As filed with the Securities and Exchange Commission on July 29, 2010.

Registration No. 333-      

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

SIGE SEMICONDUCTOR, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

200 Brickstone Square

Suite 203

Andover, MA 01810

(978) 327-6850

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive offices)

 

 

Sohail A. Khan

President and Chief Executive Officer

SiGe Semiconductor, Inc.

200 Brickstone Square

Suite 203

Andover, MA 01810

(978) 327-6850

 

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o           

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o           

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o           

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.

 

 

Subject to Completion, dated July 29, 2010

PROSPECTUS

 

           Shares

 

 

Common Stock

 

This is an initial public offering of shares of common stock of SiGe Semiconductor, Inc. We are offering           shares of our common stock and the selling stockholders identified in this prospectus are offering an additional           shares of our common stock. We will not receive any of the proceeds from the sale of the shares of our common stock offered by the selling stockholders. Prior to this offering, there has been no public market for our common stock.

 

We have applied to have our common stock listed on the NASDAQ Global Market under the symbol “SIGE.”

 

It is currently estimated that the initial public offering price per share will be between $      and $     .

 

See “Risk Factors” beginning on page 9 to read about factors you should consider before buying shares of our common stock.

 

 

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

 

 

To the extent that the underwriters sell more than           shares of common stock, the underwriters have a 30-day option to purchase up to an additional     shares from the selling stockholders at the initial public offering price, less the underwriting discount.

 

The underwriters expect to deliver the shares against payment on or about          , 2010

 

 

 

 

 

 

 

 

 

The date of this prospectus is          , 2010.

 

TABLE OF CONTENTS

 

 

 

You should rely only on the information contained in this prospectus, any free writing prospectus prepared by or on behalf of us or any information to which we have referred you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our shares of common stock.

 

Until          , 2010 (25 days after commencement of this offering), all dealers that buy, sell, or trade our shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

 

For investors outside the United States:  Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

PROSPECTUS SUMMARY

	•	Ability to Deliver High Performance RF Front End Solutions.  Our product development expertise is based on deep RF design capabilities and understanding of the manufacturing process technologies required to produce high-performance RF front end semiconductors. We believe our ability to incorporate multiple communications channels and protocols into a single semiconductor device enables us to deliver plug-and-play solutions that increase overall system performance.
	•	Highly Integrated, Silicon Based RF Front End Solutions.  Our use of silicon based materials has enabled us to develop single device, integrated RF front end solutions that include power amplifiers, RF switches, low noise amplifiers, filters, diplexers, control interfaces, power regulators and related passive circuitry. Increased functional integration reduces the physical footprint, power consumption and cost of our RF front end solutions.
	•	Improved Ease-of-Use and Support for our Customers.  We believe our ability to integrate various RF front end functions into a single semiconductor device enables us to provide plug-and-play solutions that are easier for our customers to integrate into their end products, reducing time-to-market. We work with many leading wireless reference design partners,

		OEMs and ODMs to develop RF solutions that further simplify the adoption of our products by end customers and provide local application technical support to ensure our RF front end solutions meet the specifications of our end customers.

	•	Advanced RF Engineering Capabilities Utilizing Silicon Based Processes.  Our 14 year operating history has provided us with expertise in a range of silicon and non-silicon semiconductor materials and processes. We believe our predominant use of silicon technologies, which have more mature design and simulation tools, enables us to better test our designs prior to fabrication, shorten the time from development to production, and improve production yields.
	•	Market Leadership in High Volume Markets.  We have shipped over 500 million units since our inception and have been recognized as the global market leader in Wi-Fi front end modules and power amplifiers. In addition, we believe we hold significant market share in high volume markets such as desktop and laptop computers, consumer and enterprise networking equipment, home entertainment devices and printers.
	•	Highly Efficient and Scalable Fabless Business Model.  We benefit from a fully outsourced manufacturing model using third party semiconductor foundries and assembly and test contractors. By using this model, we incur lower capital expenditures, require fewer personnel and avoid operating costs stemming from idle capacity while maintaining greater flexibility to obtain additional production capacity during periods of increased demand.
	•	Established Base of Leading OEM and ODM Customers and Reference Design Partners.  We have established strong relationships with multiple leading global reference design partners, OEMs and ODMs that integrate our RF front end solutions into their products. These close relationships have enabled us to obtain visibility into our customers’ future needs and develop substantial system-level knowledge to optimize our products and accelerate our time-to-market.

	•	Pursue Opportunities in Rapidly-Growing, High Volume Markets.  We intend to maintain our leadership in existing markets while also pursuing opportunities in new rapidly-growing, high volume markets. Our strategy to continue this expansion includes targeting markets that require large manufacturing volumes, high performance and quality specifications, and functional integration for wireless connectivity.
	•	Expand Product Portfolio to Capture Additional RF Semiconductor Content.  We plan to expand our range of silicon based RF front end solutions through continued integration of RF functionality to capture additional RF semiconductor content in wirelessly connected devices.
	•	Leverage Our Silicon Design Expertise in RF Semiconductors.  We intend to continue optimizing our existing designs to provide enhanced functionality for RF applications. Utilizing silicon based technologies, we plan to continue to meet customers’ increasing demand for wireless RF solutions that support multiple communications protocols with faster transmission speeds, greater numbers of simultaneous connections, better signal integrity and performance characteristics, smaller size, and lower cost.
	•	Increase Breadth and Depth of our Customer and Partner Relationships Through Collaboration.  We intend to continue expanding our end customer and reference design partner relationships through collaboration on critical design and product development activities to enable the optimization of their products for performance, yield, cost and time-to-market. In addition, we have

		invested capital to significantly expand our reference design activities with new design partners to pursue opportunities in existing and new markets.

Common stock offered by us		shares
Common stock offered by selling stockholders		shares
Common stock to be outstanding immediately after this offering		shares
Underwriters’ option to purchase additional shares		The underwriters have an option to purchase a maximum of          additional shares of common stock from the selling stockholders. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.
Use of Proceeds		We estimate that we will receive net proceeds from the sale of shares of our common stock in this offering of approximately $      , after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use our net proceeds from this offering for working capital and other general corporate purposes. We will not receive any proceeds from the common stock sold by the selling stockholders in this offering. See “Use of Proceeds” in this prospectus.
Proposed NASDAQ Global Market symbol		SIGE

	•	18,625,366 shares of common stock issuable upon exercise of outstanding options as of April 2, 2010 at a weighted average exercise price of $0.21 per share (of which, options to acquire 12,345,695 shares of common stock are vested as of April 2, 2010);
	•	shares of common stock reserved for future issuance under our 2010 Stock Option and Incentive Plan, or 2010 Incentive Plan, which will become effective in connection with this offering (which includes 1,837,608 shares reserved for future grant or issuance under our 2002 Stock Plan, as amended, or 2002 Stock Plan, which will be added to the shares to be reserved under our 2010 Incentive Plan upon the effectiveness of the 2010 Incentive Plan); and
	•	shares of our common stock reserved for future issuance under our 2010 Employee Stock Purchase Plan, which will become effective in connection with this offering.

	•	gives effect to the issuance of an aggregate of 15,945,046 shares of our common stock issuable upon the automatic exchange of all of the outstanding common exchangeable shares of our subsidiary SiGe Semiconductor Inc., a company organized under the laws of Canada, or SiGe Canada, in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus;

	•	gives effect to the automatic conversion of all outstanding shares of our preferred stock, including all shares of our preferred stock issued in exchange for all of the outstanding Class A-1 Exchangeable Shares, or preferred exchangeable shares, of SiGe Canada, into an aggregate of 19,353,591 shares of our common stock in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus;
	•	gives effect to the filing of our amended and restated certificate of incorporation and the adoption of our amended and restated by-laws immediately upon the completion of this offering;
	•	assumes no exercise by the underwriters of their option to purchase up to an additional           shares of common stock from the selling stockholders; and
	•	does not reflect our purchase of 600,000 shares of common stock in July 2010 from one of our existing stockholders.

		Fiscal												First Quarter of Fiscal
		2007				2008				2009				2009				2010
		(in thousands, except per share amounts)
														(unaudited)
Statement of Operations Data:
Revenue		$	68,798			$	96,921			$	82,602			$	16,437			$	20,690
Cost of revenue			43,241				63,233				53,584				10,834				13,046
Gross profit			25,557				33,688				29,018				5,603				7,644
Operating expenses:
Research and development			17,407				16,402				15,052				3,876				3,210
Selling, general and administrative			14,570				21,569				18,489				4,418				4,283
Restructuring			—				(120	)			—				—				—
			31,977				37,851				33,541				8,294				7,493
(Loss) income from operations			(6,420	)			(4,163	)			(4,523	)			(2,691	)			151
Interest income, net			628				380				167				52				9
(Loss) income before income taxes			(5,792	)			(3,783	)			(4,356	)			(2,639	)			160
Income taxes			14				17				21				5				6
Net (loss) income and comprehensive (loss) income			(5,806	)			(3,800	)			(4,377	)			(2,644	)			154
Accretion to redemption value of preferred stock			(25	)			(39	)			(39	)			(10	)			(10	)
Net income allocated to redeemable convertible preferred stockholders			—				—				—				—				(144	)
Net (loss) income attributable to common stockholders		$	(5,831	)		$	(3,839	)		$	(4,416	)		$	(2,654	)		$	—

		Fiscal												First Quarter of Fiscal
		2007				2008				2009				2009				2010
		(in thousands, except per share amounts)
														(unaudited)
Net (loss) income per share:(1)
Net (loss) income per share attributable to common stockholders
Basic and diluted		$	(0.15	)		$	(0.06	)		$	(0.07	)		$	(0.04	)		$	0.00
Shares used to compute basic and diluted net (loss) income per share attributable to common stockholders			39,506				59,763				60,100				59,983				60,183
Pro forma net (loss) income per share attributable to common stockholders (unaudited)(2)
Basic and diluted										$	(0.06	)						$	0.00
Shares used to compute pro forma net (loss) income per share attributable to common stockholders (unaudited)(2)
Basic											79,454								79,537
Diluted											79,454								90,363

		As of April 2, 2010
										Pro Forma
		Actual				Pro Forma(2)				As Adjusted(3)
		(in thousands)
		(unaudited)
Balance Sheet Data:
Cash and cash equivalents		$	10,003			$	10,003
Working capital(4)			18,674				18,674
Total assets			36,290				36,290
Redeemable convertible preferred stock			19,917				—
Total stockholders’ equity			1,722				21,639

(1)		See note 1(r) to our consolidated financial statements included elsewhere in this prospectus for an explanation of the method used to calculate net (loss) income per share attributable to common stockholders, including the method used to calculate the number of shares used in the computation of the per share amounts.
(2)		The pro forma data in the tables above reflects (i) the issuance of an aggregate of 15,945,046 shares of our common stock issuable upon the automatic exchange of all of the outstanding common exchangeable shares of SiGe Canada in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus; and (ii) the automatic conversion of all outstanding shares of our preferred stock, including all shares of our preferred stock issued in exchange for all of the outstanding preferred exchangeable shares of SiGe Canada, into an aggregate of 19,353,591 shares of our common stock in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus.
(3)		The pro forma as adjusted balance sheet data in the table above reflects our receipt of the estimated net proceeds from our sale of shares of common stock in this offering at an assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
(4)		Working capital is equal to current assets less current liabilities.

 

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in shares of our common stock. The occurrence of any of the following risks, or other risks that are currently unknown or unforeseen by us, could harm our business, financial condition, results of operations or growth prospects. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment.

 

Risks Related to Our Business

 

We depend on a small number of customers for a substantial portion of our revenue, and the loss of, or a significant reduction in orders from, one or more of our major customers could have a material adverse effect on our revenue and operating results.

 

In fiscal 2009, Hon Hai, Promaster, USI, Nintendo and RichPower accounted for 27%, 18%, 15%, 15% and 14% of our revenue, respectively, and collectively accounted for 89% of our revenue for this period. Our operating results for the foreseeable future will continue to depend on sales to a relatively small number of customers and on the ability of these customers to sell products that incorporate our RF front end solutions. Substantially all of our sales to date have been made on a purchase order basis, which permits our customers to cancel, change or delay product purchase commitments with little or no notice to us. In the future, these customers may decide not to purchase our solutions at all, may purchase fewer solutions than they did in the past, or may otherwise alter their purchasing patterns. To attract new customers or retain existing customers, we may offer favorable prices on our solutions, which could adversely affect our average selling prices and gross margins.

 

We depend on a small number of reference design partners, and changes in, or termination of, our relationship with a reference design partner could have a material adverse effect on our operating results. In addition, winning business is subject to competitive selection processes that require us to incur significant expenditures without any assurance of corresponding revenue and, even if we win business, if the product offerings of our reference design partners, OEMs and ODMs are not commercially successful, our revenue and business could suffer.

 

We work closely with our reference design partners on the development of reference designs that incorporate our RF front end solutions and the qualification of these designs at OEMs and ODMs. We collaborate with a small number of reference design partners to market and sell our solutions to OEMs and ODMs. Adverse changes in, or termination of, our relationship with any reference design partner could result in a reduction in our sales to key customers or an inability to attract new customers and could materially and adversely affect our revenue and results of operations. A reference design typically consists of a fully functional and fully tested wireless chipset solution consisting of a front end solution, a transceiver and a baseband processor, which is evaluated as a whole by OEMs and ODMs through a rigorous design selection process. These selection processes are typically lengthy and can require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of a single customer opportunity. Our reference design partners may not win the competitive selection process, and we may never generate any revenue despite incurring significant design and development expenditures. These risks are exacerbated by the fact that some of our customers’ products have short life cycles. Failure to obtain a design win could prevent us from earning any revenue from an entire generation of an end customer’s product. This could cause us to lose revenue, require us to write off obsolete inventory and weaken our position in future competitive selection processes.

 

Our OEM and ODM customers generally take a considerable amount of time to evaluate a reference design. The period from early engagement to high volume production typically takes six to 12 months for existing customers and 12 to 18 months for new customers. The delays inherent in

these lengthy sales cycles increase the risk that a customer will decide to cancel, curtail, reduce or delay its product plans, causing us to lose anticipated sales, which could materially and adversely affect our business, financial condition and results of operations.

 

If our reference design partners fail to obtain design wins that include our solutions, our business could be materially and adversely affected. Furthermore, even if our solutions are incorporated into a reference design and an OEM’s end product, we cannot be assured that the product offering will be commercially successful or that we will receive any revenue. If the products incorporating our solutions fail to meet customer demands or otherwise fail to achieve market acceptance, our revenue and business will suffer.

 

If our reference design partners successfully integrate RF front end capability into other semiconductors in a cost effective manner and they prefer these semiconductors over our solutions, we may not be able to compete effectively, our revenue will decline and our business will be harmed.

 

Our solutions provide RF signal amplification, switching and filtering as part of a multi-chip or multi-component wireless chipset solution. Certain of our reference design partners integrate some of the RF front end capabilities that our solutions provide into other semiconductors. If they are able to produce these integrated solutions in a cost-effective manner and if some or all of the wireless functionality that our solutions provide becomes commonly integrated with other functionality that we are unable to provide, the demand for our solutions may decline, our revenue may decline and our business may be harmed.

 

We have a history of net losses, and we may not achieve or sustain profitability in the future.

 

We have incurred net losses since inception. We experienced net losses of $5.8 million, $3.8 million and $4.4 million in fiscal 2007, 2008 and 2009, respectively. As of January 1, 2010, our accumulated deficit was $114.9 million. We expect to incur significant expense related to the development of our solutions and expansion of our business, including research and development and sales and administrative expenses. As a public company, we will also incur significant legal, accounting and other expenses that we did not incur as a private company. Additionally, we may encounter unforeseen difficulties, complications, solution delays and other unknown factors that require additional expense. As a result of these increased expenditures, we will have to generate and sustain substantially increased revenue to achieve future profitability.

 

We may not sustain our growth rate, and we may not be able to manage any future growth effectively.

 

We have experienced significant growth in a short period of time. Our revenue increased from $31.3 million in fiscal 2005 to $96.9 million in fiscal 2008, before declining to $82.6 million in fiscal 2009. We may not achieve similar growth rates in future periods. You should not rely on our historical operating results for any prior quarterly or annual periods as an indication of our future operating performance. If we are unable to maintain adequate revenue growth, our financial results could suffer and our stock price could decline.

 

To manage our growth successfully and handle the responsibilities of being a public company, we believe we must effectively, among other things:

 

 

 

If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities or develop new solutions and we may fail to satisfy customer requirements, maintain solution quality, execute our business plan or respond to competitive pressures.

 

Our operating results are subject to substantial quarterly and annual fluctuations and may fluctuate significantly due to a number of factors that could adversely affect our business and our stock price.

 

Our revenue and operating results have fluctuated in the past and are likely to fluctuate in the future. These fluctuations may occur on a quarterly and annual basis and are due to a number of factors, many of which are beyond our control. These factors include, among others:

 

 

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our operating results. We typically are required to incur substantial development costs in advance of a prospective sale with no certainty that we will ever recover these costs. A substantial amount of time may pass between a design win and the generation of revenue related to the expenses previously incurred, which can potentially cause our operating results to fluctuate significantly from period to period. In addition, a significant amount of our operating expenses are related to personnel. Any failure to adjust our personnel levels quickly enough to compensate for a revenue shortfall could magnify its adverse impact on our results of operations.

If we fail to develop and introduce new or enhanced solutions on a timely basis, our ability to attract and retain customers will be impaired and our competitive position could be harmed.

 

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. To compete successfully, we must design, develop, market and sell new or enhanced solutions that provide increasingly higher levels of performance and reliability while meeting the cost expectations of our customers. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future solutions obsolete. Our failure to anticipate or develop new or enhanced solutions could result in loss of business and decreased revenue. In particular, we may experience difficulties with solution design, manufacturing, marketing or qualification that could delay or prevent our development, introduction or marketing of new or enhanced solutions. If we are not successful in having our solutions qualified within a particular reference design or if we fail to introduce new or enhanced solutions that meet the needs of our customers or penetrate new markets in a timely fashion, we will lose market share and our operating results will be adversely affected.

 

To date, a substantial portion of our revenue has been attributable to demand for our solutions in the computing, networking and home entertainment device markets and the overall growth of these markets. These markets may not grow and develop in ways that we currently expect and are subject to substantial market risks, any of which could have a material adverse effect on our business, revenue and operating results.

 

Sales of our solutions to customers in the computing, networking and home entertainment device markets have accounted for a substantial portion of our revenue since inception. The market for wireless devices will depend on consumer spending, global economic conditions and the continued adoption of wireless technology in various applications, among other factors. Predicting how the global market for our solutions will develop is difficult because this market is relatively new and subject to substantial regulatory requirements and consumer adoption rates and demand, each of which vary from country to country. Delays in the development of, or unexpected developments in, this market could have an adverse effect on order activity by device manufacturers and, as a result, on our business, revenue, operating results and financial condition.

 

If we fail to further penetrate our existing markets or enter new markets, our revenue and financial condition could be materially and adversely affected.

 

Currently, we sell most of our solutions to OEMs and ODMs that build wireless devices for the computing, networking and home entertainment device markets. Our future revenue growth, if any, will depend in part on our ability to increase our penetration within these existing markets and penetrate relatively new markets, particularly the markets for mobile phones, smart energy and cellular infrastructure. Each of these markets presents distinct and substantial risks. If any of these markets does not develop as we currently anticipate or if we are unable to penetrate any of these markets successfully, it could materially and adversely affect our revenue and revenue growth rate, if any.

 

Moreover, because of differences in international wireless standards, we expect substantial differences in the development of wireless markets across different geographic markets. Major geographic markets have selected different wireless standards and, once a standard is chosen, substantial network and infrastructure changes may be required to implement the standard and make wireless communications generally available. If we fail to correctly align our development efforts with wireless standards that are eventually used in large, high volume markets, we could lose revenue and market share.

 

The fixed and mobile wireless device market is uncertain and extremely fluid. We can win and lose customers with very little notice. Securing design wins with reference design partners will require a substantial investment of our time and resources. In addition, our solutions will need to be

compatible with other components in our customers’ designs, including components produced by our competitors or potential competitors. There can be no assurance that our OEMs and ODMs will support or continue to support our solutions.

 

If we fail to further penetrate our existing markets or enter new markets that we have targeted, our revenue could decrease over time and our financial condition could suffer.

 

We face intense competition and expect competition to increase in the future, which could have an adverse effect on our revenue and market share.

 

The global semiconductor market in general and the RF semiconductor market in particular are highly competitive and tend to commoditize quickly. We compete in different target markets to varying degrees on the basis of a number of principal competitive factors, including our solutions’ performance, features and functionality, energy efficiency, size, ease of system design, reliability and price, as well as on the basis of our customer support, the quality of our product roadmap and our reputation. We expect competition to increase and intensify as new and established semiconductor companies may decide to enter our markets. Increased competition could result in price pressure, reduced profitability and loss of market share, any of which could materially and adversely affect our business, revenue and operating results.

 

Our competitors range from large, international companies offering a wide range of semiconductor products to smaller companies specializing in narrow markets. Our primary competitors include Anadigics Inc., or Anadigics, Analog Devices, Inc., or Analog Devices, Hitachi Metals America, Ltd., or Hitachi Metals, Hittite Microwave Corporation, or Hittite, Maxim Integrated Products, Inc., or Maxim, Microsemi Corporation, or Microsemi, Microchip Technology, Inc., or Microchip, Murata Manufacturing Co., Ltd., or Murata, RF Micro Devices, Inc., or RFMD, Richwave Technology Corp., or Richwave, Skyworks Solutions, Inc., or Skyworks, and TriQuint Semiconductor, Inc., or TriQuint. We expect competition in the markets in which we participate to increase in the future as existing competitors improve or expand their product offerings. In addition, we believe that a number of other public and private companies are in the process of developing competing products for wireless applications or are developing products that integrate various RF front end capabilities in their transceiver solutions. Atheros, Broadcom and Intel Corporation, or Intel, currently offer or are developing certain semiconductor products that have integrated low-power RF power amplifiers.

 

Our ability to compete successfully depends on elements both within and outside of our control, including industry and general economic trends. During past periods of downturns in our industry, competition in the markets in which we operate intensified as manufacturers of semiconductors reduced prices in order to address production overcapacity and high inventory levels. In particular, vertically integrated manufacturers of RF semiconductors using GaAs technology have captive manufacturing facilities that can be operated at a loss to compete with our solutions. Many of our competitors have substantially greater financial and other resources with which to withstand similar adverse economic or market conditions in the future. Any inability to compete successfully in our chosen markets could materially and adversely affect our business, revenue and operating results.

 

We outsource our wafer fabrication, assembly, testing and shipping operations to third parties, and if these parties fail to produce and deliver our solutions according to requested demands regarding specification, quantity, cost and time, our reputation, customer relationships and operating results could suffer.

 

We do not have our own manufacturing facilities. We operate an outsourced manufacturing model that utilizes third party foundry and assembly and test capabilities. As a result, we rely on third party foundry wafer fabrication and assembly and test capacity, which is sole-sourced for many of our solutions. We currently outsource silicon wafer fabrication to IBM Microelectronics, GaAs wafer fabrication to WIN Semiconductor Corp., or WIN Semiconductor, and integrated passive device manufacturing to STATS ChipPAC Ltd., or STATS ChipPAC. Our primary assembly and test

contractors include Unisem (M) Berhad, or Unisem, Foxconn and Tong Hsing Electronic Industries Ltd., or Tong Hsing.

 

Relying on third party manufacturing, assembly and testing presents significant risks to us, including the following:

 

 

The ability and willingness of our third party contractors to perform their obligations is largely outside our control. If one or more of our contract manufacturers or other outsourcers fails to perform its obligations in a timely manner or at satisfactory quality levels, our ability to bring solutions to market and our reputation could suffer. For example, in the event there is a significant and sudden increase in demand, or if manufacturing capacity is reduced or eliminated at one or more facilities, in either case including in response to a downturn in the semiconductor industry, we could have difficulties fulfilling our customer orders and our revenue could decline. In addition, if these third parties fail to deliver quality products and services on time and at reasonable prices, we could have difficulties fulfilling our customer orders, our revenue could decline and our business, financial condition and results of operations would be adversely affected.

 

If our foundry vendors or assembly and test contractors do not achieve satisfactory yields or quality, or are unable to meet our customers’ delivery requirements, our reputation and customer relationships could be harmed.

 

The fabrication, assembly and testing of RF semiconductors are complex and technically demanding processes. Minor deviations can cause substantial changes in RF performance, and in some cases, cause production to be suspended. Our foundry vendors or our assembly and test contractors could, from time to time, experience defects and reduced yields. Moreover, we may not be aware of problems in their processes until large quantities of products have been produced. For example, changes in manufacturing processes or the inadvertent use of defective or contaminated materials by our foundry vendors could result in lower than anticipated manufacturing yields or unacceptable performance. Many of these problems are difficult to detect at an early stage and may be time consuming and expensive to correct. Poor yields from our foundry vendors or our assembly and test contractors or defects, integration problems or other performance problems in our products could cause us significant customer relations and reputation problems, harm our financial results and result in financial or other damages to our customers or reference design partners. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

 

If we experience manufacturing or test and assembly problems at a particular location, we would be required to transfer the affected operations to a backup location or supplier. Converting or transferring operations from a primary location or supplier to a backup facility could be expensive and could take a year or more. During such a transition, we would be required to meet customer demand from our then-existing inventory. We do not seek to maintain sufficient inventory to address a lengthy transition period because we believe it is uneconomical to keep more than minimal inventory on hand. As a result, we may not be able to meet customer needs during such a transition, which could delay shipments, cause production delays or stoppages for our customers, result in a decline in our sales

and damage our relationships with our customers and reference design partners. In addition, a significant portion of our sales are to customers that practice just-in-time order management from their suppliers, which gives us a very limited amount of time in which to process and complete these orders. As a result, delays in our production or shipping by the parties to whom we outsource these functions could reduce our sales, damage our customer relationships and our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

 

We may experience difficulties in transitioning to new wafer fabrication process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delivery delays and increased costs.

 

To remain competitive, we expect to continue to transition our semiconductor solutions to higher levels of functional integration and to achieve higher levels of RF performance. These ongoing efforts require us from time to time to incorporate new manufacturing processes for our solutions and to redesign some solutions, which in turn may result in delivery delays. We periodically evaluate the benefits of migrating to new process technologies to reduce cost and improve performance. We may face difficulties, delays and increased expenses as we transition our solutions to new processes and potentially to new foundries. We depend on our relationships with IBM Microelectronics and WIN Semiconductor to transition to new processes successfully. We cannot assure you that IBM Microelectronics or WIN Semiconductor will be able to effectively manage the transition or that we will be able to maintain our relationship with IBM Microelectronics or WIN Semiconductor or develop relationships with new foundries. As new processes become more prevalent, we expect to continue to integrate greater levels of functionality into our solutions. However, we may not be able to achieve higher levels of design integration or deliver new integrated solutions on a timely basis.

 

Any increase in the costs of the raw goods used in our solutions or in the manufacturing or assembly and test costs of our solutions could reduce our gross margins and operating profit.

 

Our solutions incorporate commodities such as gold, platinum, copper and silicon. The price of gold and other commodities used in our business fluctuate from time to time. From January 2, 2009 to June 1, 2010, the price of gold increased 40%, from $875.40 per ounce to $1,225.65 per ounce. Currently, we do not hedge our exposure to fluctuations in the prices of these commodities. Our failure to obtain sufficient quantities of raw materials at reasonable prices or our inability to pass on higher materials costs to our customers could have a material adverse effect on our business, financial condition and results of operations.

 

In addition, the semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Any increase in the cost of the components used to build our solutions or otherwise in the cost of manufacturing, assembling or testing our solutions will reduce our gross margins and operating profit. We do not have any long-term supply agreements with our foundry vendors, other than IBM Microelectronics, or our assembly and test contractors, and we negotiate pricing periodically. Consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers. We cannot assure that our foundry partners will be able to deliver enough semiconductor wafers to our assembly and test contractors, or that our assembly and test contractors will be able to delivery satisfactory services to us, at reasonable prices. These and other related factors could impair our ability to meet our customers’ needs and have a material and adverse effect on our operating results.

 

We do not have any long-term supply contracts with our contract manufacturers or suppliers, and any disruption in our supply of products, materials or services could have a material adverse affect on our business, revenue and operating results.

 

We currently do not have long-term supply contracts with any of our third party vendors except for IBM Microelectronics. We make substantially all of our purchases on a purchase order basis, and none of our foundry partners or assembly and test contractors are required to supply us products,

materials or services for any specific period or in any specific quantity. We expect that it would take a year or more to transition production from our foundry vendors or assembly and testing contractors to new providers. Such a transition would likely require a re-qualification process by our OEMs and ODMs.

 

We generally place orders for products with our vendors and contractors approximately three to five months prior to the anticipated delivery date, with order volumes based on our forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our solutions, we may be unable to obtain adequate and cost-effective foundry or assembly and test capacity from our third party contractors to meet our customers’ delivery requirements, or we may accumulate excess inventories. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and therefore were unable to benefit from this incremental demand. None of our third party contractors has provided any assurance to us that adequate capacity will be available to us within the time required to meet additional demand for our solutions.

 

In the past, we have experienced limitations in test capacity. We have been required to make capital expenditures for our own automated testing equipment placed at and maintained by our test subcontractors in order to meet forecasted demand for our solutions. We may be required to purchase additional testing equipment in the future to satisfy increasing volumes of production.

 

Average selling prices for certain of our products have historically decreased consistently over time and will likely do so in the future, which could have a material adverse effect on our revenue and gross margins.

 

We may experience substantial period-to-period fluctuations in future operating results due to the erosion of average selling prices in the markets for certain of our products. The markets for certain of our products have exhibited a pattern of strong price erosion, especially as a new generation of a product is introduced. From time to time, we have reduced the average unit price of our solutions in anticipation of competitive pricing pressures, new product introductions by us or our competitors and for other reasons. If we are unable to offset any direct or indirect reductions in our average selling prices by increasing our sales volumes, improving the gross margins of our existing solutions or introducing new solutions with higher gross margins, our revenue and gross margins will suffer. To maintain our gross margins, we must develop and introduce new solutions and enhancements on a timely basis and continually reduce our costs. Failure to do so would cause our revenue and gross margins to decline.

 

We are subject to risks associated with our distributors’ inventories and sell-through. If any of our distributors reduce their sales of our solutions or stop selling our solutions, our business would suffer.

 

We currently supply some of our solutions to end customers through sales to our distributors, who maintain their own inventories of our solutions. Sales to our two largest distributors accounted for approximately 32% of our revenue in fiscal 2009 and approximately 38% of our revenue in the first quarter of fiscal 2010. If our distributors are unable to sell an adequate amount of their inventories of our solutions in a given quarter or if they decide to decrease their inventories of our solutions for any reason, our sales to these distributors and our revenue may decline. In addition, if some distributors decide to purchase more of our solutions than are required to satisfy end customer demand in any particular quarter, inventories at these distributors would grow in that quarter. These distributors likely would reduce future orders until inventory levels realign with end customer demand, which could adversely affect our revenue in subsequent periods.

 

Our reserve estimates with respect to the solutions stocked by our distributors are based principally on reports provided to us by our distributors, typically on a monthly basis, as well as on our historical results. To date, we believe that this data generally has been accurate. To the extent that

this resale and channel inventory data is inaccurate or not received in a timely manner, we may not be able to make reserve estimates for future periods accurately or at all.

 

We are subject to order and shipment uncertainties, and differences between our estimates of customer demand and product mix and our actual results could negatively affect our inventory levels, sales and operating results.

 

Our revenue is generated on the basis of purchase orders with our customers rather than long-term purchase commitments. In addition, our customers can cancel purchase orders or defer the shipments of our solutions at any time and for any reason. Our solutions are manufactured, assembled and tested by our foundry partners and assembly and test contractors according to our estimates of customer demand, which require us to make demand forecast assumptions for every customer, each of which may introduce significant variability into our aggregate estimate. Moreover, because certain of our target markets are relatively new, many of our customers have difficulty accurately forecasting their product requirements and estimating the timing of their new product introductions, which ultimately affects their demand for our solutions. We have limited visibility into future customer demand and the product mix that our customers will require, which could adversely affect our revenue forecasts. Demand for consumer electronic devices has been, and will continue to be, significantly impacted by global economic conditions. Historically, because of this limited visibility, actual results have been different from our forecasts of customer demand. Some of these differences have been material, leading to excess inventory or product shortages and revenue and margin forecasts above those we were actually able to achieve. These differences may continue to occur in the future, and the adverse impact of these differences between forecasts and actual results could grow.

 

In addition, the rapid pace of innovation in our industry could render significant portions of our inventory obsolete. Excess or obsolete inventory levels could result in unexpected expenses or increases in our reserves that could adversely affect our business, operating results and financial condition. Conversely, if we were to underestimate customer demand or if sufficient manufacturing capacity were unavailable, we could forego revenue opportunities, potentially lose market share, damage our customer relationships or damage our relationships with our reference design partners. Any significant future cancellations or deferrals of product introductions and orders or the return of previously sold products due to manufacturing defects could materially and adversely impact our revenue and profit margins, increase our write-offs due to product obsolescence and restrict our ability to fund our operations.

 

We may be unable to make the substantial and productive research and development investments required to remain competitive in our business.

 

The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and solutions. Our research and development expense, net of government and other funding, was $17.4 million in fiscal 2007, $16.4 million in fiscal 2008, $15.1 million in fiscal 2009 and $3.2 million in the first quarter of fiscal 2010. Although we had reduced research and development spending in connection with the 2009 economic downturn, we are committed to investing in new product development in order to stay competitive in our markets, and we plan to continue investing in our research and development capabilities. We do not know whether we will have sufficient resources to maintain the level of investment in research and development required to remain competitive. In addition, we cannot assure you that the technologies which are the focus of our research and development expenditures will become commercially successful.

Our business would be adversely affected by the departure of existing members of our senior management team.

 

Our success depends, in large part, on the continued contributions of our senior management team, in particular, the services of Sohail A. Khan, our President and Chief Executive Officer, Peter L. Gammel, Ph.D, our Chief Technical Officer and Vice President of Engineering, and George W. Haberlin, our Chief Operating Officer and Vice President, Worldwide Sales. None of our senior management team is contractually bound to remain with us for a specified period, and we do not currently maintain key person life insurance covering our senior management. In addition, we have entered into non-compete agreements in respect of the services of Mr. Khan and Dr. Gammel but no other member of our executive management team. A significant portion of the options we have granted to our senior management team are vested. The loss of any member of our senior management team could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.

 

If we are unable to attract, train and retain qualified personnel, especially our design and technical personnel, we may not be able to execute our business strategy effectively.

 

Our future success depends on our ability to attract, motivate and retain qualified personnel, including our management, sales and marketing and finance, and especially our design and technical personnel. We do not know whether we will be able to retain all of these personnel as we continue to pursue our business strategy. We may have to establish new offices in new locations, which will include engineering teams, in order to pursue our business strategy. Historically, we have encountered difficulties in hiring and retaining qualified engineers because there is a limited pool of engineers with the expertise required in our field and in our research and development locations. Competition for these personnel is intense in the semiconductor industry. As the source of our technological and product innovations, our design and technical personnel represent a significant asset. The loss of the services of one or more of our key employees, especially our key design and technical personnel, or our inability to retain, attract and motivate qualified design and technical personnel, could have a material adverse effect on our business, financial condition and results of operations.

 

The complexity of our semiconductor solutions could result in unforeseen delays or expenses from undetected defects, errors or bugs in hardware or software, which could reduce the market acceptance for our new semiconductor solutions, damage our reputation with current or prospective customers or reference design partners and adversely affect our operating costs.

 

Highly complex semiconductor products such as our RF front end solutions may contain defects and undetected performance flaws when they are first introduced to market. Moreover, both qualification and production testing can be limited or provide erroneous results that lead us to believe that a product is ready for the market. We have in the past experienced, and may in the future experience, defects and flaws in our products. If any of our solutions contains defects or flaws, or has reliability, quality or compatibility problems, we may not be able to successfully correct these problems. Consequently, our reputation may be damaged. Customers may not be able to ship their products and customers may be reluctant to buy our solutions, which could materially and adversely affect our ability to retain existing customers and attract new customers, and adversely affect our financial results. In addition, these defects could interrupt or delay sales to our customers. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional development costs and product recall, repair or replacement costs. These problems may also result in claims against us by our customers or others. As a result, our operating costs could be adversely affected.

We are subject to warranty claims, product liability and product recalls.

 

From time to time, we may be subject to warranty or product liability claims that may require us to make significant expenditures to defend these claims or pay compensation to our customers. We maintain product liability insurance, but this insurance is limited in amount and subject to significant deductibles. There is no guarantee that our insurance will be available or adequate to protect against all claims. We also may incur costs and expenses relating to a recall of one of our customers’ products if one of our devices included in that product is subject to defects, warranty claims or product recalls. The process of identifying a recalled product in devices that have been widely distributed may be lengthy and require significant resources, and we may incur significant replacement costs, contract damage claims from our customers and reputational harm. Costs or payments made in connection with warranty and product liability claims and product recalls could materially affect our financial condition and results of operations.

 

We support our research and development efforts in part through a grant from the Government of Ontario that is subject to certain conditions and possible repayment.

 

In March 2010, the Government of Ontario, Canada awarded us a five year grant under the Next Generation of Jobs Fund, or NGOJF. Under the NGOJF grant, certain of our research and development costs and expenses associated with our research and development activities incurred between August 2009 and August 2014 may be reimbursed on a quarterly basis up to a total of CDN$7.0 million. In order to be eligible to receive reimbursements under the NGOJF grant, we must incur expenses that meet certain criteria and we must hire and retain a minimum number of employees in the Province of Ontario. If we fail to maintain compliance with the terms of the NGOJF grant, we could be forced to repay all or a portion of the amounts paid to us under the grant, which could materially and adversely affect our financial condition.

 

We may face claims of intellectual property infringement, which could be time-consuming, costly to defend or settle and result in the loss of significant rights.

 

The semiconductor industry is characterized by companies that hold large numbers of patents and other intellectual property rights and that vigorously pursue, protect and enforce intellectual property rights. From time to time, third parties may assert against us, our customers and our distributors their patent and other intellectual property rights to technologies that are important to our business. In addition, one or more inventors may assert a claim of ownership rights on technology owned by us.

 

Claims that our solutions, processes or technology infringe third party intellectual property rights, regardless of their merit or resolution, could be costly to defend or settle and could divert the efforts and attention of our management and technical personnel. In addition, many of our customer and distributor agreements require us to indemnify and defend our customers or distributors from third party infringement claims and pay damages in the case of adverse rulings. Claims of this sort also could harm our relationships with our customers or distributors and might deter future customers from doing business with us. We do not know whether we will prevail in these proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If any pending or future proceedings result in an adverse outcome, we could be required to:

 

 

 

Any of the foregoing results could have a material adverse effect on our business, financial condition and results of operations.

 

We utilize a significant amount of intellectual property in our business. If we are unable to protect our intellectual property, our business could be adversely affected.

 

Our success depends in part upon our ability to protect our intellectual property. To accomplish this, we rely on a combination of intellectual property laws, including patent, copyright, trademark and trade secret laws in the United States and in selected foreign countries where we believe filing for such protection is appropriate. We also rely on trade secrets, technical know-how and continuing innovation to develop and maintain our competitive position.

 

We cannot guarantee that:

 

 

In addition, our competitors or others may design around our protected patents or technologies. Effective intellectual property protection may be unavailable or more limited in one or more relevant jurisdictions relative to those protections available in the United States, or may not be applied for in one or more relevant jurisdictions. As a result, we may not be able to effectively prevent competitors outside the United States from using our intellectual property, which could limit our ability to assert our intellectual property rights, impede our ability to compete, limit the value of our technology or otherwise negatively impact our business, financial condition and results of operations.

 

Monitoring unauthorized use of our intellectual property is difficult and costly. Unauthorized use of our intellectual property may have occurred or may occur in the future. Our failure to identify unauthorized use and otherwise adequately protect our intellectual property may adversely affect our business. Moreover, if we are required to commence litigation, whether as a plaintiff or defendant, not only would this be time-consuming, but we would also be forced to incur significant costs and such litigation could divert the attention and efforts of our management and employees, which could, in turn, result in lower revenue and higher expenses. An adverse decision in any of these legal actions could limit our ability to assert our intellectual property rights, limit the value of our technology, or otherwise negatively impact our business, financial condition and results of operations.

We also rely on customary contractual protections with our customers, suppliers, distributors, employees and consultants, and we implement security measures to protect our trade secrets. We cannot assure you that these contractual protections and security measures will not be breached, that we will have adequate remedies for any such breach or that our suppliers, employees or consultants will not assert rights to intellectual property arising out of such contracts.

 

In addition, we have a number of third party patent and intellectual property license agreements. In the future, we may need to obtain additional licenses, renew existing license agreements or otherwise replace existing technology. We are unable to predict whether these license agreements can be obtained or renewed or the technology can be replaced on acceptable terms, or at all.

 

We have been adversely affected by global recessions and limited availability of credit, and future global recessions and continued credit tightening could adversely affect us.

 

Our sales were adversely affected by the recent global recession and corresponding tightening of credit. If uncertain economic conditions continue or worsen, our customers could experience financial difficulties and as a result modify, delay or cancel plans to purchase our solutions or services or become unable to make payment to us for amounts due and owing. In addition, our suppliers could experience credit or other financial difficulties that could result in delays in their ability to supply us with necessary raw materials, components or finished products. These conditions may make it extremely difficult for our customers, our suppliers and us to accurately forecast and plan future business activities and could result in asset impairments. The occurrence of any of these factors could have an adverse effect on our business, financial condition and results of operations.

 

Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.

 

Sales to customers in Asia accounted for over 90% of our revenue in fiscal 2009 and in the first quarter of fiscal 2010. All of our solutions are assembled and tested in Asia, and our major distributors are located in Asia. In addition, as of April 2, 2010, 36 of our employees are located in Asia. Multiple factors relating to our international operations and to particular countries in which we operate could have a material adverse effect on our business, financial condition and results of operations. These factors include:

 

 

 

In addition, if the government of any country in which our solutions are manufactured or sold sets technical standards for products manufactured in or imported into their country that are not widely shared, it may lead some of our customers to suspend imports of their products into that country, require manufacturers in that country to manufacture products with different technical standards and disrupt cross-border manufacturing relationships which, in each case, could have a material adverse effect on our business, financial condition and results of operations.

 

Our third party contractors are concentrated primarily in Taiwan, China and Malaysia, areas subject to earthquakes and other risks. Any disruption to the operations of these contractors could cause significant delays in the production or shipment of our solutions.

 

A significant portion of our solutions are manufactured by third party contractors located in Taiwan, China, and Malaysia. The risk of an earthquake or tsunami in those areas and elsewhere in the Pacific Rim region is significant due to the proximity of major earthquake fault lines to the facilities of our assembly and test subcontractors. For example, in December 2006 and June 2003, major earthquakes occurred in Taiwan. Although our third party contractors did not suffer any significant damage as a result of these most recent earthquakes, the occurrence of additional earthquakes, fires, flooding or other natural disasters or political unrest, war, labor strikes, work stoppages or public health crises such as outbreaks of H1N1 flu, could result in the disruption of our foundry or assembly and test capacity. Any disruption resulting from such events could cause significant delays in the production or shipment of our solutions until we are able to shift our manufacturing, assembling or testing from the affected contractor to another third party vendor. We may not be able to obtain alternate capacity on favorable terms, if at all.

 

If our operations are interrupted as a result of service downtime or interruptions, our business and reputation could suffer.

 

Our operations and those of our subcontractors are vulnerable to interruption as a result of technical breakdowns, computer hardware and software malfunctions, software viruses, infrastructure failures, fire, earthquake, power loss, telecommunications failure, terrorist attacks, wars, Internet failures and other events beyond our control. Any disruption in our services or operations could harm our ability to perform our services effectively, which in turn could result in a reduction in revenue or a claim for substantial damages against us, regardless of whether we are responsible for that failure. We rely on our computer equipment, database storage facilities and other office equipment, which are located primarily in Andover, Massachusetts, and Ottawa, Ontario. If we suffer a significant database or network facility outage, our business could experience disruption until we fully implement our back-up systems.

 

Changes to financial accounting standards may affect our results of operations and could cause us to change our business practices.

 

We prepare our consolidated financial statements to conform to generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting rules and regulations. Changes in those accounting rules can have a significant effect on our financial results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of

current practices may adversely affect our reported financial results or the way we conduct our business.

 

The enactment of legislation implementing changes in U.S. taxation of international business activities or the adoption of other tax reform policies could materially impact our financial position and results of operations.

 

Several tax bills have been introduced to reform U.S. taxation of international business activities. Depending on the final form of legislation enacted, if any, the consequences may be significant for us due to the large scale of our international business activities. If any of these proposals are enacted into legislation, they could have material adverse consequences on the amount of tax we pay and thereby on our financial position and results of operations.

 

We are subject to currency exchange risks that could adversely affect our operations.

 

Our results of operations and cash flows are subject to fluctuations in foreign currency exchange rates, particularly changes in the Canadian dollar, due to our compensation expenses payable in local currencies. Although a majority of our revenue and operating expenses is denominated in U.S. dollars and we prepare our financial statements in U.S. dollars, a portion of our expenses is paid in foreign currencies. As a result, we are subject to currency risks that could adversely affect our operations, including:

 

 

Changes in exchange rates affect our costs and earnings, and may also affect the book value of our assets located outside the United States and the amount of our stockholders’ equity.

 

We will be subject to additional regulatory compliance requirements, including section 404 of the Sarbanes-Oxley Act of 2002, as a result of becoming a public company, and our management has limited experience managing a public company. In addition, we may fail to maintain an effective system of internal controls, which would significantly harm our reputation and our business.

 

We have never operated as a public company and will incur significant legal, accounting and other expenses that we did not incur as a private company. The individuals who constitute our management team have limited experience managing a publicly traded company, and limited experience complying with the increasingly complex and changing laws pertaining to public companies. Our management team and other personnel will need to devote a substantial amount of time to new compliance requirements, and we may not successfully or efficiently manage our transition to a public company. In connection with our transition to a public company, we intend to hire additional accounting and finance personnel with technical accounting and financial reporting experience. Any inability to recruit and retain the finance personnel we require would have an adverse impact on our ability to accurately and timely prepare our financial statements. We may be unable to locate and hire qualified finance professionals with requisite technical and public company experience when and as needed.

 

As a public company, our ongoing compliance with various rules and regulations, including the Sarbanes-Oxley Act of 2002, will increase our legal and finance compliance costs and will make some activities more time-consuming and costly. These rules and requirements may be modified, supplemented or amended from time to time. Implementing these changes may take a significant amount of time and may require specific compliance training of our personnel. For example, Section 404 of the Sarbanes-Oxley Act requires that our management report on, and our independent

auditors attest to, the effectiveness of our internal control structure and procedures for financial reporting in our annual reports filed with the Securities and Exchange Commission. Section 404 compliance may divert internal resources and will take a significant amount of time and effort to complete. We may not be able to successfully complete the procedures and certification and attestation requirements of Section 404 by the time we will be required to do so. If we fail to do so, or if in the future our Chief Executive Officer, Chief Financial Officer or independent registered public accounting firm determines that our internal controls over financial reporting are not effective as defined under Section 404, we could be subject to sanctions or investigations by The NASDAQ Global Market, the Securities and Exchange Commission, or other regulatory authorities. As a result, investor perceptions of our company may suffer, and this could cause a decline in the market price of our stock. Irrespective of compliance with these rules and regulations, including the requirements under the Sarbanes-Oxley Act, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.

 

We may pursue acquisitions, dispositions, investments, strategic alliances and joint ventures, which could affect our results of operations.

 

We may engage in various transactions, including purchases or sales of assets, acquisitions of design teams or businesses, or entering into investments or contractual arrangements, such as strategic alliances or joint ventures. These transactions may be intended to result in the realization of cost savings, the generation of cash or income or the reduction of risk. These transactions may also affect our consolidated results of operations. We cannot assure you that we will be able to identify suitable acquisition, investment, alliance, or joint venture opportunities or that we will be able to consummate any such transactions or relationships on terms and conditions acceptable to us, or that such transactions or relationships will be successful. We also cannot assure you that we will be able to retain any design teams that we acquire on terms and conditions acceptable to us, or that such transactions or relationships will be successful.

 

These transactions or any other acquisitions or dispositions involve risks and uncertainties. For example, the integration of acquired businesses may not be successful and could result in disruption to other parts of our business. In addition, the integration may require that we incur significant restructuring charges. To integrate acquired businesses or assets, we must implement our management information systems, operating systems and internal controls, and assimilate and manage the personnel of the acquired operations. The difficulties of the integrations may be further complicated by such factors as:

 

 

 

Even when an acquired business has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that all pre-acquisition due diligence will have identified all material problems that might arise with respect to such acquired assets.

 

Any acquisition may also cause us to assume liabilities, acquire goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential impairment charges, incur amortization expense related to certain intangible assets, increase our expenses and working capital requirements, and subject us to litigation, which would reduce our return on invested capital. Failure to manage and successfully integrate the acquisitions we make could materially harm our business and operating results.

 

Any future acquisitions may require additional debt or equity financing, which, in the case of debt financing, would increase our leverage and potentially affect our creditworthiness, and in the case of equity financing, would be dilutive to our existing stockholders. Any deterioration in our creditworthiness or our future credit ratings associated with an acquisition could adversely affect our ability to borrow by resulting in more restrictive borrowing terms. As a result of the foregoing, we may not be able to complete acquisitions or strategic customer transactions in the future. These and other factors could harm our ability to achieve anticipated levels of profitability at acquired operations or realize other anticipated benefits of an acquisition, and could adversely affect our business, financial condition and results of operations.

 

We are subject to the cyclical nature of the semiconductor industry.

 

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence and price erosion, evolving standards, short product life cycles and wide fluctuations in product supply and demand. The industry is experiencing an upturn as world economies recover from the recent global recession. Upturns have historically been characterized by lower available production capacity, low inventory levels and the entry of new competitors. The current upturn and any future downturns could have a material adverse effect on our business and operating results. We are dependent on the availability of third party manufacturing, assembly and test capacity to manufacture and assemble our solutions. None of our third party foundry or assembly contractors has provided assurances that adequate capacity will be available to us in the future. Even in respect of product development, tight capacity on wafer manufacturing and assembly means that it takes longer to complete design cycles because prototypes of our designs take longer to be delivered to us. Longer design cycles increase the risk that we may not be able to win design slots in a timely manner. We may experience significant fluctuations in our future financial results as a result of these factors.

 

Our solutions must conform to industry standards in order to be accepted by end users in our markets.

 

Generally, our solutions comprise only one part of a wireless communications device. All components of these devices must uniformly comply with industry standards in order to operate efficiently together. For example, signal emissions above a certain threshold level within a frequency band may be regulated by the U.S. Federal Communications Commission, or the FCC. We depend on companies that provide other components of the devices to support prevailing industry standards and regulations. Many of these companies are significantly larger and more influential in driving industry standards than we are. Some industry standards may not be widely adopted or implemented uniformly, and competing standards may emerge that may be preferred by our customers or end users. If larger companies do not support the same industry standards that we do, or if competing

standards emerge, market acceptance of our solutions could be adversely affected, which would harm our business.

 

Changes in current laws or regulations or the imposition of new laws or regulations could impede the sale of our solutions or otherwise harm our business.

 

Wireless networks can only operate in the frequency bands, or spectrum, allowed by regulators and in accordance with rules governing how the spectrum can be used. The FCC, as well as regulators in foreign countries, have broad jurisdiction over the allocation of frequency bands for wireless networks. We therefore rely on the FCC and international regulators to provide sufficient spectrum and usage rules. For example, countries such as China, India, Japan or Korea heavily regulate all aspects of their wireless communication industries, and may restrict spectrum allocation or usage. If further restrictions were to be imposed over the frequency range where our semiconductor solutions are designed to operate, we may have difficulty selling our solutions in those regions. In addition, some of our semiconductor solutions operate in the 2.4 GHz and 5 GHz bands, which in some countries are also used by government and commercial services such as military and commercial aviation. The FCC and European regulators have traditionally protected government uses of the 2.4 GHz and 5 GHz bands by setting power limits and indoor and outdoor designation and by requiring that wireless local area networking devices not interfere with other users of the band such as government and civilian satellite services. Changes in current laws or regulations or the imposition of new laws and regulations in the United States or elsewhere regarding the allocation and usage of the 2.4 GHz and 5 GHz bands on us, our customers or the industries in which we operate may materially and adversely impact the sale of our solutions and our business, financial condition and results of operations.

 

If wireless devices pose safety risks, we may be subject to new regulations, and demand for our solutions and those of our licensees and customers may decrease.

 

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless devices, which may decrease demand for our solutions and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones and other wireless devices. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless devices while driving. Any legislation that may be adopted in response to these expressions of concern could reduce demand for our solutions and those of our licensees and customers in the United States as well as foreign countries.

 

Our ability to use our United States federal net operating loss carryforwards may be limited.

 

As of January 1, 2010, for United States federal tax purposes, we had net operating loss, or NOL, carryforwards of $21.6 million to offset future taxable income, which will expire gradually from 2019 to 2029 if not utilized. Under the relevant provisions of the Internal Revenue Code of 1986, as amended, or the Code, certain substantial cumulative changes in our ownership may limit the amount of NOL carryforwards that can be utilized annually in the future to offset taxable income. Section 382 of the Code imposes limitations on a company’s ability to use NOL carryforwards if such company experiences a more-than-50-percent ownership change (an “ownership change”) over a three-year testing period. We believe that, as a result of this offering or as a result of future issuances of our capital stock, it is possible that such an ownership change may occur. Although we do not currently anticipate a significant limitation as a result of an ownership change in connection with this offering, if we experience an ownership change in connection with or subsequent to this offering, our ability to use our United States federal NOL carryforwards in any future periods may be restricted. If we are

limited in our ability to use our NOL carryforwards, we will pay more taxes than if we were able to utilize such NOL carryforwards fully. As a result, any inability to use our NOL carryforwards could adversely affect our financial condition and results of operations.

 

Risks Related to Our Common Stock

 

Our stock price may fluctuate significantly.

 

Prior to this offering, there has been no public market for shares of our common stock. An active public market for our common stock may not develop or be sustained after the completion of this offering. We will negotiate and determine the initial public offering price with the underwriters. This price may vary from the market price of our common stock after this offering. You may be unable to sell your shares of common stock at or above the initial offering price. The stock market, particularly in recent years, has experienced significant volatility, particularly with respect to technology stocks. The volatility of technology stocks often does not relate to the operating performance of the companies represented by the stock. Factors that could cause volatility in the market price of our common stock include:

 

 

These and other factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of our management.

 

Our principal stockholders will exercise significant control over our company.

 

After this offering, our           largest stockholders will beneficially own, in the aggregate, shares representing approximately     % of our outstanding capital stock, assuming no exercise by the underwriters of their option to purchase additional shares from the selling stockholders. Although we are not aware of any voting arrangements that will be in place among these stockholders following this offering, if these stockholders were to choose to act together, as a result of their stock ownership, they would be able to influence our management and affairs and control all matters submitted to our stockholders for approval, including the election of directors and approval of any merger, consolidation or sale of all or substantially all of our assets. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Future sales of shares by existing stockholders could cause our stock price to decline.

 

If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after the 180-day contractual lock-up and other legal restrictions on resale discussed in this prospectus lapse, the trading price of our common stock could decline significantly and could decline below the initial public offering price. Based on shares outstanding as of          , upon the completion of this offering, we will have outstanding           shares of common stock, assuming no exercise of outstanding options. Of these shares,          shares of common stock, plus any shares sold pursuant to the underwriters’ option to purchase additional shares, will be immediately freely tradable, without restriction, in the public market. Barclays Capital Inc. and Deutsche Bank Securities Inc. may, in their sole discretion, permit our officers, directors, employees and current stockholders to sell shares prior to the expiration of the lock-up agreements. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.

 

After the lock-up agreements pertaining to this offering expire, based on shares outstanding as of           and assuming no exercise by the underwriters of their option to purchase additional shares from the selling stockholders, an additional           shares will be eligible for sale in the public market. In addition, the           shares subject to outstanding options under our equity incentive plans and the           shares reserved for future issuance under our equity incentive plans will become eligible for sale in the public market in the future, subject to certain legal and contractual limitations. Moreover, 180 days after the completion of this offering, holders of approximately           shares of our common stock, assuming no exercise by the underwriters of their option to purchase additional shares from the selling stockholders, will have the right to require us to register these shares under the Securities Act of 1933, as amended, of the Securities Act, pursuant to an investor rights agreement. If our existing stockholders sell substantial amounts of our common stock in the public market, or if the public perceives that such sales could occur, this could have an adverse impact on the market price of our common stock, even if there is no relationship between such sales and the performance of our business.

 

We will have broad discretion in how we use the proceeds of this offering. We may not use these proceeds effectively, which could affect our results of operations and cause our stock price to decline.

 

We will have considerable discretion in the application of the net proceeds of this offering. We currently intend to use the net proceeds of this offering for working capital and other general corporate purposes, including capital expenditures and possible investments in, or acquisitions of, complementary businesses, services or technologies. As a result, investors will be relying upon management’s judgment with only limited information about our specific intentions for the use of the net proceeds of this offering. We may use the net proceeds for purposes that do not yield a significant return or any return at all for our stockholders. In addition, pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value.

 

Provisions of Delaware law and our charter documents could delay or prevent an acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for you to change management or members of our board of directors.

 

Provisions of Delaware law, our amended and restated certificate of incorporation and amended and restated by-laws, which will become effective upon the completion of this offering, may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for

their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

 

The affirmative vote of the holders of not less than 75% of the outstanding shares of our capital stock entitled to vote thereon, and not less than 75% of the outstanding shares of each class entitled to vote thereon as a class, is necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated by-laws may only be amended or repealed by the affirmative vote of the holders of at least 75% of the outstanding shares of our capital stock entitled to vote thereon.

 

In addition, upon the closing of this offering, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, which limits business combination transactions with stockholders of 15% or more of our outstanding voting stock that our board of directors has not approved. These provisions and other similar provisions make it more difficult for stockholders or potential acquirers to acquire us without negotiation. These provisions may apply even if some stockholders may consider the transaction beneficial to them.

 

As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our common stock. These provisions might also discourage a potential acquisition proposal or tender offer, even if the acquisition proposal or tender offer is at a premium over the then current market price for our common stock.

 

The Investment Canada Act or the Competition Act (Canada) may apply to prevent or delay a change of control of our company.

 

Under the Investment Canada Act, any investment by a “non-Canadian” (which includes any entity which is not controlled or beneficially owned by Canadians) involving the acquisition of control of a “Canadian Business” is subject to review by the Investment Review Division of Industry Canada if, in the case of an investment by or from an investor from a state that is a member of the World Trade Organization, the asset value of the entity or entities being acquired is equal to or exceeds CDN$299 million. A “Canadian Business” is defined to comprise any business carried on in Canada that has:

 

 

Based on this definition, we currently have a Canadian Business which is operated through our wholly-owned Canadian subsidiary, SiGe Canada. A reviewable acquisition may not proceed unless the relevant Minister is satisfied that the investment is likely to be a net benefit to Canada. An investment by a non-Canadian involving the acquisition of control of a Canadian Business that does not meet the CDN$299 million threshold is still required under the Investment Canada Act to be formally notified within 30 days of closing.

The sale of our company may also be subject to formal pre-notification obligations under Canada’s Competition Act if certain thresholds are met. In general, the thresholds are CDN$400 million for the combined size of the parties to the transaction and their affiliates, and CDN$70 million for the size of the target company. Independent of pre-notification obligations, the sale of our company may also raise competition law issues for which pre-approval of the Canadian Commissioner of Competition may be warranted.

 

The application of the Investment Canada Act or the Competition Act (Canada) could prevent or delay an acquisition of control of our company and may limit strategic opportunities for our stockholders to sell their common stock.

 

We have never paid dividends on our capital stock and we do not anticipate paying any dividends in the foreseeable future.

 

We have not paid dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our business. In addition, any future indebtedness that we may incur could preclude us from paying dividends. As a result, capital appreciation, if any, of our common stock will likely be your sole source of gain for the foreseeable future. Consequently, in the foreseeable future, you will likely only experience a gain from your investment in our common stock if the price of our common stock increases.

 

An active trading market for our common stock may not develop, and you may not be able to resell your shares at or above the initial public offering price.

 

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to have our common stock listed on the NASDAQ Global Market in connection with this offering, an active trading market for our shares may never develop or be sustained following this offering. The initial public offering price of our common stock will be determined through negotiations between us and the underwriters. This initial public offering price may not be indicative of the market price of our common stock after this offering. In the absence of an active trading market for our common stock, investors may not be able to sell their common stock at or above the initial public offering price or at the time that they would like to sell.

 

Investors in this offering will pay a much higher price than the book value of our common stock.

 

If you purchase common stock in this offering, you will incur immediate and substantial dilution of $      per share, representing the difference between our pro forma net tangible book value per share after giving effect to this offering and an assumed initial public offering price of $      per share, the midpoint of the price range set forth on the cover of this prospectus. In the past, we issued options to acquire common stock at prices significantly below the assumed initial public offering price. To the extent these outstanding options are ultimately exercised, you will sustain further dilution.

 

If equity research analysts do not publish research reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

 

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our common stock could decline if one or more equity analysts downgrade our common stock, issue other unfavorable commentary or cease publishing reports about us or our business.

 

This prospectus contains forward-looking statements that are based on our management’s belief and assumptions and on information currently available to our management. Although we believe that the expectations reflected in these forward-looking statements are reasonable, these statements relate to future events or our future financial performance, and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities and the effects of competition.

 

In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect our results. Factors that may cause actual results to differ materially from current expectations include, among other things, those described under “Risk Factors” and elsewhere in this prospectus. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those expressed or implied by the forward-looking statements. No forward-looking statement is a guarantee of future performance. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from any future results expressed or implied by these forward-looking statements.

 

The forward-looking statements in this prospectus represent our views as of the date of this prospectus. We anticipate that subsequent events and developments will cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this prospectus.

 

We obtained the industry, market and competitive position data used throughout this prospectus from our own internal estimates and research as well as from industry publications and research, surveys and studies conducted by third parties. Industry publications, research, surveys and studies generally state that they have been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. While we believe that such publications, research, surveys and studies are reliable, we have not independently verified industry, market and competitive position data from third party sources. While we believe our internal business research is reliable and market definitions are appropriate, neither such research nor these definitions have been verified by any independent source.

 

The Gartner report described herein represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc., and are not representations of fact. Each Gartner report speaks as of its original publication date (and not as of the date of this prospectus) and the opinions expressed in the Gartner report are subject to change without notice.

 

We estimate that the net proceeds from our sale of shares of our common stock in this offering will be approximately $      million based upon an assumed public offering price of $      per share, the mid-point of the price range set forth on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the common stock sold by the selling stockholders in this offering. A $      increase (decrease) in the assumed initial public offering price of $      per share would increase (decrease) the net proceeds to us from this offering by $      million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

We currently intend to use our net proceeds from this offering for working capital and other general corporate purposes, including capital expenditures and possible investments in, or acquisitions of, complementary businesses, services or technologies. We have no current agreements or commitments with respect to any investment or acquisition, and we currently are not engaged in negotiations with respect to any investment or acquisition. In addition, the amount and timing of any actual spending for these purposes may vary significantly and will depend on a number of factors, including our future revenue and cash generated by operations and other factors described under “Risk Factors” in this prospectus. Accordingly, our management will have broad discretion in applying our net proceeds of this offering. Pending these uses, we intend to invest the net proceeds in high quality, investment grade, short-term fixed income instruments which include corporate, financial institution, federal agency or U.S. government obligations.

 

We have never declared or paid dividends on our capital stock. We do not anticipate paying any dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. Any future determination to declare dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition, future prospects and any other factors deemed relevant by our board of directors. Investors should not purchase our common stock with the expectation of receiving cash dividends.

 

The following table sets forth our capitalization as of April 2, 2010:

 

 

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this prospectus.

 

 

 

The number of shares of common stock to be outstanding following this offering is based on 79,537,027 shares of our common stock outstanding as of April 2, 2010 and does not reflect:

 

 

If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

 

This discussion and the tables below are based on 79,537,027 shares of our common stock issued and outstanding as of April 2, 2010 and also include:

 

 

This discussion and the tables below do not reflect:

 

 

Our historical net tangible book value as of April 2, 2010 was approximately $     , or $      per share, based on           shares of common stock outstanding as of that date. Historical net tangible book value per share is determined by dividing our total tangible assets (total assets less intangible assets) less total liabilities and our preferred stock by the actual number of outstanding shares of our common stock. Our pro forma net tangible book value as of April 2, 2010 was approximately $     , or approximately $      per share, based on           shares of common stock outstanding after giving effect to (1) the issuance of an aggregate of 15,945,046 shares of our common stock issuable upon the automatic exchange of all of the outstanding common exchangeable shares of SiGe Canada in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus; and (2) the automatic conversion of all outstanding shares of our preferred stock, including all shares of our preferred stock issued in exchange for all of the outstanding preferred exchangeable shares of SiGe Canada, into an aggregate of 19,353,591 shares of our common stock in connection with this offering, as described in “Description of Capital Stock — Exchangeable Shares” elsewhere in this prospectus. Pro forma net tangible book value per share represents the amount of our total tangible assets (total assets less intangible assets) less total liabilities, divided by the pro forma number of shares of common stock outstanding before giving effect to this offering.

After giving effect to our sale of           shares of common stock in this offering based on an assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover of this prospectus, less underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value after this offering would have been $      per share. This represents an immediate increase in pro forma net tangible book value per share of $      to existing stockholders and immediate dilution in pro forma net tangible book value of $      per share to new investors purchasing our common stock in this offering at the initial public offering price. Dilution per share to new investors is determined by subtracting pro forma net tangible book value per share after this offering from the assumed initial public offering price per share paid by a new investor. The following table illustrates the per share dilution to new investors:

 

 

 

 

A $      increase (decrease) in the assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover of this prospectus, would increase (decrease) the pro forma net tangible book value per share after giving effect to this offering by $      per share and would increase (decrease) the dilution in pro forma net tangible book value per share to investors in this offering by $      per share. This calculation assumes that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

The following table summarizes as of April 2, 2010 the number of shares of our common stock purchased from us, the total cash consideration paid to us and the average price per share paid to us by existing stockholders and by new investors in this offering at an assumed initial public offering price of $      per share, the mid-point of the price range set forth on the cover of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us.

 

 

To the extent that outstanding options are exercised, you will experience further dilution. In addition, we may choose to raise additional capital due to market conditions or strategic considerations even if we believe we have sufficient funds for our current or future operating plans. To the extent that additional capital is raised through the sale of equity or convertible debt securities, the issuance of these securities may result in further dilution to our stockholders.

 

Sales by the selling stockholders in this offering will cause the number of shares held by the existing stockholders to be reduced to           shares or     % of the total number of shares of our common stock outstanding after this offering. If the underwriters exercise their option to purchase           additional shares of our common stock from the selling stockholders in this offering, the number of shares held by the existing stockholders after this offering would be reduced to     % of

the total number of shares of our common stock outstanding after this offering, and the number of shares held by new investors will increase to          million shares of our common stock, or     % of the total number of shares of our common stock outstanding after this offering.

 

The selected consolidated statement of operations data presented below for the year ended December 31, 2005, or fiscal 2005, and the year ended December 31, 2006, or fiscal 2006, and the summary consolidated balance sheet data as of December 31, 2005 and 2006 and December 28, 2007 have been derived from our audited annual consolidated financial statements not included in this prospectus. The selected consolidated statement of operations data presented below for fiscal 2007, fiscal 2008 and fiscal 2009, and the consolidated balance sheet data as of January 2, 2009 and January 1, 2010 have been derived from our audited annual consolidated financial statements included elsewhere in this prospectus. The selected consolidated statement of operations data for the first quarter of fiscal 2009 and the first quarter of fiscal 2010, and the selected consolidated balance sheet data as of April 2, 2010 have been derived from our unaudited quarterly consolidated financial statements included elsewhere in this prospectus. Our unaudited quarterly consolidated financial statements have been prepared on the same basis as our audited annual consolidated financial statements. In the opinion of management, our unaudited quarterly consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, that management considers necessary for the fair presentation of the information set forth in those financial statements.

 

Our historical results are not necessarily indicative of future operating results, and our results for the first quarter of fiscal 2010 are not necessarily indicative of results to be expected for the full year or for any other period. You should read this selected consolidated financial data in conjunction with the sections entitled “Risk Factors,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, all included elsewhere in this prospectus.

 

 

 

 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with “Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto which appear elsewhere in this prospectus. This discussion and analysis of our financial condition may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under the caption “Risk Factors” or in other parts of this prospectus.

 

Overview

 

We are a leading provider of highly integrated RF semiconductor front end solutions that enable wireless connectivity across a wide range of applications. Our innovative solutions integrate multiple RF functions into a single semiconductor device to deliver an optimal combination of performance, size, power output and efficiency. We have shipped more than 500 million front end solutions since our inception, primarily consisting of Wi-Fi front end modules and power amplifiers. Based on the latest available data published by Strategy Analytics, we were the leading global provider of these products in 2008 based on revenue.

 

We are a fabless semiconductor company and we outsource all of our manufacturing operations to leading semiconductor foundries and assembly and test contractors. This manufacturing model enhances our ability to rapidly scale production volumes, is highly capital efficient and affords us the flexibility to select the optimal technologies for each product. We have historically used a combination of silicon and non-silicon based process technologies to meet the needs of our customers, and we believe our predominant use of silicon based technologies positions us to effectively meet the technical demands of an array of high volume RF applications. We outsource silicon wafer fabrication to IBM Microelectronics, GaAs wafer fabrication to WIN Semiconductor and integrated passive device manufacturing to STATS ChipPAC. Our primary assembly and test contractors include Unisem, Foxconn and Tong Hsing.

 

We work closely with our reference design partners to incorporate our RF front end solutions into their reference designs. Our reference design partners include Atheros, Broadcom, CSR, Marvell and Ralink. We also work with our reference design partners to qualify and market our solutions to leading global OEMs and ODMs. We primarily sell our solutions to ODMs, distributors such as Promaster and Richpower and, to a lesser extent, directly to OEMs. According to publicly available information, our products have been incorporated into devices branded by leading OEMs, including Apple, Cisco, Hewlett-Packard, Lenovo, NetGear, Nintendo, Panasonic, Samsung and Thomson. We primarily sell our solutions to ODMs, including Hon Hai and USI, to distributors such as Promaster and RichPower, and, to a lesser extent, directly to OEMs.

 

Historically, a small number of customers represented a significant portion of our revenue. For fiscal 2009, Hon Hai, Promaster, USI, Nintendo and RichPower accounted for 27%, 18%, 15%, 15% and 14% of our revenue, respectively, and collectively accounted for 89% of our revenue for this period. We expect to continue to experience customer concentration in future periods.

 

Our typical sales cycle consists of a multi-month sales and development process and requires a substantial expenditure of resources before we receive revenue from product sales, if at all. The period from early engagement to high volume production typically takes six to 12 months for existing customers and 12 to 18 months for new customers. Our solutions typically remain part of a reference design during the life cycle of a product, which typically spans one to three years for computing, home entertainment and mobile applications and three to five years for networking applications.

 

The markets for certain of our products have exhibited a pattern of strong price erosion, especially as a new generation of a product is introduced to the market. In addition, we are constantly

working with our customers to redesign their products to incorporate new technology and to further reduce costs. Both of these trends are typical of the semiconductor industry and we expect these trends to continue in the future. Historically, our gross margins have not been significantly affected by declines in average selling prices because the pricing for our solutions has been typically fixed for the life of a product once our solutions have been incorporated into a reference design. To maintain our gross margins, we must continue to develop and introduce new solutions and enhancements on a timely basis and seek to reduce our costs. Failure to do so would cause our revenue and gross margins to decline.

 

Typically, our revenue has been higher in the second and third quarters due to seasonal consumer buying patterns. We believe our focus on multiple target markets and an expanding base of end applications will help to mitigate our exposure to volatility in any single target market.

 

Current uncertainty in global economic conditions poses several risks to our business, as customers may defer purchases in response to higher unemployment, tighter credit and negative economic trends, which would negatively affect demand for our solutions and our results of operations. As a result of the recent global recession and a decline in consumer spending, our revenue decreased significantly during the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009. In response, we reduced headcount and took other actions to reduce operating expenses, including implementing a salary freeze in fiscal 2009, which was subsequently lifted in the first quarter of fiscal 2010. Our operating results for the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009 were adversely affected by revenue declines and the costs associated with the steps we took to reduce operating expenses.

 

Revenue

 

Substantially all of our revenue is derived from the sale of RF front end semiconductor solutions and power amplifiers to ODMs and distributors and, to a lesser extent, directly to OEMs. Our solutions are incorporated into a broad range of devices including desktop and laptop computers and peripherals, consumer and enterprise networking equipment and home entertainment devices. We are expanding our presence in the smartphone and mobile Internet device markets and were recently added to the approved vendor list of, and began shipping products to, one of the world’s leading mobile handset manufacturers. We also recently introduced our first solutions for cellular infrastructure and smart energy applications.

 

Cost and Expenses

 

Cost of revenue.  Cost of revenue consists primarily of the cost of semiconductor wafers and other component parts, assembly, test and packaging costs and depreciation of automated test equipment. Cost of revenue also includes personnel and overhead costs associated with operations and logistics, as well as stock based compensation and occupancy costs. Cost of revenue also includes product fulfillment costs, warranty provisions and inventory reserves or write-offs.

 

Research and development.  Research and development expense includes personnel related costs, including stock based compensation, new product engineering mask costs, computer-aided design software costs, prototype design and development costs, depreciation and allocated occupancy and overhead costs. We receive government and other funding to support a portion of our research and development activities. Research and development costs are expensed as incurred and are presented net of funding earned. Research and development activities include new product design, refinement of existing solutions for use in next generation parts and design of test methodologies to ensure compliance with product specifications.

 

Selling, general and administrative.  Selling expense consists primarily of third party commissions, as well as personnel related costs, including stock based compensation.

During fiscal 2007, 2008, 2009 and the first quarters of fiscal 2009 and fiscal 2010, we incurred expenses of $5.8 million, $11.3 million, $9.2 million, $2.2 million and $1.8 million, respectively, under an incentive agreement with an unaffiliated third party pursuant to which we paid commissions in connection with our sale of specified products covered by the agreement. In July 2010, we entered into a payment agreement with that third party and at the same time terminated the incentive agreement. Under our new payment agreement, we have agreed to pay commissions in connection with our sale of certain of the specified products covered by the terminated incentive agreement. No new products have been added to either the incentive agreement or the payment agreement since April 2008. The payment agreement has an initial term that expires on December 31, 2013 and automatically renews each year thereafter for successive one-year terms unless either party provides written notice of its intention to terminate. We expect commissions payable under the payment agreement to decline over the term of this agreement as the products covered by this agreement are replaced by next generation products or are transitioned to end of life status.

 

Also included in selling expenses are field application engineering support costs, travel costs for direct sales and marketing personnel and allocated occupancy and overhead costs. General and administrative expense consists primarily of compensation and associated costs for executive management, and finance, legal and human resources staff, including stock based compensation, as well as outside professional fees, allocated occupancy and overhead costs and depreciation.

 

Interest income, net.  Interest income, net consists of interest earned on our cash and cash equivalents less interest expense.

 

Provision for income taxes.  In each period since our inception, we have recorded a valuation allowance against the full value of our deferred tax assets as the realization of the deferred tax assets is uncertain. In the future, our effective tax rate will vary based on a number of factors including overall profitability, the level of profitability by tax jurisdiction, the tax rates of those jurisdictions and our ability to utilize significant loss and credit carry-forwards to offset income taxes. Our historical income tax provisions are not necessarily reflective of our future results of operations.

 

For United States federal, United Kingdom and Canadian tax purposes, we had NOL carryforwards of approximately $21.6 million, $24.8 million and $7.0 million, respectively, as of January 1, 2010. The NOL carryforwards for United States federal tax purposes expire gradually from 2019 through 2029 and the NOL carryforwards for United Kingdom tax purposes do not expire. The Canadian NOL carryforwards expire in 2025 and 2026. We also have Canadian research and development expense carryforwards and investment tax credits of $23.1 million and $6.8 million, respectively. The Canadian research and development expense carryforwards are available to reduce any future Canadian taxable income and do not expire. The Canadian investment tax credits are available to reduce taxes payable and expire gradually from 2018 through 2029.

 

As discussed in more detail under “Risk Factors — Risks Related to Our Business — Our ability to use our United States federal net operating loss carryforwards may be limited,” under the Code, certain substantial cumulative changes in ownership could result in an annual limitation on the amount of NOL carryforwards that can be utilized in future years to offset future taxable income. Annual limitations may result in the expiration of NOL carryforwards before they are used.

 

Fiscal Period Presentation

 

During fiscal 2007, we changed our fiscal year end to be the Friday closest to December 31. Fiscal 2007 consisted of 52 weeks and ended on December 28, 2007. Fiscal 2008 consisted of 53 weeks and ended on January 2, 2009. Fiscal 2009 consisted of 52 weeks and ended on January 1, 2010. Fiscal 2010 will consist of 52 weeks and will end on December 31, 2010. The first quarters of fiscal 2009 and fiscal 2010 each consisted of 13 weeks and ended on April 3, 2009 and April 2, 2010, respectively.

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the relevant period. Actual results could differ from these estimates. Significant management estimates include assumptions used in the determination of inventory reserves, stock based compensation expense, warranty reserves, sales return reserves, the recoverability of long-lived assets and investment tax credits receivable.

 

Revenue recognition.  Revenue from product sales is recognized when evidence of an arrangement exists, the product is shipped to the customer, the selling price is fixed or determinable and collectability is reasonably assured. Certain product sales are made to electronic component distributors under agreements allowing for price protection and/or a right of return on unsold products. A reserve for sales returns and allowances for customers is recorded based on historical experience or specific identification of an event necessitating a reserve.

 

Inventory.  Inventory is valued at the lower of cost or market. Cost is determined using the first-in, first-out method. Provision is made for inventory on hand that is in excess of forecasted demand.

 

Stock based compensation.  Stock options are measured at the grant date based on the fair value of the award. For purposes of estimating the grant date fair value of stock based compensation, we use the Black-Scholes option-pricing model. The fair value of awards granted is recognized as compensation expense over the period that the employee is required to provide services in exchange for the options granted, typically the vesting period. We classify these amounts as compensation expense in the statements of operations based on the function performed by the employee. We recognized stock based compensation in the statements of operations as follows:

 

 

The total unrecognized compensation cost related to unvested stock option grants as of each of January 1, 2010 and April 2, 2010 was $1.0 million and the weighted average period over which these grants are expected to vest is 0.9 years and 1.1 years, respectively.

 

The fair value of options on their date of grant was determined using the Black-Scholes option-pricing model with the following assumptions:

 

The risk-free interest rate assumption was based on United States Treasury rates for zero-coupon bonds with maturities similar to those of the expected term of the award being valued. The assumed dividend yield reflects our expectation of not paying dividends in the foreseeable future. The weighted average expected life of options was calculated using the simplified method as prescribed by guidance provided by the Securities and Exchange Commission. The decision to use the simplified method was based on the lack of relevant historical data due to our limited operating history. Because of our lack of public trading history and the lack of historical data on the volatility of our common stock, we estimated our expected volatility based upon the historical volatilities of comparable companies within the semiconductor industry whose share prices are publicly available.

 

Given the absence of a public market for our common stock, our board of directors estimated the fair value of our common stock for purposes of determining stock based compensation expense for the relevant periods. Our board of directors, which includes members who are experienced in valuing the securities of privately-held companies, considered objective and subjective factors in determining the estimated fair value of our common stock on each grant date. Factors considered by our board of directors included:

 

 

Our board of directors performed valuations of our common stock on April 30, 2006, July 31, 2007, December 31, 2008, and May 13, 2010 to determine the fair value for options granted from March 31, 2006 through May 31, 2010. The April 30, 2006 valuation was prepared using the market-comparable approach and the income approach to estimate the aggregate enterprise value. The three other valuations were prepared using the option-pricing method using recent transactions involving the sale of shares of our preferred stock.

 

The market-comparable approach indicates the fair value of a business based on a comparison with comparable firms in similar lines of business that are publicly traded, as well as prior subject company transactions. Each comparable company was selected based on various factors, including, but not limited to, industry similarity, company size, financial risk, profitability, adequate financial data and an actively traded stock price.

 

The income approach indicates the fair value based on the cash flows that a business can be expected to generate over its remaining life. This approach begins with an estimation of the annual cash flows an investor would expect the subject company to generate over a discrete projection period. The estimated cash flows for each of the years are then converted to their present value using a rate of return appropriate for the risk of achieving the business’ projected cash flows. The present value of the estimated cash flows are then added to the present value equivalent of the residual value of the business at the end of the discrete projection period to arrive at an estimated fair value of the business.

Under the option-pricing method, each class of stock is modeled as a call option with a distinct claim on the equity value of the company. If at the date of a liquidity event, the equity value is less than the total liquidation preference of the preferred stock, the value of the common stock is zero. Conversely, if the equity value exceeds the total liquidation preference of the preferred stock, the common stock will be worth $1.00 for each dollar of enterprise value in excess of the total liquidation preference. In this case, the common stock is equal to a call option until the exercise price equals the liquidation value of the preferred stock.

 

We provided a financial forecast for each valuation to be used in the valuations discussed above. The financial forecasts took into account past experience and future expectations. There is inherent uncertainty in these estimates.

 

We also considered the fact that our stockholders cannot transfer their shares in the public markets or otherwise, except for very limited transfers amongst related entities. The estimated fair value of our common stock at each grant date reflected a discount for such lack of marketability partially based on the anticipated likelihood and timing of a liquidity event. The discount for lack of marketability was 30% for the April 30, 2006 valuation, zero for the July 31, 2007 valuation due to the recent pricing of shares of our preferred stock, 22% for the December 31, 2008 valuation and 15% for the May 13, 2010 valuation. The discount for lack of marketability was reduced to 15% in May 2010 as we were contemplating an initial public offering and there had been several recent arms-length sales among holders of our preferred stock.

 

The valuations as of April 30, 2006, July 31, 2007, December 31, 2008 and May 13, 2010 resulted in valuations of our common stock at $0.45, $0.21, $0.21 and $1.04, respectively. The principal reasons for the decrease in the estimated value of our common stock from April 30, 2006 to July 31, 2007 were as follows: (1) financial performance at a level lower than targeted plan performance, (2) projected operating losses, (3) changes in senior management, and (4) increased competitive pressures. The principal reasons for the increase in the estimated fair value of our common stock from July 31, 2007 to May 13, 2010 are as follows: (1) improved financial performance, (2) successful collaboration with new reference design partners and entry into new target markets, (3) improved financial and operational forecasts, and (4) recent third party arms-length sales among holders of our preferred stock at higher prices.

 

The following table shows the common stock option activity over the past four quarters including weighted average exercise price per share:

 

 

In June 2010, one of our stockholders notified us of its intention to sell 600,000 shares of common stock at $1.00 per share to a holder of our preferred stock. We exercised our right of first refusal to purchase these shares and we closed this transaction in July 2010.

 

We believe that we have used reasonable approaches, methodologies and assumptions consistent with the American Institute of Certified Public Accountants Practice Guide, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” to determine the fair value of our common stock. If we had made different assumptions and estimates than those described above, the amount of our recognized and to be recognized stock based compensation expense and net income (loss) amounts could have been materially different.

Based on the initial public offering price of $      per share, the aggregate intrinsic values of vested and unvested options to purchase our common stock outstanding at April 2, 2010 were approximately $      and $      , respectively.

 

Foreign currency translation.  We consider the U.S. dollar both the reporting and functional currency for our financial statements and the financial statements of our subsidiaries. The financial statements of our subsidiaries are re-measured from the local currency to U.S. dollars, as follows: monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date, and non-monetary items at exchange rates in effect when the assets were acquired or obligations incurred. Revenue and expenses are translated at the average exchange rates prevailing during the month of the transaction.

 

Warranty costs.  Our products are covered by product warranty plans that generally are for a period of one year. A liability for the expected cost of warranty-related claims is established when products are sold and the related revenue is recognized. The amount of the warranty liability accrued reflects an estimate of the expected future costs of honoring obligations under the warranty plan. In estimating the warranty liability, historical material replacement costs and other historical warranty costs are considered. Should future warranty claims differ from historical levels, revisions to the estimated warranty liability may be required.

 

Income taxes.  We apply the asset and liability method of recognizing deferred income taxes. Under this method, the differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases are recognized on our balance sheet as deferred income tax assets or liabilities. Deferred income taxes are adjusted to reflect the effects of changes in tax laws or enacted tax rates. We have deferred tax assets, which are subject to periodic recoverability assessments. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount that is likely to be realized. We account for refundable investment tax credits related to eligible research and development projects as a reduction of research and development expense. Refundable investment tax credits are accrued in the period the eligible expenditure is incurred and management believes recovery of such claims is probable.

 

Backlog

 

Our sales are generally made pursuant to short-term purchase orders. These purchase orders are made without deposits and may be rescheduled, canceled or modified on relatively short notice, and in most cases without substantial penalty. For these reasons, we believe that purchase orders and backlog are not reliable indicators of future sales.

Results of Operations

 

First Quarter of Fiscal 2009 Compared to First Quarter of Fiscal 2010

 

The following tables set forth selected statements of operations data derived from our unaudited consolidated financial statements, also expressed as a percentage of revenue, for the periods presented.

 

 

Revenue

 

Revenue for the first quarter of fiscal 2010 increased by $4.3 million, or 26%, to $20.7 million from $16.4 million for the first quarter of fiscal 2009. A significant amount of the year over year increase was generated through sales to our two largest distributors, which represented approximately 38% of revenue for the first quarter of fiscal 2010 as compared to 17% of revenue for the same period in the prior year. A portion of the revenue increase in the first quarter of fiscal 2010 also reflected new design wins in the computing and home entertainment sectors.

 

Cost of revenue

 

Cost of revenue for the first quarter of fiscal 2010 increased by $2.2 million, or 20%, to $13.0 million from $10.8 million for the first quarter of fiscal 2009. This increase primarily reflects an increase in units shipped during the same period. Gross profit as a percentage of revenue for the first quarter of fiscal 2010 was 37% as compared to 34% for the first quarter of fiscal 2009. The increase is attributable to lower product costs on certain high volume products due to yield improvements as well as fixed operating costs being applied against a significantly higher revenue base during the first quarter of fiscal 2010.

 

Research and development

 

Research and development expense for the first quarter of fiscal 2010 decreased by $666,000, or 17%, to $3.2 million from $3.9 million for the first quarter of fiscal 2009. This decrease was primarily attributable to an increase in funded research and development, from $148,000 in the first quarter of fiscal 2009 to $680,000 in the first quarter of fiscal 2010. This increase in funded research and development largely reflects reimbursed costs constituting a portion of a five-year funding grant awarded to us in March 2010 by the Government of Ontario. Research and development expense in

the first quarter of fiscal 2009 also includes approximately $172,000 of severance costs related to the termination of nine employees in research and development.

 

Selling, general and administrative

 

Selling, general and administrative costs for the first quarter of fiscal 2010 decreased by $135,000, or 3%, to $4.3 million from $4.4 million for the first quarter of fiscal 2009. Third party commissions related to the incentive agreement decreased $423,000 to $1.8 million for the first quarter of fiscal 2010 as compared to $2.2 million in the first quarter of fiscal 2009, resulting from lower unit sales of the products covered under the incentive agreement. The first quarter of fiscal 2009 also included severance costs of $82,000 associated with the termination of four selling, general and administrative employees.

 

Interest income, net

 

Interest income, net for the first quarter of fiscal 2010 decreased by $43,000, or 83%, to $9,000 from $52,000 for the first quarter of fiscal 2009. The decrease was primarily due to lower cash balances during the first quarter of fiscal 2010, as well as lower yields earned on invested cash.

 

Fiscal 2008 Compared to Fiscal 2009

 

 

Revenue

 

Revenue for fiscal 2009 decreased by $14.3 million, or 15%, to $82.6 million from $96.9 million for fiscal 2008. The decrease in revenue during fiscal 2009 was primarily attributable to a reduction in customer orders, as well as lower average selling prices of certain products sold for computing applications. Revenue from products used in personal navigation devices and home entertainment applications both decreased during fiscal 2009 due to a decrease in unit volume shipments for these products resulting from decreased consumer spending. Revenue from products used in personal navigation devices was also negatively affected by a decrease in the average selling price for our solutions used in those devices.

Cost of revenue

 

Cost of revenue for fiscal 2009 decreased by $9.6 million, or 15%, to $53.6 million from $63.2 million for fiscal 2008. This decrease primarily reflects a decline in units shipped during fiscal 2009. Gross profit as a percentage of revenue for both fiscal years was 35%. Despite improved production yields on certain products introduced in the second half of fiscal 2008, our gross profit as a percentage of revenue remained flat due to fixed operating costs applied against a lower revenue base, as well as increases in costs of raw materials, such as gold, used in certain of our products.

 

Research and development

 

Research and development expense for fiscal 2009 decreased by $1.4 million, or 8%, to $15.1 million from $16.4 million for fiscal 2008. The decrease in research and development expense is primarily attributable to an increase in funded research and development, as well as lower compensation costs for employees located in our Ottawa design center due to lower headcount and a favorable change in the exchange rate for the Canadian dollar against the U.S. dollar during fiscal 2009 as compared to fiscal 2008. During the first quarter of fiscal 2009, in response to the global economic recession, we eliminated nine employees in research and development.

 

Selling, general and administrative

 

Selling, general and administrative costs for fiscal 2009 decreased by $3.1 million, or 14%, to $18.5 million from $21.6 million for fiscal 2008. Third party commissions related to our incentive agreement decreased by $2.1 million to $9.2 million for fiscal 2009 as compared to $11.3 million in fiscal 2008, reflecting lower unit shipments of products covered under the incentive agreement. Travel and other costs also decreased significantly in fiscal 2009 as compared to fiscal 2008 as a result of our efforts to reduce operating expenses.

 

Interest income, net

 

Interest income, net for fiscal 2009 decreased by $213,000, or 56%, to $167,000 from $380,000 during fiscal 2008. The decrease was primarily due to lower cash balances in fiscal 2009 as well as lower yields earned on invested cash.

 

Fiscal 2007 Compared to Fiscal 2008