e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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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: 001-33435
CAVIUM NETWORKS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE
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77-0558625 |
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(State or other jurisdiction
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(I.R.S. Employer Identification No.) |
of incorporation or organization) |
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805 E. Middlefield Road |
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Mountain View, California
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94043 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (650) 623-7000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
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 the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ |
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Accelerated filer o |
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Non-accelerated filer o
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The number of shares of the Registrants Common Stock, $.001 par value, outstanding at May 4, 2009
was: 41,287,334
CAVIUM NETWORKS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2009
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
CAVIUM NETWORKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
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March 31, |
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December 31, |
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2009 |
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2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
65,618 |
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$ |
77,027 |
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Accounts receivable, net of allowance of $328 and $203, respectively |
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14,681 |
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14,054 |
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Inventories |
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16,171 |
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17,281 |
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Prepaid expenses and other current assets |
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4,446 |
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1,298 |
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Total current assets |
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100,916 |
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109,660 |
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Property and equipment, net |
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10,304 |
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11,115 |
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Intangible assets, net |
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15,659 |
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16,958 |
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Goodwill |
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13,092 |
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12,925 |
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Other assets |
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443 |
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506 |
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Total assets |
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$ |
140,414 |
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$ |
151,164 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
4,600 |
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$ |
7,309 |
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Accrued expenses and other current liabilities |
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4,137 |
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7,697 |
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Deferred revenue |
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1,322 |
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1,700 |
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Capital lease and technology license obligations, current portion |
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2,545 |
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2,619 |
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Total current liabilities |
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12,604 |
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19,325 |
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Capital lease and technology license obligations, net of current portion |
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1,507 |
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2,116 |
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Other non-current liabilities |
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1,617 |
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1,162 |
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Total liabilities |
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15,728 |
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22,603 |
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Commitments and contingencies (Note 11) |
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Stockholders equity |
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Preferred stock, par value $0.001: |
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10,000,000 shares authorized, no
shares issued and outstanding as of March 31,
2009 and December 31, 2008 |
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Common stock, par value $0.001: |
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200,000,000 shares authorized;
41,247,868 and 41,183,010 shares issued and
outstanding as of March 31, 2009 and December 31, 2008, respectively |
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41 |
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41 |
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Additional paid-in capital |
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188,401 |
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185,743 |
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Accumulated deficit |
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(63,756 |
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(57,223 |
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Total stockholders equity |
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124,686 |
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128,561 |
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Total liabilities and stockholders equity |
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$ |
140,414 |
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$ |
151,164 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
CAVIUM NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Net revenue |
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$ |
20,382 |
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$ |
18,342 |
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Cost of revenue |
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10,814 |
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6,587 |
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Gross profit |
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9,568 |
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11,755 |
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Operating expenses: |
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Research and development |
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9,991 |
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5,820 |
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Sales, general and administrative |
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6,137 |
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4,555 |
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Total operating expenses |
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16,128 |
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10,375 |
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(Loss) income from operations |
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(6,560 |
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1,380 |
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Other income, net: |
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Interest expense |
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(79 |
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(153 |
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Interest income and other |
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134 |
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992 |
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Total other income, net |
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55 |
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839 |
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(Loss) income before provision for income taxes |
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(6,505 |
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2,219 |
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Provision for income taxes |
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28 |
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247 |
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Net (loss) income |
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$ |
(6,533 |
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$ |
1,972 |
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Net (loss) income, per common share, basic |
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$ |
(0.16 |
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$ |
0.05 |
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Shares used in computing basic net (loss) income per
common share |
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41,083 |
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39,966 |
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Net (loss) income, per common share, diluted |
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$ |
(0.16 |
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$ |
0.05 |
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Shares used in computing diluted net (loss) income per
common share |
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41,083 |
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42,135 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CAVIUM NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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Cash flows from operating activities |
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Net (loss) income |
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$ |
(6,533 |
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$ |
1,972 |
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Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities |
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Stock-based compensation expense |
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2,589 |
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767 |
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Depreciation and amortization |
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3,743 |
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2,221 |
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Amortization of lease incentive |
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(31 |
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Changes in assets and liabilities, net of effects of acquisitions: |
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Accounts receivable, net |
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(627 |
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(3,980 |
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Inventories |
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1,110 |
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(1,162 |
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Prepaid expenses and other current assets |
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(2,353 |
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(5 |
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Other assets |
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63 |
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(137 |
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Accounts payable |
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(2,709 |
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(201 |
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Accrued expenses and other current and non-current liabilities |
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(512 |
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216 |
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Deferred revenue |
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(378 |
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841 |
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Net cash (used in) provided by operating activities |
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(5,638 |
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532 |
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Cash flows used in investing activities |
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Purchases of property and equipment |
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(1,446 |
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(1,915 |
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Purchases of IP licenses and intangible assets |
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(187 |
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Acquisition of businesses |
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(3,523 |
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Net cash used in investing activities |
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(5,156 |
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(1,915 |
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Cash flows used in financing activities |
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Proceeds from issuance of common stock upon exercise of options |
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61 |
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131 |
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Principal payment of capital lease and technology license obligations |
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(676 |
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(1,598 |
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Net cash used in financing activities |
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(615 |
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(1,467 |
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Net decrease in cash and cash equivalents |
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(11,409 |
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(2,850 |
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Cash and cash equivalents, beginning of period |
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77,027 |
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98,462 |
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Cash and cash equivalents, end of period |
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$ |
65,618 |
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$ |
95,612 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CAVIUM NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Organization and Significant Accounting Policies
Organization
Cavium Networks, Inc., (the Company), was incorporated in the State of California on
November 21, 2000 and was reincorporated in the State of Delaware on February 6, 2007. The Company
designs, develops and markets semiconductor processors for intelligent and secure networks.
Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include the accounts of Cavium Networks,
Inc. and its wholly owned foreign subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America, or GAAP, and with
the instructions to Securities and Exchange Commission, or SEC, Form 10-Q and Article 10 of SEC
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
GAAP for complete financial statements. For further information, these financial statements should
be read in conjunction with the Companys Annual Report on Form 10-K (File No. 001-33435) on file
with the SEC for the year ended December 31, 2008.
The unaudited condensed consolidated financial statements contain all normal recurring
accruals and adjustments that, in the opinion of management, are necessary to present fairly the
Companys condensed consolidated financial position at March 31, 2009, and the condensed
consolidated results of its operations for the three months ended March 31, 2009 and 2008, and the
condensed consolidated cash flows for the three months ended March 31, 2009 and 2008. The results
of operations for the three months ended March 31, 2009 are not necessarily indicative of the
results to be expected for the full year.
The condensed consolidated balance sheet at December 31, 2008 has been derived from the
audited consolidated financial statements at that date, but does not include all of the information
and footnotes required by GAAP.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the amounts reported in its condensed consolidated
financial statements and accompanying notes. Management bases its estimates on historical
experience and on various other assumptions it believes to be reasonable under the circumstances,
the results of which form the basis of making judgments about the carrying values of assets and
liabilities. Actual results could differ from those estimates. During the three months ended March
31, 2009, there were no significant changes to the significant accounting policies and estimates
discussed in the Companys Annual Report on Form 10-K.
Concentration of Risk
A majority of the Companys products are currently manufactured, assembled and tested by
third-party contractors in Asia. There are no long-term agreements with any of these contractors. A
significant disruption in the operations of one or more of these contractors would impact the
production of the Companys products for a substantial period of time, which could have a material
adverse effect on the Companys business, financial condition and results of operations.
Financial instruments that potentially subject the Company to a concentration of credit
risk consist of cash, cash equivalents and accounts receivable. The Company deposits cash and cash
equivalents with credit worthy financial institutions. The Company has not experienced any losses
on its deposits of cash and cash equivalents. Management believes that the cash and cash
equivalents are in quality money market funds, and, accordingly, minimal credit risk exists.
The Company performs ongoing credit evaluations of its customers financial condition and,
generally, requires no collateral from its customers. The Company provides an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts receivable.
Summarized below are individual customers whose revenues or accounts receivable balances were 10%
or higher of
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respective total consolidated amounts.
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For the three months |
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ended March 31, |
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2009 |
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2008 |
Percentage of total net revenue |
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Customer A |
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21 |
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30 |
% |
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As of March 31, |
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As of December |
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2009 |
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31, 2008 |
Percentage of gross accounts receivable |
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Customer B |
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15 |
% |
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21 |
% |
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Customer C |
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* |
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10 |
% |
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* |
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Represents less than 10% of the consolidated accounts receivable for the respective period end. |
Revenue Recognition
The Company derives its revenue primarily from sales of semiconductor products. The
Company applies the provisions of Staff Accounting Bulletin No. 104 Revenue Recognition, (SAB
104) for product revenue derived by the sale of semiconductor products. Under SAB 104, the Company
recognizes revenue when all of the following criteria have been met: (i) persuasive evidence of a
binding arrangement exists, (ii) delivery has occurred, (iii) the price is deemed fixed or
determinable and free of contingencies and significant uncertainties, and (iv) collection is
probable. The price is considered fixed or determinable at the execution of an agreement, based on
specific products and quantities to be delivered at specified prices, which is often memorialized
with a customer purchase order. Agreements with non-distributor customers do not include rights of
return or acceptance provisions. The Company assesses the ability to collect from the Companys
customers based on a number of factors, including credit worthiness and any past transaction
history of the customer.
Shipping charges billed to customers are included in product revenue and the related
shipping costs are included in cost of revenue. The Company generally recognizes revenue at the
time of shipment to the Companys customers. Revenue consists primarily of sales of the Companys
products to networking original equipment manufacturers, or OEMs, their contract manufacturers or
its distributors. Initial sales of the Companys products for a new design are usually made
directly to networking OEMs as they design and develop their product. Once their design enters
production, they often outsource their manufacturing to contract manufacturers that purchase the
Companys products directly from the Company or from the Companys distributors.
Revenue is recognized upon shipment for sales to distributors with limited rights of
returns and price protection if the Company concludes it can reasonably estimate the credits for
returns and price adjustments issuable. The Company records an estimated allowance, at the time of
shipment, based on the Companys historical patterns of returns and pricing credits of sales
recognized upon shipment. The credits issued to distributors or other customers were not material
in the three months ended March 31, 2009 and 2008.
Revenue and costs relating to sales to distributors are deferred if the Company grants
more than limited rights of returns and price credits or if it cannot reasonably estimate the level
of returns and credits issuable. The Company has a distribution agreement with Avnet, Inc. to
distribute the Companys products primarily in the United States. Given the terms of the
distribution agreement, for sales to Avnet revenue and costs are deferred until products are sold
by Avnet to its end customers. For the three months ended March 31, 2009 and 2008, 6.0% and 3.8%,
of the Companys net revenues were from products sold by Avnet, respectively. Revenue recognition
depends on notification from the distributor that product has been sold to Avnets end customers.
Avnet reports to the Company, on at least a monthly basis, the product resale price, quantity and
end customer shipment information, as well as inventory on hand. Reported distributor inventory on
hand is reconciled monthly to the Companys deferred revenue and cost balances. Deferred income on
shipments to Avnet is included in deferred revenue. Accounts receivable from Avnet is recognized
and inventory is relieved when title to inventories transfers, which typically takes place at the
time of shipment, which is the point in time at which the
7
Company has a legal enforceable right to collection under normal payment terms.
The Company also derives revenue in the form of license and maintenance fees through
licensing its software products. Revenue from such arrangements is recorded by applying the
provisions of Statement of Position, or SOP No. 97-2, Software Revenue Recognition, as amended by
SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue Recognition with Respect to Certain
Transactions. Revenue from such arrangements totaled $1.6 million and $266,000 for the three
months ended March 31, 2009 and 2008, respectively. If the arrangements contain support services,
the value of such support services is recognized as services revenue on a straight-line basis over
the term of the related support period, which is typically one year.
The Company also enters into development agreements with some of its customers.
Development revenue is recognized under the proportional performance method, with the associated
costs included in cost of revenue. The Company estimates the proportional performance of the
development contracts based on an analysis of progress toward completion. The Company periodically
evaluates the actual status of each project to ensure that the estimates to complete each contract
remain accurate. If the amount billed exceeds the amount of revenue recognized, the excess amount
is recorded as deferred revenue. Revenue recognized in any period is dependent on progress toward
completion of projects in progress. To the extent the Company is unable to estimate the
proportional performance then the revenue is recognized on a completed performance basis. Revenue
from such arrangements totaled $740,000 and $674,000 for the three months ended March 31, 2009 and
2008, respectively.
Total deferred revenue was $1.3 million and $1.7 million as of March 31, 2009 and as of
December 31, 2008, respectively, which includes deferred income on shipment to Avnet, development
revenue and deferred revenue associated with license and maintenance fees.
Warranty Accrual
The Companys products are subject to a one-year warranty period. The Company provides
for the estimated future costs of replacement upon shipment of the product as cost of revenue. The
warranty accrual is estimated based on historical claims compared to historical revenue. The
following table presents a reconciliation of the Companys product warranty liability, which is
included within accrued expenses and other current liabilities in the consolidated balance sheets:
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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(in thousands) |
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Beginning balance |
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$ |
154 |
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$ |
261 |
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Accruals for warranties issued |
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200 |
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17 |
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Settlements made |
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(162 |
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(18 |
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Ending balance |
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$ |
192 |
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$ |
260 |
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Recent Accounting Pronouncements
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about
Fair Value of Financial Instruments, or FAS 101-7, which requires disclosures about fair value of
financial instruments in interim periods of publicly traded companies that were previously only
required to be disclosed in annual financial statements. The provisions of FAS 107-1 are effective
for the interim reporting period ending after June 15, 2009. As FAS 107-1 amends only the
disclosure requirements about fair value of financial instruments, the adoption of FAS 107-1 is not
expected to have an impact on the Companys consolidated financial statements.
2. Net Income (Loss) Per Common Share
The Company calculates net income (loss) per share in accordance with SFAS No. 128,
"Earnings per Share, or SFAS 128. Under SFAS 128, basic net income (loss) per common share is
computed by dividing net income (loss) by the weighted average number of common shares outstanding
during the period (excluding shares subject to repurchase). Diluted net income (loss) per common
share is computed by dividing net income (loss) by the weighted-average number of common and
potentially dilutive common equivalent shares outstanding during the period. Potentially dilutive
securities, composed of incremental common shares issuable upon the exercise of stock options,
restricted stock units, and common stock subject to repurchase, are included in diluted net income
per share for the three months ended March 31, 2009 and 2008, respectively.
The following table sets forth the computation of income (loss) per share:
8
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
(in thousands, except per share data) |
|
2009 |
|
|
2008 |
|
Net income (loss) |
|
$ |
(6,533 |
) |
|
$ |
1,972 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic |
|
|
41,083 |
|
|
|
39,966 |
|
Dilutive effect of employee stock plans |
|
|
|
|
|
|
2,169 |
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
41,083 |
|
|
|
42,135 |
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
|
$ |
(0.16 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
Diluted net income (loss) per share |
|
$ |
(0.16 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
The Company excluded outstanding options and restricted stock units of 8.3 million for the
three months ended March 31, 2009 and 281,000 for the three months ended March 31, 2008 from the
computation of diluted net income (loss) per common share because including them would have had an
anti-dilutive effect.
3. Fair Value
At March 31, 2009, all of the Companys investments were classified as cash equivalents
and are comprised of highly liquid investments in money market instruments. In accordance with SFAS
157, the Company determined the fair value hierarchy of its financial assets (cash equivalents) in
the money market fund as Level 1, which approximated $57.9 million as of March 31, 2009.
4. Balance Sheet Components
Inventories
Inventories are stated at the lower of cost (determined using the first-in, first-out method),
or market value (estimated net realizable value) and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(in thousands) |
|
Work-in-process |
|
$ |
13,612 |
|
|
$ |
14,411 |
|
Finished goods |
|
|
2,559 |
|
|
|
2,870 |
|
|
|
|
|
|
|
|
|
|
$ |
16,171 |
|
|
$ |
17,281 |
|
|
|
|
|
|
|
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(in thousands) |
|
Mask costs and test equipment |
|
$ |
11,983 |
|
|
$ |
11,016 |
|
Software, computer and other equipment |
|
|
15,757 |
|
|
|
15,402 |
|
Furniture, office equipment and leasehold improvements |
|
|
190 |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
27,930 |
|
|
|
26,539 |
|
Less: accumulated depreciation and amortization |
|
|
(17,626 |
) |
|
|
(15,424 |
) |
|
|
|
|
|
|
|
|
|
$ |
10,304 |
|
|
$ |
11,115 |
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $2.3 million and $1.9 million for the three months
ended March 31, 2009 and 2008, respectively.
The Company has capitalized mask costs of $680,000 and $1.3 million during the three months
ended March 31, 2009 and 2008, respectively.
Capital leases, which are time-based subscription design tools, are included in property and
equipment, and they were $8.9 million at March 31, 2009 and December 31, 2008. Amortization expense
related to assets recorded under capital lease was $750,000 and $666,000 for the three months ended
March 31, 2009 and 2008, respectively.
9
Accrued expenses and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(in thousands) |
|
Accrued compensation and related benefits |
|
$ |
1,123 |
|
|
$ |
1,191 |
|
Acquisition related payables |
|
|
1,345 |
|
|
|
4,489 |
|
Restructuring related payables |
|
|
300 |
|
|
|
389 |
|
Accrued warranty |
|
|
192 |
|
|
|
154 |
|
Professional fees |
|
|
469 |
|
|
|
835 |
|
Income tax payable |
|
|
69 |
|
|
|
54 |
|
Other |
|
|
639 |
|
|
|
585 |
|
|
|
|
|
|
|
|
|
|
$ |
4,137 |
|
|
$ |
7,697 |
|
|
|
|
|
|
|
|
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(in thousands) |
|
Accrued rent |
|
$ |
862 |
|
|
$ |
187 |
|
Acquisition related payables |
|
|
|
|
|
|
220 |
|
Restructuring related payables |
|
|
464 |
|
|
|
464 |
|
Income tax payable |
|
|
291 |
|
|
|
291 |
|
|
|
|
|
|
|
|
|
|
$ |
1,617 |
|
|
$ |
1,162 |
|
|
|
|
|
|
|
|
5. Business Combinations
Parallogic Corporation
On May 20, 2008, the Company acquired certain assets of Parallogic Corporation (Parallogic),
a privately held company. The aggregate purchase price consisted of cash consideration of
approximately $1.3 million, including direct acquisition costs of approximately $61,000. The
Company paid $826,000 in cash at the time of close of the acquisition. The remaining two subsequent
payments of $220,000 each are due at the completion of certain milestones or the 18th
and 36th month anniversaries of the acquisition date, whichever comes first. In
January 2009, the Company paid the first installment of $220,000 due to Parallogics achievement of
the first milestone as defined in the merger agreement. The remaining $220,000 is recorded as
acquisition related payables in accrued expenses and other current liabilities. As of May 6, 2009,
Parallogic has not achieved the second milestone as defined in the merger agreement.
Identifiable intangible assets of approximately $450,000 consist of intellectual property
related to the developed technology as well as incremental value associated with existing customer
relationships. The developed technology acquired from Parallogic is the multi-core software focused
on gigabit packet processing and security applications.
The total purchase price was allocated to tangible and identifiable intangible assets based on
their estimated fair value as of May 20, 2008. The excess of the purchase price over the tangible
and identifiable intangible assets were recorded as goodwill. The purchase price allocation was as
follows (in thousands):
|
|
|
|
|
Net tangible assets |
|
$ |
|
|
Identifiable intangible assets: |
|
|
|
|
Customer relationships |
|
|
76 |
|
Developed technology |
|
|
374 |
|
Goodwill |
|
|
816 |
|
|
|
|
|
Total purchase price |
|
$ |
1,266 |
|
|
|
|
|
10
The fair value assigned to developed technology and customer relationships was based upon
future discounted cash flows related to the assets projected income streams using a discount rate
of 20% and 15% respectively. Factors considered in estimating the discounted cash flows to be
derived from developed technology and customer relationships include risk related to the
characteristics and applications of the technology, existing and future markets and an assessment
of the age of the technology within its life span. The Company is amortizing the purchased
intangible assets to cost of revenue on a straight-line basis over its estimated useful life of one
to five years.
The results of operations from Parallogic have been included in the Companys consolidated
statements of operations only since the date of acquisition. Pro forma results of operations for
the acquisition have not been presented as the effect has not been significant.
Of the total purchase price, approximately $0.8 million was allocated to goodwill, which
represents the excess of the purchase price over the estimated fair value of the underlying net
tangible and identifiable intangible assets acquired. The goodwill was attributed to the premium
paid for the opportunity to expand and better serve the addressable market and achieve greater
long-term growth opportunities. All of the $0.8 million allocated to the goodwill is expected to be
deductible for tax purposes. With this acquisition the Company believes it is better positioned to
deliver professional services for customers to help reduce the time-to-market for design wins and
provide high-performance tuning. In accordance with SFAS No. 142, goodwill will not be amortized,
but instead will be tested for impairment at least annually and more frequently if certain
indicators are present.
Star Semiconductor Corporation
On August 1, 2008, the Company acquired substantially all of the intangible assets and
inventory and certain other tangible assets of Star Semiconductor Corporation (Star), a
Taiwan-based design house in Hsinchu that builds highly integrated ARM-based SOC processors for the
broadband, connected home and SOHO market segments. The Company paid approximately $9.6 million in
cash, including acquisition related expenses of approximately $0.8 million. Included in the
purchase price was $1.0 million that was placed in escrow for 60 days after the close in order to
indemnify the Company for certain matters, including breaches of representations and warranties and
covenants made by Star. Subsequent to 60 days after the close of the acquisition, the escrow was
closed. The acquisition provided the Company with a highly experienced stand-alone SOC processor
team based in Taiwan. The results of operations from Star have been included in the Companys
consolidated statements of operations only since the date of acquisition.
The acquisition was accounted for using the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total
estimated purchase price was allocated to the tangible and identifiable intangible assets and
liabilities assumed based on their relative fair values. The excess of the purchase price over the
net tangible and identifiable intangible assets was recorded as goodwill. In accordance with SFAS
No. 142, goodwill will not be amortized, but instead will be tested for impairment at least
annually and more frequently if certain indicators are present. All of the $3.3 million allocated
to goodwill is expected to be deductible for state income tax purposes but not for federal tax
purposes. While the Company has accrued all acquisition costs that it is aware of, any adjustments
to these costs will be adjusted to goodwill. The purchase price allocation will be finalized in
2009. The total purchase price was as follows:
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Total purchase price of the acquisition of Star is as follows: |
|
|
|
|
Cash consideration |
|
$ |
8,790 |
|
Acquisition related expenses (1) |
|
|
791 |
|
|
|
|
|
Total purchase price |
|
$ |
9,581 |
|
|
|
|
|
|
|
|
(1) |
|
Acquisition related expenses include legal and accounting fees and other external costs directly related to the acquisition. |
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
Net tangible assets |
|
$ |
973 |
|
Identifiable intangible assets |
|
|
5,295 |
|
Goodwill |
|
|
3,313 |
|
|
|
|
|
Total purchase price |
|
$ |
9,581 |
|
|
|
|
|
The following table represents details of the purchased intangible assets as part of the acquisition:
11
|
|
|
|
|
|
|
|
|
|
|
Estimated useful |
|
|
|
|
|
|
life (in years) |
|
|
Amount |
|
|
|
|
Intangible Assets |
|
|
|
|
|
|
|
|
Existing technology product |
|
|
4.0 |
|
|
$ |
3,849 |
|
Core technology product |
|
|
4.0 |
|
|
|
467 |
|
Existing technology license |
|
|
0.2 |
|
|
|
507 |
|
Customer contracts and relationships |
|
|
7.0 |
|
|
|
307 |
|
Trade name |
|
|
2.0 |
|
|
|
82 |
|
Order backlog |
|
|
0.2 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
5,295 |
|
|
|
|
|
|
|
|
|
The fair value of the existing technology- product, existing technology-license and the
customer contracts and relationships was determined based on an income approach using the
discounted cash flow method. The discount rate of 18.0% used to value the existing technology -
product and discount rate of 20.0% used to value the customer contracts and relationships was
estimated using a discount rate based on implied rate of return of the transaction, adjusted for
the specific risk profile of each asset. The discount rate of 4.5% used to value the existing
technology-license was based on a short-term risk free interest rate. The remaining useful life was
estimated based on historical product development cycles, the projected rate of technology
attrition, and the patterns of project economic benefit of the assets.
The fair value of core technology and trade name was determined using a variation of income
approach known as the profit allocation method. The estimated savings in profit were determined
using a 3.0% profit allocation rate and a discount rate of 18.0%. The estimated useful life was
determined based on the future economic benefit expected to be received from the asset.
The fair value of order backlog was determined using a cost approach where the fair value was
based on estimated sales and marketing expenses expected to be incurred to regenerate the order
backlog. The estimated useful life was determined based on the future economic benefit expected to
be received from the asset.
W&W Communications, Inc.
On December 23, 2008, the Company completed the acquisition of W&W Communications, Inc.
(W&W). Total merger consideration was approximately $8.1 million, which consisted of cash
consideration of approximately $3.9 million, 338,245 unregistered common shares of the Company
valued at approximately $3.1 million (the fair value of Caviums stock of $9.16 per share was
derived using an average closing price of the Companys shares of common stock on the announcement
date and for the two days prior to, and two days subsequent to the public announcement of the
acquisition on November 20, 2008) and direct acquisition costs of approximately $1.1 million.
Additionally, in order to effect the acquisition of W&W, the Company assumed and immediately
paid-off W&Ws notes payable of approximately $8.9 million. As the notes payable were immediately
paid-off, the $8.9 million has been presented as a cash outflow and included in Acquisition of
businesses, net of cash acquired within the cash flows used in investing activities section of the
consolidated statement of cash flows for the year ended December 31, 2008. The acquisition allowed
the Company to strategically acquire W&Ws developed technology and its design team for the
emerging consumer market for high definition encoding semiconductors. In connection with the
acquisition, the Company recorded approximately $853,000 of restructuring costs related to the
contractual operating lease obligations of a W&W facility in accordance with EITF Issue No. 95-3,
Recognition of Liabilities in Connection with Purchase Business Combinations or EITF 95-3. The
costs associated with the obligation were recognized as a liability assumed in the purchase
business combination and included in the purchase price allocation. The results of operations from
W&W have been included in the Companys consolidated statements of operations only since the date
of acquisition.
The acquisition was accounted for using the purchase method of accounting in accordance with
SFAS No. 141, Business Combinations. Under the purchase method of accounting, the total
estimated purchase price was allocated to the tangible and identifiable intangible assets and
liabilities assumed based on their relative fair values. The excess of the purchase price over the
net tangible and identifiable intangible assets was recorded as goodwill. In accordance with SFAS
No. 142, goodwill will not be amortized, but instead will be tested for impairment at least
annually and more frequently if certain indicators are present. None of the $9.0 million allocated
to goodwill is expected to be deductible for federal or state income tax purposes. While the
Company has accrued all acquisition costs that it is aware of, any adjustments to these costs will
be adjusted to goodwill. The purchase price allocation will be finalized in 2009. The total
purchase price was as follows:
12
|
|
|
|
|
|
|
Amount |
|
|
|
(in thousands) |
|
Total purchase price of the acquisition of W&W is as follows: |
|
|
|
|
Cash consideration (1) |
|
$ |
3,894 |
|
Value of common stock issued |
|
|
3,098 |
|
Acquisition related expenses (2) |
|
|
1,124 |
|
|
|
|
|
Total purchase price |
|
$ |
8,116 |
|
|
|
|
|
|
|
|
(1) |
|
As of March 31, 2009, of the total cash consideration of $3.9 million, $0.1 million was paid in fiscal 2008 and $2.7 million was paid during the quarter
and the remaining $1.1 million was unpaid and was included in acquisition related payables
in accrued expenses and other current liabilities. This amount is expected to be paid in the remainder of 2009. |
|
(2) |
|
As of March 31, 2009, acquisition related expenses include legal and accounting fees and other
external costs directly related to the acquisition, of which $0.5 million was paid in fiscal 2008 and $0.6 million was paid during the quarter and the remaining $57,000 was not paid and
was included in acquisition related payables in accrued expenses and other current liabilities. This amount is expected to be paid in the remainder of 2009. |
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
|
As adjusted |
|
Cash and cash equivalents |
|
$ |
283 |
|
Inventories net |
|
|
829 |
|
Other assets |
|
|
230 |
|
Goodwill |
|
|
8,963 |
|
In-process research and development |
|
|
1,319 |
|
Other Intangibles, net |
|
|
10,114 |
|
Accounts payable |
|
|
(1,445 |
) |
Accrued expenses |
|
|
(2,464 |
) |
Accrued restructuring |
|
|
(853 |
) |
Notes payable |
|
|
(8,860 |
) |
|
|
|
|
Total purchase price |
|
$ |
8,116 |
|
|
|
|
|
The fair value of intangible assets of $10.1 million has been allocated to the following identifiable intangible asset categories:
|
|
|
|
|
|
|
|
|
|
|
Estimated useful life |
|
|
|
|
Intangible Assets |
|
(in years) |
|
|
Amount |
|
|
|
|
|
|
(in thousands) |
|
Existing technology |
|
|
1-5 |
|
|
$ |
7,768 |
|
Core technology |
|
|
5.0 |
|
|
|
1,306 |
|
Customer contracts and relationships |
|
|
6.0 |
|
|
|
583 |
|
Order backlog |
|
|
0.6 |
|
|
|
457 |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
10,114 |
|
|
|
|
|
|
|
|
|
Of the $11.4 million of acquired intangible assets, $1.3 million was assigned to in-process
research and development or IPR&D. In accordance with FASB Interpretation No. 4, Applicability of
FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method, the IPR&D was
expensed immediately as it relates to the acquisition of an in-process technology project which had
not reached technological feasibility at the time of acquisition, and had no future alternative
use. The fair value of the IPR&D was determined based on an income approach using the discounted
cash flow method. A discount rate of 24% used to value the project was based on the implied rate of
return of the transaction, adjusted to reflect additional risks inherent in the acquired project.
As of
13
March 31, 2009, the Company estimates that an additional investment of approximately $2.5
million will be required to complete the project. The Company expects to complete the project by
the end of 2009 and to benefit from the IPR&D project beginning in 2010.
The fair value of the existing technology and customer contracts and relationships was
determined based on an income approach using the discounted cash flow method. A discount rate of
18% was used to value the existing technology and a discount rate of 20% was used to value the
customer contracts and relationships and was estimated using a discount rate based on implied rate
of return of the transaction, adjusted for the specific risk profile of each asset. The remaining
useful life of existing technology was estimated based on historical product development cycles,
the projected rate of technology attrition, and the patterns of project economic benefit
of the assets. The remaining useful life of customer contracts and relationships was estimated
based on customer attrition, new customer acquisition and future economic benefit of the asset.
The fair value of core technology was determined using a variation of income approach known as
the profit allocation method. The estimated savings in profit were determined using a 5% profit
allocation rate and a discount rate of 20%. The estimated useful life was determined based on the
future economic benefit expected to be received from the asset.
The fair value of order backlog was determined using a cost approach where the fair value was
based on estimated sales and marketing expenses expected that would have to be incurred to
regenerate the order backlog. The estimated useful life was determined based on the future economic
benefit expected to be received from the asset.
Pro forma financial information (Unaudited)
The unaudited pro forma financial information in the table below summarizes the combined
results of operations of the Company, Star and W&W, on a pro forma basis, as though the companies
had been combined as of the beginning of the period presented. The pro forma financial information
is presented for informational purposes only and is not indicative of the results of operations
that would have been achieved if the acquisitions had taken place at the beginning of each of the
periods presented. The pro forma financial information for all periods presented includes the
purchase accounting adjustments on historical Star and W&W inventory, adjustments to depreciation
on acquired property and equipment, amortization charges from acquired intangible assets and
related tax effects.
The unaudited pro forma financial information for the three months ended March 31, 2008
combines the historical results for the Company, Star and W&W for the three months ended March 31,
2008. The following table summarizes the pro forma financial information (in thousands, except per
share amounts):
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
March 31, |
|
|
2008 |
Net revenue |
|
$ |
19,633 |
|
Net loss |
|
$ |
(4,079 |
) |
Net loss per common share, basic |
|
$ |
(0.10 |
) |
Net loss per common share, diluted |
|
$ |
(0.10 |
) |
6. Goodwill and Intangible Assets, Net
Goodwill
The increase in goodwill of $167,000 during three months ended March 31, 2009 was primarily
the result of adjustments to acquisition related expenses for the acquisitions completed in 2008.
(See Note 5)
Intangible assets, net consisted of the following:
14
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
As of |
|
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
(in thousands) |
|
Existing and core technology product |
|
$ |
17,614 |
|
|
$ |
17,614 |
|
Technology license |
|
|
9,723 |
|
|
|
9,536 |
|
Customer contracts and relationships |
|
|
966 |
|
|
|
966 |
|
Trade name |
|
|
82 |
|
|
|
82 |
|
Order backlog |
|
|
540 |
|
|
|
540 |
|
|
|
|
|
|
|
|
|
|
|
28,925 |
|
|
|
28,738 |
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization |
|
|
|
|
|
|
|
|
Existing and core technology product |
|
|
(5,412 |
) |
|
|
(4,398 |
) |
Technology license |
|
|
(7,168 |
) |
|
|
(6,787 |
) |
Customer contracts and relationships |
|
|
(119 |
) |
|
|
(65 |
) |
Trade name |
|
|
(27 |
) |
|
|
(17 |
) |
Order backlog |
|
|
(540 |
) |
|
|
(513 |
) |
|
|
|
|
|
|
|
|
|
$ |
15,659 |
|
|
$ |
16,958 |
|
|
|
|
|
|
|
|
Amortization expense was $1.5 million and $322,000 for the three months ended March 31, 2009
and 2008, respectively. The weighted-average remaining estimated lives for intangible assets are
approximately 3.5 years for existing and core technology-product and 1.9 years for technology
license. The weighted average remaining estimated life of intangible assets in total is
approximately 2.5 years. Future amortization expense is estimated to be $4.3 million for 2009, $4.2
million for 2010, $3.1 million for 2011, $2.5 million for 2012 and $1.6 million thereafter.
7. Restructuring Charges
In connection with the acquisition of W&W, the Company recorded restructuring liabilities of
approximately $853,000 in accordance with EITF 95-3. Of the $764,000 balance as of March 31, 2009,
$300,000 was recorded as restructuring related payables in accrued expenses and other current
liabilities and the remaining $464,000 was recorded in other non-current liabilities. The
liabilities are related to an operating lease commitment for one W&W facility, which the Company
will no longer occupy. The Company expects the obligation to be settled by the end of January 2011
with payments of approximately $300,000 in 2009, $426,000 in 2010 and $38,000 in 2011.
A summary of the accrued restructuring is as follows (in thousands):
|
|
|
|
|
|
|
As of March 31, |
|
|
|
2009 |
|
Accrued restructuring beginning balance |
|
$ |
853 |
|
Additions |
|
|
|
|
Cash payments |
|
|
(89 |
) |
|
|
|
|
Accrued restructuring ending balance |
|
$ |
764 |
|
Less: current portion |
|
|
300 |
|
|
|
|
|
Long-term portion |
|
$ |
464 |
|
|
|
|
|
8. Stockholders Equity
Common and Preferred Stock
As of March 31, 2009, the Company is authorized to issue 200,000,000 shares of $0.001 par
value common stock and 10,000,000 shares of $0.001 par value preferred stock. The Company has the
authority to issue preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption and liquidation preferences. As of March 31, 2009 and December
31, 2008, no shares of preferred stock were outstanding.
Equity Incentive Plans
15
The description of the key features of the Companys 2007 Equity Incentive Plan and 2001 Stock
Incentive Plan, may be read in conjunction with the audited financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2008.
The following table summarizes the details related to activity of early-exercise unvested
shares of common stock granted under the 2001 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Number of |
|
Average |
|
|
Unvested |
|
Exercise/ |
|
|
Shares |
|
Purchase |
|
|
Outstanding |
|
Price |
Balance as of December 31, 2008 |
|
|
145,564 |
|
|
$ |
3.50 |
|
Issued |
|
|
|
|
|
|
|
|
Vested |
|
|
(30,404 |
) |
|
|
2.12 |
|
Cancelled and forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
|
115,160 |
|
|
$ |
3.86 |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the details related to stock options granted and outstanding
under the 2007 Equity Incentive Plan and 2001 Stock Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Number of |
|
Exercise |
|
|
Shares |
|
Price |
|
|
Outstanding |
|
per Share |
Balance at December 31, 2008 |
|
|
5,397,454 |
|
|
$ |
8.78 |
|
Options granted |
|
|
2,535,906 |
|
|
|
9.90 |
|
Options exercised |
|
|
(26,611 |
) |
|
|
2.12 |
|
Options cancelled and forfeited |
|
|
(75,879 |
) |
|
|
14.77 |
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
|
7,830,870 |
|
|
$ |
9.11 |
|
|
|
|
|
|
|
|
|
|
The following table summarizes the details related to restricted stock units granted and
outstanding under the 2007 Equity Incentive Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant |
|
|
|
|
|
|
Date Fair |
|
|
Number of |
|
Value Per |
|
|
Shares |
|
Share |
Balance as of December 31, 2008 |
|
|
280,933 |
|
|
$ |
17.16 |
|
Granted |
|
|
278,549 |
|
|
|
8.88 |
|
Issued and released |
|
|
(38,247 |
) |
|
|
15.80 |
|
Cancelled and forfeited |
|
|
(9,080 |
) |
|
|
15.40 |
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
|
512,155 |
|
|
$ |
12.79 |
|
|
|
|
|
|
|
|
|
|
For restricted stock units, or RSUs, stock-based compensation expense is calculated based
on the market price of the Companys common stock on the date of grant, multiplied by the number of
RSUs granted. The grant date fair value of RSUs, less estimated forfeitures, is recorded on a
straight-line basis, over the vesting period.
16
As of March 31, 2009, there was $5.8 million of unrecognized compensation costs related to
RSUs granted under the Companys 2007 Equity Incentive Plan. The unrecognized compensation cost is
expected to be recognized over a weighted average period of 1.73 years.
Stock-Based Compensation
The Company recognizes stock-based compensation for options granted to employees in
accordance with FAS 123(R). The following table presents the detail of stock-based compensation
expense amounts included in the consolidated statement of operations for each of the periods
presented:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
Cost of revenue |
|
$ |
87 |
|
|
$ |
29 |
|
Research and development |
|
|
1,216 |
|
|
|
328 |
|
Sales, general and administrative |
|
|
1,286 |
|
|
|
410 |
|
|
|
|
|
|
|
|
|
|
$ |
2,589 |
|
|
$ |
767 |
|
|
|
|
|
|
|
|
The total stock-based compensation cost capitalized as part of inventory as of March 31,
2009 and 2008 was $175,000 and $74,000, respectively.
The fair value of each employee option grant for the three months ended March 31, 2009 and
2008 under SFAS 123(R) was estimated on the date of grant using the Black-Scholes option pricing
model with the following assumptions:
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
1.52% |
|
2.33% |
Expected life |
|
4.53 - 4.75 years |
|
4.53 - 4.75 years |
Dividend yield |
|
None |
|
None |
Volatility |
|
63.7% |
|
56.0% |
The estimated weighted-average grant date fair value of options granted were $5.06 and $7.28
for the three months ended March 31, 2009 and 2008, respectively.
As of March 31, 2009, there was $26.1 million of unrecognized compensation costs related to
stock options granted under the Companys 2007 and 2001 Stock Incentive Plans. The unrecognized
compensation cost is expected to be recognized over a weighted average period of 3.08 years.
9. Income Taxes
For the three months ended March 31, 2009 and 2008, the provision for income taxes was
based on the estimated annual effective tax rate in compliance with SFAS 109 and other related
guidance. The Company updates its estimate of its annual effective tax rate at the end of each
quarterly period. The estimate takes into account estimations of annual pre-tax income, the
geographic mix of pre-tax income and interpretations of tax laws and the possible outcomes of
current and future audits.
The following table presents the provision for income taxes and the effective tax rates
for the three months ended March 31, 2009 and 2008:
17
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
(Loss) income before provision for income taxes |
|
$ |
(6,505 |
) |
|
$ |
2,219 |
|
Provision for income taxes |
|
$ |
28 |
|
|
$ |
247 |
|
Effective tax rate |
|
|
-0.4 |
% |
|
|
11.1 |
% |
The provision for income taxes was $28,000 and $247,000 for the three months ended March
31, 2009 and 2008, respectively. The income tax expense for the three months ended March 31, 2009
was primarily related to international taxes and state income taxes.
The provision for the three months ended March 31, 2008 was primarily related to the federal
alternative minimum tax on profits in the United States adjusted by certain non-deductible items,
international taxes and state income taxes.
The Company continues to maintain a full valuation allowance on its net deferred tax
assets until sufficient positive evidence exists to support reversal of the valuation allowance.
As of March 31, 2009 and December 31, 2008, the Company had $4.0 million of unrecognized tax
benefits, which is netted against deferred tax assets and is fully offset by a valuation allowance.
There were no significant changes to the unrecognized tax benefit during the three months ended
March 31, 2009.
The Companys major tax jurisdictions are the United States federal government and the
State of California. The Company files income tax returns in the United States federal
jurisdiction, the State of California and various state and foreign tax jurisdictions in which it
has a subsidiary or branch operation. The United States federal corporation income tax returns
beginning with the 2000 tax year remain subject to examination by the Internal Revenue Service, or
IRS. The California corporation income tax returns beginning with the 2000 tax year remain subject
to examination by the California Franchise Tax Board. There are no on-going income tax audits in
the major tax jurisdictions.
10. Segment Information
SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information,
establishes standards for reporting information about operating segments. Operating segments are
defined as components of an enterprise for which separate financial information is available and
evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and in assessing performance. The Company is organized as, and operates
in, one reportable segment: the development and sale of semiconductor processor solutions for
next-generation intelligent networking equipment. The chief operating decision-maker is the Chief
Executive Officer. The Companys Chief Executive Officer reviews financial information presented on
a consolidated basis, accompanied by information about revenue by customer and geographic region,
for purposes of evaluating financial performance and allocating resources. The Company and its
Chief Executive Officer evaluate performance based primarily on revenue to the customers and in the
geographic locations in which the Company operates. Revenue is attributed by geographic location
based on the ship-to location of customers. The Companys assets are primarily located in the
United States of America and not allocated to any specific region. Therefore, geographic
information is presented only for total revenue. Substantially all of the Companys long-lived
assets are located in the United States of America.
The following table is based on the geographic location of the OEMs or the distributors
who purchased the Companys products. The geographic locations of the Companys distributors may be
different from the geographic locations of the ultimate end users. Revenues by geography for the
periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
United States |
|
$ |
10,359 |
|
|
$ |
10,428 |
|
Hong Kong |
|
|
2,755 |
|
|
|
271 |
|
Taiwan |
|
|
2,469 |
|
|
|
3,110 |
|
Japan |
|
|
1,764 |
|
|
|
1,311 |
|
China |
|
|
1,369 |
|
|
|
1,322 |
|
Other countries |
|
|
1,666 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
Total |
|
$ |
20,382 |
|
|
$ |
18,342 |
|
|
|
|
|
|
|
|
18
11. Commitments and Contingencies
The Company is not currently a party to any legal proceedings that management believes would
have a material adverse effect on the consolidated financial position, results of operations or
cash flows of the Company.
The Company leases its facilities under non-cancelable operating leases, which contain renewal
options and escalation clauses, and expire on varying dates ending in April 2013. The Company also
acquires certain assets under capital leases.
Minimum commitments under non-cancelable capital and operating lease agreements, excluding
accrued restructuring liability (See Note 7) as of March 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease |
|
|
|
|
|
|
|
|
|
and technology |
|
|
|
|
|
|
|
|
|
license |
|
|
Operating |
|
|
|
|
|
|
obligations |
|
|
leases |
|
|
Total |
|
|
|
(in thousands) |
|
2009 |
|
$ |
2,102 |
|
|
|
1,334 |
|
|
$ |
3,436 |
|
2010 |
|
|
2,037 |
|
|
|
1,898 |
|
|
|
3,935 |
|
2011 |
|
|
144 |
|
|
|
1,658 |
|
|
|
1,802 |
|
2012 |
|
|
|
|
|
|
1,044 |
|
|
|
1,044 |
|
2013 |
|
|
|
|
|
|
281 |
|
|
|
281 |
|
thereafter |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,283 |
|
|
$ |
6,215 |
|
|
$ |
10,498 |
|
Less: Interest component |
|
|
(231 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payment |
|
|
4,052 |
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
(2,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations |
|
$ |
1,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred under operating leases was $514,000 and $310,000 for the three months
ended March 31, 2009 and 2008, respectively.
The capital lease and technology license obligations include future cash payments payable
primarily for license agreements with outside vendors. The significant obligations which have
outstanding payments as of March 31, 2009 are summarized as follows:
|
|
|
The license agreement, which was entered into in October 2007, with Synopsys is for
certain design tools totaling $7.0 million, with 12 installment payments. The term of
the license is three years which will expire in October 2010. The present value of the
installment payments has been capitalized and is amortized over three years, and
included within capital lease and technology license obligations on consolidated balance
sheets. As of March 31, 2009, $3.4 million of the total $7.0 million due under the
license agreement was paid. |
|
|
|
|
A second license agreement with Synopsys, which was entered into in October 2008, is
for certain design tools totaling $575,000. The term of the license is three years which
will expire in October 2011. As of March 31, 2009, $96,000 of the total $575,000 due
under the license agreement was paid. |
19
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Consolidated Condensed
Financial Statements and the related notes that appear elsewhere in this document.
The information in this Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), which are subject
to the safe harbor created by those sections. Forward-looking statements are based on our
managements beliefs and assumptions and on information currently available to our management. In
some cases, you can identify forward-looking statements by terms such as may, will, should,
could, would, estimate, project, predict, potential, continue, strategy,
believe, anticipate, plan, expect, intend and similar expression intended to identify
forward-looking statements. These statements involve known and unknown risks, uncertainties and
other factors, which may cause our actual results, performance, time frames or achievements to be
materially different from any future results, performance, time frames or achievements expressed or
implied by the forward-looking statements. We discuss many of these risks, uncertainties and other
factors in this Quarterly Report on Form 10-Q in greater detail under the heading Risk Factors.
Given these risks, uncertainties and other factors, you should not place undue reliance on these
forward-looking statements. Also, these forward-looking statements represent our estimates and
assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q
completely and with the understanding that our actual future results may be materially different
from what we expect. We hereby qualify our forward-looking statements by these cautionary
statements. Except as required by law, we assume no obligation to update these forward-looking
statements publicly, or to update the reasons actual results could differ materially from those
anticipated in these forward-looking statements, even if new information becomes available in the
future.
Overview
We are a provider of highly integrated semiconductor products that enable intelligent
processing for networking, communications, storage, wireless and security applications. We market
and sell our products to providers of networking equipment that sell their products into the
enterprise network, data center, broadband and consumer, and access and service provider markets.
Our products are used in a broad array of networking equipment, including routers, switches,
content-aware switches, unified threat management, or UTM and other security appliances,
application-aware gateways, voice/video/data, or triple-play, gateways, wireless local area
network, or WLAN and third-generation, or 3G access and aggregation devices, storage networking
equipment, servers and intelligent network interface cards. We focus our resources on the design,
sales and marketing of our products, and outsource the manufacturing of our products.
From our incorporation in 2000 through 2003, we were primarily engaged in the design and
development of our first processor family, NITROX, which we began shipping commercially in 2003. In
2004, we introduced and commenced commercial shipments of NITROX Soho. In 2006, we commenced our
first commercial shipments of our OCTEON family of multi-core MIPS64® processors. We
introduced a number of new products within all three of these product families in 2006. In 2007 we
introduced our new line of OCTEON based storage services processors designed to address the
specific needs in the storage market, as well as other new products in the OCTEON and NITROX
families. In 2008, we expanded our OCTEON and NITROX product families with new products including
wireless services processors to address the needs for wireless infrastructure equipment. In 2009 we
introduced the next generation OCTEON II Internet Application Processor (IAP) family of
multi-core MIPS64® processors, with one to 32 cores to address next generation
networking applications support and converged voice, video, data mobile traffic and services.
We acquired W&W Communications, Inc. (W&W) in the fourth quarter of 2008. This acquisition
launched us into the high growth video processor market with a broad product line called
PureVutm. The PureVutm family of video processors and
modules incorporate proprietary and patent pending video technology that produce perceptual
lossless video quality and deliver practically zero latency with extremely low power and cost.
Through the acquisition of substantially all of the assets of Star Semiconductor Corporation
(Star) in the third quarter of 2008, we also added the Star ARM-based processors to our portfolio
to address connected home and office applications. For a complete discussion on our 2008
acquisitions, see Note 5 Business Combinations in Item 1, of this Quarterly Report, which is
incorporated herein by reference.
Since inception, we have invested heavily in new product development and achieved our first
quarter of profitability during the quarter ended September 30, 2007. Our net revenue has grown
from $19.4 million in 2005 to $34.2 million in 2006, $54.2 million in 2007, $86.6 million in 2008
and $20.4 million in the three months ended March 31, 2009, driven primarily by demand in the
enterprise network and data center markets, and more recently by increased demand in the broadband
and consumer markets. We expect sales of our products for use in the enterprise network and data
center markets to continue to represent a substantial portion of our revenue in the foreseeable
future. However, we expect sales into those markets to decline as a percentage of overall sales as
sales in the broadband and consumer and the access and service provider markets are expected to
increase at a faster rate than the expected increase in sales into the enterprise network and data
center markets.
20
We primarily sell our products to OEMs, either directly or through their contract
manufacturers. Contract manufacturers purchase our products only when an OEM incorporates our
product into the OEMs product, not as commercial off-the-shelf products. Our customers products
are complex and require significant time to define, design and ramp to volume production.
Accordingly, our sales cycle is long. This cycle begins with our technical marketing, sales and
field application engineers engaging with our customers system designers and management, which is
typically a multi-month process. If we are successful, a customer will decide to incorporate our
product in its product, which we refer to as a design win. Because the sales cycles for our
products are long, we incur expenses to develop and sell our products, regardless of whether we
achieve the design win and well in advance of generating revenue, if any, from those expenditures.
We do not have long-term purchase commitments from any of our customers, as sales of our products
are generally made under individual purchase orders. However, once one of our products is
incorporated into a customers design, it is likely to remain designed in for the life cycle of the
product. We believe this to be the case because a redesign would generally be time consuming and
expensive. We have experienced revenue growth due to an increase in the number of our products, an
expansion of our customer base, an increase in the number of average design wins within any one
customer and an increase in the average revenue per design win.
Key Business Metrics
Design Wins. We closely monitor design wins by customer and end market on a periodic basis.
We consider design wins to be a key ingredient in our future success, although the revenue
generated by each design can vary significantly. Our long-term sales expectations are based on
internal forecasts from specific customer design wins based upon the expected time to market for
end customer products deploying our products and associated revenue potential.
Pricing and Margins. Pricing and margins depend on the features of the products we provide to
our customers. In general, products with more complex configurations and higher performance tend to
be priced higher and have higher gross margins. These configurations tend to be used in high
performance applications that are focused on the enterprise network, data center, and access and
service provider markets. We tend to experience price decreases over the life cycle of our
products, which can vary by market and application. In general, we experience less pricing
volatility with customers that sell to the enterprise and data center markets.
Sales Volume. A typical design win can generate a wide range of sales volumes for our
products, depending on the end market demand for our customers products. This can depend on
several factors, including the reputation, market penetration, the size of the end market that the
product addresses, and the marketing and sales effectiveness of our customer. In general, our
customers with greater market penetration and better branding tend to develop products that
generate larger volumes over the product life cycle. In addition, some markets generate large
volumes if the end market product is adopted by the mass market.
Customer Product Life Cycle. We typically commence commercial shipments from nine months to
three years following the design win. Once our product is in production, revenue from a particular
customer may continue for several years. We estimate our customers product life cycles based on
the customer, type of product and end market. In general, products that go into the enterprise
network and data center take longer to reach volume production but tend to have longer lives.
Products for other markets, such as broadband and consumer, tend to ramp relatively quickly, but
generally have shorter life cycles. We estimate these life cycles based on our managements
experience with providers of networking equipment and the semiconductor market as a whole.
Results of Operations
Three months ended March 31, 2009 and 2008
Net Revenue. Our net revenue consists primarily of sales of our semiconductor products to
providers of networking equipment and their contract manufacturers and distributors. Initial sales
of our products for a new design are usually made directly to providers of networking equipment as
they design and develop their product. Once their design enters production, they often outsource
their manufacturing to contract manufacturers that purchase our products directly from us or from
our distributors. We price our products based on market and competitive conditions and periodically
reduce the price of our products, as market and competitive conditions change, and as manufacturing
costs are reduced. We do not experience different margins on direct sales to providers of
networking equipment and indirect sales through contract manufacturers because in all cases we
negotiate product pricing directly with the providers of networking equipment. To date, all of our
revenue has been denominated in U.S. dollars.
We also derive revenue in the form of license and maintenance fees through licensing our
software products which help our customers build products around our systems-on-a-chip, or SoCs in
a more time and cost efficient manner. Revenue from such arrangements totaled $1.6 million and
$266,000 for the three months ended March 31, 2009 and 2008, respectively
Our customers representing greater than 10% of net revenue for each of the periods were:
21
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
ended March 31, |
|
|
2009 |
|
2008 |
Percentage of total net revenue |
|
|
|
|
|
|
|
|
Cisco |
|
|
21 |
% |
|
|
30 |
% |
Our distributors are used primarily to support international sale logistics in Asia,
including importation and credit management. Total net revenue through distributors was
$6.7 million and $5.5 million for the three months ended March 31, 2009 and 2008, or 32.8% and
30.0% of net revenue, respectively. While we have purchase agreements with our distributors, the
distributors do not have long-term contracts with any of the equipment providers. Our distributor
agreements, except as noted below for Avnet, limit the distributors ability to return product up
to a portion of purchases in the preceding quarter. Given our experience, along with our
distributors limited contractual return rights, we believe we can reasonably estimate expected
returns from our distributors. Accordingly, we recognize sales through distributors at the time of
shipment, reduced by our estimate of expected returns.
Revenue and costs relating to sales to distributors are deferred if we grant more than limited
rights of returns and price credits or if we cannot reasonably estimate the level of returns and
credits issuable. Our distribution agreement with Avnet, Inc. is to distribute our products
primarily in the United States. Given the terms of the distribution agreement, for sales to Avnet,
revenue and costs are being deferred until products are sold by Avnet to their end customers. For
the three months ended March 31, 2009 and 2008, 6.0% and 3.8%, respectively, of our net revenues
were from products sold by Avnet. Revenue recognition depends on notification from Avnet that
product has been sold to Avnets end customers.
The following table is based on the geographic location of the original equipment
manufacturers or the distributors who purchased our products. The geographic locations of our
distributors may be different from the geographic locations of the ultimate end customers. Revenues
by geography for the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(in thousands) |
|
United States |
|
$ |
10,359 |
|
|
$ |
10,428 |
|
Hong Kong |
|
|
2,755 |
|
|
|
271 |
|
Taiwan |
|
|
2,469 |
|
|
|
3,110 |
|
Japan |
|
|
1,764 |
|
|
|
1,311 |
|
China |
|
|
1,369 |
|
|
|
1,322 |
|
Other countries |
|
|
1,666 |
|
|
|
1,900 |
|
|
|
|
|
|
|
|
Total |
|
$ |
20,382 |
|
|
$ |
18,342 |
|
|
|
|
|
|
|
|
Three Months ended March 31, 2009 Compared to the Three Months ended March 31, 2008: Net
Revenue. Our net revenue was $20.4 million in the three months ended March 31, 2009, as compared
to $18.3 million in the three months ended March 31, 2008, an increase of $2.0 million, or 11.1%.
The increase in net revenue was mainly attributable to the increase in sales of $3.5 million in
broadband and consumer markets due to increase in demand for our products from our existing and new
customers combined with revenue generated from acquisitions completed in 2008. This increase was
partially offset by a $2.3 million decline in sales into the enterprise network and data center
markets due to weakened demand as a result of the current global economic downturn. In the three
months ended March 31, 2009 we derived 32.8% of our net revenue from distributors compared to 30.0%
in the three months ended March 31, 2008, due to increased sales across all our major distributors.
Cost of Revenue and Gross Margin. We outsource wafer fabrication, assembly and test
functions of our products. A significant portion of our cost of revenue consists of payments for
the purchase of wafers and for assembly and test services, amortization of acquired intangibles and
amortization related to capitalized mask costs. To a lesser extent, cost of revenue includes
expenses relating to our internal operations that manage our contractors, stock-based compensation,
the cost of shipping and logistics, royalties, inventory valuation expenses for excess and obsolete
inventories, warranty costs and changes in product cost due to changes in sort, assembly and test
yields. In general, our cost of revenue associated with a particular product declines over time as
a result of yield improvements, primarily associated with design and test enhancements.
We use third-party foundries and assembly and test contractors, which are primarily located in
Asia, to manufacture, assemble and test our semiconductor products. We purchase processed wafers on
a per wafer basis from our fabrication suppliers, which are currently TSMC, UMC and Fujitsu. We
also outsource the sort, assembly, final testing and other processing of our product to third-party
contractors, primarily ASE and ISE. We negotiate wafer fabrication on a purchase order basis and do
not have long-term agreements with any of our third-party contractors. A significant disruption in
the operations of one or more of these contractors would impact the production of our products
which could have a material adverse effect on our business, financial condition and results of
operations.
Our net revenue, cost of revenue, gross profit and gross margin for the three months ended
March 31, 2009 and 2008 were:
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
% change |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
|
Net revenue |
|
$ |
20,382 |
|
|
$ |
18,342 |
|
|
$ |
2,040 |
|
|
|
11.1 |
% |
Cost of revenue |
|
|
10,814 |
|
|
|
6,587 |
|
|
|
4,227 |
|
|
|
64.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
$ |
9,568 |
|
|
$ |
11,755 |
|
|
$ |
(2,187 |
) |
|
|
-18.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin |
|
|
46.9 |
% |
|
|
64.1 |
% |
|
|
-17.2 |
% |
|
|
-26.9 |
% |
Our gross margin has been and will continue to be affected by a variety of factors,
including average sales prices of our products, the product mix, amortization of acquired
intangibles, the cost of fabrication masks that are capitalized and amortized, the timing of cost
reductions for fabricated wafers and assembly and test service costs, inventory valuation charges
and the timing and changes in sort, assembly and test yields. Overall product margin is impacted by
the mix between higher performance, higher margin products and lower performance, lower margin
products. In addition, we typically experience lower yields and higher associated costs on new
products, which improve as production volumes increase.
Three Months ended March 31, 2009 Compared to the Three Months ended March 31, 2008: Cost
of Revenue and Gross Margin. Gross margin declined from 64.1% in the three months ended March 31,
2008 to 46.9 % in the three months ended March 31, 2009, a decline of 17.2 percentage points. The
decline in gross margin in the three months ended March 31, 2009 compared to the three months ended
March 31, 2008 was primarily due to higher amortization costs of acquired intangible assets and
amortization of fair value adjustments of acquired inventory resulting from the acquisitions
completed in 2008, and to a lesser extent, to a product sales mix shift towards increased sales of
lower performance, lower margin products.
Research and Development Expenses
Research and development expenses primarily include personnel costs, engineering design
development software and hardware tools, allocated facilities expenses and depreciation of
equipment used in research and development, and stock-based compensation under SFAS 123(R).
Total research and development expenses for the three months ended March 31, 2009 and 2008
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
2008 |
|
change |
|
% change |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Research and development
expenses |
|
$ |
9,991 |
|
|
$ |
5,820 |
|
|
$ |
4,171 |
|
|
|
71.7 |
% |
Percent of total net revenue |
|
|
49.0 |
% |
|
|
31.7 |
% |
|
|
17.3 |
% |
|
|
54.5 |
% |
23
Three Months ended March 31, 2009 Compared to the Three Months ended March 31, 2008: Research and
development expenses increased by $4.2 million, or 71.7% to $9.9 million in the three months ended
March 31, 2009 from $5.8 million in the three months ended March 31, 2008. Of the $4.2 million
increase, salaries, benefits and commissions accounted for $2.4 million and stock-based
compensation expense accounted for $0.9 million due to increased headcount mainly resulting from
the acquisitions completed in 2008. In addition, consulting services and other miscellaneous expenses accounted for $0.9 million
of the increase. Research and development headcount increased to 240 at the end of March 2009 from
135 at the end of March 2008.
Sales, General and Administrative Expenses
Sales, general and administrative expenses primarily include personnel costs, accounting
and legal fees, information systems, sales commissions, trade shows, marketing programs,
depreciation, allocated facilities expenses and stock-based compensation under SFAS 123(R). Total
sales, general and administrative costs for the three months ended March 31, 2009 and 2008 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
2008 |
|
change |
|
% change |
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
Sales, general and
administrative |
|
$ |
6,137 |
|
|
$ |
4,555 |
|
|
$ |
1,582 |
|
|
|
34.7 |
% |
Percent of total net revenue |
|
|
30.1 |
% |
|
|
24.8 |
% |
|
|
5.3 |
% |
|
|
21.2 |
% |
Three Months ended March 31, 2009 Compared to the Three Months ended March 31, 2008:
Sales, general and administrative expenses increased $1.6 million, or 34.7% in the three months
ended March 31, 2009 from $4.6 million in the three months ended March 31, 2008. Of the
$1.6 million increase, stock-based compensation expense accounted for $0.9 million and salaries,
benefits and commissions accounted for $0.5 million due to increased headcount. Other miscellaneous
expenses accounted for $0.2 million of the increase. Sales, general and administrative headcount
increased to 82 at the end of March 2009 from 63 at the end of March 2008.
Other Income, Net. Other income, net, primarily includes interest income on cash and cash
equivalents and, to a lesser extent, includes interest expense component associated with the
installment payment of capitalized licenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
change |
|
|
% change |
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Interest income and other |
|
$ |
134 |
|
|
$ |
992 |
|
|
$ |
(858 |
) |
|
|
-86.5 |
% |
Interest expense |
|
|
(79 |
) |
|
|
(153 |
) |
|
|
74 |
|
|
|
-48.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
55 |
|
|
$ |
839 |
|
|
$ |
(784 |
) |
|
|
-93.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended March 31, 2009 Compared to the Three Months ended March 31, 2008:
Other income, net decreased in the three months ended March 31, 2009 primarily as the result of
decreased interest income resulting from lower average cash and cash equivalents balances combined
with lower short-term U.S. interest rates in the three months ended March 31, 2009 compared to the
three months ended March 31, 2008.
Provision for income taxes. For the three months ended March 31, 2009 and 2008, the provision for
income taxes was based on our estimated annual effective tax rate in compliance with SFAS 109 and
other related guidance. We update our estimate of our annual effective tax rate at the end of each
quarterly period. Our estimate takes into account estimations of annual pre-tax income, the
geographic mix of pre-tax income and our interpretations of tax laws and the possible outcomes of
current and future audits.
The following table presents the provision for income taxes and the effective tax rates for
the three months ended March 31, 2009 and 2008:
24
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
(Loss) income before provision for income taxes |
|
$ |
(6,505 |
) |
|
$ |
2,219 |
|
Provision for income taxes |
|
$ |
28 |
|
|
$ |
247 |
|
Effective tax rate |
|
|
-0.4 |
% |
|
|
11.1 |
% |
The provision for income taxes was $28,000 and $247,000 for the three months ended March 31, 2009
and 2008, respectively. The provision for income taxes for the three months ended March 31, 2009
was primarily related to international taxes and state income taxes. The provision for the three
months ended March 31, 2008 was primarily related to the federal alternative minimum tax on profits
in the United States adjusted by certain non-deductible items, international taxes and state income
taxes.
We continue to maintain a full valuation allowance on our net deferred tax assets until sufficient
positive evidence exists to support reversal of the valuation allowance.
Liquidity and Capital Resources
We believe that we will have adequate liquidity over the next twelve months to operate our business
and to meet our cash requirements. Our primary sources of cash subsequent to our initial public
offering in 2007 have been cash generated from our operations, cash collections from customers and
to a lesser extent, cash received from the exercise of employee stock options.
Cash equivalents consist primarily of an investment in a money market fund. As of March 31, 2009,
we have not experienced any impairment charges due to such concentration of credit risk. We believe
that our $65.6 million of cash and cash equivalents at March 31, 2009 and expected cash flow from
operations will be sufficient to fund our projected operating requirements for at least twelve
months. Our future capital requirements will depend on many factors, including our rate of revenue
growth, the expansion of our engineering, sales and marketing activities, the timing and extent of
our expansion into new territories, the timing of introductions of new products and enhancements to
existing products and the continuing market acceptance of our products. Although we currently are
not a party to any agreement or letter of intent with respect to potential material investments in,
or acquisitions of, complementary businesses, services or technologies, we may enter into these
types of arrangements in the future, which could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms favorable to us or at all.
Following is a summary of our working capital and cash and cash equivalents as of
March 31, 2009 and December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Working capital |
|
$ |
88,312 |
|
|
$ |
90,335 |
|
Cash and cash equivalents |
|
|
65,618 |
|
|
|
77,027 |
|
Following is a summary of our cash flows from operating activities, investing activities and
financing activities for the three months ended March 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31 |
|
|
2009 |
|
2008 |
|
|
(in thousands) |
Net cash (used in) provided by operating activities |
|
$ |
(5,638 |
) |
|
$ |
532 |
|
Net cash used in investing activities |
|
|
(5,156 |
) |
|
|
(1,915 |
) |
Net cash used in financing activities |
|
|
(615 |
) |
|
|
(1,467 |
) |
25
Cash Flows from Operating Activities
Net cash from operating activities decreased by $6.2 million in the three months ended March
31, 2009 compared to the three months ended March 31, 2008. The decrease in our cash flows from
operations was primarily due to our net loss of $6.5 million in the three months ended March 31,
2009 compared to net income of $2.0 million in the three months ended March 31, 2008, which was
offset in part by higher non-cash expenses of $3.3 million in the three months ended March 31,
2009. The non-cash expenses were mainly attributable to the higher stock-based compensation due to
increased headcount as a result of our acquisitions completed in 2008 and higher amortization
expenses resulting from the intangibles acquired in connection with the acquisitions completed in
2008. In addition, changes in assets and liabilities, net increased by $1.0 million in the three
months ended March 31, 2009 compared to the changes in assets and liabilities in the three months
ended March 31, 2008.
Cash Flows from Investing Activities
Net cash used in investing activities increased by $3.2 million in the three months ended
March 31, 2009 compared to the three months ended March 31, 2008. The increase was mainly due to
cash paid for the W&W Communications, Inc. acquisition completed in December 2008, which was
accrued for as of December 31, 2008.
Cash Flows from Financing Activities
Net cash used in financing activities decreased by $0.9 million in the three months ended
March 31, 2009 compared to the three months ended March 31, 2008. The decline was mainly due to
lower principal payments of capital lease and technology license obligations.
Indemnities
In the ordinary course of business, we have entered into agreements with customers that
include indemnity provisions. Based on historical experience and information known as of March 31,
2009, we believe our exposure related to the indemnities at March 31, 2009 is not material. We also
enter into indemnification agreements with our officers and directors and our certificate of
incorporation and bylaws include similar indemnification obligations to our officers and directors.
It is not possible to determine the amount of our liability related to these indemnification
agreements and obligations to our officers and directors due to the limited history of prior
indemnification claims and the unique facts and circumstances involved in each particular
agreement.
Off-Balance Sheet Arrangements
During the periods presented, we did not have, nor do we currently have, any
relationships with unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes.
Contractual Obligations
The following table describes our commitments to settle contractual obligations in cash
as of March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
Less Than 1 |
|
|
|
|
|
|
|
|
|
|
More Than 5 |
|
|
|
|
|
|
Year |
|
|
1 to 2 Years |
|
|
3 to 5 Years |
|
|
Years |
|
|
Total |
|
|
|
(in thousands) |
|
Operating lease obligations |
|
$ |
1,334 |
|
|
$ |
3,556 |
|
|
$ |
1,325 |
|
|
$ |
|
|
|
$ |
6,215 |
|
Capital lease obligations |
|
|
2,102 |
|
|
|
2,181 |
|
|
|
|
|
|
|
|
|
|
|
4,283 |
|
Purchase obligations |
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,415 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,851 |
|
|
$ |
5,737 |
|
|
$ |
1,325 |
|
|
$ |
|
|
|
$ |
12,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We adopted FIN 48 on January 1, 2007. As of March 31, 2009, we had $4.0 million of total
gross unrecognized tax benefits and related interest. The timing of any payments which could result
from these unrecognized tax benefits will depend upon a number of factors. Accordingly, the timing
of payment cannot be estimated. We do not expect a significant tax payment related to these
obligations to occur within the next 12 months.
26
In addition to the contractual obligations noted in the table above, we also have the following
funding commitments:
In connection with our acquisition of certain assets of Parallogic Corporation (Parallogic),
we are obligated to make two installment payments of $220,000 each at the completion of certain
milestones or the 18th and 36th month anniversaries of the acquisition date,
whichever comes first. In January 2009, we paid the first installment of $220,000 due to
Parallogics achievement of the first milestone as defined in the Asset Purchase Agreement. The
remaining $220,000 was recorded as acquisition related payables in accrued expenses and other
current liabilities. As of May 6, 2009, Parallogic has not achieved the second milestone as defined
in the Asset Purchase Agreement.
As of March 31, 2009, in connection with our acquisition of W&W, we recorded a total of
purchase consideration related liabilities of $1.2 million. Of the $1.2 million, $1.1 million
relates to the unpaid portion of the cash consideration and $57,000 relates to the unpaid portion
of acquisition related expenses. We expect to pay the unpaid purchase consideration of $1.2 million
in the remainder of 2009.
Critical Accounting Policies and Estimates
The preparation of our financial statements and accompanying disclosures in conformity
with GAAP requires estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in
the consolidated financial statements and the accompanying notes. The SEC has defined a companys
critical accounting policies as policies that are most important to the portrayal of a companys
financial condition and results of operations, and which require a company to make its most
difficult and subjective judgments, often as a result of the need to make estimates of matters that
are inherently uncertain. Based on this definition, we have identified our most critical accounting
policies and estimates to be as follows: (1) revenue recognition; (2) product warranty accrual; (3)
stock-based compensation; (4) inventory valuation; (5) accounting for income tax; (6) mask costs;
(7) business combinations and (8) goodwill and purchased intangible assets. Although we believe
that our estimates, assumptions and judgments are reasonable, they are based upon information not
presently available. Actual results may differ significantly from these estimates if the
assumptions, judgments and conditions upon which they are based turn out to be inaccurate.
Management believes that there have been no significant changes during the three months ended March
31, 2009 to the items that we disclosed as our critical accounting policies and estimates in
Managements Discussion and Analysis of Financial Condition and Results of Operations, in our
Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 2, 2009.
Recent Accounting Pronouncements
Please refer to the recent accounting pronouncements listed in the footnote 1 of the
financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
During the three months ended March 31, 2009, there were no material changes to our
quantitative and qualitative disclosures about market risk related to our investment activities as
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008 as filed with the
SEC on March 2, 2009.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
Our Chief Executive Officer and our Chief Financial Officer evaluated with the
participation of our management, the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of
March 31, 2009. Based on this evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that our disclosure controls and procedures are effective to ensure that
information we are required to disclose in reports that we file or submit under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time
periods specified in SEC rules and forms, and that such information is accumulated and communicated
to management as appropriately to allow for timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
Under the supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we conducted an evaluation of any changes in our
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) that occurred during our most recently completed first quarter ending on
27
March 31, 2009. Based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer concluded that there has not been any change in our internal control over financial
reporting during that quarter that has materially affected, or is reasonably likely to materially
affect, the effectiveness, design or operation of our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may become involved in legal proceedings arising in the ordinary
course of our business. We are not presently a party to any legal proceedings the outcome of which,
if determined adversely against us, would individually or in the aggregate have a material adverse
effect on our business, operating results, financial condition or cash flows.
Item 1A. Risk Factors
The following risks and uncertainties may have a material adverse effect on our business,
financial condition or results of operations. Investors should carefully consider the risks
described below before making an investment decision. The risks described below are not the only
ones we face. Additional risks not presently known to us or that we currently believe are
immaterial may also significantly impair our business operations. Our business could be harmed by
any of these risks. The trading price of our common stock could decline due to any of these risks,
and investors may lose all or part of their investment.
We have marked with an asterisk(*) those risks described below that reflect substantive
changes from the risks described under Item 1A. Risk Factors included in our Annual Report on
Form 10-K filed with the Securities and Exchange Commission on March 2, 2009.
Risks Related to Our Business and Industry
We had a limited history of profitability, and we may not achieve or sustain profitability in the
future, on a quarterly or annual basis.*
We were established in 2000. Our first quarter of profitability since then was the quarter
ended September 30, 2007 and we remained profitable until the quarter ended December 31, 2008. We
experienced net loss of $6.5 million and net income of $2.0 million for the three months ended
March 31, 2009 and 2008, respectively. As of March 31, 2009, our accumulated deficit was
$63.8 million. We expect to make significant expenditures related to the development of our
products and expansion of our business, including research and development and sales and
administrative expenses. As a public company, we also incur significant legal, accounting and other
expenses. Additionally, we may encounter unforeseen difficulties, complications, product delays and
other unknown factors that require additional expenditures. As a result of these increased
expenditures, we may have to generate and sustain substantially increased revenue to achieve
profitability. Our revenue growth trends in prior periods may not be sustainable. Accordingly, we
may not be able to achieve or maintain profitability and we may continue to incur losses in the
future.
We face intense competition and expect competition to increase in the future, which could reduce
our revenue and customer base.
The market for our products is highly competitive and we expect competition to intensify in
the future. This competition could make it more difficult for us to sell our products, and result
in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and
failure to increase, or the loss of, market share or expected market share, any of which would
likely seriously harm our business, operating results and financial condition. For instance,
semiconductor products have a history of declining prices as the cost of production is reduced.
However, if market prices decrease faster than product costs, gross and operating margins can be
adversely affected. Currently, we face competition from a number of established companies,
including Broadcom Corporation, Freescale Semiconductor, Inc., Intel Corporation, Marvell
Technology Group Ltd., PMC-Sierra, Inc. and others. We also face competition from a number of
private or smaller companies, including RMI Corporation and to a lesser extent, Hifn, Inc. and
others. In addition, in the video capture, process and display market segments we consider our
competition to be companies that provide video encode and decode solutions, including TI DSPs and
SOCs for H.264 encoding and Amimon for wireless replacement of HDMI cables and wireless video
displays.
A few of our current competitors operate their own fabrication facilities and have, and some
of our potential competitors could have, longer operating histories, greater name recognition,
larger customer bases and significantly greater financial, technical, sales, marketing and other
resources than we have. Potential customers may prefer to purchase from their existing suppliers
rather than a new supplier regardless of product performance or features.
We expect increased competition from other established and emerging companies both
domestically and internationally. Our current and potential competitors may also establish
cooperative relationships among themselves or with third parties. If so, new competitors or
alliances that include our competitors may emerge that could acquire significant market share. We
expect these trends
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to continue as companies attempt to strengthen or maintain their market
positions in an evolving industry. In the future, further development by our competitors could
cause our products to become obsolete. We expect continued competition from incumbents as well as
from new entrants into the markets we serve. Our ability to compete depends on a number of factors,
including:
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our success in identifying new and emerging markets, applications and technologies; |
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our products performance and cost effectiveness relative to that of our competitors products; |
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our ability to deliver products in large volume on a timely basis at a competitive price; |
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our success in utilizing new and proprietary technologies to offer products and features
previously not available in the marketplace; |
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our ability to recruit design and application engineers and sales and marketing personnel; and |
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our ability to protect our intellectual property. |
In addition, we cannot assure you that existing customers or potential customers will not
develop their own products, purchase competitive products or acquire companies that use alternative
methods to enable networking, communication or security applications to facilitate network-aware
processing in their systems. Any of these competitive threats, alone or in combination with others,
could seriously harm our business, operating results and financial condition.
Our customers may cancel their orders, change production quantities or delay production, and if we
fail to forecast demand for our products accurately, we may incur product shortages, delays in
product shipments or excess or insufficient product inventory.
We generally do not obtain firm, long-term purchase commitments from our customers. Because
production lead times often exceed the amount of time required to fulfill orders, we often must
build in advance of orders, relying on an imperfect demand forecast to project volumes and product
mix. Our demand forecast accuracy can be adversely affected by a number of factors, including
inaccurate forecasting by our customers, changes in market conditions, adverse changes in our
product order mix and demand for our customers products. Even after an order is received, our
customers may cancel these orders or request a decrease in production quantities. Any such
cancellation or decrease subjects us to a number of risks, most notably that our projected sales
will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess
or obsolete inventory which we may be unable to sell to other customers. Alternatively, if we are
unable to project customer requirements accurately, we may not build enough products, which could
lead to delays in product shipments and lost sales opportunities in the near term, as well as force
our customers to identify alternative sources, which could affect our ongoing relationships with
these customers. We have in the past had customers dramatically increase their requested production
quantities with little or no advance notice. If we do not timely fulfill customer demands, our
customers may cancel their orders and we may be subject to customer claims for cost of replacement.
Either underestimating or overestimating demand would lead to insufficient, excess or obsolete
inventory, which could harm our operating results, cash flow and financial condition, as well as
our relationships with our customers.
Adverse changes in general economic or political conditions in any of the major countries in which
we do business could adversely affect our operating results.
As our business has grown to both customers located in the United States as well as customers
located outside of the United States, we have become increasingly subject to the risks arising from
adverse changes in both the domestic and global economic and political conditions. For example, the
direction and relative strength of the U.S. and International economies remains uncertain due to
softness in the housing markets, difficulties in the financial services sector and credit markets
and continuing geopolitical uncertainties. If economic growth in the United States and other
countries economies continues to slow, the demand for our customers products could decline, which
would then decrease demand for our products. Furthermore, if economic conditions in the countries
into which our customers sell their products continue to deteriorate, some of our customers may
decide to postpone or delay certain development programs, which would then delay their need to
purchase our products. This could result in a reduction in sales of our products or in a reduction
in the growth of our product sales. Any of these events would likely harm investors view of our
business, our results of operations and financial condition.
We receive a substantial portion of our revenues from a limited number of customers, and the loss
of, or a significant reduction in, orders from one or a few of our major customers would adversely
affect our operations and financial condition.*
We receive a substantial portion of our revenues from a limited number of customers. We
received an aggregate of approximately 53.2% and 54.3% of our net revenues from our top five
customers for the three months ended March 31, 2009 and 2008, respectively. We anticipate that we
will continue to be dependent on a limited number of customers for a significant portion of
29
our
revenues in the immediate future and in some cases the portion of our revenues attributable to
certain customers may increase in the future. However, we may not be able to maintain or increase
sales to certain of our top customers for a variety of reasons, including the following:
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our agreements with our customers do not require them to purchase a minimum quantity of our
products; |
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some of our customers can stop incorporating our products into their
own products with limited notice to us and suffer little or no
penalty; and |
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many of our customers have pre-existing or concurrent relationships
with our current or potential competitors that may affect the
customers decisions to purchase our products. |
In the past, we have relied in significant part on our strategic relationships with customers
that are technology leaders in our target markets. We intend to continue expanding such
relationships and forming new strategic relationships but we cannot assure you that we will be able
to do so. These relationships often require us to develop new products that may involve significant
technological challenges. Our customers frequently place considerable pressure on us to meet their
tight development schedules. Accordingly, we may have to devote a substantial amount of our
resources to our strategic relationships, which could detract from or delay our completion of other
important development projects. Delays in development could impair our relationships with our other
strategic customers and negatively impact sales of the products under development. Moreover, it is
possible that our customers may develop their own product or adopt a competitors solution for
products that they currently buy from us. If that happens, our sales would decline and our
business, financial condition and results of operations could be materially and adversely affected.
In addition, our relationships with some customers may also deter other potential customers
who compete with these customers from buying our products. To attract new customers or retain
existing customers, we may offer certain customers favorable prices on our products. In that event,
our average selling prices and gross margins would decline. The loss of a key customer, a reduction
in sales to any key customer or our inability to attract new significant customers could seriously
impact our revenue and materially and adversely affect our results of operations.
We expect our operating results to fluctuate.
We expect our revenues and expense levels to vary in the future, making it difficult to
predict our future operating results. In particular, we experience variability in demand for our
products as our customers manage their product introduction dates and their inventories. Given the
current global economic uncertainty, the demand for our products may be more varied and difficult
to ascertain in a timely and efficient manner.
Additional factors that could cause our results to fluctuate include, among other things:
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our ability to retain, recruit and hire key executives, technical personnel and other employees in the positions and
numbers, and with the experience and capabilities that we need; |
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fluctuations in demand, sales cycles, product mix and prices for our products; |
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the timing of our product introductions, and the variability in lead time between the time when a customer begins to
design in one of our products and the time when the customers end system goes into production and they begin
purchasing our products; |
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the forecasting, scheduling, rescheduling or cancellation of orders by our customers; |
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our ability to successfully define, design and release new products in a timely manner that meet our customers needs; |
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changes in manufacturing costs, including wafer, test and assembly costs, mask costs, manufacturing yields and
product quality and reliability; |
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the timing and availability of adequate manufacturing capacity from our manufacturing suppliers; |
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the timing of announcements by our competitors or us; |
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future accounting pronouncements and changes in accounting policies;
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volatility in our stock price, which may lead to higher stock compensation expenses; |
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general economic and political conditions in the countries where we operate or our products are sold or used; costs
associated with litigation, especially related to intellectual property; and |
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productivity and growth of our sales and marketing force. |
Unfavorable changes in any of the above factors, most of which are beyond our control, could
significantly harm our business and results of operations.
We may not sustain our growth rate, and we may not be able to manage any future growth effectively.
We have experienced significant growth in a short period of time. Our revenues increased from
approximately $7.4 million in 2004 to approximately $19.4 million in 2005, $34.2 million in 2006,
$54.2 million in 2007 and $86.6 million in 2008. We may not achieve similar growth rates in future
periods. You should not rely on our operating results for any prior quarterly or annual periods as
an indication of our future operating performance. If we are unable to maintain adequate revenue
growth, our financial results could suffer and our stock price could decline.
To manage our growth successfully and to continue handling the responsibilities of being a
public company, we believe we must effectively, among other things:
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recruit, hire, train and manage additional qualified engineers for our research and
development activities, especially in the positions of design engineering, product and test
engineering, and applications engineering; |
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add additional sales personnel and expand sales offices; |
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expand our administrative, financial and operational systems, procedures and controls; and |
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enhance our information technology support for enterprise resource planning and design
engineering by adapting and expanding our systems and tool capabilities, and properly
training new hires as to their use. |
If we are unable to manage our growth effectively, we may not be able to take advantage of
market opportunities or develop new products and we may fail to satisfy customer requirements,
maintain product quality, execute our business plan or respond to competitive pressures.
The average selling prices of products in our markets have historically decreased over time and
will likely do so in the future, which could harm our revenues and gross profits.
Average selling prices of semiconductor products in the markets we serve have historically
decreased over time. Our gross profits and financial results will suffer if we are unable to offset
any reductions in our average selling prices by reducing our costs, developing new or enhanced
products on a timely basis with higher selling prices or gross profits, or increasing our sales
volumes. Additionally, because we do not operate our own manufacturing, assembly or testing
facilities, we may not be able to reduce our costs as rapidly as companies that operate their own
facilities, and our costs may even increase, which could also reduce our margins. We have reduced
the prices of our products in anticipation of future competitive pricing pressures, new product
introductions by us or our competitors and other factors. We expect that we will have to do so
again in the future.
We may be unsuccessful in developing and selling new products or in penetrating new markets.
We operate in a dynamic environment characterized by rapidly changing technologies and
industry standards and technological obsolescence. Our competitiveness and future success depend on
our ability to design, develop, manufacture, assemble, test, market and support new products and
enhancements on a timely and cost effective basis. A fundamental shift in technologies in any of
our product markets could harm our competitive position within these markets. Our failure to
anticipate these shifts, to develop new technologies or to react to changes in existing
technologies could materially delay our development of new products, which could result in product
obsolescence, decreased revenues and a loss of design wins to our competitors. The success of a new
product depends on accurate forecasts of long-term market demand and future technological
developments, as well as on a variety of specific implementation factors, including:
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timely and efficient completion of process design and transfer to manufacturing, assembly and test processes;
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the quality, performance and reliability of the product; and |
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effective marketing, sales and service. |
If we fail to introduce new products that meet the demand of our customers or penetrate new
markets that we target our resources on, our revenues will likely decrease over time and our
financial condition could suffer. Additionally, if we concentrate
resources on a new market that does not prove profitable or sustainable, our financial
condition could decline.
Fluctuations in the mix of products sold may adversely affect our financial results.*
Because of the wide price differences among our processors, the mix and types of performance
capabilities of processors sold affect the average selling price of our products and have a
substantial impact on our revenue. Generally, sales of higher performance products have higher
gross margins than sales of lower performance products. We currently offer both higher and lower
performance products in our NITROX, OCTEON, ECONA ARM and PureVu Video product families. During
2008 and in the three months ended March 31, 2009, we experienced a sales mix shift towards
increased sales of lower performance, lower margin products. If this shift continues, our overall
gross margins will be negatively affected. Fluctuations in the mix and types of our products may
also affect the extent to which we are able to recover our fixed costs and investments that are
associated with a particular product, and as a result can negatively impact our financial results.
The semiconductor and communications industries have historically experienced significant
fluctuations with prolonged downturns, which could impact our operating results, financial
condition and cash flows.*
The semiconductor industry has historically exhibited cyclical behavior, which at various
times has included significant downturns in customer demand. We began to see such a downturn in the
fourth quarter of 2008 and expect this downturn to continue through 2009. Because a significant
portion of our expenses is fixed in the near term or is incurred in advance of anticipated sales,
we may not be able to decrease our expenses rapidly enough to offset any unanticipated shortfall in
revenues. If this situation were to occur, it could adversely affect our operating results, cash
flow and financial condition. Furthermore, the semiconductor industry has periodically experienced
periods of increased demand and production constraints. If this happens in the future, we may not
be able to produce sufficient quantities of our products to meet the increased demand. We may also
have difficulty in obtaining sufficient wafer, assembly and test resources from our subcontract
manufacturers. Any factor adversely affecting the semiconductor industry in general, or the
particular segments of the industry that our products target, may adversely affect our ability to
generate revenue and could negatively impact our operating results.
The communications industry has, in the past, experienced pronounced downturns, and these
cycles may continue in the future. To respond to a downturn, many networking equipment providers
may slow their research and development activities, cancel or delay new product development, reduce
their inventories and take a cautious approach to acquiring our products, which would have a
significant negative impact on our business. If this situation were to occur, it could adversely
affect our operating results, cash flow and financial condition. In the future, any of these trends
may also cause our operating results to fluctuate significantly from year to year, which may
increase the volatility of the price of our stock.
Our products must meet exact specifications, and defects and failures may occur, which may cause
customers to return or stop buying our products.
Our customers generally establish demanding specifications for quality, performance and
reliability that our products must meet. However, our products are highly complex and may contain
defects and failures when they are first introduced or as new versions are released. If defects and
failures occur in our products during the design phase or after, we could experience lost revenues,
increased costs, including warranty expense and costs associated with customer support, delays in
or cancellations or rescheduling of orders or shipments, product returns or discounts, diversion of
management resources or damage to our reputation and brand equity, and in some cases consequential
damages, any of which would harm our operating results. In addition, delays in our ability to fill
product orders as a result of quality control issues may negatively impact our relationship with
our customers. We cannot assure you that we will have sufficient resources, including any available
insurance, to satisfy any asserted claims.
We may have difficulty selling our products if our customers do not design our products into their
systems, and the nature of the design process requires us to incur expenses prior to recognizing
revenues associated with those expenses which may adversely affect our financial results.
One of our primary focuses is on winning competitive bid selection processes, known as design
wins, to develop products for use in our customers products. We devote significant time and
resources in working with our customers system designers to understand their future needs and to
provide products that we believe will meet those needs and these bid selection processes can be
lengthy. If a customers system designer initially chooses a competitors product, it becomes
significantly more difficult for us to sell
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our products for use in that system because changing
suppliers can involve significant cost, time, effort and risk for our customers. Thus, our failure
to win a competitive bid can result in our foregoing revenues from a given customers product line
for the life of that product. In addition, design opportunities may be infrequent or may be
delayed. Our ability to compete in the future will depend, in large part, on our ability to design
products to ensure compliance with our customers and potential customers specifications. We
expect to invest significant time and resources and to incur significant expenses to design our
products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a new product without any
assurance that our customers system designers will select our product for use in their
applications. We often are required to anticipate which product designs will generate demand in
advance of our customers expressly indicating a need for that particular design. Even if our
customers system designers select our products, a substantial period of time will elapse before we
generate revenues related to the significant expenses we have incurred.
The reasons for this delay generally include the following elements of our product sales and
development cycle timeline and related influences:
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our customers usually require a comprehensive technical evaluation of
our products before they incorporate them into their designs; |
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it can take from nine months to three years from the time our products
are selected to commence commercial shipments; and our customers may
experience changed market conditions or product development issues.
The resources devoted to product development and sales and marketing
may not generate material revenue for us, and from time to time, we
may need to write off excess and obsolete inventory if we have
produced product in anticipation of expected demand. We may spend
resources on the development of products that our customers may not
adopt. If we incur significant expenses and investments in inventory
in the future that we are not able to recover, and we are not able to
compensate for those expenses, our operating results could be
adversely affected. In addition, if we sell our products at reduced
prices in anticipation of cost reductions but still hold higher cost
products in inventory, our operating results would be harmed. |
Additionally, even if system designers use our products in their systems, we cannot assure you
that these systems will be commercially successful or that we will receive significant revenue from
the sales of processors for those systems. As a result, we may be unable to accurately forecast the
volume and timing of our orders and revenues associated with any new product introductions.
If customers do not believe our products solve a critical need, our revenues will decline.
Our products are used in networking and security equipment including routers, switches, UTM
appliances, intelligent switches, application-aware gateways, triple-play gateways, WLAN and 3G
access and aggregation devices, storage networking equipment, servers, intelligent network
interface cards, IP surveillance systems, wireless HDMI cable replacement systems, video
conferencing systems and connected home and office equipment.
In order to meet our growth and strategic objectives, providers of networking equipment must
continue to incorporate our products into their systems and the demands for their systems must grow
as well. Our future depends in large part on factors outside our control, and the sale of
next-generation networks may not meet our revenue growth and strategic objectives.
In the event we terminate one of our distributor arrangements, it could lead to a loss of revenues
and possible product returns.
A portion of our sales is made through third-party distribution agreements. Termination of a
distributor relationship, either by us or by the distributor, could result in a temporary or
permanent loss of revenues, until a replacement distributor can be established to service the
affected end-user customers. We may not be successful in finding suitable alternative distributors
on satisfactory terms or at all and this could adversely affect our ability to sell in certain
locations or to certain end-user customers. Additionally, if we terminate our relationship with a
distributor, we may be obligated to repurchase unsold products. We record a reserve for estimated
returns and price credits. If actual returns and credits exceed our estimates, our operating
results could be harmed. Our arrangements with our distributors typically also include price
protection provisions if we reduce our list prices.
We rely on our ecosystem partners to enhance our product offerings and our inability to continue to
develop or maintain such relationships in the future would harm our ability to remain competitive.
We have developed relationships with third parties, which we refer to as ecosystem partners,
which provide operating systems, tool support, reference designs and other services designed for
specific uses with our SoCs. We believe that these relationships enhance our customers ability to
get their products to market quickly. If we are unable to continue to develop or maintain these
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relationships, we might not be able to enhance our customers ability to commercialize their
products in a timely fashion and our ability to remain competitive would be harmed.
The loss of any of our key personnel could seriously harm our business, and our failure to attract
or retain specialized technical, management or sales and marketing talent could impair our ability
to grow our business.
We believe our future success will depend in large part upon our ability to attract, retain
and motivate highly skilled managerial, engineering, sales and marketing personnel. The loss of any
key employees or the inability to attract, retain or motivate qualified personnel, including
engineers and sales and marketing personnel, could delay the development and introduction of and
harm our ability to sell our products. We believe that our future success is highly dependent on
the contributions of Syed Ali, our co-founder, President and Chief Executive Officer, and others.
None of our employees have fixed-term employment contracts; they are all at-will employees. The
loss of the services of Mr. Ali, other executive officers or certain other key personnel could
materially and adversely affect our business, financial condition and results of operations. For
instance, if any of these individuals were to leave our company unexpectedly, we could face
substantial difficulty in hiring qualified successors and could experience a loss in productivity
during the search for and while any such successor is integrated into our business and operations.
There is currently a shortage of qualified technical personnel with significant experience in
the design, development, manufacturing, marketing and sales of integrated circuits. In particular,
there is a shortage of engineers who are familiar with the intricacies of the design and
manufacture of networking processors, and competition for these engineers is intense. Our key
technical personnel represent a significant asset and serve as the source of our technological and
product innovations. We may not be successful in attracting, retaining and motivating sufficient
numbers of technical personnel to support our anticipated growth.
To date, we have relied primarily on our direct marketing and sales force to drive new
customer design wins and to sell our products. Because we are looking to expand our customer base
and grow our sales to existing customers, we will need to hire additional qualified sales personnel
in the near term and beyond if we are to achieve revenue growth. The competition for qualified
marketing and sales personnel in our industry, and particularly in Silicon Valley, is very intense.
If we are unable to hire, train, deploy and manage qualified sales personnel in a timely manner,
our ability to grow our business will be impaired. In addition, if we are unable to retain our
existing sales personnel, our ability to maintain or grow our current level of revenues will be
adversely affected. Further, if we are unable to integrate and retain personnel acquired through
our various acquisitions, we may not be able to fully capitalize on such acquisitions.
Stock options and restricted stock units generally comprise a significant portion of our
compensation packages for all employees. The FASB requirement to expense the fair value of stock
options awarded to employees beginning in the first quarter of our fiscal 2006 has increased our
operating expenses and may cause us to reevaluate our compensation structure for our employees. Our
inability to attract, retain and motivate additional key employees could have an adverse effect on
our business, financial condition and results of operations.
In addition, we rely on stock-based awards as one means for recruiting, motivating and
retaining highly skilled talent. If the value of such stock awards does not appreciate as measured
by the performance of the price of our common stock or if our share-based compensation otherwise
ceases to be viewed as a valuable benefit, our ability to attract, retain, and motivate employees
could be weakened, which could harm our results of operations. The decline in the trading price of
our common stock has resulted in the exercise price of a portion of our outstanding options to
exceed the current trading price of our common stock, thus lessening the effectiveness of these
stock-based awards. Consequently, we may not continue to successfully attract and retain key
personnel which would harm our business.
We have a limited operating history, and we may have difficulty accurately predicting our future
revenues for the purpose of appropriately budgeting and adjusting our expenses.*
We were established in 2000. Our first quarter of profitability since then was the quarter
ended September 30, 2007 and we remained profitable until the quarter ended December 31, 2008. We
experienced net loss of $6.5 million and net income of $2.0 million for the three months ended
March 31, 2009 and 2008, respectively. Since we had only five quarters of operating profitability,
we do not have an extended history from which to predict and manage profitability. Our limited
operating experience, a dynamic and rapidly evolving market in which we sell our products, our
dependence on a limited number of customers, as well as numerous other factors beyond our control,
including general market conditions, impede our ability to forecast quarterly and annual revenues
accurately. As a result, we could experience budgeting and cash flow management problems,
unexpected fluctuations in our results of operations and other difficulties, any of which could
make it difficult for us to gain and maintain profitability and could increase the volatility of
the market price of our common stock.
Some of our operations and a significant portion of our customers and contract manufacturers are
located outside of the United States, which subjects us to additional risks, including increased
complexity and costs of managing international operations and
geopolitical instability.
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We have international sales offices and research and development facilities and we conduct,
and expect to continue to conduct, a significant amount of our business with companies that are
located outside the United States, particularly in Asia and Europe. Even customers of ours that are
based in the U.S. often use contract manufacturers based in Asia to manufacture their systems, and
it is the contract manufacturers that purchase products directly from us. As a result of our
international focus, we face numerous challenges,
including:
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increased complexity and costs of managing international operations; |
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longer and more difficult collection of receivables; |
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difficulties in enforcing contracts generally; |
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geopolitical and economic instability and military conflicts; |
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limited protection of our intellectual property and other assets; |
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compliance with local laws and regulations and unanticipated changes in local laws and
regulations, including tax laws and regulations; |
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trade and foreign exchange restrictions and higher tariffs; |
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travel restrictions; |
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timing and availability of import and export licenses and other governmental approvals,
permits and licenses, including export classification requirements; |
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foreign currency exchange fluctuations relating to our international operating activities; |
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transportation delays and limited local infrastructure and disruptions, such as large
scale outages or interruptions of service from utilities or telecommunications providers; |
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difficulties in staffing international operations; |
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heightened risk of terrorism; |
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local business and cultural factors that differ from our normal standards and practices; |
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differing employment practices and labor issues; |
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regional health issues (e.g., SARS) and natural disasters; and |
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work stoppages. |
We outsource our wafer fabrication, assembly, testing, warehousing and shipping operations to third
parties, and rely on these parties to produce and deliver our products according to requested
demands in specification, quantity, cost and time.
We rely on third parties for substantially all of our manufacturing operations, including
wafer fabrication, assembly, testing, warehousing and shipping. We depend on these parties to
supply us with material of a requested quantity in a timely manner that meets our standards for
yield, cost and manufacturing quality. We do not have any long-term supply agreements with our
manufacturing suppliers. Any problems with our manufacturing supply chain could adversely impact
our ability to ship our products to our customers on time and in the quantity required, which in
turn could cause an unanticipated decline in our sales and possibly damage our customer
relationships.
The fabrication of integrated circuits is a complex and technically demanding process. Our
foundries could, from time to time, experience manufacturing defects and reduced manufacturing
yields. Changes in manufacturing processes or the inadvertent use of defective or contaminated
materials by our foundries could result in lower than anticipated manufacturing yields or
unacceptable performance. Many of these problems are difficult to detect at an early stage of the
manufacturing process and may be time consuming and expensive to correct. Poor yields from our
foundries, or defects, integration issues or other performance problems in our products
35
could cause
us significant customer relations and business reputation problems, harm our financial results and
result in financial or other damages to our customers. Our customers could also seek damages from
us for their losses. A product liability claim brought against us, even if unsuccessful, would
likely be time consuming and costly to defend.
Our products are manufactured at a limited number of locations. If we experience manufacturing
problems at a particular location, we would be required to transfer manufacturing to a backup
location or supplier. Converting or transferring manufacturing
from a primary location or supplier to a backup fabrication facility could be expensive and
could take one to two quarters. During such a transition, we would be required to meet customer
demand from our then-existing inventory, as well as any partially finished goods that can be
modified to the required product specifications. We do not seek to maintain sufficient inventory to
address a lengthy transition period because we believe it is uneconomical to keep more than minimal
inventory on hand. As a result, we may not be able to meet customer needs during such a transition,
which could delay shipments, cause a production delay or stoppage for our customers, result in a
decline in our sales and damage our customer relationships. In addition, we have no long-term
supply contracts with the foundries that we work with. Availability of foundry capacity has in the
recent past been reduced due to strong demand. The ability of each foundry to provide us with
semiconductor devices is limited by its available capacity and existing obligations. Foundry
capacity may not be available when we need it or at reasonable prices which could cause us to be
unable to meet customer needs, delay shipments, because a production delay or stoppage for our
customers, result in a decline in our sales and harm our financial results.
In addition, a significant portion of our sales are to customers that practice just-in-time
order management from their suppliers, which gives us a very limited amount of time in which to
process and complete these orders. As a result, delays in our production or shipping by the parties
to whom we outsource these functions could reduce our sales, damage our customer relationships and
damage our reputation in the marketplace, any of which could harm our business, results of
operations and financial condition.
Any increase in the manufacturing cost of our products could reduce our gross margins and operating
profit.
The semiconductor business exhibits ongoing competitive pricing pressure from customers and
competitors. Accordingly, any increase in the cost of our products, whether by adverse purchase
price variances or adverse manufacturing cost variances, will reduce our gross margins and
operating profit. We do not have any long-term supply agreements with our manufacturing suppliers
and we typically negotiate pricing on a purchase order by purchase order basis. Consequently, we
may not be able to obtain price reductions or anticipate or prevent future price increases from our
suppliers.
Some of our competitors may be better financed than we are, may have long-term agreements with
our main foundries and may induce our foundries to reallocate capacity to those customers. This
reallocation could impair our ability to secure the supply of components that we need. Although we
use several independent foundries to manufacture substantially all of our semiconductor products,
most of our components are not manufactured at more than one foundry at any given time, and our
products typically are designed to be manufactured in a specific process at only one of these
foundries. Accordingly, if one of our foundries is unable to provide us with components as needed,
we could experience significant delays in securing sufficient supplies of those components. We
cannot assure you that any of our existing or new foundries will be able to produce integrated
circuits with acceptable manufacturing yields, or that our foundries will be able to deliver enough
semiconductor devices to us on a timely basis, or at reasonable prices. These and other related
factors could impair our ability to meet our customers needs and have a material and adverse
effect on our operating results.
In order to secure sufficient foundry capacity when demand is high and mitigate the risks
described in the foregoing paragraph, we may enter into various arrangements with suppliers that
could be costly and harm our operating results, such as nonrefundable deposits with or loans to
foundries in exchange for capacity commitments and contracts that commit us to purchase specified
quantities of integrated circuits over extended periods. We may not be able to make any such
arrangement in a timely fashion or at all, and any arrangements may be costly, reduce our financial
flexibility, and not be on terms favorable to us. Moreover, if we are able to secure foundry
capacity, we may be obligated to use all of that capacity or incur penalties. These penalties may
be expensive and could harm our financial results.
If we fail to maintain an effective system of internal controls, we may not be able to accurately
report our financial results or prevent fraud.
Effective internal controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. Any inability to provide reliable financial reports or prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires management and our auditors to
evaluate and assess the effectiveness of our internal control over financial reporting. These
Sarbanes-Oxley Act requirements may be modified, supplemented or amended from time to time.
Implementing these changes may take a significant amount of time and may require specific
compliance training of our personnel. In the future, we may discover areas of our internal controls
that need improvement. If our auditors or we discover a material weakness, the disclosure of that
fact, even if quickly remedied, could reduce the markets confidence in our financial statements
and harm our stock price. We may not be able to effectively and timely implement necessary control
changes and employee training to ensure continued compliance with the Sarbanes-
36
Oxley Act and other
regulatory and reporting requirements. Our rapid growth in recent periods and our possible future
expansion through acquisitions, present challenges to maintain the internal control and disclosure
control standards applicable to public companies. If we fail to maintain effective internal
controls, we could be subject to regulatory scrutiny and sanctions and investors could lose
confidence in the accuracy and completeness of our financial reports.
We rely on third-party technologies for the development of our products and our inability to use
such technologies in the future
would harm our ability to remain competitive.
We rely on third parties for technologies that are integrated into our products, such as wafer
fabrication and assembly and test technologies used by our contract manufacturers, as well as
licensed MIPS and ARM architecture technologies. If we are unable to continue to use or license
these technologies on reasonable terms, or if these technologies fail to operate properly, we may
not be able to secure alternatives in a timely manner and our ability to remain competitive would
be harmed. In addition, if we are unable to successfully license technology from third parties to
develop future products, we may not be able to develop such products in a timely manner or at all.
Our failure to protect our intellectual property rights adequately could impair our ability to
compete effectively or to defend ourselves from litigation, which could harm our business,
financial condition and results of operations.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as
confidentiality and nondisclosure agreements and other methods, to protect our proprietary
technologies and know-how. We have been issued 15 patents in the United States and two patents in
foreign countries and have an additional 29 patent applications pending in the United States and 28
patent applications pending in foreign countries. Even if the pending patent applications are
granted, the rights granted to us may not be meaningful or provide us with any commercial
advantage. For example, these patents could be opposed, contested, circumvented or designed around
by our competitors or be declared invalid or unenforceable in judicial or administrative
proceedings. The failure of our patents to adequately protect our technology might make it easier
for our competitors to offer similar products or technologies. Our foreign patent protection is
generally not as comprehensive as our U.S. patent protection and may not protect our intellectual
property in some countries where our products are sold or may be sold in the future. Many
U.S.-based companies have encountered
substantial intellectual property infringement in foreign countries, including countries where we
sell products. Even if foreign patents are granted, effective enforcement in foreign countries may
not be available.
Monitoring unauthorized use of our intellectual property is difficult and costly. Although we
are not aware of any unauthorized use of our intellectual property in the past, it is possible that
unauthorized use of our intellectual property may have occurred or may occur without our knowledge.
We cannot assure you that the steps we have taken will prevent unauthorized use of our intellectual
property.
Our failure to effectively protect our intellectual property could reduce the value of our
technology in licensing arrangements or in cross-licensing negotiations, and could harm our
business, results of operations and financial condition. We may in the future need to initiate
infringement claims or litigation. Litigation, whether we are a plaintiff or a defendant, can be
expensive, time consuming and may divert the efforts of our technical staff and managerial
personnel, which could harm our business, whether or not such litigation results in a determination
favorable to us.
Some of the software used with our products, as well as that of some of our customers, may be
derived from so called open source software that is generally made available to the public by its
authors and/or other third parties. Such open source software is often made available to us under
licenses, such as the GNU General Public License, which impose certain obligations on us in the
event we were to make available derivative works of the open source software. These obligations may
require us to make source code for the derivative works available to the public, and/or license
such derivative works under a particular type of license, rather than the forms of license
customarily used to protect our intellectual property. In addition, there is little or no legal
precedent for interpreting the terms of certain of these open source licenses, including the
determination of which works are subject to the terms of such licenses. While we believe we have
complied with our obligations under the various applicable licenses for open source software, in
the event the copyright holder of any open source software were to successfully establish in court
that we had not complied with the terms of a license for a particular work, we could be required to
release the source code of that work to the public and/or stop distribution of that work.
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. We expect that in the future we may receive, communications from various industry
participants alleging our infringement of their patents, trade secrets or other intellectual
property rights. Any lawsuits resulting from such allegations could subject us to significant
liability for damages and invalidate our
37
proprietary rights. Any potential intellectual property
litigation also could force us to do one or more of the following:
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stop selling products or using technology that contain the allegedly infringing intellectual property; |
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lose the opportunity to license our technology to others or to collect royalty payments based upon
successful protection and assertion of our intellectual property against others; incur significant legal
expenses; |
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pay substantial damages to the party whose intellectual property rights we may be found to be infringing; |
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redesign those products that contain the allegedly infringing intellectual property; or |
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attempt to obtain a license to the relevant intellectual property from third parties, which may not be
available on reasonable terms or at all. |
Any significant impairment of our intellectual property rights from any litigation we face
could harm our business and our ability to compete.
Our customers could also become the target of litigation relating to the patent and other
intellectual property rights of others. This could trigger technical support and indemnification
obligations in some of our licenses or customer agreements. These obligations could result in
substantial expenses, including the payment by us of costs and damages relating to claims of
intellectual property infringement. In addition to the time and expense required for us to provide
support or indemnification to our customers, any such litigation could disrupt the businesses of
our customers, which in turn could hurt our relationships with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for indemnification will not be made or
that if made, such claims would not have a material adverse effect on our business, operating
results or financial conditions.
Our third-party contractors are concentrated primarily in Taiwan and Japan, an area subject to
earthquake and other risks. Any disruption to the operations of these contractors could cause
significant delays in the production or shipment of our products.
Substantially all of our products are manufactured by third-party contractors located in
Taiwan and to a lesser extent manufactured by a third party contractor located in Japan. The risk
of an earthquake in Taiwan, Japan and elsewhere in the Pacific Rim region is significant due to the
proximity of major earthquake fault lines to the facilities of our foundries and assembly and test
subcontractors. For example, several major earthquakes have occurred in Taiwan and Japan since our
incorporation in 2000. Although our third-party contractors did not suffer any significant damage
as a result of these most recent earthquakes, the occurrence of additional earthquakes or other
natural disasters could result in the disruption of our foundry or assembly and test capacity. Any
disruption resulting from such events could cause significant delays in the production or shipment
of our products until we are able to shift our manufacturing, assembling or testing from the
affected contractor to another third-party vendor. We may not be able to obtain alternate capacity
on favorable terms, if at all.
We may experience difficulties in transitioning to new wafer fabrication process technologies or in
achieving higher levels of design integration, which may result in reduced manufacturing yields,
delays in product deliveries and increased expenses.
In order to remain competitive, we expect to continue to transition our semiconductor products
to increasingly smaller line width geometries. This transition requires us to modify our designs to
work with the manufacturing processes of our foundries. We periodically evaluate the benefits, on a
product-by-product basis, of migrating to new process technologies to reduce cost and improve
performance. We may face difficulties, delays and expenses as we continue to transition our
products to new processes. We are dependent on our relationships with our foundry contractors to
transition to new processes successfully. We cannot assure you that the foundries that we use will
be able to effectively manage the transition or that we will be able to maintain our existing
foundry relationships or develop new ones. If any of our foundry contractors or we experience
significant delays in this transition or fail to efficiently implement this transition, we could
experience reduced manufacturing yields, delays in product deliveries and increased expenses, all
of which could harm our relationships with our customers and our results of operations. As new
processes become more prevalent, we expect to continue to integrate greater levels of
functionality, as well as customer and third-party intellectual property, into our products.
However, we may not be able to achieve higher levels of design integration or deliver new
integrated products on a timely basis.
Our acquisition strategy may result in unanticipated accounting charges or otherwise adversely
affect our results of operations, and result in difficulties in assimilating and integrating the
operations, personnel, technologies and products of acquired companies or businesses, or be
dilutive to existing shareholders.*
In May 2008, we acquired certain assets of Parallogic, in August 2008 we acquired
substantially all of the assets of Star, in
38
December 2008, we acquired W&W and we may in the future
acquire companies or assets of companies that we believe to be complementary to our business,
including for the purpose of expanding our new product design capacity, introducing new design,
market or application skills or enhancing and expanding our existing product lines. In connection
with any such future acquisitions, we may need to use a significant portion of our available cash,
issue additional equity securities that would dilute current stockholders percentage ownership and
incur substantial debt or contingent liabilities. Such actions could adversely impact our operating
results and the market price of our common stock. In addition, difficulties may occur in
assimilating and integrating the
operations, personnel, technologies, and products of acquired companies or businesses. In
addition, key personnel of an acquired company may decide not to work for us. Moreover, to the
extent we acquire a company with existing products; those products may have lower gross margins
than our customary products, which could adversely affect our gross margin and operating results.
If an acquired company also has inventory that we assume, we will be required to write up the
carrying value of that inventory to fair value.
When that inventory is sold, the gross margins for those products are reduced and our gross
margins for that period are negatively affected. Furthermore, the purchase price of any acquired
businesses may exceed the current fair values of the net tangible assets of such acquired
businesses. As a result, we would be required to record material amounts of goodwill, and acquired
in-process research and development charges and other intangible assets, which could result in
significant impairment and acquired in-process research and development charges and amortization
expense in future periods. These charges, in addition to the results of operations of such acquired
businesses and potential restructuring costs associated with an acquisition, could have a material
adverse effect on our business, financial condition and results of operations. We cannot forecast
the number, timing or size of future acquisitions, or the effect that any such acquisitions might
have on our operating or financial results.
Our investment portfolio may become impaired by further deterioration of the capital markets.
Our cash equivalents at March 31, 2009 consisted primarily of money market instruments, which
are invested primarily in United States treasury securities, bonds of government agencies, and
corporate bonds. We follow an established investment policy and set of guidelines to monitor,
manage and limit our exposure to interest rate and credit risk. The policy sets forth credit
quality standards and limits our exposure to any one issuer, as well as our maximum exposure to
various asset classes.
As a result of current adverse financial market conditions, investments in some financial
instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and
collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of
March 31, 2009, we had no direct holdings in these categories of investments and our indirect
exposure to these financial instruments through our holdings in money market instruments was
immaterial. As of March 31, 2009, we had no impairment charge associated with our cash equivalents
relating to such adverse financial market conditions. Although we believe our current investment
portfolio has very little risk of impairment, we cannot predict future market conditions or market
liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
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 use.
We believe our existing cash balances and cash expected to be generated from our operations
will be sufficient to meet our working capital, capital expenditures and other needs for at least
the next twelve months. In the future, we may need to raise additional funds, and we cannot be
certain that we will be able to obtain additional financing on favorable terms, if at all. If we
issue equity securities to raise additional funds, the ownership percentage of our stockholders
would be reduced, and the new equity securities may have rights, preferences or privileges senior
to those of existing holders of our common stock. If we borrow money, we may incur significant
interest charges, which could harm our profitability. Holders of debt would also have rights,
preferences or privileges senior to those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or unanticipated
requirements, which could harm our business, operating results and financial condition.
Our future effective tax rates could be affected by the allocation of our income among different
geographic regions, which could affect our future operating results, financial condition and cash
flows.
We are in the process of expanding our international operations and staff to better support
our expansion into international markets. This expansion includes the implementation of an
international structure that includes, among other things, a research and development cost-sharing
arrangement, certain licenses and other contractual arrangements between us and our wholly-owned
domestic and foreign subsidiaries. As a result of these changes, we anticipate that our
consolidated pre-tax income will be subject to foreign tax at relatively lower tax rates when
compared to the United States federal statutory tax rate and, as a consequence, our effective
income tax rate is expected to be lower than the United States federal statutory rate. Our future
effective income tax rates could be adversely affected if tax authorities challenge our
international tax structure or if the relative mix of United States and international income
changes for any reason. Accordingly, there can be no assurance that our income tax rate will be
less than the United States federal statutory rate.
39
Risks Related to our Common Stock
The market price of our common stock may be volatile, which could cause the value of your
investment to decline. *
The trading prices of the securities of technology companies have been highly volatile.
Further, our common stock has a limited
trading history. Since our initial public offering in May 2007 through March 31, 2009, our
stock price has fluctuated from a low of $7.61 to a high of $35.60. We cannot predict the extent to
which the trading market will continue to develop or how liquid the market may become. The trading
price of our common stock is therefore likely to be highly volatile and could be subject to wide
fluctuations in price in response to various factors, some of which are beyond our control. These
factors include:
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quarterly variations in our results of operations or those of our competitors; |
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general economic conditions and slow or negative growth of related markets; |
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announcements by us or our competitors of design wins, acquisitions, new products, significant contracts, commercial
relationships or capital commitments; |
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our ability to develop and market new and enhanced products on a timely basis; |
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commencement of, or our involvement in, litigation; |
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disruption to our operations; |
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the emergence of new sales channels in which we are unable to compete effectively; |
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any major change in our board of directors or management; |
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changes in financial estimates including our ability to meet our future revenue and operating profit or loss projections; |
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changes in governmental regulations; and |
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changes in earnings estimates or recommendations by securities analysts. |
Furthermore, the stock market in general, and the market for semiconductor and other
technology companies in particular, have experienced price and volume fluctuations that have often
been unrelated or disproportionate to the operating performance of those companies. These broad
market and industry factors may seriously harm the market price of our common stock, regardless of
our actual operating performance. These trading price fluctuations may also make it more difficult
for us to use our common stock as a means to make acquisitions or to use options to purchase our
common stock to attract and retain employees. In addition, in the past, following periods of
volatility in the overall market and the market price of a companys securities, securities class
action litigation has often been instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of our managements attention and
resources.
A limited number of stockholders may have the ability to influence the outcome of director
elections and other matters requiring stockholder approval.*
Our directors, executive officers and principal stockholders and their affiliates beneficially
owned approximately 48% of our outstanding common stock as of March 31, 2009. These stockholders,
if they acted together, could exert substantial influence over matters requiring approval by our
stockholders, including electing directors, adopting new compensation plans and approving mergers,
acquisitions or other business combination transactions. This concentration of ownership may
discourage, delay or prevent a change of control of our company, which could deprive our
stockholders of an opportunity to receive a premium for their stock as part of a sale of our
company and might reduce our stock price. These actions may be taken even if they are opposed by
our other stockholders.
Delaware law and our amended and restated certificate of incorporation and bylaws contain
provisions that could delay or discourage takeover attempts that stockholders may consider
favorable.
Provisions in our amended and restated certificate of incorporation and bylaws may have the
effect of delaying or preventing a change of control or changes in our management. These provisions
include the following:
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the division of our board of directors into three classes; |
40
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the right of the board of directors to elect a director to fill a vacancy created by the
expansion of the board of directors or due to the resignation or departure of an existing board
member; |
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the prohibition of cumulative voting in the election of directors, which would otherwise allow
less than a majority of stockholders to elect director candidates; |
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the requirement for the advance notice of nominations for election to the board of directors or
for proposing matters that can be acted upon at a stockholders meeting; |
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the ability of our board of directors to alter our bylaws without obtaining stockholder approval; |
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the ability of the board of directors to issue, without stockholder approval, up to
10,000,000 shares of preferred stock with terms set by the board of directors, which rights
could be senior to those of our common stock; |
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the elimination of the rights of stockholders to call a special meeting of stockholders and to
take action by written consent in lieu of a meeting; |
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the required approval of at least 66 2/3% of the shares entitled to vote at an election of
directors to adopt, amend or repeal our bylaws or repeal the provisions of our amended and
restated certificate of incorporation regarding the election and removal of directors and the
inability of stockholders to take action by written consent in lieu of a meeting; and |
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the required approval of at least a majority of the shares entitled to vote at an election of
directors to remove directors without cause. |
In addition, because we are incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our outstanding voting stock, from merging
or combining with us. These provisions in our amended and restated certificate of incorporation and
bylaws and under Delaware law could discourage potential takeover attempts, could reduce the price
that investors are willing to pay for shares of our common stock in the future and could
potentially result in the market price being lower than they would without these provisions.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sale of Equity Securities
None.
Use of Proceeds from Sale of Registered Securities
Our initial public offering of common stock was effected through a Registration Statement
on Form S-1 (File No. 333-140660), that was declared effective by the SEC on May 1, 2007. As of
March 31, 2009, $63.8 million of the approximately $94.7 million in net proceeds received by us in
the offering, after deducting approximately $7.3 million in underwriting discounts, commissions,
and $2.8 million in other offering costs, were invested in various interest-bearing instruments,
and $30.9 million of the net proceeds had been used for acquisitions, general corporate purposes,
including the repayment of the outstanding balances under the term loan with Silicon Valley Bank,
general and administrative and manufacturing expenses.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None
Item 6. Exhibits
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Exhibit |
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Number |
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Description |
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3.1
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Amended and Restated Certificate of Incorporation of the Registrant (1) |
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3.2
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Amended and Restated Bylaws (2) |
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4.1
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Reference is made to Exhibits 3.1 and 3.2 |
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4.2
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Specimen of Common Stock Certificate (3) |
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10.1
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2009 Executive Officer Salaries |
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31.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali,
President and Chief Executive Officer |
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31.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 of Arthur D.
Chadwick, Chief Financial Officer |
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32.1*
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali,
President and Chief Executive Officer and Arthur D. Chadwick, Chief
Financial Officer |
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(1)
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Filed as Exhibit 3.1 to the Registrants Annual Report on Form 10-K
(No. 001-33435), filed with the SEC on March 2, 2009, and incorporated
herein by reference. |
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(2)
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Filed as Exhibit 3.5 to the Registrants registration statement on
Form S-1 (No. 333-140660), filed with the SEC on February 13, 2007, as
amended, and incorporated herein by reference. |
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(3)
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Filed as Exhibit 4.2 to the Registrants registration statement on
Form S-1 (No. 333-140660), filed with the SEC on February 13, 2007, as
amended, and incorporated herein by reference. |
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*
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This certification accompanies the Form 10-Q to which it relates, is
not deemed filed with the Securities and Exchange Commission and is
not to be incorporated by reference into any filing of the Registrant
under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (whether made before or after the
date of the Form 10-Q), irrespective of any general incorporation
language contained in such filing. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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CAVIUM NETWORKS, INC.
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Date: May 7, 2009 |
By: |
/s/ ARTHUR D. CHADWICK
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Arthur D. Chadwick |
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Chief Financial Officer and Vice
President of Finance and
Administration |
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EXHIBIT INDEX
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Exhibit |
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Number |
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Description |
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3.1
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Amended and Restated Certificate of Incorporation of the Registrant (1) |
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3.2
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Amended and Restated Bylaws (2) |
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4.1
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Reference is made to Exhibits 3.1 and 3.2 |
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4.2
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Specimen of Common Stock Certificate (3) |
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10.1
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2009 Executive Officer Salaries |
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31.1
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali,
President and Chief Executive Officer |
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31.2
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002 of Arthur D.
Chadwick, Chief Financial Officer |
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32.1*
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Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 of Syed B. Ali,
President and Chief Executive Officer and Arthur D. Chadwick, Chief
Financial Officer |
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(1)
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Filed as Exhibit 3.1 to the Registrants Annual Report on Form 10-K
(No. 001-33435), filed with the SEC on March 2, 2009, and incorporated
herein by reference. |
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(2)
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Filed as Exhibit 3.5 to the Registrants registration statement on
Form S-1 (No. 333-140660), filed with the SEC on February 13, 2007, as
amended, and incorporated herein by reference. |
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(2)
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Filed as Exhibit 4.2 to the Registrants registration statement on
Form S-1 (No. 333-140660), filed with the SEC on February 13, 2007, as
amended, and incorporated herein by reference. |
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*
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This certification accompanies the Form 10-Q to which it relates, is
not deemed filed with the Securities and Exchange Commission and is
not to be incorporated by reference into any filing of the Registrant
under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (whether made before or after the
date of the Form 10-Q), irrespective of any general incorporation
language contained in such filing. |
44