Description
Ramtron International. Director, 10% Owner SEMICONDUCTOR CORP /DE CYPRESS bought 1,975,272 shares on 10-17-2012 at $ 3.1
BUSINESS OVERVIEW
We are a fabless semiconductor company that designs, develops and markets specialized semiconductor memory and integrated semiconductor solutions that are used in many markets for a wide range of applications. We pioneered the integration of ferroelectric materials into semiconductor products, which enabled the development of a new class of nonvolatile memory, called ferroelectric random access memory (F-RAM). F-RAM products merge the advantages of multiple memory technologies into a single device that retains information without a power source, can be read from and written to at very fast speeds, written to many times, consumes low amounts of power, and can simplify the design of electronic systems. We believe that the characteristics of our technology are conducive to close customer relationships, long application lifecycles and the potential for higher-margin sales than are typical of commodity semiconductor memory products.
We also integrate wireless communication capabilities as well as analog and mixed-signal functions such as microprocessor supervision, tamper detection, timekeeping, and power failure detection into our devices. This has enabled classes of products that address the growing market need for more functional, efficient and cost-effective semiconductor products.
Our revenue is derived from the sale of our products and from license, development and royalty arrangements entered into with a limited number of established semiconductor manufacturers. Product sales have been made to various customers for use in a variety of applications including utility meters, office equipment, automobiles, electronics, telecommunications, disk array controllers, and industrial control devices, among others.
2011 Product Highlights and Other Achievements
We announced our W-Family of F-RAM memory products. Devices in the W-Family offer a wide operating voltage range and performance enhancements including a 25% to 50% reduction in active current compared to competing memory devices.
The company’s MaxArias Wireless Memory products were recognized with Electronic Products China magazine’s “Product of the Year” and Application of Electronic Technique (AET) magazine’s “2010 Top Product” award.
We announced upgrades to our family of Processor Companion products targeted at the high-volume, processor-based electronics system market. Our upgraded Processor Companion integrates a precise Real-Time Clock (RTC) and offers competitive advantages for leading-edge electronics manufacturers that seek to reduce part inventory, lower bill-of-material cost, reduce manufacturing steps and potential points of failure, as well as decrease board space.
Taiwan-based King Yuan Electronics Co., LTD (KYEC) was selected to expand the assembly and test capacity for our entire line of F-RAM products. KYEC’s global leadership in semiconductor assembly and test services provides us with additional back-end production capabilities to satisfy customer demand for F-RAM products.
Pre-qualification samples were announced of a 64-Kilobit (Kb) F-RAM product built on our new manufacturing line at IBM Corporation, in Burlington, Vermont. We are sampling two families of 5-volt serial F-RAM devices in 4K, 16K and 64K densities that are being built on the new manufacturing line.
Financial Information by Segment
Our operations are conducted through one business segment, our semiconductor business. Our semiconductor business designs, develops, markets, and manufactures specialized semiconductor memories and integrated semiconductor solutions.
See Part II. Item 8. Financial Statements and Supplementary Data – Note 11 of the Notes to Consolidated Financial Statements for certain geographic financial information concerning our business.
2011 Overview of Business
In January 2011, the Chief Executive Officer (“CEO”) and Chief Operating Officer (“COO”) resigned and our Board of Directors appointed our former Chief Financial Officer (“CFO”) to the position of CEO. At that time, we commenced a search for a new CFO and also appointed a vice president of customer satisfaction, with responsibilities for directing our quality assurance program, as well as managing our product and test engineering organizations. The Company’s executive management began focusing on improving business process management systems, which included increasing the sophistication of our product design methodologies, implementing a capable product realization process, and establishing high-quality manufacturing and supply chain management processes.
During the first quarter of 2011, we shipped the remaining product inventory that was built by our prior Japanese foundry, and continued to transition our product manufacturing to our established US foundry. As we made the transition to our established foundry, our products were supply constrained, leading to product allocations and increases in past due backlog. To ease the supply constraints, we rapidly secured greater wafer output from our established foundry, which significantly increased the number of devices we were able to build throughout the year to satisfy our past due backlog.
While we were transitioning our product manufacturing to our established foundry, we also made solid progress toward establishing a new wafer foundry for commercial production. Process improvements during the first quarter at the new wafer foundry allowed us to sample the first pre-qualification devices to customers.
During the second quarter of 2011, the Company’s revenue grew as wafer production and test capacity were increased. With the increased manufacturing capacity, the Company established a plan to fully resolve its supply constraints before the end of 2011. A new CFO was appointed in April 2011.
As we demonstrated our ability to deliver products and manage the challenges of our foundry transition, we began focusing on further strengthening our operational capabilities. We implemented a comprehensive ongoing program of process review and continual improvements that were designed to attain and maintain operational excellence across the company. This included reducing product costs, improving demand forecasting, increasing on-time deliveries, and accelerating product launches.
As a result of our efforts earlier in the year, revenue grew to a record level during the third quarter of 2011, which was driven by increased product shipments to customers as we reduced our past due backlog, executed our capacity expansion plan and continued to resolve our wafer manufacturing, product assembly and test-related supply constraints.
In August, 2011, we appointed a new vice president of worldwide sales with 29 years of semiconductor sales management, engineering, marketing and quality assurance experience. In October 2011, our CFO resigned and we appointed our controller as Interim CFO. We also named a new vice president of marketing, with 10 years of semiconductor industry experience, to lead the company’s global marketing team with overall responsibility for product line marketing, applications and technical support.
The fourth quarter of 2011 marked the completion of the foundry transition we began a year earlier. As anticipated, we satisfied our remaining past due backlog as we resolved our supply constraints. However, the pace of new orders slowed as a result of weak industry conditions. We reduced spending and wafer production during the fourth quarter and took further cost reduction measures to ensure that we remained financially sound. Despite the reductions, we expect to continue investing in revenue generating opportunities, driving new product development, and continuing to strengthen resources for an anticipated business upturn in 2012.
General Industry Background
Semiconductor products are typically classified as analog, digital, or mixed signal. Analog semiconductors are devices that have the ability to sense continuous real-world parameters like voltage, flow, pressure, temperature, velocity, and time. Digital semiconductors, such as memories, store or process information via circuit-based on and off switches. Digital semiconductors store, process and manipulate data once the analog components have conditioned the inputs or signals. Mixed-signal semiconductors are integrated products that combine analog and digital circuit functions into a single device and are generally considered the most specialized and complex type of semiconductors in the market.
Memory Market
Virtually all electronic systems incorporate semiconductor memory to enable and enhance performance. The primary performance characteristics of memory devices include: speed (the amount of time it takes to read and write data from and to the device); density (how much data can be stored in the device); power consumption, (how much power a device consumes when reading or writing data); endurance (how many times data can be written onto a memory device before it wears out); and volatility (whether or not the device can retain data without power and without refreshing). Volatile memory products rely on a random access memory (RAM) architecture, which requires a constant power source to retain data but allows data to be written and re-written quickly onto the device. The most common volatile memories on the market today are dynamic random access memories (DRAM), which are favored by designers for their density, and static random access memories (SRAM), which are favored because of their speed.
Nonvolatile memories were originally designed using a read only memory (ROM) architecture, which allows data to be written once and retained even when the power is turned off or lost. Technology advances in ROM-based memories now allow data to be written and erased multiple times as well as to retain data without a power source. Despite these advances, ROM-based devices’ write operations require a significant amount of power, are slow, and degrade relatively quickly. Among the more advanced ROM-based devices on the market today are electrically erasable programmable read only memory (EEPROM) and FLASH memory. EEPROM is a low density nonvolatile memory solution that is generally used because of its low cost. FLASH memory is used because of its very low cost per bit and high density data storage capability. Despite their relative low cost, EEPROM and FLASH suffer from the performance disadvantages of ROM-based memory.
In an effort to create a nonvolatile memory with high read/write speeds, a hybrid memory, called battery-backed SRAM (BBSRAM) was created. While BBSRAMs allow higher speed data storage, the battery attachment makes the device larger in size, more expensive, and introduces battery-related reliability, lifetime and adverse environmental issues.
EEPROM, FLASH, and BBSRAMs are used by system designers and are more or less standardized. As is the case with most commodities, price is the main differentiator. While these products are widely produced and incorporated in many applications, technical limitations such as write speed, power consumption, endurance and ease of use prevent one or more of these nonvolatile memory devices from being implemented in certain situations.
Due to the large market for semiconductor memory products and the technical limitations of existing nonvolatile memory products, a market opportunity for alternative memory technologies has evolved. This has made F-RAM the most commercially successful of the alternative nonvolatile memory technologies. Other technologies, such as magnetic random access memory (MRAM), have begun selling commercially, and ovonics and molecular memory are still in their early stages of development and have yet to demonstrate commercial viability and achieve market acceptance.
Integration Trend - Mixed-Signal Devices
In a typical system design, analog inputs are gathered by sensing devices and then conditioned for use by digital circuits. Once the analog inputs are converted into digital data by analog-to-digital conversion circuitry, digital devices such as memory are used to manipulate and store the data, which is used to achieve a desired result or function in the system.
Until recently, analog and digital functions were performed by stand-alone components that worked alongside each other within the system. Due to the increasing complexity of products, the advancement of product features and the desire among original equipment manufacturers to decrease the size and cost of electronic systems, the market has progressed toward integrating analog and digital components into stand-alone mixed-signal semiconductor devices. Analog products that are commonly integrated into an electronic system include temperature sensors, op amps, and regulators. This analog circuitry operates in conjunction with digital devices such as memories. Mixed-signal devices are typically designed to control or perform very specific tasks in a system. Advances in process technology and design capabilities now allow the integration of analog and digital devices into a single device by either embedding the functions onto a single chip or by combining them in a multi-chip package. Integrating functions in a single device has enabled lower overall system costs while increasing functionality and reducing board space requirements. As a result, many integrated semiconductor solutions generally recognize longer product life cycles and relatively higher product margins.
Wireless RFID Connectivity
RFID (Radio Frequency Identification) is used mainly for contactless data transfer. RFID is easily integrated with other technologies to optimize data capture and exchange. RFID uses radio frequency waves to transfer data between a reader and a tag. As the tag enters the RF field, the RF signal powers the tag or turns it on. The tag then transmits the ID and data that has been programmed to the reader. RFID readers (also called Interrogators) translate the radio frequency information into digital information that can be read by software on the host computer. The computer determines the required actions and instructs the reader, which in turn transmits data back to the tag. RFID technologies are quickly expanding in logistics, supply chain, and asset tracking applications in almost every conceivable area around the globe.
Our Products
We design, develop and market specialized semiconductor memory and integrated semiconductor solutions used by customers for a wide range of applications in the metering, computing and information systems, automotive, communications, consumer and industrial, scientific and medical markets. Our product portfolio is comprised of stand-alone memory products and integrated products.
We pioneered the use of ferroelectric technology to produce nonvolatile semiconductor memory products in commercial volumes. Our products have distinct advantages over incumbent nonvolatile memory devices. F-RAM products combine the nonvolatile data storage capability of ROM with the benefits of RAM, which include a high number of read and write cycles, high-speed read and write cycles, and low power consumption. Since demonstrating our first product, we have expanded our F-RAM product line to include various interfaces and densities, which include industry-standard serial and parallel interfaces; industry standard package types; and 4-kilobit (kb), 16-kb, 64-kb, 256-kb, 1-megabit (Mb), 2Mb, 4Mb, and 8Mb densities.
Memory Products
Our serial and parallel memories contain industry-standard interfaces that are widely used in electronic applications. System designers use serial memories to collect data due to their relative low cost. Serial memories require fewer connections to the host system, and because they have a small package footprint, occupy less space on a circuit board. They are slower than other types of memory because they deliver data serially through a single port, which can require a system’s processor to wait longer for the data from the memory. Our serial F-RAM devices are faster than serial EEPROM devices because the fast write speed of F-RAM allows more frequent data transfers over the serial bus to the processor in a given period of time.
Our parallel F-RAM products are drop-in replacements for battery-backed SRAM products (BBSRAM). F-RAM parallel products offer features and data retention comparable to BBSRAMs, but without the requirement of a battery, which increases system reliability, reduces board space and avoids the adverse environmental effects of batteries. Parallel memory devices transfer data faster than serial memories because they can deliver data through several ports simultaneously. Although parallel memory devices are larger and more costly than serial memory devices, they are well suited for high-performance applications due to their inherent high read and write speed capability.
Integrated Mixed-Signal Products
Our integrated F-RAM products, called processor companions, are single-chip solutions that replace a number of individual system components to reduce cost and board space. The processor companion family is the most integrated F-RAM product line developed to date and provides on a single chip the most commonly needed system functions for a variety of applications. Processor companions typically combine nonvolatile F-RAM with analog and mixed-signal circuitry such as a real-time clock (RTC), a processor supervisor, and other commonly needed peripheral functions. Our processor Companion products are available in a variety of memory density and mixed-signal feature configurations. Processor companions are used in similar applications to our serial and parallel F-RAM memory technologies but provide more of the system’s functions with a single device.
Our engineering team has helped many customers develop leading-edge products that benefit from our F-RAM products’ unique technological characteristics, such as fast write speeds, high write endurance, low power, and accelerated time-to-market. The following application examples illustrate the use of our products in certain markets.
Automotive - Electronic systems and semiconductor content in automobiles has increased significantly in recent years with the advent of more sophisticated safety, entertainment, body control, and telematics systems. In addition, the sensor count in automobiles has grown significantly over the past few years, which requires processing and storing more data than ever before.
Metering - The need to monitor power usage has become increasingly important for utility companies as fuel prices have increased significantly over the past few years. Worldwide, there is a significant demand for systems that efficiently distribute power to areas of high demand. These trends have given rise to the need for more sophisticated digital metering products that can constantly track and report power usage data for utility companies. As a result of our success in supplying F-RAM products for one of the world’s largest digital metering installations, we believe that F-RAM products are becoming more widely accepted in time-of-use and automated meter reading applications.
Computing - Computing applications for our products have increased significantly in recent years as we have focused on uses for our products in multi-function printers and copiers, laser and inkjet printers and hard disk array controllers. The high write endurance of our F-RAM products is the primary reason multi-function printer and copier manufacturers use F-RAM products in their products, while the fast write capability and ability to store information quickly upon power-down is the primary reason hard disk array controller manufacturers use our products.
Industrial, Scientific and Medical - The industrial, scientific and medical market provides a large opportunity for F-RAM products because it is characterized by applications that are subject to unique and demanding operating environments. F-RAM products are well suited for these applications due to their inherent high reliability features like high endurance and their low power consumption.
Wireless - To answer the need for higher performance wireless memory devices, we have developed a family of products, named the MaxArias product line, which features F-RAM memory with wireless RFID access using a standard UHF EPCglobal Class-1 Generation-2 protocol. The MaxArias family is ideal for applications spanning many industries including aircraft/industrial manufacturing, inventory control, maintenance tracking, building security, electronic toll collection, pharmaceutical tracking, and product authentication, among others.
Manufacturing
As a fabless semiconductor manufacturer, we design and develop new products for production by contracted manufacturing partners. Outsourcing manufacturing to our foundry partners enables us to avoid the large capital expenditures that would otherwise be required to manufacture our products in commercial volumes.
In 1999, we entered into a manufacturing agreement with Fujitsu Limited for the supply of our F-RAM products with an initial term of five years with automatic one-year renewals. The agreement required Fujitsu to provide us with a two-year advance notice of any change in its ability or intention to supply product wafers to us. In October 2009, Fujitsu notified us of their intent to discontinue the manufacture of our F-RAM products in March of 2010 and agreed to hold inventory to satisfy our product delivery requirements through the first quarter of 2011. We have since transitioned the manufacturing of most of the products previously made by Fujitsu to our US-based foundries at Texas Instruments Incorporated (TI) and IBM Corporation. We no longer rely on Fujitsu for the manufacture of our products.
In 2007, we entered into a commercial manufacturing agreement with TI to manufacture our F-RAM memory products, which was amended in 2011. Under the TI manufacturing agreement, we provide design, testing and other activities associated with product development efforts, and TI provides foundry services for a minimum period of two years with one year automatic renewal periods. In the event we or TI notifies the other party of its desire to terminate the manufacturing agreement for convenience, then the agreement shall terminate two years following such notice of termination. The manufacturing agreement also contains obligations for us with respect to minimum orders and negotiated pricing.
CEO BACKGROUND
Dr. William G. Howard has served as a director of the Company since July 1994. Since September 1990, Dr. Howard has been an independent engineering consultant to various entities, including SEMATECH, the semiconductor Industry Association and Dow Corning. Dr. Howard is a member of the National Academy of Engineering and a fellow of the Institute of Electrical Engineers and of the American Association for the Advancement of Science. Dr. Howard has served on many boards of directors of both public and private companies and is currently a director of Xilinx, Inc. (XLNX), a public company that manufactures integrated circuits and Sandia National Laboratories, a private company that is a multi-program engineering and science laboratory operated by Sandia Corporation, a Lockheed Martin Company. He has served on audit, compensation, and governance committees of several companies. Dr. Howard’s technology, business expertise, and diversified background of managing and serving on the boards of directors of public and private technology-based companies, give him the qualifications and skills to serve as Chairman of the Board of Directors of the Company. For these reasons, in addition to his past service as a director and Chairman of the Board of the Company and his status as an independent director, Dr. Howard is fully qualified to serve an additional term as director on our board.
Dr. William L. George became a director of the Company in August 2005. From July 2007 until his retirement in September 2008, Dr. George served as executive vice president, manufacturing services, of ON Semiconductor, a supplier of performance power solutions. From August 1999 until June 2007, Dr. George served as executive vice president of operations for ON Semiconductor. Dr. George received a B.S. degree in metallurgical engineering from the University of Oklahoma and a Ph.D. in Materials Science from Purdue University. Dr. George is a director of Silicon Image, Inc. (SIMG), a public company that designs and develops mixed-signal integrated circuits, and is a director of Power Integrations, Inc. (POWI), a public company that is a supplier of high voltage analog circuits for power management in line driven applications. Dr. George serves on the compensation committee of Silicon Image, the compensation and audit committees of Power Integrations, and chairs the nominating and governance committee of Silicon Image. Dr. George’s operations and manufacturing expertise, including 30 years of managing and serving on the boards of directors of public technology-based and semiconductor manufacturing companies, gives him the qualifications and skills to serve as a director of our Company. For these reasons, in addition to his past service as a director of the Company and his status as an independent director, Dr. George is fully qualified to serve an additional term as director on our board.
Mr. Theodore J. Coburn joined the Company as a director in September 2005. From August 1991 to December of 2009, Mr. Coburn served as president of the Coburn Capital Group, a boutique investment bank based in New York City. Since January 2010, Mr. Coburn has served as a partner of Coburn Greenberg Partners LLC, a strategic advisory and investment banking firm. He also served as trustee of the Allianz Global Investors Mutual Fund Complex from 1991 to 2011. From January 2007 to November 2008, Mr. Coburn served as executive vice president of Nations Academy, a private education management company. From March 2006 to January 2007, Mr. Coburn was executive vice president of Edison Schools Inc., a private educational management company. Mr. Coburn received a B.S. degree in economics and finance from the University of Virginia; an M.B.A. degree from Columbia’s Graduate School of Business; and a Masters of Divinity degree, a Master’s degree in education, and a Certificate of Advanced Studies in Cognitive Development from Harvard University. Mr. Coburn’s financial and investment management expertise and diversified background of managing and serving on the boards of directors of private companies, together with his experience in managing financial affairs of complex institutions and insight into U.S. financial markets, give him the qualifications and skills to serve as a director of our Company. For these reasons, in addition to his past service as a director of the Company and his status as an independent director, Mr. Coburn is fully qualified to serve an additional term as director on our board.
In October 2004, Mr. Coburn, in his capacity as an independent trustee of the Allianz Funds (a mutual fund family), was named as a defendant along with the investment advisers, distributor, other trustees, officers and other affiliates of the Funds in a consolidated class action pending in the federal district court in Connecticut. The lawsuit involved class and derivative claims, and it was based on allegations that the investment advisers and other service providers were involved in improper revenue sharing arrangements relating to the Funds. The plaintiffs seek, among other things, unspecified compensatory damages plus interest, as well as punitive damages.
Mr. Eric Kuo joined us as a director in March 2008. From April 2003 until December 2007, he served as president and managing director of Fairchild Semiconductor (HK) Ltd., the Asia/Pacific arm of Fairchild Semiconductor (FCS), a public company that provides high performance semiconductors that optimize energy for various product applications. In that capacity, Mr. Kuo was responsible for defining and implementing the region’s strategic business plan and execution for Fairchild Semiconductor’s Asia Pacific investments, acquisitions, divestitures and joint ventures. From January 2009 to December 2009, Mr. Kuo served as senior vice president of worldwide sales of Alpha and Omega Semiconductor (AOSL), a public company engaged in power management semiconductor products. Since June 2011, Mr. Kuo has served as president of Lite-On Semiconductor Corp., a Taiwanese public company that develops and markets contact image sensors and semiconductor components. Mr. Kuo holds both a BSc in Management from National Chung Hsin University in Taiwan and an MBA from Golden Gate University in San Francisco. Mr. Kuo’s operations and sales and marketing expertise, as well as his extensive experience in sales management and relationship development in the Asia/Pacific region which is particularly relevant due to the Company’s global sales, foreign manufacturing and assembly of products, gives him the qualifications and skills to serve as a director of our Company. For these reasons, in addition to his past service as a director of the Company and his status as an independent director, Mr. Kuo is fully qualified to serve an additional term as director on our board.
Mr. James E. Doran became a director of the Company in January 2012. During 2011, Mr. Doran was a consultant to the Company on its foundry technology and supply strategy. From 2008 to 2010, Mr. Doran was senior vice president of foundry operations for Globalfoundries, where he led the transformation of the AMD Dresden 300mm fabrication facility into a leading-edge technology foundry. From 2005 to 2008, Mr. Doran was the chief operating officer of Spansion where he was responsible for all aspects of technology development and wafer fab operations. Prior to that, Mr. Doran spent 15 years at AMD where he held a variety of technology development, operations, and executive level positions. As group vice president, Mr. Doran led the transformation of an AMD memory division into a merged joint venture with Fujitsu that later resulted in the IPO of Spansion. Prior to AMD, he served as the vice president of operations at Paradigm Semiconductor and also worked with Intel, Intersil and Signetics Corporation as a manager, director and process engineer. Mr. Doran holds a B.S. degree in physics from Northwestern University and a master’s degree in physics from the University of Wisconsin. Mr. Doran’s experience as a senior executive and his extensive knowledge of international foundry operations and technology development give him the qualifications and skills to serve as a director of our Company.
Mr. Eric A. Balzer was named our chief executive officer in January 2011 and has served as a director since September 1998. Prior to his appointment as our CEO, Mr. Balzer was our chief financial officer from October of 2004. From November 1999 until October 2004, Mr. Balzer was a retired executive. Prior to his retirement, he spent nearly 10 years as senior vice president of operations for Advanced Energy Industries (AEIS), a manufacturer of power conversion devices for the semiconductor equipment industry. In that role, Mr. Balzer was instrumental in building AEIS from $18 million in revenue into a high-growth $450 million company where he managed the introduction of new products, the expansion into new market areas, and the implementation of robust processes, systems and quality programs. Earlier, he served in senior operating management roles at IBM’s Systems Technology Division and in financial and operations roles at Shell Oil. Mr. Balzer began his career serving for six years in the US Navy where he operated nuclear reactors and had responsibility for electronic reactor control systems on nuclear submarines.
Mr. Balzer is a director of Constar International, Inc. (CNPN.PK), a public company that supplies plastic containers primarily for soft drinks and water. Mr. Balzer has served on both the compensation committee and audit committee of various public and private companies and is currently the chairman of the audit committee of Constar International, Inc.
Mr. Balzer holds a Bachelor of Science degree in finance from the University of Colorado. He also studied mechanical, electrical and nuclear engineering at the U.S. Navy Nuclear Power School and studied history and physics at Harvard University. Mr. Balzer’s financial and operational expertise, and diversified background of managing and serving on the boards of directors of private and public companies, give him the qualifications and skills to serve as a director of our Company. For these reasons, in addition to his current service as our Chief Executive Officer and his past service as a director and chief financial officer of the Company, Mr. Balzer is fully qualified to serve an additional term as director on our board.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Our total revenue for the year ended December 31, 2011 was $66.4 million. In 2011, 99% of our revenue was derived from sales of our products and 1% of our revenue was derived from customer-sponsored research and development programs, royalties and other income.
Cash Flow provided by (used for) Operating Activities
The net amount of cash used for operating activities during 2011 was $9.6 million. Cash was used to fund our working capital, which included a $18.7 million increase in inventory from the prior year. This increase was partially offset by an increase of $3.1 million in accounts payable and accrued liabilities and a $2.4 million decrease in our accounts receivable balances.
The net amount of cash provided by operating activities during 2010 was $5.4 million. This was due primarily to earnings from operations after adjusting for non-cash items and increases in accounts payable and accrued liabilities during 2010. This was offset in part by an increase in accounts receivable.
Cash Flow used for Investing Activities
The net amount of cash used for investing activities during 2011 was $3.8 million, which was primarily related to $3.6 million of purchases of test equipment throughout the year in order to resolve supply constraints in our back-end processing, coupled with other capital purchases throughout the year. This was offset by $1.5 million in proceeds from a sale-leaseback transaction.
The net amount of cash used for investing activities during 2010 was $6.8 million, which was related primarily to $6.6 million of capital purchases associated with our new foundry initiative. We began depreciating this machinery on a straight-line basis over ten years during the quarter ending December 31, 2011.
Cash Flow provided by Financing Activities
The net amount of cash provided by financing activities during 2011 was $8.2 million, which was primarily related to net proceeds of $9.8 million from our sale of common stock in August 2011, coupled with $1.7 million of proceeds received from employee stock option exercises. Partially offsetting these increases were debt service payments of $3.3 million.
The net amount of cash provided by financing activities during 2010 was $3.9 million. The primary source of cash was $6.0 million of proceeds from our term loan obtained in June 2010, partially offset by $2.4 million of payments on our outstanding debt.
Liquidity
Our future liquidity depends primarily on revenue, gross margins, control of operating expenses, management of our working capital and capital expenditures, and our ability to obtain financing. Based upon our expected future demand, current sales backlog and consumption of our inventory, we believe that we have sufficient resources from cash on hand, funds from operations, and availability under our secured line of credit facility to fund operations through at least the fourth quarter of 2013.
The Company had $4.7 million in cash and cash equivalents at December 31, 2011. We also have approximately $3.6 million available to us under our $5.5 million secured line of credit facility. As of December 31, 2011, we had no amounts outstanding under our secured line of credit facility.
Our cash and cash equivalents decreased by $5.2 million during 2011, primarily due to the funding of an $18.7 million increase in total inventories. The increase in inventories is related to the receipt of wafers ordered earlier in 2011, while we were managing our supply constraints and working to satisfy past due customer orders. As the semiconductor industry began to weaken toward the end of 2011, wafer orders were reduced during the fourth quarter of 2011, but some were non-cancellable, which caused the increase in our inventory at year-end. We are focusing on returning to desired inventory levels and converting the inventory into cash through product sales. If operating cash flow is not sufficient to fund these purchases, we will borrow funds against our line of credit facility with SVB and pursue other potentially available sources of cash. On February 29, 2012, we negotiated an extension of our line of credit facility through February 28, 2013.
At December 31, 2011 no amounts were outstanding under our secured revolving line of credit facility and we had availability of $3.6 million under this facility. The availability under this line of credit facility, which is measured on a monthly basis, could fluctuate as it is primarily based on eligible accounts receivable.
At December 31, 2011, we had outstanding capital commitments of approximately $100,000. Expenditures incurred for capital and engineering support for our IBM foundry project from inception to date have been approximately $31 million, and wafer production began on this line during 2011, with initial commercial shipments to customers in early 2012.
Our existing loan agreement with SVB requires SVB to approve any additional debt financing we may seek to obtain, other than specific approved debt, such as lease lines of credit. We may be required to seek additional debt or equity to repay our existing debt or execute our business strategy. Any issuance of equity securities to obtain additional funds would result in dilution of our existing stockholders’ interests.
Debt Instruments
On June 28, 2010, the Company and SVB executed a Second Amendment (the “Second Amendment”) to our Amended and Restated Loan and Security Agreement dated August 18, 2009 (the “Amended Loan Agreement”). The Amendment provides for a 4-year $6.0 million term loan with a fixed interest rate of 6.5% per annum. The maturity date for the term is June 28, 2014. Principal payments are fixed at $125,000 per month plus accrued interest.
We are required to comply with certain covenants under our line of credit and loan agreement, as amended, including requirements to maintain a minimum net worth and maintain certain leverage ratios, and restrictions on certain business actions, such as payment of cash dividends, without the consent of SVB. Our loss for the first quarter of 2011 would have prevented us from meeting our existing fixed charge coverage ratio at that time. Upon notifying SVB of the likelihood that we would violate the loan covenants, SVB waived compliance of this covenant along with our adjusted quick ratio for the first two quarters of 2011. They replaced these covenants with a minimum liquidity ratio measured monthly and minimum EBITDA measured on a quarterly basis. We met these revised covenants for the quarter ending March 31, 2011.
During June, 2011, the Company and SVB determined that we were not in compliance with our liquidity ratio covenant for the months of April and May of 2011. As a result, on June 30, 2011 the Company and SVB executed a Default Waiver and Fifth Amendment to the Company’s Amended Loan Agreement. SVB waived compliance with the liquidity ratio covenant for the months of April and May and adjusted the minimum liquidity ratio and EBITDA covenants. The amendment also provided for an increase in the working capital line of credit from $6.0 million to $7.5 million, a reduction of the letter of credit, foreign exchange and cash management services sublimits to $1,750,000, and a reduction of the borrowing base to be 50% of the outstanding balance of the Company’s existing term loan. In connection with the amendment, we also replaced our existing Export-Import (EX-IM) Loan Agreement with a new EX-IM Loan Agreement that guarantees advances of eligible foreign accounts.
On December 30, 2011 the Company and SVB executed an additional amendment to the Amended Loan Agreement to provide for a decrease of the total amount available under the revolving line from $7.5 million to $5.5 million, which is offset by the elimination of the letter of credit, foreign exchange and cash management services sublimits, which totaled approximately $1,900,000 as of December 31, 2011. This amendment also extended the maturity date to January 31, 2012, at which time the Company and SVB further extended the maturity date to February 29, 2012.
On February 29, 2012, the Company and SVB executed a new Amended and Restated Loan and Security Agreement, which extended the maturity of our revolving line of credit to February 28, 2013. As a result of this extension, the amount available under the line was increased from $5.5 million to $7.5 million. The borrowing base was adjusted to include eligible raw materials, work in process and finished goods inventory, capped at $1 million for domestic inventory and $3 million for export inventory, further capped by eligible accounts receivable limits. We are required to pay-down up to $1.25 million of our term loan during the first quarter of 2012, with a resultant reduction of principal payments over the remaining term of the loan.
At December 31, 2011 no amounts were outstanding under our secured revolving line of credit facility and we had availability of $3.6 million under this facility. The availability under this line of credit facility, which is measured on a monthly basis, could fluctuate as it is primarily based on eligible accounts receivable.
If we cannot sell and ship product consistently throughout the quarter, our borrowing base relating to accounts receivable could be materially impacted. If we cannot generate sufficient cash from operations or obtain a sufficient borrowing base on our secured line of credit facility, we may seek to obtain additional equity or debt financing. Additional debt financing would require approval from SVB in accordance with the covenants in our existing agreements.
We currently have six capital leases outstanding, totaling approximately $4.2 million, with terms between two and three years and effective interest rates between 9% and 10%. These leases have standby letters of credit in favor of four of the lessors for approximately $1.8 million.
In April 2004, we entered into a patent interference settlement agreement with National Semiconductor Corporation. We are required to pay National Semiconductor Corporation $250,000 annually through 2013. As of December 31, 2011, the present value of this promissory note is $478,000. We recorded this note at the discounted present value assuming an annualized discount rate of 5.75%. The face value of this note as of December 31, 2011 was $500,000.
On December 15, 2005, Ramtron LLC, our wholly-owned subsidiary, closed on a mortgage loan facility with American National Insurance Company. Ramtron LLC entered into a promissory note evidencing the loan with the principal amount of $4.2 million, with a maturity date of January 1, 2016, bearing interest at 6.17%. We are obligated to make monthly principal and interest payments of $30,500 until January 2016 and a balloon payment of $2,757,000 in January 2016. Ramtron LLC also entered into an agreement for the benefit of American National Insurance Company securing our real estate as collateral for the mortgage loan facility.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Significant Estimates . The preparation of our consolidated financial statements and related disclosures in conformity with generally accepted accounting principles in the United States requires us to make estimates and judgments that affect the amounts reported in our financial statements and accompanying notes. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates including those related to bad debts and sales returns and allowances, inventories, long-lived assets, intangible assets, income taxes, accrued expenses, stock compensation accruals, and other contingencies. We base our estimates and judgments on our historical experience, market trends, financial forecasts and projections and on other assumptions that we believe are reasonable under the circumstances, and apply them on a consistent basis. Any factual errors or errors in these estimates and judgments may have a material impact on our financial condition and operating results.
Recognition of Revenue . Revenue from product sales to direct customers and distributors is recognized upon shipment as we generally do not have any post-shipment obligations and allow limited rights of return to certain customers. In the event a situation occurs to create a post-shipment obligation, we would defer revenue recognition until the specific obligation was satisfied. We defer recognition of sales to distributors when we are unable to make a reasonable estimate of product returns, or due to insufficient historical product return information. The revenue recorded is dependent upon estimates of expected customer returns and sales discounts based upon both historical data and management estimates.
Revenue from licensing programs is recognized over the period we are required to provide services under the terms of the agreement. Revenue from royalties is recognized upon the notification to us of shipment of product from our technology license partners to direct customers.
Inventory Valuation/Scrap . We write-down our inventory, with a resulting increase in our scrap expense, for estimated obsolescence or lack of marketability for the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
Our forecasts, including forecasts for future demand, are developed using a bottom-up approach with input from our field sales force and supply chain management teams. These forecasts, coupled with our backlog, are then compared to our inventory levels. Any excess is included in our inventory allowance reserve.
In recent periods, estimates of future demand were difficult to determine due to the supply constraints we experienced when our previous wafer foundry ceased the production of wafers for us. During the transition to another wafer foundry, we underestimated demand, as well as the amount of time it would take to establish the new foundry for production. This situation forced us to put customers on allocation. As a result of this allocation, some customers placed orders beyond their actual needs at the time. As we began to fill those orders, many customers rescheduled shipments to later dates, which caused our inventory levels to rise. We have since revised our policy and require customers to give a 60-day notice when revising shipment dates, which is an industry standard.
Allowance for Doubtful Accounts and Returns . We seek to maintain a stringent credit approval process although our management must make significant judgments in assessing our customers’ ability to pay at the time of shipment. Despite this assessment, from time to time, customers are unable to meet their payment obligations. If we are aware of a customer’s inability to meet its financial obligations to us, we record an allowance to reduce the receivable to the amount we believe we will be able to collect from the customer. For all other customers, we record an allowance based upon the amount of time the receivables are past due and collection attempts. If actual accounts receivable collections differ from these estimates, an adjustment to the allowance may be necessary with a resulting effect on operating expense. We continue to monitor our customers’ credit worthiness, and use judgment in establishing the estimated amounts of customer receivables that will ultimately not be collected.
An allowance for sales returns is established based on historical and current trends in product returns and customer rebates. Our distributors have a right to return products under certain conditions. We recognize revenue on shipments to distributors at the time of shipment, along with a reserve for estimated returns based on historical data and future estimates. Also, certain distributors are granted rebates if specific end customers purchase our products. We estimate these rebates at the time of sale and record a related allowance. At June 30, 2012 and December 31, 2011, the Company’s reserve for sales returns was $2.4 million and $2.3 million, respectively.
Deferred Income Taxes . As part of the process of preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to estimate our income taxes on a consolidated basis. We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts recorded in the consolidated financial statements, and for operating loss and tax credit carryforwards. Realization of the recorded deferred tax assets depends upon the generation of sufficient taxable income in future years to obtain benefit from the reversal of net deductible temporary differences and from tax credit and operating loss carryforwards. A valuation allowance is provided to the extent that management deems it more likely than not that the net deferred tax assets will not be realized. The amount of deferred tax assets considered realizable is subject to adjustment up or down in future periods if estimates of future taxable income are changed. Future adjustments could materially affect our financial results and, among other effects, could cause us not to achieve our projected results.
In assessing the potential to realize our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax assets and liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that we will realize the benefits of these deductible differences. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income during the carryforward period are reduced.
Intangible Assets . Intangible assets are recorded at cost and are amortized on a straight-line basis over their estimated useful lives, ranging from 15 to 17 years, and reviewed for impairment when events or changes in circumstances indicate that the intangible asset may be impaired. The amounts capitalized for patents are primarily the cost of securing the patent. Expenditures incurred to renew or extend the life of intangible assets are expensed.
Long-lived Assets . We review the carrying values of long-lived assets whenever events or changes in circumstances indicate that such carrying values may not be recoverable. Under current standards, the assets must be carried at historical cost if the projected cash flows from their use will recover their carrying amounts on an undiscounted basis and without considering interest. However, if projected cash flows are less than their carrying value, the long-lived assets must be reduced to their estimated fair value. Considerable judgment is required to project such cash flows and, if required, estimate the fair value of the impaired long-lived asset. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows.
Warranty Costs . We make periodic provisions for expected warranty costs. Historically, warranty costs have been insignificant.
Share-based Payment Assumptions . We estimate volatility, forfeitures, and expected term of our options granted based upon historical data. All of these variables have an effect on the estimated fair value of our share-based awards.
Three Months:
Cost of product sales was $6.8 million for the three months ended June 30, 2012, which was a decrease of $2.0 million from the same period in 2011. This decrease was due to a 25% decrease in units shipped, combined with improved gross product margins. Gross product margin increased to 52%, compared with 47% for the same period last year. The increase in gross margin was due primarily to improved cost control measures and a change in product mix, toward higher-margin, high-density products.
Six Months:
Cost of product sales for the six months ended June 30, 2012 was $14.0 million, which was a decrease of $317,000 from the same period in 2011. This decrease was due to a reduction in units shipped, combined with improved gross product margins. Product gross margin for the six months ended June 30, 2012 increased by 5%, to 52%, compared with 47% for the same period last year. The increase in gross margin was due primarily to improved cost control measures and a change in product mix toward sales of higher-margin, high-density products.
Liquidity
Our future liquidity depends primarily on revenue, gross margins, control of operating expenses, management of our working capital and capital expenditures, and our ability to obtain financing. Based upon our expected future demand, current sales backlog and consumption of our inventory, we believe that we have sufficient resources from cash on hand, funds from operations, and availability under our secured line of credit facility to fund operations through at least the fourth quarter of 2013.
The Company had $4.2 million in cash and cash equivalents at June 30, 2012. We also had approximately $3.2 million available to us under our $7.5 million secured line of credit facility. As of June 30, 2012, we had $1.5 million outstanding under this facility, which has been extended until February 28, 2013.
Inventories increased by $2.7 million during the first quarter of 2012, and decreased $1.4 million in the second quarter of 2012. We expect further decreases in inventories through the remainder of 2012, as we focus on returning to desired inventory levels and converting inventory into cash through product sales.
If the Cypress tender offer, as described earlier in this Item 2., and subsequent acquisition is not consummated, we expect payments due in connection with the transaction during the second half of 2012 and the first quarter of 2013 to total in excess of $750,000, and further required payments during the second quarter of 2013 to be in excess of $1.25 million. These payments include primarily legal, advisory, and other professional fees, as well as proxy solicitation costs.
Our existing loan agreement with SVB requires SVB to approve any additional debt financing we may seek to obtain, other than specific approved debt, such as lease lines of credit. We may be required to seek additional debt or equity funds to repay our existing debt, execute our business strategy, or pay expenses associated with the Cypress tender offer. Any issuance of equity securities to obtain additional funds would result in dilution of our existing stockholders’ interests.
Debt Instruments
On February 29, 2012, we executed an Amended and Restated Loan and Security Agreement (“Loan Agreement”) with Silicon Valley Bank (“SVB”). The Loan Agreement provides for a maximum of $7.5 million working capital line of credit and a $6.0 million term loan with a fixed interest rate of 6.5% per annum. The borrowing base under the line of credit includes eligible accounts receivable and eligible raw materials, work in process and finished goods inventory, capped at $1 million for domestic inventory and $3 million for export inventory, further reduced by 50% of the outstanding balance under our term loan. The Loan Agreement provides for interest on the line of credit at a floating rate equal to the SVB prime lending rate plus 1.75% to 2.25% per annum depending upon cash balances maintained at SVB and borrowing base availability, with an expiration date of February 28, 2013. The Loan Agreement also required an additional principal payment against the term loan of $875,000 before March 31, 2012, which reduced our remaining 27 monthly principal payments to approximately $93,000 each, plus accrued interest. Security for the Loan Agreement includes all of the Company’s assets except for real estate and leased equipment. The Company draws upon the loan facility for working capital purposes and to fund capital requirements as needed.
As of June 30, 2012 we had $1.5 million outstanding on the secured line of credit facility, with a remaining net availability under this facility of $3.2 million.
If we cannot sell and ship product consistently throughout the quarter, our borrowing base relating to accounts receivable could be materially impacted. If we cannot generate sufficient cash from operations or obtain a sufficient borrowing base on our secured line of credit facility, we may seek to obtain additional equity or debt financing. Additional debt financing would require approval from SVB in accordance with the covenants in our existing agreements. In addition, since our covenants are measured on a monthly basis, we could be at risk of violating our liquidity ratio covenant if our revenue is not consistent throughout the quarter.
We currently have seven capital leases outstanding, totaling approximately $3.6 million, with terms between two and three years and effective interest rates between 9% and 10%. These leases have standby letters of credit in favor of five of the lessors for approximately $1.7 million.
In April 2004, we entered into a patent interference settlement agreement with National Semiconductor Corporation. We are required to pay National Semiconductor Corporation $250,000 annually through 2013. We expect to make the 2012 payment, which was due in April, during the second half of 2012. As of June 30, 2012, the present value of this promissory note is $485,000. We recorded this note at the discounted present value assuming an annualized discount rate of 5.75%. The face value of this note as of June 30, 2012 was $500,000.
On December 15, 2005, Ramtron LLC, our wholly-owned subsidiary, closed on a mortgage loan facility with American National Insurance Company. Ramtron LLC entered into a promissory note evidencing the loan with the principal amount of $4.2 million, with a maturity date of January 1, 2016, bearing interest at 6.17%. We are obligated to make monthly principal and interest payments of $30,500 until January 2016 and a balloon payment of $2,757,000 in January 2016. Ramtron LLC also entered into an agreement for the benefit of American National Insurance Company securing our real estate as collateral for the mortgage loan facility.
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Fund Letters
