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SEMILEDS CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 which provides a "safe harbor" for statements about future events, products and future financial performance that are based on the beliefs of, estimates made by and information currently available to the management of SemiLEDs Corporation ("SemiLEDs") and its subsidiaries (collectively "we," "our" or the "Company"). The outcome of the events described in these forward-looking statements is subject to risks and uncertainties. Actual results and the outcome or timing of certain events may differ significantly from those projected in these forward-looking statements or management's current expectations due to the factors cited in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A"), the Risk Factors listed under Part II, Item 1A of this Quarterly Report on Form 10-Q, and other factors described from time to time in our other filings with the Securities and Exchange Commission ("SEC"), or other reasons. For this purpose, statements concerning: industry or market segment outlook; market acceptance of or transition to new products or technology; growth drivers; future orders, revenues, backlog, earnings or other financial results; and any statements using the terms "believe," "expect," "anticipate," "estimate," "should," "would," "could," "can," "may," "will," "ongoing," "likely," and "possible" or similar statements are forward-looking statements. By making forward-looking statements, we have not assumed any obligation to, and you should not expect us to, update or revise those statements because of new information, future events or otherwise. The following discussion and analysis of our financial condition and results of operations is based upon and should be read in conjunction with the unaudited consolidated financial statements and the notes included elsewhere in this Quarterly Report on Form 10-Q, as well as the Risk Factors contained in Part II, Item 1A of this Quarterly Report on Form 10-Q, and other information provided from time to time in our other filings with the SEC. Overview We develop, manufacture and sell LED chips and LED components that we believe are among the industry leading LED products on both a lumens per watt and cost per lumen basis. Our products are used primarily for general lighting applications, including street lights and commercial, industrial and residential lighting. We sell blue, green and ultraviolet (UV) LED chips under our MvpLED brand to a customer base that is heavily concentrated in Asia, in particular China and Taiwan, as well as in Russia and North America. Our operations include both LED chip and LED component manufacturing. Utilizing our patented and proprietary technology, our manufacturing process begins by growing upon the surface of a sapphire wafer, or substrate, several very thin separate semiconductive crystalline layers of gallium nitride, or GaN, a process known as epitaxial growth, on top of which a mirror-like reflective silver layer is then deposited. After the subsequent addition of a copper alloy layer and finally the removal of the sapphire substrate, we further process this multiple-layered material to create individual LED chips. We produce a wide variety of LED chips, currently ranging from chip sizes of 380 microns, or µm, by 380µm to 1520µm by 1520µm, which are capable of providing over 100 lumens per watt when properly packaged as cool white emitters. We sell our LED chips to packaging customers or to distributors, who in turn sell to packagers. In addition, we package 18 -------------------------------------------------------------------------------- Table of Contents our LED chips into LED components, which we sell to distributors and end-customers in selected markets. We are a holding company for various wholly owned subsidiaries and joint ventures. Our most significant subsidiary is our wholly owned operating subsidiary, Taiwan SemiLEDs, where substantially all of our assets are held and located, substantially all of our employees are employed and located, and where substantially all of our research and development and sales activities take place. Taiwan SemiLEDs owns a 100% equity interest in SBDI, a consolidated entity effective April 1, 2010. Starting in April 2011, we sold a portion of our LED components through SBDI. We also sell our LED components through the Taiwan branch office of Helios Crew Corporation, or Helios Crew, our wholly owned Delaware subsidiary. We have a 49% interest in China SemiLEDs, a joint venture in China. In addition, we own a 50% interest in SILQ, a joint venture established in Malaysia to design, manufacture and sell lighting fixtures and systems. We also own a 49% interest in SS Optoelectronics, a joint venture that we formed in Taiwan with one of our customers. SS Optoelectronics has not had any operations or employees to date. We made a determination to dissolve the joint venture in accordance with the joint venture agreement and sent a notice of termination to the other shareholder of SS Optoelectronics in November 2010. SILQ is still in an early development stage and has not had any material operations to date. China SemiLEDs has substantially completed the construction of its manufacturing facilities, purchased equipment and installed LED chip manufacturing lines, hired technical and managerial personnel, and installed financial and administrative equipment and software. China SemiLEDs recently commenced production and has not had any material sales to date. Our 49% ownership interest in China SemiLEDs is accounted for as an equity method investment and as such is not consolidated for financial reporting purposes. Our investment in China SemiLEDs on our consolidated balance sheet included acquisition cost, plus our portion of equity in undistributed earnings or losses. If the fair value of our investment in China SemiLEDs declines below the carrying amount, and the decline is determined to be other-than-temporary, the investment will be written down to fair value. We recognize our proportionate share (based on our percentage ownership) of the net income or loss, as the case may be, from China SemiLEDs under loss from unconsolidated entities in our unaudited consolidated statements of operations, which include, in addition to the income or loss attributable to China SemiLEDs, our proportionate share of the income or loss from our other two joint venture entities. 19 -------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates There have been no material changes in the matters for which we make critical accounting policies and estimates in the preparation of our unaudited consolidated financial statements during the nine months ended May 31, 2011 as compared to those disclosed in our prospectus filed with the SEC on December 9, 2010 pursuant to Rule 424(b) under the Securities Act. Results of Operations Three Months Ended May 31, 2011 Compared to the Three Months Ended May 31, 2010 Revenues, net Our revenues decreased by approximately 43% from $9.9 million during the three months ended May 31, 2010 to $5.6 million during the three months ended May 31, 2011. The $4.3 million decrease in revenues reflects a $4.1 million decrease in revenues attributable to sales of LED chips, a $0.7 million decrease in revenues attributable to sales of LED components, offset in part by a $0.5 million increase in other revenues. The decrease in revenues attributable to sales of LED chips was due to a 45% decrease in the volume of LED chips sold and a 26% decrease in the average selling price of LED chips, primarily due to a slowdown in demand, in particular the outdoor street lighting market in Asia, and intense competition in the indoor lighting market. Increased competition, which created a highly aggressive pricing environment, resulted in industry players, including us, having to lower prices for existing products and existing inventory. In addition, we also faced substantial competition from a number of competitors that are much larger than us, as well as numerous smaller players in the indoor lighting market, which led to a decrease in demand for our LED chips. The decrease in revenues attributable to sales of LED components was due to a 28% decrease in the volume of LED components sold and a 15% decrease in the average selling price of LED components due to continued market competition and the general trend of lower average selling prices for products that have been available in the market for some time. The decrease in volume sold was primarily due to inventory backlogs at certain of our large customers. The increase in other revenues was primarily due to a $0.4 million increase in the sale of scrap. Gross Profit Our gross profit decreased from $5.0 million during the three months ended May 31, 2010 to $0.5 million during the three months ended May 31, 2011. Our gross margin percentage decreased from 51% during the three months ended May 31, 2010 to 9% during the three months ended May 31, 2011, primarily due to a decrease in the average selling prices for both our LED chips and LED components, as a result of a highly aggressive pricing environment in the three months ended May 31, 2011. The decrease was also due to a large inventory valuation adjustment of $1.1 million to write down certain of our chips inventories to their estimated net realizable values as a result of a significant decline in the average selling prices, lower capacity utilization as a result of a decrease in customer demand, higher production costs primarily due to an increase in salary-related expenses (including stock-based compensation) and depreciation expenses, and lower production yield for our LED chips primarily due to our efforts in optimizing epitaxial growth process and chip manufacturing process. 20 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Research and development. Our research and development expenses increased by 79% from $0.6 million for the three months ended May 31, 2010 to $1.0 million for the three months ended May 31, 2011. The increase was primarily due to an increase in materials and supplies used in research and development of $0.3 million and an increase in salaries attributable to research and development function of $0.1 million. Our research and development expenses were higher for the three months ended May 31, 2011, primarily as a result of our continued research and development efforts focusing on the migration to larger wafer sizes, in particular 4" wafers, which resulted in an increased amount of materials and supplies. The increase in salary related expenses was primarily due to an increase in stock-based compensation cost for our research and development personnel and our hiring of an additional employee for our research and development functions. Selling, general and administrative. Our selling, general and administrative expenses increased by 262% from $0.9 million for the three months ended May 31, 2010 to $3.3 million for the three months ended May 31, 2011. The increase was mainly attributable to an increase in professional service expenses for legal, accounting, tax and advisory services of $1.2 million primarily in relation to our defense against a patent infringement lawsuit and a significantly higher level of professional service expenses as a public company. The increase was also attributable to an increase in salary related expenses of $0.4 million, an establishment of compensation to our directors of $0.4 million, an establishment of insurance for our directors and officers of $0.1 million, and increases in travel related expenses, advertisement, depreciation expenses and rent of $0.2 million, primarily due to the general expansion of our business. The increase in salary related expenses was primarily a result of the hiring of additional employees for sales, marketing and administrative functions to support the growth of our business and to meet our public company regulatory and financial reporting and corporate governance requirements, as well as an increase in stock-based compensation costs for our sales, marketing and administrative personnel. Other Income (Expense) Loss from unconsolidated entities. We recorded a loss from unconsolidated entities of $0.2 million during the three months ended May 31, 2010, which was primarily attributable to the recognition of our portion of the net loss from China SemiLEDs. SILQ and SS Optoelectronics were in an early development stage and did not have any material operations. The loss recorded from unconsolidated entities was mainly due to administrative and start-up costs incurred by such entities. We recorded a loss from unconsolidated entities of $1.1 million during the three months ended May 31, 2011, which was primarily attributable to the recognition of our portion of the net loss from China SemiLEDs. The increase in our loss from unconsolidated entities was mainly due to a higher level of costs and expenses incurred by China SemiLEDs as it was in the early stages of ramping up production and began to incur research and development expenses beginning in April 2011. China SemiLEDs is still at an early business development stage and has not had any material sales to date. Foreign currency transaction gain (loss). We recorded a foreign currency transaction gain of $27,000 during the three months ended May 31, 2010 and a foreign currency transaction loss of $0.2 million during the three months ended May 31, 2011, primarily due to the appreciation of the NT dollar against the U.S. dollar. 21 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense (Benefit) Our income tax benefit in the three months ended May 31, 2011 was $10,000, reflecting the tax impact of a decrease in the estimated annual profit of our Taiwan branch office of Helios Crew Corporation, which is subject to a corporate statutory income tax rate of 17%. The effective tax rate for Taiwan SemiLEDs, our primary operating subsidiary, is estimated to be zero for fiscal 2011, as it is expected that Taiwan SemiLEDs will be in a loss position based on the most current estimation, where appropriate valuation allowance would be provided to reduce the deferred tax assets because we believe it is unlikely that such tax benefits will be realized. Subsidiaries in Taiwan file their income tax returns separately. We recorded income tax expense of $0.2 million, resulting in an effective tax rate of 4.4% in the three months ended May 31, 2010. The effective tax rate was lower than corporate statutory income tax rate, which is 25% for Taiwan SemiLEDs, our primary operating subsidiary, as we have tax loss carryforwards and tax credits to offset corporate income tax payable. In prior years, these unused loss carryforwards and tax credits were fully provided with a valuation allowance; therefore, tax benefits were recognized when they were expected to be utilized in fiscal 2010. Nine Months Ended May 31, 2011 Compared to the Nine Months Ended May 31, 2010 Revenues, net Our revenues increased by approximately 18% from $24.3 million for the nine months ended May 31, 2010 to $28.6 million for the nine months ended May 31, 2011. The $4.3 million increase in revenues reflected a $4.5 million increase in revenues attributable to sales of LED components and a $2.1 million increase in other revenues, offset in part by a $2.3 million decrease in revenues attributable to sales of LED chips. The decrease in revenues attributable to sales of LED chips was due to a 8% decrease in the volume of LED chips sold and a 10% decrease in the average selling price of LED chips, primarily due to a slowdown in demand, in particular the outdoor street lighting market in Asia, and intense competition in the indoor lighting market. Increased competition, which created a highly aggressive pricing environment, resulted in industry players, including us, having to lower prices for existing products and existing inventory. In addition, we also faced substantial competition from a number of competitors that are much larger than us, as well as numerous smaller players in the indoor lighting market, which led to a decrease in demand for our LED chips. The increase in revenues attributable to sales of LED components was due to a 117% increase in the volume of LED components sold, offset in part by a 16% decrease in the average selling price of LED components due to continued market competition and the general trend of lower average selling prices for products that have been available in the market for some time. The significant increase in volume of LED components sold was primarily due to increased customer demand for our LED components, and also due to our ability to ramp up our production capacity to produce LED components that met our customers' demand and technical specifications. The increase in other revenues was primarily due to a $1.1 million increase in the sale of scrap, a $0.3 million increase in the sale of materials, a $0.3 million service revenue, a $0.3 million increase in the sale of lighting products, and an increase in the sale of epitaxial wafers of $0.1 million. Gross Profit Our gross profit decreased from $10.0 million during the nine months ended May 31, 2010 to $9.4 million during the nine months ended May 31, 2011. Our gross margin 22 -------------------------------------------------------------------------------- Table of Contents percentage decreased from 41% during the nine months ended May 31, 2010 to 33% during the nine months ended May 31, 2011, primarily due to a change in our product mix as we decreased our production of LED chips and increased our production of LED components, which are lower-margin products relative to LED chips, primarily in response to a change in customer demand, as well as a large inventory valuation adjustment of $1.1 million to write down certain of our chips inventories to their estimated net realizable values as a result of a significant decline in the average selling prices of our LED chips. Operating Expenses Research and development. Our research and development expenses increased by 49% from $1.5 million for the nine months ended May 31, 2010 to $2.2 million for the nine months ended May 31, 2011. The increase was primarily due to an increase in materials and supplies used in research and development of $0.5 million, an increase in salaries attributable to research and development functions of $0.2 million, and an increase in depreciation expense of $0.1 million, offset in part by a higher amount of grants from the Taiwan Ministry of Economic Affairs for government sponsored research and development projects for the nine months ended May 31, 2010, which was recorded as an offset against our research and development expenses. Our research and development expenses were higher for the nine months ended May 31, 2011, primarily as a result of our continued research and development efforts focusing on the migration to larger wafer sizes, in particular 4" wafers, which resulted in an increased amount of materials and supplies. The increase in salary related expenses was primarily due to an increase in stock-based compensation cost for our research and development personnel and an extra bonus awarded to our employees during the Chinese New Year holiday, offset in part by a decrease in salary related expenses, as we had assigned a higher number of research and development personnel during the nine months ended May 31, 2010 to support a government sponsored research and development project, which was completed in November 2009. In addition, such expenses were higher because they included the research and development expenses including primarily materials and supplies and depreciation related expenses of SBDI, which we acquired in April 2010. Selling, general and administrative. Our selling, general and administrative expenses increased by 204% from $2.2 million for the nine months ended May 31, 2010 to $6.8 million for the nine months ended May 31, 2011. The increase was primarily due to an increase in professional service expenses for legal, accounting, tax and advisory services of $2.0 million primarily in relation to our defense against a patent infringement lawsuit and a significantly higher level of professional service expenses as a public company. The increase was also attributable to an increase in salary related expenses of $1.0 million, an establishment of compensation to our directors of $0.7 million, an establishment of insurance for our directors and officers of $0.2 million, and increases in travel related expenses, rent, depreciation, taxes, and advertisement expenses of $0.4 million, primarily due to the general expansion of our business. The increase in salary related expenses was primarily due to our hiring of additional employees for sales, marketing and administrative functions to support the growth and to meet our public company regulatory and financial reporting and corporate governance requirements, an increase in stock-based compensation cost for our sales, marketing and administrative personnel, and an extra bonus awarded to our employees during the Chinese New Year holiday. Other Income (Expense) Loss from unconsolidated entities. We recorded a loss from unconsolidated entities of $0.2 million during the nine months ended May 31, 2010, which was primarily attributable to the recognition of our portion of the net loss from China SemiLEDs. SILQ and SS Optoelectronics were in an early development stage and did not have any material operations. The loss recorded from unconsolidated entities was mainly due to administrative and start-up costs incurred by such entities. We recorded a loss from unconsolidated entities of $2.0 million during the nine months ended May 31, 2011, which was primarily attributable to the recognition of our portion of the net loss from China SemiLEDs. The increase in our loss from unconsolidated entities was mainly due to a higher level of costs and expenses incurred by China SemiLEDs as it was in the early stages of ramping up production and began to incur research and development expenses beginning in April 2011. China SemiLEDs is still in an early business development stage and has not had any material sales to date. 23 -------------------------------------------------------------------------------- Table of Contents Foreign currency transaction loss. We recorded a foreign currency transaction loss of $0.3 million and $0.9 million during the nine months ended May 31, 2010 and 2011, respectively, primarily due to the appreciation of the NT dollar against the U.S. dollar. Income Tax Expense (Benefit) We recorded an income tax expense of $47,000, in spite of a loss before income taxes, in the nine months ended May 31, 2011, as it is estimated that our Taiwan branch office of Helios Crew Corporation will record a profit for fiscal 2011, which is subject to a corporate income tax rate of 17%. The effective tax rate for Taiwan SemiLEDs, our primary operating subsidiary, is estimated to be zero for fiscal 2011, as it is expected that Taiwan SemiLEDs will be in a loss position based on the most current estimation, where appropriate valuation allowance would be provided to reduce the deferred tax assets because we believe it is unlikely that such tax benefits will be realized. Subsidiaries in Taiwan file their income tax returns separately. We recorded income tax expense of $0.3 million, resulting in an effective tax rate of 4.7% in the nine months ended May 31, 2010. The effective tax rate was lower than corporate statutory income tax rate, which is 25% for Taiwan SemiLEDs, our primary operating subsidiary, as we have tax loss carryforwards and tax credits to offset corporate income tax payable. In prior years, these unused loss carryforwards and tax credits were fully provided with a valuation allowance; therefore, tax benefits were recognized when they were expected to be utilized in fiscal 2010. Liquidity and Capital Resources From our inception through the completion of our initial public offering in December 2010, we have substantially satisfied our capital and liquidity needs from private sales of our convertible preferred stock and, to a lesser extent, from cash flow from operations, bank borrowings and credit lines. As a result of the offering, we received net proceeds of $95.5 million, before deducting offering-related expenses of $3.5 million. As of August 31, 2010 and May 31, 2011, we had cash and cash equivalents of $13.5 million and $94.4 million, respectively, which were predominately held in U.S. dollars. During the year ended August 31, 2010 and the nine months ended May 31, 2011, we utilized operating lines of credit with certain banks to fulfill our short-term financing needs. The outstanding balances of these lines of credit were $1.0 million and $3.1 million as of August 31, 2010 and May 31, 2011, respectively. These lines of credit had maturity dates of six to eight months from the date of draw down and bore fixed interest rates ranging from 1.2% to 1.5% during these periods. Unused amounts on these lines of credit were $4.7 million and $1.4 million as of August 31, 2010 and May 31, 2011, respectively. In June 2011, we renewed a short-term loan agreement that had expired on March 18, 2011. The renewed loan agreement provides for the following three facilities: (i) an unsecured revolving credit facility for working capital purposes; (ii) the issuance of overseas letters of credit; and (iii) financing for international transactions using the documents against acceptance (D/A), documents against payment (D/P) or open account (O/A) payment methods; of approximately $7.0 million in the aggregate. As of June 30, 2011, we drew down $1.0 million on the letters of credit facility. As of August 31, 2010 and May 31, 2011, our long-term debt, which includes long-term notes, totaled $4.5 million and $7.4 million, respectively. These long-term notes carry variable interest rates ranging from 1.6% to 2.0% per annum, are payable in monthly installments, and are secured by our property, plant and equipment. The first note payable requires monthly payments of principal and interest in the amount of $13,000 over the 15-year term of the note with final payment to occur in May 2024 and, as of May 31, 2011, our outstanding balance on this note payable was approximately $1.9 million. The second note payable requires monthly payments of principal and interest in the amount of $29,000 over the five-year term of the note with final payment to occur in August 2014 and, as of May 31, 2011, our outstanding balance on this note payable was approximately $1.1 million. The third note payable requires monthly payments of principal and interest in the amount of $28,000 over the five-year term of the note with final payment to occur in March 2015 and, as of May 31, 2011, our outstanding balance on this note payable was approximately $1.3 million. The fourth note payable requires monthly payments of principal and interest in the amount of $18,000 over the 15-year term of the note with final payment to occur in December 2025 and, as of May 31, 2011, our outstanding balance on this note payable was approximately $3.0 million. These long-term notes do not have prepayment penalties or balloon payments upon maturity. 24 -------------------------------------------------------------------------------- Table of Contents We have incurred significant losses since inception, including net losses of $0.8 million and $3.7 million during the years ended August 31, 2008 and 2009, respectively. For the year ended August 31, 2010 and the nine months ended May 31, 2011, we generated net income of $10.8 million and net loss of $2.5 million, respectively. We believe that, based on our current level of operations and spending needs, the net proceeds from our initial public offering, together with our existing liquidity sources and anticipated funds from operations, will satisfy our cash requirements for at least the next 12 months. However, if we are not able to continue to generate positive cash flows from operations, we may need to consider alternative financing sources and seek additional funds through public or private equity financings or from other sources to support our working capital requirements or for other purposes. There can be no assurance that additional financing will be available to us or that, if available, such financing will be available on terms favorable to us. Cash Flow The following summary of our cash flows for the periods indicated has been derived from our unaudited consolidated financial statements, which are included elsewhere in this Quarterly Report on Form 10-Q: Nine Months Ended May 31, 2011 2010 (in thousands)Net cash provided by (used in) operating activities $ (25 ) $ 6,093 Net cash used in investing activities (17,212 ) (22,628 ) Net cash provided by financing activities 96,897 16,637 Cash Flows Provided By (Used In) Operating Activities Net cash used in operating activities during the nine months ended May 31, 2011 of $25,000 was primarily attributable to: (i) our net loss of $2.5 million and aggregate non-cash charges, net, of $8.2 million, which primarily included depreciation and amortization expenses of $4.8 million, loss from unconsolidated entities of $2.0 million and stock-based compensation of $1.4 million; (ii) offset by net growth in operating assets and liabilities during the period of $5.7 million, which included a large increase in inventory of $5.6 million as a result of a build-up in inventories. Net cash provided by operating activities during the nine months ended May 31, 2010 of $6.1 million was primarily attributable to: (i) our net income of $5.5 million and aggregate non-cash charges of $3.8 million, which primarily included depreciation and amortization expenses; (ii) offset in part by net growth in operating assets and liabilities during the period of $3.2 million, which included a large increase in accounts receivable and inventory of $3.4 million and $1.5 million as a result of increased sales and customer demand over the period, offset in part by an increase in accounts payable of $1.2 million, respectively. Cash Flows Used in Investing Activities Net cash used in investing activities during the nine months ended May 31, 2011 was $17.2 million, consisting primarily of the purchases of buildings and purchases of machinery and 25 -------------------------------------------------------------------------------- Table of Contents equipment in an amount of $16.5 million, our investments in LumenMax and SILQ in the aggregate amount of $1.0 million, offset in part by proceeds from patents assigned to China SemiLEDs of $0.5 million. Net cash used in investing activities during the nine months ended May 31, 2010 was $22.6 million, consisting primarily of our investments in China SemiLEDs and two other joint venture entities in the aggregate amount of $15.5 million, purchases of machinery and equipment of $6.1 million to support the expansion of our manufacturing capacity in Taiwan and payment for the acquisition of SBDI, net of cash acquired of $0.9 million. Cash Flows Provided by Financing Activities Net cash provided by financing activities during the nine months ended May 31, 2011 was $96.9 million, consisting primarily of net proceeds from the issuance of common stock of $92.7 million, proceeds from the issuance of long-term debt of $2.9 million, proceeds from the draw down on lines of credit of $3.3 million, offset in part by payments of lines of credit and long-term debt of $1.4 million and $0.6 million, respectively. Net cash provided by financing activities during the nine months ended May 31, 2010 was $16.6 million, consisting primarily of proceeds from the issuance of Series E convertible preferred stock of $15.0 million, proceeds from the issuance of long-term debt of $1.5 million, proceeds from the draw down on lines of credit of $1.4 million, offset in part by payments on lines of credits and long-term debt of $1.1 million and $0.3 million, respectively. Contractual Obligations The following table sets forth our contractual obligations as of August 31, 2010: Payment Due In Less than 1-3 3-5 More than 1 year years years 5 years Total (in thousands) Operating lease agreements $ 671 $ 1,355 $ 1,505 $ 1,020 $ 4,551 Long-term debt, including current portion 1,752 1,459 1,109 1,218 5,538 Purchase obligations for property, plant and equipment 6,919 - - - 6,919 Total contractual obligations $ 9,342 $ 2,814 $ 2,614 $ 2,238 $ 17,008 As of May 31, 2011, our total purchase obligations for property, plant and equipment were $12.6 million. In addition, during the nine months ended May 31, 2011, we incurred additional long-term debt of $2.9 million and drew down another $3.3 million from lines of credit, and also made regular payments on our long-term debt and lines of credit of $2.1 million. Subsequent to August 31, 2010, we entered into an agreement to purchase the first and second floors of a building at our Hsinchu, Taiwan headquarters for approximately $3.9 million. The purchase of the first and second floors was approved by the Science Park Administration on October 13, 2010 and we obtained title to such property on November 17, 2010. Following such transfer of title, our operating lease for the first floor was automatically terminated on November 17, 2010 and we now own the entire building. We incurred additional long-term debt by entering into the fourth note payable agreement for the acquisition of the building in December 2010. Subsequent to August 31, 2010, we renewed a short-term loan agreement that had expired on March 18, 2011. The renewed loan agreement provides for the following three facilities: (i) an unsecured revolving credit facility for working capital purposes; (ii) the issuance of overseas letters of credit; and (iii) financing for international transactions using the documents against acceptance (D/A), documents against payment (D/P) or open account (O/A) payment methods; of approximately $7.0 million in the aggregate. As of June 30, 2011, we drew down $1.0 million on the letters of credit facility. 26 -------------------------------------------------------------------------------- Table of Contents Capital Expenditures We had capital expenditures of $6.1 million and $16.5 million during the nine months ended May 31, 2010 and 2011, respectively. Our capital expenditures consisted primarily of purchases of building, machinery and equipment, construction in progress, prepayments for our manufacturing facilities and prepayments for equipment purchases. We expect to continue investing in capital expenditures in the future as we expand our business operations and prudently invest in the coordinated expansion of our production capacity. Off-Balance Sheet Arrangements As of May 31, 2011, we did not engage in any off-balance sheet arrangements. We do not have any interest in entities referred to as variable interest entities. |