DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.     )

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨        Preliminary Proxy Statement

 

x       Definitive Proxy Statement

 

¨        Definitive Additional Materials

 

¨        Soliciting Material Pursuant to § 240.14a-12

  

¨        Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

LEADIS TECHNOLOGY, INC.

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)

Payment of Filing Fee (Check the appropriate box)

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  1. Title of each class of securities to which transaction applies:

 

 
  2. Aggregate number of securities to which transaction applies:

 

 
  3. Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined):

 

 
  4. Proposed maximum aggregate value of transaction:

 

 
  5. Total fee paid:

 

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  6. Amount Previously Paid:

 

 
  7. Form, Schedule or Registration Statement No.:

 

 
  8. Filing Party:

 

 
  9. Date Filed:

 

 


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LEADIS TECHNOLOGY, INC.

Sunnyvale Business Park

800 W. California Avenue, Suite 200

Sunnyvale, CA 94086

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To Be Held On October 23, 2009

Dear Stockholder:

You are cordially invited to attend a Special Meeting of Stockholders of Leadis Technology, Inc., a Delaware corporation (the “Company”). The meeting will be held on October 23, 2009 at 9:00 a.m. local time at the Company’s offices located at 800 W. California Avenue, Suite 200, Sunnyvale, California 94086 for the following purposes:

 

  1. To approve the liquidation and dissolution of the Company pursuant to a Plan of Dissolution, substantially in the form attached as Annex A to the accompanying proxy statement.

 

  2. To consider and vote upon a proposal to adjourn the Special Meeting, if necessary to permit further solicitation of proxies if there are not sufficient votes at the time of the Special Meeting to approve the Plan of Dissolution.

 

  3. To conduct such other business as is properly brought before the meeting and any postponement or adjournment of the meeting.

 

 

Important Notice Regarding the Availability of Proxy Materials for the Stockholders’ Meeting to Be Held on October 23, 2009 at 9:00 a.m. local time at the Company’s offices located at

800 W. California Avenue, Suite 200, Sunnyvale, California 94086.

 

The proxy statement is available at http://ir.leadis.com/proxy.cfm.

These items of business are more fully described in the proxy statement accompanying this notice.

Only stockholders of record at the close of business on September 15, 2009 will be entitled to vote at the Special Meeting or any adjournment or postponement thereof.

The Company’s Board of Directors has carefully reviewed and considered the terms and conditions of the Plan of Dissolution, and the Board of Directors has concluded that the liquidation and dissolution of the Company is in the best interests of the Company and its stockholders. Therefore, the Company’s Board of Directors has approved these proposals and recommends that you vote FOR each of the proposals described in the accompanying proxy statement.

The Company urges you to read the accompanying proxy statement in its entirety and consider it carefully, including the “Risk Factors” pertaining to the Plan of Dissolution beginning on page 14.

It is very important that your shares be represented at the Special Meeting, regardless of the size of your holdings. The Plan of Dissolution, and the transactions contemplated thereby, cannot be consummated unless the holders of a majority of the shares of our common stock outstanding on the record date vote “For” the proposal. Accordingly, whether or not you expect to attend the meeting, please complete, date, sign and return the enclosed proxy card, as instructed in these materials, as promptly as possible in order to ensure your representation at the meeting. You may revoke your proxy at any time before it has been voted.

This notice, proxy statement and proxy card are being mailed on or about October 2, 2009.

 

By Order of the Board of Directors

/s/ John K. Allen

John K. Allen

Chief Financial Officer and Secretary

Sunnyvale, California

October 2, 2009

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the Plan of Dissolution, passed on the merits of the Plan of Dissolution, nor passed on the adequacy or accuracy of the disclosure contained in the proxy statement.


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LEADIS TECHNOLOGY, INC.

Sunnyvale Business Park

800 W. California Avenue, Suite 200

Sunnyvale, CA 94086

PROXY STATEMENT

FOR THE SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON OCTOBER 23, 2009

SUMMARY TERM SHEET

This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To fully understand the proposed liquidation and dissolution of the Company pursuant to the Plan of Dissolution, you should carefully read this entire proxy statement and the annexes attached to this proxy statement. As used in this proxy statement, unless the context otherwise requires, the terms “we,” “us,” “our,” “the Company,” and “Leadis” refer to Leadis Technology, Inc., a Delaware corporation.

About Leadis Technology, Inc.

We were incorporated in Delaware on May 15, 2000. Our principal executive offices are located at 800 W. California Avenue, Suite 200, Sunnyvale, California, 94086, and our telephone number is (408) 331-8600. All of our public filings with the Securities and Exchange Commission are accessible from our corporate website at www.leadis.com. Information contained on the website is not a part of this proxy statement.

We design, market and sell analog and mixed-signal semiconductor products, primarily for use in consumer electronic devices. As a fabless semiconductor company, we outsource all of the fabrication, assembly and testing of our products to outside subcontractors. Traditionally, our core products have been mixed-signal color display drivers with integrated controllers, which are critical components of displays used in portable consumer electronic devices. Beginning in 2007, we expanded our product offerings to include light-emitting diode, or LED, drivers, power management, touch technology and consumer audio analog integrated circuits. For the years ended December 31, 2008, 2007 and 2006, we incurred significant operating losses and negative cash flows, including net losses of $51.5 million, $30.9 million and $11.9 million, respectively. During this period our revenue decreased from $101.2 million in 2006 to $39.6 million in 2007 to $18.6 million in 2008.

As a result of our continuing financial losses, the impact of the global economic downturn, the prospects for our business and other factors, we took a number of actions in 2009 to significantly narrow the scope of our operations and reduce our expenses and cash burn. In addition to reducing our headcount, we sold assets related to our audio, power management, LED, and display driver product lines in separate transactions. Despite these actions, after consideration of strategic alternatives our Board of Directors determined that it is in the best interests of our stockholders to liquidate and dissolve the Company in accordance with Delaware law rather than continue our operations.

The Special Meeting

On September 15, 2009, our Board of Directors approved, subject to stockholder approval, the complete liquidation and dissolution of the Company pursuant to the terms of the Plan of Dissolution.

A Special Meeting of the Company’s stockholders will be held at the Company’s offices located at 800 W. California Avenue, Suite 200, Sunnyvale, California, 94086, on October 23, 2009 at 9:00 a.m., local time. At the Special Meeting, you will be asked to consider and vote upon proposals to (i) approve the Plan of Dissolution; (ii) adjourn the Special Meeting, if necessary or appropriate, to permit further solicitation of proxies if there are

 

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not sufficient votes at the time of the Special Meeting to approve the Plan of Dissolution (the “Meeting Adjournment Proposal”); and (iii) transact such other business as may properly come before the Special Meeting or any adjournments of the Special Meeting.

Below is a summary of the Plan of Dissolution. For more detailed information regarding the Plan of Dissolution, see “Proposal No. 1: Approval of the Plan of Dissolution—Principal Provisions of the Plan of Dissolution” beginning on page 21.

Required Vote

The affirmative vote of the holders of a majority of our common stock issued and outstanding and entitled to vote is required for the approval of the Plan of Dissolution.

Reasons for the Dissolution (Page 20)

Our Board of Directors believes that the dissolution and liquidation of the Company is advisable and in our best interests and the best interests of our stockholders. Our Board of Directors considered at length, with the assistance of legal and financial advisors, potential strategic alternatives available to us, including continuing to develop and market our current semiconductor products, seeking to acquire new businesses or technologies, partnering with third parties, or seeking a buyer for the entire company. In making its determination to approve the Plan of Dissolution, our Board of Directors considered, in addition to other pertinent factors:

 

   

that continuing to operate our business as currently constituted would result in further operating losses and depletion of our cash reserves;

 

   

the challenges that we would likely face in pursuing an acquisition strategy that would accelerate our growth, including competition for potential acquisition targets, our limited financial resources and the difficulties in successfully integrating acquisitions;

 

   

the potential enhanced stockholder value that might be derived if we were to continue to operate our businesses or acquire new businesses or technologies;

 

   

the fact that we have been actively considering strategic alternatives and restructuring alternatives for some time and engaged ThinkEquity LLC as a financial advisor in August 2008 to assist in the evaluation of strategic options, including the possible sale of the Company or its assets;

 

   

the Board’s belief that it would be in the best interest of our stockholders to allow our stockholders to determine how to best utilize cash resources rather than pursuing an alternative strategy such as entering into new markets or pursuing acquisitions;

 

   

the adverse effects of the economic downturn on the market for our products;

 

   

the possibility that our common stock will be delisted from the NASDAQ Global Market in the future if we do not regain compliance with the continued listing requirements of the NASDAQ Global Market as a result of our stock price or financial condition; and

 

   

the Board’s ability to abandon the Plan of Dissolution if an alternate transaction providing greater value to our stockholders is presented to the Company.

Our Board of Directors concluded that dissolution and liquidation under Delaware law is the preferred strategy among the alternatives available to us, is in the best interests of our stockholders and has adopted the Plan of Dissolution and recommends that our stockholders approve the Plan of Dissolution.

 

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Our Conduct Following the Adoption of the Plan of Dissolution (Page 23)

If our stockholders approve the Plan of Dissolution, we intend to complete the following steps at such times as our Board of Directors, in its discretion and in accordance with Delaware law, deems necessary, appropriate or advisable in the best interest of the Company and its stockholders:

 

   

file a Certificate of dissolution with the Secretary of State of the State of Delaware;

 

   

cease conducting normal business operations, except as may be required to wind up our business affairs;

 

   

attempt to convert, sell or otherwise dispose of all of our remaining non-cash assets for cash or cash equivalents in an orderly fashion;

 

   

pay or adequately provide for the payment of all of our known obligations and liabilities; and

 

   

distribute pro rata in one or more liquidating distributions all of our remaining assets, if any, to our stockholders as of the applicable record date.

Our Board of Directors may, to the full extent permitted by law, amend the Plan of Dissolution without any further stockholder approval if it determines that such amendment is in the best interest of our stockholders. In addition, if the Board of Directors determines that liquidation and dissolution are not in the best interests of our stockholders, the Board of Directors may direct that the Plan of Dissolution be abandoned, either before or after stockholder approval.

Sale of Our Assets (Page 26)

The Plan of Dissolution contemplates the sale of all of our non-cash assets without further stockholder approval. Stockholder approval of the Plan of Dissolution will constitute approval of any and all such future asset dispositions on such terms as are approved by our Board of Directors in its sole discretion. The prices at which we will be able to sell our various assets depend largely on factors beyond our control, including, without limitation, economic conditions, the condition of the semiconductor market in general, limitations on transferability of certain assets, the availability of financing to prospective purchasers of our assets, and any required United States and foreign regulatory approvals. In addition, we may no obtain as high of a price for a particular asset as we might secure if we were not in liquidation.

Liquidating Distributions; Nature; Amount; Timing (Page 23)

Although the Board has not established a firm timetable for distributions to our stockholders, if the Plan of Dissolution is approved, the Plan of Dissolution provides for an initial liquidating cash distribution as soon as practicable following such approval. After the initial cash distribution, we intend to make additional liquidating distributions from time to time following the filing of our Certificate of dissolution. Prior to making any liquidating distribution, the Board or the trustee, if we have transferred our assets to the Liquidating Trust, must have made a determination that reasonable provision has been made for the prosecution, defense, settlement or other resolution of claims and the satisfaction of all reasonably ascertainable liabilities of the Company. We currently estimate that, if we are able to dispose of substantially all of our non-cash assets, the aggregate amount of all liquidating distributions that will be paid to stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock. We currently anticipate that the amount of the initial distribution will be near the low end of the $0.93 to $1.20 per share range. Many of the factors influencing the amount of cash that may be distributed to our stockholders as a liquidating distribution cannot be currently quantified with certainty and are subject to change. Accordingly, you will not know the exact amount of any liquidating distributions you may receive as a result of the Plan of Dissolution when you vote on the proposal to approve the Plan of Dissolution. You may receive substantially less than the low end of the current estimate.

 

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All liquidating distributions from us will be made to stockholders based upon their holdings of common stock as of a final record date. Subject to the provisions of Delaware law, we expect to conclude the liquidation prior to the third anniversary of the filing of the Certificate of dissolution with the Delaware Secretary of State.

Treatment of Stock Options (Page 28)

Options to acquire shares of our common stock granted under our incentive plans that are outstanding immediately prior to the approval of the Plan of Dissolution, whether currently vested or unvested, will be cancelled as of the date on which our Certificate of dissolution is filed with the Delaware Secretary of State, which is expected to be promptly following approval of the Plan of Dissolution by stockholders.

Unless and until an option is exercised and payment of the applicable exercise price is made, option holders are not entitled to any cash distributions with respect to their options payable under the Plan of Dissolution.

Contingent Liabilities; Contingency Reserve; Liquidating Trust (Page 26)

In connection with our dissolution, we are required by Delaware law to pay or provide for payment of all of our liabilities and obligations. Following the date we file our Certificate of dissolution with the Delaware Secretary of State, we will pay all expenses and other known liabilities and establish a contingency reserve, consisting of cash or other assets, that we believe will be adequate for the satisfaction of all current, contingent or conditional claims and liabilities. We also may take other steps we determine are reasonably calculated to provide for the satisfaction of the reasonably estimated amount of such liabilities. We are currently unable to provide a precise estimate of the amount of the contingency reserve or the cost of other steps we may undertake to make provision for the satisfaction of liabilities and claims, but any such amount will be deducted before the determination of amounts available for distribution to stockholders. From time to time, we may distribute to our stockholders on a pro rata basis any portions of the contingency reserve that we deem no longer to be required. In the event we fail to create an adequate contingency reserve for payment of our expenses and liabilities and amounts have been distributed to the stockholders under the Plan of Dissolution, each stockholder could be held liable for the repayment to creditors of such stockholder’s pro rata portion of the shortfall out of the liquidation distributions received by such stockholder from us under the Plan of Distribution. See “Proposal 1: Approval of the Plan of Dissolution—Description of the Plan of Dissolution and Dissolution Process—Contingent Liabilities; Contingency Reserve.”

Reporting Requirements (Page 26)

Whether or not the Plan of Dissolution is approved, we have an obligation to continue to comply with the applicable reporting requirements of the Securities and Exchange Act of 1934, as amended, or the Exchange Act, even though compliance with such reporting requirements may be economically burdensome and of minimal value to our stockholders. If the Plan of Dissolution is approved by our stockholders, in order to curtail expenses, we intend to seek relief from the Securities and Exchange Commission, or SEC, to suspend our reporting obligations under the Exchange Act, and ultimately to terminate the registration of our common stock. We anticipate that, if granted such relief, we would continue to file current reports on Form 8-K to disclose material events relating to our dissolution and liquidation along with any other reports that the SEC might require. However, the SEC may not grant us the requested relief.

Trading of Leadis Common Stock and Interests in any Liquidating Trust (Page 28)

We anticipate that we will request that our common stock be delisted from the NASDAQ Global Market at the close of business on the date that we file the Certificate of dissolution with the Delaware Secretary of State and that trading of our shares on the NASDAQ Global Market will be suspended on that date or as soon thereafter as is reasonably practicable. We also currently expect to close our stock transfer books on or around the date that we file the Certificate of dissolution with the Delaware Secretary of State and to discontinue

 

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recording transfers and issuing stock certificates (other than replacement certificates) at that time. Accordingly, it is expected that trading in our shares of common stock will cease after the date that we file the Certificate of dissolution with the Delaware Secretary of State.

Interests of Directors and Officers in the Plan of Dissolution (Page 29)

In considering the recommendation of our Board of Directors, you should be aware that some of our directors and executive officers may have interests in the Plan of Dissolution that are different from or in addition to your interests as a stockholder and that may present actual or potential conflicts of interest. Our Board of Directors was aware of these interests and considered them, among other matters, in approving the Plan of Dissolution and the transactions contemplated thereby and in determining to recommend that our stockholders vote FOR the approval of the Plan of Dissolution. You should consider these and other interests of our directors and executive officers that are described in this proxy statement. See “Proposal 1: Approval of the Plan of Dissolution—Interests of Directors and Officers in the Plan of Dissolution.”

Material United States Federal Income Tax Consequences of Our Dissolution and Liquidation (Page 30)

After the approval of the Plan of Dissolution and until the liquidation is completed, our taxable income, if any, will continue to be subject to Federal and state income taxation. Upon the sale of any of our assets in connection with our liquidation, we will recognize gain or loss, and may recognize gain upon any distribution of non-cash assets that may or may not be offset by the Company’s net operating loss carryforwards. In the event we were to make a liquidating distribution of property other than cash to our stockholders, we will recognize gain or loss upon the distribution of such property as if we sold the distributed property for its fair market value on the date of the distribution. We currently do not anticipate that our dissolution and liquidation pursuant to the Plan of Dissolution will produce a material corporate tax liability for U.S. federal income tax purposes.

Required Stockholder Vote (Page 33)

The approval of the Plan of Dissolution requires the affirmative vote of a majority of the outstanding shares of our common stock. Abstentions and broker non-votes will have the same effect as votes against the proposal to approve the Plan of Dissolution.

Recommendation of our Board of Directors (Page 33)

At a meeting held on September 15, 2009, our Board of Directors: (i) determined that the liquidation and dissolution of the Company, and the other transactions contemplated thereby, are fair to, advisable and in the best interests of us and our stockholders, (ii) approved in all respects the Plan of Dissolution and the other transactions contemplated thereby, and (iii) recommended that our stockholders vote FOR the approval and adoption of the Plan of Dissolution.

 

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CAUTION AGAINST FORWARD-LOOKING STATEMENTS

This proxy statement contains certain forward-looking statements. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of invoking these safe harbor provisions. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from our expectations of future results, performance or achievements expressed or implied by such forward-looking statements. These risks include the risk that we may incur additional liabilities, that we may have liabilities about which we are not currently aware, that the value of our non-cash assets could be lower than anticipated, and that the cost of settlement of our liabilities and litigation matters could be higher than expected, all of which would impact our ability to make any distributions to our stockholders, as well as the estimated amount and timing of distributions as described in this proxy statement. Although we believe that the expectations reflected in any forward-looking statements are reasonable, we cannot guarantee future events or results. Except as may be required under federal law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur.

QUESTIONS AND ANSWERS ABOUT THIS PROXY MATERIAL AND VOTING

General Questions and Answers

Why am I receiving these materials?

We sent you this proxy statement and the enclosed proxy card because the Board of Directors (sometimes referred to as the “Board”) of Leadis Technology, Inc. (sometimes referred to as the “Company” or “Leadis”) is soliciting your proxy to vote at the Special Meeting of Stockholders to be held on October 23, 2009. You are invited to attend the meeting to vote on the proposals described in this proxy statement. However, you do not need to attend the meeting to vote your shares. Instead, you may simply complete, sign and return the enclosed proxy card.

The Company intends to mail this proxy statement and accompanying proxy card on or about October 2, 2009 to all stockholders of record as of the record date entitled to vote at the meeting.

Who can vote at the special meeting?

Only stockholders of record at the close of business on September 15, 2009 will be entitled to vote at the meeting. On this record date, there were 30,077,987 shares of common stock outstanding and entitled to vote.

Stockholder of Record: Shares Registered in Your Name

If on September 15, 2009 your shares were registered directly in your name with Leadis’ transfer agent, BNY Mellon Shareowner Services, then you are a stockholder of record. As a stockholder of record, you may vote in person at the meeting or vote by proxy. Whether or not you plan to attend the meeting, we urge you to fill out and return the enclosed proxy card as instructed below to ensure your vote is counted.

Beneficial Owner: Shares Registered in the Name of a Broker or Bank

If on September 15, 2009 your shares were held, not in your name, but rather in an account at a brokerage firm, bank, dealer, or other similar organization, then you are the beneficial owner of shares held in “street name” and these proxy materials are being forwarded to you by that organization. The organization holding your account is considered to be the stockholder of record for purposes of voting at the meeting. As a beneficial owner, you have the right to direct your broker or other agent on how to vote the shares in your account. You are also invited to attend the meeting. However, since you are not the stockholder of record, you may not vote your shares in person at the meeting unless you request and obtain a valid proxy from your broker or other agent.

 

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What am I voting on?

The following matters are scheduled for a vote at the Special Meeting:

 

   

the approval of the liquidation and dissolution of the Company pursuant to the Plan of Dissolution, substantially in the form attached hereto as Annex A and granting the Board of Directors the authority to modify, amend or abandon the Plan of Dissolution, without further action by stockholders if it determines that such action would be in the best interests of the Company and its stockholders; and

 

   

the approval of a proposal to adjourn the Special Meeting, if necessary to permit further solicitation of proxies if there are not sufficient votes at the time of the Special Meeting to approve the Plan of Dissolution.

How do I vote?

For each of the matters to be voted on, you may vote “For” or “Against” or abstain from voting. An abstention has the same effect as an against vote. The procedures for voting are fairly simple:

Stockholder of Record: Shares Registered in Your Name

If you are a stockholder of record, you may vote in person at the meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the meeting, we urge you to vote by proxy to ensure your vote is counted. You may still attend the meeting and vote in person if you have already voted by proxy.

 

   

To vote in person, come to the Special Meeting and we will give you a ballot when you arrive.

 

   

To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the envelope provided, or follow the instructions on the proxy card to submit your proxy over the Internet or by telephone. If you return your signed proxy card to us such that it is received by us before the meeting, we will vote your shares as you direct.

Beneficial Owner: Shares Registered in the Name of Broker or Bank

If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received a proxy card and voting instructions with these proxy materials from that organization rather than from the Company. Simply complete and mail the proxy card to ensure that your vote is counted. To vote in person at the special meeting, you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker or bank included with these proxy materials, or contact your broker or bank to request a proxy form.

How many votes do I have?

On each matter to be voted upon, you have one vote for each share of common stock you owned as of September 15, 2009.

What if I return a proxy card but do not make specific choices?

If you return a signed and dated proxy card without marking any voting selections, your shares will be voted (i) “For” the approval of the Plan of Dissolution and the liquidation and dissolution of the Company pursuant thereto and (ii) “For” a proposal to adjourn or postpone the Special Meeting if there are not sufficient votes at the time of the Special Meeting to approve the Plan of Dissolution. If any other matter is properly presented at the meeting, your proxy (one of the individuals named on your proxy card) will vote your shares using his best judgment.

Who is paying for this proxy solicitation?

The Company will bear the entire cost of soliciting proxies. In addition to these mailed proxy materials, our directors and employees may also solicit proxies in person, by telephone, or by other means of communication.

 

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Directors and employees will not be paid any additional compensation for soliciting proxies. We may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners.

What does it mean if I receive more than one proxy card?

If you receive more than one proxy card, your shares are registered in more than one name or are registered in different accounts. Please complete, sign and return each proxy card to ensure that all of your shares are voted.

Can I change my vote after submitting my proxy?

Yes. You can revoke your proxy at any time before the final vote at the meeting. If you are the record holder of your shares, you may revoke your proxy in any one of three ways:

 

   

You may submit another properly completed proxy card with a later date.

 

   

You may send a written notice that you are revoking your proxy to the Corporate Secretary of the Company at 800 W. California Avenue, Suite 200, Sunnyvale, California 94086.

 

   

You may attend the meeting and vote in person. Simply attending the meeting will not, by itself, revoke your proxy.

If your shares are held by your broker or bank as a nominee or agent, you should follow the instructions provided by your broker or bank to revoke your proxy.

How are votes counted?

Votes will be counted by the inspector of election appointed for the meeting, who will separately count “For”, “Against” votes, abstentions and broker non-votes. Abstentions will be counted towards the vote total for each proposal, and will have the same effect as “Against” votes. Broker non-votes have no effect and will not be counted towards the vote total for any proposal.

If your shares are held by your broker as your nominee (that is, in “street name”), you will need to obtain a proxy form from the institution that holds your shares and follow the instructions included on that form regarding how to instruct your broker to vote your shares. If you do not give instructions to your broker, your broker can vote your shares with respect to “routine” items, but not with respect to “non-routine” matters. Under the rules of the New York Stock Exchange, “non-routine” matters are generally those involving a contest or a matter that substantially affects the rights or privileges of stockholders, such as mergers, dissolution or stockholder proposals. On “non-routine” items for which you do not give your broker instructions, the shares will be treated as broker non-votes.

How many votes are needed to approve the Plan of Dissolution?

To be approved, the Plan of Dissolution must receive “For” votes from the holders of a majority of the shares of common stock outstanding on the record date for the Special Meeting either in person or by proxy. Abstentions and broker non-votes will have the same effect as votes “Against” the proposal to approve the Plan of Dissolution. As of the record date for the Special Meeting, there were 30,077,987 shares of common stock outstanding, which means that the proposal to approve the Plan of Dissolution must receive at least 15,038,994 “For” votes to be approved.

What is the quorum requirement?

A quorum of stockholders is necessary to hold a valid meeting. A quorum will be present if at least a majority of the outstanding shares as of the record date, September 15, 2009, are represented by stockholders present at the meeting or by proxy.

 

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Your shares will be counted towards the quorum only if you submit a valid proxy (or one is submitted on your behalf by your broker, bank or other nominee) or if you vote in person at the meeting. Abstentions and broker non-votes will be counted towards the quorum requirement. If there is no quorum, either the chairman of the meeting or a majority of the votes present at the meeting may adjourn the meeting to another date.

Questions and Answers Relating to the Plan of Dissolution

How does the Board of Directors recommend stockholders vote on the proposal to approve the Plan of Dissolution?

Our Board of Directors recommends that you vote FOR the authorization and approval of the Plan of Dissolution.

Why has the Board of Directors recommended the Plan of Dissolution and liquidation of the Company?

Our Board of Directors has determined that it is not advisable to continue to operate our business on an independent basis and that the distribution of our net assets in a liquidation has a greater probability of producing more value to our stockholders than other alternatives. We have incurred operating losses since 2005, including a loss of $51.5 million in 2008. Our Board considered and reviewed numerous strategies to maintain an operating business, including negotiations with potential acquirors or licensing partners, reductions in our workforce and restructuring of the Company, changing our business focus, and acquiring new businesses or technologies, none of which proved viable. As detailed in this proxy statement, our Board of Directors determined that it was in the best interests of our stockholders to adopt the Plan of Dissolution providing for the payment of outstanding creditor claims and the distribution of the balance of the Company’s remaining assets to stockholders in accordance with Delaware law. See “Proposal No. 1—Approval of the Plan of Dissolution—Background” and “—Reasons for Approving the Plan of Dissolution.”

What will happen if stockholders approve the Plan of Dissolution?

If the Plan of Dissolution is approved, we plan to file a Certificate of dissolution with the Delaware Secretary of State, complete the liquidation of our remaining assets, satisfy our remaining obligations and make distributions to our stockholders of available liquidation proceeds, if any.

We may, at any time, turn management of our company over to a third party to complete the liquidation of our remaining assets and distribute the available liquidation proceeds to our stockholders pursuant to the Plan of Dissolution, including an assignment for the benefit of creditors. This third-party management may be in the form of a liquidating trust, which, if adopted, would succeed to all of our assets, liabilities and obligations. Our Board of Directors, or a special committee of the Board of Directors, may appoint one or more of its members, one or more of our officers or a third party to act as trustee or trustees of such liquidating trust. See “Proposal No. 1—Approval of the Plan of Dissolution—Description of the Dissolution Process” and “—Contingent Liabilities; Contingency Reserve; Liquidating Trust.”

When will stockholders receive payment of liquidation proceeds?

If our stockholders approve the Plan of Dissolution and our liquidation thereto, we will distribute available liquidation proceeds to stockholders as our Board of Directors deems appropriate. While we are currently unable to predict the precise timing of any distributions pursuant to the Plan of Dissolution, we expect to make an initial liquidating cash distribution as soon as practicable following approval of the Plan of Dissolution by stockholders. Distributions may be made over the next few years, but if we are unable to sell our non-cash assets, if the proceeds of the sales of our non-cash assets are less than anticipated, if we are unable to settle or otherwise resolve existing claims for the amounts anticipated or if unanticipated claims are made against us, distributions to stockholders may be delayed and made over a longer period of time, if at all. The timing of any distributions will be determined by our Board and will depend upon our ability to sell our non-cash assets and resolve and pay our remaining liabilities, including contingent claims.

 

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How much can stockholders expect to receive if the Plan of Dissolution is approved at the special meeting?

At this time, we cannot predict with certainty the amount of any liquidating distributions to our stockholders. However, based on information currently available to us, assuming, among other things, no unanticipated actual or contingent liabilities, we estimate that over time stockholders will receive one or more distributions that in the aggregate range from approximately $0.93 to $1.20 per share. This range of estimated distributions represents our estimate of the amount to be distributed to stockholders during the liquidation, but does not represent the minimum or maximum distribution amount. Actual distributions could be higher or lower.

This estimated range is based upon, among other things, the fact that as of August 31, 2009, we had approximately $28.6 million in cash, cash equivalents, restricted cash equivalents and short-term and non-current investments. In addition, subsequent to August 31, 2009, we received approximately $3.2 million in connection with the sale of certain assets to IXYS Corporation. We expect to use cash of approximately $2.3 million to satisfy liabilities on our unaudited balance sheet after August 31, 2009. In addition to converting our remaining non-cash assets to cash and satisfying the liabilities currently on our balance sheet, we have used and anticipate using cash for a number of items, including but not limited to: satisfying capital leases and other contractual commitments. In addition to the satisfaction of our liabilities, we have used and anticipate continuing to use cash in the next several months for a number of items, including, but not limited to, the following:

 

   

ongoing operating expenses;

 

   

expenses incurred in connection with extending our directors’ and officers’ insurance coverage;

 

   

expenses incurred in connection with the liquidation and dissolution process;

 

   

severance and related costs;

 

   

resolution of pending and potential claims, assessments and obligations; and

 

   

professional, legal, consulting and accounting fees.

We are unable at this time to predict the ultimate amount of our liabilities because the settlement of our existing liabilities could cost more than we anticipate and we may incur additional liabilities arising out of contingent claims that have not been quantified, are not yet reflected as liabilities on our balance sheet and have not been included in the estimated range of potential distributions, such as liabilities relating to claims that have not been resolved and claims or lawsuits that could be brought against us in the future. If any payments are made with respect to the foregoing, the estimated range of distributions to stockholders will be negatively impacted and less than estimated. If the ultimate amount of our liabilities is greater than what we anticipate, the distribution to our stockholders may be substantially lower than anticipated. Therefore, we are unable at this time to predict the precise nature, amount and timing of any distributions due in part to our inability to predict the ultimate amount of our liabilities. Accordingly, you will not know the exact amount of any liquidating distributions you may receive as a result of the Plan of Dissolution when you vote on the proposal to approve the Plan of Dissolution. You may receive substantially less than the low end of the current estimate.

For further information regarding the expected amount of the distribution to stockholders, see “Proposal No. 1—Approval of the Plan of Dissolution—Liquidating Distributions; Nature; Amount; Timing.”

When will the liquidation be complete?

The liquidation pursuant to the Plan of Dissolution will be completed as soon as practicable. The exact period required for liquidation will depend on our ability to sell our non-cash assets, settle or otherwise resolve our liabilities, including contingent liabilities, and complete the dissolution of the Company and its subsidiaries.

What will happen if the Plan of Dissolution is not approved?

If the Plan of Dissolution is not approved by our stockholders, the liquidation and dissolution of the Company will not occur and our Board of Directors and management will explore what, if any, alternatives are

 

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available for the future of the Company, particularly in light of the fact that we have terminated substantially all of our employees, sold most of our product lines, and will continue to incur net losses for the foreseeable future. We took several of these steps in the interest of preserving cash available for distribution to stockholders and in recognition of the expectation that the announcement of approval of the Plan of Dissolution would adversely affect our ability to conduct our business in the ordinary course. At this time, we have only a few display driver and power management products in commercial production, which we expect to generate minimal revenue, and rehiring employees may not be possible, or would take several months at a cost that we are unable to estimate.

Possible alternatives include selling all of our stock or assets, changing our business focus, acquiring one or more new businesses or technologies, continuing our efforts to identify a merger partner or a reverse merger partner, turning the Company over to a third-party management company or liquidator, or seeking voluntary dissolution at a later time and with diminished assets. At this time, our Board of Directors has considered these options and has determined that it is in the best interests of our stockholders to dissolve the Company and return the cash to our stockholders. The Board of Directors, however, retains the right to consider other alternatives should a more attractive offer arise before or after the approval of the Plan of Dissolution. If our stockholders do not approve the Plan of Dissolution, we expect that our cash resources will continue to diminish and we would face risks related to continuing to try to market and sell the few products we have in commercial production. These risks could materially and adversely affect our business, financial condition or operating results and the value of our common stock, and you may lose all or part of your investment. Moreover, any alternative we select may have unanticipated negative consequences.

Do I have dissenters’ rights?

No. Under Delaware law, stockholders will not have dissenters’ appraisal rights with respect to the Plan of Dissolution.

Do directors and officers have interests in the Plan of Dissolution that differ from mine?

In considering the Board of Directors’ recommendation to approve the Plan of Dissolution, you should be aware that some of the directors and officers may have interests that are different from or in addition to your interests as a stockholder, including compensation and benefits payable as a result of termination of employment or other events, an indemnification insurance policy purchased for the benefit of directors and officers and/or our continuing indemnification obligations to directors. For a detailed description of the interests of directors and officers that differ from yours, see “Proposal No. 1—Approval of the Plan of Dissolution—Interests of Directors and Officers in the Plan of Dissolution.”

Can I still sell my shares of common stock?

Yes, you may sell your shares at this time, but it may be difficult or impossible to sell your shares in the near future. Our common stock is currently listed on the NASDAQ Global Market (NASDAQ) and currently you may sell your shares on this trading market. However, we are subject to financial and market-related tests and various qualitative standards established by NASDAQ to maintain our listing on the NASDAQ Global Market. We may also be delisted if we fail to meet NASDAQ Global Market’s other quantitative listing requirements or its qualitative standards.

To maintain the listing of our common stock on the NASDAQ Global Market, we are required to meet certain listing requirements, including a minimum bid price of $1 per share. On September 15, 2009, we received a letter from NASDAQ notifying us that the Company was not in compliance with the minimum bid price requirement of Nasdaq Marketplace Rule 4310(c)(4) as a result of the closing bid price for the Company’s common stock being below $1.00 for 30 consecutive business days. The Nasdaq Marketplace Rules provide the Company with 180 calendar days, or until March 15, 2010, to regain compliance with the minimum bid price requirement, which will require the bid price of the Company’s common stock to remain at or above $1.00 for a

 

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minimum of 10 consecutive business days. If the Company does not comply with Marketplace Rule 4310(c)(4) by March 15, 2010, the Company may be entitled to an additional compliance period of 180 days, if at that time the Company meets the NASDAQ Capital Market initial listing criteria in Marketplace Rule 4310(c), except for the bid price requirement. If the Company is not eligible for an additional compliance period, the Staff will provide written notification that the Company’s securities will be delisted, at which time, the Company may appeal Staff’s determination to delist its securities to a Listing Qualifications Panel. There is no assurance the Company will be eligible for such additional compliance period or that its common stock will not be delisted from Nasdaq. If our common stock is delisted from the NASDAQ Global Market and the NASDAQ Capital Market, it would 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 could materially adversely affect the market price and market liquidity of our common stock and our ability to raise necessary capital.

If the Plan of Dissolution is approved by our stockholders, we intend to delist our common stock from trading on the NASDAQ Global Market as soon as practicable after such stockholder approval and ultimately close our stock transfer books. Thereafter, certificates representing shares of Leadis common stock will not be assignable or transferable on our books except by will, intestate succession or operation of law.

Should I send in my stock certificates now?

No. You should not forward your stock certificates before receiving instructions to do so. As a condition to the receipt of any distribution to the stockholders, the Board of Directors, in its discretion, may require stockholders to (i) surrender their certificates evidencing their shares of Leadis common stock to us or (ii) furnish us with evidence satisfactory to the Board of the loss, theft or destruction of such certificates, together with such surety bond or other security or indemnity as may be required by and satisfactory to the Board. If surrender of stock certificates will be required following the dissolution, you will be provided written instructions regarding such surrender. Any distributions otherwise payable by us to stockholders who have not surrendered their stock certificates, if requested to do so, may be held in trust for such stockholders, without interest, pending the surrender of such certificates (subject to escheat pursuant to the law relating to unclaimed property).

What are the tax consequences to stockholders of the liquidation?

Generally, as a result of our liquidation, for U.S. federal income tax purposes stockholders will recognize gain or loss in an amount equal to the difference between (i) the sum of the amount of cash distributed to them plus the aggregate fair market value (at the time of the distribution) of any property distributed to them (including transfers of assets to a liquidating trust), and (ii) their adjusted tax basis for their shares of our common stock. A stockholder’s tax basis in his or her shares will depend upon various factors, including the stockholder’s cost and the amount and nature of any distributions received with respect thereto. Any loss will generally be recognized only when the final distribution from us has been received (including transfers of assets to a liquidating trust), which could be as long as three years after the date that the Plan of Dissolution is approved.

A brief summary of the material U.S. federal income tax consequences of our liquidation and dissolution appears beginning on page 28 of this proxy statement. Tax consequences to stockholders may differ depending on their circumstances. You should consult your own tax advisor as to the tax effect of your particular circumstances.

What do stockholders need to do now?

After carefully reading and considering the information contained in this proxy statement, each stockholder should vote by Internet or by telephone or complete, sign and date his or her proxy and return it in the enclosed return envelope as soon as possible so that his or her shares may be represented at the Special Meeting. A majority of shares entitled to vote must be represented at the Special Meeting to enable us to conduct business at the Special Meeting.

 

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Who can help answer my questions?

If you would like additional copies, without charge, of this proxy statement or if you have questions about the Plan of Dissolution, or the procedures for voting your shares, you should contact John K. Allen, our Vice President, Chief Financial Officer and Secretary, by phone at (408) 331-8616 or by mail at Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, California 94086.

 

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RISK FACTORS

RISKS RELATED TO THE PLAN OF DISSOLUTION

Our anticipated timing of the liquidation and dissolution may not be achieved.

As soon as practicable after the Special Meeting, if our stockholders approve the Plan of Dissolution, we intend to file a Certificate of dissolution with the Delaware Secretary of State and sell and monetize our remaining non-cash assets. There are a number of factors that could delay our anticipated timetable, including, but not limited to, the following:

 

   

our inability to sell and monetize or delays in selling and monetizing certain non-cash assets on terms acceptable to us;

 

   

delays in settling our remaining liabilities;

 

   

lawsuits or other claims asserted against us;

 

   

legal, regulatory or administrative delays; and

 

   

delays in liquidating and dissolving subsidiaries in domestic and foreign jurisdictions.

We cannot determine with certainty the amount of distributions to stockholders.

We cannot determine with certainty at this time the amount of distributions to our stockholders pursuant to the Plan of Dissolution. This determination depends on a variety of factors, including, but not limited to, the amount required to satisfy or settle known and unknown liabilities, and other contingent liabilities; the net proceeds, if any, from the sale of our remaining non-cash assets, including our accounts receivable; and other factors. Examples of uncertainties that could reduce the value of or eliminate distributions to our stockholders include unanticipated costs relating to:

 

   

delays in our liquidation and dissolution, including due to our inability to sell non-cash assets or settle claims;

 

   

delays in receiving or our inability to collect account receivables;

 

   

the defense, satisfaction or settlement of lawsuits or other claims that may be made or threatened against us in the future; and

 

   

delays in liquidating and dissolving subsidiaries in domestic and foreign jurisdictions.

As a result, we cannot determine with certainty the amount of distributions to our stockholders. It is possible that you may receive substantially less that the amounts estimated in this proxy statement.

We may not be able to settle all of our liabilities to creditors.

We have current and future liabilities to creditors. Our estimated distribution to stockholders takes into account all of our known liabilities and certain possible contingent liabilities and our best estimate of the amount reasonably required to satisfy such liabilities. As part of the wind-down process, we will attempt to settle all liabilities with our creditors. We cannot assure you that unknown liabilities that we have not accounted for will not arise, that we will be able to settle all of our liabilities or that they can be settled for the amounts we have estimated for purposes of calculating the range of distribution to stockholders. If we are unable to reach an agreement with a creditor relating to a liability, that creditor may bring a lawsuit against us. Amounts required to settle liabilities or defend lawsuits in excess of the amounts estimated by us will reduce the amount of net proceeds available for distribution to stockholders.

 

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Stockholders could be liable to the extent of liquidating distributions received if contingent reserves are insufficient to satisfy our liabilities.

If we fail to create an adequate contingency reserve for payment of our expenses and liabilities, or if we transfer our assets to a liquidating trust and the contingency reserve and the assets held by the liquidating trust are less than the amount ultimately found payable in respect of expenses and liabilities, each stockholder could be held liable for the payment to creditors of such stockholder’s pro rata portion of the deficiency, limited, however, to the amounts previously received by the stockholder in distributions from us or the liquidating trust. Accordingly, you could be required to return some or all distributions made to you. In such an event, you could receive nothing under the Plan of Dissolution.

If a court holds at any time that we have failed to make adequate provision for our expenses and liabilities or if the amount ultimately required to be paid in respect of such liabilities exceeds the amount available from the contingency reserve and the assets of the liquidating trust, if any, our creditors could seek an injunction against the making of distributions under the Plan of Dissolution on the grounds that the amounts to be distributed are needed to provide for the payment of our expenses and liabilities. Any such action could delay or substantially diminish the cash distributions to be made to stockholders and/or holders of beneficial interests of the liquidating trust under the Plan of Dissolution.

If our stockholders do not approve the Plan of Dissolution, our resources may diminish completely.

If our stockholders do not approve the Plan of Dissolution, our Board of Directors will explore what, if any, strategic alternatives are available for the future of the Company. Possible alternatives include changing our business focus, which could include acquiring a business or assets from a third party, expanding the scope of our business through relationships with third parties, selling all of our stock or assets, seeking to raise capital from the sale of securities, which could result in substantial dilution to our existing stockholders, or seeking voluntary dissolution at a later time and with potentially diminished assets. There can be no assurance that any of these alternatives would result in greater stockholder value than the proposed Plan of Dissolution. In the interest of preserving cash available for distribution to stockholders, we have significantly reduced our operating activities, including divesting of certain product lines and implementing headcount reductions, all of which would make it difficult to operate our business as we have in the past if the Plan of Dissolution is not approved. Moreover, any alternative we select may have unanticipated negative consequences, and we will face a number of risks, including the following:

 

   

We are likely to continue to incur net losses from the operation of our business. Moreover, our business may be negatively impacted by our announced intent to liquidate and dissolve the Company, which may cause our customers to transition to our competitors and make suppliers less willing to conduct business with us on the same terms as in the past, if at all. For this and other reasons, including the current economic climate, our net losses may increase in the future if we continue to operate our business and could consume a material amount of our remaining cash resources.

 

   

Any financing we may require to continue our operations or to acquire another business or technology may not be available on acceptable terms, if at all, particularly in light of the current economic climate. Any financing we are able to obtain may substantially dilute the interests of our current stockholders.

 

   

We would continue to incur expenses associated with being a public reporting company, including ongoing Securities and Exchange Commission (the “SEC”) reporting obligations. These expenses would accelerate the depletion of our existing cash resources.

 

   

On September 15, 2009, we received a letter from NASDAQ notifying us that the Company was not in compliance with the minimum bid price requirement of Nasdaq Marketplace Rule 4310(c)(4) as a result of the closing bid price for the Company’s common stock being below $1.00 for 30 consecutive business days. The Nasdaq Marketplace Rules provide the Company with 180 calendar days, or until March 15, 2010, to regain compliance with the minimum bid price requirement, which will require the

 

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bid price of the Company’s common stock to remain at or above $1.00 for a minimum of 10 consecutive business days. If the Company does not comply with Marketplace Rule 4310(c)(4) by March 15, 2010, our common stock could be delisted from the NASDAQ Global Market. Subsequent to any delisting of Leadis common stock from the NASDAQ Global Market, trading of Leadis common stock most likely would be conducted in the over-the-counter market on an electronic bulletin board established for unlisted securities, such as the Pink Sheets or the OTC Bulletin Board. Such trading would reduce the market liquidity of Leadis common stock and an investor would find it more difficult to dispose of, or obtain accurate quotations for the price of, Leadis common stock.

Our common stock will be delisted from the NASDAQ Global Market and our stock transfer books will close when we file the certificate of dissolution, after which it will not be possible for stockholders to publicly trade our stock.

In connection with the proposed liquidation and dissolution, our stock transfer books will close, after which it may not be possible for stockholders to trade in or transfer Leadis common stock. In connection with the proposed liquidation and dissolution, we intend to delist Leadis common stock from the NASDAQ Global Market, close our stock transfer books and discontinue recording transfers of Leadis common stock at which time common stock and stock certificates evidencing Leadis common stock will not be assignable or transferable on our books except by will, intestate succession or operation of law.

We expect to terminate registration of Leadis common stock under the Exchange Act, which will substantially reduce publicly-available information about the Company.

Leadis common stock is currently registered under the Exchange Act, which requires that we, and our officers and directors with respect to Section 16 of the Exchange Act, comply with certain public reporting and proxy statement requirements thereunder. Compliance with these requirements is costly and time-consuming. We anticipate that, if our stockholders approve the Plan of Dissolution, in order to curtail expenses, we will, after filing a Certificate of dissolution, seek to suspend our reporting obligations under the Exchange Act, and ultimately to terminate the registration of our common stock. We anticipate that we will continue to file with the SEC current reports on Form 8-K to disclose material events relating to our liquidation and dissolution until the effectiveness of the termination of the registration of Leadis common stock by filing a Form 15 with the SEC.

No further stockholder approval will be required.

Approval of the Plan of Dissolution and the actions contemplated thereby requires the affirmative vote of a majority of the shares of common stock outstanding on the record date. If our stockholders approve the Plan of Dissolution, we will be authorized to cease operations, sell, license or otherwise dispose of our non-cash assets and dissolve the Company and its subsidiaries without further approval of our stockholders, unless required to do so by Delaware law.

Our Board of Directors may abandon or delay implementation of the Plan of Dissolution even if the plan is approved by our stockholders.

Even if our stockholders approve the Plan of Dissolution, the Board of Directors has reserved the right, in its discretion, to the extent permitted by Delaware law, to abandon or delay implementation of the Plan of Dissolution, in order, for example, to permit us to pursue new business opportunities or strategic transactions.

We may be the potential target of an acquisition.

Until we dissolve and terminate registration of Leadis common stock, we will continue to exist as a public company. We could become an acquisition target, through a hostile tender offer or other means, as a result of our business operations, non-cash assets, cash holdings or for other reasons. If we become the target of a successful

 

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acquisition, the Board of Directors could potentially decide to either delay or, subject to applicable Delaware law, abandon the Plan of Dissolution, and our stockholders may not receive any proceeds that would have otherwise been distributed in connection with the proposed liquidation and dissolution.

Our board members may have a potential conflict of interest in recommending approval of the Plan of Dissolution.

Because of the compensation and benefits payable as a result of termination of employment or other events, an indemnification insurance policy purchased for the benefit of directors and officers and/or our continuing indemnification obligations to directors, our directors and officers may be deemed to have a potential conflict of interest in recommending approval of the Plan of Dissolution. See “Proposal No. 1—Approval of the Plan of Dissolution—Interests of Directors and Officers in the Plan of Dissolution.”

Stockholders may not be able to recognize a loss for federal income tax purposes until they receive a final distribution from us.

As a result of our liquidation and dissolution, for U.S. federal income tax purposes, stockholders will recognize gain or loss equal to the difference between (i) the sum of the amount of cash distributed to them and the aggregate fair market value at the time of distribution of any property distributed to them (including transfers of assets to a liquidating trust), and (ii) their adjusted tax basis in their shares of our common stock. Any loss may generally be recognized only when the final distribution has been received (including transfers of assets to a liquidating trust) from us and we are unable, at this time, to predict when any final distribution would be made.

Tax treatment of any liquidating distributions may vary from stockholder to stockholder, and the discussions in this proxy statement regarding such tax treatment are general in nature. You should consult your own tax advisor instead of relying on the discussions of tax treatment in this proxy for tax advice.

We have not requested a ruling from the Internal Revenue Service with respect to the anticipated tax consequences of the Plan of Dissolution, and we will not seek an opinion of counsel with respect to the anticipated tax consequences of any liquidating distributions. If any of the anticipated tax consequences described in this proxy statement proves to be incorrect, the result could be increased taxation at the corporate and/or stockholder level, thus reducing the benefit to our stockholders and us from the liquidation and distributions. Tax considerations applicable to particular stockholders may vary with and be contingent upon the stockholder’s individual circumstances.

 

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PROPOSAL NO. 1

APPROVAL OF THE PLAN OF DISSOLUTION

General

At the Special Meeting, stockholders will be asked to approve the voluntary dissolution and liquidation of the Company pursuant to the Plan of Dissolution. The Plan of Dissolution was approved by our Board of Directors, subject to stockholder approval, on September 15, 2009. A copy of the Plan of Dissolution is attached as Annex A to this proxy statement and incorporated herein by reference. Certain material features of the Plan of Dissolution are summarized below. Stockholders are urged to carefully read the Plan of Dissolution in its entirety.

BACKGROUND AND REASONS FOR THE PLAN OF DISSOLUTION

We were incorporated in Delaware on May 15, 2000. We design, market and sell analog and mixed-signal semiconductor products, primarily for use in consumer electronic devices. As a fabless semiconductor company, we outsource all of the fabrication, assembly and testing of our products to outside subcontractors. Traditionally, our core products have been mixed-signal color display drivers with integrated controllers, which are critical components of displays used in portable consumer electronic devices. Beginning in 2007, we expanded our product offerings to include light-emitting diode, or LED, drivers, power management, touch technology and consumer audio analog integrated circuits.

Our primary customers have traditionally been display module manufacturers, which incorporate our products into their display subassemblies for mobile phone manufacturers. For the years ended December 31, 2008, 2007 and 2006, we incurred significant operating losses and negative cash flows, including net losses of $51.5 million, $30.9 million and $11.9 million, respectively. During this period our revenue decreased from $101.2 million in 2006 to $39.6 million in 2007 to $18.6 million in 2008. As a result of our continuing financial losses, the impact of the global economic downturn, the prospects for our business and other factors, we took a number of actions in 2009 that significantly narrowed the scope of our operations and reduced our expenses and cash burn. These actions are described more specifically below.

Background

In 2006, we recorded $101.2 million in revenue from sales of our display driver products. Our gross margin, however, declined to 13% and we lost $11.9 million for the fiscal year ended December 31, 2006. Faced with the prospect of continuing declining margins for our core display driver products, we embarked on a plan to (i) focus our display driver business on advanced technology and (ii) diversify our business beyond display drivers into synergistic markets. Beginning in 2007, we began developing LED drivers and touch sensor products for the consumer electronics markets, and mobile phones in particular. In February 2007, we acquired Mondowave Inc., a privately-held developer of portable audio components, and in December 2007, we acquired Acutechnology Semiconductor, Inc., a privately-held provider of power management IC products. Collectively, these actions significantly expanded the scope of our operating activities and the range of products we could offer.

For 2008, we set three primary goals: (i) return to quarterly sequential revenue growth with improved operating margins; (ii) re-establish the Company as a supplier of high-performance display driver products; and (iii) establish the Company as a provider of high-performance analog and touch sensor products. At that time, we anticipated that continued growth in sales of our display driver solutions, resulting from design wins that we secured in 2007 and early 2008, would provide the necessary revenue base to support the broader research and development expenses associated with our diversified operations. Several display driver programs with Tier-1 customers, however, did not ramp in the first half of 2008 as anticipated, and forecasts from these customers remained below previously projected levels for the remainder of the 2008 fiscal year.

 

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In mid-2008, we began to focus on the preservation of our cash levels as revenue from sales of display driver products was not sufficient to offset the cost of research and development in the increased number of product areas. Our Board of Directors met to consider strategies to address our continuing financial losses and the potential impact of the worsening global economic climate on our business and operations, and determined that the prospects for our business were likely to continue to deteriorate due to continuing declines in demand for our core display driver products, and our likely continued difficulty in competing and realizing a profit as a small public company.

Between June 12, 2008 and December 31, 2008, our Board met more than ten times and considered several alternative strategies for the Company, including: (i) continuing current operations; (ii) making a sale or other disposition of all or part of the Company or its business; (iii) a “going-private” transaction; and (iv) an immediate shutdown and liquidation of the Company. In August 2008, we retained ThinkEquity LLC to provide financial advisory services to the Company and the Board of Directors with respect to strategic alternatives. ThinkEquity is a full-service, privately-owned investment bank experienced in providing advice in connection with merger and acquisitions and related transactions. Prior to this engagement, ThinkEquity had not provided any financial services to the Company. ThinkEquity conducted due diligence and provided analyses and other information related to the Board’s consideration of these strategic alternatives.

With the assistance of ThinkEquity, we initially focused on the sale of its audio products business. The With the assistance of ThinkEquity, we contacted over 20 potential suitors for the audio business between August and November 2008. We received several non-binding indications of interest from parties regarding the potential purchase of the Company’s audio business. In November 2008, we believed we were close to reaching a tentative agreement with a party to purchase our audio business. In late November, however, this party pulled out of negotiations to purchase the audio business based on overall economic conditions and that party’s own efforts to reduce its operating expenses. Following the withdrawal of this potential bidder from the process, we ceased further investment in our audio business, except as necessary to support existing customers, and continued to look for additional bidders.

While we initially focused primarily on the sale of our audio business, we received interest from other parties in acquiring other parts of our business. In addition to the pursuit of a sale of the audio business or other parts of the Company, during the second half of 2008 our Board of Directors and management also re-examined our product development strategy to examine whether we would have sufficient resources to allocate to our most promising businesses. As economic conditions further deteriorated in the latter part of 2008, we took actions to restructure our operations and reduce spending, including a reduction in our headcount.

In December 2008, our Board of Directors held meetings to discuss potential strategic alternatives in light of the worsening global economic conditions, our financial position and estimated financial results for 2009, the value proposition of each of our product lines, operating risks facing the Company, and other factors. In light of the challenges we faced, we continued to actively pursue strategic sales of parts of our business as well as other ways to reduce our overall operating expenses. As a result of these activities, we contacted or was contacted by more than 30 parties, including those parties contacted as part of the proposed sale of the audio business, regarding potential strategic transactions involving the Company’s business. These continued discussions resulted in several transactions over the first eight months of 2009:

 

   

In January 2009, we sold certain of our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea. The consideration paid was $3.5 million in the form of a non-interest bearing receivable due no later than January 2010 plus $0.5 million of assumed liabilities. The cash consideration has yet to be received, and the associated receivable carries risk of non-payment. To maintain the Company’s revenue levels while we continued to pursue strategic alternatives, we retained all but one of the display driver products that was then in commercial production. We also retained ownership of our proprietary EPiC™ technology for AM-OLED displays. As a result of this transaction, we ceased further investment in the development of new display driver products, significantly reducing our operating expenses.

 

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In February 2009, we sold certain assets relating to one development-stage power management product to a publicly-traded supplier of analog and mixed-signal semiconductor products. Under the terms of the transaction, we were paid $2.3 million in cash for the assets, all of which has been received. In connection with this transaction, we ceased development of new power management integrated circuits.

 

   

In March 2009, we sold assets related to our audio business and transferred certain employees to a publicly-traded supplier of semiconductor products for consideration of $1.45 million in cash, all of which has been received.

 

   

In June 2009, we sold assets related to our touch sensor products and transferred certain employees to a publicly-traded supplier of semiconductor products for consideration of $6.25 million in cash, all of which has been received.

 

   

On August 15, 2009, we executed an Asset Purchase Agreement with IXYS CH GmbH for the sale of assets related to our LED driver and controller business and three of our legacy display driver products. This transaction was completed on September 14, 2009. The cash consideration for the assets was $3.5 million plus approximately $569,000 for product inventory and other related assets that were transferred at the closing of the transaction, of which approximately $3.2 million was paid at the closing and $875,000 is payable in March 2010.

As a result of the foregoing transactions, the Company’s business currently consists of several legacy display drivers products and approximately twelve power management products. Collectively, these products generate only modest revenue. The Company also continues to hold intellectual property rights to its proprietary EPiC™ technology for AM-OLED displays. The Company is not actively developing any new products.

At a meeting held on September 10, 2009, in light of the pending completion of the Company’s transaction with IXYS, our Board of Directors again discussed different strategic alternatives available to the Company, including a voluntary dissolution of the Company. At a meeting on September 15, 2009, our Board of Directors continued its earlier discussions regarding the voluntary dissolution of the Company. After discussion of the legal benefits and risks and the potential timing and costs of the strategic options available to the Company and, upon consideration of the Company’s financial situation, business prospects, and the continued challenging economic climate, our Board of Directors determined that the voluntary dissolution and liquidation and winding up of the Company under Delaware law is advisable and in the best interests of the Company and its stockholders, approved the Plan of Dissolution and recommended the Plan of Dissolution for approval of the stockholders. It was noted that the Plan of Dissolution could be abandoned by the Board if a more attractive transaction became available to the Company.

Reasons for Approving the Plan of Dissolution

In approving the Plan of Dissolution, the Board of Directors considered a variety of factors, including the following:

 

   

our inability to find a purchaser or strategic partner that valued the Company in excess of the value of its cash assets after engaging a financial advisor to solicit indications of interest from prospective parties;

 

   

the challenges that we would likely face in pursuing an acquisition strategy that would accelerate our growth, including competition for potential acquisition targets, our limited financial resources and the difficulties in successfully integrating acquisitions;

 

   

the substantial accounting, legal and other expenses associated with being a small publicly-traded company in light of our existing and expected revenues;

 

   

the Board’s belief that it would be in the best interest of our stockholders to allow our stockholders to determine how to best utilize cash resources rather than pursuing an alternative strategy such as entering into new markets or pursuing acquisitions;

 

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the operating losses from our continuing operations in recent years, including for the year ended December 31, 2008, and the likelihood that we would continue to incur operating losses in future years;

 

   

the adverse effects of the economic downturn on the market for our products;

 

   

the possibility that our common stock will be delisted from the NASDAQ Global Market in the future if we do not regain compliance with the continued listing requirements of the NASDAQ Global Market as a result of our stock price; and

 

   

the Board’s ability to abandon the Plan of Dissolution if an alternate transaction providing greater value to our stockholders is presented to the Company.

The Board also considered potential negative factors relating to the Plan of Dissolution, including the uncertainty of the timing of distributions to stockholders, that stockholders will lose the opportunity to capitalize on the potential business opportunities and possible future growth of our business and on the potential future success had we elected to pursue an acquisition strategy or otherwise use our available cash to continue as a going concern, and that under applicable law our stockholders could be required to return to creditors some or all of the distributions made to stockholders in the liquidation.

The foregoing discussion of the information and positive and negative factors considered by our Board is not intended to be exhaustive. Our Board did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination.

Principal Provisions of the Plan of Dissolution

This section of the proxy statement describes material aspects of the proposed Plan of Dissolution. While we believe that the description covers the material terms of the Plan of Dissolution, this summary may not contain all of the information that is important to you. You should carefully read this entire proxy statement, including the Plan of Dissolution attached as Annex A to this proxy statement, and the other documents delivered with this proxy statement for a more complete understanding of the Plan of Dissolution.

Dissolution Under Delaware Law

Section 275 of the Delaware General Corporation Law, or DGCL, provides that a corporation may dissolve upon either (i) a majority vote of the board of directors of the corporation followed by a majority vote of its stockholders or (ii) a unanimous stockholder consent. Following such approval, the dissolution is effected by filing a Certificate of dissolution with the Delaware Secretary of State. Once a corporation is dissolved, its existence is automatically continued for a term of three years, but solely for the purpose of winding up its business. The process of winding up includes:

 

   

the settling and closing of any business;

 

   

the disposition and conveyance of any property;

 

   

the discharge of any liabilities;

 

   

the prosecution and defense of lawsuits, if any; and

 

   

the distribution of any remaining assets to the stockholders of the corporation.

If any action, suit or proceeding is commenced by or against the corporation before or within the winding up period, the corporation will, solely for the purpose of such action, suit or proceeding, automatically continue to exist beyond the three-year period until any judgments, orders or decrees are fully executed.

 

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Description of the Dissolution Process

Following stockholder approval of the Plan of Dissolution, the Company will file a Certificate of dissolution with the Delaware Secretary of State as soon as reasonably practicable and the Board of Directors and management will take the steps enumerated in the Plan of Dissolution in order to wind up our business, pay-off all liabilities and distribute to stockholders any remaining assets in the Company. Upon approval of the Plan of Dissolution, the Company shall use its best efforts to sell, exchange or otherwise dispose of its assets on terms and conditions as the Board, in its reasonable judgment, deems expedient and in the best interests of the Company and its stockholders. The Company will not be required to obtain appraisals or other third party opinions as to the value of its properties and assets in connection with the sale of its assets, and the approval of the Plan of Dissolution by our stockholders will constitute the approval of any sale, exchange or other disposition of the property and assets of the Company contemplated by the Plan of Dissolution. The Company will also collect or make provision for the collection of all debts owing to the Company and pay or make reasonable provision to pay all of its and its subsidiaries claims and obligations.

Following the payment, or the provision for payment, of our indebtedness and other obligations, we intend to establish a reasonable contingency reserve in an amount determined by the Board to be sufficient to satisfy our liabilities, expenses and obligations not otherwise paid, provided for or discharged (the “Contingency Reserve”). The Contingency Reserve will be used to provide compensation for a trustee that may be appointed to manage a liquidating trust for the benefit of stockholders and for any claim against the Company or its subsidiaries which (i) is the subject of a currently pending action or lawsuit or (ii) is likely to arise within ten years after the date of dissolution.

Subject to establishment of the Contingency Reserve, the Plan of Dissolution provides for an initial cash distribution as soon as practicable following approval of the Plan of Dissolution by our stockholders. After the initial cash distribution, we intend to make additional liquidating distributions from time to time following the filing of our Certificate of dissolution. All liquidating distributions will be made pro rata in accordance with the respective number of shares of Leadis common stock held of record on the effective date of our Certificate of dissolution. We currently estimate that, if we are able to dispose of substantially all of our non-cash assets, the aggregate amount of all liquidating distributions that we intend to pay to stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock. We currently anticipate that the amount of the initial distribution will be near the low end of the $0.93 to $1.20 per share range. Many of the factors influencing the amount of cash that may be distributed to our stockholders as a liquidating distribution cannot be currently quantified with certainty and are subject to change. Accordingly, you will not know the exact amount of any liquidating distributions you may receive as a result of the Plan of Dissolution when you vote on the proposal to approve the Plan of Dissolution. You may receive substantially less than the low end of the current estimate.

Additionally, the Board may, but is not required to, establish a liquidating trust for the benefit of stockholders (the “Liquidating Trust”). Should the Board elect to establish the Liquidating Trust, as a final liquidating distribution, the Company will transfer to the Liquidating Trust any assets of the Company which (i) have not been previously distributed to stockholders or (ii) are held as the Contingency Reserve. The Liquidating Trust would be managed by a liquidating trustee (the “Trustee”) pursuant to a liquidating trust agreement and any conveyance of assets to the Trustee would be in trust for the stockholders of the Company. Approval of the Plan of Dissolution by stockholders shall constitute the approval of the appointment of the Trustee, the liquidating trust agreement and the transfer of any assets by the Company to the Liquidating Trust.

In the event of a transfer of assets to the Liquidating Trust, we would distribute, pro rata to the holders of Leadis common stock, beneficial interests in the Liquidating Trust. It is anticipated that the interests in the Liquidating Trust, if established, will not be transferable; therefore, although the recipients of the interests would be treated for U.S. federal income tax purposes as having received their pro rata share of property transferred to the Liquidating Trust and having contributed such property to the Liquidating Trust and will thereafter take into

 

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account for U.S. federal income tax purposes their allocable portion of any income, gain or loss realized by the Liquidating Trust, the recipients of the interests will not receive the value thereof unless and until the Liquidating Trust distributes cash or other assets to them.

We intend to close our stock transfer books and discontinue recording transfers of shares of Leadis common stock when we file a Certificate of dissolution with the Delaware Secretary of State, and thereafter certificates representing Leadis common stock will not be assignable or transferable on the books of the Company except by will, intestate succession, or operation of law, and our capital stock and stock certificates evidencing the common stock will be treated as no longer being outstanding.

Conduct Following the Dissolution

Once the Certificate of dissolution is filed with the Delaware Secretary of State and becomes effective, we will continue to exist, but only for the purpose of winding up our affairs, and we will undertake to (i) convert to cash, by sales, as much of our remaining non-cash assets as possible, (ii) withdraw from any jurisdiction in which we are qualified to do business, (iii) pay or make provision for the payment of all of our expenses and liabilities, (iv) continue to indemnify our directors and officers as required by our Certificate of Incorporation, Bylaws and any contractual arrangements, and in connection therewith the Board of Directors and the Trustee shall have the authority to continue to pay the premiums on director and officer liability insurance, (v) create reserves for contingencies, (vi) prosecute, defend and settle lawsuits, if any, (vii) distribute our remaining assets, if any, to stockholders, and (viii) do any other act necessary to wind up and liquidate our business and affairs. The Board and management will oversee our dissolution and liquidation.

Right to Modify, Amend or Terminate the Plan of Dissolution

By approving the Plan of Dissolution, stockholders will be granting the Board of Directors the authority to modify, amend or abandon the Plan of Dissolution, without further action by stockholders and to the extent permitted by the DGCL, if it determines that such action would be in the best interests of the Company and its stockholders.

Liquidating Distributions; Nature; Amount; Timing

MANY OF THE FACTORS INFLUENCING THE AMOUNT OF CASH DISTRIBUTED TO OUR STOCKHOLDERS AS A LIQUIDATING DISTRIBUTION CANNOT CURRENTLY BE QUANTIFIED WITH CERTAINTY AND ARE SUBJECT TO CHANGE. ACCORDINGLY, YOU WILL NOT KNOW THE EXACT AMOUNT OF ANY LIQUIDATING DISTRIBUTIONS YOU MAY RECEIVE AS A RESULT OF THE PLAN OF DISSOLUTION WHEN YOU VOTE ON THE PROPOSAL TO APPROVE THE PLAN OF DISSOLUTION. YOU MAY RECEIVE SUBSTANTIALLY LESS THAN THE AMOUNT WE CURRENTLY ESTIMATE.

Although the Board of Directors has not established a firm timetable for distributions to our stockholders, if the Plan of Dissolution is approved, the Plan of Dissolution provides for an initial liquidating cash distribution as soon as practicable following such approval. After the initial cash distribution, we intend to make additional liquidating distributions from time to time following the filing of our Certificate of dissolution. Prior to making any liquidating distribution, the Board or the trustee, if we have transferred our assets to the Liquidating Trust, must have made a determination that reasonable provision has been made for the prosecution, defense, settlement or other resolution of claims and the satisfaction of all reasonably ascertainable liabilities of the Company. We currently estimate that, if we are able to dispose of substantially all of our non-cash assets, the aggregate amount of all liquidating distributions that we intend to pay to stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock. We currently expect that the initial cash distribution to be in an amount near the low end of the $0.93 to $1.20 per share range.

 

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We currently anticipate that the majority of the remaining proceeds from the liquidation would be distributed before the end of 2010, and that any additional proceeds would be distributed by way of a final liquidating distribution, either from the Company or the Liquidating Trust, within three years after the approval of the Plan of Dissolution. However, if we are unable to sell our non-cash assets, if the proceeds of the sales of our non-cash assets are less than anticipated, if we are unable to settle or otherwise resolve existing claims for the amounts anticipated or if unanticipated claims are made against us, distributions to stockholders may be delayed and made over a longer period of time. The ultimate nature, amount and timing of all distributions will be determined by the Board or the Trustee, in its sole discretion, and will depend in part upon our ability to convert our remaining assets into cash and pay and settle our remaining liabilities and obligations.

As of August 31, 2009, we had approximately $28.6 million in cash and cash equivalents. In addition, we received approximately $3.2 million on September 14, 2009 in connection with the closing of the sale of certain assets to IXYS Corporation. In addition to satisfying the liabilities reflected on our balance sheet, we anticipate using our cash during the liquidation process for a number of items, including, but not limited to, the following:

 

   

ongoing operating, overhead and administrative expenses;

 

   

purchasing a director and officer liability insurance policy as well as a “tail” insurance policy for periods subsequent to our filing of the Certificate of dissolution;

 

   

employee severance payments;

 

   

expenses incurred in connection with our dissolution and liquidation;

 

   

resolution of lease and other contractual obligations;

 

   

resolution of pending and potential claims, assessments and other obligations; and

 

   

professional, legal, tax, accounting and consulting fees.

This projected liquidation analysis assumes that the Plan of Dissolution will be approved by our stockholders. If the Plan of Dissolution is not approved by our stockholders, no liquidating distributions will be made. We intend to sell our remaining non-cash assets as soon as reasonably practicable after approval of the Plan of Dissolution; however, we have no way of knowing what will be the ultimate price received for our remaining non-cash assets. The amount of the Contingency Reserve established by the Board will be deducted before the determination of amounts available for distribution to stockholders. Based on the foregoing, we currently estimate that the aggregate amount ultimately distributed to our stockholders will be in the range of approximately $0.93 to $1.20 per share of Leadis common stock. The following estimates are not guarantees and they do not reflect the total range of possible outcomes. You may receive substantially less than the amount of liquidating distributions we currently estimate, or you may not receive any liquidating distributions.

 

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Estimated Liquidating Distributions to Stockholders

(in thousands, except per share amounts)

 

     Low Range     High Range  

Current cash and investments as of August 31, 2009 (a)

   $ 28,567      $ 28,567   

Proceeds from sale of assets to IXYS Corporation (b)

     3,194        3,194   

Non-cash assets (c)

     2,325        8,761   
                

Total estimated assets

     34,086        40,522   

Employee compensation—severance (d)

     (1,203     (1,153

Employee compensation—closing activities

     (410     (310

Professional fees (e)

     (250     (110

Insurance (f)

     (130     (75

Other operating expenses (g)

     (335     (135
                

Total operating expenses

     (2,328     (1,783

Total estimated liabilities and reserves (h)

     (3,406     (2,151
                

Estimated cash to distribute to shareholders

   $ 28,352      $ 36,588   
                

Shares outstanding (i)

     30,554        30,554   

Estimated per share distribution

   $ 0.93      $ 1.20   

 

Notes:

(a) Consists of approximately $23.8 million in cash and cash equivalents and approximately $4.8 million in short-term investments.
(b) This transaction was completed on September 14, 2009.
(c) Consists of account receivables for product shipments, prepaid expenses and other deposits, tax refunds, and other non-cash assets to be sold in the wind up of the Company. Also, includes (i) $0 and approximately $3.5 million in the high and low estimates, respectively, related to the account receivable from the January 2009 sale of certain display driver assets to AsTEK, Inc. Due to the uncertainty of the value of our intellectual property, we have not included the value of intellectual property in Non-cash assets.
(d) Estimated severance costs for remaining employees involved in the wind up operations. See also “Proposal No. 1—Approval of the Plan of Dissolution—Interests of Directors and Officers in the Plan of Dissolution” on page 29.
(e) Estimated range of cash use for professional fees related to our liquidation and dissolution, as well as ongoing SEC reporting requirements.
(f) Estimated range of cash use for the purchase of insurance, including directors and officers liability insurance, general liability and other insurance premiums.
(g) Consists of ongoing operating, overhead and administrative expenses expected to be incurred through the wind up process, including independent contractor fees, dissolution and liquidation expenses, compliance costs, as well as other customary operating expenses.
(h) Includes (i) approximately $1.8 million in accounts payable and accrued liabilities, (ii) approximately $300,000 in connection with the resolution of pending and potential claims, assessments and related obligations and liabilities, and (iii) approximately $1.3 million and $300,000 in the low and high estimates, respectively, for resolution of lease and contractual obligations and wind up costs.
(i) Consists of 30,067,287 shares of common stock outstanding as of August 31, 2009, 415,000 shares of common stock issuable upon the exercise of in-the-money stock options having an exercise price of less than $0.80, the closing price of our common stock on the NASDAQ Global Market on August 31, 2009, and 71,663 shares issuable pursuant to restricted stock unit awards held by current employees as of August 31, 2009.

 

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Sale of Our Assets

The Plan of Dissolution gives our Board of Directors the authority to sell all of our assets. Agreements for the sale of assets may be entered into prior to the Special Meeting and, if entered into, may be contingent on approval of the Plan of Dissolution at the Special Meeting. Authorization and approval of the Plan of Dissolution will constitute approval of any such agreements and sales. Sales of our remaining non-cash assets will be made on such terms as are approved by the Board and may be conducted by either competitive bidding, public sales or privately negotiated sales. We do not anticipate that any further stockholder votes will be solicited with respect to the approval of the specific terms of any particular sales of assets approved by the Board. We do not anticipate amending or supplementing this proxy statement to reflect any such agreement or sale, unless required by applicable law. The prices at which we will be able to sell our various assets depends largely on factors beyond our control, including, without limitation, the condition of financial markets, the condition of the semiconductor markets in general, the availability of financing to prospective purchasers of the assets, limitations on transferability of individual assets, and regulatory approvals. In addition, we may not obtain as high a price for a particular asset as we might secure if we were not in liquidation.

Continuing Insurance

Following stockholder approval of the Plan of Dissolution, we will continue to indemnify our officers, directors, employees and agents for their lawful actions in accordance with our Certificate of Incorporation, Bylaws and any contractual arrangement, for the actions taken in connection with the Plan of Dissolution and the winding up of the affairs of the Company. The Company’s obligation to indemnify such persons may also be satisfied out of the assets of the Liquidating Trust, if any. Additionally, we have maintained, and intend to continue to maintain, director and officer liability insurance for the benefit of such persons. As part of our wind-down, we intend to prepay the premium to continue to maintain such insurance for claims made following the filing of our certificate of dissolution. Since our insurance policy may, depending upon the circumstances, require us to pay the initial amount of any liability incurred and then to pay the further costs of defending a claim, subject to reimbursement from the insurance carrier, we intend to establish a contingency reserve to cover such possible contingency.

Reporting Requirements

Whether or not the Plan of Dissolution is approved, we have an obligation to continue to comply with the applicable reporting requirements of the Securities and Exchange Act of 1934, as amended even though compliance with such reporting requirements may be economically burdensome and of minimal value to our stockholders. In order to curtail expenses, we will seek to deregister the Company under the Exchange Act, and avoid the applicable reporting requirements thereof to the extent that continued reporting is otherwise required. We anticipate that, if granted such relief, we would continue to file current reports on Form 8-K to disclose material events relating to our dissolution and liquidation along with any other reports that the SEC might require. However, the SEC may not grant us the requested relief. To the extent that we are unable to suspend our obligation to file periodic reports with the SEC, we would be obligated to continue complying with the applicable reporting requirements of the Exchange Act and will be required to continue to incur the expenses associated with these reporting requirements, which will reduce the cash available for distribution to our stockholders.

Contingent Liabilities; Contingency Reserve; Liquidating Trust

Under Delaware law, we are required, in connection with our liquidation and dissolution, to pay or provide for payment of all of our liabilities and obligations. Following the authorization and approval of the Plan of Dissolution by our stockholders, we intend to pay all expenses and fixed and other known liabilities, and establish the Contingency Reserve, which will include cash and other assets which we believe to be sufficient, based on factors known to us, to satisfy such liabilities, including additional liabilities arising out of contingent claims that are not yet reflected on our balance sheet, and other claims that might arise. We are currently unable to estimate with precision the amount of the Contingency Reserve which may be required, but that amount will be deducted before the determination of amounts available for distribution to stockholders.

 

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The actual amount of the Contingency Reserve will be based upon estimates and opinions of management and the Board of Directors and derived from consultations with outside experts and review of our estimated operating expenses and future estimated liabilities, including, without limitation, anticipated compensation payments, estimated legal and accounting fees, operating lease expenses, payroll and other taxes payable, miscellaneous office expenses, expenses accrued in our financial statements, and reserves for litigation expenses. There can be no assurance that the Contingency Reserve in fact will be sufficient. We have not made any specific provision for an increase in the amount of the Contingency Reserve. Subsequent to the establishment of the Contingency Reserve, we intend to distribute to our stockholders any portions of the Contingency Reserve which are deemed no longer to be required. After the liabilities, expenses and obligations for which the contingency reserve had been established have been satisfied in full, we intend to distribute to our stockholders any remaining portion of the Contingency Reserve.

The Plan of Dissolution provides that the Board may, in its discretion, transfer as a final liquidating distribution, our remaining assets and liabilities, including the Contingency Reserve, to the Liquidating Trust, which would then have responsibility for disposing of assets, settling and paying liabilities and making distributions to stockholders. Such a transfer would be pursuant to a liquidating trust agreement with the Trustee on such terms and conditions as may be approved by the Board. The Board would appoint the Trustee, which could be an officer or director of the Company. Stockholder approval of the Plan of Dissolution will constitute stockholder approval of the Board’s trustee appointment and any liquidating trust agreement. In the event of a transfer of assets to the Liquidating Trust, we would distribute, pro rata to our stockholders, beneficial interests in the Liquidating Trust. It is anticipated that the interests would be evidenced only by the records of the Liquidating Trust and there would be no certificates or other tangible evidence of such interests and that no holder of Leadis common stock would be required to pay any cash or other consideration for the interests to be received in the distribution or to surrender or exchange shares of Leadis common stock in order to receive the interests. It is also anticipated that the interests in the Liquidating Trust, if established, will not be transferable. Therefore, although the recipients of such interests would be treated for U.S. federal income tax purposes as having received their pro rata share of property transferred to the Liquidating Trust and having contributed such property to the Liquidating Trust and will thereafter take into account for U.S. federal income tax purposes their allocable portion of any income, gain or loss realized by the Liquidating Trust, the recipients of interests will not receive the value thereof unless and until the Liquidating Trust distributes cash or other assets to them.

Under Delaware law, in the event that the Contingency Reserve proves to be inadequate for payment of our expenses and liabilities, or should the Contingency Reserve and the assets held by the Liquidating Trust be exceeded by the amount ultimately found payable in respect of expenses and liabilities, each stockholder could be held liable for the payment to creditors of such stockholder’s pro rata share of such excess, limited to the amounts theretofore received by such stockholder from us and from the Liquidating Trust.

If we were held by a court to have failed to make adequate provision for our expenses and liabilities or if the amount ultimately required to be paid in respect of such liabilities exceeded the amount available from the Contingency Reserve and the assets of the Liquidating Trust, a creditor of ours could seek an injunction against the making of distributions under the Plan of Dissolution on the ground that the amounts to be distributed were needed to provide for the payment of our expenses and liabilities. Any such action could delay or substantially diminish the cash distributions to be made to stockholders and/or interest holders under the Plan of Dissolution.

Final Record Date For Receiving Liquidating Distributions

We intend to close our stock transfer books and discontinue recording transfers of shares of Leadis common stock when we file a certificate of dissolution with the Delaware Secretary of State (the “Final Record Date”), and thereafter certificates representing Leadis common stock will not be assignable or transferable on the books of the Company except by will, intestate succession, or operation of law, and our capital stock and stock certificates evidencing the common stock will be treated as no longer being outstanding. Additionally, after the Final Record Date, we will not issue any new stock certificates. We anticipate that no further trading of our shares will occur on or after the Final Record Date. See “—Trading of Leadis Common Stock and Interests in the Liquidating Trust” below.

 

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All liquidating distributions from us or the Liquidating Trust on or after the Final Record Date will be made to stockholders according to their holdings of Leadis common stock as of the Final Record Date. Subsequent to the Final Record Date, we may at our election require stockholders to surrender certificates representing their shares of Leadis common stock in order to receive subsequent distributions. Stockholders should not forward their stock certificates before receiving instructions to do so. If surrender of stock certificates should be required, all distributions otherwise payable by us or the Liquidating Trust, if any, to stockholders who have not surrendered their stock certificates may be held in trust for those stockholders, without interest, until the surrender of their certificates (subject to escheat pursuant to the laws relating to unclaimed property). If a stockholder’s certificate evidencing Leadis common stock has been lost, stolen or destroyed, the stockholder may be required to furnish us with satisfactory evidence of the loss, theft or destruction thereof, together with a surety bond or other indemnity, as a condition to the receipt of any distribution.

Trading of Leadis Common Stock and Interests in the Liquidating Trust

We anticipate that we will request that our common stock be delisted from the NASDAQ Global Market at the close of business on the date that we file the Certificate of dissolution with the Delaware Secretary of State and that trading of our shares on the NASDAQ Global Market will be suspended on that date or as soon thereafter as is reasonably practicable. We also currently expect to close our stock transfer books on or around the date that we file the Certificate of dissolution with the Delaware Secretary of State and to discontinue recording transfers and issuing stock certificates (other than replacement certificates) at that time. Accordingly, it is expected that trading in our shares of common stock will cease after the date that we file the Certificate of dissolution with the Delaware Secretary of State.

We anticipate that the interests in the Liquidating Trust, if established, will not be transferable, although no determination has yet been made. This determination will be made by the Board of Directors and management prior to the transfer of unsold assets to the Liquidating Trust and will be based on, among other things, the Board’s and management’s estimate of the value of the assets being transferred to the Liquidating Trust, tax consequences and the impact of compliance with applicable securities laws. The Liquidating Trust may be required to comply with the periodic reporting and proxy requirements of the Exchange Act. The costs of compliance with such requirements would reduce the amount which otherwise could be distributed to interest holders. Even if transferable, the interests are not expected to be listed on the NASDAQ Stock Market or another national securities exchange, and the extent of any trading market therein cannot be predicted. Moreover, the interests may not be accepted by commercial lenders as security for loans as readily as more conventional securities with established trading markets.

As stockholders will be deemed to have received a liquidating distribution equal to their pro rata share of the value of the net assets distributed to an entity which is treated as a liquidating trust for tax purposes, the distribution of non-transferable interests could result in tax liability to the interest holders without their being readily able to realize the value of such interests to pay such taxes or otherwise.

Treatment of Stock Options

Options to acquire shares of Leadis common stock granted under the Company’s various stock incentive plans that are outstanding immediately prior to the approval of the Plan of Dissolution, vested or unvested, will be cancelled as of the date on which our certificate of dissolution is filed with the Delaware Secretary of State, which is expected to occur promptly after approval of the Plan of Dissolution by our stockholders.

Absence of Appraisal Rights

Under Delaware law, our stockholders are not entitled to appraisal rights for their shares of Leadis common stock in connection with the transactions contemplated by the Plan of Dissolution.

 

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Regulatory Approvals

Except for filing the certificate of dissolution with the Delaware Secretary of State and compliance with the DGCL, the rules and regulations of the SEC and the United States Internal Revenue Code, no United States federal or state regulatory requirements must be complied with or approvals obtained in connection with the liquidation.

Interests of Directors and Officers in the Plan of Dissolution

In considering the recommendation of the Board of Directors to approve the Plan of Dissolution, you should be aware that our directors and our executive officers have interests that may be different from, or are in addition to, your interests as a stockholder. The Board was aware of these actual and potential conflicts of interest and considered them along with other matters when they determined to recommend the Plan of Dissolution.

Following dissolution, we will continue to indemnify our officers, directors, employees and agents in accordance with our certificate of incorporation and bylaws for actions taken in connection with the Plan of Dissolution and the winding up of our business and affairs, and we will continue to compensate our officers, directors and employees in connection with their services provided in connection with the implementation of the Plan of Dissolution, if any. As part of our dissolution process, we intend to purchase a director and officer liability insurance policy as well as a “tail” insurance policy for periods subsequent to our filing of the certificate of dissolution. We also will continue to indemnify our directors, officers, employees, consultants, and agents to the maximum extent permitted in accordance with applicable law, our certificate of incorporation and bylaws, and any contractual arrangements, for actions taken in connection with the Plan of Dissolution and the winding up of our business and affairs, and we will indemnify any trustees and their agents on similar terms. Our board of directors and any trustees are authorized to obtain and maintain insurance for the benefit of such directors, officers, employees, consultants, agents and any trustees to the extent permitted by law and as may be necessary or appropriate to cover our obligations under the Plan of Dissolution, including seeking an extension in time and coverage of our insurance policies currently in effect.

Each of our officers and directors have vested and exercisable options to purchase an aggregate of 2,296,399 shares of our common stock. Pursuant to the terms of the plans under which the options were granted, we are required to give notice to option holders prior to a proposed liquidation or dissolution of the Company notifying the holders that options that have not been exercised prior to the effective date of the dissolution will automatically terminate on the effective date. Based on the estimated per share liquidating distribution to be made to stockholders under the Plan of Dissolution, we expect that approximately 395,000 shares subject to options held by our directors and executive officers will be exercised prior to their termination. See “Security Ownership of Certain Beneficial Owners and Management” for information on the number of shares and options held by our directors and executive officers.

Following approval of the Plan of Dissolution, we expect to reduce the annual fees paid to our non-employee directors from the current rate of $30,000 to $15,000.

Certain of our officers and other employees are entitled to benefits under the Change of Control and Severance Benefit Plan adopted by the Company in June 2006, including Antonio Alvarez, our Chief Executive Officer, John Allen, our Chief Financial Officer, and Skip Wong, our Executive Vice President of Operations. Under this Plan, if we were to terminate Mr. Alvarez’s employment with us without cause following approval of the Plan of Dissolution, Mr. Alvarez would be entitled to receive (i) his base salary, health insurance and general benefits for a period of two years from the effective date of the termination of his employment; (ii) immediate vesting of his unvested and outstanding stock options; and (iii) a one-time termination payment equal to 80% of twice his annual base salary. Under this Plan, if we were to terminate Mr. Allen’s employment with us without cause following approval of the Plan of Dissolution, Mr. Allen be entitled to receive (i) his base salary and health insurance benefits for a period of one year from the effective date of the termination of his employment;

 

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(ii) immediate vesting of his unvested and outstanding stock options; and (iii) a one-time termination payment equal to 50% of his annual base salary. Under this Plan, if we were to terminate Mr. Wong’s employment with us without cause following approval of the Plan of Dissolution, Mr. Wong would be entitled to receive (i) his base salary and health insurance benefits for a period of six months from the effective date of the termination of his employment and (ii) immediate vesting of his unvested and outstanding stock options. If the Plan of Dissolution is approved by stockholders, it is contemplated that the employment with the Company of Messrs. Alvarez, Allen and Wong will be terminated when their services are no longer required in connection with the winding up of the Company and the liquidation of its assets.

In an effort to reduce expenses and preserve assets available for distribution to our stockholders, the Company and Messrs. Alvarez and Allen have agreed to reduce the amount of benefits payable to them in connection with the proposed liquidation and dissolution of the Company. Upon the termination of his employment, which is expected to occur after approval of the Plan of Dissolution by our stockholders, Mr. Alvarez will be paid severance benefits equal to his annual base salary of $350,000 plus health insurance and general benefits for a period of one year from the effective date of the termination of his employment, estimated to be approximately $17,500. The Board of Directors has also approved a consulting relationship with Mr. Alvarez in the amount of $6,000 per month to assist with the sale of the Company’s remaining non-cash assets following the anticipated termination of his employment. Upon the termination of his employment, which is expected to occur after approval of the Plan of Dissolution by our stockholders, Mr. Allen will be paid severance benefits equal to six months of his annual base salary, or $110,250, plus health insurance and general benefits for a period of nine months from the effective date of the termination of his employment, estimated to be approximately $15,500. The Board of Directors has also approved a consulting relationship with Mr. Allen in the amount of $4,000 per month to assist with the wind down of the Company following the anticipated termination of his employment.

Based upon his role in connection with the transactions completed by the Company in 2009 and to help retain his services through the special meeting, the Board of Directors approved an increase in the severance benefits payable to Mr. Wong. Upon the termination of his employment, which is expected to occur after approval of the Plan of Dissolution by our stockholders, Mr. Wong will be paid severance benefits equal to nine months of his annual base salary, or $165,000, plus health insurance and general benefits for a period of nine months from the effective date of the termination of his employment, estimated to be approximately $12,500. The Board of Directors has also approved a consulting relationship with Mr. Wong in the amount of $4,000 per month to assist with the wind down of the Company following the anticipated termination of his employment.

The Company may terminate the consulting relationships with Messrs. Alvarez, Allen and Wong at any time when their services are no longer needed in connection with the wind down of the Company.

Certain Federal and State Income Tax Consequences

The following is a general summary of the material U.S. federal income tax consequences of the liquidation and dissolution of the Company to certain holders of Leadis common stock. This summary is based on the Internal Revenue Code of 1986, as amended, referred to as the “Code” in this proxy statement, regulations promulgated under the Code, administrative rulings by the Internal Revenue Service and court decisions now in effect. All of these authorities are subject to change, possibly with retroactive effect so as to result in tax consequences different from those described below. This summary does not address all of the U.S. federal income tax consequences that may be applicable to a particular holder of Leadis common stock. In addition, this summary does not address the U.S. federal income tax consequences of the liquidation and dissolution to holders of Leadis common stock who are subject to special treatment under U.S. federal income tax laws, including, for example, banks and other financial institutions, insurance companies, tax-exempt investors, S corporations, holders that are properly classified as “partnerships” under the Code, dealers in securities, holders who hold their Leadis common stock as part of a hedge, straddle or conversion transaction, holders whose functional currency is not the U.S. dollar, holders who acquired our common stock through the exercise of employee stock options or other compensatory arrangements, holders who are subject to the alternative minimum tax provisions of the Code

 

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and holders who do not hold their shares of Leadis common stock as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment). This summary does not address the U.S. federal income tax consequences to any holder of Leadis common stock who or which, for U.S. federal income tax purposes, is a nonresident alien individual, a foreign corporation, a foreign partnership or a foreign estate or trust and this summary does not address the tax consequences of the liquidation and dissolution under state, local or foreign tax laws.

This summary is provided for general information purposes only and is not intended as a substitute for individual tax advice. No ruling has been requested from the Internal Revenue Service with respect to the anticipated tax treatment of the Plan of Dissolution, and no assurance can be given that the IRS would not assert, or that a court would not sustain, a position contrary to any of the tax consequences set forth below. Each holder of Leadis common stock should consult the holder’s individual tax advisors as to the particular tax consequences of the liquidation and dissolution to such holder, including the application and effect of any state, local, foreign or other tax laws and the possible effect of changes to such laws.

Distributions, if any, to stockholders pursuant to the Plan of Dissolution may occur at various times and in more than one tax year. No assurance can be given that the tax treatment described herein will remain unchanged at the time of such distributions.

Income Taxation of the Company

After the approval of the Plan of Dissolution and until our liquidation is completed, we will continue to be subject to U.S. federal income tax on our taxable income, if any, such as interest income, gain from the sale of any remaining assets or income from operations. Upon the sale of any of our assets in connection with our liquidation and dissolution, we will recognize gain or loss in an amount equal to the difference between (i) the fair market value of the consideration received for each asset sold and (ii) our adjusted tax basis in the asset sold. We do not expect to recognize any gain or loss upon the distribution of cash to our stockholders in liquidation of their shares of Leadis common stock. We currently do not anticipate making distributions of property other than cash to stockholders in our liquidation. In the event we were to make a liquidating distribution of property other than cash to our stockholders, we may recognize gain upon the distribution of such property as if we sold the distributed property for its fair market value on the date of the distribution. We currently do not anticipate that our dissolution and liquidation pursuant to the Plan of Dissolution will produce a material corporate tax liability for U.S. federal income tax purposes.

Federal Income Taxation of the Stockholders

In general, for U.S. federal income tax purposes, we intend that amounts received by our stockholders pursuant to the Plan of Dissolution will be treated as full payment in exchange for their shares of Leadis common stock. As a result of our dissolution and liquidation, stockholders generally will recognize gain or loss equal to the difference between (i) the sum of the amount of cash and the fair market value (at the time of distribution) of property, if any, distributed to them (including transfers of assets to a liquidating trust) and (ii) their tax basis for their shares of Leadis common stock. In general, a stockholder’s gain or loss will be computed on a “per share” basis. If we make more than one liquidating distribution, which is expected, each liquidating distribution will be allocated proportionately to each share of stock owned by a stockholder, and the value of each liquidating distribution will be applied against and reduce a stockholder’s tax basis in his or her shares of stock. In general, gain will be recognized as a result of a liquidating distribution to the extent that the aggregate value of all liquidating distributions received by a stockholder with respect to a share exceeds his or her tax basis for that share. Any loss generally will be recognized by a stockholder only when the stockholder receives our final liquidating distribution to stockholders (including transfers of assets to a liquidating trust), and then only if the aggregate value of all liquidating distributions with respect to a share is less than the stockholder’s tax basis for that share. Gain or loss recognized by a stockholder generally will be capital gain or loss and will be long term capital gain or loss if the stock has been held for more than one year; otherwise it will be treated as short term capital gain or loss. The deductibility of capital losses is subject to limitations.

 

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In the unlikely event we make a liquidating distribution of property other than cash to our stockholders, a stockholder’s tax basis in such property immediately after the distribution generally will be the fair market value of the property received by the stockholder at the time of distribution. Gain or loss realized upon the stockholder’s future sale of that property generally would be measured by the difference between the proceeds received by the stockholder in the sale and the tax basis of the property sold.

In the event that our liabilities are not fully covered by the assets in the Contingency Reserve or otherwise satisfied through insurance or other reasonable means (See “—Contingent Liabilities; Contingency Reserve; Liquidating Trust” above), payments made by a stockholder in satisfaction of those liabilities generally would produce a capital loss for such stockholder in the year the liabilities are paid. The deductibility of any such capital loss would generally be subject to certain limitations under the Code.

Liquidating Trusts

If we transfer assets to the Liquidating Trust, a stockholder generally should be treated for U.S. federal income tax purposes as having received a pro rata share of the property transferred to the Liquidating Trust, reduced by the amount of known liabilities assumed by the Liquidating Trust or to which the property transferred is subject, and having contributed such assets and liabilities to the Liquidating Trust. Our transfer of assets to the Liquidating Trust will cause a stockholder to be treated in the same manner for U.S. federal income tax purposes as if the stockholder had received a distribution directly from us. The Liquidating Trust should not be subject to U.S. federal income tax, assuming that it is treated as a liquidating trust for U.S. federal income tax purposes. After formation of the Liquidating Trust, a stockholder must take into account for U.S. federal income tax purposes the stockholder’s allocable portion of any income, gain or loss recognized by the Liquidating Trust. As a result of our transfer of assets to the Liquidating Trust and the ongoing operations of the Liquidating Trust, stockholders may be subject to tax, whether or not they have received any actual distributions from the Liquidating Trust with which to pay such tax. There can be no assurance that the Liquidating Trust described in the Plan of Dissolution will be treated as a liquidating trust for federal income tax purposes.

Backup Withholding

Under the U.S. federal backup withholding tax rules, unless an exemption applies, the paying agent will be required to withhold, and will withhold, 28% of all cash distributions made to holders of Leadis common stock in connection with the liquidation and dissolution unless the holder provides a tax identification number (social security number in the case of an individual or employer identification number in the case of other holders), certifies that such number is correct and that no backup withholding is otherwise required and otherwise complies with such backup withholding rules. Each holder of Leadis common stock should complete, sign and return to the paying agent the Substitute Form W-9 in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent. The Substitute Form W-9 will be included as part of the letter of transmittal mailed to each record holder of Leadis common stock.

The foregoing summary of U.S. federal income tax consequences is included for general information only and does not constitute legal advice to any stockholder. The tax consequences of the Plan of Dissolution may vary depending upon the particular circumstances of each stockholder. Each stockholder should consult his or her own tax advisor regarding the U.S. federal income tax consequences of the Plan of Dissolution as well as any state, local, and foreign tax consequences.

 

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Vote Required and Board Recommendation

The authorization and approval of the Plan of Dissolution requires the affirmative vote of the holders of a majority of the outstanding shares of Leadis common stock. Members of the Board and our executive officers who hold (not including options to purchase shares of Leadis common stock) as of September 1, 2009 an aggregate of 1,378,503 shares of Leadis common stock (approximately 4.6% of the outstanding shares of Leadis common stock as of September 1, 2009) have indicated that they will vote in favor of the Plan of Dissolution.

THE BOARD BELIEVES THAT THE PLAN OF DISSOLUTION IS IN THE BEST INTERESTS OF OUR STOCKHOLDERS AND RECOMMENDS A VOTE “FOR” THIS PROPOSAL. IT IS INTENDED THAT SHARES REPRESENTED BY THE ENCLOSED FORM OF PROXY WILL BE VOTED IN FAVOR OF THIS PROPOSAL UNLESS OTHERWISE SPECIFIED IN SUCH PROXY.

 

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PROPOSAL NO. 2

APPROVAL OF ADJOURNMENT OF SPECIAL MEETING TO SOLICIT

ADDITIONAL PROXIES

General

At the Special Meeting, we may ask our stockholders to vote on a proposal to adjourn the Special Meeting to another date, time or place, if deemed necessary in the judgment of the proxy holders, for the purpose of soliciting additional proxies to vote in favor of Proposal No. 1—Approval of the Plan of Dissolution. Any adjournment of the Special Meeting may be made without notice, other than by the announcement made at the Special Meeting, if the votes cast in favor of the adjournment proposal by the holders of shares of our common stock entitled to vote on the proposal exceed the votes cast against the proposal at the Special Meeting. However, if the adjournment is for more than 120 days from the date set for the original meeting, a new record date for the adjourned meeting shall be fixed and a new notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. If we adjourn the Special Meeting to a later date, we will transact the same business and, unless we must fix a new record date, only the stockholders who were eligible to vote at the original meeting will be permitted to vote at the adjourned meeting.

Required Vote

The approval of any adjournment of the Special Meeting requires that the votes cast in favor of the proposal exceed the votes cast against the proposal at the Special Meeting. Abstentions from voting and broker non-votes will have no impact on the vote on Proposal No. 2.

Recommendation of our Board of Directors

Our board of directors unanimously recommends that stockholders vote “FOR” approval of Proposal No. 2.

 

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IMPORTANT INFORMATION CONCERNING LEADIS TECHNOLOGY, INC.

Description of Business

For a description of our business, see the Annual Report on Form 10-K for the fiscal year ended December 31, 2008, which is attached as Annex B to this proxy statement, the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, which is attached as Annex C to this proxy statement, and the Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, which is attached as Annex D to this proxy statement. The Form 10-K and Form 10-Qs that are attached to this proxy statement as annexes do not include the exhibits originally filed with such reports. Copies of these reports, including the exhibits to such reports, are available without charge upon written request to: Corporate Secretary, Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, CA 94086.

Selected Financial Data

Set forth below is selected financial data for Leadis for the periods indicated. We derived the selected statement of operations data for the years ended December 31, 2008, 2007 and 2006 and balance sheet data as of December 31, 2008 and 2007 from our audited financial statements that are included in our Annual Report on Form 10-K for the year ended December 31, 2008, a copy of which is being delivered with this proxy statement as Annex B. We derived the selected statement of operations data for the years ended December 31, 2005 and 2004 and the balance sheet data as of December 31, 2006, 2005, and 2004 from our audited financial statements which are not being delivered with or incorporated by reference into this proxy statement. We derived the statements of operations data for the six months ended June 30, 2009 and the balance sheet data as of June 30, 2009 from our unaudited financial statements that are included in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, a copy of which is being delivered with this proxy statement as Annex D. Our historic results are not necessarily indicative of the results that may be expected in the future. You should read this data together with our financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2008 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, as well as the sections of each of those reports entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our board of directors approved the Plan of Dissolution, subject to stockholder approval, on September 15, 2009. The information presented below and delivered with and incorporated by reference into this proxy statement does not include any adjustments necessary to reflect the possible future effects on recoverability of the assets or satisfaction of liabilities that may result from adoption of the Plan of Dissolution or our potential to complete such a plan in an orderly manner.

 

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    Six Months Ended
June 30, 2009
    Year Ended December 31,
     
      2008     2007     2006     2005     2004

Statement of operations data:

           

Revenue

  $ 4,840      $ 18,556      $ 39,581      $ 101,208      $ 64,182      $ 150,250

Cost of sales

    4,051        21,899        36,343        88,506        50,197        97,725
                                             

Gross profit (loss)

    789        (3,343     3,238        12,702        13,985        52,525

Research and development expenses

    4,203        21,631        18,599        13,796        14,522        14,964

Selling, general and administrative expenses

    4,496        17,011        16,383        14,785        12,766        8,545

Amortization of purchased intangible assets

    —          1,750        2,090        —          —          —  

Impairment of goodwill and intangible assets

    —          9,498        —          —          —          —  

In-process research and development

    —          —          2,470        —          —          —  
                                             

Total operating expenses

    8,699        49,890        39,542        28,581        27,288        23,509

Net gain on sales of assets and technology

    (6,937     —          —          —          —          —  
                                             

Operating income (loss)

    (973     (53,233     (36,304     (15,879     (13,303     29,016

Interest and other income, net

    694        879        4,392        4,349        2,718        956
                                             

Income (loss) before provision for (benefit from) income taxes

    (279     (52,354     (31,912     (11,530     (10,585     29,972

Provision for (benefit from) income taxes

    (240     (821     (980     523        765        12,379
                                             

Income (loss) before cumulative effect of change in accounting principle, net of tax

    (39     (51,533     (30,932     (12,053     (11,350     17,593

Cumulative effect of change in accounting principle, net of tax

    —          —          —          142        —          —  
                                             

Net income (loss)

  $ (39   $ (51,533   $ (30,932   $ (11,911   $ (11,350   $ 17,593
                                             

Basic net income (loss) per share before cumulative effect of change in accounting principle

  $ (0.00   $ (1.76   $ (1.06   $ (0.42   $ (0.40   $ 0.72

Cumulative effect of change in accounting principle

    —          —          —          0.01        —          —  
                                             

Basic net income (loss) per share

  $ (0.00   $ (1.76   $ (1.06   $ (0.41   $ (0.40   $ 0.72

Diluted net income (loss) per share before cumulative effect of change in accounting principle

  $ (0.00   $ (1.76   $ (1.06   $ (0.42   $ (0.40   $ 0.63

Cumulative effect of change in accounting principle

    —          —          —          0.01        —          —  
                                             

Diluted net income (loss) per share

  $ (0.00   $ (1.76   $ (1.06   $ (0.41   $ (0.40   $ 0.63
                                             

Weighted-average number of shares used in calculating net income (loss) per share:

           

Basic

    29,627        29,260        29,119        28,802        28,143        24,469

Diluted

    29,627        29,260        29,119        28,802        28,143        27,817

 

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    June 30,
2009
  December 31,
      2008   2007   2006   2005   2004

Balance sheet data:

           

Cash and cash equivalents

  $ 25,107   $ 21,642   $ 33,945   $ 62,697   $ 72,801   $ 45,012

Short-term investments

  $ 3,556   $ 7,726   $ 31,286   $ 43,845   $ 34,077   $ 63,961

Working capital

  $ 33,773   $ 29,555   $ 68,418   $ 109,310   $ 116,040   $ 124,351

Total assets

  $ 38,628   $ 42,769   $ 99,579   $ 140,729   $ 143,914   $ 154,815

Total stockholders’ equity

  $ 34,411   $ 32,913   $ 83,477   $ 114,037   $ 119,815   $ 127,106

 

 

Security Ownership of Certain Beneficial Owners

The following table sets forth certain information regarding the ownership of the Company’s common stock as of September 1, 2009 by: (i) each director and named executive officer of the Company; (ii) all directors and named executive officers of the Company as a group; and (iii) all those known by the Company to be beneficial owners of more than five percent of the Company’s common stock.

 

    Beneficial Ownership (1)

Beneficial Owner

  Number of Shares   Percent of Total (%)

Directors and Executive Officers

   

Antonio Alvarez (2)

  1,019,371   3.3

John Allen (3)

  193,064   *

Kaichiu (“Skip”) Wong (4)

  62,395   *

Alden Chauvin (5)

  37,499   *

Keunmyung (“Ken”) Lee (6)

  1,625,480   5.1

Douglas McBurnie (7)

  63,333   *

James Plummer (8)

  187,500   *

Jack Saltich (9)

  80,833   *

Sam Srinivasan (10)

  10,833   *

All executive officers and directors as a group (9 persons) (11)

  3,280,308   10.3

5% Stockholders

   

Dialectic Capital Management, LLC (12)

  3,019,063   10.0

153 East 53rd Street, 29th Floor

   

New York, NY 10022

   

Firelake Strategic Technology Fund, LP (13)

  2,100,000   7.0

575 High Street, Suite 330

   

Palo Alto, CA 94301

   

Kettle Hill Capital Management, LLC (14)

  3,877,631   12.9

101 Park avenue, 23rd Floor

   

New York, NY 10178

   

Renaissance Technologies LLC (15)

  2,220,300   7.4

800 Third Avenue

   

New York, NY 10022

   

 

 * Less than one percent.
(1)

This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G filed with the SEC. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws. We have determined beneficial ownership in

 

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accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities. In addition, the rules include shares of common stock issuable pursuant to the exercise of stock options that are either immediately exercisable or exercisable within 60 days after September 1, 2009. These shares are deemed to be outstanding and beneficially owned by the person holding those options for the purpose of computing the percentage ownership of that person, but they are not treated as outstanding for the purpose of computing the percentage ownership of any other person. However, of the aggregate 1,901,805 shares issuable pursuant to options held by directors or executive officers and included in the ownership table below, only 395,000 have an exercise price below $0.93, which is the low range of the estimated aggregate amount that would be available for distribution in connection with the dissolution and liquidation of the Company. Applicable percentages are based on 30,070,487 shares outstanding on September 1, 2009, adjusted as required by rules promulgated by the SEC. Unless otherwise indicated, the address of each of the individuals and entities listed is c/o Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, California 94086.

(2) Includes 890,621 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009, and 8,750 issuable pursuant to a restricted stock unit award issued in September 2007.
(3) Includes 161,085 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(4) Includes 59,895 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(5) Includes 37,499 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(6) Includes 300,000 shares held by Keunmyung Lee and Buyong Lee, or successors in trust, under the Edina Yerim-Holly Trust dated 11/26/03 (the “Yerim-Holly Trust”), of which Dr. Lee is a co-trustee and 891,500 shares held by Keunmyung Lee and Buyong Lee, Trustees, Keunmyung Lee and Buyong Lee Living Trust dated 11/2/00. Dr. Lee disclaims beneficial ownership of the shares held by the Yerim-Holly Trust except to the extent of his pecuniary interest therein. Also includes 430,206 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(7) Includes 63,333 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(8) Includes 187,500 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(9) Includes 60,833 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(10) Includes 10,833 shares issuable upon exercise of outstanding options exercisable within 60 days after September 1, 2009.
(11) Includes 1,901,805 shares issuable upon exercise of stock options held by all executive officers and directors currently exercisable or exercisable within 60 days after September 1, 2009. See footnotes (2) through (10) above.
(12) As reported in a Schedule 13D filed with the Securities and Exchange Commission on October 24, 2008 by Dialectic Capital Management, LLC.
(13) As reported in a Schedule 13G/A filed with the Securities and Exchange Commission on February 6, 2009 by Firelake Strategic Technology Fund, L.P.
(14) As reported in a Form 4 filed with the Securities and Exchange Commission on January 16, 2009 by Kettle Hill Capital Management, LLC.
(15) As reported in a Schedule 13G/A filed with the Securities and Exchange Commission on February 13, 2009 by Renaissance Technologies LLC.

 

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Market for Our Common Stock

Our common stock trades on the NASDAQ Global Market under the symbol “LDIS.” The following table sets forth, for the periods indicated, the high and low closing sales prices for our common stock as quoted on the NASDAQ Global Market for each full quarterly period. The closing sales price of our common stock on the NASDAQ Global Market was $0.85 on September 17, 2009, the trading day prior to the announcement that our board of directors approved the Plan of Dissolution.

 

     2009    2008    2007
      High    Low    High    Low    High    Low

Fiscal Year Ended December 31,

                 

First Quarter

   $ 0.64    $ 0.30    $ 2.80    $ 1.83    $ 5.01    $ 3.95

Second Quarter

     0.67      0.52      1.95      1.59      4.16      3.43

Third Quarter (1)

     0.87      0.70      1.52      0.75      3.59      3.09

Fourth Quarter

     —        —        0.77      0.29      3.42      2.62

 

(1) For the third quarter of 2009, reflects high and low sales prices through September 15, 2009. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares.

As of September 1, 2009, there were approximately 22 holders of record of our common stock.

No cash dividends have ever been paid on our common stock. In accordance with the Plan of Dissolution, it is anticipated that, if the Plan of Dissolution is approved by our stockholders, we will make one or more liquidating distributions to our stockholders.

 

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STOCKHOLDER PROPOSALS

We do not intend to hold a 2009 annual meeting of stockholders if the Plan of Dissolution is approved and we file our Certificate of dissolution. If the Plan of Dissolution is not approved and we hold an annual meeting of the stockholders, stockholder proposals and nominations for election to our Board of Directors intended to be presented at that meeting would be required to be received by us, in writing (containing certain information specified in our bylaws about the stockholder and the proposed action), at our corporate headquarters, located at 800 W. California Avenue, Suite 200, Sunnyvale, CA 94086, no fewer than 90 days nor more than 120 days prior to the date of the annual meeting; provided, however, that if less than 100 days notice or prior public disclosure of the date of the annual meeting is given to the stockholders, then, in order for any stockholder proposal or nomination to be considered timely, such stockholder proposal or nomination must have been received by us by the close of business on the 10th day following the earlier of the day on which (i) notice of the date of the annual meeting was mailed or (ii) public disclosure of the date was made. These requirements are separate from and in addition to the SEC requirements that a stockholder must meet in order to have a stockholder proposal or nomination included in our proxy statement.

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the reporting requirements of the Exchange Act and we file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy the reports, proxy statements and other information that we file at the SEC’s Public Reference Room at 100 F Street NE, Washington, D.C. 20549 at prescribed rates. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Our filings are also available free of charge at the SEC’s website at http://www.sec.gov.

You should rely only on the information contained in this proxy statement. No one has been authorized to provide you with information that is different from what is contained in this proxy statement. The date of this proxy statement is October 2, 2009. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date. The mailing of this proxy statement will not create any implication to the contrary.

WHO CAN HELP ANSWER YOUR QUESTIONS

If you have additional questions about the Special Meeting, you should contact:

John K. Allen, Secretary

Leadis Technology, Inc.

800 W. California Avenue, Suite 200

Sunnyvale, California 94086

Telephone: (408) 331-8610

 

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HOUSEHOLDING OF PROXY MATERIALS

The SEC has adopted rules that permit companies and intermediaries (e.g., brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

This year, a number of brokers with account holders who are Leadis Technology, Inc. stockholders will be “householding” our proxy materials. A single proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement and annual report, please notify your broker. Direct your written request to Leadis Technology, Inc., John K. Allen, Corporate Secretary, Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, CA 94086. Stockholders who currently receive multiple copies of the proxy statement at their addresses and would like to request “householding” of their communications should contact their brokers.

OTHER MATTERS

The Board of Directors knows of no other matters that will be presented for consideration at the Special Meeting. If any other matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such matters in accordance with their best judgment.

 

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INCORPORATION BY REFERENCE

The SEC allows us to “incorporate by reference” information into this proxy statement, which means that we can disclose important information to you by referring you to other documents that we have filed separately with the SEC and delivered to you with this proxy statement. This proxy statement incorporates by reference the following documents:

 

   

our annual report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 31, 2009, a copy of which is attached hereto as Annex B;

 

   

our quarterly report on Form 10-Q for the quarter ended March 31, 2009, as filed with the SEC on May 15, 2009, a copy of which is attached hereto as Annex C; and

 

   

our quarterly report on Form 10-Q for the quarter ended June 30, 2009, as filed with the SEC on August 14, 2009, a copy of which is attached hereto as Annex D.

In addition, all documents we file pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the date of the Special Meeting or any adjournment or postponement thereof will be deemed to be incorporated by reference herein and made a part hereof from the date of the filing of such documents.

Any statement contained in a document incorporated by reference into this proxy statement will be deemed to be modified or superseded for purposes of this proxy statement to the extent that a statement contained in this proxy statement modifies or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement.

 

  By Order of the Board of Directors
 

/s/ John K. Allen

 

John K. Allen

Chief Financial Officer and Secretary

October 2, 2009

Copies of our Annual Report to the Securities and Exchange Commission on Form 10-K for the fiscal year ended December 31, 2008 and our Quarterly Reports to the Securities and Exchange Commission on Form 10-Q for the fiscal quarters ended March 31, 2009 and June 30, 2009, including the exhibits to such reports, are available without charge upon written request to: Corporate Secretary, Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, CA 94086.

 

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Annex A

LEADIS TECHNOLOGY, INC.

PLAN OF DISSOLUTION

This Plan of Dissolution (the “Plan”) is for the purpose of effecting an orderly liquidation and/or windup (the “Liquidation and Wind Up”) of LEADIS TECHNOLOGY, INC., a Delaware corporation (the “Company”) including, without limitation and in the discretion of the Board of Directors of the Company (the “Board”), through a dissolution under the laws of the State of Delaware (the “Dissolution”), in accordance with Section 331 of the Internal Revenue Code of 1986, as amended (the “Code”), as follows:

The Board has determined in its reasonable business judgment that it is advisable and in the best interests of the Company and its stockholders and creditors that the Company commence an orderly Liquidation and Wind Up as soon as practicable. The Board has appointed Michael Morehead, the Company’s General Counsel, or any successor person as the Board may later designate, as manager (collectively, the “Manager”) to oversee the sale of the Company’s assets and the Company’s Liquidation and Wind Up, subject to any further approvals by the Board required under this Plan. The Manager shall be deemed a Board appointed officer of the Company for the purposes of implementing this Plan.

1. Approval of this Plan By Stockholders. The Board has adopted this Plan and called a special meeting (the “Meeting”) of the holders of the Company’s common stock to approve the implementation of this Plan, including without limitation the Dissolution of the Company pursuant to this Plan, as required by applicable law and the Company’s current Certificate of Incorporation and Amended and Restated Bylaws (collectively, the “Charter”). If stockholders holding a majority of the Company’s common stock, par value $0.001 per share (the “Common Stock”), vote in favor of the approval of this Plan at the Meeting, the Plan shall constitute the adopted Plan of the Company as of the date of the Meeting, or such later date on which the stockholders may approve the implementation of this Plan and the Dissolution of the Company pursuant to this Plan if the Meeting is adjourned to later date (the “Adoption Date”). If, notwithstanding the approval of the implementation of the Plan and the Dissolution of the Company pursuant to this Plan by the stockholders of the Company, the Board determines that it would be in the best interests of the Company and its stockholders and creditors not to implement this Plan or initiate a Dissolution, then the implementation of this Plan and/or the Dissolution of the Company pursuant to this Plan may be abandoned, delayed until a future date to be determined by the Board, or abandoned and re-initiated at a future date to be determined by the Board.

2. Corporate Action Following Adoption of the Plan. From and after the Adoption Date, and subject to the discretionary right of the Board to abandon, delay, or abandon and later re-initiate implementation of this Plan and/or the Dissolution of the Company pursuant to this Plan, the Manager shall complete the following corporate actions:

(a) The Board shall determine whether and when to (i) transfer the Company’s remaining property and assets to a liquidating trust (established pursuant to Section 4 hereof, or (ii) collect, sell, exchange or otherwise dispose of its remaining property and assets in one or more transactions upon such terms and conditions as the Manager, in the Manager’s absolute discretion, deems expedient and in the best interests of the Company and its stockholders and creditors, provided, however, that Board approval (not any further stockholder approval) shall be required as to (i) a settlement of any dispute where the amount in controversy is $25,000 or more, or (ii) the sale of any asset of the Company valued at $25,000 or more. It is understood that the Company has already commenced the sale and disposition of its assets and such sales and disposition are hereby ratified and approved. The Company’s remaining assets and properties may be sold in bulk to one buyer or a small number of buyers or on a piecemeal basis to numerous buyers. The Company will not be required to obtain appraisals or other third party opinions as to the value of its properties and assets in connection with the liquidation. In connection with such collection, sale, exchange and other disposition, the Company shall use reasonable efforts to collect or make provision for the collection of all

 

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accounts receivable, debts and claims owing to the Company. Approval of this Plan by the stockholders of the Company shall constitute the approval of the stockholders of the sale, exchange, transfer or other disposition of all of the property of the Company in furtherance of the Liquidation and Wind Up, whether such sale, exchange, transfer or other disposition occurs in one transaction or a series of transactions, and shall constitute a ratification of all contracts for sale, exchange, transfer or other disposition which are conditioned on approval of this Plan.

(b) The Company shall distribute pro rata to its stockholders in accordance with the provisions in the Charter and the DGCL, available cash including the cash proceeds of any sale, exchange or disposition, except such cash, property or assets as are required for paying or making reasonable provision for the known liabilities and obligations of the Company. Any such distribution may occur all at once or in a series of distributions and shall be in cash or assets, in such amounts, and at such time or times, as the Manager or the Trustee(s) (as defined in Section 4), in their absolute discretion, may determine. If and to the extent deemed necessary, appropriate or desirable by the Manager or the Trustee(s), in their absolute discretion, the Company may establish and set aside a reasonable amount of cash and/or property (the “Contingency Reserve”) to satisfy claims against and any unmatured or contingent liabilities and obligations of, the Company, including, without limitation, tax obligations, and all expenses of the sale of the Company’s property and assets, of the collection and defense of the Company’s property and assets, and the Liquidation and Wind Up provided for in this Plan.

(c) The Company shall file final federal and comparable state income tax reporting forms as required by applicable law.

3. Stock Matters, Redemption and Cancellations of Stock.

(a) Distributions to the stockholders of the Company pursuant to Section 2 hereof shall be in complete redemption and cancellation of all of the outstanding capital stock of the Company. As a condition to receipt of any distribution to the Company’s stockholders, the Manager or the Trustee(s), in their absolute discretion, may require the stockholders to (i) surrender their certificates evidencing the stock to the Company or its agents for recording of such distributions thereon or (ii) furnish the Company with evidence satisfactory to the Manager or the Trustee(s) of the loss, theft or destruction of their certificates evidencing the stock, together with such surety bond or other security or indemnity as may be required by and satisfactory to the Manager or the Trustee(s).

(b) The Company will finally close its stock transfer books and discontinue recording transfers of stock on the earliest to occur of (i) the close of business on the record date fixed by the Manager for the liquidating distribution or (ii) such other date on which the Manager or the Trustee(s), in accordance with applicable law, determines and closes such stock transfer books, and thereafter certificates representing stock will not be assignable or transferable on the books of the Company except by will, intestate succession, or operation of law.

(c) If any distribution to a stockholder cannot be made, whether because the stockholder cannot be located, has not surrendered its certificates evidencing the stock as required hereunder or for any other reason, the distribution to which such stockholder is entitled shall be transferred, at such time as the final liquidating distribution is made by the Company, to the official of such state or other jurisdiction authorized by applicable law to receive the proceeds of such distribution. The proceeds of such distribution shall thereafter be held solely for the benefit of and for ultimate distribution to such stockholder as the sole equitable owner thereof and shall be treated as abandoned property and escheat to the applicable state or other jurisdiction in accordance with applicable law. In no event shall the proceeds of any such distribution revert to or become the property of the Company.

4. Liquidating Trust(s).

(a) If deemed necessary, appropriate or desirable by the Board, in its absolute discretion, in furtherance of the Liquidation and Wind Up, as a final liquidating distribution or from time to time, the Company shall transfer to one or more liquidating trustees (the “Trustee(s)”), for the benefit of its stockholders and/or

 

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creditors, one or more liquidating trusts (the “Trust(s)”), any assets of the Company which are (i) not reasonably susceptible to distribution to the stockholders, Including without limitation non-cash assets and assets held on behalf of the stockholders (a) who cannot be located or who do not tender their certificates evidencing Common Stock to the Company or its agent as herein above required or (b) to whom distributions may not be made based upon restrictions under contract or law, including, without limitation, restrictions of the federal securities laws and regulations promulgated thereunder, or (ii) held as the Contingency Reserve. The Board is hereby authorized to appoint one or more individuals, corporations, partnerships or other persons, or any combination thereof, including, without limitation, any one or more officers directors, employees, agents or representatives of the Company, to act as the initial Trustee or Trustees for the benefit of the stockholders and to receive any assets of the Company. Any Trustee(s) appointed as provided in the preceding sentence shall succeed to all right, title and interest of the Company of any kind and character with respect to such transferred assets and, to the extent of the assets so transferred and solely in their capacity as Trustee(s), shall assume all of the liabilities and obligations of the Company, including, without limitation, any unsatisfied claims and unascertained contingent liabilities. Further, any conveyance of assets to the Trustee(s) shall be deemed to be a distribution of property and assets by the Company to the stockholders for the purposes of Section 2 of this Plan. Any such conveyance to the Trustee(s) shall be in trust for the creditors and stockholders of the Company. The Company, subject to this Section and as authorized by the Board, in its absolute discretion, may enter into one or more liquidating trust agreements with the Trustee(s), on such terms and conditions as the Board, in its absolute discretion, may deem necessary, appropriate or desirable. Approval of the Dissolution of the Company pursuant to this plan by the holders of a majority of the outstanding Common Stock shall constitute the approval of the stockholders of any such appointment, any such liquidating trust agreement, and any transfer of assets of the Company to the Trust(s), as their act and as a part hereof as if set forth fully herein.

5. Liquidating Distributions; Nature; Amount; Timing.

(a) Although the Board has not established a firm timetable for completion of the Company’s Liquidation and Wind Up, the Company will, subject to exigencies inherent in winding up the Company’s business, complete the Liquidation and Wind Up as promptly as practicable. The Company plans to satisfy all of its liabilities and obligations, or make adequate provision for doing so, prior to making any distribution to its stockholders pursuant to this Plan.

(b) The uncertainty of the value of the Company’s assets and the ultimate amount of its liabilities and the expenses of liquidation make it impracticable to predict the aggregate net value, if any, ultimately distributable to stockholders.

(c) No assurance can be given that available cash and amounts received on the sale of assets will be adequate to provide for the Company’s obligations, liabilities, expenses and claims or to make any cash distributions to the stockholders. If such available cash and amounts received on the sale of assets are not adequate to provide for the Company’s obligations, liabilities, expenses and claims, distributions of cash to the Company’s stockholders will be reduced or eliminated.

6. Payment of Franchise Taxes. Subject to the Board’s right in its absolute discretion to abandon or delay implementation of this Plan and/or a Dissolution, after the Adoption Date and prior to the filing of a certificate of dissolution, if applicable as determined by the Manager or as otherwise required by this Plan, the Manager shall determine and cause to be paid all franchise taxes due to or assessable by the State of Delaware including for the entire month during which any dissolution becomes effective pursuant to Section 277 of the DGCL.

7. Dissolution. Subject to the Board’s right in its absolute discretion to abandon or delay implementation of this Plan, following the Adoption Date and the payment of applicable franchise taxes, if (i) the Manager determines, in the Manager’s absolute discretion, that there are not sufficient proceeds to satisfy the Company’s obligations, liabilities and expenses in full (including funding any Contingency Reserve), but that dissolution is nonetheless appropriate, or (ii) as a result of the liquidation and wind up of the Company, it is determined by the

 

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Manager, in the Manager’s absolute discretion, that there are sufficient proceeds to satisfy the Company’s obligations, liabilities, and expenses in full (including funding any Contingency Reserve) and to make a distribution to stockholders, then the Manager is authorized and directed to file a Certificate of Dissolution pursuant to Section 275 and/or Section 284 of the DGCL, and to execute all other instruments and do all other things they deem advisable to wind up the affairs of the Company, pursuant to the DGCL. Adoption of this Plan by the Requisite Consent shall constitute approval by the Company’s stockholders of any such filing of a Certificate of Dissolution as their act and as a part hereof as if set forth fully herein.

8. Notice to Claimants; Claims Procedure. Subject to the Board’s right in its absolute discretion to abandon or delay implementation of this Plan, the Manager is authorized to and may give appropriate notice, as applicable, of the Liquidation and Wind Up and, to the extent applicable, the procedure and deadline for the presentment of claims against the Company pursuant to Section 280 of the DGCL, to implement such claims procedure, and to pay or make provision for the Company’s known or determined liabilities, and distribute any remaining assets to stockholders, pursuant to this Plan and Section 281 of the DGCL.

9. Limited Continuation of Company. Subject to the Board’s right in its absolute discretion to abandon or delay implementation of this Plan, following completion of the Liquidation and Wind Up, and/or, to the extent applicable, the filing of a certificate of dissolution, the Company shall not engage in any further business activities except for the period set forth in and purposes allowed by Section 278 of the DGCL, including without limitation the purpose of implementing the above claims procedure, prosecuting or defending suits and engaging in such activities as are necessary to enable the Company to gradually settle and close its business, liquidate, dispose of and convey its property, discharge its liabilities and distribute any remaining assets to its stockholders. The Board and the officers of the Company then in office shall continue in office solely for these purposes and shall cease to be members of the Board and/or officers of the Company upon the earlier of the completion of these activities, the date of their respective resignations, or the expiration of the continuation period set forth in Section 278 of the DGCL.

10. Continuing Employees and Consultants. For the purpose of effecting the Liquidation and Wind Up, the Manager and/or the Trustee(s), as applicable, may hire or retain, in their sole discretion, such employees, consultants and other advisors as they may deem necessary, appropriate or desirable to accomplish such Liquidation and Wind Up in accordance with this Plan and the DGCL, until all affairs of the Company are settled and closed.

11. Expenses of Liquidation. The Manager and/or the Trustee(s), as applicable, shall provide, from the assets of the Company, funds for payment of the reasonable expenses of the Liquidation and Wind Up, including filing fees and other costs required in connection with implementation of this Plan, any brokerage, agency, professional and other fees and expenses of persons rendering services to the Company in connection with the collection, sale, exchange or other disposition of the Company’s property and assets, continuation of employees and/or consultants engaged in the Liquidation and Wind Up, accountants’ and attorneys’ fees and expenses, and other reasonable fees and expenses incurred in connection with the Liquidation and Wind Up.

12. Provision for Continued Indemnification of Board and Officers. The Company may reserve sufficient assets and/or obtain and maintain such insurance as shall be necessary to provide for continued indemnification of the members of the Board, officers (including without limitation the Manager), the Trustee(s) and agents of the Company, and other parties whom the Company has agreed to indemnify, to the full extent provided by the Charter and bylaws of the Company, any existing indemnification agreements between the Company and any of such persons, and applicable law. The Manager or the Trustee(s), in their absolute discretion, are authorized to obtain and maintain such policies of director and officer and trustee and officer liability insurance as the Manager or the Trustee(s) may determine are necessary or appropriate.

13. Further Actions. The Manager is hereby authorized, without further action by the Company’s stockholders, subject only to any further approvals by the Board required hereunder, to do and perform, any and

 

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all acts, and to make, execute, deliver or adopt any and all agreements, resolutions, assignments, certificates and other documents of every kind which are deemed necessary, appropriate or desirable, in the absolute discretion of the Manager, to implement this Plan and the transactions contemplated hereby, including, without limitation, all filings or acts required by any state or federal law or regulation to wind up the Company’s affairs.

14. Modification or Abandonment of Plan. Notwithstanding approval of or consent to this Plan and any actions or transactions contemplated hereby by the Company’s stockholders, the Board may modify, amend, or abandon this Plan and any actions or transactions contemplated hereby without further action by the stockholders to the extent permitted by the DGCL.

 

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Annex B

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

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

For the fiscal year ended December 31, 2008.

or

 

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

For the transition period from                      to                     .

Commission File Number 000-50770

LOGO

Leadis Technology, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   77-0547089
(State or other jurisdiction of incorporation or organization)   (IRS Employer Identification No.)
800 W. California Avenue, Ste 200, Sunnyvale, CA   94086
(Address of principal executive offices)   (Zip Code)

(408) 331-8600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $0.001 par value   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    YES  ¨    NO  þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ¨    NO  þ

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

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

 

Large accelerated filer  ¨    Accelerated filer  ¨
Non-accelerated filer  þ    Smaller reporting company  ¨

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

The aggregate market value of the voting stock held by non-affiliates of the registrant based upon the closing sale price of the common stock on June 30, 2008, the last day of registrant’s most recently completed second fiscal quarter, as reported on The NASDAQ Global Market was approximately $30.6 million. Shares of common stock held by each executive officer and director and by each person who is known to the registrant to own 5% or more of the outstanding common stock have been excluded from this calculation in that such persons may be deemed affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At February 28, 2009, the registrant had 29,662,816 shares of common stock, $0.001 par value, outstanding.

 

 

 


Table of Contents

LEADIS TECHNOLOGY, INC.

Form 10-K

For the Fiscal Year Ended December 31, 2008

TABLE OF CONTENTS

 

          Page

PART I

  

Item 1

  

Business

   B-1

Item 1A

  

Risk Factors

   B-7

Item 1B

  

Unresolved Staff Comments

   B-22

Item 2

  

Properties

   B-22

Item 3

  

Legal Proceedings

   B-22

Item 4

  

Submission of Matters to a Vote of Security Holders

   B-22

PART II

  

Item 5

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

   B-23

Item 6

  

Selected Financial Data

   B-25

Item 7

  

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

   B-27

Item 7A

  

Quantitative and Qualitative Disclosures about Market Risk

   B-44

Item 8

  

Financial Statements and Supplementary Data

   B-46

Item 9

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   B-78

Item 9A

  

Controls and Procedures

   B-78

Item 9B

  

Other Information

   B-79

PART III

  

Item 10

  

Directors and Executive Officers of the Registrant

   B-80

Item 11

  

Executive Compensation

   B-83

Item 12

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

   B-96

Item 13

  

Certain Relationships and Related Transactions

   B-97

Item 14

  

Principal Accountant Fees and Services

   B-100

PART IV

  

Item 15

  

Exhibits

   B-101

Signatures

   B-103

 

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PART I

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, and particularly the sections entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are subject to the “safe harbor” created by those sections. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our financial performance or achievements to differ materially from these forward-looking statements. Forward-looking statements can often be identified by terminology such as “may,” “will,” “could,” “should,” “expect,” “believe,” “anticipate,” “estimate,” “continue,” “plan,” “intend,” “potential,” “project” or other similar words. Except as required by law, we undertake no obligation to update or publicly revise any forward-looking statements to reflect events or circumstances after the date of this document.

 

ITEM 1. BUSINESS

Overview

We design, develop and market analog and mixed-signal semiconductor products that enable and enhance the features and capabilities of consumer electronic products. We outsource all of the fabrication, assembly and testing of our products to outside subcontractors. We were incorporated in Delaware on May 15, 2000, and began commercially shipping products in the third quarter of 2002. Traditionally, our core products have been mixed-signal color display drivers with integrated controllers, which are critical components of displays used in portable consumer electronic devices. Beginning in 2007, we expanded our product offerings to include light-emitting diode, or LED, drivers, power management, touch technology and consumer audio analog integrated circuits, or ICs.

Until recently, we have sold our products primarily to display module manufacturers, which incorporate our products into their display module subassemblies for portable handset manufacturers. Our end market customers have been concentrated among a few significant portable handset manufacturers, including Nokia Corporation, Sony Ericsson and Samsung Electronics Co., Ltd. We expect our customer base to include a broader range of consumer electronics manufacturers as our product mix becomes more concentrated on products other than display drivers.

For the years ended December 31, 2008, 2007 and 2006, we incurred significant operating losses and negative cash flows, with net losses of $51.5 million, $30.9 million and $11.9 million, respectively. During this period our revenue decreased from $101.2 million in 2006 to $39.6 million in 2007 and $18.6 million in 2008. At December 31, 2008, we had an accumulated deficit of $77.2 million and cash, cash equivalents and short-term investments totaling $29.4 million.

In the second half of 2008, as economic conditions deteriorated, we took actions to restructure our operations and reduce our spending to bring costs more in line with expected revenues and our business strategy. We engaged financial advisors during the third quarter of 2008 and began evaluating alternatives for each of our business areas. In the fourth quarter of 2008, we ceased investment in our audio products, except as necessary to support existing customers, and implemented headcount reductions.

In January 2009, we sold our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea whose principal is the former general manager of our Korean R&D operation. The total consideration was $3.5 million in the form of a receivable due no later than January 2010 plus $0.5 million of assumed liabilities. We retained rights to most of the current display driver products in production, which we expect will continue to generate revenue through 2009, as well as ownership of our proprietary EPiC technology for AM-OLED displays. As a result of this transaction, we have ceased investment in the production, marketing and sale of new display driver integrated circuits.

 

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In February 2009, we sold assets relating to a development-stage power management product. We sold these assets and transferred certain employees to a publicly-traded supplier of analog and mixed-signal semiconductor products. Under the terms of the sale, Leadis will be paid $2.3 million in cash, of which $2 million has been received to date. As a result of this action, we ceased development of power management integrated circuits.

In March 2009, we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products. Under the terms of the sale we were paid $1.45 million in cash, all of which has been received.

In addition to the sales of the display driver, power management and audio parts of our business, we have enacted salary reductions and reduced hours worked for a substantial portion of our remaining employees.

The net impact of actions to date is that we have reduced our headcount by approximately 54% from the levels in the third quarter of 2008, while focusing our resources on development of capacitive touch controllers and LED drivers. We continue to invest in and develop these businesses while exploring our other options to realize maximum value from the technologies we have developed. We have continued discussions with parties that have expressed interest in acquiring other parts of our business. While we do not have any agreements relating to additional strategic activities, these discussions may lead to us selling one or more of our remaining businesses.

We believe that as a result of the actions taken in the fourth quarter of 2008 and in the first quarter of 2009, our cash, cash equivalents, and short term investment balances will be sufficient to fund our operations for the next twelve months. However, we expect to incur operating losses in 2009 and expect our cash balances to decline during the year. If anticipated operating results in our touch controller, LED driver and legacy display driver businesses are not achieved, we have the intent and believe we have the ability to delay or further reduce expenditures. We may also enter into additional agreements for the sale of all or parts of our remaining business in the future. We currently have no plans to seek additional cash. However, if additional capital is raised through the sale of equity or convertible debt, our stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to current holders of common stock. If we obtain additional funds through arrangements with strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. There can be no assurance that we will be able to obtain such financing, or obtain it on acceptable terms. If we are unable to obtain necessary financing on acceptable terms, we may be unable to execute our business plan and we could be required to delay or reduce the scope of our operations.

Our principal executive offices are located in Sunnyvale, California. Our website address is www.leadis.com. This annual report on Form 10-K, as well as our quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act, are publicly available on our website without charge promptly following our filing with the Securities and Exchange Commission. In addition, a copy of this annual report is available without charge on our website at www.leadis.com or upon written request to: Investor Relations, Leadis Technology, Inc., 800 W. California Avenue, Suite 200, Sunnyvale, California 94086.

Industry Overview

As a result of the restructuring activities taken in the fourth quarter of 2008 and first quarter of 2009, we have significantly reduced the scope of our operating activities. In 2009, we will focus our product development on touch controllers and LED driver products. We will also continue to sell the legacy display driver products we retained in connection with the divestment of our display driver assets.

Capacitive touch technology is rapidly being integrated into the fundamental design of a variety of systems from consumer electronics, point-of-sale systems, public information displays, industrial and climate control systems, and household appliances. Touch buttons enable attractive industrial design and end-product

 

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differentiation, while touch screens improve the user interface, allowing it to change with context and reduce the reliance on single function mechanical controls. In most capacitive touch applications, touching the sensor changes the electrical charge held in a conducting layer. In the case of touch screens, the sensor layer is transparent and typically created from indium tin oxide, or ITO. While a button interface simply has to determine whether or not a touch occurred, a touch screen controller analyzes the level and location of capacitive changes to ascertain the precise location of a touch. Devices implementing touch technology may also be designed to produce tactile feedback synchronized with a touch input, which significantly enhances the user experience. In these devices, the touch controller interprets the touch inputs and relays them to a microprocessor, which in turn generates signals to a haptics driver that powers the small motors or vibration actuators providing the tactile feedback. In some cases, the touch controller incorporates the haptics driver which decreases the number of discrete system components.

Small liquid crystal displays, or LCDs, require a backlight unit to supply the light illuminating the screen, and each backlight unit requires LED drivers. A leading market research firm estimated the total 2007 market for LED drivers to be $925 million, with LED drivers for portable handset backlighting representing approximately three quarters of the LED driver market.

Every portable device display needs a display driver. While advances in materials used to manufacture displays have played an important role in display innovation, display drivers are the critical semiconductor components that enable display functionality. The majority of small and medium size displays are made using thin film transistor, or TFT, technology. We believe active matrix organic light emitting diode, or AM-OLED, displays have the potential to capture a significant share of the total display driver market. While AM-OLED displays today are typically still more expensive than TFT displays, they are an attractive alternative due to their better display quality and thin form factor. We believe that our proprietary EPiC technology, with its ability to reduce mura defects and control image sticking by periodically recalibrating the display pixels, will be critical in improving manufacturing yields, enabling more cost-effective AM-OLED displays and improving their lifetime. The worldwide AM-OLED market is expected to grow to $4.6 billion by 2014, up from $67 million in 2007, according to a leading market research firm. As AM-OLED displays can be made in larger sizes, our EPiC technology is applicable beyond mobile phones to mid-size displays for digital picture frames, navigation devices, laptops and monitors.

Our Businesses

Touch Controller Chips. We initiated our development of touch technology IC solutions in 2007, and introduced our initial products in 2008. Touch technology is increasingly being utilized by manufacturers to create sleek, streamlined products with enhanced reliability. In consumer electronics, many of the latest and most attractive mobile phones and media players utilize capacitive touch to realize thin, attractive products differentiated from standard offerings with mechanical buttons. In the industrial and household appliances markets, touch interfaces are increasingly being implemented not only for visual appeal, but also for enhanced reliability in kitchen and laundry environments where heat, moisture, and dust present challenges for traditional input techniques. Our current portfolio consists of 11 products targeted for applications implementing capacitive touch buttons, sliders, and scroll wheels. The products are grouped into four major categories based on degree of integration.

 

   

Our LDS600x products contain only the PureTouch controller block and offer 6, 10, or 15 channel options.

 

   

Our LDS602x products add integrated keypad LED drivers and are offered in 6, 10, 13, and 15 channel options.

 

   

Our two LDS601x products integrate a TouchSense®—certified haptics driver and feature 15 channels, with one product optimized for mobile applications and the other for non-mobile.

 

   

Our LDS604x offerings are similar to the LDS601x products, with the addition of the same keypad LED driver functionality featured in the LDS602x line.

 

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In January 2009, we entered into an agreement with Immersion Corporation in which we received a license to use Immersion’s TouchSense(R) Player and Haptics Effect Library which will extend to customers purchasing Leadis’ capacitive touch controllers with integrated haptics driver, enabling end-product manufacturers to quickly incorporate a standard library of tactile feedback effects for capacitive touch inputs.

LED Driver Chips. During 2007, we began internal development of a portfolio of LED drivers. As of December 31, 2008, we offer 8 LED driver products for portable backlighting and flash applications such as flash or lamp LEDs in cell phone cameras. These devices are all high efficiency charge pumps that differ in the number of LEDs each can drive, the input voltages, and the current level upon each LED. In January 2009, we announced our LDS8160 featuring our proprietary in-situ Temperature Compensation engine. The LDS8160 measures the temperature of the LED directly at the diode junction without need for an external sensor and adjusts the current on each LED channel in order to optimize luminosity, color saturation, and prevent system overheating. All of our LED drivers support our PowerLite current regulation feature which enable a device to stay in the charge pump’s highest efficiency mode for a longer time and reduces power consumption.

Display Driver Chips. Our core business through 2008 was the development and sale of integrated single chip mixed signal display drivers for small panel displays. Sales of display drivers accounted for 98% of our revenue in 2008. In January 2009, we sold our display driver business to AsTEK, Inc., a privately-held company located in Korea. As a result of this transaction, we will continue to fulfill orders for certain existing display driver products into customer programs already established, but will cease investment in the production, marketing and sale of new display driver integrated circuits. We have also licensed our proprietary EPiC technology for AM-OLED displays to ASTEK, Inc.

Audio Chips. We are no longer manufacturing our portable audio products. The volumes sold in 2008 were insignificant and in March 2009 we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products.

Power Management Chips. We are manufacturing and selling a modest amount of power management devices such as LDO regulators, shunt references and thermal switches. The volumes sold in 2008 were insignificant and we have ceased development of new power management devices.

Product Strategy

Our product strategy for 2009 is as follows:

First, we will focus our internal engineering development to produce high quality, cost effective touch controllers and LED drivers. We believe that our proprietary technology in these areas significantly differentiates our products from others in the market and affords potential customers real benefits in terms of lower overall product cost, power consumption and improved end user experience.

Second, we will leverage strategic partnerships to field complete product solutions. For example, our touch controller solutions are significantly enriched by the inclusion of drivers using Immersion Corporation’s industry-leading haptics technology. In February 2009, we announced that our proprietary LED-Sense Temperature Sensing and Compensation Engine, implemented in the LDS8160, is now available for licensing to third parties as an embedded, stand-alone IP block. Regardless of the application, a critical factor to the adoption of LEDs is their reliability, which can degrade with self-heating. Preventing excessive heating on the device is one of the most significant challenges system designers face today. This is especially the case for High Brightness LEDs in automotive and general illumination.

Sales and Marketing

Historically, our display driver products were sold to manufacturers of small panel displays for portable handsets. Our LED products and touch controller products may be sold to a variety of manufacturers for use in consumer electronics, household appliances, and industrial or climate control systems. We focus our sales and marketing strategy on establishing business and technology relationships with manufacturers to allow us to work

 

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closely with them on future solutions that align with their product roadmaps. Our design engineers collaborate with customer design engineers to create solutions that comply with the specifications of the manufacturers and provide a high level of performance at competitive prices.

To date, we have sold our products through our direct sales force and sales representative firms with staff located in Asia and Europe. We also market and sell through independent distributors in China, Hong Kong, Japan, Korea, and Taiwan. We employ field application engineers to provide technical support and assistance to potential and existing customers in designing, testing and qualifying electronic designs that incorporate our products.

Customers

In 2008, our two largest customers, Samsung SDI Corporation and Rikei Corporation, a sales distributor in Japan, accounted for approximately 24% and 38% of our revenue, respectively. Sales to customers located in China and Japan represented approximately 40% and 38% of our total sales in 2008, respectively. However, our product mix by geography will vary depending on changes in sales and design wins by customer, and the customer base for our touch controllers and LED driver products may be substantially different than our historical customer base for display drivers. Please refer to Note 11 of Notes to Consolidated Financial Statements included in this annual report for additional information regarding revenue by geographic region.

Seasonality

Our current sales are made into the consumer electronic products market. Due to the seasonality in this market, we typically expect to see stronger revenue growth in the second half of the calendar year than in the first half of the year. In addition to the seasonality, the portable handset market is also characterized by intense competition among a concentrated group of manufacturers, rapidly evolving technology and changing consumer preferences. These factors result in the frequent introduction of new products, short product life cycles, continually evolving portable handset specifications and significant price competition. As our product portfolio mix shifts to LED drivers and touch controllers, we may experience demand trends that overshadow our prior seasonal revenue patterns.

In addition, in the past, consumer electronics manufacturers have inaccurately forecasted consumer demand, which has led to significant changes in orders to their component suppliers. We have experienced both increases and decreases to orders within the same quarter and with limited advance notice. We expect such increases and decreases of orders to continue to occur in the future.

Manufacturing

We outsource the manufacturing, assembly and testing of our products to third parties. Our foundry suppliers fabricate our display driver products using a customized, high-voltage version of their mature and stable CMOS process technology with feature sizes of 0.15 micron and higher. Our LED and touch controller products are fabricated on mature CMOS processes. Our principal foundry suppliers are Seiko Epson in Japan, and Vanguard International Semiconductor Corporation, Taiwan Semiconductor Manufacturing Corporation and United Microelectronics Corporation in Taiwan, but we may use other foundry suppliers in the future. Our fabless manufacturing model significantly reduces our capital requirements and allows us to focus our resources on the design, development and marketing of our products. In addition, we benefit from our suppliers’ manufacturing expertise, and from the flexibility to select those vendors that we believe offer the best capability and value. To the extent our foundry suppliers experience poor yield rates or tightened capacity conditions, we may be unable to meet our customers’ demand requirements and our business may be harmed.

Following wafer fabrication processing, our wafers are shipped from the foundries to assembly and testing contractors, where they are electrically tested and assembled onto plastic packages for certain devices. We

 

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develop and control all product test programs used by our subcontractors. These test programs are developed based on product specifications, thereby maintaining our control over the performance of our devices. We currently rely primarily on Chipbond Technology Corporation, International Semiconductor Technology Ltd. and King Yuan Electronics Co., Ltd., each located in Taiwan, and Unisem Group in Malaysia, to assemble and test our products. As our product portfolio expands, we may use additional assembly and testing contractors. To the extent these contractors experience heightened demand for their services, we may be unable to secure sufficient testing and assembly capacity to meet our customers’ product demand requirements. While our testing contractors currently ship our products directly to our customers, we may in the future ship products to customers out of our own facility.

Inventory

We manage inventories by forecasting product-by-product demand based upon our industry experience and communications with our customers. We place manufacturing orders for our products that are based on this forecasted demand. The quantity of products actually purchased by our customers as well as shipment schedules are subject to revisions that reflect changes in both the customers’ requirements and in manufacturing availability. Depending upon the level of demand for our products and demand for products incorporating our devices, we may maintain substantial inventories of our products in order to be able to meet demand on a timely basis. In addition, any cancellation, modification or delay in shipments in the future may impact our inventory levels, and could cause us to create provisions for excess and obsolete inventory.

Research and Development

We conduct our design and development activities in Korea and the United States. We believe that our continued commitment to research and development and timely introduction of new and enhanced products is integral to maintaining the value of the company, but we determined in 2008 that we needed to reduce our research and development investments to focus on a narrow range of opportunities. In the fourth quarter of 2008, we ceased investment in our audio products. In January 2009, we sold our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea. In February 2009, we sold assets relating to a development-stage power management product. In March 2009, we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products. We continue to explore numerous alternatives to optimize value from our research and development efforts to date. Our total expenditures for research and development were $21.6 million for 2008, $18.6 million for 2007, and $13.8 million for 2006. As a result of our restructuring and adoption of a new business strategy, we expect our 2009 research and development spending will be substantially below the 2008 levels.

Intellectual Property

Our success and ability to realize value for our shareholders will depend on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark, trade secret laws, contractual provisions, and licenses to protect our intellectual property. We also attempt to protect our trade secrets and proprietary information through agreements with our customers, suppliers, employees and consultants. As of March 15, 2009, we had twenty U.S patents applications pending and had been issued nine U.S. patents. These patent applications and issued patents cover our intellectual property contained in our LED drivers, power management and touch technology products. In January 2009, we sold our display driver business including a number of relevant patents. In February 2009, we sold assets relating to a development-stage power management product, including one issued patent. In March 2009, we sold assets related to our audio products, including a number of patents and pending patents. We expect to file additional patent applications covering our intellectual property, and we may sell additional patents as part of future sales of all or any parts of our business. We cannot assure you that any patents will be issued to us as a result of our pending or future applications or that any patent issued will provide substantive protection for the technology or product covered by it.

 

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While we intend to protect our intellectual property rights vigorously, we cannot assure you that these efforts will be successful. Despite our precautions, a third party may copy or otherwise obtain and use our products, technology or processes without authorization, or may independently develop similar technology. In addition, effective copyright, trademark and trade secret protection may be unavailable or limited in certain foreign jurisdictions. We cannot assure you that the measures we have implemented to prevent misappropriation or infringement of our intellectual property will be successful.

Competition

The markets for semiconductors generally, and portable electronics integrated circuits in particular, are intensely competitive. We believe that the principal competitive factors in our market include cost, design times, operating performance, level of integration, design customization, manufacturing expertise and quality. We believe our solutions compete favorably across these factors. However, many of our current and potential competitors have longer operating histories, greater name recognition, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. We anticipate that the market for our products will be subject to rapid technological change.

Competitors for our LED drivers include Advanced Analogic Technologies, Inc., Linear Technology Corporation, Maxim Integrated Products, Inc., Micrel Incorporated, National Semiconductor Corporation, RichTech Co., Ltd., and Texas Instruments Incorporated.

Competitors for our touch products include Atmel Corporation, Cypress Semiconductor and Synaptics Incorporated.

Employees

As of December 31, 2008, we had 161 employees, including 100 in research and development, 23 in operations and 38 in sales, marketing, general and administrative functions. By region, 59 of our employees were located in the United States, 69 in Korea and 33 in Asia and Europe. At the end of 2007, we had 184 employees. Through sales of portions of our business and related transfers of headcount, as well as staff reductions enacted to reduce operating expenses, our headcount declined to 89 as of March 14, 2009. None of our employees is covered by a collective bargaining agreement. We believe we have good relations with our employees.

Financial Information by Geographic Location

We operate as a single industry segment: the design, development and marketing of mixed-signal semiconductors that enable and enhance the features and capabilities of portable consumer electronic products. We currently generate substantially all of our revenue from customers in Asia and Japan. Related information is included in Note 11 of the Notes to Consolidated Financial Statements.

 

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below as well as the other information contained in this annual report on Form 10-K in evaluating our company and our business. The risks and uncertainties described below may not be the only risks and uncertainties that we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occurs, our business, financial condition and results of operations would be impaired. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Our business strategy is currently going through significant evaluation and change.

We announced in October 2008 that our business strategy was going through a transition. Rather than continuing to pursue a broad range of analog semiconductor products for portable electronic devices, we are

 

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significantly reducing the scope of our operating activities. In January 2009, we sold our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea whose principal is the former general manager of our Korean R&D operation. The total consideration was $3.5 million in the form of a receivable due no later than January 2010 plus $0.5 million of assumed liabilities. We retained rights to most of the current display driver products in production, which we expect will continue to generate revenue through 2009, as well as ownership of our proprietary EPiC technology for AM-OLED displays. In February 2009, we sold assets relating to a development-stage power management product. In March 2009, we sold the assets relating to our portable audio products. As a result of these transactions, we have reduced our headcount by approximately 54% from the level at the end of the third quarter of 2008, and we are focusing our operating activities on our touch controllers and LED drivers. We also expect to generate revenue from the sale of our legacy display driver products. This transition and our current plan may fail to stop our operating losses. As part of this transition, we may not be able to make our LED driver and touch controller businesses profitable and therefore may exit them. We may not be able to identify, acquire, or transition to new lines of business that may be profitable, and we may not have enough resources to transition to certain alternative lines of business. We are also evaluating alternatives to maximize shareholder value including the potential sale of all or parts of the remaining business.

If our new business strategy is unsuccessful, it will significantly harm our business and operating results.

In the second half of 2008, as economic conditions deteriorated, we took actions to restructure our operations and reduce our spending to bring costs more in line with expected revenues and our business strategy. We engaged financial advisors during the third quarter of 2008 and began evaluating alternatives for each of our business areas. In the fourth quarter of 2008, we ceased investment in our audio products and implemented headcount reductions. As a result of this restructuring, we are focusing our operating activities on touch controllers and LED drivers. In the short term, we also will generate revenue from the sale of our legacy display driver products. The sale of our display driver and audio businesses has reduced the scale of our business and income stream, resulting in our greater reliance on our touch controller and LED driver products. If the market demand for our LED driver or our touch controller product offerings is smaller than we anticipated, our results of operations and business would be adversely affected. In addition, if there is a delay in bringing our new products to market, it would delay our ability to derive revenues from such products and our business and operating results could be significantly harmed.

We have incurred losses in prior periods and will incur losses in the future, which will reduce our cash flows and could harm our financial condition.

For the years ended December 31, 2008, 2007 and 2006, we incurred significant operating losses and negative cash flows, with net losses of $51.5 million, $30.9 million and $11.9 million, respectively. During this period our revenue decreased from $101.2 million in 2006 to $39.6 million in 2007 and $18.6 million in 2008. At December 31, 2008, we had an accumulated deficit of $77.2 million and cash, cash equivalents and short-term investments totaling $29.4 million. The loss in 2008 includes a $9.5 million non-cash impairment charge of our goodwill and other intangible assets. Although we have taken steps to significantly reduce our operating expenses, our ability to return to or sustain profitability on a quarterly or annual basis in the future depends in part on our ability to develop new touch controller and LED driver products that gain market acceptance, and our ability to manage expenses. We may not generate sufficient revenue from these products and we may not again achieve or sustain profitability on a quarterly or annual basis. If we fail to return to profitability, the continued operating losses will reduce our cash flows and negatively harm our business and financial condition.

We may need to raise additional capital, which might not be available or which, if available, may be on terms that are not favorable to us.

We believe that as a result of our actions taken in the fourth quarter of 2008 and in the first quarter of 2009, our cash, cash equivalents, and short term investment balances will be sufficient to fund our operations for the

 

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next twelve months. However, we expect to incur operating losses in 2009 and expect our cash balances to decline during the year. If anticipated operating results in our touch controller, LED driver and legacy display driver businesses are not achieved, we may have to delay or further reduce expenditures. We may also enter into additional agreements for the sale of all or parts of our remaining business in the future. If additional capital is raised through the sale of equity or convertible debt, our stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to current holders of common stock. If we obtain additional funds through arrangements with strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. There can be no assurance that we will be able to obtain such financing, or obtain it on acceptable terms. If we are unable to obtain financing on acceptable terms, we may be unable to execute our business plan and we could be required to delay or reduce the scope of our operations.

Recent deterioration of worldwide economic conditions may affect our financial performance and our ability to forecast our business.

Our operations and performance depend on worldwide economic conditions and its impact on purchases of our products by our customers. Economic conditions have deteriorated significantly in recent months in many countries and regions, including the United States, and may remain depressed for the foreseeable future. As a result, our customers may experience unexpected fluctuations in demand for their products, as consumers alter their purchasing activities in response to this economic uncertainty, and our customers may change or scale back their product development efforts, component purchases or other activities that affect purchases of our products. This uncertainty may affect our ability to provide or meet specific forecasted results, as we attempt to address this increased volatility in our business. If we are unable to adequately respond to unforeseeable changes in demand resulting from general economic conditions, our operating results and financial condition may be materially and adversely affected.

If we are unable to timely develop new and enhanced products that achieve market acceptance, our operating results and competitive position could be harmed.

Our future success will depend on our ability to develop touch controller and LED driver products that achieve timely and cost-effective market acceptance. The development of our products is highly complex, and we have experienced, and in the future may experience, delays in the development and introduction of new products and product enhancements. We often incur significant expenditures on the development of a new product without any assurance that a manufacturer will select our product for design into its own product. Once a customer designs a competitor’s product into its product offering, it becomes significantly more difficult for us to sell our products to that customer because changing suppliers typically involves significant cost, time, effort and risk for the customer.

Successful product development and market acceptance of our products depend on a number of factors, including:

 

   

accurate prediction of changing requirements of customers within the portable device and consumer electronics markets;

 

   

timely completion and introduction of new designs;

 

   

timely qualification and certification of our products for use in our customers’ products;

 

   

the prices at which we are able to offer our products;

 

   

quality, performance, power use and size of our products as compared to competing products and technologies;

 

   

commercial acceptance and commercial production of the devices into which our products are incorporated;

 

   

achievement of acceptable manufacturing yields;

 

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interoperability of our products with other system components;

 

   

successful development of our relationships with existing and potential customers;

 

   

our ability to retain, train and manage new suppliers and sales representatives and distributors; and

 

   

changes in technology, industry standards or end-user preferences.

We cannot assure you that products we recently developed, or products we may develop in the future, will achieve market acceptance. If our customers notify us that they have incorporated our products into their products in the design phase, we describe this event as a design win. Even if we achieve design wins for our products, these design wins may not generate significant, or any revenue. Design wins for our LED driver products have not yet generated significant revenue. We recently received our first design wins for our touch controller products, but it is unclear at this time how much revenue will be generated from these design wins. If our LED driver and touch controller products fail to achieve design wins, the design wins do not generate significant revenue, or if we fail to develop new products that achieve market acceptance, our growth prospects, operating results and competitive position will be adversely affected.

Not all new design wins ramp into production, and even if ramped into production, the timing of such production may not occur as we or our customers had estimated or the volumes derived from such projects may not be as significant as we had estimated, which could have a substantial negative impact on our anticipated revenues and financial condition.

Once our touch controller and LED driver products have achieved a design win, it typically takes 3 to 9 months to actually ramp into commercial production. The value of any design win depends in large part upon the ultimate success of our customer’s product in its market. Not all design wins ramp into production and, even if a design win ramps into production, the volumes derived from such projects may be less than we had originally estimated due to lower than anticipated acceptance of our customer’s product by the market. Our failure to obtain sufficient design wins for touch controller and LED driver products, or the failure of designs we win to generate sufficient revenues, will have a materially adverse effect on our business, financial condition, and operating results.

We depend on a small number of key customers for substantially all of our revenue and the loss of, or a significant reduction in orders from, any key customer would significantly reduce our revenue and adversely impact our operating results.

For the next several quarters, our primary source of revenue will continue to come from the sale of our legacy display drivers to display module manufacturers serving the portable handset market. Historically, substantially all of our revenue has been generated from sales to a very small number of display module manufacturer customers. The loss of, or a reduction in purchases by, any of our key customers would likely harm our business, financial condition and results of operations. As we focus our business on touch controller and LED driver products, we will need to achieve design wins at new customers to whom we have not previously sold products. Our inability to achieve a sufficient number of design wins with new customers will significantly harm our financial position. Consolidation in our customers’ industries may result in increased customer concentration and the potential loss of customers. In addition, some of our customers may have efforts underway to actively consolidate their supply chain, which could reduce their purchases of our products.

We are dependent on sales of a small number of products, and the absence of continued market acceptance of these products could harm our business.

Historically, we have derived all of our revenue from a limited number of display driver products and, despite our recent restructuring, we expect to continue to derive a substantial portion of our revenue from these products in the near term. As a result, in the short term, a decline in market demand for one or more of our current display driver products could result in a significant decline in revenue and reduced operating results. As

 

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part of our restructuring, we are focusing our operating activities on the development of new touch controller and LED driver products. Until we have broadened our portfolio of these products, we will continue to be dependent on sales from a small number of products for substantially all of our revenue. Market acceptance of these new products is critical to our long-term success.

The average selling prices of our products tend to decline over time, often rapidly, and if we are unable to develop successful new products in a timely manner, our operating results will be harmed.

The portable electronic device market, and in particular the portable handset market, is extremely cost sensitive, which has resulted, and may continue to result, in declining average selling prices of portable handset components. The products we develop and sell are used for high volume applications and the average selling prices tend to decline, often rapidly, over the life of the product. We may reduce the average unit price of our products in response to competitive pricing pressures, new product introductions by us or our competitors and other factors. To maintain acceptable operating results, we will need to develop and introduce new products and product enhancements on a timely basis and continue to reduce our production costs. If we are unable to offset reductions in our average selling prices by timely introducing new products at higher average prices or reducing our production costs, our operating results will suffer.

If we are unable to comply with evolving customer specifications and requirements, customers may choose other products instead of our own.

Our touch controller and LED driver products must satisfy certain performance specifications of portable handset or electronic device manufacturers. Our ability to compete in the future will depend on our ability to comply with these specifications. We must continue to incorporate additional features and advanced technology into our products to be successful. In addition, as we seek to add new customers, we will need to comply with new and different specifications and quality standards. As a result, we could be required to invest significant time and effort and to incur significant expense to redesign our products to ensure compliance with relevant specifications. If our products are not in compliance with prevailing specifications for a significant period of time, we could miss opportunities to have customers choose our products over those of our competitors early in the customer’s design process. Loss of design wins could harm our business by making it more difficult to obtain future design wins with the manufacturer. We may not be successful in developing new products or product enhancements that achieve market acceptance. Our pursuit of necessary technological advances requires substantial time and expense and may not be successful, which would harm our competitive position.

Our business is highly dependent on the consumer electronics market, which is highly concentrated and characterized by significant price competition, short product life cycles, fluctuations in demand, and seasonality, any of which could negatively impact our business or results of operations.

Nearly all of our revenue to date has been generated from sales of display drivers for use in portable handsets. We anticipate that a significant portion of sales of our touch controllers and LED drivers will be for use in portable handsets or other consumer electronic devices. These markets are characterized by intense competition among a concentrated group of manufacturers, rapidly evolving technology, and changing consumer preferences. These factors result in the frequent introduction of new products, significant price competition, short product life cycles, and continually evolving product specifications. If we, our customers or consumer electronic device manufacturers are unable to manage product transitions, our business and results of operations could be negatively affected. Our business is also dependent on the broad commercial acceptance of the consumer electronic devices into which our products are incorporated. Even though we may achieve design wins, if the consumer electronic device incorporating our products do not achieve significant customer acceptance, our revenue will be adversely affected.

We expect our business to be subject to seasonality and varying order patterns in the consumer electronic device market. Demand is typically stronger in this market in the second half of the year than the first half of the

 

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year. However, in the past consumer electronic device manufacturers inaccurately forecasted consumer demand, which led to significant changes in orders to their component suppliers. We have experienced both increases and decreases in orders within the same quarter and with limited advance notice, and we expect such increases and decreases to occur in the future.

Our limited operating history makes it difficult for us to assess the impact of seasonal factors on our business. If we, or our customers, are unable to increase production of new or existing products to meet any increases in demand due to seasonality or other factors, our revenue from such products would be adversely affected and this may damage our reputation. Conversely, if our customers overestimate consumer demand, they may reduce their orders or delay shipments of our products from amounts forecasted, and our revenue in a particular period could be adversely affected.

Our products are complex and may require modifications to resolve undetected errors or failures, which could lead to an increase in our costs, a loss of customers or a delay in market acceptance of our products.

Our products are highly complex and have contained, and may in the future contain, undetected errors or failures when first introduced or as new revisions are released. If we deliver products with errors or defects, we may incur additional development, repair or replacement costs, our margin rates will suffer, and our credibility and the market acceptance of our products could be harmed. Defects in our products could also lead to liability as a result of lawsuits against us or our customers. We have agreed to indemnify our customers in some circumstances against liability from defects in our products. A successful product liability claim could require us to make significant damage payments.

Our products must interoperate with the components supplied to our customers by other suppliers.

Our touch controller and LED driver products comprise only part of complex electronics systems manufactured by our customers. As a result, these products must operate according to specifications with the other components in the system. Our touch controller products must often interoperate with a third party microprocessor. If other components of the electronic system fail to operate efficiently with our products, we may be required to incur additional development time and costs optimizing the interoperability of our products with the other components. Additionally, if other components of the system contain errors or defects that cannot be corrected in a timely fashion, the customer may delay or cancel production of its system, adversely impacting our sales.

Failure to transition to new manufacturing process technologies could adversely affect our operating results and gross margin.

To remain competitive, we strive to manufacture our drivers using increasingly smaller geometries and higher levels of design integration. Our strategy is to utilize the most advanced manufacturing process technology appropriate for our products and available from our third-party foundry contractors. Use of advanced processes may have greater risk of initial yield problems and higher production costs. Manufacturing process technologies are subject to rapid change and require significant expenditures for research and development. In the past, we have experienced difficulty in migrating to new manufacturing processes and, consequently, have suffered reduced yields, delays in product deliveries and increased expense levels. We may face similar difficulties, delays and expenses as we continue to transition our products to smaller geometry processes. Moreover, we are dependent on our relationships with our third-party manufacturers to successfully migrate to smaller geometry processes. The inability by us or our third-party manufacturers to effectively and efficiently transition to new manufacturing process technologies may adversely affect our gross margin and our operating results.

Our limited operating history makes it difficult for us to accurately forecast revenue and appropriately plan our expenses.

We were formed in May 2000 and had our initial meaningful shipments of display driver products in the third quarter of 2002. As a result, we have limited historical financial data from which to predict our future

 

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revenue and expenses. We have not yet had meaningful shipments of our touch controller or LED driver products. The rapidly evolving nature of the consumer electronic device markets and other factors that are beyond our control also limit our ability to accurately forecast revenue and expenses. Because most of our expenses are fixed in the short term or incurred in advance of anticipated revenue, we may not be able to decrease our expenses in a timely manner to offset any shortfall in revenue.

Our revenue has fluctuated significantly from quarter to quarter and year to year, so you should not rely on the results of any past periods as an indication of future revenue performance or growth.

In the past, we have experienced significant revenue fluctuation from quarter to quarter and year to year. While our revenue increased 58% in 2006 compared to 2005, we experienced a 61% decline in revenue in 2007 compared to 2006, and our revenue for 2008 decreased 53% compared to 2007. We also sold off significant parts of our business in the first quarter of 2009. Accordingly, you should not rely on the results of any prior periods as an indication of our future revenue growth or financial results.

Our quarterly financial results fluctuate, which leads to volatility in our stock price.

Our revenue and operating results have fluctuated from quarter to quarter in the past and may continue to do so in the future. As a result, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. Fluctuations in our revenue and operating results could negatively affect the trading price of our stock. In addition, our revenue and results of operations may, in the future, be below the expectations of analysts and investors, which could cause our stock price to decline. Factors that are likely to cause our revenue and operating results to fluctuate include the risk factors discussed throughout this section.

If we fail to accurately forecast customer demand, we may have excess or insufficient inventory, which may increase our operating costs and harm our business.

We will sell our touch controller and LED driver products to manufacturers of consumer electronics devices. We sell our display drivers to display module manufacturers who integrate our drivers into the displays that they supply to handset manufacturers. We have limited visibility as to the volume of our products that our customers are selling to their customers or carrying in their inventory. If our customers have excess inventory or experience a slowing of products sold through to their end customers, it would likely result in a slowdown in orders from our customers and adversely impact our future sales. Moreover, to ensure availability of our products for our customers, in some cases we start the manufacturing of our products based on forecasts provided by these customers in advance of receiving purchase orders. However, these forecasts do not represent binding purchase commitments, and we do not recognize revenue from these products until they are shipped to the customer. As a result, we incur inventory and manufacturing costs in advance of anticipated revenue. If we overestimate customer demand for our products or if purchase orders are cancelled or shipments delayed by our customers, we may end up with excess inventory that we cannot sell, which would harm our financial results. For example, in 2008, we recorded charges of $5.9 million to write down excess inventory. During 2008, we experienced a sharp drop in demand for two display driver products that had been our largest volume programs. We deliberately built ahead of demand in one program to take advantage of favorable supplier pricing. These products represent approximately 77% of our inventory carrying value as of December 31, 2008. While we expect this increased inventory to be sold in subsequent quarters, we cannot assure you that the inventory will sell, nor that it will sell at prices in excess of our manufacturing costs, and this may result in future inventory provisions. This inventory risk is exacerbated because many of our display driver products are customized, which hampers our ability to sell any excess inventory to the general market.

Our customer orders are subject to cancellation, reduction or delay in delivery schedules, which may result in lower than anticipated revenue.

Our sales are generally made pursuant to standard purchase orders rather than long-term purchase commitments. These purchase orders may be cancelled or modified or the shipment dates delayed by the

 

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customer. We have in the past experienced, and may, in the future, experience delays in scheduled shipment dates, which have on occasion resulted, and may in the future result, in our recognizing revenue in a later period than anticipated. We have also experienced reductions to previously placed purchase orders. Any cancellation, modification or delay in shipments in the future may result in lower than anticipated revenue.

We face significant competition and may be unsuccessful in competing against current and future competitors.

The markets in which we operate are intensely competitive and are characterized by rapid technological changes, rapid price reductions and short product life cycles. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems. Increased competition may result in price pressure, reduced profitability and loss of market share, any of which could seriously harm our revenue and operating results.

Competitors for our touch controller products include Atmel Corporation, Cypress Semiconductor and Synaptics Incorporated. Competitors for our LED driver products include Advanced Analogic Technologies, Inc., Linear Technology Corporation, Maxim Integrated Products, Inc., Micrel Incorporated, National Semiconductor Corporation, RichTech Co., Ltd., and Texas Instruments Incorporated.

Competitors for our legacy display driver products include Himax Technologies, Ltd., MagnaChip Semiconductor Ltd., Novatek Microelectronics Corp., Ltd., Renesas Technology Corp., Sitronix Technology Corporation, and Solomon Systech Limited. Additionally, many portable device display module manufacturers are affiliated with vertically integrated electronics companies. Some of these companies also have semiconductor design and manufacturing resources for developing display drivers. Captive semiconductor suppliers with which we may compete include semiconductor divisions of Samsung Electronics Co., Ltd., Seiko Epson Corporation, Sharp Electronics Corporation and Toshiba Corporation.

Many of our competitors and potential competitors have longer operating histories, greater name recognition, complementary product offerings, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than us. As a result, they may be able to respond more quickly to changing customer demands or to devote greater resources to the development, promotion and sales of their products than we can. In addition, in the event of a manufacturing capacity shortage, these competitors may be able to obtain wafer fabrication capacity when we are unable to do so. Any of these factors could cause us to be at a competitive disadvantage to our existing and potential new competitors.

We rely on a limited number of independent foundries and subcontractors for the manufacture, assembly and testing of our chipsets and on third-party logistics providers to ship products to our customers. The failure of any of these third-party vendors to deliver products or otherwise perform as requested could damage our relationships with our customers, decrease our sales and limit our growth.

As a fabless semiconductor company, we do not have our own manufacturing or assembly facilities and have limited in-house testing facilities. As a result, we rely on third-party vendors to manufacture, assemble and test the products that we design. Our principal foundry partners are Seiko Epson in Japan, and Vanguard International Semiconductor Corporation, Taiwan Semiconductor Manufacturing Corporation and United Microelectronics Corporation in Taiwan. We currently rely primarily on Chipbond Technology Corporation, International Semiconductor Technology Ltd. and King Yuan Electronics Co., Ltd., each located in Taiwan, and Unisem Group in Malaysia, to assemble and test our products. If our current or future vendors do not provide us with high-quality products, services and/or production and test capacity in a timely manner, or if the relationship with one or more of these vendors is terminated, we may be unable to obtain satisfactory replacements and/or we may be unable to fulfill customer orders on a timely basis, our relationships with our customers could suffer, our sales could decrease and our growth could be limited.

 

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We face risks associated with relying on third-party vendors for the manufacture, assembly and testing of our products.

We rely, in whole or in part, upon independent vendors to manufacture, assemble and test our products. We face significant risks associated with relying on third-party vendors, including:

 

   

reduced ability to increase production and achieve acceptable yields on a timely basis;

 

   

reduced control over delivery schedules and product quality;

 

   

limited warranties on wafers or products supplied to us;

 

   

limited ability to obtain insurance coverage for business interruptions related to contractors;

 

   

increased exposure to potential misappropriation of our intellectual property;

 

   

shortages of materials that foundries use to manufacture our products;

 

   

labor shortages or labor strikes;

 

   

political instability in countries where contractors are located; and

 

   

actions taken by our subcontractors that breach our agreements.

We do not have long-term supply contracts with our third-party manufacturing vendors and they may allocate capacity to other customers and may not allocate sufficient capacity to us to meet future demands for our products.

We currently do not have long-term supply contracts with any of our third-party contractors. As a result, none of our third-party contractors is obligated to perform services or supply products to us for any specific period, in any specific quantities, or at any specific price, except as may be provided in a particular purchase order. Moreover, none of our third-party foundry or assembly and test vendors has provided contractual assurances to us that adequate capacity will be available to us to meet future demand for our products. We provide our foundry contractors with monthly rolling forecasts of our production requirements; however, the ability of each foundry to provide wafers to us is limited by the foundry’s available capacity. Our foundry contractors use raw materials in the manufacture of wafers used to manufacture our products. To the extent our foundry contractors experience shortages of these wafers, we may be unable to obtain capacity as required. In addition, the price of our wafers will fluctuate based on changes in available industry capacity. Our foundry, assembly and test contractors may allocate capacity to the production of other companies’ products while reducing deliveries to us on short notice or increasing the prices they charge us. These foundry, assembly and test contractors may reallocate capacity to other customers that are larger and better financed than us or that have long-term agreements or relationships with these foundries or assembly and test contractors, which would decrease the capacity available to us. Moreover, to the extent we decide to, or are required to, change contractors we will face risks associated with establishing new business relationships and capacity. To secure manufacturing capacity at our foundry, assembly and test suppliers we may be required to make substantial purchase commitments or prepayments in future periods or enter into agreements that commit us to purchase minimum quantities in order to secure capacity or to achieve favorable prices. While we currently do not have plans for long-term agreements with any of our suppliers, we may enter into such agreements in the future, which could reduce our cash flow and subject us to risks of excess inventory or service costs.

Failure to achieve expected manufacturing yields for existing and/or new products would reduce our gross margin and could adversely affect our ability to compete effectively.

We have experienced, and may again experience, manufacturing yields that were less than we had anticipated. Semiconductor manufacturing yields are a function of product design, which is developed largely by us, and process technology, which is typically developed by our third-party foundries. As low manufacturing yields may result from either design or process technology failures, yield problems may not be effectively

 

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determined or resolved until an actual product exists that can be analyzed and tested to identify sensitivities relating to the design processes used. As a result, yield problems may not be identified until well after the production process has begun. Any decrease in manufacturing yields could result in an increase in our manufacturing costs and decrease our ability to fulfill customer orders in a timely fashion. This could potentially have a negative impact on our revenue, our gross margin, our gross profit, and our customer relationships. The manufacturing yields for new products tend to be lower initially and increase as we achieve full production. In many cases, these shorter manufacturing periods will not reach the longer, higher volume manufacturing periods conducive to higher manufacturing yields and declining costs. We also face the risk of product recalls or product returns resulting from design or manufacturing defects that are not discovered during the manufacturing and testing process. A significant number of product returns due to a defect or recall could damage our reputation and result in our customers working with our competitors.

The semiconductor industry is highly cyclical, and our operating results may be negatively impacted by downturns in the general semiconductor industry.

Our business is impacted by the cyclical nature of the semiconductor industry. The semiconductor industry has experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles of both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by production overcapacity, high inventory levels and accelerated erosion of average selling prices. Any future downturns could significantly harm our sales, reduce our profitability or result in losses for a prolonged period of time. From time to time, the semiconductor industry also has experienced periods of increased demand and production capacity constraints. We may experience substantial changes in future operating results due to general semiconductor industry conditions, general economic conditions and other factors.

Any disruption to our operations or the operations of our foundry, assembly and test contractors resulting from earthquakes or other natural disasters could cause significant delays in the production or shipment of our products.

Our corporate headquarters are located in California. In addition, a substantial portion of our engineering operations and the third-party contractors that manufacture, assemble and test our products are located in the Pacific Rim. The risk of losses due to an earthquake in California and the Pacific Rim is significant due to the proximity to major earthquake fault lines. The occurrence of earthquakes or other natural disasters could result in disruption of our operations and the operations of our foundry, assembly and test contractors.

We rely on our key personnel to manage our business, and to develop products, and if we are unable to retain our current personnel and hire additional personnel, our ability to develop and successfully market our products could be harmed.

We believe that our future success depends in large part on our ability to retain the services of our skilled managerial, engineering, sales and marketing personnel, and to develop their successors and effectively managing the transition of key roles when they occur. Beginning in the second half of 2008, we began to restructure our operating activities, and have completed the sale of assets related to our display driver, audio and power management products. As part of the sale of these assets, we have also implemented headcount reductions and other operating expense reductions. It may become more difficult for us to retain executives and other key employees as we go through this restructuring process. In addition, a substantial majority of stock options held by our executives and key employees had exercise prices above the closing price of our common stock on February 28, 2009. If we lose any of our key technical or senior management personnel, or are unable to fill key positions, our business could be harmed. There are a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of analog integrated circuits, and we may face challenges hiring and retaining these types of employees. Our ability to expand our operations to meet corporate growth objectives depends upon our ability to hire and retain additional senior management personnel and qualified technical personnel.

 

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Our ability to compete will be harmed if we are unable to adequately protect our intellectual property.

We rely primarily on a combination of patent, trademark, trade secret and copyright laws and contractual restrictions to protect our intellectual property. These afford only limited protection. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to obtain, copy or use information that we regard as proprietary, such as product design and manufacturing process expertise. Our pending patent applications and any future applications may not result in issued patents and any issued patents may not be sufficiently broad to protect our proprietary technologies. Moreover, policing any unauthorized use of our products is difficult and costly, and we cannot be certain that the measures we have implemented will prevent misappropriation or unauthorized use of our technologies, particularly in foreign jurisdictions where the laws may not protect our proprietary rights as fully as the laws of the United States. The enforcement of patents by others may harm our ability to conduct our business. Others may independently develop substantially equivalent intellectual property or otherwise gain access to our trade secrets or intellectual property. Our failure to effectively protect our intellectual property could harm our business.

Assertions by third parties of infringement by us of their intellectual property rights could result in significant costs and cause our operating results to suffer.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights and positions, which has resulted in protracted and expensive litigation for many companies. Although we are not currently a party to legal action alleging our infringement of third-party intellectual property rights, in the future we may receive letters from various industry participants alleging infringement of patents, trade secrets or other intellectual property rights. Any lawsuits resulting from such allegations could subject us to significant liability for damages and invalidate our proprietary rights. These lawsuits, regardless of their success, would likely be time-consuming and expensive to resolve and would divert management time and attention. Any potential intellectual property litigation also could force us to do one or more of the following:

 

   

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

 

   

pay damages to the party claiming infringement;

 

   

attempt to obtain a license to the relevant intellectual property, which may not be available on reasonable terms or at all; and

 

   

attempt to redesign those products that contain the allegedly infringing intellectual property.

In the future, the outcome of a dispute may be that we would need to develop non-infringing technology or enter into royalty or licensing agreements. We may also initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. We have agreed to indemnify certain customers for certain claims of infringement arising out of the sale of our products. This practice may subject us to significant indemnification claims by our customers or others.

We have significant international activities and customers, and plan to continue such efforts, which subjects us to additional business risks including increased logistical complexity, political instability and currency fluctuations.

We are incorporated and headquartered in the United States, and we have international subsidiaries in the Cayman Islands, Hong Kong and Japan. We have engineering personnel in Korea and marketing and/or operations personnel in China, Hong Kong, Japan, and Taiwan. Substantially all of our revenue to date has been attributable to customers located outside of the United States. We anticipate that all or substantially all of our revenue will continue to be represented by sales to customers in Asia. Our international operations are subject to a number of risks, including:

 

   

increased complexity and costs of managing international operations;

 

   

protectionist and other foreign laws and business practices that favor local competition in some countries;

 

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difficulties in managing foreign operations, including cultural differences;

 

   

difficulty in hiring qualified management, technical sales and applications engineers;

 

   

potentially reduced protection for intellectual property rights;

 

   

inadequate local infrastructure;

 

   

multiple, conflicting and changing laws, regulations, export and import restrictions, and tax schemes;

 

   

potentially longer and more difficult collection periods and exposure to foreign currency exchange rate fluctuations; and

 

   

political and economic instability.

Any of these factors could significantly harm our future sales and operations and, consequently, results of operations and financial condition.

We may have exposure to greater than anticipated tax liabilities.

The determination of our worldwide provision for income taxes and other tax liabilities requires estimation and significant judgment and there are many transactions and calculations where the ultimate tax determination is uncertain. Our determination of our tax liability is always subject to review by applicable domestic and international tax authorities. Any adverse outcome of such a review could have a negative effect on our operating results and financial condition. Although we believe our estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in our financial statements and may materially affect our financial results in the period or periods for which such determination is made.

Difficulties in collecting accounts receivable could result in significant charges against income and the deferral of revenue recognition from sales to affected customers, which could harm our operating results and financial condition.

Our accounts receivable are highly concentrated and make us vulnerable to adverse changes in our customers’ businesses and to downturns in the economy and the industry. In addition, difficulties in collecting accounts receivable or the loss of any significant customer could materially and adversely affect our financial condition and results of operations. As we seek to expand our customer base, it is possible that new customers may expose us to greater credit risk than our existing customers. Accounts receivable owed by foreign customers may be difficult to collect. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance consists of an amount identified for specific customers and an amount based on overall estimated exposure. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required and we may be required to defer revenue recognition on sales to affected customers, which could adversely affect our operating results. We may have to record additional allowances or write-offs and/or defer revenue on certain sales transactions in the future, which could negatively impact our financial results.

Funds associated with certain of our auction rate securities may not be accessible for in excess of twelve months.

Our available for sale securities as of December 31, 2008 include $1.6 million at fair value of auction rate securities (ARS) that are securitized packages of government guaranteed student loans. Since February 2008, our ARS have repeatedly failed to auction successfully due to market supply consistently exceeding market demand. In accordance with the terms of the notes, in the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. To date we have collected all interest payable on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed

 

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auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, issuers repay principal over time from cash flows prior to final maturity, or final payments come due according to contractual maturities ranging from 22 to 26 years. As a result, we have classified all ARS as long-term investments in the consolidated balance sheets. We understand that issuers and financial underwriters are working on alternatives that may improve liquidity of student loan auction rate securities, although it is not yet clear when or if such efforts will be successful. In the fourth quarter of 2008, we determined that we no longer had the ability to hold these instruments to maturity, and therefore we recorded an other than temporary impairment charge of $1.1 million relating to our ARS portfolio, which is recorded in “Interest and other income, net” on the consolidated statement of operations.

We may not maintain Nasdaq listing requirements, which would adversely affect the price and liquidity of our common stock.

To maintain the listing of our common stock on the Nasdaq Global Market (Nasdaq), we are required to meet certain listing requirements, including a minimum bid price of $1 per share. Our common stock has traded below the $1 minimum bid price every trading day since September 10, 2008. Under normal circumstances, companies traded on Nasdaq would receive a deficiency notice from Nasdaq if their common stock has traded below the $1 minimum bid price for 30 consecutive business days. Due to market conditions, however, on October 16, 2008 Nasdaq announced a suspension of the enforcement of rules requiring a minimum $1 closing bid price, with the suspension to remain in place until Friday, January 16, 2009. Nasdaq has subsequently announced an extension of this suspension until July 20, 2009. If our common stock continues to trade below the $1 minimum bid price for 30 consecutive business days following the end of Nasdaq’s enforcement suspension, we would likely receive a deficiency notice. Following receipt of a deficiency notice, we expect we would have 180 days to “cure” the deficiency by having our common stock trade over $1 minimum bid price for at least a 10-day period. If we were to fail to meet the minimum bid price for at least 10 consecutive days during the grace period, our common stock could be delisted. Even if we are able to comply with the minimum bid requirement, there is no assurance that in the future we will continue to satisfy Nasdaq listing requirements, with the result that our common stock may be delisted. Should our common stock be delisted from Nasdaq, and the delisting determination was based solely on non-compliance with the $1 minimum bid price, we may consider applying to transfer our common stock to the Nasdaq Capital Market provided that we satisfy all criteria for initial inclusion on such market other than the minimum bid price rule. In the event of such a transfer, the Nasdaq Marketplace Rules provide that we would have an additional 180 calendar days to comply with the minimum bid price rule while on the Nasdaq Capital Market. If our stock is delisted from the Nasdaq Global Market and the Nasdaq Capital Market, it would 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 could materially adversely affect the market price and market liquidity of our common stock and our ability to raise necessary capital.

Our stock price is volatile, which could result in substantial losses for investors and significant costs related to litigation.

The trading price of our common stock is highly volatile. Between December 31, 2007 and December 31, 2008, our common stock traded between $2.86 per share and $0.29 per share. This volatility could result in substantial losses for investors. The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control. These factors include:

 

   

quarterly variations in revenue or operating results;

 

   

failure to meet the expectations of securities analysts or investors with respect to our financial performance;

 

   

changes in financial estimates by securities analysts;

 

   

announcements by us or our competitors of new product and service offerings, significant contracts, acquisitions or strategic relationships;

 

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publicity about our company or our products or our competitors;

 

   

announcements by manufacturers of consumer electronics or portable handsets;

 

   

actual or anticipated fluctuations in our competitors’ operating results or changes in their growth rates;

 

   

additions or departures of key personnel;

 

   

the trading volume of our common stock;

 

   

any future sales of our common stock or other securities; and

 

   

stock market price and volume fluctuations of publicly-traded companies in general and semiconductor companies in particular.

Investors may be unable to resell their shares of our common stock at or above their purchase price. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities, such as the lawsuit filed against us in March 2005. This securities litigation, and any other such litigation, may result in significant costs and diversion of management’s attention and resources, which could seriously harm our business and operating results.

We currently are, and in the future may be, subject to securities class action lawsuits that could cause harm to our business, financial condition, results of operations and cash flow.

We are at risk of being subject to securities class action lawsuits if our stock price declines substantially. Securities class action litigation has often been brought against a company following a decline in the market price of its securities. For example, on March 2, 2005, a securities class action suit was filed in the United States District Court for the Northern District of California against us, certain of our officers and our directors. The complaint alleges the defendants violated the Securities Act of 1933 by making allegedly false and misleading statements in the registration statement and prospectus filed on June 16, 2004 for our initial public offering. A similar additional action was filed on March 11, 2005 and the court consolidated the two actions. In the fourth quarter of 2008, the parties to this litigation reached a tentative settlement of all claims. The District Court preliminarily approved the settlement in February 2009, and we anticipate that the District Court will provide final approval of the settlement in the second quarter of 2009. This securities litigation, and any other such litigation, may result in significant costs and diversion of management’s attention and resources, which could seriously harm our business, operating results and cash flows.

Our principal stockholders have significant voting power and may influence actions that may not be in the best interests of our other stockholders.

We believe that our executive officers, directors and holders of 5% or more of our outstanding common stock, in the aggregate, beneficially own approximately 42% of our outstanding common stock as of March 1, 2009. As a result, these persons, acting together, may have the ability to exert substantial influence over matters requiring approval of our stockholders, including the election and removal of directors and the approval of mergers or other business combinations and divestitures. This concentration of beneficial ownership could be disadvantageous to other stockholders whose interests are different from those of our executive officers, directors, and 5% shareholders. For example, our executive officers and directors, acting together with a few stockholders owning a relatively small percentage of our outstanding stock, could delay or prevent an acquisition or merger even if the transaction would benefit other stockholders.

Our reported financial results may be adversely affected by changes in accounting principles generally accepted in the United States.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States. These accounting principles are subject to interpretation by the Financial Accounting Standards

 

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Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change. For example, on January 1, 2006, we adopted SFAS No. 123(R), “Share-based Payment,” which requires that we record compensation expense in our statement of operations for stock-based payments, such as employee stock options, using the fair value method. The adoption of this new standard had, and will continue to have, a significant effect on our reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial results due to the variability of the factors used to estimate the values of stock-based payments. If factors change and we employ different assumptions in the application of SFAS No. 123(R) in future periods, the compensation expense that we record under SFAS No. 123(R) may differ significantly from what we have recorded in the current period, which could negatively affect our stock price.

If we fail to maintain the adequacy of our internal controls, our ability to provide accurate financial statements could be impaired and any failure to maintain our internal controls and provide accurate financial statements could cause our stock price to decrease substantially.

Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on for the fiscal year 2008 the effectiveness of our internal control structure and procedures for financial reporting. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We have incurred, and expect to continue to incur, substantial expense and to devote significant management resources to Section 404 compliance. The Section 404 compliance costs are relatively fixed, therefore compliance costs increase as a percentage of revenue with declines in revenue such as those we experienced during 2007. If in the future our chief executive officer, chief financial officer or independent registered public accounting firm determines that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.

Anti-takeover provisions of our charter documents and Delaware law could prevent or delay transactions resulting in a change in control.

Provisions of our certificate of incorporation and bylaws and applicable provisions of Delaware law may make it more difficult for or prevent a third party from acquiring control of us without the approval of our board of directors. These provisions:

 

   

establish a classified board of directors, so that not all members of our board may be elected at one time;

 

   

set limitations on the removal of directors;

 

   

limit who may call a special meeting of stockholders;

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;

 

   

prohibit stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders; and

 

   

provide our board of directors the ability to designate the terms of and issue new series of preferred stock without stockholder approval.

These provisions may have the effect of entrenching our management team and may deprive shareholders of the opportunity to sell their shares to potential acquirers at a premium over prevailing prices. This potential inability to obtain a control premium could reduce the price of our common stock.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

ITEM 2. PROPERTIES

Our executive and administrative headquarters occupy approximately 14,839 square feet of a facility located in Sunnyvale, California, under a lease that expires in June 2010. We lease additional space in Korea, Hong Kong, Taiwan, China and Japan to support activities in these countries. We believe that our facilities are adequate for our current needs and that suitable additional or substitute space will be available as needed to accommodate our foreseeable expansion of operations. For additional information regarding obligations under leases, see Note 7 of Notes to Consolidated Financial Statements under the subheading “Operating leases and financing,” which information is hereby incorporated by reference.

 

ITEM 3. LEGAL PROCEEDINGS

On March 2, 2005, a securities class action suit was filed in the United States District Court for the Northern District of California against Leadis Technology, Inc., certain of its officers and its directors. The complaint alleges the defendants violated Sections 11 and 15 of the Securities Act of 1933 by making allegedly false and misleading statements in our registration statement and prospectus filed on June 16, 2004 for our initial public offering. A similar additional action was filed on March 11, 2005. On April 20, 2005, the court consolidated the two actions. In the fourth quarter of 2008, the parties to this litigation reached a tentative settlement of all claims. The District Court preliminarily approved the settlement in February 2009, and we anticipate that the District Court will provide final approval of the settlement in the second quarter of 2009. There will be no financial impact of this settlement on the Company as the settlement amount will be paid by the Company’s liability insurer.

From time to time we may be subject to legal proceedings in the ordinary course of business. Except for the securities class action suit described above, we are not involved in any legal proceedings.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.

 

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PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed on The NASDAQ Global Market under the symbol “LDIS.” As of December 31, 2008, there were approximately 25 stockholders of record. Since many holders’ shares are listed under their brokerage firms’ names, we estimate the actual number of stockholders to be over 1,000.

The following table sets forth the high and low closing prices, for the periods indicated, for our common stock as reported by The NASDAQ Global Market:

 

     Fiscal Year 2008    Fiscal Year 2007
         High            Low            High            Low    

First Quarter

   $ 2.80    $ 1.83    $ 5.01    $ 3.95

Second Quarter

     1.95      1.59      4.16      3.43

Third Quarter

     1.52      0.75      3.59      3.09

Fourth Quarter

     0.77      0.29      3.42      2.62

No cash dividends were paid on our common stock in 2008 and 2007.

Our Board of Directors approved a common stock repurchase plan in January 2007 to purchase up to 2.5 million shares. During 2007, we purchased 1.1 million shares for $3.8 million. The authorization for stock repurchases expired on December 31, 2007. We cannot assure you that additional shares will be authorized for repurchase.

Use of Proceeds from the Sale of Registered Securities

On June 15, 2004, our registration statement on Form S-1 (Registration No. 333-113880) was declared effective for our initial public offering. As of December 31, 2008, we had invested the $76.5 million in net proceeds from the offering in money market funds, municipal bonds, commercial paper and government agency bonds. We have used these proceeds for general corporate purposes, including working capital, research and development, general and administrative expenses and capital expenditures. A portion of the proceeds were used to fund our operating losses, our acquisition of Mondowave, Inc., the assets of Nuelight Corporation, and the acquisition of Acutechnology Semiconductor, Inc.

 

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Stock Performance Graph

The graph below shows a comparison of the cumulative total shareholder return on our common stock with the cumulative total return on the NASDAQ Stock Market (U.S.) Index and the Philadelphia Semiconductor Index (denoted as Peer Group Index) for the period from June 16, 2004 (the first trading date of our common stock) through December 31, 2008. The graph assumes $100 invested at the indicated starting date in our common stock and in each of the market indices, with the reinvestment of all dividends.

LOGO

We have not paid or declared any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Shareholder returns over the indicated periods should not be considered indicative of future stock prices or shareholder returns.

 

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ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected consolidated financial and operating information for Leadis Technology together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors,” and our audited consolidated financial statements and notes thereto included elsewhere in this annual report.

The selected consolidated balance sheet data as of December 31, 2008 and December 31, 2007 and the selected consolidated statements of operations data for each of the three years in the period ended December 31, 2008, 2007 and 2006 have been derived from our audited consolidated financial statements, which are included elsewhere in this annual report. The selected consolidated balance sheet data as of December 31, 2006, December 31, 2005 and December 31, 2004 and the selected consolidated statements of operations data for the years ended December 31, 2005 and December 31, 2004 have been derived from our audited consolidated financial statements not included in this annual report. Historical results are not necessarily indicative of the results to be expected in future periods.

On May 15, 2004, our board of directors approved, and on June 10, 2004 our stockholders approved, an amendment to our Amended and Restated Certificate of Incorporation to effect a 3 for 2 split of our common stock and preferred stock. All information related to common stock, preferred stock, options and warrants to purchase common or preferred stock and earnings per share included in these selected balance sheet data and selected consolidated statement of operations data has been retroactively adjusted to give effect to the stock split.

 

    Year Ended December 31,
    2008     2007     2006     2005     2004
    (in thousands, except per share amounts)

Consolidated Statement of Operations Data (2):

         

Revenue

  $ 18,556      $ 39,581      $ 101,208      $ 64,182      $ 150,250

Cost of sales (1)

    21,899        36,343        88,506        50,197        97,725
                                     

Gross profit (loss)

    (3,343     3,238        12,702        13,985        52,525
                                     

Operating expenses:

         

Research and development (1)

    21,631        18,599        13,796        14,522        14,964

Selling, general and administrative (1)

    17,011        16,383        14,785        12,766        8,545

Amortization of purchased intangible assets

    1,750        2,090        —          —          —  

Impairment of goodwill and intangible assets

    9,498           

In-process research and development

    —          2,470        —          —          —  
                                     

Total operating expenses

    49,890        39,542        28,581        27,288        23,509
                                     

Operating income (loss)

    (53,233     (36,304     (15,879     (13,303     29,016

Interest and other income, net

    879        4,392        4,349        2,718        956
                                     

Income (loss) before income taxes and cumulative effect of change in accounting principle

    (52,354     (31,912     (11,530     (10,585     29,972

Provision for (benefit from) income taxes

    (821     (980     523        765        12,379
                                     

Income (loss) before cumulative effect of change in accounting principle

    (51,533     (30,932     (12,053     (11,350     17,593

Cumulative effect of change in accounting principle, net of tax (1)

    —          —          142        —          —  
                                     

Net income (loss)

  $ (51,533   $ (30,932   $ (11,911   $ (11,350   $ 17,593
                                     

Basic net income (loss) per share before cumulative effect of change in accounting principle

  $ (1.76   $ (1.06   $ (0.42   $ (0.40   $ 0.72

Cumulative effect of change in accounting principle

    —          —          0.01        —          —  
                                     

Basic net income (loss) per share

  $ (1.76   $ (1.06   $ (0.41   $ (0.40   $ 0.72
                                     

Diluted net income (loss) per share before cumulative effect of change in accounting principle

  $ (1.76   $ (1.06   $ (0.42   $ (0.40   $ 0.63

Cumulative effect of change in accounting principle

    —          —          0.01        —          —  
                                     

Diluted net income (loss) per share

  $ (1.76   $ (1.06   $ (0.41   $ (0.40   $ 0.63
                                     

 

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(1) As required under SFAS No. 123(R), we recorded a cumulative effect of change in accounting principle benefit of $0.1 million for the year ended December 31, 2006, reflecting estimated future forfeitures of options previously expensed under APB No. 25. Amounts in 2006 through 2008 include stock-based compensation expenses recorded under SFAS No. 123(R), and amounts in 2004 through 2005 include amortization of deferred stock-based compensation recorded under APB No. 25, as follows (in thousands):

 

     Years Ended December 31,
     2008
(SFAS123R)
   2007
(SFAS123R)
   2006
(SFAS123R)
   2005
(APB25)
   2004
(APB25)

Cost of sales

   $ 165    $ 122    $ 417    $ 97    $ 269

Research and development

   $ 992    $ 1,046    $ 1,017    $ 794    $ 1,730

Selling, general and administrative

   $ 1,578    $ 2,224    $ 3,232    $ 1,211    $ 2,492

 

(2) During 2007, we acquired Mondowave, Inc. and Acutechnology Semiconductor, Inc. The consolidated statement of operations data for 2007 include the operations of acquired entities and other charges related to the acquisitions and, as a result, are not fully comparable to data in prior periods.

 

     December 31,
     2008    2007    2006    2005    2004
     (in thousands)

Consolidated Balance Sheet Data:

              

Cash and cash equivalents

   $ 21,642    $ 33,945    $ 62,697    $ 72,801    $ 45,012

Working capital

   $ 29,555    $ 68,418    $ 109,310    $ 116,040    $ 124,351

Total assets

   $ 42,769    $ 99,579    $ 140,729    $ 143,914    $ 154,815

Total debt

   $ 780    $ 1,061    $ —      $ —      $ —  

Stockholders’ equity

   $ 32,913    $ 83,477    $ 114,037    $ 119,815    $ 127,106

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying audited consolidated financial statements and notes included in this report. This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which include, without limitation, statements about the market for our technology, our strategy, competition, expected financial performance, and all information disclosed under Item 7 of this Part II. Any statements about our business, financial results, financial condition and operations contained in this Form 10-K that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “expects,” “intends,” “projects,” or similar expressions are intended to identify forward-looking statements. Our actual results could differ materially from those expressed or implied by these forward-looking statements as a result of various factors, including the risk factors described under the heading “Risk Factors” and elsewhere in this report. We undertake no obligation to update publicly any forward-looking statements for any reason, except as required by law, even as new information becomes available or events occur in the future.

Overview

We design, develop and market analog and mixed-signal semiconductor products that enable and enhance the features and capabilities of portable and other consumer electronic products. We outsource all of the fabrication, assembly and testing of our products to outside subcontractors. We were incorporated in Delaware on May 15, 2000, and began commercially shipping products in the third quarter of 2002. Traditionally, our core products have been mixed-signal color display drivers with integrated controllers, which are critical components of displays used in portable consumer electronic devices. Beginning in 2007, we expanded our product offerings to include light-emitting diode, or LED, drivers, power management, touch technology and consumer audio analog integrated circuits, or ICs.

Until recently, we have sold our products primarily to display module manufacturers, which incorporate our products into their display module subassemblies for portable handset manufacturers. Our end market customers have been concentrated among a few significant portable handset manufacturers, including Nokia Corporation, Sony Ericsson and Samsung Electronics Co., Ltd. We expect our customer base to include a broader range of consumer electronics manufacturers as our product mix becomes more concentrated on products other than display drivers.

For the years ended December 31, 2008, 2007 and 2006, we incurred significant operating losses and negative cash flows, with net losses of $51.5 million, $30.9 million and $11.9 million, respectively. During this period our revenue decreased from $101.2 million in 2006 to $39.6 million in 2007 and $18.6 million in 2008. At December 31, 2008, we had an accumulated deficit of $77.2 million and cash, cash equivalents and short-term investments totaling $29.4 million.

In the second half of 2008, as economic conditions deteriorated, we took actions to restructure our operations and reduce our spending to bring costs more in line with expected revenues and our business strategy. We engaged financial advisors during the third quarter of 2008 and began evaluating alternatives for each of our business areas. In the fourth quarter of 2008, we ceased investment in our audio products, except as necessary to support existing customers, and implemented headcount reductions.

In January 2009, we sold our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea whose principal is the former general manager of our Korean R&D operation. The total consideration was $3.5 million in the form of a receivable due no later than January 2010 plus $0.5 million of assumed liabilities. We retained rights to most of the current display driver products in

 

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production, as well as ownership of our proprietary EpiC technology for AM-OLED displays. As a result of this transaction, we have ceased investment in the production, marketing and sale of new display driver integrated circuits.

In February 2009, we sold assets relating to a development-stage power management product. We sold these assets and transferred certain employees to a publicly-traded supplier of analog and mixed-signal semiconductor products. Under the terms of the sale, we will be paid $2.3 million in cash, of which $2 million has been received to date. As a result of this transaction, we ceased development of power management integrated circuits.

In March 2009, we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products. Under the terms of the sale, we were paid $1.45 million in cash, all of which has been received.

In addition to the sales of the display driver, power management and audio parts of our business, we have enacted salary reductions and reduced hours worked for a substantial portion of our remaining employees.

The net impact of actions to date is that we have reduced our headcount by approximately 54% from the levels in the third quarter of 2008, while focusing our resources on development of capacitive touch controllers and LED drivers. We continue to invest in and develop these businesses while exploring our other options to realize maximum value from the technologies we have developed. We have continued discussions with parties that have expressed interest in acquiring other parts of our business. While we do not have any agreements relating to additional strategic activities, these discussions may lead to us selling one or more of our remaining businesses.

We believe that as a result of the actions taken in the fourth quarter of 2008 and so far in the first quarter of 2009, our cash, cash equivalents, and short term investment balances will be sufficient to fund our operations for the next twelve months. However, we expect to incur operating losses in 2009 and expect our cash balances to decline during the year. If anticipated operating results in our legacy display driver, touch controller and LED driver businesses are not achieved, we have the intent and believe we have the ability to delay or further reduce expenditures. We may also enter into additional agreements for the sale of all or parts of our remaining business in the future. We currently have no plans to seek additional cash. However, if additional capital is raised through the sale of equity or convertible debt, our stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to current holders of common stock. If we obtain additional funds through arrangements with strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. There can be no assurance that we will be able to obtain such financing, or obtain it on acceptable terms. If we are unable to obtain necessary financing on acceptable terms, we may be unable to execute our business plan and we could be required to delay or reduce the scope of our operations.

During 2008, we sold our display driver products to display module manufacturers, which incorporate our products into their display module subassemblies. Our legacy display drivers, LED drivers, and touch controllers are sold to manufacturers of portable handsets and other consumer electronic devices. We currently generate substantially all of our revenue from customers outside the United States. Our sales are generally made pursuant to standard purchase orders that may be cancelled or the shipment dates may be delayed by the customer. We operate in one operating segment, comprising the design, development and marketing of analog and mixed-signal semiconductors for consumer electronics.

Total revenue was $18.6 million in 2008, a decrease of 53% from $39.6 million in 2007. Nearly all of our revenue in 2008 was generated from sales of our display driver products. Unit shipments were 26.9 million in 2008, a decrease of 45% as compared to 2007. Our gross margin was a loss of 18% in 2008 as compared to a gross profit of 8% in 2007. We incurred $5.9 million in provisions for excess and obsolete inventory in 2008 as

 

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compared to $2.2 million in 2007. Gross margin was also negatively impacted as the fixed cost of maintaining a product operations team was spread over significantly lower sales volume, and prices declined on our older products. Operating expenses increased 26% to $49.9 million in 2008 as compared to $39.5 million in 2007. Our net loss was $51.5 million in 2008 as compared to a net loss of $30.9 million in 2007. Our cash, cash equivalents and short-term investments decreased $35.9 million from December 31, 2007 to December 31, 2008, due principally to our net loss in 2008.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) 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 the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period to period. On an ongoing basis we re-evaluate our judgments and estimates including those related to valuation of investments, intangible assets and goodwill, uncollectible accounts receivable, inventories, income taxes, stock-based compensation, warranty obligations and contingencies. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We refer to accounting estimates of this type as “critical accounting estimates,” which are discussed further below. Actual results could differ from those estimates, and material effects on our operating results and financial position may result.

In addition to making critical accounting estimates, we must ensure that our financial statements are properly stated in accordance with GAAP. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application, while in other cases, management’s judgment is required in selecting among available alternative accounting standards that allow different accounting treatment for similar transactions (e.g., stock-based compensation, depreciation methodology, etc.). We believe that the following accounting policies are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates: revenue recognition, the allowance for uncollectible accounts receivable, inventory valuation, valuation of investments, warranty obligations, income taxes, stock-based compensation, and valuation of intangible assets and goodwill.

Revenue Recognition. We recognize revenue in accordance with Securities and Exchange Commission Staff Accounting Bulletin, or SAB, No. 104, “Revenue Recognition.” SAB No. 104 requires that four basic criteria be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the price is fixed or determinable; and (4) collectability is reasonably assured. To date, most of our sales were to large established companies based on purchase orders from these customers with minimal collectability issues. Customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents are used to verify delivery. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction. We assess collectability based primarily on the credit worthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Should changes in conditions cause management to determine these criteria will not be met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

Allowance for Uncollectible Accounts Receivable. We perform credit evaluations of each of our customers and adjust credit limits based upon payment history and the customer’s current credit worthiness, as determined by our review of their current credit information. We regularly monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon any specific customer collection issues

 

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we have identified and our best estimate of allowance requirements. While we have not experienced any significant credit losses to date, we may experience substantially higher credit loss rates in the future. Our accounts receivable are generally concentrated in a limited number of customers, and we expect them to remain concentrated in the future. We may increase our credit risk as we expand our limited customer base due to the credit worthiness of newer customers compared with our existing customers. Any significant change in the liquidity or financial position of any current or future customer could make it more difficult for us to collect our accounts receivable and require us to increase our allowance for doubtful accounts.

Inventory Valuation. We state our inventories at the lower of cost (which approximates a first-in, first-out basis) or market. We record inventory provisions for estimated obsolescence or unmarketable inventories by comparing quantity on hand with forecasted future sales based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those expected by management, additional inventory provisions may be required. When analyzing inventory provisions, we take into consideration the quantity of inventory on hand as well as purchase commitments. We specifically provide for lower of cost or market adjustments if pricing trends or forecasts indicate that the carrying value of our inventory exceeds its estimated selling price less the cost to dispose of inventory. The provision is reviewed each period to ensure that it reflects changes in our actual experience. Once inventory is written down, a new accounting basis is established and, accordingly, it is not written back up in future periods. Our inventory provision requirements may change in future periods based on actual experience, the life cycles of our products or market conditions.

Asset & Goodwill Impairment. Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired in a business combination. We account for goodwill in accordance with Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets.” We evaluate goodwill for impairment on an annual basis or whenever events and change in circumstances suggest that the carrying amount may not be recoverable. Because we have one reporting unit under SFAS No. 142, we utilize an enterprise wide approach to assess goodwill for impairment. Impairment of goodwill is tested at the enterprise level by comparing the enterprise’s carrying amount, including goodwill, to the fair value of the enterprise. If the carrying amount of the enterprise exceeds its fair value, goodwill is considered impaired, and a second step is performed to measure the amount of the impairment loss.

During the second quarter of 2008, we concluded that our market capitalization had been below our net book value for an extended period of time. We therefore assessed the fair value of the enterprise using both an income approach with a discounted cash flow model and a market approach using the observed market capitalization based on the quoted price of our common stock. We compared these to the carrying value of the net assets. The evaluation resulted in a $5.1 million impairment charge in the second quarter of 2008 which was included in “Impairment of goodwill and other intangible assets” in our consolidated statement of operations for 2008.

In accordance with Statement of Financial Accounting Standards No. 144, or SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” long-lived assets, such as property and equipment and intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We compare the carrying value of long-lived assets to our projection of future undiscounted cash flows attributable to such assets, and if the carrying value exceeds the future undiscounted cash flows, we record an impairment charge against income equal to the excess of the carrying value over the fair value of the assets.

During the second quarter of 2008, we concluded that our market capitalization had been below our net book value for an extended period of time and as a result, long lived assets were tested for recoverability. We assessed the fair value of our long lived assets using a combination of an income approach with a discounted cash flow model and a market approach. We compared these to the carrying value of the assets, and determined that the carrying value of intangible assets purchased in the acquisitions of Acutechnology Semiconductor and Mondowave, Inc. exceeded their fair value. The evaluation resulted in a $4.3 million impairment charge in the second quarter of 2008 which was included in “Impairment of goodwill and other intangible assets” in our consolidated statement of operations for 2008.

 

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Fair Value Measurements. Effective January 1, 2008, we adopted Statement of Financial Accounting Standards, or SFAS No. 157, “Fair Value Measurements.” In February 2008, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS No. 157 with respect to our financial assets and liabilities only. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable:

 

   

Level 1—Quoted prices in active markets for identical assets or liabilities.

 

   

Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on our consolidated results of operations, financial condition, or cash flows.

Effective January 1, 2008, we adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. We did not elect to adopt the fair value option under this Statement.

Our Level 3 investments as of December 31, 2008 include auction rate securities (ARS) that are securitized packages of government guaranteed student loans. In February 2008, liquidity issues in the global credit markets resulted in the failure of auctions representing all of the auction-rate securities we hold, as the amount of securities submitted for sale in those auctions exceeded the amount of bids. In accordance with the terms of the notes, in the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. To date we have collected all interest payable on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, issuers repay principal over time from cash flows prior to final maturity, or final payments come due according to contractual maturities ranging from 22 to 26 years. Due to their sustained illiquidity, we have classified all ARS as long-term investments in the consolidated balance sheets. During the second quarter of 2008, one of these securities was partially redeemed at par and we received $0.3 million .

Due to the current economic environment in which there is a lack of market activity for ARS, we have been unable to obtain quoted prices or market prices for identical assets as of the measurement date and so we use significant unobservable inputs to determine the fair value. The fair value of these securities has been estimated based on prices provided by third parties along with estimates we made. In the fourth quarter of 2008, we determined that we no longer had the ability to hold these instruments to maturity, and therefore we recorded an other than temporary impairment charge of $1.1 million relating to our ARS portfolio, which is recorded in “Interest and other income, net” on the consolidated statement of operations.

 

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Warranty Obligations. We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality assessment, our warranty obligation may be affected by future product failure rates, material usage and service delivery costs incurred in correcting a product failure. We regularly monitor product returns and maintain a reserve for warranty expenses based upon our historical experience and any specifically identified failures. As we sell new products to our customers, we must exercise considerable judgment in estimating the expected failure rates. This estimation process is based on historical experience of similar products as well as various other assumptions that we believe are reasonable under the circumstances. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

From time to time, we may be subject to additional costs related to warranty claims from our customers. If this occurs in a future period, we would make judgments and estimates to establish the related warranty liability, based on historical experience, communication with our customers, and various assumptions based on the circumstances. This additional warranty would be recorded in the determination of net income in the period in which the additional cost was identified.

Accounting for Income Taxes. In July 2006, the FASB issued FASB Interpretation 48 (FIN 48), “Accounting for Income Tax Uncertainties.” FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. FIN 48 also provides guidance on the recognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting and disclosure for income tax uncertainties in interim periods. FIN 48 became effective for us on January 1, 2007.

We account for income taxes under the provisions of Statement of Financial Accounting Standards, or SFAS No. 109, “Accounting for Income Taxes.” Under this method, we determine deferred tax assets and liabilities based upon the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenue, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax basis of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of the assets are recovered, hence giving rise to a deferred tax asset. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income or tax strategies and to the extent we believe it is more likely than not that our deferred tax assets will not be recovered, we must establish a valuation allowance. We continually review our estimates related to our income tax obligations, and revise our estimates, if necessary. A revision in our estimates of our tax obligations will be reflected as an adjustment to our income tax provision at the time of the change in our estimates. Such a revision could materially impact our effective tax rate, income tax provision and net income. In addition, the calculation of our tax liabilities involves the inherent uncertainty in the application of complex tax laws. We record tax reserves for additional taxes that we estimate we may be required to pay as a result of potential examinations by tax authorities. If such payments ultimately prove to be unnecessary, the reversal of these tax reserves would result in tax benefits being recognized in the period we determine such reserves are no longer necessary. If an ultimate tax assessment exceeds our estimate of tax liabilities, an additional charge to expense will result.

We have established valuation allowances against substantially all of our deferred tax assets as we believe that it is more likely than not that the tax benefits may not be realized. In 2008, we established a valuation allowance of $4.8 million against our U.S. federal deferred tax assets and a $1.3 million allowance against our California state deferred tax assets. The valuation allowances were determined in accordance with the provisions

 

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of SFAS No. 109 which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. In connection with the purchase accounting resulting from the acquisition of Mondowave, Inc. during the first quarter of 2007, we recorded deferred tax liabilities of approximately $1.9 million. In connection with the purchase accounting resulting from the acquisition of Acutechnology Semiconductor, Inc. during the fourth quarter of 2007, we recorded deferred tax liabilities of approximately $1.0 million. These deferred tax liabilities are the result of differences in the book and tax basis of the intangible assets recorded as a result of the acquisition. Because our deferred tax liabilities exceeded our deferred tax assets, the valuation allowance on the U.S. deferred tax assets recorded in 2006 was reversed in 2007, with a corresponding reduction in goodwill as a part of our purchase accounting. The deferred tax liabilities related to these acquisitions were eliminated in 2008 in conjunction with the intangible asset impairment charges recorded in 2008. In the event that our restructuring actions cause us to believe that it is more likely than not that the tax benefits of our deferred tax assets will be realized, we may in the future release our valuation allowances which would decrease our income tax expense.

Stock-Based Compensation. On January 1, 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors, including employee stock options, restricted stock units, and employee stock purchases related to the Employee Stock Purchase Plan (ESPP) based on estimated fair values. Share-based compensation expense recognized under SFAS No. 123(R) was $2.7 million in 2008 and $3.4 million in 2007. We use the Black-Scholes option pricing model to determine the fair value of stock-based awards under SFAS No. 123(R). The Black-Scholes model requires various judgmental assumptions including estimating stock price volatility and expected option life. Volatilities are based on historical actual volatility in the daily closing price of our common stock since we became a publicly traded company. The risk-free interest rate assumption is based upon observed interest rates appropriate for the term of our employee stock options. In January 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB No. 107), which provides supplemental implementation guidance for SFAS No. 123(R). The expected life is calculated using the simplified method allowed under SAB No. 107. During the first half of 2008, we evaluated the historical data on employee stock option exercises to estimate expected term of options granted. As a majority of the option exercises in 2006 and 2007 were by employees who left the company, we judged the historical data to be unsuitable to estimate the expected term of future option grants, and so pursuant to the guidance in SAB No. 110, we continue to calculate the expected life of employee stock options using the simplified method allowed under SAB No. 107. We do not currently pay dividends and have no plans to do so in the future.

The weighted average assumptions using the Black-Scholes model are summarized as follows:

 

     Year ended
December 31, 2008
    Year ended
December 31, 2007
 
     Stock Options     ESPP     Stock Options     ESPP  

Expected term (years)

     4.25        0.75        4.56        0.75   

Volatility

     47     39     49     43

Risk-free interest rate

     2.5     2.1     4.4     4.7

Dividend yield

     0.0     0.0     0.0     0.0

Weighted-average estimated fair value

   $ 0.77      $ 0.54      $ 1.68      $ 1.22   

The assumptions related to volatility, risk free interest rate and dividend yield used for the stock option plans differ from those used for the purchase plan primarily due to the difference in the respective expected lives of option grants and purchase plan awards.

Stock-based compensation expense is recorded net of estimated forfeitures that are based on historical experience. If any of the assumptions used in the Black-Scholes model or forfeiture rate change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period, which could materially affect our financial results. We elected the modified prospective transition method as

 

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permitted under SFAS No. 123(R), and accordingly prior periods have not been restated to reflect the impact of SFAS No. 123(R). The modified prospective transition method requires that stock-based compensation expense be recorded for all new and unvested stock options that are expected to vest, and employee stock purchase plan activity, over the requisite service periods beginning on January 1, 2006, the first day of our fiscal year 2006.

Prior to adoption of SFAS No. 123(R), we accounted for stock-based employee compensation arrangements in accordance with provisions of APB No. 25, “Accounting for Stock Issued to Employees,” and Financial Accounting Standards Board Interpretation, or FIN No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans,” and complied with the disclosure provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Under APB No. 25, compensation cost was recognized based on the difference, if any, on the date of grant between the fair value of our stock and the amount an employee must pay to acquire the stock. SFAS No. 123 defines a “fair value” based method of accounting for an employee stock option or similar equity investment. We used the Black-Scholes model to estimate the fair value. This model requires the use of judgmental assumptions, including future stock price volatility and expected time until exercise, which greatly affect the fair value. We reviewed these assumptions periodically and modified them as conditions changed. We calculated our stock price volatility and compared with that of peer companies to determine the reasonableness of this variable. We accounted for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force, or EITF, No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” We amortized deferred stock-based compensation on the graded vesting method over the vesting periods of the stock options, which is generally four years. The graded vesting method provides for vesting of portions of the overall awards at interim dates and results in accelerated vesting as compared to the straight-line method. As required under SFAS No. 123(R), we recorded a cumulative effect of change in accounting principle benefit of $0.1 million for the year ended December 31, 2006, reflecting estimated future forfeitures of options previously expensed under APB No. 25.

Results of Operations

The following table summarizes the results of our operations as a percentage of total revenue for the three years ended December 31, 2008:

 

     Year ended December 31,  
       2008         2007         2006    

Total revenue

   100   100   100

Cost of sales

   118   92   87
                  

Gross profit (loss)

   (18 %)    8   13

Operating expenses:

      

Research and development

   117   47   14

Selling, general and administrative

   92   42   15

Amortization of purchased intangible assets

   9   5   —     

Impairment of goodwill and intangible assets

   51   —        —     

In-process research and development

   —        6   —     
                  

Total operating expenses

   269   100   29
                  

Operating loss

   (287 %)    (92 %)    (16 %) 

Net loss

   (278 %)    (78 %)    (12 %) 

Total Revenue

 

     2008    Change,
2008 vs.
2007
    2007    Change,
2007 vs.
2006
    2006
     (in thousands)

Total revenue

   $ 18,556    (53 %)    $ 39,581    (61 %)    $ 101,208

 

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Total revenue was $18.6 million in 2008, a decrease of $21.0 million, or 53%, as compared to $39.6 million in 2007. Total revenue for 2008 included $0.6 million of non-recurring engineering, or NRE, revenue. We sold approximately 26.9 million units in 2008, which represented a decrease of 45% compared to the approximately 48.9 million units we sold in 2007. Our product average selling price in 2008 declined 15% from 2007. Display driver price is a function of technology, the maturity of the device sold and general industry conditions. During the second half of 2008 we experienced a marked decline in unit shipments as older programs ramped down. Some newer programs were at lower average selling prices, or ASPs, and with the decline in global economic conditions, these new programs did not achieve the sales unit ramp we expected. Sales of audio, touch, LED and power management products represented 2% of total revenue in 2008.

Total revenue decreased $61.6 million, or 61%, in 2007 as compared to 2006. Approximately 48.9 million units were sold in 2007, a 52% decrease as compared to approximately 101.6 million units sold in 2006. We did not have enough new design wins in 2006 to compensate for the decline in unit volumes of older programs, and this negatively impacted our unit sales in 2007. Our ASP declined 19% from 2006 to 2007. This ASP decline was caused by an increase in lower priced super twisted nematic, or STN, sales; these increased from 53% of sales in 2006 to 74% of sales in 2007.

Revenue by Customer

 

     % of Revenue for the
Years Ended December 31,
    % of Accounts Receivable
at December 31,
 
     2008     2007     2006     2008     2007  

Rikei Corp.  

   38   29   *      71   *   

Samsung SDI Co.  

   24   *      35   *      *   

TPO Displays Corp. **

   18   53   31   *      84

RitDisplay

   10   *      *      *      *   

AU Optronics Corp.  

   *      *      21   *      *   

 

* Less than 10%
** TPO Displays Corp. includes both Philips Mobile Display Systems and Toppoly Optoelectronics Corporation for all periods presented as a result of the merger of these companies in 2006.

Substantially all of our revenue in 2008, 2007 and 2006 has been generated from sales to a very small number of customers. Our largest customers have been AU Optronics Corporation, RitDisplay Corporation, Rikei Corporation, Samsung SDI Co. and TPO Displays Corporation, which collectively accounted for 90%, 93%, and 91% of our revenue in 2008, 2007 and 2006, respectively. In the second quarter of 2006, Philips Mobile Display Systems merged with Toppoly Optoelectronics Corporation, another of our customers, to form TPO Displays Corp. As a result, sales to these two customers are combined under the name TPO Displays Corp. Sales to Rikei Corporation, a Japanese distributor, grew in 2007 and 2008 with increases in several new programs at Japanese customers. In general, year over year variations result from the timing of the production ramp of new designs, illustrating the short life cycle of the end products into which our display drivers are incorporated.

We will likely experience shifts in our customer concentration in 2009 resulting from the ramping down of older display driver programs and the diversification of our product offerings. Sales of our legacy display driver products could decline during 2009, but these sales should remain a large percentage of our revenue in 2009. We expect that our touch controller, LED driver, and legacy power management product customers will be manufacturers of consumer electronics rather than display module manufacturers who have historically been the purchasers of our display driver products. While we seek to add additional customers, we expect to remain reliant on a small number of customers for the foreseeable future. In addition, existing customers may reduce their demand, as has occurred in the past, which could cause period to period fluctuations between customers representing significant amounts of our revenue.

 

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Revenue by Geography

The following table summarizes revenue by geographic region, based on the country in which the customer is located:

 

     Years Ended December 31,  
     2008     2007     2006  

China

   40   58   82

Japan/U.S.

   38   29   6

Taiwan

   11   9   4

Korea

   11   4   8
                  

Total revenue

   100   100   100
                  

In 2007 and 2006, all of our sales were invoiced in U.S. dollars. In 2008, our product shipments were all invoiced in U.S. dollars, and we also invoiced the equivalent of $0.6 million in South Korean won under non-recurring engineering contracts.

Gross Profit (loss)

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
    2006  
     (in thousands)  

Gross profit (loss)

   ($3,343   (203 %)    $ 3,238      (75 %)    $ 12,702   

as % of Revenue

   (18 %)        8       13

Gross profit (loss) decreased $6.6 million, or 203%, in 2008 as compared to 2007. We incurred charges of $5.9 million to write down inventory in 2008 due to inventory quantities on hand that were larger than forecasted demand. In 2007, we incurred similar charges of $2.2 million. Additionally, in 2008, the relatively fixed cost of product operations was spread over substantially lower sales volume. These charges contributed to the decline in gross profit as a percentage of revenue in 2008 as compared to 2007.

Gross profit decreased $9.5 million, or 75%, in 2007 as compared to 2006, due to the lack of sales volume of new products with higher gross margins to offset gross margin declines on older products.

We have reduced headcount, enacted salary reductions and reduced hours worked for a substantial portion of our operations staff. We expect these changes will reduce our fixed costs of product operation in 2009 to bring expenses more in line with substantially lower sales volume; however, we cannot guarantee that such actions will be sufficient for us to generate gross profit in the future.

Research and Development

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
    2006  
     (in thousands)  

Research and development

   $ 21,631      16   $ 18,599      35   $ 13,796   

as % of revenue

     117       47       14

Research and development (R&D) expenses consist of costs related to development, testing, evaluation, masking revisions, compensation and related costs for personnel, occupancy costs and depreciation on research and development equipment. R&D expenses include stock-based compensation of $1.0 million in each of 2008, 2007 and 2006. All research and development costs are expensed as incurred. R&D expenses may fluctuate in future periods due to timing of wafer qualification costs as well as the timing and number of new products under development.

 

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Research and development expenses increased $3.0 million, or 16%, from 2007 to 2008, and increased to 117% of revenue, in large part due to the decline in revenue. Wages, salaries, bonus and consulting costs increased $1.5 million in 2008 as we increased R&D headcount to support our newer businesses. R&D materials cost increased by $1.3 million, due principally to wafers expensed to engineering prior to production and other engineering services. Expenses for equipment, facilities, and software, including depreciation, increased $0.8 million.

Research and development expenses increased $4.8 million, or 35%, from 2006 to 2007, and increased 47% as a percentage of revenue, in large part due to the decline in revenue. Wages, salaries, bonus and consulting costs increased $4.9 million over 2006 as we increased R&D headcount 46%, from 67 at the end of 2006 to 98 at the end of 2007. We added headcount primarily to expand our efforts in audio, LED drivers and touch controller development. Expenses for travel, equipment, facilities, and software, including depreciation, increased $2.0 million. The costs of pre production wafer manufacturing and qualification dropped by $2.1 million.

We have taken actions that, collectively, should reduce our 2009 research and development spending substantially below the levels in 2008. In the second half of 2008, as economic conditions deteriorated, we took actions to restructure our operations and reduce our spending. We engaged financial advisors during the third quarter of 2008 and began evaluating alternatives for each of our business areas. In the fourth quarter of 2008, we ceased investment in our audio products and implemented headcount reductions. In January 2009, we sold our display driver assets and transferred certain employees to a privately-held company located in Korea. We retained rights to most of the current display driver products in production, as well as ownership of our proprietary EpiC technology for AM-OLED displays. As a result of this transaction, we ceased investment in the production, marketing and sale of new display driver integrated circuits. In February 2009, we sold assets relating to a development-stage power management product. As a result of this action, we will cease development of power management integrated circuits. In March 2009, we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products.

Selling, General and Administrative

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
    2006  
     (in thousands)  

Selling, general and administrative

   $ 17,011      4   $ 16,383      11   $ 14,785   

as % of Revenue

     92       42       15

Selling, general and administrative (SG&A) expenses consist primarily of compensation and related costs of personnel in general management, sales, finance and information technology, as well as outside legal and accounting costs. Selling, general and administrative expenses include stock-based compensation expenses of $1.6 million, $2.2 million, and $3.2 million in 2008, 2007, and 2006, respectively.

SG&A expenses in 2008 increased by $0.6 million, or 4%, over 2007. Excluding a $0.4 million reduction in allowance for doubtful accounts taken in the first half of 2007, the increase was $0.2 million. Approximately $1.0 million of this increase was in sales and marketing for additional product marketing and internal and external sales staff to support our expanded sales efforts to promote our broader product offerings. Offsetting this increase, stock compensation expense decreased $0.6 million from 2007 to 2008.

SG&A expenses in 2007 increased by $1.6 million, or 11%, over 2006, and increased substantially as a percentage of revenue due to the decline in sales. Wages, salaries, and consulting costs increased $2.9 million. Offsetting these increases, stock compensation expense declined $1.0 million from 2006 to 2007 principally due to the decline in our common stock price, which is an input in the Black-Scholes option pricing model used to estimate our stock compensation costs under SFAS 123(R).

 

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In the fourth quarter of 2008 and the first quarter of 2009, we reduced spending and headcount in our sales, marketing and general and administration functions which we expect will result in decreased SG&A spending in 2009 as compared with 2008. In January 2009, we sold our display driver business to a privately-held company located in Korea, and will cease marketing and promotion of display driver products. In February 2009, we sold assets relating to a development-stage power management product. As a result, we ceased marketing and promotion of new power management products. In March 2009, we sold certain assets related to our audio products and ceased marketing and promotion of audio products.

In-Process Research and Development and Amortization of Intangible Assets

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
   2006  
     (in thousands)  

In-process research and development

   $ 0      —        $ 2,470      —      $ 0   

as % of Revenue

     0       6        0

Amortization of intangible assets

   $ 1,750      (16 %)    $ 2,090      —      $ 0   

as % of Revenue

     9       5        0

In 2007, we recorded $2.0 million of in-process research and development expense to reflect the estimated value of development work in progress, but not completed, resulting from the Mondowave, Inc. and Acutechnology Semiconductor, Inc. acquisitions. The fair value assigned to in-process research and development was determined using the income approach and applying a discount rate derived from a weighted-average cost of capital analysis, adjusted to reflect risks related to the products, development completion stage and success. The estimates used in valuing in-process research and development were based upon assumptions of estimated costs to complete development and cash flows from the sale of such products. Such assumptions were believed to be reasonable at the time but are inherently uncertain and unpredictable. Subsequently, we have discontinued our investment in the technology acquired in the Mondowave acquisition, and refocused the efforts of our power management product development away from efforts in progress at the time of the acquisition of Acutechnology.

In September 2007, we acquired for $0.5 million in cash the intellectual property of Nuelight Corporation. The Nuelight technology shows potential to improve the manufacturing yields by correcting non-uniform brightness due to mura defects and overcome image sticking in AM-OLED display panels. As the acquired technology had not yet reached technical feasibility and no alternative uses existed, the full purchase price was expensed to in-process research and development upon acquisition.

We commenced amortization of intangible assets related to the acquisition of Mondowave, Inc. in the first quarter of 2007. These intangible assets include developed technology and non-compete covenant agreements. In 2008, we began amortization of the intangible assets related to the acquisition of Acutechnology Semiconductor, Inc., including developed technology, non-compete covenant agreements and customer relationships. The acquired intangible assets of Mondowave, Inc. and Acutechnology Semiconductor, Inc. were amortized using the straight line method over their expected useful lives, which ranged from two to four years.

Impairment of Goodwill and other Intangible Assets

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
   2006  
     (in thousands)  

Impairment of goodwill and intangible assets

   $ 9,498      100   $ 0      —      $ 0   

as % of Revenue

     51       0        0

 

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During the second quarter of 2008, we concluded that indicators of impairment were present as our market capitalization had remained below our book value for an extended period of time, and we forecasted lower future cash flows from our acquisitions of Mondowave, Inc. and Acutechnology Semiconductor, Inc. Our revenue projections for analog audio products developed from the intangible assets acquired in the Mondowave acquisition, and for products developed by Acutechnology Semiconductor, Inc. have declined due to the impact of the weakening global economy and delays in the sales ramp of new products. As a result, we tested the recoverability of our long-lived assets pursuant to the guidance in SFAS No. 144. We determined that the carrying value of the purchased intangible assets from the Mondowave and Acutechnology Semiconductor acquisitions exceeded their fair value under the test of impairment in SFAS No. 144 and recorded an impairment charge of approximately $4.3 million. We then tested our goodwill for impairment pursuant to the guidance in SFAS No. 142. Because we have one reporting unit under SFAS No. 142, we utilized an entity wide approach to assess goodwill for impairment. We assessed the fair value of the reporting unit using both an income approach with a discounted cash flow model and a market approach using the observed market capitalization based on the quoted price of our common stock. We compared these to the carrying value of the net assets after recognizing the impairment charge on our long-lived assets. The evaluation resulted in a $5.1 million goodwill impairment charge in the second quarter of 2008. During the fourth quarter of 2008, we concluded that the remaining book value of the Acutechnology purchased intangible assets exceeded their fair value and recorded an impairment charge of $53 thousand. As of December 31, 2008, the carrying value of our goodwill and intangible assets was zero.

Interest and Other Income, net

 

     2008    Change,
2008 vs.
2007
    2007    Change,
2007 vs.
2006
    2006
     (in thousands)

Interest and other income, net

   $ 879    (80 %)    $ 4,392    1   $ 4,349

Interest and other income, net, decreased $3.5 million or 80% from 2007 to 2008. Interest income declined by $2.8 million, reflecting the decline in our average cash and marketable securities balances, and the overall decline in interest rates over the last twelve months. Our losses on investments increased from $0.1 million in 2007 to $0.5 million in 2008 as we recorded a $1.1 million other-than-temporary impairment charge recognized in 2008 on our portfolio of ARS and gains on foreign exchange forward contracts during the year. These gains on foreign exchange forward contracts were in turn offset by a $0.3 million loss on foreign currency translation in 2008.

Interest and other income, net, was approximately flat from 2006 to 2007, despite the approximately 18% decline in average cash and marketable securities balances. In 2007, we earned higher interest rates on cash and investment balances due to increases in market interest rates and by extending a portion of our portfolio into securities with longer maturities.

We expect interest income to decline in 2009 as we anticipate our average cash and securities balance will be lower than in 2008.

Provision for (Benefit from) Income Taxes

 

     2008     Change,
2008 vs.
2007
    2007     Change,
2007 vs.
2006
    2006  
     (in thousands)  

Provision for (benefit from) income taxes

   ($ 821   (16 %)    ($ 980   (287 %)    $ 523   

Effective tax rate

     2       3       (5 %) 

as % of Revenue

     (4 %)        (2 %)        1

 

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Provision for (benefit from) income taxes was ($0.8) million, ($1.0) million, and $0.5 million in 2008, 2007 and 2006, respectively, representing effective tax rates of 2%, 3% and (5)%, respectively. Although we incurred cumulative losses in all three years, we are subject to taxes in the various countries where we operate; therefore, our effective tax rate is dependent on the mix of activities by country. Our net losses include stock-based compensation expense of $2.7 million in 2008, $3.4 million in 2007, and $4.7 million in 2006. The stock-based compensation expense for international employees is generally nondeductible based on tax rules in the countries where these employees reside. In addition, stock-based compensation expense on incentive stock options issued to U.S. employees is generally nondeductible. In 2008, we incurred non-deductible charges for impairment of goodwill of $5.1 million. We also incurred non-deductible in-process R&D charges of $2.5 million in 2007. These nondeductible expenses result in a higher tax rate for us, and increased our effective tax rate approximately 0.5% in 2008, 4% in 2007, 8% in 2006. Our tax rate for 2008 is not indicative of the rate we would expect on a consolidated basis if we generated consolidated net income.

We have established valuation allowances against deferred tax assets where we believe it is more likely than not that the tax benefits may not be realized. In 2008, we established a valuation allowance of $4.8 million against our U.S. federal deferred tax assets and a $1.3 million allowance against our California state deferred tax assets. In 2007, we established a valuation allowance of approximately $0.8 million for the Company’s California state deferred tax assets, increasing our income tax expense. Our tax provision for 2006 included a valuation allowance recorded against our net U.S. federal deferred tax assets of $0.4 million and California state deferred tax assets of $0.2 million. The valuation allowances were determined in accordance with the provisions of SFAS No. 109 which require an assessment of both positive and negative evidence when determining whether it is more likely than not that deferred tax assets are recoverable. Such assessment is required on a jurisdiction by jurisdiction basis. Associated with the purchase accounting of Mondowave, Inc. and Acutechnology Semiconductor, Inc. in 2007, we recorded deferred tax liabilities of approximately $2.9 million. These deferred tax liabilities result from the difference in book versus tax basis of the intangible assets recorded as a result of the acquisitions. Because our deferred tax liabilities exceeded our deferred tax assets, the U.S. deferred tax asset valuation allowance recorded in 2006 was reversed in 2007, with a corresponding reduction in goodwill as a part of our purchase accounting. The deferred tax liabilities related to Mondowave, Inc. and Acutechnology Semiconductor, Inc. acquisitions were eliminated in 2008 in conjunction with the intangible asset impairment charges recorded in 2008. In the event that our restructuring actions cause us to believe that it is more likely than not that the tax benefits of our deferred tax assets will be realized, we may in the future release our valuation allowances which would decrease our income tax expense.

Liquidity and Capital Resources

Since our inception, we have financed our operations primarily through sales of equity securities and through cash generated from operations prior to 2006. In the years ending December 31, 2007 and 2008, we have incurred substantial losses and negative cash flows from operations. Working capital decreased from $109.3 million at December 31, 2006 to $68.4 million at December 31, 2007, and $29.6 million at December 31, 2008 due primarily to our net losses in 2007 and 2008, and our expenditures of $13 million to acquire Mondowave, Inc. and Acutechnology Semiconductor, Inc. in 2007. Our cash, cash equivalents and short-term investments at December 31, 2008 were $29.4 million.

In the second half of 2008, as economic conditions deteriorated, we took actions to restructure our operations and reduce our spending to bring costs more in line with expected revenues and our business strategy. We engaged financial advisors during the third quarter of 2008 and began evaluating alternatives for each of our business areas. In the fourth quarter of 2008, we ceased investment in our audio products, except as necessary to support existing customers, and implemented headcount reductions.

In January 2009, we sold our display driver assets and transferred certain employees to AsTEK, Inc., a privately-held company located in Korea whose principal is the former general manager of our Korean R&D operation. The total consideration was $3.5 million in the form of a receivable due no later than January 2010 plus $0.5 million of assumed liabilities. We retained rights to most of the current display driver products in

 

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production, as well as ownership of our proprietary EpiC technology for AM-OLED displays. As a result of this transaction, we ceased investment in the production, marketing and sale of new display driver integrated circuits.

In February 2009, we sold assets relating to a development-stage power management product. We sold these assets and transferred certain employees to a publicly-traded supplier of analog and mixed-signal semiconductor products. Under the terms of the sale, we will be paid $2.3 million in cash, of which $2 million has been received to date. As a result of this action, we ceased development of power management integrated circuits.

In March 2009, we sold assets related to our audio products and transferred certain employees to a publicly-traded supplier of semiconductor products for consideration of $1.45 million in cash, all of which has been received.

We have continued discussions with parties that have expressed interest in acquiring other parts of our business and we may enter into additional agreements for the sale of all or parts of our business in the future. In addition to the sales of parts of our business, we have also enacted salary reductions and reduced hours worked for a substantial portion of our remaining employees.

Under the terms of the Mondowave, Inc. acquisition agreement, we are obligated to pay retention bonuses of $2.5 million in 2008 and $2.5 million in 2009, and may be obligated to make earn-out payments to certain former Mondowave, Inc. employees who joined the Company as a result of the acquisition. These earn-out payments shall be up to a maximum of 6% of revenue generated from certain audio products introduced by the former Mondowave, Inc. employees upon their continued employment over the next three years. Under the terms of the Acutechnology Semiconductor, Inc. acquisition agreement, we may be obligated to make earn-out payments to the former Acutechnology Semiconductor, Inc. employees; these payments shall be up to a maximum of 3% of revenue generated from products introduced by the former Acutechnology Semiconductor, Inc. employees upon their continued employment with us. With our exit from the audio IC and power management IC businesses, we expect that our 2009 obligations for earn out payments under these acquisition agreements will be minimal.

Net cash used in operating activities was $34.7 million, $18.5 million and $53,000 for 2008, 2007, and 2006 respectively. We incurred a net loss of $51.5 million in 2008, compared to a net loss of $30.9 million in 2007 and a net loss of $11.9 million in 2006. For 2008, cash used in operating activities was favorably impacted by $14.0 million of non-cash charges for impairment of goodwill and intangible assets, intangible asset amortization, and share-based compensation.

Accounts receivable decreased $3.8 million in 2008 and $11.7 million in 2007, and increased $2.6 million in 2006. The decrease in 2008 and 2007 correspond to the decreases in revenue in the corresponding periods. Additionally, payment terms vary by customer and our receivable balance fluctuates with changes in our customer mix. Our days of sales outstanding were 75 at December 31, 2008 and 84 at December 31, 2007. We expect days of sales outstanding typically to range from 60 to 90 days.

Inventory increased by $6.3 million in 2008 and decreased by $2.7 million and $4.1 million in 2007 and 2006, respectively. The increase in 2008 reflects the steeper than expected decline in sales of two major TFT display driver programs. To effectively manage inventory volumes, we must carefully monitor forecasted sales by device due to the relatively long manufacturing process for semiconductors and risk of obsolescence in a rapidly evolving industry.

Accounts payable and accrued liabilities decreased $4.0 million and $13.1 million in 2008 and 2007, respectively, and increased $1.5 million in 2006. The decrease in 2008 reflects lower inventory purchasing in 2008 as compared to 2007, as we experienced substantially lower sales volume in 2008. Our days of payables were 34 for the fourth quarter of 2008 and 64 for the corresponding quarter of 2007.

 

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Net cash provided by investing activities was $23.8 million for the year ended December 31, 2008, compared to net cash used in investing activities of $6.9 million and $11.4 million for the years ended December 31, 2007 and 2006, respectively. Sales or maturities of available for sale securities, net of purchases of available for sale securities, were $24.0 million and $9.6 million in 2008 and 2007 respectively. In 2006, purchases of available for sale securities, net of sales, were $9.8 million. The net sales in 2008 reflect our use of cash for operations. The net sales in 2007 reflect our use of cash for operations and the acquisitions of Mondowave and Acutechnology. In 2007, we lengthened the maturities of our investment portfolio as interest rate increases subsided. Cash, cash equivalents and short-term investment balances may fluctuate significantly in future quarters as we manage our investment mix. All investments comply with our corporate investment policy, with our primary objective being the preservation of principal while maximizing income without significantly increasing risk.

Our marketable securities include commercial paper, corporate bonds, government securities and auction rate securities, and are reported at fair value with the related unrealized gains and losses (net of taxes) included in accumulated other comprehensive income (loss), a component of shareholders’ equity. Our available for sale securities include auction rate securities (ARS) of $1.6 million as of December 31, 2008. In February 2008, liquidity issues in the global credit markets resulted in the failure of auctions representing all of the auction-rate securities we hold, as the amount of securities submitted for sale in those auctions exceeded the amount of bids. In accordance with the terms of the notes, in the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. To date we have collected all interest payable on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, issuers repay principal over time from cash flows prior to final maturity, or final payments come due according to contractual maturities ranging from 22 to 26 years. Due to their sustained illiquidity, we have classified all ARS as long-term investments in the consolidated balance sheets. During the second quarter of 2008, one of these securities was partially redeemed at par and we received $0.3 million .

Due to the current economic environment in which there is a lack of market activity for ARS, we have been unable to obtain quoted prices or market prices for identical assets as of the measurement date and so we use significant unobservable inputs to determine the fair value. The fair value of these securities has been estimated based on prices provided by third parties along with estimates we made. In the fourth quarter of 2008, we determined that we no longer had the ability to hold these instruments to maturity, and therefore we recorded an other than temporary impairment charge of $1.1 million relating to our ARS portfolio, which is recorded in “Interest and other income, net” on our consolidated statement of operations for 2008.

We used cash of $13.2 million in 2007 to acquire Mondowave, Inc., the assets of Nuelight Corporation, and Acutechnology Semiconductor, Inc., net of cash received. We also used $0.2 million in 2008 and $0.7 million in 2007 for the purchase of property and equipment, primarily for equipment and software for our design engineers and secondarily for furniture and leasehold improvements in our worldwide facilities.

Net cash used in financing activities was $3.4 million in 2007, principally for stock repurchases under a plan approved by our Board of Directors in January 2007 to purchase up to 2.5 million shares. During 2007, we purchased 1.1 million shares. The authorization for stock repurchases expired December 31, 2007. We cannot assure you that additional shares will be authorized for repurchase, but our cash flow will be negatively impacted if and to the extent additional shares are purchased. Cash provided by proceeds from stock option exercises and employee stock purchase plan purchases were $0.3 million in 2008 and $0.5 million in 2007.

In order to secure key future design wins for our touch controller and LED driver products, we may be required to increase our inventory balances so we can meet rapid increases in product demand from our customers. For example, in 2006 we initiated sales to a customer through a hub, whereby inventory is shipped to

 

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a third-party warehouse near the customer’s manufacturing site and pulled by the customer when required for manufacturing. We invoice the customer when the customer pulls the inventory from the hub. This arrangement, and any similar future arrangements, could significantly increase our inventory balances and create short-term decreases in cash flow due to the longer period between inventory purchase and customer payment.

We believe that as a result of our actions taken in the fourth quarter of 2008 and so far in the first quarter of 2009, our cash, cash equivalents, and short term investment balances will be sufficient to fund our operations for the next twelve months. However, we expect to incur operating losses in 2009 and expect our cash balances to decline during the year. If anticipated operating results in our legacy display driver, touch controller and LED driver businesses are not achieved, we have the intent and believe we have the ability to delay or further reduce expenditures. Additionally, we may enter into additional agreements for the sale of all or parts of our business in the future. We currently have no plans to seek additional cash. However, if additional capital is raised through the sale of equity or convertible debt, our stockholders will experience dilution, and such securities may have rights, preferences or privileges senior to current holders of common stock. If we obtain additional funds through arrangements with strategic partners, we may be required to relinquish our rights to certain technologies or products that we might otherwise seek to retain. There can be no assurance that we will be able to obtain such financing, or obtain it on acceptable terms. If we are unable to obtain necessary financing on acceptable terms, we may be unable to execute our business plan and we could be required to delay or reduce the scope of our operations.

Recently issued accounting pronouncements

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, or SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133.” This standard applies to derivative instruments, non-derivative instruments that are designated and qualify as hedging instruments and related hedged items accounted for under SFAS No. 133. SFAS No. 161 does not change the accounting for derivatives and hedging activities, but requires enhanced disclosures concerning the effect on the financial statements from their use. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We do not expect adoption of SFAS No. 161 to have a material impact on our consolidated financial statements.

In October, 2008, the FASB issued FASB Staff Position (“FSP”) No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” which clarifies the application of SFAS No. 157 when the market for a financial asset is not active and illustrates how an entity would determine fair value when the market for a financial asset is not active. The Staff Position is effective immediately and applies to prior periods for which financial statements have not been issued, including interim or annual periods ending on or before September 30, 2008. The adoption of FSP FAS No. 157-3 did not have any impact on our consolidated financial statements.

Contractual Obligations

Purchase obligations are comprised of orders for materials and services to build our inventory. We depend entirely upon subcontractors to manufacture our silicon wafers and provide assembly and test services. Due to lengthy subcontractor lead times, we must order materials and services from these subcontractors well in advance of required delivery dates, and we are obligated to pay for them in accordance with the payment terms. We expect to receive and pay for substantially all inventory purchased under these purchase obligations within the next three months.

 

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The following sets forth our commitments to settle contractual obligations in cash as of December 31, 2008 (in thousands):

 

     Payments Due by Period
     Total    Less than
1 year
   1 to 3
years
   3 to 5
years
   More than
5 years

Operating lease obligations

   $ 1,469    $ 1,082    $ 385    $ 2    $ —  

Purchase obligations

     415      415      —        —        —  

Software license installment payments

     1,109      680      429      —        —  
                                  

Total

   $ 2,993    $ 2,177    $ 814    $ 2    $ —  
                                  

As a result of the sale of our display driver business in January 2009, the purchaser assumed the liabilities under our Korean operating leases. The payments due under these leases total $371 thousand in 2009 and $184 thousand in 2010 and are included in the totals above.

As of December 31, 2008, we had $2.9 million of non-current unrecognized tax benefits, including interest and penalties, recorded in accordance with FIN No. 48. We are not able to provide a reasonably reliable estimate of the timing of future payments relating to these obligations.

Off-Balance-Sheet Arrangements

As of December 31, 2008, we had no off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Our investment portfolio currently consists of money market funds, corporate notes and bonds, commercial paper, auction rate securities and U.S. government agency bonds. Our primary objective with this investment portfolio is to invest available cash while preserving principal and meeting liquidity needs. In accordance with our investment policy, we place investments with high credit quality issuers and limit the amount of credit exposure to any one issuer. These securities, which approximated $25 million as of December 31, 2008, and have a weighted average interest rate of approximately 3.3%, are subject to interest rate risks. However, based on the liquidity of our investments, we believe that if a significant change in interest rates were to occur, it would not have a material effect on our financial condition.

Liquidity Risk. Our available for sale securities as of December 31, 2008 include $1.6 million at fair value of auction rate securities (ARS) that are securitized packages of government guaranteed student loans. Starting in February of 2008, our ARS have repeatedly failed to auction successfully due to market supply consistently exceeding market demand. In accordance with the terms of the notes, in the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. To date we have collected all interest payable on all of our auction-rate securities when due and expect to continue to do so in the future. The principal associated with failed auctions will not be accessible until successful auctions occur, a buyer is found outside of the auction process, the issuers establish a different form of financing to replace these securities, issuers repay principal over time from cash flows prior to final maturity, or final payments come due according to contractual maturities ranging from 22 to 26 years. Due to their sustained illiquidity, we have classified all ARS as long-term investments in the consolidated balance sheets. We understand that issuers and financial underwriters are working on alternatives that may improve liquidity of student loan auction rate securities, although it is not yet clear when or if such efforts will be successful. As of December 31, 2008, we determined that we were unable to hold these ARS to their maturity dates, and therefore we recorded a $1.1 million other than temporary impairment charge to “Interest and other income, net” on our consolidated statement of operations for 2008.

 

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Foreign Currency Exchange Risk. We engage in international operations and transact business in various foreign countries, primarily China, Japan, Korea, Singapore and Taiwan. Activities with our manufacturing partners located in Singapore and Taiwan are denominated in U.S. dollars. All of our 2007 and all but $0.6 million of our 2008 sales invoices were denominated in U.S. dollars.

Prior to the sale of our display driver business, in which we sold our Korean R&D subsidiary, our foreign currency exchange risk was primarily associated with settlement of our intercompany accounts with our Korean subsidiary. We recorded intercompany transactions related to activities performed in Korea on behalf of the U.S. parent. These transactions are recorded in U.S. dollars. These intercompany balances were generally reimbursed within 75 to 90 days. Our Korean subsidiary carried the foreign currency exchange risk on these U.S. dollar denominated transactions. We entered into foreign exchange contracts to minimize this exchange rate risk. In 2008, we incurred a gain of $0.3 million net of hedging gains and losses; in 2007, we incurred $0.1 million net loss. Our policy is to enter into foreign exchange contracts only when an associated underlying foreign currency exposure exists. Although our foreign currency exchange risk has been reduced with the sale of our Korean R&D subsidiary, we cannot assure you that foreign currency risk will not cause a material impact to our financial position, results of operations or cash flows in the future.

 

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Leadis Technology, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows and stockholders’ equity present fairly, in all material respects, the financial position of Leadis Technology, Inc., and its subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for stock-based compensation in 2006.

The Company has incurred net losses and negative cash flows from operations for each of the past three years. As discussed in Note 1 to the financial statements, the Company’s ability to achieve its longer term business objectives is dependent upon, among other things, the successful restructuring of its operations to bring costs in line with revenue and the Company’s business strategy.

/s/ PricewaterhouseCoopers LLP

San Jose, California

March 31, 2009

 

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LEADIS TECHNOLOGY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

     December 31,
2008
    December 31,
2007
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 21,642      $ 33,945   

Short-term investments

     7,726        31,286   

Accounts receivable, net

     1,936        5,787   

Inventories

     2,673        2,210   

Income taxes receivable and deferred tax assets

     326        3,038   

Restricted cash

     1,775        2,508   

Prepaid expenses and other current assets

     1,233        1,232   
                

Total current assets

     37,311        80,006   

Property and equipment, net

     2,440        4,534   

Goodwill

     —          5,108   

Intangible assets, net

     —          6,125   

Long term investments

     1,620        3,000   

Other assets

     1,398        806   
                

Total assets

   $ 42,769      $ 99,579   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 2,257      $ 4,538   

Income taxes payable and deferred tax liabilities

     323        353   

Deferred margin

     697        6   

Other accrued liabilities

     4,479        6,691   
                

Total current liabilities

     7,756        11,588   

Income taxes payable and deferred tax liabilities

     1,659        3,439   

Other noncurrent liabilities

     441        1,075   
                

Total liabilities

     9,856        16,102   
                

Commitments and Contingencies (Note 7)

    

Stockholders’ equity:

    

Preferred stock: $0.001 par value; 5,000,000 shares authorized and 0 shares issued and outstanding at December 31, 2008 and 2007

     —          —     

Common stock: $0.001 par value; 120,000,000 share authorized and 29,422,920 shares issued and outstanding at December 31, 2008; 120,000,000 shares authorized and 28,905,998 shares issued and outstanding at December 31, 2007

     29        29   

Additional paid-in capital

     110,917        107,910   

Accumulated other comprehensive income (loss)

     (806     1,232   

Accumulated deficit

     (77,227     (25,694
                

Total stockholders’ equity

     32,913        83,477   
                

Total liabilities and stockholders’ equity

   $ 42,769      $ 99,579   
                

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

 

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LEADIS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Year ended December 31,  
     2008     2007     2006  

Revenue

   $ 18,556      $ 39,581      $ 101,208   

Cost of sales

     21,899        36,343        88,506   
                        

Gross profit (loss)

     (3,343     3,238        12,702   
                        

Operating expenses:

      

Research and development

     21,631        18,599        13,796   

Selling, general and administrative

     17,011        16,383        14,785   

Amortization of intangible assets

     1,750        2,090        —     

Impairment of goodwill and intangible assets

     9,498        —          —     

In-process research and development

     —          2,470        —     
                        

Total operating expenses

     49,890        39,542        28,581   
                        

Operating loss

     (53,233     (36,304     (15,879

Interest and other income, net

     879        4,392        4,349   
                        

Loss before income taxes

     (52,354     (31,912     (11,530

Provision for (benefit from) income taxes

     (821     (980     523   
                        

Loss before cumulative effect of change in accounting principle

     (51,533     (30,932     (12,053

Cumulative effect of change in accounting principle, net of tax

     —          —          142   
                        

Net loss

   $ (51,533   $ (30,932   $ (11,911

Basic and diluted net loss per share before cumulative effect of change in accounting principle

   $ (1.76   $ (1.06   $ (0.42

Cumulative effect of change in accounting principle

     —          —          0.01   
                        

Basic and diluted net loss per share

   $ (1.76   $ (1.06   $ (0.41
                        

Weighted-average number of shares used in computing basic and diluted per share amounts

     29,260        29,119        28,802   

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

 

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LEADIS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
     2008     2007     2006  
     (In thousands)  

Cash flows from operating activities:

      

Net loss

   $ (51,533   $ (30,932   $ (11,911

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation

     1,713        1,500        1,229   

Amortization of intangible assets

     1,750        2,090        —     

Goodwill and intangible asset impairment

     9,498        —          —     

Net loss (gain) on disposal or sale of fixed assets

     (5     4        (2

Provision for excess and obsolete inventory

     5,857        2,165        1,972   

Loss on purchase commitments

     —          368        887   

Deferred tax benefit

     (1,417     (1,781     (4

Cumulative effect of change in accounting principle

     —          —          (142

Stock-based compensation

     2,735        3,392        4,666   

Tax benefit from exercise of warrants or options

     —          —          (98

In-process research and development

     —          2,470        —     

Other-than-temporary impairment of auction rate securities

     1,080        —          —     

Changes in assets and liabilities, net of effect of acquisition:

      

Accounts receivable

     3,787        11,706        (2,626

Inventories

     (6,319     2,672        4,111   

Income taxes receivable

     2,296        338        327   

Prepaid expenses and other assets

     (857     226        (296

Accounts payable

     (2,257     (15,086     1,792   

Accrued liabilities

     (1,748     2,005        (284

Income taxes payable

     23        700        274   

Deferred margin

     740        (377     52   
                        

Net cash used in operating activities

     (34,657     (18,540     (53
                        

Cash flows from investing activities:

      

Sale or maturity of available-for-sale securities

     87,600        57,423        34,066   

Purchases of available-for-sale securities

     (63,581     (47,864     (43,834

Purchase of property and equipment

     (220     (683     (1,605

Acquisition of businesses, net of cash acquired

     —          (12,727     —     

Restricted cash

     41        (2,508     —     

Purchase of intellectual property

     —          (500     —     
                        

Net cash provided by (used in) investing activities

     23,840        (6,859     (11,373
                        

Cash flows from financing activities:

      

Proceeds from issuances of common stock

     273        520        754   

Repurchases and retirement of common stock

     —          (3,836     —     

Tax benefit from exercise of stock options

     —          —          98   

Installment payments on acquisition of software licenses

     (278     (73     —     
                        

Net cash provided by (used in) financing activities

     (5     (3,389     852   
                        

Effect of exchange rate changes on cash and cash equivalents

     (1,481     36        470   
                        

Net decrease in cash and cash equivalents

     (12,303     (28,752     (10,104

Cash and cash equivalents at beginning of period

     33,945        62,697        72,801   
                        

Cash and cash equivalents at end of period

   $ 21,642      $ 33,945      $ 62,697   
                        

Supplemental disclosures:

      

Software acquired under financing arrangement

   $ —        $ 1,131      $ 23   
                        

Interest paid

   $ 63      $ 25      $ 1   
                        

Total taxes paid (refunded), net

   $ (2,281   $ (279   $ 844   
                        

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

 

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LEADIS TECHNOLOGY, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

 

    Common Stock     Additional
Paid-in
Capital
    Deferred
Stock-based
Compensation
    Accumulated
other
Comprehensive
Income (Loss)
    Retained
Earnings
(Deficit)
    Total
Stockholder’s
Equity
    Comprehensive
(Loss)
 
               
    Shares     Amount              

Balance at December 31, 2005

  28,492      $ 28      $ 103,674      $ (1,196   $ 471      $ 16,838      $ 119,815     

Net loss

  —          —          —          —          —          (11,911     (11,911   $ (11,911

Currency translation adjustment, net of tax

  —          —          —          —          664        —          664        664   

Unrealized gain on investments, net of tax

  —          —          —          —          93        —          93        93   
                     

Comprehensive loss

                $ (11,154
                     

Elimination of deferred stock-based compensation upon adoption of SFAS No. 123(R)

  —          —          (1,196     1,196        —          —          —       

Cumulative effect of change in accounting principle, net of tax

  —          —          (142     —          —          —          (142  

Stock-based compensation

  —          —          4,666        —          —          —          4,666     

Exercise of common stock options

  683        1        216        —          —          —          217     

Issuance of common shares under stock purchase plan

  131        —          537    &nb