S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on March 1, 2006

Registration No. 333-          


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933


TRIPATH TECHNOLOGY

(Exact name of Registrant as specified in its charter)


Delaware   3674   77-0407364

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

2560 Orchard Parkway

San Jose, CA 95131

(408) 750-3000

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


Dr. Adya S. Tripathi

President and Chief Executive Officer

2560 Orchard Parkway

San Jose, CA 95131

(408) 750-3000

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


Copies to:

David J. Segre, Esq.

Bret M. DiMarco, Esq.

Wilson Sonsini Goodrich & Rosati

Professional Corporation

650 Page Mill Road

Palo Alto, CA 94304

(650) 493-9300


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

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

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

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

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


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


Calculation of Registration Fee


Title of Each Class of

Securities to be Registered

 

Amount

to be
Registered(1)

  Proposed Maximum
Offering Price
Per Share(2)
 

Proposed Maximum
Aggregate Offering

Price(2)

  Amount of
Registration Fee

Common Stock, $0.001 par value per share

  6,081,080   $0.38   $2,310,811   $247

(1) Pursuant to Rule 416 under the Securities Act of 1933, these shares include an indeterminate number of shares of common stock issuable as a result of stock splits, stock dividends, recapitalizations or similar events.
(2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c) under the Securities Act on the basis of the average of the high and low prices on the OTC Bulletin Board on February 28, 2006.

 

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



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The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

(Subject to Completion, dated                     , 2006)

 

PROSPECTUS

 

6,081,080 Shares

 

TRIPATH TECHNOLOGY INC.

 

Common Stock

 


 

This prospectus relates to the public offering, which is not being underwritten, of up to 6,081,080 shares of our common stock under this prospectus by the selling stockholders identified in this prospectus. The entire amount of 6,081,080 shares are shares that can be acquired from us by the selling stockholders pursuant to the exercise of Common Stock Warrants that we issued to the selling stockholders on February 14, 2006 in a private placement transaction. We expect the selling stockholders may sell the shares from time to time in regular brokerage transactions, in transactions directly with market makers, in privately negotiated transactions on or off the OTC Bulletin Board.

 

For additional information on the methods of sale that may be used by the selling stockholders, see the section entitled “Plan of Distribution” beginning on page 78. We will not receive any of the proceeds from the sale of these shares. We will bear the costs relating to the registration of these shares.

 

Our common stock is listed on the OTC Bulletin Board under the symbol “TRPH.” On February 28, 2006, the last sale price of our common stock on the OTC Bulletin Board was $0.38 per share.

 


 

THIS OFFERING INVOLVES MATERIAL RISKS. SEE “ RISK FACTORS” BEGINNING ON PAGE 10.

 


 

The Securities and Exchange Commission may take the view that, under certain circumstances, the selling stockholders and any broker-dealers or agents that participate with the selling stockholder in the distribution of the shares may be deemed to be “underwriters” within the meaning of the Securities Act of 1933, as amended. Commissions, discounts or concessions received by any such broker-dealer or agent may be deemed to be underwriting commissions under the Securities Act.

 


 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The date of this prospectus is March [    ], 2006


Table of Contents

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   10

Special Note Regarding Forward-Looking Statements

   26

Use of Proceeds

   27

Dividend Policy

   27

Market Price Information

   27

Capitalization

   28

Selected Consolidated Financial Data

   29

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   32

Business

   48

Management

   59

Certain Relationships and Related Party Transactions

   70

Principal and Selling Stockholders

   71

Description of Capital Stock

   76

Plan of Distribution

   78

Legal Matters

   80

Experts

   80

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   80

Where You Can Find Additional Information

   81

Index to Financial Statements

   F-1

 


 

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Except where the context requires otherwise, in this prospectus the “Company,” “Tripath,” “Tripath Technology,” “we,” “us” and “our” refer to Tripath Technology Inc., a Delaware corporation, and, where appropriate, its subsidiaries.


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PROSPECTUS SUMMARY

 

This summary highlights information contained elsewhere in this prospectus and does not contain all of the information you should consider in making your investment decision. You should read this summary together with the more detailed information, including our financial statements and the related notes, elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors.”

 

TRIPATH TECHNOLOGY INC.

 

We are a fabless semiconductor company that focuses on providing highly efficient power amplification to the digital media consumer electronics and communications markets. We design and sell digital amplifiers based on our proprietary technology, called Digital Power Processing®, which enables us to provide significant performance, power efficiency, size and weight advantages over traditional amplifier technology. Our digital amplifiers are branded “Class-T®” and combine a switching mode approach that generates high fidelity sound with low distortion and considerably lower heat dissipation than Class-AB amplifiers. We target and provide digital amplifiers for three primary markets where signal fidelity and power efficiency are important: Consumer and PC Convergence, Digital Subscriber Line, or DSL, and Wireless. Within the Consumer and PC Convergence market, we target multiple market segments, which include consumer audio applications such as 5.1-7.1 channel home theater systems, flat panel televisions, personal computers, mini/micro component stereo systems, cable set-top boxes and gaming consoles, automotive audio applications such as in-dash head units and trunk amplifiers and professional audio applications such as audio distribution systems and pro-audio amplifiers. We are currently offering digital amplifiers in the form of line drivers for use in DSL equipment. We also have a research and development program aimed at developing amplifiers for digital wireless handsets and base stations to increase talk time and battery life and improve overall power efficiency.

 

Recent Developments

 

February 14, 2006 Financing

 

On February 14, 2006, we entered into a Warrant Issuance Agreement (the “Issuance Agreement”) with the holders of the Series A Common Stock Purchase Warrants previously issued by the Company (the “Series A Warrants”). Pursuant to the Issuance Agreement, we raised approximately $2.5 million from the exercise of the Series A Warrants that were issued in connection with our November 8, 2005 financing further described below. The Series A Warrants permitted the holders to purchase up to 6,756,757 shares of our common stock at an exercise price of $0.37 per share. In partial consideration for the exercise of the Series A Warrants, we issued new Common Stock Purchase Warrants (the “New Warrants”) to the investors on February 14, 2006. The New Warrants are exercisable from the date of issuance until July 1, 2007 and permit the holders to purchase an aggregate of up to 6,081,080 shares of our common stock at an exercise price of $0.315 per share. The New Warrants permit cashless exercise and contain a call provision, pursuant to which the New Warrants can be called for exercise by us on 20-days notice if our common stock price per share closes for 10 consecutive trading days at or above 150% of the New Warrant exercise price, so long as our common stock is traded on the Nasdaq National Market, the Nasdaq Capital Market or the OTC Bulletin Board. The Issuance Agreement also contains a provision that, for as long as the investors hold the New Warrants, we shall not engage in future equity financings in which common stock or securities exercisable or convertible to common stock is issued at an effective price that is less than $0.315 without the consent of the investors.

 

The financing was completed through a private placement to accredited investors and is exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company has agreed to file a registration statement covering the resale of the shares issuable to the investors upon the exercise of the New Warrants.

 

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November 8, 2005 Financing

 

On November 8, 2005, we closed a financing transaction (the “November Financing”) whereby certain institutional investors purchased 6% Senior Secured Convertible Debentures (the “Debentures”) in an aggregate principal amount of $5,000,000. The Debentures have a term of 2 years and come fully due on November 8, 2007. Interest is payable on the Debentures at a rate of 6% per annum and monthly principal and interest payments begin on April 8, 2006. At our option, the interest payments are payable either in cash or in registered common stock, subject to certain conditions as specified in the Debentures. The Debentures are convertible at the option of the holder at any time and from time to time into our common stock at a conversion price of $0.37 per share, subject to certain adjustments. Additionally, pursuant to the terms of the Debentures, the conversion price will be reset in the event that we (i) effect a reverse stock split and/or (ii) have our common stock delisted from the Nasdaq Capital Market. The conversion price will be adjusted on the 60th day following any such reverse stock split or delisting to the lower of either the then conversion price or the volume weighted average price of our common stock for the 10 trading days preceding such reset. When we were delisted from the Nasdaq Capital Market effective at the opening of business on December 8, 2005, the Debenture conversion price was subject to adjustment on February 6, 2006. On February 6, 2006, the volume weighted average price of our common stock for the 10 trading days preceding such adjustment was greater than the then current conversion price, and therefore no adjustment occurred. Additionally, in the event that we issue common stock in an equity financing at a price less than the then conversion price, the conversion price shall be immediately adjusted to the price at which such common stock was issued. In connection with the November Financing, we also issued Series A Common Stock Warrants and Series B Common Stock Warrants to the purchasers. The Series A Common Stock Warrants to purchase up to 6,756,755 shares of common stock, at an exercise price of $0.37 per share, are exercisable from November 8, 2005 until the later of July 1, 2006 or 30 days after the effectiveness of a resale registration statement registering the resale of the common stock issuable upon the conversion of the Debentures and the exercise of the warrants (the “Resale Registration Statement”). The Series A Common Stock Warrants were exercised in full on February 14, 2006, as described above. The Series B Common Stock Warrants to purchase up to 10,368,854 shares of common stock, at an exercise price of $0.43 per share, are exercisable from May 8, 2006 until May 8, 2011. The Series B Common Stock Warrants contain provisions to adjust their exercise prices and share amounts in the event that we issue common stock in an equity financing at a price less than the then applicable exercise prices of the warrants. Additionally, the Series B Common Stock Warrants contain a call provision, which we may exercise on 20-days notice, if the price per share of our common stock closes for 10 consecutive days at or above 250% of the exercise price, so long as our common stock is traded on the Nasdaq National Market, the Nasdaq Capital Market or the OTC Bulletin Board.

 

The Debentures contain various covenants that limit our ability to incur additional debt, repay or repurchase more than a de minimus number of shares of common stock, incur certain liens or amend our certificate, bylaws, or charter documents in a material adverse manner to the holders of the Debentures. Further, in connection with the November Financing, we have also agreed not to file any other registration statements (except for amendments to registration statements already filed) until March 22, 2006 (this provision has been waived by the investors with respect to this registration statement), not to assume any corporate debt senior to the Debentures, to either terminate our then-existing accounts receivable secured credit facility with Bridge Bank, National Association or enter into an inter-creditor agreement to subordinate the facility to the Debentures, and not to pay cash dividends or distributions on our equity securities. Furthermore, upon an event of default under the Debentures, 130% of the outstanding principal of the Debentures plus all accrued and unpaid interest shall become immediately due and payable to the holders of the Debentures.

 

As part of the November Financing, we entered into a security agreement with the investors, pursuant to which our obligations under the Debentures are secured by all of our assets, including our intellectual property. The November Financing was completed through a private placement to institutional investors and was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. In addition, as long as the Debentures remain outstanding, the holders of the Debentures have the right to participate in the Company’s

 

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future equity or equity-linked financings. Additionally, in connection with services related to the consummation of this transaction we paid fees of approximately $150,750 and issued a Series B Common Stock Warrant to a placement agent to purchase up to 233,721 shares of our common stock.

 

Nasdaq Delisting

 

As we previously disclosed in our Current Report on Form 8-K filed on April 29, 2005, we received written notification (the “Original Notice”) from the Nasdaq Stock Market on April 26, 2005 that the bid price of our common stock for the last 30 consecutive trading days had closed below the minimum $1.00 per share (the “Minimum Price Requirement”) required for continued listing under Nasdaq Marketplace Rule 4450(b)(4) (the “Rule”). Pursuant to Nasdaq Marketplace Rule 4450(e)(2), we were provided a period of 180 calendar days, or until October 24, 2005, to regain compliance.

 

As we previously disclosed in our Current Report on Form 8-K filed on August 24, 2005, we received a letter from the Office of General Counsel, Nasdaq Listing Qualifications Hearings on August 22, 2005 informing us that a Nasdaq Listing Qualifications Panel had determined to transfer the listing of our securities from the Nasdaq National Market to the Nasdaq SmallCap Market (now called the Nasdaq Capital Market), effective at the opening of business on August 24, 2005. The Company’s securities have traded on the Nasdaq Capital Market from August 24, 2005 until December 8, 2005. As set forth in Nasdaq Marketplace Rule 4310(c)(8)(D), we were afforded the remainder of the Capital Market’s 180 calendar day compliance period, or until October 24, 2005, to regain compliance with the Minimum Price Requirement, as set forth in Nasdaq Marketplace Rule 4310(c)(4). As we also disclosed in our Current Report on Form 8-K filed on August 24, 2005, our ability to maintain the listing of our securities on the Nasdaq Capital Market would require, among other things, that we satisfy the Minimum Bid Price Requirement. At our annual stockholder meeting held on September 30, 2005, our stockholders approved a proposal to effect a reverse stock split of our common stock at an exchange ratio ranging from one-for-two to one-for-six and authorized our board of directors to select the appropriate ratio at its discretion.

 

As we previously disclosed in our Current Report on Form 8-K filed on November 1, 2005, on October 26, 2005, we received a Nasdaq Staff Determination letter (the “Staff Determination”), indicating (i) that we had not regained compliance with the Minimum Price Requirement, (ii) that we were not eligible for an additional 180 calendar day compliance period given that we did not meet the Nasdaq Capital Market initial inclusion criteria set forth in Nasdaq Marketplace Rule 4310(c), and that (iii) accordingly, our securities would be delisted from the Nasdaq Capital Market at the opening of business on November 4, 2005 unless we requested a hearing (the “Hearing”) before a Nasdaq Listing Qualifications Panel (the “Panel”) to appeal the Nasdaq Staff’s delisting determination, in which case the delisting of our securities would be stayed pending the Panel’s decision. We requested a Hearing before the Panel to review the Staff Determination. Such Hearing was held December 1, 2005.

 

As discussed above and as we previously disclosed in our Current Report on Form 8-K filed on November 9, 2005 as amended, we closed a $5 million financing on November 8, 2005. As we previously disclosed in our Current Report on Form 8-K filed on November 18, 2005, we received on November 14, 2005 an Additional Staff Determination letter (the “Additional Staff Determination”) from Nasdaq indicating that we failed to comply with (i) the shareholder approval requirements for continued listing set forth in Nasdaq Marketplace Rules 4350(i)(1)(D)(ii) and IM-4350-2 and (ii) the stockholders’ equity requirements for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(2)(B), and that our securities are, therefore, subject to delisting from the Nasdaq Capital Market. The Additional Staff Determination also notified the Company that these two matters would be considered at the Hearing by the Panel in rendering a determination regarding the Company’s continued listing of its common stock on the Nasdaq Capital Market. These two matters are discussed in more detail below.

 

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According to the Additional Staff Determination, the Nasdaq Staff believes that a certain provision of the Debentures issued as part of the November Financing and of the Common Stock Purchase Warrants also issued as part of the November Financing violates Nasdaq shareholder approval rules. The transaction documents of the November Financing provide that we may not issue a number of shares of common stock which, when aggregated with any shares of common stock issued prior to such conversion date or payment date, as the case may be, (A) pursuant to any Debentures issued as part of the November Financing and (B) pursuant to any Common Stock Purchase Warrants issued as part of the November Financing, would either (i) exceed 19.999% of the number of shares of common stock outstanding on the trading day immediately preceding the original issue date or (ii) allow for the issuance of stock to any particular holder such that the shares owned by such holder when added to such shares issuable upon such conversion of the Debentures or exercise of the Common Stock Purchase Warrants would result in the holder owning more than 19.999% of our outstanding shares as of the date of such proposed issuance. The transaction documents of the November Financing further provide that, notwithstanding the foregoing, these limitations shall not apply at any time that the common stock ceases to be listed on markets or exchanges on which the common stock is listed or quoted for trading on the date in question: the Nasdaq Capital Market, the American Stock Exchange, the New York Stock Exchange or the Nasdaq National Market. The Nasdaq Staff notes, however, that pursuant to Nasdaq interpretive material IM-4350-2, a cap must apply for the life of the transaction, unless shareholder approval is obtained. Nasdaq Staff further notes that caps that no longer apply if we are not listed on Nasdaq are not permissible, that, as such, the above-referenced provisions of the Debenture and of the Common Stock Purchase Warrant do not comply with Nasdaq Marketplace Rule 4350(i)(1)(D)(ii) and that this matter serves as an additional basis for delisting our securities from the Nasdaq Capital Market to be considered by the Panel at the Hearing.

 

Also in the Additional Staff Determination, the Nasdaq Staff noted that we stated in our Current Report on Form 8-K filed on November 9, 2005 that we expected to report stockholders’ equity as of September 30, 2005 that is less than $1 million. The Nasdaq Staff additionally determined that the market value of our listed securities as of November 11, 2005 was approximately $22.7 million and that we reported net loss from continuing operations of $11,665,000, $7,215,000 and $19,314,000 in our annual filings for the nine months ended September 30, 2004 and for the years ended December 31, 2003 and December 31, 2002, respectively. Accordingly, the Nasdaq Staff believed that we did not comply with Nasdaq Marketplace Rule 4310(c)(2)(B) which requires us to have either (i) a minimum of $2.5 million in stockholders’ equity, (ii) $35 million market value of listed securities or (iii) $0.5 million of net income from continuing operations for the most recently completed fiscal year or two of the three most recently completed fiscal years. The Nasdaq Staff noted that this matter would serve as an additional basis for delisting our securities from the Nasdaq Capital Market to be considered by the Panel at the Hearing.

 

On December 6, 2005, we received a notice from the Counsel to the Panel, Nasdaq Office of General Counsel, Listing Qualifications Hearing of the Nasdaq Stock Market informing us that the Panel had denied the Company’s request to continue its listing on the Nasdaq Capital Market, and that, accordingly, the Panel would delist the Company’s shares from the Nasdaq Capital Market effective at the opening of business on Thursday, December 8, 2005. The Panel found that the Company failed to meet the minimum $1.00 bid price per share requirement, as set forth in Marketplace Rule 4310(c)(4); comply with the shareholder approval requirements under Marketplace Rule 4350(i)(1)(D)(ii) and IM-4350-2; or meet the $2.5 million stockholders’ equity requirement under Marketplace Rule 4310(c)(2)(B)(i).

 

On December 8, 2005, the shares of our common stock began trading on the Pink Sheets. On December 30, 2005 the shares of our common stock ceased to trade on the Pink Sheets and began to trade on the OTC Bulletin Board.

 

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Restatements of Prior Financial Statements

 

As originally described in our Current Report on Form 8-K dated October     , 2004 and filed with the Securities and Exchange Commission on October 22, 2004 (the “Prior 8-K”), our Audit Committee initiated an internal investigation regarding certain purported product returns (the “Product Returns”) to one of our distributors, Macnica Japan (“Macnica”), by its customers. The Audit Committee investigation and discussion included a review of our compliance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements” (“SAB 104”) as applied to the circumstances surrounding the Product Returns. Under SAB 104, a requirement for revenue recognition is that all of the following criteria must be met: (1) there is persuasive evidence that an arrangement exists, (2) delivery of goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. In accordance with SAB 104, our revenue recognition policy, for sales to distributors, requires that we defer recognition of revenue until such time that the distributor sells products to its customers based upon receipt of point-of-sales reports from the distributor. As of the Audit Committee’s determination on January 25, 2005, the internal investigation revealed that approximately $1.4 million of a sale of our product to Macnica did not meet the foregoing criteria because our Country Manager for the Japan Sales Office (who is no longer employed by us) had agreed that Macnica could return the product to us at Macnica’s discretion. The Audit Committee determined that this former employee had agreed to a term of sale that was outside of our standard practices and was not referenced in the documentation related to the sale submitted to our finance department. Given the discovery of this arrangement for Macnica to return the product, our Audit Committee concluded that we should restate certain financial information that was previously reported in our Form 10-Q for the quarter ended June 30, 2004, filed with the Securities and Exchange Commission on August 6, 2004 (the “June 2004 Form 10-Q”) to properly reflect our revenue and related financial information for the referenced periods (the “Initial Restatement”). Accordingly, we advised in the Prior 8-K that the Consolidated Statement of Operations for the three months and six months ended June 30, 2004 and the Consolidated Balance Sheet as of June 30, 2004 included in the June 2004 Form 10-Q should no longer be relied upon because of errors in such financial statements. The financial impact of the Initial Restatement was reflected in our Transition Report on Form 10-K/T for the transition period ended September 30, 2004 filed with the Securities and Exchange Commission on February 3, 2005 (the “Transition Report”).

 

The Audit Committee directed that the internal investigation continue following reporting of the Initial Restatement. As a result of this further investigation, on May 5, 2005 the Audit Committee determined that additional sale transactions with Macnica, as well as with an additional distributor of the Company, Uniquest, did not meet our revenue recognition criteria and the requirements of SAB 104. In certain circumstances, the same former employee of the Company had agreed that Macnica could return the referenced product at Macnica’s discretion. This former employee had on these occasions agreed to a term of sale that was outside of our standard practices and was not referenced in the documentation related to the sale submitted to our finance department. In addition, the Audit Committee determined that, in certain other circumstances, Macnica had shipped product not to end customers but to other distributors and we had relied on point-of-sales reports submitted to us by Macnica that indicated the referenced product had been shipped to an end customer of Macnica when such product had only been shipped to other distributors. Recognition of revenue on sales between distributors instead of to the end customers is not permitted under our revenue recognition policies. Further, the Audit Committee determined that certain sales transactions with Uniquest did not meet our revenue recognition criteria and the requirements of SAB 104 because in certain circumstances, employees of Uniquest had incorrectly reported to us the date of shipments to end customers.

 

As a result, the Audit Committee concluded on May 5, 2005 that we should restate certain financial information (the “Additional Restatement”) that was previously reported in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004 as well as certain financial information for the quarter and transition period ended September 30, 2004 and that was previously reported in our Transition Report. The Additional Restatement was based on the Audit Committee’s conclusion on such date

 

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that the Consolidated Balance Sheets as of March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 and the related Consolidated Statements of Operations for the three months ended March 31, 2004, the three and six months ended June 30, 2004, the nine month transition period ended September 30, 2004 and the three months ended December 31, 2004 should no longer be relied upon because of errors in such financial statements. The Additional Restatement was originally described in our Current Report on Form 8-K dated May 5, 2005 and filed with the Securities and Exchange Commission on May 11, 2005. The restated financial statements for the nine months ended September 30, 2004 are included elsewhere in this document.

 

Following receipt of a final report on the internal investigation, the Audit Committee determined that the internal investigation had been completed on June 15, 2005. The internal investigation revealed errors in the Company’s financial statements for 2002 and 2003. Such errors included certain shipments between distributors rather than to end-customers which were not noted on applicable point-of-sales reports, inaccurate shipment dates on certain point-of-sales reports, and inaccurate quantities noted on certain point-of-sales reports. The Company reviewed these errors with reference to the guidelines set forth in SAB99. Based upon such review, the Company concluded that such errors were immaterial and thus would not result in a restatement of the 2002 or 2003 financial statements.

 

Exercise of Amended Warrants issued in March 2005

 

On October 14, 2005, we issued 533,333 shares of common stock upon the exercise of Common Stock Purchase Warrants issued as part of our March 2005 financing, as amended, and raised $266,667 from the exercise of such warrants.

 

Corporate Information

 

We were incorporated in California in July 1995, and reincorporated in Delaware in July 2000. We became a public reporting company in August 2000, and our stock was listed on the Nasdaq National Market or the Nasdaq Capital Market under the stock symbol “TRPH” through December 7, 2005. On December 8, 2005, the shares of our common stock began trading on the Pink Sheets. On December 30, 2005 the shares of our common stock ceased to trade on the Pink Sheets and began to trade on the OTC Bulletin Board. On November 14, 2004, we changed our fiscal year-end from December 31 to September 30, effective as of September 30, 2004. Our principal executive office is located at 2560 Orchard Parkway, San Jose, CA 95131. Our telephone number is (408) 750-3000, and our Internet home page is located at www.tripath.com; however, the information in, or that can be accessed through, our home page is not part of this prospectus. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our Internet home page as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC. Any material we file with the SEC may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549, and information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

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THE OFFERING

 

Common Stock Offered by the selling stockholders

   6,081,080 shares

Selling Shareholders

   See “Principal and Selling Shareholders” for more information on the selling shareholders in this transaction

Use of Proceeds

   We will not receive any proceeds from the sale of shares in this offering

Trading symbol

   “TRPH”

 

SUMMARY CONSOLIDATED FINANCIAL DATA

 

On November 14, 2004, Tripath’s Board of Directors approved a change in Tripath’s fiscal year end from December 31 to September 30, effective beginning September 30, 2004. All references in this prospectus to the period ended September 30, 2004 or to 2004 refer to the nine months ended September 30, 2004. The following summary historical information has been derived from the audited consolidated financial statements of Tripath. The financial information for the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus. The financial information as of December 31, 2002 and 2001 are derived from audited financial statements not included in this prospectus. The financial information for the quarter ended December 31, 2005 is unaudited. The following Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” included elsewhere in this prospectus. The historical results are not necessarily indicative of the results of operations to be expected in the future.

 

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Summary Consolidated Financial Information

(in thousands, except per share data)

 

   

Quarter

Ended
December 31,

2005

(unaudited)


   

Year Ended
September 30,

2005


   

Nine Months
Ended
September 30

2004

(restated)


    Year Ended December 31,

 
          2003

    2002

    2001

 

Statement of Operations Data:

                                               

Revenue

  $ 3,422     $ 10,761     $ 9,169     $ 13,891     $ 16,227     $ 13,541  

Cost of revenue

    2,218       5,285       7,415       9,467       13,517       11,948  

Provision for slow-moving, excess and obsolete inventory (1)

    —         —         4,316       243       4,977       —    
   


 


 


 


 


 


Gross profit (loss)

    1,204       5,476       (2,562 )     4,181       (2,267 )     1,593  
   


 


 


 


 


 


Operating expenses:

                                               

Research & development

    1,831       7,413       5,521       6,874       11,650       19,913  

Selling, general and administrative

    1,843       8,586       3,556       4,544       5,557       8,664  

Restructuring and other charges (2)

    —         —         —         —         —         684  
   


 


 


 


 


 


Total operating expenses

    3,674       15,999       9,077       11,418       17,207       29,261  
   


 


 


 


 


 


Loss from operations

    (2,470 )     (10,523 )     (11,639 )     (7,237 )     (19,474 )     (27,668 )

Gain on revaluation of warrant and conversion feature liabilities (3)

    3,222       570       —         —         —         —    

Interest, amortization and other income (expense), net

    (5,479 )     (19 )     (26 )     22       160       687  
   


 


 


 


 


 


Net loss

    (4,727 )     (9,972 )     (11,665 )     (7,215 )     (19,314 )     (26,981 )

Accretion on preferred stock (4)

    —         —         —         —         (14,952 )     —    
   


 


 


 


 


 


Net loss applicable to common stockholders

  $ (4,727 )   $ (9,972 )   $ (11,665 )   $ (7,215 )   $ (34,266 )   $ (26,981 )
   


 


 


 


 


 


Basic and diluted net loss per share

  $ (0.08 )   $ (0.19 )   $ (0.25 )   $ (0.17 )   $ (0.88 )   $ (1.00 )
   


 


 


 


 


 


Number of shares used in computing basic and diluted net loss per share

    55,858       53,206       46,541       41,993       38,823       27,009  
   


 


 


 


 


 


 

   

December 31

2005


   

September 30

2005


 

September 30
2004

(restated)


  December 31,

          2003

  2002

  2001

Balance Sheet Data:

                                     

Cash, cash equivalents, short-term investments and restricted cash

  $ 1,880     $ 878   $ 7,339   $ 9,612   $ 10,598   $ 5,097

Working capital

    (3,402 )     352     6,832     11,198     13,711     12,854

Total assets

    10,914       9,854     14,306     19,468     20,685     22,160

Long term obligations, net of current portion

    177       188     571     1,256     933     262

Total stockholders equity

    (2,584 )     1,161     8,058     11,920     15,436     15,347

(1)

During the year ended December 31, 2002 we recorded a provision for slow moving, excess and obsolete inventory of approximately $5.0 million. The inventory charge related to excess inventory for our TA2022 product based on a decline in forecasted sales for this product. During the year ended December 31, 2003 we recorded a provision for slow moving, excess and obsolete inventory of approximately $243,000. The inventory charge related to excess inventory for our TA2022 product based on a decline in forecasted sales

 

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for this product. During the nine months ended September 30, 2004 we recorded a provision for slow moving, excess and obsolete inventory of approximately $4.3 million. The inventory charge related to slow moving and excess inventory for our TA1101B, TA3020, TA2041, TA2022 and leaded TA2024 products, the TK2350, TK2051, TK2150, TK2050 and TK2052 chipsets, and Kauai 2BB and U461 die based on a decline in forecasted sales for these parts.

 

(2) On August 3, 2001 we announced a restructuring and cost reduction plan which included a workforce reduction and write down of assets no longer used. As a result of the restructuring and cost reduction plan, we recorded restructuring and other charges of $684,000 during the quarter ended September 30, 2001.

 

(3) On March 3, 2005, we completed a private placement that included the issuance of warrants. Since the warrants are subject to certain registration rights, we recorded a warrant liability in accordance with EITF 00-19. The change in fair value on revaluation of warrant liability represents the difference between the fair value of the warrants on the closing date, March 3, 2005, of the private placement and the fair value of those same warrants on March 31, 2005.

 

(4) On January 24, 2002, we completed a financing in which we raised $21 million in gross proceeds through a private placement of non-voting Series A Preferred Stock and warrants, at $30 per unit to a group of investors, which was convertible into 13,999,000 shares of common stock and warrants to purchase 3,303,760 shares of common stock. Each share of Series A Preferred Stock was convertible into 20 shares of common stock (or an effective common stock price of $1.50 per share). As a result of the favorable conversion price of the shares and related warrants at the date of issuance, we recorded accretion of approximately $15 million relating to the beneficial conversion feature representing the difference between the accounting conversion price and the fair value of the common stock on the date of the transaction, after valuing the warrants issued in connection with the financing transaction.

 

No dividends have been paid or declared since our inception.

 

Restatement of Financial Statements Previously included in our Form 10-Qs for the Quarters Ended March 31, 2004, June 30, 2004 and December 31, 2004 and in our Transition Report on Form 10-K/T for the nine months ended September 30, 2004.

 

Following the receipt of the report of our litigation counsel, including discussion of the findings of the forensic accountant hired by our litigation counsel and approved by our Audit Committee on January 25, 2005, the Audit Committee determined to restate the financial statements previously included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the “Initial Restatement”) as such financial statements included errors and should no longer be relied upon.

 

Following further investigation, our Audit Committee concluded on May 5, 2005 that we should restate the financial statements (the “Additional Restatement”) that were previously included in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004 as well as the financial statements for the quarter and transitional period ended September 30, 2004 previously included in our Transition Report on Form 10-K/T as such financial statements included errors and should no longer be relied upon.

 

We have amended our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004, and December 31, 2004, as well as our Form 10-K/T for the nine months ended September 30, 2004, which are affected by the Initial Restatement and Additional Restatement. As reported in our Form 8-K dated May 5, 2005 and filed on May 11, 2005, the financial statements and related financial information contained in such prior reports should no longer be relied upon because of errors in such financial statements. The restated financial statements for the nine months ended September 30, 2004 are included elsewhere in this prospectus.

 

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RISK FACTORS

 

You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition or operating results could be materially adversely affected by any of these risks, as well as other risks not currently known to us or that we currently deem immaterial. The trading price of our common stock could decline due to any of these risks and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes, before deciding to purchase any shares of our common stock.

 

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

 

We incurred net losses of approximately $4.7 million for the three months ended December 31, 2005, $10.0 million for the fiscal year ended September 30, 2005, $11.7 million for the nine months ended September 30, 2004, and $7.2 million for the twelve months ended December 31, 2003. Because we have had losses, we have funded our operating activities to date from the sale of securities, including our most recent financings in February 2006, November 2005 and March 2005 as well as from the proceeds from the related exercise of warrants issued in connection with the March 2005 and November 2005 financings. However, to grow our business significantly and to fund additional losses, we will need additional capital. We cannot be certain that any such financing will be available on acceptable terms, or at all. Moreover, additional equity financing, if available, would likely be dilutive to the holders of our equity securities, including our common stock, and debt financing, if available, would likely involve restrictive covenants.

 

In addition, pursuant to the terms of the private transaction under which we sold $5,000,000 in principal amount of 6% Senior Secured Convertible Debentures on November 8, 2005, we are prohibited from filing any registration statement other than the resale registration statement (except for amendments to registration statements already filed) until March 22, 2006 (this provision has been waived by the investors with respect to this registration statement), except Form S-8 registration statements in connection with employee stock benefit plans, upon exercise or conversion of outstanding securities and pursuant to acquisitions or other strategic transactions that are not primarily for the purpose of raising additional capital. Moreover, pursuant to the terms of the Warrant Issuance Agreement dated February 14, 2006, for as long as investors hold the warrants issued pursuant to the Warrant Issuance Agreement, we are prohibited from engaging in future equity financings in which common stock or securities exercisable or convertible to common stock is issued at an effective price that is less than $0.315 without the consent of the signatory investors to the Warrant Issuance Agreement. This restriction expires at the occurrence of the earlier of the expiration of the warrants on July 1, 2007 or when the warrants are exercised. We are also subject to certain cash penalties payable to the selling stockholders in the registration statement contemplated by the March 2005 financing under certain circumstances relating to the timely filing, effectiveness and maintenance of effectiveness of such registration statement. We are further subject to certain cash penalties payable to the selling stockholders listed in the resale registration statement contemplated by our financing that closed on November 8, 2005. Such cash penalties are payable under certain circumstances relating to the timely filing, effectiveness and maintenance of effectiveness of such resale registration statement. We are additionally subject to certain cash penalties payable to the selling stockholders listed in this registration statement. Such cash penalties are payable under certain circumstances relating to the timely filing, effectiveness and maintenance of effectiveness of this registration statement.

 

If we cannot raise sufficient additional capital, it would adversely affect our ability to achieve our business objectives and to continue as a going concern. The Company’s independent auditors have included a going concern qualification in connection with the issuance of their report of independent auditors in respect of our consolidated financial statements for our fiscal year ending September 30, 2005. Additionally, in connection with the audit of the Company’s consolidated financial statements for the fiscal year ended September 30, 2005, the Company’s independent auditor has identified a number of material weaknesses in our internal accounting controls over financial reporting. As a result, the Company has received an adverse attestation regarding

 

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Sarbanes-Oxley Section 404 compliance. These conditions may also adversely affect our ability to raise additional financing and to conduct our business.

 

Unless our stockholders approve an increase in the number of authorized shares in our Certificate of Incorporation, we will not be able to raise additional capital through equity financings except by effecting a reverse stock split.

 

Our current Certificate of Incorporation limits the number of shares of our authorized common stock to 100,000,000. Both our outstanding Debentures and the outstanding Series B Common Stock Purchase Warrants contain provisions, pursuant to which, under certain contingencies, the conversion or exercise price of such security, as applicable, will be adjusted such that additional shares of our common stock will be issuable upon the conversion or exercise of such security. Because of such provisions, we may not have sufficient authorized common stock to engage in subsequent equity financings unless our stockholders approve an increase in the authorized number of shares of common stock of 100,000,000 or we effect a reverse stock split. Either course of action is likely to be dilutive to our existing stockholders and may cause the price of our common stock (on a split adjusted basis) to decline.

 

Our independent registered public accounting firm has issued an adverse attestation on the adequacy of our internal controls over financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002.

 

The SEC, as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on internal controls over financial reporting in their annual reports on Form 10-K that contain an assessment by management of the effectiveness of the company’s internal controls over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal controls over financial reporting. We are required to provide a report on the adequacy of internal controls over financial reporting beginning with our fiscal year ending September 30, 2005. In connection with the audit of our financial statements for the fiscal year ended September 30, 2005, our independent auditor identified a number of material weaknesses in our internal accounting controls over financial reporting. As a result, we have received an adverse attestation regarding compliance with Section 404 of the Sarbanes-Oxley Act of 2002 from our independent registered public accounting firm. Certain of these material weaknesses resulted in adjustments to the Company’s fiscal year 2005 annual consolidated financial statements. If not remediated, such weaknesses could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected. Although we intend to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the Section 404 requirements on an annual basis, if in the future, our independent registered public accounting firm is still not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent registered public accounting firm interprets the requirements, rules and/or regulations differently from us, then they may decline to attest to management’s assessment or may again issue a report that is qualified. This could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our consolidated financial statements, which ultimately could negatively impact our stock price as well as our ability to raise additional financing.

 

Neither our disclosure controls and procedures nor our internal control over financial reporting can prevent all errors or fraud, in the past these controls and procedures were not effective and resulted in restatements to our financial results, and we currently have material weaknesses in our internal controls.

 

Our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system will be attained. Furthermore, the design of a control system must reflect the fact that there are resource constraints and the

 

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benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that all misstatements due to error or fraud, if any, may occur and not be detected on a timely basis. These inherent limitations include the possibility that judgments in decision-making can be faulty and that breakdowns can occur because of errors or mistakes. Our controls and procedures can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Furthermore, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. While we seek to design our controls and procedures to provide reasonable assurance that information required to be disclosed in our periodic filings is timely disclosed, these inherent limitations expose us to breakdowns in such controls and procedures. For example, while our certifying officers believed that the design of our controls and procedures would ensure that material information related to the Company would be made known to them on a timely basis, in light of the circumstances underlying the Initial Restatement and Additional Restatement, these controls and procedures for the financial statement periods covered by the Initial Restatement and Additional Restatement were not effective. We have made certain changes to our internal controls over financial reporting regarding the review of sales orders designed to address these circumstances, although even these improvements to our controls and procedures cannot ensure that all errors or fraud will be prevented. Additionally, in connection with the audit of the Company’s consolidated financial statements for the fiscal year ended September 30, 2005, the Company’s independent auditor identified a number of material weaknesses in our internal controls over financial reporting. Certain of these material weaknesses resulted in adjustments to the Company’s fiscal year 2005 annual consolidated financial statements. If not remediated, such weaknesses could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected. As a result, we have received an adverse attestation from our independent auditors regarding Sarbanes-Oxley Section 404 compliance. These conditions may also adversely affect our ability to raise additional financing and to conduct our business.

 

If we were to have an event of default or breach a covenant under the 6% Senior Secured Convertible Debentures issued in our November 2005 Financing, 130 percent of the outstanding principal amount of the Debentures plus all accrued and unpaid interest would become immediately due and payable to the holders of the Debentures, and we currently do not have the cash resources to pay these obligations, which are secured by all of our assets including our intellectual property and would therefore be subject to seizure by the holders of the Debentures in the event of a default or covenant breach.

 

The Debentures contain numerous events of default and covenants. Events of default under the Debentures include:

 

    failure to pay principal or any premium on any Debenture when due;

 

    failure to pay any interest, late fees or liquidated damages on any Debenture after a period of 3 trading days;

 

    failure to perform other covenants under the Debenture that is not cured by the earlier of 5 trading days after notice by holder or 10 trading days after the Company is aware of such default;

 

    any default under the other financing documents that is not cured by the earlier of 5 trading days after notice or 10 trading days after the Company is aware of such default;

 

    any representation or warranty under the financing documents that is untrue or incorrect in any material respect;

 

    certain events of bankruptcy or insolvency of the Company or any of its subsidiaries;

 

    any default by the Company or its subsidiaries under any instrument in excess of $150,000 that results in such obligation becoming due and payable prior to maturity;

 

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    the Company becoming party to a change of control transaction, or disposing of greater than 40 percent of its assets or redeeming more than a de minimus number of outstanding equity securities;

 

    if, during the effectiveness period of the Resale Registration Statement, the effectiveness of the registration statement lapses for any reason or the holder shall not be permitted to resell registrable securities under such Resale Registration Statement, in either case, for more than 20 consecutive trading days or 30 non-consecutive trading days during any 12 month period, subject to certain limited exceptions;

 

    failure to deliver common stock certificates to a holder prior to the third trading day after a Debenture conversion date;

 

    any breach of the Voting Agreement entered into by Dr. Adya S. Tripathi in connection with the November 8, 2005 financing to vote shares of the Company’s common stock owned by him in favor of any required stockholder approval of the financing to the extent required in order to maintain the listing of the Company’s common stock on the Nasdaq Capital Market; or

 

    any draw-down by the Company under its current accounts receivable secured credit agreement facility without the express prior written consent of holder.

 

Upon an event of default, 130 percent of the outstanding principal of the Debentures plus all accrued and unpaid interest shall become immediately due and payable to the holder of the Debentures.

 

The Debentures contain various covenants that limit the Company’s ability to:

 

    incur additional debt, other than permitted debt as defined in the Debenture;

 

    repay or repurchase more than a de minimus number of shares of common stock;

 

    incur specified liens, other than permitted liens as defined in the Debenture; or

 

    amend its certificate, bylaws or charter documents in a material adverse manner to the holder of the Debenture.

 

A breach of these covenants that is uncured within the applicable 5 or 10 trading day periods noted above would constitute an event of default under the Debentures. In addition, as part of the November Financing, the Company has agreed to be bound by the following additional covenants, a breach of which covenants that is uncured within the applicable 5 or 10 trading day periods noted above would constitute an event of default under the Debentures:

 

    not to issue shares of common stock or other securities convertible or exercisable for common stock until the effective date of the Resale Registration Statement and not to file any other registration statements (except for amendments to registration statements already filed) until March 22, 2006 (this provision has been waived by the investors with respect to this registration statement);

 

    not to assume any corporate debt which is senior to the Debentures;

 

    not to repay or repurchase more than a de minimus number of shares of common stock;

 

    not to incur specified liens, other than certain specified permitted liens;

 

    not to amend the Company’s current Certificate of Incorporation except to effect a reverse stock split or as the result of a delisting of the Company’s common stock from the Nasdaq Capital Market; and

 

    not to pay cash dividends or distributions on its equity securities.

 

We currently do not have the cash resources to pay these obligations, which are secured by all of our assets including our personal and intellectual property, and such assets would therefore be subject to seizure by the holders of the Debentures in the event of a default or covenant breach. We cannot assure you that we will not have an event of default under the Debentures or experience a covenant breach that would trigger such an event of default.

 

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We have incurred liquidated damages and may incur additional penalties under the contractual terms of our March 2005 financing and may also incur liquidated damages and penalties under the contractual terms of our November 2005 financing and our February 2006 financing.

 

Pursuant to the terms of our March 2005, November 2005 and February 2006 financings, to the extent that we fail to have our resale registration statements on Form S-1 declared effective within a certain amount of time, we are obligated to pay liquidated damages and penalties. In the event that we incur liquidated damages and penalties under the terms of our financings, our cash and cash equivalents balances will be adversely affected which may have an adverse effect on our continuing operations.

 

We have maintained neither Nasdaq National Market listing requirements nor Nasdaq Capital Market listing requirements and now trade on the OTC Bulletin Board.

 

On April 25, 2005 we received a deficiency notice from the Nasdaq Stock Market, or Nasdaq, for failing to (1) maintain the Nasdaq National Market’s minimum $50 million market value of listed securities requirement for continued listing and (2) maintain our total assets and total revenue for the most recently completed fiscal year or for two of the last three most recently completed fiscal years above the $50 million requirement for continued listing. We had a grace period of 30 calendar days, or until May 25, 2005, to cure the deficiency by meeting the $50 million minimum market value of listed securities for 10 consecutive days or such longer period of time as may be required by Nasdaq, at its discretion.

 

In addition, on April 26, 2005, we received a deficiency notice from Nasdaq for failing to maintain the Nasdaq National Market’s minimum $1.00 bid price requirement for continued listing. We had a grace period of 180 calendar days, or until October 24, 2005, to cure the deficiency by meeting the minimum $1.00 bid price for 10 consecutive trading days or such longer period of time as may be required by Nasdaq, at its discretion.

 

On May 26, 2005, we received another letter from Nasdaq notifying us that we had not regained compliance with Marketplace Rule 4450(b)(1)(A), which sets a $50 million market value of listed securities requirement for continued listing, during the relevant grace period. According to this letter, we were subject to delisting from the Nasdaq National Market. We appealed Nasdaq’s determination and a hearing before a Nasdaq Listing Qualifications Panel was held on July 14, 2005.

 

On August 22, 2005, we received a letter from the Office of General Counsel, Nasdaq Listing Qualifications Hearings informing us that the Nasdaq Listing Qualifications Panel determined to transfer the securities of Tripath from the Nasdaq National Market to the Nasdaq Capital Market, effective at the opening of business on August 24, 2005, and our common stock has been traded on the Nasdaq Capital Market from August 24, 2005 until December 8, 2005.

 

On October 26, 2005, we received a Nasdaq Staff Determination letter indicating that we had not regained compliance with the Minimum Price Requirement, that we are not eligible for an additional 180-day compliance period given that we do not meet the Nasdaq Capital Market initial inclusion criteria set forth in Nasdaq Marketplace Rule 4310(c) and, therefore, our securities would be delisted from the Nasdaq Capital Market at the opening of business on November 4, 2005 unless we requested a hearing before a Nasdaq Listing Qualifications Panel to appeal the delisting determination. We requested a hearing before a Nasdaq Listing Qualifications Panel and the delisting of our securities was stayed pending the panel’s decision. Such hearing was held on December 1, 2005.

 

We closed a $5 million financing on November 8, 2005. We received on November 14, 2005 an Additional Staff Determination letter from Nasdaq indicating that we failed to comply with (i) the shareholder approval requirements for continued listing set forth in Nasdaq Marketplace Rules 4350(i)(1)(D)(ii) and IM-4350-2 and (ii) the stockholders’ equity requirements for continued listing set forth in Nasdaq Marketplace Rule 4310(c)(2)(B), and that our securities were, therefore, subject to delisting from the Nasdaq Capital Market. The Additional Staff Determination letter also notified us that these two matters would be considered at the

 

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hearing on December 1, 2005 in rendering a determination regarding the Company’s continued listing of its common stock on the Nasdaq Capital Market.

 

On December 6, 2005, the Company received a notice from the Counsel to the Panel, Nasdaq Office of General Counsel, Listing Qualifications Hearing of the Nasdaq Stock Market informing the Company that the Nasdaq Listing Qualifications Panel (the “Panel”) had denied the Company’s request to continue its listing on the Nasdaq Capital Market, and that, accordingly, the Panel would delist the Company’s shares from the Nasdaq Capital Market effective at the opening of business on Thursday, December 8, 2005. The Panel found that the Company failed to meet the minimum $1.00 bid price per share requirement, as set forth in Marketplace Rule 4310(c)(4); comply with the shareholder approval requirements under Marketplace Rule 4350(i)(1)(D)(ii) and IM-4350-2; or meet the $2.5 million stockholders’ equity requirement under Marketplace Rule 4310(c)(2)(B)(i).

 

On December 8, 2005, shares of common stock of the Company began trading on the Pink Sheets.

 

On December 30, 2005, the shares of common stock of the Company ceased to trade on the Pink Sheets and began to trade on the OTC Bulletin Board.

 

Given that our common stock has been delisted from the Nasdaq Capital Market, it will likely be more difficult to trade in or obtain accurate quotations as to the market price of our common stock. Delisting of our common stock can materially adversely affect the market price, the market liquidity of our common stock, and our ability to raise necessary capital and can otherwise have an adverse impact on our business, financial condition, and results of operations. There is no assurance that we will again satisfy the Nasdaq Capital Market’s listing requirements at any time in the future.

 

The Debentures and Series B Common Stock Purchase Warrants issued in the November Financing contain reset and adjustment provisions which may result in additional dilution to our stockholders.

 

The Debentures include a provision whereby the conversion price thereof will be reset 60 days following one of the two following events: (i) we effect a reverse stock split and/or (ii) have our common stock delisted from the Nasdaq Capital Market. When we were delisted from the Nasdaq Capital Market effective at the opening of business on December 8, 2005, the Debenture conversion price was subject to adjustment on February 6, 2006 to the lower of either (x) the current conversion price or (y) the volume weighted average price of our common stock for the 10 trading days preceding such reset (the “Volume Price”). On February 6, 2006, the Volume Price was greater than the then current conversion price, and therefore no adjustment occurred. In the future if we were to effect a reverse stock split which could result in a reset to the conversion price of the Debentures, stockholders would be subject to dilution.

 

The Series B Common Stock Purchase Warrants issued in the Financing also contain provisions to adjust their exercise prices and share amounts in the event that we issue common stock in an equity financing at a price less than the then applicable exercise price of the Series B Common Stock Purchase Warrants, in which case our stockholders will be subject to dilution.

 

Our proposed reverse stock split that was approved by our stockholders at our September 2005 Annual Meeting, if deemed necessary by our board of directors, may be dilutive, may result in a negative market reaction and, by itself, will not permit us to comply with the Nasdaq Capital Market’s listing requirements for our common stock.

 

At our annual stockholder meeting held on September 30, 2005, our stockholders approved a proposal to affect a reverse stock split of our common stock at an exchange ratio ranging from one-for-two to one-for-six and authorized our board of directors to select the appropriate ration at its discretion. If the reverse stock split is deemed necessary to be effected by our board of directors, the market may react negatively to the proposed

 

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reverse stock split and the price of our common stock could decline. Additionally, the proposed reverse stock split, if effected by our board of directors, will not, by itself, permit us to comply with the Nasdaq Capital Market’s listing requirements for our common stock. In addition, in the event we reverse split our common stock, the conversion price of the 6% Senior Secured Convertible Debentures we issued in our November Financing would be reset on the 60th calendar day following such reverse split to the lower of the current $0.37 conversion price or the average of the volume weighted average price per share of our common stock on the applicable trading market 10 days preceding the reset date.

 

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

 

As of December 31, 2005, we had an accumulated deficit of $205.9 million. We incurred net losses of approximately $10.0 million for the year ended September 30, 2005, $11.7 million for the nine months ended September 30, 2004 and $7.2 million for the twelve months ended December 31, 2003. We may continue to incur net losses and these losses may be substantial. Furthermore, we may continue to generate significant negative cash flow in the future. We will need to generate substantially higher revenue to achieve and sustain profitability and positive cash flow. Our ability to generate future revenue and achieve profitability will depend on a number of factors, many of which are described throughout this section. If we are unable to achieve or maintain profitability, we will be unable to build a sustainable business. In this event, our share price and the value of your investment would likely decline and we might be unable to continue as a going concern. The Company’s independent auditors have included a going concern qualification in connection with the issuance of their report of independent auditors in respect to our consolidated financial statements for our fiscal year ending September 30, 2005 included elsewhere in this registration statement.

 

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

 

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

 

    level of sales and recognition of revenue;

 

    mix of high and low margin products;

 

    availability and pricing of wafers;

 

    timing of introducing new products, including, but not limited to, the introduction of new products based on the lower cost “Godzilla” architecture, lower cost versions of existing products, fluctuations in manufacturing yields and other problems or delays in the fabrication, assembly, testing or delivery of products;

 

    market acceptance of our products and our customers’ products;

 

    rate of development of target markets; and

 

    increases in inventory reserves associated with slow moving, excess and obsolete inventory.

 

A large portion of our operating expenses, including salaries, rent and capital lease are fixed expenses. If we experience a shortfall in revenues relative to our expenses, we may be unable to reduce our expenses quickly enough to offset the reduction in revenues during that accounting period, which would adversely affect our operating results. Fluctuations in our operating results may also result in fluctuations in our common stock price. If the market price of our stock is adversely affected, we may experience difficulty in raising capital or making acquisitions. In addition, we may become the object of securities class action litigation, which occurred in late 2004. As a result, we do not believe that period-to-period comparisons of our revenues and operating results are necessarily meaningful. One should not rely on the results of any one quarter as an indication of future performance.

 

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Our stock price has been and may continue to be highly volatile.

 

The trading price of our stock has been and may continue to be highly volatile. For example, during the fiscal year 2005 and through February 28, 2006, our common stock had closing sales prices on the applicable trading market as low as $0.20 and as high as $1.90 per share. Broad market fluctuations as well as general economic conditions may cause our stock price to decline. We believe that fluctuations of our stock price may continue to be caused by a variety of factors, including:

 

    announcements of developments related to our business;

 

    fluctuations in our financial results;

 

    our financial condition and liquidity resources;

 

    our ability to meet our obligations under the Debentures and other agreements entered into in connection with our November Financing;

 

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

 

    sales or purchases of our common stock in the marketplace;

 

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

 

    developments in patents or other intellectual property rights;

 

    developments in our relationships with customers and suppliers;

 

    the market listing status of our common stock;

 

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

 

    acquisition or merger activity.

 

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

 

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

 

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

 

Our sales are generally made pursuant to individual purchase orders that may be canceled or deferred by customers on short notice without significant penalty. Thus, orders in backlog may not result in future revenue. In the past, we have had cancellations and deferrals by customers. Any cancellation or deferral of product orders could result in us holding excess inventory, or result in obsolete inventory over time, which could seriously harm our profit margins and restrict our ability to fund our operations. For example, during the quarter ended September 30, 2004, we recorded a provision for slow moving, excess and obsolete inventory of approximately $4.3 million. Our inventory and purchase commitments are based on expected demand and not necessarily built for firm purchase commitments for our customers. Because of the required delivery lead time, we need to carry a high level of inventory in comparison to past sales. We recognize revenue upon shipment of products to the end customer and, in the case of distributor sales, based upon receipt of point-of-sales report from the distributor. Although we have not experienced customer refusals to accept shipped products or material difficulties in collecting accounts receivable, such refusals or collection difficulties are possible and could result in significant charges against income, which could seriously harm our revenues and our cash flow.

 

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

 

A relatively small number of customers have accounted for most of our revenues to date. Any reduction or delay in sales of our products to one or more of these key customers could seriously reduce our sales volume and revenue and adversely affect our operating results. Our top five end customers accounted for 47 percent and 53 percent of revenue in the three months ended December 31, 2005 and the three months ended December 31, 2004, respectively. Our primary customers during the three months ended December 31, 2005 were Sharp, Bekoand TCL representing 12 percent, 10 percent and 10 percent of revenue, respectively. In the December quarter of 2004, our primary customers were KTS, Alcatel and Samsung representing 28 percent, 19 percent and 9 percent of revenue, respectively. Our top five end customers accounted for 40 percent and 65 percent of revenue in the year ended September 30, 2005 and transition period ended September 30, 2004, respectively, versus 68 percent in 2003. Our primary customers in 2005 were Sharp, Kyoshin Technosonic Co., Ltd. (KTS), Beko, Alcatel and Sanyo representing 16 percent, 7 percent, 6 percent, 6 percent and 5 percent of revenue, respectively. In 2004, our primary customers were KTS, Alcatel and Samsung representing 28 percent, 19 percent and 9 percent of revenue, respectively. In 2003, our primary customers were KTS, Samsung, and Apple representing 24 percent, 18 percent and 15 percent of revenue, respectively. We expect that we will continue to rely on the success of our largest customers and on our success in selling our existing and future products to those customers in significant quantities. In addition, one distributor, Macnica, Inc. and its affiliates, accounted for 55 percent, 53 percent and 41 percent of total revenues for the year ended September 30, 2005, the nine months ended September 30, 2004, and the year ended December 31, 2003, respectively. We cannot be sure that we will retain our largest customers (whether from inside sales or through our distributors) or that we will be able to obtain additional key customers or replace key customers we may lose or who may reduce their purchases.

 

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

 

We currently rely on sales of our TA2024 digital audio amplifier product family to generate a significant portion of our revenue. Sales of this product family amounted to 68 percent of our revenue for the three months ended December 31, 2005 and 78 percent of our revenue for the three months ended December 31, and for the year ended September 30, 2005, sales of this product family amounted to 60 percent of our revenue as compared with 35 percent of our revenue for the nine months ended September 30, 2004, and 39 percent of our revenue for the year ended December 31, 2003. We have developed additional products and plan to introduce more products in the future, but there can be no assurance that these products will be commercially successful. Consequently, if our existing products are not successful, our sales could decline substantially.

 

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

 

Because of our lengthy sales cycles, we may continue to experience a delay between incurring expenses for research and development, sales and marketing and general and administrative efforts, as well as incurring investments in inventory, and the generation of revenue, if any, from such expenditures. In addition, the delays inherent in such a lengthy sales cycle raise additional risks of customer decisions to cancel or change product plans, which could result in our loss of anticipated sales. Our new products are generally incorporated into our customers’ products or systems at the design stage. To try and have our products selected for design into new products of current and potential customers, commonly referred to as design wins, often requires significant expenditures by us without any assurance of success. Once we have achieved a design win, our sales cycle will start with the test and evaluation of our products by the potential customer and design of the customer’s equipment to incorporate our products. Generally, different parts have to be redesigned to incorporate our devices successfully into our customers’ products.

 

The sales cycle for the test and evaluation of our products can range from a minimum of three to six months, and it can take a minimum of an additional six to nine months before a customer commences volume production

 

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of equipment that incorporates our products. Achieving a design win provides no assurance that such customer will ultimately ship products incorporating our products or that such products will be commercially successful. Our revenue or prospective revenue would be reduced if a significant customer curtails, reduces or delays orders during our sales cycle, or chooses not to release products incorporating our products.

 

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

 

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

 

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

 

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

 

The cyclical nature of the semiconductor industry could create fluctuations in our operating results.

 

The semiconductor industry has historically been cyclical and characterized by wide fluctuations in product supply and demand. From time to time, the industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. Industry downturns have been characterized by diminished product demand, production overcapacity and accelerated decline in average selling prices, and in some cases have lasted for more than a year. In addition, we may determine to lower our prices of our products to increase or maintain market share, which would likely harm our operating results. The semiconductor industry also periodically experiences increased demand and production capacity constraints. As a result, we have experienced and may experience in the future substantial period-to-period fluctuations in our results of operations due to general semiconductor industry conditions, overall economic conditions or other factors, many of which are outside our control. Due to these risks, you should not rely on period-to-period comparisons to predict our future performance.

 

We may experience difficulties in the introduction of new or enhanced products, including but not limited to the new “Godzilla” architecture products, that could result in significant, unexpected expenses or delay their launch, which would harm our business.

 

Our failure or our customers’ failure to develop and introduce new products successfully and in a timely manner would seriously harm our ability to generate revenues. Consequently, our success depends on our ability to develop new products for existing and new markets, introduce such products in a timely and cost-effective

 

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manner and to achieve design wins. The development of these new devices is highly complex, and from time to time we have experienced delays in completing the development and introduction of new products. The successful introduction of a new product may currently take up to 18 months. Successful product development and introduction depends on a number of factors, including:

 

    accurate prediction of market requirements and evolving standards;

 

    accurate new product definition;

 

    timely completion and introduction of new product designs;

 

    our financial, working capital and engineering resources;

 

    availability of foundry capacity;

 

    achieving acceptable manufacturing yields;

 

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

 

    market competition.

 

We cannot guarantee success with regard to these factors. We introduced our lower cost “Godzilla” architecture products in January 2004 and have been sampling them in certain customers’ products since mid-2004. However, we have not received revenues for these products to date.

 

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

 

We do not own or operate a fabrication facility, and substantially all of our semiconductor device requirements are currently supplied by three outside foundries, United Microelectronics Corporation, in Taiwan, STMicroelectronics Group in Europe and Renesas Technology (Mitsubishi Electric) in Japan. Although we primarily utilize these three outside foundries, most of our components are not manufactured at these foundries at the same time. As a result, each foundry is a sole source for certain products.

 

There are significant risks associated with our reliance on outside foundries, including:

 

    the lack of guaranteed wafer supply;

 

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

 

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

 

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

 

We provide our foundries with continuous forecasts of our production requirements; however, the ability of each foundry to provide us with semiconductor devices is limited by the foundry’s available capacity. In many cases, we place our orders on a purchase order basis, and foundries may allocate capacity to the production of other companies’ products while reducing the deliveries to us on short notice. In particular, foundry customers that are larger and better financed than us or that have long-term agreements with our foundries may cause such foundries to reallocate capacity in a manner adverse to us. While capacity at our foundries has been available during the last several years, the cyclical nature of the semiconductor industry could result in capacity limitations in a cyclical upturn or otherwise. In addition, our limited capital resources has from time to time and may in the future result in our not keeping our vendors, including our foundries, as current in our accounts payable to them as they desire which may negatively affect the amount and timing of capacity that is allocated to production of our products.

 

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

 

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

 

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

 

Semiconductor assembly and testing are complex processes, which involve significant technological expertise and specialized equipment. As a result of our reliance on third-party subcontractors for assembly and testing of our products, we cannot directly control product delivery schedules, which has in the past, and could in the future, result in product shortages or quality assurance problems that could increase the costs of manufacture, assembly or testing of our products. Almost all of our products are assembled and tested by one of five subcontractors: ASE in Korea, Malaysia and Taiwan, Hon Hai (formerly AMBIT Microsystems Corporation) in China, Lingsen in Taiwan, STMicroelectronics Group in Malaysia, and ST Assembly Test Services Ltd. in Singapore. We do not have long-term agreements with any of these suppliers and retain their services on a per order basis. The availability of assembly and testing services from these subcontractors could be adversely affected in the event a subcontractor suffers any damage or destruction to their respective facilities, or in the event of any other disruption of assembly and testing capacity. Due to the amount of time normally required to qualify assemblers and testers, if we are required to find alternative manufacturing assemblers or testers of our components, shipments could be delayed. Any problems associated with the delivery, quality or cost of our products could seriously harm our business. In addition, our limited capital resources has from time to time and may in the future result in our not keeping our vendors, including our foundries, as current in our accounts payable to them as they desire which may negatively affect the amount and timing of capacity that is allocated to production of our products.

 

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

 

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

 

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

 

We currently obtain almost all of our manufacturing, assembly and test services from suppliers who are located outside the United States and may further expand our manufacturing activities abroad. Approximately 98 percent and 88 percent of our total revenue for the three months ended December 31, 2005 and for the three months ended December 31, 2004, respectively, were derived from sales to end customers based outside the

 

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United States. Approximately 94 percent, 89 percent and 93 percent, respectively, of our total revenue for the year ended September 30, 2005, the nine months ended September 30, 2004 and for the year ended December 31, 2003, were derived from sales to end customers based outside the United States. In addition, we often ship products to our domestic customers’ international manufacturing divisions and subcontractors.

 

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

 

    political, social and economic instability;

 

    trade restrictions and tariffs;

 

    the imposition of governmental controls;

 

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

 

    import and export license requirements;

 

    unexpected changes in regulatory requirements; and

 

    difficulties in collecting receivables.

 

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

 

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

 

The market for our DSL products is characterized by rapid technological advances, intense competition and a relatively small number of potential customers. These conditions could likely result in price erosion on existing products and pressure for cost-reduced future versions. Implementation of our products requires manufacturers to accept our technology and redesign their products. If potential customers do not accept our technology or experience problems implementing our devices in their products, our products could be rendered obsolete and our business would be harmed. If we are unsuccessful in introducing future products with enhanced performance, our ability to achieve revenue growth will be seriously harmed.

 

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

 

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

 

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

 

The semiconductor industry and the consumer audio and communications markets are highly competitive. We compete with a number of major domestic and international suppliers of semiconductors in the consumer electronics and communications markets. We also may face competition from suppliers of products based on new or emerging technologies. Many of our competitors operate their own fabrication facilities and have longer operating histories and presence in key markets, greater name recognition, access to larger customer bases and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources

 

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than us. As a result, such competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or devote greater resources to the promotion and sale of their products than us. Current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, it is possible that new competitors or alliances among competitors could emerge and rapidly acquire significant market share. In addition, existing or new competitors may in the future develop technologies that more effectively address the transmission of digital information through existing analog infrastructures at a lower cost or develop new technologies that may render our technology obsolete. There can be no assurance that we will be able to compete successfully in the future against our existing or potential competitors, or that our business will not be harmed by increased competition.

 

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

 

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

 

We do not have third party insurance coverage to offset the cost of defending the pending securities class action and derivative litigation and, therefore, defending the litigation matters set forth in this prospectus will likely materially and adversely affect our financial condition.

 

Our financial condition will likely be materially adversely affected by the pendency of the litigation referenced in this prospectus because we do not have third-party insurance coverage for either the costs of defending these lawsuits, including the costs of possible indemnification claims by the individual named defendants, or settling such litigation. We believe that the cost of defending or settling such litigation will have a material adverse effect on our cash balances and will be another factor requiring us to raise additional funds. In addition, these matters will require devotion of significant management resources which may also adversely affect our business operations.

 

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

 

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

 

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

 

Our business depends, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws to protect our proprietary technologies. We cannot be sure that

 

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such measures will provide meaningful protection for our proprietary technologies and processes. As of December 31, 2005, we had 43 issued United States patents, and 10 additional United States patent applications which are pending. In addition, we had 15 international patents issued and an additional 23 international patents pending. We cannot be sure that any patent will issue as a result of these applications or future applications or, if issued, that any claims allowed will be sufficient to protect our technology. In addition, we cannot be sure that any existing or future patents will not be challenged, invalidated or circumvented, or that any right granted thereunder would provide us meaningful protection. The failure of any patents to provide protection to our technology would make it easier for our competitors to offer similar products. In connection with our participation in the development of various industry standards, we may be required to agree to license certain of our patents to other parties, including our competitors that develop products based upon the adopted standards.

 

We also rely on copyright, trademark and trade secret laws in the United States and other countries to protect our proprietary rights. As discussed above, we have several international issued and pending patents in certain foreign countries. However the laws of some foreign countries in which we do business may not protect our copyrights, trademarks and trade secrets to the same extent as the laws of the United States. We also generally enter into confidentiality agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products, services or technology without authorization, develop similar technology independently or design around our patents. Some of our customers have entered into agreements with us pursuant to which such customers have the right to use our proprietary technology in the event we default in our contractual obligations, including product supply obligations, and fail to cure the default within a specified period of time.

 

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

 

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

 

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

 

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

 

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

 

Changes in accounting rules for stock-based compensation may adversely affect our operating results, our stock price and our competitiveness in the employee marketplace.

 

We have a history of using employee stock options and other stock-based compensation to hire, motivate and retain our workforce. In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” which has required us, starting in the first quarter of fiscal year 2006, to measure compensation costs for all stock-based compensation (including stock options and our employee stock purchase plan) at fair value and to recognize these costs as expenses in our statements of operations. The recognition of these expenses in our statements of operations has resulted in lower earnings per share, which could negatively impact our future stock price. In addition, if we reduced or alter our use of stock-based compensation to minimize the recognition of these expenses, our ability to recruit, motivate and retain employees may be impaired, which could put us at a competitive disadvantage in the employee marketplace.

 

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

 

The threat of terrorist attacks involving the United States, the instability in the Middle East, a decline in consumer confidence and continued economic weakness and geo-political instability have had a substantial adverse effect on the economy. If consumer confidence does not recover, our revenues may be adversely affected for fiscal 2006 and beyond. Moreover, any further terrorist attacks involving the U.S. or any additional U.S. military actions overseas may disrupt our operations or those of our customers and suppliers. These events have had and may continue to have an adverse impact on the U.S. and world economy in general and consumer confidence and spending in particular, which could harm our sales. Any of these events could increase volatility in the U.S. and world financial markets which could harm our stock price and may limit the capital resources available to us and our customers or suppliers. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock.

 

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

 

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus contains forward looking statements (as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934) and information relating to us that are based on the beliefs of our management as well as assumptions made by and information currently available to our management. In addition, when used in this report, the words “likely,” “will,” “suggests,” “target,” “may,” “would,” “could,” “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “predict,” and similar expressions and their variants, as they relate to us or our management, may identify forward looking statements. Such statements reflect our judgment as of the date of this prospectus with respect to future events, the outcome of which are subject to certain known and unknown risks and uncertainties, including the factors discussed under the caption “Risk Factors,” and those discussed elsewhere in this prospectus, which may have a significant impact on our business, operating results or financial condition. Investors are cautioned that these forward looking statements are inherently uncertain. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein. Although we believe that the expectations reflected in these forward looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. All forward looking statements included in this report are based on information available to us as of the date of this report. We undertake no obligation to update or revise any forward looking statements, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

 

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USE OF PROCEEDS

 

We will not receive any proceeds from the sale of shares by the selling stockholders. All net proceeds from the sale of the common stock covered by this prospectus will go to the selling stockholders. See “Principal and Selling Stockholders” and “Plan of Distribution” described below.

 

DIVIDEND POLICY

 

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Furthermore, we are prohibited from paying cash dividends or distributions by negative covenants that are contained the Debentures we issued as part of our November 2005 financing. Such Debentures have a term of 2 years and the prohibition on the payment of cash dividends or distributions lasts as long as the Debentures or any portion thereof remain outstanding.

 

MARKET PRICE INFORMATION

 

Our common stock has been quoted on the Nasdaq National Market or the Nasdaq Capital Market under the symbol “TRPH” from our initial public offering in August 2000 until December 7, 2005. Prior to this time, there was no public market for our stock. Our common stock was delisted from the Nasdaq Capital Market effective December 7, 2005. On December 8, 2005, the shares of our common stock began trading on the Pink Sheets. On December 30, 2005 the shares of our common stock ceased to trade on the Pink Sheets and began to trade on the OTC Bulletin Board. The following table sets forth for the periods indicated the high and low closing sales prices per share of our common stock as reported on the Nasdaq National Market, the Nasdaq Capital Market, the Pink Sheets or the OTC Bulletin Board through February 28, 2006.

 

     High

   Low

2006

             

Quarter ended March 31(1)

   $ 0.51    $ 0.20

2005

             

Quarter ended March 31

   $ 1.90    $ 0.88

Quarter ended June 30

   $ 0.99    $ 0.64

Quarter ended September 30

   $ 0.94    $ 0.65

Quarter ended December 31

   $ 0.69    $ 0.30

2004

             

Quarter ended March 31

   $ 8.65    $ 4.06

Quarter ended June 30

   $ 4.93    $ 2.04

Quarter ended September 30

   $ 3.29    $ 1.09

Quarter ended December 31

   $ 1.83    $ 0.77

(1) Through February 28, 2006

 

As of February 28, 2006, there were 257 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of December 31, 2005, actual and pro forma, which give effect to the February 14, 2006 exercise of certain Series A Common Stock Purchase Warrants issued in connection with the November Financing to purchase 6,756,755 shares of common stock at an aggregate exercise price of $2.5 million. No effect has been given to the sale and issuance of the 433,334 shares of common stock that would result if the remaining unexercised warrants issued in connection with the March 3, 2005 private placement were exercised at a price of $1.25 per share since there is no assurance that any of such warrants will be exercised. Additionally, no effect has been given to (i) the sale and issuance in connection with the November Financing of Series B Common Stock Purchase Warrants to purchase up to 10,368,854 shares of common stock at an exercise price of $0.43 (subject to certain adjustments) since there is no assurance that any of such warrants will be exercised or (ii) the sale and issuance in connection with the February 14, 2006 financing of Common Stock Warrants to purchase 6,081,080 shares of our common stock at an exercise price of $0.315 since there is no assurance that any of such warrants will be exercised. This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements included elsewhere in this prospectus.

 

     December 31, 2005

    Pro Forma

 
     Actual

   
     (in thousands)        

Long term debt, net of current portion

   $ 178     $ 178  

Stockholders’ equity:

                

Common stock, $0.001 par value, 100,000,000 shares authorized, 62,715,210 shares issued and outstanding, actual; 68,786,290 shares issued and outstanding, pro forma

     55       61  

Additional paid-in capital

     203,296       205,205  

Accumulated deficit

     (205,929 )     (205,929 )

Accumulated other comprehensive income/(expense)

     (6 )     (6 )

Total stockholders’ equity

     (2,584 )     (669 )

Total capitalization

   $ (2,406 )   $ (491 )

 

The shares of common stock outstanding above exclude:

 

    6,534,225 shares of common stock issuable as of December 31, 2005 upon the exercise of outstanding stock options under our equity incentive plans, including our 2000 Stock Plan, as amended in August 2001, as of December 31, 2005 at a weighted average exercise price of $2.20;

 

    7,673,704 shares of common stock reserved and available for future issuance under our equity incentive plans as of December 31, 2005, including our 2000 Stock Plan, as amended, and an additional 2,000,000 shares approved for future issuance under such plan at our Annual Meeting of Stockholders Meeting in September 2005.

 

    10,000 shares of common stock issuable pursuant to the exercise of warrants issued on March 1, 1998 for $1.50 and which expire on March 1, 2008.

 

    6,000 shares of common stock issuable pursuant to the exercise of warrants issued on July 1, 2000 for $12.00 and which expire on July 1, 2010.

 

    the remaining 433,334 shares of common stock issuable pursuant to the exercise of warrants registered under a prior registration statement, not including the 10,368,854 shares of common stock issuable pursuant to the exercise of the Series B Common Stock warrants issued in the Company’s November 8, 2005 financing and registered under a prior registration statement, and not including the 6,081,080 shares of common stock issuable under the registration statement of which this prospectus is a part.; and

 

    124,676 shares of common stock reserved for issuance under the Employee Stock Purchase Plan, and an additional 500,000 shares approved for future issuance under such plan at our Annual Meeting of Stockholders in September 2005.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

 

On November 14, 2004, Tripath’s Board of Directors approved a change in Tripath’s fiscal year end from December 31 to September 30, effective beginning September 30, 2004. All references in this prospectus to the period ended September 30, 2004 or to 2004 refer to the nine months ended September 30, 2004. The following summary historical information has been derived from the audited consolidated financial statements of Tripath. The financial information for the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003 are derived from, and are qualified by reference to, our audited consolidated financial statements included elsewhere in this prospectus. The financial information as of December 31, 2002 and 2001 are derived from audited financial statements not included in this prospectus. The financial information for the quarter ended December 31, 2005 is unaudited. The following Selected Financial Data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” included elsewhere in this prospectus. The historical results are not necessarily indicative of the results of operations to be expected in the future.

 

Summary Consolidated Financial Information

(in thousands, except per share data)

 

   

Quarter
Ended
December 31,

2005

(unaudited)


   

Year Ended
September 30,

2005


   

Nine Months
Ended
September 30

2004

(restated)


    Year Ended December 31,

 
          2003

    2002

    2001

 

Statement of Operations Data:

                                               

Revenue

  $ 3,422     $ 10,761     $ 9,169     $ 13,891     $ 16,227     $ 13,541  

Cost of revenue

    2,218       5,285       7,415       9,467       13,517       11,948  

Provision for slow-moving, excess and obsolete inventory (1)

    —         —         4,316       243       4,977       —    
   


 


 


 


 


 


Gross profit (loss)

    1,204       5,476       (2,562 )     4,181       (2,267 )     1,593  
   


 


 


 


 


 


Operating expenses:

                                               

Research & development

    1,831       7,413       5,521       6,874       11,650       19,913  

Selling, general and administrative

    1,843       8,586       3,556       4,544       5,557       8,664  

Restructuring and other charges (2)

    —         —         —         —         —         684  
   


 


 


 


 


 


Total operating expenses

    3,674       15,999       9,077       11,418       17,207       29,261  
   


 


 


 


 


 


Loss from operations

    (2,470 )     (10,523 )     (11,639 )     (7,237 )     (19,474 )     (27,668 )

Gain on revaluation of warrant and conversion feature liabilities (3)

    3,222       570       —         —         —         —    

Interest, amortization and other income (expense), net

    (5,479 )     (19 )     (26 )     22       160       687  
   


 


 


 


 


 


Net loss

    (4,727 )     (9,972 )     (11,665 )     (7,215 )     (19,314 )     (26,981 )

Accretion on preferred stock (4)

    —         —         —         —         (14,952 )     —    
   


 


 


 


 


 


Net loss applicable to common stockholders

  $ (4,727 )   $ (9,972 )   $ (11,665 )   $ (7,215 )   $ (34,266 )   $ (26,981 )
   


 


 


 


 


 


Basic and diluted net loss per share

  $ (0.08 )   $ (0.19 )   $ (0.25 )   $ (0.17 )   $ (0.88 )   $ (1.00 )
   


 


 


 


 


 


Number of shares used in computing basic and diluted net loss per share

    55,858       53,206       46,541       41,993       38,823       27,009  
   


 


 


 


 


 


 

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December 31

2005


   

September 30

2005


 

September 30
2004

(restated)


  December 31,

          2003

  2002

  2001

Balance Sheet Data:

                                     

Cash, cash equivalents, short-term investments and restricted cash

  $ 1,880     $ 878   $ 7,339   $ 9,612   $ 10,598   $ 5,097

Working capital

    (3,402 )     352     6,832     11,198     13,711     12,854

Total assets

    10,914       9,854     14,306     19,468     20,685     22,160

Long term obligations, net of current portion

    177       188     571     1,256     933     262

Total stockholders equity

    (2,584 )     1,161     8,058     11,920     15,436     15,347

(1) During the year ended December 31, 2002 we recorded a provision for slow moving, excess and obsolete inventory of approximately $5.0 million. The inventory charge related to excess inventory for our TA2022 product based on a decline in forecasted sales for this product. During the year ended December 31, 2003 we recorded a provision for slow moving, excess and obsolete inventory of approximately $243,000. The inventory charge related to excess inventory for our TA2022 product based on a decline in forecasted sales for this product. During the nine months ended September 30, 2004 we recorded a provision for slow moving, excess and obsolete inventory of approximately $4.3 million. The inventory charge related to slow moving and excess inventory for our TA1101B, TA3020, TA2041, TA2022 and leaded TA2024 products, the TK2350, TK2051, TK2150, TK2050 and TK2052 chipsets, and Kauai 2BB and U461 die based on a decline in forecasted sales for these parts.

 

(2) On August 3, 2001 we announced a restructuring and cost reduction plan which included a workforce reduction and write down of assets no longer used. As a result of the restructuring and cost reduction plan, we recorded restructuring and other charges of $684,000 during the quarter ended September 30, 2001.

 

(3) On March 3, 2005, we completed a private placement that included the issuance of warrants. Since the warrants are subject to certain registration rights, we recorded a warrant liability in accordance with EITF 00-19. The change in fair value on revaluation of warrant liability represents the difference between the fair value of the warrants on the closing date, March 3, 2005, of the private placement and the fair value of those same warrants on March 31, 2005.

 

(4) On October 24, 2002, we completed a financing in which we raised $21 million in gross proceeds through a private placement of non-voting Series A Preferred Stock and warrants, at $30 per unit to a group of investors, which was convertible into 13,999,000 shares of common stock and warrants to purchase 3,303,760 shares of common stock. Each share of Series A Preferred Stock was convertible into 20 shares of common stock (or an effective common stock price of $1.50 per share). As a result of the favorable conversion price of the shares and related warrants at the date of issuance, we recorded accretion of approximately $15 million relating to the beneficial conversion feature representing the difference between the accounting conversion price and the fair value of the common stock on the date of the transaction, after valuing the warrants issued in connection with the financing transaction.

 

No dividends have been paid or declared since our inception.

 

Restatement of Financial Statements Previously included in our Form 10-Qs for the Quarters Ended March 31, 2004, June 30, 2004 and December 31, 2004 and in our Transition Report on Form 10-K/T for the nine months ended September 30, 2004.

 

Following the receipt of the report of our litigation counsel, including discussion of the findings of the forensic accountant hired by our litigation counsel and approved by our Audit Committee on October 25, 2005, the Audit Committee determined to restate the financial statements previously included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the “Initial Restatement”) as such financial statements included errors and should no longer be relied upon.

 

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Following further investigation, our Audit Committee concluded on May 5, 2005 that we should restate the financial statements (the “Additional Restatement”) that were previously included in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004 as well as the financial statements for the nine month transition period ended September 30, 2004 previously included in our Transition Report on Form 10-K/T as such financial statements included errors and should no longer be relied upon.

 

We have amended our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2004, June 30, 2004, and December 31, 2004, as well as our Form 10-K/T for the nine months ended September 30, 2004, which are affected by the Initial Restatement and Additional Restatement. As reported in our Form 8-K dated May 5, 2005 and filed on May 11, 2005, and the financial statements and related financial information contained in such prior reports should no longer be relied upon. Set forth on page 3 above is a summary of the restated financial information. The restated financial statements for the nine months ended September 30, 2004 are included elsewhere in this prospectus.

 

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MANAGEMENT’S DISCUSSION AND

ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with our audited and unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements due to a number of factors, including those set forth in the section entitled “Risk Factors” and elsewhere in this prospectus. You should also read the following discussion and analysis in conjunction with the Special Note Regarding Forward-Looking Statements.

 

Overview

 

We design and sell digital amplifiers based on our proprietary Digital Power Processing (DPP®) technology. We currently supply amplifiers for audio electronics applications, as well as amplifiers for DSL applications. We were incorporated in July 1995, began shipping products in the first quarter of 1998 and became a public reporting company in August 2000. We incurred net losses of approximately $10.0 million in fiscal 2005, $11.7 million in fiscal 2004, and $7.2 million in fiscal 2003. We expect to continue to incur net losses in fiscal 2006, and possibly beyond. On November 14, 2004 we changed our fiscal year-end from December 31 to September 30, effective as of September 30, 2004.

 

We sell our products to original equipment manufacturers and distributors. We recognize revenue from product sales upon shipment to original equipment manufacturers, net of sales returns and allowances. Our sales to distributors are made under arrangements allowing for returns or credits under certain circumstances and we defer recognition on sales to distributors until products are resold by the distributor to the end user. All of our sales are made in United States, or U.S., dollars.

 

As a “fabless” semiconductor company, we contract with third party semiconductor fabricators to manufacture the silicon wafers based on our integrated circuit, or IC, designs. Each wafer contains numerous die, which are cut from the wafer to create a chip for an IC. We also contract with third party assembly and test houses to assemble and package our die and conduct final product testing.

 

Cost of revenue includes the cost of purchasing finished silicon wafers and the cost of die manufactured by independent foundries, costs associated with assembly and final product testing, as well as salaries and overhead costs associated with employees engaged in activities related to manufacturing. Research and development expense consists primarily of salaries and related overhead costs associated with employees engaged in research, design and development activities, as well as the cost of wafers and other materials and related services used in the development process. Selling, general and administrative expense consists primarily of employee compensation and related overhead expenses and advertising and marketing expenses.

 

Stock-based compensation expense relates both to stock-based employee and consultant compensation arrangements. Employee-related stock-based compensation expense is based on the difference between the estimated fair value of our common stock on the date of grant and the exercise price of options to purchase that stock and is being recognized on an accelerated basis over the vesting periods of the related options, usually four years, or in the case of fully vested options, in the period of grant. Future compensation charges will be reduced if any employee or consultant terminates employment or consultation prior to the expiration of the option vesting period.

 

Restatement

 

As originally described in our Current Report on Form 8-K dated October 18, 2004 and filed with the Securities and Exchange Commission on October 22, 2004 (the “Prior 8-K”), our Audit Committee initiated an

 

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internal investigation regarding certain purported product returns (the “Product Returns”) to one of our distributors, Macnica Japan (“Macnica”), by its customers. The Audit Committee investigation and discussion included a review of our compliance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements” (“SAB 104”) as applied to the circumstances surrounding the Product Returns. Under SAB 104, a requirement for revenue recognition is that all of the following criteria must be met: (1) there is persuasive evidence that an arrangement exists, (2) delivery of goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. In accordance with SAB 104, our revenue recognition policy, for sales to distributors, requires that we defer recognition of revenue until such time that the distributor sells products to its customers based upon receipt of point-of-sales reports from the distributor. As of the Audit Committee’s determination on October 25, 2005, the internal investigation revealed that approximately $1.4 million of a sale of our product to Macnica did not meet the foregoing criteria because our Country Manager for the Japan Sales Office (who is no longer employed by us) had agreed that Macnica could return the product to us at Macnica’s discretion. The Audit Committee determined that this former employee had agreed to a term of sale that was outside of our standard practices and was not referenced in the documentation related to the sale submitted to our finance department. Given the discovery of this arrangement for Macnica to return the product, our Audit Committee concluded that we should restate certain financial information that was previously reported in our Form 10-Q for the quarter ended June 30, 2004, filed with the Securities and Exchange Commission on August 6, 2004 (the “June 2004 Form 10-Q”) to properly reflect our revenue and related financial information for the referenced periods (the “Initial Restatement”). Accordingly, we advised in the Prior 8-K that the Consolidated Statement of Operations for the three months and six months ended June 30, 2004 and the Consolidated Balance Sheet as of June 30, 2004 included in the June 2004 Form 10-Q should no longer be relied upon because of errors in such financial statements. The financial impact of the Initial Restatement was reflected in our Transition Report on Form 10-K/T for the transition period ended September 30, 2004 filed with the Securities and Exchange Commission on February 3, 2005 (the “Transition Report”).

 

The Audit Committee directed that the internal investigation continue following reporting of the Initial Restatement. As a result of this further investigation, on May 5, 2005 the Audit Committee determined that additional sale transactions with Macnica, as well as with an additional distributor of the Company, Uniquest, did not meet the our revenue recognition criteria and the requirements of SAB 104. In certain circumstances, the same former employee of the Company had agreed that Macnica could return the referenced product at Macnica’s discretion. This former employee had on these occasions agreed to a term of sale that was outside of our standard practices and was not referenced in the documentation related to the sale submitted to our finance department. In addition, the Audit Committee determined that, in certain other circumstances, Macnica had shipped product not to end customers but to other distributors and we had relied on point-of-sales reports submitted to us by Macnica that indicated the referenced product had been shipped to an end customer of Macnica when such product had only been shipped to other distributors. Recognition of revenue on sales between distributors instead of to the end customers is not permitted under our revenue recognition policies. Further, the Audit Committee determined that certain sales transactions with Uniquest did not meet our revenue recognition criteria and the requirements of SAB 104 because in certain circumstances, employees of Uniquest had incorrectly reported to us the date of shipments to end customers.

 

As a result, the Audit Committee concluded on May 5, 2005 that we should restate certain financial information (the “Additional Restatement”) that was previously reported in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004 as well as certain financial information for the quarter and transition period ended September 30, 2004 and that was previously reported in our Transition Report. The Additional Restatement was based on the Audit Committee’s conclusion on such date that the Consolidated Balance Sheets as of March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 and the related Consolidated Statements of Operations for the three months ended March 31, 2004, the three and six months ended June 30, 2004, the nine month transition period ended September 30, 2004 and the three months ended December 31, 2004 should no longer be relied upon because of errors in such financial statements. The Additional Restatement was originally described in our Current Report on Form 8-K

 

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dated May 5, 2005 and filed with the Securities and Exchange Commission on May 11, 2005. The restated financial statements for the nine months ended September 30, 2004 are included elsewhere in this document.

 

Following receipt of a final report on the internal investigation, the Audit Committee determined that the internal investigation had been completed on June 15, 2005. The internal investigation revealed errors in the Company’s financial statements for 2002 and 2003. Such errors included certain shipments between distributors rather than to end-customers which were not noted on applicable point-of-sales reports, inaccurate shipment dates on certain point-of-sales reports, and inaccurate quantities noted on certain point-of-sales reports. The Company reviewed these errors with reference to the guidelines set forth in SAB99. Based upon such review, the Company concluded that such errors were immaterial and thus would not result in a restatement of the 2002 or 2003 financial statements.

 

Material Weakness of Internal Controls Over Financial Reporting

 

In connection with the audit of the Company’s consolidated financial statements for the fiscal year ended September 30, 2005, the Company’s independent auditor identified a number of material weaknesses in our internal controls over financial reporting. Certain of these material weaknesses resulted in adjustments to the Company’s fiscal year 2005 annual consolidated financial statements. If not remediated, such weaknesses could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected. As a result, we have received an adverse attestation from our independent auditors regarding Sarbanes-Oxley Section 404 compliance.

 

Critical Accounting Policies

 

Use of Estimates: Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to product returns, warranty obligations, bad debts, inventory direct costing and valuation, accruals, valuation of stock options and warrants, income taxes (including the valuation allowance for deferred taxes) and restructuring costs. 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 that are not readily apparent from the other sources. Actual results may materially differ from these estimates under different assumptions or conditions. Material differences may occur in our results of operations for any period if we made different judgments or utilized different estimates.

 

Revenue Recognition: We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104, or SAB 104, “Revenue Recognition in Financial Statements”. We recognize revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. The following policies apply to our major categories of revenue transactions.

 

Sales to OEM Customers: Under our standard terms and conditions of sale, title and risk of loss transfer to the customer at the time product is delivered to the customer, FOB shipping point, and revenue is recognized accordingly. We accrue the estimated cost of post-sale obligations, including product warranties or returns, based on historical experience. We have experienced minimal warranty or other returns to date.

 

Sales to Distributors: Sales to distributors are made under arrangements allowing limited rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances which may be granted subject

 

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to our approval. As a result of these return rights and potential pricing adjustments, we generally defer recognition of revenue until such time that the distributor sells product to its customer based upon receipt of point-of-sale reports from the distributor.

 

Allowance for Doubtful Accounts: We provide an allowance for doubtful accounts to ensure trade receivables are not overstated due to un-collectibility. The collectibility of our receivables is evaluated based on a variety of factors, including the length of time receivables are past due, indication of the customer’s willingness to pay, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when we become aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or substantial deterioration in the customer’s operating results or financial position. If circumstances related to our customers change, estimates of the recoverability of receivables would be further adjusted.

 

Inventories: Inventories are stated at the lower of cost or market. This policy requires us to make estimates regarding the market value of our inventory, including an assessment of excess or obsolete inventory. We determine excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for our products within a specified time horizon, generally 12 months. The estimates we use for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with our revenue forecasts. Actual demand and market conditions may be different from those projected by our management. If our unit demand forecast is less than our current inventory levels and purchase commitments, during the specified time horizon, or if the estimated selling price is less than our inventory value, we will be required to take additional excess inventory charges or write-downs to net realizable value which will decrease our gross margin and net operating results in the future. During the quarter ended March 31, 2002, we recorded a provision for excess inventory of approximately $5 million primarily related to excess inventory for our TA2022 product as a result of a decrease in forecasted sales for this product. In 2004, we increased the inventory reserves by an additional $4.3 million, from $4.9 million to $9.2 million, representing 10.4 million units with a net realizable value of $2.6 million, to account for slow moving, excess and obsolete inventory. The balance of the previously reserved inventory at September 30, 2005 had a net realizable value of $5.2 million and represented 8.7 million units. This was a reduction of the reserved for inventory during fiscal 2005 of $4.0 million representing 1.7 million units from the overall balance at September 30, 2004. The balance of the previously reserved inventory at December 31, 2005 had a net realizable value of $4.5 million and represented 8.7 million units. This was a reduction of the reserved for inventory during the fiscal first quarter ended December 31, 2005 of $0.7 million representing a minimal change in units from the overall balance at September 30, 2005.

 

Stock-Based Compensation Expense: On December 16, 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R eliminates the alternative of applying the intrinsic value measurement provisions of APB 25 to stock compensation awards issued to employees. Rather, the new standard requires enterprises to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). On April 14, 2005, the Securities and Exchange Commission (“SEC”) announced the adoption of a rule that defers the required effective date of SFAS 123R. The SEC rule provides that SFAS 123R is now effective for registrants as of the beginning of the first fiscal year beginning after June 15, 2005.

 

SFAS 123R is effective for our fiscal quarter beginning October 1, 2005, and allows for the use of the Modified Prospective Application Method. Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased, or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (such as unvested options) that are outstanding as of the date of adoption is recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption shall be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS 123. In addition, companies may

 

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use the Modified Retrospective Application Method. This method may be applied to all prior years for which the original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the Modified Retrospective Application Method is applied, financial statements for prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123. We have adapted SFAS 123R in our quarter ended December 31, 2005 using the Modified Prospective Application Method.

 

Change in Year End: On November 14, 2004, our Board of Directors approved a change in our fiscal year end from December 31 to September 30, effective as of September 30, 2004.

 

Results of Operations

 

Three months ended December 31, 2005 and 2004, Year Ended September 30, 2005, Nine Months Ended September 30, 2004, and Year Ended December 31, 2003

 

Revenues. Revenues for the three months ended December 31, 2005 were $3.4 million, an increase of $1.7 million or 105 percent from revenues of $1.7 million for the three months ended December 31, 2004. This increase in revenue resulted primarily from increased sales of our TA2024 family into the flat panel display television market. Revenues for the year ended September 30, 2005 were $10.8 million an increase of $1.6 million or 17 percent from revenues of $9.2 million for the nine month transition period ended September 30, 2004 and a decrease of $3.1 million or 22 percent from revenues of $13.9 million for the twelve months ended December 31, 2003. In addition to the increase in revenue attributable to the longer fiscal period, the increase in revenues for the year ended September 30, 2005 as compared to the nine month period ended September 30, 2004 was primarily due to increase in sales of our 2024 series of products into the flat panel display television market. For the nine month period ended September 2004, sales of the TA1101, TA2024 and TA2020 decreased from the period ended December 31, 2003, partially offset by increases in sales of our TLD4012 product reflecting increased sales of DSL line drivers. In addition, revenues for the nine months ended September 30, 2004 are stated net of a $1.3 million sales return. Revenues for fiscal year 2003 decreased by $2.3 million or 14 percent from revenues of $16.2 million for fiscal year 2002. The decrease in revenues was primarily due to decreases in sales of our TA2022, TA3020 and TK2050 products, reflecting lower sales of low margin home theater products in the China market and decreased demand from Apple Computer, partially offset by increases in sales of our TLD4012 and TA2024 products reflecting increased sales of DSL line drivers and digital audio amplifier products in the flat panel TV and gaming vertical markets.

 

Our top five end customers accounted for 45 percent of revenue in the three months ended December 31, 2005 compared to 42 percent of revenues in the three months ended December 31, 2004. Our primary customers during the three months ended December 31, 2005 were Sharp, Beko, and TCL representing 12 percent, 10 percent and 10 percent of revenues, respectively. During the three months ended December 31, 2004 our top five end customers accounted for 42% of revenues in this period. Our primary customers were Alcatel and Sharp representing 14 percent and 10 percent of revenues, respectively. Our top five end customers accounted for 40 percent of revenues in 2005 versus 65 percent and 68 percent in 2004 and 2003 respectively. Our primary customers in 2005 were Sharp, Kyoshin Technosonic Co., Ltd. (KTS), Beko, Alcatel and Sanyo representing 16 percent, 7 percent, 6 percent, 6 percent and 5 percent of revenues, respectively. In 2004, our primary customers were Kyoshin Technosonic Co., Ltd. (KTS), Alcatel and Samsung representing 28 percent, 19 percent and 9 percent of revenues, respectively. In 2003, our primary customers were KTS, Samsung, and Apple representing 24 percent, 18 percent and 15 percent of revenues, respectively.

 

Our revenue by geography has changed significantly over the past year as our revenues from the U.S. have decreased from $199,000 in the quarter ended December 31, 2004 to $54,000 in the quarter ended December 31, 2005. This has been primarily due to the continued shift of manufacturing from domestic to foreign manufacturing as our products have been used in the production of products in the fast growing consumer markets of flat panel display TV and home theater. This is further evidenced by the corresponding increases in business to Japan, Taiwan, China and Europe.

 

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Gross Profit (Loss). Gross profit for the three months ended December 31, 2005 was $1.2 million or 35 percent, compared with a gross profit of $0.4 million or 27 percent for the three months ended December 31, 2004. The higher gross margin achieved during the three months ended December 31, 2005 was primarily attributable to the sale of inventory that was previously written down to its estimated net realizable value. This contributed $0.7 million to gross profit for the year ended September 30, 2005. Excluding this effect, the gross profit margin would have been $0.5 million or 16 percent for the three months ended December 31, 2005, reflecting primarily a decrease in average selling prices. Gross profit for the year ended September 30, 2005 was $5.5 million or 51 percent, compared to a gross loss of $2.6 million or negative 28 percent for the nine months ended September 30, 2004 and a gross profit of $4.2 million or 30 percent for fiscal year 2003. The higher gross margin achieved during the year ended September 30, 2005 is primarily attributable to the sale of inventory that was previously written down to its estimated net realizable value. This contributed $4.0 million to gross profit for the year ended September 30, 2005. Excluding this effect, the gross profit margin would have been $1.5 million or 14 percent for the year ended September 30, 2005, reflecting primarily a decrease in average selling prices. The gross loss for the nine months ended September 30, 2004 was primarily due to a net increase of $4.3 million in inventory reserves for slow moving, excess and obsolete inventory.

 

Inventory is reviewed and valued based on a lower of cost or market analysis. The inventory reserve at September 30, 2004 totaled $9.2 million and included approximately $5.0 million related to excess inventory primarily for the Company’s TA2022 product as a result of a decrease in forecasted sales for this product. In September 2004, the Company increased the inventory reserve by an additional $4.3 million from $4.9 million to $9.2 million to account for slow moving, excess, and obsolete inventory. The additional inventory charge related to slow moving and excess inventory for our TA1101B, TA3020, TA2041, TA2022 and leaded TA2024 products, the TK2350, TK2051, TK2150, TK2050 and TK2052 chipsets, and Kauai2BB and U461 die based on a decline in forecasted sales for these parts. At September 30, 2004, the Company had approximately 10.4 million units of inventory which had previously been written down to their net realizable value of approximately $2.6 million. These components and finished goods did not have a market or sales forecast based on customer demand that could support the number of units in inventory at that time. During the year ended September 30, 2005, the Company released a net amount of approximately $4.0 million of inventory reserves for products sold that were previously reserved for. These releases were due to the Company’s end-customers experiencing significant growth which resulted in sales of previously written down inventory. In addition during 2005, certain of the Company’s customers’ products had experienced growth beyond previously estimated levels.

 

Following the hiring of the Company’s newly promoted Vice President of Sales in October of 2005, the Company began to develop a new strategy to increase sales volume in its target markets. The Company had previously pursued a pricing strategy that had resulted in a lack of competitiveness in many end-customer accounts and applications.

 

During the year ended September 30, 2005, our end-customers experienced significant growth which resulted in sales of previously written down inventory primarily to existing end-customers. In addition, during this period, certain of our customers’ products have experienced growth beyond previously estimated levels. As a result of these trends, a number of our existing end-customers developed new designs and applications which offered the Company an opportunity to sell some of our previously written down inventory. For example, sales of our products for flat panel display television applications have increased as these markets have expanded, reflecting increased consumer demand for flat panel televisions due to the increasingly lower prices of consumer products that are being marketed to the public. The Company was able to address these new opportunities in the growing flat panel display market as new designs and applications became available in the first calendar quarter of 2005 in connection with our end-customers’ consumer product design and component sourcing activity. These options were not known or available at the time the inventory was written down. This additional strategy of addressing our expanding target markets resulted in sales during the March 2005, June 2005, September 2005 and December 2005 quarters of previously written down inventory. It is not clear to the Company how long the markets for these new design-ins and new applications will be available.

 

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The Company has seen results from executing this strategy and has been able to take advantage of the fast growing flat panel television market as an opportunity to sell some of the previously written down inventory. This has resulted in higher gross margin as the actual value of the inventory at the time of sale has been greater than was anticipated at the time the inventory was written down. For the quarter ended December 31, 2005 the gross margin would have been 16 percent instead of the reported gross margin of 35 percent were it not for the favorable impact of $0.73 million as a result of the sale of previously written down inventory which resulted in favorable impact to gross margin of approximately 19 percent. At December 31, 2005 the Company had approximately 8.7 million units still on hand representing a net realizable value of approximately $5.1 million. The Company expects the favorable impact to its gross margin in the second quarter of fiscal 2006 ending March 31, 2006 from the sale of previously written down inventory to be in the range of 5 percent to 10 percent, and therefore would expect to report a gross margin in the range of 20 to 30 percent for such period, although the resulting reported gross profit and gross margin may be different depending on the actual sale of previously written down inventory.

 

Along with our new sales strategy the Company has embarked on a program to reduce manufacturing cost of some of our higher volume products. This is being accomplished through a combination of negotiation for improved pricing from our vendors along with transitioning of many of our customers for 2024 to 2024B which is a newer lower cost version of this high volume product. In addition, we continue to utilize our engineering and applications development staff to work closely with our key customers to design-in our existing products as we continue to improve the design of our future products. As we continue the implementation of expected manufacturing cost reductions, engineering and design strategies, we would expect that our gross margin would settle in the range of 30 percent to 40 percent. This estimate is dependent on our ability to build sustainable sales volume and complete the manufacturing cost reductions, engineering and design strategies on a timely basis.

 

Research and Development. Research and development expenses for the three months ended December 31, 2005 were $1.8 million, a decrease of $0.1 million from $1.9 million for the three months ended December 31, 2004. The decrease in R&D expenses was due to a comparable decrease in headcount and related personnel costs and would have been greater were it not for the additional expenses associated with the implementation of SFAS 123R which had an unfavorable impact of $0.3 million in the three months ended December 31, 2005. We anticipate that our R&D expenses will increase in fiscal 2006.Research and development (R&D) expenses for the year ended September 30, 2005 were $7.4 million, an increase of $1.9 million or 35 percent from the $5.5 million during the nine months ended September 30, 2004. This increase in R&D expenses was primarily due to the longer comparable twelve-month period when compared to the nine months ended September 30, 2004. R&D expenses for the nine months ended September 30, 2004 were $5.5 million, a decrease of $1.4 million or 20 percent from R&D expenses of $6.9 million for the fiscal year ended December 31, 2003. This decrease in R&D expenses was primarily due to the shorter comparable nine month period when compared to the twelve months ended December 31, 2003.

 

Selling, General and Administrative Expenses. Selling, general and administrative expenses for the three months ended December 31, 2005 were $1.8 million, an increase of approximately $0.4 million from $1.4 million for the three months ended December 31, 2004. This increase in selling, general and administrative expenses was due to primarily to implementation of SFAS 123R which had an unfavorable impact of $0.2 million in the three months ended December 31, 2005. Apart from the impact of SFAS 123R, and/ or litigation related costs and/ or financing related expenses, we anticipate that our S,G&A expenses would continue to be flat or decrease in fiscal 2006. Selling, general and administrative (S,G&A) expenses for the year ended September 30, 2005 were $8.6 million, an increase of $5.0 million or 139 percent from $3.6 million for the nine months ended September 30, 2004. The increase in S,G&A expenses for the corresponding period was due to increased legal and accounting fees associated with our on-going SEC investigation and related litigation along with the relate expenses for legal and financial compliance costs related to the Sarbanes-Oxley Act of 2002 and to increased insurance costs as a result of obtaining a new Directors and Officers Liability Insurance policy and due to the longer comparable twelve-month period when compared to the nine months ended September 30, 2004. S,G&A expenses for the nine months ended September 30, 2004 were $3.6 million, a decrease of $0.9

 

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million or 20% from S,G&A expenses of $4.5 million in for the fiscal year ended December 31, 2003. This decrease in S,G&A expenses was primarily due to the shorter comparable nine month period when compared to the twelve months ended December 31, 2003. We anticipate that our S,G&A expenses will be flat or decrease in fiscal 2006, due to anticipated reduced activity and expenses for ongoing litigation costs, legal and financial compliance and expenses related to the Sarbanes-Oxley Act of 2002.

 

Change in Fair Value on Revaluation of Warrant and Conversion Feature Liability. The change in fair value on revaluation of warrant liability represents the difference between the fair value of the warrants and conversion feature we issued in connection with our March 3, 2005, private placement on their original issue date and the fair value of those same warrants on December 31, 2005 using Black-Scholes. The change in fair value on revaluation of warrant liability related to the March 2005 transaction was a reduction of the liability of $0.1 million for the three months ended December 31, 2005, while there was no change in fair value or revaluation of warrant liability for the three months ended December 31, 2004 since no warrants were issued during that period. The change in fair value on revaluation of warrant liability related to the March 2005 transaction was a reduction of the liability of $0.6 million for the year ended September 30, 2005, while there was no change in fair value or revaluation of warrant liability for 2004 or 2003 since no warrants were issued during those periods. We issued additional warrants in our November 8, 2005 private placement and thus expect these to affect this change in future periods.

 

Interest, Amortization and Other Income (Expense), net. Net interest expense for the three month ended December 31, 2005 was $5.5 million, compared with net interest income of $5,000 for the three months ended December 31, 2004. The changes in interest expense are a result of the recognition of interest paid on the 6% Senior Secured Convertible Debentures issued in November of 2005, recording the conversion feature related to the debt financing, and amortizing the debt discount and related fees. Net interest expense for fiscal 2005 was $1,425, compared with net interest expense of $26,000 for fiscal 2004 and net interest income of $22,000 for fiscal 2003. The changes in interest income to interest expense are as a result of additional leases and the decrease in our average cash balances.

 

Income Taxes. We have incurred only a minimal amount of statutory income tax expense to date. As of September 30, 2005, we had available federal net operating loss carry-forwards of approximately $127 million and state net operating loss carry-forwards of approximately $46 million. We also had research and development tax credit carry-forwards of approximately $5 million for federal and state purposes. The net operating loss and credit carry-forwards will expire at various times through 2026. As of September 30, 2005, we had deferred tax assets of approximately $56 million which consisted primarily of net operating loss carry-forwards, research and development tax credit carry-forwards and non-deductible reserves and accruals. We have recorded a full valuation allowance against these deferred tax assets. Deferred tax assets will be recognized in future periods only as any taxable income is realized and consistent profits are reported. Deferred tax assets related to items effecting equity will be charged to equity when realized.

 

Liquidity and Capital Resources

 

Since our inception, we have financed our operations through the private sale of our equity securities, primarily the sale of preferred stock, through our initial public offering on August 1, 2000, through a private placement in October 2002, a financing in August 2004, a private placement in March 2005, a private placement in November 2005 and a private placement in February 2006. The October 2002, March 2005, November 2005 and February 2006 private placements included warrants whereas no warrants were issued in connection with the August 2004 financing. The November 2005 private placement also included debentures convertible into common stock whereas no such convertible debentures were issued in connection with the October 2002, March 2005 and February 2006 private placements or the August 2004 financing. Net proceeds to us as a result of our initial public offering, our 2002 private placement, our 2004 financing, our March 2005 private placement, our November 2005 private placement and our February 2006 private placement were approximately $45.4 million, $19.9 million, $5.0 million, $4.4 million, $4.8 million and $2.5 million, respectively. In addition we received $5.4 million from the exercise of warrants issued in connection with the 2002 private placement and $0.3 million from the exercise of warrants issued in connection with the March 2005 private placement.

 

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Net cash used for the year ended September 30, 2005 was $5.9 million, representing an increase of $3.5 million when compared to the $2.4 million used in the nine months ended September 30, 2004. Net cash used during the nine months ended September 30, 2004 increased by $1.2 million when compared to the $1.2 million used in the year ended December 31, 2003.

 

Net cash used by operating activities increased to $4.0 million for the quarter ended December 31, 2005 from $3.2 million for the quarter ended December 31, 2004. The increase was mainly due to a significant decrease in accounts payable. Net cash used by operating activities for the year ended September 30, 2005 was $9.8 million representing an increase of $0.7 million when compared to the $9.1 million used by operating activities in the nine months ended September 30, 2004. The increase was mainly due to the longer comparable twelve-month period when compared to the nine months ended September 30, 2004 in addition to an increase in prepaid expenses of $1.3 million offset by the decrease in our net loss of $1.7 million combined with the cash benefits from the sale in 2005 of inventory written down in prior years. Net cash used by operating activities increased by $5.0 million during the nine months ended September 30, 2004 when compared to the $4.1 million used by operating activities in the year ended December 31, 2003.

 

Cash used by investing activities was $(0.1) million for the quarter ended December 31, 2005 compared to cash used of $4,000 for the quarter ended December 31, 2004. The cash provided in the quarter ended December 31, 2005 was the result of renewal of the Cadence license. Net cash provided in investing activities for the year ended September 30, 2005 was $0.5 million representing a decrease in cash used of $1.2 million when compared to the $0.7 million used in investing activities in the nine months ended September 30, 2004. The decrease was primarily due to the release of $0.6 million from a letter of credit and from a decrease of $0.5 million in purchases of equipment. Cash used in investing activities during the nine months ended September 30, 2004 was $0.7 million use for investing activities representing an increase of $0.2 million when compared to the $0.5 million used in the year ended December 31, 2003.

 

Cash provided by financing activities was $5.1 million for the quarter ended December 31, 2005. Cash used in financing activities was $158,000 for the quarter ended December 31, 2004. Net cash provided by financing activities for the year ended September 30, 2005 was $3.4 million for the year ended September 30, 2005 compared to $7.4 million for the nine months ended September 30, 2004. Net cash provided by financing activities for the year ended December 30, 2003 was $3.4 million. The positive cash flow from financing activities in 2005 and 2004 were primarily due to proceeds received from the sale of equity securities of the Company to investors in a private placement in 2005 and in a registered transaction in 2004 as further described below. Cash provided by financing activities was in 2003 was mostly due to the proceeds received of approximately $3.1 million from the exercise of warrants.

 

On July 12, 2002, we entered into a credit agreement with a financial institution that provided for a one-year revolving credit facility in an amount of up to $10 million, subject to certain restrictions in the borrowing base based on eligibility of receivables. The credit agreement was used to issue stand-by letters of credit totaling $1.7 million to collateralize our obligations to a third party for the purchase of inventory and to provide a security deposit for the lease of new office space. Upon the expiration of the credit agreement on June 30, 2003, we entered into a Pledge and Security Agreement to provide a security interest in a money market account in the amount of $0.7 million for the standby letters of credit. In March 2004 we canceled the standby letters of credit and then reissued them using a different financial institution, entering into a Security Agreement to collateralize the standby letters of credit which totaled $0.7 million at September 20, 2004. At December 31, 2005, the Company continued to maintain a standby letter of credit in the amount of $0.2 million as security for our building lease in San Jose, California.

 

During the year ended December 31, 2003, warrants issued in connection with the 2002 private placement were exercised which resulted in the issuance of 1,896,226 shares of our common stock with proceeds totaling approximately $3.1million. The warrants issued to the placement agent were exercised on a cashless net issuance basis resulting in 300,438 shares of our common stock being issued to the placement agent.

 

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The warrant agreement contained a provision for the mandatory exercise of the warrants if our common stock traded at $5.85 or higher for 20 out of 30 trading days. At the close of business on October 2, 2004 our common stock had traded at $5.85 or higher for 20 consecutive days and we were able to invoke the provision for the mandatory exercise of all outstanding warrants issued in connection with the October 2002 financing. All outstanding warrants were exercised in October 2004 resulting in the issuance of an additional 1.2 million shares of common stock. We received proceeds of approximately $2.3 million from the exercise of these warrants in October 2004.

 

In August 2004, we completed a financing in which we raised gross proceeds of $5 million through financing of 2,500,000 shares of common stock at a price of $2.00 per share.

 

In March 2005, we completed a private placement which resulted in gross proceeds of $4.4 million. In connection with this private placement we sold 4,833,335 shares of common stock at a price of $0.90 per share and issued warrants to purchase up to 966,667 shares of common stock with an exercise price of $1.25 per share.

 

In October 2005, we proposed amending the warrants issued as part of the March 2005 private placement. The holders of warrants to exercise 533,333 shares of the Company’s common stock agreed to the amendment, which lowered the exercise price to $0.50 per share, eliminated the cashless net exercise provision of the warrant, and advanced the warrant termination date to October 14, 2005. The Company issued 533,333 shares of common stock upon the exercise of such amended warrants on October 14, 2005 for aggregate proceeds of $0.3 million.

 

In November 2005, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) and a Registration Rights Agreement (the “Registration Rights Agreement”), each dated as of November 8, 2005. The financing, a combination of debt and warrants, closed on November 8, 2005. The 6% Senior Secured Convertible Debentures issued pursuant to the Purchase Agreement are secured by substantially all of the Company’s assets including Intellectual Property.

 

The proceeds to the Company were $5.0 million. The Company paid legal expenses and a finders’ fee of $150,750 in commissions and Series B Common Stock Warrants to acquire 233,721 shares of the Company’s common stock in connection with the financing. The Series B Common Stock Warrants issued are exercisable at $0.43 per share. The Company has ascribed the value of $95,826 to the finders’ fee warrants which is recorded along with the finders’ fees as deferred financing cost in the balance sheet at December 31, 2005. The fair value ascribed to the finders’ fee Series B Common Stock Warrants was estimated on the commitment date using the Black-Scholes pricing model with the following assumptions: risk-free interest rate of 4.51%; contractual life of 5 years; expected volatility of 145.04%; and expected dividend yield of 0%. The Company expects to use the proceeds of the financing to finance on-going operations.

 

Under the terms of the financing, the Company issued to the investors 6% Senior Secured Convertible Debentures (the “Debentures”) in the aggregate principal amount of $5.0 million and Series A Common Stock Warrants (the “Series A Warrants”) to acquire 6,756,755 shares at an exercise price of $0.37 per share and Series B Common Stock Warrants (the “Series B Warrants” and together with the Series A Warrants, the “Warrants”) to acquire 10,135,133 shares of the Company’s common stock at an exercise price of $0.43 per share. The Debentures accrue interest at the rate of 6% per annum. The first payment is due April 8, 2006 and additional payments are due on the first of each month thereafter. The Debentures are convertible into shares of the Company’s common stock at the rate of $0.37 per share (subject to adjustments).

 

The Company has ascribed a value at the issuance date, November 8, 2005, of $1,148,648 to the Series A Warrants. The Series A Warrants issued in the financing transaction are free-standing derivatives accounted for under SFAS FAS 133. The fair value ascribed to the Series A Warrants was estimated on the commitment date using the Black-Scholes-Merton pricing model with the following assumptions:

 

Stock price of $0.45;

 

Exercise price of $0.37;

 

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Contractual term of 0.7 years;

 

Volatility of 92.04%;

 

Expected yield of 0%; and

 

Risk-free interest rate of 4.51%.

 

The Black-Scholes-Merton model resulted in a fair value of $0.17 and therefore a warrant liability in the amount of $1,148,648 was recorded on November 8, 2005 as a credit to ‘warrant liability’ in the Company’s Balance Sheet. The fair value of the Series A Warrants was subsequently revalued to $675,676 at December 31, 2005 using the Black-Scholes-Merton model. This change in value was reflected in the Company’s consolidated Statement of Operations.

 

The Company has ascribed a value at the issuance date, November 8, 2005, of $4,155,405 to the Series B Warrants. The Series B Warrants issued in the financing transaction are free-standing derivatives accounted for under SFAS 133. The fair value ascribed to the Series B Warrants was estimated on the commitment date using the Black-Scholes-Merton pricing model with the following assumptions:

 

Stock price of $0.45;

 

Exercise price of $0.43;

 

Contractual term of 5.0 years;

 

Volatility of 145.04%;

 

Expected yield of 0%; and

 

Risk-free interest rate of 4.51%.

 

The Black-Scholes-Merton model resulted in a fair value of $0.41 for the Series B Warrants and therefore a warrant liability in the amount of $4,155,405 was recorded on November 8, 2005 as a credit to ‘warrant liability’ in the Company’s Balance Sheet. The fair value of the Series B Warrants was subsequently revalued to $2,939,189 at December 31, 2005 using the Black-Scholes-Merton model. This change in value was reflected in the Company’s consolidated Statement of Operations.

 

The $5,000,000 face amount of the Debentures was stripped of its conversion feature due to the accounting for the conversion feature as a derivative, which was recorded using the residual proceeds method, whereby any remaining proceeds after allocating the proceeds to the Warrants and conversion option would be attributed to the debt. Since the combined fair values of the Warrants and the conversion option at issuance of $10,037,348 was in excess of the total proceeds on the transaction, the debt was recorded at a net zero value. As a result, the Company recorded the amount of the value ascribed to the conversion feature and the Warrants that exceeded proceeds from the financing of $5,000,000 as interest expense in the Company’s consolidated Statement of Operations. This resulted in a charge of $5.037 million to interest expense leaving a net debt discount value of $5 million. The debt discount of $5 million is being accreted and recognized as interest expense from the date of issuance to the stated redemption date using the effective yield method.

 

The values ascribed to the Warrants and conversion feature of the Debentures follow the guidance of the EITF Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,” EITF 00-19: “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” and ETIF Issue No. 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments” of the FASB’s Emerging Issues Task Force. The debt discount from the Warrants and conversion feature of the Debentures is amortized to expense over the life of the Debentures or upon earlier conversion of the Debentures using the effective interest method. As of December 31, 2005, the Company had amortized to expense approximately $1.8 million of the debt discount and revaluation of the warrant liability, $1.5 million of the conversion feature and approximately $381,000 in

 

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amortization of the debt discount and related fees. The balance due under the Debentures is shown net of the remaining unamortized discount on the accompanying consolidated balance sheet.

 

If the aggregate principal amount owing under the Debentures is converted, the Company will issue 17,125,609 shares, which may be adjusted pursuant to the reset provisions in the Debentures, of its common stock. If the Debentures are not converted, the first payment of principal and accrued but unpaid interest will be due on April 8, 2006 and additional payments will be due on the first of each month thereafter with the final payment due on November 8, 2007. The Company may pay accrued interest in cash or in shares of Company common stock, if the daily volume weighted average price of the Common Stock is equal to or greater than 115% of the conversion price on the ten trading days prior to the interest payment. The Company does not currently intend to pay accrued interest with shares of its common stock.

 

The Series A Warrants expire on July, 1, 2006 and the Series B Warrants expire on May 8, 2011. The Company may call the Series A Warrants if the Company’s common stock trades at 150% of the Series A Warrant exercise price or above for 10 consecutive trading days after the date that is 10 days following the effectiveness of the registration statement providing for the resale of the shares issued upon the conversion of the Debentures and exercise of the Warrants (December 21, 2005). The Company may call the Series B Warrants if the Company’s common stock trades at 250% of the Series B Warrant exercise price or above for 10 consecutive trading days after the date that is 10 days following the effectiveness of the registration statement providing for the resale of the shares issued upon the conversion of the Debentures and exercise of the Warrants (December 21, 2005). The Company will receive proceeds of approximately $2,499,999 for the Series A Warrants and $4,458,607 for the Series B Warrants if all of the Warrants are exercised.

 

The Company also was required to file a registration statement providing for the resale of the shares that are issuable upon the conversion of the Debentures and the exercise of the Warrants. Such registration statement was filed on December 8, 2005, and was declared effective on December 21, 2005. This registration statement on Form S-1 will need to be updated to maintain effectiveness pursuant to the rule promulgated by the SEC.

 

Our total commitments on our operating and capital leases as of September 30, 2005, were as follows (in thousands):

 

Year Ending September 30


   Operating
Leases


   Capital
Leases


 

2006

   $ 1,189    $ 222  

2007

     568      21  

2008

     5      —    

2009

     —        —    
    

  


Total minimum lease payments

   $ 1,762      243  
    

        

Less: amount representing interest

            (8 )
           


Present value of minimum lease payments

            235  

Less: current portion of capital lease obligations

            (490 )
           


Long-term capital lease obligations

          $ (255 )
           


 

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

 

The Company’s independent auditors included a going concern qualification in connection with the issuance of their report of independent auditors in respect of our consolidated financial statements for our fiscal year

 

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ending September 30, 2005. The Company has incurred substantial losses and has experienced negative cash flow since inception and has an accumulated deficit of $ 207.3 million at December 31, 2005. The Company has therefore prepared its consolidated financial statements on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

 

Beginning in August 2001, the Company instituted programs to reduce expenses including reducing headcount from 144 employees at the end of July 2001 to 56 employees at the end of December 2003 and reducing employees’ salaries by 10 percent. In September 2002 the Company relocated its headquarters which reduced rent expense and canceled its Directors and Officers Liability Insurance policy which reduced insurance expense (although the Company subsequently obtained Directors and Officers Liability Insurance during the year ended September 30, 2005). These actions resulted in significant cost savings in 2003. The Company reduced its cash used in operating activities from approximately $13 million in 2002 to approximately $4 million in 2003. However, for the nine months ended September 30, 2004, cash used in operating activities increased to $9.1 million and for the year ended September 30, 2005 the Company used $9.8 million in cash. At the end of December 2005, the Company had 63 employees. For the three months ended December 31, 2005, the cash used by the Company in operating activities was $4.4 million.

 

We, as well as certain of our directors and current and former officers have been named as defendants in certain legal proceedings described in this prospectus. We do not have third party insurance coverage for either the costs of defending these legal proceedings, including the costs of possible indemnification claims by the individual named defendants, or any potential settlement payments. The costs of defending or settling these legal proceedings will likely be significant. At this time, other than the $1.8 million that was accrued for the legal settlement that was reached on July 11, 2005, we are not able to accurately estimate the costs of the defense or of a potential settlement, but we believe that these costs may have a material adverse effect on our cash balances and may be another factor requiring the Company to raise additional funds.

 

During fiscal 2004, warrants were exercised which resulted in us receiving proceeds totaling approximately $2.3 million. In addition, in August 2004 we raised $5.0 million through a financing. In March 2005, we completed a private placement which resulted in gross proceeds of $4.4 million. In connection with this private placement we sold 4,833,335 shares of common stock at a price of $0.90 per share and issued warrants to purchase up to 966,667 shares of common stock with an exercise price of $1.25 per share. At September 30, 2004 and September 30, 2005, we had working capital of $6.8 million and $0.4 million, including unrestricted cash of $6.6 million and $0.7 million respectively. At December 31, 2005, the Company had negative working capital of $3.4 million, including unrestricted cash of $1.7 million.

 

On August 4, 2005, we entered into a credit agreement with a financial institution for a one-year credit facility. The agreement provided advances up to $6 million of eligible securities at a 60 percent advance rate, such that the aggregate principal amount of the advances outstanding at any time may not exceed $3.6 million. We did not draw down any amount from the available credit facility and agreed as part of our November Financing (i) not to draw any amounts from the facility and (ii) by January 6, 2005 either to terminate the facility or to enter into an inter-creditor agreement to effect the subordination of the facility to the Debentures. Accordingly, on December 13, 2005, we terminated the facility.

 

We will need to raise additional funds to finance our activities through public or private equity or debt financings, the formation of strategic partnerships or alliances with other companies or through bank borrowings with existing or new banks. We may not be able to obtain additional funds on terms that would be favorable to our stockholders and us, or at all. In such instance, we will take measures to reduce our operating expenses, such as reducing headcount or canceling selected research and development projects. Additionally, pursuant to the terms of the November Financincg, we are prohibited from filing any other registration statements (except for amendments to registration statements already filed) until March 22, 2006 (this provision has been waived by the investors with respect to this registration statement), except in connection with employee stock benefit plans, upon exercise or conversion of outstanding securities and pursuant to acquisitions or other strategic transactions

 

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that are not primarily for the purpose of raising additional capital. We are further prohibited, pursuant to the terms of our February 2005 financing, from engaging in further equity financings in which we issue stock or stock equivalents at an effective price less than $0.315 per share without the prior consent of the investors in the February 2006 financing. We are also subject to certain cash penalties payable to the selling stockholders under the terms of our the March 2005 private placement, our November 2005 Financing and our February 2006 financing under certain circumstances relating to the timely filing, effectiveness and maintenance of effectiveness of registration statements contemplated by the respective financing agreements. Our future is dependent upon obtaining sufficient additional financing as needed to fund current working capital needs and future growth, and ultimately on achieving profitability, and we cannot be certain that any such financing will be available on acceptable terms or at all. We are also reducing inventory levels and creating what we believe to be sustainable unit volume increases with many of our customers which should allow us to increase revenues and reduce manufacturing costs; however, we cannot assure that the unit volume increase with our customers will in fact be sustainable or that our revenue will increase or our manufacturing costs will decrease.

 

In addition, the Debentures we issued on November 8, 2005 have a reset provision whereby the conversion prices will be reset in the event we (i) effect a reverse stock split and/or (ii) have our common stock delisted from the Nasdaq Capital Market. When we were delisted from the Nasdaq Capital Market effective at the opening of business on December 8, 2005, the Debenture conversion price was subject to reset on February 6, 2006. On February 6, 2006, the volume weighted average price of our common stock for the 10 trading days preceding such reset was greater than the then current conversion price, and therefore no reset occurred.

 

If we cannot raise sufficient additional capital, it would adversely affect our ability to achieve our business objectives and to continue as a going concern. The Company’s independent auditors have included a going concern qualification in connection with the issuance of the report of independent auditors included in this document in respect of our consolidated financial statements for our fiscal year ending September 30, 2005. Additionally, the Company’s independent auditor has identified a number of material weaknesses in our internal accounting controls over financial reporting. As a result, we have received an adverse attestation from our independent auditors regarding Sarbanes-Oxley Section 404 compliance. These conditions may also adversely affect our ability to raise additional financing and to conduct our business.

 

Recent Accounting Pronouncements

 

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs—an amendment of ARB No. 43, Chapter 4,” or “SFAS 151.” SFAS 151 amends ARB 43, Chapter 4 to clarify that “abnormal” amounts of idle freight, handling costs and spoilage should be recognized as current period charges. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

In December 2004, the FASB issued SFAS No. 153 “Exchanges of Non-monetary Assets—an amendment of APB opinion No. 29,” or SFAS 153. SFAS 153 clarifies that exchanges of non-monetary assets should be measured based on the fair value of the assets exchanged, with a general exception for exchanges that have no commercial substance. SFAS 153 is effective for non-monetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

In March 2005, the FASB issued FSP No. 46(R)-5, “Implicit Variable Interests under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities” (FSP 46(R)-5), which provides guidance for a reporting enterprise on whether it holds an implicit variable interest in a variable interest entity (VIE) or potential VIE when specific conditions exist. FSP 46(R)-5 became applicable to the Company in the quarter ended June 30, 2005. FSP 46(R) had no impact on the Company’s consolidated results of operations and financial condition as of September 30, 2005.

 

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In March 2005, the FASB issued FIN 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (FIN 47), which requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective for fiscal years ending after December 15, 2005. The Company is currently evaluating the effect that the adoption of FIN 47 will have on the Company’s consolidated results of operations and financial condition, but does not expect it to have a material impact.

 

In May 2005, the FASB issued SFAS No. 154 “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20, and FASB Statement No. 3.” (SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 31, 2005. We do not anticipate that the adoption of this standard will have a material impact on our consolidated financial statements.

 

In February 2006, the FASB decided to move forward with the issuance of a final FSP FAS 123R-4 Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon the Occurrence of a Contingent Event. The guidance in this FSP FAS 123R-4 amends paragraphs 32 and A229 of FASB Statement No. 123R to incorporate the concept articulated in footnote 16 of FAS 123R. That is, a cash settlement feature that can be exercised only upon the occurrence of a contingent event that is outside the employee’s control does not meet the condition in paragraphs 32 and A229 until it becomes probable that the event will occur. Originally under FAS 123R, a provision in a share-based payment plan that required an entity to settle outstanding options in cash upon the occurrence of any contingent event required classification and accounting for the share based payment as a liability. This caused an issue under certain awards that require or permit, at the holder’s election, cash settlement of the option or similar instrument upon (a) a change in control or other liquidity event of the entity or (b) death or disability of the holder. With this new FSP, these types of cash settlement features will not require liability accounting so long as the feature can be exercised only upon the occurrence of a contingent event that is outside the employee’s control (such as an initial public offering) until it becomes probable that event will occur. The guidance in this FSP shall be applied upon initial adoption of Statement 123(R). An entity that adopted Statement 123(R) prior to the issuance of the FSP shall apply the guidance in the FSP in the first reporting period beginning after February 2006. Early application of FSP FAS 123R-4 is permitted in periods for which financial statements have not yet been issued. The Company does not anticipate that this new FSP will have any material impact upon its financial condition or results of operations.

 

In February 2006, the FASB issued SFAS 155 “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140”. This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This Statement:

 

  a. Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation

 

  b. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133

 

  c. Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation

 

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  d. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives

 

  e. Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.

 

This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated under paragraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period for that fiscal year. Provisions of this Statement may be applied to instruments that an entity holds at the date of adoption on an instrument-by-instrument basis. The Company will be evaluating the impact of SFAS 155.

 

In December 2004, the FASB issued and made effective, two Staff Positions (FSP) that provide accounting guidance on how companies should account for the effect of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. In FSP FAS 109-1, “Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,” the FASB concluded that the special tax deduction for domestic manufacturing, created by the new legislation, should be accounted for as a “special deduction” instead of a tax rate reduction. As such, the special tax deduction for domestic manufacturing is recognized no earlier than the year in which the deduction is taken on the tax return. FSP FAS 109-2, “Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,” allows additional time to evaluate the effects of the new legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying FASB Statement No. 109. The Company does not anticipate that this legislation will impact its results of operations or financial condition.

 

Quantitative and Qualitative Disclosure About Market Risk

 

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk of loss. Some of the securities that we may acquire in the future may be subject to market risk for changes in interest rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalents and short-term investments in a variety of securities, which may include commercial paper, money market funds, government and non-government debt securities. We manage the sensitivity of our results of operations to these risks by maintaining a conservative portfolio, which is comprised solely of highly-rated, short-term investments. We do not hold or issue derivative, derivative commodity instruments or other financial instruments for trading purposes. Currently we are exposed to minimal market risks. Due to the short-term and liquid nature of our portfolio, if interest rates were to fluctuate by 10 percent from rates at December 31, 2005 and December 31, 2004, our financial position and results of operations would not be materially affected.

 

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BUSINESS

 

We are a fabless semiconductor company that focuses on providing highly efficient power amplification to the digital media consumer electronics and communications markets. We design and sell digital amplifiers based on our proprietary technology, called Digital Power Processing®, which enables us to provide significant performance, power efficiency, size and weight advantages over traditional amplifier technology. Our digital amplifiers are branded “Class-T®” and combine a switching mode approach that generates high fidelity sound with low distortion and considerably lower heat dissipation than Class-AB amplifiers. We target and provide digital amplifiers for three primary markets where signal fidelity and power efficiency are important: Consumer and PC Convergence, Digital Subscriber Line, or DSL, and Wireless. Within the Consumer and PC Convergence market, we target multiple market segments, which include consumer audio applications such as 5.1-7.1 channel home theater systems, flat panel televisions, personal computers, mini/micro component stereo systems, cable set-top boxes and gaming consoles, automotive audio applications such as in-dash head units and trunk amplifiers and professional audio applications such as audio distribution systems and pro-audio amplifiers. We are currently offering digital amplifiers in the form of line drivers for use in DSL equipment. We also have a research and development program aimed at developing amplifiers for digital wireless handsets and base stations to increase talk time and battery life and improve overall power efficiency.

 

We were incorporated in California in July 1995, and reincorporated in Delaware in July 2000. We became a public reporting company in August 2000. On November 14, 2004, we changed our fiscal year-end from December 31 to September 30, effective as of September 30, 2004. Our principal executive office is located at 2560 Orchard Parkway, San Jose, CA 95131. Our telephone number is (408) 750-3000, and our Internet home page is located at www.tripath.com; however, the information in, or that can be accessed through, our home page is not part of this prospectus.

 

Markets and Products

 

We develop and supply digital amplifiers for three primary markets: Consumer and PC Convergence, DSL and Wireless. Within the Consumer Electronics market, we target the home-theater, television, professional and automotive audio market segments. Within the DSL market, we have recently begun offering single and dual channel line driver products. Within the Wireless market, we have a research and development program aimed at developing a family of amplifier products for use in wireless handsets, also known as Radio Frequency, or RF, Power Amplifiers.

 

Consumer and PC Convergence

 

We provide a broad range of digital audio amplifiers based on Class-T and our Digital Power Processing, or DPP®, technology. Manufacturers are incorporating our digital audio amplifiers in a diverse set of applications, including 5.1-7.1 channel home theater systems, flat panel televisions, automotive head units, professional amplifiers, DVD and A/V receivers, mini/micro component stereo systems, network media players and accessory speakers systems for MP3 players and for portable-music-player docking stations.

 

The key factors that differentiate our products are the broad range of power levels, the input format to the amplifier and the level of integration included in our products. We augment our products with applications support that includes reference designs, evaluation kits and consulting services.

 

Because of the broad range of product offering we have in our digital amplifiers, we have created specific products to appeal to applications such as DVD and A/V receivers as well as pro-audio amplifiers. Our proprietary technology helps realize clear sound, almost half the energy consumption of conventional professional amplifiers and natural heat dissipation without a cooling fan.

 

Digital amplifiers require three major components; controller, FET driver, and output FETs. These three components can be integrated together on one die, or separate die in common packages, or in discrete packages,

 

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depending on the process and power requirements. The controller, sometimes called a processor, can be analog or digital input and encodes the signal for amplification. The FET driver scales the output voltage to the appropriate level for the output. The output FETs provide the output current to the speaker. A “chipset” refers to a set of separately packaged products that include all three of the components.

 

Package configurations offered by Tripath:

 

     Controller

   Driver

   FET

Integrated Amplifier

        

Amplifier Driver

          

Power Stage

          

Processor

            

FET Driver

            

 

The output power of an integrated product or chipset is determined by the driver and FET portions and is depended on the power supply, load impedance, and other factors. For comparison reasons, the listings below give the maximum power generated in a typical application. Several of the products can be driven above the ratings given. Currently our customer’s applications range from less then 10 Watts to over 2000 Watts. This is the broadest range in the industry.

 

We offer controllers with both digital and analog inputs. The analog products are included as part of chipsets along with various power stages. We currently offer 2 parts with digital input format, the TCD6000 and TCD6001. For both of the controllers, the digital content is encoded in a format that is specified by the I2S standard.

 

Automotive Audio Amplifiers

 

Because of their ability to decrease the size and weight of audio systems and lower heat dissipation, our products can be used in applications in automotive audio systems where these issues are critical. Our proprietary technology allows products to generate high fidelity sound with significantly lower heat dissipation making it ideal for compact design applications. We currently offer products specifically targeted for automotive applications such as in-dash head units and trunk amplifiers.

 

Automotive head units from Panasonic, introduced this year, that are powered by Tripath amplifiers currently offer approximately double the power output of previously available units. The new units offer 35 Watts (based on CEA2006 spec) versus typical A/B units that generally offer 15 to 20 Watts.

 

Products currently available for the automotive audio market are listed below.

 

TA2041A

   Integrated Amplifier    35 Watts (max CEA2006 specification)

TAA4100

  

Integrated Amplifier

  

65 Watts (max CEA2006 specification)

TPS4070

  

Power Stage

  

35 Watts (max CEA2006 specification)

TPS4100

  

Power Stage

  

65 Watts (max CEA2006 specification)

TCD6001

  

Digital Controller

    

 

Television Audio Amplifiers

 

Flat panel televisions typically require small enclosures and low heat dissipation, which are both strengths of Tripath’s products. This year we introduced the TAA2008, a version of our popular TA2024. The new TAA2008 is smaller and less expensive than its predecessor and offers improved click and pop reduction.

 

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Products currently available for the television market (stereo, single supply, bridged output) are listed below.

 

TAA2008

   Integrated Amplifier    12 Watts (6 ohm, 10% THD+N)

TA2024B

   Integrated Amplifier    15 Watts (4 ohm, 10% THD+N)

TA2021B

   Integrated Amplifier    23 Watts (4 ohm, 10% THD+N)

 

Home Theater Audio Amplifiers

 

Our amplifiers allow home theater makers to fit more channels into smaller space without sacrificing sound quality. OEMs have used our products to produce compact all-in-one DVD receivers with high power and exceptional sound quality. We have 4 products for home theater based on our CMOS driver technology (TDA2125A, TDA2075A, TPD2125 and TPD2075).

 

Products currently available for the home theater market (various configurations) are listed below.

 

TA2022

   Integrated Amplifier    100 Watts (4 ohm, 1% THD+N)

TDA2125A

  

Amplifier Driver

  

150 Watts (8 ohm, 0.1% THD+N)

TDA2075A

  

Amplifier Driver

  

75 Watts (8 ohm, 0.1% THD+N)

TPD2125

  

FET Driver

  

150 Watts (8 ohm, 0.1% THD+N)

TPD2075

  

FET Driver

  

75 Watts (8 ohm, 0.1% THD+N)

TCD6000

  

Digital Controller

    

TK2019

  

Chipset

  

20 Watts (4 ohm, 10% THD+N)

TK2050

  

Chipset

  

60 Watts (8 ohm, 10% THD+N)

TK2051

  

Chipset

  

60 Watts (8 ohm, 10% THD+N)

TK2070

  

Chipset

  

75 Watts (4 ohm, 10% THD+N)

TK2150

  

Chipset

  

200 Watts (6 ohm, 10% THD+N)

 

Professional and Audiophile Audio Amplifiers

 

The high power efficiency and fidelity of Class-T and DPP are attractive to both professional and audiophile equipment makers.

 

Products currently available for the professional and audiophile market are listed below.

 

TK2350

   Chipset,    300 Watts (4 ohm, 10% THD+N)

TDA2500

   Amplifier Driver    500 Watts (12 ohm, 0.5% THD+N)

TA0105

   Amplifier Driver    500 Watts (4 ohm, 0.02% THD+N)

 

DSL Line Driver Amplifiers

 

Our DPP® technology allows us to produce highly linear amplifiers for line cards that use power more efficiently than traditional amplifiers with conventional architectures. DSL amplifiers are often called line drivers. Because our line drivers are more power efficient, they eliminate the heat sink and other electronic components associated with traditional line drivers. As a result, our line drivers can be smaller than traditional line drivers. In addition, their efficiency makes them a more attractive solution for DSL service providers because the power budgeted for the equipment in such service providers’ central offices is fixed.

 

Our initial product is a line driver for use in the Asymmetric DSL, or ADSL, market. ADSL, a popular form of DSL technology, is designed to allow greater data rates from the central office to the subscriber than from the subscriber to the central office. This means that typical users will be able to download data faster than they can send data, which is suitable for most residential users. In February 2001, we announced our entry into the ADSL

 

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chipset market with a new family of central office ADSL line drivers. These new products offer full reach and data rate capability and can reduce heat dissipation substantially versus conventional line drivers. Our line driver configurations feature:

 

    power consumption of approximately 680mW per channel

 

    support for full rate and G. LITE data rates

 

    low distortion specifications

 

    low power mode

 

    digitally programmable gain

 

    small footprint package

 

Our DSL line drivers offer DSL service providers the following benefits:

 

    Higher Port Density. Our line drivers enable our customers to increase the number of subscriber lines given fixed power and space constraints. This allows DSL service providers to achieve higher port density.

 

    Increased Signal Reach and Connection Speed. The distance a signal can travel with an effective usefulness is known as signal reach, and the speed at which data can be transferred is known as connection speed. Intermodulation Distortion, or IMD, is a measure of linearity and indicates how well an amplifier can reduce the impact of undesirable frequencies which are produced in the transmission process. Our line drivers, due to their linearity, can more accurately reproduce the signal inputs, allowing for improvements in output signal reach and connection speed to the consumer.

 

The following table provides additional information concerning the specifications of our currently available DSL line drivers.

 

Product


   Power
Consumption
(milliwatts/channel)


  

Application


TLD4012 Single channel family

   680mW    Central office ADSL line driver

TLD4021 Dual channel family

   500mW    Central office ADSL line driver

 

RF/Wireless Power Amplifiers

 

Within the wireless market, we have a research and development program aimed at developing a family of amplifier products for use in wireless handsets, also known as radio frequency, or RF, power amplifiers. Our expertise in the development of highly linear and energy efficient circuits has allowed us to develop an amplifier architecture which we believe is well-suited for use in digital handsets, base stations and other wireless products. The initial targeted market is for cellular phones that utilize a digital transmission method known as Code Division Multiple Access, or CDMA. Linearity is important to this technology because CDMA uses a complex signal transmission method that requires more accurate reception and reproduction. Additionally, we believe our DPP® technology could provide significant improvements to the design of cellular phones in terms of talk-time, data connection time and battery size, which are all dependent on the efficiency of the RF Power Amplifier.

 

Core Technology

 

We believe that one of our key competitive advantages is our broad base of patented core technologies, which are comprised of innovative adaptive and predictive signal processing techniques. These processing techniques are derived from algorithms used in communications theories. These unique techniques are derived from a confluence of four primary disciplines in mixed signal circuit design, digital signal processing, or DSP, algorithm development, power semiconductor circuit design and packaging design. We intend to continue to build and improve on these four primary technology foundations as we expand our product reach into other markets and industries.

 

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We have implemented unique processing algorithms in a silicon-based processor which we call a Mixed Signal Processor. The execution speed of these complex algorithms by our Mixed Signal Processor allows us to achieve the required linearity and efficiency in our products. The Mixed Signal Processor functionality is a vital component in the architecture of the products we design.

 

Our core technologies are characterized by four key areas of competency highlighted below:

 

Mixed Signal Circuit Design Expertise

 

We are an innovator in advanced mixed signal circuit design including audio amplifiers, DSL line driver amplifiers and RF Power Amplifiers. We have developed significant intellectual property in our mixed signal circuit designs, which are applicable across multiple market segments. As such, we have demonstrated significant improvements in power efficiency and linearity for audio amplifiers and central office line driver integrated circuits. We are also applying this same core technology to the development of highly linear and highly efficient RF Power Amplifier integrated circuits for incorporation in cellular telephones.

 

DSP Algorithm Expertise

 

We have expertise in developing system applications using our DPP® technology. This includes industry standard designs as well as customer specific systems in the DSL and Consumer and PC Convergence markets. The high efficiency, high quality power processing products that we design require a comprehensive understanding of new and innovative DSP techniques at the system as well as the device level. We will continue to research and improve our DPP® technology.

 

Power Semiconductor Circuit Design Expertise

 

We have developed significant expertise in designing power circuits in semiconductors. This requires a specialized understanding of complex issues, such as thermal effects and reliability related to the control of power.

 

Packaging Design Expertise

 

We have developed significant competency and knowledge regarding packaging requirements for various applications in different markets. Our customers have specific requirements in terms of form factor and package type for their end-use products.

 

Research and Development

 

Our research and development efforts are focused on developing products based on our DPP® technology for high growth markets, such as the consumer audio, DSL and wireless communications markets. As of December 31, 2005, our research and development staff consisted of 43 employees, many of whom have experience across multiple engineering disciplines. For the year ended September 30, 2005, the nine months ended September 30, 2004 and year ended December 31, 2003, our research and development expenses were approximately $7.4 million, $5.5 million, and $6.9 million, respectively.

 

Manufacturing

 

Wafer Fabrication

 

We are able to use independent silicon foundries to manufacture our integrated circuits because our products are manufactured with standard processes. By outsourcing our manufacturing requirements, we are able to focus our resources on design and product engineering.

 

Our operations group closely manages the interface between manufacturing, design engineering and sales. The group provides manufacturing support required for test and product engineering, process and device

 

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engineering, package engineering, reliability, quality assurance and production control. We maintain our organizational structure and quality standards to match with market leading semiconductor manufacturers. We use an online work-in-progress control methodology wherever possible, and maintain close reporting mechanisms with all of our suppliers to ensure that the manufacturing subcontracting process is transparent to our customers.

 

Our key silicon foundries are United Microelectronics Corporation in Taiwan, STMicroelectronics Group in Europe and Renesas Technology (Mitsubishi Electric) in Japan. We work with these companies on a purchase order basis and do not have long term or master supply agreements with any of them. We believe we have adequate capacity to support our current sales levels. We continue to work with our existing foundries to obtain more production capacity and we are actively qualifying new foundries to procure additional production capacity.

 

Our Mixed Signal Processor and high voltage power devices are currently manufactured with Complementary Metal Oxide Semiconductor, or CMOS, and Diffusion Metal Oxide Semiconductor, or DMOS processes using 0.18 or greater micron technology. CMOS and DMOS are industry standard semiconductor manufacturing processes. We continuously evaluate the benefits, on a product by product basis, of migrating to smaller design technologies to reduce costs and improve performance.

 

In September 2003, we announced the introduction of a new breakthrough low cost power stage architecture platform, based on “CMOS” processes, which we refer to as “Godzilla” that can be used across the broad spectrum of audio amplifiers from 10 Watt per channel PC stereo to greater than 150 Watt per channel audio video receivers. We introduced our lower cost “Godzilla” architecture products in January 2004 and began sampling them in certain customers’ products in mid-2004. However, as of December 31, we have not received revenues from these products. Customer adoption of products based upon this new architecture would enable us to reduce our manufacturing costs.

 

In September of 2005 we introduced our new “Trivici” architecture. This architecture is the culmination of more than five years of multi-disciplinary research and development effort aimed at increasing integration of power amplifiers. Modern audio amplifiers can be broken into four distinct blocks: a digital processor, a mixed signal processor, a power driver, and an output power stage. Our Trivici architecture is used for integrating these blocks into a single chip. Certain customers have begun to sample pre-production devices based upon this architecture.

 

Assembly and Test

 

We currently outsource all of our assembly and testing operations to Advanced Semiconductor Engineering, or ASE, in Korea, Malaysia and Taiwan, Hon Hai (formerly AMBIT Microsystems Corporation) in China, Lingsen in Taiwan, ST Microelectronics Group in Malaysia, and ST Assembly Test Services Ltd. in Singapore.

 

Quality Assurance

 

We currently rely on our foundries and assembly subcontractors to assist in the qualification process of our products. We also participate in quality and reliability monitoring through each stage of the production cycle. We closely monitor wafer foundry production, assembly and test manufacturing operations to ensure consistent overall quality, reliability and yield levels. We are also exploring opportunities to obtain ISO 9000 certification.

 

Marketing, Sales and Customers

 

Our marketing strategy is to target existing and potential customers who are industry leaders in the consumer electronics (consumer and PC convergence, automotive and professional audio), DSL communications and wireless communications markets. Currently, our sales and marketing effort is primarily focused on market segments, divided among integrated audio products and module-based driver products, and separately divided among the flat panel TV, home theater, gaming, professional and automotive audio.

 

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We rely on our direct sales force and distributors to sell our products in our target markets. Approximately 89 percent of our total revenues came through distributors for the three month period ended December 31, 2005, compared to 83 percent for the three month period ended December 31, 2004. Approximately 88 percent of our total revenues came through distributors for the year ended September 30, 2005, compared to 78 percent for the nine month transition period ended September 30, 2004. One distributor, Macnica, Inc. and its affiliates, accounted for 55 percent, 53 percent and 41 percent of total revenues for the year ended September 30, 2005, the nine month transition period ended September 30, 2004, and the year ended December 31, 2003, respectively.

 

Our sales headquarters is located in San Jose, California. In addition, we market and sell our products through our regional offices located in Japan and Hong Kong, as well as through independent distributors in Asia, Europe and the United States. We incorporated our regional office in Japan as a wholly-owned subsidiary in January 2001. Our sales force, together with our engineering and technical staff, works closely with customers to integrate our amplifiers into their products. We believe that close working relationships with customers will help us to achieve design wins and ultimately achieve high volume production.

 

End customers for our products are primarily manufacturers of audio electronic components, communications infrastructure equipment and wireless communications equipment. For the three months ended December 31, 2005, three end customers accounted for more than 10 percent of our total revenues, compared with two end customers accounting for more than 10 percent of our total revenues for the three month period ended December 31, 2004. One, three, and three end customers accounted for more than 10 percent of our total revenues for the year ended September 30, 2005, the nine months ended September 30, 2004 and the year ended December 31, 2003, respectively. The customers who accounted for more than 5 percent of our total revenues in 2005 were Sharp, Kyoshin, Beko and Alcatel.

 

For a detailed description of our sales by geographic region, see Note 8 (Segment and geographic information) to our consolidated financial statements for the quarter ended December 31, 2005.

 

Competition

 

We currently compete with a number of larger companies in the consumer audio amplifier market. While our technology offers distinct advantages over the analog approach, we believe that approximately only 2-3 percent of the market has converted to digital audio amplifiers at this time. The primary analog amplifier competitors in the market today are National Semiconductor, Philips Electronics (“Philips”), ST Microelectronics and Texas Instruments. Philips, ST Microelectronics and Texas Instruments are also our major competitors in the digital audio amplifier market. Several other smaller companies also offer digital amplifier products including: D2, Ice Power and Wolfson Microelectronics plc. In addition, a number of companies, such as Cirrus Logic Inc., have announced their intention to enter this market. We have been active in the audio amplifier market since our inception and we believe that we maintain a strong competitive position.

 

In the DSL line driver market, our principal competitors include Analog Devices, Inc., Intersil Corporation, Linear Technology Corporation and Texas Instruments Incorporated. This is a new market for us in which many of our competitors have longer operating histories.

 

We believe that the principal factors of competition in these markets are product capabilities, level of integration, reliability, price, power consumption, time-to-market, system cost, intellectual property, customer support and reputation.

 

In each of these markets, we believe that our main competitive advantages are our product capabilities, low power consumption, high signal fidelity and level of integration. However, many of our competitors are large public companies that have longer operating histories and significantly greater resources than us. As a result, these competitors may compete favorably on factors such as price, customer support and reputation.

 

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Intellectual Property

 

We rely primarily on a combination of patent, copyright, trademark, trade secret and other intellectual property laws, nondisclosure agreements and other protective measures to protect our proprietary technologies and processes. At December 31, 2005, we had 43 issued United States patents and 10 additional pending United States patent applications. Our issued U.S. patents have expiration dates ranging from June 2016 to December 2024. In addition, we had 15 international patents issued and an additional 23 international patents pending. Our issued international patents have expiration dates ranging from June 2017 to March 2021. We expect to continue to file patent applications where appropriate to protect our proprietary technologies. To our knowledge, no patents have been contested by third parties thus far.

 

Employees

 

As of December 31, 2005, we had 63 employees, including 43 employees engaged in research and development, 10 engaged in sales and marketing and 10 engaged in general administration activities. None of our employees are represented by a labor union and we have never experienced a work stoppage. We consider our employee relations to be good.

 

Facilities

 

We lease one facility in San Jose, California, which has approximately 65,000 square feet pursuant to the lease, which expires on March 31, 2007. This facility comprises our headquarters and includes our administration, sales and marketing and research and development departments. We also lease approximately 2,400 square feet of office space outside of Tokyo, Japan for our Japanese sales office. The lease for this space expires on January 31, 2007. We believe that existing facilities are adequate for our needs.

 

Legal Proceedings

 

From time to time, we become subject to various legal proceedings and claims, both asserted and unasserted, that arise in the ordinary course of business. Litigation in general, and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict. An unfavorable resolution of one or more of these lawsuits would materially adversely affect our business, results of operations, or financial condition. In addition, given our financial condition and that we do not have insurance to offset the cost of litigation, the costs of defending one or more of these lawsuits will likely adversely affect our financial condition. We cannot estimate the loss or range of loss that may be reasonably possible for any of the contingencies described and accordingly have not recorded any associated liabilities in our consolidated balance sheets. We accrue legal costs when incurred.

 

SEC Investigation

 

On or about November 9, 2004, the SEC requested that we voluntarily produce documents responsive to certain document requests in the investigation entitled In the Matter of Tripath Technology, Inc. On or about January 25, 2005, February 14, 2005, and February 16, 2005, the SEC made additional documents requests. On or about March 30, 2005, the SEC issued a subpoena to the Company seeking additional documents. We have produced documents in response to the SEC’s voluntary requests for documents as well as the subpoena. We have cooperated with the SEC in its review of these matters.

 

On February 24, 2005, the SEC, pursuant to Section 20(a) of the Securities Act and Section 21(a) of the Exchange Act, issued a formal order of private investigation to determine whether there have been any violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and Rules 10b-5, 12b-20, 13a-13, 13a-14, 13b2-1 and 13b2-2 thereunder.

 

In a letter dated December 15, 2005, the SEC indicated that the formal investigation of the Company had been terminated and that no enforcement action has been recommended to the Commission.

 

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Federal Securities Class Actions

 

Beginning on November 4, 2004, plaintiffs filed four separate complaints purporting to be class actions in the United States District Court for the Northern District of California alleging that we and certain of our present or former officers and/or directors, Dr. Adya S. Tripathi, David Eichler and Graham Wright, violated Sections 10(b) and 20(a) of the Exchange Act. Plaintiffs purported to represent a putative class of shareholders who purchased or otherwise acquired Tripath securities between January 29, 2004 and October 22, 2004. The complaints contain varying allegations, including that we and the individual defendants made materially false and misleading statements with respect to our financial results and with respect to our business, prospects and operations in the our filings with the SEC, press releases and other disclosures. The complaints seek unspecified compensatory damages, attorneys’ fees, expert witness fees, costs and such other relief as may be awarded by the Court.

 

On December 22, 2004, the Court entered a stipulation and order consolidating all of these complaints and ordering that the defendants need not respond to any of these complaints until after plaintiffs file a consolidated complaint. On January 4, 2005, plaintiffs filed motions for the appointment of lead plaintiff. The Court, by Order dated January 28, 2005, appointed Robert Poteet as the sole lead plaintiff and approved Milberg Weiss Bershad & Schulman LLP as lead counsel.

 

On July 11, 2005, the Company entered into a Stipulation and Settlement Agreement (the “Stipulation”) which was filed with the Court on July 12, 2005. The settlement class consists of all persons who purchased the securities of Tripath between January 29, 2004 and June 13, 2005, inclusive. Under the terms of the Stipulation, the parties agreed that the class action will be dismissed in exchange for a payment of $200,000 in cash by Tripath and the issuance of 2.45 million shares of Tripath common stock which shall be exempt from registration pursuant to Section 3(a)(10) of the Securities Act. The Stipulation remains subject to the satisfaction of various conditions, including without limitation final approval of the Stipulation by the Court, including a finding that the 2.45 million shares of Tripath common stock to be issued are exempt from registration pursuant to Section 3(a)(10) of the Securities Act. On October 20, 2005, the Court entered a Preliminary Order for Notice and Hearing in Connection with Settlement Proceedings.

 

The hearing for final approval of the settlement currently is scheduled for April 11, 2006. Approximately $1.8 million has been accrued for this matter.

 

Derivative Shareholder Litigation

 

On December 7, 2004, plaintiff Mildred Lyon filed a purported derivative action in Santa Clara Superior Court against us and the following present or former officers and/or directors of the Company, Dr. Adya S. Tripathi, David P. Eichler, Graham K. Wright, A.K. Acharya, Andy Jasuja and Y.S. Fu. This complaint appears to be based upon the same facts and circumstances as the federal class actions and makes the following claims: violation of Section 25402 of the California Corporations Code, breach of fiduciary duty and misappropriation of information, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment. On this basis, the complaint seeks unspecified compensatory damages, treble damages under Section 25502.5(a) of the California Corporations Code, extraordinary equitable and/or injunctive relief, restitution and disgorgement, attorneys’ fees, expert witness fees, costs, and such other relief as may be ordered by the Court.

 

On December 27, 2004, the Court entered a stipulation and order extending the time for us to respond to the complaint to February 23, 2005. On February 16, 2005, the Court entered an order further extending the time for us to respond to the complaint to March 25, 2005. On March 10, 2005, the court ordered that the individual defendants shall have through and including April 25, 2005 to file any motions to quash and/or dismiss for lack of personal jurisdiction, and that all defendants shall have thirty (30) days from the date the court issues a ruling on any motions to quash and/or dismiss for lack of personal jurisdiction to respond to the complaint, or in the event that no such motions are brought, extended the time for all defendants to respond to the complaint to April 25, 2005.

 

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On April 4, 2005, the Court ordered that all deadlines shall be stayed for Defendants filing any motions to quash and/or dismiss for lack of personal jurisdictions, or otherwise respond to the Complaint, until such date as the parties mutually designate to the Court for the Court’s approval.

 

A Case Management Conference is scheduled for March 28, 2006 before the Court. The parties currently are engaged in settlement discussions.

 

Langley Securities Fraud Litigation

 

On or about June 2, 2005, plaintiff Langley Partners, L.P. (“Langley”) filed a complaint in the United States District Court for the Southern District of New York alleging claims against the Company, Dr. Adya Tripathi, the Company’s President and Chief Executive Officer, and David Eichler, the Company’s former Chief Financial Officer. Langley alleges that it entered into a stock purchase agreement with Tripath on or about August 2, 2004 in which Langley purchased 1 million shares of Tripath common stock at a purchase price of $2.00 per share. Langley also alleges that it consented to the receipt of the Company’s Prospectus dated August 2, 2004 and the accompanying Prospectus dated June 1, 2004 which specifically incorporated certain of the Company’s filings with the SEC from March through July 2004. The complaint generally alleges that the Company and the individual defendants made materially false and misleading statements with respect to the Company’s financial results and with respect to its business, prospects, internal accounting controls and design wins on Godzilla products in the Company’s filings with the SEC, press releases and other documents. The complaint alleges claims against the Company and the individual defendants for violations of Sections 10(b) and 20(a) of the Exchange Act, fraud, breach of contract, unjust enrichment and money that had been and received, rescission and violations of Sections 11 and 15 of the Securities Act. On this basis, the complaint seeks unspecified compensatory damages and restitution in an amount in excess of $2 million, rescission of the purchase agreement and a return of $2 million, unspecified punitive damages, costs and such other relief as may be awarded by the Court.

 

On October 6, 2005, the Court entered an Order granting the Company’s motion to transfer this action from the Southern District of New York to the United States District Court for the Northern District of California. On October 18, 2005, the action was transferred to the Northern District of California.

 

On December 9, 2005, the Company and the individual defendants filed a motion to dismiss the complaint in its entirety which was taken under submission by the Court on February 16, 2006. The Court has not yet entered a decision with respect to this motion. A case management conference is scheduled before the Court on March 31, 2006.

 

Changes in and Disagreements with Accountants

 

As previously disclosed in our current report on Form 8-K dated October 18, 2004 and filed on October 22, 2004, in October 2004, our former independent registered public accountants, BDO Seidman LLP, or BDO, provided our Audit Committee with a letter citing what BDO asserted are two “material weaknesses” over our internal financial controls: one regarding the lack of effectiveness of our Audit Committee and the other regarding the lack of controls in place to estimate distributor returns in accordance with SFAS No. 48. Following discussions with our employees, representatives of BDO further orally advised us that BDO had concerns regarding the appropriate accounting for approximately $1.3 million of product that, upon our inquiries, one of our distributors, Macnica, or the Distributor, reported had been returned to the Distributor by the Distributor’s customers, or the Product Return. In response to both the letter and the verbal comments, the Audit Committee instructed our then-Chief Financial Officer to investigate this matter and report the findings to the Audit Committee. As a result of the litigation matters referenced above, we retained outside litigation counsel to represent us in responding to the aforementioned complaints. In addition, the Audit Committee and the then-Chief Financial Officer directed litigation counsel to further conduct an internal investigation into the verbal concerns raised by BDO regarding the Product Return. Separately, the Audit Committee, with the assistance of our then-Chief Financial Officer investigated BDO’s assertion regarding the lack of controls in place to estimate distributor returns.

 

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The Audit Committee received an initial report from our litigation counsel on findings of the internal investigation on January 21, 2005 and requested additional investigation by litigation counsel. On January 25, 2005, litigation counsel made a supplemental report on the findings of the internal investigation to date. Following the presentation of such report, including discussion of the findings of the forensic accountant hired by the litigation counsel with the approval of the Audit Committee, the Audit Committee concluded that our Country Manager for the Japan Sales Office (who is no longer employed with us) agreed in an arrangement outside the formal paperwork of the transactions underlying the Product Return that the Distributor could return the products back to us at the Distributor’s discretion.

 

The Audit Committee investigation and discussion included a review of our compliance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 “Revenue Recognition in Financial Statements, or SAB 104, as applied to the circumstances surrounding the Product Return. Under SAB 104, a requirement for revenue recognition is that all of the following criteria must be met: (1) there is persuasive evidence that an arrangement exists, (2) delivery of goods has occurred, (3) the sales price is fixed or determinable, and (4) collectibility is reasonably assured. In addition, pursuant to our revenue recognition policy, for sales to distributors, we defer recognition of revenue until such time that the distributor sells products to its customers based upon receipt of point-of-sales reports from the distributor. The internal investigation revealed that approximately $1.4 million of a sale of our product to the Distributor did not meet the foregoing criteria because our former employee had agreed that the Distributor could return the product at the Distributor’s discretion, which forms the basis of the Restatement. This former employee had on this occasion agreed to a term of sale that was outside of our standard practices and was not referenced in the documentation related to the sale submitted to our finance department. Given the discovery of this arrangement for the Distributor to return the product, the Audit Committee concluded on January 25, 2005 that we should restate certain financial information that was previously reported in our Form 10-Q for the quarter ended June 30, 2004 filed with the Securities and Exchange Commission on August 6, 2004. For more information regarding the Restatement, please see Note 9 of Notes to Consolidated Financial Statements included elsewhere in this prospectus. In addition, the Audit Committee approved certain changes to our internal controls over financial reporting as an additional remedial action in response to the report of our litigation counsel and our forensic accountant and to the report by our Chief Financial Officer.

 

As a result, the Audit Committee concluded on May 5, 2005 that we should restate certain financial information (the “Additional Restatement”) that was previously reported in our Quarterly Reports on Form 10-Q for the fiscal quarters ended March 31, 2004, June 30, 2004 and December 31, 2004 as well as certain financial information for the quarter and transition period ended September 30, 2004 and that was previously reported in our Transition Report. The Additional Restatement was based on the Audit Committee’s conclusion on such date that the Consolidated Balance Sheets as of March 31, 2004, June 30, 2004, September 30, 2004 and December 31, 2004 and the related Consolidated Statements of Operations for the three months ended March 31, 2004, the three and six months ended June 30, 2004, the nine month transition period ended September 30, 2004 and the three months ended December 31, 2004 should no longer be relied upon because of errors in such financial statements.

 

Following receipt of a final report on the internal investigation, the Audit Committee determined that the internal investigation had been completed on June 15, 2005. The internal investigation revealed errors in the Company’s financial statements for 2002 and 2003. Such errors included certain shipments between distributors rather than to end-customers which were not noted on applicable point-of-sales reports, inaccurate shipment dates on certain point-of-sales reports, and inaccurate quantities noted on certain point-of-sales reports. The Company reviewed these errors with reference to the guidelines set forth in SAB 99. Based upon such review, the Company concluded that such errors were immaterial and thus would not result in a restatement of the 2002 or 2003 financial statements.

 

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MANAGEMENT

 

Executive Officers and Directors

 

The following table provides information regarding our directors and executive officers as of December 31, 2005:

 

Name


   Age

  

Position(s)


Dr. Adya S. Tripathi

   53    President, Chief Executive Officer and Chairman of the Board

Mr. A.K. Acharya

   49    Director

Mr. Andy Jasuja

   55    Director

Mr. Y.S. Fu

   57    Director

Mr. Akifumi Goto

   62    Director

Jeffrey L. Garon

   46    Vice President, Financing and Chief Financial Officer

Dr. Naresh C. Sharma

   53    Vice President of Operations

George Fang

   47    Vice President of Sales

 

Dr. Adya S. Tripathi founded Tripath and has served as our President, Chief Executive Officer and Chairman since our inception in 1995. Before founding Tripath, Dr. Tripathi held a variety of senior management and engineering positions with Advanced Micro Devices, Hewlett-Packard, International Business Machines, International Microelectronic Products, National Semiconductor and Vitel Communications. Dr. Tripathi holds Bachelor of Science and Master of Science degrees in Electrical Engineering from Banaras Hindu University in India. He pursued graduate work at the University of Nevada—Reno and the University of California—Berkeley, receiving his doctorate of philosophy in Electrical Engineering from the former in 1984. Dr. Tripathi has also taught at the University of California—Berkeley Extension.

 

Mr. A.K. Acharya has served as a director of Tripath since August 2002. Mr. Acharya is President of HTL Co. Japan Ltd, a distribution company & software development company for semiconductor capital equipment, a position he has held since 1994. Mr. Acharya holds a Bachelor of Technology in Electrical Engineering from the Institute of Technology, Banaras Hindu University in India and a Masters of Technology degree in Electrical Engineering—Control System and Instrumentation from the Indian Institute of Technology, Delhi in India.

 

Mr. Andy Jasuja has served as a director of Tripath since September 2002. Mr. Jasuja is the founder and Chairman of Sigma Systems Group, a provider of service management software for cable companies, a position he has held since 1994. Mr. Jasuja is an information technology professional with 27 years of experience in the software industry. Prior to founding Sigma, Mr. Jasuja spent several years in the banking and telecommunications industries in senior management and consulting roles. Mr. Jasuja holds a Bachelors degree in Electrical Engineering from the Institute of Technology in Varansi, India and a Masters degree in Systems Design Engineering from the University of Waterloo in Canada.

 

Mr. Y.S. Fu has served as a director of Tripath since May 2002. Mr. Fu is Chairman of Invested, Inc, an investment firm focusing on Greater China, a position he has held since 1997. From 1998 until May 2005 Mr. Fu was President of Wyse Technology (Taiwan) Ltd., a server-centric computing company. He was previously President of WK Technology Investment Co., a technology investment firm based in Taiwan. Mr. Fu has also held positions with Logitech Far East Ltd., Qume and Texas Instruments. Mr. Fu has a degree in Mechanical Engineering from Chung-Yuan Christian University and a Masters of Business Administration from West Coast University in California.

 

Mr. Akifumi Goto has served as a director of Tripath since December 2004. Mr. Goto has served as Chairman of SANYO Semiconductor Corporation since November 2002. From February 1993 to January 2002 he served as its President and Chief Executive Officer, and from February 1983 to January 1993, Mr. Goto served as its Executive Vice President. Mr. Goto joined SANYO in January 1978. Mr. Goto received a B.S. in Electrical Engineering from Tamagawa University and his M.B.A. from Santa Clara University.

 

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Mr. Jeffrey L. Garon has served as our Vice President and Chief Financial Officer since February 2005. From November 2003 through February 2005, Mr. Garon was a private investor. From March 1998 through November 2003, Mr. Garon served as Chief Financial Officer, Vice President, Finance and Administration and Secretary of Silicon Storage Technology, Inc., a publicly traded company that designs, manufactures and markets flash memory components. From 1994 to 1998, Mr. Garon served as president and senior operating officer of the Garon Financial Group, Inc., a venture capital and venture consulting firm specializing in start-ups, turnarounds and restarts. From 1993 to 1994, he served as a vice president and chief financial officer of Monster Cable Products, Inc., a leading provider of audio cables and supplies to consumers and the consumer electronic retail channel. Prior to 1993, Mr. Garon held senior financial positions with Visual Edge Technology, Inc., a provider of large format digital imaging systems, Oracle Corporation, Ashton-Tate Corporation and Teledyne Microelectronics. Mr. Garon holds a B.S. in Business Administration Finance from California State University, Northridge and an M.B.A. from Loyola Marymount University.

 

Dr. Naresh C. Sharma has served as our Vice President of Operations since August 2001. Dr. Sharma joined Tripath in 1998 serving as Director of Process Engineering and Development. Prior to joining us, from 1997 to 1998, Dr. Sharma was Director, Foundry FAB Operations at Alliance Semiconductor and from 1992 to 1997, he was Senior Manager, Strategic Fabs at Cirrus Logic. Dr. Sharma has also held various management and engineering positions at Cypress Semiconductor, National (Fairchild) Semiconductor and American Microsystems. He received his Doctorate of Philosophy in Physics from the Indian Institute of Technology (Delhi) in 1978 and his Master of Science in Solid State Physics from the Indian Institute of Technology (Roorkee) in India.

 

Mr. George Fang has served as our Vice President of Sales since February 2005. From March 2004 to February 2005 he served as Vice President of Sales for Europe, Americas and Asia Pacific. Prior to rejoining Tripath in March 2004, from May 2003 to March 2004, Mr. Fang served as a consultant to a couple of companies, including Tripath. From January 2000 to May 2003 he served as the Vice President of Worldwide Sales at PortalPlayer (the iPod chip company). From June 1998 to January 2000 Mr. Fang was at Tripath. Prior to 1998, he held Vice President and Director positions in sales and marketing at OPTi, Oak Technology and Trident Microsystems. Mr. Fang holds a Bachelor of Science degree from UCLA and a Masters of Science degree from Loyola Marymount University.

 

Board of Directors

 

On December 13, 2004, our Board of Directors amended Section 3.2 of our Bylaws to increase the authorized number of directors from four members to five members.

 

There are no family relationships among any of our directors or executive officers.

 

Committees of the Board of Directors

 

The Board of Directors has three standing committees: the Audit Committee, the Compensation Committee and the Nominating Committee.

 

Audit Committee and Audit Committee Financial Expert. Tripath has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Exchange Act. The Audit Committee currently consists of four directors: Messrs. Acharya, Fu, Goto and Jasuja, all of whom are “independent” as independence for Audit Committee members is defined in the Nasdaq listing standards. Mr. Fu serves as Chairman of the committee.

 

The Audit Committee includes at least one independent member who is determined by the Board of Directors to meet the qualifications of an “audit committee financial expert” in accordance with SEC rules, including that the person meets the relevant definition of an “independent director.” Mr. Akifumi Goto is the

 

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independent director who has been determined by the Board of Directors to be an audit committee financial expert. Stockholders should understand that this designation is a disclosure requirement of the SEC related to Mr. Goto’s experience and understanding with respect to certain accounting and auditing matters. The designation does not impose upon Mr. Goto any duties, obligations or liability that are greater than are generally imposed on him as a member of the Audit Committee and the Board, and his designation as an audit committee financial expert pursuant to this SEC requirement does not affect the duties, obligations or liability of any other member of the Audit Committee or the Board.

 

Compensation Committee. The Compensation Committee currently consists of two directors: Messrs. Fu and Acharya, both of whom are “independent” as defined in the Nasdaq listing standards. Mr. Acharya serves as Chairman of the Committee.

 

The Compensation Committee reviews and approves our overall compensation strategy and policies; determines the compensation and terms of employment of our chief executive officer and other executive officers; and recommends to the Board of Directors the types and amount of compensation to be paid to our directors. The compensation committee also administers our common stock option plans. The Compensation Committee did not hold a meeting during 2004 because no changes to the compensation of executive officers were proposed. The Compensation Committee acted by written consent three times during fiscal year 2004. The report of the compensation committee is presented later in this prospectus. The Board of Directors has adopted a written charter for the compensation committee that is available at Tripath’s Corporate Governance Webpage.

 

Nominating Committee. The nominating committee is composed of two directors: Messrs Jasuja and Acharya, both of whom are “independent” as independence for nominating committee members is defined in the Nasdaq listing standards. Mr. Acharya serves as Chairman of the Committee. The Nominating Committee identifies, evaluates and recommends candidates for membership on our Board of Directors and committees thereof and periodically evaluates the performance of the Board of Directors and its committees. The Board of Directors has adopted a written charter for the nominating committee that is available at Tripath’s Corporate Governance Webpage.

 

Compensation Committee Interlocks and Insider Participation

 

No interlocking relationships exist between any member of Tripath’s Board of Directors or Compensation Committee and any member of the Board of Directors or compensation committee of any other company, nor has any such interlocking relationship existed in the past. No member of the Compensation Committee is or was formerly an officer or an employee of Tripath.

 

Director Compensation

 

Our directors did not receive any cash compensation for their services as directors during the year ended September 30, 2005. Our 2000 Stock Plan provides for grants of options to purchase common stock to our directors who are not employees. Our non-employee directors each received a grant of options to purchase 100,000 shares of our common stock for their service during the year ended September 30, 2005. Our non-employee directors did not receive any options to purchase shares of our common stock for participation on any committee of the board of directors on which they served during the year ended September 30, 2005. In addition, our directors are reimbursed for expenses incurred in connection with attending board and committee meetings.

 

Code of Ethics

 

We are committed to maintaining the highest standards of business conduct and ethics. Our Code of Business Conduct and Ethics, or the Code, reflects the business practices and principles of behavior that support this commitment. The Code satisfies SEC rules for a “code of ethics” required by Section 406 of the Sarbanes- Oxley Act of 2002, as well as the Nasdaq listing standards requirement for a “code of conduct.” The Code is

 

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available at Tripath’s Corporate Governance Webpage, and we will post any amendment to the Code, as well as any waivers that are required to be disclosed by the rules of the SEC or the Nasdaq, on Tripath’s Corporate Governance Webpage.

 

Executive Compensation

 

During the year ended September 30, 2005, we paid an aggregate $866,061 in cash compensation to our executive officers named in the Summary Compensation Table, or the Named Executive Officers, as a group.

 

As of September 30, 2005, our directors and Named Executive Officers as a group held options to purchase a total of 2,614,864 shares of common stock, at exercise prices ranging from $0.14 to $12 per share. These options are scheduled to expire on various dates between March 23, 2006 and February 22, 2015.

 

Summary Compensation Table

 

The following table sets forth all compensation awarded to, earned by, or paid to our Chief Executive Officer and the other four most highly paid executive officers, each of whose total cash compensation exceeded $100,000 during the year ended September 30, 2005, the nine months ended September 30, 2004 and the years ended December 31, 2003 and December 31, 2002.

 

          Annual Compensation

    Long Term Compensation

Name and Principal Position


   Year

   Salary ($)

   Bonus ($)

   Other

   

Restricted

Stock
Awards


   

Securities

Underlying
Options


Dr. Adya S. Tripathi

President, Chief Executive Officer and

Chairman of the Board

   2005
2004
2003
2002
   $
$
$
$
324,000
243,000
324,000
348,000
   $
$
$
$
0
0
0
0
   $
$
$
$
0
0
0
0
 
 
 
 
  0
0
322,200
0
 
 
(1)
 
  0
500,000
500,000
200,000

Jeffrey L. Garon (2)

Vice President, Finance and

Chief Financial Officer

   2005    $ 109,378    $ 0    $ 0     0     350,000

Dr. Naresh Sharma

Vice President of Sales

   2005
2004
2003
2002
   $
$
$
$
135,000
101,250
135,000
137,500
   $
$
$
$
0
0
0
0
   $
$
$
$
0
0
0
0
 
 
 
 
  0
0
0
0
 
 
 
 
  0
150,000
125,000
100,000

George Fang (3)

Vice President of Sales

   2005
2004
   $
$
141,833
75,833
    
 
0
0
   $
$
16,000
15,700
(4)
(5)
        150,000
200,000

(1) On April 28, 2003, the Compensation Committee of the Board of Directors approved a grant of 1.8 million shares of restricted stock to Dr. Tripathi pursuant to the 2000 Stock Plan, in part to rectify the previous invalid grant of options to purchase an aggregate of 3.4 million shares. The restricted shares vest as to 50 percent one year after the date of grant and the remainder will vest in full two years after the date of grant. The vesting of the shares accelerates in full upon a change in control of the Company or upon involuntary termination. The value of $322,200 represents the dollar value of the restricted stock award calculated by multiplying the closing market price of the Company’s stock on the date of grant ($0.18) by the number of shares awarded (1.8 million) net of consideration paid ($ 1,800).

 

(2) Jeffrey L. Garon commenced employment with Tripath on February 16, 2005.

 

(3) George Fang commenced employment with Tripath on March 1, 2004 and was promoted to Vice President of Sales February 1, 2005.

 

(4) Includes sales commissions of $10,000 and an automobile allowance of $6,000.

 

(5) Includes sales commissions of $12,200 and an automobile allowance of $3,500.

 

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Stock Option Grants in Last Fiscal Year

 

The following table sets forth information with respect to stock options granted pursuant to our 2000 Stock Plan during the year ended September 30, 2005 to each of the executive officers named in the Summary Compensation Table above.

 

The amounts shown as potential realizable value represent hypothetical gain that could be achieved for the respective options if exercised at the end of the option term. These amounts represent assumed rates of appreciation in the value of our common stock from the fair market value at the date of grant. The 5 percent and 10 percent assumed annual rates of compounded stock price appreciation are mandated by rules of the Commission and do not represent our estimate of projection of the future price of our common stock. Actual gains, if any, on stock option exercises depend on the future performance of the trading price of our common stock. The amounts reflected in the table may not necessarily be achieved.

 

     Individual Grants

    
     Number of
Securities
Underlying
Options
Granted


   Percent of Total
Options Fiscal
Granted to
Employees in
2005 (1)


    Exercise
Price Per
Share


   Expiration
Date


  

Potential Realizable Value

at Assumed Annual Rates

of Stock Price Appreciation
for Option Term


Name


              5%

   10%

Adya S. Tripathi (2)(3)

   0    0.00 %   $ —      —      $ —      $ —  

Jeffrey L. Garon (2)(3) (4)

   350,000    33.18 %   $ 1.15    2/22/15    $ 253,130    $ 641,481

Naresh Sharma (2)(3)(4)

   0    0.0 %   $ —      —        —        —  

George Fang (2)(3)(4)

   150,000    14.22 %   $ 1.15    2/22/15    $ 108,484    $ 274,921

(1) Based on options granted to purchase an aggregate of 1,055,000 shares of common stock to employees during the year ended September 30, 2005 (fiscal 2005). We have never granted any stock appreciation rights.

 

(2) Options may terminate before their expiration upon the termination of optionee’s status as an employee or consultant, the optionee’s death or an acquisition of Tripath.

 

(3) Includes Incentive Stock Options (“ISOs”) and Nonstatutory Options (“NSOs”). To the extent the options are determined to be ISOs, such options have an expiration date of August 11, 2009. To the extent the options are determined to be NSOs, such options have an expiration date of August 11, 2014.

 

(4) Options vest in equal monthly installments over 48 months.

 

Fiscal Year-End Option Values

 

The following table provides information for the Named Executive Officers concerning the number and value of securities underlying exercisable and unexercisable options held as of September 30, 2005.

 

     Number of Securities Underlying
Unexercised Options at
September 30, 2005 (#)


  

Value of Unexercised
In-the-Money Options

at September 30, 2005 ($)


     Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Adya S. Tripathi

   1,370,833    229,167    $ 204,433    $ 0

Jeffrey L. Garon

   0    350,000    $ 0    $ 0

Naresh Sharma

   387,389    196,881    $ 58,405    $ 15,094

George Fang

   91,664    258,336    $ 0    $ 0

 

The values shown for in-the-money options represent the difference between the respective exercise price of outstanding stock options, and $0.68, which is the fair market value of our common stock as of September 30, 2005.

 

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Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values

 

The following table provides information regarding the exercise of stock options during the fiscal year ended September 30, 2005, by the named executive officers, and the value of securities underlying options held by our named executive officers at September 30, 2005.

 

    

Shares
Acquired on

Exercise


  

Value

Realized ($)


  

Number of Securities Underlying
Unexercised Options at

September 30, 2005 (#)


   Value of Unexercised
In-the-Money Options at
September 30, 2005 ($)


           Exercisable

   Unexercisable

   Exercisable

   Unexercisable

Adya S. Tripathi

   0      0    1,370,833    229,167    $ 204,433    $ 0

Jeffrey L. Garon

   0      0    0    350,000    $ 0    $ 0

Naresh Sharma

   13,428    $ 43,670    387,389    196,881    $ 58,405    $ 15,094

George Fang

   0      0    91,664    258,336    $ 0    $ 0

 

Employee Benefit Plans

 

2000 Stock Option Plan

 

The major provisions of the Amended and Restated 2000 Stock Option Plan (the “Stock Plan”) are described below. The following summary is qualified in its entirety by reference to the Stock Plan, a copy of which is attached as Exhibit 10.1 to Tripath’s current report on Form 8-K dated February 24, 2006 filed with the SEC on February 28, 2006.

 

Purpose. The purposes of the Stock Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees, directors and consultants and to promote the success of our business.

 

Eligibility. Stock options and stock awards may be granted to employees, directors and consultants who are providing services to Tripath or any parent or subsidiary of Tripath. Incentive stock options may be granted under the Stock Plan only to our employees (including officers) and employees of our parent or subsidiaries. Our employees (including officers), directors and consultants (including those of our parent or subsidiaries) are eligible to receive nonstatutory stock options under the Stock Plan. Those employees, directors and consultants who receive an award under the Stock Plan are referred to as “Optionees.”

 

Administration. The Stock Plan may generally be administered by the Board of Directors (the “Board”) or a committee appointed by the Board, as applicable (the “Administrator”). The Administrator may make any determinations deemed necessary or advisable for the Stock Plan.

 

Term of Plan. The Stock Plan became effective in April 2000, was amended and restated in February 2006 and will continue until its expiration in April 2010, unless terminated earlier. The Board has the power to terminate the Stock Plan at any time, except with respect to outstanding options or stock purchase rights.

 

Amendment. The Board may amend, alter, suspend or terminate the Stock Plan at any time without approval of the stockholders; provided, however, that stockholder approval will be obtained if required under applicable laws. No amendment, alteration, suspension or termination of the Stock Plan may adversely change or modify any option or award already granted without the consent of the Optionee.

 

Adjustment upon changes in capitalization, dissolution, merger or asset sale.

 

   

If our outstanding shares of common stock are increased or decreased or changed into or exchanged for a different number or kind of shares or other securities by reason of any stock split, reverse stock split, stock dividend, combination, recapitalization or reclassification or other similar change in our capital structure effected without receipt of consideration, the Board may make appropriate adjustment in the number and kind of shares for which grants and awards may be made under the Stock Plan, in the

 

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number and kind of shares as to which outstanding grants and rights will be exercisable and the exercise price of any such outstanding option or stock purchase right.

 

    In the event of our liquidation or dissolution, any unexercised options or stock purchase rights will terminate. The Administrator may in its discretion provide that prior to such event, Optionees will have the right to exercise his or her options including shares as to which the option would not otherwise be exercisable and the Administrator may provide that any Tripath repurchase option will lapse as to all such shares until ten (10) days prior to the liquidation or dissolution.

 

    In the event of a merger of Tripath with or into another corporation, or the sale of substantially all of the assets of Tripath, stock options and stock purchase rights shall be assumed or an equivalent option or right substituted by the successor corporation. If the successor corporation refuses to assume the options and stock purchase rights or to substitute substantially equivalent options or rights, the Optionee will have the right to exercise the option or stock purchase right as to all of the optioned stock, including shares not otherwise vested or exercisable. In such event, the Administrator will notify the Optionee that the option or stock purchase right is fully exercisable for fifteen (15) days from the date of such notice and that the option or stock purchase right terminates upon expiration of such period.

 

Stock Options. Each option is evidenced by a stock option agreement between us and the Optionee. The Administrator determines:

 

    the persons to whom options are granted,

 

    the exercise price,

 

    the number of shares to be covered by each option (subject to the limits described below),

 

    the period of each option,

 

    the times at which options may be exercised,

 

    whether the option is an incentive stock option or a nonstatutory stock option, and

 

    the other terms applicable to each option.

 

The exercise price of an incentive stock option cannot be less than the fair market value of our common stock on the date of grant unless issued pursuant to a merger or other corporate transaction and the incentive stock option may not be exercised later than ten (10) years from the date of grant. If an Optionee receiving an incentive stock option at the time of grant owns stock representing more than 10 percent of the combined voting power of Tripath, then: (i) the exercise price of such option may not be less than 110 percent of the fair market value of our common stock on the date of grant and (ii) such incentive stock option may not be exercisable after the expiration of five (5) years from the date of grant. If the aggregate fair market value (determined as of the date of grant) of the stock underlying incentive stock options that become exercisable by an employee in any calendar year exceeds $100,000, such excess will be treated as a nonstatutory stock option.

 

The exercise price of a nonstatutory stock option cannot be less than 85 percent of the fair market value of our common stock on the date of grant. In the case of a nonstatutory stock option granted to an Optionee who at the time of the grant owns shares representing more than 10 percent of the voting power of all classes of our stock, the per share exercise price will be no less than 110 percent of the fair market value of our stock on the date of grant. Notwithstanding the foregoing, nonstatutory stock options may be granted with a per share exercise price other than as required above pursuant to a merger or other corporate transaction.

 

The fair market value of our common stock is generally determined with reference to the closing sale price for our common stock on the date of grant. No option may be exercised after the expiration of its term (typically ten (10) years). No monetary consideration is paid to the Company upon the granting of options.

 

Pursuant to the Stock Plan, no employee, director or consultant can be granted stock options to purchase more than 500,000 shares in any given year, except in connection with such individual’s initial service to us, at

 

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which time such individual may be granted options to purchase up to an additional 500,000 shares, which will not count against the annual limit.

 

Options are nontransferable except upon the death of the holder or, at the Administrator’s discretion. Such transferred options will contain additional terms as the Administrator deems appropriate.

 

Options are exercisable in accordance with the terms of the Stock Plan and the stock option agreement entered into at the time of the grant between us and the Optionee. Options may only be exercised (i) while an Optionee is serving us or a parent or subsidiary of Tripath as an employee, director or consultant, (ii) within twelve (12) months following termination of employment by reason of death or disability, (iii) within three (3) months following termination of employment for any other reason, or (iv) within the time specified in the Optionee’s stock option agreement. The purchase price for shares purchased pursuant to the exercise of options must be paid in a form of consideration acceptable to the Administrator, including cash, check, a promissory note (if permissible by law), certain other shares, cashless exercise, cancellation of indebtedness, any combination of the foregoing methods, or such other consideration and method of payment to the extent permitted by applicable laws.

 

An Optionee’s stock option agreement may contain other terms, provisions and conditions not inconsistent with the Stock Plan as may be determined by the Administrator. Except in the case of options granted to officers, directors and consultants, options will become exercisable at a rate of no less than 20 percent per year over five (5) years from the date the options are granted.

 

Stock Purchase Rights. Stock purchase rights may be granted under the Stock Plan, subject to the terms prescribed by the Administrator. After the Administrator determines that it will offer stock purchase rights under the Stock Plan, it will advise the Optionee by means of a notice of grant, of the terms, conditions and restrictions related to the offer, including the number of shares that the Optionee will be entitled to purchase, the price to be paid, and the time within which the Optionee must accept such offer. The offer will be accepted by execution of a restricted stock purchase agreement.

 

Unless the Administrator determines otherwise, the restricted stock purchase agreement will grant Tripath a repurchase option exercisable within ninety (90) days upon the termination of the Optionee’s service with us for any reason (including death or disability). The purchase price for shares repurchased pursuant to the restricted stock purchase agreement will be the original price paid by the Optionee and may be paid by cancellation of any indebtedness of the purchaser to us. The repurchase option will lapse at a rate determined by the Administrator; provided, however, that except with respect to shares purchased by officers, directors and consultants the repurchase option will in no case lapse at a rate of less than 20 percent per year over five (5) years from the date of purchase. The restricted stock purchase agreement will contain such other terms, provisions and conditions not inconsistent with the Stock Plan as may be determined by the Administrator in its sole discretion.

 

Once the stock purchase right is exercised, the Optionee will have the rights equivalent to those of a stockholder, and will be a stockholder when his or her purchase is entered upon the records of our duly authorized transfer agent. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock purchase right is exercised, except as in accordance with the provisions, described above, governing adjustments upon changes in capitalization, dissolution, merger or asset sale.

 

Tax Consequences

 

Incentive Stock Options. Certain options authorized to be granted under the Stock Plan are intended to qualify as “incentive stock options” for federal income tax purposes. Under federal income tax law currently in effect, there generally are no federal income tax consequences to the Optionee or Tripath by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the Optionee’s alternative minimum tax liability, if any. If an Optionee exercises an incentive stock option and does not dispose of any of the option shares within two (2) years following the date of grant and within one (1) year

 

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following the date of exercise, any gain or loss on a disposition of such stock will be a long-term capital gain or loss. If an Optionee disposes of shares acquired upon exercise of an incentive stock option before the expiration of either the one-year holding period or the two-year waiting period (a “disqualifying disposition”), then at the time of the disqualifying disposition the Optionee will recognize taxable ordinary income equal to the lesser of (i) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (ii) the Optionee’s actual gain, if any, on the purchase and sale. The Optionee’s additional gain or any loss upon the disqualifying disposition will be a capital gain or loss, which will be long-term or short-term depending on whether the stock was held for more than one (1) year. To the extent the Optionee recognizes ordinary income by reason of a disqualifying disposition, we will generally be entitled (subject to the requirement of reasonableness, the provisions of Section 162(m) (discussed below) of the Internal Revenue Code of 1986, as amended (the “Code”) and the satisfaction of a tax reporting obligation) to a corresponding business expense deduction in the tax year in which the disqualifying disposition occurs.

 

Nonstatutory Stock Options and Stock Purchase Rights. Nonstatutory stock options and stock purchase rights granted under the Stock Plan generally have the following federal income tax consequences. There are no tax consequences to the Optionee or us by reason of the grant of a nonstatutory stock option or stock purchase right. Upon acquisition of the stock pursuant to the exercise of a nonstatutory stock option or purchase under a stock purchase right, the Optionee normally will recognize taxable ordinary income equal to the excess, if any, of the stock’s fair market value on the acquisition date over the purchase price. However, to the extent the stock is subject to certain types of vesting restrictions (for example, our right to repurchase the stock at the holder’s original cost), the taxable event will be delayed until the vesting restrictions lapse, unless the Optionee makes an election pursuant to Section 83(b) of the Code to be taxed upon receipt of the stock. With respect to employees, the ordinary income recognized will be subject to income and employment tax withholding. Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income recognized by the Optionee. Upon disposition of the stock, the Optionee will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for such stock plus any amount recognized as ordinary income upon acquisition (or vesting) of the stock. Such gain or loss will be long-term or short-term depending on whether the stock was held for more than one year. Slightly different rules may apply to Optionees who acquire stock subject to certain repurchase options or who are subject to Section 16(b) of the Securities Exchange Act of 1934, as amended.

 

Potential Limitation on Company Deductions. Section 162(m) of the Code denies a deduction to any publicly held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1,000,000. It is possible that compensation attributable to awards, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year.

 

Certain kinds of compensation, including qualified “performance-based compensation,” are disregarded for purposes of the deduction limitation. In accordance with Treasury Regulations issued under Section 162(m), compensation attributable to stock options and stock appreciation rights will qualify as performance-based compensation if the award is granted by a committee comprised solely of “outside directors” and either (i) the plan contains a per-employee limitation on the number of shares for which such awards may be granted during a specified period, the per-employee limitation is approved by the stockholders, and the exercise price of the award is no less than the fair market value of the stock on the date of grant, or (ii) the award is granted (or exercisable) only upon the achievement (as certified in writing by the compensation committee) of an objective performance goal established in writing by the committee while the outcome is substantially uncertain, and the award is approved by stockholders.

 

Awards to purchase restricted stock will qualify as performance-based compensation under the Treasury Regulations only if (i) the award is granted by a committee comprised solely of “outside directors,” (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established in writing by the

 

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committee while the outcome is substantially uncertain, (iii) the compensation committee certifies in writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied and (iv) prior to the granting (or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business criteria on which the performance goal is based, and the maximum amount—or formula used to calculate the amount—payable upon attainment of the performance goal).

 

The foregoing is only a summary of the effect of federal income taxation upon Optionees and us with respect to the grant and exercise of options and stock purchase rights under the Stock Plan. It does not purport to be complete, and does not discuss the tax consequences of the Optionee’s death or the provisions of the income tax laws of any municipality, state or foreign country in which the Optionee may reside. Each Optionee must rely on his or her own tax advisor for advice regarding his or her specific tax consequences.

 

2000 Employee Stock Purchase Plan

 

The major provisions of the 2000 Employee Stock Purchase Plan (the “ESPP”) are described below. The following summary is qualified in its entirety by reference to the ESPP, a copy of which is attached as Exhibit 10.2 to Tripath’s current report on Form 8-K dated February 24, 2006 filed with the SEC on February 28, 2006.

 

Our employees are eligible to participate in the ESPP if they are customarily employed by us or any participating subsidiary for at least twenty (20) hours per week and more than five (5) months in any calendar year. However, an employee may not be granted an option to purchase stock under the ESPP if such employee:

 

    immediately after grant owns stock possessing 5 percent or more of the total combined voting power or value of all classes of our capital stock; or

 

    whose rights to purchase stock under all of our employee stock purchase plans accrues at a rate that exceeds $25,000 worth of stock for each calendar year.

 

Our ESPP contains consecutive, overlapping 24-month offering periods. Each offering period includes four 6-month purchase periods. The offering periods generally start on the first trading day on or after January 1 and July 1 of each year.

 

The ESPP permits employees to purchase common stock through payroll deductions of up to 15 percent of their eligible compensation, which includes the employee’s base straight time gross earnings and commissions but excludes all other compensation. A participant may purchase no more than 5,000 shares during any calendar year.

 

Amounts deducted and accumulated by the participants are used to purchase shares of our common stock at the end of each six-month purchase period. The purchase price is 85 percent of the lower of the fair market value of our common stock on the first trading day of an offering period or the first trading day on or after January 1 and July 1 of each year. If the fair market value at the end of a purchase period is less than the fair market value at the beginning of the offering period, participants will be withdrawn from the current offering period following their purchase of shares on the purchase date and will be automatically re-enrolled in a new offering period. Participants may end their participation at any time during an offering period, and will be paid their payroll deductions to date. Participation ends automatically upon termination of employment with us.

 

A participant may not transfer rights granted under our ESPP other than by will, the laws of descent and distribution or as otherwise provided.

 

In the event of our merger with or into another corporation or a sale of all or substantially all of our assets, a successor corporation may assume or substitute for each outstanding option. If the successor corporation refuses to assume or substitute for the outstanding options, the purchase period then in progress will be shortened by setting a new exercise date and any offering periods then in progress will end on such new exercise date.

 

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The ESPP will terminate in 2010. However, our Board of Directors (the “Board”) has the authority to amend or terminate the ESPP, except that, subject to certain exceptions described in the plan, no such action may adversely affect any outstanding rights to purchase stock under the ESPP. The ESPP is administered by our Board or a committee established by the Board.

 

Equity Compensation Plan Information

 

The following table provides certain information with respect to our equity compensation plans in effect as of September 30, 2005.

 

Plan Category


  

Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights

(a)


  

Weighted-
average
exercise price

of outstanding
options,
warrants and
rights

(b)


  

Number of securities
remaining available
for issuance under
equity compensation
plans (excluding
securities reflected
in column (a))

(c)


Equity compensation plans approved by stockholders:

                

2000 Stock Option Plan

   10,402,722    $ 2.20    8,012,939

2000 Employee Stock Purchase Plan

   —        —      124,676

Equity compensation plans not approved by security holders

   —        —      —  
    
         

Total

   10,402,722    $ 2.20    8,137,615
    
         

 

The above equity compensation plans that were in effect as of September 30, 2005 were adopted with the approval of our stockholders.

 

Limitation on Liability and Indemnification Matters

 

Our bylaws provide that we shall indemnify our directors and officers and may indemnify our employees and other agents to the fullest extent permitted by Delaware law. Our bylaws also permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in such capacity, regardless of whether the Delaware General Corporation Law expressly permits indemnification.

 

We have entered into agreements to indemnify our directors and executive officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and executive officers for certain expenses including attorneys’ fees, judgments, fines and settlement amounts incurred by any director or executive officer in any action or proceeding, including any action by or in our right arising out of that person’s services as a director, officer, employee, agent or fiduciary for us, any subsidiary of ours or any other company or enterprise to which the person provides services at our request. The agreements do not provide for indemnification in cases where

 

    the claim is brought by the indemnified party;

 

    the indemnified party has not acted in good faith;

 

    the expenses have been paid directly to the indemnified party under a policy of officers’ and directors’ insurance maintained by us; or

 

    the claim arises under Section 16(b) of the Securities Exchange Act.

 

We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. It is the position of the Securities and Exchange Commission that indemnification for liabilities arising under federal or state securities laws is against public policy and not enforceable.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

In the last fiscal year, there has not been nor is there currently proposed any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeds $60,000 and in which any of our directors, executive officers, holders of more than 5% of our common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

 

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PRINCIPAL AND SELLING STOCKHOLDERS

 

The 6,081,080 shares of common stock covered by this prospectus can be acquired from us pursuant to the exercise of warrants (the “Warrants”) issued by us in a private placement financing consummated on February 14, 2006. The following table sets forth certain information with respect to the beneficial ownership of our common stock at February 28, 2006 for:

 

    each person who we know beneficially owns more than five percent of our common stock;

 

    each of our directors;

 

    each of our named executive officers;

 

    all of our directors and executive officers as a group; and

 

    all of the selling stockholders.

 

We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws.

 

Shares being offered in the table below include shares issuable upon exercise of the Warrants.

 

Applicable percentage ownership is based on 62,715,210 shares of our common stock outstanding at February 28, 2006. In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding all shares of common stock subject to options, warrants or other convertible securities held by that person or entity that are currently exercisable or exercisable within 60 days of February 28, 2006. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than one percent is denoted with an “*.”

 

Unless otherwise indicated, the address of each beneficial owner listed in the table below is c/o Tripath Technology Inc., 2560 Orchard Parkway, San Jose, CA 95131.

 

    Shares Beneficially
Owned Prior to
Offering Common Stock


    Shares
Being
Offered


  Shares Beneficially
Owned After
Offering Common Stock


 

Name of Beneficial Owner


    Shares (1)  

      % (1)  

        Shares (1)  

      % (1)  

 

Selling Stockholders:

                           

Enable Opportunity Partners, LP (2)

c/o Enable Capital Management, LLC

One Ferry Building, Suite 255

San Francisco, CA 94111

  1,862,011 (3)   2.90 %   425,676   1,436,335 (4)   2.26 %

Enable Growth Partners, LP (2)

c/o Enable Capital Management, LLC

One Ferry Building, Suite 255

San Francisco, CA 94111

  7,249,373 (5)   10.67 %   1,581,081   5,668,292 (6)   8.54 %

Gryphon Master Fund, L.P.

100 Crescent Court, #490

Dallas, TX 75201

  5,320,029 (7)   7.98 %   1,216,216   4,103,813 (4)   6.27 %

GSSF Master Fund, L.P.

100 Crescent Court, #490

Dallas, TX 75201

  2,660,015 (8)   4.11 %   608,108   2,051,907 (4)   3.20 %

 

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    Shares Beneficially
Owned Prior to
Offering Common Stock


    Shares
Being
Offered


  Shares Beneficially
Owned After
Offering Common Stock


 

Name of Beneficial Owner


    Shares (1)  

      % (1)  

        Shares (1)  

      % (1)  

 

SRG Capital, LLC (2)

120 Broadway, 40th Floor

New York, NY 10271

  1,862,011 (9)   2.90 %   425,676   1,436,335 (4)   2.26 %

Bushido Capital Master Fund, LP

c/o Bushido Capital Partners, Ltd.

275 Seventh Avenue, Suite 2000

New York, NY 10001

  5,320,029 (10)   7.98 %   1,216,216   4,103,813 (4)   6.27 %

Gamma Opportunity Capital Partners, LP Class C

1967 Longwood—Lake Mary Rd.

Longwood, FL 32750

  1,330,006 (11)   2.09 %   304,053   1,025,953 (4)   1.62 %

Gamma Opportunity Capital Partners, LP Class A

1967 Longwood—Lake Mary Rd.

Longwood, FL 32750

  1,330,006 (12)   2.09 %   304,053   1,025,953 (4)   1.62 %

Directors and Executive Officers:

                           

Adya S. Tripathi (13)

  12,916,666     20.60 %   0   12,916,666     20.60 %

Jeffrey L. Garon (14)

  102,083     *     0   102,083     *  

George Fang (15)

  148,938     *     0   148,938     *  

Naresh Sharma (16)

  516,305     *     0   516,305     *  

Andy Jasuja (17)

  196,666     *     0   196,666     *  

A.K. Acharya (18)

  211,666     *     0   211,666     *  

Y.S. Fu (19)

  189,666     *     0   189,666     *  

Akifumi Goto (20)

  66,666     *     0   66,666     *  

All executive officers and directors as a group (8 persons) (21)

  14,348,656     22.88 %       14,348,656     22.88 %

   * Less than one percent.

 

  (1) This table is based upon information supplied by officers, directors and principal stockholders, and in Schedules 13D and 13G filed with the Securities and Exchange Commission. Unless otherwise indicated in the footnotes to this table and subject to community property laws, where applicable, we believe that each stockholder named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. The number and percentage of shares beneficially owned are based on an aggregate of 62,715,210 shares of our common stock outstanding as of February 28, 2006, and are determined under rules promulgated by the Securities and Exchange Commission. This information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of February 28, 2006 through the exercise of any stock option or other right.

 

  (2) This selling stockholder has advised us that it is an affiliate of a broker-dealer. The selling stockholder has also advised us that it purchased the securities being registered for resale in the ordinary course of business, and at the time of the purchase, the selling stockholder had no agreements or understandings, directly or indirectly, with any person to distribute the securities.

 

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  (3) Includes 945,946 shares issuable upon the conversion of the Debentures, 17,416 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 472,973 shares acquired upon the exercise of Series A Common Stock Warrants issued in the November Financing. Does not include 709,459 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Mitch Levine, Managing Partner, has voting and investment power over the shares held by Enable Opportunity Partners L.P.

 

  (4) Assumes that selling stockholder sells all shares registered under this registration statement but not shares acquired in connection with the exercise of the Series A Common Stock Warrants issued in the November Financing, not shares issuable upon the conversion of the Debentures, and not shares issuable upon the conversion of accrued interest pursuant to the Debentures. To our knowledge, there are no agreements, arrangements or understandings with respect to the sale of any of our common stock, and selling stockholder may decide not to sell its shares that are registered under this registration statement. This registration statement also shall cover any additional shares of common stock that become issuable in connection with the shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration that results in an increase in the number of our outstanding shares of common stock.

 

  (5) Includes 3,513,514 shares issuable upon the conversion of the Debentures, 64,687 shares issuable upon the conversion of accrued interest pursuant to the Debentures, , 1,756,757 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing, 227,772 shares that were acquired in connection with the Company’s March 3, 2005 PIPE financing and 55,556 shares issuable upon the exercise of warrants issued in connection with the Company’s March 3, 2005 PIPE financing. Does not include 2,635,135 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Mitch Levine, Managing Partner, has voting and investment power over the shares held by Enable Growth Partners L.P.

 

  (6) Assumes that selling stockholder sells all shares registered under this registration statement, but not shares acquired in connection with the exercise of the Series A Common Stock Warrants issued in the November Financing, not shares issuable upon the conversion of the Debentures, not shares issuable upon the conversion of accrued interest pursuant to the Debentures, not shares acquired in connection with the Company’s March 3, 2005 PIPE financing and not shares issuable upon the exercise of warrants issued in connection with the Company’s March 3, 2005 PIPE financing. To our knowledge, there are no agreements, arrangements or understandings with respect to the sale of any of our common stock, and selling stockholder may decide not to sell its shares that are registered under this registration statement. This registration statement also shall cover any additional shares of common stock that become issuable in connection with the shares registered for sale hereby by reason of any stock dividend, stock split, recapitalization or other similar transaction effected without the receipt of consideration that results in an increase in the number of our outstanding shares of common stock.

 

  (7) Includes 2,702,703 shares issuable upon the conversion of the Debentures, 49,759 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 1,351,351 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing. Does not include 2,027,027 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. E.B. Lyon IV has voting control for Gryphon Master Fund, L.P.

 

  (8) Includes 1,351,351 shares issuable upon the conversion of the Debentures, 24,880 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 675,676 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing. Does not include 1,013,514 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Tom C. Davis has voting control for GSSF Master Fund, LP.

 

  (9)

Includes 1,351,351 shares issuable upon the conversion of the Debentures, 17,416 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 675,676 shares acquired upon the exercise of

 

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the Series A Common Stock Warrants issued in the November Financing. Does not include 1,013,514 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Edwin Mecabe and Tai May Lee, two members of SRG Capital, LLC, have been empowered by a resolution of the board of directors of Gerber Capital Management, Inc., the managing member of SRG Capital, LLC, to share voting and investment power over these securities. Both Edwin Mecabe and Tai May Lee disclaim beneficial ownership of the securities being registered hereto.

 

(10) Includes 2,702,703 shares issuable upon the conversion of the Debentures, 49,759 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 1,351,351 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing. Does not include 2,027,027 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Bushido Capital Partners, Ltd., a Cayman Islands company, is the general partner of the stockholder, Bushido Capital Master Fund, LP, a Cayman Islands registered limited partnership, with the power to vote and dispose of the shares being registered on behalf of the stockholder. As such, Bushido Capital Partners, Ltd. may be deemed to be the beneficial owner of said shares. Christopher Rossman is the Managing Director of Bushido Capital Partners, Ltd., possessing the power to act on its behalf. Bushido Capital Partners, Ltd. and Christopher Rossman each disclaim beneficial ownership of the shares being registered.

 

(11) Includes 675,676 shares issuable upon the conversion of the Debentures, 12,440 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 377,837 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing. Does not include 506,756 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Gamma Capital Advisors, Ltd., an Anguilla, British West Indies company, is the general partner of the stockholder, Gamma Opportunity Capital Partners, LP, a Cayman Islands registered limited partnership, with the power to vote and dispose of the shares being registered on behalf of the stockholder. As such, Gamma Capital Advisors, Ltd. may be deemed to be the beneficial owner of said shares. Jonathan P. Knight, PhD and Christopher Rossman are the Directors of Gamma Capital Advisors, Ltd., jointly possessing the power to vote and dispose of the shares being registered. Gamma Capital Advisors, Ltd., Jonathan P. Knight, PhD., and Christopher Rossman each disclaim beneficial ownership of the shares being registered.

 

(12) Includes 675,676 shares issuable upon the conversion of the Debentures, 12,440 shares issuable upon the conversion of accrued interest pursuant to the Debentures and 377,837 shares acquired upon the exercise of the Series A Common Stock Warrants issued in the November Financing. Does not include 506,756 shares issuable upon the exercise of the Series B Common Stock Warrants issued in the November Financing that are not exercisable until May 8, 2006. Gamma Capital Advisors, Ltd., an Anguilla, British West Indies company, is the general partner of the stockholder, Gamma Opportunity Capital Partners, LP, a Cayman Islands registered limited partnership, with the power to vote and dispose of the shares being registered on behalf of the stockholder. As such, Gamma Capital Advisors, Ltd. may be deemed to be the beneficial owner of said shares. Jonathan P. Knight, PhD and Christopher Rossman are the Directors of Gamma Capital Advisors, Ltd., jointly possessing the power to vote and dispose of the shares being registered. Gamma Capital Advisors, Ltd., Jonathan P. Knight, PhD., and Christopher Rossman each disclaim beneficial ownership of the shares being registered.

 

(13) Includes 1,516,666 shares subject to options that are exercisable within 60 days of December 5, 2005 and 900,000 shares held in trust for the benefit of Dr. Tripathi’s minor children over which Dr. Tripathi holds sole voting and dispositive power. Dr. Tripathi’s address is Tripath Technology Inc., 2560 Orchard Parkway, San Jose, CA 95131.

 

(14) Includes 102,083 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

(15) Includes 142,705 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

(16) Includes 445,203 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

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(17) Includes 196,666 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

(18) Includes 191,666 shares subject to options that are exercisable within 60 days of February 28, 2006 and 20,000 shares held by HTL Co. Japan Ltd.

 

(19) Includes 189,666 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

(20) Includes 66,666 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

(21) Includes 2,851,321 shares subject to options that are exercisable within 60 days of February 28, 2006.

 

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DESCRIPTION OF CAPITAL STOCK

 

General

 

As of the date of this prospectus, our authorized capital stock consists of 105,000,000 shares. Those shares consist of (1) 100,000,000 shares designated as common stock, with a par value of $0.001 and (2) 5,000,000 shares designated as preferred stock, with a par value of $0.001. The only equity securities currently outstanding are shares of common stock. As of February 28, 2006, there were 62,715,210 shares of common stock issued and outstanding.

 

The following is a summary of the material provisions of the common stock and preferred stock contained in our restated certificate of incorporation and bylaws. For greater details about our capital stock, please refer to our certificate of incorporation and bylaws.

 

Common stock

 

The holders of common stock are entitled to one vote per share on all matters to be voted upon by the shareholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available for that purpose. We have never declared or paid any cash dividend on our capital stock and do not anticipate paying any cash dividends on our capital stock in the foreseeable future. In the event of a liquidation, dissolution or winding up of Tripath, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable, and any shares of common stock to be issued upon an offering pursuant to this prospectus and the related prospectus supplement will be fully paid and non-assessable upon issuance.

 

Our common stock has been quoted on the Nasdaq National Market or the Nasdaq Capital Market under the symbol “TRPH” from our initial public offering in August 2000 until December 7, 2005. Our common stock was delisted from the Nasdaq Capital Market effective December 8, 2005. Prior to this time, there was no public market for our stock. On December 8, 2005 shares of common stock of the Company began trading on the Pink Sheets. On December 30, 2005 the shares of common stock of the Company ceased to trade on the Pink Sheets and began to trade on the OTC Bulletin Board. The transfer agent and registrar for the common stock is Mellon Investor Services.

 

Preferred stock

 

The following description of preferred stock and the description of the terms of a particular series of preferred stock that will be set forth in the related prospectus supplement are not complete. These descriptions are qualified in their entirety by reference to the certificate of determination relating to that series. The rights, preferences, privileges and restrictions of the preferred stock of each series will be fixed by the certificate relating to that series. The prospectus supplement also will contain a description of certain United States federal income tax consequences relating to the purchase and ownership of the series of preferred stock that is described in the prospectus supplement.

 

The Board of Directors has the authority, without further action by the shareholders, to issue up to 5,000,000 shares of preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon the preferred stock. Any or all of these rights may be greater than the rights of the common stock.

 

The Board of Directors, without shareholder approval, can issue preferred stock with voting, conversion or other rights that could negatively affect the voting power and other rights of the holders of common stock.

 

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Preferred stock could thus be issued quickly with terms calculated to delay or prevent a change in control of us or make it more difficult to remove our management. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock.

 

The prospectus supplement for a series of preferred stock will specify:

 

    the maximum number of shares;

 

    the designation of the shares;

 

    the annual dividend rate, if any, whether the dividend rate is fixed or variable, the date dividends will accrue, the dividend payment dates, and whether dividends will be cumulative;

 

    the price and the terms and conditions for redemption, if any, including redemption at our option at the option of the holders, including the time period for redemption, and any accumulated dividends or premiums;

 

    the liquidation preference, if any, and any accumulated dividends upon the liquidation, dissolution or winding up of our affairs;

 

    any sinking fund or similar provision, and, if so, the terms and provisions relating to the purpose and operation of the fund;

 

    the terms and conditions, if any, for conversion or exchange of shares of any other class or classes of our capital stock or any series of any other class or classes, or of any other series of the same class, or any other securities or assets, including the price or the rate of conversion or exchange and the method, if any, of adjustment;

 

    the voting rights; and

 

    any or all other preferences and relative, participating, optional or other special rights, privileges or qualifications, limitations or restrictions.

 

Preferred stock will be fully paid and non-assessable upon issuance.

 

Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws

 

In addition to the right to amend the certificate of incorporation as prescribed by Delaware law, our certificate of incorporation provides that the affirmative vote of the holders of at least 66 2/3% of the voting power of all of our then outstanding shares entitled to vote generally in the election of directors, voting together as a single class, is required to amend or repeal the provisions of our certificate of incorporation relating to:

 

    our Board of Directors, including the number, classes and terms of directors;

 

    removal of directors and vacancies in the Board of Directors;

 

    the requirement of a supermajority to amend the sections of our bylaws relating to annual meetings and special meetings;

 

    the prohibition of stockholder action by written consent without a meeting; or

 

    the supermajority vote requirement described above.

 

Our Board of Directors is expressly authorized to make, alter, amend or repeal our bylaws, subject to the right of our stockholders entitled to vote thereon, who also may adopt, amend or repeal our bylaws in accordance with Delaware law.

 

Our bylaws allow us to advance to a director, officer, employee or agent the expenses incurred in defending a civil or criminal action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by us.

 

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PLAN OF DISTRIBUTION

 

Each Selling Stockholder (the “Selling Stockholders”) of the common stock (“Common Stock”) of Tripath Technology Inc., a Delaware corporation (the “Company”) and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of Common Stock on the Trading Market or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:

 

    ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;

 

    block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;

 

    purchases by a broker-dealer as principal and resale by the broker-dealer for its account;

 

    an exchange distribution in accordance with the rules of the applicable exchange;

 

    privately negotiated transactions;

 

    settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;

 

    broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;

 

    a combination of any such methods of sale;

 

    through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise; or

 

    any other method permitted pursuant to applicable law.

 

The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.

 

Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with NASDR Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASDR IM-2440.

 

In connection with the sale of the Common Stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the Common Stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the Common Stock short and deliver these securities to close out their short positions, or loan or pledge the Common Stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).

 

The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each

 

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Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).

 

The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. Each Selling Stockholder has advised us that they have not entered into any written or oral agreements, understandings or arrangements with any underwriter or broker-dealer regarding the sale of the resale shares. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.

 

We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume limitations by reason of Rule 144(e) under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to the prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the Common Stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the Common Stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale.

 

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LEGAL MATTERS

 

The validity of the shares of common stock offered hereby will be passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California.

 

EXPERTS

 

The consolidated financial statements for the year ended September 30, 2005, nine months ended September 30, 2004, and year ended December 31, 2003 included in this prospectus have been so included in reliance on the report of Stonefield Josephson, Inc., an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

On October 18, 2004, BDO Seidman, the independent accounting firm previously engaged as our auditing firm to audit our financial statements, resigned. The report of BDO Seidman on the financial statements for the fiscal year ended December 31, 2003 contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principle. The decision by BDO Seidman to terminate the client-auditor relationship was not recommended or approved by the Audit Committee of our Board of Directors.

 

In connection with its audit for the fiscal year ended December 31, 2003 and through October 18, 2004, there were no disagreements with BDO Seidman on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements if not resolved to the satisfaction of BDO Seidman would have caused them to make reference thereto in their report on the financial statements for such years.

 

BDO Seidman’s letter to the Securities and Exchange Commission stating its agreement with the statements made in our Current Report on Form 8-K filed with the Securities and Exchange Commission on October 22, 2004, which are not materially different than the statements made herein, is filed as an exhibit to such Current Report on Form 8-K.

 

On November 21, 2004, we engaged the services of Stonefield Josephson, Inc., as our new independent auditors for our nine months ended September 30, 2004. Our Board of Directors, with the recommendation of the Audit Committee of the Board of Directors, authorized and approved the engagement of Stonefield Josephson, Inc. In deciding to select Stonefield Josephson, Inc., the Audit Committee and our management considered auditor independence issues raised by commercial relationships we have or may have with certain accounting firms. With respect to Stonefield Josephson, Inc., we do not have any commercial relationship with Stonefield Josephson, Inc. that would impair its independence. During our two most recent fiscal years ended December 31, 2003, and the subsequent interim period through November 21, 2004, we did not consult with Stonefield Josephson, Inc. regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

 

On April 10, 2003, PricewaterhouseCoopers LLP, the independent registered public accounting firm previously engaged as our auditing firm to audit our financial statements, resigned. The reports of PricewaterhouseCoopers LLP on the financial statements for the fiscal years ended December 31, 2001 and 2002 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle, except that the reports for each of the fiscal years ended December 31, 2001 and 2002 included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern. The decision by PricewaterhouseCoopers LLP to terminate the client-auditor relationship was not recommended or approved by the Audit Committee of our Board of Directors.

 

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In connection with its audits for the fiscal years ended December 31, 2001 and 2002 and through April 10, 2003, there were no disagreements with PricewaterhouseCoopers LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure which disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP would have caused them to make reference thereto in their report on the financial statements for such years. In connection with the audit for the fiscal year ended December 31, 2002, our then chief financial officer made certain public comments following the filing of Form 10-K/A on April 1, 2003 indicating management’s disagreement with PricewaterhouseCoopers LLP including in its audit report on our financial statements for the year ended December 31, 2002 a reference to the existence of substantial doubt regarding our ability to continue as a going concern. The Audit Committee of our Board of Directors did not discuss the subject matter of this disagreement with PricewaterhouseCoopers LLP. We have authorized PricewaterhouseCoopers LLP to respond fully to the inquiries of its successor accountant concerning the subject matter of such disagreement.

 

PricewaterhouseCoopers LLP’s letter to the Securities and Exchange Commission stating its agreement with the statements made in our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2003, which are not materially different than the statements made herein, is filed as an exhibit to such Current Report on Form 8-K.

 

On May 9, 2003, we engaged the services of BDO Seidman, LLP as our new independent auditors for our fiscal year ended December 31, 2003. Our Board of Directors, with the recommendation of the Audit Committee of the Board of Directors, authorized and approved the engagement of BDO Seidman. In deciding to select BDO Seidman, the Audit Committee and our management considered auditor independence issues raised by commercial relationships we have or may have with certain accounting firms. With respect to BDO Seidman, we did not have any commercial relationship with BDO Seidman that would impair its independence. During our fiscal years ended December 31, 2002 and 2001, and the subsequent interim period through May 9, 2003, we did not consult with BDO Seidman regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

 

WHERE YOU CAN FIND ADDITIONAL INFORMATION

 

We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information about us and the common stock offered hereby, reference is made to the registration statement and the exhibits and schedules filed therewith. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. A copy of the registration statement and the exhibits and schedules filed therewith may be inspected without charge at the public reference room maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington, D.C. 20549, and copies of all or any part of the registration statement may be obtained from such offices upon the payment of the fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room. The SEC also maintains an Internet web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is www.sec.gov.

 

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PART I. Financial Information

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

INDEX TO FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firm

   F-2

Consolidated Balance Sheets

   F-6

Consolidated Statements of Operations

   F-7

Consolidated Statements of Stockholders’ Equity

   F-8

Consolidated Statements of Cash Flows

   F-9

Notes to Consolidated Financial Statements

   F-10

 

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Table of Contents

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders

Tripath Technology Inc.

San Jose, CA

 

To The Board of Directors and Stockholders of Tripath Technology Inc.:

 

We have audited the accompanying consolidated balance sheets of Tripath Technology Inc. (the “Company”) and its subsidiary as of September 30, 2005 and 2004 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended September 30, 2005, the nine month period ended September 30, 2004 and the year ended December 31, 2003. Our audit also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tripath Technology Inc. at September 30, 2005 and 2004, and the consolidated results of their operations and their cash flows for the year ended September 30, 2005, the nine month period ended September 30, 2004 and the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule as of September 30, 2005 and 2004 and for each of the two years in the period then ended, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s significant recurring operating losses and accumulated deficit raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Tripath Technology Inc.’s internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 23, 2005 expressed an unqualified opinion on management’s assessment and an adverse opinion on the effectiveness of internal control over financial reporting.

 

/s/    Stonefield Josephson, Inc.

 

San Francisco, California

November 23, 2005, except as to the fourth, seventh and ninth paragraphs of Note 8, which are as of December 15, 2005.

 

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Report of Independent Registered Public Accounting Firm On Internal Controls

Over Financial Reporting

 

Board of Directors and Stockholders

Tripath Technology Inc.

San Jose, CA

 

To The Board of Directors and Stockholders of Tripath Technology Inc.:

 

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting, that Tripath Technology Inc. did not maintain effective internal control over financial reporting as of September 30, 2005, because of the effects of the material weaknesses identified in management’s assessment, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Tripath Technology Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:

 

    Lack of sufficient personnel and technical accounting and financial reporting expertise within the Company’s accounting and finance function. As of September 30, 2005, the Company did not have sufficient personnel and technical accounting and financial reporting expertise within its accounting function to sufficiently address relatively complex transactions and/or accounting and financial reporting issues that arise from time to time in the course of its operations. This situation was exacerbated by the additional demands placed upon the Company’s accounting and finance personnel as it worked to meet the internal control requirements under Section 404 of the Sarbanes-Oxley Act of 2002 and the turnover in the personnel in the accounting and finance functions.

 

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This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls over the period-end financial reporting process. As of September 30, 2005, the Company’s Chief Financial Officer was responsible for preparing or compiling certain critical portions of the quarterly and annual internal financial information and was also responsible for performing a review of this information to monitor the results of operations. This review represents an important detective control in the Company’s internal control over financial reporting. Because there was no separate independent detailed review of this critical financial information, there is a risk that inaccurate information may be reported and misstatements may not be identified. Also, due to the turnover in the personnel in the accounting and finance functions many controls over period-end financial reporting were not properly followed. This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls in the area of inventory. As of September 30, 2005, there were certain instances in which the Company’s standard costing was not applied correctly. In addition, in certain instances one individual had authority for certain activities which should be segregated, such as processing of point-of-sale reports, inventory reports and invoicing. The Company did not have adequate oversight and review of these personnel to compensate for the inadequate segregation of duties. These weaknesses individually represent significant deficiencies and, in the aggregate, represent a material weakness. This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls in the area of fixed assets. As of September 30, 2005, management did not ensure that the Company’s Fixed Asset Policy was strictly enforced, including instances where the detail listing of assets was not comprehensive, the capitation policy was not followed and depreciation expense was not calculated correctly. In addition, the Company did not maintain adequate segregation of duties among members of its fixed asset department. In several instances, the Company had the same personnel performing duties that were not compatible. Furthermore, management did not have adequate oversight and review of these personnel to compensate for the inadequate segregation of duties. These weaknesses individually represent significant deficiencies and, in the aggregate, represent a material weakness. This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls in the areas of reconciliation of accrued expenses. As of September 30, 2005, there were certain instances in which the company failed to reconcile the supporting documentation for accrued expenses to the general ledger control account impacting the Company’s ability to ensure all transactions flowing through the accounts are properly reflected in the recorded account balances. These weaknesses individually represent significant deficiencies and, in the aggregate, represent a material weakness. This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls in the area of payroll/human resources. As of September 30, 2005, management did not ensure that the Company’s review of payroll reports was strictly enforced, including tracking of vacation and tracking of new and terminated employees. In addition, the Company did not maintain adequate segregation of duties among members of its payroll/human resource departments. In several instances, the Company had the same personnel performing duties that were not compatible.

 

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Furthermore, management did not have adequate oversight and review of these personnel to compensate for the inadequate segregation of duties. These weaknesses individually represent significant deficiencies and, in the aggregate, represent a material weakness. This material weakness resulted in adjustments, some of which are material to the Company’s fiscal year 2005 annual financial statements. Further, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Inadequate controls in the area of information technology. As of September 30, 2005, the Company did not maintain effective controls over access to the accounting system and in some cases did not maintain complete documentation regarding these access rights. Specifically, certain of the Company’s accounting users with financial, accounting and reporting responsibilities also had inappropriate access to financial application programs and data. Such access was not in compliance with segregation of duties requirements nor was this access independently monitored. In addition, the documentation regarding access privileges of certain individuals to the accounting system was not reflective of actual access privileges. Further, the Company did not maintain adequate controls in the area of system development. These weaknesses individually represent significant deficiencies and, in the aggregate, represent a material weakness. This material weakness did not result in adjustments to the Company’s fiscal year 2005 annual financial statements. However, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected.

 

    Lack of internal control reports (under SAS 70) from critical external service providers whose processes are significant to the Company’s internal control over financial reporting. As of September 30, 2005, the Company was unable to obtain proper “Report on Controls Placed in Operation and Test of Operating Effectiveness” (in accordance with Statement of Auditing Standards No. 70) from two external service providers, and the Company did not have alternative procedures to test user controls, test controls at service organizations or request the service organization auditor to perform agreed upon procedures. These include the providers of the Company’s payroll service, and the stock management provider. The services performed by these service providers were deemed material and significant to the Company’s business and accurate financial reporting. This material weakness did not result in adjustments to the Company’s fiscal year 2005 annual financial statements. However, this material weakness could result in material misstatements to the Company’s future annual or interim financial statements that would not be prevented or detected by the Company’s system of internal control over financial reporting.

 

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of Tripath Technology Inc.’s consolidated financial statements as of and for the year ended September 30, 2005, and this report does not affect our report dated November 23, 2005 on those consolidated financial statements.

 

In our opinion, management’s assessment that Tripath Technology Inc. did not maintain effective internal control over financial reporting as of September 30, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effects of the material weaknesses described above on the achievement of the objectives of the control criteria, Tripath Technology Inc. has not maintained effective internal control over financial reporting as of September 30, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We do not express an opinion or any other form of assurance on management’s statements regarding corrective actions taken by the Company after September 30, 2005.

 

/s/    Stonefield Josephson, Inc.

 

San Francisco, California

November 23, 2005

 

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Item 1. Financial Statements

 

TRIPATH TECHNOLOGY INC.

 

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

     September 30,
2005


    September 30,
2004
Restated
(Note 9)


 

ASSETS

                

Current assets:

                

Cash and cash equivalents

   $ 716     $ 6,577  

Restricted cash

     162       762  

Accounts receivable, net of allowance for doubtful accounts of $0 and $50 at September 30, 2005 and 2004, respectively

     1,010       1,019  

Inventories, net

     5,457       3,939  

Prepaid expenses and other current assets

     1,512       212  
    


 


Total current assets

     8,857       12,509  

Property and equipment, net

     875       1,674  

Other assets

     122       123  
    


 


Total assets

   $ 9,854     $ 14,306  
    


 


LIABILITIES

                

Current liabilities:

                

Accounts payable

   $ 3,488     $ 2,908  

Current portion of capital lease obligations

     215       664  

Current portion of deferred rent

     305       266  

Accrued expenses

     2,899       764  

Deferred distributor revenue

     1,202       1,075  

Warrant liability

     396       —    
    


 


Total current liabilities

     8,505       5,677  
    


 


Deferred rent

     167       471  

Capital lease obligations

     21       100  
    


 


Total long-term liabilities

     188       571  
    


 


Commitments and contingencies

                

Stockholders’ equity:

                

Preferred stock, $0.001 par value, 5,000,000 shares authorized; 0 shares issued and outstanding

     —         —    

Common stock, $0.001 par value, 100,000,000 shares authorized; 55,410,722 and 50,043,58 shares issued and outstanding at September 30, 2005 and September 30, 2004, respectively

     55       49  

Additional paid-in capital

     202,310       199,333  

Deferred stock-based compensation

     —         (95 )

Other comprehensive expense

     (3 )     —    

Accumulated deficit

     (201,201 )     (191,229 )
    


 


Total stockholders’ equity

     1,161       8,058  
    


 


Total liabilities and stockholders’ equity

   $ 9,854     $ 14,306  
    


 


 

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

 

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TRIPATH TECHNOLOGY INC.

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

     Year Ended
September 30,
2005


   

Nine Months
Ended
September 30,
2004

Restated

2004


    Year Ended
December 30,
2003


 

Revenue

   $ 10,761     $ 9,169     $ 13,891  

Cost of revenue

     5,285       7,415       9,467  

Provision for slow moving, excess and obsolete inventory

     —         4,316       243  
    


 


 


Gross profit (loss)

     5,476       (2,562 )     4,181  
    


 


 


Operating expenses:

                        

Research and development

     7,413       5,521       6,874  

Selling, general and administrative

     8,586       3,556       4,544  
    


 


 


Total operating expenses

     15,999       9,077       11,418  
    


 


 


Loss from operations

     (10,523 )     (11,639 )     (7,237 )

Net gain on revaluation of warrant liability

     570       —         —    

Interest and other income (expense), net

     (19 )     (26 )     22  
    


 


 


Net loss

     (9,972 )     (11,665 )     (7,215 )
    


 


 


Basic and diluted net loss per share

   $ (0.19 )   $ (0.25 )   $ (0.17 )
    


 


 


Number of shares used to compute basic and diluted net loss per share

     53,206       46,541       41,993  
    


 


 


 

 

 

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

 

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TRIPATH TECHNOLOGY INC.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

    Common
Shares


  Amount

  Additional
Paid in
Capital


    Deferred
Stock-based
Compensation


    Accumulated
Deficit


    Other
Comprehensive
Expense


    Total
Stockholders’
Equity


 

Balance at December 31, 2002

  41,327   $ 41   $ 187,835     $ (91 )   $ (172,349 )           $ 15,436  

Issuance of common stock upon exercise of stock options

  660     —       498       —         —                 498  

Issuance of common stock upon exercise of warrants

  1,896     2     3,111                               3,113  

Issuance of common stock through the ESPP

  27     —       7       —         —                 7  

Reversal of previously recognized compensation due to forfeitures

  —       —       (117 )     10       —                 (107 )

Deferred stock-based compensation

  —       —       —         (324 )     —                 (324 )

Amortization of deferred stock-based compensation

  —       —       —         188       —                 188  

Issuance of restricted stock

  1,800     2     322       —         —                 324  

Net Loss

  —       —       —         —         (7,215 )             (7,215 )
   
 

 


 


 


 


 


Balance at December 31, 2003

  45,710     45     191,656       (217 )     (179,564 )             11,920  

Issuance of common stock upon exercise of stock options

  535     1     345       —         —                 346  

Issuance of common stock upon exercise of warrants

  1,211     1     2,347       —         —                 2,348  

Issuance of common stock through the ESPP

  87     —       43       —         —                 43  

Issuance of common stock

  2,500     2     4,998       —         —                 5,000  

Stock issuance cost

  —       —       (56 )     —         —                 (56 )

Amortization of deferred stock-based compensation

  —       —       —         122       —                 122  

Net loss (restated)

  —       —       —         —         (11,665 )             (11,665 )
   
 

 


 


 


 


 


Balance at September 30, 2004 (restated)

  50,043     49     199,333       (95 )     (191,229 )             8,058  

Issuance of common stock upon exercise of stock options

  425     1     135       —         —                 136  

Deferred stock-based compensation

  —       —       19       —         —                 19  

Issuance of common stock through the ESPP

  110     —       51       —         —                 51  

Issuance of common stock

  4,833     5     3,380       —         —                 3,385  

Stock issuance costs

  —       —       (608 )     —         —                 (608 )

Amortization of deferred stock-based compensation

  —       —       —         95       —                 95  

Foreign currency translation adjustment

                              (3 )     (3 )        

Net loss

  —       —       —         —         (9,972 )             (9,972 )
   
 

 


 


 


 


 


Balance at September 30, 2005

  55,411   $ 55   $ 202,310     $ —       $ (201,201 )   $ (3 )   $ 1,161  
   
 

 


 


 


 


 


 

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

 

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TRIPATH TECHNOLOGY INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended
September 30,
2005


    Nine Months
Ended
September 30,
2004 Restated


    Year Ended
December 30,
2003


 

Cash flows from operating activities:

                        

Net loss

   $ (9,972 )   $ (11,665 )   $ (7,215 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

                        

Change due to revaluation of warrant liability

     (570 )     —         —    

Depreciation and amortization

     895       829       1,206  

Allowance for doubtful accounts

     (111 )     —         —    

Provision for slow moving excess and obsolete inventory

     (4,026 )     4,316       243  

Stock-based compensation

     95       122       81  

Changes in assets and liabilities:

                        

Accounts receivable

     120       1,012       (570 )

Inventories

     2,508       (2,681 )     (565 )

Prepaid expenses and other assets

     (1,299 )     9       546  

Accounts payable

     580       (1,151 )     1,674  

Accrued expenses

     2,135       162       (468 )

Deferred distributor revenue

     127       (50 )     499  

Deferred rent

     (265 )     40       502  
    


 


 


Net cash used in operating activities

     (9,783 )     (9,057 )     (4,067 )
    


 


 


Cash flows from investing activities:

                        

Restricted cash

     600       (101 )     (175 )

Purchase of property and equipment

     (96 )     (606 )     (312 )
    


 


 


Net cash provided by (used in) investing activities

     504       (707 )     (487 )
    


 


 


Cash flows from financing activities:

                        

Proceeds from issuance of common stock under ESPP and upon exercise of options

     —         389       505  

Issuance of common stock upon exercise of warrants

     —         2,348       3113  

Issuance of common stock upon sale of sale of common stock, net of issuance costs

     3,949       4,944       —    

Principal payments on capital lease obligations

     (528 )     (291 )     (225 )
    


 


 


Net cash provided by financing activities

     3,421       7,390       3,393  
    


 


 


Effect of exchange rate changes on cash and cash equivalents

     (3 )     —         —    

Net decrease in cash and cash equivalents

     (5,861 )     (2,374 )     (1,161 )

Cash and cash equivalents at beginning of year

     6,577       8,951       10,112  
    


 


 


Cash and cash equivalents at end of year

   $ 716     $ 6,577     $ 8,951  
    


 


 


Supplemental disclosure of cash flow information:

                        

Interest Income (Expense)

   $ (25 )   $ (26 )   $ 23  

Non-cash investing and financing activities:

                        

Property and equipment acquired by capital lease

   $ —       $ —       $ 317  

Conversion of preferred stock into common stock

   $ —       $ —       $ —    

Issuance of common stock warrants

   $ —       $ —       $ —    

 

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

 

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Table of Contents

TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1—THE COMPANY AND BASIS OF PRESENTATION:

 

The Company

 

Tripath Technology Inc. (the “Company” or “Tripath”) was incorporated in California in July 1995. The Company was reincorporated in Delaware in July 2000. The Company designs, develops and markets integrated circuit devices for the Consumer and PC Convergence, DSL and Wireless markets. On August 1, 2000, the Company completed its initial public offering of 5 million shares of common stock at $10.00 per share.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of Tripath and its wholly owned subsidiary, Tripath Technology Japan Ltd. All significant intercompany accounts and transactions have been eliminated. Accounts denominated in foreign currency have been remeasured using the U.S. dollar as the functional currency.

 

On November 14, 2004, Tripath’s Board of Directors approved a change in the Company’s fiscal year end from December 31 to September 30, effective as of September 30, 2004.

 

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

 

Going Concern

 

The Company’s consolidated financial statements have been prepared on the basis of a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred substantial losses and has experienced negative cash flow since inception and has an accumulated deficit of $201.2 million at September 30, 2005. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

Beginning in August 2001, the Company instituted programs to reduce expenses including reducing headcount from 144 employees at the end of July 2001 to 56 employees at the end of December 2003 and reducing employee salaries by 10 percent. In September 2002 the Company relocated its headquarters which reduced rent expense and canceled its D&O policy which reduced insurance expense. These actions resulted in significant cost savings in 2003. The Company reduced its cash used in operating activities from approximately $13 million in 2002 to approximately $4 million in 2003. However, for the nine months ended September 30, 2004, cash used in operating activities increased to $9.1 million and for the year ended September 30, 2005 the Company used $9.8 million in cash.

 

During 2003 warrants were exercised which resulted in the Company receiving proceeds totaling approximately $3.1 million. During 2004, the Company received proceeds of approximately $2.3 million from the exercise of outstanding warrants and $5 million from the sale of common stock. During 2005, the Company received proceeds of approximately $4.4 million from the sale of common stock. At September 30, 2005, the Company had working capital of $0.4 million, including cash of $0.9 million.

 

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TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company will require more cash during 2006 to fund its operations and management believes that such additional cash requirements could be met by first obtaining additional financing or by taking measures to reduce operating expenses such as reducing headcount or canceling research and development projects. However, the Company may not be able to obtain additional funds on terms that would be favorable to its stockholders and the Company, or at all. The Company’s long-term prospects are dependent upon obtaining sufficient financing as needed to fund current working capital needs and future growth, and ultimately on achieving profitability.

 

Foreign Currency Translation

 

The U.S. dollar is the functional currency for the Company’s Japanese wholly-owned subsidiary. Assets and liabilities that are not denominated in the functional currency are remeasured into U.S. dollars and the resulting gains or losses are included in “Interest and other income, net.” Such gains or losses have not been material for any period presented.

 

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

Revenue Recognition

 

The Company recognizes revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition in Financial Statements”. The Company recognizes revenue when all of the following criteria are met: 1) there is persuasive evidence that an arrangement exists, 2) delivery of goods has occurred, 3) the sales price is fixed or determinable, and 4) collectibility is reasonably assured. The following policies apply to the Company’s major categories of revenue transactions:

 

Sales to OEM Customers: Under the Company’s standard terms and conditions of sale, title and risk of loss transfer to the customer at the time product is delivered to the customer, FOB shipping point, and revenue is recognized accordingly. The Company accrues the estimated cost of post-sale obligations, including basic product warranties or returns, based on historical experience. The Company has experienced minimal warranty or other returns to date.

 

Sales to Distributors: Sales to distributors are made under arrangements allowing limited rights of return, generally under product warranty provisions, stock rotation rights and price protection on products unsold by the distributor. In addition, the distributor may request special pricing and allowances which may be granted subject to the company’s approval. As a result of these return rights and potential pricing adjustments, the Company generally defers recognition of revenue until such time that the distributor sells product to its customer based upon receipt of point-of-sale reports from the distributor.

 

Costs that relate to shipping and handling are included in cost of revenue for all periods presented.

 

Allowance for Doubtful Accounts

 

The Company provides an allowance for doubtful accounts to ensure trade receivables are not overstated due to un-collectibility. The collectibility of the Company’s receivables is evaluated based on a variety of factors, including the length of time receivables are past due, indication of the customer’s willingness to pay, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or substantial deterioration in the customer’s operating results or financial position. If circumstances related to the Company’s customers change, estimates of the recoverability of receivables would be further adjusted.

 

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TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Cash and cash equivalents and restricted cash

 

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

 

The following table summarizes the Company’s cash and cash equivalents (in thousands):

 

     September 30,
2005


   September 30,
2004


Cash and cash equivalents:

             

Cash

   $ 530    $ 942

Money market funds

     186      5,635
    

  

     $ 716    $ 6,577
    

  

 

At September 30, 2005 and September 30, 2004, the Company had $0.2 million and $0.8 million in restricted cash, respectively. The restricted cash represents monies held in a separate money market account that collateralize standby letters of credit that have been issued (see Note 7).

 

Fair value of financial instruments

 

Carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, approximate their fair values due to their relative short maturities and based upon comparable market information available at the respective balance sheet dates. The Company does not hold or issue financial instruments for trading purposes.

 

Concentration of credit risk and significant customers

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and short-term investments. Substantially all of the Company’s cash and cash equivalents are invested in highly-liquid money market funds. The Company sells its products through distributors and directly to original equipment manufacturers. The Company performs ongoing credit evaluations of its customers and maintains an allowance for potential credit losses, as considered necessary by management. Credit losses to date have been consistent with management’s estimates. During the year ended September 30, 2005, the nine months ended September 30, 2004 and year ended December 31, 2003 the Company wrote-off bad debts which had previously been reserved totaling approximately $0, $0, and $295,000, respectively.

 

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

 

    

% of Revenue for the
Year Ended
September 30,

2005


   

% of Revenue for the
Nine Months Ended
September 30,

2004

Restated


   

% of Revenue for the
Year Ended
December 31,

2003


 

Customer A

   40 %   28 %   24 %

Customer B

   16 %   19 %   —   %

Customer C

   12 %   9 %   18 %

Customer D

   —   %   —   %   15 %

 

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TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

The Company’s accounts receivable were concentrated with 3 customers at September 30, 2005 representing 40 percent, 16 percent and 12 percent of aggregate gross receivables, three customers at September 30, 2004 representing 28 percent, 19 percent and 9 percent of aggregate gross receivables and three customers at December 31, 2003 representing 24 percent, 18 percent and 15 percent of aggregate gross receivables.

 

Inventories

 

Inventories are stated at the lower of cost or market. This policy requires the Company to make estimates regarding the market value of the Company’s inventory, including an assessment of excess or obsolete inventory. The Company determines excess and obsolete inventory based on an estimate of the future demand and estimated selling prices for the Company’s products within a specified time horizon, generally 12 months. The estimates the Company uses for expected demand are also used for near-term capacity planning and inventory purchasing and are consistent with the Company’s revenue forecasts. Actual demand and market conditions may be different from those projected by the Company’s management. If the Company’s unit demand forecast is less than the Company’s current inventory levels and purchase commitments, during the specified time horizon, or if the estimated selling price is less than the Company’s inventory value, the Company will be required to take additional excess inventory charges or write-downs to net realizable value which will decrease the Company’s gross margin and net operating results in the future. During the quarter ended March 31, 2002, the Company recorded a provision for excess inventory of approximately $5 million primarily related to excess inventory for the Company’s TA2022 product as a result of a decrease in forecasted sales for this product. In 2004, the Company increased the inventory reserves by an additional $4.3 million from $4.9 million to $9.2 million to account for slow moving, excess, and obsolete inventory. The additional inventory charge related to slow-moving and excess inventory for our TA1101B, TA3020, TA2041, TA2022 and leaded TA2024 products, the TK2350, TK2051, TK2150, TK2050 and TK2052 chipsets, and Kauai 2BB and U461 die based on a decline in forecasted sales for these parts. These components and finished goods did not have a market or sales forecast based on customer demand that could support the number of units in inventory at that time. During the year ended September 30, 2005, the Company released a net amount of approximately $4.0 million of inventory reserves for products sold that were previously reserved for. These releases were due to the Company’s end-customers experiencing significant growth which resulted in sales of previously written down inventory. In addition during 2005, certain of the Company’s customers’ products had experienced growth beyond previously estimated levels.

 

Inventory purchase commitment losses

 

The Company accrues for estimated losses on non-cancelable purchase orders. The estimated losses result from anticipated future sale of products for sales prices less than the estimated cost to manufacture. Inventory purchase commitment losses accrued at September 30, 2005, September 30, 2004 and December 31, 2003 were $0.

 

Research and development expenses

 

Research and development costs are charged to expense as incurred.

 

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TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Property and equipment

 

Property and equipment, including leasehold improvements, are stated at historical cost, less accumulated depreciation and amortization. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the estimated useful lives of the assets or the term of the lease. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

 

Furniture and fixtures

   5 years

Software

   Shorter of 3-5 years or term of license

Equipment

   2-5 years

 

Long-lived assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that their net book value may not be recoverable. An impairment loss is recognized if the sum of the expected future cash flows (undiscounted and before interest) from the use of the assets is less than the net book value of the asset. The amount of the impairment loss, if any, will generally be measured as the difference between net book value of the assets and their estimated fair values.

 

Comprehensive income

 

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purposes financial statements. There was no difference between the Company’s net loss and its total comprehensive loss for the year ended September 30, 2005, the nine months ended September 30, 2004, and for the year ended December 31, 2003.

 

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TRIPATH TECHNOLOGY INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(continued)

 

Accounting for stock-based compensation

 

At September 30, 2005, the Company has two stock-based employee compensation plans, which are described more fully in Note 5. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. No stock-based employee compensation cost related to stock options is reflected in net income for the year ended September 30, 2005, the nine months ended September 30, 2004 and year ended December 31, 2003, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

 

    

Year Ended
September 30,

2005


   

Nine Months
Ended
September 30,
2004

Restated


    Year Ended
December 31,
2003


 

Net loss applicable to common stockholders, as reported

   $ (9,972 )   $ (11,665 )   $ (7,215 )

Total stock-based employee compensation expense included in the net loss, determined under the recognition and measurement principles of APB Opinion No. 25

     95       122       81  

Total stock-based employee compensation expense determined under fair value based method for all awards

     (3,657 )     (2,378 )     (1,211