Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE
COMMISSION
Washington,
D.C. 20549
FORM 10-Q
x
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QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
quarterly period ended June 27, 2008
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OR
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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Commission file number: 000-50499
MINDSPEED TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
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01-0616769
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(State of incorporation)
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(I.R.S. Employer
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Identification No.)
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4000 MacArthur Boulevard, East Tower
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Newport Beach, California
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92660-3095
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(Address of principal executive offices)
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(Zip code)
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Registrants telephone number, including area code:
(949) 579-3000
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
x
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 definitions of large accelerated filer, accelerated filer, and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
o
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Accelerated filer
x
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Non-accelerated filer
o
(Do not check if a smaller reporting
company)
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Smaller reporting company
o
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Indicate by check mark
whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
The number of outstanding
shares of the Registrants Common Stock as of July 25, 2008 was
23,813,151.
Table
of Contents
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q
contains statements relating to Mindspeed Technologies, Inc. (including
certain projections and business trends) that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended (the Securities Act), and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and are subject to the safe harbor
created by those sections. All statements included in this Quarterly Report on Form 10-Q,
other than those that are purely historical, are forward-looking statements.
Words such as expect, believe, anticipate, outlook, could, target, project,
intend, plan, seek, estimate, should, may, assume and continue,
as well as variations of such words and similar expressions, also identify
forward-looking statements. Forward-looking statements in this Quarterly Report
on Form 10-Q include, without limitation, statements regarding:
·
the ability of our
relationships with network infrastructure original equipment manufacturers to
facilitate early adoption of our products, enhance our ability to obtain design
wins and encourage adoption of our technology in the industry;
·
the growth prospects
for the network infrastructure equipment and communications semiconductors
markets, including increased demand for network capacity, the upgrade and
expansion of legacy networks, and the build-out of networks in developing
countries;
·
our plans to make
substantial investments in research and development and participate in the
formulation of industry standards;
·
our ability to achieve
design wins and convert wins into revenue;
·
the continuation of
intense price and product competition, and the resulting declining average
selling prices for our products;
·
the value of our
intellectual property and our strategy regarding sales and licensing of
non-core intellectual property;
·
the impact of changes
in customer purchasing activities, inventory levels and inventory management
practices;
·
the importance of
attracting and retaining highly skilled, dedicated personnel;
·
the challenges of
shifting any operations or labor offshore, including the likelihood of
competition in offshore markets for qualified personnel;
·
our ability to achieve
revenue growth and profitability, or to sustain positive cash flows from
operations, and the expected period through which we will continue to incur
losses;
·
our plans to reduce
operating expenses, the amount and timing of any such expense reductions, and
its effects on cash flow;
·
our anticipation that
we will not pay a dividend in the foreseeable future;
·
the dependence of our
operating results on our ability to develop and introduce new products and enhancements
to existing products on a timely basis;
·
the continuation of a
trend toward industry consolidation and the effect it could have on our
operating results;
·
our belief that we are
benefiting from the increased deployment of internet protocol-based networks
both in new network buildouts worldwide and the replacement of circuit-switched
networks;
·
the sufficiency of our
existing sources of liquidity and expected sources of cash to fund our
operations, research and development efforts, anticipated capital expenditures,
working capital and other financing requirements for the next 12 months;
·
the circumstances under
which we may need to seek additional financing, our ability to obtain any such
financing and any consideration of acquisition opportunities;
·
our expectation that
our provision for income taxes for fiscal 2008 will principally consist of
income taxes related to our foreign operations;
·
our expectations with
respect to our recognition of income tax benefits in the future;
2
Table
of Contents
·
our restructuring
plans, including expected workforce reductions and facilities closures, the
expected cost savings under our restructuring plans and the uses of those
savings, the timing and amount of payments to complete the actions, the source
of funds for such payments, the impact on our liquidity and the resulting
decreases in our research and development and selling, general and
administrative expenses, and the amounts of future charges to complete our
restructuring plans;
·
our beliefs regarding
the effect of the disposition of pending or asserted legal matters;
·
our acquisition
strategy, the means of financing such a strategy, and the impact of any past or
future acquisitions, including the impact on revenue, margin and profitability;
·
our intentions to
market, sell and support acquired Ethernet aggregation products and to develop
and further extend the Ethernet MAC product line;
·
our plans relating to
our use of stock-based compensation, the effectiveness of our incentive
compensation programs and the expected amounts of stock-based compensation
expense in future periods;
·
our belief that the
financial stability of suppliers is an important consideration in our customers
purchasing decisions;
·
the amount and timing
of future payments under contractual obligations; and
·
the impact
of recent accounting pronouncements and the adoption of new accounting
standards.
Our
expectations, beliefs, anticipations, objectives, intentions, plans and
strategies regarding the future are not guarantees of future performance and
are subject to risks and uncertainties that could cause actual results, and
actual events that occur, to differ materially from results contemplated by the
forward-looking statement. These risks and uncertainties include, but are not
limited to:
·
future operating losses;
·
cash requirements and terms and availability of
financing;
·
worldwide political and economic uncertainties and
specific conditions in the markets we address;
·
loss of or diminished demand from one or more key
customers or distributors;
·
fluctuations in the price of our common stock and
our operating results;
·
our ability to attract and retain qualified
personnel;
·
constraints in the supply of wafers and other
product components from our third-party manufacturers;
·
doing business internationally;
·
pricing pressures and other competitive factors;
·
successful development and introduction of new
products;
·
our ability to successfully and cost effectively
establish and manage operations in foreign jurisdictions;
·
industry consolidation;
·
order and shipment uncertainty;
·
our ability to obtain design wins and develop
revenues from them;
·
lengthy sales cycles;
·
the expense of and our ability to defend our
intellectual property against infringement claims by others;
·
product defects and bugs; and
·
business acquisitions and investments.
3
Table
of Contents
The forward-looking
statements in this report are subject to additional risks and uncertainties,
including those set forth in Part II, Item 1A under the heading Risk
Factors and those detailed from time to time in our other filings with the
SEC. These forward-looking statements are made only as of the date hereof and,
except as required by law, we undertake no obligation to update or revise any
of them, whether as a result of new information, future events or otherwise.
Mindspeed
®
and Mindspeed Technologies
®
are registered trademarks of Mindspeed
Technologies, Inc. Other brands, names and trademarks contained in this
report are the property of their respective owners.
4
Table
of Contents
PART I.
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
MINDSPEED TECHNOLOGIES, INC.
Consolidated Condensed Balance Sheets
(unaudited, in thousands, except per share amounts)
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June 27,
2008
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September 28,
2007
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ASSETS
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Current Assets
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Cash and cash equivalents
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$
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29,898
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$
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25,796
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Receivables, net of allowance for doubtful
accounts of $348 and $353 at June 27, 2008 and September 28, 2007,
respectively
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17,155
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13,584
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Inventories
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10,551
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15,023
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Other current assets
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2,375
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3,763
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Total current assets
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59,979
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58,166
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Property, plant and equipment, net
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13,314
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13,147
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Intangible assets, net
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2,635
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3,200
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Goodwill
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2,429
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2,324
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License agreements, net
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3,239
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1,798
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Other assets
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2,763
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3,444
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Total assets
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$
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84,359
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$
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82,079
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LIABILITIES
AND STOCKHOLDERS EQUITY
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Current Liabilities
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Accounts payable
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$
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8,521
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$
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7,117
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Deferred income on sales to distributors
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3,739
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4,226
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Accrued compensation and benefits
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6,950
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5,286
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Accrued income tax
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92
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752
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Restructuring
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163
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1,478
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Other current liabilities
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2,839
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3,493
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Total current liabilities
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22,304
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22,352
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Convertible senior notes
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45,365
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45,037
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Other liabilities
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598
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444
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Total liabilities
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68,267
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67,833
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Commitments and contingencies (Note 4)
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Stockholders Equity
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Preferred stock, $0.01 par value: 25,000
shares authorized; no shares issued or outstanding
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Common stock, $0.01 par value: 100,000
shares authorized; 23,817 and 23,152 shares issued at June 27, 2008 and
September 28, 2007, respectively (1)
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238
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232
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Additional paid-in capital (1)
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268,106
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263,427
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Accumulated deficit
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(238,027
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)
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(234,480
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)
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Accumulated other comprehensive loss
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(14,225
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)
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(14,933
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)
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Total stockholders equity
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16,092
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14,246
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Total liabilities and stockholders equity
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$
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84,359
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$
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82,079
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(1) Common stock and
additional paid in capital amounts have been retroactively adjusted to reflect
the effect of the Companys June 30, 2008 one-for-five reverse stock
split. See Note 1.
See
accompanying notes to consolidated condensed financial statements.
6
Table
of Contents
MINDSPEED TECHNOLOGIES, INC.
Consolidated Condensed Statements of Operations
(unaudited, in thousands, except per share amounts)
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Three months ended
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Nine months ended
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June 27,
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June 29,
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June 27,
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June 29,
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2008
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2007
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2008
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2007
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Net revenues
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$
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38,049
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$
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33,207
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$
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109,598
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$
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94,122
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Cost of goods sold
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12,510
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10,522
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34,651
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32,016
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Gross margin
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25,539
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22,685
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74,947
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62,106
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Operating expenses:
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Research and development
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14,771
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13,871
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42,193
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44,181
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Selling, general and
administrative
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11,196
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10,835
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34,376
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32,907
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Special charges
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110
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(104
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)
|
284
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4,728
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|
|
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Total operating expenses
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26,077
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24,602
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76,853
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81,816
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Operating loss
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(538
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)
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(1,917
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)
|
(1,906
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)
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(19,710
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)
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|
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Interest expense
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(563
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)
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(560
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)
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(1,689
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)
|
(1,678
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)
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Other income, net
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150
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|
121
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|
125
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388
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|
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|
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Loss before income taxes
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(951
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)
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(2,356
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)
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(3,470
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)
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(21,000
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)
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|
|
|
|
|
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|
|
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Provision for income taxes
|
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132
|
|
163
|
|
279
|
|
455
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|
|
|
|
|
|
|
|
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Net loss
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$
|
(1,083
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)
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$
|
(2,519
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)
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$
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(3,749
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)
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$
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(21,455
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)
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Net loss per share, basic and
diluted (1)
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$
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(0.05
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)
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$
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(0.11
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)
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$
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(0.16
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)
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$
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(0.97
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)
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Weighted-average number of
shares used in
per share
computation (1)
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23,144
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22,365
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22,981
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22,042
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(1) Earnings per share
amounts have been retroactively adjusted to reflect the effect of the Companys
June 30, 2008 one-for-five reverse stock split. See Note 1.
See
accompanying notes to consolidated condensed financial statements.
7
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of Contents
MINDSPEED TECHNOLOGIES, INC.
Consolidated Condensed Statements of Cash Flows
(unaudited, in thousands)
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Nine months ended
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June 27,
2008
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June 29,
2007
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Cash Flows From Operating Activities
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Net loss
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$
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(3,749
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)
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$
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(21,455
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)
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Adjustments to reconcile net
loss to net cash
Provided
by (used in) operating activities:
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Depreciation and amortization
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4,640
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3,893
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Stock-based compensation
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4,123
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5,870
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Inventory provisions
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(1,188
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)
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(384
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)
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Other non-cash items, net
|
|
387
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|
444
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|
Changes in assets and
liabilities, net of effects of acquisitions:
|
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Receivables
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(3,490
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)
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(568
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)
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Inventories
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5,660
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3,139
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Accounts payable
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2,680
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(2,459
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)
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Deferred income on sales to
distributors
|
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(487
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)
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(1,135
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)
|
Accrued expenses and other
current liabilities
|
|
616
|
|
1,662
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|
Other
|
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2,445
|
|
1,558
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|
Net cash provided by (used in)
operating activities
|
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11,637
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|
(9,435
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)
|
|
|
|
|
|
|
Cash Flows From Investing
Activities
|
|
|
|
|
|
Capital expenditures
|
|
(6,426
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)
|
(3,436
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)
|
Acquisition of assets, net of cash acquired
|
|
(1,172
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)
|
|
|
Purchases of available-for-sale
marketable securities
|
|
|
|
(13,832
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)
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Sales of available-for-sale marketable
securities
|
|
|
|
18,000
|
|
Maturities of held-to-maturity
marketable securities
|
|
|
|
863
|
|
Net cash (used in) provided by
investing activities
|
|
(7,598
|
)
|
1,595
|
|
|
|
|
|
|
|
Cash Flows From Financing
Activities
|
|
|
|
|
|
Exercise of stock options and
warrants
|
|
111
|
|
3,320
|
|
Net cash provided by financing
activities
|
|
111
|
|
3,320
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rates
on cash
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
4,102
|
|
(4,520
|
)
|
Cash and cash equivalents at
beginning of period
|
|
25,796
|
|
29,976
|
|
Cash and cash equivalents at
end of period
|
|
$
|
29,898
|
|
$
|
25,456
|
|
See
accompanying notes to consolidated condensed financial statements.
8
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. Basis of
Presentation and Significant Accounting Policies
Mindspeed Technologies, Inc.
(Mindspeed or the Company) designs, develops and sells semiconductor networking
solutions for communications applications in enterprise, broadband access,
metropolitan and wide-area networks. On June 27, 2003, Conexant Systems, Inc.
(Conexant) completed the distribution (the Distribution) to Conexant
stockholders of all 18,066,689 (90,333,445 on a pre June 30, 2008 one-for-five
reverse stock split basis) outstanding shares of common stock of its wholly
owned subsidiary, Mindspeed. In the Distribution, each Conexant stockholder
received one fifth of a share (one share on a pre June 30, 2008
one-for-five reverse stock split basis) of Mindspeed common stock (including an
associated preferred share purchase right) for every three shares of Conexant
common stock held and cash for any fractional share of Mindspeed common stock.
Following the Distribution, Mindspeed began operations as an independent,
publicly held company.
Prior to the Distribution,
Conexant transferred to Mindspeed the assets and liabilities of the Mindspeed
business, including the stock of certain subsidiaries, and certain other assets
and liabilities which were allocated to Mindspeed under the Distribution
Agreement entered into between Conexant and Mindspeed. Also prior to the
Distribution, Conexant contributed to Mindspeed cash in an amount such that at
the time of the Distribution Mindspeeds cash balance was $100 million.
Mindspeed issued to Conexant a warrant to purchase six million shares (adjusted
to reflect our June 30, 2008 one-for-five reverse stock split) of
Mindspeed common stock at a price of $17.04 per share (adjusted to reflect our June 30,
2008 one-for-five reverse stock split), exercisable for a period beginning one
year and ending ten years after the Distribution. In connection with the
Distribution, Mindspeed and Conexant also entered into a Credit Agreement
(terminated December 2004), an Employee Matters Agreement, a Tax
Allocation Agreement, a Transition Services Agreement and a Sublease.
Basis of
Presentation
The
consolidated condensed financial statements, prepared in accordance with
generally accepted accounting principles in the United States of America.,
include the accounts of Mindspeed and each of its subsidiaries. All accounts
and transactions among Mindspeed and its subsidiaries have been eliminated in
consolidation. In the opinion of management, the accompanying consolidated
condensed financial statements contain all adjustments, consisting of
adjustments of a normal recurring nature and the special charges (Note 5),
necessary to present fairly the Companys financial position, results of
operations and cash flows in accordance with generally accepted accounting
principles in the United States of America. The results of operations for
interim periods are not necessarily indicative of the results that may be
expected for a full year. These financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K for the fiscal year
ended September 28, 2007.
Reverse Stock Split
In May 2008, the Companys Board of
Directors approved a one-for-five reverse stock split following approval by the
Companys stockholders on April 7, 2008.
The reverse stock split was effected June 30, 2008. All share and per share amounts have been
retroactively adjusted to reflect the reverse stock split. There was no net effect on total stockholders
equity as a result of the reverse stock split.
Liquidity
In order to become profitable, or to generate and sustain positive cash flows
from operations, the Company must further reduce operating expenses and/or
increase revenues. During the first nine months of fiscal 2008, the Company
benefited from the completion of a series of cost reduction actions which have
improved its operating cost structure.
These expense reductions alone may not make the Company profitable or
allow it to sustain profitability if it is achieved. The Companys ability to
achieve the necessary revenue growth will depend on increased demand for
network infrastructure equipment that incorporates its products, which in turn
depends primarily on the level of capital spending by communications service
providers and enterprises. The Company may not be successful in achieving the
necessary revenue growth or may be unable to sustain past and future expense
reductions in subsequent periods. The Company may not achieve profitability or
sustain such profitability, if achieved.
The Company
believes that its existing sources of liquidity, along with cash expected to be
generated from product sales and sales or licensing of non-core intellectual
property, will be sufficient to fund its operations, research and development
efforts, anticipated capital expenditures, working capital and other financing
requirements for at least the next 12 months. The Company is currently
evaluating a number of available refinancing alternatives regarding its
convertible debt due November 2009, including alternatives to provide cash
necessary to repay its convertible debt when the instrument reaches maturity in
2009, assuming that it has not been converted into equity prior to maturity
(Note 7). From time to time, the
Company may acquire its debt securities through privately negotiated transactions,
tender offers, exchange offers (for new debt or other securities),
9
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
redemptions or
otherwise, upon such terms and at such prices as the Company may determine
appropriate. The Company will need to
continue a focused program of capital expenditures to meet its research and
development and corporate requirements. The Company may also consider
acquisition opportunities to extend its technology portfolio and design
expertise and to expand its product offerings. In order to fund capital
expenditures, increase its working capital or complete any acquisitions, the
Company may seek to obtain additional debt or equity financing. The Company may
also need to seek to obtain additional debt or equity financing if it
experiences downturns or cyclical fluctuations in its business that are more
severe or longer than anticipated or if it fails to achieve anticipated revenue
and expense levels. However, the Company cannot assure you that such financing
will be available to it on favorable terms, or at all.
Reclassifications
Certain reclassifications have been made to
2007 financial statements to conform to the 2008 presentation.
Fiscal
Periods
Our interim
fiscal quarters end on the thirteenth Friday of each quarter. The third quarter
of fiscal 2008 and 2007 ended on June 27, 2008 and June 29, 2007,
respectively.
Recent Accounting Standards
On September 29, 2007, the Company adopted Financial Accounting
Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty
in Income Taxes An Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes and
recommends a recognition threshold and measurement process for recording in the
financial statements uncertain tax positions taken or expected to be taken in
the Companys tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure requirements for uncertain tax positions. See Note 3 for further information on the
adoption of FIN 48.
In
December 2007, the FASB issued Financial Accounting Standards (SFAS) No. 141R,
Business Combinations, and SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an Amendment of
ARB No. 51. These new standards will significantly change the financial
accounting and reporting of business combination transactions and noncontrolling
(or minority) interests in consolidated financial statements.
These
Statements are effective for fiscal years beginning after December 15,
2008. The Company will be required to
adopt SFAS No. 141R and SFAS No. 160 in the first quarter of fiscal
2010.
Accordingly, to the extent
the Company engages in any business combination transactions, such transactions
will be recorded and disclosed following existing accounting principles until October 2,
2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activitiesan Amendment of FASB
Statement No. 133. This Statement requires enhanced disclosures about an
entitys derivative and hedging activities and is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008. The Company will be required to adopt SFAS 161 in the first quarter of
fiscal 2010 and does not expect that the adoption will have a material impact
on its financial condition
or results of operations.
In May 2008, the FASB
issued FASB Staff Position FSP APB 14-1, Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (Including Partial
Cash Settlement). This FSP specifies
that issuers
of such instruments should separately account for the
liability and equity components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in
subsequent periods. This FSP is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company will be
required to adopt this FSP in the first quarter of fiscal 2010. Early adoption is not permitted. The Company
believes this change in methodology will negatively affect its earnings and
earnings per share as interest expense will be required to reflect the market
rate of interest for nonconvertible debt.
The Company is currently evaluating the magnitude of this impact on its
financial condition and results of operations.
Income
Taxes
The provision
for income taxes for the nine months ended June 27, 2008 and June 29,
2007, respectively, principally consists of income taxes incurred by the
Companys foreign subsidiaries.
Supplemental
Cash Flow Information
Interest paid for each of the nine month periods ended June 27, 2008 and June 29,
2007 was $1.7 million. Income taxes
paid, net of refunds received, for the nine months ended June 27, 2008 and
June 29, 2007 were $56,000 and $752,000, respectively. Non-cash investing activities in the first
nine months fiscal 2008 consisted of the purchase of $754,000 of property and
equipment from suppliers on account.
Assets acquired consist of amounts paid and received during the first
nine months of fiscal 2008 on cash, accounts receivable, accounts payable and
accrued liabilities created through the acquisition of certain assets of Ample
Communications, Inc., which occurred in the fourth quarter of fiscal 2007.
10
Table
of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
2.
Supplemental Financial Statement Data
Inventories
Inventories consist of the
following (in thousands):
|
|
June 27,
2008
|
|
September 28,
2007
|
|
Work-in-process
|
|
$
|
6,770
|
|
$
|
7,497
|
|
Finished goods
|
|
3,781
|
|
7,526
|
|
|
|
$
|
10,551
|
|
$
|
15,023
|
|
During the nine months ended
June 27, 2008 and June 29, 2007, the Company sold inventories with an
original cost of approximately $1.1 million and $3.1 million, respectively,
that had been written down to a zero cost basis during fiscal 2001.
Intangible Assets and Goodwill
In conjunction
with the acquisition of certain assets of Ample Communications, Inc. on September 25,
2007, the Company acquired certain intangible assets. These intangible assets consist of backlog
(approximately $0.1 million), developed technology (approximately $3.1 million)
and goodwill (approximately $2.3 million). In the first nine months of fiscal
2008, the Company recorded purchase accounting adjustments related to
additional transaction costs, additional cash and accounts receivable received
as well as a decrease in the value of fixed assets received. Accordingly, the balance of goodwill has
changed as follows (in thousands):
|
|
September 28,
2007
|
|
Purchase Price
Adjustments
|
|
June 27,
2008
|
|
Goodwill
|
|
$
|
2,324
|
|
$
|
105
|
|
$
|
2,429
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Income on
Shipments to Distributors
Deferred income on shipments
to distributors is as follows (in thousands):
|
|
June 27,
2008
|
|
September 28,
2007
|
|
Deferred revenue on shipments to
distributors
|
|
$
|
4,165
|
|
$
|
4,953
|
|
Deferred cost of inventory on shipments to
distributors
|
|
(473
|
)
|
(808
|
)
|
Reserves
|
|
47
|
|
81
|
|
Deferred income on sales to distributors
|
|
$
|
3,739
|
|
$
|
4,226
|
|
Comprehensive Loss
Comprehensive loss is as
follows (in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,083
|
)
|
$
|
(2,519
|
)
|
$
|
(3,749
|
)
|
$
|
(21,455
|
)
|
Foreign currency translation adjustments
|
|
22
|
|
67
|
|
708
|
|
487
|
|
Comprehensive loss
|
|
$
|
(1,061
|
)
|
$
|
(2,452
|
)
|
$
|
(3,041
|
)
|
$
|
(20.968
|
)
|
The balance of accumulated
other comprehensive loss at June 27, 2008 and September 28, 2007
consists of accumulated foreign currency translation adjustments.
11
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
Revenues by Product Line
Revenues by product line are
as follows (in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Multiservice access products
|
|
$
|
13,748
|
|
$
|
9,241
|
|
$
|
35,555
|
|
$
|
27,545
|
|
High-performance analog products
|
|
10,921
|
|
9,408
|
|
31,649
|
|
27,360
|
|
WAN communications products
|
|
13,380
|
|
14,558
|
|
42,394
|
|
39,217
|
|
|
|
$
|
38,049
|
|
$
|
33,207
|
|
$
|
109,598
|
|
$
|
94,122
|
|
Revenues by Geographic Area
Revenues by geographic area,
based on product shipment destination, are as follows (in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Americas
|
|
$
|
8,795
|
|
$
|
12,538
|
|
$
|
34,883
|
|
$
|
33,916
|
|
Asia-Pacific
|
|
24,891
|
|
16,729
|
|
60,728
|
|
49,329
|
|
Europe, Middle East and Africa
|
|
4,363
|
|
3,940
|
|
13,987
|
|
10,877
|
|
|
|
$
|
38,049
|
|
$
|
33,207
|
|
$
|
109,598
|
|
$
|
94,122
|
|
The Company believes a
substantial portion of the products sold to original equipment manufacturers
(OEMs) and third-party manufacturing service providers in the Asia-Pacific
region are ultimately shipped to end-markets in the Americas and Europe.
Direct sales to the
following customers accounted for 10% or more of net revenues in the periods
presented:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
20
|
%
|
13
|
%
|
17
|
%
|
14
|
%
|
Customer B
|
|
11
|
%
|
16
|
%
|
12
|
%
|
17
|
%
|
Customer C
|
|
10
|
%
|
7
|
%
|
7
|
%
|
5
|
%
|
3. Income Taxes
In July 2006, the FASB issued FIN 48, which clarifies the
accounting for uncertainty in income taxes recognized in an entitys financial
statements in accordance with FASB Statement No. 109, Accounting for
Income Taxes and prescribes a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or expected to be
taken on a tax return. Under FIN 48, the impact of an uncertain income tax
position on the income tax return must be recognized at the largest amount that
is more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it has
less than a 50% likelihood of being sustained. Additionally, FIN 48 provides
guidance on de-recognition, classification, interest and penalties, accounting
in interim periods, disclosure and transition.
The
Company adopted the provisions of FIN 48 on September 29, 2007. As a result of the adoption of FIN 48 and
recognition of the cumulative effect of adoption of a new accounting principle,
the Company recorded a $202,000 decrease in the liability for unrecognized
income tax benefits, with an offsetting decrease in accumulated deficit. As of September 29, 2007 the Company had
approximately $28.9 million of total unrecognized tax benefits. Of this total, $474,000 represents the amount
of unrecognized tax benefits that, if recognized, would favorably affect the
effective tax rate. The remaining $28.4
million of unrecognized tax benefits, if recognized, would have no impact on
the effective tax rate and be recorded as an increase to the Companys net
operating loss carry-forwards with a related increase in the valuation allowance. However, to the extent that any portion of
such benefit is recognized at the time a valuation allowance no longer exists,
such benefit would favorably affect the effective tax rate. In the first nine
months of fiscal 2008, there has been no change in the balance of unrecognized
tax benefits. The Company does not expect that the unrecognized tax benefit
will change significantly within the next 12 months. The Company recognizes
interest and penalties related to unrecognized tax benefits in the tax provision.
As of September 29, 2007, the Company had no liability for the payment of
interest and penalties. The liability for the payment of interest and penalties
did not change as of June 27, 2008.
12
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
The
Companys tax years ended October 1, 2004 to September 28, 2007
remain open to examination by certain foreign taxing jurisdictions. The Company has incurred U.S. federal and
state net operating losses in all tax periods since inception. The statute of limitations on these tax
periods with net operating losses does not begin until these losses are
utilized. Accordingly, all federal and
all significant states tax years since inception remain open for examination.
4.
Stock-Based Compensation
Effective October 1,
2005, the Company adopted Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment (SFAS 123R). SFAS 123R requires that the
Company account for all stock-based compensation using a fair-value method and
recognize the fair value of each award as an expense over the service period.
The Company elected to adopt SFAS 123R using modified prospective application.
Stock-based compensation
awards generally vest over time and require continued service to the Company
and, in some cases, require the achievement of specified performance
conditions. The amount of compensation expense recognized is based upon the
number of awards that are ultimately expected to vest. The Company estimates
forfeiture rates of 10% to 12.5% depending on the characteristics of the award.
As a result of the Companys
operating losses and its expectation of future operating results, no income tax
benefits have been recognized for any U.S. federal and state operating
lossesincluding those related to stock-based compensation expense. The Company
does not expect to recognize any income tax benefits relating to future
operating losses until it determines that such tax benefits are more likely
than not to be realized.
The fair value of stock
options awarded during the nine months ended June 27, 2008 and June 29,
2007 was estimated at the date of grant using the Black-Scholes option-pricing
model. The following table summarizes the weighted-average assumptions used and
the resulting fair value of options granted:
|
|
Nine months ended
|
|
|
|
June 27, 2008
|
|
June 29, 2007
|
|
Weighted-average fair value of options
granted
|
|
$
|
2.15
|
|
$
|
5.85
|
|
|
|
|
|
|
|
Weighted-average assumptions:
|
|
|
|
|
|
Expected option life
|
|
3.3 years
|
|
3.3 years
|
|
Risk-free interest rate
|
|
2.6
|
%
|
4.7
|
%
|
Expected volatility
|
|
65
|
%
|
75
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The expected option term was
estimated based upon historical experience and managements expectation of
exercise behavior. The expected volatility of the Companys stock price is
based upon the historical daily changes in the price of the Companys common
stock. The risk-free interest rate is based upon the current yield on U.S.
Treasury securities having a term similar to the expected option term. Dividend
yield is estimated at zero because the Company does not anticipate paying
dividends in the foreseeable future.
Stock-based compensation
expense related to employee stock options and restricted stock under SFAS 123R
was allocated as follows (in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
$
|
43
|
|
$
|
118
|
|
$
|
121
|
|
$
|
307
|
|
Research and development
|
|
450
|
|
816
|
|
1,762
|
|
1,910
|
|
Selling, general and administrative
|
|
603
|
|
1,351
|
|
2,240
|
|
3,584
|
|
Special charges
|
|
|
|
|
|
|
|
69
|
|
Total stock-based compensation expense
|
|
$
|
1,096
|
|
$
|
2,285
|
|
$
|
4,123
|
|
$
|
5,870
|
|
13
Table
of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
Stock Compensation Plans
The Company
has two principal stock incentive plans: the 2003 Long-Term Incentives Plan and
the Directors Stock Plan. The 2003 Long-Term Incentives Plan provides for the grant
of stock options, restricted stock, restricted stock units and other
stock-based awards to officers and employees of the Company. The Directors
Stock Plan provides for the grant of stock options, restricted stock units and
other stock-based awards to the Companys non-employee directors. On March 5,
2007 the stockholders of the Company approved plan amendments which, among
other things, (1) increased the authorized number of shares reserved for
issuance under the 2003 Long-Term Incentives Plan to 3.9 million shares (19.3
million shares on a pre June 30, 2008 one- for-five reverse stock split
basis), (2) removed the evergreen provision from the Directors Stock
Plan that automatically increased the number of shares available under the
Directors Stock Plan each year and (3) fixed the total number of shares
authorized for issuance under the Directors Stock Plan at 288,000 shares
(1,440,000 shares on a pre June 30, 2008 one-for-five reverse stock split
basis). As of June 27, 2008, an aggregate of 358,000 shares (adjusted for
the June 30, 2008 one-for-five reverse stock split) of the Companys
common stock were available for issuance under these plans.
The Company
also has a 2003 Stock Option Plan, under which stock options were issued in
connection with the Distribution. In the Distribution, each holder of a
Conexant stock option (other than options held by persons in certain foreign
locations) received an option to purchase a number of shares of Mindspeed
common stock. The number of shares subject to, and the exercise prices of, the
outstanding Conexant options and the Mindspeed options were adjusted so that
the aggregate intrinsic value of the options was equal to the intrinsic value
of the Conexant option immediately prior to the Distribution and the ratio of
the exercise price per share to the market value per share of each option was
the same immediately before and after the Distribution. As a result of such
option adjustments, Mindspeed issued options to purchase an aggregate of
approximately 6.0 million shares (29.9 million shares on a pre June 30,
2008 one- for-five reverse stock split basis) of its common stock to holders of
Conexant stock options (including Mindspeed employees) under the 2003 Stock
Option Plan. There are no shares available for new stock option awards under
the 2003 Stock Option Plan. However, any shares subject to the unexercised
portion of any terminated, forfeited or cancelled option are available for
future option grants only in connection with an offer to exchange outstanding
options for new options.
Prior to February 2007,
the Company maintained employee stock purchase plans for its domestic and
foreign employees. Under SFAS 123R, the plans were non-compensatory and the
Company has recorded no compensation expense in connection therewith. The employee stock purchase plans were
terminated by the Companys board of directors effective February 28,
2007.
Stock
Option Awards
Prior to
fiscal 2006, stock-based compensation consisted principally of stock options.
Eligible employees received grants of stock options at the time of hire; the
Company also made broad-based stock option grants covering substantially all
employees annually. Stock option awards have exercise prices not less than the
market price of the common stock at the grant date and a contractual term of
eight or ten years, and are subject to time-based vesting (generally over four
years). The following table summarizes stock option activity under all
plans (adjusted for the June 30, 2008 one- for-five reverse stock split) (shares
in thousands):
|
|
Number
of Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-Average
Remaining
Contractual Term
|
|
Outstanding at September 28, 2007
|
|
3,982
|
|
$
|
11.65
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
84
|
|
$
|
5.85
|
|
|
|
Exercised
|
|
(18
|
)
|
$
|
5.95
|
|
|
|
Forfeited or expired
|
|
(533
|
)
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 27, 2008
|
|
3,515
|
|
$
|
11.55
|
|
3.3 years
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
3,001
|
|
$
|
11.80
|
|
2.7 years
|
|
As of June 27, 2008,
there was unrecognized compensation expense of $1.6 million related to unvested
stock options, which the Company expects to recognize over a weighted-average
period of 2.0 years. The aggregate intrinsic value of options exercised during
the nine months ended June 27, 2008 was $33,000. The aggregate intrinsic
value of options outstanding and options exercisable as of June 27, 2008
was $20,000.
14
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
Restricted Stock Awards
The Companys
stock incentive plans also provide for awards of shares of restricted stock and
other stock-based incentive awards. Restricted stock awards have time-based
vesting and/or performance conditions and are generally subject to forfeiture
if employment terminates prior to the end of the service period or if the
prescribed performance criteria are not met. Restricted stock awards are valued
at the grant date based upon the market price of the Companys common stock and
the fair value of each award is charged to expense over the service period.
In fiscal 2007
and the first nine months of fiscal 2008, new awards of stock-based
compensation have principally consisted of restricted stock awards. The
majority of the restricted stock awards are intended to provide performance
emphasis and incentive compensation through vesting tied to each employees
performance against individual goals, as well as to improvements in the Companys
operating performance. The actual amounts of expense will depend on the number
of awards that ultimately vest upon the satisfaction of the related performance
and service conditions. The fair value
of each award is charged to expense over the service period.
The following
table summarizes restricted stock award activity (adjusted for the June 30,
2008 one-for-five reverse stock split), (shares in thousands):
|
|
Number
of
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested shares at September 28, 2007
|
|
638
|
|
$
|
10.85
|
|
|
|
|
|
|
|
Granted
|
|
731
|
|
$
|
4.50
|
|
Vested
|
|
(499
|
)
|
$
|
7.70
|
|
Forfeited
|
|
(118
|
)
|
$
|
8.95
|
|
|
|
|
|
|
|
Nonvested shares at June 27, 2008
|
|
752
|
|
$
|
7.30
|
|
The total fair value of
shares vested during the nine months ended June 27, 2008 was $3.0
million. As of June 27, 2008, there
was unrecognized compensation expense of $2.8 million related to unvested
restricted stock awards, which the Company expects to recognize over a
weighted-average period of approximately 1.4 years.
4.
Commitments and Contingencies
Various lawsuits, claims and
proceedings have been or may be instituted or asserted against Conexant or
Mindspeed, including those pertaining to product liability, intellectual
property, environmental, safety and health and employment matters. In
connection with the Distribution, Mindspeed assumed responsibility for all
contingent liabilities and current and future litigation against Conexant or
its subsidiaries to the extent such matters relate to Mindspeed.
The outcome of litigation
cannot be predicted with certainty and some lawsuits, claims or proceedings may
be disposed of unfavorably to the Company. Many intellectual property disputes
have a risk of injunctive relief and there can be no assurance that the Company
will be able to license a third partys intellectual property. Injunctive
relief could have a material adverse effect on the financial condition or
results of operations of the Company. Based on its evaluation of matters which
are pending or asserted, management of the Company believes the disposition of
such matters will not have a material adverse effect on the financial condition
or results of operations of the Company.
5. Special
Charges
Special charges consist of
the following (in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
$
|
110
|
|
$
|
(104
|
)
|
$
|
284
|
|
$
|
4,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(continued)
(unaudited)
Mindspeed Restructuring Plans
In fiscal 2006
and 2007, the Company implemented a number of cost reduction initiatives to
improve its operating cost structure. The cost reduction initiatives included
workforce reductions, significant reductions in capital spending, the
consolidation of certain facilities and salary reductions for the senior
management team.
Activity and
liability balances related to the Mindspeed restructuring plans through June 27,
2008 are as follows (in thousands):
|
|
Workforce
Reductions
|
|
Facility
and Other
|
|
Total
|
|
Restructuring balance, September 28,
2007
|
|
$
|
232
|
|
$
|
1,252
|
|
$
|
1,484
|
|
Charged to costs and expenses
|
|
|
|
284
|
|
284
|
|
Cash payments
|
|
(171
|
)
|
(1,428
|
)
|
(1,599
|
)
|
Restructuring balance, June 27, 2008
|
|
$
|
61
|
|
$
|
108
|
|
$
|
169
|
|
The remaining
accrued restructuring balance principally represents obligations under
non-cancelable leases, employee severance benefits and other contractual
commitments. The Company expects to pay these obligations over their respective
terms, which expire at various dates through fiscal 2009. The payments will be
funded from available cash balances and funds from product sales and are not
expected to significantly impact liquidity.
6. Related
Party Transactions
The
Company leases its headquarters and principal design center in Newport Beach,
California from Conexant. For the nine months ended June 27, 2008 and June 29,
2007, rent and operating expenses payable to Conexant were $5.1 million and
$4.0 million, respectively.
7.
Subsequent Events
In
July 2008, the Company completed the sale of certain non-core patents for
$10 million, which will be reported in the Companys fiscal 2008 fourth quarter
revenues.
In
addition, in August 2008, the Company
issued $15 million aggregate
principal amount of its 6.50% Convertible Senior Notes due 2013 in exchange for
the surrender and cancellation of $15 million aggregate principal amount of its
outstanding 3.75% Convertible Senior Notes due 2009.
16
Table
of Contents
ITEM 2.
MANAGEMENTS DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This information should be
read in conjunction with our unaudited consolidated condensed financial
statements and the notes thereto included in this Quarterly Report and our
audited consolidated financial statements and notes thereto and Managements
Discussion and Analysis of Financial Condition and Results of Operations
contained in our Annual Report on Form 10-K for our fiscal year ended September 28,
2007.
Overview
We design, develop and sell
semiconductor networking solutions for communications applications in
enterprise, broadband access, metropolitan and wide-area networks. Our
products, ranging from optical network transceiver solutions to voice and
Internet protocol (IP) processors, are classified into three focused product
families: high-performance analog products, multiservice access products and
wide area networking (WAN) communications products. Our products are sold to
original equipment manufacturers (OEMs) for use in a variety of network
infrastructure equipment, including mixed media gateways, high-speed routers,
switches, access multiplexers, cross-connect systems, add-drop multiplexers, IP
private branch exchanges (PBXs),optical modules and broadcast video systems.
Service providers use this equipment for the processing, transmission and
switching of high-speed voice, data and video traffic, including advanced
services such as voice-over-IP (VoIP), within different segments of the
communications network.
Our customers include Alcatel-Lucent, Cisco
Systems, Inc., Huawei Technologies Co., LM Ericsson Telephone Company,
Neophotonics Corporation, Nokia Siemens Networks, Nortel Networks, Inc.
and Zhongxing Telecom Equipment Corp. (ZTE).
Trends and
Factors Affecting Our Business
Our products are components
of network infrastructure equipment. As a result, we rely on network infrastructure
OEMs to select our products from among alternative offerings to be designed
into their equipment. These design wins are an integral part of the long
sales cycle for our products. Our customers may need six months or longer to
test and evaluate our products and an additional six months or more to begin
volume production of equipment that incorporates our products. We believe our
close relationships with leading network infrastructure OEMs facilitate early
adoption of our products during development of their products, enhance our
ability to obtain design wins and encourage adoption of our technology by the
industry.
We market and sell our
semiconductor products directly to network infrastructure OEMs. We also
sell our products indirectly through electronic component distributors and
third-party electronic manufacturing service providers, who manufacture
products incorporating our semiconductor networking solutions for OEMs. Sales
to distributors accounted for approximately 54% of our revenues for fiscal 2007
and 55% for the first nine months of fiscal 2008. Sales to customers located
outside the United States, primarily in the Asia-Pacific region and Europe,
were approximately 69% of our net revenues for fiscal 2007 and 73% for the
first nine months of fiscal 2008. We believe a substantial portion of the
products we sell to OEMs and third-party manufacturing service providers in the
Asia-Pacific region is ultimately shipped to end markets in the Americas and
Europe.
We
have significant research, development, engineering and product design
capabilities. Our success depends to a substantial degree upon our ability to
develop and introduce in a timely fashion new products and enhancements to our
existing products that meet changing customer requirements and emerging
industry standards. We have made, and plan to make, substantial investments in
research and development and to participate in the formulation of industry
standards. We spent approximately $57.4 million and $42.2 million on research
and development for fiscal 2007 and the first nine months of fiscal 2008,
respectively. We seek to maximize our return on our research and development
spending by focusing our research and development investment in what we believe
are key high-growth markets, including VoIP and high-performance analog
applications. We have developed and
maintain a broad intellectual property portfolio, and we intend to periodically
enter into strategic arrangements to leverage our portfolio by licensing or
selling our patents which are no longer core to our business. We recognized our first revenues from the
sale of patents during the fourth quarter of fiscal 2007 and additional
revenues in the first and second quarters of fiscal 2008. We anticipate continuing this intellectual
property strategy in future periods.
We are dependent upon third
parties for the manufacture, assembly and testing of our products. Our ability
to bring new products to market, to fulfill orders and to achieve long-term
revenue growth is dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer fabrication capacity. Periods of upturn
in the semiconductor industry may be characterized by rapid increases in demand
and a shortage of capacity for wafer fabrication and assembly and test
services.
17
Table
of Contents
In such periods, we may
experience longer lead times or indeterminate delivery schedules, which may
adversely affect our ability to fulfill orders for our products. During periods
of capacity shortages for manufacturing, assembly and testing services, our
primary foundries and other suppliers may devote their limited capacity to
fulfill the requirements of other clients that are larger than we are, or who
have superior contractual rights to enforce manufacture of their products,
including to the exclusion of producing our products. We may also incur
increased manufacturing costs, including costs of finding acceptable
alternative foundries or assembly and test service providers.
In order to become
profitable, or to generate and sustain positive cash flows from operations, we
must further reduce operating expenses and/or increase our revenues. Through
the first nine months of fiscal 2008, we have completed a series of cost
reduction actions which have improved our operating cost structure.
Our ability to
achieve revenue growth will depend on increased demand for network
infrastructure equipment that incorporates our products, which in turn depends
primarily on the level of capital spending by communications service providers.
We believe the market for network infrastructure equipment in general, and for
communications semiconductors in particular, offers attractive long-term growth
prospects due to increasing demand for network capacity, the continued
upgrading and expansion of existing networks and the build-out of
telecommunication networks in developing countries. However, the semiconductor
industry is highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price erosion, evolving
technical standards, short product life cycles and wide fluctuations in product
supply and demand. In addition, there has been an increasing trend toward
industry consolidation, particularly among major network equipment and
telecommunications companies.
Consolidation in the industry may lead to pricing pressure and loss of
market share. These factors have caused
substantial fluctuations in our revenues and our results of operations in the
past, and we may experience cyclical fluctuations in our business in the
future.
On
September 25, 2007, we acquired the product portfolio and intellectual
property assets of Ample Communications, Inc., an innovative developer of
Ethernet media access controller (MAC) products for carrier Ethernet
aggregation applications. We purchased
these assets in a private foreclosure sale from Amples senior creditor.
The products we acquired from
Ample ship to major OEM equipment customers for installation in Ethernet
metropolitan, access, and enterprise networks, including wireless/cellular
backhaul and Ethernet-over-SONET applications.
We market, sell and support these Ethernet aggregation products with
densities ranging from two to 24 ports and Ethernet transmission speeds from 10
Mbps to 10 Gbps. We also expect to develop and further extend the Ethernet MAC
product line.
On February 29,
2008, we received a letter from The NASDAQ Stock Market notifying us that for
the 30 consecutive business days preceding the date of the letter the bid price
of our common stock had closed below the $1.00 per share minimum bid price
required for continued inclusion on The NASDAQ Global Market pursuant to NASDAQ
Marketplace Rule 4450(a)(5). In order to regain compliance with the
minimum bid price rule, we effected a one-for-five reverse stock split on June 30,
2008.
On July 23,
2008, we received a letter from NASDAQ informing us that the closing bid price of
our common stock met or exceeded $1.00 per share for a minimum of 10
consecutive business days. Accordingly,
we have regained compliance with Marketplace Rule 4450(a)(5).
Critical
Accounting Policies and Estimates
The
preparation of financial statements in accordance with generally accepted
accounting principles in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Among the significant estimates affecting our consolidated
financial statements are those relating to inventories, revenue recognition,
allowances for doubtful accounts, stock-based compensation, income taxes and
impairment of long-lived assets. We regularly evaluate our estimates and
assumptions based upon historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. To the extent actual results
differ from those estimates, our future results of operations may be affected.
Inventories
We write down our inventory
for estimated obsolete or unmarketable inventory in an amount equal to the
difference between the cost of inventory and the estimated market value based
upon assumptions about future demand and market conditions. If actual market
conditions are less favorable than our estimates, additional inventory
write-downs may be required. In the event we experience unanticipated demand
and are able to sell a portion of the inventories we have previously written
down, our gross margins will be favorably affected.
18
Table
of Contents
Stock-Based Compensation
We account for
stock-based compensation in accordance with SFAS No. 123R, Share-Based
Payment. SFAS 123R requires that we account for all stock-based
compensation transactions using a fair-value method and recognize the fair
value of each award as an expense over the service period. The fair value of
restricted stock awards is based upon the market price of our common stock at
the grant date. We estimate the fair value of stock option awards, as of the
grant date, using the Black-Scholes option-pricing model. The use of the Black-Scholes
model requires that we make a number of estimates, including the expected
option term, the expected volatility in the price of our common stock, the
risk-free rate of interest and the dividend yield on our common stock. If our
expected option term and stock-price volatility assumptions were different, the
resulting determination of the fair value of stock option awards could be
materially different. In addition, judgment is also required in estimating the
number of share-based awards that we expect will ultimately vest upon the
fulfillment of service conditions (such as time-based vesting) or the
achievement of specific performance conditions. If the actual number of awards
that ultimately vest differs significantly from these estimates, stock-based compensation
expense and our results of operations could be materially impacted.
Revenue Recognition
We recognize revenues when the following
fundamental criteria are met: (i) persuasive evidence of an arrangement
exists; (ii) delivery has occurred; (iii) our price to the customer
is fixed or determinable; and (iv) collection of the sales price is
reasonably assured. We generate revenues from direct product sales, sales to
distributors, development agreements and the sale and license of intellectual
property.
We recognize revenues on products shipped directly to customers at the
time the products are shipped and title and risk of loss transfer to the
customer, in accordance with the terms specified in the arrangement, and the
four above mentioned revenue recognition criteria are met.
We recognize revenues on sales to distributors based on the rights
granted to these distributors in our distribution agreements. We have certain distributors who have been
granted return rights and receive credits for changes in selling prices to end
customers, the magnitude of which is not known at the time products are shipped
to the distributor. The return rights
granted to these distributors consist of limited stock rotation rights,
which allow them to rotate up to 10% of the products in their inventory twice a
year, as well as certain product return rights if the applicable distribution
agreement is terminated. These
distributors also receive price concessions because they resell our products to
end customers at various negotiated price points which vary by end customer,
product, quantity, geography and competitive pricing environments. When a
distributors resale is priced at a discount from the distributors invoice
price, we credit back to the distributor a portion of the distributors
original purchase price after the resale transaction is complete. Thus, a
portion of the Deferred income on sales to distributors balance will be
credited back to the distributor in the future.
Under these agreements,
we defer recognition of revenue until the products are resold by the
distributor, at which time our final net
sales price is fixed and the distributors right to return the products
expires. At the time of shipment to
these distributors, (i) we record a trade receivable at the invoiced
selling price because there is a legally enforceable obligation from the
distributor to pay us currently for product delivered, (ii) we relieve
inventory for the carrying value of products shipped because legal title has
passed to the distributor, and (iii) we record deferred revenue and
deferred cost of inventory under the Deferred income on sales to distributors
caption in the liability section of our consolidated balance sheets. We evaluate the deferred cost of inventory
component of this account for possible impairment by considering potential
obsolescence of products that might be returned to us and by considering the
potential of resale prices of these products being below our cost. By
reviewing deferred inventory costs in the manners discussed above, we ensure
that any portion of deferred inventory costs that are not recoverable from
future contractual revenue are charged to cost of sales as an expense. Deferred income on sales to distributors
effectively represents the gross margin on sales to distributors, however, the
amount of gross margin we recognize in future periods may be less than the
originally recorded deferred income as a result of negotiated price
concessions. In recent years, such
concessions have exceeded 30% of list price on average. For detail of this account balance, see Note
2 - Supplemental Financial Statement Data to our consolidated financial
statements.
We
recognize revenues from other distributors at the time of shipment
and
when title and risk of loss transfer to the distributor, in accordance with the
terms specified in the arrangement, and when the four above mentioned revenue
recognition criteria are met
.
These distributors may also be given business terms to return a portion of
inventory, however they do not receive credits for changes in selling prices to
end customers. At the time of shipment, product prices are fixed and
determinable and the amount of future returns can be reasonably estimated and
accrued.
Revenue from
the sale and license of intellectual property is recognized when the above
mentioned four revenue recognition criteria are met. Development revenue is
recognized when services are performed and customer acceptance has been
received and was not significant for any of the periods presented.
19
Table
of Contents
Deferred Income Taxes
We have provided
a full valuation allowance against our U.S federal and state deferred tax
assets. If sufficient evidence of our ability to generate future U.S federal
and/or state taxable income becomes apparent, we may be required to reduce our
valuation allowance, resulting in income tax benefits in our statement of
operations. We evaluate the realizability of our deferred tax assets and assess
the need for a valuation allowance quarterly.
Impairment of Long-Lived Assets
We
regularly monitor and review long-lived assets, including fixed assets,
goodwill and intangible assets, for impairment including whenever events or
changes in circumstances indicate that the carrying amount of any such asset
may not be recoverable. The determination of recoverability is based on an
estimate of the undiscounted cash flows expected to result from the use of an
asset and its eventual disposition. The estimate of cash flows is based upon,
among other things, certain assumptions about expected future operating
performance, growth rates and other factors. Our estimates of undiscounted cash
flows may differ from actual cash flows due to, among other things,
technological changes, economic conditions, changes to our business model or
changes in our operating performance. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, we recognize an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset.
Recent
Accounting Pronouncements
On September 29, 2007, we adopted Financial Accounting Standards
Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes and
recommends a recognition threshold and measurement process for recording in the
financial statements uncertain tax positions taken or expected to be taken in
our tax return. FIN 48 also provides guidance on de-recognition,
classification, interest and penalties, accounting in interim periods and
disclosure requirements for uncertain tax positions. See Note 3 to the financial statements for
further information on our adoption of FIN 48.
In
December 2007, the FASB issued Financial Accounting Standards (SFAS) No. 141R,
Business Combinations, and SFAS No. 160, Accounting and Reporting of
Noncontrolling Interest in Consolidated Financial Statements, an Amendment of
ARB No. 51 (SFAS No. 160). These new standards will significantly
change the financial accounting and reporting of business combination
transactions and noncontrolling (or minority) interests in consolidated
financial statements.
These Statements are effective for fiscal years
beginning after December 15, 2008.
We will be required to adopt SFAS No. 141R and SFAS No. 160 in
the first quarter of fiscal 2010.
Accordingly, to the extent we engage in any business combination transactions,
such transaction will be recorded and disclosed following existing accounting
principles until October 2, 2009.
In March 2008, the FASB issued SFAS No. 161, Disclosures
about Derivative Instruments and Hedging Activitiesan Amendment of FASB
Statement No. 133. This Statement requires enhanced disclosures about an
entitys derivative and hedging activities and is effective for financial
statements issued for fiscal years and interim periods beginning after November 15,
2008. We will be required to adopt SFAS 161 in the first quarter of fiscal 2010
and do not expect that the adoption will have a material impact on our
financial condition or results of operations.
In May 2008, the FASB
issued FASB Staff Position FSP APB 14-1, Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (Including Partial
Cash Settlement). This FSP specifies
that issuers
of such instruments should separately account for the
liability and equity components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent
periods. This FSP is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years. We will be required to adopt this
FSP in the first quarter of fiscal 2010.
Early adoption is not permitted. We believe this change in methodology
will negatively affect our earnings and earnings per share as interest expense
will be required to reflect the market rate of interest for nonconvertible
debt. We are currently evaluating the magnitude
of this impact on our financial condition and results of operations.
20
Table of Contents
Results of Operations
Net Revenues
The following table summarizes our net revenues:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
|
|
June 29,
|
|
June 27,
|
|
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
Change
|
|
2007
|
|
2008
|
|
Change
|
|
2007
|
|
Multiservice access products
|
|
$
|
13.7
|
|
49
|
%
|
$
|
9.2
|
|
$
|
35.6
|
|
29
|
%
|
$
|
27.5
|
|
High-performance analog products
|
|
10.9
|
|
16
|
%
|
9.4
|
|
31.6
|
|
16
|
%
|
27.4
|
|
WAN communications products
|
|
13.4
|
|
(8
|
)%
|
14.6
|
|
42.4
|
|
8
|
%
|
39.2
|
|
Net revenues
|
|
$
|
38.0
|
|
15
|
%
|
$
|
33.2
|
|
$
|
109.6
|
|
16
|
%
|
$
|
94.1
|
|
For
the fiscal 2008 third quarter, the 15% increase in our revenues compared to the
third quarter of fiscal 2007 reflects higher sales of our multiservice access
products and our high-performance analog products, partially offset by lower
sales of our WAN communications products.
Revenues from our multiservice access processors increased by $4.5
million, or 49%, principally reflecting increased sales volumes across our
newer VoIP products as telecommunication service providers deploy IP-based
access and enterprise networks partially offset by decreased shipments in our
legacy products. In addition, we
experienced an increase in shipments in our multiservice access enterprise
products. Revenues from our
high-performance analog products increased by $1.5 million, or 16%, primarily
as a result of increased shipments of our switching and signal conditioning
products. Sales of our WAN
communications products decreased by $1.2 million, or 8%, when compared to the
third quarter of fiscal 2007, resulting
from lower shipments of DSL transceivers, SONET
applications and T/E carrier transmission products. This decrease was partially offset by
revenues from the sale of Ethernet products added to the WAN portfolio as a
result of the acquisition of certain assets of Ample Communications in the
fourth quarter of fiscal 2007 and increased shipments of our high-level data
link controller (HDLC) devices.
For the first nine months of
fiscal 2008, the 16% increase in our revenues compared to the similar fiscal
2007 period reflects higher sales volumes across each of our product families
including approximately $4.35 million in
revenues from leveraging our intellectual property portfolio by selling
non-core patents.
Net revenues from our multiservice access products
increased $8.1 million, or 29%, reflecting a combination of increased sales
volumes across our newer VoIP product families, as well as revenues recorded on
the sale of intellectual property, and increased shipments in our multiservice
access enterprise products. These
increases were partially offset by a decrease in sales in our legacy products.
We believe we are benefiting from the increasing deployment of IP-based networks
both in new network buildouts worldwide and the replacement of circuit-switched
networks.
Net
revenues from our high-performance analog products increased $4.2 million, or
16%, reflecting a benefit from increased demand
for our switching and signal
conditioning products
.
Net revenues from our WAN communications products increased $3.2 million, or 8%
reflecting a
combination of
sales
of Ethernet products added to the WAN portfolio as a result of the acquisition
of certain assets of Ample Communications in the fourth quarter of fiscal 2007,
revenue recorded on the sale of intellectual property and increased shipments
of our high-level data link controller (HDLC) devices. These benefits were partially offset by
a decrease in
demand for
our
products in access and metropolitan area network applications such as T/E
carrier transmission products and DSL transceivers.
Gross Margin
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
|
|
June 29,
|
|
June 27,
|
|
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
Change
|
|
2007
|
|
2008
|
|
Change
|
|
2007
|
|
Gross margin
|
|
$
|
25.5
|
|
13
|
%
|
$
|
22.7
|
|
$
|
74.9
|
|
21
|
%
|
$
|
62.1
|
|
Percent of net revenues
|
|
67
|
%
|
|
|
68
|
%
|
68
|
%
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin represents revenues less cost of goods
sold. As a fabless semiconductor company, we use third parties (including Taiwan
Semiconductor Manufacturing Co., Ltd. (TSMC), Jazz Semiconductor, Inc. and
Amkor Technology, Inc.) for wafer fabrication and assembly and test
services. Our cost of goods sold consists predominantly of: purchased finished
wafers; assembly and test services; royalty and other intellectual property
costs; labor and overhead costs associated with product procurement; the cost
of mask sets purchased; and sustaining engineering expenses pertaining to
products sold.
Our gross margin for the
fiscal 2008 third quarter increased $2.8 million over the comparable fiscal
2007 period, principally reflecting an increase in product sales. The provision for excess and obsolete
inventories was a net credit of $0.1 million for the fiscal 2008 third quarter,
compared to a net credit of $0.2 million for the comparable fiscal 2007
period. We experienced a
decrease in sales in the third quarter of
fiscal 2008 of inventory previously written down to a zero cost basis in fiscal
2001 to $0.2 million from $1.1 million in the third quarter of fiscal 2007.
21
Table of Contents
Our gross margin for the
first nine months of fiscal 2008 increased $12.8 million over the comparable
fiscal 2007 period, principally reflecting an increase in product sales and the
sale of intellectual property with a zero cost basis. The improvement of our
gross margin for the first nine months of fiscal 2008 includes $4.35 million
from the sale of certain patents that are no longer core to our business.
In addition, t
he provision for excess and
obsolete inventories was a $1.2 million net credit for the first nine months of
fiscal 2008, compared to $0.4 million net credit for the comparable fiscal 2007
period.
Our gross margin improvement was partially offset by a
decrease in sales in the first nine months of fiscal 2008 of inventory
previously written down to a zero cost basis in fiscal 2001 to $1.1 million
from $3.1 million in the first nine months of fiscal 2007.
We assess the recoverability of our inventories at
least quarterly through a review of inventory levels in relation to foreseeable
demand (generally over 12 months). Foreseeable demand is based upon all
available information, including sales backlog and forecasts, product marketing
plans and product life cycles. When the inventory on hand exceeds the
foreseeable demand, we write down the value of those inventories which, at the
time of our review, we expect to be unable to sell. The amount of the inventory
write-down is the excess of historical cost over estimated realizable value.
Once established, these write-downs are considered permanent adjustments to the
cost basis of the excess inventory.
Our products are used by OEMs that have designed our
products into network infrastructure equipment. For many of our products, we
gain these design wins through a lengthy sales cycle, which often includes
providing technical support to the OEM customer. In the event of the loss of
business from existing OEM customers, we may be unable to secure new customers
for our existing products without first achieving new design wins. When the
quantities of inventory on hand exceed foreseeable demand from existing OEM
customers into whose products our products have been designed, we generally
will be unable to sell our excess inventories to others, and the estimated
realizable value of such inventories to us is generally zero.
We base our assessment of
the recoverability of our inventories, and the amounts of any write-downs, on
currently available information and assumptions about future demand and market
conditions. Demand for our products may fluctuate significantly over time, and
actual demand and market conditions may be more or less favorable than those
projected by management. In the event that actual demand is lower than
originally projected, additional inventory write-downs may be required.
Research and Development
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
|
|
June 29,
|
|
June 27,
|
|
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
Change
|
|
2007
|
|
2008
|
|
Change
|
|
2007
|
|
Research and development
|
|
$
|
14.8
|
|
6
|
%
|
$
|
13.9
|
|
$
|
42.2
|
|
(4
|
)%
|
$
|
44.2
|
|
Percent of net revenues
|
|
39
|
%
|
|
|
42
|
%
|
38
|
%
|
|
|
47
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our research and development (R&D) expenses consist
principally of direct personnel costs, photomasks, electronic design automation
tools and pre-production evaluation and test costs.
The $0.9 million increase in
R&D expenses for the third quarter of fiscal 2008 compared to the third
quarter of fiscal 2007 is mainly driven by $0.7 million in employee separation
costs which consist of severance benefits payable to certain former employees
as a result of organizational changes.
In addition, we experienced an increase in expenses related to
electronic design automation tools.
These increases were partially offset by a $0.3 million decrease in
depreciation expense, principally resulting from certain assets reaching the
end of their depreciable lives.
The $2.0 million decrease in
R&D expenses for the first nine months of fiscal 2008 compared to the first
nine months of fiscal 2007
reflects a $0.7 million decrease
in compensation and
personnel-related costs and a $0.6 million decrease in the cost of our
facilities resulting from our expense reduction actions. The decrease in
R&D expenses also reflects a $0.9 million decrease in depreciation
expense, principally resulting from certain assets reaching the end of their
depreciable lives.
22
Table of Contents
Selling, General and Administrative
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
|
|
June 29,
|
|
June 27,
|
|
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
Change
|
|
2007
|
|
2008
|
|
Change
|
|
2007
|
|
Selling, general and administrative
|
|
$
|
11.2
|
|
3
|
%
|
$
|
10.8
|
|
$
|
34.4
|
|
4
|
%
|
$
|
32.9
|
|
Percent of net revenues
|
|
29
|
%
|
|
|
33
|
%
|
31
|
%
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our selling, general and
administrative (SG&A) expenses include sales and marketing costs, including
the cost of personnel, independent sales representative commissions and product
marketing, applications engineering and other marketing costs. Our SG&A
expenses also include costs of corporate functions including accounting,
finance, legal, human resources, information systems and communications. The
$0.4 million increase in our SG&A expenses for the third quarter of fiscal
2008 compared to the third quarter of fiscal 2007 reflects a $0.5 million
increase in legal and consulting fees incurred in conjunction with business
development activities.
The $1.5 million increase in
our SG&A expenses for the first nine months of fiscal 2008 compared to the
comparable fiscal 2007 period reflects an increase of approximately $0.7
million in labor and benefits due to an increase in the cost of benefits
offered to our employees, as well as
$0.3 million in severance benefits payable to a former
officer of the company. Additionally, we
experienced a $0.7 million increase in professional fees. The increase in professional fees is
primarily due to expenses incurred in connection with the printing and
distribution of our proxy statement and the addition of submitting a proposal
for stockholder approval to amend our certificate of incorporation to effect a
reverse stock split and reduce our authorized shares of common stock.
Special Charges
Special charges consist of the following (in
thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
2008
|
|
June 29,
2007
|
|
June 27,
2008
|
|
June 29,
2007
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
$
|
110
|
|
$
|
(104
|
)
|
$
|
284
|
|
$
|
4,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mindspeed
Restructuring Plans
In fiscal 2006 and 2007, we implemented a number
of cost reduction initiatives to improve our operating cost structure. The cost
reduction initiatives included workforce reductions, significant reductions in
capital spending, the consolidation of certain facilities and salary reductions
for the senior management team.
Activity and liability
balances related to the Mindspeed restructuring plans through June 27,
2008 are as follows (in thousands):
|
|
Workforce
Reductions
|
|
Facility
and Other
|
|
Total
|
|
Restructuring balance, September 28, 2007
|
|
$
|
232
|
|
$
|
1,252
|
|
$
|
1,484
|
|
Charged to costs and expenses
|
|
|
|
284
|
|
284
|
|
Cash payments
|
|
(171
|
)
|
(1,428
|
)
|
(1,599
|
)
|
Restructuring balance, June 27, 2008
|
|
$
|
61
|
|
$
|
108
|
|
$
|
169
|
|
The remaining accrued
restructuring balance principally represents obligations under non-cancelable
leases, employee severance benefits and other contractual commitments. We
expect to pay these obligations over their respective terms, which expire at
various dates through fiscal 2009. The payments will be funded from available
cash balances and funds from product sales and are not expected to
significantly impact liquidity.
Interest Expense
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
June 29,
|
|
June 27,
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Interest expense
|
|
$
|
0.6
|
|
$
|
0.6
|
|
$
|
1.7
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense represents interest on the $46
million aggregate principal amount of convertible senior notes we issued in December 2004.
23
Table of Contents
Other Income, Net
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
June 27,
|
|
June 29,
|
|
June 27,
|
|
June 29,
|
|
($ in millions)
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Other income, net
|
|
$
|
0.2
|
|
$
|
0.1
|
|
$
|
0.1
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
principally consists of interest income, foreign exchange gains and losses and
other non-operating gains and losses. The increase in other income for the
third quarter of fiscal 2008 compared to the third quarter of fiscal 2007
principally reflects lower foreign exchange losses incurred in the third
quarter of fiscal 2008 than in the third quarter of fiscal 2007. This was
partially offset by a decrease in interest income for the third quarter of 2008
compared to the third quarter of 2007 resulting from lower invested cash
balances and lower interest rates. The
decrease in other income for the first nine months of fiscal 2008 compared to the
first nine months of fiscal 2007 principally reflects lower interest income in
the nine months of 2008 than in the same period in the prior year resulting
from lower invested cash balances and lower interest rates.
Provision for Income Taxes
Our provision for income taxes for the first nine
months of fiscal 2008 and 2007 principally consisted of income taxes incurred
by our foreign subsidiaries. As a result of our recent operating losses and our
expectation of future operating results, we determined that it is more likely
than not that the U.S. federal and state income tax benefits (principally net
operating losses we can carry forward to future years) which arose during the
first nine months of fiscal 2008 and 2007 will not be realized. Accordingly, we
have not recognized any income tax benefits relating to our U.S. federal and
state operating losses for those periods and we do not expect to recognize any
income tax benefits relating to future operating losses until we believe that
such tax benefits are more likely than not to be realized. We expect that our
provision for income taxes for fiscal 2008 will principally consist of income
taxes related to our foreign operations.
Liquidity and Capital Resources
Cash provided by operating activities was $11.6
million for the first nine months of fiscal 2008 compared to cash used in
operating activities of $9.4 million for the first nine months of fiscal
2007. Operating cash flows for the first
nine months of fiscal 2008 reflect our net loss of $3.7 million, offset by
non-cash charges (depreciation and amortization, stock-based compensation
expense, inventory provisions and other) of $8.0 million, and net working
capital decreases of approximately $7.4 million.
The net working capital decreases for the first nine
months of fiscal 2008 consisted principally of a
$5.7 million decrease in net
inventories resulting from our efforts to reduce inventory on hand and a
$2.7 million increase in payables mainly due to the timing of
payments. In addition, other assets and
other current assets decreased by $2.2 million mainly due to decreases in
prepaid insurance and prepaid software licenses.
These working capital decreases were partially offset
by a $3.5 million increase in accounts receivable.
Cash used in operating
activities was $9.4 million for the first nine months of fiscal 2007. Operating
cash flows for the first nine months of fiscal 2007 reflect our net loss of
$21.5 million, partially offset by non-cash charges (depreciation, stock-based
compensation expense and other) of $9.8 million, and net working capital
decreases of approximately $2.2 million.
The net working capital
decreases for the first nine months of fiscal 2007 consisted principally of a
$3.1 million decrease in inventory primarily due to continued focus on
decreasing inventory on hand. The
working capital decreases also include a $1.9 million increase in accrued
expenses and other current liabilities mainly consisting of an increase in
accrued compensation expense due to the timing of payment. These amounts were
partially offset by a $2.5 million decrease in accounts payable principally
related to the timing of vendor payments.
Cash used in investing activities of $7.6 million for
the first nine months of fiscal 2008 principally consisted of $6.4 million of
capital expenditures
and payments associated with our acquisition of
certain assets of Ample Communications of $1.2 million
. For the first nine months of fiscal
2007, cash provided by investing activities of $1.6 million principally
consisted of sales of marketable securities (net of purchases) of $5.0 million
and capital expenditures of $3.4 million.
Cash provided by financing activities of $0.1 million
and $3.3 million for the first nine months of fiscal 2008 and 2007,
respectively, consisted of proceeds from the exercise of stock options.
24
Table of
Contents
Senior Notes Offerings
3.75%
Convertible Senior Notes due 2009
In December 2004, we sold an aggregate principal
amount of $46.0 million in convertible senior notes due 2009 for net proceeds
(after discounts and commissions) of approximately $43.9 million. The notes are
senior unsecured obligations, ranking equal in right of payment with all future
unsecured indebtedness. The notes bear interest at a rate of 3.75%, payable
semiannually in arrears each May 18 and November 18. The notes are
due November 18, 2009. We used approximately $3.3 million of the proceeds
to purchase U.S. government securities that were pledged to the trustee for the
payment of the first four scheduled interest payments on the notes when due.
The notes are convertible, at the option of the
holder, at any time prior to maturity into shares of our common stock. Upon
conversion, we may, at our option, elect to deliver cash in lieu of shares of our
common stock or a combination of cash and shares of common stock. Effective May 13,
2005, the conversion price of the notes was adjusted to $11.55 per share ($2.31
per share on a pre June 30, 2008 one-for-five reverse stock split basis)
of common stock, which is equal to a conversion rate of approximately 86.58
shares (432.9004 shares on a pre June 30, 2008 one-for-five reverse stock
split basis) of common stock per $1,000 principal amount of notes. Prior to
this adjustment, the conversion price applicable to the notes was $14.05 per
share ($2.81 per share on a pre June 30, 2008 one-for-five reverse stock
split basis) of common stock, which was equal to approximately 71.17 shares
(355.8719 shares on a pre June 30, 2008 one-for-five reverse stock split
basis) of common stock per $1,000 principal amount of notes. The adjustment was
made pursuant to the terms of the indenture governing the notes. The conversion
price is subject to further adjustment under the terms of the indenture to
reflect stock dividends, stock splits, issuances of rights to purchase shares
of common stock and certain other events.
If we undergo certain
fundamental changes (as defined in the indenture), holders of notes may require
us to repurchase some or all of their notes at 100% of the principal amount
plus accrued and unpaid interest. If, upon notice of certain events
constituting a fundamental change, holders of the notes elect to convert the
notes, we may be required to make additional cash payment per $1,000 principal
amount of notes in connection with the conversion. The amount of the additional
cash payment, if any, will be determined by reference to a table set forth in
the indenture governing the notes and our average stock price (as determined in
accordance with the indenture) for the 20 trading days following the conversion
date. If an applicable fundamental change were to occur between November 18,
2007 and November 18, 2008, the amount of the additional cash payment
would be equal to such average stock price times a multiplier of up to 12.24
(61.19 on a pre June 30, 2008 one-for-five reverse stock split basis). Our
obligation to make the additional cash payment will not apply to fundamental
changes that occur on or after November 18, 2009, and the applicable
multiplier will decrease on a daily basis through that date. Notwithstanding
the foregoing, no additional cash payment will be required if the applicable
average stock price is less than $11.50 per share ($2.30 per share on a pre June 30,
2008 one-for-five reverse stock split basis) (subject to adjustment as set
forth in the indenture). In the event of a non-stock change of control
constituting a public acquirer change of control (as defined in the
indenture), we may, in lieu of making an additional cash payment upon conversion
as required by the indenture, elect to adjust the conversion price and the
related conversion obligation such that the noteholders will be entitled to
convert their notes into a number of shares of public acquirer common stock.
For financial accounting purposes, our contingent
obligation to issue additional shares or make additional cash payment upon
conversion following a fundamental change is an embedded derivative. As of June 27,
2008, the liability under the fundamental change adjustment has been recorded
at its estimated fair value and is not significant.
6.50%
Convertible Senior Notes due 2013
On
July 30, 2008, we entered into separate exchange agreements with certain
holders of our existing 3.75% Convertible Senior Notes due 2009, pursuant to
which holders of an aggregate of $15 million of the existing notes agreed to
exchange their notes for $15 million in aggregate principal amount of a new
series of 6.50% Convertible Senior Notes due 2013. The exchanges closed on August 1,
2008. We paid at the closing an aggregate of approximately $116,000 in accrued
and unpaid interest on the existing notes that were exchanged for the new
notes, as well as a $750,000 fee to our financial advisor.
We
issued the new notes pursuant to an indenture, dated as of August 1, 2008,
between us and Wells Fargo Bank, N.A., as trustee. Following the completion of
the exchange, $31 million in aggregate principal amount of the existing notes
remain outstanding.
The
new notes are unsecured senior indebtedness and bear interest at a rate of
6.50% per annum. Interest is payable on February 1 and August 1 of
each year, commencing on February 1, 2009. The new notes mature on August 1,
2013. At maturity, we will be required to repay the outstanding principal of
the new notes.
25
Table of Contents
The
new notes are convertible at the option of the holders, at any time on or prior
to maturity, into shares of our common stock at a conversion rate initially
equal to approximately $4.74 per share of common stock, which is subject to
adjustment in certain circumstances. Upon conversion of the new notes, we
generally have the right to deliver to the holders thereof, at our option, (i) cash,
(ii) shares of our common stock, or (iii) a combination thereof. The
initial conversion price of the new notes will be adjusted to reflect stock
dividends, stock splits, issuances of rights to purchase shares of our common
stock, and upon other events. If we undergo certain fundamental changes prior
to maturity of the new notes, the holders thereof will have the right, at their
option, to require us to repurchase for cash some or all of their new notes at
a repurchase price equal to 100% of the principal amount of the new notes being
repurchased, plus accrued and unpaid interest (including additional interest,
if any) to, but not including, the repurchase date, or convert the new notes
into shares of our common stock and,
under certain circumstances, receive additional shares of our common
stock in the amount provided in the indenture.
If
there is an event of default on the new notes, the principal of and premium, if
any, on all the new notes and the interest accrued thereon may be declared
immediately due and payable, subject to certain conditions set forth in the indenture.
An event of default under the indenture will occur if we: (i) are
delinquent in making certain payments due under the new notes; (ii) fail
to deliver shares of common stock or cash upon conversion of the new notes; (iii) fail
to deliver certain required notices under the new notes; (iv) fail,
following notice, to cure a breach of a covenant under the new notes or the indenture;
(v) incur certain events of default with respect to other indebtedness; or
(vi) is subject to certain bankruptcy proceedings or orders. If we fail to
deliver certain SEC reports to the trustee in a timely manner as required by
the indenture, (x) the interest rate applicable to the new notes during
the delinquency will be increased by 0.25% or 0.50%, as applicable (depending
on the duration of the delinquency), and (y) if the required reports are
not delivered to the trustee within 180 days after their due date under the indenture,
a holder of the new notes will generally have the right, subject to certain
limitations, to require us to repurchase all or any portion of the new notes
then held by such holder.
Conexant Warrant
On June 27, 2003, Conexant Systems, Inc.
(Conexant) completed the distribution (the Distribution) to Conexant
stockholders of all 18,066,689 (90,333,445 on a pre June 30, 2008 one-for-five
reverse stock split basis) outstanding shares of common stock of its wholly
owned subsidiary, Mindspeed. In the Distribution, each Conexant stockholder
received one fifth of one share (one share on a pre June 30, 2008
one-for-five reverse stock split basis) of Mindspeed common stock (including an
associated preferred share purchase right) for every three shares of Conexant
common stock held and cash for any fractional share of Mindspeed common stock.
Following the Distribution, Mindspeed began operations as an independent,
publicly held company.
In the Distribution, we issued to Conexant a warrant
to purchase six million shares (adjusted to reflect our June 30, 2008
one-for-five reverse stock split) of our common stock at a price of $17.04 per
share (adjusted to reflect our June 30, 2008 one-for-five reverse stock
split), exercisable for a period of ten years after the Distribution. The
warrant may be transferred or sold in whole or part at any time. The warrant
contains antidilution provisions that provide for adjustment of the exercise
price, and the number of shares issuable under the warrant, upon the occurrence
of certain events. If we issue, or are deemed to have issued, shares of our
common stock, or securities convertible into our common stock, at prices below
the current market price of our common stock (as defined in the warrants) at
the time of the issuance of such securities, the warrants exercise price will
be reduced and the number of shares issuable under the warrant will be
increased. The amount of such adjustment if any, will be determined pursuant to
a formula specified in the warrant and will depend on the number of shares
issued, the offering price and the current market price of our common stock at
the time of the issuance of such securities. Adjustments to the warrant
pursuant to these antidilution provisions may result in significant dilution to
the interests of our existing stockholders and may adversely affect the market
price of our common stock. The antidilution provisions may also limit our
ability to obtain additional financing on terms favorable to us.
Moreover, we may not realize any cash proceeds from the
exercise of the warrant held by Conexant. A holder of the warrant may opt for a
cashless exercise of all or part of the warrant. In a cashless exercise, the
holder of the warrant would make no cash payment to us and would receive a
number of shares of our common stock having an aggregate value equal to the
excess of the then-current market price of the shares of our common stock
issuable upon exercise of the warrant over the exercise price of the warrant.
Such an issuance of common stock would be immediately dilutive to the interests
of other stockholders.
Liquidity
Our principal sources of
liquidity are our existing cash balances and cash generated from product sales.
During the first nine months of fiscal 2008, we also received approximately
$4.35 million in cash from sales of our non-core intellectual property. As of June 27,
2008, our cash and cash equivalents totaled $29.9 million. Our working
capital at June 27, 2008 was $37.7 million. In July 2008, we
received $10.0 million from the sale of non-core patents which will be included
in revenues in the fourth quarter of fiscal 2008.
26
Table of Contents
In order to become profitable,
or to sustain positive cash flows from operations, we must further reduce
operating expenses and/or increase revenues. Through the first nine months of
fiscal 2008, we have completed a series of cost reduction actions which have
improved our operating cost structure. These expense reductions alone may not
make us profitable or allow us to sustain profitability if it is achieved. Our
ability to achieve the necessary revenue growth will depend on increased demand
for network infrastructure equipment that incorporates our products, which in
turn depends primarily on the level of capital spending by communications
service providers and enterprises. We may not be successful in achieving the
necessary revenue growth or we may be unable to sustain past and future expense
reductions in subsequent periods. We may not achieve profitability or sustain
such profitability, if achieved.
We believe that our existing
sources of liquidity, along with cash expected to be generated from product
sales and sales or licensing of non-core intellectual property, will be
sufficient to fund our operations, research and development efforts,
anticipated capital expenditures, working capital and other financing
requirements for at least the next 12 months. We are currently evaluating a
number of available refinancing alternatives regarding our convertible debt,
including alternatives to provide cash necessary to repay our convertible debt
due November 2009, when the instrument reaches maturity in 2009, assuming
that it has not been converted into equity prior to maturity. From time to
time, we may acquire our debt securities through open market purchases,
privately negotiated transactions, tender offers, exchange offers (for new debt
or other securities), redemptions or otherwise, upon such terms and at such
prices as we may determine. We will need to continue a focused program of
capital expenditures to meet our research and development and corporate
requirements. We may also consider acquisition opportunities to extend our
technology portfolio and design expertise and to expand our product offerings.
In order to fund capital expenditures, increase its working capital or complete
any acquisitions, we may seek to obtain additional debt or equity financing. We
may also need to seek to obtain additional debt or equity financing if we
experience downturns or cyclical fluctuations in our business that are more
severe or longer than anticipated or if we fail to achieve anticipated revenue
and expense levels. However, we cannot assure you that such financing will be
available to us on favorable terms, or at all.
Off-Balance Sheet Arrangements
We have made guarantees and indemnities, under which
we may be required to make payments to a guaranteed or indemnified party, in
relation to certain transactions. In connection with the Distribution, we
generally assumed responsibility for all contingent liabilities and
then-current and future litigation against Conexant or its subsidiaries related
to the Mindspeed business. We may also be responsible for certain federal
income tax liabilities under the tax allocation agreement between us and
Conexant, which provides that we will be responsible for certain taxes imposed
on us, Conexant or Conexant stockholders. In connection with certain facility
leases, we have indemnified our lessors for certain claims arising from the
facility or the lease. We indemnify our directors, officers, employees and
agents to the maximum extent permitted under the laws of the State of Delaware.
The duration of the guarantees and indemnities varies, and in many cases is
indefinite. The majority of our guarantees and indemnities do not provide for
any limitation of the maximum potential future payments we could be obligated
to make. We have not recorded any liability for these guarantees and
indemnities in the accompanying consolidated balance sheets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Our cash and cash equivalents consist of demand
deposits, highly-liquid money market funds and commercial paper. Our main
investment objectives are the preservation of investment capital and the
maximization of after-tax returns on our investment portfolio. Consequently, we
invest in securities that meet high credit quality standards and we limit the
amount of our credit exposure to any one issuer. We do not use derivative
instruments for speculative or investment purposes.
Interest Rate Risk
Our cash and cash equivalents are not subject to
significant interest rate risk due to the short maturities or variable interest
rate characteristics of these instruments. As of June 27, 2008, the
carrying value of our cash and cash equivalents approximates fair value.
Our long-term debt consists of convertible senior
notes which bear interest at a fixed rate of 3.75%. Consequently, our results
of operations and cash flows are not subject to any significant interest rate
risk relating to our long-term debt.
27
Table of Contents
Foreign Currency Exchange Rate Risk
We transact business in various foreign currencies and
we face foreign currency exchange rate risk on assets and liabilities that are
denominated in foreign currencies. The majority of our foreign exchange risks
are not hedged; however, from time to time, we may utilize foreign currency
forward exchange contracts to hedge a portion of our exposure to foreign
currency exchange rate risk. These hedging transactions are intended to offset
the gains and losses we experience on foreign currency transactions with gains
and losses on the forward contracts, so as to mitigate our overall risk of
foreign exchange gains and losses. We do not enter into forward contracts for
speculative or trading purposes. At June 27, 2008, we held no foreign
currency forward exchange contracts. Based on our overall currency rate
exposure at June 27, 2008, a 10% change in currency rates would not have a
material effect on our consolidated financial position, results of operations
or cash flows.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and
Procedures
Under the supervision and with the participation of
our management, including our Chief Executive Officer and our Chief Financial
Officer, we have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of June 27, 2008. Disclosure
controls and procedures are defined under SEC rules as controls and other
procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within required time periods.
Based upon that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that, as of June 27, 2008, these disclosure
controls and procedures were effective.
Changes in Internal Control over
Financial Reporting
There were no changes in our internal control over
financial reporting during the fiscal quarter ended June 27, 2008 that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
28
Table of
Contents
PART II.
OTHER INFORMATION
ITEM 1A.
RISK FACTORS
We have revised the risk factors that relate to our
business, as set forth below. These risks include any material changes to and
supersede the risks previously disclosed in Part I, Item 1A of our Annual
Report on Form 10-K for the fiscal year ended September 28, 2007. We
encourage investors to review these risk factors, as well as those contained
under Forward-Looking Statements preceding Part I of this Report.
Our business, financial
condition and operating results can be affected by a number of factors,
including those listed below, any one of which could cause our actual results
to vary materially from recent results or from our anticipated future results.
Any of these risks could also materially and adversely affect our business,
financial condition or the price of our common stock or other securities.
We are incurring operating losses and we may continue to incur losses
in future
periods
.
We incurred a net loss of
$3.7 million in the first nine months of fiscal 2008 and incurred net losses of
$21.9 million in fiscal 2007 and $24.5 million in fiscal 2006. We may
continue to incur losses and negative cash flows in future periods.
In order to become
profitable, or to sustain positive cash flows from operations, we must further
reduce operating expenses and/or increase our revenues. Through the first nine
months of fiscal 2008, we have completed a series of cost reduction actions
which have improved our operating cost structure. These expense reductions
alone may not make us profitable or allow us to sustain profitability if it is
achieved. Our ability to achieve the necessary revenue growth will depend on
increased demand for network infrastructure equipment that incorporates our
products, which in turn depends primarily on the level of capital spending by
communications service providers and enterprises. We may not be successful in
achieving the necessary revenue growth or the expected expense reductions.
Moreover, we may be unable to sustain past or expected future expense
reductions in subsequent periods. We may not achieve profitability or sustain
such profitability, if achieved.
We have substantial cash requirements to fund our operations, research
and
development
efforts and capital expenditures. Our capital resources are limited and
capital needed for our
business may not be available when we need it.
For the first nine months of
fiscal 2008, we generated $11.6 million in cash from operating activities
compared to net cash used of $9.4 million in the first nine months of fiscal
2007. Our net cash used in operating activities was $10.0 million in fiscal
2007 and $15.9 million for fiscal 2006. Our principal sources of liquidity are
our existing cash balances and cash generated from product sales and sales of
intellectual property. As of June 27, 2008, our cash and cash equivalents
totaled $29.9 million. We believe that our existing sources of liquidity will
be sufficient to fund our operations, research and development efforts,
anticipated capital expenditures, working capital and other financing
requirements for at least the next 12 months. However, this may not be the
case, and if we continue to incur operating losses and negative cash flows in
the future, we may need to reduce further our operating costs or obtain
alternate sources of financing, or both. We are currently evaluating, and may
evaluate in the future, transactions that may involve the issuance or
incurrence of indebtedness, including credit facilities, however we may not
have access to additional sources of capital on favorable terms or at all. If
we raise additional funds through the issuance of equity, equity-based or debt
securities, such securities may have rights, preferences or privileges senior
to those of our common stock and our stockholders may experience dilution of
their ownership interests.
Our operating results may be
adversely impacted by worldwide political and economic uncertainties and
specific conditions in the markets we address, including the cyclical nature of
and volatility in the semiconductor industry. As a result, the market price of
our common stock may decline.
We
operate primarily in the semiconductor industry, which is cyclical and subject
to rapid change and evolving industry standards. From time to time, the
semiconductor industry has experienced significant downturns. These downturns
are characterized by decreases in product demand, excess customer inventories
and accelerated erosion of prices. These factors could cause substantial
fluctuations in our revenue and in our results of operations. Any downturns in
the semiconductor industry may be severe and prolonged, and any failure of the
industry or wired and wireless communications markets to fully recover from
downturns could seriously impact our revenue and harm our business, financial
condition and results of operations. The semiconductor industry also
periodically experiences increased demand and production capacity constraints,
which may affect our ability to ship products. Accordingly, our operating
results may vary significantly as a result of the general conditions in the
semiconductor industry, which could cause large fluctuations in our stock
price.
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Additionally,
in the recent past, general worldwide economic conditions have experienced a
downturn due to slower economic activity, concerns about inflation and
deflation, increased energy costs, decreased consumer confidence, reduced
corporate profits and capital spending, adverse business conditions and
liquidity concerns in the wired and wireless communications markets, the effect
on the market in China due to the Olympic games, recent international conflicts
and terrorist and military activity, and the impact of natural disasters and
public health emergencies. These conditions make it extremely difficult for our
customers, our vendors and us to accurately forecast and plan future business
activities, and they could cause U.S. and foreign businesses to slow
spending on our products and services, which would delay and lengthen sales
cycles. We cannot predict the timing, strength or duration of any worldwide
economic slowdown or subsequent economic recovery, or in the semiconductor
industry or the wired and wireless communications markets. If the economy or
markets in which we operate do not continue at their present levels, our
business, financial condition and results of operations will likely be
materially and adversely affected. Additionally, the combination of our lengthy
sales cycle coupled with challenging macroeconomic conditions could have a
synergistic negative impact on the results of our operations.
The loss of one or more key customers or
distributors, or the diminished demand for our products from a key customer
could significantly reduce our revenues and profits.
A
relatively small number of end customers and distributors have accounted for a
significant portion of our revenues in any particular period. We have no
long-term volume purchase commitments from our key customers. One or more of
our key customers or distributors may discontinue operations as a result of
consolidation, liquidation or otherwise. Reductions, delays and cancellation of
orders from our key customers or the loss of one or more key customers could
significantly reduce our revenues and profits. We cannot assure you that our
current customers will continue to place orders with us, that orders by
existing customers will continue at current or historical levels or that we
will be able to obtain orders from new customers.
The price of our common stock may fluctuate significantly.
The price of our common
stock is volatile and may fluctuate significantly. There can be no assurance as
to the prices at which our common stock will trade or that an active trading
market in our common stock will be sustained in the future. The market price at
which our common stock trades may be influenced by many factors, including:
·
our operating and financial
performance and prospects, including our ability to achieve or sustain
profitability, if achieved, within the forecasted time period;
·
the depth and liquidity of
the market for our common stock;
·
investor perception of us
and the industry in which we operate;
·
the level of research
coverage of our common stock;
·
changes in earnings
estimates or buy/sell recommendations by analysts;
·
general financial and other
market conditions; and
·
domestic and international
economic conditions.
In addition, public stock
markets have experienced, and may in the future experience, extreme price and
trading volume volatility, particularly in the technology sectors of the
market. This volatility has significantly affected the market prices of
securities of many technology companies for reasons frequently unrelated to or
disproportionately impacted by the operating performance of these companies.
These broad market fluctuations may adversely affect the market price of our
common stock.
If our
common stock trades below $1.00 for 30 consecutive trading days, or if we
otherwise do not meet the requirements for continued quotation on the Nasdaq
Global Market, our common stock could be delisted which would adversely affect
the ability of investors to sell shares of our common stock and could otherwise
adversely affect our business. During fiscal 2008, our common stock traded
below $1.00 for 30 consecutive trading days.
In order to regain compliance
with the minimum bid price rule, we effected a one-for-five reverse stock split
on June 30, 2008.
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Our operating results are subject to substantial quarterly and annual
fluctuations.
Our revenues and operating
results have fluctuated in the past and may fluctuate in the future. These
fluctuations are due to a number of factors, many of which are beyond our
control. These factors include, among others:
·
changes in
end-user demand for the products manufactured and sold by our customers;
·
the effects of
competitive pricing pressures, including decreases in average selling prices of
our products;
·
the gain or
loss of significant customers;
·
market acceptance
of our products and our customers products;
·
our ability to
develop, introduce, market and support new products and technologies on a
timely basis;
·
the timing of
receipt, reduction or cancellation of significant orders by customers;
·
fluctuations in
the levels of component inventories held by our customers and changes in our
customers inventory management practices;
·
shifts in our
product mix and the effect of maturing products;
·
availability
and cost of products from our suppliers;
·
the timing and
extent of product development costs;
·
new product and
technology introductions by us or our competitors;
·
fluctuations in
manufacturing yields;
·
significant
warranty claims, including those not covered by our suppliers; and
·
intellectual
property disputes.
The foregoing factors are
difficult to forecast, and these, as well as other factors, could materially
and adversely affect our quarterly or annual operating results.
We may not be able to attract and retain qualified personnel necessary
for the
design, development, sale and support of our products. Our success
could be
negatively
affected if key personnel leave.
Our future success depends
on our ability to attract, retain and motivate qualified personnel, including
executive officers and other key management, technical and support personnel.
As the source of our technological and product innovations, our key technical
personnel represent a significant asset. The competition for such personnel can
be intense in the semiconductor industry. We may not be able to attract and
retain qualified management and other personnel necessary for the design,
development, sale and support of our products.
In periods of poor operating
performance, we have experienced, and may experience in the future, particular
difficulty attracting and retaining key personnel. If we are not successful in
assuring our employees of our financial stability and our prospects for
success, our employees may seek other employment, which may materially and
adversely affect our business. Moreover, our recent expense reduction and
restructuring initiatives, including a series of worldwide workforce
reductions, have significantly reduced the number of our technical employees.
We intend to continue to expand our international business activities including
expansion of design and operational centers abroad and may have difficulty
attracting and maintaining international employees. The loss of the services of
one or more of our key employees, including Raouf Y. Halim, our chief executive
officer, or certain key design and technical personnel, or our inability to
attract, retain and motivate qualified personnel could have a material adverse
effect on our ability to operate our business.
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Many of our engineers are
foreign nationals working in the United States under visas. The visas held by
many of our employees permit qualified foreign nationals working in specialty
occupations, such as certain categories of engineers, to reside in the United
States during their employment. The number of new visas approved each year may
be limited and may restrict our ability to hire additional qualified technical
employees. In addition, immigration policies are subject to change, and these
policies have generally become more stringent since the events of September 11,
2001. Any additional significant changes in immigration laws, rules or
regulations may further restrict our ability to retain or hire technical
personnel.
We are entirely dependent upon third parties for the manufacture of our
products and
are vulnerable to their capacity constraints during times of increasing
demand for
semiconductor
products.
We are entirely dependent
upon outside wafer fabrication facilities, known as foundries, for wafer
fabrication services. Our principal suppliers of wafer fabrication services are
TSMC and Jazz. We are also dependent upon third parties, including Amkor, for
the assembly and testing of all of our products. Under our fabless business
model, our long-term revenue growth is dependent on our ability to obtain
sufficient external manufacturing capacity, including wafer production
capacity. Periods of upturns in the semiconductor industry may be characterized
by rapid increases in demand and a shortage of capacity for wafer fabrication
and assembly and test services.
The risks associated with
our reliance on third parties for manufacturing services include:
·
the lack of assured supply,
potential shortages and higher prices;
·
increased lead times;
·
limited control over
delivery schedules, manufacturing yields, production costs and product quality;
and
·
the unavailability of, or
delays in obtaining, products or access to key process technologies.
Our standard lead time, or
the time required to manufacture our products (including wafer fabrication,
assembly and testing) is typically 12 to 16 weeks. During periods of
manufacturing capacity shortages, the foundries and other suppliers on whom we
rely may devote their limited capacity to fulfill the production requirements
of other clients that are larger or better financed than we are, or who have
superior contractual rights to enforce manufacture of their products, including
to the exclusion of producing our products.
Additionally, if we are
required to seek alternative foundries or assembly and test service providers,
we would be subject to longer lead times, indeterminate delivery schedules and
increased manufacturing costs, including costs to find and qualify acceptable
suppliers. For example, if we choose to use a new foundry, the qualification
process may take as long as six months over the standard lead time before we
can begin shipping products from the new foundry.
Wafer
fabrication processes are subject to obsolescence, and foundries may
discontinue a wafer fabrication process used for certain of our products. In
such event, we generally offer our customers a last-time buy program to
satisfy their anticipated requirements for our products. The unanticipated
discontinuation of a wafer fabrication process on which we rely may adversely
affect our revenues and our customer relationships.
The foundries and other
suppliers on whom we rely may experience financial difficulties or suffer
disruptions in their operations due to causes beyond our control, including
labor strikes, work stoppages, electrical power outages, fire, earthquake,
flooding or other natural disasters. Certain of our suppliers manufacturing
facilities are located near major earthquake fault lines in the Asia-Pacific
region and in California. In the event of a disruption of the operations of one
or more of our suppliers, we may not have an alternate source immediately
available. Such an event could cause significant delays in shipments until we
are able to shift the products from an affected facility or supplier to another
facility or supplier. The manufacturing processes we rely on are specialized
and are available from a limited number of suppliers. Alternate sources of
manufacturing capacity, particularly wafer production capacity, may not be
available to us on a timely basis. Even if alternate manufacturing capacity is
available, we may not be able to obtain it on favorable terms, or at all.
Difficulties or delays in securing an adequate supply of our products on
favorable terms, or at all, could impair our ability to meet our customers
requirements and have a material adverse effect on our operating results.
In addition, the highly complex
and technologically demanding nature of semiconductor manufacturing has caused
foundries to experience, from time to time, lower than anticipated
manufacturing yields, particularly in connection with the introduction of new
products and the installation and start-up of new process technologies. Lower
than anticipated manufacturing yields may affect our ability to fulfill our
customers demands for our products on a timely basis. Moreover, lower than
anticipated manufacturing yields may adversely affect our cost of goods sold
and our results of operations.
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We are subject to the risks of doing business internationally.
A significant part of our
strategy involves our continued pursuit of growth opportunities in a number of
international markets. We market, sell, design and service our products
internationally.
Sales
to customers located outside the United States, primarily in the Asia-Pacific
region and Europe, were approximately 69% of our net revenues for fiscal 2007
and 73% for the first nine months of fiscal 2008.
In addition, we have design
centers, customer support centers, and rely on suppliers, located outside the
United States, including foundries and assembly and test service providers
located in the Asia-Pacific region. Our international sales and operations are
subject to a number of risks inherent in selling and operating abroad which
could adversely affect our ability to increase or maintain our foreign sales.
These include, but are not limited to, risks regarding:
·
|
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currency exchange rate
fluctuations;
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local economic and
political conditions;
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disruptions of capital and
trading markets;
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accounts receivable
collection and longer payment cycles;
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difficulties in staffing
and managing foreign operations;
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potential hostilities and
changes in diplomatic and trade relationships;
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·
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restrictive governmental
actions (such as restrictions on the transfer or repatriation of funds and
trade protection measures, including export duties and quotas and customs
duties and tariffs);
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changes in legal or
regulatory requirements;
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difficulty in obtaining
distribution and support;
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·
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the laws and policies of
the United States and other countries affecting trade, foreign investment and
loans and import or export licensing requirements;
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environmental laws and
regulations governing, among other things, air emissions, wastewater
discharges, the use, handling and disposal of hazardous substances and
wastes, soil and groundwater contamination and employee health and safety;
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tax laws;
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limitations on our ability
under local laws to protect our intellectual property;
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cultural differences in
the conduct of business; and
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natural disasters, acts of
terrorism and war.
|
Because most of our
international sales are currently denominated in U.S. dollars, our products
could become less competitive in international markets if the value of the U.S.
dollar increases relative to foreign currencies. As we continue to shift a
portion of our operations offshore, more of our expenses are incurred in
currencies other than those in which we bill for the related services. An
increase in the value of certain currencies, such as the Euro, Ukrainian
hryvnia and Indian rupee, against the U.S. dollar could increase costs of our
offshore operations by increasing labor and other costs that are denominated in
local currencies.
From time to time we may
enter into foreign currency forward exchange contracts to mitigate the risk of
loss from currency exchange rate fluctuations for foreign currency commitments
entered into in the ordinary course of business. We have not entered into
foreign currency forward exchange contracts for other purposes. Our financial
condition and results of operations could be adversely affected by currency
fluctuations.
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We are subject to intense
competition.
The communications
semiconductor industry in general, and the markets in which we compete in
particular, are intensely competitive. We compete worldwide with a number of
U.S. and international semiconductor manufacturers that are both larger and
smaller than we are in terms of resources and market share. We currently face
significant competition in our markets and expect that intense price and
product competition will continue. This competition has resulted, and is
expected to continue to result, in declining average selling prices for our
products.
Many of our current and
potential competitors have certain advantages over us, including:
·
stronger financial position
and liquidity;
·
longer presence in key
markets;
·
greater name recognition;
·
more secure supply chain;
·
access to larger customer
bases; and
·
significantly greater sales
and marketing, manufacturing, distribution, technical and other resources.
As a result, these
competitors may be able to adapt more quickly to new or emerging technologies
and changes in customer requirements or may be able to devote greater resources
to the development, promotion and sale of their products than we can. Moreover,
we have incurred substantial operating losses and we may continue to incur
losses in future periods. We believe that financial stability of suppliers is
an important consideration in our customers purchasing decisions. If our OEM
customers perceive that we lack adequate financial stability, they may choose
semiconductor suppliers that they believe have a stronger financial position or
liquidity.
Current and potential
competitors also have established or may establish financial or strategic
relationships among themselves or with our existing or potential customers,
resellers or other third parties. These relationships may affect customers
purchasing decisions. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire significant market
share. We may not be able to compete successfully against current and potential
competitors.
Our success depends on our ability to develop competitive new products
in a timely
manner and keep abreast of the rapid technological changes in our
market.
Our operating results will
depend largely on our ability to continue to introduce new and enhanced
semiconductor products on a timely basis as well as our ability to keep abreast
of rapid technological changes in our markets. Our products could become
obsolete sooner than we expect because of faster than anticipated, or
unanticipated, changes in one or more of the technologies related to our
products. The introduction of new technology representing a substantial advance
over current technology could adversely affect demand for our existing
products. Currently accepted industry standards are also subject to change,
which may also contribute to the obsolescence of our products. If we are unable
to develop and introduce new or enhanced products in a timely manner, our
business may be adversely affected.
Successful product
development and introduction depends on numerous factors, including, among
others:
·
our ability to anticipate
customer and market requirements and changes in technology and industry
standards;
·
our ability to accurately
define new products;
·
our ability to complete
development of new products, and bring our products to market, on a timely
basis;
·
our ability to differentiate
our products from offerings of our competitors; and
·
overall market acceptance of
our products.
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We may not
have sufficient resources to make the substantial investment in research and
development in order to develop and bring to market new and enhanced products,
particularly if we are required to take further cost reduction actions.
Furthermore, we are required to evaluate expenditures for planned product
development continually and to choose among alternative technologies based on
our expectations of future market growth. We may be unable to develop and
introduce new or enhanced products in a timely manner, our products may not
satisfy customer requirements or achieve market acceptance, or we may be unable
to anticipate new industry standards and technological changes. We also may not
be able to respond successfully to new product announcements and introductions
by competitors.
Research and
development projects may experience unanticipated delays related to our
internal design efforts. New product development also requires the production
of photomask sets and the production and testing of sample devices. In the
event we experience delays in obtaining these services from the wafer
fabrication and assembly and test vendors on whom we rely, our product introductions
may be delayed and our revenues and results of operations may be adversely
affected.
The increasing significance of our foreign
operations exposes us to risks that are
beyond our control and could affect
our ability to operate successfully.
In order to
enhance the cost-effectiveness of our operations, we have increasingly sought
to shift portions of our research and development and customer support
operations to jurisdictions with lower cost structures than that available in
the United States. The transition of even a portion of our business operations
to new facilities in a foreign country involves a number of logistical and
technical challenges that could result in product development delays and
operational interruptions, which could reduce our revenues and adversely affect
our business. We may encounter complications associated with the set-up,
migration and operation of business systems and equipment in a new facility.
This could result in delays in our research and development efforts and otherwise
disrupt our operations. If such delays or disruptions occur, they could damage
our reputation and otherwise adversely affect our business and results of
operations.
To the extent
that we shift any operations or labor offshore to jurisdictions with lower cost
structures, we may experience challenges in effectively managing those
operations as a result of several factors, including time zone differences and
regulatory, legal, cultural and logistical issues. Additionally, the relocation
of labor resources may have a negative impact on our existing employees, which
could negatively impact our operations. If we are unable to effectively manage
our offshore research and development staff and any other offshore operations,
our business and results of operations could be adversely affected.
We cannot be
certain that any shifts in our operations to offshore jurisdictions will
ultimately produce the expected cost savings. We cannot predict the extent of
government support, availability of qualified workers, future labor rates or
monetary and economic conditions in any offshore locations where we may
operate. Although some of these factors may influence our decision to establish
or increase our offshore operations, there are inherent risks beyond our
control, including:
·
political
uncertainties;
·
wage inflation;
·
exposure to
foreign currency fluctuations;
·
tariffs and other
trade barriers; and
·
foreign
regulatory restrictions and unexpected changes in regulatory environments.
We will likely
be faced with competition in these offshore markets for qualified personnel,
including skilled design and technical personnel, and we expect this
competition to increase as companies expand their operations offshore. If the
supply of such qualified personnel becomes limited due to increased competition
or otherwise, it could increase our costs and employee turnover rates. One or
more of these factors or other factors relating to foreign operations could
result in increased operating expenses and make it more difficult for us to
manage our costs and operations, which could cause our operating results to
decline and result in reduced revenues.
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Industry consolidation may harm our operating
results.
There has been
an increasing trend toward industry consolidation in our markets in recent
years, particularly among major network equipment and telecommunications
companies. We expect this trend to continue as companies attempt to strengthen
or hold their market positions in an evolving industry and as companies are
acquired or are unable to continue operations. While we cannot predict how
consolidation in our industry will affect our customers or competitors, rapid
consolidation will lead to fewer customers, with the effect that loss of a
major customer could have a material impact on results not anticipated in a
customer marketplace composed of more numerous participants. Increased consolidation and competition for
fewer customers may result in pricing pressures or a loss in market share, each
of which could materially impact our business.
Uncertainties involving the ordering and
shipment of our products could adversely
affect our business.
Our sales are
typically made pursuant to individual purchase orders and we generally do not
have long-term supply arrangements with our customers. Generally, our customers
may cancel orders until 30 days prior to shipment. In addition, we sell a substantial
portion of our products through distributors, some of whom have a right to
return unsold products to us. Sales to distributors accounted for
approximately 54% of our revenues for fiscal 2007 and 55% for the first nine
months of fiscal 2008.
Because of the
significant lead times for wafer fabrication and assembly and test services, we
routinely purchase inventory based on estimates of end-market demand for our
customers products. End-market demand
may be subject to dramatic changes and is difficult to predict. End-market demand is highly influenced by the
timing and extent of carrier capital expenditures. The difficulty in predicting
demand may be compounded when we sell to OEMs indirectly through distributors
or contract manufacturers, or both, as our forecasts of demand are then based
on estimates provided by multiple parties. In addition, our customers may
change their inventory practices on short notice for any reason. The
cancellation or deferral of product orders, the return of previously sold
products or overproduction due to the failure of anticipated orders to
materialize could result in our holding excess or obsolete inventory, which
could result in write-downs of inventory. Conversely, if we fail to anticipate
inventory needs we may be unable to fulfill demand for our products, resulting
in a loss of potential revenue.
If network infrastructure OEMs do not design
our products into their equipment, we
will be unable to sell those
products. Moreover, a design win from a customer does
not guarantee future sales to that
customer.
Our products
are not sold directly to the end-user but are components of other products. As
a result, we rely on network infrastructure OEMs to select our products from
among alternative offerings to be designed into their equipment. We may be
unable to achieve these design wins. Without design wins from OEMs, we would
be unable to sell our products. Once an OEM designs another suppliers
semiconductors into one of its product platforms, it is more difficult for us
to achieve future design wins with that OEMs product platform because changing
suppliers involves significant cost, time, effort and risk. Achieving a design
win with a customer does not ensure that we will receive significant revenues
from that customer and we may be unable to convert design wins into actual
sales. Even after a design win, the customer is not obligated to purchase our
products and can choose at any time to stop using our products if, for example,
its own products are not commercially successful.
Because of the lengthy sales cycles of many
of our products, we may incur significant
expenses before we generate any
revenues related to those products.
Our customers
generally need six months or longer to test and evaluate our products and an additional
six months or more to begin volume production of equipment that incorporates
our products. These lengthy periods also increase the possibility that a
customer may decide to cancel or change product plans, which could reduce or
eliminate sales to that customer. As a result of this lengthy sales cycle, we
may incur significant research and development and selling, general and
administrative expenses before we generate any revenues from new products. We
may never generate the anticipated revenues if our customers cancel or change
their product plans.
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We may be subject to claims, or we may be
required to defend and indemnify customers
against claims, of infringement of
third-party intellectual property rights or
demands that we, or our customers,
license third-party technology, which could result
in significant expense.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights. From time to time, third parties have asserted
and may in the future assert patent, copyright, trademark and other
intellectual property rights against technologies that are important to our
business. The resolution or compromise of any litigation or other legal process
to enforce such alleged third party rights, including claims arising through
our contractual indemnification of our customers, or claims challenging the
validity of our patents, regardless of its merit or resolution, could be costly
and divert the efforts and attention of our management and technical personnel.
We may not
prevail in any such litigation or other legal process or we may compromise or
settle such claims because of the complex technical issues and inherent
uncertainties in intellectual property disputes and the significant expense in
defending such claims. If litigation or other legal process results in adverse
rulings, we may be required to:
·
pay substantial
damages for past, present and future use of the infringing technology;
·
cease the
manufacture, use or sale of infringing products;
·
discontinue the
use of infringing technology;
·
expend
significant resources to develop non-infringing technology;
·
pay substantial
damages to our customers or end users to discontinue use or replace infringing
technology with non-infringing technology;
·
license
technology from the third party claiming infringement, which license may not be
available on commercially reasonable terms, or at all; or
·
relinquish
intellectual property rights associated with one or more of our patent claims,
if such claims are held invalid or otherwise unenforceable.
In connection
with the distribution, we generally assumed responsibility for all contingent
liabilities and litigation against Conexant or its subsidiaries related to our
business.
If we are not successful in protecting our
intellectual property rights, it may harm
our ability to compete.
We rely
primarily on patent, copyright, trademark and trade secret laws, as well as
employee and third-party nondisclosure and confidentiality agreements and other
methods, to protect our proprietary technologies and processes. We may be
required to engage in litigation to enforce or protect our intellectual
property rights, which may require us to expend significant resources and to
divert the efforts and attention of our management from our business
operations. In particular:
·
the steps we take
to prevent misappropriation or infringement of our intellectual property may
not be successful;
·
any existing or
future patents may be challenged, invalidated or circumvented; or
·
the measures
described above may not provide meaningful protection.
Despite the
preventive measures and precautions that we take, a third party could copy or
otherwise obtain and use our technology without authorization, develop similar
technology independently or design around our patents. We generally enter into
confidentiality agreements with our employees, consultants and strategic
partners. We also try to control access to and distribution of our
technologies, documentation and other proprietary information. Despite these
efforts, internal or external parties may attempt to copy, disclose, obtain or
use our products, services or technology without our authorization. Also,
former employees may seek employment with our business partners, customers or
competitors, and the confidential nature of our proprietary information may not
be maintained in the course of such future employment. Further, in some
countries outside the United States, patent protection is not available or not
reliably enforced. Some countries that do allow registration of patents do not
provide meaningful redress for patent violations. As a result, protecting
intellectual property in those countries is difficult and competitors may sell
products in those countries that have functions and features that infringe on
our intellectual property.
37
Table of Contents
The complexity of our products may lead to
errors, defects and bugs, which could
subject us to significant costs or
damages and adversely affect market acceptance of
our products.
Although we,
our customers and our suppliers rigorously test our products, our products are
complex and may contain errors, defects or bugs when first introduced or as new
versions are released. We have in the past experienced, and may in the future
experience, errors, defects and bugs. If any of our products contain production
defects or reliability, safety, quality or compatibility problems that are
significant to our customers, our reputation may be damaged and customers may
be reluctant to buy our products, which could adversely affect our ability to
retain existing customers and attract new customers. In addition, these defects
or bugs could interrupt or delay sales of affected products to our customers,
which could adversely affect our results of operations.
If defects or
bugs are discovered after commencement of commercial production of a new
product, we may be required to make significant expenditures of capital and
other resources to resolve the problems. This could result in significant
additional development costs and the diversion of technical and other resources
from our other development efforts. We could also incur significant costs to
repair or replace defective products and we could be subject to claims for
damages by our customers or others against us. We could also be exposed to
product liability claims or indemnification claims by our customers. These costs or damages could have a material
adverse effect on our financial condition and results of operations.
We may make business acquisitions or
investments, which involve significant risk.
We may from
time to time make acquisitions, enter into alliances or make investments in
other businesses to complement our existing product offerings, augment our
market coverage or enhance our technological capabilities. However, any such
transactions could result in:
·
issuances of
equity securities dilutive to our existing stockholders;
·
substantial cash
payments;
·
the incurrence of
substantial debt and assumption of unknown liabilities;
·
large one-time
write-offs;
·
amortization
expenses related to intangible assets;
·
the diversion of
managements attention from other business concerns; and
·
the potential
loss of key employees, customers and suppliers of the acquired business.
Integrating
acquired organizations and their products and services may be expensive,
time-consuming and a strain on our resources and our relationships with
employees, customers and suppliers, and ultimately may not be successful. The
benefits or synergies we may expect from the acquisition of complementary or
supplementary businesses may not be realized to the extent or in the time frame
we initially anticipate.
Additionally,
in periods subsequent to an acquisition, we must evaluate goodwill and
acquisition-related intangible assets for impairment. If such assets are found
to be impaired, they will be written down to estimated fair value, with a
charge against earnings.
Our results of operations could vary as a
result of the methods, estimates and
judgments we use in applying our
accounting policies.
The methods,
estimates and judgments we use in applying our accounting policies have a
significant impact on our results of operations (see Critical Accounting
Policies and Estimates in Part I, Item 2 of this Form 10-Q). Such
methods, estimates and judgments are, by their nature, subject to substantial
risks, uncertainties and assumptions, and changes in rule making by the
regulatory bodies. Factors may arise
over time that lead us to change our methods, estimates and judgments. Changes
in those methods, estimates and judgments could significantly affect our
results of operations.
38
Table of Contents
Substantial sales of the shares of our common
stock issuable upon conversion of our
convertible senior notes or exercise
of the warrant issued to Conexant could
adversely affect our stock price or
our ability to raise additional financing in the
public capital markets.
Conexant holds
a warrant to acquire six million shares (adjusted to reflect our June 30,
2008 one-for-five reverse stock split) of our common stock at a price of $17.04
per share (adjusted to reflect our June 30, 2008 one-for-five reverse
stock split), exercisable
through June 27, 2013, representing approximately
16% of our outstanding common stock on a fully diluted basis. The warrant may
be transferred or sold in whole or part at any time. If Conexant sells the
warrant or if Conexant or a transferee of the warrant exercises the warrant and
sells a substantial number of shares of our common stock in the future, or if
investors perceive that these sales may occur, the market price of our common
stock could decline or market demand for our common stock could be sharply
reduced. As of June 27, 2008, we have $46.0 million aggregate principal
amount of convertible senior notes outstanding. These notes are convertible at
any time, at the option of the holder, into approximately 86.5801shares (
adjusted to reflect our June 30, 2008
one-for-five reverse stock split) of common stock per $1,000 principal
amount of notes or an aggregate of approximately 3,983,000 shares (adjusted to reflect our June 30, 2008
one-for-five reverse stock split) of our common stock. The conversion of
the notes and subsequent sale of a substantial number of shares of our common
stock could also adversely affect demand for, and the market price of, our
common stock. Each of these transactions could adversely affect our ability to
raise additional financing by issuing equity or equity-based securities in the
public capital markets.
Antidilution and other provisions in the
warrant issued to Conexant may also
adversely affect our stock price or
our ability to raise additional financing.
The warrant
issued to Conexant contains antidilution provisions that provide for adjustment
of the warrants exercise price, and the number of shares issuable under the
warrant, upon the occurrence of certain events. If we issue, or are deemed to
have issued, shares of our common stock, or securities convertible into our
common stock, at prices below the current market price of our common stock (as
defined in the warrant) at the time of the issuance of such securities, the
warrants exercise price will be reduced and the number of shares issuable
under the warrant will be increased. The amount of such adjustment if any, will
be determined pursuant to a formula specified in the warrant and will depend on
the number of shares issued, the offering price and the current market price of
our common stock at the time of the issuance of such securities. Adjustments to
the warrant pursuant to these antidilution provisions may result in significant
dilution to the interests of our existing stockholders and may adversely affect
the market price of our common stock. The antidilution provisions may also
limit our ability to obtain additional financing on terms favorable to us.
Moreover, we
may not realize any cash proceeds from the exercise of the warrant held by
Conexant. A holder of the warrant may opt for a cashless exercise of all or
part of the warrant. In a cashless exercise, the holder of the warrant would
make no cash payment to us, and would receive a number of shares of our common
stock having an aggregate value equal to the excess of the then-current market
price of the shares of our common stock issuable upon exercise of the warrant
over the exercise price of the warrant. Such an issuance of common stock would
be immediately dilutive to the interests of other stockholders.
Some of our directors and executive officers
may have potential conflicts of interest
because of their positions with
Conexant or their ownership of Conexant common
stock.
Some of our
directors are Conexant directors, and our non-executive chairman of the board
is chairman of the board of Conexant. Several of our directors and executive
officers own Conexant common stock and hold options to purchase Conexant common
stock. Service on our board of directors and as a director or officer of
Conexant, or ownership of Conexant common stock by our directors and executive
officers, could create, or appear to create, potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for us and Conexant. For example, potential conflicts could arise
in connection with decisions involving the warrant to purchase our common stock
issued to Conexant, or other agreements entered into between us and Conexant in
connection with the distribution.
Our restated
certificate of incorporation includes provisions relating to the allocation of
business opportunities that may be suitable for both us and Conexant based on
the relationship to the companies of the individual to whom the opportunity is
presented and the method by which it was presented and also includes provisions
limiting challenges to the enforceability of contracts between us and Conexant.
We may have
difficulty resolving any potential conflicts of interest with Conexant, and
even if we do, the resolution may be less favorable than if we were dealing
with an entirely unrelated third party.
39
Table of Contents
Provisions in our organizational documents
and rights plan and Delaware law will make
it more difficult for someone to
acquire control of us.
Our restated
certificate of incorporation, our amended and restated bylaws, our amended
rights agreement and the Delaware General Corporation Law contain several
provisions that would make more difficult an acquisition of control of us in a
transaction not approved by our board of directors. Our restated certificate of
incorporation and amended and restated bylaws include provisions such as:
·
the division of
our board of directors into three classes to be elected on a staggered basis,
one class each year;
·
the ability of
our board of directors to issue shares of our preferred stock in one or more
series without further authorization of our stockholders;
·
a prohibition on
stockholder action by written consent;
·
a requirement
that stockholders provide advance notice of any stockholder nominations of
directors or any proposal of new business to be considered at any meeting of
stockholders;
·
a requirement
that a supermajority vote be obtained to remove a director for cause or to
amend or repeal certain provisions of our restated certificate of incorporation
or amended and restated bylaws;
·
elimination of
the right of stockholders to call a special meeting of stockholders; and
·
a fair price
provision.
Our rights
agreement gives our stockholders certain rights that would substantially
increase the cost of acquiring us in a transaction not approved by our board of
directors.
In addition to
the rights agreement and the provisions in our restated certificate of
incorporation and amended and restated bylaws, Section 203 of the Delaware
General Corporation Law generally provides that a corporation shall not engage
in any business combination with any interested stockholder during the
three-year period following the time that such stockholder becomes an
interested stockholder, unless a majority of the directors then in office
approves either the business combination or the transaction that results in the
stockholder becoming an interested stockholder or specified stockholder
approval requirements are met.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual
meeting of stockholders was held on April 7, 2008 in Costa Mesa, California.
At the meeting, the following matters were voted on by our stockholders and
approved by the following votes:
|
|
Number of shares
|
|
|
|
Voted For
|
|
Withheld
|
|
Election of three Class II directors
for a three-year term expiring in 2011:
|
|
|
|
|
|
Michael T. Hayashi
|
|
85,742,789
|
|
11,226,312
|
|
Ming Louie
|
|
92,413,463
|
|
4,555,638
|
|
Thomas A. Madden
|
|
85,740,691
|
|
11,228,410
|
|
|
|
Number of shares
|
|
|
|
Voted
For
|
|
Voted Against
|
|
Abstentions
|
|
Broker
Non-Votes
|
|
Proposal to ratify the appointment of
Deloitte & Touche LLP as our independent registered public
accounting firm
|
|
95,352,232
|
|
1,068,185
|
|
548,684
|
|
|
|
Proposal for approval of an amendment to
Certificate of Incorporation to effect a reverse stock split by a ratio of
between 1-for-3 and 1-for-8 shares, at the discretion of the Board of
Directors, and to reduce authorized shares of common stock by the same ratio
|
|
91,801,400
|
|
4,543,513
|
|
624,188
|
|
|
|
Messrs. Raouf Y. Halim, Donald H. Gips, Jerre L. Stead and Dwight
W. Decker continue to serve as directors.
40
Table
of Contents
ITEM 6. EXHIBITS
3.1
|
|
Restated
Certificate of Incorporation of the Registrant, filed as Exhibit 4.1 to
the Registrants Registration Statement on Form S-3 (Registration
Statement No. 333-106146), is incorporated herein by reference.
|
|
|
|
3.2
|
|
Certificate of Amendment
to the Restated Certificate of Incorporation of the Registrant, filed as
Exhibit 3.1 to the Registrants Current Report on Form 8-K dated
July 1, 2008, is incorporated herein by reference.
|
|
|
|
3.3
|
|
Amended and Restated
Bylaws of the Registrant, filed as Exhibit 3.2 to the Registrants
Annual Report on Form 10-K for the year ended September 30, 2005,
is incorporated herein by reference.
|
|
|
|
4.1
|
|
Specimen certificate for
the Registrants Common Stock, par value $.01 per share.
|
|
|
|
4.2
|
|
Rights Agreement dated as
of June 26, 2003, by and between the Registrant and Mellon Investor
Services LLC, as Rights Agent, filed as Exhibit 4.1 to the Registrants
Current Report on Form 8-K dated July 1, 2003, is incorporated
herein by reference.
|
|
|
|
4.3
|
|
First Amendment to Rights
Agreement, dated as of December 6, 2004, by and between the Registrant
and Mellon Investor Services LLC, filed as Exhibit 4.4 to the
Registrants Current Report on Form 8-K dated December 2, 2004, is
incorporated herein by reference.
|
|
|
|
4.4
|
|
Second
Amendment to Rights Agreement, dated as of June 16, 2008, by and between
the Registrant and Mellon Investor Services LLC, filed as
Exhibit 10.2 to the Registrants Current Report on Form 8-K dated
June 16, 2008, is incorporated herein by reference.
|
|
|
|
4.5
|
|
Common Stock Purchase
Warrant dated June 27, 2003, filed as Exhibit 4.5 to the Registrants
Registration Statement on Form S-3 (Registration Statement
No. 333-109523), is incorporated herein by reference.
|
|
|
|
4.6
|
|
Registration Rights
Agreement dated as of June 27, 2003, by and between the Registrant and
Conexant Systems, Inc., filed as Exhibit 4.6 to the Registrants
Registration Statement on Form S-3 (Registration Statement
No. 333-109523), is incorporated herein by reference.
|
|
|
|
4.7
|
|
Credit Agreement Warrant
dated June 27, 2003, issued by the Registrant to Conexant
Systems, Inc., filed as Exhibit 4.5 to the Registrants
Registration Statement on Form S-3 (Registration Statement
No. 333-109525), is incorporated herein by reference.
|
|
|
|
4.8
|
|
Registration Rights
Agreement dated as of June 27, 2003 by and between the Registrant and
Conexant Systems, Inc., filed as Exhibit 4.6 to the Registrants
Registration Statement on Form S-3 (Registration Statement
No. 333-109525), is incorporated herein by reference.
|
|
|
|
4.9
|
|
Indenture, dated as of
December 8, 2004, between the Registrant and Wells Fargo Bank, N.A.,
filed as Exhibit 4.1 to the Registrants Current Report on Form 8-K
dated December 2, 2004, is incorporated herein by reference.
|
|
|
|
4.10
|
|
Form of 3.75%
Convertible Senior Notes due 2009, attached as Exhibit A to the
Indenture (Exhibit 4.8 hereto), is incorporated herein by reference.
|
|
|
|
4.11
|
|
Registration Rights
Agreement, dated as of December 8, 2004, by and between the Registrant
and Lehman Brothers Inc., filed as Exhibit 4.3 to the Registrants
Current Report on Form 8-K dated December 2, 2004, is incorporated
herein by reference.
|
|
|
|
*10.1
|
|
Form of Employment
Agreement, filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated May 15, 2008, is incorporated herein by reference.
|
|
|
|
10.2
|
|
Schedule identifying
parties to and terms of agreements with the Registrant substantially
identical to the form of Employment Agreement filed as Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated May 15, 2008.
|
41
Table of Contents
10.3
|
|
Schedule identifying
parties to and terms of agreements with the Registrant substantially
identical to the
form of Indemnification Agreement filed as
Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005.
|
|
|
|
*10.4
|
|
Letter Agreement, dated as
of April 15, 2008, by and between the Registrant and Simon Biddiscombe,
filed as Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended March 28, 2008, is incorporated
herein by reference.
|
|
|
|
*10.5
|
|
Non-Qualified Stock Option
Award and Award Agreement, dated July 25, 2008, by and between the
Registrant and Bret W. Johnsen.
|
|
|
|
*10.6
|
|
Mindspeed Technologies, Inc.
2003 Long-Term Incentives Plan, as Amended and Restated, as of July 1,
2008.
|
|
|
|
*10.7
|
|
Mindspeed
Technologies, Inc. 2003 Stock Option Plan, as Amended and Restated, as
of July 1, 2008.
|
|
|
|
*10.8
|
|
Mindspeed
Technologies, Inc. Directors Stock Plan, as Amended and Restated, as of
July 1, 2008.
|
|
|
|
*10.9
|
|
Form of Restricted
Stock Unit Award under the Mindspeed Technologies, Inc. Directors Stock
Plan, filed as Exhibit 10.2 to the Registrants Current Report on
Form 8-K dated April 11, 2008, is incorporated herein by reference.
|
|
|
|
*10.10
|
|
Restricted Stock Unit
Terms and Conditions under the Mindspeed Technologies, Inc. Directors
Stock Plan, filed as Exhibit 10.1 to the Registrants Current Report on
Form 8-K dated April 11, 2008, is incorporated herein by reference.
|
|
|
|
*10.11
|
|
Summary of Cash Bonus
Arrangement
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
*
Management contract or compensatory plan or
arrangement.
42
Table
of Contents
SIGNATURE
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.
|
MINDSPEED TECHNOLOGIES,
INC.
|
|
(Registrant)
|
|
|
|
Date: August 5, 2008
|
By
|
/s/ BRET W. JOHNSEN
|
|
|
|
|
|
Bret W. Johnsen
|
|
|
Senior Vice President,
Chief Financial
|
|
|
Officer and Treasurer
|
|
|
(principal financial and
accounting officer)
|
43
EXHIBIT INDEX
4.1
|
|
Specimen certificate for
the Registrants Common Stock, par value $.01 per share.
|
|
|
|
10.2
|
|
Schedule identifying
parties to and terms of agreements with the Registrant substantially
identical to the form of Employment Agreement filed as Exhibit 10.1 to
the Registrants Current Report on Form 8-K dated May 15, 2008.
|
|
|
|
10.3
|
|
Schedule identifying
parties to and terms of agreements with the Registrant substantially
identical to the
form of Indemnification Agreement filed as
Exhibit 10.2 to the Registrants Quarterly Report on Form 10-Q for
the quarter ended March 31, 2005.
|
|
|
|
10.5
|
|
Non-Qualified Stock Option
Award and Award Agreement, dated July 25, 2008, by and between the Registrant
and Bret W. Johnsen.
|
|
|
|
10.6
|
|
Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan, as Amended and
Restated, as of July 1, 2008.
|
|
|
|
10.7
|
|
Mindspeed
Technologies, Inc. 2003 Stock Option Plan, as Amended and Restated, as
of July 1, 2008.
|
|
|
|
10.8
|
|
Mindspeed
Technologies, Inc. Directors Stock Plan, as Amended and Restated, as of
July 1, 2008.
|
|
|
|
10.11
|
|
Summary of Cash Bonus
Arrangement
|
|
|
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
32.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
44
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