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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-51349

 

 

Advanced Analogic Technologies Incorporated

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

Delaware		77-0462930
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
3230 Scott Blvd., Santa Clara, California		95054
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(408) 737-4600

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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

Large accelerated filer  ¨        Accelerated filer  x        Non-accelerated filer  ¨        Smaller reporting Company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

There were 42,212,503 shares of the registrant’s common stock outstanding as of October 22, 2010.

 

 

 

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TABLE OF CONTENTS

 

				PAGE
PART I. FINANCIAL INFORMATION					3
ITEM 1.		FINANCIAL STATEMENTS (UNAUDITED)			3
		CONDENSED CONSOLIDATED BALANCE SHEETS AT SEPTEMBER 30, 2010 AND DECEMBER 31, 2009			3
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009			4
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND SEPTEMBER 30, 2009			5
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			6
ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			16
ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			23
ITEM 4.		CONTROLS AND PROCEDURES			24
PART II. OTHER INFORMATION					25
ITEM 1.		LEGAL PROCEEDINGS			25
ITEM 1A.		RISK FACTORS			26
ITEM 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			36
ITEM 3.		DEFAULTS UPON SENIOR SECURITIES			36
ITEM 4.		REMOVED AND RESERVED			36
ITEM 5.		OTHER INFORMATION			36
ITEM 6.		EXHIBITS			36

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except shares and par value)

 

		September 30, 2010				December 31, 2009
Assets
Current assets
Cash and cash equivalents		$	30,160			$	36,120
Short-term investments			60,609				65,883
Total cash, cash equivalents and short-term investments			90,769				102,003
Accounts receivable, net of allowances			15,250				9,348
Inventories			11,911				7,234
Prepaid expenses and other current assets			2,223				4,291
Total current assets			120,153				122,876
Property and equipment, net			4,676				4,607
Other assets			3,502				3,110
Deferred income taxes			291				318
Intangibles, net			67				117
Goodwill			16,116				16,116
Total assets		$	144,805			$	147,144
Liabilities and stockholders’ equity
Current liabilities
Accounts payable		$	13,716			$	6,614
Accrued liabilities			4,714				3,726
Income tax payable			107				114
Total current liabilities			18,537				10,454
Long-term income tax payable			1,820				4,365
Other long-term liabilities			295				275
Total liabilities			20,652				15,094
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock, $0.001 par value—100,000,000 shares authorized; 46,389,102 and 42,195,661 shares issued and outstanding, respectively, as of September 30, 2010; 46,127,931 and 42,934,490 shares issued and outstanding, respectively, as of December 31, 2009			46				46
Treasury stock, at cost; 4,193,441 and 3,193,441 shares as of September 30, 2010 and December 31, 2009, respectively			(12,251	)			(8,649	)
Additional paid-in capital			187,427				182,457
Accumulated other comprehensive loss			(69	)			(212	)
Accumulated deficit			(51,000	)			(41,592	)
Total stockholders’ equity			124,153				132,050
Total liabilities and stockholders’ equity		$	144,805			$	147,144

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share amounts)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
Net revenues		$	24,982			$	26,140			$	70,046			$	65,667
Cost of revenues			14,111				12,763				38,035				33,763
Gross profit			10,871				13,377				32,011				31,904
Operating expenses:
Research and development			8,679				6,928				23,617				20,319
Sales, general and administrative			6,546				6,337				18,816				18,047
Patent litigation			41				1,013				1,370				1,699
Total operating expenses			15,266				14,278				43,803				40,065
Loss from operations			(4,395	)			(901	)			(11,792	)			(8,161	)
Interest and other income:
Interest and investment income			51				177				228				793
Other income (expense), net			(63	)			(36	)			(156	)			16
Total interest and other income (expense), net			(12	)			141				72				809
Loss before income taxes			(4,407	)			(760	)			(11,720	)			(7,352	)
Provision for (benefit from) income taxes			(3,114	)			256				(2,312	)			1,361
Net loss		$	(1,293	)		$	(1,016	)		$	(9,408	)		$	(8,713	)
Net loss per share:
Basic		$	(0.03	)		$	(0.02	)		$	(0.22	)		$	(0.20	)
Diluted		$	(0.03	)		$	(0.02	)		$	(0.22	)		$	(0.20	)
Weighted average shares used in net loss per share calculation:
Basic			42,156				42,956				42,665				42,982
Diluted			42,156				42,956				42,665				42,982

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

 

		Nine Months Ended September 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(9,408	)		$	(8,713	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			1,385				1,540
Stock-based compensation			4,351				4,940
Provision for doubtful accounts			(1	)			34
Net unrealized gain on trading securities			(3	)			(61	)
Loss on sales of property and equipment			20				69
Changes in operating assets and liabilities:
Accounts receivable			(5,901	)			(7,410	)
Inventories			(4,674	)			(356	)
Prepaid expenses and other current assets			709				(155	)
Other assets			22				(27	)
Deferred income taxes			27				(47	)
Accounts payable			7,457				6,345
Accrued liabilities and other long-term liabilities			946				457
Income taxes payable			(2,552	)			1,170
Net cash used in operating activities			(7,622	)			(2,214	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(2,012	)			(736	)
Purchases of short-term investments			(102,744	)			(64,584	)
Proceeds from sales and maturities of short-term investments			108,023				53,886
Sale of auction-rate securities			1,350				50
Purchases of long-term investment			—				(175	)
Net cash provided by (used in) investing activities			4,617				(11,559	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of common stock options			618				97
Common stock repurchases			(3,602	)			(3,299	)
Principal payments on capital lease obligations			—				(41	)
Net cash used in financing activities			(2,984	)			(3,243	)
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS			29				42
NET DECREASE IN CASH AND CASH EQUIVALENTS			(5,960	)			(16,974	)
CASH AND CASH EQUIVALENTS—Beginning of period			36,120				52,094
CASH AND CASH EQUIVALENTS—End of period		$	30,160			$	35,120
NONCASH INVESTING ACTIVITY:
Increase (decrease) in accounts payable and accrued liabilities related to property and equipment purchases		$	(305	)		$	75
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	—			$	1
Cash paid for income taxes		$	144			$	141

See accompanying notes to the unaudited condensed consolidated financial statements.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Advanced Analogic Technologies Incorporated (the “Company”) have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”). Certain information and disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with these rules and regulations. The information in this report should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in its annual report on Form 10-K filed with the SEC on February 19, 2010.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and nine months ended September 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010 or for any other future period. The condensed consolidated balance sheet as of December 31, 2009 is derived from the audited consolidated financial statements as of and for the year then ended.

2. INVESTMENTS

As of September 30, 2010 and December 31, 2009, the Company had investments in short-term debt instruments and long-term auction rate securities (ARS), which were classified as available-for-sale. As of December 31, 2009, the Company also had investments in ARS that were classified as trading securities. Short-term investments consist primarily of investment grade debt securities with a maturity of greater than 90 days at the time of purchase. Interest earned on securities is included in “Interest and investment income” in the Condensed Consolidated Statements of Operations.

The Company’s available-for-sale investments are carried at fair market value with the related unrealized gains and losses included in accumulated other comprehensive loss, which is a separate component of stockholders’ equity. The Company records other-than-temporary impairment charges for its available-for-sale investments when it intends to sell the securities, it is more likely than not that it will be required to sell the securities before a recovery, or when it does not expect to recover the entire amortized cost basis of the securities. Trading securities are carried at fair value with unrealized gains and losses recognized in earnings. The cost of securities sold is based on the specific identification method.

The following table, which excludes cash, is a summary of cash equivalents, short-term investments and long-term investments classified as available-for-sale as of September 30, 2010 and December 31, 2009:

 

		September 30, 2010
		Amortized Cost				Unrealized Gains				Unrealized (Losses)				Estimated Fair Value
		(in thousands)
Money market funds		$	25,224			$	—			$	—			$	25,224
Municipal bonds			11,551				—				(2	)			11,549
U.S. Treasury bills			49,059				2				(1	)			49,060
Auction rate securities			1,800				—				(88	)			1,712
Total		$	87,634			$	2			$	(91	)		$	87,545
Amounts included in:
Cash equivalents		$	25,224			$	—			$	—			$	25,224
Short-term investments			60,610				2				(3	)			60,609
Other assets			1,800				—				(88	)			1,712
Total		$	87,634			$	2			$	(91	)		$	87,545

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

		December 31, 2009
		Amortized Cost				Unrealized Gains				Unrealized (Losses)				Estimated Fair Value
		(in thousands)
Money market funds		$	15,964			$	—			$	—			$	15,964
Municipal bonds			65,129				13				(23	)			65,119
U.S. government agency bonds			11,999				12				—				12,011
Auction rate securities			1,950				—				(125	)			1,825
Total		$	95,042			$	25			$	(148	)		$	94,919
Amounts included in:
Cash equivalents		$	27,213			$	—			$	(2	)		$	27,211
Short-term investments			65,879				25				(21	)			65,883
Other assets			1,950				—				(125	)			1,825
Total		$	95,042			$	25			$	(148	)		$	94,919

3. FAIR VALUE MEASUREMENTS

The Company’s financial assets are measured at fair value. Fair value is the price that the Company estimates would be received to sell its financial assets in an orderly transaction between market participants at the measurement date.

Fair Value Hierarchy

The Company classifies investments within Level 1 of the fair value hierarchy when the fair value is based on quoted prices in active markets for identical assets or liabilities. The Company considers a market to be active when transactions for the asset occur with sufficient frequency and volume to provide pricing information on an ongoing basis. As of September 30, 2010, the Company’s Level 1 investments consisted of money market funds and U.S. Treasury bills.

The Company classifies investments within Level 2 of the fair value hierarchy when the fair value is based on broker/dealer quotes which use observable market inputs instead of quoted market prices in active markets. As of September 30, 2010, the Company’s Level 2 investments consisted of municipal bonds.

Investments are classified within Level 3 of the fair value hierarchy if the fair value is determined using unobservable inputs that are not corroborated by market data. The valuation of Level 3 investments requires the use of significant management judgments or estimation. As of September 30, 2010, the Company’s Level 3 investments consisted of ARS. The methodology used for determining the fair value of these Level 3 financial assets is described below.

The following table, which excludes cash, presents the fair value of the Company’s cash equivalents, short-term investments and long-term investments as of September 30, 2010 and December 31, 2009:

 

										Fair Value Measurements as of September 30, 2010  Using:
		Carrying Amount				Total fair value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(in thousands)
Available-for-sale securities:
Money market funds		$	25,224			$	25,224			$	25,224			$	—			$	—
Municipal bonds			11,549				11,549				—				11,549				—
U.S. Treasury bills			49,060				49,060				49,060				—				—
Auction rate securities			1,712				1,712				—				—				1,712
Total Available-for-sale securities		$	87,545			$	87,545			$	74,284			$	11,549			$	1,712
Amounts included in:
Cash and cash equivalents		$	25,224
Short-term investments			60,609
Other assets			1,712
Total		$	87,545

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

										Fair Value Measurements as of December 31, 2009  Using:
		Carrying Amount				Total Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(in thousands)
Available-for-sale securities:
Money market funds		$	15,964			$	15,964			$	15,964			$	—			$	—
Municipal bonds			65,119				65,119				—				65,119				—
U.S. government agency bonds			12,011				12,011				—				12,011				—
Auction rate securities			1,825				1,825				—				—				1,825
Total Available-for-sale securities		$	94,919			$	94,919			$	15,964			$	77,130			$	1,825
Other investments:
Auction rate securities classified as trading securities		$	593			$	593			$	—			$	—			$	593
ARS put option			604				604				—				—				604
Total Other investments		$	1,197			$	1,197			$	—			$	—			$	1,197
Amounts included in:
Cash and cash equivalents		$	27,211
Short-term investments			65,883
Prepaid expenses and other current assets			1,197
Other assets			1,825
Total		$	96,116

The following table provides a reconciliation of the beginning and ending balances for the assets measured at fair value using unobservable inputs (Level 3):

 

		Fair Value Measurement  Using Significant Unobservable Inputs (Level 3)
		Auction Rate Securities				ARS Put Option
Beginning balances as of December 31, 2009		$	2,418			$	604
Unrealized gain included in accumulated other comprehensive loss			8				—
Unrealized gain (loss) recognized in earnings			400				(397	)
Ending balances as of March 31, 2010			2,826				207
Unrealized gain included in accumulated other comprehensive loss			10				—
Unrealized gain (loss) recognized in earnings			19				(19	)
Purchases, sales, issuances and settlements, net			(50	)			—
Ending balances as of June 30, 2010			2,805				188
Unrealized gain included in accumulated other comprehensive loss			19				—
Purchases, sales, issuances and settlements, net			(1,112	)			(188	)
Ending balances as of September 30, 2010		$	1,712			$	—
The amount of total unrealized gain for the period included in accumulated other comprehensive loss attributable to assets still held at the reporting date		$	37			$	—
The amount of total unrealized gain for the period recognized in earnings attributable to assets still held at the reporting date		$	—			$	—

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Auction Rate Securities

As of September 30, 2010, the Company’s investment portfolio included $1.8 million of ARS with a fair value of $1.7 million. As of December 31, 2009, the Company’s investment portfolio included $3.2 million of ARS with a fair value of $2.4 million.

During the quarter-ended December 31, 2008, the Company entered into a settlement agreement with UBS under which it was granted ARS exchange rights (“ARS Put Option”) that provided it with the right, but not the obligation, to sell one of its ARS to UBS for the full $1.2 million par value during the period of June 30, 2010 to July 2, 2012. The Company exercised its ARS Put Option to sell these ARS to UBS on June 30, 2010. Following the exercise of the ARS Put Option, the sale of these ARS was settled and the $1.2 million of cash was received on July 1, 2010. During the nine months ended September 30, 2010, the Company also sold $0.2 million of its other ARS at par value through issuer redemptions.

As of September 30, 2010, the fair value of the Company’s Level 3 assets decreased by $1.3 million primarily due to the sale of the ARS to UBS per the settlement agreement. As the Company sold the ARS at full par value, there was no resulting impact on the condensed consolidated statements of operations for the three and nine months ended September 30, 2010.

The Company’s ARS are interest-bearing investments in debt obligations collateralized by Federal Family Education Program student loans. The Company considers the ARS market to be inactive because auctions have failed to settle on their respective settlement dates since 2008. Further, the secondary market for ARS is inactive and there have been few issuer repurchases. The Company believes that available pricing information is not determinative of the ARS fair value. As such, the Company estimated the fair value of its ARS as of September 30, 2010 and December 31, 2009 using a discounted cash flow model.

To determine the fair value of its ARS, the Company estimated the contractual interest that will be earned during the expected time to liquidity, and discounted these cash flows to reflect liquidity and credit risk. The discount factor represents the current market conditions for instruments with similar credit quality, adjusted by 300 basis points to reflect the risk in the marketplace for the ARS. The following average assumptions were used to determine the ARS fair value as of September 30, 2010 and December 31, 2009:

 

		September 30, 2010		December 31, 2009
Expected time to liquidity		2 years		2 to 4 years
Expected annual rate of return		1.3% to 1.8%		1.1% to 1.7%
Discount rate		4.1%		4.9% to 19.3%

As of September 30, 2010, the Company’s ARS are classified within other long-term assets on the condensed consolidated balance sheet because the Company estimates that it will take longer than one year for a successful auction or issuer repurchase to occur.

4. STOCKHOLDERS’ EQUITY

Common Stock Repurchases

On October 29, 2008, the Company’s board of directors authorized a program to repurchase shares of the Company’s outstanding common stock. Under the stock repurchase program, the Company was authorized to use up to $30 million to repurchase shares of its outstanding common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased depends upon market conditions and other factors, in accordance with SEC requirements.

During the three months ended September 30, 2010 and September 30, 2009, the Company did not repurchase any shares of its common stock. During the nine months ended September 30, 2010, the Company repurchased 1.0 million shares of its common stock for a total cost of $3.6 million. During the nine months ended September 30, 2009, the Company repurchased 1.1 million shares of its common stock for a total cost of $3.3 million. As of September 30, 2010, the Company has $17.7 million of remaining funds authorized to purchase shares under the stock repurchase program. Shares repurchased are accounted for as treasury stock and the total cost of shares repurchased is recorded as a reduction to stockholders’ equity.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

Stock-Based Compensation Expense and Valuation of Awards

The following table summarizes stock-based compensation expense included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2010 and September 30, 2009:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
Statement of operations classifications		2010				2009				2010				2009
Cost of revenues		$	120			$	79			$	257			$	227
Research and development			832				767				1,969				2,199
Sales, general and administrative			825				873				2,125				2,514
Total stock-based compensation expense		$	1,777			$	1,719			$	4,351			$	4,940

There was no related tax effect for stock-based compensation expense for the three and nine months ended September 30, 2010 and September 30, 2009 as the Company has a full valuation allowance against its U.S. deferred tax assets.

During the three months ended September 30, 2010, in connection with the departure of two of the Company’s officers, the Company recognized $0.4 million of stock-based compensation expense related to the modification of stock option agreements allowing for an extended post-termination exercise period and accelerated vesting of stock options as part of the separation and release agreements with these officers. During the three months ended September 30, 2010, the Company also recognized $0.2 million of stock-based compensation expense for restricted stock units granted to the officers in connection with their departure.

The Company uses the Black-Scholes option pricing model to calculate the grant date fair value of stock options. The Company used the following weighted average assumptions to calculate the fair value of stock options granted during the three and nine months ended September 30, 2010 and September 30, 2009:

 

		Three Months  Ended September 30,								Nine Months  Ended September 30,
		2010				2009				2010				2009
Volatility			63	%			53	%			63	%			58	%
Expected option term (in years)			4.71				4.24				4.79				3.89
Expected annual dividend yield			0	%			0	%			0	%			0	%
Risk free interest rate			1.52	%			2.13	%			2.18	%			1.66	%

The expected term of the Company’s stock options represents the estimated weighted-average period that the stock options are expected to remain outstanding. Beginning in 2010, to determine the expected term, the Company estimates future employee exercise behavior by considering its historical option exercise and post-vest cancellation experience as well as the contractual term of its stock option grants. The Company bases its expected volatility assumption on its daily historical volatility data over a period commensurate with the expected term. Due to the low volume of traded options on the Company’s common stock and because the term of traded options was much shorter than the expected term of the Company’s stock options, implied volatility was not included in the valuation of options granted during the three and nine months ended September 30, 2010. Prior to 2010, due to the limited history of trading since the Company’s initial public offering in 2005, the Company’s expected term and volatility assumptions were based in part on the volatility and expected term data of a group of peer companies.

The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the Company’s stock options. The dividend yield is based on the Company’s history and expectation of dividend payouts. The Company has never declared or paid any cash dividends on common stock, and it does not anticipate paying cash dividends in the foreseeable future. Compensation expense for all share-based payment awards is recognized using the straight-line single-option method over the vesting period of the stock options.

During the three months ended September 30, 2010, the Company granted 0.3 million restricted stock units with a total fair value of $1.1 million. For restricted stock units, the fair value is based on the closing stock price of the Company’s common stock on the grant date, multiplied by the number of restricted stock units granted. The fair

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

5. NET LOSS PER SHARE

The Company calculates basic net loss per common share by dividing net loss by the weighted-average number of common shares outstanding during the period. To determine diluted net loss per common share, the effect of potentially dilutive securities, which consist of common stock options and restricted stock units, is calculated under the treasury stock method. The effect of potentially dilutive securities is excluded from the computation of diluted net loss per share when their effect is anti-dilutive.

A reconciliation of shares used in the calculation of basic and diluted net loss per share is as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(in thousands)
Weighted average shares used to calculate basic net loss per share			42,156				42,956				42,665				42,982
Effect of dilutive securities:
Stock options			—				—				—				—
Restricted stock units			—				—				—				—
Dilutive potential common stock			—				—				—				—
Weighted average shares used to calculate diluted net loss per share			42,156				42,956				42,665				42,982

The Company excluded 9.0 million and 8.0 million potentially dilutive securities from the computation of diluted net loss per share for the three months ended September 30, 2010 and September 30, 2009, respectively. The Company excluded 9.1 million and 7.8 million potentially dilutive securities from the computation of diluted net loss per share for the nine months ended September 30, 2010 and September 30, 2009, respectively.

6. OTHER COMPREHENSIVE LOSS

Other comprehensive loss includes charges or credits to equity that are not the result of transactions with owners. The components of comprehensive loss are as follows:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(in thousands)								(in thousands)
Net loss, as reported		$	(1,293	)		$	(1,016	)		$	(9,408	)		$	(8,713	)
Changes in cumulative translation adjustment			92				47				100				66
Changes in unrealized gains (losses) on investments, net of taxes			25				(43	)			43				(190	)
Total other comprehensive loss		$	(1,176	)		$	(1,012	)		$	(9,265	)		$	(8,837	)

7. DETAILS OF CERTAIN BALANCE SHEET COMPONENTS

 

		September 30, 2010				December 31, 2009
		(in thousands)
Inventories
Work in process		$	7,627			$	3,209
Finished goods			4,284				4,025
Total inventories		$	11,911			$	7,234
Property and equipment, net
Computers and software		$	5,652			$	5,458
Office and test equipment			8,084				7,439
Leasehold improvements			1,566				1,441
Gross property and equipment			15,302				14,338
Accumulated depreciation and amortization			(10,626	)			(9,731	)
Total property and equipment, net		$	4,676			$	4,607
Accrued liabilities
Accrued payroll and benefits		$	2,138			$	1,645
Deferred revenue			127				110
Accrued legal and accounting services			98				458
Warranty reserve			48				105
Restructuring reserve (1)			547				—
Accrued payables and other			1,756				1,408
Total accrued liabilities		$	4,714			$	3,726

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

(1) During the three months ended September 30, 2010, the Company approved and communicated a restructuring plan for the purpose of reducing future operating expenses by terminating approximately 15 percent of its U.S. workforce. The Company recorded a restructuring charge of $0.5 million during the three months ended September 30, 2010 for severance and insurance benefit payments to be made in connection with the reduction in force. The Company expects to make all severance payments during the three months ending December 31, 2010, while insurance benefits are expected to be paid within the next twelve months.

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of net tangible and identifiable intangible assets acquired in a business combination. As of September 30, 2010, the Company’s goodwill balance was $16.1 million, of which $15.7 million relates to the Company’s October 2006 acquisition of Analog Power Semiconductor Corporation and $0.4 million relates to the Company’s June 2008 acquisition of Elite Micro Devices, Inc.

The Company evaluates goodwill for impairment, at a minimum, on an annual basis on September 30 and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. The Company performed its annual goodwill impairment test as of September 30, 2010 and determined that goodwill was not impaired.

Intangible Assets

The Company’s intangible asset balance was $0.1 million as of September 30, 2010 and $0.1 million as of December 31, 2009. The Company amortizes intangible assets on a straight-line basis over the estimated useful life of the assets. The intangible assets balance of $0.1 million will be amortized over the remainder of 2010 and 2011.

9. SEGMENT INFORMATION

The Company operates in one reportable segment: the design, development, marketing and sale of power management semiconductor products and solutions for the communications, computing and consumer portable and personal electronics marketplace. The Company’s chief operating decision maker is its chief executive officer.

The following is a summary of net revenues by geographic region based on the location to which the product is shipped:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2010				2009				2010				2009
		(in thousands)
South Korea		$	12,020			$	18,201			$	35,061			$	44,970
China			4,791				4,723				14,500				13,126
Taiwan			7,089				2,547				17,261				5,028
Europe			219				266				862				1,064
North America			311				191				861				883
Japan			552				212				1,501				596
Total		$	24,982			$	26,140			$	70,046			$	65,667

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

The following table summarizes net revenues and accounts receivable for customers who accounted for 10% or more of accounts receivable or net revenues, respectively:

 

		Accounts Receivable as of								Net Revenues Three Months Ended September 30,								Net Revenues Nine Months Ended September 30,
		September 30, 2010				December 31, 2009				2010				2009				2010				2009
Customer
A			37	%			42	%			27	%			37	%			27	%			33	%
B			18	%			29	%			15	%			25	%			17	%			25	%
C			16	%			*				15	%			*				10	%			*
D			*				*				*				*				10	%			*

 

*	Amount represents less than 10%.

10. INCOME TAXES

The Company adjusts its effective tax rate each quarter to be consistent with the estimated annual effective tax rate. The Company also records the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. The Company’s effective tax rate reflects the impact of a significant amount of its earnings being taxed in foreign jurisdictions at tax rates below the United States statutory tax rate and a valuation allowance maintained on the Company’s U.S. deferred tax assets.

The Company recorded a tax benefit of $3.1 million for the three months ended September 30, 2010 and a tax provision of $0.3 million for the three months ended September 30, 2009. The Company recorded a tax benefit of $2.3 million for the nine months ended September 30, 2010 and a tax provision of $1.4 million for the nine months ended September 30, 2009. The significant decrease in the Company’s tax provision from both the three and nine months ended 2009 to 2010 is primarily related to a tax benefit recorded from the reversal of liabilities for uncertain tax positions as a result of the conclusion of the 2005 and 2006 audits by the Internal Revenue Service (“IRS”) and from an increase in loss before taxes.

The Company established a full valuation allowance against its United States deferred tax assets on December 31, 2008. The Company has established valuation allowances for deferred tax assets based on a “more likely than not” threshold. The Company’s ability to realize its deferred tax assets depends on its ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of its deferred tax assets:

 

•

Future reversals of existing taxable temporary differences;

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards;

 

•

Taxable income in prior carryback years; and

 

•

Tax-planning strategies.

The Company concludes that a valuation allowance is required when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. The Company utilizes a rolling three years of actual results as its primary measure of its cumulative losses in recent years. As of September 30, 2010, the Company continues to have a three year cumulative loss and, therefore, concluded that a valuation allowance is still required.

During the nine months ended September 30, 2010, the Company decreased its total amount of unrecognized tax benefits by approximately $5.7 million as a result of a $7.9 million release of the accrual related to the settlement of the 2005 and 2006 IRS audit, partially offset by a $1.3 million increase from the filing of the 2009 tax return and an accrual for uncertain tax positions for the current year of $0.9 million. The current year increase includes an

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

accrual of interest and penalties of less than $0.1 million. The Company recognizes interest and penalties accrued related to unrecognized tax benefits in income tax expense.

During the three and nine months ended September 30, 2010, the Company recorded a one-time tax benefit of $3.4 million and $2.8 million, respectively, from the settlement of an IRS examination with the Appeals Division for tax years 2005 and 2006. As of September 30, 2010, the Company decreased the accrual for uncertain tax positions by $7.9 million, of which $5.1 million offset deferred tax assets which currently has a full valuation allowance against it.

In April 2010, the Company received an IRS examination report showing proposed changes to its income tax for the 2007 tax year. The Company filed a timely protest to the April 2010 IRS examination report in May 2010 and is currently waiting for discussions with the IRS Appeals Division. The Company believes the adjustments proposed in the IRS examination report are not supported by the facts and are inconsistent with applicable tax laws and existing Treasury regulations. No payments, if any, will be made related to the disputed proposed adjustments until the issues are resolved with either the IRS Appeals Division or the tax court. The Company believes that it has adequately provided in its financial statements for any additional taxes that it may be required to pay as a result of the examination.

Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, the Company is unable to estimate the range of possible adjustments to the balance of gross unrecognized tax benefits.

11. COMMITMENTS AND CONTINGENCIES

Indemnification and Product Warranty

The Company indemnifies certain customers, distributors, suppliers, and subcontractors for attorneys’ fees and damages and costs awarded against these parties in certain circumstances in which the Company’s products are alleged to infringe third party intellectual property rights, including patents, trade secret, trademarks, or copyrights. The Company cannot estimate the amount of potential future payments, if any, that it might be required to make as a result of these agreements. To date, the Company has not paid any claim or been required to defend any action related to its indemnification obligations, and accordingly, it has not accrued any amounts for such indemnification obligations. However, the Company may record charges in the future as a result of these indemnification obligations.

The Company provides a warranty against defects in materials and workmanship and will either repair the goods, provide replacement products at no charge to the customer or refund amounts to the customer for defective products. The Company records estimated warranty costs, based on historical experience by product, at the time it recognizes product revenues. The Company’s warranty reserve balance was less than $0.1 million as of September 30, 2010 and $0.1 million as of December 31, 2009.

Legal Proceedings

In May 2003, the Company received a letter from Linear Technology Corporation (“Linear Technology”) alleging that certain of its charge pump products infringed United States Patent No. 6,411,531 (‘531 Patent) owned by Linear Technology. In August 2004, the Company received a letter from Linear Technology alleging that certain of its switching regulator products infringed United States Patent Nos. 5,481,178, 6,304,066 and 6,580,258 (‘258 Patent). In response to these letters, the Company contacted Linear Technology to convey its good faith belief that it does not infringe the patents in question. Subsequently, the Company became aware of a marketing campaign conducted by Linear Technology in which it sought to disrupt the Company’s business relationships and sales by suggesting to the Company’s customers that its products infringe the same United States patents mentioned in its two letters to the Company. As a result, in February 2006, the Company initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. This case is currently stayed pending the outcome of the United States International Trade Commission (“USITC”) action described in the following paragraphs.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

 

 

In March 2006, the USITC responded to a complaint filed by Linear Technology by initiating an investigation under Section 337 of the Tariff Act to determine if certain of the Company’s products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in the Company’s lawsuit with Linear Technology. A final determination was issued September 24, 2007 which was followed by separate appeals for the charge pump and switching regulator products. The last of these appeals, including the parties’ respective requests for rehearing, ended in 2009. The overall result of these processes clears the path for importation of the Company’s charge pump products. A limited exclusion order was also issued preventing the Company from importing certain of its switching regulator designs and the scope of this order was expanded by the appeals process. This exclusion order does not, however, prevent the Company’s customers from importing downstream products (i.e., products that incorporate AATI switching regulators) into the United States. To date, the Company’s sales of the excluded products in the United States have been minimal.

On October 1, 2008, the USITC initiated a formal enforcement proceeding at the request of Linear Technology. In that enforcement proceeding, Linear Technology alleges that the Company imported certain switching regulator products in violation of the limited exclusion order originally issued on September 24, 2007. The list of products alleged to be in violation was modified by a mutual agreement between the parties under which the Company voluntarily agreed to cease importation of its switching regulator products that do not use its most recent low-noise design. A trial for the remaining products (i.e., those that use the Company’s low-noise design) was completed on January 13, 2010. The final determination of that trial was issued on July 19, 2010 and held that the Company’s low-noise switching regulators are subject to the limited exclusion order and cannot be imported by the Company. As mentioned above, the limited exclusion order applies only to the Company and its agents and does not prevent importation of downstream products. U.S. sales of the products involved in the enforcement have never been significant. The Company has served notice that it will appeal unfavorable portions of the final determination to the United States Court of Appeals for the Federal Circuit.

In March 2009, the Company initiated a lawsuit against a small, privately held semiconductor manufacturing company alleging patent infringement of certain of its products. This case, filed in the United States District Court for the Northern District of California, is currently stayed pending a reexamination of the patent that the Company believes has been infringed. The Company does not believe that this lawsuit will have a material impact on its business or financial condition.

The Company will continue to incur patent litigation expenses for the remainder of 2010 and future years. The Company records legal expenses as incurred.

12. RECENT ACCOUNTING PRONOUNCEMENTS

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-17, Consolidations (Accounting Standards Codification Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 became effective for the Company’s 2010 fiscal year and early application was not permitted. The Company’s adoption of this new guidance did not have any impact on its consolidated results of operations or financial position.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to require various additional disclosures regarding fair value measurements and also clarify certain existing disclosure requirements. Under ASU 2010-06, the Company is required to: (1) disclose separately the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, (2) disclose activity in Level 3 fair value measurements including transfers into and out of Level 3 and the reasons for such transfers, and (3) present separately in its reconciliation of recurring Level 3 measurements information about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 does not change any accounting requirements, but is expected to have a significant effect on the disclosures of entities that measure assets and liabilities at fair value. The amendments prescribed by ASU 2010-06 became effective for the Company’s fiscal quarter ending March 31, 2010, except for the requirements described in item (3) above, which will be effective for the Company’s fiscal year beginning January 1, 2011. The Company’s adoption of this new guidance did not impact its consolidated results of operations or financial position.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our most recently filed Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. When used in this Quarterly Report on Form 10-Q the words “anticipate,” “objective,” “may,” “might,” “should,” “could,” “can,” “intend,” “expect,” “believe,” “estimate,” “predict,” “potential,” “plan,” “is designed to” or the negative of these and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

 

•

our expectations regarding our expenses, sales and operations;

 

•

our anticipated cash needs and our estimates regarding our capital requirements and our need for additional financing;

 

•

our ability to anticipate the future needs of our customers;

 

•

our plans for future products and enhancements of existing products;

 

•

our growth strategy elements;

 

•

our intellectual property;

 

•

our anticipated trends and challenges in the markets in which we operate; and

 

•

our ability to attract customers.

These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. While we believe our plans, intentions and expectations reflected in those forward-looking statements are reasonable, we cannot assure you that these plans, intentions or expectations will be achieved. Our actual results, performance or achievements could differ materially from those contemplated, expressed or implied by the forward-looking statements contained in this Quarterly Report on Form 10-Q, including those under the heading “Risk Factors.”

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements set forth in this Quarterly Report on Form 10-Q. Other than as required by applicable laws, we are under no obligation to, and do not intend to, update any forward-looking statement, whether as a result of new information, future events or otherwise.

Overview

Our net revenues for the three months ended September 30, 2010 decreased by 4% compared to the three months ended September 30, 2009. Gross margin for the three months ended September 30, 2010 decreased to

 

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43.5% compared to 51.2% for the three months ended September 30, 2009 primarily due to an unfavorable product mix.

Our net revenues for the nine months ended September 30, 2010 increased by 7% compared to the nine months ended September 30, 2009. Gross margin decreased to 45.7% for the nine months ended September 30, 2010 compared to 48.6% for the nine months ended September 30, 2009 primarily due to an unfavorable product mix.

Cash, cash equivalents and short-term investments as of September 30, 2010 decreased by $11.2 million to $90.8 million compared to $102.0 million as of December 31, 2009, primarily due to $7.9 million used in operating activities and $3.6 million used to repurchase shares of our common stock. We continue to be debt free as of September 30, 2010.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts in our condensed consolidated financial statements. We evaluate our estimates on an on-going basis, including those related to our revenues, inventory valuation, stock-based compensation, income taxes, goodwill, investments and long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Although actual results have historically been reasonably consistent with management’s expectations, the actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions.

Management believes that there have been no significant changes during the three and nine months ended September 30, 2010 to the items that we disclosed as our critical accounting policies and estimates in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2009, except for changes to the assumptions used in our computation of stock-based compensation expense which became effective during the three months ended March 31, 2010.

Stock-Based Compensation

Stock-based compensation expense for all share-based payment awards including stock options and restricted stock units is based on the grant date fair value of the award. The fair value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. The expense recognized for the portion of the award that is expected to vest has been reduced by an estimated forfeiture rate. The forfeiture rate is determined at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The grant date fair value of our stock options was calculated using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the use of highly subjective assumptions which determine the fair value of stock options, including the price volatility of the underlying stock and the stock option’s expected term. The expected term of our stock options represents the estimated weighted-average period that the stock options are expected to remain outstanding. Beginning in 2010, to determine the expected term, we estimate future employee exercise behavior by considering our historical option exercise and post-vest cancellation experience as well as the contractual term of our stock option grants. We base our expected volatility assumption on our daily historical volatility data over a period commensurate with the expected term. Due to the low volume of the traded options on our common stock and because the term of traded options was much shorter than the expected term of our stock options, implied volatility was not included in the valuation of options granted during the three and nine months ended September 30, 2010. Prior to 2010, due to the limited history of trading since our initial public offering in 2005, our expected term and volatility assumptions were based in part on the volatility and expected term data of a group of peer companies. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of our stock options. The dividend yield is based on our history and expectation of dividend payouts. We have never declared or paid any cash dividends on common stock, and we do not anticipate paying cash dividends in the foreseeable future.

 

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If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from amounts recorded in the current period. Further, to the extent that we revise our estimated forfeiture rate in the future, our stock-based compensation expense could be materially impacted in the quarter of revision, as well as in the following quarters.

Results of Operations

The following table sets forth our unaudited historical operating results, in dollar amounts and as a percentage of net revenues for the periods indicated:

 

		Three Months Ended September 30,																Nine Months Ended September 30,
(in thousands, except percentages)		2010								2009								2010								2009
Net revenues		$	24,982				100.0	%		$	26,140				100.0	%		$	70,046				100.0	%		$	65,667				100.0	%
Cost of revenues			14,111				56.5				12,763				48.8				38,035				54.3				33,763				51.4
Gross profit			10,871				43.5				13,377				51.2				32,011				45.7				31,904				48.6
Operating expenses:
Research and development			8,679				34.7				6,928				26.5				23,617				33.7				20,319				30.9
Sales, general and administrative			6,546				26.2				6,337				24.2				18,816				26.9				18,047				27.5
Patent litigation			41				0.2				1,013				3.9				1,370				2.0				1,699				2.6
Total operating expenses			15,266				61.1				14,278				54.6				43,803				62.5				40,065				61.0
Loss from operations			(4,395	)			(17.6	)			(901	)			(3.4	)			(11,792	)			(16.8	)			(8,161	)			(12.4	)
Interest and other income:
Interest and investment income			51				0.2				177				0.7				228				0.3				793				1.2
Other income (expense), net			(63	)			(0.3	)			(36	)			(0.1	)			(156	)			(0.2	)			16				0.0
Total interest and other income (expense), net			(12	)			(0.1	)			141				0.5				72				0.1				809				1.2
Loss before income taxes			(4,407	)			(17.6	)			(760	)			(2.9	)			(11,720	)			(16.7	)			(7,352	)			(11.2	)
Provision for (benefit from) income taxes			(3,114	)			(12.5	)			256				1.0				(2,312	)			(3.3	)			1,361				2.1
Net loss		$	(1,293	)			(5.2	)%		$	(1,016	)			(3.9	)%		$	(9,408	)			(13.4	)%		$	(8,713	)			(13.3	)%

Comparison of Three and Nine Months ended September 30, 2010 and September 30, 2009

Revenues

The following table illustrates our net revenues by principal product families:

 

		Three Months Ended September 30,																Nine Months Ended September 30,
		2010								2009								2010								2009
		Amount				Percent of net revenues				Amount				Percent of net revenues				Amount				Percent of net revenues				Amount				Percent of net revenues
		(in thousands, except percentages)
Display and Lighting Solutions		$	14,592				58	%		$	17,674				68	%		$	40,242				58	%		$	43,770				67	%
Voltage Regulation and DC/DC Conversion			4,906				20	%			3,680				14	%			14,346				20	%			9,476				14	%
Interface and Power Management			3,503				14	%			3,105				12	%			10,122				14	%			9,293				14	%
Battery Management			1,981				8	%			1,681				6	%			5,336				8	%			3,128				5	%
Total		$	24,982				100	%		$	26,140				100	%		$	70,046				100	%		$	65,667				100	%

Our net revenues for the three months ended September 30, 2010 decreased by 4% compared to the three months ended September 30, 2009. For the three months ended September 30, 2010, sales of our Display and Lighting Solutions products decreased while sales of our other product families increased primarily due to our continued efforts to grow and diversify our product offerings. Total unit shipments in the three months ended September 30, 2010 increased 11% compared to the three months ended September 30, 2009 while the average selling prices decreased by approximately 14%.

 

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Our net revenues for the nine months ended September 30, 2010 increased by 7% compared to the nine months ended September 30, 2009. Our sales of Voltage Regulation and DC/DC Conversion and Battery Management product families increased for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 due to our continued effort to grow and diversify our product offerings. Total unit shipments increased 20% during the first nine months of 2010 compared to the first nine months of 2009 while the average selling prices decreased 11%.

Geographically, higher sales in Taiwan were offset by a decrease in sales in Korea for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. For the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009, the increase in sales was primarily due to higher sales in Taiwan and China, partially offset by a decrease in sales in Korea.

Gross Profit

 

		Three Months  Ended September 30,																Nine Months  Ended September 30,
(in thousands, except percentages)		2010				2009				Increase (Decrease)								2010				2009				Increase (Decrease)
Net revenues		$	24,982			$	26,140			$	(1,158	)			(4	)%		$	70,046			$	65,667			$	4,379				7	%
Cost of revenues			14,111				12,763				1,348				11	%			38,035				33,763				4,272				13	%
Gross profit		$	10,871			$	13,377											$	32,011			$	31,904
Gross profit margin percentage			43.5	%			51.2	%			(7.7	)%							45.7	%			48.6	%			(2.9	)%

Gross margin decreased during the three and nine months ended September 30, 2010 compared to the same periods a year ago primarily due to unfavorable product mix.

During the three months ended September 30, 2010, our gross inventory write-down was approximately $0.9 million, partially offset by the sale of $0.4 million of previously written down inventory. During the three months ended September 30, 2009, our gross inventory write-down was approximately $0.9 million, partially offset by the sale of $0.6 million of previously written down inventory.

During the nine months ended September 30, 2010, our gross inventory write-down was approximately $2.2 million, partially offset by the sale of $1.5 million of previously written down inventory. During the nine months ended September 30, 2009, our gross inventory write-down was approximately $3.2 million, partially offset by the sale of $1.7 million of previously written-down inventory.

Research and Development

 

		Three Months  Ended September 30,																Nine Months  Ended September 30,
(in thousands, except percentages)		2010				2009				Increase (Decrease)								2010				2009				Increase (Decrease)
Research and development		$	8,679			$	6,928			$	1,751				25	%		$	23,617			$	20,319			$	3,298				16	%
Percentage of net revenues			34.7	%			26.5	%			8.2	%							33.7	%			30.9	%			2.8	%

Research and development expenses for the three months ended September 30, 2010 increased by $1.8 million as compared to the three months ended September 30, 2009 primarily due to a $0.7 million increase in engineering wafer and mask expenses, a $0.5 million increase in payroll and personnel related expenses due to an increase in headcount and a $0.4 million increase in severance expenses related to a reduction in force during the three months ended September 30, 2010.

Research and development expenses for the nine months ended September 30, 2010 increased by $3.3 million as compared to the nine months ended September 30, 2009 primarily due to a $1.9 million increase in payroll and payroll related expenses due to an increase in headcount and our conclusion of certain cost reduction measures including company-wide shut-downs that occurred during the three months ended March 31, 2009, a $0.8 million increase in engineering wafer and mask expenses, a $0.5 million increase in outside service expenses and a $0.3 million increase in severance expenses related to a reduction in force during the three months ended September 30, 2010, partially offset by a $0.2 million decrease in stock-based compensation expense.

 

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Sales, General and Administrative

 

		Three Months  Ended September 30,																Nine Months  Ended September 30,
(in thousands, except percentages)		2010				2009				Increase (Decrease)								2010				2009				Increase (Decrease)
Sales, general and administrative		$	6,546			$	6,337			$	209				3	%		$	18,816			$	18,047			$	769				4	%
Percentage of net revenues			26.2	%			24.2	%			2.0	%							26.9	%			27.5	%			(0.6	)%

Sales, general and administrative expenses for the three months ended September 30, 2010 remained relatively flat compared to the three months ended September 30, 2009.

Sales, general and administrative expenses for the nine months ended September 30, 2010 increased by $0.8 million as compared to the nine months ended September 30, 2009 primarily due to a $0.8 million increase in travel expenses and a $0.7 million increase in payroll and payroll related expenses as a result of higher headcount and our conclusion of certain cost reduction measures including company-wide shutdowns that occurred during the three months ended March 31, 2009, partially offset by a $0.4 million decrease in stock-based compensation expense.

Patent Litigation

 

		Three Months Ended September 30,																Nine Months Ended September 30,
(in thousands, except percentages)		2010				2009				Increase (Decrease)								2010				2009				Increase (Decrease)
Patent litigation		$	41			$	1,013			$	(972	)			(96	)%		$	1,370			$	1,699			$	(329	)			(19	)%
Percentage of net revenues			0.2	%			3.9	%			(3.7	)%							2.0	%			2.6	%			(0.6	)%

Patent litigation expense decreased during the three and nine months ended September 30, 2010 compared to the same periods a year ago due to the timing of activity in our patent infringement cases.

We believe that we will continue to incur patent litigation expenses for the remainder of 2010 and future years. For a description of our litigation, please see Part II, Item 1—Legal Proceedings—for further details.

Interest and Investment Income

Interest and investment income decreased during the three and nine months ended September 30, 2010 compared to the same periods a year ago due to a lower average cash balance and lower average interest rates.

Provision for (benefit from) Income Taxes

We adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We also record the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. Our effective tax rate reflects the impact of a significant amount of our earnings being taxed in foreign jurisdictions at tax rates below the United States statutory tax rate and a valuation allowance maintained on our U.S. deferred tax assets.

We recorded a tax benefit of $3.1 million for the three months ended September 30, 2010 and a tax provision of $0.3 million for the three months ended September 30, 2009. We recorded a tax benefit of $2.3 million for the nine months ended September 30, 2010 and a tax provision of $1.4 million for the nine months ended September 30, 2009. The significant decrease in our tax provision from both the three and nine months ended 2009 to 2010 is primarily related to a tax benefit recorded from the reversal of liabilities for uncertain tax positions as a result of the conclusion of the 2005 and 2006 audits by the Internal Revenue Service (“IRS”) and from an increase in loss before taxes.

We established a full valuation allowance against our United States deferred tax assets on December 31, 2008. We established valuation allowances for deferred tax assets based on a “more likely than not” threshold. Our ability to realize our deferred tax assets depends on the ability to generate sufficient taxable income within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. We consider the following possible sources of taxable income when assessing the realization of our deferred tax assets:

 

•

Future reversals of existing taxable temporary differences;

 

•

Future taxable income exclusive of reversing temporary differences and carryforwards;

 

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•

Taxable income in prior carryback years; and

 

•

Tax-planning strategies.

We conclude that a valuation allowance is required when there is significant negative evidence which is objective and verifiable, such as cumulative losses in recent years. We utilize a rolling three years of actual results as the primary measure of the cumulative losses in recent years. As of September 30, 2010, we continue to have a three year cumulative loss and, therefore, concluded that a valuation allowance is still required.

During the nine months ended September 30, 2010, we decreased our total amount of unrecognized tax benefits by approximately $5.7 million as a result of a $7.9 million release of the accrual related to the settlement of the 2005 and 2006 IRS audit, partially offset by a $1.3 million increase from the filing of our 2009 tax return and an accrual for uncertain tax positions for the current year of $0.9 million. The current year increase includes an accrual of interest and penalties of less than $0.1 million. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.

During the three and nine months ended September 30, 2010, we recorded a one-time tax benefit of $3.4 million and $2.8 million, respectively, from the settlement of an IRS examination with the Appeals Division for tax years 2005 and 2006. As of September 30, 2010, we decreased the accrual for uncertain tax positions by $7.9 million, of which $5.1 million offset deferred tax assets which currently has a full valuation allowance against it.

In April 2010, we received an IRS examination report showing proposed changes to our income tax for the 2007 tax year. We filed a timely protest to the April 2010 IRS examination report in May 2010 and are currently waiting for discussions with the IRS Appeals Division. We believe the adjustments proposed in the IRS examination report are not supported by the facts and are inconsistent with applicable tax laws and existing Treasury regulations. No payments, if any, will be made related to the disputed proposed adjustments until the issues are resolved with either the IRS Appeals Division or the tax court. We believe that we have adequately provided in our financial statements for any additional taxes that we may be required to pay as a result of the examination.

Although the timing of the resolution and/or closure on audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the range of possible adjustments to the balance of gross unrecognized tax benefits.

Recent Accounting Pronouncements

In December 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2009-17, Consolidations (Accounting Standards Codification Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. ASU 2009-17 also requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. ASU 2009-17 became effective for our 2010 fiscal year and early application was not permitted. Our adoption of this new guidance did not have any impact on our consolidated results of operations or financial position.

In January 2010, the FASB issued Accounting Standards Update No. 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which amends FASB Accounting Standards Codification Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) to require various additional disclosures regarding fair value measurements and also clarify certain existing disclosure requirements. Under ASU 2010-06, we are required to: (1) disclose separately the amounts of significant transfers between Level 1 and Level 2 of the fair value hierarchy, (2) disclose activity in Level 3 fair value measurements including transfers into and out of Level 3 and the reasons for such transfers, and (3) present separately in our reconciliation of recurring Level 3 measurements information about purchases, sales, issuances and settlements on a gross basis. ASU 2010-06 does not change any accounting requirements, but is expected to have a significant effect on the disclosures of entities that measure assets and liabilities at fair value. The amendments prescribed by ASU 2010-06 became effective for our fiscal quarter

 

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ending March 31, 2010, except for the requirements described in item (3) above, which will be effective for our fiscal year beginning January 1, 2011. Our adoption of this new guidance did not impact our consolidated results of operations or financial position.

Liquidity and Capital Resources

 

		Nine Months  Ended September 30,
(in thousands)		2010				2009				Increase (Decrease)
Net cash used in operating activities		$	(7,622	)		$	(2,214	)		$	(5,408	)
Net cash provided by (used in) investing activities			4,617				(11,559	)			16,176
Net cash used in financing activities			(2,984	)			(3,243	)			259
Effect of exchange rate changes on cash and cash equivalents			29				42				(13	)
Net decrease in cash and cash equivalents		$	(5,960	)		$	(16,974	)		$	11,014

Net Cash Used in Operating Activities

Cash used in operating activities was $7.6 million for the nine months ended September 30, 2010. Cash used in operating activities was comprised of the net loss of $9.4 million, less non-cash adjustments including $4.4 million of stock-based compensation expense and $1.4 million of depreciation and amortization. Cash used in operating activities was also comprised of $5.9 million used to increase accounts receivable as a result of higher sales, $4.7 million used to increase inventory and $2.6 million used to decrease income taxes payable. These uses were offset by a $7.5 million increase in accounts payable due to the timing of purchases and a $1.0 million increase in accrued liabilities and other long-term liabilities primarily due to our accrual for expenses related to a reduction in force during the three months ended September 30, 2010 and an increase in accrued engineering wafer and mask expenses.

Cash used in operating activities was $2.2 million for the nine months ended September 30, 2009. Cash used in operating activities was comprised of the net loss of $8.7 million, less non-cash adjustments including $4.9 million of stock-based compensation expense and $1.5 million of depreciation and amortization. Cash used in operating activities was also comprised of a $7.4 million increase in accounts receivable as a result of higher sales. These uses were offset by a $6.3 million increase in accounts payable due to a production demand ramp and a $1.2 million increase in income taxes payable due to the current year income taxes.

Net Cash Provided By (Used in) Investing Activities

Net cash provided by investing activities of $4.6 million for the nine months ended September 30, 2010 was primarily comprised of $108.0 million of proceeds from sales and maturities of short-term investments and $1.4 million of proceeds from the sale of auction rate securities, partially offset by $102.7 million from purchases of short-term investments and $2.0 million used to purchase property and equipment.

Net cash used in investing activities was $11.6 million for the nine months ended September 30, 2009 and was primarily comprised of a net cash outflow of $10.7 million from sales, maturities and purchases of our short-term investments and a $0.7 million cash outflow from purchases of property and equipment.

Net Cash Used in Financing Activities

Net cash used in financing activities was $3.0 million for the nine months ended September 30, 2010, primarily due to $3.6 million used to repurchase our common stock during the period, partially offset by $0.6 million of proceeds from stock option exercises.

Net cash used in financing activities was $3.2 million for the nine months ended September 30, 2009, primarily due to repurchases of our common stock during the period.

Liquidity

Our cash, cash equivalents and short term investments were $90.8 million as of September 30, 2010 and $102.0 million as of December 31, 2009. We believe our existing cash, cash equivalents and short-term investment

 

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balances, as well as any cash expected to be generated from operating activities, will be sufficient to meet our anticipated cash needs for at least the next 12 months.

Our long-term future capital requirements will depend on many factors, including our level of revenues, the timing and extent of spending to support our product development efforts, the expansion of sales and marketing activities, the timing of our introductions of new products, the costs to ensure access to adequate manufacturing capacity, our level of acquisition activity or other strategic transactions, the continuing market acceptance of our products and the amount and intensity of our litigation activity. We could be required, or could elect, to seek additional funding through public or private equity or debt financing and additional funds may not be available on terms acceptable to us or at all.

Off Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Contractual Obligations

The following table describes our principal contractual cash obligations as of September 30, 2010:

 

		Total				Remaining 2010				2011				2012				2013				2014				2015 and beyond
		(in thousands)
Operating leases		$	6,865			$	659			$	2,080			$	1,841			$	1,058			$	540			$	687
Purchase commitments (1)			10,957				10,957				—				—				—				—				—
Total contractual obligations		$	17,822			$	7,817			$	5,879			$	1,841			$	1,058			$	540			$	687

 

(1)	Purchase commitments consist primarily of our commitment to purchase wafers and assembly services.

Common Stock Repurchases

On October 29, 2008, our board of directors authorized a program to repurchase shares of our outstanding common stock. Under the stock repurchase program, we were authorized to use up to $30 million to repurchase shares of our outstanding common stock in the open market or through privately negotiated transactions. The timing and actual number of shares repurchased depended upon market conditions and other factors, in accordance with Securities and Exchange Commission requirements.

During the three months ended September 30, 2010 and September 30, 2009, we did not repurchase any shares of our common stock. During the nine months ended September 30, 2010, we repurchased 1.0 million shares of our common stock for a total cost of $3.6 million. During the nine months ended September 30, 2010, we repurchased 1.1 million shares of our common stock for a total cost of $3.3 million. As of September 30, 2010, we had $17.7 million of remaining funds authorized to purchase shares under the stock repurchase program. Shares repurchased are accounted for as treasury stock and the total cost of shares repurchased is recorded as a reduction to stockholders’ equity.

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of September 30, 2010, we had cash and cash equivalents totaling $30.2 million, compared to $36.1 million at December 31, 2009. At September 30, 2010, we had $60.6 million in short-term investments as compared to $65.9 million at December 31, 2009. Cash equivalents have an original or remaining maturity when purchased of 90 days or less; short-term investments generally have an original or remaining maturity when purchased of greater than 90 days. Our investment policy places emphasis on instruments with more liquidity.

The taxable equivalent interest rates for the three months ended September 30, 2010 and 2009, on those cash equivalents and short-term investments average approximately 0.2% and 0.7%, respectively. The taxable equivalent interest rates for the nine months ended September 30, 2010 and 2009, on those cash equivalents and short-term

 

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investments average approximately 0.3% and 1.0%. The primary objective of our investment activities is to preserve principal while maximizing income without significantly increasing risk. While none of the securities in which we invested are secured by real estate, these securities may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we may maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, debt securities and treasury notes.

A hypothetical increase in market interest rates of 100 basis points from the market rates in effect at September 30, 2010 would cause the fair value of these investments to decrease by approximately $0.2 million and a hypothetical decrease in market interest rates of 100 basis points from the market rates in effect at September 30, 2010 would cause the fair value of these investments to increase by less than $0.1 million. Neither of which would significantly impact our financial position or results of operations. Based upon our analysis the fair values did not change materially as our investment are of short duration.

As of September 30, 2010, our investment portfolio included $1.8 million of auction rate securities (“ARS”) with a fair value of $1.7 million. As of December 31, 2009, our investment portfolio included $3.2 million of ARS with a fair value of $2.4 million.

During the quarter-ended December 31, 2008, the Company entered into a settlement agreement with UBS under which it was granted ARS exchange rights (“ARS Put Option”) that provided it with the right, but not the obligation, to sell one of its ARS to UBS for the full $1.2 million par value during the period of June 30, 2010 to July 2, 2012. The Company exercised its ARS Put Option to sell these ARS to UBS on June 30, 2010. Following the exercise of the ARS Put Option, the sale of these ARS was settled and the $1.2 million of cash was received on July 1, 2010. During the nine months ended September 30, 2010, we also sold $0.2 million of our other ARS at par value through issuer redemptions.

As of September 30, 2010, the fair value of our Level 3 assets decreased by $1.3 million primarily due to the sale of the ARS to UBS per the settlement agreement. As we sold the ARS at full par value, there was no resulting impact on the condensed consolidated statements of operations for the three and nine months ended September 30, 2010.

Our ARS are interest-bearing investments in debt obligations collateralized by Federal Family Education Program student loans. We consider the ARS market to be inactive because auctions have failed to settle on their respective settlement dates since 2008. Further, the secondary market for ARS is inactive and there have been few issuer repurchases. We believe that available pricing information is not determinative of the ARS fair value. As such, we estimated the fair value of our ARS as of September 30, 2010 and December 31, 2009 using a discounted cash flow model.

To determine the fair value of our ARS, we estimated the contractual interest that will be earned during the expected time to liquidity, and discounted these cash flows to reflect liquidity and credit risk. The discount factor represents the current market conditions for instruments with similar credit quality, adjusted by 300 basis points to reflect the risk in the marketplace for the ARS. The following average assumptions were used to determine the ARS fair value as of September 30, 2010 and December 31, 2009:

 

		September 30, 2010		December 31, 2009
Expected time to liquidity		2 years		2 to 4 years
Expected annual rate of return		1.3% to 1.8%		1.1% to 1.7%
Discount rate		4.1%		4.9% to 19.3%

 

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. As of September 30, 2010, our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective to ensure that information that we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 was (i) recorded, processed, summarized and reported within the time periods

 

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specified in Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls Over Financial Reporting

There were no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2010 covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

In May 2003, we received a letter from Linear Technology Corporation (“Linear Technology”) alleging that certain of our charge pump products infringed United States Patent No. 6,411,531 (‘531 Patent) owned by Linear Technology. In August 2004, we received a letter from Linear Technology alleging that certain of our switching regulator products infringed United States Patent Nos. 5,481,178, 6,304,066 and 6,580,258 (‘258 Patent). In response to these letters, we contacted Linear Technology to convey our good faith belief that we do not infringe the patents in question. Subsequently, we became aware of a marketing campaign conducted by Linear Technology in which it sought to disrupt our business relationships and sales by suggesting to our customers that our products infringe the same United States patents mentioned in its two letters to us. As a result, in February 2006, we initiated a lawsuit against Linear Technology for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and non-infringement. This case is currently stayed pending the outcome of the United States International Trade Commission (“USITC”) action described in the following paragraphs.

In March 2006, the USITC responded to a complaint filed by Linear Technology by initiating an investigation under Section 337 of the Tariff Act to determine if certain of our products infringe certain patents owned by Linear Technology. The accused products include charge pumps and switching regulators and are similar to the products involved in our lawsuit with Linear Technology. A final determination was issued September 24, 2007 which was followed by separate appeals for the charge pump and switching regulator products. The last of these appeals, including the parties’ respective requests for rehearing, ended in 2009. The overall result of these processes clears the path for importation of our charge pump products. A limited exclusion order was also issued preventing us from importing certain of our switching regulator designs and the scope of this order was expanded by the appeals process. This exclusion order does not, however, prevent our customers from importing downstream products (i.e., products that incorporate AATI switching regulators) into the United States. To date, our sales of the excluded products in the United States have been minimal.

On October 1, 2008, the USITC initiated a formal enforcement proceeding at the request of Linear Technology. In that enforcement proceeding, Linear Technology alleges that we imported certain switching regulator products in violation of the limited exclusion order originally issued on September 24, 2007. The list of products alleged to be in violation was modified by a mutual agreement between the parties under which we voluntarily agreed to cease importation of our switching regulator products that do not use our low-noise design. A trial for the remaining products (i.e., those that use our most recent low-noise design) was completed on January 13, 2010. The final determination of that trial was issued on July 19, 2010 and held that our low-noise switching regulators are subject to the limited exclusion order and cannot be imported by us. As mentioned above, the limited exclusion order applies only to AATI and its agents and does not prevent importation of downstream products. U.S. sales of the products involved in the enforcement have never been significant. We have served notice that we will appeal unfavorable portions of the final determination to the United States Court of Appeals for the Federal Circuit.

In March 2009, we initiated a lawsuit against a small, privately held semiconductor manufacturing company alleging patent infringement of certain of its products. This case, filed in the United States District Court for the Northern District of California, is currently stayed pending a reexamination of the patent that we believe has been infringed. We do not believe that this lawsuit will have a material impact on our business or financial condition.

 

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We will continue to incur patent litigation expenses for the remainder of 2010 and future years. We record legal expenses as incurred.

 

ITEM 1A.

RISK FACTORS

If we fail to forecast demand for our products accurately, we may incur product shortages, delays in product shipments or excess or insufficient product inventory.

We generally do not obtain firm, long-term purchase commitments from our customers. Because production lead times often exceed the amount of time required to fulfill orders, we often must build in advance of orders, relying on an imperfect demand forecast to project volumes and product mix. Our demand forecast accuracy can be adversely affected by a number of factors, including inaccurate forecasting by our customers, changes in market conditions, new part introductions by our competitors that lead to our loss of previous design wins, adverse changes in our product order mix and demand for our customers’ products or models. Even after an order is received, our customers may cancel these orders or request a decrease in production quantities. Any such cancellation or decrease subjects us to a number of risks, most notably that our projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are unable to project customer requirements accurately, we may not build enough products, which could lead to delays in product shipments and lost sales opportunities in the near term, as well as force our customers to identify alternative sources, which could affect our ongoing relationships with these customers. We have in the past had customers dramatically increase their requested production quantities with little or no advance notice and after they had submitted their original order. We have on occasion been unable to fulfill these revised orders within the time period requested. Either overestimating or underestimating demand would lead to excess, obsolete or insufficient inventory, which could harm our operating results, cash flow and financial condition, as well as our relationships with our customers.

We receive a substantial portion of our revenues from a small number of OEM customers and distributors, and the loss of, or a significant reduction in, orders from those customers or our other largest customers would adversely affect our operations and financial condition.

We received an aggregate of approximately 88% and 93% of our net revenues from our ten largest customers for the three months ended September 30, 2010 and September 30, 2009, respectively. Any action by one of our largest customers that affects our orders, product pricing or vendor status could significantly reduce our revenues and harm our financial results.

We receive a substantial portion of our revenues from a small number of customers. For example, for the three months ended September 30, 2010 and September 30, 2009, Samsung and LG Electronics were our largest customers. Sales to Samsung represented 27% and 37% of our net revenues in the three months ended September 30, 2010 and September 30, 2009, respectively. Additionally, we sell to a number of contract manufacturers of Samsung. Sales to Samsung and its contract manufacturers represented 32% and 43% of our net revenues for the three months ended September 30, 2010 and September 30, 2009, respectively. Sales to LG Electronics represented 15% and 25% of our net revenues in the three months ended September 30, 2010 and September 30, 2009, respectively. We anticipate that we will continue to be dependent on these customers for a significant portion of our revenues in the immediate future; however, we do not have long-term contractual purchase commitments from them, and we cannot assure you that they will continue to be our customers. Because our largest customers account for such a significant part of our business, the loss of, or a decline in sales to, any of our major customers would negatively impact our business.

Our operating results have fluctuated in the past and we expect our operating results to continue to fluctuate.

Our revenues are difficult to predict and have varied significantly in the past from period to period. We expect our revenues and expense levels to continue to vary in the future, making it difficult to predict our future operating results. In particular, we experience seasonality and variability in demand for our products as our customers manage their inventories. Our customers tend to increase inventory of our products in anticipation of the peak fourth quarter buying season for the mobile consumer electronic devices in which our products are used, which often leads to sequentially lower sales of our products in the first calendar quarter and, potentially, late in the fourth calendar quarter.

 

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Additional factors that could cause our results to fluctuate include:

 

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the forecasting, scheduling, rescheduling or cancellation of orders by our customers, particularly in China and other emerging markets;

 

•

costs associated with litigation, especially related to intellectual property;

 

•

liquidity and cash flow of our distributors, suppliers and end-market customers;

 

•

changes in manufacturing costs, including wafer, test and assembly costs, and manufacturing yields, product quality and reliability;

 

•

the timing and availability of adequate manufacturing capacity from our manufacturing suppliers;

 

•

our ability to successfully define, design and release new products in a timely manner that meet our customers’ needs;

 

•

the timing, performance and pricing of new product introductions by us and by our competitors;

 

•

general economic conditions in the countries where we operate or our products are used;

 

•

changes in exchange rates, interest rates, tax rates and tax withholding;

 

•

geopolitical stability, especially affecting China, Taiwan and Asia in general; and

 

•

changes in domestic and international tax laws.

Unfavorable changes in any of the above factors, most of which are beyond our control, could significantly harm our business and results of operations.

We may be required to record additional significant charges to earnings if our goodwill becomes impaired.

Under accounting principles generally accepted in the United States, we review our goodwill for impairment each year as of September 30^th and when events or changes in circumstances indicate the carrying value may not be recoverable. The carrying value of our goodwill may not be recoverable due to factors indicating a decrease in the value of the Company, such as a decline in stock price and market capitalization, reduced estimates of future cash flows and slower growth rates in our industry. Estimates of future cash flows are based on an updated long-term financial outlook of our operations. However, actual performance in the near-term or long-term could be materially different from these forecasts, which could impact future estimates. For example, a significant decline in our stock price and/or market capitalization may result in goodwill impairment. We may be required to record a charge to earnings in our financial statements during a period in which an impairment of our goodwill is determined to exist, which may negatively impact our results of operations.

We may be required to record impairment charges in future quarters as a result of the decline in value of our investments in auction rate securities.

As of September 30, 2010, our investment portfolio included interest bearing auction rate securities (ARS) with a fair value of $1.7 million. Our ARS represent investments in debt obligations collateralized by Federal Family Education Program student loans. At the time of acquisition, these ARS investments were intended to provide liquidity via an auction process that resets the applicable interest rate at predetermined calendar intervals, allowing investors to either roll over their holdings or gain immediate liquidity by selling such interests at par. The monthly auctions historically provided a liquid market for these securities. However, beginning in 2008, uncertainties in the credit markets have affected all of our holdings in ARS and auctions for our investments in these securities have failed to settle on their respective settlement dates. Auctions for our investments in these securities continued to fail through September 30, 2010.

If the current market conditions deteriorate further, the anticipated recovery in market values does not occur, or if we determine that we intend to sell the ARS, it is possible that we will be required to sell the ARS before a recovery of the auction process, or that we will not recover the entire amortized cost basis of the ARS, and we may be required to record impairment charges in future quarters which may negatively impact our results of operations.

 

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We may be unsuccessful in developing and selling new products or in penetrating new markets.

We operate in a dynamic environment characterized by rapidly changing technologies and industry standards and technological obsolescence. Our competitiveness and future success depends on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. A fundamental shift in technologies in any of our product markets could harm our competitive position within these markets. Our failure to anticipate these shifts, to develop new technologies or to react to changes in existing technologies could materially delay our development of new products, which could result in product obsolescence, decreased revenues and a loss of design wins to our competitors. Our understanding is that our overall product acceptance rate is typical for the semiconductor analog sector due to ongoing competition, long design-in and qualification cycles, late introduction and/or product not meeting exact customer requirements. In some instances, our products were designed into a customer’s product or system but our customer’s product failed to gain market acceptance so no substantial business resulted. In other cases, we may introduce a product before the market is ready to accept or require the features offered in our product, in which revenues may result at a later and somewhat unpredictable date in the future.

As part of our continued efforts to grow and diversify our product offerings, we recently introduced a new family of LED driver system solutions for LED backlit LCD televisions. The success of these and all of our new products depends on accurate forecasts of long-term market demand and future technological developments, as well as on a variety of specific implementation factors, including:

 

•

effective marketing, sales and service;

 

•

timely and efficient completion of process design and device structure improvements and implementation of manufacturing, assembly and test processes; and

 

•

the quality, performance and reliability of the product.

If we fail to introduce new products or penetrate new markets, our revenues will likely decrease over time and our financial condition could suffer.

We may not have the expertise we need to successfully define or develop products for new market opportunities, and we may lack the sales connections and applications expertise to secure orders for such products. Identifying and hiring such resources may be difficult and we may not be successful in identifying and hiring necessary personnel. Attempts to balance product development and sales efforts between new and existing applications may delay our entrance into new markets and make it more difficult to penetrate new customers and application opportunities in the future.

Due to defects and failures that may occur, our products may not meet specifications, which may cause customers to return or stop buying our products and may expose us to product liability claims.

Our customers generally establish demanding specifications for quality, performance and reliability that our products must meet. Integrated circuits as complex as ours often encounter development delays and may contain undetected defects or failures when first introduced or after commencement of commercial shipments, which might require product replacement or recall. In addition, our customers may not use our products in a way that is consistent with our published specifications. If defects and failures occur in our products during the design phase or after, or our customers use our products in ways that are not consistent with their intended use, we could experience lost revenues, increased costs, including warranty expense and costs associated with customer support, delays in or cancellations or rescheduling of orders or shipments, or product returns or discounts, any of which would harm our operating results. We cannot assure you that we will have sufficient resources, including any available insurance, to satisfy any asserted claims.

The nature of the design process requires us to incur expenses prior to earning revenues associated with those expenses, and we will have difficulty selling our products if system designers do not design our products into their electronic systems.

We devote significant time and resources to working with our customers’ system designers to understand their future needs and to provide products that we believe will meet those needs. If a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system because changing suppliers can involve significant cost, time, effort and risk for our customers.

 

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We often incur significant expenditures in the development of a new product without any assurance that our customers’ system designers will select our product for use in their electronic systems. We often are required to anticipate which product designs will generate demand in advance of our customers expressly indicating a need for that particular design. In some cases, there is minimal or no demand for our products in our anticipated target applications. Even if our products are selected by our customers’ system designers, a substantial period of time will elapse before we generate revenues related to the significant expenses we have incurred. The reasons for this delay generally include the following elements of our product sales and development cycle timeline and related influences:

 

•

our customers usually require a comprehensive technical evaluation of our products before they incorporate them into their electronic systems;

 

•

it can take up to 12 months from the time our products are selected to complete the design process;

 

•

it can take an additional 9 to 12 months or longer to complete commercial introduction of the electronic systems that use our products, if they are introduced at all;

 

•

original equipment manufacturers typically limit the initial release of their electronic systems to evaluate performance and consumer demand; and

 

•

the development and commercial introduction of products incorporating new technology are frequently delayed.

We estimate that the overall sales and development cycle timeline of an average product is approximately 16 months.

Additionally, even if system designers use our products in their electronic systems, we cannot assure you that these systems will be commercially successful. As a result, we are unable to accurately forecast the volume and timing of our orders and revenues associated with any new product introductions.

Any increase in the manufacturing cost of our products could reduce our gross margins and operating profit.

The semiconductor business exhibits ongoing competitive pricing pressure from customers and competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase price variances or adverse manufacturing cost variances, will reduce our gross margins and operating profit. We do not have many long-term supply agreements with our manufacturing suppliers and, consequently, we may not be able to obtain price reductions or anticipate or prevent future price increases from our suppliers.

The average selling price of our products may decline, or a change in the mix of product orders may occur, either of which could reduce our gross margins.

During a power management product’s life, its selling price tends to decrease for a particular application. As a result, to maintain gross margins on our products, we must continue to identify new applications for our products, reduce manufacturing costs for our existing products and introduce new products. If we are unable to identify new, high gross margin applications for our existing products, reduce our production costs or sell new, high gross margin products, our gross margins will suffer. A sustained reduction in our gross margins could harm our future operating results, cash flow and financial condition, which could lead to a significant drop in the price of our common stock.

Because we receive a substantial portion of our revenues through distributors, their financial viability and ability to access the capital markets could impact our ability to continue to do business with them and could result in lower revenues, which could adversely affect our operating results and our customer relationships.

We obtain a portion of our revenues through sales to distributors located in Asia who act as our fulfillment representatives. For example, sales to distributors accounted for 42% and 21% of our net revenues for the three months ended September 30, 2010 and September 30, 2009, respectively. In the normal course of their operation as fulfillment representatives, these distributors typically perform functions such as order scheduling, shipment coordination, inventory stocking, payment and collections and, when applicable, currency exchange between purchasers of our products and these distributors. Our distributors’ compensation for these functions is reflected in the price of the products we sell to these distributors. Many of our current distributors also serve as our sales representatives procuring orders for us to fill directly. If these distributors are unable to pay us in a timely manner or if we anticipate that they will not pay us, we may elect to withhold future shipments, which could adversely affect

 

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our operating results. If one of our distributors experiences severe financial difficulties, becomes insolvent or declares bankruptcy, we could lose product inventory held by that distributor and we could be required to write off the value of any receivables owed to us by that distributor. We could also be required to record bad debt expense in excess of our reserves. We may not be successful in recognizing these indications or in finding replacement distributors in a timely manner, or at all, any of which could harm our operating results, cash flow and financial condition.

Our distributor arrangements often require us to accept product returns and to provide price protection and if we fail to properly estimate our product returns and price protection reserves, this may adversely impact our reported financial information.

A substantial portion of our sales are made through third-party distribution arrangements, which include stock rotation rights that generally permit the return of up to 5% of the previous three months’ purchases. We generally accept these returns quarterly. We record estimated returns for stock rotation at the time of shipment. Our arrangements with our distributors typically also include price protection provisions if we reduce our list prices. We record reserves for price protection at the time we decide to reduce our list prices. In the future, we could receive returns or claims that are in excess of our estimates and reserves, which could harm our operating results.

If our relationship with any of our distributors deteriorates or terminates, it could lead to a temporary or permanent loss of revenues until a replacement sales channel can be established to service the affected end-user customers, as well as inventory write-offs or accounts receivable write-offs. In addition, we also may be obligated to repurchase unsold products from a distributor if we decide to terminate our relationship with that distributor.

Our current backlog may not be indicative of future sales.

Due to the nature of our business, in which order lead times may vary, and the fact that customers are generally allowed to reschedule or cancel orders on short notice, we believe that our backlog is not necessarily a good indicator of our future sales. Our quarterly revenues also depend on orders booked and shipped in that quarter. Because our lead times for the manufacturing of our products generally take six to ten weeks, we often must build in advance of orders. This exposes us to certain risks, most notably the possibility that expected sales will not occur, which may lead to excess inventory, and we may not be able to sell this inventory to other customers. In addition, we supply LG Electronics, one of our largest customers, through its central hub and we do not record backlog with respect to the products we ship to the hub. Therefore, our backlog may not be a reliable indicator of future sales.

We face risks in connection with our internal control over financial reporting and any related remedial measures that we undertake to correct any material weaknesses in our internal control over financial reporting.

In accordance with Section 404 of the Sarbanes-Oxley Act, we are required to report annually on the effectiveness of our internal control over financial reporting as such term is defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934. This report must include disclosure of any material weakness in our internal control over financial reporting. In preparation for issuing this management report, we document, evaluate, and test our internal control over financial reporting.

No material weakness will be considered remediated until our remedial efforts have operated for an appropriate period, have been tested, and management has concluded that they are operating effectively. We cannot be certain that any measures we take to remediate a material weakness will ensure that we implement and maintain adequate internal control over financial reporting and that we will successfully remediate the material weakness. In addition, we cannot assure you that we will not in the future identify further material weaknesses in our internal control over financial reporting that we have not discovered to date, which may impact the reliability of our financial reporting and financial statements.

If consumer demand for mobile consumer electronic devices declines, our revenues will decrease.

Our products are used primarily in the mobile consumer electronic devices market. For the foreseeable future, we expect to see the significant majority of our revenues continue to come from this market, especially in wireless handsets. If consumer demand for these products declines and fewer mobile customer electronic devices are sold, our revenues will decrease significantly. For example, in the second half of 2008, we experienced a significant

 

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decrease in worldwide billings to our customers, suggesting that our customers were reacting to decreased consumer demand for their end products. In an adverse economic climate such as the current economic downturn, consumers are less likely to prioritize purchasing new mobile consumer electronic devices or upgrading existing devices. In addition, if we are unsuccessful in identifying alternative markets for our products in a timely manner, our operating results will suffer dramatically.

Substantially all of our manufacturing suppliers, customers and operations are located in Asia, which subjects us to additional risks, including regional economic influences, logistical complexity, political instability and natural disasters including earthquakes.

We conduct, and expect to continue to conduct, almost all of our business with companies that are located outside the United States. Based on ship-to locations, substantially all of our revenues for the three months ended September 30, 2010 and September 30, 2009 came from customers in Asia, particularly South Korea, Taiwan, China and Japan. A vast majority of our contract manufacturing operations are located in South Korea, Taiwan, Malaysia and China. In addition, we have a design center in Shanghai, China. As a result of our international focus, we face several challenges, including:

 

•

increased complexity and costs of managing international operations;

 

•

longer and more difficult collection of receivables;

 

•

political and economic instability;

 

•

limited protection of our intellectual property;

 

•

unanticipated changes in local regulations, including tax regulations;

 

•

timing and availability of import and export licenses; and

 

•

foreign currency exchange fluctuations relating to our international operating activities.

Our corporate headquarters in Santa Clara, California, our operations office in Chupei, Taiwan, and the production facilities of one of our wafer fabrication suppliers and several of our assembly and test suppliers in Hsinchu and across Taiwan are located near seismically active regions and are subject to periodic earthquakes. We do not maintain earthquake insurance and our business could be damaged in the event of a major earthquake or other natural disaster.

In addition to risks in our operations from natural disasters, our customers are also subject to these risks. Any disaster impacting our customers could result in loss of orders, delay of business and temporary regional economic recessions.

We are also more susceptible to the regional economic impact of health crises. Because we anticipate that we will continue to rely heavily on foreign companies or United States companies operating in Asia for our future growth, the above risks and issues that we do not currently anticipate could adversely affect our ability to conduct business and our results of operations.

We outsource our wafer fabrication, testing, packaging, warehousing and shipping operations to third parties, and rely on these parties to produce and deliver our products according to requested demands in specification, quantity, cost and time.

We rely on third parties for substantially all of our manufacturing operations, including wafer fabrication, wafer probe, wafer thinning, assembly, final test, warehousing and shipping. Furthermore, for certain packages, at times we rely on a single manufacturer. We depend on these parties to supply us with material of a requested quantity in a timely manner that meets our standards for yield, cost and manufacturing quality. Any problems with our manufacturing supply chain could adversely impact our ability to ship our products to our customers on time and in the quantity required, which in turn could cause an unanticipated decline in our sales and possibly damage our customer relationships. The current economic downturn could adversely affect the financial strength of our vendors and adversely impact their ability to manufacture product, resulting in a shortage or delay in product shipments to our customers.

 

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Our products are manufactured at a limited number of locations. If we experience manufacturing problems at a particular location or with a particular supplier, we would be required to transfer manufacturing to a backup supplier. Converting or transferring manufacturing from a primary supplier to a backup fabrication facility could be expensive and could take as long as 6 to 12 months. During such a transition, we would be required to meet customer demand from our then-existing inventory, as well as any partially finished goods that can be modified to the required product specifications. 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 a production delay or stoppage for our customers, result in a decline in our sales and damage our customer relationships. Should we be required to manufacture safety stock and finished goods to insure against any supply interruptions to our customers, there is no guarantee that our customers would necessarily purchase the extra material and excess inventory may result. There is no guarantee we would be able to sell that excess inventory to other customers and we may have to write-off this material as an expense adversely affecting our financial performance.

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 damage our reputation in the marketplace, any of which could harm our business, results of operations and financial condition.

The loss of any of our key personnel could seriously harm our business, and our failure to attract or retain specialized technical and management talent could impair our ability to grow our business.

The loss of services of one or more of our key personnel could seriously harm our business. In particular, our ability to define and design new products, gain new customers and grow our business depends on the continued contributions of Richard K. Williams, our President, Chief Executive Officer and Chief Technical Officer, as well as our senior level sales, finance, operations, technology and engineering personnel. Our future growth will also depend significantly on our ability to recruit and retain qualified and talented managers and engineers, along with key manufacturing, quality, sales and marketing staff members. There remains intense competition for these individuals in our industry, especially those with power and analog semiconductor design and applications expertise. We cannot assure you we will be successful in finding, hiring and retaining these individuals. If we are unable to recruit and retain such talent, our product and technology development, manufacturing, marketing and sales efforts could be impaired.

In economic downturns where consumer demand for our customer’s products is reduced or delayed, we expect lower revenues and reduced profitability. In response to these downturns, we may implement certain cost reduction actions including spending controls, forced holidays and company shutdowns, employee layoffs, shortened work-weeks and involuntary salary reductions. It is uncertain what affect such measures may have on our ability to retain key talent and staff members, or our ability to rehire employees should business improve. For example, in 2008, we reduced our headcount and announced employee salary reductions. It is unclear what long term affect these actions may have on our ability to recruit and retain engineering, sales and managerial talent.

Changes in effective tax rates or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our future effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or interpretations thereof. Further, as a result of certain ongoing employment and capital investment commitments made by us, our income in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from tax. Our failure to meet such commitments could adversely impact our effective tax rate. In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

 

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We compete against companies with substantially greater financial and other resources, and our market share or gross margins may be reduced if we are unable to respond to competitive challenges effectively.

The analog, mixed-signal, or analog with digital, and power management semiconductor industry in which we operate is highly competitive and dynamic, and we expect it to remain so. Our ability to compete effectively depends on defining, designing and regularly introducing new products that meet or anticipate the power management needs of our customers’ next-generation products and applications. We compete with numerous domestic and international semiconductor companies, many of which have greater financial and other resources with which to pursue marketing, technology development, product design, manufacturing, quality, sales and distribution of their products.

We consider our primary competitors to be Maxim Integrated Products, Inc., Linear Technology Corporation, Intersil Corporation, Texas Instruments Incorporated, Semtech Corporation and National Semiconductor Corporation. We expect continued competition from existing competitors as well as from new entrants into the power management semiconductor market. Our ability to compete depends on a number of factors, including:

 

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our success in identifying new and emerging markets, applications and technologies, and developing power management solutions for these markets;

 

•

our products’ performance and cost effectiveness relative to that of our competitors’ products;

 

•

our ability to deliver products in large volume on a timely basis at a competitive price;

 

•

our success in utilizing new and proprietary technologies to offer products and features previously not available in the marketplace;

 

•

our ability to recruit application engineers and designers; and

 

•

our ability to protect our intellectual property.

We cannot assure you that our products will compete favorably or that we will be successful in the face of increasing competition from new products and enhancements introduced by our existing competitors or new companies entering this market.

Intellectual property litigation could result in significant costs, reduce sales of our products and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. We have in the past received, and expect that in the future we may receive, communications from various industry participants alleging our infringement of their patents, trade secrets or other intellectual property rights. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

 

•

stop selling products or using technology that contain the allegedly infringing intellectual property;

 

•

incur significant legal expenses;

 

•

pay damages to the party claiming infringement;

 

•

redesign those products that contain the allegedly infringing intellectual property; and

 

•

attempt to obtain a license to the relevant intellectual property from third parties, which may not be available on reasonable terms or at all.

Furthermore, we have in the past agreed, and may in the future agree, to indemnify certain of our customers, distributors, suppliers, subcontractors and their affiliates for attorneys’ fees and damages and costs awarded against these parties in certain circumstances in which our products are alleged to infringe third-party intellectual property rights. These obligations could lead us to incur significant additional costs in related intellectual property litigation involving these parties, which could cause our operating results to suffer.

We initiated a lawsuit against Linear Technology Corporation in February 2006 for unfair business practices, interference with existing and prospective customers and trade libel, as well as a declaration of patent invalidity and

 

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non-infringement. In a related case, the International Trade Commission has initiated an investigation and subsequent enforcement action against AATI at the request of Linear Technology.

Uncertainty over the outcome of our litigation with Linear Technology may cause our customers or potential customers to elect not to include our products that are the subject of this litigation into the design of their systems. Once a customer’s system designer initially chooses a competitor’s product for a particular electronic system, it becomes significantly more difficult for us to sell our products for use in that electronic system, because changing suppliers can involve significant cost, time, effort and risk for our customers. As a result, our litigation with Linear Technology or any similar future litigation may result in significantly increased expenses on a quarterly basis. If we are unsuccessful in any such litigation, our business and our ability to compete in foreign markets could be harmed, and we could be enjoined from selling the accused products, either directly or indirectly, which could have a material adverse impact on our revenues, financial condition, results of operations and cash flows. See Part II, Item 1 – Legal Proceedings.

Our failure to protect our intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

We rely primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and non-disclosure agreements to protect our proprietary technologies and know-how. While we have more than 150 patents issued, allowed or pending in the United States or foreign countries, the rights granted to us may not be meaningful or provide us with any commercial advantage. For example, these patents could be challenged or circumvented by our competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of our patents to adequately protect our technology might make it easier for our competitors to offer similar products or technologies. Our foreign patent protection is generally not as comprehensive as our United States patent protection and may not protect our intellectual property in some countries where our products are sold or may be sold in the future. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. Many United States-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where we sell products.

Monitoring unauthorized use of our intellectual property is difficult and costly. It is possible that unauthorized use of our intellectual property may occur without our knowledge. We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual property. Our failure to effectively protect our intellectual property could reduce the value of our technology in licensing arrangements or in cross-licensing negotiations, and could harm our business, results of operations and financial condition. We may in the future need to initiate infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination favorable to us.

Any acquisitions we make could disrupt our business, result in integration difficulties or fail to realize anticipated benefits, which could adversely affect our financial condition and operating results.

We may choose to acquire companies, technologies, assets and personnel that are complementary to our business, including for the purpose of expanding our new product design capacity, introducing new design, market or application skills or enhancing and expanding our existing product lines. In October 2006, we acquired Analog Power Semiconductor Corporation and related assets and personnel, primarily located in Shanghai, China. In June 2008, we acquired Elite Micro Devices, located in Shanghai, China. Acquisitions involve numerous risks, including the following:

 

•

difficulties in integrating the operations, systems, technologies, products and personnel of the acquired companies;

 

•

diversion of management’s attention from normal daily operations of the business and the challenges of managing larger and more widespread operations resulting from acquisitions;

 

•

difficulties in entering markets in which we may have no or limited direct prior experience and where competitors may have stronger market positions;

 

•

the potential loss of key employees, customers, distributors, suppliers and other business partners of the companies we acquire following and continuing after announcement of acquisition plans;

 

 

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•

improving and expanding our management information systems to accommodate expanded operations;

 

•

insufficient revenue to offset increased expenses associated with acquisitions; and

 

•

addressing unforeseen liabilities of acquired businesses.

Acquisitions may also cause us to:

 

•

issue capital stock that would dilute our current stockholders’ percentage ownership;

 

•

use a substantial portion of our cash resources or incur debt;

 

•

assume liabilities;

 

•

record goodwill or incur amortization expenses related to certain intangible assets; and

 

•

incur large and immediate write-offs and other related expenses.

Any of these factors could prevent us from realizing the anticipated benefits of an acquisition, and our failure to realize these benefits could adversely affect our business. In addition, we may not be successful in identifying future acquisition opportunities or in consummating any acquisitions that we may pursue on favorable terms, if at all. Any transactions that we complete may impair stockholder value or otherwise adversely affect our business and the market price of our stock. Failure to manage and successfully integrate acquisitions could materially harm our financial condition and operating results.

Our operating results, financial condition and cash flows may be adversely impacted by worldwide political and economic uncertainties and specific conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry.

The semiconductor industry has historically exhibited cyclical behavior which at various times has included significant downturns in customer demand. These conditions have caused significant variations in product orders and production capacity utilization, as well as price erosion. Because a significant portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales, we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in revenues. If this situation were to occur, it could adversely affect our operating results, cash flow and financial condition.

Additionally, general worldwide economic conditions have recently experienced a downturn due to slower economic activity, concerns about inflation and deflation, fears of recession, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions and liquidity concerns in the wired and wireless communications markets, recent international conflicts and terrorist and military activity and the impact of natural disasters and public health emergencies. Our operations and performance depend significantly on worldwide economic conditions and their impact on consumer spending, which has recently deteriorated significantly in many countries and regions, including the United States and Asia, and may remain depressed for the foreseeable future. For example, some of the factors that could influence consumer spending include conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results. In addition, these conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and they could cause United States and foreign businesses to slow spending on our products and services, which would delay and lengthen sales cycles. We cannot predict the timing, strength or duration of any economic slowdown or subsequent economic recovery, worldwide, or in the semiconductor industry. If the economy or markets in which we operate do not continue at their present levels, our business, financial condition and results of operations will likely be materially and adversely affected.

We could be adversely affected by violations of the United States’ Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.

The United States’ Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials for the purpose of obtaining or retaining business. Our policies mandate compliance with these anti-bribery laws. There can be no assurance that our internal controls and procedures always will protect us from reckless or

 

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criminal acts committed by our employees or agents. If we are found to be liable for FCPA violations, we could suffer from criminal or civil penalties or other sanctions, which could have a material adverse effect on our business.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable.

 

ITEM 4.

(REMOVED AND RESERVED)

 

ITEM 5.

OTHER INFORMATION

Not applicable.

 

ITEM 6.

EXHIBITS

 

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED

SIGNATURE

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

 

				ADVANCED ANALOGIC TECHNOLOGIES INCORPORATED
Dated: October 27, 2010				By:		/S/    BRIAN R. MCDONALD
						Brian R. McDonald Chief Financial Officer, Vice President of Worldwide Finance and Secretary

 

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EXHIBIT INDEX

 

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

*

This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that Section, nor shall it be deemed incorporated by reference in any filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

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