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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OR THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO _________.
Commission File Number 000-26565
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TRIPATH TECHNOLOGY INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0407364
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(State or other jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
3900 Freedom Circle
Santa Clara, California 95054
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(Address of Principal Executive Office including (Zip Code)
(408) 567-3000
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(Registrant's telephone number, including area code)
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(Former name, former address and former
fiscal year if changed since last report)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
26,011,241 shares of the Registrant's common stock were outstanding as of
November 1, 2000.
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TRIPATH TECHNOLOGY INC.
FORM 10-Q
For The Quarter Ended September 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets at September 30, 2000
and December 31, 1999...................................................... 1
Condensed Statements of Operations for the Three Months
and Nine Months Ended September 30, 2000 and September 30,1999............. 2
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and September 30, 1999.................................. 3
Notes to Condensed Financial Statements.................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................ 6
Item 3. Quantitative and Qualitative Disclosure About Market Risk.................. 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................... 16
Item 2. Changes in Securities and Use of Proceeds.................................. 16
Item 3. Defaults in Securities..................................................... 17
Item 5. Other Information.......................................................... 17
Item 6. Exhibits and Reports on Form 8-K........................................... 17
Signature.......................................................................... 18
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TRIPATH TECHNOLOGY INC.
CONDENSED BALANCE SHEETS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 45,663 $ 9,568
Short-term investments........................................................ - 6,835
Restricted cash............................................................... 1,000 1,000
Accounts receivable, net...................................................... 1,390 414
Inventories................................................................... 2,152 2,301
Prepaid expenses and other current assets..................................... 1,218 248
--------- ---------
Total current assets.......................................................... 51,423 20,366
Property and equipment, net......................................................... 3,090 2,093
Other assets........................................................................ 175 175
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Total assets.................................................................. $ 54,688 $ 22,634
========= =========
LIABILITIES, CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY(DEFICIT)
Current liabilities:
Accounts payable.............................................................. $ 4,399 $ 746
Accrued expenses.............................................................. 2,615 1,592
Deferred distributor revenue.................................................. 432 947
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Total current liabilities..................................................... 7,446 3,285
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Convertible preferred stock......................................................... - 49,611
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Stockholders' equity (deficit):
Common stock.................................................................. 26 11
Additional paid-in capital.................................................... 158,143 50,854
Stockholder notes receivable.................................................. - (726)
Deferred stock-based compensation............................................. (9,688) (10,566)
Accumulated deficit........................................................... (101,239) (69,835)
--------- ---------
Total stockholders' equity (deficit)................................................ 47,242 (30,262)
--------- ---------
Total liabilities, convertible preferred stock
and stockholders' equity (deficit)............................................ $ 54,688 $ 22,634
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
1
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TRIPATH TECHNOLOGY INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Unaudited
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue...................................................... $ 2,641 $ 271 $ 5,365 $ 375
Cost of revenue.............................................. 3,351 1,159 7,364 1,422
---------- ---------- ---------- ----------
Gross loss.............................................. (710) (888) (1,999) (1,047)
---------- ---------- ---------- ----------
Operating expenses:
Research and development.................................. 5,254 3,223 12,123 8,747
Selling, general and administrative....................... 2,156 1,427 6,117 4,456
Stock-based compensation.................................. 2,496 6,646 12,115 10,611
---------- ---------- ---------- ----------
Total operating expenses................................ 9,906 11,296 30,355 23,814
---------- ---------- ---------- ----------
Loss from operations.................................... (10,616) (12,184) (32,354) (24,861)
Interest income......................................... 527 314 950 1,115
---------- ---------- ---------- ----------
Net loss................................................ $ (10,089) $ (11,870) $ (31,404) $ (23,746)
========== ========== ========== =========
Basic and diluted net loss per share......................... $ (0.47) $ (1.11) $ (2.13) $ (2.25)
========== ========== ========== ==========
Number of shares used in computing basic and diluted
net loss per share....................................... 21,383 10,738 14,767 10,539
========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
2
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TRIPATH TECHNOLOGY INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................ $ (31,404) $ (23,746)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization............................................... 740 697
Allowance for doubtful accounts ............................................ 120 -
Stock-based compensation.................................................... 12,115 10,611
Forgiveness of stockholder notes receivable................................. 738 -
Issuance of common stock warrants........................................... 58 140
Amortization of warrants.................................................... - 170
Changes in assets and liabilities:
Accounts receivable...................................................... (1,096) (388)
Inventories.............................................................. 149 (1,134)
Prepaid expenses and other assets........................................ (970) (284)
Accounts payable......................................................... 3,653 32
Accrued expenses......................................................... 1,023 701
Deferred distributor revenue............................................. (515) 646
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Net cash used in operating activities........................................... (15,389) (12,555)
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Cash flows from investing activities:
Purchase of short-term investments.............................................. - (4,011)
Sale of short-term investments.................................................. 6,835 10,159
Purchase of property and equipment.............................................. (1,737) (970)
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Net cash provided by investing activities....................................... 5,098 5,178
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Cash flows from financing activities:
Proceeds from issuance of convertible preferred stock........................... - 1,000
Proceeds from issuance of common stock.......................................... 46,386 59
---------- ----------
Net cash provided by financing activities....................................... 46,386 1,059
---------- ----------
Net increase (decrease) in cash and cash equivalents................................. 36,095 (6,318)
Cash and cash equivalents, beginning of period....................................... 9,568 21,975
---------- ----------
Cash and cash equivalents, end of period............................................. $ 45,663 $ 15,657
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
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TRIPATH TECHNOLOGY INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements included herein have been
prepared by the Company in accordance with generally accepted
accounting principles 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. Results for the
three and nine months ended September 30, 2000 are not necessarily
indicative of the results of 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.
2. 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.
A total of 7,908,000 and 4,558,000 shares of potential common stock
were not included in the diluted net loss per share calculation for the
periods ending September 30, 2000 and 1999, 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):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Numerator:
Net loss $ (10,089) $ (11,870) $ (31,404) $ (23,746)
Denominator:
Weighted average common stock 21,383 10,738 14,767 10,539
Net loss per share:
Basic and diluted $ (0.47) $ (1.11) $ (2.13) $ (2.25)
</TABLE>
3. 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 also grants 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.
4
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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):
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30 September 30
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Deferred stock-based compensation $ (396) $ 16,410 $ 11,237 $ 11,443
Amortization of deferred stock-based compensation $ 2,496 $ 6,646 $ 12,115 $ 10,611
</TABLE>
Unamortized deferred stock-based compensation at September 30, 2000 and
December 31, 1999 was $9,688,000 and $10,566,000, respectively.
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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 fair
value of these securities approximates cost, and there were no material
unrealized gains or losses as of September 30, 2000 or December 31,
1999. Short-term investments generally have maturities of less than one
year from the date of purchase.
5. INVENTORIES
Inventories are comprised of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
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<S> <C> <C>
Raw materials $ 1,610 $ 1,197
Work-in-process 122 164
Finished goods 127 20
Inventory held by distributors 293 920
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Total $ 2,152 $ 2,301
============= =============
</TABLE>
6. BORROWINGS
In August 1998, the Company entered into a line of credit agreement
with a bank, under which it may borrow up to $1,000,000. In November
1999, the line of credit was extended through October 31, 2000. The
Company has not borrowed any amounts under the line of credit through
September 30, 2000 and did not renew the line of credit prior to its
expiration on October 31, 2000.
7. INITIAL PUBLIC OFFERING
On August 1, 2000, the Company completed its initial public offering of
5 million shares of common stock at $10.00 per share. Net proceeds to
the company as a result of the initial public offering, plus the
proceeds relating to the exercise of the underwriters' overallotment
option to purchase 100,000 shares of common stock, were approximately
$45.5 million and will be used for general working capital purposes.
Upon closing, all outstanding shares of preferred stock were converted
into shares of common stock on a one-for-one basis.
5
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8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137 and 138, establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000. We believe that adoption of
SFAS No. 133 will not have a material impact on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provided
guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. We believe that complying with SAB
101 will not have a material impact on our financial position and
results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions
involving Stock Compensation" an interpretation of APB Opinion No. 25.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN 44 did not have a material effect on our financial
position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
This report contains certain 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 the
Company that are based on the beliefs of management of the Company as
well as assumptions made by and information currently available to
management of the Company. 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 the Company or the management of the Company, may identify forward
looking statements. Such statements reflect the judgment of the Company
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 risks,
including the factors set forth below and in "Factors Potentially
Affecting Future Results," which may have a significant impact on the
Company's business, operating results or financial condition. Such
risks and uncertainties include risks and uncertainties regarding
silicon wafer pricing and the availability of foundry and assembly
capacity and raw materials; the availability and pricing of competing
products and technologies and the resulting effects on sales and
pricing of our products; fluctuations in the manufacturing yields of
our third party semiconductor foundries and other problems or delays in
the fabrication, assembly, testing or delivery of our products; our
ability to specify, develop or acquire, complete, introduce, market and
transition to volume production new products and technologies in a
timely manner; the volume of product sales and pricing concessions on
certain product sales; and, the timing requirements of our customers
with respect to new product introductions. 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. The Company undertakes no obligation to
update forward looking statements.
The following discussion and analysis should be read in connection with
the condensed financial statements and the notes thereto included in
Item 1 in this Quarterly Report and our Registration Statement on Form
S-1 declared effective by the Securities and Exchange Commission on
July 31, 2000 (File No. 333-35028).
OVERVIEW
We design and sell amplifiers based on our proprietary Digital Power
Processing technology. We are supplying amplifiers for audio
electronics applications, and we have begun offering amplifiers for DSL
applications. We were incorporated in July 1995, and we began shipping
products in the first quarter of 1998. Accordingly, we have limited
historical financial information and operating history upon which you
may evaluate us and our prospects. We incurred net losses of
approximately $31.4 million in the nine months ended September 30,
2000, $31.7 million in 1999 and $33.7 million in 1998. We expect to
continue to incur net losses and these losses may be significant.
6
<PAGE>
We sell our products to original equipment manufacturers and
distributors. We recognize revenue from product sales upon shipment to
original equipment manufacturers and end users, net of sales returns
and allowances. Our sales to distributors are made under arrangements
allowing for returns or credits under certain circumstances and we
defer recognition on sales to distributors until products are resold by
the distributor to the end user. All of our sales are made in U.S.
dollars.
We currently use independent suppliers to manufacture, test and
assemble all of our products. Cost of revenue includes third party
manufacturing, test and assembly costs as well as salaries and overhead
costs associated with employees engaged in activities related to
manufacturing. Research and development expense consists primarily of
salaries and related overhead costs associated with employees engaged
in research, design and development activities as well as the cost of
wafers, and other materials and related services used in the
development process. Selling, general and administrative expense
consists primarily of employee compensation and related overhead
expenses and advertising and marketing expenses.
Stock-based compensation expense relates both to stock-based employee
and consultant compensation arrangements. Employee-related stock-based
compensation expense is based on the difference between the estimated
fair value of our common stock on the date of grant and the exercise
price of options to purchase that stock and is being recognized on an
accelerated basis over the vesting periods of the related options,
usually four years, or in the case of fully vested options, in the
period of grant. In January 1997 and March 1998, our President
exercised fully-vested stock options and made payment in the form of
non-recourse notes totaling $636,000. Due to certain terms contained in
these non-recourse notes, the options were being accounted for on a
variable basis, and accordingly, the compensation costs associated with
shares purchased with non-recourse notes have been remeasured at each
period end, and to the extent the estimated fair market value of our
stock has increased during the period, we have recorded additional
compensation expense. Total compensation expense recognized up to
September 30, 2000 for these shares is $14.2 million. The notes are no
longer outstanding. Consultant stock-based compensation expense is
based on the Black-Scholes option pricing model. Future compensation
charges will be reduced if any employee or consultant terminates
employment or consultation prior to the expiration of the option
vesting period. The amortization of stock-based compensation is
classified as a separate component of operating expenses in our
statement of operations.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue for the three months ended September 30, 2000 was $2.6
million, an increase of 859.4% from revenues of $271,000 for the third
quarter of fiscal 1999. The increase in revenue resulted primarily from
an increase in unit sales of our TA2020 and TA1101 digital audio
amplifiers.
Sales to Komatsu Semiconductor Corporation, the majority of which
relate to Sony Corporation, and sales to NatSteel Electronics Ltd., the
majority of which relate to Apple Computer, accounted for approximately
55.1% and 35.8%, respectively, of revenue in the three months ended
September 30, 2000 and 52.1% and 0.0%, respectively, in the
corresponding prior year quarter. Sales to our five largest customers
represented approximately 97.3% of revenue in the three months ended
September 30, 2000 and 86.6% of revenue in the three months ended
September 30, 1999.
GROSS LOSS. Gross loss for the three months ended September 30, 2000
was $710,000, a decrease of $178,000 from gross loss of $888,000 for
the three months ended September 30, 1999. The decrease in the gross
loss was primarily due to a change in product mix and the continued
impact of price concessions made to Komatsu (for sales to Sony
Corporation) in order to accelerate the acceptance and introduction of
a product in a new market segment. The price concession relates to one
of the customer's products and is expected to continue through 2001. As
a result of this price concession, we expect to incur gross losses on
sales of this particular product to this customer throughout 2000 and
2001.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
three months ended September 30, 2000 was $5.3 million, an increase of
$2.1 million from $3.2 million for the three months ended September 30,
1999. The increase in expenses resulted primarily from an increase in
related headcount and salaries.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the three months ended September 30, 2000
were $2.2 million, an increase of $0.8 million from $1.4 million for the
three months ended September 30, 1999. This increase was primarily a
result of an increase in related headcount and salaries and an increase
in professional services expenses.
7
<PAGE>
STOCK-BASED COMPENSATION. We recorded total stock-based compensation
expense of $2.5 million in the three month period ended September 30,
2000. The expense for the three months represented a decrease of $4.1
million from stock-based compensation expense of $6.6 million for the
three months ended September 30, 1999.
INTEREST INCOME. Interest income for the three months ended September
30, 2000 was $527,000, an increase of $213,000 from interest income of
$314,000 in the three months ended September 30, 1999. The increase in
interest income reflected an increase in our cash equivalents and
short-term investments, mainly due to our IPO in August, 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUE. Revenue for the nine months ended September 30, 2000 was $5.4
million, an increase of 1,340% from revenues of $375,000 for the first
nine months of fiscal 1999. The increase in revenue resulted primarily
from an increase in unit sales of our TA2020 and TA1101 digital audio
amplifiers. Both of these products were introduced in the latter half
of 1999 and began shipping in volume in the first quarter of 2000.
Sales to Komatsu Semiconductor Corporation, the majority of which
relate to Sony Corporation, and sales to Natsteel Electronics Ltd., the
majority of which relate to Apple Computer, accounted for approximately
56.2% and 17.5%, respectively, of revenue in the nine months ended
September 30, 2000 and 44.3% and 0.0%, respectively, in the
corresponding prior year period. For the nine months of 2000, sales to
our five largest customers represented approximately 89.3% compared
with 81.2% for the corresponding prior year period.
GROSS LOSS. Gross loss for the nine months ended September 30, 2000 was
$2.0 million, an increase of $1 million from gross loss of $1.0 million
for the nine months ended September 30, 1999. The increase in the gross
loss was primarily due to a change in product mix and the continued
impact of price concessions made to Komatsu (for sales to Sony
Corporation) in order to accelerate the acceptance and introduction of
a product in a new market segment. The price concession relates to one
of the customer's products and is expected to continue through 2001. As
a result of this price concession, we expect to incur gross losses on
sales of this particular product to this customer throughout 2000 and
2001.
RESEARCH AND DEVELOPMENT. Research and development expenses for the
nine months ended September 30, 2000 was $12.1 million, an increase of
$3.4 million from $8.7 million for the nine months ended September 30,
1999. The increase resulted primarily from an increase in related
headcount and salaries and an increase in product development expenses
related to the development of our future audio, DSL and wireless products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the nine months ended September 30, 2000
was $6.1 million, an increase of $1.6 million from $4.5 million for the
nine months ended September 30, 1999. This increase was primarily due
to the forgiveness of stockholder notes receivable of approximately $1
million and an increase in related headcount and salaries.
STOCK-BASED COMPENSATION. We recorded total stock-based compensation
expense of $12.1 million in the nine month period ended September 30,
2000, an increase of $1.5 million from stock-based compensation expense
of $10.6 million for the nine month period of 1999. Included in the
charge for the nine months of 2000 is $800,000 resulting from the
increase in the estimated fair value of our stock relating to the stock
purchased by our President in 1997 and 1998 with non-recourse notes as
we were accounting for the options on a variable basis.
INTEREST INCOME. Interest income for the nine months ended September
30, 2000 was $950,000, a decrease of $150,000 from interest income of
$1.1 million in the nine months ended September 30, 1999. The decrease
in interest income reflected a decrease in our cash equivalents and
short-term investments, as we were using our cash and short-term
investments over much of the nine month period leading up to the IPO in
August for working capital purposes.
8
<PAGE>
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 and through our initial public offering on August 1, 2000. Net
proceeds to the company as a result of our initial public offering were
approximately $45.5 million.
Net cash used by operating activities increased from $12.6 million for
the nine months ended September 30, 1999 to $15.4 million for the nine
months ended September 30, 2000. The increase was primarily due to an
increase in our net loss from $23.7 million to $31.4 million in the
corresponding periods ended September 30, 1999 and 2000, respectively.
Cash provided by investing activities decreased from $5.2 million for
the nine months ended September 30, 1999 to $5.1 million for the nine
months ended September 30, 2000. The decrease was primarily due to
increased purchases of property and equipment.
Cash provided by financing activities increased from $1.1 million for
the nine months ended September 30, 1999 to $46.4 million for the nine
months ended September 30, 2000. The increase was primarily due to the
net proceeds of $45.5 million from our initial public offering in August
2000.
We expect our future liquidity and capital requirements will fluctuate
depending on numerous factors, including the cost and timing of future
product development efforts, the timing of introductions of new
products and enhancements to existing products, market acceptance of
our existing and new products and the cost and timing of sales and
marketing activities. We believe that the net proceeds from our
initial public offering, together with cash generated by our
operations, if any, will be sufficient to meet our operating and
capital requirements for at least the next twelve months. However, we
may need to raise additional capital in future periods through public
or private financings, strategic relationships or other arrangements
in order to fund our operations and potential acquisitions, if any,
until we achieve profitability, if ever. Additional equity financing
may be dilutive to the holders of our common stock, and debt
financing, if available, may involve restrictive covenants. However,
we cannot be certain that any such financing will be available on
acceptable terms, or at all. If we cannot raise additional capital
when needed and on acceptable terms, we may not be able to pursue our
growth strategy.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133, as amended by SFAS
No. 137 and 138, establishes methods of accounting for derivative
financial instruments and hedging activities related to those
instruments as well as other hedging activities, and is effective for
fiscal years beginning after June 15, 2000. We believe that adoption of
SFAS No. 133 will not have a material impact on our financial position
or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition," which outlines the
basic criteria that must be met to recognize revenue and provided
guidance for presentation of revenue and for disclosure related to
revenue recognition policies in financial statements filed with the
Securities and Exchange Commission. We believe that complying with SAB
101 will not have a material impact on our financial position and
results of operations.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions
involving Stock Compensation" an interpretation of APB Opinion No. 25.
FIN 44 is effective July 1, 2000, but certain conclusions cover specific
events that occur after either December 15, 1998, or January 12, 2000.
The adoption of FIN 44 did not have a material effect on our financial
position or results of operations.
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FACTORS POTENTIALLY AFFECTING FUTURE RESULTS
RISKS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE
OR SUSTAIN PROFITABILITY.
As of September 30, 2000, we had an accumulated deficit of $101.2
million. We incurred net losses of approximately $31.4 million in the
nine months ended September 30, 2000, $31.7 million in 1999 and $33.7
million in 1998. We expect to continue to incur net losses and these
losses may be substantial. Furthermore, we expect 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 recent revenue growth may not be sustainable
and should not be considered indicative of future revenue growth. 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.
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:
- 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; or 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 achieve quarterly operating results that
meet the expectations of securities analysts and investors. In
addition, we intend to increase our operating expenses in 2000 and
2001. We do not know whether our business will grow rapidly enough to
absorb these costs. As a result, our operating results could fluctuate,
and such fluctuations could cause the market price of our common stock
to decline. 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.
WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR A SIGNIFICANT PORTION 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 a significant
portion 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. In particular, sales to Komatsu
Semiconductor Corporation, the purchasing agent for Sony Corporation,
accounted for 78.0% of total revenue in 1999, and sales to Komatsu and
to NatSteel Electronics accounted for 56.2% and 17.5% of total revenue
in the nine months ended September 30, 2000. Moreover, sales to our
five largest customers represented approximately 89.3% of our total
revenue in the nine months ended September 30, 2000 and 80.8% of our
total revenue in 1999. 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. We cannot be sure that we will retain our largest customers
or that we will be able to obtain additional key customers.
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WE CURRENTLY RELY ON SALES OF TWO 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 TA2020 and TA1101 digital audio
amplifiers to generate a significant portion of our revenue. Sales of
these products amounted to 33.2% and 19.4%, respectively, of our revenue
in 1999 and 54.8% and 37.5%, respectively, of our revenue in the nine
months ended September 30, 2000. 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 AND TO FORECAST OUR REVENUE AND BUDGET EXPENSES,
WHICH MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY RESULTS.
Because of our lengthy sales cycles, we may experience a delay between
increasing expenses for research and development, sales and marketing,
and general and administrative efforts, as well as increasing
investments in inventory, and the generation of revenue, if any, from
such expenditures. In addition, the delays inherent in such lengthy
sales cycle raise additional risks of customer decisions to cancel or
change product plans, which could result in the loss of anticipated
sales by us. Our new products are generally incorporated into our
customers' products or systems at the design stage. To 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 in order to incorporate
successfully our devices 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.
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. To date we have not had any cancellations or
deferrals by customers, however, 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. We recognize revenue upon shipment of products to the end
customer. Although we have not experienced customer refusals to accept
shipped products or difficulties in collecting accounts receivable,
such refusals or collection difficulties could result in significant
charges against income, which could seriously harm our revenues and our
cash flow.
WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF NEW OR ENHANCED
PRODUCTS THAT COULD RESULT IN SIGNIFICANT, UNEXPECTED EXPENSES OR DELAY
THEIR LAUNCH, WHICH WOULD HARM OUR BUSINESS.
Our failure or our customers' failure to develop and introduce new
products successfully and in a timely manner would seriously harm our
ability to generate revenues. Consequently, our success depends on our
ability to develop new products for existing and new markets, introduce
such products in a timely and cost-effective manner and to achieve
design wins. The development of these new devices is highly complex,
and from time to time we have experienced delays in completing the
development and introduction of new products. The successful
introduction of a new product may currently take up to 18 months.
Successful product development and introduction depends on a number of
factors, including:accurate prediction of market requirements and
evolving standards;
- accurate new product definition;
- timely completion and introduction of new product designs;
- availability of foundry capacity;
- achieving acceptable manufacturing yields; and
- market acceptance of our products and our customers' products.
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IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MIGHT NOT BE ABLE
TO OPERATE OUR BUSINESS SUCCESSFULLY.
We may not be successful in recruiting and retaining executive officers
and other key management and technical personnel. The competition for
such employees is intense, particularly in Silicon Valley and
particularly for experienced mixed-signal circuit designers, systems
applications engineers and experienced executive personnel. A high
level of technical expertise is required to support the implementation
of our technology in our existing and new customers' products. We will
need to hire a number of additional technical personnel if we are to
increase the rate at which we develop new products and if we are to
provide adequate technical support to a larger number of customers. 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.
IF WE FAIL TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH, OUR BUSINESS COULD BE SERIOUSLY HARMED.
We have experienced a period of rapid growth, expanding from 22
employees in December 1997 to 135 employees in September 2000. This
expansion has placed, and continues to place, significant demands on
our resources. We must continue to improve our operational, financial
and management information systems to keep pace with the growth of our
business. In particular, our recent implementation of a new management
information system, may cause problems and result in disruption of our
operations. We cannot be sure that our efforts to improve our systems
can be accomplished successfully.
RISKS RELATED TO MANUFACTURING
WE DEPEND ON TWO 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 two
outside foundries, United Microelectronics Corporation, or UMC, in
Taiwan and STMicroelectronics Group in Europe. Although we primarily
utilize these two outside foundries, most of our components are not
manufactured at both foundries at any given 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. Due to supply shortages in the wafer market, our
wafer supply costs have increased significantly from the first quarter
to the third quarter of 2000.
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. In
addition, if we choose to use a new foundry, several months are
typically required to complete the qualification process before we can
begin shipping products from the new foundry. 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.
In the event either foundry 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.
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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, ST Assembly Test Services
Ltd. in Singapore, Amkor Technology, Inc. in the Philippines, ASE in Korea
and ISE Labs Assembly in the United States. We do not have long-term
agreements with any of these suppliers and retain their services on a per
order basis. The availability of assembly and testing services from these
subcontractors could be adversely affected in the event a subcontractor
suffers any damage or destruction to their respective facilities, or in
the event of any other disruption of assembly and testing capacity. Due
to the amount of time normally required to qualify assemblers and
testers, if we are required to find alternative manufacturing
assemblers or testers of our components, shipments could be delayed.
Any problems associated with the delivery, quality or cost of our
products could seriously harm our business.
FAILURE TO TRANSITION OUR PRODUCTS TO 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 98.0% of our
total revenue in the nine months ended September 30, 2000 was derived
from sales to independent customers based outside the United States. In
1999, approximately 94.6% of our total revenue was derived from sales
to independent 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. In order to adopt our products, manufacturers and engineers
must understand and accept our new technology. To take advantage of our
products, manufactures 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 HIGH-END 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 high-end 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 are currently sampling and field
testing our first product for the DSL market and we have not received
any large volume orders. 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 INTRODUCTION OF AMPLIFIER
PRODUCTS FOR USE IN THE CELLULAR PHONE MARKET THAT COULD RESULT IN
SIGNIFICANT EXPENSES OR DELAY IN THEIR LAUNCH.
We are currently developing a line of amplifier products for use in the
cellular phone market. The first in this family of products is being
designed for use in particular types of cellular phones which use a
digital wireless transmission method known as Code Division Multiple
Access, or CDMA. We currently have no design wins or customers for
these products under development. We may not introduce our amplifier
products for the cellular phone market on time, and such products may
never achieve market acceptance. Furthermore, competition in the
cellular phone market is likely to result in price reductions, shorter
product life cycles, reduced gross margins and longer sales cycles.
INTENSE COMPETITION IN THE SEMICONDUCTOR INDUSTRY AND IN THE CONSUMER
AUDIO AND COMMUNICATIONS MARKETS COULD PREVENT US FROM ACHIEVING OR
SUSTAINING PROFITABILITY.
The consumer audio, personal computer, communications and semiconductor
industries 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
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requirements or devote greater resources to the promotion and sale of
their products than us. Current and potential competitors have
established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other
third parties. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire
significant market share. In addition, existing or new competitors may
in the future develop technologies that more effectively address the
transmission of digital information through existing analog
infrastructures at a lower cost or develop new technologies that may
render our technology obsolete. We cannot assure you 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 may experience substantial
period-to-period fluctuations in future results of operations due to
general semiconductor industry conditions, overall economic conditions
or other factors, many of which are outside our control. Due to these
risks, you should not rely on period-to-period comparisons to predict
our future performance.
RISKS RELATED TO OUR INTELLECTUAL PROPERTY
OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO
PROTECT OUR COMPETITIVE POSITION.
Our business depends, in part, on our ability to protect our
intellectual property. We rely primarily on patent, copyright,
trademark and trade secret laws to protect our proprietary
technologies. We cannot be sure that such measures will provide
meaningful protection for our proprietary technologies and processes.
We have five issued United States patents, two allowed United States
patent applications and 20 additional United States patent applications
which are 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.
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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 the
intellectual property will be successful.
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 invest 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. Currently, we are exposed to minimal market
risks. 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, 2000 we completed an initial public offering of shares of our
common stock. The managing underwriters in the offering were Salomon Smith
Barney, Deutsche Banc Alex. Brown, U. S. Bancorp Piper Jaffray and Dain
Rauscher Wessels. The shares of common stock sold in the offering were
registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-35028). The Securities and Exchange Commission
declared the Registration Statement effective July 31, 2000.
In our initial public offering we sold 5,000,000 shares of common stock
registered under the Registration Statement and an additional 100,000 shares
were sold pursuant to the exercise of the underwriters' over-allotment
option. The securities were sold at $10.00 per share resulting in net
proceeds to the company of $45.5 million, after deducting underwriting fees,
commissions and other offering expenses. Upon closing, all outstanding shares
of preferred stock were converted into shares of common stock on a
one-for-one basis.
We expect to use the net proceeds from the sale of the common stock for
general corporate purposes, including working capital and capital
expenditures. The amounts actually expended for such purposes may vary
significantly and will depend on a number of factors, including the Company's
future revenues and cash generated by operations and other factors described
under "Factors Potentially Affecting Future Results." Accordingly, the
Company retains broad discretion in the allocation of the net proceeds of the
offering. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies or product offerings, however,
there are no current material agreements or commitments with respect to such
activities.
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ITEM 3. DEFAULTS IN SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3-1 Amended and Restated Certifcate of Incorporation
27-1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by
undersigned, thereunto duly authorized.
Tripath Technology Inc
Date: November 8, 2000 by: /s/ John J. DiPietro
-----------------------------
John J. DiPietro,
Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
18
