UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

 

FORM 10-Q

 

 

 

For the transition period from                    to                   .

 

Commission File Number 000-31081

 

TRIPATH TECHNOLOGY INC.

(Exact name of registrant as specified in its charter)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes o No ý

 

41,360,894 shares of the Registrant’s common stock were outstanding as of May 14, 2003.

 

 

TABLE OF CONTENTS

 

PART I. Financial Information
	Item 1. Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2003 and 2002
		Notes to Condensed Interim Consolidated Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. Other Information
	Item 1. Legal Proceedings
	Item 2. Changes in Securities and Use of Proceeds
	Item 3. Defaults upon Senior Securities
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
	Signature
	Certifications
	Exhibit Index

 

 

PART I.    Financial Information

 

Item 1. Financial Statements

TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

Unaudited

 

		March 31, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents		$	9,232		$	10,112
Restricted cash		—			486
Accounts receivable, net		1,232			1,471
Inventories		4,240			5,252
Prepaid expenses and other current assets		108			706
Total current assets		14,812			18,027
Property and equipment, net		2,167			2,474
Other assets		72			184
Total assets		$	17,051		$	20,685
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,289		$	2,395
Current portion of capital lease obligations		250			225
Accrued expenses		872			1,070
Deferred distributor revenue		672			626
Total current liabilities		3,083			4,316
Long term liabilities		1,038			933
Commitments and contingencies (see Note 11)
Stockholders’ equity:
Common stock, $0.001 par value, 100,000,000 shares authorized; 41,357,145 and 41,326,760 shares issued and outstanding		41			41
Additional paid-in capital		187,754			187,835
Deferred stock-based compensation		(39		)	(91		)
Accumulated deficit		(174,826		)	(172,349		)
Total stockholders’ equity		12,930			15,436
Total liabilities and stockholders’ equity		$	17,051		$	20,685

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

1

 

TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

Unaudited

 

		Three Months Ended March 31,
		2003			2002
Revenue		$	2,952		$	4,555
Cost of revenue		2,207			8,554
Gross profit (loss)		745			(3,999		)
Operating expenses:
Research and development		1,978			3,549
Selling, general and administrative		1,246			1,807
Total operating expenses		3,224			5,356
Loss from operations		(2,479		)	(9,355		)
Interest and other income, net		2			48
Net loss		(2,477		)	(9,307		)
Accretion on preferred stock		—			(14,952		)
Net loss applicable to common stockholders		$	(2,477	)	$	(24,259	)
Basic and diluted net loss per share applicable to common stockholders		$	(0.06	)	$	(0.78	)
Number of shares used in computing basic and diluted net loss per share		41,352			31,193

 

Stock-based compensation included in:

 

		Three Months Ended March 31,
		2003			2002
Cost of revenue		$	2		$	13
Research and development		17			212
Selling, general and administrative		(55		)	122
Total stock-based compensation		$	(36	)	$	347

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

2

 

TRIPATH TECHNOLOGY INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Unaudited

		Three Months Ended March 31,
		2003			2002
Cash flows from operating activities:
Net loss		$	(2,477	)	$	(9,307	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		320			358
Allowance for doubtful accounts		—			127
Provision for excess inventory		—			4,977
Stock-based compensation		(36		)	347
Changes in assets and liabilities:
Accounts receivable		239			(1,098		)
Inventories		1,012			1,714
Prepaid expenses and other assets		710			114
Accounts payable		(1,106		)	(250		)
Accrued expenses		(20		)	(120		)
Deferred distributor revenue		46			(103		)
Net cash used in operating activities		(1,312		)	(3,241		)
Cash flows from investing activities:
Sale of short-term investments		—			1,100
Restricted cash		486			—
Purchase of property and equipment		(13		)	(59		)
Net cash provided by investing activities		473			1,041
Cash flows from financing activities:
Proceeds from issuance of common stock, net		7			19,746
Principal payments on capital lease obligations		(48		)	(87		)
Net cash provided by (used in) financing activities		(41		)	19,659
Net increase (decrease) in cash and cash equivalents		(880		)	17,459
Cash and cash equivalents, beginning of period		10,112			3,997
Cash and cash equivalents, end of period		$	9,232		$	21,456

 

The accompanying notes are an integral part of these condensed interim consolidated financial statements.

 

3

 

Tripath Technology Inc.

Notes to Condensed Interim Consolidated Financial Statements

(Unaudited)

 

1.                                       Basis of Presentation

 

The unaudited condensed interim consolidated financial statements included herein have been prepared by Tripath Technology Inc. (the “Company”) in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to state fairly the Company’s financial position, results of operations and cash flows for the periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2002.  Our fiscal year-end and fourth quarter ends on December 31, whereas our first, second and third quarter ends on the Sunday closest to the calendar month end date.  For presentation purposes, the Company has indicated that its first quarter ended on March 31, whereas in fact, the Company’s first quarter of fiscal 2003 ended on March 30, 2003. The Company’s first quarter of fiscal  2002 ended on March 31, 2002. The results of operations for the three months ended March 31, 2003 are not necessarily indicative of the results to be expected for any subsequent quarter or for the entire year.

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates, and such differences may be material to the financial statements.

 

The unaudited condensed interim consolidated financial statements include the accounts of the Company and its wholly owned Japanese subsidiary, which was incorporated in January 2001. All significant intercompany balances and transactions have been eliminated in consolidation. The U.S. dollar is the functional currency for the Company’s Japanese wholly-owned subsidiary. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars and the resulting gains or losses are included in “Interest and other income, net.” Such gains or losses have not been material for any period presented.

 

The Company's unaudited condensed interim consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The Company's former independent accountants included an explanatory paragraph in their audit report on the Company's consolidated financial statements for the fiscal year ended December 31, 2002 which indicates that the Company has suffered recurring losses from operations and has an accumulated deficit that raises substantial doubt about the Company's ability to continue as a going concern.

 

To conserve cash, the Company has implemented cost cutting measures, and in August 2001, implemented a restructuring program. In addition, on January 24, 2002, the Company completed a financing in which it raised $21 million in gross proceeds through a private equity placement and in July 2002, the Company entered into a credit agreement with a financial institution that provides for a one-year revolving credit facility of up to $10 million, subject to certain restrictions in the borrowing base based on eligibility of receivables.

 

If liquidity problems should arise, the Company will, as a last resort, take measures to reduce operating expenses such as reducing headcount or canceling research and development projects. However, the Company may need to raise additional funds to finance its activities next year and beyond through public or private equity or debt financings, the formation of strategic partnerships or alliances with other companies or through bank borrowings with existing or new banks. The Company may not be able to obtain additional funds on terms that would be favorable to its stockholders and the Company, or at all.

 

The Company believes, based on its ability to implement the aforementioned measures, if needed, that it will have liquidity sufficient to meet its operating, working capital and financing needs for the next nine months and perhaps beyond. The Company has not made any adjustment to its consolidated financial statements as a result of the outcome of the uncertainty described above.

 

2.             Revenue recognition

 

The Company recognizes revenue from product sales upon shipment to original equipment manufacturers and end users, net of sales returns and allowances. The Company’s sales to distributors are made under arrangements allowing limited rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances which may be granted subject to approval by the Company. As a result of these returns rights and potential pricing adjustments, except in very limited circumstances, the Company defers recognition on sales to distributors until products are resold by the distributor to the end user. Revenue may be recognized when sold to a distributor when the distributor has no rights of return.

 

3.                                       Net loss per share

 

Basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common stock outstanding during the period.  Diluted net loss per share is computed based on the weighted average number of common stock and dilutive potential common stock outstanding.  The calculation of diluted net loss per share excludes potential common stock if the effect is anti-dilutive.  Potential common stock consist of incremental common stock issuable upon the exercise of stock options, shares issuable upon conversion of convertible preferred stock and common stock issuable upon the exercise of common stock warrants.

 

Total potential common stock of 10,338,000 and 7,051,000 shares were not included in the diluted net loss per share calculation for the periods ended March 31, 2003 and 2002, respectively, because to do so would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted net loss per share for the periods presented (in thousands, except per share amounts):

 

		Three Months Ended March 31,
		2003			2002
Numerator:
Net loss		$	(2,477	)	$	(9,307	)
Accretion on preferred stock		—			(14,952		)
Net loss applicable to common stockholders		$	(2,477	)	$	24,259
Denominator:
Weighted average common stock		41,352			31,193
Basic and diluted net loss per share applicable to common stockholders		$	(0.06	)	$	(0.78	)

 

4

 

4.                                       Deferred stock-based compensation

 

In connection with certain employee stock option grants and issuance of restricted stock to an officer made since January 1998, the Company recognized deferred stock-based compensation, which is being amortized over the vesting periods of the related options and stock, generally four years, using an accelerated basis.  The fair value per share used to calculate deferred stock-based compensation was derived by reference to the convertible preferred stock issuance prices.  Future compensation charges are subject to reduction for any employee who terminates employment prior to such employee’s option vesting date.

 

The Company has granted options to purchase shares of common stock to consultants in exchange for services.  The Company determined the value of the options granted to consultants based on the Black-Scholes option pricing model.

 

The following table sets forth, for each of the periods presented, the deferred stock-based compensation recorded and the amortization of deferred stock-based compensation (in thousands):

 

		Three Months Ended March 31,
		2003			2002
Deferred stock-based compensation		$	(88	)	$	(34	)
Amortization of deferred stock-based compensation		$	(36	)	$	347

 

Unamortized deferred stock-based compensation at March 31, 2003 and December 31, 2002 was $39,000 and $91,000 respectively.

 

5.                                    Accounting for stock-based compensation

 

The Company accounts for its stock-based compensation plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.  No stock-based employee compensation cost is reflected in net income for the periods ended March 31, 2003 and 2002, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

 

The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation.

 

		Three Months Ended March 31,
		2003			2002
Net loss		$	(2,477	)	$	(9,307	)
Accretion on preferred stock		—			(14,952		)
Net loss applicable to common stockholders, as reported		(2,477		)	(24,259		)
Total stock-based employee compensation expense (benefit) included in the net loss, determined under the recognition and measurement principles of APB Opinion No. 25, net of related tax effects		(36		)	347
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(94		)	(1,681		)
Pro forma net loss applicable to common stockholders		$	(2,607	)	$	(26,385	)
Loss per share:
Basic - as reported		$	(0.06	)	$	(0.78	)
Basic - pro forma		$	(0.06	)	$	(0.82	)

 

5

 

6.                                       Cash, cash equivalents and restricted cash

 

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents.  Cash and cash equivalents consist of cash on deposit with banks, money market funds and commercial paper, bonds and notes, the fair value of which approximates cost.

 

The Company categorizes short-term investments as available-for-sale. Accordingly these investments are carried at fair value. The Company had no short-term investments as of March 31, 2003 or December 31, 2002.

 

The Company has a credit facility with a financial institution that has certain restrictions in the borrowing base. The amount by which the aggregate face amount of all outstanding stand-by letters of credit exceeds the borrowing base, as determined by eligible receivables, represents the amount of restricted cash necessary to secure the letters of credit. At March 31, 2003, the Company had no restricted cash.

 

7 .            Concentration of credit risk and significant customers

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. Substantially all of the Company’s cash and cash equivalents are invested in highly-liquid money market funds and commercial securities with major financial institutions. Short-term investments consist of U.S. government and commercial bonds and notes. The Company sells its products principally to original equipment manufacturers. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses, as considered necessary by management. Credit losses to date have been consistent with management’s estimates. During the quarters ended March 31, 2003 and 2002, the Company had minimal bad debts write-offs.

 

The following table summarizes sales to end customers comprising 10% or more of the Company’s total revenue for the periods indicated:

 

 

The Company’s accounts receivable were concentrated with three customers at March 31, 2003 representing 24%, 18% and 18% of aggregate gross receivables, four customers at March 31, 2002 representing 35%, 22%, 12% and 10% of aggregate gross receivables.

 

8.                                       Inventories

 

Inventories are stated at the lower of cost or market. This policy requires the Company to make estimates regarding the market value of the Company’s inventory, including an assessment of excess or obsolete inventory. The Company determines excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for the Company’s products within a specified time horizon, generally 12 months. The estimates the Company uses for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with the Company’s revenue forecasts. Actual demand and market conditions may be different from those projected by the Company’s management. If the Company’s unit demand forecast is less than the Company’s current inventory levels and purchase commitments during the specified time horizon, or if the estimated selling price is less than the Company’s inventory value, the Company will be required to take additional excess inventory charges or write-downs to net realizable value which will decrease the Company’s gross margin and net operating results in the future. During the quarter ended March 31, 2002, the Company recorded a provision for excess inventory of approximately $5 million related to excess inventory for the Company’s TA2022 product as a result of a decrease in forecasted sales for this product.

 

 

6

 

Inventories are comprised of the following (in thousands):

 

		March 31, 2003			December 31, 2002
Raw materials		$	1,237		$	1,868
Work-in-process		495			551
Finished goods		2,113			2,409
Inventory held by distributors		395			424
Total		$	4,240		$	5,252

 

9.             Segment and geographic information

 

The Company has determined that it has one reportable business segment: the design, license and marketing of integrated circuits.

 

The following is a geographic breakdown of the Company’s sales by shipping destination for the following periods:

 

 

Approximately 69% and 62% of the Company's total revenue for the three months ended March 31, 2003 and March 31, 2002, respectively, was derived from sales to end customers based outside the United States.

 

10.           Line of credit

 

On July 12, 2002, the Company entered into a credit agreement with a financial institution that provides for a one-year revolving credit facility in an amount of up to $10 million, subject to certain restrictions in the borrowing base based on eligibility of receivables. Any advances under the credit agreement will be secured by the Company’s personal property and will bear interest at the prime rate plus 0.875% per annum. The Company has agreed to provide a security interest in its intellectual property solely, in the event that a judicial authority holds that this is necessary, to enable the financial institution to perfect the financial institution’s security interest in the rights to payment and proceeds from sale of the Company’s personal property. The Company has also agreed not to pledge its intellectual property to a third party.  The credit agreement contains certain financial and reporting covenants.  The covenant relating to meeting the deadline for submission of reporting items was violated during the quarter ended March 31, 2003.  A waiver is in the process of being obtained from the financial institution for the covenant that was violated.

 

The credit agreement was used to issue stand-by letters of credit totaling $0.7 million to collateralize the Company’s obligations to a third party for the purchase of inventory and to provide a security deposit for the lease of new office space. At March 31, 2003, there was up to $9.3 million available under the credit facility, subject to certain restrictions in the borrowing base. The Company is currently unable to borrow any additional amounts at March 31, 2003. The amount by which the aggregate face amount of all outstanding stand-by letters of credit exceeds the borrowing base, as determined by eligible receivables, represents the amount of restricted cash necessary to secure the letters of credit. At March 31, 2003, the Company had outstanding stand-by letters of credit of $0.7 million.

 

 

7

 

11.           Commitments and contingencies

 

Lease commitments:  The Company leases office space and equipment under non-cancelable operating leases.  The Company also has a capital lease for research and development related software.

 

Our total potential commitments on our operating leases and inventory purchases as of  March 31, 2003, were as follows (in thousands):

 

As of March 31, 2003		Operating Leases			Capital Lease			Inventory Purchase Commitments
2003		$	392		$	230		$	1,002
2004		933			406			—
2005		1,083			408			—
2006		1,046			—			—
2007		269			—			—
Total minimum lease payments		$	3,723		1,044			$	1,002
Less: amount representing interest					(129		)
Present value of minimum lease payments					915
Less: current portion of capital lease obligations					(250		)
Long-term capital lease obligations					$	665

 

Contingencies:  From time to time, in the normal course of business, various claims could be made against the Company.  At March 31, 2003, there were no pending claims the outcome of which is expected to result in a material adverse effect on the financial position or results of operations of the Company.

 

12.           Guarantees

 

In November 2002, the FASB issued FIN No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others — an interpretation of FASB Statements No. 5, 57 and 107 and rescission of FIN 34.” The following is a summary of the Company’s agreements that the Company has determined are within the scope of FIN 45.

 

The Company provides a limited warranty for up to one year for any defective products. During the quarter ended March 31, 2003 and for the year ended December 31, 2002, warranty expense was insignificant. The Company has a reserve for warranty costs of $30,000, which has not changed in the past quarter.

 

Pursuant to its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director serving in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. To date, the Company has not incurred any costs as there have been no lawsuits or claims that would invoke these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2003.

 

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors and customers, its sublandlord and (ii) its agreements with investors. Under these provisions the Company has agreed to generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. To date, the Company has not incurred any costs as there have been no lawsuits or claims related to these indemnification agreements. Accordingly, the Company has no liabilities recorded for these agreements as of March 31, 2003.

 

8

 

13.                                 Recent Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” as well as FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions.  The Company adopted the provisions of SFAS 145 on January 1, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002, and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  The Company adopted SFAS 146 on January 1, 2003. The adoption of this statement did not have a material impact on the Company’s consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”). FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities.  The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end.  The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company adopted FIN 45 on January 1, 2003 and has provided the required disclosures about guarantees.  The Company did not have significant warranty expense for the period ended March 31, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure — an amendment of FASB Statement No.123.”(“SFAS 148”).  SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ended after December 15, 2002.  The interim disclosure requirements are effective for interim periods ending after December 15, 2002.  The Company adopted SFAS 148 on January 1, 2003, and has provided disclosures to comply with the requirements of SFAS 148.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”).  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  The Company adopted FIN 46 on January 1, 2003. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

 

9

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This report contains forward looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management.  In addition, when used in this report, the words “likely,” “will,” “suggests,” “target,” “may,” “would,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” and similar expressions and their variants, as they relate to us or our management, may identify forward looking statements.  Such statements reflect our judgment as of the date of this quarterly report on Form 10-Q with respect to future events, the outcome of which are subject to certain known and unknown risks and uncertainties, including but not limited to the factors set forth elsewhere in this report and in “Risk Factors,” which may have a significant impact on our business, operating results or financial condition.  Investors are cautioned that these forward looking statements are inherently uncertain.  Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein.  Although we believe that the expectations reflected in these forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements.  Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of these forward looking statements.  All forward looking statements included in this report are based on information available to us as of the date of this report.  We undertake no obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

 

The following discussion and analysis should be read in connection with the condensed consolidated financial statements and the notes thereto included in Item 1 in this quarterly report and our annual report on Form 10-K, as amended on April 30, 2003, for the year ended December 31, 2002.

 

Critical Accounting Policies

 

Use of Estimates: Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, warranty obligations, bad debts, inventories, accruals, stock options, warrants, income taxes (including the valuation allowance for deferred taxes) and restructuring costs. We base our estimates on historical experience and on

 

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various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Material differences may occur in our results of operations for any period if we made different judgments or utilized different estimates.

 

Revenue Recognition: We recognize revenue from product sales upon shipment to original equipment manufacturers and end users, net of reserves for estimated returns and allowances, provided that persuasive evidence of an arrangement exists, the price is fixed, title has transferred, collectibility of resulting receivables is reasonably assured, there are no acceptance requirements and there are no remaining significant obligations. Sales to distributors are made under arrangements allowing limited rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances which may be granted subject to approval by us. As a result of these returns rights and potential pricing adjustments, except in very limited circumstances we defer recognition on sales to distributors until products are resold by the distributor to the end user.  Revenue may be recognized when sold to a distributor when the distributor has no rights of return.

 

Inventories:   Inventories are stated at the lower of cost or market. This policy requires us to make estimates regarding the market value of our inventory, including an assessment of excess or obsolete inventory. We determine excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for our products within a specified time horizon, generally 12 months. The estimates we use for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. Actual demand and market conditions may be different from those projected by our management. If our unit demand forecast is less than our current inventory levels and purchase commitments during the specified time horizon, or if the estimated selling price is less than our inventory value, we will be required to take additional excess inventory charges or write-downs to net realizable value, which will decrease our gross margin and net operating results in the future. During the quarter ended March 31, 2002, we recorded a provision for excess inventory of approximately $5 million related to excess inventory for our TA2022 product as a result of a decrease in forecasted sales for this product.

 

Results of Operations

 

Three months ended March 31, 2003 and 2002

 

Revenue.  Revenue for the three months ended March 31, 2003 was $3.0 million, a decrease of $1.6 from revenues of $4.6 million for the three months ended March 31, 2002.  The decrease in revenue resulted primarily from a decrease in sales of our TA1101, TA2020, TA2022 and TA3020 digital audio amplifiers.

 

Sales to Apple Computer Inc. and Kyoshin Technosonic Co., Ltd., (KTS) accounted for approximately 25% and 21%, respectively, of revenue in the three months ended March 31, 2003 and 31% and 0%, respectively, in the corresponding prior year quarter. Sales to our five largest customers represented approximately 70% of revenue in the three months ended March 31, 2003 and 87% of revenue in the three months ended March 31, 2002.

 

Gross Profit (Loss).  Gross profit for the three months ended March 31, 2003 was $0.7 million (including stock-based compensation expense of $2,000), compared with a gross loss of $4.0 million (including stock-based compensation expense of $13,000) for the three months ended March 31, 2002.  The gross profit for the three months ended March 31, 2003 reflects ongoing product cost reduction efforts.

 

The gross loss for the three months ended March 31, 2002 was primarily due to a write off of  $5.0 million for excess inventory. The inventory charge related to excess inventory for the Company’s TA 2022 product based on a decline in forecasted sales for this product.

 

Research and Development.  Research and development expenses for the three months ended March 31, 2003 were $2.0 million (including stock-based compensation expense of $17,000), a decrease of $1.5 million from $3.5 million (including stock-based compensation expense of $212,000) for the three months ended March 31, 2002.  The year over year decrease for the three month periods resulted from a decrease in personnel costs, a decrease in product development expenses and lower expenses related to rent and insurance.

 

Selling, General and Administrative Expenses.  Selling, general and administrative expenses for the three months ended March 31, 2003 were $1.2 million (including stock-based compensation benefit of $55,000) a decrease of $600,000 from $1.8 million (including

 

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stock-based compensation expense of $122,000) for the three months ended March 31, 2002. Selling general and administrative expenses decreased year over year due to decreased headcount and related costs and lower expenses related to rent, insurance and bad debts.

 

Accretion on Preferred Stock. Accretion on preferred stock for the three months ended March 31, 2003 was $0 compared to approximately $15.0 million for the corresponding prior year quarter. The year-over-year decrease was due to the financing transaction that was completed in January 2002, in which we raised $21 million in gross proceeds through a private placement of non-voting Series A Preferred Stock and warrants. The accretion related to the beneficial conversion feature represents the difference between the accounting conversion price and the fair value of the common stock on the date of the transaction, after valuing the warrants issued in connection with the financing transaction.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations through the private sale of our equity securities, primarily the sale of preferred stock, through our initial public offering on August 1, 2000 and through a private placement in January 2002.  Net proceeds to us as a result of our initial public offering and our private placement were approximately $45.4 million and $19.9 million, respectively.

 

Net cash used in operating activities decreased from $3.2 million for the three months ended March 31, 2002 to $1.3 million for the three months ended March 31, 2003. The $1.9 million decrease was primarily due to a $1.8 million reduction in net loss, which was net of a provision for excess inventory of $5.0 million during the three months ended March 31, 2002, plus lower levels of accounts receivable, inventories, accounts payable and other working capital items.  Under the current lease agreement we did not pay any cash during the first quarter of 2003. However, beginning August 1, 2003 we will be required to pay approximately $42,000 per month.

 

Net cash provided by investing activities decreased to $0.5  million for the three months ended March 31, 2003 as compared to $1.0 million for the three months ended March 31, 2002. The decrease was due to a decrease in sale of short-term investments offset by a decrease in restricted cash.

 

Cash used in financing activities for the three months ended March 31, 2003 was $41,000 as compared to cash provided by financing activities of $19.7 million for the three months ended March 31, 2002. We completed a financing in January 2002 and raised $21 million in gross proceeds through a private placement.

 

At March 31, 2003, we had approximately $9.2 million in cash and net total working capital of approximately $11.7 million with which to fund current operations.

 

We entered into a credit agreement with a financial institution that provides for a one year revolving credit facility in an amount of up to $10 million subject to certain restrictions in the borrowing base based on eligibility of receivables. The credit agreement was used to secure stand-by letters of credit which currently total $0.7 million. We are currently unable to borrow any additional amounts at March 31, 2003 and do not expect to be able to borrow any substantial amounts in the future under this credit agreement.

 

Our total potential commitments on our operating leases and inventory purchases as of  March 31, 2003, were as follows (in thousands):

 

As of March 31, 2003		Operating Leases			Capital Lease			Inventory Purchase Commitments
2003		$	392		$	230		$	1,002
2004		933			406			—
2005		1,083			408			—
2006		1,046			—			—
2007		269			—			—
Total minimum lease payments		$	3,723		1,044			$	1,002
Less: amount representing interest					(129		)
Present value of minimum lease payments					915
Less: current portion of capital lease obligations					(250		)
Long-term capital lease obligations					$	665

 

 

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We expect our future liquidity and capital requirements will fluctuate depending on numerous factors including: market acceptance and demand for current and future products, the timing of new product introductions and enhancements to existing products, the success of on-going efforts to reduce our manufacturing costs as well as operating expenses and need for working capital for such items as inventory and accounts receivable.

 

On January 24, 2002, we completed a financing in which we raised $21 million in gross proceeds through a private equity placement.  Moreover, in July 2002, we entered into a credit agreement with a financial institution that provides for a one-year revolving credit facility of up to $10 million, subject to certain restrictions in the borrowing base, based on eligibility of receivables.

 

If future revenues and gross margins do not meet our forecasts, we may take measures to reduce our operating expenses, such as reducing headcount or canceling research and development projects. However, we may need to raise additional funds to finance our activities next year and beyond through public or private equity or debt financings, the formation of strategic partnerships or alliances with other companies or through bank borrowings with existing or new banks. We may not be able to obtain additional funds on terms that would be favorable to us and our stockholders, or at all.

 

We believe, based on our ability to implement the aforementioned measures, if needed, that we will have liquidity sufficient to meet our operating, working capital and financing needs for the next nine months and perhaps beyond.  We have not made any adjustment to our consolidated financial statements as a result of the outcome of the uncertainty described above. Our former independent accountants included an explanatory paragraph in their audit report on our consolidated financial statements for the fiscal year ended December 31, 2002 which indicates that we have suffered recurring losses from operations and have an accumulated deficit that raises substantial doubt about our ability to continue as a going concern.

 

Recent Accounting Pronouncements

 

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.”

 

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SFAS 145 rescinds FASB Statement No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” and an amendment of that Statement, FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” as well as FASB Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.” This Statement amends FASB Statement No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions.  This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions.  We adopted the provisions of SFAS 145 on January 1, 2003. The adoption of this statement did not have a material impact on our consolidated financial statements.

 

In June 2002, the FASB issued SFAS No. 146, “Accounting for Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under EITF No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit arrangement that is not an ongoing benefit arrangement or an individual deferred-compensation contract. SFAS 146 will be effective for exit or disposal activities that are initiated after December 31, 2002, and early application is encouraged. The provisions of EITF No. 94-3 shall continue to apply for an exit activity initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the adoption of SFAS 146.  We adopted SFAS 146 on January 1, 2003. The adoption of this statement did not have a material impact on our consolidated financial statements.

 

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (“FIN 45”).” FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities.  The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end.  The disclosure requirements of FIN 45 are effective for financial statements of interim or annual periods ending after December 15, 2002. We adopted FIN 45 on January 1, 2003 and have provided the required disclosures about guarantees.  We did not have significant warranty expense for the period ended March 31, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure — an amendment of FASB Statement No.123.”(“SFAS 148”). SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS 148 requires disclosure of the pro forma effect in interim financial statements. The transition and annual disclosure requirements of SFAS 148 are effective for fiscal years ended after December 15, 2002.  The interim disclosure requirements are effective for interim periods ending after December 15, 2002. We adopted SFAS 148 on January 1, 2003 and have provided disclosures to comply with the requirements of SFAS 148.

 

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (“FIN 46”).  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  We adopted FIN 46 on January 1, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

Risk Factors

 

Set forth below and elsewhere in this quarterly report and in the other documents we file with the Securities and Exchange Commission are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward looking statements contained in this quarterly report.  Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this quarterly report and our other public filings.  Some of these factors are as follows:

 

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Risks Related to Our Business

 

We have a history of losses, expect future losses and may never achieve or sustain profitability.

 

As of March 31, 2003, we had an accumulated deficit of $174.8 million. We incurred net losses of approximately $2.5 million in the three months ended March 31, 2003, $19.3 million (before accretion on preferred stock of $14.9 million) in 2002 and $27.0 million in 2001.  We may continue to incur net losses and these losses may be substantial. Furthermore, we may continue to generate significant negative cash flow in the future. We will need to generate substantially higher revenue to achieve and sustain profitability and positive cash flow. Our ability to generate future revenue and achieve profitability will depend on a number of factors, many of which are described throughout this section. If we are unable to achieve or maintain profitability, we will be unable to build a sustainable business. In this event, our share price and the value of your investment would likely decline and the Company might be unable to continue as a going concern.

 

We may need to raise additional capital to continue to grow our business, which may not be available to us.

 

Because we have had losses, we have funded our operating activities to date from the sale of securities, including our most recent financing in January 2002. Additionally, in July 2002, we put in place a $10 million revolving line of credit for a term of one year, whose availability is dependent on meeting certain loan covenants. However, to grow our business significantly, we will need additional capital. We cannot be certain that any such financing will be available on acceptable terms, or at all. Moreover, additional equity financing, if available, would likely be dilutive to the holders of our common stock, and debt financing, if available, would likely involve restrictive covenants. If we cannot raise sufficient additional capital, it would adversely affect our ability to achieve our business objectives and to continue as a going concern.

 

Our former independent accountants have included a going concern explanatory paragraph in their report on our consolidated financial statements.

 

Our former independent accountants have included an explanatory paragraph in their audit report on our consolidated financial statements for the fiscal year ended December 31, 2002, which indicates that we have suffered recurring losses from operations and have an accumulated deficit that raises substantial doubt about our ability to continue as a going concern.  The inclusion of a going concern explanatory paragraph in our independent auditor’s audit report on our consolidated financial statements for the fiscal year ended December 31, 2002 could have a detrimental effect on our stock price, and our ability to raise new capital.

 

We may not be able to pay our debt and other obligations, which would cause us to be in default under the terms of our credit facility, which would result in harm to our business and financial condition.

 

On July 12, 2002, we entered into a credit agreement with a financial institution that provides for a one-year revolving credit facility in an amount of up to $10 million.  Any advances under the credit agreement will be secured by our personal property and will bear interest at the prime rate plus 0.875% per annum. We have agreed to provide a security interest in our intellectual property solely, in the event that a judicial authority holds that this is necessary, to enable the financial institution to perfect the financial institution’s security interest in the rights to payment and proceeds from sale of our personal property. We have also agreed not to pledge our intellectual property to a third party. The credit agreement contains certain financial and reporting covenants.  A covenant relating to meeting the deadline for submission of reporting items was violated during the quarter ended March 31, 2003.  A waiver is in the process of being obtained from the financial institution for the covenant that was violated. We intend to fulfill our debt service obligations from cash generated by our operations, if any, and from our existing cash and investments.  There can be no assurance that we will be able to meet our debt service obligations of the credit facility.

 

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If our cash flow is inadequate to meet our obligations under the credit facility or otherwise, we could face substantial liquidity problems.  If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on the credit facility, we would be in default under the terms thereof, which would permit the financial institution that provided the credit facility to accelerate the maturity of our obligations.  Any such default would harm our business, prospects, financial condition and operating results.  In addition, we cannot assure you that we would be able to repay amounts due in respect of the credit facility if payment were to be accelerated following the occurrence of any event of default under the terms of the credit facility.

 

In addition, in the event of our bankruptcy, liquidation or reorganization or upon acceleration of the payments due under the credit facility due to an event of default, our assets would be available for distribution to our current stockholders only after our indebtedness has been paid in full.  As a result, there may not be sufficient assets remaining to make any distributions to our stockholders.

 

We must continue to reduce our costs and improve our margins in order to reach profitability.

 

The market for our products is extremely competitive and is characterized by aggressive pricing.  As a result, margins in our market are often low. Traditionally, we have experienced low or even negative margins.  To assist us in reaching profitability, we must continue to increase our margins by reducing the cost of our products.  We have taken steps in the past and plan to take additional steps in 2003 and beyond to reduce our cost of manufacturing and to improve our overall profit margin, but there is no guarantee that we will be successful in our efforts to reduce our manufacturing costs and improve our gross margins in the future.

 

Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which may cause our share price to decline.

 

Our quarterly operating results have fluctuated significantly in the past and are likely to continue to do so in the future. The many factors that could cause our quarterly results to fluctuate include, in part:

 

•                  level of sales;

 

•                  mix of high and low margin products;

 

•                  availability and pricing of wafers;

 

•                  timing of introducing new products, including lower cost versions of existing products, fluctuations in manufacturing yields and other problems or delays in the fabrication, assembly, testing or delivery of products; and

 

•                  rate of development of target markets.

 

A large portion of our operating expenses, including salaries, rent and capital lease expenses, are fixed.  If we experience a shortfall in revenues relative to our expenses, we may be unable to reduce our expenses quickly enough to off-set the reduction in revenues during that accounting period, which would adversely affect our operating results. Fluctuations in our operating results may also result in fluctuations in our common stock price. If the market price of our stock is adversely affected, we may experience difficulty in raising capital or making acquisitions.  In addition, we may become the object of securities class action litigation. As a result, we do not believe that period-to-period comparisons of our revenues and operating results are necessarily meaningful. You should not rely on the results of any one quarter as an indication of future performance.

 

Our stock price may be subject to significant volatility.

 

The stock prices for many technology companies have recently experienced large fluctuations, which may or may not be directly related to the operating performance of the specific companies. Broad market fluctuations as well as general economic conditions may cause our stock price to decline. We believe that fluctuations of our stock price may continue to be caused by a variety of factors, including:

 

•                  announcements of developments related to our business;

 

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•                  fluctuations in our financial results;

 

•                  general conditions in the stock market or around the world, terrorism or developments in the semiconductor and capital equipment industry and the general economy;

 

•                  sales or purchases of our common stock in the marketplace;

 

•                  announcements of our technological innovations or new products or enhancements or those of our competitors;

 

•                  developments in patents or other intellectual property rights;

 

•                  developments in our relationships with customers and suppliers;

 

•                  a shortfall or changes in revenue, gross margins or earnings or other financial results from analysts’ expectations or an outbreak of hostilities or natural disasters; or

 

•                  acquisition or merger activity and the success in implementing such acquisitions.

 

Our customers may cancel or defer product orders, which could result in excess inventory.

 

Our sales are generally made pursuant to individual purchase orders that may be canceled or deferred by customers on short notice without significant penalty.  Thus, orders in backlog may not result in future revenue.  In the past, we have had cancellations and deferrals by customers.  Any cancellation or deferral of product orders could result in us holding excess inventory, which could seriously harm our profit margins and restrict our ability to fund our operations. During the quarter ended March 31, 2002, we recorded a provision for excess inventory of approximately $5.0 million.  We recognize revenue upon shipment of products to the end customer.  Although we have not experienced customer refusals to accept shipped products or material difficulties in collecting accounts receivable, such refusals or collection difficulties are possible and could result in significant charges against income, which could seriously harm our revenues and our cash flow.

 

Industry-wide overcapacity has caused and may continue to cause our results to fluctuate, and such shifts could result in significant inventory write-downs and adversely affect our relationships with our suppliers.

 

We must build inventory well in advance of product shipments. The semiconductor industry is highly cyclical and in light of the current downturn, which has resulted in excess capacity and overproduction, there is a risk that we could continue to forecast inaccurately and produce excess inventories of our products.  As a result of such inventory imbalances, large future inventory write-downs may occur due to excess inventory or inventory obsolescence. In addition, any adjustment in our ordering patterns resulting from increased inventory may adversely affect our suppliers’ willingness to meet our demand, if our demand increases in the future.

 

Our product shipment patterns make it difficult to predict our quarterly revenues.

 

As is common in our industry, we frequently ship more products in the third month of each quarter than in either of the first two months of the quarter, and shipments in the third month are higher at the end of that month.  We believe this pattern is likely to continue.  The concentration of sales in the last month of the quarter may cause our quarterly results of operations to be more difficult to predict.  Moreover, if sufficient business does not materialize or a disruption in our production or shipping occurs near the end of a quarter, our revenues for that quarter could be materially reduced.

 

We rely on a small number of customers for most of our revenue and a decrease in revenue from these customers could seriously harm our business.

 

A relatively small number of customers have accounted for most of our revenues to date.  Any reduction or delay in sales of our products to one or more of these key customers could seriously reduce our sales volume and revenue and adversely affect our operating results.  In particular, sales to three large customers, including Apple Computer Inc., Kyoshin Technosonic Co., Ltd., (KTS) and Samsung Electronics Co., Ltd., accounted for approximately 25%, 21% and 11%, respectively, of revenue for the three months ended March 31, 2003 and 31%, 0% and 4% respectively, in the corresponding prior year quarter.  Moreover, sales to our five largest end customers represented approximately 70% revenue in the three months ended March 31, 2003 and 87% of revenue in the three

 

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months ended March 31, 2002.  We expect that we will continue to rely on the success of our largest customers and on our success in selling our existing and future products to those customers in significant quantities.  However, we cannot be sure that we will retain our largest customers or that we will be able to obtain additional key customers or replace key customers we may lose or who may reduce their purchases.

 

We currently rely on sales of six products for a significant portion of our revenue, and the failure of these products to be successful in the future could substantially reduce our sales.

 

We currently rely on sales of our TA0105, TA1101B, TA2020, TA2024, TK2050 and TLD4012 digital audio amplifiers to generate a significant portion of our revenue. Sales of these products amounted to 93% of our revenue for the three months ended March 31, 2003, 75% of our revenue in 2002 and 69% of our revenue in 2001. We have developed additional products and plan to introduce more products in the future, but there can be no assurance that these products will be commercially successful. Consequently, if our existing products are not successful, our sales could decline substantially.

 

Our lengthy sales cycle makes it difficult for us to predict if or when a sale will be made, to forecast our revenue and to budget expenses, which may cause fluctuations in our quarterly results.

 

Because of our lengthy sales cycles, we may continue to experience a delay between incurring expenses for research and development, sales and marketing and general and administrative efforts, as well as incurring investments in inventory, and the generation of revenue, if any, from such expenditures.  In addition, the delays inherent in such a lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans, which could result in our loss of anticipated sales.  Our new products are generally incorporated into our customers’ products or systems at the design stage.  To try and have our products selected for design into new products of current and potential customers, commonly referred to as design wins, often requires significant expenditures by us without any assurance of success.  Once we have achieved a design win, our sales cycle will start with the test and evaluation of our products by the potential customer and design of the customer’s equipment to incorporate our products.  Generally, different parts have to be redesigned to incorporate our devices successfully into our customers’ products.  The sales cycle for the test and evaluation of our products can range from a minimum of three to six months, and it can take a minimum of an additional six to nine months before a customer commences volume production of equipment that incorporates our products.  Achieving a design win provides no assurance that such customer will ultimately ship products incorporating our products or that such products will be commercially successful.  Our revenue or prospective revenue would be reduced if a significant customer curtails, reduces or delays orders during our sales cycle, or chooses not to release products incorporating our products.

 

The current general economic downturn in the semiconductor industry has lead and may continue to lead to decreased revenue.

 

During 2001, 2002 and the first quarter of 2003, slowing worldwide demand for semiconductors has resulted in significant inventory buildups for semiconductor companies.  Presently, we cannot predict with any degree of certainty how long the semiconductor industry downturn will last or how severe the downturn will be. If the downturn continues or worsens, we may experience greater levels of cancellations and/or push-outs of orders for our products in the future, which could adversely affect our business and operating results, including the possibility of additional inventory write-downs, over a prolonged period of time. In addition, we reduced our workforce during fiscal 2002 by approximately 20%, or about 15 people.  If we continue to reduce our workforce, it may adversely impact our ability to respond rapidly to any renewed growth opportunities in the future.

 

We may experience difficulties in the introduction of new or enhanced products that could result in significant, unexpected expenses or delay their launch, which would harm our business.

 

Our failure or our customers’ failure to develop and introduce new products successfully and in a timely manner would seriously harm our ability to generate revenues.  Consequently, our success depends on our ability to develop new products for existing and new markets, introduce such products in a timely and cost-effective manner and to achieve design wins.  The development of these new devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products. The successful introduction of a new product may currently take up to 18 months.  Successful product development and introduction depends on a number of factors, including:

 

•                  accurate prediction of market requirements and evolving standards;

 

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•                  accurate new product definition;

 

•                  timely completion and introduction of new product designs;

 

•                  availability of foundry capacity;

 

•                  achieving acceptable manufacturing yields;

 

•                  market acceptance of our products and our customers’ products; and

 

•                  market competition.

 

We cannot guarantee success with regard to these factors.

 

If we are unable to retain key personnel, we may not be able to operate our business successfully.

 

We may not be successful in retaining executive officers and other key management and technical personnel.  A high level of technical expertise is required to support the implementation of our technology in our existing and new customers’ products. In addition, the loss of the management and technical expertise of Dr. Adya S. Tripathi, our founder, president and chief executive officer, could seriously harm us. We do not have any employment contracts with our employees.

 

The facilities of several of our key manufacturers and the majority of our customers, are located in geographic regions with increased risks of natural disasters, labor strikes and political unrest.

 

Several key manufacturers and a majority of customers are located in the Pacific Rim region. The risk of earthquakes in this region, particularly in Taiwan, is significant due to the proximity of major earthquake fault lines. Earthquakes, fire, flooding and other natural disasters in the Pacific Rim region likely would result in the disruption of our foundry partners’ assembly and testing capacity and the ability of our customers to purchase our products. Labor strikes or political unrest in these regions would likely also disrupt operations of our foundries and customers. In particular, there is a recent history of political unrest between China and Taiwan. Any disruption resulting from such events could cause significant delays in shipments of our products until we are able to shift our manufacturing, assembly and testing from the affected contractor to another third party vendor. We cannot be sure that such alternative capacity could be obtained on favorable terms, if at all. Moreover, any such disruptions could also cause significant decreases in our sales to these customers until our customers resume normal purchasing volumes.

 

It is unclear how the Severe Acute Respiratory Syndrome (SARS) outbreak will impact our business.

 

The recent SARS outbreak may have an adverse impact on our worldwide business, particularly in the Pacific Rim region, where the outbreak has been most widespread. Several key manufacturers and a majority of our customers are located in the Pacific Rim region. In the three months ended March 31, 2003, sales to end customers based in the Pacific Rim region accounted for approximately 63% of our total revenues. If the SARS outbreak leads to quarantines affecting our operations in the Pacific Rim region, it would likely cause serious harm to our operations in Asia. In addition, in response to the SARS outbreak, many companies have restricted travel for their employees in the affected regions, which may affect our ability to conduct sales, marketing and other operations in these areas. If the outbreak were to continue or worsen, these adverse effects could grow, as well as possibly impact the economies of the affected countries overall, and, accordingly, adversely impact our manufacturing and sales in the Pacific Rim region. The risk of delayed or cancelled orders is particularly relevant with respect to enterprise customer orders, which are more likely to be cancelled, delayed or reduced and also have a greater financial impact on our operating results.

 

Stockholders will incur additional dilution upon the exercise of warrants, and management will have sole discretion to use the proceeds received from exercise of these warrants.

 

To the extent that the warrants issued in connection with the January 2002 Series A financing are exercised, there will be additional dilution to your shares.  If all of the warrants are exercised, we will be required to issue an additional 3,328,760 shares of common stock, or approximately 8% of the common stock outstanding as of March 31, 2003. If all of the warrants are exercised in full, we would receive approximately $6.4 million in proceeds.  Our management will have sole discretion over use of these proceeds and may spend the proceeds in ways with which our stockholders may not agree.

 

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We may not maintain The Nasdaq Small Cap Market listing requirements, and as a result, our common stock may be subject to delisting.

 

On August 13, 2002, we received a deficiency notice from the Nasdaq Stock Market, or Nasdaq, for failing to maintain the Nasdaq National Market’s minimum bid price requirement for continued listing, which includes meeting a $1.00 minimum bid price for 30 consecutive trading days. As we were unable to maintain this requirement, we submitted an application to Nasdaq for transfer to their SmallCap Market.  The application was approved and accordingly we are now listed on The Nasdaq SmallCap Market.  Stock trading on The Nasdaq SmallCap Market is typically less liquid and usually involves larger variations between the bid and ask price than stock trading on the Nasdaq National Market.  Therefore, the transfer of our stock from the Nasdaq National Market to The Nasdaq SmallCap Market could have an adverse effect on the liquidity of our common stock and your ability to sell our common stock.  To remain listed on The Nasdaq SmallCap Market, we must meet the minimum listing requirement that the bid price of our common stock closes at $1.00 per share or higher for a minimum of 10 consecutive trading dates.  As we had not met this minimum listing requirement by the initial deadline of February 10, 2003, we applied for and, on February 11, 2003, were provided with, an additional 180 days, or until August 8, 2003, to gain compliance with The Nasdaq SmallCap Market minimum listing requirement.  If we are unable to meet the minimum listing requirement prior to August 8, 2003, we may be delisted from The Nasdaq SmallCap Market, or, in the alternative, we may be granted an additional grace period to regain compliance. Furthermore, we may be eligible to transfer back to the Nasdaq National Market if by August 8, 2003 the bid price of our common stock maintains the $1.00 per share requirement for 30 consecutive trading days and we have maintained compliance with all other continued listing requirements of the Nasdaq National Market.

 

On March 17, 2003, The Nasdaq Stock Market, Inc. extended a pilot program governing bid price rules for all Nasdaq National Market and Nasdaq SmallCap issuers. The pilot program allows issuers that meet core SmallCap initial listing criteria to benefit from extended compliance periods for satisfying minimum bid price requirements. Therefore, if we meet the core SmallCap initial listing criteria, we will be eligible to apply for an extended compliance period for satisfying the minimum bid price requirements.

 

Additionally, if our common stock is delisted from The Nasdaq SmallCap Market, sales of our common stock would likely be conducted only in the over-the-counter market or potentially in regional exchanges. This may have a negative impact on the liquidity and the price of our common stock, and investors may find it more difficult to purchase or dispose of, or to obtain accurate quotations as to the market value of, our common stock.  In addition, if our common stock is not listed on the Nasdaq National Market or The Nasdaq SmallCap Market and the trading price of our common stock was to remain below $1.00 per share, trading in our common stock would also be subject to the requirements of certain rules promulgated under the Exchange Act, which require additional disclosures by broker-dealers in connection with any trades involving a stock defined as a “penny stock” (generally, a non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions).  In such event, the additional burdens imposed upon broker-dealers to effect transactions in our common stock could further limit the market liquidity of our common stock and the ability of investors to trade our common stock.

 

We also believe that the current per share price level of our common stock has reduced the effective marketability of our shares of common stock because of the reluctance of many leading brokerage firms to recommend low-priced stock to their clients. Certain investors view low-priced stock as speculative and unattractive. In addition, a variety of brokerage house policies and practices tend to discourage individual brokers within those firms from dealing in low-priced stock. Such policies and practices pertain to the payment of broker’s commissions and to time-consuming procedures that make the handling of low-priced stocks unattractive to brokers from an economic standpoint.

 

In addition, because brokerage commissions on low-priced stock generally represent a higher percentage of the stock price than commissions on higher-priced stock, the current share price of our common stock can result in individual stockholders paying transaction costs (commissions, markups or markdowns) that represent a higher percentage of their total share value than would be the case if the share price were substantially higher. This factor also may limit the willingness of institutions to purchase our common stock at its current low share price.

 

Terrorist attacks and threats, and government responses thereto, may negatively impact all aspects of our operations, revenues, costs and stock price.

 

The threat of terrorist attacks involving the United States, the instability in the Middle East, a decline in consumer confidence and continued economic weakness and geo-political instability have had a substantial adverse impact on the economy.  If consumer confidence does not recover, our revenues may be adversely impacted for fiscal 2003 and beyond. Moreover, any further terrorist attacks involving the U.S., or any additional U.S. military actions overseas may disrupt our operations or those of our customers and

 

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suppliers.  These events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world financial markets which could harm our stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.

 

We are subject to anti-takeover provisions that could delay or prevent an unfriendly acquisition of our company.

 

Provisions of our restated certificate of incorporation, equity incentive plans, bylaws and Delaware law may discourage transactions involving an unfriendly change in corporate control.  In addition to the foregoing, the stockholdings of our officers, directors and persons or entities that may be deemed affiliates and the ability of our board of directors to issue preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a third party from acquiring us and may adversely affect the voting and other rights of holders of our common stock.

 

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Risks Related to Manufacturing

 

We depend on three outside foundries for our semiconductor device manufacturing requirements.

 

We do not own or operate a fabrication facility, and substantially all of our semiconductor device requirements are currently supplied by three outside foundries, United Microelectronics Corporation, or UMC, in Taiwan, STMicroelectronics Group in Europe and Mitsubishi, in Japan.  Although we primarily utilize these three outside foundries, most of our components are not manufactured at both foundries at the same time.  As a result, each foundry is a sole source for certain products.  There are significant risks associated with our reliance on outside foundries, including:

 

•                  the lack of guaranteed wafer supply;

 

•                  limited control over delivery schedules, quality assurance and control, manufacturing yields and production costs; and

 

•                  the unavailability of or delays in obtaining access to key process technologies.

 

In addition, the manufacture of integrated circuits is a highly complex and technologically demanding process.  Although we work closely with our foundries to minimize the likelihood of reduced manufacturing yields, our foundries have from time to time experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies.

 

We provide our foundries with continuous forecasts of our production requirements; however, the ability of each foundry to provide us with semiconductor devices is limited by the foundry’s available capacity.  In many cases, we place our orders on a purchase order basis, and foundries may allocate capacity to the production of other companies’ products while reducing the deliveries to us on short notice.  In particular, foundry customers that are larger and better financed than us or that have long-term agreements with our foundries may cause such foundries to reallocate capacity in a manner adverse to us.

 

If we use a new foundry, several months would be typically required to complete the qualification process before we can begin shipping products from the new foundry. In the event either of our current foundries suffers any damage or destruction to their respective facilities, or in the event of any other disruption of foundry capacity, we may not be able to qualify alternative manufacturing sources for existing or new products in a timely manner.  Even our current outside foundries would need to have certain manufacturing processes qualified in the event of disruption at another foundry, which we may not be able to accomplish in a timely enough manner to prevent an interruption in supply of the affected products.

 

If we encounter shortages or delays in obtaining semiconductor devices for our products in sufficient quantities when required, delivery of our products could be delayed, resulting in customer dissatisfaction and decreased revenues.

 

We depend on third-party subcontractors for most of our semiconductor assembly and testing requirements and any unexpected interruption in their services could cause us to miss scheduled shipments to customers and to lose revenues.

 

Semiconductor assembly and testing are complex processes, which involve significant technological expertise and specialized equipment.  As a result of our reliance on third-party subcontractors for assembly and testing of our products, we cannot directly control product delivery schedules, which has in the past, and could in the future, result in product shortages or quality assurance problems that could increase the costs of manufacture, assembly or testing of our products.  Almost all of our products are assembled and tested by one of five subcontractors: AMBIT Microsystems Corporation in Taiwan, Amkor Technology, Inc. in the Philippines, ASE in Korea, Malaysia and Taiwan, SGS in China, and ST Assembly Test Services Ltd. in Singapore.  We do not have long-term agreements with any of these suppliers and retain their services on a per order basis.  The availability of assembly and testing services from these subcontractors could be adversely affected in the event a subcontractor suffers any damage or destruction to their respective facilities, or in the event of any other disruption of assembly and testing capacity.  Due to the amount of time normally required to qualify assemblers and testers, if we are required to find alternative manufacturing assemblers or testers of our components, shipments could be delayed.  Any problems associated with the delivery, quality or cost of our products could seriously harm our business.

 

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Failure to transition our products to more effective and/or increasingly smaller semiconductor chip sizes and packaging could cause us to lose our competitive advantage and reduce our gross margins.

 

We evaluate the benefits, on a product-by-product basis, of migrating to smaller semiconductor process technologies in order to reduce costs and have commenced migration of some products to smaller semiconductor processes.  We believe that the transition of our products to increasingly smaller semiconductor processes will be important for us to reduce manufacturing costs and to remain competitive. Moreover, we are dependent on our relationships with our foundries to migrate to smaller semiconductor processes successfully.  We cannot be sure that our future process migrations will be achieved without difficulties, delays or increased expenses.  Our gross margins would be seriously harmed if any such transition is substantially delayed or inefficiently implemented.

 

Our international operations subject us to risks inherent in doing business on an international level that could harm our operating results.

 

We currently obtain almost all of our manufacturing, assembly and test services from suppliers located outside the United States and may expand our manufacturing activities abroad.  Approximately 69% of our total revenue for the three months ended March 31, 2003 was derived from sales to end customers based outside the United States.  In 2002 and 2001, 61% and 72%, respectively, of our total revenue was derived from sales to end customers based outside of the United States.  In addition, we often ship products to our domestic customers’ international manufacturing divisions and subcontractors.

 

Accordingly, we are subject to risks inherent in international operations, which include:

 

•                  political, social and economic instability;

 

•                  trade restrictions and tariffs;

 

•                  the imposition of governmental controls;

 

•                  exposure to different legal standards, particularly with respect to intellectual property;

 

•                  import and export license requirements;

 

•                  unexpected changes in regulatory requirements;

 

•                  difficulties in collecting receivables; and

 

•                  potentially adverse tax consequences.

 

All of our international sales to date have been denominated in U.S. dollars.  As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products less competitive in international markets.  Conversely, a decrease in the value of the U.S. dollar relative to foreign currencies would increase the cost of our overseas manufacturing, which would reduce our gross margins.

 

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Risks Related to Our Product Lines

 

Our ability to achieve revenue growth will be harmed if we are unable to persuade electronic systems manufacturers to adopt our new amplifier technology.

 

We face difficulties in persuading manufacturers to adopt our products using our new amplifier technology. Traditional amplifiers use design approaches developed in the 1930s.  These approaches are still used in most amplifiers and engineers are familiar with these design approaches.  To adopt our products, manufacturers and engineers must understand and accept our new technology.  To take advantage of our products, manufacturers must redesign their systems, particularly components such as the power supply and heat sinks.  Manufacturers must work with their suppliers to obtain modified components and they often must complete lengthy evaluation and testing.  In addition, our amplifiers are often more expensive as components than traditional amplifiers. For these reasons, prospective customers may be reluctant to adopt our technology.

 

We currently depend on consumer audio markets that are typically characterized by aggressive pricing, frequent new product introductions and intense competition.

 

A substantial portion of our current revenue is generated from sales of products that address the consumer audio markets, including home theater, computer audio and the automotive audio markets.  These markets are characterized by frequent new product introductions, declining prices and intense competition. Pricing in these markets is aggressive, and we expect pricing pressure to continue.  In the computer audio segment, our success depends on consumer awareness and acceptance of existing and new products by our customers and consumers, in particular, the elimination of externally-powered speakers.  In the automotive audio segment, we face pressure from our customers to deliver increasingly higher-powered solutions under significant engineering limitations due to the size constraints in car dashboards.  In addition, our ability to obtain prices higher than the prices of traditional amplifiers will depend on our ability to educate manufacturers and their customers about the benefits of our products.  Failure of our customers and consumers to accept our existing or new products will seriously harm our operating results.

 

If we are not successful in developing and marketing new and enhanced products for the DSL high speed communications markets that keep pace with technology and our customers’ needs, our operating results will suffer.

 

The market for our DSL products is new and emerging, and is characterized by rapid technological advances, intense competition and a relatively small number of potential customers. This will likely result in price erosion on existing products and pressure for cost-reduced future versions. We recently started to ship our TA4012 DSL line driver in volume and are in the sampling phase of our new dual channel line driver. Implementation of our products require manufacturers to accept our technology and redesign their products.  If potential customers do not accept our technology or experience problems implementing our devices in their products, our products could be rendered obsolete and our business would be harmed.  If we are unsuccessful in introducing future products with enhanced performance, our ability to achieve revenue growth will be seriously harmed.

 

We may experience difficulties in the development and introduction of a new amplifier product for use in the cellular phone market, which could result in significant expenses or delay in its launch.

 

We are currently developing an amplifier product for use in the cellular phone market.  We currently have no design wins or customers for this product. We may not introduce our amplifier product for the cellular phone market on time, and this product may never achieve market acceptance.  Furthermore, competition in this market is likely to result in price reductions, shorter product life cycles, reduced gross margins and longer sales cycles compared with what we have experienced to date with our other products.

 

Intense competition in the semiconductor industry and in the consumer audio and communications markets could prevent us from achieving or sustaining profitability.

 

The semiconductor industry and the consumer audio and communications markets are highly competitive.  We compete with a number of major domestic and international suppliers of semiconductors in the audio and communications markets.  We also may face competition from suppliers of products based on new or emerging technologies.  Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us.  As a result, such competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the promotion and sale of their products than us.  Current and potential competitors have

 

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established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties.  Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share.  In addition, existing or new competitors may in the future develop technologies that more effectively address the transmission of digital information through existing analog infrastructures at a lower cost or develop new technologies that may render our technology obsolete.  There can be no assurance that we will be able to compete successfully in the future against our existing or potential competitors, or that our business will not be harmed by increased competition.

 

Our products are complex and may have errors and defects that are detected only after deployment in customers’ products, which may harm our business.

 

Products such as those that we offer may contain errors and defects when first introduced or as new versions are released.  We have in the past experienced such errors and defects, in particular in the development stage of a new product.  Delivery of products with production defects or reliability, quality or compatibility problems could significantly delay or hinder market acceptance of such products, which could damage our reputation and seriously harm our ability to retain our existing customers and to attract new customers.  Moreover, such errors and defects could cause problems, interruptions, delays or a cessation of sales to our customers.  Alleviating such problems may require substantial redesign, manufacturing and testing which would result in significant expenditures of capital and resources.  Despite testing conducted by us, our suppliers and our customers, we cannot be sure that errors and defects will not be found in new products after commencement of commercial production.  Such errors and defects could result in additional development costs, loss of, or delays in, market acceptance, diversion of technical and other resources from our other development efforts, product repair or replacement costs, claims by our customers or others against us or the loss of credibility with our current and prospective customers.  Any such event could result in the delay or loss of market acceptance of our products and would likely harm our business.

 

Downturns in the highly cyclical semiconductor industry and rapid technological change could result in substantial period-to-period fluctuations in wafer supply, pricing and average selling prices, which make it difficult to predict our future performance.

 

We provide semiconductor devices to the audio, personal computer and communications markets.  The semiconductor industry is highly cyclical and subject to rapid technological change and has been subject to significant economic downturns at various times, characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity.  The semiconductor industry also periodically experiences increased demand and production capacity constraints.  As a result, we have experienced and may experience in the future substantial period-to-period fluctuations in our results of operations due to general semiconductor industry conditions, overall economic conditions or other factors, many of which are outside our control.  Due to these risks, you should not rely on period-to-period comparisons to predict our future performance.

 

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Risks Related to Our Intellectual Property

 

Our intellectual property and proprietary rights may be insufficient to protect our competitive position.

 

Our business depends, in part, on our ability to protect our intellectual property.  We rely primarily on patent, copyright, trademark and trade secret laws to protect our proprietary technologies.  We cannot be sure that such measures will provide meaningful protection for our proprietary technologies and processes. As of March 31, 2003, we have 22 issued United States patents, and 20 additional United States patent applications which are pending. In addition, we have 14 international patents issued and an additional 61 international patents pending. We cannot be sure that any patent will issue as a result of these applications or future applications or, if issued, that any claims allowed will be sufficient to protect our technology.  In addition, we cannot be sure that any existing or future patents will not be challenged, invalidated or circumvented, or that any right granted thereunder would provide us meaningful protection.  The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products.  In connection with our participation in the development of various industry standards, we may be required to agree to license certain of our patents to other parties, including our competitors, that develop products based upon the adopted standards.

 

We also generally enter into confidentiality agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other proprietary information.  Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, develop similar technology independently or design around our patents.  In addition, effective copyright, trademark and trade secret protection may be unavailable or limited in certain foreign countries.  Some of our customers have entered into agreements with us pursuant to which such customers have the right to use our proprietary technology in the event we default in our contractual obligations, including product supply obligations, and fail to cure the default within a specified period of time.

 

We may be subject to intellectual property rights disputes that could divert management’s attention and could be costly.

 

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights.  From time to time, we may receive in the future notices of claims of infringement, misappropriation or misuse of other parties’ proprietary rights.  We cannot be sure that we will prevail in these actions, or that other actions alleging infringement by us of third-party patents, misappropriation or misuse by us of third-party trade secrets or the invalidity of one or more patents held by us will not be asserted or prosecuted against us, or that any assertions of infringement, misappropriation or misuse or prosecutions seeking to establish the invalidity of our patents will not seriously harm our business.  For example, in a patent or trade secret action, an injunction could be issued against us requiring that we withdraw particular products from the market or necessitating that specific products offered for sale or under development be redesigned.  We have also entered into certain indemnification obligations in favor of our customers and strategic partners that could be triggered upon an allegation or finding of our infringement, misappropriation or misuse of other parties’ proprietary rights.  Irrespective of the validity or successful assertion of such claims, we would likely incur significant costs and diversion of our management and personnel resources with respect to the defense of such claims, which could also seriously harm our business.  If any claims or actions are asserted against us, we may seek to obtain a license under a third party’s intellectual property rights.  We cannot be sure that under such circumstances a license would be available on commercially reasonable terms, if at all.  Moreover, we often incorporate the intellectual property of our strategic customers into our designs, and we have certain obligations with respect to the non-use and non-disclosure of such intellectual property.

 

We cannot be sure that the steps taken by us to prevent our, or our customers’, misappropriation or infringement of intellectual property will be successful.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk of loss.  Some of the securities that we may acquire in the future may be subject to market risk for changes in interest rates.  To mitigate this risk, we plan to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, which may include commercial paper, money market funds, government and non-government debt securities. We manage the sensitivity of our results of operations to these risks by maintaining a conservative portfolio, which is comprised solely of highly-rated, short-term investments.  We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. Currently we are exposed to minimal market risks. Due to the short-term and liquid nature of our portfolio, fluctuations in interest rates within historical norms would not materially affect its value nor our financial condition.

 

Item 4. Controls and Procedures

 

(a)    Evaluation of disclosure controls and procedures.  Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on Form 10-Q, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”), are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

(b)    Changes in internal controls. On April 21, 2003, the Company revised its internal controls and procedures to include a requirement that, where a signed document must be filed with or furnished to the Commission, the Company will receive a manually signed signature page or other document authenticating, acknowledging or otherwise adopting the signature that appears in the filing.  Such document will be executed and received by the Company before or at the time the filing is made and will be retained by the Company for a period of five years after the date of filing.  Except as described above, there have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, nor were there any significant deficiencies or material weaknesses in the Company’s internal controls.  Accordingly, no additional corrective actions were required or undertaken.

 

(c)    Limitations on the effectiveness of controls. Our management, including the chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

 

Part II.          Other Information

 

Item 1.             Legal proceedings

 

None.

 

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Item 6.    Exhibits and Reports on Form 8-K

 

(a)                                  Exhibits

 

See Exhibit Index below

 

(b)                                 Reports on Form 8-K

 

None

 

Availability of this Report

 

The Company intends to make this quarterly report on Form 10-Q publicly available on its web site (www.tripath.com) without charge immediately following its filing with the Securities and Exchange Commission.  The Company assumes no obligation to update or revise any forward-looking statements in this quarterly report on Form 10-Q, whether as a result of new information, future events or otherwise, unless it is required to do so by law.

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned, thereunto duly authorized.

 

	Tripath Technology Inc.
	Date: May 16, 2003
	By:	/s/  David P. Eichler
	David P. Eichler
	Vice President Finance and
	Chief Financial Officer
	Principal Financial and Accounting Officer

 

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CERTIFICATIONS

 

I, Dr. Adya S. Tripathi, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Tripath Technology Inc.;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 16, 2003
/s/  Dr. Adya  S. Tripathi
Dr. Adya  S. Tripathi
Chief Executive Officer

 

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CERTIFICATIONS

 

I, David P. Eichler, certify that:

 

1.                                       I have reviewed this quarterly report on Form 10-Q of Tripath Technology Inc.;

 

2.                                       Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.                                       Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.                                       The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)                                      designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

b)                                     evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)                                      presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

a)                                      all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

b)                                     any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.                                       The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

Date: May 16, 2003
/s/  David P. Eichler
David P. Eichler
Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.		Description
3.1(1)		Restated Certificate of Incorporation of Tripath Technology Inc.
3.2(1)		Bylaws of Tripath Technology Inc.
99.1*		Certification by Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*                      This certification accompanies this quarterly report on Form 10-Q and shall not be deemed “filed” by Tripath Technology Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.

 

(1)               Incorporated by reference to the Registrant’s Registration Statement on Form S-1, registration number 333-35028, as amended.

 

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