K.
There was no IPR&D expense recorded during each of the fiscal years 2009 and 2008. IPR&D expense in fiscal 2007 of $2.2 million was related to the Arques acquisition. IPR&D was expensed upon acquisition in fiscal 2007 because technological feasibility had not been established and no future alternative uses existed. For further discussion of IPR&D, see Note 4 of Notes to Consolidated Financial Statements in this Form 10-K.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was $78,000, $165,000 and $158,000, respectively during fiscal 2009, 2008 and 2007. The intangible assets were related to the Arques acquisition in fiscal 2007.
The decrease in amortization expense in fiscal 2009 as compared to a year ago was primarily due to the sale of intangible assets, related to our line of LED Drivers during fiscal 2009. An impairment charge of $55,000 was also recorded during fiscal 2009. For further discussion of intangible assets, see Notes 4 and 5 of Notes to Consolidated Financial Statements in this Form 10-K.
Other Income, Net
Other income, net includes interest income, interest expense and other non-operating income and expense in fiscal 2009, 2008 and 2007.
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Fiscal 2009 versus 2008
Interest income decreased to $0.7 million in fiscal 2009 from $2.5 million a year ago primarily as a result of decline in interest rates and our moving the majority of our short-term investments into treasury bills and to a lesser extent due to our reduced total amount of cash, cash equivalents and short-term investments. We expect interest income, in the near future, to remain at this reduced level or even decline unless interest rates increase materially or we change the instruments in which we invest. Other non-operating income increased by $1.0 million in fiscal 2009 as compared to a year ago primarily due to the gain on sale of LED Driver intellectual property and related fixed assets.
Interest expense was immaterial for fiscal years 2009 and 2008.
Fiscal 2008 versus 2007
Interest income remained at a consistent level of $2.5 million and interest expense was immaterial for both fiscal years 2008 and 2007.
Income tax expense is comprised of a current and deferred component. The current tax provision in fiscal 2009 was $0.1 million and primarily consists of cash payments made to taxing authorities and accruals under FIN 48 for potential additional tax in certain jurisdictions. The deferred component of the fiscal 2009 tax provision was $1.2 million and represents the net change to our valuation allowance to reflect the expected future tax benefits of our net operating losses and other credits. Fiscal year ended March 31, 2009 total expense of $1.3 million compares with an income tax provision of $0.9 million recorded a year ago. Our income tax provision increased during the fiscal year ended March 31, 2009 compared to a year ago, primarily as a result of our estimates in our ability to utilize loss carry forwards and the valuation allowance of the deferred tax assets. During the fiscal year ended March 31, 2006, we reduced $2.7 million of the valuation allowance against deferred tax assets, resulting in a net tax benefit of $2.6 million. See Note 16 of the Notes to Consolidated Financial Statements in this Form 10-K for further discussion.
Critical Accounting Policies and Estimates
The preparation of financial statements, in conformity with U.S. GAAP, requires management to make estimates and assumptions that affect amounts reported in our financial statements and accompanying notes. We base our estimates on historical experience and the known facts and circumstances that we believe are relevant. We have not made any material changes in the accounting methodology used to establish our estimates and assumptions during the past three fiscal years. We do not believe there is a reasonable likelihood that there will be a material change in the future estimates or assumptions. However, actual results may differ materially from our estimates. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements in this Form 10-K. The significant accounting policies that we believe are critical, either because they relate to financial line items that are key indicators of our financial performance such as revenue or because their application requires significant management judgment, are described in the following paragraphs:
We recognize revenue when persuasive evidence of an arrangement exists, delivery or customer acceptance, where applicable, has occurred, the fee is fixed or determinable, and collection is reasonably assured.
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Revenue from product sales to end user customers, or to distributors that do not receive price concessions and do not have return rights, is recognized upon shipment and transfer of risk of loss, if we believe collection is reasonably assured and all other revenue recognition criteria are met. We assess the probability of collection based on a number of factors, including past transaction history and customer credit worthiness. If we determine that collection of a receivable is not probable, we defer recognition of revenue until the collection becomes probable, which is generally upon receipt of cash. Reserves for sales returns and allowances from end user customers are estimated based on historical experience and management judgment, and are provided for at the time of shipment. The sufficiency of the reserves for sales return and allowances is assessed at the end of each reporting period.
Revenue from sales of our standard products to distributors whose terms provide for price concessions or for product return rights is recognized when the distributor sells the product to an end customer. When we sell such products to distributors, we defer our gross selling price of the product shipped and its related cost and reflect such net amounts on our balance sheet as a current liability entitled “deferred margin on shipments to distributors”. We receive periodic reports from our distributors of their inventory of our products and when we test our inventory in order to determine the extent, if any, to which we have excess or obsolete inventory, we also test the inventory held by our distributors. For our custom products and end of life products, if we believe that collection is probable, we recognize revenue upon shipment to the distributor, because our contractual arrangements provide for no right of return or price concessions for those products.
We typically have written agreements with our distributors which provide that (1) if we lower our distributor list price, our distributors may request for a limited time period a credit for the differential of eligible product in the distributor's inventory and (2) periodically, our distributors have the right to return eligible product to us, provided that the amount returned must be limited to a certain agreed percentage of the value of our shipments to them during such period. Product over a certain age may not be returned and there is a restocking charge if the distributor has not placed a recent commensurate replacement stocking order.
Forecasting customer demand is the factor in our inventory policy that involves significant judgments and estimates. We estimate excess and obsolete inventory based on a comparison of the quantity and cost of inventory on hand to management’s forecast of customer demand for the next twelve months. In forecasting customer demand, we make estimates as to, among other things, the timing of sales, the mix of products sold to customers, the timing of design wins and related volume purchases by new and existing customers, and the timing of existing customers’ transition to new products. We also use historical trends as a factor in forecasting customer demand, especially that from our distributors. We review our excess and obsolete inventory on a quarterly basis considering the known facts. Once inventory is written down, it is valued as such until it is sold or otherwise disposed of. To the extent that our forecast of customer demand materially differs from actual demand, our cost of sales and gross margin could be impacted.
Impairment of long lived assets
Long lived assets are reviewed for impairment whenever events indicate that their carrying value may not be recoverable. An impairment loss is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value.
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We have accounted for goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives and requires that these assets be reviewed for impairment at the reporting unit level at least annually and more frequently if there are indicators of impairment. The amount of impairment loss is measured as the difference between the carrying value of the assets and their estimated fair value. An impairment loss for an intangible asset is recognized if the sum of the expected undiscounted cash flows from the use of the asset is less than the carrying value of the asset. Significant judgment required to estimate the fair value of an intangible asset includes estimating future cash flows and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value.
Impairment of goodwill is tested at the reporting unit level by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair value was estimated using present value of estimated future cash flows which was consistent with a market-based approach. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any. Because the Company has one reporting unit under SFAS No. 142, it utilizes the entity-wide approach to assess goodwill for impairment. Due to the current economic environment, our operating results, and the sustained decline in our market valuation, we performed an interim goodwill impairment analysis during the third quarter of fiscal 2009 pursuant to the steps and requirements under SFAS No. 142. The analysis indicated that the estimated fair value of the reporting unit is less than the corresponding carrying amount and the goodwill is no longer recoverable. Therefore, we determined that goodwill is fully impaired.
In accordance with the fair value recognition provisions of SFAS 123(R), we estimate the stock-based compensation cost at the grant date based on the fair value of the award and recognize it as an expense on a graded vesting schedule over the requisite service period of the award.
We estimate the value of employee stock options on the date of grant using the Black-Scholes model. The determination of fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. The use of the Black-Scholes model requires the use of extensive actual employee exercise behavior data and a number of complex assumptions including expected volatility, risk-free interest rate and expected dividends.
Our computation of expected volatility is based on a combination of historical and market-based implied volatility. Our computation of expected life is based on a combination of historical exercise patterns and certain assumptions regarding the exercise life of unexercised options adjusted for job level and demographics. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant. The dividend yield assumption is based on our history and expectation of dividend payouts.
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As stock-based compensation expense recognized in the consolidated statement of operations for the years ended March 31, 2009, March 31, 2008 and March 31, 2007 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on an average of historical forfeitures. The expense that we recognize in future periods could differ significantly from the current period and/or our forecasts due to adjustments in assumed forfeiture rates or change in our assumptions.
We account for income taxes under the asset and liability method; which requires significant judgments in making estimates for determining certain tax liabilities and recoverability of certain deferred tax assets, including the tax effects attributable to net operating loss carryforwards and temporary differences between the tax and financial statement recognition of revenue and expenses, as well as the interest and penalties relating to these uncertain tax positions.
On a quarterly basis, we evaluate our ability to recover our deferred tax assets, including but not limited to our past operating results, the existence of cumulative losses in the most recent fiscal years, and our forecast of future taxable income on a jurisdiction by jurisdiction basis. In the event that actual results differ from our estimates in the future, we will adjust the amount of the valuation allowance that may result in a decrease or increase in income tax expense in those periods.
In the first quarter of fiscal 2008, we adopted Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes–an interpretation of FASB Statement No. 109” (FIN 48). As a result of the implementation of FIN 48, we recognize liabilities for uncertain tax positions based on a two-step process prescribed within the interpretation. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on examination, including resolution of any related appeals or litigation processes, if any. The second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
It is inherently difficult and subjective to estimate such amounts, as this requires us to determine the probability of various possible outcomes. We will evaluate these uncertain tax positions on a quarterly basis. A change in recognition or measurement in the future may result in the recognition of a tax benefit or an additional charge to the tax provision in the period.
See Note 16 in the Notes to Consolidated Financial Statements in this Form 10-K for further discussion.
We are, on occasion, a party to lawsuits, claims, investigations, and proceedings, including commercial and employment matters, which are being addressed in the ordinary course of business. We review the current status of any pending or threatened proceedings with our outside counsel on a regular basis and, considering all the known relevant facts and circumstances, we recognize any loss that we consider probable and estimable as of the balance sheet date. For these purposes, we consider settlement offers we may make to be indicative of such a loss under certain circumstances. As of March 31, 2009, there was no accrual for litigation related matters.
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Liquidity and Capital Resources
We have historically financed our operations through a combination of debt and equity financing and cash generated from operations. As highlighted in the consolidated statements of cash flows, the Company’s liquidity and available capital resources are impacted by the following key components: (i) cash and cash equivalents, (ii) operating activities, (iii) investing activities, and (iv) financing activities.
Cash, cash equivalents and short-term investments
Total cash, cash equivalents and short-term investments were $45.6 million as of March 31, 2009, compared to $51.6 million at March 31, 2008, a decrease of $6.0 million or 11.6%, primarily due to cash used in operating activities and repurchase of Company’s outstanding common stock under the stock repurchase program partially offset by proceeds from the sale of LED Driver assets (including patents, related fixed assets and inventory) and proceeds from the issuance of common stock under our employee stock benefit plans.
Cash provided by (used in) operating activities consists of net loss adjusted for certain non-cash items and changes in assets and liabilities.
During fiscal 2009, cash used in operating activities was $5.7 million. The net loss of $15.2 million during fiscal 2009 included non-cash items, such as employee stock-based compensation expense of $2.0 million, goodwill impairment loss of $5.3 million and depreciation of fixed assets and amortization of intangible assets aggregating to $2.5 million. Accounts receivable decreased to $4.2 million at March 31, 2009 compared to $6.2 million at March 31, 2008, mainly attributable to lower shipments. Receivables days of sales outstanding were 38 days and 42 days at March 31, 2009 and March 31, 2008, respectively. Net inventory was $5.2 million as of March 31, 2009, compared to $6.4 million as of March 31, 2008. Annual inventory turns decreased to 5.9 at March 31, 2009 as compared to 6.8 at March 31, 2008 primarily as a result of lower sales of our products. Accounts payable and accrued liabilities totaled $5.4 million at March 31, 2009 compared to $8.3 million at March 31, 2008. Days payables outstanding were 48 days and 54 days at March 31, 2009 and March 31, 2008, respectively. Deferred margin on shipments to distributors decreased to $1.0 million as of March 31, 2009 from $1.9 million as of March 31, 2008.
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During fiscal 2008, cash provided by operating activities was $4.4 million. The net loss of $1.4 million for fiscal year 2008 included non-cash items, such as employee stock-based compensation expense of $2.4 million, and depreciation and amortization of fixed assets and amortization of intangible assets aggregating to $1.9 million. Accounts receivable decreased to $6.2 million at March 31, 2008 compared to $7.5 million at March 31, 2007, mainly as a result of faster collections and change in our customer mix. Receivables days of sales outstanding were 42 days and 49 days at March 31, 2008 and 2007, respectively. Net inventory was $6.4 million as of March 31, 2008, compared to $5.2 million as of March 31, 2007. Annual inventory turns were 6.8 at March 31, 2008 as compared to 8.0 at March 31, 2007. Accounts payable and accrued liabilities totaled $8.3 million at March 31, 2008 compared to $7.9 million at March 31, 2007. Days payables outstanding were 54 days and 49 days as of March 31, 2008 and March 31, 2007, respectively. Deferred margin on shipments to distributors increased to $1.9 million as of March 31, 2008 from $1.5 million as of March 31, 2007, primarily as a result of higher shipments to the distributors.
During fiscal 2007, operating activities provided $6.7 million of cash. The net loss of $0.1 million for fiscal year 2007 included non-cash charges such as stock-based compensation of $3.1 million, in-process research and development expense of $2.2 million from the Arques acquisition and depreciation and amortization of fixed assets and amortization of intangible assets aggregating to $1.7 million. Accounts receivables decreased by $3.1 million, accounts payable and other current liabilities decreased by $1.6 million and deferred margin on shipments to distributors decreased by $1.2 million as compared to fiscal 2006.
Investing activities during fiscal 2009 provided $19.4 million of cash, primarily due to net sales and maturities of short-term investments, which were not re-invested but rather held as cash and cash equivalents, and $1.2 million of proceeds from the sale of LED Driver intellectual property and related fixed assets partially offset by payment towards capital expenditures.
Investing activities during fiscal 2008 provided $26.2 million of cash primarily due to movement of assets from short-term investments to cash and cash equivalents, partially offset by the payment towards capital expenditure for purchase of fixed assets and the final Arques escrow payment. Net sales and maturity of short-term investments mainly includes commercial paper, corporate bonds and certificates of deposit. Our capital expenditure during fiscal 2008 includes payment of $1.2 million towards the equipment purchased for SPEL, one of our sub-contractors, in order to increase their production capacity in return for periodic repayments and lower product pricing. We acquired Arques for a total purchase consideration of $8.4 million in fiscal 2007, out of which the final escrow payable balance of $1.0 million was paid during fiscal 2008.
Investing activities during fiscal 2007 used $15.6 million of cash primarily due to payment towards Arques acquisition, net purchase of short-term investments and capital expenditure for purchase of fixed assets. We acquired Arques for a total purchase consideration of $8.4 million, out of which $7.0 million was paid during fiscal 2007. Net purchase of short-term investments of $5.6 million mainly includes corporate bonds, asset-backed securities and certificate of deposits. Our capital expenditure during fiscal 2007 includes payment of $1 million towards the equipment purchase for SPEL, one of our sub-contractors, in order to increase their production capacity in return for periodic repayments and lower product pricing.
Net cash used in financing activities in fiscal 2009 was $1.0 million and was the result of repurchase of $1.4 million of Company’s outstanding common stock under the stock repurchase program and repayment of capital lease obligations of $0.1 million, partially offset by proceeds from the issuance of common stock under the ESPP of $0.5 million.
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Cash provided by financing activities in fiscal 2008 was $0.4 million and was primarily the result of net proceeds of $0.5 million from issuance of common stock under employee stock purchase plan and exercise of common stock options, partially offset by repayment of capital lease obligations of $0.1 million.
Cash provided by financing activities in fiscal 2007 was $1.0 million and was primarily the result of $1.1 million of net proceeds from issuance of common stock under employee stock purchase plan and exercise of common stock options, partially offset by repayment of capital lease obligations of $0.1 million.
The following table summarizes our contractual obligations as of March 31, 2009, (fiscal years ended March 31, in thousands):
Effective April 1, 2007, we adopted the provisions of FIN 48. Refer to Note 16 of Notes to Consolidated Financial Statements in this Form 10-K. As of March 31, 2009, the liability for uncertain tax positions was $193,000 in addition to the interest and tax penalties of $62,000, of which none is expected to be paid within one year. We are unable to estimate when cash settlement with a taxing authority may occur.
We expect to fund all of these obligations with cash on hand or cash provided from operations.
We anticipate that our existing cash and cash equivalents of $45.6 million as of March 31, 2009 will be sufficient to meet our anticipated cash needs for the next twelve months. Should we desire to expand our level of operations more quickly, either through increased internal development or through the acquisition of product lines from other entities, we may need to raise additional funds through public or private equity or debt financing. The funds may not be available to us, or if available, we may not be able to obtain them on terms favorable to us.
Recent Accounting pronouncements
Refer to Note 2 of Notes to Consolidated Financial Statements in this Form 10-K for a discussion of the expected impact of recently issued accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have off balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K that have, or are reasonably likely to have, a current or future effect upon our financial condition, revenue, expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors, other than contractual obligations shown above.
Impact of Inflation and Changing Prices
Although we cannot accurately determine the precise effect of inflation on our operations, we do not believe inflation has had a material effect on net sales or net loss during fiscal 2009, 2008 and 2007.
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ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.
We have evaluated the estimated fair value of our financial instruments. The amounts reported as cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their short term maturities.
We have little exposure to foreign currency risk as all our sales are denominated in US dollars as is most of our spending.
We are exposed to financial market risks primarily due to changes in interest rates. We do not use derivatives to alter the interest characteristics of our investment securities. As of March 31, 2009, we had no short term investments and our cash and cash equivalents were comprised primarily of money market funds. Our short-term investments and cash and cash equivalents generated interest income of $0.7 million and $2.5 million in fiscal year 2009 and 2008, respectively. Based on our short-term investments and cash and cash equivalent balances as of March 31, 2009 and March 31, 2008, one percentage point change in interest rates would cause change in our annual interest income in an amount of approximately $0.46 million compared to $0.52 million as of March 31, 2008.
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ITEM 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements and Schedules
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
California Micro Devices Corporation
We have audited the accompanying consolidated balance sheets of California Micro Devices Corporation (the “Company”), a Delaware corporation, as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the appendix appearing under Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of California Micro Devices Corporation as of March 31, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), California Micro Devices Corporation’s internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated June 9, 2009 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
San Jose, California
June 9, 2009
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
California Micro Devices Corporation
We have audited California Micro Devices Corporation’s (a Delaware Corporation) internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). California Micro Devices Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on California Micro Devices Corporation’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, California Micro Devices Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of California Micro Devices Corporation as of March 31, 2009 and 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended March 31, 2009. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15. Our report dated June 9, 2009 expressed an unqualified opinion thereon.
/s/ GRANT THORNTON LLP
San Jose, California
June 9, 2009
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