Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the Quarterly Period Ended September 30,
2009
OR
o
|
|
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: 000-52014
Techwell, Inc.
(Exact name of
registrant as specified in its charter)
Delaware
|
|
77-0451738
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer Identification No.)
|
408 E. Plumeria Drive
San Jose, CA 94134
(Address of
principal executive offices, including Zip Code)
(408) 435-3888
(Registrants
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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 requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate website, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 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
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-Accelerated filer
o
|
|
Smaller Reporting
Company
o
|
(Do not check if
smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Securities Exchange Act). Yes
o
No
x
As of October 31,
2009, 21,659,281 shares of the registrants common stock were outstanding.
Table of Contents
PART I. Financial Information
Item 1. Financial Statements
TECHWELL, INC.
CONDENSED UNAUDITED CONSOLIDATED
BALANCE SHEETS
(in thousands, except par value
amount)
|
|
September 30,
2009
|
|
December 31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
16,027
|
|
$
|
44,485
|
|
Short-term investments
|
|
48,089
|
|
17,582
|
|
Accounts receivable
|
|
977
|
|
1,985
|
|
Inventory
|
|
6,706
|
|
4,780
|
|
Deferred income tax assets
|
|
1,322
|
|
1,353
|
|
Prepaid expenses and other current assets
|
|
1,972
|
|
1,200
|
|
Total current assets
|
|
75,093
|
|
71,385
|
|
Property and equipment, net
|
|
1,063
|
|
1,290
|
|
Long-term investments
|
|
26,053
|
|
19,350
|
|
Deferred income tax assets
|
|
3,873
|
|
4,031
|
|
Other assets
|
|
243
|
|
1,308
|
|
TOTAL ASSETS
|
|
$
|
106,325
|
|
$
|
97,364
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,450
|
|
$
|
2,221
|
|
Accrued liabilities
|
|
3,985
|
|
2,117
|
|
Total current liabilities
|
|
8,435
|
|
4,338
|
|
|
|
|
|
|
|
Deferred rent
|
|
81
|
|
122
|
|
Total liabilities
|
|
8,516
|
|
4,460
|
|
|
|
|
|
|
|
Contingencies (see Note 9)
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000 shares
authorized and no shares issued and outstanding
|
|
|
|
|
|
Common stock, $0.001 par value; 250,000 shares
authorized; 21,633 shares and 21,347 shares issued and outstanding at
September 30, 2009 and December 31, 2008, respectively
|
|
22
|
|
21
|
|
Additional paid-in capital
|
|
84,985
|
|
80,240
|
|
Deferred stock-based compensation
|
|
|
|
(19
|
)
|
Retained earnings
|
|
12,439
|
|
12,493
|
|
Accumulated other comprehensive income
|
|
363
|
|
169
|
|
Total stockholders equity
|
|
97,809
|
|
92,904
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$
|
106,325
|
|
$
|
97,364
|
|
See accompanying notes to condensed unaudited consolidated financial
statements.
3
Table of
Contents
TECHWELL, INC.
CONDENSED UNAUDITED CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share
amounts)
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
18,015
|
|
$
|
18,520
|
|
$
|
40,392
|
|
$
|
51,133
|
|
Cost of revenues
|
|
7,035
|
|
6,859
|
|
15,977
|
|
19,423
|
|
Gross profit
|
|
10,980
|
|
11,661
|
|
24,415
|
|
31,710
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
5,274
|
|
4,442
|
|
13,907
|
|
12,199
|
|
Selling, general and administrative
|
|
3,835
|
|
3,576
|
|
11,090
|
|
11,033
|
|
Total operating expenses
|
|
9,109
|
|
8,018
|
|
24,997
|
|
23,232
|
|
Income (loss) from operations
|
|
1,871
|
|
3,643
|
|
(582
|
)
|
8,478
|
|
Interest income
|
|
357
|
|
507
|
|
1,055
|
|
1,802
|
|
Income before income taxes
|
|
2,228
|
|
4,150
|
|
473
|
|
10,280
|
|
Income tax provision
|
|
1,169
|
|
1,634
|
|
527
|
|
4,051
|
|
Net income (loss)
|
|
$
|
1,059
|
|
$
|
2,516
|
|
$
|
(54
|
)
|
$
|
6,229
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.05
|
|
$
|
0.12
|
|
$
|
0.00
|
|
$
|
0.30
|
|
Diluted
|
|
$
|
0.05
|
|
$
|
0.11
|
|
$
|
0.00
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in computing net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
21,560
|
|
21,169
|
|
21,471
|
|
21,054
|
|
Diluted
|
|
22,315
|
|
22,080
|
|
21,471
|
|
22,038
|
|
See accompanying notes to condensed unaudited consolidated financial
statements.
4
Table of
Contents
TECHWELL, INC.
CONDENSED UNAUDITED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
|
|
|
|
|
|
Cash flows from operating
activities
:
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(54
|
)
|
$
|
6,229
|
|
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
538
|
|
526
|
|
Stock-based compensation
|
|
5,429
|
|
5,433
|
|
Tax benefit from employee equity incentive plan
|
|
78
|
|
211
|
|
Realized gain on investments
|
|
|
|
(18
|
)
|
Put option loss
|
|
316
|
|
|
|
Gain from trading securities
|
|
(316
|
)
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
1,008
|
|
(268
|
)
|
Inventory
|
|
(1,926
|
)
|
(1,261
|
)
|
Prepaid expenses and other current assets
|
|
(772
|
)
|
(310
|
)
|
Other assets
|
|
749
|
|
(72
|
)
|
Deferred income tax assets
|
|
189
|
|
25
|
|
Accounts payable
|
|
2,187
|
|
360
|
|
Accrued liabilities
|
|
1,854
|
|
(135
|
)
|
Deferred rent
|
|
(41
|
)
|
(32
|
)
|
Net cash provided by operating activities
|
|
9,239
|
|
10,688
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
Purchase of property and equipment
|
|
(255
|
)
|
(413
|
)
|
Purchase of investments
|
|
(56,619
|
)
|
(46,357
|
)
|
Proceeds from maturities of investments
|
|
19,919
|
|
54,149
|
|
Net cash provided by (used in) investing activities
|
|
(36,955
|
)
|
7,379
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
95
|
|
354
|
|
Repurchases of common stock upon release of stock
awards
|
|
(837
|
)
|
(923
|
)
|
Net cash used in financing activities
|
|
(742
|
)
|
(569
|
)
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
(28,458
|
)
|
17,498
|
|
Cash and cash equivalents at beginning of period
|
|
44,485
|
|
27,177
|
|
Cash and cash equivalents at end of period
|
|
$
|
16,027
|
|
$
|
44,675
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash
investing and financing activity:
|
|
|
|
|
|
Gross issuance of restricted stock awards
|
|
$
|
3,933
|
|
$
|
3,773
|
|
Accrued equipment purchase costs
|
|
56
|
|
$
|
19
|
|
See accompanying notes to condensed unaudited consolidated financial
statements.
5
Table of
Contents
TECHWELL, INC.
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS
Note
1The Company and Basis of Presentation
The Company
Techwell, Inc. (Techwell
or the Company) was incorporated in California in 1997 and reincorporated in
Delaware in 2006. The Company is a fabless semiconductor company that designs,
markets and sells mixed signal integrated circuits for two primary markets:
security surveillance and automotive infotainment.
The Companys
headquarters is located in San Jose, California. The Companys international offices include
branch offices in South Korea and Taiwan and subsidiaries in China and Japan.
These offices provide marketing support to customers. The China and Japan
offices are also involved in product development.
The Company has evaluated
subsequent events through the date and time the financial statements were
issued on November 6, 2009.
Basis of Presentation
The accompanying
condensed unaudited consolidated financial statements of the Company have been
prepared without audit in accordance with the rules and regulations of the
Securities and Exchange Commission. The consolidated balance sheet at December 31,
2008 has been derived from the audited consolidated financial statements as of
and for the year then ended. Certain information and disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted in accordance with these rules and regulations. The
information in this report should be read in conjunction with the Companys
consolidated financial statements and notes thereto included in its Annual
Report on Form 10-K for the year ended December 31, 2008.
In the opinion of
management, the accompanying condensed unaudited consolidated financial
statements reflect all adjustments (consisting only of normal recurring
adjustments) necessary to summarize fairly the Companys financial position,
results of operations and cash flows for the interim periods presented. The
operating results for the three and nine months ended September 30, 2009 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2009 or for any other future period.
Principles of Consolidation
The condensed unaudited
consolidated financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation. The Company reports its financial results on a
calendar fiscal year.
Use of Estimates
The preparation of
condensed unaudited consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the condensed unaudited consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Certain Significant Risks and Uncertainties
The Company operates in a
dynamic high technology industry and changes in any of the following areas
could have a material adverse effect on the Companys financial position and
results of operations: unpredictable volume and timing of customer orders,
which are not fixed by contract; loss of one or more of its customers; decrease
in the overall average selling prices of its products; changes in the relative
sales mix of its products; changes in its cost of finished goods; the quality
and timely service of third-party vendors that manufacture, assemble and test
the Companys products; the Companys customers sales outlook, purchasing
patterns and inventory adjustments based on demand and general economic
conditions; product obsolescence and the Companys ability to manage product
transitions; the Companys ability to successfully develop, introduce and sell
new or enhanced products in a timely manner; and the timing of new product
announcements or introductions by the Company or by its competitors.
6
Table of
Contents
TECHWELL, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other
comprehensive income (loss) consists of net unrealized gains (losses) on
available-for-sale investments. The change in unrealized gains on investments
for the three and nine months ended September, 2009 was an increase of $0.1
million and $0.2 million, respectively. The change in unrealized losses for the
three and nine months ended September 30, 2008 was an increase of $0.4
million and $0.8 million, respectively. Total comprehensive income for the
three and nine months ended September 30, 2009 was $1.1 million and $0.1 million,
respectively. Total comprehensive income for the three and nine months ended September 30,
2008 was $2.1 million and $5.4 million, respectively.
Note 2Stock-Based
Compensation
The Company has equity
incentive plans under which it may grant stock options, restricted stock
awards, stock units and stock appreciation rights to employees, consultants and
directors. Currently, the Company is granting stock options, restricted stock
awards, stock units and stock appreciation rights under its 2006 stock
incentive plan (Plan) which was adopted by the Board of Directors in November 2005.
At September 30, 2009, the total number of shares available for issuance
under the Plan was 2.4 million. Stock
options and awards granted under the Plans have a contractual term of up to ten
years, generally vest over four years at the rate of 25 percent on the
one-year anniversary of the vesting commencement date and ratably each month
thereafter and are exercisable under conditions determined by the Board of Directors
or committee thereof as permissible under the terms of the Plan. At September 30,
2009, 834 shares exercised prior to vesting are subject to repurchase by the
Company.
For the three and nine
months ended September 30, 2009 and 2008, stock-based compensation expense
includes compensation cost related to estimated fair values of stock options
and awards granted after January 1, 2006 and stock-based compensation
costs based on intrinsic value related to unvested stock options at January 1,
2006.
The following table
summarizes the distribution of stock-based compensation expense (in thousands):
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Cost
of revenues
|
|
$
|
122
|
|
$
|
122
|
|
$
|
361
|
|
$
|
366
|
|
Research
and development
|
|
881
|
|
901
|
|
2,626
|
|
2,453
|
|
Selling,
general and administrative
|
|
816
|
|
825
|
|
2,442
|
|
2,614
|
|
Related
tax-effect
|
|
(888
|
)
|
(616
|
)
|
(1,673
|
)
|
(1,957
|
)
|
Total
costs and expenses
|
|
$
|
931
|
|
$
|
1,232
|
|
$
|
3,756
|
|
$
|
3,476
|
|
Total compensation cost
attributable to activities capitalized into inventory was not significant in
any period presented.
7
Table of Contents
TECHWELL,
INC.
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3Net
Income (Loss) Per Share
Basic net income (loss)
per common share is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the reporting period
excluding shares subject to repurchase. Diluted net income (loss) per common
share reflects the effects of potentially dilutive securities, which consist of
common stock options (calculated using the treasury stock method) and
restricted awards and shares subject to repurchase. A reconciliation of shares
used in the calculation of basic and diluted net income (loss) per share is as
follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Weighted
average common shares outstanding
|
|
21,563
|
|
21,181
|
|
21,476
|
|
21,071
|
|
Weighted
average shares subject to repurchase
|
|
(3
|
)
|
(12
|
)
|
(5
|
)
|
(17
|
)
|
Shares
used to calculate basic net income (loss) per share
|
|
21,560
|
|
21,169
|
|
21,471
|
|
21,054
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
Common
stock options and restricted awards and unvested common shares subject to
repurchase or cancellations
|
|
755
|
|
911
|
|
|
|
984
|
|
Shares
used to calculate diluted net income (loss) per share
|
|
22,315
|
|
22,080
|
|
21,471
|
|
22,038
|
|
For the three months
ended September 30, 2009 and 2008, 1.7 million and 1.5 million shares,
respectively, associated with stock options and restricted awards outstanding
and unvested shares subject to repurchase have been excluded from the
weighted-average number of common shares outstanding for the diluted net income
per share computation as they are anti-dilutive. For the nine months ended September 30,
2009 and 2008, 3.0 million and 1.2 million shares, respectively,
associated with stock options and restricted awards outstanding and unvested
shares subject to repurchase have been excluded from the weighted-average
number of common shares outstanding for the diluted net income (loss) per share
computation as they are anti-dilutive.
Note
4Income Taxes
In accounting for income
taxes, the Company is required to estimate its current tax expense together
with assessing temporary differences resulting from differing treatments of
items for tax and accounting purposes. These differences result in deferred tax
assets and liabilities. Significant management judgment is required to assess
the likelihood that its deferred tax assets will be recovered from future
taxable income. As of September 30, 2009, the Companys total deferred tax
assets were principally comprised of research and other credit carryforwards,
stock-based compensation and expense accruals.
The Company and its
subsidiaries file income tax returns in the U.S. federal jurisdiction, various
states and foreign jurisdictions. The Company is currently under
examination by the Internal Revenue Service for the tax years 2007 and 2008.
The outcome of the examination is not known, and therefore, the Company is
unable to estimate the effect of the audit to the Companys financial position,
results of operations or cash flows.
The Companys effective
tax rate is based on the estimated annual effective tax rate. The effective tax
rate was 52% and 39% for the three months ended September 30, 2009 and
2008, respectively. The effective tax rate was 112% and 39% for the nine months
ended September 30, 2009 and 2008, respectively. For the nine months ended
September 2009, the Company had a significant discrete tax expense related
to stock-based compensation of approximately $0.5 million that impacted the
Companys effective tax rate. In the three and nine months ended September 30,
2009 and 2008 the effective tax rate differed from the statutory federal income
tax rate primarily due to stock-based compensation, research and development
credits and state income taxes.
Note 5Financial
Instruments
The Companys investments
consist of corporate bonds, US government agency securities, commercial paper
and auction rate securities (ARS). Investments, with the exception of ARS
which are currently classified as trading, are considered available-for-sale.
With the exception of ARS, they are all carried at fair market value based on
market quotes. The Companys investment in ARS was intended to provide
liquidity via an auction process that resets the applicable interest rate at predetermined
calendar intervals, allowing investors to either roll over their holdings or
gain immediate liquidity by selling such interests at par. During 2008,
uncertainties in the credit markets affected all of the Companys holdings in
ARS investments and auctions for the Companys investments in these securities
failed to settle on their respective settlement dates. Consequently, the
investments are not currently liquid and the Company will not be able to access
these funds until a future auction of these investments is successful or a
buyer is found outside of the auction process. All of the ARS investments were
investment grade quality and were in compliance with the Companys investment
policy at the time of acquisition.
8
Table of Contents
TECHWELL,
INC.
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the fourth quarter
of 2008, the Company entered into an agreement with one of its investment
providers, which currently holds its ARS and from whom it had purchased the
ARS, to sell, at the Companys discretion, at par value all of the ARS the
Company currently holds back to the investment provider at anytime starting in June 2010.
The rights granted under the agreement represent a firm agreement, which is as
an agreement with an unrelated party, binding on both parties and legally
enforceable, with the following characteristics: a) the agreement specifies all
significant terms, including the quantity to be exchanged, the fixed price and
the time of transaction and b) the agreement includes a disincentive for
nonperformance that is sufficiently large to make performance probable. The
enforceability of the agreement results in a put option and should be
recognized as a free standing asset separate from the ARS. The put option does
not meet the definition of a derivative instrument. Therefore, the Company has
elected to measure the put option at fair value, based on authoritative
guidance which permits an entity to elect the fair value option for recognized
financial assets. As a result, realized gains and losses will be included in
earnings in the period in which they arise.
In connection with the acceptance
of the offer, the Company recorded $1.0 million as the fair value of the put
option asset with a corresponding gain to interest income. Additionally, the
Company transferred its ARS from investments classified as available-for-sale
to trading. The transfer to trading reflects the Companys intent to exercise
the put option, whereas, prior to the agreement, the Companys intent was to
hold the ARS until the market recovered. Upon transfer to trading, the Company
recognized a loss of $1.0 million, included in interest income, for the amount
of unrealized loss not previously recognized in earnings. As a result of this
transfer unrealized gains or losses will be included in earnings in future
periods, and the Company anticipates future changes in fair value of the put
option will approximate the fair value movement of the related ARS. The net
impact of the change in fair value of the ARS and related put option to the
Companys operating results was nil for the three and nine months ended September 30,
2009.
As of September 30,
2009, the entire ARS investment balance of $6.3 million is classified as
short-term investments on the condensed unaudited consolidated balance sheet
because the sale of the ARS back to the investment provider is expected to
occur in June 2010.
Typically the fair value
of ARS investments approximates par value due to the frequent resets through
the auction process. While the Company continues to earn interest on its ARS
investments at the maximum contractual rate, these investments are not
currently trading and therefore do not currently have a readily determinable
market value. Accordingly, the estimated fair value of ARS no longer
approximates par value.
The Company has used a
discounted cash flow model to determine the estimated fair value of its
investment in ARS as of September 30, 2009. The assumptions used in
preparing the discounted cash flow model include estimates for interest rates,
estimates for discount rates using yields of comparable traded instruments
adjusted for illiquidity and other risk factors, amount of cash flows and
expected holding periods of the ARS. These inputs reflect the Companys own
assumptions about the assumptions market participants would use in pricing the
ARS, including assumptions about risk, developed based on the best information
available in the circumstances.
The put option is a free
standing asset separate from the ARS, and represents the Companys contractual
right to require its investment provider to purchase the ARS at par at anytime
starting in June 2010. The Company values the put option based on amount
of cash flows and expected holding periods of the related ARS, time value of
money and the Companys assessment of the credit worthiness of its investment
provider.
9
Table of Contents
TECHWELL,
INC.
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a
summary of the Companys available-for-sale securities as of September 30,
2009 (in thousands):
|
|
|
|
|
|
Less
than
12 Months
|
|
12
Months
or Longer
|
|
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
9,555
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
9,555
|
|
Corporate
bonds
|
|
34,342
|
|
276
|
|
(9
|
)
|
|
|
34,609
|
|
Municipal
bonds
|
|
1,500
|
|
7
|
|
|
|
|
|
1,507
|
|
Treasuries
and federal agencies
|
|
28,631
|
|
91
|
|
(2
|
)
|
|
|
28,720
|
|
Commercial
paper
|
|
2,991
|
|
|
|
|
|
|
|
2,991
|
|
Total
|
|
$
|
77,019
|
|
$
|
374
|
|
$
|
(11
|
)
|
$
|
|
|
$
|
77,382
|
|
The following is a
summary of the Companys available-for-sale securities as of December 31,
2008 (in thousands):
|
|
|
|
|
|
Less
than
12 Months
|
|
12
Months
or Longer
|
|
|
|
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money
market funds
|
|
$
|
33,998
|
|
$
|
|
|
$
|
|
|
|
|
$
|
33,998
|
|
Corporate
bonds
|
|
19,710
|
|
97
|
|
(57
|
)
|
|
|
19,750
|
|
Treasuries
and federal agencies
|
|
5,023
|
|
103
|
|
|
|
|
|
5,126
|
|
Commercial
paper
|
|
12,061
|
|
26
|
|
|
|
|
|
12,087
|
|
Total
|
|
$
|
70,792
|
|
$
|
226
|
|
$
|
(57
|
)
|
$
|
|
|
$
|
70,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
2009, the unrealized losses on our available-for-sale securities were
insignificant in relation to our total available-for-sale securities.
Substantially all of our unrealized losses on our available-for-sale
investments can be attributed to fair value fluctuations in an unstable credit
environment. The Company considers the declines in market value of its
available-for-sale securities to be temporary in nature. When evaluating the
investments for other-than-temporary impairment, the Company reviews factors
such as the length of time and extent to which fair value has been below cost
basis, the financial condition of the issuer and any changes thereto, and the
Companys intent to sell, or whether it is more likely than not it will be
required to sell, the investment before recovery of the investments amortized
cost basis. The Company believes that the unrealized losses are temporary and
do not require an other-than-temporary impairment. During the three and nine
months ended September 30, 2009 and 2008, the Company did not recognize
any other-than-temporary impairment charges on outstanding available-for-sale
securities.
10
Table of Contents
TECHWELL,
INC.
NOTES
TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective January 1,
2008, the Company adopted the authoritative guidance for fair value
measurements and the fair value option for financial assets and financial
liabilities. The table below represents the fair value hierarchy of the Companys
financial instruments measured at fair value as of September 30, 2009 (in
thousands):
|
|
Total
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Money
market funds
|
|
$
|
9,555
|
|
$
|
9,555
|
|
$
|
|
|
$
|
|
|
Corporate
bonds
|
|
34,609
|
|
34,609
|
|
|
|
|
|
Municipal
bonds
|
|
1,507
|
|
1,507
|
|
|
|
|
|
Treasuries
and federal agencies
|
|
28,720
|
|
28,720
|
|
|
|
|
|
Commercial
paper
|
|
2,991
|
|
2,991
|
|
|
|
|
|
Put
option
|
|
785
|
|
|
|
|
|
785
|
|
Auction
rate securities
|
|
6,315
|
|
|
|
|
|
6,315
|
|
Total
|
|
$
|
84,482
|
|
$
|
77,382
|
|
$
|
|
|
$
|
7,100
|
|
Amount
included in:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
9,555
|
|
$
|
9,555
|
|
$
|
|
|
$
|
|
|
Short-term
investments
|
|
48,089
|
|
41,774
|
|
|
|
6,315
|
|
Long-term
investments
|
|
26,053
|
|
26,053
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
785
|
|
|
|
|
|
785
|
|
Total
|
|
$
|
84,482
|
|
$
|
77,382
|
|
$
|
|
|
$
|
7,100
|
|
The following table
provides a reconciliation of the beginning and ending balances for the assets
measured at fair value using significant unobservable inputs (Level 3) (in
thousands):
|
|
Put
Option
|
|
Auction
Rate
Securities
|
|
Balances
as of December 31, 2008
|
|
$
|
1,101
|
|
$
|
5,999
|
|
Unrealized
gains (losses) included in earnings
|
|
(304
|
)
|
304
|
|
Balances
as of March 31, 2009
|
|
797
|
|
6,303
|
|
Unrealized
gains (losses) included in earnings
|
|
(46
|
)
|
46
|
|
Balances
as of June 30, 2009
|
|
751
|
|
6,349
|
|
Unrealized
gains (losses) included in earnings
|
|
34
|
|
(34
|
)
|
Balances
as of September 30, 2009
|
|
$
|
785
|
|
$
|
6,315
|
|
Note 6Details
of Certain Balance Sheet Components
|
|
September 30,
2009
|
|
December 31,
2008
|
|
|
|
(in
thousands)
|
|
Inventory:
|
|
|
|
|
|
Finished
goods
|
|
$
|
4,501
|
|
$
|
2,750
|
|
Work-in-process
|
|
2,205
|
|
2,030
|
|
|
|
$
|
6,706
|
|
$
|
4,780
|
|
|
|
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
Equipment
|
|
$
|
2,034
|
|
$
|
1,888
|
|
Software
|
|
820
|
|
779
|
|
Furniture
and fixtures
|
|
320
|
|
308
|
|
Leasehold
improvements
|
|
414
|
|
454
|
|
|
|
3,588
|
|
3,429
|
|
Accumulated
depreciation and amortization
|
|
(2,525
|
)
|
(2,139
|
)
|
|
|
$
|
1,063
|
|
$
|
1,290
|
|
|
|
|
|
|
|
Accrued
liabilities:
|
|
|
|
|
|
Accrued
compensation
|
|
$
|
1,150
|
|
$
|
1,168
|
|
Accrued
inventory purchases
|
|
100
|
|
104
|
|
Customer
advance
|
|
1,624
|
|
|
|
Legal
and professional service fees
|
|
170
|
|
320
|
|
Other
|
|
941
|
|
525
|
|
|
|
$
|
3,985
|
|
$
|
2,117
|
|
11
Table of
Contents
TECHWELL,
INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7Segment
Information
The
Company currently operates in one reportable segment, the designing, marketing
and selling of mixed signal integrated circuits for multiple video applications
primarily for the security surveillance and automotive infotainment markets.
The Companys chief operating decision maker is the Chief Executive Officer.
The
percentage of total revenues by geographic location is as follows:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
China
|
|
53
|
%
|
41
|
%
|
51
|
%
|
35
|
%
|
South Korea
|
|
20
|
|
25
|
|
22
|
|
28
|
|
Taiwan
|
|
20
|
|
29
|
|
18
|
|
31
|
|
Japan
|
|
5
|
|
3
|
|
6
|
|
4
|
|
United States
|
|
1
|
|
1
|
|
1
|
|
1
|
|
Other
|
|
1
|
|
1
|
|
2
|
|
1
|
|
Total revenues
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
Revenues by product line
are as follows (in thousands):
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Security surveillance
|
|
$
|
13,287
|
|
$
|
14,409
|
|
$
|
29,129
|
|
$
|
38,873
|
|
Automotive infotainment
|
|
3,172
|
|
1,995
|
|
7,204
|
|
5,655
|
|
Consumer
|
|
1,543
|
|
2,100
|
|
4,034
|
|
6,356
|
|
Other (1)
|
|
13
|
|
16
|
|
25
|
|
249
|
|
Total revenues
|
|
$
|
18,015
|
|
$
|
18,520
|
|
$
|
40,392
|
|
$
|
51,133
|
|
(1) Consists of contract development projects,
early generation mixed signal semiconductors for digital video applications and
PCI video decoder products.
The
revenues and accounts receivable from customers representing 10% or more of
total revenues and accounts receivable are as follows:
|
|
Accounts Receivable at
|
|
Revenues
|
|
|
|
September 30,
|
|
December 31,
|
|
Three
Months ended
September 30,
|
|
Nine
Months ended
September 30,
|
|
Customer
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
A
|
|
*
|
%
|
21
|
%
|
38
|
%
|
37
|
%
|
37
|
%
|
32
|
%
|
B
|
|
*
|
|
11
|
|
*
|
|
*
|
|
*
|
|
*
|
|
C
|
|
14
|
|
*
|
|
*
|
|
*
|
|
*
|
|
*
|
|
D
|
|
11
|
|
*
|
|
*
|
|
*
|
|
*
|
|
*
|
|
E
|
|
*
|
|
20
|
|
*
|
|
*
|
|
*
|
|
*
|
|
F
|
|
18
|
|
*
|
|
*
|
|
11
|
|
*
|
|
11
|
|
G
|
|
13
|
|
*
|
|
*
|
|
*
|
|
*
|
|
*
|
|
* less
than 10%
12
Table of
Contents
TECHWELL,
INC.
NOTES TO CONDENSED UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following is a summary of long-lived assets by geographic region (in
thousands):
|
|
September 30,
2009
|
|
December 31,
2008
|
|
United States
|
|
$
|
873
|
|
$
|
1,069
|
|
China
|
|
63
|
|
73
|
|
Taiwan
|
|
56
|
|
79
|
|
Japan
|
|
36
|
|
60
|
|
South Korea
|
|
35
|
|
9
|
|
Total
|
|
$
|
1,063
|
|
$
|
1,290
|
|
Note
8Related Party Transactions
One of
the Companys Board members is a partner in a law firm that provides services
to the Company. The Company incurred fees of nil and $8,000 from this law firm
for legal services in the three months ended September 30, 2009 and 2008,
respectively. The Company incurred fees of $7,000 and $21,000 from this law
firm for legal services in the nine months ended September 30, 2009 and
2008, respectively. The amount payable to this law firm was nil and $8,000 at September 30,
2009 and December 31, 2008, respectively.
Note
9Contingencies
Indemnification Obligations
Subject
to certain limitations, the Company is obligated to indemnify its current and
former directors, officers and employees in connection with government
inquiries and litigation. These obligations arise under the terms of the
Companys certificate of incorporation, its bylaws, applicable contracts, and
Delaware and California law. The obligation to indemnify generally means
that the Company is required to pay or reimburse the individuals reasonable
legal expenses and possibly damages and other liabilities incurred in
connection with these matters. Additionally, the Company has certain
indemnification obligations to customers under its contract development
projects with respect to any infringement of third-party patents and
intellectual property rights by its products.
Other Legal Matters
The
Company is currently not a party to any material legal proceedings. The Company
may be named from time to time as a party to lawsuits in the normal course of
its business. Litigation in general and intellectual property and securities
litigation in particular, can be expensive and disruptive to normal business
operations. Moreover, the results of legal proceedings are difficult to
predict.
Note
10Recent Accounting Pronouncements
In September 2006,
the Financial Accounting Standards Board (FASB) issued authoritative guidance
for fair value measurements, which defines fair value, establishes a framework
for measuring fair value and expands disclosures about assets and liabilities
measured at fair value in the financial statements. In February 2008, the
FASB issued authoritative guidance, which allows for the delay of the effective
date of the authoritative guidance for fair value measurements for one year for
all non-financial assets and liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company adopted the provisions of the guidance for financial assets and
liabilities effective January 1, 2008 and the provisions of the guidance
for non-financial assets and non-financial liabilities effective January 1,
2009. The application of the guidance to non-financial assets and non-financial
liabilities did not have an impact on the condensed unaudited consolidated
financial position, results of operations or cash flows.
In December 2007,
the FASB revised the authoritative guidance for business combinations, which
establishes principles and requirements for how an acquirer recognizes and
measures in its consolidated financial statements the identifiable assets
acquired, the liabilities assumed, contractual contingencies and contingent
consideration at their fair value on the acquisition date, any controlling
interest in the acquiree and the goodwill acquired. The guidance also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of the business combination. The guidance is effective for
fiscal years beginning after December 15, 2008. The Company will apply the
provisions of the guidance to any acquisitions occurring subsequent to January 1,
2009.
13
Table of
Contents
TECHWELL,
INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In April 2009,
the FASB issued authoritative guidance on accounting for assets acquired and
liabilities assumed in a business combination that arise from contingencies,
which amends the guidance for the initial recognition and measurement,
subsequent measurement and accounting, and disclosures for assets and
liabilities arising from contingencies in business combinations. The guidance
eliminates the distinction between contractual and non-contractual
contingencies, including the initial recognition and measurement criteria. The
guidance is effective for contingent assets and contingent liabilities acquired
in business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15,
2008. The Company will assess the impact of this guidance at the time of any
such acquisition.
In April 2009,
the FASB issued three related authoritative guidance for determining fair value
when the volume and level of activity for an asset or liability have
significantly decreased and identifying transactions that are not orderly,
recognition and presentation of other-than-temporary impairments and interim
disclosures about fair value of financial instruments, which are effective for
interim and annual periods ending after June 15, 2009. These authoritative
guidance provides guidance on how to determine the fair value of assets and
liabilities in the current economic environment and reemphasizes that the
objective of a fair value measurement remains an exit price, modifies the
requirements for recognizing other-than-temporarily impaired debt securities
and revises the existing impairment model for such securities, by modifying the
current intent and ability indicator in determining whether an investment in
debt security is other-than-temporarily impaired, and enhances the disclosure
of instruments for both interim and annual periods. Effective April 1,
2009, the Company adopted the provisions of the guidance. The adoption of the
three guidance did not have an impact on the condensed unaudited consolidated
financial position, results of operations or cash flows.
Note
11Subsequent Events
On October 9,
2009, the Company acquired substantially all of the assets of a development
stage company based in China. The purchase price for the acquisition was $4.2
million, less assumed liabilities of approximately $0.8 million.. The Company
paid the purchase price in cash and agreed to make restricted stock awards,
which will vest over four years, to employees in connection with their new
employment with the Company. The acquired company is focused on developing
video solutions for the security surveillance market. As part of the purchase
agreement, the Company extended employment offers to approximately 40
employees.
14
Table of Contents
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
The
following discussion of our financial condition and results of operations
should be read in conjunction with the condensed unaudited consolidated
financial statements and notes to those statements included elsewhere in this
Quarterly Report on Form 10-Q for the three and nine months ended September 30,
2009 and our audited consolidated financial statements for the year ended December 31,
2008 included in our Annual Report on Form 10-K.
This
Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. These statements relate to future
periods, future events or our future operating or financial plans or
performance. These statements can often be identified by the use of
forward-looking terminology such as expects, believes, intends, anticipates,
estimates, plans, may, or will, or the negative of these terms, and
other similar expressions. These forward-looking statements include
statements as to the source of our revenues, our ability to generate revenues,
our ability to sustain our growth rate and return to profitability, expected
growth in our target markets and application-specific products, our expectation
regarding the increase in certain expenses, our cash needs, our capital
requirements, our market risk sensitivity, our business and product strategies,
our anticipated tax rate, industry trends and our anticipation that
developments in our technologies and new products will increase our target
market share.
These
forward-looking statements reflect our current views with respect to future
events, are based on assumptions and are subject to risks and
uncertainties. These risks and uncertainties could cause actual results to
differ materially from those projected and include, but are not limited to,
fluctuations in our revenue and operating results, our ability to return to
profitability, the demand for our products in our target markets, our ability
to compete, our dependence on key and highly skilled personnel, the ability to
develop new products and to enhance our existing products, the continued
seasonality of our business due to our target markets and location of our
customers, our ability to integrate businesses that we may acquire, our ability
to estimate and predict customer demand,
economic
volatility in either domestic or foreign markets, the impact of any change in
United States federal income tax laws and the loss of any beneficial tax
treatment that we currently enjoy, our reliance on independent foundries and
subcontractors for the manufacture, assembly and testing of our products, the
length of our sales cycle and reliance on distributors, our ability to protect
our intellectual property, the cyclical nature of the semiconductor industry,
our ability to raise capital, the potential volatility of our stock, the
outcome of future litigation and the other risks set forth under PART II
OTHER INFORMATION, Item 1A. Risk
Factors. Given these risks and uncertainties, you should not place undue
reliance on these forward-looking statements. Except as required by
federal securities laws, we undertake no obligation to update any
forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
In this
report all references to Techwell, we, us or our mean Techwell, Inc.
Techwell
is our registered trademark. We also refer to trademarks of other
corporations and organizations in this Form 10-Q.
Overview
We are
a fabless semiconductor company that designs, markets and sells mixed signal
integrated circuits for two primary markets: security surveillance and
automotive infotainment. We design application-specific products for our two
primary markets that enable the conversion of analog video signals to digital
form and perform advanced digital video processing to facilitate the display,
storage and transport of video content. We believe this application specific
product strategy allows us to better address varying customer requirements,
fully leverage our technology capabilities and achieve greater share within our
two core markets. To a lesser extent, we market and sell video decoders to the
consumer market. Our semiconductors are based on our proprietary architecture
and mixed signal technologies that we believe provide high video quality under
a wide range of signal conditions, enable high levels of integration and are
cost-effective.
Our business has
experienced significant growth primarily as a result of our ability to develop
new products, obtain design wins and convert these design wins into revenues.
We generated revenues from the sale of over 25 different products in the
quarter ended September 30, 2009.
15
Table of Contents
We
have three principal semiconductor product lines: security surveillance
products, automotive infotainment products and consumer products. Our security
surveillance products integrate important functions required to display, store
and transport analog video signals from security surveillance cameras. For
example, we integrate multiple video decoders into a single semiconductor. As a
result, this semiconductor is able to receive and decode analog video signals
from multiple cameras into a standard digital format. In addition, we integrate
a multiplexor, a key technology required to combine multiple video signals into
a single video signal, and a display processor, a key technology required to
display multiple video channels. In 2007, we introduced our first integrated
security surveillance product, which integrated four video decoders and a
system controller and a multiplexor on a single semiconductor. In December 2008,
we introduced a new security surveillance product which includes a 16 channel
multiplexer and supports the display of multiple standard definition and high
definition video sources. We currently sell our security surveillance products
to customers for the following applications: embedded digital video recorders,
or DVRs, PC-based DVRs, networked video recorders, or NVRs, and multiplexors.
Our
automotive infotainment products integrate important functions required to
display popular analog video, high definition video and PC graphics signals on
a LCD display. These key functions include a video decoder, deinterlacer and
scaler. In addition, our newer generation automotive infotainment products
integrate a timing controller to interface directly with certain types of LCD
displays and image enhancement functionality to improve overall video quality.
In January 2008, we announced the introduction of five new LCD display
processors designed for the automotive end market. These new products are
designed to provide advanced image processing, an integrated programmable
timing controller and multiple analog and digital video inputs.
Our
consumer products are high performance mixed signal semiconductors that decode
analog TV broadcast signals, including NTSC, PAL and SECAM, and popular analog
video signals, including composite, S-Video, component and SCART, into a
standard digital format. Our consumer products integrate proprietary sync
processing, color demodulating and digital 2D and 3D comb filtering, which are
the key technologies required for high performance video decoding. We offer a
broad range of consumer products at various price points and with varying
features. We have developed our video decoder products for applications within
the consumer markets such as advanced TV, multifunction LCD monitor, DVD
recorder and camcorders. In the future, however, we intend to focus our
development efforts specifically on applications for the security surveillance
and automotive infotainment markets and as a result, we anticipate our consumer
revenues will decline over the next several quarters.
Our
other products include early generation mixed signal semiconductors for digital
video applications and PCI video decoder products, which are video decoders
that utilize peripheral component interconnect, or PCI, technology for personal
computer applications.
Although our revenues
have grown rapidly since 2004, we do not expect to achieve similar growth rates
in the future. We currently expect to increase our expense levels in the future
to support increased research and development efforts in order to bring new
products to our primary markets. These expenditures may not result in increased
revenue or profitability in the future. In addition, our ability to increase
our revenues will depend on increased demand for digital video applications in
the security surveillance and automotive infotainment markets. Although we
believe our two primary markets will experience growth in the next few years,
actual growth of these markets is uncertain. In addition, the timing of orders
by and shipments to our customers, as well as general trends in our two primary
markets, can cause our revenue growth to be inconsistent.
We undertake significant
product development efforts well in advance of a products release, and in
advance of receiving purchase orders from our customers. Our product
development efforts, which are focused on developing new designs with broad
demand and potential for future derivative products, typically take from six to
24 months until production begins, depending on the products complexity. If we
secure a design win, the system designer is likely to continue to use the same
or enhanced versions of our product across a number of their models, which
tends to extend the life cycles of our products. Conversely, if a competitor
secures the design win, it may be difficult for us to sell into the customers
application for an extended period. Our sales cycle typically ranges from six
to 24 months. Due to the length of our product development and sales cycle, the
majority of our revenues for any period is generally weighted toward products
introduced for sale, meaning products for which we commenced placing orders
with our manufacturing subcontractors, in the prior one or two years. As a
result, our present revenues are not necessarily representative of future sales
because our future sales are likely to be comprised of a different mix of
products, some of which are now in the development stage.
16
Table of Contents
As a
fabless semiconductor company, we outsource all of our manufacturing, assembly
and test functions to third-party vendors primarily located in Taiwan. This
business model enables us to reduce our capital expenditures and fixed costs,
while focusing our engineering and design resources on our core strength, the
design of mixed signal semiconductors for digital video applications.
We
sell our products to distributors that fulfill third-party orders for our
products. We also sell directly, using independent sales representatives, to
original equipment manufacturers, or OEMs, and to original design
manufacturers, or ODMs. For the nine months ended September 30, 2009,
we derived 76% of our revenues from products sold to distributors and 24% from
products sold to OEMs or ODMs. For the year ended December 31, 2008,
we derived 79% of our revenues from products sold to distributors and 21% from
products sold to OEMs or ODMs. Our gross margins have not historically
been significantly different between sales to distributors and sales to OEMs or
ODMs through orders procured by independent sales representatives. However, our
operating profit on sales through orders procured by independent sales
representatives can be less due to the payment of commissions to sales
representatives which we record as sales and marketing expense.
We
received an aggregate of 75% and 80% of our revenues from our ten largest
customers for the three months ended September 30, 2009 and 2008,
respectively. For the three months ended September 30, 2009, Lacewood
International Corporation, or Lacewood, a distributor, accounted for 38% of our
revenues. For the three months ended September 30, 2008, Lacewood and AV
Tech Corporation, or AV Tech, accounted for 37% and 11% of our revenues,
respectively. For the nine months ended September 30, 2009, Lacewood
accounted for 37% of our revenues. For the nine months ended September 30,
2008, Lacewood and AV Tech accounted for 32% and 11% of our revenues,
respectively.
We
derive substantially all of our revenues from sales to foreign customers,
particularly in Asia, which sales accounted for 97% and 98% of our revenues for
the nine months ended September 30, 2009 and 2008, respectively. The table
below indicates the percentage of total revenues by geographic location for the
periods indicated:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
China
|
|
53
|
%
|
41
|
%
|
51
|
%
|
35
|
%
|
South Korea
|
|
20
|
|
25
|
|
22
|
|
28
|
|
Taiwan
|
|
20
|
|
29
|
|
18
|
|
31
|
|
Japan
|
|
5
|
|
3
|
|
6
|
|
4
|
|
United States
|
|
1
|
|
1
|
|
1
|
|
1
|
|
Other
|
|
1
|
|
1
|
|
2
|
|
1
|
|
Total revenues
|
|
100
|
%
|
100
|
%
|
100
|
%
|
100
|
%
|
We received 51% and 35%
of our revenues from China in the nine months ended September 30, 2009 and
2008, respectively. The percentage
increase between 2009 and 2008 was primarily due to an increase in revenue from
our security surveillance customers in China who are benefitting from the
relative strength in the Chinese domestic economy. We received 18% and 31% of
our revenues from Taiwan in the nine months ended September 30, 2009 and
2008, respectively. The decrease was
primarily due to a decline in revenues from consumer markets, whose products
were primarily sold to customers in Taiwan.
We believe that a
substantial majority of our revenues will continue to come from customers
located in Asia, where most of the electronic devices that use our
semiconductors are manufactured. As a result of this regional customer
concentration, we may be subject to environmental, economic, cultural and political
events as well as other developments that impact our customers in Asia. All of
our sales currently are denominated in U.S. dollars. Therefore, an increase in
the value of the U.S. dollar relative to foreign currencies could make our
products less competitive in international markets. Substantially all of our
cost of revenues and a majority of our operating expenses are also denominated
in U.S. dollars. As a result, we believe that our overall exposure to foreign
exchange risk is low.
17
Table of
Contents
At September 30,
2009, we had two international subsidiaries, one in Japan and one in China. We
also have two international branches, one in South Korea and one in Taiwan. At September 30,
2009, 64 of our 165 employees were located in our international subsidiaries
and branch offices. Our China and Japan subsidiaries are involved in both
product development and technical marketing support. Our Taiwan and Korea
branches primarily provide technical marketing support.
It is
difficult for us to forecast the demand for our products, in part because of
the highly complex supply chain between us and the end markets that incorporate
our products. Demand for new features changes rapidly. Distributors and ODMs
add an additional layer of complexity. We must, therefore, forecast demand not
only from our direct customers, but also from other participants in this
multi-level distribution channel. Because of our lengthy product development
cycle, it is critical for us to anticipate changes in demand for our various
product features and the applications they serve, to allow sufficient time for
product design. Our failure to accurately forecast demand can lead to product
shortages that can impede production by our customers and harm our relationship
with these customers. Conversely, our failure to forecast declining demand or
shifts in product mix can result in excess or obsolete inventory.
Generally,
the average selling price of our products will decline over the life of the
product. Our experience to date is that the decline has not had a material
effect on our gross margins, as price reductions have been mitigated by lower
per unit costs associated with both high unit volume and the transition of our
products to smaller process geometries.
We
expect our revenues to be lower in the first calendar quarter of each year. The
most significant factor for this decline is because most of our semiconductors
are sold to customers located in Asia, primarily to customers located in
regions who observe the Lunar New Year holiday. Typically, our customers
offices are closed for a week or more during the extended holiday period, which
negatively impacts our business during the first calendar quarter of the year.
As a result of seasonality associated with our customer concentration in Asia,
we expect our revenues to be lower in the first calendar quarter of each year.
Critical Accounting Policies
Our
discussion and analysis of our financial condition and results of operations
are based upon our condensed unaudited consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these condensed unaudited consolidated
financial statements requires us to make estimates and judgments that affect
the reported amount of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. We evaluate our estimates on
an on-going basis, including those related to inventory valuations, valuation
of investments, income taxes and stock-based compensation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making the judgments we make about the carrying values of assets and
liabilities that are not readily apparent from other sources. Because these
estimates can vary depending on the situation, actual results may differ from
the estimates.
We
believe the following critical accounting policies affect our more significant
judgments used in the preparation of our condensed unaudited consolidated
financial statements.
Revenue
Recognition.
Revenues from product sales are recognized upon shipment, provided that
title and risk of loss has passed to the customer, persuasive evidence of an
arrangement exists, the price is fixed or determinable and collectibility is
probable. We do not allow for price protection or stock rotation rights with
any of our distributors. If we change our practice and allow stock rotation or
price protection in the future, we would have to evaluate the consequences on
the timing of our revenue recognition, which could lead to the deferral of the
revenues subject to such uncertainties unless reasonable estimates of returns
or price reductions can be made at the time of shipment.
18
Table of
Contents
Fair
Value Measurements.
Effective January 1, 2008, we
adopted the authoritative guidance for fair value measurements and the fair
value option for financial assets and financial liabilities. The guidance
defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements required under other
accounting guidance. The guidance
clarifies that fair value is an exit price, representing the amount that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants and also requires that a fair value
measurement reflect the assumptions market participants would use in pricing an
asset or liability based on the best information available. Assumptions include
the risks inherent in a particular valuation technique (such as a pricing
model) and/or the risks inherent in the inputs to the model. These assumptions are
volatile and subject to change as the underlying sources of these assumptions
and market conditions change. Refer to
Note 2 to our consolidated financial statements included in our Annual Report
on Form 10-K for the year ended December 31, 2008 for the fair value
hierarchy, and Note 5 to our condensed unaudited consolidated financial
statements included in this Quarterly Report on Form 10-Q for inputs to
valuation techniques and fair value measurements of financial assets carried at
fair value.
Inventory
Valuation.
Inventory is valued at the lower of cost or market, computed on a
first-in, first-out basis. We evaluate inventory for excess and obsolescence
and write-down units that are unlikely to be sold based upon a six month demand
forecast. This evaluation may take into account matters including expected
demand, anticipated sales price, product obsolescence and other factors. If
actual future demand for our products is less than currently forecasted,
additional inventory write-downs may be required. Once inventory costs are
written down, such revised costs are maintained until the product is sold or
scrapped. If a unit that has been written down is subsequently sold, the cost
associated with the revenue from this unit is reduced to the extent of the write-down,
resulting in an increase in gross profit.
Accounting
for Income Taxes.
In accounting for income taxes, we are required to
estimate our current tax expense together with assessing temporary differences
resulting from differing treatments of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. We must assess
the likelihood that our deferred tax assets will be recovered from future
taxable income and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. Significant management judgment is
required to assess the likelihood that our deferred tax assets will be
recovered from future taxable income. At September 30, 2009, our total
deferred tax assets were principally comprised of research and other credit
carryforwards, stock-based compensation and expense accruals.
We assess the
recoverability of our deferred tax assets. To assess the likelihood that the
deferred tax assets will be recovered from future taxable income, we considered
both positive evidence that indicates a valuation allowance is not needed and
negative evidence that indicates a valuation allowance is needed. As of September 30,
2009, we believe that our predictable strong earnings provide ample evidence
that no valuation allowance is required at this time as it is more likely than
not the deferred tax assets will be realized in the future.
Management believes it is
more likely than not that forecasted income, including income that may be
generated as a result of certain tax planning strategies, together with the tax
effects of the deferred tax liabilities, will be sufficient to fully recover
the remaining deferred tax assets. In the event that we determine all or part
of the net deferred tax assets are not realizable in the future, we will make
an adjustment to the valuation allowance that would be charged to earnings in
the period such determination is made. In addition, the calculation of tax
liabilities involves significant judgment in estimating the impact of
uncertainties. Resolution of these uncertainties in a manner inconsistent with
managements expectations could have a material impact on our financial
condition and operating results.
We file income tax
returns in the U.S. federal jurisdiction, various states and foreign
jurisdictions. We are currently under examination by the Internal Revenue
Service for the tax years 2007 and 2008. The outcome of the examination is not
known, and therefore, we are unable to estimate the effect of the audit to our
financial position, results of operations or cash flows.
Stock-Based
Compensation.
For the three and nine months ended September 30, 2009 and 2008,
stock-based compensation expense includes compensation costs related to
estimated fair values of stock options and awards granted after January 1,
2006 and compensation costs related to unvested stock options at January 1,
2006 based on the intrinsic values.
19
Table of Contents
For options granted after
January 1, 2006, we use the straight-line method for expense attribution.
For options granted prior to January 1, 2006, we use the multiple grant
approach for expense attribution, which results in substantially higher amounts
of amortization in earlier years as opposed to the straight-line method, which
results in equal amortization over the vesting period of the options.
The fair value of options
granted after January 1, 2006 is estimated on the grant date using the
Black-Scholes option valuation model. The expected term assumption calculation
was based on historical data as adjusted for any changes in future
expectations. We relied exclusively on historical volatility in the expected
volatility assumption calculation since we do not have any publicly traded
options. The risk-free rate is based on the U.S. Treasury yield curve in effect
at the time of grant for periods corresponding with the expected term of the
option and the estimated forfeiture rate is based on our historical forfeiture
experience.
The following assumptions
are used to value stock options granted in the periods presented:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Expected
term (years)
|
|
4.34
|
|
4.28
|
|
4.34
|
|
4.28
|
|
Risk-free
interest rate
|
|
2.01
|
%
|
2.79
|
%
|
1.52 2.01
|
%
|
2.57 2.86
|
%
|
Expected
volatility
|
|
53.00
|
%
|
51.00
|
%
|
53.00 54.00
|
%
|
51.00 64.00
|
%
|
Expected
dividend
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
expense for restricted stock awards is determined using the fair value of our
stock on the date of the grant and is recognized on a straight-line basis over
the service period.
Stock-based compensation
expense is allocated among cost of revenues, research and development expenses
and selling, general and administrative expenses, respectively, based upon the
employees job function. We expect to continue to recognize substantial amounts
of stock-based compensation expense relating to our employee stock options and
awards in future periods.
Results
of Operations
The following table is
derived from our selected financial data and sets forth our historical
operating results as a percentage of revenues:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Cost
of revenues*
|
|
39.1
|
|
37.0
|
|
39.6
|
|
38.0
|
|
Gross
profit
|
|
60.9
|
|
63.0
|
|
60.4
|
|
62.0
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
Research
and development*
|
|
29.3
|
|
24.0
|
|
34.4
|
|
23.9
|
|
Selling,
general and administrative*
|
|
21.3
|
|
19.3
|
|
27.4
|
|
21.5
|
|
Total
operating expenses
|
|
50.6
|
|
43.3
|
|
61.8
|
|
45.4
|
|
Income
(loss) from operations
|
|
10.3
|
|
19.7
|
|
(1.4
|
)
|
16.6
|
|
Interest
income
|
|
2.0
|
|
2.7
|
|
2.6
|
|
3.5
|
|
Income
before income taxes
|
|
12.3
|
|
22.4
|
|
1.2
|
|
20.1
|
|
Income
tax provision
|
|
6.4
|
|
8.8
|
|
1.3
|
|
7.9
|
|
Net
income (loss)
|
|
5.9
|
%
|
13.6
|
%
|
(0.1
|
)%
|
12.2
|
%
|
* Percentages include
stock-based compensation
20
Table of Contents
The following table
indicates the percentage of stock-based compensation attributed to each item as
a percentage of revenues:
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Cost
of revenues
|
|
0.7
|
%
|
0.7
|
%
|
0.9
|
%
|
0.7
|
%
|
Research
and development
|
|
4.9
|
|
4.9
|
|
6.5
|
|
4.8
|
|
Selling,
general and administrative
|
|
4.5
|
|
4.5
|
|
6.0
|
|
5.1
|
|
Revenues by product line are as follows (in
thousands):
|
|
Three
Months Ended
September 30,
|
|
Nine
Months Ended
September 30,
|
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
|
Security
surveillance
|
|
$
|
13,287
|
|
$
|
14,409
|
|
$
|
29,129
|
|
$
|
38,873
|
|
Automotive
infotainment
|
|
3,172
|
|
1,995
|
|
7,204
|
|
5,655
|
|
Consumer
|
|
1,543
|
|
2,100
|
|
4,034
|
|
6,356
|
|
Other
(1)
|
|
13
|
|
16
|
|
25
|
|
249
|
|
Total
revenues
|
|
$
|
18,015
|
|
$
|
18,520
|
|
$
|
40,392
|
|
$
|
51,133
|
|
(1) Consists
of contract development projects, early generation mixed signal semiconductors
for digital video applications and PCI video decoder products.
Comparisons
of the Three Months Ended September 30, 2009 and 2008
Revenues.
Our revenues consist of
sales of our mixed signal integrated circuits for digital video applications.
We have three principal product lines: security surveillance, automotive
infotainment and consumer. All of our sales are denominated in U.S. dollars.
Revenues were $18.0
million for the three months ended September 30, 2009 and $18.5 million
for the three months ended September 30, 2008, a decrease of 3% due to a
general decrease in demand for our security surveillance and consumer products primarily
as a result of current economic conditions, partially offset by an increase in
demand for our automotive infotainment products. Revenues from our security surveillance
products decreased $1.1 million, or 8%, in the three months ended September 30,
2009 compared to the three months ended September 30, 2008. Revenues from
of our automotive infotainment products increased $1.2 million, or 59%, in the
three months ended September 30, 2009 compared to the three months ended September 30,
2008 due primarily to previously awarded design wins with customers
increasingly moving into volume production. Revenues from consumer products
decreased $0.6 million, or 27%, in the three months ended September 30,
2009 compared to the three months ended September 30, 2008.
Gross
Profit and Gross Margin
. Gross profit is the difference between revenues and cost
of revenues, and gross margin represents gross profit as a percentage of
revenues. Costs of revenues, also known as costs of goods sold, consists
primarily of cost of processed silicon wafers, costs associated with assembly,
test and shipping of our production semiconductors, cost of personnel and
related expenses associated with supporting our outsourced manufacturing
activities and write-downs for excess and obsolete inventory.
Gross profit was $11.0
million and $11.7 million for the three months ended September 30, 2009
and 2008, respectively, a decrease of 6%. Gross margin was 61% for the three
months ended September 30, 2009 decreasing from 63% for the three months
ended September 30, 2008 due to production variances and changes in
product mix.
We incurred stock-based
compensation included in cost of revenues associated with outsourced
manufacturing support and quality assurance personnel of $0.1 million in the
three months ended September 30, 2009 and 2008.
Research
and Development Expenses.
Research and development expenses consist primarily of
compensation and associated costs of employees engaged in research and
development, contractor costs, tape-out costs, development testing and
evaluation costs, occupancy costs and depreciation expense. Before
releasing new products, we incur charges for mask sets, prototype wafers and
mask set revisions, which we refer to as tape-out costs. Tape-out costs
cause our research and development expenses to fluctuate because they are not
incurred uniformly every quarter. We expect our research and development
costs to increase in absolute dollars in the future as we increase our
investment in developing new products and headcount to support our development
efforts.
21
Table of Contents
Research and development expenses were $5.3 million,
or 29% of revenues, for the three months ended September 30, 2009 and $4.4
million, or 24% of revenues, for the three months ended September 30,
2008, an increase of 19%. The increase in research and development expenses was
primarily attributable to increased tape-out expenses of $0.8 million as a
result of our development of new products and our migration to smaller geometry
process technologies.
We incurred stock-based
compensation expense associated with research and development personnel of $0.9
million in the three months ended September 30, 2009 and 2008.
Selling,
General and Administrative Expenses.
Selling, general and administrative
expenses consist primarily of compensation and associated costs for marketing,
selling and administrative personnel, sales commissions to independent sales
representatives, public relations, promotional and other marketing expenses,
insurance and fees paid for professional services, travel, depreciation
expenses and occupancy costs. Costs associated with audit and tax services, corporate
governance and compliance and financial reporting are also included in selling,
general and administrative expenses. We expect selling, general and
administrative expenses to remain relatively constant in absolute dollars
throughout the rest of fiscal 2009.
Selling, general and
administrative expenses were $3.8 million, or 21% of revenues, for the three
months ended September 30, 2009 and $3.6 million, or 19% of revenues, for
the three months ended September 30, 2008, an increase of 7%. The increase
in selling, general and administrative expenses was primarily due to increased
professional service expenses of $0.5 million, primarily for legal and
accounting services, partially offset by a decrease in compensation-related
expenses of $0.1 million.
We incurred stock-based
compensation expense associated with selling, general and administrative
personnel of $0.8 million in the three months ended September 30, 2009 and
2008.
Interest
Income.
Interest
income was $0.4 million and $0.5 million for the three months ended September 30,
2009 and 2008, respectively, a decrease of 30%. The decrease was primarily due
to lower rates of returns on our cash equivalents and investments partially
offset by higher cash equivalents and investment balances.
Provision
for Income Taxes.
Our
provision for income taxes was $1.2 million and $1.6 million for the three
months ended September 30, 2009 and 2008, respectively. Our effective tax
rate was 52% and 39% for the three months ended September 30, 2009 and
2008, respectively. The effective tax rate for the three months ended September 30,
2009 and 2008 differed from the statutory federal income tax rate primarily due
to stock-based compensation, research and development credits and state income
taxes.
Comparisons
of the Nine Months Ended September 30, 2009 and 2008
Revenues.
Revenues were $40.4 million
for the nine months ended September 30, 2009 and $51.1 million for the
nine months ended September 30, 2008, a decrease of 21% due to a general
decrease in demand for our security surveillance and consumer products
primarily as a result of current economic conditions, partially offset by an
increase in demand for our automotive infotainment products. Revenues from our security surveillance
products decreased $9.7 million, or 25%, in the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008. Revenues from
of our automotive infotainment products increased $1.5 million, or 27%, in the
nine months ended September 30, 2009 compared to the nine months ended September 30,
2008 primarily due to previously awarded design wins with customers
increasingly moving into volume production. Revenues from consumer products
decreased $2.3 million, or 37%, in the nine months ended September 30,
2009 compared to the nine months ended September 30, 2008. Other revenues
decreased by $0.2 million, or 90%, in the nine months ended September 30,
2009 compared with the nine months ended September 30, 2008.
22
Table of Contents
Gross
Profit and Gross Margin
. Gross profit was $24.4 million and $31.7 million for the
nine months ended September 30, 2009 and 2008, respectively, a decrease of
23%. Gross margin was 60% for the nine months ended September 30, 2009
decreasing from 62% for the nine months ended September 30, 2008 due to
production variances and changes in product mix.
We incurred stock-based
compensation included in cost of revenues associated with outsourced
manufacturing support and quality assurance personnel of $0.4 million in the
nine months ended September 30, 2009 and 2008.
Research
and Development Expenses.
Research and development expenses were $13.9 million, or
34% of revenues, for the nine months ended September 30, 2009 and $12.2
million, or 24% of revenues, for the nine months ended September 30, 2008,
an increase of 14%. The increase in research and development expenses was
primarily attributable to an increase of $1.0 million of tape-out expenses as a
result of our development of new products and our migration to smaller geometry
process technologies and increased compensation-related expenses of $0.8
million, reflecting both increases in stock-based compensation and in headcount
to support the development of new products and technologies.
We incurred stock-based
compensation expense associated with research and development personnel of $2.6
million and $2.5 million in the nine months ended September 30, 2009 and
2008, respectively.
Selling,
General and Administrative Expenses.
Selling, general and administrative
expenses were $11.1 million, or 27% of revenues, for the nine months ended September 30,
2009 and $11.0 million, or 22% of revenues, for the nine months ended September 30,
2008, an increase of 1%.
We incurred stock-based
compensation expense associated with selling, general and administrative
personnel of $2.4 million and $2.6 million in the nine months ended September 30,
2009 and 2008, respectively.
Interest
Income.
Interest
income was $1.1 million and $1.8 million for the nine months ended September 30,
2009 and 2008, respectively, a decrease of 41%. The decrease was primarily due
to lower rates of returns on our cash equivalents and investments partially
offset by higher cash equivalents and investment balances.
Provision
for Income Taxes.
Our
provision for income taxes was $0.5 million and $4.1 million in the nine months
ended September 30, 2009 and 2008, respectively. Our effective tax rate
was 112% and 39% for the nine months ended September 30, 2009 and 2008,
respectively. For the nine months ended September 2009, we had a
significant discrete tax expense related to stock-based compensation of
approximately $0.5 million that impacted our effective tax rate. The effective
tax rate for the nine months ended September 30, 2009 and 2008 differed
from the statutory federal income tax rate primarily due to stock-based
compensation, research and development credits and state income taxes.
Liquidity and Capital Resources
Since our inception, we have financed our growth
primarily with proceeds from the issuance of preferred stock and common stock
and cash flow generated by our operations. Our cash and cash equivalents and
short-term and long-term investments were $90.2 million as of September 30,
2009.
Net
cash from operating activities
Net cash provided by
operating activities was $9.2 million in the nine months ended September 30,
2009. The net cash provided by operating activities in the nine months ended September 30,
2009 was primarily due to non-cash charges for stock-based compensation of $5.4
million, an increase in accounts payable of $2.2 million due to timing of
purchases, an increase in accrued liabilities of $1.9 million due to increases
in customer advances and a decrease in accounts receivable of $1.0 million due
to timing of customer collections. These were partially offset by an increase
in inventory of $1.9 million due to increased purchases.
Net cash provided by
operating activities was $10.7 million in the nine months ended September 30,
2008. The net cash provided by our operating activities in the nine months
ended September 30, 2008 was primarily due to our net income of
$6.2 million and non-cash charges for stock-based compensation of $5.4
million. These were partially offset by an increase in inventory of $1.3
million attributable to the growth in our revenue during this period.
23
Table of Contents
Net
cash from investing activities
Net cash used in
investing activities was $37.0 million in the nine months ended September 30,
2009 due to the purchases of our investments of $56.6 million partially offset
by maturities of our investments of $19.9 million.
Net cash provided by our
investing activities was $7.4 million in the nine months ended September 30,
2008 due to the maturities of our investments of $54.1 million partially
offset by purchases of short and long-term investments of $46.4 million and
capital expenditures of $0.4 million.
Net
cash from financing activities
Net cash used in
financing activities was $0.7 million in the nine months ended September 30,
2009 due to repurchases of common stock upon release of restricted stock
awards.
Net cash used in
financing activities was $0.6 million in the nine months ended September 30,
2008 due to repurchases of common stock upon release of restricted stock awards
partially offset by proceeds from the exercise of stock options.
At September 30,
2009, we held $6.3 million of investments with an auction reset feature, which
are referred to as auction rate securities, or ARS, whose underlying assets are
generally student loans which are substantially backed by the federal
government. In February and March of 2008, auctions failed for our
ARS, and there is no assurance that successful auctions of any ARS in our
investment portfolio will occur in the future. An auction failure means that
the parties wishing to sell securities could not. All of our ARS were rated AAA
at the time of purchase, and continue to be rated AAA, the highest rating, by a
rating agency.
During the fourth quarter
of 2008, we entered into an agreement with one of our investment providers,
which currently holds all of our ARS and from whom we had purchased the ARS, to
sell, at our discretion, at par value all of the ARS we currently hold back to
the investment provider at anytime starting in June 2010. Our ability to
liquidate our ARS investment and fully recover the carrying value of our
investment in the near term may be limited or not-existent. We have classified
these ARS investments as short-term investments because our sale of the ARS
back to the investment provider is expected to occur in June 2010. We are
continuing to evaluate the credit quality, classification and valuation of our
ARS, but based on our expected operating cash flows, and our other sources of
cash, we do not anticipate the potential near term lack of liquidity on these
investments will affect our ability to execute our current business plan.
We believe our existing
cash and cash equivalents and short-term and long-term investments, as well as
cash expected to be generated from operating activities will be sufficient to
meet our anticipated cash needs for at least the next 12 months. Our long-term
future capital requirements will depend on many factors, including our level of
revenues, the timing and extent of spending to support our product development
efforts, the expansion of sales and marketing activities, the timing of our
introductions of new products, the costs to ensure access to adequate
manufacturing capacity and the continuing market acceptance of our products. We
could be required, or could elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all.
Off-Balance
Sheet Arrangements
As of September 30,
2009, we have no off-balance sheet arrangements as defined in Item 303(a)(4) of
the Securities and Exchange Commissions Regulation S-K.
24
Table of
Contents
Contractual
Obligations
The following table
identifies our commitments to settle contractual obligations as of September 30,
2009 (in thousands):
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
Less
than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
Minimum lease commitments
|
|
$
|
1,656
|
|
$
|
683
|
|
$
|
909
|
|
$
|
64
|
|
Purchase commitments
|
|
2,880
|
|
2,880
|
|
|
|
|
|
Total commitments
|
|
$
|
4,536
|
|
$
|
3,563
|
|
$
|
909
|
|
$
|
64
|
|
Recent
Accounting Pronouncements
For a
description of recent accounting pronouncements, including the expected dates
of adoption and estimated effects, if any, on our condensed unaudited
consolidated financial statements, refer to Note 10 to our condensed unaudited
consolidated financial statements.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
The
primary objectives of our investment activities are to preserve principal,
provide liquidity and maximize income without significantly increasing the
risk. Some of the securities we invest in are subject to market risk. This
means that a change in prevailing interest rates may cause the principal amount
of the investment to fluctuate. To minimize this risk, we maintain our
portfolio of cash equivalents, short and long-term investments in demand
accounts, money market funds, commercial paper, corporate bonds, U.S.
government agency securities and ARS which are investment grade securities with
a maximum dollar weighted maturity of two years or less. The risk associated
with fluctuating interest rates is limited to our investment portfolio, and we
believe that a 10% change in interest rates would not have a significant impact
on our interest income.
At September 30,
2009, we held $6.3 million of investments with an auction reset feature (ARS),
whose underlying assets are generally student loans which are substantially
backed by the federal government. In February and March of 2008,
auctions failed for our ARS. An auction failure means that the parties wishing
to sell securities could not. All of our ARS were rated AAA at the time of
purchase and are still rated AAA as of September 30, 2009, the highest
rating, by a rating agency. During the fourth quarter of 2008, we entered into
an agreement with one of our investment providers, which currently holds all of
our ARS and from whom we had purchased the ARS, to sell, at our discretion, at
par value the ARS we currently hold back to the investment provider at anytime
starting in June 2010. We have classified our ARS investment as a
short-term investment on the condensed unaudited consolidated balance sheet
because the sale of the ARS back to our investment provider is expected to
occur in June 2010. Refer to Note 5
to our condensed unaudited consolidated financial statements for additional discussions
regarding our ARS and related put option.
To date, our
international customer agreements have been denominated solely in U.S. dollars,
and accordingly, we have not been exposed to foreign currency exchange rate
fluctuations from customer agreements, and do not currently engage in foreign
currency hedging transactions. However, the functional currency of our foreign
operations is the U.S. dollar and our local accounts are maintained in the
local currency, and thus we are subject to foreign currency exchange rate
fluctuations associated with remeasurement to U.S. dollars. Such fluctuations
have not been significant historically, and we believe that a 10% change in
exchange rates would not have a significant impact on our operating expenses.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures, as such term is defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act),
that are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and
25
Table of Contents
forms, and that such
information is accumulated and communicated to our management, including our
chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our
disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet the reasonable assurance standards. Additionally, in
designing disclosure controls and procedures, our management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible disclosure controls and procedures. The design of any disclosure controls
and procedures also is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under potential future conditions.
Based
on the evaluation as of the end of the period covered by this Quarterly Report
on Form 10-Q, our chief executive officer and chief financial officer have
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
There
was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and
15d-15(f) under the Exchange Act) that occurred during the period covered
by this Quarterly Report on Form 10-Q that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
Part II.
Other Information
Item
1. Legal Proceedings
We are
currently not a party to any material legal proceedings. We may from time to
time become involved in litigation relating to claims arising from our ordinary
course of business. These claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Item
1A. Risk Factors
If any of the following
risks actually occur, our business, results of operations and financial
condition could suffer significantly.
Risks
Related to Our Business
Fluctuations in our revenue and operating results on a
quarterly basis could cause the market price of our common stock to decline.
Our
revenue and operating results are difficult to predict, have in the past
fluctuated, and may in the future fluctuate from quarter to quarter. It is
possible that our operating results in some quarters will be below market
expectations. This would likely cause the market price of our common stock to
decline. Our quarterly operating results are affected by a number of factors,
including:
·
unpredictable volume and timing of
customer orders, which are not fixed by contract and vary on a purchase order
basis;
·
uncertain demand in our two primary end markets for
our products;
·
the loss of one or more of our customers, causing a
significant reduction or postponement of orders from these customers;
·
decreases in the overall average selling prices of our
products;
·
changes in the relative sales mix of our products;
·
changes in our cost of finished goods;
·
the availability, pricing and timeliness of delivery
of other components used in our customers products;
·
our customers sales outlook, purchasing patterns and
inventory adjustments based on demands and general economic conditions;
·
product obsolescence and our ability to manage product
transitions;
26
Table of Contents
·
our ability to successfully develop, introduce and
sell new or enhanced products in a timely manner;
·
the timing of new product announcements or
introductions by us or by our competitors; and
·
fluctuations in our effective tax rate.
We
base our planned operating expenses in part on our expectations of future
revenue, and a significant portion of our expenses is relatively fixed in the
short-term. We have limited historical financial data from which to predict
future sales for our products. As a result, it is difficult for us to forecast
our future revenue and budget our operating expenses accordingly. If revenue
for a particular quarter is lower than we expect, we likely will be unable to
proportionately reduce our operating expenses for that quarter, which would
harm our operating results for that quarter.
We incurred a net loss for the nine months ended September 30,
2009, and may not return to profitability in the future, which may cause the
market price of our common stock to decline.
We
first became profitable in the second quarter of 2005. We incurred significant
net losses prior to that quarter and incurred a net loss for the nine months
ended September 30, 2009. To return to profitability, we will need to
generate and sustain substantially higher revenue while maintaining reasonable
cost and expense levels. We currently expect to increase expense levels in each
of the next several quarters to support increased research and development
efforts. These expenditures may not result in increased revenue or customer
growth. Because many of our expenses are fixed in the short-term, or are
incurred in advance of anticipated sales, we may not be able to decrease our
expenses in a timely manner to offset any shortfall of sales. We also believe
our future effective tax rate will be at or near the current statutory tax
rate, which is higher than our average historical annual effective tax rate,
which has been less than 10% of our pre-tax income since our inception. This
will harm our future financial results and negatively impact our profitability.
We may not be able to return to profitability on a quarterly or an annual
basis. This may, in turn, cause the price of our common stock to decline.
The demand for our products is affected by general economic
conditions, which could impact our business.
The
United States and international economies are currently experiencing a period
of economic downturn. The timing of sustained economic recovery, if any, is
uncertain. In addition, terrorist acts and similar events, turmoil in the
Middle East or war in general, could contribute to a slowdown of the market
demand for our products. If the economy continues to slow down as a result of
the recent economic, political and social turmoil, or if there are further
terrorist attacks in the United States or elsewhere, we may experience
decreases in the demand for our products, which may harm our operating results.
Our business has been adversely affected by the current economic downturn.
Demand for our products has suffered as customers delay purchasing decisions or
change or reduce their discretionary spending.
Fluctuations in demand for our products may harm our
financial results and are difficult to forecast.
Current
uncertainty in global economic conditions pose a risk to the overall economy as
consumers and businesses may delay or postpone purchases in response to tighter
credit and negative financial news, which could negatively affect demand for
our products. Consequently, demand could be different from our expectations due
to many factors including:
·
changes in business and economic
conditions, including conditions in the credit market that could affect
consumer confidence;
·
customer acceptance of our products;
·
changes in customer order patterns including order
cancellations; and
·
changes in the level of inventory at customers.
27
Table of Contents
If the growth of demand for digital video applications for
the security surveillance and automotive infotainment markets does not
continue, our ability to increase our revenue could suffer.
Our ability to increase
our revenue will depend on increased demand for digital video applications in
the security surveillance and automotive infotainment markets. For the three
and nine months ended September 30, 2009, 74% and 72% of our revenues,
respectively, was derived from the sale of our products designed for the
security surveillance market. If our products sold into this market decline or
do not increase, or if demand slows in this market generally, our operating
results would suffer. In addition, we have increased our focus on the
automotive infotainment market and devoted substantial resources to the
development of products for digital video applications that address this
market. If we are not successful in selling our products into this market, or
if the automotive infotainment industry in general continues to experience weak
demand, we may not recover the costs associated with our efforts in this area
and our operating results could suffer.
The
growth of our target markets is uncertain and will depend in particular upon:
·
the pace at which new digital video
applications are adopted;
·
a continued reduction in the costs of products in
these markets;
·
the availability, at a reasonable price, of components
required by such products, such as LCD panels; and
·
consumer confidence and the continued increase of
consumer spending levels.
Our success depends on our ability to develop and introduce
new products, which we may not be able to do in a timely manner, as product
development in smaller wafer fabrication geometries becomes more complex and
costly.
The development of new
products is highly complex, and we have experienced some delays in bringing new
products to the market in the past. As our products integrate new, more
advanced functions, they become more complex and increasingly difficult to
design. In addition, in our effort to decrease cost, we intend to design new
products in smaller fabrication geometries, some of which we may have no prior
experience of success. In the past, we have experienced some difficulties in shifting
to smaller geometry process technologies.
Completing
these projects is extremely challenging, time-consuming and expensive, and we
can give no assurance that we will succeed or succeed in a timely and
cost-effective manner. Product development delays may result from unanticipated
engineering complexities, changing market or competitive product requirements
or specifications, difficulties in overcoming resource limitations, the
inability to license third-party technology or other factors. If we are unable
to develop products successfully, in a timely and cost-effective manner, our
business, financial condition and results of operations could suffer.
The average selling prices of our semiconductor products may
be subject to rapid price declines, which could harm our revenue and gross
profits.
The semiconductor
products we develop and sell may be subject to rapid declines in average
selling prices. From time to time, we have had to reduce our prices
significantly to meet customer requirements, and we may be required to reduce
our prices in the future. This would cause our gross margins to decline which
in turn may negatively impact our operating results. Our financial results will
suffer if we are unable to offset any reductions in our average selling prices
by increasing our sales volumes, reducing our costs or developing new or
enhanced products on a timely basis with higher selling prices or gross
margins.
We face intense competition and may not be able to compete
effectively, which could reduce our market share and decrease our revenue and
profitability.
The
markets in which we operate are extremely competitive and are characterized by
rapid technological change, continuous evolving customer requirements and
declining average selling prices. We may not be able to compete successfully
against current or potential competitors. If we do not compete successfully,
our market share and revenue may decline. We compete with large semiconductor
manufacturers and designers, and our current and
28
Table of Contents
potential competitors
have longer operating histories, significantly greater resources and name
recognition and a larger base of customers than we do. This may allow them to
respond more quickly than we can to new or emerging technologies or changes in
customer requirements. In addition, these competitors may have greater
credibility with our existing and potential customers. Many of our current and
potential customers have their own internally developed semiconductor solutions
and may choose not to purchase products from third-party suppliers like us.
We depend on key and highly skilled personnel to operate our
business, and if we are unable to retain our current personnel and hire
additional personnel, our ability to develop and market our products could be
harmed.
We
believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. The loss of any key employees or the inability to attract
or retain qualified personnel could delay the development and introduction of,
and harm our ability to sell, our products and harm the markets perception of
us. We believe that our future success is highly dependent on the contributions
of Fumihiro Kozato, our president and chief executive officer, and Dr. Feng
Kuo, our chief technical officer. We do not have long-term employment contracts
with these or any other key personnel, and their knowledge of our business and
industry would be extremely difficult to replace.
If we fail to develop new products and enhance our existing
products in order to react to rapid technological change and market demands,
our business will suffer.
We
must develop new products and enhance our existing products with improved
technologies to meet rapidly evolving customer requirements. We need to design
products for customers who continually require higher performance and
functionality at lower costs. We must, therefore, continue to cost-effectively
add features that enhance performance and functionality to our products. The
development process for these advancements is lengthy and requires us to
accurately anticipate market trends. Our failure to accurately anticipate
market trends in a timely manner will harm the market acceptance of our
products and the sales of our products.
Developing and enhancing
these products is uncertain and can be time-consuming, costly and complex.
There is a risk that these developments and enhancements will be late, fail to
meet customer or market specifications or not be competitive with products from
our competitors that offer comparable or superior performance and
functionality. Any new products or product enhancements may not be accepted in
new or existing markets. Our business will suffer if we fail to develop and
introduce new products or product enhancements on a cost-effective basis.
If we fail to achieve initial design wins for our products,
we may lose the opportunity for sales for a significant period of time to
customers and be unable to recoup our investments in our products.
We
expend considerable resources in order to achieve design wins for our products,
especially our new products and product enhancements. Once a customer designs a
semiconductor into a product, it is likely to continue to use the same
semiconductor or enhanced versions of that semiconductor from the same supplier
across a number of similar and successor products for a lengthy period of time
due to the significant costs associated with qualifying a new supplier and
potentially redesigning the product to incorporate a different semiconductor.
If we fail to achieve an initial design win in a customers qualification
process, we may lose the opportunity for significant sales to that customer for
a number of its products and for a lengthy period of time. This may cause us to
be unable to recoup our investments in our products, which would harm our
business.
If we fail to develop, in a timely manner, or at all,
technologies that address the demands of a shift from analog video signals to
digital video signals our operating results could suffer.
Our
semiconductors are principally designed to decode analog video signals into
digital images. On June 12, 2009, transmission of broadcast TV signals
were no longer permitted in analog and all broadcast signals must be in a
digital format. Current forecasts project that many other electronic products
and applications will similarly transition to digital transmission. We are developing mixed signal and digital
technologies to decode digital signals. However, transmission of digital video
involves a combination of emerging technologies. The complexities of these
technologies and the variability in implementations between manufacturers may
cause our development of semiconductors to be costly and time-consuming. We may
never obtain the benefits of our investment in developing
29
Table of Contents
these technologies. The
complexities of digital broadcast technologies may also cause some of the
semiconductors we are developing to ultimately work incorrectly for reasons
that may be either related or unrelated to our products, or not be
interoperable with other key products. Delays or difficulties in integrating
our semiconductors into digital broadcast products or the failure of products
incorporating digital video to achieve broad market acceptance could have an
adverse effect on our business.
Our business is subject to seasonality, which is likely to
cause our revenues to fluctuate.
Our
business is subject to seasonality as a result of our target markets and the
location of our customers. We sell a significant number of our semiconductors
to customers located in Asia, primarily to customers located in regions who
observe the Lunar New Year holiday, also referred to as Chinese New Year.
Typically, our foreign offices and those of our customers are closed for a week
or more during the extended holiday period. For the three and nine months ended
September 30, 2009, 93% and 91% of our revenues, respectively, was
attributable to customers located in regions that observe the Lunar New Year
holiday. As a result, we typically experience fluctuations in our first
calendar quarter due in part to a slowing of business activity around the
period of the Lunar New Year holiday.
We manufacture our products based on our estimates of
customer demand, and if our estimates are incorrect our financial results could
be negatively impacted.
Our
sales are made on the basis of purchase orders rather than long-term purchase
commitments. In addition, our customers may cancel purchase orders or defer the
shipments of our products. We manufacture our products according to our
estimates of customer demand. This process requires us to make multiple demand
forecast assumptions, each of which may introduce error into our estimates. If
we overestimate customer demand, we may manufacture products that we may not be
able to sell. As a result, we would have excess inventory, which would increase
our losses. Conversely, if we underestimate customer demand or if sufficient
manufacturing capacity were unavailable, we would forego revenue opportunities,
lose market share and damage our customer relationships.
We do not expect to sustain the growth rate of our recent
revenues.
Our
revenues increased 109% in 2005 from 2004 and 49% in 2006 from 2005. We do not
expect to achieve similar growth rates in future periods. For example, our
revenues increased 11% in 2007 from 2006 and 13% in 2008 compared to 2007 and
decreased 21% in the nine months ended September 30, 2009 compared to the
nine months ended September 30, 2008. You should not rely on the results
of any prior quarterly or annual periods as an indication of our future
operating performance. If we are unable to maintain adequate revenue growth,
our stock price may decline and we may not have adequate financial resources to
execute our business objectives.
We may pursue acquisitions or investments in complementary
technologies and businesses, which could harm our operating results and may
disrupt our business.
We
have pursued and may continue to pursue acquisitions of, or investments in,
complementary technologies and businesses. Acquisitions present a number of
potential risks and challenges that could, if not successfully addressed,
disrupt our business operations, increase our operating costs and reduce the
value to us of the acquired company. Even if we are successful, we may not be
able to integrate the acquired businesses, products or technologies into our
existing business and products. Furthermore, potential acquisitions and
investments, whether or not consummated, may divert managements attention and
require considerable cash outlays at the expense of existing operations. In
addition, to complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization expenses and
write-downs of acquired assets, which could adversely affect our profitability.
Changes in our tax rates will affect our future results.
Our
future effective tax rates will be favorably or unfavorably affected by the
absolute amount and future geographic distribution of our pre-tax income, our
ability to take advantage of the available tax planning strategies and the
availability of tax credits. In addition, we are subject to the examination of
our income tax returns by the Internal Revenue Service and other tax
authorities. The outcomes of these examinations, when and if they occur, could
harm our financial condition.
30
Table of Contents
We may not be able to manage our future growth effectively,
and we may need to incur significant expenditures to address the additional
operational and control requirements of our growth.
We
have experienced a period of significant growth and expansion, which has
placed, and any future expansion will continue to place, a significant strain
on management, personnel, systems and financial resources. We have hired
additional employees to support an increase in research and development as well
as increase our sales and marketing efforts, which resulted in increasing our
headcount from 96 employees at the end of 2006 to 165 employees at September 30,
2009. As a result of a recent acquisition, we added approximately 40 employees
in October 2009. To manage our growth successfully, we believe we must
effectively:
·
train, integrate and manage additional
qualified engineers for research and development activities, sales and
marketing personnel and financial and information technology personnel;
·
continue to enhance our customer resource management
and manufacturing management systems;
·
implement additional and improve existing
administrative, financial and operations systems, procedures and controls,
including the requirements of the Sarbanes-Oxley Act of 2002;
·
expand and upgrade our technological capabilities; and
·
manage multiple relationships with our customers,
distributors, suppliers and other third-parties.
Our efforts may require
substantial managerial and financial resources and may increase our operating
costs even though these efforts may not be successful. If we are unable to
manage our growth effectively, we may not be able to take advantage of market
opportunities, develop new products, satisfy customer requirements, execute our
business plan or respond to competitive pressures.
We may experience unforeseen delays, expenses or lower than
expected product yields for our semiconductors manufactured by our third-party
vendors, which could increase our costs and prevent us from recognizing the
benefits of new technologies we develop.
We occasionally have
experienced delays in completing the development and introduction of new
products and product enhancements, and we could experience delays in the future
that may render our new or enhanced products, when introduced, obsolete and
unmarketable. In addition, it is often difficult for semiconductor foundries to
achieve satisfactory product yields. Product yields depend on both our product
design and the manufacturing process technology unique to the semiconductor
foundry. Since low yields may result from either design or process
difficulties, identifying yield problems can only occur well into the
production cycle after a product that can be physically analyzed and tested
exists. Poor yields from our foundry could cause us to sell our products at
lower gross margins and therefore harm our financial results.
Defects in our products could increase our costs, cause
customer claims and delay our product shipments.
Although
we test our products, they are complex and may contain defects and errors. In
the past, we have encountered defects and errors in our products. For example,
in the past, we were unable to sell certain products to a customer for whom
these products were specifically designed as a result of our failure to produce
a product that met this customers specifications. We believe this customer
secured the product from another vendor. Delivery of products with defects or
reliability, quality or compatibility problems may damage our reputation and
our ability to retain existing customers and attract new customers. In
addition, product defects and errors could result in additional development
costs, diversion of technical resources, delayed product shipments, increased
product returns and product liability claims against us, which may not be fully
covered by insurance. Any of these could harm our business.
31
Table of Contents
We rely on a limited number of independent subcontractors for
the manufacture, assembly and testing of our semiconductors, and the failure of
any of these third-party vendors to deliver products or otherwise perform as
requested could damage our relationships with our customers, decrease our sales
and limit our growth.
We do
not have our own manufacturing or assembly facilities and have very limited
in-house testing facilities. Therefore, we must rely on third-party vendors to
manufacture, assemble and test the products we design. We currently rely on
Taiwan Semiconductor Manufacturing Company, or TSMC, to produce the majority of
our semiconductors. We rely on Advanced Semiconductor Engineering, Inc.,
or ASE, to assemble, package and test many of our products. If these vendors do
not provide us with high-quality products, services and production and test
capacity in a timely manner, or if one or more of these vendors terminates its
relationship with us, we may be unable to obtain satisfactory replacements to
fulfill customer orders on a timely basis, our relationships with our customers
could suffer and our sales could decrease. Other significant risks associated
with relying on these third-party vendors include:
·
reduced control over product cost,
delivery schedules and product quality;
·
potential price increases;
·
inability to achieve required production or test
capacity and achieve acceptable yields on a timely basis;
·
longer delivery times;
·
increased exposure to potential misappropriation of
our intellectual property;
·
shortages of materials that foundries use to
manufacture products;
·
labor shortages or labor strikes; and
·
quarantines or closures of manufacturing facilities
due to the outbreak of viruses, such as SARS, the avian flu or any similar
future outbreaks in Asia.
We
currently do not have long-term supply contracts with any of our third-party
vendors. Therefore, they are not obligated to perform services or supply
products to us for any specific period, in any specific quantities or at any
specific price, except as may be provided in a particular purchase order.
Neither TSMC nor ASE has provided contractual assurances to us that adequate
capacity will be available for us to meet future demand for our products. These
third-party vendors may allocate capacity to the production of other companies
products while reducing deliveries to us on short notice. In particular, other
customers that are larger and better financed than we are or that have
long-term agreements with TSMC or ASE may cause either or both of them to
reallocate capacity to those customers, decreasing the capacity available to
us.
We plan to retain additional foundries to manufacture our
semiconductors, which could disrupt our current manufacturing process and
negatively impact our sales volumes and revenue.
We are a fabless
semiconductor company which relies on third-party manufacturers or foundries to
manufacture our semiconductors. We are reliant on these foundries for the
manufacture of our products as well as providing services to assist us in
getting our products into production. As a result of the complexity in
manufacturing our semiconductors, it is difficult to determine if a new foundry
will be able to successfully produce our products. We may not be able to enter
into a relationship with a new foundry that produces satisfactory yields on a
cost-effective basis. If we need another foundry because of increased demand,
or the inability to obtain timely and adequate deliveries from our current
provider, we might not be able to cost-effectively and quickly retain other
vendors to satisfy our requirements. Any failure to successfully integrate a
new foundry could negatively impact our sales volumes and revenue.
Our business depends on customers, suppliers and operations
in Asia, and as a result we are subject to regulatory, operational, financial
and political risks, which could adversely affect our financial results.
The
percentage of our revenues attributable to sales to customers in Asia was 97%
and 98% for the nine months ended September 30, 2009 and 2008,
respectively. We expect that revenues from customers in Asia will continue to
account for substantially all of our revenues. All our sales currently are
denominated in U.S. dollars. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make our products less competitive
in international markets.
32
Table of Contents
Currently, we maintain
international sales offices in Asia, and we rely on a network of third-party
sales representatives to sell our products internationally. We have offices in
China, Japan, Taiwan and South Korea, which serve various aspects of our
business. Moreover, we have in the past relied on, and expect to continue to
rely on, suppliers, manufacturers and subcontractors primarily located in
Taiwan. Accordingly, we are subject to several risks and challenges, any of
which could harm our business and financial results. These risks and challenges
include:
·
difficulties and costs of staffing and
managing international operations across different geographic areas and
cultures;
·
compliance with a wide variety of domestic and foreign
laws and regulations, including those relating to the import or export of semiconductor
products;
·
legal uncertainties regarding taxes, tariffs, quotas,
export controls, export licenses and other trade barriers;
·
foreign currency exchange fluctuations relating to our
international operating activities;
·
our ability to receive timely payment and collect our
accounts receivable;
·
political, legal and economic instability, foreign
conflicts and the impact of regional and global infectious illnesses, such as
the SARS outbreak or avian flu in the countries in which we and our customers,
suppliers, manufacturers and subcontractors are located;
·
legal uncertainties regarding protection for
intellectual property rights in some countries; and
·
fluctuations in freight rates and transportation
disruptions.
Our sales cycle can be lengthy, which could result in
uncertainty and delays in generating revenue.
Because
our products are based on constantly evolving technologies, we have experienced
a lengthy sales cycle for some of our semiconductors, particularly those
designed for digital video applications in the automotive infotainment market.
Our sales cycle typically ranges from six to 24 months. We may experience a
delay between the time we increase expenditures for research and development,
sales and marketing efforts and inventory to the time we generate revenue, if
any, from these expenditures. In addition, because we do not have long-term
commitments from our customers, we must repeat our sales process on a continual
basis even for current customers looking to purchase a new product. As a
result, our business could be harmed if a customer reduces or delays its
orders, chooses not to release products incorporating our semiconductors or
elects not to purchase a new product or product enhancements from us.
We primarily sell our products through a limited number of
distributors, and if our relationships with one or more of those distributors
were to terminate, our operating results may be harmed.
We market and distribute
our products primarily through a limited number of distributors, most of which
are located in Asia. This distribution channel has been characterized by rapid
change and consolidations. Distributors have accounted for a significant
portion of our revenues in the past. Sales to our distributors represented 76%
and 77% of our revenues for the nine months ended September 30, 2009 and
2008, respectively. For the nine months ended September 30, 2009, Lacewood
International Corporation accounted for 37% of our revenues.
Our
operating results and financial condition could be significantly disrupted by
the loss of one or more of our current distributors and sales representatives,
volume pricing discounts, order cancellations, delays in shipment by one of our
major distributors or sales representatives or the failure of our distributors
or sales representatives to successfully sell our products.
We rely primarily upon copyright and trade secret laws and
contractual restrictions to protect our proprietary rights and if these rights
are not sufficiently protected, our ability to compete and generate revenue
could suffer.
We
seek to protect our proprietary design processes, documentation and other
written materials primarily under trade secret and copyright laws. We also
typically require employees and consultants with access to our proprietary
information to execute confidentiality agreements. The steps taken by us to
protect our proprietary information may not be adequate to prevent
misappropriation of our technology. In addition, our proprietary rights may not
be adequately protected because:
·
the laws of other countries in which we
market our semiconductors, such as some countries in the Asia/Pacific region,
may offer little or no protection for our proprietary technologies;
·
people may not be deterred from misappropriating our
technologies despite the existence of laws or contracts prohibiting these
actions; and
·
policing unauthorized use of our intellectual property
may be difficult, expensive and time-consuming, and we may be unable to
determine the extent of any unauthorized use.
33
Table of Contents
Reverse
engineering, unauthorized copying or other misappropriation of our proprietary
technologies could enable third-parties to benefit from our technologies
without compensating us for doing so. For example, if the foundry that
manufactures our semiconductors loses control of our intellectual property, it
would be more difficult for us to take remedial measures since it is located in
Taiwan, which does not have the same protection for intellectual property as is
provided in the United States. Any inability to adequately protect our
proprietary rights could harm our ability to compete, generate revenue and grow
our business.
We may not obtain sufficient patent protection on the
technology embodied in the semiconductors we currently manufacture and market,
which could harm our competitive position and increase our expenses.
Although
we rely primarily on trade secret laws and contractual restrictions to protect
the technology in the semiconductors we currently manufacture and market, our
success and ability to compete in the future may also depend to a significant
degree upon obtaining patent protection for our proprietary technology. As of December 31,
2008, we had two issued patents in the United States and five patent
applications pending in the United States and two applications pending in
foreign jurisdictions. These patents and patent applications cover aspects of
the technology in the semiconductors we currently manufacture and market,
including a patent for our video decoding architecture. Patents that we
currently own do not cover all of the semiconductors that we presently
manufacture and market. Our patent applications may not result in issued
patents, and even if they result in issued patents, the patents may not have
claims of the scope we seek. In addition, any issued patents may be challenged,
invalidated or declared unenforceable. The term of any issued patents would be
20 years from its filing date and if our applications are pending for a long
time period, we may have a correspondingly shorter term for any patent that may
issue. Our issued patents have expiration dates ranging from September 2,
2019 to March 27, 2020. Our present and future patents may provide only
limited protection for our technology and may not be sufficient to provide us
with competitive advantages. For example, competitors could be successful in
challenging any issued patents or, alternatively, could develop similar or more
advantageous technologies on their own or design around our patents. Also,
patent protection in certain foreign countries may not be available or may be
limited in scope and any patents obtained may not be as readily enforceable as
in the United States, making it difficult for us to effectively protect our
intellectual property from misuse or infringement by anyone in these countries.
Our inability to obtain and enforce our intellectual property rights in some
countries may harm our business. In addition, given the costs of obtaining
patent protection, we may choose not to protect certain innovations that later
turn out to be important to our business or our competitive position.
Intellectual property litigation, which is common in our
industry, could be costly, harm our reputation, limit our ability to sell our
products and divert the attention of management and technical personnel.
Our
industry is characterized by frequent litigation regarding patent and other
intellectual property rights. For example, during 2005 and 2006, we were a
party to an administrative proceeding in front of the intellectual property
tribunal in South Korea in which another party unsuccessfully sought a
determination that our TW2824 and TW2834 products infringed a South Korean
patent allegedly held by that party. We have certain indemnification
obligations to customers under our contract development projects with respect
to any infringement of third-party patents and intellectual property rights by
our products. If a lawsuit were to be filed against us in connection with
claims of infringement, our business would be harmed.
Questions
of infringement in the digital video applications market involve highly
technical and subjective analyses. Litigation may be necessary in the future to
enforce any patents we may receive and other intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity, and we may not prevail in any future litigation. Litigation,
whether or not determined in our favor or settled, could be costly, could harm
our reputation, could cause our customers to use our competitors products and
could divert the efforts and attention of management and technical personnel
from normal business operations. In addition, adverse determinations in
litigation could result in the loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third-parties or
prevent us from licensing our technology or selling our products, any of which
could seriously harm our business.
34
Table of
Contents
Our headquarters are located in the State of California and
our third-party manufacturing, assembly and testing vendors have facilities in
the State of Washington and in Taiwan, areas subject to significant earthquake
risks. Any disruption to our or their operations resulting from earthquakes or
other natural disasters could cause significant delays in the production or
shipment of our product.
TSMC, which manufactures
substantially all of our semiconductors, has facilities in the State of
Washington and in Taiwan. Our assembly and testing vendors facilities are
primarily located in Taiwan. In addition, our headquarters are located in
Northern California. The risk of an earthquake or extreme weather in the
Pacific Rim region or an earthquake in Northern California or Washington State
is significant due to the proximity of major earthquake fault lines. In September 1999,
a major earthquake in Taiwan affected the facilities of TSMC and ASE, our
primary assembly vendor, as well as other providers of foundry, packaging and
test services. In March 2002 and June 2003, additional earthquakes
occurred in Taiwan. In 2005, several typhoons also disrupted the operations of
TSMC and ASE. As a result of these natural disasters, these contractors
suffered power outages and disruptions that impaired their production capacity.
The occurrence of earthquakes or other natural disasters could result in the
disruption of our foundry or assembly and test capacity. We may not be able to
obtain alternate capacity on favorable terms, if at all, which could harm our
operating results.
Management may apply our cash, cash equivalents and
short-term and long-term investments to uses that do not increase our market
value or improve our operating results.
We
intend to use our cash, cash equivalents and short-term and long-term
investments for general corporate purposes, including working capital and
capital expenditures. We may also use a portion of our cash, cash equivalents
and short-term and long-term investments to acquire or invest in complementary
technologies, businesses or other assets. We have not reserved or allocated our
cash, cash equivalents and short-term and long-term investments for any
specific purpose, and we cannot state with certainty how management will use
our cash, cash equivalents and short-term and long-term investments.
Accordingly, management has considerable discretion in applying our cash, cash
equivalents and short-term and long-term investments and may use our cash, cash
equivalents and short-term and long-term investments for purposes that do not
result in any increase in our results of operations or market value. Until the
cash, cash equivalents and short-term and long-term investments are used, they
may be placed in investments that do not produce income or lose value.
Risks
Related to Our Industry
Due to the cyclical nature of the semiconductor industry,
our operating results may fluctuate significantly, which could adversely affect
the market price of our common stock.
The
semiconductor industry is highly cyclical and subject to rapid change and
evolving industry standards and, from time to time, has experienced significant
downturns. These downturns are characterized by decreases in product demand,
excess customer inventory and accelerated erosion of prices. These factors have
caused and could cause substantial fluctuations in our revenue and in our
operating results. Any downturns in the semiconductor industry may be severe
and prolonged, and any failure of this industry to fully recover from downturns
could harm our business. The semiconductor industry also periodically
experiences increased demand and production capacity constraints, which may
affect our ability to ship products. Accordingly, our operating results have
varied and may vary significantly as a result of the general conditions in the
semiconductor industry, which could cause our stock price to decline.
The recent financial crisis could negatively affect our
business, results of operations and financial condition.
The recent financial
crises affecting the banking system and financial markets and the going concern
threats to investment banks and other financial institutions have resulted in a
tightening in the credit markets, a low level of liquidity in many financial
markets and extreme volatility in credit and equity markets. There could be a
number of follow on effects from the credit crisis on our business, including
insolvency of key suppliers resulting in product delays, inability of customers
to obtain credit to finance purchases of our products and customer
insolvencies.
35
Table of Contents
Risks
Related to Our Common Stock
Our stock price has been volatile and you may not be able to
resell shares of our common stock at or above the price you paid, or at all.
The
trading price of our common stock has experienced wide fluctuations due to the
factors discussed in this risk factors section and elsewhere in this Quarterly
Report on Form 10-Q. For example, in the three months ended September 30,
2009, the closing price of our stock ranged from a low of $8.03 on July 7,
2009 to a high of $11.09 on September 28, 2009. In addition, the stock
market in general has, and The NASDAQ Global Market and technology companies in
particular have, experienced extreme price and volume fluctuations. These
trading prices and valuations may not be sustainable. These broad market and
industry factors may decrease the market price of our common stock, regardless
of our actual operating performance. In addition, in the past, following
periods of volatility in the overall market and the market price of a companys
securities, securities class action litigation has often been instituted
against companies that experienced such volatility. This litigation, if
instituted against us, regardless of its outcome, could result in substantial
costs and a diversion of managements attention and resources.
If securities or industry analysts do not publish research
or reports about our business, or if they change their recommendations
regarding our stock adversely, our stock price and trading volume could decline.
The trading market for
our common stock is influenced by the research and reports that industry or
securities analysts publish about us or our business. If one or more of the
analysts who cover us downgrade our stock, our stock price would likely decline.
If one or more of these analysts cease coverage of our company or fail to
regularly publish reports on us, we could lose visibility in the financial
markets, which in turn could cause our stock price or trading volume to
decline.
Our ability to raise capital in the future may be limited
and our failure to raise capital when needed could prevent us from executing
our growth strategy.
We
believe that our existing cash and cash equivalents and short-term and
long-term investments will be sufficient to meet our anticipated cash needs for
at least the next 12 months. The timing and amount of our working capital and
capital expenditure requirements may vary significantly depending on numerous
factors, including:
·
market acceptance of our products;
·
the need to adapt to changing technologies and
technical requirements;
·
the existence of opportunities for expansion; and
·
access to and availability of sufficient management,
technical, marketing and financial personnel.
If our
capital resources are insufficient to satisfy our liquidity requirements, we
may seek to sell additional equity securities or debt securities or obtain debt
financing. The sale of additional equity securities or convertible debt
securities would result in additional dilution to our stockholders. Additional
debt would result in increased expenses and could result in covenants that
would restrict our operations. We have not made arrangements to obtain
additional financing and there is no assurance that financing, if required,
will be available in amounts or on terms acceptable to us, if at all.
Substantial future sales of our common stock in the public
market could cause our stock price to fall.
Additional
sales of our common stock in the public market, or the perception that these
sales could occur, could cause the market price of our common stock to decline.
At September 30, 2009, we had 21.6 million shares of common stock
outstanding. A substantial portion of these shares of common stock are entitled
to rights to cause us to register the sale of those shares under the Securities
Act. Registration of these shares under the Securities Act would result in
these shares, other than shares purchased by our affiliates, becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration.
36
Table of Contents
Our corporate actions are substantially controlled by officers,
directors, principal stockholders and affiliated entities.
Our directors, executive
officers and affiliated entities beneficially own a significant percentage of
our outstanding common stock. These stockholders, if they acted together, could
exert substantial control over matters requiring approval by our stockholders,
including electing directors and approving mergers or other business
combination transactions. This concentration of ownership may also discourage,
delay or prevent a change in control of our company, which could deprive our
stockholders of an opportunity to receive a premium for their stock as part of
a sale of our company and might reduce our stock price. These actions may be
taken even if they are opposed by our other stockholders.
Certain provisions of Delaware law, our corporate charter
and bylaws and our shareholder rights plan contain anti-takeover provisions
that could delay or discourage takeover attempts that stockholders may consider
favorable.
Provisions
in our certificate of incorporation, as amended and restated, may have the
effect of delaying or preventing a change of control or changes in our
management. These provisions include the following:
·
the right of the board of directors to
elect a director to fill a vacancy created by the expansion of the board of
directors;
·
the prohibition of cumulative voting in the election
of directors, which would otherwise allow less than a majority of stockholders
to elect director candidates;
·
the requirement for advance notice for nominations for
election to the board of directors or for proposing matters that can be acted
upon at a stockholders meeting;
·
the ability of the board of directors to alter our
bylaws without obtaining stockholder approval;
·
the ability of the board of directors to issue,
without stockholder approval, up to 10,000,000 shares of preferred stock with
terms set by the board of directors, which rights could be senior to those of
common stock;
·
the required approval of holders of at least
two-thirds of the shares entitled to vote at an election of directors to adopt,
amend or repeal our bylaws or amend or repeal the provisions of our certificate
of incorporation regarding the indemnification of directors and officers and
the ability of stockholders to take action;
·
the required approval of holders of at least a
majority of the shares entitled to vote at an election of directors to remove
directors for cause; and
·
the elimination of the right of stockholders to call a
special meeting of stockholders and to take action by written consent.
In
addition, our stockholder rights plan would cause substantial dilution to any
person or group who attempts to acquire a significant interest in us without
advance approval from our board of directors.
While
these provisions and our stockholder rights plan have the effect of encouraging
persons seeking to acquire control of our company to negotiate with our board
of directors, the provisions could enable the board of directors to hinder or
frustrate a transaction that some, or a majority, of the stockholders might
believe to be in their best interests and, in that case, may prevent or
discourage attempts to remove and replace incumbent directors.
Because
we are incorporated in Delaware, we are governed by the provisions of Section 203
of the Delaware General Corporation Law. These provisions may prohibit or
restrict large stockholders, in particular those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These
provisions in our certificate of incorporation and bylaws, stockholder rights
plan and under Delaware law could discourage potential takeover attempts and
could reduce the price that investors might be willing to pay for shares of our
common stock in the future and result in our market price being lower than it
would without these provisions.
37
Table of Contents
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not
applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not
applicable
Item 5. Other Information
Not
applicable
Item
6. Exhibits
a.
Exhibits
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate of
Designation of Techwell, Inc. classifying and designating the
Series A Participating Preferred Stock, as filed with the Secretary of
State of the State of Delaware on August 4, 2009 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K which was filed on August 5, 2009).
|
4.1
|
|
Rights Agreement, dated
as of August 4, 2009, between Techwell, Inc. and Computershare
Trust Company, N.A., as Rights Agent (which includes as
Exhibit A
the Certificate of Designation of Series A Participating Stock, as
Exhibit B
the form of Rights Certificate, and as
Exhibit C
the Summary of
Rights) (incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form 8-A relating to the Series A Participating
Preferred Stock Purchase Rights which was filed on August 5, 2009).
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Securities Exchange Act rules 13a-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Securities Exchange Act rules 13a-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1 (1)
|
|
Certification of Chief
Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2 (1)
|
|
Certification of Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
(1)
The material contained in Exhibit 32.1
and Exhibit 32.2 is not deemed filed with the SEC and is not to be
incorporated by reference into any filing of the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date hereof and irrespective of any general incorporation language
contained in such filing, except to the extent that the registrant specifically
incorporates it by reference.
38
Table of Contents
Signatures
Pursuant
to the requirements of the Securities Exchange Act, as amended, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Date:
November 6, 2009
|
/s/ Fumihiro
Kozato
|
|
Fumihiro Kozato
|
|
President and
Chief Executive Officer
|
|
|
|
|
Date:
November 6, 2009
|
/s/ Mark Voll
|
|
Mark Voll
|
|
Vice President
of Finance and Administration and Chief Financial Officer
|
39
Table of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Description
|
3.1
|
|
Certificate of
Designation of Techwell, Inc. classifying and designating the
Series A Participating Preferred Stock, as filed with the Secretary of
State of the State of Delaware on August 4, 2009 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K which was filed on August 5, 2009).
|
4.1
|
|
Rights Agreement, dated
as of August 4, 2009, between Techwell, Inc. and Computershare
Trust Company, N.A., as Rights Agent (which includes as
Exhibit A
the Certificate of Designation of Series A Participating Stock, as
Exhibit B
the form of Rights Certificate, and as
Exhibit C
the Summary of
Rights) (incorporated by reference to Exhibit 4.1 to the Companys
Registration Statement on Form 8-A relating to the Series A
Participating Preferred Stock Purchase Rights which was filed on
August 5, 2009).
|
31.1
|
|
Certification of Chief
Executive Officer pursuant to Securities Exchange Act rules 13a-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2
|
|
Certification of Chief
Financial Officer pursuant to Securities Exchange Act rules 13a-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1 (1)
|
|
Certification of Chief
Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
32.2 (1)
|
|
Certification of Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
(1)
The material contained in Exhibit 32.1
and Exhibit 32.2 is not deemed filed with the SEC and is not to be
incorporated by reference into any filing of the Company under the Securities
Act of 1933 or the Securities Exchange Act of 1934, whether made before or
after the date hereof and irrespective of any general incorporation language
contained in such filing, except to the extent that the registrant specifically
incorporates it by reference.
40
Grafico Azioni Techwell (MM) (NASDAQ:TWLL)
Storico
Da Mag 2024 a Giu 2024
Grafico Azioni Techwell (MM) (NASDAQ:TWLL)
Storico
Da Giu 2023 a Giu 2024