UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
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 SeptemberJune 30, 2003
2004 [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 000-31863
COMPUTER ACCESS TECHNOLOGY CORPORATION
(exact
(exact name of registrant as specified in its charter)
| 77-0302527 | ||
California | ||
(408) 727-6600
(Registrant’s
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x[X] No ¨
[_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act.)
Yes ¨[_] No x
[X]
As of November 1, 2003,July 31, 2004, there were 19,761,45519,672,151 shares of the registrant’sregistrant's
Common Stock outstanding.
Part
1
–- FINANCIAL INFORMATION
Item
ITEM 1. Financial Statements
FINANCIAL STATEMENTS COMPUTER ACCESS TECHNOLOGY CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
September 30, 2003 | December 31, 2002 | |||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 33,399 | $ | 30,846 | ||||
Short-term investments | 10,983 | 12,905 | ||||||
Trade accounts receivable, net | 2,600 | 1,724 | ||||||
Inventories | 924 | 1,032 | ||||||
Other current assets | 648 | 2,632 | ||||||
Total current assets | 48,554 | 49,139 | ||||||
Property and equipment, net | 797 | 999 | ||||||
Purchased intangibles | 202 | 305 | ||||||
Other assets | 109 | 87 | ||||||
| $ | 49,662 | $ | 50,530 | |||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 546 | $ | 1,326 | ||||
Accrued expenses | 2,486 | 1,247 | ||||||
Accrued restructuring | 34 | 270 | ||||||
Deferred revenue | 473 | 485 | ||||||
Total current liabilities | 3,539 | 3,328 | ||||||
Stockholders’ equity: | ||||||||
Common stock | 19 | 19 | ||||||
Additional paid-in capital | 52,495 | 53,210 | ||||||
Deferred stock-based compensation | (73 | ) | (324 | ) | ||||
Accumulated deficit | (6,318 | ) | (5,703 | ) | ||||
Total stockholders’ equity | 46,123 | 47,202 | ||||||
| $ | 49,662 | $ | 50,530 | |||||
(UNAUDITED, IN THOUSANDS)
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Month Period September 30, | Nine Month Period September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Revenue | $ | 3,995 | $ | 4,016 | $ | 11,113 | $ | 10,931 | ||||||||
Cost of revenue (inclusive of amortization of deferred stock-based compensation of $11 and $32 in the three month periods ended September 30, 2003 and 2002, respectively, and of $29 and $112 in the nine month period ended September 30, 2003 and 2002, respectively) | 814 | 979 | 2,269 | 2,315 | ||||||||||||
Amortization of acquired developed technology | 9 | 160 | 27 | 177 | ||||||||||||
Gross profit | 3,172 | 2,877 | 8,817 | 8,439 | ||||||||||||
Operating expenses: | ||||||||||||||||
Research and development (exclusive of amortization of deferred stock-based compensation (recovery) of $38 and $(38) in the three month periods ended September 30, 2003 and 2002, respectively, and of $123 and $32 in the nine month periods ended September 30, 2003 and 2002, respectively) | 1,351 | 2,043 | 3,908 | 5,938 | ||||||||||||
Sales and marketing (exclusive of amortization of deferred stock-based compensation (recovery) of $29 and $24 in the three month periods ended September 30, 2003 and 2002, respectively, and of $69 and $(131) in the nine month periods ended September 30, 2003 and 2002, respectively) | 1,288 | 1,098 | 3,625 | 3,578 | ||||||||||||
General and administrative (exclusive of amortization of deferred stock-based compensation of $5 and $293 in the three month periods ended September 30, 2003 and 2002, respectively, and of $20 and $484 in the nine month periods ended September 30, 2003 and 2002, respectively) | 563 | 1,426 | 1,824 | 3,599 | ||||||||||||
Goodwill impairment | — | 1,427 | — | 1,427 | ||||||||||||
Acquired in-process research and development | — | — | — | 410 | ||||||||||||
Amortization of purchased intangibles | 26 | 228 | 78 | 240 | ||||||||||||
Restructuring expenses | — | — | — | 443 | ||||||||||||
Amortization of deferred stock-based compensation | 72 | 279 | 212 | 385 | ||||||||||||
Total operating expenses | 3,300 | 6,501 | 9,647 | 16,020 | ||||||||||||
Loss from operations | (128 | ) | (3,624 | ) | (830 | ) | (7,581 | ) | ||||||||
Other income, net | 127 | 157 | 486 | 527 | ||||||||||||
Loss before benefit from income taxes | (1 | ) | (3,467 | ) | (344 | ) | (7,054 | ) | ||||||||
Benefit from income taxes | — | (690 | ) | — | (2,461 | ) | ||||||||||
Net loss | $ | (1 | ) | $ | (2,777 | ) | $ | (344 | ) | $ | (4,593 | ) | ||||
Net loss per share: | ||||||||||||||||
Basic and diluted | $ | (0.00 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | (0.24 | ) | ||||
Weighted average shares outstanding: | ||||||||||||||||
Basic and diluted | 19,411 | 19,401 | 19,365 | 19,131 | ||||||||||||
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Nine Month Period Ended | ||||||||
| 2003 | 2002 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (344 | ) | $ | (4,593 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 574 | 489 | ||||||
Provision for doubtful accounts | (9 | ) | (10 | ) | ||||
Write-down of property and equipment in connection with restructuring | — | 134 | ||||||
Acquired in-process research and development | — | 410 | ||||||
Amortization of acquired developed technology | 27 | 177 | ||||||
Goodwill impairment | — | 1,427 | ||||||
Amortization of purchased intangibles | 78 | 240 | ||||||
Amortization of deferred stock-based compensation | 241 | 497 | ||||||
Amortization of premium on short-term investments | 389 | — | ||||||
Changes in assets and liabilities: | ||||||||
Trade receivables | (867 | ) | 284 | |||||
Inventories | 108 | (74 | ) | |||||
Deferred tax assets | — | (867 | ) | |||||
Other assets | 1,866 | (314 | ) | |||||
Accounts payable | (780 | ) | 94 | |||||
Accrued expenses | 1,237 | (426 | ) | |||||
Accrued restructuring | (236 | ) | 143 | |||||
Deferred revenue | (12 | ) | 546 | |||||
Deferred rent | — | (4 | ) | |||||
Net cash provided by (used in) operating activities | 2,272 | (1,847 | ) | |||||
Cash flows from investing activities: | ||||||||
Acquisition of property and equipment | (372 | ) | (346 | ) | ||||
Other long-term assets | 96 | — | ||||||
Purchase of short-term investments | (4,392 | ) | (17,108 | ) | ||||
Sale of short-term investments | 5,925 | 5,076 | ||||||
Acquisition of subsidiary, net of cash acquired | — | (980 | ) | |||||
Net cash provided by (used in) investing activities | 1,257 | (13,358 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from exercise of stock options | 200 | 213 | ||||||
Proceeds from employee stock purchase plan | 142 | 210 | ||||||
Repurchases of common stock | (1,318 | ) | — | |||||
Net cash provided by (used in) financing activities | (976 | ) | 423 | |||||
Net increase (decrease) in cash and cash equivalents | 2,553 | (14,782 | ) | |||||
Cash and cash equivalents at beginning of period | 30,846 | 42,941 | ||||||
Cash and cash equivalents at end of period | $ | 33,399 | $ | 28,159 | ||||
(UNAUDITED, IN THOUSANDS)
4
5
Business
Computer Access Technology Corporation is a provider of advanced
verification systems for existing and emerging digital communications standards.
Our products are used by semiconductor, computer systems,system and software data storage, communications, automotive and aerospace companies at each
phase of their products’products' lifecycles from development through production and
market deployment.
We have expertise in the Bluetooth, Ethernet, Fibre Channel, IEEE 1394, InfiniBand, PCI
Express, SCSI, Serial ATA, Serial Attached SCSI and USB standards and are
actively engaged with our customers throughout their development and production
processes.processes in order to deliver solutions that meet their needs. Utilizing our
easy to use, color-coded expert analysis software, the CATC Trace™Trace(TM), our
development products generate, capture, filter and analyze high-speed
communications traffic, allowing our customers to quickly discover and correct
persistent and intermittent errors and flaws in their product design.designs. Our
production products are used induring the manufacturing process to ensure that our
customers' products comply with applicable standards and operate with other devices, as
well as assist system manufacturers in downloadingto download software onto new computers.
We have two reportable operating segments: development products and
production products. Further segment and geographic information is included in
Note 97 of the Notes to Condensed Consolidated Financial Statements included in
this report.
Computer Access Technology Corporation was incorporated in California in
1992 and reincorporated in Delaware in 2000. Our headquarters are located at
2403 Walsh Avenue,3385 Scott Boulevard, Santa Clara, California 95051.95054. We maintain a websiteWorld Wide
Web site atwww.catc.com. www.catc.com. The reference to this websiteWorld Wide Web site address does
not constitute incorporation by reference of the information contained therein.
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and all amendments to those reports, and the proxy statementProxy Statement
for our annual meeting of stockholders are made available, free of charge, on
our websitewww.catc.com, as soon as reasonably practicable after the reports have been filed
with or furnished to the Securities and Exchange Commission (“SEC”(the "SEC").
Interim Financial Information and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements as
of SeptemberJune 30, 2003,2004, and for the three and nine month periodssix months ended SeptemberJune 30, 2004 and 2003,
and 2002,respectively, have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
statements and pursuant to the rules and regulations of the SEC and include the
accounts of Computer Access Technology Corporation and its wholly owned
subsidiaries (collectively, “Computer"Computer Access Technology Corporation”Corporation" or the
“Company”"Company"). Intercompany accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included in
annual consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to SEC rules and regulations. In the opinion of
management, the unaudited condensed consolidated financial statements reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the condensed consolidated balance sheet at SeptemberJune 30,
2003,2004, the condensed consolidated operating results for the three and nine month periodssix months
ended SeptemberJune 30, 20032004 and 2002, and2003, the condensed consolidated cash flows for the nine month periodssix
months ended SeptemberJune 30, 2004 and 2003 and 2002.the condensed consolidated statements of
stockholders' equity for the six months ended June 30, 2004 and 2003. Certain
reclassifications have been made to prior year balances in order to conform to
the current year's presentation. These unaudited condensed consolidated
financial statements should be read in conjunction with the Company’sCompany's audited
consolidated financial statements and notes thereto for the year ended December
31, 2002.
2003.
The unaudited condensed consolidated balance sheet at December 31, 20022003
has been derived from the audited consolidated financial statements at that date
but does not include all of the information and footnotes required by generally
accepted accounting principles in the United States of America for complete
financial statements.
5
Concentrations of credit risk
Revenue and accounts receivable from customers comprising more than 10% of revenue or trade accounts receivable are summarized as follows:
Nine Month Period Ended September 30, | ||||||
| 2003 | 2002 | |||||
Revenue: | ||||||
Company A | 18 | % | 19 | % | ||
Company B | 17 | % | * | % | ||
Company C | * | % | 11 | % | ||
September 30, 2003 | December 31, 2002 | |||||
Accounts receivable: | ||||||
Company A | 15 | % | 21 | % | ||
Company B | 16 | % | 11 | % | ||
Company D | 15 | % | * | % | ||
6
–- COMPREHENSIVE LOSS
INCOME (LOSS)
Comprehensive lossincome (loss) is defined as changes in equity of a company
from transactions, other events and circumstances, excluding transactions
resulting from investments by owners and distributions to owners.
There is no difference betweenThe following table sets forth comprehensive net loss and comprehensive lossincome (loss) for the
Company in any of the periods presented.
indicated (in thousands):
NOTE 3 - STOCK-BASED COMPENSATION
Stock-based compensation
In connection with certain stock option grants in 2000, 1999 and 1998, the
Company recorded deferred stock-based compensation totaling $14,393,000 which
represented the difference between the exercise price and the deemed fair value
at the date of grant and is being recognized over the vesting period of the
related options. All amortization of deferred stock-based compensation was
recognized as of March 31, 2004. Accordingly, no amortization of deferred
stock-based compensation was recognized in the three months ended June 30, 2004.
Amortization of deferred stock-based compensation was $83,000 and $241,000$32,000 in the quartersix months
ended SeptemberJune 30, 2004, of which $6,000 was included in cost of revenue.
Amortization of deferred stock-based compensation was $96,000 and $158,000 in
the three months ended June 30, 2003 and the nine month periodsix months ended SeptemberJune 30, 2003,
respectively, of which $11,000$15,000 and $29,000$18,000 was included in cost of revenue in
the quarterthree months ended SeptemberJune 30, 2003 and the nine month periodsix months ended SeptemberJune 30, 2003,
respectively.
Amortization of deferred stock-based compensation was $311,000 and $497,000 in the quarter ended September 30, 2002 and the nine month period ended September 30, 2002, respectively, of which $32,000 and $112,000 was included in cost of revenue in the quarter ended September 30, 2002 and the nine month period ended September 30, 2002, respectively. Amortization of deferred stock-based compensation on grants prior to December 31, 2000 is estimated to be approximately $40,000 for the remainder of the year ending December 31, 2003 and $33,000 in the year ending December 31, 2004 and may change due to the granting of additional options or the cancellation of existing grants in future periods.
Fair value disclosures
The Company has adopted the disclosure provisions of Statement of
Financial Accounting Standard (“SFAS”("SFAS") No. 148, “Accounting"Accounting for Stock-Based
Compensation, Transition and Disclosure.”" This statement amends SFAS No. 123,
“Accounting"Accounting for Stock-Based Compensation,”" to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and requires prominent disclosure in both the
annual and interim financial statements of the method of accounting used and the
financial impact of stock-based compensation. As permitted by SFAS No. 123, the
Company accounts for stock options granted as prescribed under Accounting
Principles Board Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees,”"
which recognizes compensation cost based upon the intrinsic value of the award.
6
7
SeptemberJune 30, 2004 and 2003 were $2.06 and 2002, were $2.62 and $2.25$2.01, and for the nine month periodssix months ended
SeptemberJune 30, 2004 and 2003 were $2.15, and 2002, were $1.91, and $3.60.$1.78, respectively. In determining the
fair value of options granted in each of the periods, the Company used the Black
Scholes option pricing model and assumed the following:
| Quarter Ended September 30, | Nine Month Period Ended September 30, | |||||||
| 2003 | 2002 | 2003 | 2002 | |||||
Expected life (in years) | 5 | 5 | 5 | 5 | ||||
Risk-free interest rate | 3.13% | 3.09-3.38% | 2.29%-3.13% | 3.09%-6.88% | ||||
Volatility | 62% | 100% | 53-77% | 100% | ||||
Dividend yield | 0% | 0% | 0% | 0% | ||||
| Quarter Ended September 30, | Nine Month Period Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss, as reported | $ | (1 | ) | $ | 2,777 | $ | (344 | ) | $ | (4,593 | ) | |||||
Add: Amortization of deferred stock-based compensation included in as reported net loss | 83 | 311 | 241 | 497 | ||||||||||||
Deduct: Stock-based employee compensation expense determined under fair value based method for all grants | (553 | ) | (1,612 | ) | (1,709 | ) | (5,194 | ) | ||||||||
Net loss, pro forma | $ | (471 | ) | $ | (4,078 | ) | $ | (1,812 | ) | $ | (9,290 | ) | ||||
Net loss per share, as reported | ||||||||||||||||
Basic and diluted | $ | (0.00 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | (0.24 | ) | ||||
Net loss per share, pro forma | ||||||||||||||||
Basic and diluted | $ | (0.02 | ) | $ | (0.21 | ) | $ | (0.09 | ) | $ | (0.49 | ) | ||||
NOTE 4 - NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with SFAS
No. 128, “Earnings"Earnings per Share,”" and SEC Staff Accounting Bulletin (“SAB”("SAB") No. 98.
Under the provisions of SFAS No. 128 and SAB No. 98, basic net income (loss) per
share is computed by dividing net income (loss) for the period by the weighted
average number of shares of common stock outstanding during the period. The
calculation of diluted net income (loss)loss per share excludes potential common stock if its
effect is antidilutive.anti-dilutive. Potential common stock consists of incremental common
shares issuable upon the exercise of stock options.
7
8
lossincome (loss) per share for the periods indicated (in thousands except per share
data):
| Quarter Ended September 30, | Nine Month Period Ended September 30, | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Numerator: | ||||||||||||||||
Net loss | $ | (1 | ) | $ | (2,777 | ) | $ | (344 | ) | $ | (4,593 | ) | ||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | 19,411 | 19,401 | 19,365 | 19,131 | ||||||||||||
Denominator for basic calculation | 19,411 | 19,401 | 19,365 | 19,131 | ||||||||||||
Dilutive effect of stock options | — | — | — | — | ||||||||||||
Denominator for diluted calculation | 19,411 | 19,401 | 19,365 | 19,131 | ||||||||||||
Net loss per share: | ||||||||||||||||
Basic | $ | (0.00 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | (0.24 | ) | ||||
Diluted | $ | (0.00 | ) | $ | (0.14 | ) | $ | (0.02 | ) | $ | (0.24 | ) | ||||
Total common stock equivalents, related to options outstanding, excluded from the computation of earnings per share as their effect is antidilutive | 2,175 | 4,470 | 2,649 | 4,035 | ||||||||||||
NOTE 5 - INVENTORIES
Inventories consist of the following (in thousands):
September 30, 2003 | December 31, 2002 | |||||
Raw materials | $ | 303 | $ | 369 | ||
Work in progress | 261 | 259 | ||||
Finished goods | 360 | 404 | ||||
| $ | 924 | $ | 1,032 | |||
AS OF JUNE 30, AS OF DECEMBER 31,
2004 2003
-------------- ------------------
Raw materials ................ $ 577 $ 334
Work in progress ............. 624 250
Finished goods ............... 391 323
-------------- ------------------
$1,592 $ 907
============== ==================
NOTE 6 – RESTRUCTURING
During the quarters ended September 30, 2002 and December 31, 2002, the Company implemented two separate restructuring plans designed to consolidate operations and reduce costs.- INCOME TAXES
The Company had restructuring expenses of $443,000 for the nine months ended September 30, 2002 and $365,000 for the quarter ended December 31, 2002. The restructuring plans included the closure of our facilities in San Diego, California and Netanya, Israel and a reduction in staff by a total of 34 positions, primarily in research and development. Obligations related to subleasing may continue until 2004 as estimated and accrued for as of September 30, 2003.
8
The following table summarizes the components of the accrued restructuring (in thousands):
| Employee Severance | Office Closure | Other Costs | Total | |||||||||
Accrued restructuring balance, December 31, 2002 | $ | 197 | $ | 68 | $ | 5 | $ | 270 | ||||
Cash payments made during the nine months ended September 30, 2003 | 197 | 34 | 5 | 236 | ||||||||
Accrued restructuring balance, September 30, 2003 | $ | — | $ | 34 | $ | — | $ | 34 | ||||
NOTE 7 – INCOME TAXES
The Company’sCompany's effective income tax benefit decreased from 19.9% and 34.9% in the quarter ended September 30, 2002 and the nine months ended September 30, 2002, respectively, torate was 0.0% in the quarter ended September 30, 2003quarters and the ninesix
months ended SeptemberJune 30, 2004 and June 30, 2003, as the Company provided a full
valuation allowance against its net deferred tax assets through SeptemberJune 30, 2003.2004.
As of SeptemberJune 30, 2003,2004, the Company continued to carry a full valuation against its
net deferred tax assets, as it has determined that it is more likely than not
that such amounts will not be realized through taxable income from future
operations, or by carrybackcarry-back to prior year’syear's taxable income.
NOTE 8 – STOCK REPURCHASE PROGRAM
On January 30, 2003, the Company announced that its Board of Directors had authorized a stock repurchase program under which up to 1 million shares of the Company’s outstanding Common Stock could be acquired in the open market. The Company has set up a Rule 10b5-1 plan for purchases of the shares that will allow the Company to repurchase shares at times when it would ordinarily not be in the market because of self-imposed blackout periods. Repurchases will be effected by Needham & Company, Inc. Purchases under the program will be funded from available working capital. There is no guarantee as to the exact number of shares that will be repurchased and the Company has the option to discontinue stock repurchases at any time.
During the nine months ended September 30, 2003, the Company purchased approximately 385,000 shares under the stock repurchase program at a cost of approximately $1.3 million.
NOTE 97 - REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION
The Company has two reportable segments categorized by product type:
development products and production products. Prior to the quarter ended March 31, 2003, the Company had three reportable segments: development products, production products and connectivity products. For the quarter ended September 30, 2003, connectivity product revenue and segment gross profit were $24,000 and $12,000, respectively. For the quarter ended September 30, 2002, connectivity product revenue and segment gross loss were $44,000 and $7,000, respectively. Connectivity products are now included in the production products segment information below and under the caption “Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations” elsewhere in this report.
Development products are advanced verification systems that assist product developers to efficiently design reliable and interoperable systems and devices. Production products are production verification systems and connectivity solutions designed to assist manufacturers in the volume production of reliable devices and systems. The Company has no inter-segment revenue.
The Company analyzes segment revenue and cost of revenue, but does not allocate operating expenses, including stock-based compensation, or assets to segments. Accordingly, the Company has presented only revenue and gross profit by segment.
9
| Development Products | Production Products | Unallocated Stock-based Compensation Expense | Total | ||||||||||
Three Month Period Ended September 30, 2003 | |||||||||||||
Segment revenue | $ | 3,470 | $ | 525 | $ | — | $ | 3,995 | |||||
Segment gross profit | $ | 2,818 | $ | 365 | $ | (11 | ) | $ | 3,172 | ||||
Three Month Period Ended September 30, 2002 | |||||||||||||
Segment revenue | $ | 3,467 | $ | 549 | $ | — | $ | 4,016 | |||||
Segment gross profit | $ | 2,622 | $ | 287 | $ | (32 | ) | $ | 2,877 | ||||
Nine month Period Ended September 30, 2003 | |||||||||||||
Segment revenue | $ | 9,840 | $ | 1,273 | $ | — | $ | 11,113 | |||||
Segment gross profit | $ | 8,049 | $ | 797 | $ | (29 | ) | $ | 8,817 | ||||
Nine month Period Ended September 30, 2002 | |||||||||||||
Segment revenue | $ | 9,304 | $ | 1,627 | $ | — | $ | 10,931 | |||||
Segment gross profit | $ | 7,576 | $ | 975 | $ | (112 | ) | $ | 8,439 | ||||
| Revenue | Long-Lived Assets | |||||
Three Month Period Ended September 30, 2003 | ||||||
North America | $ | 1,890 | $ | 797 | ||
Europe | 444 | — | ||||
Asia | 1,661 | — | ||||
Rest of world | — | — | ||||
Total | $ | 3,995 | $ | 797 | ||
Three Month Period Ended September 30, 2002 | ||||||
North America | $ | 1,382 | ||||
Europe | 1,166 | |||||
Asia | 1,468 | |||||
Rest of world | — | |||||
Total | $ | 4,016 | ||||
Nine month Period Ended September 30, 2003 | ||||||
North America | $ | 5,057 | $ | 797 | ||
Europe | 1,409 | — | ||||
Asia | 4,641 | — | ||||
Rest of world | 6 | — | ||||
Total | $ | 11,113 | $ | 797 | ||
Nine month Period Ended September 30, 2002 | ||||||
North America | $ | 4,263 | ||||
Europe | 2,272 | |||||
Asia | 4,366 | |||||
Rest of world | 30 | |||||
Total | $ | 10,931 | ||||
LONG-LIVED
REVENUE ASSETS
------- ----------
Three Months Ended June 30, 2004
North America ........................... $ 2,811 $25,992
Europe .................................. 519 --
Asia .................................... 1,566 --
Rest of world ........................... -- --
------- -------
Total ............................... $ 4,896 $25,992
======= =======
Three Months Ended June 30, 2003
North America ..................... $ 1,907 $ 872
Europe ............................ 525 --
Asia .............................. 1,424 --
Rest of world ..................... -- --
------- -------
Total ......................... $ 3,856 $ 872
======= =======
Six Months Ended June 30, 2004
North America ........................... $ 4,931 $25,992
Europe .................................. 1,083 --
Asia .................................... 3,527 --
Rest of world ........................... -- --
------- -------
Total ............................... $ 9,541 $25,992
======= =======
Six Months Ended June 30, 2003
North America ..................... $ 3,167 $ 872
Europe ............................ 965 --
Asia .............................. 2,980 --
Rest of world ..................... 6 --
------- -------
Total ......................... $ 7,118 $ 872
======= =======
The increases in long-lived assets held in North America for the three and six
months ended June 30, 2004 reflect the increases in the Company's long-term
investments. Revenues are attributed to countriesregions based on delivery locations.
Sales to international customers accounted for 52.7%42.6% and 65.6%50.5% of revenue during
the quarters ended SeptemberJune 30, 20032004 and 2002,2003, respectively, and 54.5%48.3% and 61.0%55.5% for
the ninesix months ended SeptemberJune 30, 2004 and 2003, and 2002, respectively.
10
10 –8 - WARRANTIES
The Company offers warranties on certain products and records at the time
of shipment an estimate for the future costs associated with warranty claims.
We accrueThe Company accrues these costs based upon our historical experience and ourits
estimate of the level of future warranty costs. We assessThe Company assesses the
adequacy of ourits warranty reserve on a quarterly basis and makemakes adjustments, if
needed.
The following table reconciles the changes in our warranty reserve for the
ninesix months ended SeptemberJune 30, 20032004 (in thousands):
Balance as of December 31, 2002 | $ | 187 | ||
Accrual for warranty reserve for sales made during the nine months ended September 30, 2003 | 171 | |||
Warranty costs for the nine months ended September 30, 2003 | (33 | ) | ||
Warranty expirations during the nine months ended September 30, 2003 | (151 | ) | ||
Total | $ | 174 | ||
Balance as of December 31, 2003 ............................ $ 125
Accrual for warranty for sales made during
the six months ended June 30, 2004 182
Warranty costs for the six months ended June 30, 2004 ...... (1)
Warranty expirations during the six months ended
June 30, 2004 ............................................ (181)
-----
Total ...................................................... $ 125
=====
NOTE 11 –9 - RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003,
On March 31, 2004, the Financial Accounting Standards Board (“FASB”("FASB")issued SFASa proposed Statement, "Share-Based Payment, an amendment of FASB
Statements Nos. 123 and 95," that addresses accounting for share-based payment
transactions in which an enterprise receives employee services in exchange for
either equity instruments of the enterprise or liabilities that are based on the
fair value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. The proposed statement would eliminate the
ability to account for share-based compensation transactions using Accounting
Principles Board ("APB") Opinion No. 150, “Accounting25, "Accounting for Certain Financial Instruments with Characteristics of both LiabilitiesStock Issued to
Employees," and Equity.” This Statement establishes standardsgenerally would require that such transactions be accounted for
how an issuer classifiesusing a fair-value-based method and measuresrecognized as expenses in itsour consolidated
statement of financial position certain financial instruments with characteristics of both liabilities and equity. Itoperations. The proposed standard would require that the modified
prospective method be used, which requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances) because that financial instrument embodies an obligationthe fair value of the issuer. This Statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective atnew awards
granted from the beginning of the first interim period beginning after June 15, 2003, exceptyear of adoption, plus unvested awards at the
date of adoption, be expensed over the vesting period. In addition, the proposed
statement encourages companies to use the "binomial" approach to value stock
options, which differs from the Black-Scholes option pricing model that we
currently use. The recommended effective date of the proposed standard for
mandatorily redeemable financial instruments of nonpublic entities. For nonpublic entities, mandatorily redeemable financial instruments are subject to the provisions of this Statementpublic companies is for the first periodfiscal years beginning after December 15, 2003. It is to2004.
Should this proposed statement be implemented by reporting the cumulative effect of a changefinalized in an accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The Company believes that the adoption of SFAS 150its current form, it will not
have a materialsignificant impact on our consolidated statement of operations as we will
be required to expense the fair value of our stock option grants and stock
purchases under our employee stock purchase plan rather than disclose the impact
on our consolidated financial position or resultsnet income (loss) within our footnotes, as is our current
practice. In addition, the proposed standard will have a significant impact on
our consolidated cash flows from operations, as we will be required to
reclassify our tax benefit on the exercise of the operations of the Company.
Itememployee stock options from cash
flows from operating activities to cash flows from financing activities.
11
Management’s DiscussionMANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly Report and Analysis of Financial Condition and Results of Operations
This Report on Form 10-Q containscertain information incorporated herein by
reference contain forward-looking statements within the “safe harbor”"safe harbor" provisions
of the Private Securities Litigation Reform Act of 1995,1995. All statements
contained in this Quarterly Report that are not purely historical are
forward-looking statements, including, without limitation, statements regarding
our expectations, objectives, anticipations, plans, hopes, beliefs, intentions, beliefs
or strategies regarding the future. SuchForward-looking statements are not
guarantees of future performance and are subject to risks and uncertainties that
could cause actual results to differ materially from the results contemplated by
the forward-looking statements. Forward-looking statements include, without
limitation, the statements regarding:
o Our anticipation that revenue from sales of our Universal Serial Bus
(USB) products will decrease as the markets for our USB products
mature;
o Our belief that the repurchasedevelopment of Company stock will be funded out of working capital; our belief that emerging communications standards
and technological change arehas influenced and is likely to continue to
influence our revenuesquarterly and annual revenue and results of
operations;
o Our expectation that our belief thatoperating cash flow requirements will
increase in the ratefuture in connection with the expanding scope and
timinglevel of customer orders may vary significantly from month to month; our activities;
o Our belief that our current cash, cash equivalents and short-term
investments together with funds generated from operations will be
sufficient to meet our working capital and capital expenditure
requirements will be met for at least the next twelve12 months;
o Our belief that our quarterly and annual operating results are
likely to fluctuate significantly in the future;
o Our belief that our future revenue growth relies on our ability to
successfully design, manufacture and sell new products into new and
established markets;
o Our belief that we must work closely with core or promoter companies
in our target markets to gain valuable insights into new market
demands, obtain early access to standards as they develop and help
us design new or enhanced products;
o Our expectation that revenue from USBwe will encounter increased competition as we
expand our product portfolio into new and existing markets;
o Our anticipation that the average selling prices of our products
will decrease in the future in response to such things as product
introductions or enhancements by us or our competitors, product
discounting on volume purchase orders or additional pricing
pressures;
o Our belief that we must continue to accountdevelop and introduce on a
timely basis new products that can be sold at higher average selling
prices;
o Our belief that developments related to the Sarbanes-Oxley Act of
2002 will increase our legal compliance and financial reporting
costs, make it more difficult and more expensive for a substantial portionus to obtain
director and officer liability insurance, and may cause us to accept
reduced coverage or incur substantially higher costs to obtain
coverage;
o Our expectations to continue to review opportunities to acquire
other businesses or technologies that complement our current
products, expand our markets, enhance our technical capabilities or
otherwise offer growth opportunities;
o Our intent to continue the development and expansion of our revenue for the foreseeable future;direct
sales organization and our expectationindirect distribution channels
domestically and internationally;
o Our anticipation that revenue from international operations will
continue to represent a substantial portion of our revenue;
and ouro Our belief that our products do not infringe any other party's
intellectual property rights in any way that would have a material
adverse effect on our operations;
12
have no material marketmay need
to order larger quantities of these components earlier than
forecasted or risk exposure duedelays in product shipments to our short-term investments;customers;
o Our anticipation that we will not pay any cash dividends on our
common stock in the foreseeable future; and
o Our belief that the amount of ultimate liability, if any, for legal
proceedings and claims will not materially affect our estimations regarding the amortizationfinancial
position, results of deferred stock-based compensation on certain stock grants. Actualoperations, or liquidity.
These forward-looking statements are subject to risks and uncertainties
that could cause actual results couldto differ materially from those projectedstated or
implied by the forward-looking statements. For a detailed description of the
risks associated with our business that could cause actual results to differ
from those stated or implied in anysuch forward-looking statements, forsee the
reasons noteddisclosure contained under the sub-heading “RISK FACTORS”heading "Risk Factors" in this Quarterly Report
as well as such other risks and uncertainties as are detailed in other sections of this Report on Form 10-Q.our Securities
and Exchange Commission reports and filings. All forward-looking statements
included in this Form 10-Qquarterly Report are based on information available to us on
the date of this Quarterly Report, on Form 10-Q, and we assume no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
See “RISK FACTORS” below, as well as such other risks and uncertainties as are detailed in our Securities and Exchange Commission reports and filings for a discussion of the factors that could cause actual results to differ materially from the forward-looking statements.
11
The following “Management’s"Management's Discussion and Analysis of Financial Condition
and Results of Operations”Operations" should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in Item 1
of this reportQuarterly Report and “Management’s"Management's Discussion and Analysis of Financial
Condition and Results of Operations”Operations" contained in our Form 10-K as filed with the
Securities and Exchange Commission on February 20, 2004, as amended by our Form
10-K/A filed on March 21, 2003.
Critical Accounting Policies and Estimates
3, 2004. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our consolidated financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We believe the following critical accounting policies, among others, affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
REVENUE RECOGNITION. Due to the significant software content of our
products, we have adopted Statement of Position (“SOP”("SOP"), 97-2,Software Revenue
Recognition.Recognition. Under SOP 97-2, we recognize revenue on sales to distributors,
resellers and end usersdirect customers upon shipment, provided that there is persuasive
evidence of an arrangement, the product has been delivered and title has passed,
the fee is fixed or determinable and collection of the resulting receivable is
reasonably assured. We do not provide distributors, resellers or end-usersdirect
customers price protection, and only provide limited rights of return or
exchange. Generally, our distributors do not maintain inventory; however, to the
extent they do, so, the Company haswe have the right, but not the obligation, under the terms of
our distributor agreements to repurchase inventory at the sales price pursuant toupon
termination of the distribution agreement.relationship. We review distributor inventory levels, held by distributors, if any,
on a quarterly basis to ensure that any potential returns in the event of terminationrepurchases are not material. When we
have shipped products, but some elements essential to the functionality of the
products have not been completed, revenue and associated cost of revenue are
deferred until all remainingessential elements have been delivered. Software maintenance
support revenue is deferred and recognized ratably over the maintenance support
period. Provisions for warranty costs are recorded at the time products are
shipped.
13
short-termlong-term investments are placed in
portfolios managed by professional money management firms under investment
guidelines we have established. These guidelines address the critical objectives
of preservation of principal, avoiding inappropriate concentrations, meeting
liquidity requirements and maximizing after-tax returns. We classify all highly
liquid investments purchased with an original maturitymaturities from the date of purchase of 90 days
or less to beas cash equivalents and thoseequivalents. Those with a maturityoriginal maturities greater than 90 days
but less than one year to beare classified as short-term investments, and those with
an original maturity greater than one year are classified as long-term
investments. Our cash equivalents short-term investments and short-termlong-term
investments consist principally of investments in commercial paper, investment
quality corporate and municipal bonds, money market funds, collateralized
mortgage obligations and U.S. government agency securities.
INCOME TAXES. We account for income taxes under the liability method,
which requires, among other things, that we record deferred income taxes accounttax assets and
liabilities for temporary differences between the tax bases of our assets and
liabilities and their financial statement reported amounts. In addition,
deferred tax assets are recorded for the future benefit of utilizing net
operating losses and research and development credit carryforwards.carry-forwards. A full
valuation allowance is provided against deferred tax assets unless it is more
likely than not that they will be realized. In the quarterthree months ended December
31, 2002, we provided a full valuation allowance for our net deferred tax
assets. As of SeptemberJune 30, 2003,2004, we continue to maintain a full valuation allowance
against our net deferred tax assets as we have determined that it is more likely than not that such amounts will not be realized through taxable income from future operations, or by carryback to prior years’ taxable income.
assets.
INTANGIBLE ASSETS. Our purchased intangible assets total $202,000$98,000 as of
SeptemberJune 30, 2003.2004. We are required to make judgments aboutreduce the recoverabilitycarrying value of these assets
whenever events or changes in circumstances indicate that the carrying value of
these assets may not be recoverable. In order to make such judgments,adjustments, we are
required to make assumptions about the value of these assets in the future
including future prospects for earnings and cash flows of the businesses
underlying these investments. Judgments and assumptions about the future are
complex, subjective and can be affected by a variety of factors including
industry and economic trends, our market position and the competitive
environment in which we operate. Although we believe our judgments and
assumptions are reasonable and appropriate, different judgments and assumptions
could materially impact our reported financial results.
12
Overview
OVERVIEW
We are a provider of advanced verification systems and connectivity products for existing and
emerging digital communications standards such as Bluetooth, Ethernet, Fibre Channel, IEEE
1394, InfiniBand, PCI Express, SCSI, Serial ATA, Serial Attached SCSI and USB.
Our products are used by semiconductor, computer systems, software, data
storage, communications, automotive and aerospace companies at each phase of
their products’products' lifecycles from development through production and market
deployment. Our verification systems consist of development and production
products that accurately monitor communications traffic and diagnose operational
problems to ensure that products comply with standards and operate with other
devices as well as to assist system manufacturers in downloading software onto new computers.devices. We currently outsource most of the manufacturing of our verification systemsproducts so
that we may concentrate our resources on the design, development and marketing
of our existing and new products.
We report our revenue and gross profit in two business segments:
development products and production products. In the quarterthree months ended SeptemberJune 30,
2003,2004, revenue from our development products was $3.5$4.7 million and revenue from
our production products was $525,000.
$242,000. Historically, we have generated a majority
of our revenue from products for the USB standard. We anticipate that revenue
from sales of our USB products will decrease as the markets for our USB products
mature. Consequently, we rely on our ability to generate growth in revenue with
our new product offerings in other communications standards in order to offset
any decreases in revenues from the USB standard.
We sell our products to technology, infrastructure and application
companies through our direct sales force and indirectly through our distributors
and manufacturer’smanufacturers' representatives. Historically, a substantial portion of our
revenue has been derived from customers outside of North America. In the quarterthree
months ended SeptemberJune 30, 2003, 52.7%2004, 42.6% of our revenue was derived from international
customers, of which 17.7%12.8% was derived from customers in Japan, 23.6% was derived19.1% from
customers in other parts of Asia, and 11.1% was derived10.6% from customers in Europe. All of our
revenue and accounts receivable are denominated in U.S. dollars. Although
seasonality affects many of our target markets, to date our revenue and
financial condition as a whole have not been materially impacted by seasonality.
Prior
However, as we continue to the quarter ended September 30, 2003, we reported related party revenue and accounts receivables for Toyo Corporation, one of the Company’s distributors and a holder ofexpand our stock and Agilent Technologies, a holder of our stock. Beginning with the quarter ended September 30, 2003, these entities will no longer be considered related parties.
product offerings into new markets,
seasonality effects may become material.
14
have invested significantlyinvest heavily in the research, development and marketing of our products for
emerging communications standards, often before these standards have gained
widespread industry acceptance and in advance of generating substantialbefore we generate revenue related to these
investments. Additionally, the rateadoption rates for our new products by customers
in our target markets are unpredictable and timingsubject to substantial risks, most
of customer orders may vary significantly from month to month.which are beyond our control. Accordingly, if sales ofthe markets for our new
products do not occur whenmaterialize or materialize later than we expect, and we are unableour ability to
predictsustain or adjust our expenses on a timely basis, our expensesincrease revenue may increase as a percentage of revenue.
13
Results of Operations
be harmed. RESULTS OF OPERATIONS The following table presents selected consolidated financial data for the periods indicated as a percentage of revenue:
Quarter Ended September 30, | Nine Month Period Ended | |||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||
Consolidated Statement of Operations Data: | ||||||||||||
Revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||
Cost of Revenue | 20.4 | 24.4 | 20.4 | 21.2 | ||||||||
Amortization of acquired developed technology | 0.2 | 4.0 | 0.3 | 1.6 | ||||||||
Gross profit | 79.4 | 71.6 | 79.3 | 77.2 | ||||||||
Operating expenses: | ||||||||||||
Research and development | 33.8 | 50.9 | 35.2 | 54.3 | ||||||||
Sales and marketing | 32.2 | 27.3 | 32.6 | 32.7 | ||||||||
General and administrative | 14.1 | 35.5 | 16.4 | 32.9 | ||||||||
Goodwill impairment | — | 35.5 | — | 13.1 | ||||||||
Acquired in-process research and development | — | — | — | 3.8 | ||||||||
Amortization of purchased intangibles | 0.7 | 5.7 | 0.7 | 2.2 | ||||||||
Restructuring expenses | — | — | — | 4.1 | ||||||||
Amortization of deferred stock-based compensation | 1.8 | 6.9 | 1.9 | 3.5 | ||||||||
Total operating expenses | 82.6 | 161.8 | 86.8 | 146.6 | ||||||||
Loss from operations | (3.2 | ) | (90.2 | ) | (7.5 | ) | (69.4 | ) | ||||
Other income, net | 3.2 | 3.9 | 4.4 | 4.8 | ||||||||
Loss before benefit from income taxes | (0.0 | ) | (86.3 | ) | (3.2 | ) | (64.6 | ) | ||||
Benefit from income taxes | — | (17.2 | ) | — | (22.5 | ) | ||||||
Net loss | (0.0 | )% | (69.1 | )% | (3.2 | )% | (42.1 | )% | ||||
Results of Operations in the Quarters Ended September
RESULTS OF OPERATIONS IN THE QUARTERS ENDED JUNE 30, 2004 AND 2003
and 2002
Revenue.Revenue. Our revenue was $4.0$4.9 million in the quarterthree months ended SeptemberJune 30,
2004, compared to $3.9 million in the three months ended June 30, 2003, the same as in the quarter ended September 30, 2002.an
increase of 27.0%. New product revenue increased byincreases of $1.5 million were partially
offset by decreases in sales of certain existing products of $1.5 million.$442,000. The
decrease in sales of existing products was primarily the result of decreased
sales of certain InfiniBand products and reduced demand for InfiniBandcertain SCSI
development products due to the maturity and Bluetoothstability of the protocol. Going
forward, we expect continuing declines in certain USB and SCSI development products.and
USB production product revenues as these communication standards continue to
mature. Revenue from international customers represented 52.7%42.6% of our revenue in the
quarterthree months ended SeptemberJune 30, 20032004 and 65.6%50.5% of our revenue in the quarterthree months ended
SeptemberJune 30, 2002. The decrease in international revenue was primarily the result of reduced demand for InfiniBand products.
2003.
Cost of Revenue and Gross Profit.Profit. Our gross profit was $3.2$4.0 million in the
quarterthree months ended SeptemberJune 30, 20032004 compared to $2.9$3.1 million in the quarterthree months
ended SeptemberJune 30, 2002,2003, an increase of 10.3%32.0%. The increase in gross profit was primarily the result of $200,000 of inventory write-offs for obsolete inventory recorded in the quarter ended September 30, 2002 and a decrease in the amortization of acquired developed technology of $152,000. Our gross margin percentage was 79.4%82.4%
in the quarterthree months ended SeptemberJune 30, 20032004 and 71.6%79.3% in the quarterthree months ended SeptemberJune
30, 2002.2003. The increase in gross margin percentage was primarily due to the decreaseresult of an
increase in expenses noted in this paragraph when compared to the quarter ended September 30, 2002.
development product sales as a percentage of total revenue and
reduced manufacturing costs of certain products. Our higher margin business
segment, development products, increased as a percentage of total revenue by
2.4%.
15
Development.Development. Our research and development expenses were $1.4$1.6
million in the quarterthree months ended SeptemberJune 30, 20032004 compared to $2.0$1.3 million in the
quarterthree months ended SeptemberJune 30, 2002, a decrease2003, an increase of 33.9%20.5%. Research and development
expenses represented 32.0% of revenue in the three months ended June 30, 2004
and 33.8% of revenue in the quarterthree months ended SeptemberJune 30, 2003. Research and
development expenses for the three months ended June 30, 2003 and 50.9%include $53,000 of
revenueamortization of deferred stock-based compensation. There were no similar
expenses in the quarterthree months ended SeptemberJune 30, 2002. The decrease in expenses was primarily due to decreases in personnel and related costs of approximately $332,000, decreases in purchased research and development costs of $250,000, and decreases in consulting fees of $102,000. The percentage of revenue decrease for the quarter ended September 30, 2003 was primarily due to the decrease in expenses noted in this paragraph when compared to the quarter ended September 30, 2002.
14
Sales and Marketing. Our sales and marketing expenses were $1.3 million in the quarter ended September 30, 2003 compared to $1.1 million in the quarter ended September 30, 2002, an increase of 17.3%. Sales and marketing expenses represented 32.2% of revenue in the quarter ended September 30, 2003 and 27.3% of revenue in the quarter ended September 30, 2002.2004. The increase in expenses was
primarily due to increases inincreased personnel and related costs of approximately
$143,000.$253,000. In addition, as a result of a reorganization of our technical services
department approximately $120,000 for certain customer service costs were
included in research and development expenses for the three months ended June
30, 2004. Such customer service costs were included in sales and marketing
expenses prior to the first three months of 2004. The percentage of revenue
increasedecrease for the quarterthree months ended SeptemberJune 30, 20032004 was primarily due to increased
revenues partially offset by the increase in expenses noted in this paragraph
when compared to the quarterthree months ended SeptemberJune 30, 2002.
2003.
Sales and Marketing. Our sales and marketing expenses were $1.5 million in
the three months ended June 30, 2004 compared to $1.2 million in the three
months ended June 30, 2003, an increase of 24.8%. Sales and marketing expenses
represented 30.9% of revenue in the three months ended June 30, 2004 and 31.5%
in the three months ended June 30, 2003. Sales and marketing expenses for the
three months ended June 30, 2003 include $21,000 of amortization of deferred
stock-based compensation. There were no similar expenses in the three months
ended June 30, 2004. The increase in expenses was primarily due to an increase
in the commissions earned by our manufacturers' representatives of $189,000 and
increased consulting costs of $115,000, partially offset by a reduction of
approximately $120,000 for certain customer service costs that were included in
sales and marketing expenses prior to the first three months of 2004 and are now
included in research and development expenses.
General and Administrative.Administrative. Our general and administrative expenses were
$563,000$590,000 in the quarterthree months ended SeptemberJune 30, 20032004 compared to $1.4 million$592,000 in the
quarterthree months ended SeptemberJune 30, 2002, a decrease of 60.5%.2003. General and administrative expenses
represented 14.1%12.1% of revenue in the quarterthree months ended SeptemberJune 30, 2004 and 15.4%
in the three months ended June 30, 2003. General and administrative expenses for
the three months ended June 30, 2003 and 35.5%include $7,000 of amortization of deferred
stock-based compensation. There were no similar expenses in the quarterthree months
ended SeptemberJune 30, 2002. The decrease was primarily due to a decrease in professional services of $671,000 and decreases in personnel and related costs of $215,000.2004. The percentage of revenue decrease for the quarterthree months
ended SeptemberJune 30, 2004, when compared to the three months ended June 30, 2003, was
primarily due to the decrease in costs noted in this paragraph when compared to the quarter ended September 30, 2002.
Amortizationimpact of Purchased Intangibles.Our amortization of purchased intangibles resulting from our purchase of Verisys was $26,000 in the quarter ended September 30, 2003 compared to $228,000 in the quarter ended September 30, 2002. Amortization of purchased intangibles represented 0.7% and 5.7% of revenue in the quarter ended September 30, 2003 and September 30, 2002, respectively. The decrease was primarily due to an impairment write-down of $194,000 in the quarter ended September 30, 2002, which reduced the remaining balance to be amortized resulting in lower subsequent amortization. The percentage of revenue decrease for the quarter ended September 30, 2003 was primarily due to the decrease in costs noted in this paragraph when compared to the quarter ended September 30, 2002.
Amortization of Deferred Stock-based Compensation. Amortization of deferred stock-based compensation was $83,000 in the quarter ended September 30, 2003, of which $11,000 was included in cost of revenue. Amortization of deferred stock-based compensation was $311,000 in the quarter ended September 30, 2002, of which $32,000 was included in cost of revenue. Amortization of deferred stock-based compensation represented 1.8% and 6.9% of revenue in the quarter ended September 30, 2003 and September 30, 2002, respectively. Amortization of deferred stock-based compensation on grants prior to December 31, 2000 is estimated to be approximately $40,000 for the remainder of the year ending December 31, 2003 and $33,000 in the year ending December 31, 2004, and may change due to the granting of additional options or the cancellation of existing grants in future periods.
increased revenues.
Other Income.Income. Other income was $127,000$218,000 in the quarterthree months ended SeptemberJune 30,
2004 compared to $198,000 in the three months ended June 30, 2003, compared to $157,000 in the quarter ended September 30, 2002, a decreasean increase
of 19.1%10.1%. This decreaseincrease resulted primarily from decliningincreased interest income earned on the
investment of excess cash balances, primarily associated with lowerhigher interest
rates.
Benefit fromrates earned on increased investment in instruments with longer maturities.
Income Taxes.Taxes. We have incurred no provision for income taxes infor the
quarterquarters ended SeptemberJune 30, 2003 compared to a benefit from income taxes of $690,000 in the quarter ended September 30, 2002, a decrease of 100.0%. Our effective tax benefit decreased from 19.9% in the quarter ended September 30, 2002 to 0.0% in the quarter ended September2004 and June 30, 2003. As of SeptemberJune 30, 2003,2004, we continue
to maintain a full valuation allowance against our net deferred tax assets, as
we have determined that it is more likely than not that such amounts will not be
realized through taxable income from future operations or by carrybackcarry-back to prior
years’years' taxable income.
Results of Operations in the Nine Months Ended September
RESULTS OF OPERATIONS IN THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
and 2002
Revenue.Revenue. Our revenue was $11.1$9.5 million in the ninesix months ended SeptemberJune 30,
20032004, compared to $10.9$7.1 million in the ninesix months ended SeptemberJune 30, 2002,2003, an
increase of 1.7%34.0%. The increase inNew product revenue was due primarily to increases in sales of new products of $2.3$2.9 million were partially
offset by decreases in sales of certain existing products of $2.2 million.$430,000. The
decrease in sales of existing products was primarily the result of decreased
sales of certain InfiniBand products, reduced demand for InfiniBandcertain SCSI
development products due to the maturity and stability of the protocol and
reduced demand for USB production products primarily as a resultdue to the maturity and stability of
the SARS epidemic in key production areas of Asia earlier in 2003.protocol components incorporated into end-user products. Revenue from
international customers represented 54.5%48.3% of our revenue in the ninesix months ended
SeptemberJune 30, 20032004 and 61.0 %55.5% of our revenue in the ninesix months ended SeptemberJune 30, 2002.
15
2003.
Cost of Revenue and Gross Profit.Profit. Our gross profit was $8.8$7.9 million in the
ninesix months ended SeptemberJune 30, 2003 and $8.42004 compared to $5.6 million in the ninesix months ended
SeptemberJune 30, 2002,2003, an increase of 4.5%39.1%. Our gross margin percentage was 82.3% in
the six months ended June 30, 2004 and 79.3% in the ninesix months ended SeptemberJune 30,
2003 and 77.2% in the nine months ended September 30, 2002.2003. The increase in gross profitmargin percentage was primarily the result of $200,000an
increase in development product sales as a percentage of inventory write-offs for obsolete inventory in the nine month period ended September 30, 2002, a decrease in the amortizationtotal revenue and
reduced manufacturing costs of acquired developed technology of $151,000 and a decrease in the amortization of deferred stock based compensation of $83,000. In addition,certain products. Our higher margin business
segment, development products, which typically exhibit higher gross margins, increased as a percentage of total revenue by
3.4% in the nine months ended September 30, 2003 when compared to the nine months ended September 30, 2002.
5.6%.
16
Development.Development. Our research and development expenses were $3.9$3.2
million in the ninesix months ended SeptemberJune 30, 20032004 compared to $5.9$2.6 million in the
ninesix months ended SeptemberJune 30, 2002, a decrease2003, an increase of 34.2%20.8%. Research and development
expenses represented 35.2%33.4% of revenue in the ninesix months ended SeptemberJune 30, 20032004 and
54.3%37.1% of revenue in the ninesix months ended SeptemberJune 30, 2002.2003. Research and development
expenses for the six months ended June 30, 2004 and June 30, 2003 include
$19,000 and $85,000 of amortization of deferred stock-based compensation,
respectively. The decreaseincrease in expenses was primarily due to decreases inincreased personnel
and related costs of approximately $1.5 million, decreases$537,000. In addition, as a result of a
reorganization of our technical services department approximately $230,000 for
certain customer service costs were included in purchased research and development
expenses for the six months ended June 30, 2004. Such customer service costs
were included in sales and marketing expenses prior to the first six months of
$250,000, and decreases in consulting fees of $99,000.2004. The percentage of revenue decrease for the ninesix months ended SeptemberJune 30, 20032004
was primarily due to the decrease in costs noted in this paragraph combined with the impact of increased revenue when compared to the nine months ended September 30, 2002.
Sales and Marketing. Our sales and marketing expenses were $3.6 million in the nine months ended September 30, 2003, the same as in the nine months ended September 30, 2002. Sales and marketing expenses represented 32.6% of revenue in the nine months ended September 30, 2003 and 32.7% of revenue in the nine months ended September 30, 2002.
General and Administrative. Our general and administrative expenses were $1.8 million in the nine months ended September 30, 2003 compared to $3.6 million in the nine months ended September 30, 2002, a decrease of 49.3%. General and administrative expenses represented 16.4% of revenue in the nine months ended September 30, 2003 and 32.9% in the nine months ended September 30, 2002. The decrease was primarily due to a decrease in professional services of $1.4 million, decreases in personnel and related costs of $383,000,revenues partially offset by anthe
increase risk management costs of $126,000. The percentage of revenue decrease for the nine months ended September 30, 2003 was primarily due to the decrease in costs noted in this paragraph combined with the impact of increased revenue when compared to the nine months ended September 30, 2002.
Acquired In-Process Research and Development.Our acquired in-process research and development expenses resulting from our purchase of Verisys were $410,000 in the nine months ended September 30, 2002. There were no comparable charges in the nine months ended September 30, 2003. Acquired in-process research and development expenses represented 3.8% of revenue in the nine months ended September 30, 2002.
Amortization of Purchased Intangibles.Our amortization of purchased intangibles resulting from our purchase of Verisys was $78,000 in the nine months ended September 30, 2003 compared to $240,000 in the nine months ended September 30, 2002. Amortization of purchased intangibles represented 0.7% and 2.2% of revenue in the nine months ended September 30, 2003 and September 30, 2002, respectively. The decrease was primarily due to an impairment write-down of $194,000 in the quarter ended September 30, 2002, which reduced the remaining balance to be amortized resulting in lower subsequent amortization. The percentage of revenue decrease for the quarter ended September 30, 2003 was primarily due to the decrease in costs noted in this paragraph when compared to the quartersix months
ended SeptemberJune 30, 2002 combined with2003.
Sales and Marketing. Our sales and marketing expenses were $2.8 million in
the six months ended June 30, 2004 compared to $2.4 million in the six months
ended June 30, 2003, an increase of 17.7%. Sales and marketing expenses
represented 29.3% of revenue in the six months ended June 30, 2004 and 33.4% of
revenue in the six months ended June 30, 2003. Sales and marketing expenses for
the six months ended June 30, 2004 and June 30, 2003 include $2,000 and $40,000
of amortization of deferred stock-based compensation, respectively. The increase
in expenses was primarily due to an increase in the commissions earned by our
manufacturers' representatives of $290,000 and increased personnel and related
costs of approximately $77,000, partially offset by a reduction of approximately
$230,000 for certain customer service costs that were included in sales and
marketing expenses prior to the first three months of 2004 and are now included
in research and development expenses. The percentage of revenue decrease for the
six months ended June 30, 2004 was primarily due to the impact of increased
revenuerevenues partially offset by the increase in expenses noted in this paragraph
when compared to the ninesix months ended SeptemberJune 30, 2002.
Restructuring Expenses. Restructuring2003.
General and Administrative. Our general and administrative expenses were
$443,000$1.3 million in the ninesix months ended SeptemberJune 30, 2002, representing 4.1%2004 and in the six months ended
June 30, 2003. General and administrative expenses represented 13.4% of revenue
in the ninesix months ended SeptemberJune 30, 2002. There were no comparable charges2004 and 17.9% in the ninesix months ended SeptemberJune 30,
2003. RestructuringGeneral and administrative expenses consisted of severance payments in connection with our headcount reduction, other expenses relating to office closures, write-down of fixed assets and other one-time charges relating to our restructuring plan implemented infor the ninesix months ended SeptemberJune 30, 2002.
Amortization2004
and June 30, 2003 include $5,000 and $15,000 of Deferred Stock-based Compensation. Amortizationamortization of deferred
stock-based compensation, was $241,000 inrespectively The percentage of revenue decrease for
the ninesix months ended SeptemberJune 30, 2003, of which $29,0002004 was included in cost of revenue. Amortization of deferred stock-based compensation was $497,000 in the nine months ended September 30, 2002, of
16
which $112,000 was included in cost of revenue. Amortization of deferred stock-based compensation represented 1.9% and 3.5% of revenue in the nine months ended September 30, 2003 and September 30, 2002, respectively. Amortization of deferred stock-based compensation on grants prior to December 31, 2000 is estimated to be approximately $40,000 for the remainder of the year ending December 31, 2003 and $33,000 in the year ending December 31, 2004, and may changeprimarily due to the grantingimpact of additional options orincreased
revenues when compared to the cancellation of existing grants in future periods.
six months ended June 30, 2003.
Other Income.Income. Other income was $486,000$376,000 in the ninesix months ended SeptemberJune 30,
2004 compared to $359,000 in the six months ended June 30, 2003, compared to $527,000 in the nine months ended September 30, 2002, a decreasean increase of
7.8%4.7%. This decreaseincrease resulted primarily from decliningincreased interest income earned on the
investment of excess cash balances, primarily associated with lowerhigher interest
rates partially offset by interestearned on income tax refunds of $60,000increased investment in the nine month ended September 30, 2003.
Benefit frominstruments with longer maturities.
Income Taxes.Taxes. We have incurred no provision for income taxes infor the ninesix
months ended SeptemberJune 30, 2003 compared to a benefit from income taxes of $2.5 million in the nine months ended September 30, 2002, a decrease of 100.0%. Our effective tax benefit decreased from 34.9% in the nine months ended September 30, 2002 to 0.0% in the nine months ended September2004 and June 30, 2003. As of SeptemberJune 30, 2003,2004, we continue
to maintain a full valuation allowance against our net deferred tax assets, as
we have determined that it is more likely than not that such amounts will not be
realized through taxable income from future operations or by carrybackcarry-back to prior
years’years' taxable income.
Liquidity and Capital Resources
Our
LIQUIDITY AND CAPITAL RESOURCES
Generally, we expect our operating cash flow requirements have generally increased reflectingto increase in
the future in connection with the expanding scope and level of our activities.
Since our inception, we have financed our operations primarily through cash
flows from operating activities. In November 2000, we received net proceeds of
$38.3 million from the initial public offering of our Common Stock.
In the ninesix months ended SeptemberJune 30, 2003,2004, cash provided by operating
activities of $2.3$1.7 million was primarily the result of net income of $913,000,
non-cash expenses associated with depreciation of $316,000, decreases in related
assets and liabilities for working capital purposes of $199,000, amortization of
premium on investments of $160,000, amortization of acquired intangibles of
$52,000, amortization of deferred stock based compensation of $32,000, and
amortization of other acquired developed technology of $17,000. Cash used in
investing activities was $18.0 million, primarily relating to the purchase of
long-term investments of $15.9 million, the purchase of short-term investments
of $2.6 million and capital expenditures of $528,000, partially offset by the
sale of short-term investments of $1.1 million. Cash provided by financing
activities was $366,000, consisting of proceeds from the exercise of stock
options of $239,000 and the sale of stock pursuant to our employee stock
purchase plan of $127,000.
17
$1.3 million,$800,000,
offset by non-cash expenses associated with depreciation expenses of $574,000,$397,000,
amortization of premium on short-term investments of $389,000,$262,000, amortization of
deferred stock-based compensation of $241,000 and$158,000, amortization of other purchased
intangibles of $78,000 partially offset by our net loss$52,000 and the amortization of $344,000.other acquired developed
technology of $18,000. Cash provided by investing activities was $1.3 million,$358,000,
related to the sale of short-term investments of $5.9$4.9 million and other
long-term assets of $96,000, partially$120,000, offset by the purchase of short-term investments
of $4.4 million and capital expenditures of $372,000.$270,000. Cash used in financing
activities was $976,000,$250,000, consisting of the repurchases of common stock of $1.3 million, partially$465,000,
offset by the proceeds from the exercise of stock options of $200,000$145,000 and the
sale of stock pursuant to our employee stock purchase plan of $142,000.
In the nine months ended September 30, 2002, cash used in operating activities of $1.8 million was primarily a result of the net loss of $4.6 million and an increase in related assets and liabilities for working capital purposes of $618,000, partially offset by non-cash expenses associated with goodwill impairment of $1.4 million, amortization of deferred stock-based compensation of $497,000, acquired in-process research and development of $410,000, depreciation expenses of $489,000, amortization of other purchased intangibles of $240,000, amortization of other acquired developed technology of $177,000, and the write-down of property and equipment in connection with restructuring of $134,000. Cash used in investing activities was $13.4 million, related to the purchase of short-term investments of $17.1 million, acquisition of a subsidiary of $980,000, capital expenditures of $237,000, partially offset by proceeds from the sale of short-term investments of $5.1 million. Cash provided by financing activities was $423,000, consisting of the proceeds from the exercise of stock options of $213,000 and the sale of stock pursuant to our employee stock purchase plan of $210,000.
$70,000.
As of SeptemberJune 30, 2003,2004, we had cash, cash equivalents and short-term investments of
$44.4$45.6 million, working capital of $45.0$21.5 million and no debt. We currently have no capital
lease obligations, and we had future minimum lease payments under our operating
leases of approximately $1.6 million, primarily associated with the lease of certain real property for our corporate headquarters commencing in the quarter ending December 31, 2003. In order to meet our long term operating objections, however, it may become necessary for us in the future to commit to long term lease arrangements.
17
$1.5 million.
We believe that our current cash, cash equivalents and short-term
investments, together with funds generated from operations, will be sufficient
to meet our working capital and capital expenditure requirements for at least the next 12
months. In the future, we may find it necessary to obtain additional equity or
debt financing. If we are requireddesire to raise additional funds, we may not be able to do
so on acceptable terms or at all. In addition, if we issue new securities,
stockholders might experience dilution and the holders of the new securities
might have rights, preferences or privileges senior to those of existing
stockholders.
RISK FACTORS
Stated below, elsewhere in this Quarterly Report, and in other documents
we file with the SECSecurities and Exchange Commission (SEC) are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this report.
The occurrence of any of the developments or risks identified below may make the
occurrence of one or more of the other risk factors below more likely to occur.
Our future operating results are unpredictable and are likely to fluctuate from quarter to quarter. If we fail to meet the expectations of securities analysts or investors, our stock price would likely decline significantly.
RISKS RELATED TO OUR BUSINESS
OUR FUTURE OPERATING RESULTS ARE UNPREDICTABLE AND LIKELY TO FLUCTUATE FROM
QUARTER TO QUARTER. IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS
OR INVESTORS, OUR STOCK PRICE WILL LIKELY DECLINE SIGNIFICANTLY.
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future due to a number of factors,
some of which are wholly or partially outside our control. Accordingly, we
believe that period-to-period comparisons of our results of operations are not meaningful and should
not be relied upon as indications of future performance. Some of the factors
that could cause our operating results to fluctuate include:
If our operating results fall below the expectations of securities
analysts or investors, the trading price of our Common Stock wouldwill likely
decline, possibly significantly.
We depend upon widespread market acceptance of our products, and our results of operations will suffer if the market does not accept our products.
18
predominantsignificant percentage of our revenue derives from Universal Serial Bus
(USB) product sales. However, we expect a decline in USB product sales, anddue to
the maturity of the product line, that we expect that will continue for the
foreseeable future. Factors that may affect our USB product sales include the
continued growth of markets for the development of USB compliant devices, the
performance and pricing of our USB products, and the availability, functionality
and price of competing products. Many of these factors are beyond our control.
Our future revenue growth relies on our ability to successfully design,
manufacture and sell new products tointo new and established markets. The competitionCompetition
for product sales in these new markets is significant.typically intense and our competitors are
often firmly established. If we are unable to gain significant market share in
these markets, our ability to increase revenue is likely to be adversely
effected. If we are unable to grow revenue, our operating results will suffer,
and the trading price of our Common Stockcommon stock may decline significantly.
If we fail to keep up with rapid technological change and evolving industry standards, our products could become less competitive or obsolete.
IF WE FAIL TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY
STANDARDS, OUR PRODUCTS COULD BECOME LESS COMPETITIVE OR OBSOLETE.
The markets for our products are characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. We may cease to be competitive if we fail to timely
introduce new products or product enhancements that address these factors. To
continue to introduce new products orand product enhancements on a timely basis,
we must:
18
If we are unablefail to timely identify, develop, manufacture, market or support new
or enhanced products successfully, our competitors could gain market share, or
our new products or product enhancementsenhanced products might not gain market acceptance.
Delays in the development of new products or product enhancements could harm our operating results and our competitive position.
NEW OR ENHANCED PRODUCT DEVELOPMENT DELAYS COULD HARM OUR OPERATING RESULTS AND
OUR COMPETITIVE POSITION.
The development of new, technologically advanced products is a complex and
uncertain process requiring high levels of innovation, and highly skilled
engineering and development personnel as well asand accurate anticipation of technological
and market trends. Consequently, product development delays are typical in our
industry. If we fail to timely introduce a product for an emerging standard,
or customers may defer or cancel orders on existing products expecting the release
of a new or enhanced product, or product enhancement,and our operating results could suffer. Product
development delays may result from numerous factors, including:
If we devote resources to developing products for emerging communications standards that ultimately are not widely accepted, our business could be harmed.
IF WE DEVOTE RESOURCES TO DEVELOPING PRODUCTS FOR EMERGING COMMUNICATIONS
STANDARDS THAT ULTIMATELY ARE NOT WIDELY ACCEPTED, OUR BUSINESS COULD BE HARMED.
Our future growth depends upon our ability to develop, manufacture and
sell in volume advanced verification systems for existing, emerging and yet
unforeseen communications standards. We have little or no control over the
conception, development or adoption of new standards. Moreover, even as it
relates to currently emerging standards, the markets are rapidly evolving and we
have virtually no ability to impact the adoption of those standards.
As a result,Consequently, there is significant uncertainty as to whether markets for new and
emerging standards ultimately will develop at all or, if they do develop, their
potential size or future growth rate. We may incur significant expenses and
dedicate significant time and resources to develop products for standards that
fail to gain broad acceptance. For example, we spent four years from 1992 to
1995 developing products for the ACCESS.bus technology, a standard designed to
connect peripheral devices to computers, which did not gain market acceptance.
The failureFailure of a standard for which we devote substantial resources to gain
widespread acceptance would likely harm our business.
We continue to face uncertainty relating to economic conditions affecting our customers.
We face uncertainty in the degree to which the current global economic climate will continue to negatively affect growth and capital spending by our existing and potential customers. We continue to experience instances of customers delaying or deferring orders and longer lead times to close sales. If global economic conditions do not improve, or if they worsen, our business, operating results and financial condition will continue to be adversely impacted.
If we fail to maintain and expand our relationships with the core or promoter companies in our target markets, we may have difficulty developing and marketing our products.
It is important to our success to maintain and expand our relationships with technology and infrastructure leaders developing emerging communications standards in our target markets, as well as expand our relationships with leaders in new markets. We believe that we need to work closely with these companies to gain valuable insights into new product market demands, obtain early access to standards as they develop and help us design new products. Generally, we do not enter into formal contracts obligating these companies to work or share their
19
technology with us. Industry leaders could choose to work with other companies in the future. If we fail to maintain and expand our industry relationships, we could lose first-mover advantage with respect to emerging standards and it would be more difficult for us to develop and market products that address these standards.
Increased competition, new product introductions by competitors, and our entry into new markets may decrease the average selling prices of our products, revenue and market share.
multiplenumerous companies in each of
our various markets, and we expect the number of competitors, some of which may
be current customers, and the intensity of competition will continue to increase. Any of these
existing or future competitors may have substantially greater financial,
technical, marketing and distribution resources and brand name recognition. If
companies develop competing products or form alliances with or acquire companies
offering competing products, any of which address our target markets more
effectively or at a lower cost, even if those products do not have capabilities
comparable to our products, they could be significantformidable competitors.
We continue to experience increased competition in our principal markets
and, as we expand our product portfolio into other new and existing markets, we
expect to encounter similar competitive forces in those markets. Increased
competition could result in significant price erosion, reduced revenue, lower
margins and loss of market share, any of which would significantly harm our
business. As a result, we anticipate that the average selling prices of our
products will decrease in the future in response to such things as product
introductions or enhancements by us or our competitors, product discounting on
volume purchase orders or additional pricing pressures. We believe we must
continue to timely develop and introduce on a timely basis new products that incorporate features that can be sold at higher
average selling prices. Failure to do so would likely cause our revenue and
gross margins to decline.
Our executive officers, directors, Philips Semiconductors
WE CONTINUE TO FACE UNCERTAINTY RELATING TO ECONOMIC CONDITIONS AFFECTING OUR
CUSTOMERS.
We face uncertainty in the degree to which the current global economic
climate will continue to negatively affect growth and certain entities affiliated with them owncapital spending by our
existing and potential customers. We continue to experience instances of
customers delaying or deferring orders and longer lead times to close sales. If
global economic conditions do not improve, or if they worsen, our business,
operating results and financial condition will be adversely impacted.
VARIATIONS IN OUR REVENUE MAY CAUSE FLUCTUATIONS IN OUR OPERATING RESULTS.
We may experience delays generating or recognizing revenue for a largenumber of
reasons. Historically, we carry little backlog and our revenue in any quarter
has depended upon orders booked and shipped in that quarter. Customers may delay
scheduled delivery dates and cancel orders without significant penalty. In
addition, even if we ship orders, generally accepted accounting principles may
require us to defer recognition of revenue until a later date. Because we budget
our operating expenses on anticipated revenue trends and a high percentage of
our voting stock, whichexpenses are fixed in the short term, any delay in generating forecasted
revenue could have the effect of delaying or preventing a changesignificant negative impact on our operating results.
IF WE FAIL TO MAINTAIN AND EXPAND OUR RELATIONSHIPS WITH THE CORE OR PROMOTER
COMPANIES IN OUR TARGET MARKETS, WE MAY HAVE DIFFICULTY DEVELOPING AND MARKETING
OUR PRODUCTS.
It is important to our success to establish, maintain and expand our
relationships with technology and infrastructure leader companies developing
emerging communications standards in our control.
target markets. We believe we must work
closely with these companies to gain valuable insights into new market demands,
obtain early access to standards as they develop and help us design new or
enhanced products. Generally, we do not enter into contracts obligating these
companies to work or share their technology. Industry leaders could choose to
work with other companies in the future. If we fail to establish, maintain and
expand our industry relationships, we could lose first-mover advantage with
respect to emerging standards, and it would likely be more difficult for us to
develop and market products that address these standards.
20
November 1, 2003,July 31, 2004, our executive officers, directors, Philips
Semiconductors and certain entities affiliated with or beneficially controlled
by them owned approximately 12,452,4107,165,842 shares or approximately 63.01%36.41% of theour
outstanding shares of common stock, excluding 398,047 shares of common stock
held in our Common Stock.treasury acquired primarily pursuant to our Stock Repurchase
Program. These stockholders, acting together, can exercise significant control
regarding matters requiring stockholder approval, including the election or
removal of directors and the approval of mergers or other business combination
transactions. This concentration of ownership could have the effect of delaying
or preventing a change in our control or otherwise discouraging potential
acquirers from attempting to obtain control, which in turn could have an adverse
effect on the market price of our Common Stockcommon stock or prevent our stockholders from
realizing a premium over the market price for their shares of Common Stock.common stock. Our
repurchase of shares of our Common Stockcommon stock pursuant to our stock repurchase programStock Repurchase
Program discussed under the separate caption in “Part"Part I, Item 1, Note 8” elsewhere12" in this Quarterly Report,our annual
report on Form 10-K for the year ended December 31, 2003, filed with the
Securities and Exchange Commission (SEC) on February 20, 2004, as amended by our
Form 10-K/A filed with the SEC on March 3, 2004, may increase their control over
us.
A TRANSITION IN OUR MANAGEMENT COULD CAUSE SUBSTANTIAL DISRUPTIONS TO OUR
BUSINESS AND OPERATIONS.
On July 22, 2004, we announced the controlretirement of these stockholders.
The interim statusone of our co-founders
and our Chief Executive Officer, and the transition to his successor may cause substantial organizational disruptions and inefficiencies.
In October 2002, one of our co-founders, Dan Wilnai returnedand new appointments to assume day-to-daythe
executive management team and Board of the Company on an interim basis as ourDirectors. President and Chief Financial
Officer, Carmine Napolitano, was promoted and given the additional title of
Chief Executive Officer. The future departureOfficer along with his appointment to the Board of Mr. WilnaiDirectors.
Former Director of Finance and any transitions under a newAdministration, Jason LeBeck was promoted to Vice
President and CEOChief Financial Officer, and John T. Rossi, Vice President of
Finance and Chief Financial Officer of OmniVision Technologies, Inc. was
appointed to the Board of Directors. Substantial disruptions to our business and
operations may still occur during this transition.
INCREASED COSTS ASSOCIATED WITH CORPORATE GOVERNANCE COMPLIANCE MAY
SIGNIFICANTLY IMPACT OUR RESULTS OF OPERATIONS.
The Sarbanes-Oxley Act of 2002 (the "Act") requires changes in some of our
corporate governance and securities disclosure or compliance practices. That Act
also requires the SEC to promulgate new rules on a variety of subjects, in
addition to rule proposals already made, and Nasdaq has revised and continues to
revise its requirements for Nasdaq-listed companies. We expect these
developments to increase our legal compliance and financial reporting costs. We
also expect these developments to make it more difficult and expensive to obtain
director and officer liability insurance, and may cause us to accept reduced
coverage or incur substantially higher premiums to obtain coverage.
These developments could make it more difficult for us to attract and
retain qualified members on our board of directors, or qualified executive
officers. We are presently evaluating and monitoring regulatory developments and
cannot estimate the timing or magnitude of additional costs. To the extent these
costs are significant, operational disruptionsour general and inefficiencies, the fulladministrative expenses are likely to
increase as a percentage of revenue, which would negatively impact our results
of which we are currently unable to predict.
The loss of key management personnel, on whose knowledge, leadership and technical expertise we rely, would cause significant disruptions in our operations and harm our ability to execute our business plan.
operations.
THE LOSS OF KEY MANAGEMENT PERSONNEL, ON WHOSE KNOWLEDGE, LEADERSHIP AND
TECHNICAL EXPERTISE WE RELY, COULD CAUSE SIGNIFICANT DISRUPTIONS IN OUR
OPERATIONS AND HARM OUR ABILITY TO EXECUTE OUR BUSINESS PLAN.
Our success depends heavily upon the continued contributions of our key
management personnel, whose knowledge, leadership and technical expertise may be
time-consuming and difficult to replace. Moreover, all of our personnel,
including our executive staff, are employed on an “at will”"at will" basis. We do not
maintain no key person insurance on any of our personnel. If we were to terminate
or lose the services of any of our key personnel and were unable to timely hire
qualified replacements, our ability to execute our business plan would be
harmed. Even if we were able to hire qualified replacements, we would expect to
experience operational disruptions and inefficiencies. In addition, employees
who leave our company may subsequently compete against us.
Variations in our revenue may cause fluctuations in our operating results.
We may experience delays generating or recognizing revenue for a number of reasons. Historically, we have had little backlog and our revenue in any quarter has depended upon orders booked and shipped in that quarter. Furthermore, customers may delay scheduled delivery dates and cancel orders without significant penalty. In
20
addition, even if we ship orders, generally accepted accounting principles may require us to defer recognition of revenue until a later date. Because we budget our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating forecasted revenue could have a significant negative impact on our operating results.
Shifts in our product mix may result in declines in gross margins.
Our gross margins vary by product, with gross margins generally higher on our development products than our production products. Our overall gross margins might fluctuate from period to period as a result of shifts in product mix, the channels through which we sell our products, the introduction of new products and product costs.
We depend on contract manufacturers for substantially all of our manufacturing requirements and if these manufacturers fail to provide us with adequate supplies of high-quality products, our competitive position, reputation and business could be harmed.
We currently rely on four contract manufacturers for all of our manufacturing requirements except for the final assembly, testing and quality assurance on our lower volume, higher margin products. We do not have long-term contracts with any of these manufacturers. As a result, our manufacturers could refuse to continue to manufacture all or some of our products or attempt to change the terms under which they manufacture our products. Previously, we experienced delays in product shipments from some of our manufacturers, which forced us to delay product shipments. We may experience similar future delays or other problems, such as inferior quality and insufficient quantity of products, any of which could significantly harm our business. Our manufacturers may not be able to timely deliver products of sufficient quality and quantity in the future. We intend to introduce new products and product enhancements regularly, which will require that we rapidly achieve volume production by coordinating our efforts with those of our suppliers and contract manufacturers. The inability of our manufacturers to provide us with adequate supplies of high quality products or the loss of any manufacturer would cause a delay in our ability to timely fulfill orders.
If we fail to accurately forecast our supply needs, our costs may increase or we may not be able to ship products in a timely manner.
We purchase components used in the manufacture of our products from several key sources. We depend on these sources to timely deliver components based on twelve-month rolling forecasts we provide. Lead times for materials and components vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand. If we overestimate our component requirements, we may develop excess inventory, which would increase costs. If we underestimate our component requirements, we may not be able to timely fulfill orders.
We depend on sole source suppliers for several key product components and we may lose sales if they fail to meet our needs.
We obtain some parts, components and packaging used in our products from sole sources of supply. If suppliers are unable to meet our demand for sole source components at reasonable costs and if we are unable to obtain an alternative source at an equivalent price, our ability to maintain timely and cost-effective production of our products would be harmed. In addition, because we rely on purchase orders rather than long-term contracts with our suppliers, including our sole source suppliers, we cannot predict with certainty our ability to obtain components in the long term. If we are unable to obtain components or receive a smaller allocation of components than is necessary to meet demand, customers could choose to purchase competing products.
If our distributors and manufacturer’s representatives do not actively sell our products, our product sales may decline.
Historically, we have relied on manufacturer’s representatives to sell our products domestically and distributors to sell our products internationally. We sell a substantial portion of our products through our distributors and manufacturer’s representatives. Our distributors and manufacturer’s representatives generally offer products from multiple manufacturers. Accordingly, there is a risk that our distributors and manufacturer’s representatives may give higher priority to selling products from other suppliers and reduce their efforts to sell our products. Our distributors and manufacturer’s representatives may not market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our distributors may on occasion build inventories in anticipation of substantial growth in sales and, if growth does not occur as rapidly as anticipated, they may subsequently decrease their product orders.
OUR PRODUCTS MAY CONTAIN DEFECTS THAT CAUSE US TO INCUR SIGNIFICANT CORRECTIVE
COSTS, DIVERT OUR ATTENTION FROM PRODUCT DEVELOPMENT EFFORTS AND RESULT IN A
slowdown in orders from our distributors or manufacturer’s representatives could reduce our revenue in any given quarter and cause fluctuations in our operating results.
21
In addition, sales to our distributors are initiated by purchase orders rather than long-term commitments. The loss of any major distributor, the delay of significant orders from our distributors, or the failure of our distributors to timely pay for products purchased could result in decreased or deferred recognition of revenue.
If we are unable to expand our direct sales operations and our distributor and manufacturer’s representatives channels or successfully manage our expanded sales organization, our operations may be harmed.
We intend to continue development and expansion of our direct sales organization and our indirect distribution channels domestically and internationally. Managing our distribution channels has become more complex as we have expanded both our product lines and our geographic presence. As a result, it has also become increasingly critical that we optimize our distribution channels around complementary products and users. We may not be able to expand our direct sales organization or distribution channels successfully, manage them optimally, and the cost of any expansion may exceed the revenue generated.
If we are unable to retain and motivate our personnel, our operations will be impaired.
To be successful and maintain a high level of quality, we will need to retain and motivate highly skilled personnel. If we are unable to retain a sufficient number of qualified employees, our operations may be impaired. We may have even greater difficulty retaining employees if employees perceive the equity component of our compensation package to be less valuable as a result of market fluctuations in the price of our Common Stock.
If we fail to manage our operations effectively, our business could suffer.
Our ability to offer products and implement our business plan successfully in a rapidly evolving market requires effective planning and management. We implemented two separate corporate restructuring plans in 2002. Some or all of the adopted measures in these restructures may not yield the intended results, if any, and may furthermore give rise to unforeseen complications and inefficiencies as we adjust personnel assignments. Moreover, reductions in force and cost cutting measures effected in both of these restructurings can adversely impact the morale of our personnel leading to further complications and operational inefficiencies. If this were to occur, our profitability or financial position could be negatively impacted and our operating results could suffer.
Our products may contain defects that cause us to incur significant corrective costs, divert our attention from product development efforts and result in a loss of customers.
LOSS OF CUSTOMERS.
Highly complex products such as our verification systems frequently
contain defects when they are first introduced or as new versions are released.Ifreleased.
If any of our products contain defects or have reliability, quality or
compatibility problems, our reputation may be damaged and customers may be
reluctant to buy our products. In addition, these defects could interrupt or
delay sales. We may have to invest significant capital and other resources to
alleviate these problems. If any problem remains undiscovered until after we
have commenced commercial production of a new product, we may be required to
incur additional development costs and product recall, repair or replacement
costs. These problems may also result in claims against us by our customers or
others. In addition, these problems may divert our technical and other resources
from other development efforts.
Any acquisitions
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undertake couldoptimize our sales operations around complementary products and users. We may
be unable to expand our direct sales organization or distribution channels
successfully or manage them optimally, and the cost of any expansion may exceed
the revenue generated.
Moreover, our historical distribution channel strategy may not be
appropriate for the successful sale and marketing of our products in new target
markets. Consequently, in order to increase market share in those markets, we
may have to attempt new, creative and previously untested methodologies. These
new methodologies may be time-consuming to develop, difficult to integrate, disruptimplement, and
ultimately unsuccessful, which could negatively impact our business, dilute stockholder valuerevenues.
SHIFTS IN OUR PRODUCT MIX MAY RESULT IN DECLINES IN GROSS MARGINS.
Our gross margins vary by product, with gross margins generally higher on
our development products than our production products. Our overall gross margins
might fluctuate from period to period as a result of shifts in product mix and
the channels through which we sell our products, the introduction of new
products and product or changes in costs.
WE DEPEND ON CONTRACT MANUFACTURERS FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING
REQUIREMENTS AND IF THESE MANUFACTURERS FAIL TO PROVIDE US WITH ADEQUATE
SUPPLIES OF HIGH-QUALITY PRODUCTS, OUR COMPETITIVE POSITION, REPUTATION AND
BUSINESS COULD BE HARMED.
We currently rely on four contract manufacturers for all of our
manufacturing requirements other than final assembly, testing and quality
assurance on our lower volume, higher margin products. We do not have long-term
contracts with any of these manufacturers. All purchase commitments and
obligations between us and our contract manufacturers are on a purchase order
basis. As a result, our manufacturers could refuse to continue to manufacture
all or some of our products or attempt to change the terms under which they
manufacture our products. Previously, we experienced delays in product shipments
from some of our manufacturers, which forced us to delay product shipments to
customers. We may experience similar future delays or other problems, such as
inferior quality and insufficient quantity of products, any of which could
significantly harm our operating results.
business. We intend to introduce new products and product
enhancements regularly, which will require that we rapidly achieve volume
production by coordinating our efforts with those of our suppliers and contract
manufacturers. The inability of our manufacturers to provide adequate supplies
of high quality products or the loss of any manufacturer could cause a delay in
our ability to timely fulfill orders.
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that might otherwise offer growth opportunities. If
we make any acquisitions, we could issue stock that would dilute the percentage
ownership of our existing stockholders, incur substantial debt or assume
contingent liabilities. For example, we issued 360,000 shares of our Common Stockcommon
stock in connection with our acquisition of Verisys in June 2002. In addition,
in the quarterthree months ended September 30, 2002, we recorded a goodwill impairment
of $1.4 million, and a partial impairment write-down of $194,000 offor purchased
intangibles, arisingintangible assets from our purchase of Verisys. Moreover, the Verisys
acquisition and other potential acquisitions involve numerous risks, including:
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Economic, political
IF WE FAIL TO ACCURATELY FORECAST OUR SUPPLY NEEDS, OUR COSTS MAY INCREASE OR WE
MAY BE UNABLE TO TIMELY SHIP PRODUCTS.
We purchase components used in the manufacture of our products from
several key sources. We depend on these sources to timely deliver components
based on twelve-month rolling forecasts that we provide. Lead times for
materials and other risks associatedcomponents vary significantly and depend on factors such as
specific supplier requirements, contract terms and current market demand. We
believe that as the economy expands the demand for certain key components used
in our products will increase such that we may need to order larger quantities
of these components earlier than forecasted or risk delays in product shipments
to our customers. If we overestimate our component requirements, we may develop
excess inventory, increasing costs. If we underestimate our requirements, we may
be unable to timely fulfill orders.
WE DEPEND ON SOLE SOURCE SUPPLIERS FOR SEVERAL KEY PRODUCT COMPONENTS, AND WE
MAY LOSE SALES IF THEY FAIL TO TIMELY MEET OUR NEEDS.
We obtain some parts, components and packaging used in our products from
sole sources of supply. If these suppliers are unable to meet our demand for
components at reasonable costs or if we are unable to obtain an alternative
source at an equivalent price, our ability to timely and cost-effectively ship
products will be harmed. In addition, because we rely on purchase orders rather
than long-term contracts with international salesour sole source suppliers, we cannot predict with
certainty our ability to obtain components over the long term. Furthermore,
qualifying additional suppliers could be time-consuming, expensive, and may
increase the likelihood of errors or defects. If we are unable to obtain
components or receive a smaller allocation of components than necessary to meet
demand, customers could choose to purchase competing products.
IF WE ARE UNABLE TO RETAIN AND MOTIVATE OUR PERSONNEL, OUR OPERATIONS WILL BE
IMPAIRED.
To be successful and maintain a high level of quality, we will need to
retain and motivate highly skilled personnel. If we are unable to retain a
sufficient number of qualified employees, our operations could adversely affect sales.
may be impaired. We may
have even greater difficulty retaining employees if employees perceive the
equity component of our compensation package to be less valuable as a result of
market fluctuations in the price of our common stock.
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52.7%42.6% of our
revenue from sales to international customers in the quarterthree months ended SeptemberJune 30,
2003.2004. We anticipate that revenue from international operations will continue to
represent a substantial portion of our revenue. In addition, several of our
manufacturers’manufacturers' facilities and suppliers are located outside the United States.States of
America. Accordingly, our future results could be harmed by a variety of
factors, including:
Geopolitical instability and the threat of terrorist attacks have created many economic and political uncertainties, some of which may harm our business, our prospects and our ability to conduct business generally.
Geopolitical instability and the continued threat of terrorismconflicts and the resulting military, economic and political
responses (including, without limitation, war between sovereign
nations) as well as heightened security measures which may cause
significant disruption to commerce worldwide. To the extent any disruption resultsworldwide;
o limited protection of intellectual property in some international
markets; and
o unexpected changes in regulatory requirements.
IF WE FAIL TO MANAGE OUR OPERATIONS EFFECTIVELY, OUR BUSINESS COULD SUFFER.
Our ability to offer products and implement our business plan successfully
in a general decreaserapidly evolving market requires effective planning and management. Failure
by our management or delaypersonnel to properly allocate resources to meet our
current and future needs as well as unforeseen complications and inefficiencies
in planning our customers’ spending,operations can adversely impact the morale of our businesspersonnel and
results of operationslead to further complications and operational inefficiencies. If this were to
occur, our profitability or financial position could be materially adversely affected. We are unable to predict whether the threat of such instability and terrorism or the responses thereto will result in any long-term commercial disruptions or adverse effects on our business, results of operations or financial condition.
Our headquartersnegatively impacted and
our contract manufacturers are located in Northern California, Asia and other areas where natural disasters may occur.
operating results could suffer.
OUR HEADQUARTERS AND OUR CONTRACT MANUFACTURERS ARE LOCATED IN NORTHERN
CALIFORNIA, ASIA AND OTHER AREAS WHERE NATURAL DISASTERS MAY OCCUR.
Currently, our corporate headquarters and some of our contract
manufacturers are located in Northern California and our other contract
manufacturers are located in Asia. Northern California and Asia historically
have been vulnerable to natural disasters and other risks, such as earthquakes,
fires, floods, power loss and telecommunications failure, which at times have
disrupted the local economy and posed physical risks to our and our
manufacturers’manufacturers' properties. We do not have redundant, multiple site capacity in
the event of a natural disaster.
Relocation of our corporate headquarters could result in negative operating results if not performed efficiently.
We have entered into a long-term lease for commercial real estate in Santa Clara, California and as a result we will be relocating our corporate headquarters in December 2003. Logistics for the move have been prepared and evaluated with an emphasis on making the transition quickly and efficiently with minimal disruption to operations. However, even under the best of circumstances moving into a new facility is likely to impact operational efficiencies for a limited period of time. Problems are most likely to arise in connection with construction delays, communications failures, shipping and delivery errors, and other problems typically associated with business relocations. If any of these problems or other unforeseen issues become significant, our results of operations for the fourth quarter of 2003 and possibly the first quarter of 2004 may be adversely impacted.
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Any failure to protect our intellectual property adequately may significantly harm our business.
We protect our proprietary processes, software, know-how and other intellectual property and related rights through copyrights, trademarks and the maintenance of trade secrets, including entering into confidentiality agreements. Our success and ability to compete depend in part on our proprietary technology. We currently do not have any registered patents. Although we have six patents pending, patents may not issue as a result of these or other patent applications. Any patents that ultimately issue may be successfully challenged or invalidated, or may not provide us with a significant competitive advantage. Third parties may breach confidentiality agreements or other protective contracts with us and we may not be able to enforce our rights in the event of these breaches. We may be required to spend significant resources to monitor and police our intellectual property rights, including pursuing remedies in court. We may become involved in legal proceedings against other parties, which may also cause other parties to assert claims against us. We report material pending legal proceedings, if any, under the separate caption “Part II, Item 1. Legal Proceedings” elsewhere in this Quarterly Report. In the future we may not be able to detect infringements and may lose competitive position in our markets before we do so. In addition, competitors may design around our technologies or develop competing technologies. The laws of other countries in which we market our products might offer little or no effective protection of our proprietary technology. Reverse engineering, unauthorized copying or other misappropriation of our proprietary technology could enable third parties to benefit from our technology without payment, which could significantly harm our business.
Claims that we infringe third-party intellectual property rights could result in significant expenses or restrictions on our ability to sell our products.
CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES OR RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS.
Our industry is characterized by uncertain and conflicting intellectual
property claims and frequent litigation, especially regarding patent rights. We
cannot be certain that our products do not andor will not infringe issued patents
or the intellectual property rights of others. In fact, we expect that we will
be subject to infringement claims as the number of products and competitors in
our markets grows and the functionality of products further overlap.
Historically, patent applications in the United States of America have not been
publicly disclosed until the patent is issued, and we may not be aware of filed
patent applications that relate to our products or technology. If patents are
later issued in connection with these applications, we may be liable for
infringement. Periodically, other parties, including some of our competitors,
may assert patent, copyright and other rights to technologies in various
jurisdictions that are important to our business. Any claims asserting that our
products infringe or may infringe the rights of third parties, including claims
arising through our contractual indemnification of our customers, regardless of
their merit or resolution, would likely be costly and time-consuming, divert the
efforts of our technical and management personnel, cause product shipment delays
or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements, if required, may not be available on terms acceptable to
us, or at all.
Changes
At present, we do not believe that our products infringe any other party's
intellectual property rights in current lawsany way that would have a material adverse
effect on our operations. However, if any material claims arise and if these
claims cannot be resolved through a license or regulations orsimilar arrangement, we could
become a party to litigation. The results of any litigation are inherently
uncertain. In the impositionevent of new laws or regulationsan adverse result in any litigation, we could impedebe
required to pay substantial damages, including treble damages if we are held to
have willfully infringed, to cease the manufacture, use and sale of infringing
products, to expend significant resources to develop non-infringing technology,
or to obtain licenses to the infringing technology. In addition, lawsuits,
regardless of their success, would likely be time-consuming and expensive to
resolve and would divert management time and attention from our products.
business.
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or FCC.(FCC).
Internationally, many of our customers and their products may also be required
to comply with regulations established by authorities in various countries. We
are required to determine to what extent our products may be subject to FCC
standards and regulations and to what extent we are required to obtain
authorizationscertification from the FCC directly or from a third-party authorized by the FCC to issue such authorizations.third-parties. We are
also required to maintain in good standing any equipment authorizationcertification we
receive from the FCC or an FCC-approved party. In addition, the regulations in
force both in the United States of America and in foreign jurisdictions may
change. Failure to comply with applicable regulations established by regulatory authorities or to obtain timely
domestic or foreign regulatory approvals or certificates could significantly
harm our business.
RISKS RELATED TO OUR EQUITY
FUTURE SALES OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK BY US OR BY OUR EXISTING
STOCKHOLDERS COULD CAUSE OUR STOCK PRICE TO FALL.
Additional equity financings or other share issuances by us could
adversely affect the market price of our common stock. Sales by existing
stockholders of a large number of shares of our common stock in the public
trading market (or in private transactions) including sales by our executive
officers, directors or Philips Semiconductors Inc. and the sale of shares issued
in connection with strategic alliances, or the perception that such additional
sales could occur, could cause the market price of our common stock to drop.
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objectiveobjectives of our investment activities isare to preserve
principal while concurrently maximizingand maximize the after-tax income we receive from our investments
without significantly increasing risk. Some of the securities in which we invest
may be subject to market risk. This means that a change in prevailing interest
rates may cause the principal amount of the investment to fluctuate. For
example, if we hold a security that was issued with an interest rate fixed at
the then-prevailing rate and the prevailing interest raterates later rises, the current value ofrise, the principal amount of
our investment will probably decline. SinceWe have the ability to hold our fixed
income investments until maturity, and therefore we would not expect to
recognize any adverse impact in income or cash flows in the event of rising
interest rates previously mentioned. Cash equivalents short-term investments and
short-termlong-term investments consist principally of investments in commercial paper,
investment quality corporate and municipal bonds, money market funds,
collateralized mortgage obligations, and U.S. government agency securities in
which we believe there is no material market risk exposure.
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Subsequent to September 30, 2003,
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, we carried
out an evaluation, under the supervision and with the participation of our Chief
Executive Officer (principal executive officer) and Chief Financial Officer
(principal financial officer), of the effectiveness of the design and operation
of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that as of the date of the evaluation, our disclosure
controls and procedures are effective in timely alerting them to material
information required to be included in our periodic SEC filings. It should be
noted that the design of any system of controls is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
There have been no significant changes in our internal controls over financial reporting or in
other factors that could significantly affect internal controls subsequent to
our most recent evaluation of our internal controls.
Part
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–- OTHER INFORMATION
On December 29, 2000,
ITEM 1. LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings. However, we
filedare periodically subject to legal proceedings and claims that arise in the
United States District Court forordinary course of business. While management currently believes the Northern Districtamount of
California a complaint against Catalyst Enterprises, Inc., alleging trademark and trade dress infringement, copyright infringement and unfair competition and seeking damages and attorneys’ fees. The caseultimate liability, if any, with respect to these actions will not materially
affect our financial position, results of operations, or liquidity, the ultimate
outcome of any litigation is referreduncertain. Were an unfavorable outcome to as Computer Access Technology Corporation v. Catalyst Enterprises, Inc., Case No. C 00 4852 DLJ. Catalyst respondedoccur, or
if protracted litigation were to ensue, the impact could be material to the
complaint on April 6, 2001 by denying eachCompany.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2004 annual meeting of the substantive claims and asserting federal and state unfair competition counterclaims, and requesting an award of attorneys’ fees. We answered the counterclaims on September 27, 2001, and denied all the substantive claims of Catalyst’s counterclaims.
On December 11, 2001, Catalyst filed a motion for partial summary judgment on the issue of trade dress functionality. On January 25, 2002, we filed a motion for judgment on the pleadings or, in the alternative, a special motion to strike Catalyst’s counterclaims. The Court denied Catalyst’s motion and granted our motion for judgment on the pleadings by order entered March 29, 2002, and dismissed each of Catalyst’s counterclaims with prejudice.
The case was tried before a jury, with trial commencing October 28, 2002. On November 15, 2002, a unanimous jury returned a verdict finding that we own valid trademark rights in our CATC Trace design and that Catalyst infringed our trademark, that Catalyst violated the federal and state unfair competition statutes, and that Catalyst acted willfully when it violated the unfair competition statutes. The jury further found that Catalyst did not infringe our copyright and that we did not prove that our CATC Trace design is protectible trade dress. On November 26, 2002, the Court heard our request for injunctive relief and restitution under federal and state law and, by an order issued the same day, the Court stayed execution of the judgment and deferred ruling on the equitable relief claims pending resolution of Catalyst’s motion for judgment as a matter of law, or alternatively, for retrial.
On January 10, 2003, the Court held a hearing on Catalyst’s motion for judgment as a matter of law in favor of Catalyst or, alternatively, for retrial of the trademark, federal and state unfair competition causes of action. On February 18, 2003, the Court granted Catalyst’s motion for a new trial on the claims of trademark infringement and violation of federal and state unfair competition statutes by Catalyst. The Court furthermore granted our motion for retrial on our claims of copyright and trade dress infringement.
A status conferencestockholders was held on November 7, 2003May 20, 2004. At the
meeting, our stockholders approved the following proposals presented to them
pursuant to the vote totals indicated next to each item:
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quarterly report by reference.
+ Denotes management contract or compensation plan, contract or arrangement.
b. Reports on Form 8-K
On October 23, 2003,July 22, 2004, we filed a Form 8-K disclosing our earnings for
the quarterthree months ended SeptemberJune 30, 2003.
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2004.
On July 22, 2004, we filed a Form 8-K disclosing the resignation of
our Chief Executive Officer, Dan Wilnai, and new appointments to the
executive management team and Board of Directors.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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