e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended October 3, 2008
Commission file number:
000-50499
MINDSPEED TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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01-0616769
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(State of
incorporation)
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(I.R.S. Employer
Identification No.)
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4000 MacArthur Boulevard, East Tower
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92660-3095
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Newport Beach, California
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(Zip code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(949) 579-3000
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Common Stock $0.01 par value per share
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The NASDAQ Stock Market LLC
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(including associated Preferred Share Purchase Rights)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of the Registrants voting and
non-voting stock held by non-affiliates of the Registrant as of
the end of its most recently completed second fiscal quarter was
approximately $54 million. Shares held by each officer and
director and each person owning more than 10% of the outstanding
voting and non-voting stock have been excluded from this
calculation because such persons may be deemed to be affiliates
of the Registrant. This determination of potential affiliate
status is not necessarily a conclusive determination for other
purposes. Shares held include shares of which certain of such
persons disclaim beneficial ownership.
The number of outstanding shares of the Registrants Common
Stock as of November 28, 2008 was 23,868,160.
Documents
Incorporated by Reference
Portions of the Registrants Proxy Statement for the 2009
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A within 120 days after the end of the
2008 fiscal year, are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
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 Annual Report on
Form 10-K,
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 Annual Report on
Form 10-K
include, without limitation, statements regarding:
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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;
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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;
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our plans to make substantial investments in research and
development and participate in the formulation of industry
standards;
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our ability to achieve design wins and convert wins into revenue;
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the continuation of intense price and product competition, and
the resulting declining average selling prices for our products;
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the value of our intellectual property and our strategy
regarding sales and licensing of non-core intellectual property;
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the impact of changes in customer purchasing activities,
inventory levels and inventory management practices;
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the importance of attracting and retaining highly skilled,
dedicated personnel;
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the challenges of shifting any operations or labor offshore,
including the likelihood of competition in offshore markets for
qualified personnel;
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our ability to achieve revenue growth and sustain profitability
or to sustain positive cash flows from operations;
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our plans to reduce operating expenses, the amount and timing of
any such expense reductions, and its effects on cash flow;
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our anticipation that we will not pay a dividend in the
foreseeable future;
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the dependence of our operating results on our ability to
develop and introduce new products and enhancements to existing
products on a timely basis;
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the continuation of a trend toward industry consolidation and
the effect it could have on our operating results;
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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;
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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;
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the circumstances under which we may need to seek additional
financing, our ability to obtain any such financing and any
consideration of acquisition opportunities;
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our expectation that our provision for income taxes for fiscal
2009 will principally consist of income taxes related to our
foreign operations;
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our expectations with respect to our recognition of income tax
benefits in the future;
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our restructuring plans, including expected workforce
reductions, 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;
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our beliefs regarding the effect of the disposition of pending
or asserted legal matters;
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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;
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our intentions to market, sell and support acquired Ethernet
aggregation products and to develop and further extend the
Ethernet MAC product line;
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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;
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our belief that the financial stability of suppliers is an
important consideration in our customers purchasing
decisions;
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the amount and timing of future payments under contractual
obligations;
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the effects of a downturn in the semiconductor industry and the
general economy at large, including the impact of 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, recent international conflicts and
terrorist and military activity and the impact of natural
disasters and public health emergencies on our revenue and
results of operation;
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the impact of reductions, delays and cancellation of orders from
key customers given our dependence on a relatively small number
of end customers and distributors for a significant portion of
our revenue and our lack of long term purchase commitments;
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the impact of volatility in the stock market on the market price
of our common stock;
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the impact on our business if we fail to comply with the minimum
listing requirements for continued quotation on the Nasdaq
Global Market;
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the effect of changes in the amount of research coverage of our
common stock, changes in earnings estimates or buy/sell
recommendations by analysts and changes in investor perception
of us and the industry in which we operate;
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the effect of shifts in our product mix and the effect of
maturing products;
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the continued availability and costs of products from our
suppliers;
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the effect of exchange rates on our ability to be competitive
internationally;
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our ability to continue recognizing patent related revenues from
the sale of non-core patents;
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market demand for our new and existing products and our ability
to increase our revenues;
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our intentions with respect to inventories that were previously
written down;
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the growth rate for products in the enterprise, network access
and metro service areas and our position to increase market
share;
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our competitive advantages;
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competition and the principal competitive factors for
semiconductor suppliers, including time to market, product
quality, reliability and performance, customer support, price
and total system cost, new product innovation and compliance
with industry standards; and
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the impact of recent accounting pronouncements and the adoption
of new accounting standards.
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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:
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future operating losses;
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cash requirements and terms and availability of financing;
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worldwide political and economic uncertainties and specific
conditions in the markets we address;
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fluctuations in the price of our common stock and our operating
results;
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loss of or diminished demand from one or more key customers or
distributors;
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our ability to attract and retain qualified personnel;
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constraints in the supply of wafers and other product components
from our third-party manufacturers;
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doing business internationally;
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pricing pressures and other competitive factors;
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successful development and introduction of new products;
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our ability to successfully and cost effectively establish and
manage operations in foreign jurisdictions;
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industry consolidation;
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order and shipment uncertainty;
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our ability to obtain design wins and develop revenues from them;
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lengthy sales cycles;
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the expense of and our ability to defend our intellectual
property against infringement claims by others;
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product defects and bugs; and
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business acquisitions and investments.
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The forward-looking statements in this report are subject to
additional risks and uncertainties, including those set forth in
Item 1A Risk Factors and those
detailed from time to time in our other filings with the
Securities and Exchange Commission. 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®,
Mindspeed
Technologies®
and
Comcerto®
are registered trademarks of Mindspeed Technologies, Inc. Other
brands, names and trademarks contained in this report are the
property of their respective owners.
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PART I
Mindspeed Technologies, Inc. (we or Mindspeed) designs, develops
and sells 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 digital
signal processor (DSP) 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. Ltd., LM Ericsson Telephone Company, Nokia Siemens Networks,
Nortel Networks, Inc. and Zhongxing Telecom Equipment
Corp. (ZTE).
We believe the breadth of our product portfolio, combined with
more than three decades of experience in semiconductor hardware,
software and communications systems engineering, provide us with
a competitive advantage. We have proven expertise in signal,
packet and transmission processing technologies, which are
critical core competencies for successfully defining, designing
and implementing advanced semiconductor products for
next-generation network infrastructure equipment. We seek to
cultivate close relationships with leading network
infrastructure OEMs to understand emerging markets, technologies
and standards. We focus our research and development efforts on
applications in the segments of the telecommunications network
which we believe offer the most attractive growth prospects. Our
business is fabless, which means we outsource all of our
manufacturing needs, and we do not own or operate any
semiconductor manufacturing facilities. We believe being fabless
allows us to minimize operating infrastructure and capital
expenditures, maintain operational flexibility and focus our
resources on the design, development and marketing of our
products the highest value-creation elements of our
business model.
Spin-off
from Conexant Systems, Inc.
Mindspeed was originally incorporated in Delaware in 2001 as a
wholly owned subsidiary of Conexant Systems, Inc. On
June 27, 2003, Conexant completed the distribution to
Conexant stockholders of all outstanding shares of common stock
of Mindspeed. In the distribution, each Conexant stockholder
received one share of our 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
our common stock. Following the distribution, we began
operations as an independent, publicly held company. Our common
stock trades on the Nasdaq Global Market under the ticker symbol
MSPD.
Prior to the distribution, Conexant transferred to us the assets
and liabilities of its Mindspeed business, including the stock
of certain subsidiaries, and certain other assets and
liabilities which were allocated to us under the distribution
agreement entered into between us and Conexant. Also prior to
the distribution, Conexant contributed to us cash in an amount
such that at the time of the distribution our cash balance was
$100.0 million. We issued to Conexant a warrant to purchase
six million shares (30 million shares on a
pre-June 30, 2008 one-for-five reverse stock split basis)
of our common stock at a price of $17.04 per share ($3.408 on a
pre-June 30, 2008 one-for-five reverse stock split basis),
exercisable for a period of ten years after the distribution. In
connection with the distribution, we 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.
Industry
Overview
Communications semiconductor products are a critical part of
network infrastructure equipment. Network infrastructure OEMs
require advanced communications semiconductor
products such as digital signal processors,
transceivers, framers, packet and cell processors and switching
solutions that are highly optimized for the
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equipment employed by their customers. We seek to provide
semiconductor products that enable network infrastructure OEMs
to meet the needs of their service provider and enterprise
customers in terms of system performance, functionality and
time-to-market.
Addressed
Markets
Our semiconductor products are primarily focused on network
infrastructure equipment applications in three segments of the
broadly defined communications network: enterprise networks,
broadband access service areas, and metropolitan and wide area
networks. The type and complexity of network infrastructure
equipment used in these network segments continues to expand,
driven by the need for the processing, transmission and
switching of digital voice, data and video traffic over multiple
communication media, at numerous transmission data rates and
employing different protocols.
Enterprise networks include equipment that is deployed
primarily in the offices of commercial enterprises for voice and
data communications and access to outside networks. An
enterprise network may be comprised of many local area networks,
as well as client workstations, centralized database management
systems, storage area networks and other components. In
enterprise networks, communications semiconductors facilitate
the processing and transmission of voice, data and video traffic
in converged IP networks that are replacing the traditional
separate telephone, data and video conferencing networks.
Typical network infrastructure equipment found in enterprise
networks that use our products include voice gateways, IP PBXs,
storage area network (SAN) routers and director class switches.
In addition, a major trend in the broadcast video market is the
switch from analog to digital television transmission and the
conversion from standard-definition television services to
high-definition television (HDTV) services featuring more
detailed images and digital surround sound. We offer a family of
broadcast-video products optimized for high-speed HDTV routing
and production switcher applications.
Broadband Access service areas of the telecommunications
network refer to the last mile of a
telecommunications or cable service providers physical
network (including copper, fiber optic or wireless transmission)
and the network infrastructure equipment that connects
end-users, typically located at a business or residence, with
metropolitan and wide area networks. For this portion of the
network, infrastructure equipment requires semiconductors that
enable reliable, high-speed connectivity capable of aggregating
or disaggregating and transporting multiple forms of voice, data
and video traffic. In addition, communications semiconductors
must accommodate multiple transmission standards and
communications protocols to provide a bridge between dissimilar
access networks, for example, connecting wireless base station
equipment to a wireline network. Typical network infrastructure
equipment found at the edge of the broadband access service area
that use our products include optical node units (ONU), optical
line terminals (OLT), remote access concentrators, digital
subscriber line (DSL) access multiplexers, mixed-media gateways,
wireless base stations, digital loop carrier equipment and media
converters.
Metropolitan and Wide Area Networks, or metro and WAN,
service areas of the telecommunications network refer to the
portion of a service providers physical network that
enables high-speed communications within a city or a larger
regional area. In addition, it provides the communications link
between broadband access service areas and the fiber
optic-based, wide-area network. For metro equipment
applications, communications semiconductors provide transmission
and processing capabilities, as well as information segmentation
and classification, and routing and switching functionality, to
support high-speed traffic from multiple sources employing
different transmission standards and communications protocols.
These functions require signal conversion, signal processing and
packet processing expertise to support the design and
development of highly integrated mixed-signal devices combining
analog and digital functions with communications protocols and
application software. Typical network infrastructure equipment
found in metro service areas that use our products include
add-drop multiplexers, switches, high-speed routers, digital
cross-connect systems, optical edge devices and multiservice
provisioning platforms.
The telecommunications network, including the Internet, has
evolved into a complex, hybrid series of digital and optical
networks that connect individuals and businesses globally. These
new larger bandwidth, data-centric networks integrate voice,
data and video traffic, operate over both wired and wireless
media, link existing voice and data networks and cross
traditional enterprise, broadband access, metro and long haul
service area boundaries.
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Network infrastructure OEMs are designing faster, more
intelligent and more complex equipment to satisfy the needs of
the service providers as they continue to expand their network
coverage and service offerings while upgrading and connecting or
integrating existing networks of disparate types. In this
demanding environment, we believe network infrastructure OEMs
select as their strategic partners communications semiconductor
suppliers who can deliver advanced products that provide
increased functionality, lower total system cost and support for
a variety of communications media, operating speeds and
protocols.
The
Mindspeed Approach
We believe the breadth of our product portfolio, combined with
our expertise in semiconductor hardware, software and
communications systems engineering, provide us with a
competitive advantage in designing and selling our products to
leading network infrastructure OEMs.
We have proven expertise in signal, packet and transmission
processing technologies. Signal processing involves both signal
conversion and digital signal processing techniques that convert
and compress voice, data and video between analog and digital
representations. Packet processing involves bundling or
segmenting information traffic using standard protocols such as
IP or asynchronous transfer mode (ATM) and enables sharing of
transmission bandwidth across a given communication medium.
Transmission processing involves the transport and receipt of
voice, data and video traffic across copper wire and optical
fiber communications media.
These core technology competencies are critical for developing
semiconductor networking solutions that enable the processing,
transmission and switching of high-speed voice, data and video
traffic, employing multiple communications protocols, across
disparate communications networks. Our core technology
competencies are the foundation for developing our:
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semiconductor device architectures, including digital signal
processors, mixed signal devices and programmable protocol
engines, as well as analog signal processing capabilities;
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highly optimized signal processing algorithms and communications
protocols, which we implement in semiconductor devices; and
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critical software drivers and application software to perform
signal, packet and transmission processing tasks.
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We believe the software drivers and application software are an
increasingly important part of the semiconductor networking
solutions we offer to OEMs.
Increasing
Demand for Communications Semiconductors
We believe the market for network infrastructure equipment in
general, and for communications semiconductors in particular,
offers attractive long-term growth prospects for several reasons:
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We anticipate that demand for network capacity will continue to
increase, driven by:
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Internet user growth;
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higher network utilization rates; and
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the popularity of VoIP and other bandwidth-intensive
applications, such as wireless data transfer and
video/multimedia applications.
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We believe that incumbent telecommunications carriers,
integrated communication service providers and cable multiple
service operators worldwide will continue to upgrade and expand
legacy portions of their networks to accommodate new service
offerings and to reduce operating costs.
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In developing countries, we expect that service providers will
continue the build-out of telecommunication networks, many of
which were previously government owned.
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Moreover, we expect that network infrastructure OEMs will
outsource more of their semiconductor component requirements to
semiconductor suppliers, allowing the OEMs to reduce their
operating cost structure by
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shifting their focus and investment from internal application
specific integrated circuit (ASIC) semiconductor design and
development to more strategic systems development.
Strategy
Our objective is to grow our business and to become the leading
supplier of semiconductor networking solutions to leading global
network infrastructure OEMs in key enterprise, broadband access
and metro service area market segments. To achieve this
objective, we are pursuing the following strategies:
Focus
on Increasing Share in High-Growth, High-Margin
Applications
We have established strong market positions for our products in
the enterprise, broadband access and metro service areas of the
telecommunications network. We believe the markets for
semiconductor products that address these applications will grow
at faster rates than the markets for network infrastructure
equipment in general. In addition, products which address
applications in the enterprise, broadband access and metro
service areas and perform packet processing, transmission
processing
and/or
signal processing functions typically command higher average
selling prices and higher margins, primarily due to their
functional complexity and their software content. These two key
attributes are expected to make the enterprise, broadband access
and metro service areas the most attractive market segments for
the foreseeable future. We believe that our three core
technology competencies, coupled with focused investments in
product development, will position us to increase our share in
those target areas.
Expand
Strategic Relationships with Industry-Leading Global Network
Infrastructure OEMs and Maximize Design Win Share
We identify and selectively establish strategic relationships
with market leaders in the network infrastructure equipment
industry to develop next-generation products and, in some cases,
customized solutions for their specific needs. We have an
extensive history of working closely with our customers
research and development and marketing teams to understand
emerging markets, technologies and standards, and we invest our
product development resources in those areas. We believe our
close relationships with leading network infrastructure OEMs
facilitate early adoption of our semiconductor products during
development of their system-level products, enhance our ability
to obtain design wins from those customers and encourage
adoption of our technology throughout the industry.
In North America, we have cultivated close relationships with
leading network infrastructure OEMs, including Cisco Systems,
Inc. and Nortel Networks, Inc. Abroad, we have established close
relationships with market leaders such as Huawei Technologies
Co., Ltd., and Zhongxing Telecom Equipment Corp. in the
Asia-Pacific region and Alcatel-Lucent, Nokia Siemens Networks,
and LM Ericsson Telephone Company in Europe.
Capitalize
on the Breadth of Our Product Portfolio
We build on the breadth of our product portfolio of
physical-layer devices, together with our signal and packet
processing devices and communications software expertise, to
increase our share of the silicon content in our customers
products. We offer a range of complementary products that are
optimized to work with each other and provide our customers with
complete information receipt, processing and transmission
functions. These complementary products allow infrastructure
OEMs to source components that provide proven interoperability
from a single semiconductor supplier, rather than requiring OEMs
to combine and coordinate individual components from multiple
vendors. In addition, we offer highly integrated products such
as our family of Comcerto packet processors that provide our
customers with a complete hardware and software solution in a
single device. These integrated products perform functions
typically requiring multiple discrete components and software.
We believe that this strategy of offering both complementary and
integrated products increases product performance, speeds
time-to-market and lowers the total system cost for our
customers.
The breadth of our product portfolio also provides a competitive
advantage for serving network convergence applications such as
multiprotocol wireless-to-wireline connectivity. These
applications generally require a combination of processing,
transmission or switching functionality to move high-speed voice
and data traffic using multiple communications protocols across
disparate communications networks.
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Through our efforts in building a large product portfolio, we
have developed and we maintain a broad intellectual property
portfolio. We periodically enter into strategic arrangements to
leverage our portfolio by licensing or selling our patents which
are no longer core to our business.
Provide
Outstanding Technical Support and Customer Service
We provide broad-based technical and product design support to
our customers through three dedicated teams: field application
engineers, product application engineers and technical marketing
personnel. We believe that comprehensive service and support are
critical to shortening our customers design cycles and
maintaining a long-term competitive position within the network
infrastructure equipment market. Outstanding customer service
and support are important competitive factors for semiconductor
component suppliers like us seeking to be the preferred
suppliers to leading network infrastructure OEMs.
Products
We provide network infrastructure OEMs with a broad portfolio of
advanced semiconductor networking solutions, ranging from
physical-layer transceivers and framers to higher-layer network
processors. Our products can be classified into three focused
product families: high-performance analog products, multiservice
access DSP products, and WAN communications products. These
three product families are found in a variety of networking
equipment designed to process, transmit and switch voice, data
and video traffic between, and within, the different segments of
the communications network.
High-Performance
Analog Products
Our high-performance analog transmission devices and switching
products support storage area networking, fiber-to-the-premise
and broadcast video, as well as mainstream synchronous optical
networking (SONET)/synchronous digital hierarchy (SDH) and
packet-over-SONET applications, typically operating at data
transmission rates between 155 megabits per second (Mbps) and 10
gigabits per second (Gbps). Our transmission products include
laser drivers, transimpedance amplifiers, post amplifiers, clock
and data recovery circuits, serializers/deserializers, video
reclockers, cable drivers and line equalizers. These products
serve as the connection between a fiber optic or coaxial cable
component interface and the remainder of the electrical
subsystem in various network equipment and perform a variety of
functions, including:
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converting incoming optical signals from fiber optic cables to
electrical signals for processing and transport over a wireline
medium and vice-versa;
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conditioning the signal to remove unwanted noise or errors;
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combining lower speed signals from multiple parallel paths into
higher speed serial paths, and vice-versa, for bandwidth
economy; and
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amplifying and equalizing weaker signals as they pass through a
particular systems equipment, media or network.
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Our switching products include a family of high-speed crosspoint
switches capable of switching traffic beyond 4.25 Gpbs within
various types of network switching equipment. These crosspoint
switches direct, or transfer, a large number of high-speed data
input streams, regardless of traffic type, to different
connection trunks for rerouting the information to new
destination points in the network. Crosspoint switches are often
used to provide redundant traffic paths in networking equipment
to protect against the loss of critical data from spurious
network outages or failures that may occur from time-to-time.
Target equipment applications for our switching products include
add-drop multiplexers, high-density IP switches, storage-area
routers and optical cross-connect systems. In addition, we offer
crosspoint switches optimized for standard and high-definition
broadcast video routing and production switching applications at
rates up to 3 Gbps.
9
Multiservice
Access Processor Products
Our software-configurable multiservice access DSP products serve
as bridges for transporting voice, fax and modem transmissions
between circuit-switched networks and packet-based networks. Our
multiservice access DSP device architecture combines the
performance of a digital-signal processor core with the
flexibility of a microcontroller core to support our extensive
suite of voice compression techniques, echo cancellers and
communications protocols. These products process and translate
voice and data and perform various management and reporting
functions. They compress the signals to minimize bandwidth
consumption and modify or add communications protocols to
accommodate transport of the signals across a variety of
different networks. Supported services include VoIP,
voice-over-ATM (VoATM) and voice-over-DSL services, as well as
wireline-to-wireless connectivity.
Our Comcerto family of packet processors includes a full range
of software-compatible solutions that enable OEMs to provide
scalable systems with customized features for carrier,
enterprise and customer premise applications. The high-density
members of this family, the Comcerto 600, Comcerto 700 and
Comcerto 900 series processors and related software, provide a
complete
system-on-a-chip
solution for carrier-class VoIP and VoATM applications. The
Comcerto 600 is capable of handling more than 256 channels of
both VoIP and VoATM traffic, while the Comcerto 700 supports
more than 400 channels, and the Comcerto 900 supports more than
600 channels. All are targeted for use in media gateways
designed to bridge wireless, wireline and enterprise networks.
The Comcerto 500 and 800 series solutions are designed for
enterprise voice and data processing applications. The Comcerto
500 series is a silicon
PBX-on-a-chip
which supports all required voice processing functionality for
up to 64 channels, including encryption and is also used in
access gateway applications. The Comcerto 800 series
enables a new class of
office-in-a-box
systems by combining a high-quality voice-over-packet (VoP)
subsystem with a high-performance routing and virtual private
network (VPN) engine. The Comcerto 800 series integrates voice
processing, packet processing and encryption functionality into
a single device for the rapidly growing market for VoP
enterprise networks. This product is targeted for use in
enterprise voice gateways, IP PBXs and integrated access devices
(IADs).
The newest member of the Comcerto family, the Comcerto 100
series broadband services processor, is designed to support
secure triple-play voice, video and data networks
for residential and small office/home office markets. The
Comcerto 100 series processor integrates high-performance
security processing, packet processing and quality of service
(QoS) capabilities for next-generation broadband customer
premise equipment (CPE) enabling service providers to deliver
sophisticated multimedia content to their subscribers.
WAN
Communications Products
Our WAN communications products include transmission solutions
and high-performance
ATM/multi-protocol
label switching (MPLS) network processors that facilitate the
aggregation, processing and transport of voice and data traffic
over copper wire or fiber optic cable to access metropolitan and
long-haul networks.
Our T1/E1, T3/E3 and SONET carrier devices incorporate
high-speed analog, digital and mixed-signal circuit technologies
and include multi-port framers and line interface units (LIUs)
or transceivers for 1.5 Mbps to 155 Mbps data
transmission. Framers format data for transmission and extract
data at reception, while LIUs condition signals for transmission
and reception over multiple media. Our link-layer products
include multi-channel, high-level data link channel (HDLC)
communications controllers and multi-channel, inverse
multiplexing over ATM (IMA) traffic controllers. The IMA
protocol enables the aggregation of multiple T1 or DSL lines to
deliver higher data rates using existing ATM infrastructure
while the HDLC protocol is used for the packetization of data
and the transfer of messaging and signaling information across
the network. We also offer a family of symmetric DSL (SDSL)
transceivers which enable service providers to deliver Internet
access at data transmission rates of 1.5 Mbps to
5.7 Mbps in both directions over copper wire, supporting
telecommuting and branch office functions worldwide.
Our high-performance ATM/MPLS network processors are designed to
offer advanced protocol translation and traffic management
capabilities. Protocol translation occurs where different types
of networks and protocols interconnect. Traffic management
describes a collection of functions which are used to optimally
allocate network bandwidth and allow service providers to
provide differentiated services over their networks. Our
software-
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programmable devices operate at data transmission rates from
1.5 Mbps to 2.5 Gbps. Our network processor devices address
internetworking applications, including ATM segmentation and
reassembly, and a variety of traffic management functions,
including traffic shaping, traffic policing and queue
management, required by these applications.
Our carrier Ethernet products include Ethernet media access
controllers and oversubscription aggregators which have
applications in both enterprise switches and telecom edge
switches. These carrier Ethernet products add traffic shaping
and quality of service prioritization mechanisms in order to
provide the higher degree of traffic control needed in wide area
networks that base their data transmission on the Ethernet
protocol prevalent in local area networks. In late fiscal 2008
we also introduced a carrier Ethernet switch component that can
be used to aggregate up to ten 1 Gbps Ethernet streams to a
single 10 Gbps Ethernet stream.
Our wide-area networking communications products are designed
for use in a variety of equipment including digital loop
carriers, DSL access multiplexers, add-drop multiplexers,
switches, high-speed routers, digital cross-connect systems,
optical edge devices, multiservice provisioning platforms, voice
gateways and wireless base station controllers.
Customers
We market and sell our semiconductor networking solutions
directly to leading network infrastructure OEMs. We also sell
our products indirectly through electronic component
distributors and third-party electronic manufacturing service
providers, which manufacture products incorporating our
semiconductor networking solutions for OEMs. Sales to
distributors accounted for approximately 52% of our revenues for
fiscal 2008. For fiscal 2008, distributors Alltek Technology
Corporation and Avnet, Inc. accounted for 16% and 11%,
respectively, of our net revenues.
Our top five direct OEM customers for fiscal year 2008 were
Alcatel-Lucent, Huawei Technologies Co., Oplink Communications,
Inc., Samsung Electronics Co. and Zhongxing Telecom Equipment
Corp. While our direct sales to these customers accounted for a
total of approximately 14% of our fiscal 2008 net revenues,
we believe indirect sales to these same customers represent a
significant additional portion of our net revenues. We believe
that our significant indirect network infrastructure OEM
customers for fiscal year 2008 included Cisco Systems, Inc.,
Nortel Networks, Inc., and Nokia Siemens Networks, however we do
not believe any of our OEM customers accounted for 10% or more
of our net revenues.
Our customer base is widely dispersed geographically. Revenues
derived from customers located in the Americas, Europe and the
Asia-Pacific region were 36%, 13% and 51%, respectively, of our
total revenues for 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. See
Item 8 Financial Statements and Supplementary
Data, including Note 2 and Note 14 of Notes to
Consolidated Financial Statements for additional information on
customers and geographic areas.
Sales,
Marketing and Technical Support
We have a worldwide sales, marketing and technical support
organization comprised of 100 employees as of
October 31, 2008, located in two domestic and seven
international sales locations. Our marketing, sales and field
applications engineering teams, augmented by 14 electronic
component distributors and 10 sales representative
organizations, focus on marketing and selling semiconductor
networking solutions to worldwide network infrastructure OEMs.
We maintain close working relationships with our customers
throughout their lengthy product development cycle. Our
customers may need six months or longer to test and evaluate our
products and an additional six months or longer to begin volume
production of network infrastructure equipment that incorporates
our products. During this process, we provide broad-based
technical and product design support to our customers through
our field application engineers, product application engineers
and technical marketing personnel. We believe that providing
comprehensive product service and support is critical to
shortening our customers design cycles and maintaining a
competitive position in the network infrastructure equipment
market.
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Operations
and Manufacturing
We are a fabless company, which means we do not own or operate
foundries for wafer fabrication or facilities for device
assembly and final test of our products. Instead, we outsource
wafer fabrication, assembly and testing of our semiconductor
products to independent, third-party contractors. We use
mainstream digital complementary metal-oxide semiconductor
(CMOS) process technology for the majority of our products; we
rely on specialty processes for the remainder of our products.
Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) is our
principal foundry supplier of CMOS wafers and die. Our primary
foundry supplier for specialty process requirements is Jazz
Semiconductor, Inc. We use several other suppliers for wafers
used in older products. We believe that the raw materials, parts
and supplies required by our foundry suppliers are generally
available at present and will be available in the foreseeable
future.
Semiconductor wafers are usually shipped to third-party
contractors for device assembly and packaging where the wafers
are cut into individual die, packaged and tested before final
shipment to customers. We use Amkor Technology, Inc. and other
third-party contractors, located in the Asia-Pacific region,
Europe and California, to satisfy a variety of assembly and
packaging technology and product testing requirements associated
with the back-end portion of the manufacturing process.
We qualify each of our foundry and back-end process providers.
This qualification process consists of a detailed technical
review of process performance, design rules, process models,
tools and support, as well as analysis of the
subcontractors quality system and manufacturing
capability. We also participate in quality and reliability
monitoring through each stage of the production cycle by
reviewing electrical and parametric data from our wafer foundry
and back-end providers. We closely monitor wafer foundry
production for overall quality, reliability and yield levels.
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 suppliers that are both larger and smaller than us
in terms of resources and market share. We expect intense
competition to continue.
Our principal competitors are Applied Micro Circuits
Corporation, Exar Corporation, Freescale Semiconductor, Inc.,
Gennum Corporation, Infineon Technologies A.G., Maxim Integrated
Products, Inc., PMC-Sierra, Inc., Texas Instruments
Incorporated, Transwitch Corporation and Vitesse Semiconductor
Corporation.
We believe that the principal competitive factors for
semiconductor suppliers in each of our served markets are:
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time-to-market;
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product quality, reliability and performance;
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customer support;
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price and total system cost;
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new product innovation; and
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compliance with industry standards.
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While we believe that we compete favorably with respect to each
of these factors, many of our current and potential competitors
have certain advantages over us, including:
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stronger financial position and liquidity;
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longer presence in key markets;
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greater name recognition;
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more secure supply chain;
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access to larger customer bases; and
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significantly greater sales and marketing, manufacturing,
distribution, technical and other resources.
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As a result, these competitors may be able to devote greater
resources to the development, promotion and sale of their
products than we can. Our competitors may also be able to adapt
more quickly to new or emerging technologies and changes in
customer requirements or may be more able to respond to the
cyclical fluctuations or downturns that affect the semiconductor
industry from time to time. Moreover, we have incurred
substantial operating losses and we anticipate future losses. If
we are not successful in assuring our customers of our financial
stability, our OEM customers may choose semiconductor suppliers
whom they believe have a stronger financial position or
liquidity, which may materially adversely affect our business.
Backlog
Our sales are made primarily pursuant to standard purchase
orders for delivery of products. Because industry practice
allows customers to cancel orders with limited advance notice to
us prior to shipment, we believe that backlog as of any
particular date is not a reliable indicator of our future
revenue levels.
Research
and Development
We have significant research, development, engineering and
product design capabilities. As of October 31, 2008, we had
271 employees engaged in research and development
activities. We perform research and product development
activities at our headquarters in Newport Beach, California and
at eight design centers. In order to enhance the
cost-effectiveness of our operations, we have increasingly
sought to shift portions of our research and development
operations to jurisdictions with lower cost structures than that
available in the United States. Our design centers are
strategically located to take advantage of key technical and
engineering talent. 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. In addition, we actively collaborate with
technology leaders to define and develop next-generation
technologies.
We spent approximately $56.2 million, $57.4 million,
and $64.1 million on research and development activities in
fiscal years 2008, 2007 and 2006, respectively. The decreases in
our research and development expenses reflect the workforce
reductions and other cost reduction actions we implemented in
fiscal years 2002 through 2008.
Intellectual
Property
Our success and future revenue growth depend, in part, on the
intellectual property that we own and develop, including
patents, licenses, trade secrets, know-how, trademarks and
copyrights, and on our ability to protect our intellectual
property. We continuously review our patent portfolio to
maximize its value to us, abandoning or selling inapplicable or
less useful patents and filing new patents important to our
product roadmap. Our patent portfolio may be used to avoid,
defend or settle any potential litigation with respect to
various technologies contained in our products. The portfolio
may also provide negotiating leverage in attempts to
cross-license patents or technologies with third parties. We may
also seek to leverage our patent portfolio by licensing or
selling our patents or other intellectual property. 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. In connection with our
participation in the development of various industry standards,
we may be required to reasonably license certain of our patents
to other parties, including competitors that develop products
based upon the adopted industry standards. We have also entered
into agreements with certain of our customers and granted these
customers the right to use our proprietary technology in the
event that we file for bankruptcy protection or take other
equivalent actions. While in the aggregate our intellectual
property is considered important to our operations, no single
patent, license, trade secret, know-how, trademark or copyright
is considered of such importance that its loss or termination
would materially affect our business or financial condition.
Employees
As of October 31, 2008, we had 484 full-time
employees, approximately 322 of whom were engineers. Our
employees are not covered by any collective bargaining
agreements and we have not experienced a work stoppage
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in the past five years. We believe our future success will
depend in large part on our ability to continue to attract,
motivate, develop and retain highly skilled and dedicated
technical, marketing and management personnel.
Cyclicality
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. From time to time, these and other
factors, together with changes in general economic conditions,
cause significant upturns and downturns in the industry, and in
our business in particular.
In addition, our operating results are subject to substantial
quarterly and annual fluctuations due to a number of factors,
such as demand for network infrastructure equipment, the timing
of receipt, reduction or cancellation of significant orders,
fluctuations in the levels of component inventories held by our
customers, the gain or loss of significant customers, market
acceptance of our products and our customers products, our
ability to develop, introduce and market new products and
technologies on a timely basis, the availability and cost of
products from our suppliers, new product and technology
introductions by competitors, intellectual property disputes,
and the timing and extent of product development costs.
Available
Information
We maintain an Internet website at
http://www.mindspeed.com.
Our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, and other
information related to our company, are available free of charge
on this site as soon as reasonably practicable after such
reports are filed with or furnished to the Securities and
Exchange Commission (SEC). Our Code of Business Conduct and
Ethics, Guidelines on Corporate Governance and Board Committee
Charters are also available on our website. We will provide
reasonable quantities of paper copies of filings free of charge
upon request. In addition, we will provide a copy of the Board
Committee Charters to stockholders upon request. No portion of
our Internet website or the information contained in or
connected to the website is incorporated into this Annual Report
on
Form 10-K.
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
have incurred operating losses in the past and we may incur
losses in future periods.
We generated net income of $7.2 million in fiscal 2008,
however incurred net losses of $21.9 million in fiscal 2007
and $24.5 million in fiscal 2006. We may incur losses and
negative cash flows in future periods.
In order to sustain profitability and positive cash flows from
operations, we must further reduce operating expenses
and/or
increase our revenues. We have completed a series of cost
reduction actions which have improved our operating cost
structure, and we will continue to perform additional actions,
when necessary. These expense reductions alone may not allow us
to sustain the profitability we achieved in the fourth quarter
of fiscal 2008. 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, the level of
which may decrease due to general economic conditions, and
uncertainty, over which we have no control. 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 be able to sustain the profitability
achieved in fiscal 2008.
14
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 fiscal 2008, we generated $26.7 million in cash from
operating activities compared to net cash used in operating
activities of $10.0 million in fiscal 2007 and
$15.9 million in 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
October 3, 2008, our cash and cash equivalents totaled
$43.0 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, including the repayment of the
remaining $10.5 million in senior convertible debt due in
November 2009. However, this may not be the case, and if we
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 have recently
completed transactions that involved the issuance or incurrence
of indebtedness, including credit facilities. Even after
completing these transactions, we may need additional capital in
the future and 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. In addition, there can be no assurance that we will
continue to benefit from the sale of non-core patents as we have
in previous periods.
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.
Additionally, recently general worldwide economic conditions
have experienced a significant 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, 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 return to historical 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.
15
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:
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our operating and financial performance and prospects, including
our ability to sustain the profitability we achieved in the
fourth quarter of fiscal 2008;
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the depth and liquidity of the market for our common stock which
can impact, among other things, the volatility of our stock
price and the availability of market participants to borrow
shares;
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investor perception of us and the industry in which we operate;
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the level of research coverage of our common stock;
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changes in earnings estimates or buy/sell recommendations by
analysts;
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general financial and other market conditions; and
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domestic and international economic conditions.
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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 (NASDAQ), 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.
On October 16, 2008, NASDAQ filed a rule change with the
SEC to suspend temporarily the continued listing requirements
relating to bid price and market value of publicly held shares
through January 16, 2009. In November 2009, our stock price
began trading below $1.00 per share. We can provide no assurance
that we will be in compliance with the minimum bid price rule
once the suspension is lifted.
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:
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changes in end-user demand for the products manufactured and
sold by our customers;
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the effects of competitive pricing pressures, including
decreases in average selling prices of our products;
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the gain or loss of significant customers;
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market acceptance of our products and our customers
products;
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our ability to develop, introduce, market and support new
products and technologies on a timely basis;
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intellectual property disputes;
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the timing of receipt, reduction or cancellation of significant
orders by customers;
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fluctuations in the levels of component inventories held by our
customers and changes in our customers inventory
management practices;
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shifts in our product mix and the effect of maturing products;
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availability and cost of products from our suppliers;
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the timing and extent of product development costs;
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new product and technology introductions by us or our
competitors;
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fluctuations in manufacturing yields; and
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significant warranty claims, including those not covered by our
suppliers.
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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.
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.
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:
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changes in end-user demand for the products manufactured and
sold by our customers;
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the effects of competitive pricing pressures, including
decreases in average selling prices of our products;
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the gain or loss of significant customers;
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market acceptance of our products and our customers
products;
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our ability to develop, introduce, market and support new
products and technologies on a timely basis;
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intellectual property disputes;
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the timing of receipt, reduction or cancellation of significant
orders by customers;
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fluctuations in the levels of component inventories held by our
customers and changes in our customers inventory
management practices;
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shifts in our product mix and the effect of maturing products;
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availability and cost of products from our suppliers;
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the timing and extent of product development costs;
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new product and technology introductions by us or our
competitors;
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fluctuations in manufacturing yields; and
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significant warranty claims, including those not covered by our
suppliers.
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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
17
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 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.
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:
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the lack of assured supply, potential shortages and higher
prices;
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increased lead times;
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limited control over delivery schedules, manufacturing yields,
production costs and product quality; and
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the unavailability of, or delays in obtaining, products or
access to key process technologies.
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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
the 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. Such delays could negatively
affect our relationships with our customers.
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
18
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 deteriorations in
general economic conditions, 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.
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 68% of our net revenues for 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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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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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.
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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.
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:
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stronger financial position and liquidity;
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longer presence in key markets;
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greater name recognition;
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more secure supply chain;
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access to larger customer bases; and
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significantly greater sales and marketing, manufacturing,
distribution, technical and other resources.
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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
20
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:
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our ability to anticipate customer and market requirements and
changes in technology and industry standards;
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our ability to accurately define new products;
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our ability to complete development of new products, and bring
our products to market, on a timely basis;
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our ability to differentiate our products from offerings of our
competitors; and
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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
21
these factors may influence our decision to establish or
increase our offshore operations, there are inherent risks
beyond our control, including:
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political uncertainties;
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wage inflation;
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exposure to foreign currency fluctuations;
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tariffs and other trade barriers; and
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foreign regulatory restrictions and unexpected changes in
regulatory environments.
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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.
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 52% of our revenues for 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 which may decrease due to general economic
conditions, and uncertainty, over which we have no control. 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
22
changing suppliers involves significant cost, time, effort and
risk for the OEM. 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 as customers may
increasingly do if economic conditions continue to deteriorate.
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:
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pay substantial damages for past, present and future use of the
infringing technology;
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cease the manufacture, use or sale of infringing products;
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discontinue the use of infringing technology;
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expend significant resources to develop non-infringing
technology;
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pay substantial damages to our customers or end users to
discontinue use or replace infringing technology with
non-infringing technology;
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license technology from the third party claiming infringement,
which license may not be available on commercially reasonable
terms, or at all; or
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relinquish intellectual property rights associated with one or
more of our patent claims, if such claims are held invalid or
otherwise unenforceable.
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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
23
may require us to expend significant resources and to divert the
efforts and attention of our management from our business
operations; in particular:
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the steps we take to prevent misappropriation or infringement of
our intellectual property may not be successful;
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any existing or future patents may be challenged, invalidated or
circumvented; or
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the measures described above may not provide meaningful
protection.
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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.
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:
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issuances of equity securities dilutive to our existing
stockholders;
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substantial cash payments;
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the incurrence of substantial debt and assumption of unknown
liabilities;
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large one-time write-offs;
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amortization expenses related to intangible assets;
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the diversion of managements attention from other business
concerns; and
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the potential loss of key employees, customers and suppliers of
the acquired business.
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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 7 of this
Form 10-K).
Such methods, estimates and judgments are, by their nature,
subject to substantial risks, uncertainties and assumptions, and
changes in rule making by various 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.
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 15% 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. Currently,
we have $25.5 million aggregate principal amount of
convertible senior notes outstanding. These notes are
convertible at any time, at the option of the holder, into a
total of approximately 4.1 million shares (adjusted to
reflect our June 30, 2008 one-for-five reverse stock split)
of 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
25
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. 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 with respect to other
agreements made 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.
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:
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|
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|
|
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;
|
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|
|
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;
|
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|
|
elimination of the right of stockholders to call a special
meeting of stockholders; and
|
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|
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.
26
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
At October 31, 2008, we occupied our headquarters located
in Newport Beach, California (which includes design and sales
offices), eight design centers and nine sales locations. These
facilities had an aggregate floor space of approximately
219,000 square feet, all of which is leased, consisting of
approximately 144,000 square feet at our headquarters,
58,000 square feet at our design centers and
17,000 square feet at our sales locations. We believe our
properties are well maintained, are in sound operating condition
and contain all the equipment and facilities to operate at
present levels.
Through our design centers, we provide design engineering and
product application support and after-sales service to our OEM
customers. The design centers are strategically located to take
advantage of key technical and engineering talent worldwide.
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|
Item 3.
|
Legal
Proceedings
|
We are currently not engaged in legal proceedings that require
disclosure under this Item.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our stockholders during
the quarter ended October 3, 2008.
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information
Our common stock is traded on the Nasdaq Global Market under the
symbol MSPD. The following table lists the high and
low closing sales price of our common stock as reported by the
Nasdaq Global Market for the periods indicated, adjusted to
reflect our June 30, 2008 one-for-five reverse stock split.
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|
|
|
|
|
|
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High
|
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|
Low
|
|
|
Fiscal 2007
|
|
|
|
|
|
|
|
|
Quarter ended December 29, 2006
|
|
$
|
10.25
|
|
|
$
|
8.10
|
|
Quarter ended March 30, 2007
|
|
$
|
12.65
|
|
|
$
|
8.75
|
|
Quarter ended June 29, 2007
|
|
$
|
11.90
|
|
|
$
|
9.75
|
|
Quarter ended September 28, 2007
|
|
$
|
11.25
|
|
|
$
|
7.95
|
|
Fiscal 2008
|
|
|
|
|
|
|
|
|
Quarter ended December 28, 2007
|
|
$
|
9.20
|
|
|
$
|
5.65
|
|
Quarter ended March 28, 2008
|
|
$
|
6.10
|
|
|
$
|
2.40
|
|
Quarter ended June 27, 2008
|
|
$
|
4.75
|
|
|
$
|
2.35
|
|
Quarter ended October 3, 2008
|
|
$
|
4.40
|
|
|
$
|
2.08
|
|
Recent
Share Prices and Holders
The last reported sale price of our common stock on
December 12, 2008 was $1.05 and there were approximately
30,210 holders of record of our common stock. However, many
holders shares are listed under their brokerage
firms names.
27
Dividend
Policy
We have never paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business
and do not anticipate paying cash dividends in the foreseeable
future. Our current revolving credit facility restricts our
ability to pay cash dividends on our common stock without the
lenders consent. Our future dividend policy will depend on
our earnings, capital requirements and financial condition, as
well as requirements of our financing agreements and other
factors that our board of directors considers relevant.
|
|
Item 6.
|
Selected
Financial Data
|
The selected consolidated financial data presented below should
be read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the notes thereto appearing elsewhere in this Annual Report on
Form 10-K.
Our consolidated selected financial data have been derived from
our audited consolidated financial statements.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct. 3,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Oct. 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
144,349
|
|
|
$
|
125,805
|
|
|
$
|
135,919
|
|
|
$
|
111,777
|
|
|
$
|
119,435
|
|
Intellectual Property
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
160,699
|
|
|
|
127,805
|
|
|
|
135,919
|
|
|
|
111,777
|
|
|
|
119,435
|
|
Cost of goods sold
|
|
|
47,625
|
|
|
|
42,334
|
|
|
|
43,592
|
|
|
|
33,704
|
|
|
|
35,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
113,074
|
|
|
|
85,471
|
|
|
|
92,327
|
|
|
|
78,073
|
|
|
|
84,286
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
56,217
|
|
|
|
57,447
|
|
|
|
64,104
|
|
|
|
71,355
|
|
|
|
79,582
|
|
Selling, general and administrative
|
|
|
46,984
|
|
|
|
43,385
|
|
|
|
46,970
|
|
|
|
41,871
|
|
|
|
46,845
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,481
|
|
|
|
50,318
|
|
Special charges(1)
|
|
|
211
|
|
|
|
4,724
|
|
|
|
2,550
|
|
|
|
5,999
|
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
103,412
|
|
|
|
105,556
|
|
|
|
113,624
|
|
|
|
139,706
|
|
|
|
177,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
9,662
|
|
|
|
(20,085
|
)
|
|
|
(21,297
|
)
|
|
|
(61,633
|
)
|
|
|
(92,846
|
)
|
Interest expense
|
|
|
(2,360
|
)
|
|
|
(2,240
|
)
|
|
|
(2,231
|
)
|
|
|
(1,788
|
)
|
|
|
|
|
Other income, net
|
|
|
544
|
|
|
|
522
|
|
|
|
863
|
|
|
|
1,162
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
7,846
|
|
|
|
(21,803
|
)
|
|
|
(22,665
|
)
|
|
|
(62,259
|
)
|
|
|
(92,526
|
)
|
Provision for income taxes
|
|
|
611
|
|
|
|
111
|
|
|
|
1,849
|
|
|
|
370
|
|
|
|
721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
|
$
|
(24,514
|
)
|
|
$
|
(62,629
|
)
|
|
$
|
(93,247
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share, basic(2)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(3.06
|
)
|
|
$
|
(4.75
|
)
|
Income/(loss) per share, diluted(2)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(3.06
|
)
|
|
$
|
(4.75
|
)
|
Shares used in computation of net income/(loss) per share, in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(2)
|
|
|
23,046
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
20,438
|
|
|
|
19,628
|
|
Diluted(2)
|
|
|
23,202
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
20,438
|
|
|
|
19,628
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct. 3,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
Oct. 1,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
|
$
|
29,976
|
|
|
$
|
15,335
|
|
|
$
|
43,638
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
11,260
|
|
|
|
40,094
|
|
|
|
|
|
Working capital
|
|
|
50,277
|
|
|
|
35,814
|
|
|
|
50,880
|
|
|
|
59,332
|
|
|
|
49,082
|
|
Total assets
|
|
|
100,604
|
|
|
|
82,079
|
|
|
|
96,542
|
|
|
|
105,504
|
|
|
|
126,300
|
|
Long-term debt
|
|
|
45,648
|
|
|
|
45,037
|
|
|
|
44,618
|
|
|
|
44,219
|
|
|
|
|
|
Stockholders equity
|
|
|
27,958
|
|
|
|
14,246
|
|
|
|
23,476
|
|
|
|
33,826
|
|
|
|
90,927
|
|
|
|
|
(1) |
|
Special charges consist of asset impairments, restructuring
charges, separation costs and gains and losses on the sale of
certain assets. |
|
(2) |
|
Adjusted to reflect our one-for-five reverse stock split which
was effected on June 30, 2008. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
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 digital signal processor (DSP) 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, 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 52% of our revenues for fiscal 2008. Sales to
customers located outside the United States, primarily in the
Asia-Pacific region and Europe, were approximately 68% of our
net revenues for 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
$56.2 million on research and development in fiscal 2008.
We seek
29
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 continued to recognize patent related revenues
throughout 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.
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 sustain profitability and
positive cash flows from operations, we may need to further
reduce operating expenses
and/or
increase our revenues. Through fiscal 2008, we have completed a
series of cost reduction actions which have improved our
operating cost structure. In the first quarter of fiscal 2009,
we announced a restructuring plan. We anticipate incurring
special charges of between $2.7 and $3.2 million dollars
during the first and second quarters of fiscal 2009, primarily
associated with severance costs for affected employees. When we
complete these restructuring actions, we estimate we will
achieve annualized savings of between $4.5 and $5.1 million
dollars.
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 the level
of which may decrease due to general economic conditions, and
uncertainty, over which we have no control. 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 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 ten consecutive
business days. Accordingly, we have regained compliance with
Marketplace Rule 4450(a)(5).
On October 16, 2008, NASDAQ filed a rule change with the
SEC to suspend temporarily the continued listing requirements
relating to bid price and market value of publicly held shares
through January 16, 2009. In November 2009, our stock
price began trading below $1.00 per share. We can provide no
assurance that we will be in compliance with the minimum bid
price rule once the suspension is lifted.
30
Stock-Based
Compensation Programs
We use stock-based compensation to attract and retain employees
and to provide long-term incentive compensation that further
aligns the interests of our employees with those of our
stockholders. Prior to fiscal 2006, our stock-based compensation
consisted principally of stock options. Eligible employees
received grants of stock options at the time of hire; we also
made broad-based stock option grants covering substantially all
of our employees annually. Stock option awards have exercise
prices not less than the market price of our 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). From
time to time we have also used restricted stock awards with
time-based vesting for incentive or retention purposes.
Beginning in fiscal 2006, we revised our stock-based
compensation arrangements to provide current and long-term
incentive compensation, principally through restricted stock
awards. During the last three fiscal years, we granted an
aggregate of 0.8 million (fiscal 2008), 0.6 million
(fiscal 2007) and 0.8 million (fiscal
2006) shares of restricted stock (adjusted to reflect our
June 30, 2008 one-for-five reverse stock split) to our
employees. These awards principally consisted of broad-based
grants, covering substantially all of our employees. One
broad-based grant was intended to provide performance emphasis
and incentive compensation through vesting tied to each
employees performance against individual goals for each of
the fiscal years. Another broad-based grant of restricted stock
was intended to provide long-term incentive compensation; these
awards vest ratably over a period of four years, and require
continued service. In fiscal 2006, certain senior management
personnel also received additional restricted stock awards
having vesting tied to our achievement of an operating profit.
From time to time, we also grant stock options or other
stock-based awards for incentive, retention or inducement
purposes. We periodically review, and may further revise, our
compensation arrangements based on our assessment of the
effectiveness of our compensation arrangements and to keep our
overall compensation package at market levels.
Effective October 1, 2005, we adopted Financial Accounting
Standards (SFAS) 123R, Share-Based Payment using the
modified prospective application. 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. As
required by SFAS 123R, our stock-based compensation expense
for fiscal 2008, fiscal 2007 and fiscal 2006 includes the fair
value of new awards, modified awards and any unvested awards
outstanding at October 1, 2005. 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 fair value of each award
is recognized on a straight-line basis over the vesting or
service period.
Stock-based compensation expense totaling $5.5 million,
$7.3 million, and $7.5 million for fiscal 2008, fiscal
2007, and fiscal 2006, respectively, is included in cost of
goods sold, research and development expenses, selling, general
and administrative expenses and special charges. As of
October 3, 2008, there was unrecognized compensation
expense of $2.0 million related to unvested stock options,
which we expect to recognize over a weighted-average period of
1.4 years and unrecognized compensation expense of
$2.0 million related to unvested restricted stock awards,
which we expect to recognize over a weighted-average period of
0.9 years.
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.
31
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.
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 Our products are often
integrated with software that is essential to the functionality
of the equipment. Additionally, we provide unspecified software
upgrades and enhancements through our maintenance contracts for
many of our products. Accordingly, we account for revenue in
accordance with Statement of Position
No. 97-2,
Software Revenue Recognition, and all related
interpretations. For sales of products where software is
incidental to the equipment, we apply the provisions of Staff
Accounting Bulletin No. 104, Revenue
Recognition, and all related interpretations.
We generate revenues from direct product sales, sales to
distributors, maintenance contracts, development agreements and
the sale and license of intellectual property. 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. In instances where final
acceptance of the product, system, or solution is specified by
the customer, revenue is deferred until all acceptance criteria
have been met. Technical support services revenue is deferred
and recognized ratably over the period during which the services
are to be performed. Advanced services revenue is recognized
upon delivery or completion of performance.
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
32
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 3 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.
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
In September 2006, the FASB issued Financial Accounting
Standards (SFAS) No. 157, Fair Value
Measurement, which defines fair value, establishes a
framework for measuring fair value and expands disclosures
regarding assets and liabilities measured at fair value. In
February 2008, the FASB issued FASB Staff Position (FSP)
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS 157 to remove certain leasing transactions from
its scope.
FSP 157-2
delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2010. The measurement
and disclosure requirements related to financial assets and
financial liabilities are effective for us in the first quarter
of fiscal 2009. The adoption of SFAS 157 for financial
assets and financial liabilities is not expected to have a
material impact on our results of operations or financial
position. We are currently assessing the
33
impact that SFAS 157 will have on our results of operations
and financial position when it is applied to nonfinancial assets
and nonfinancial liabilities beginning in the first quarter of
fiscal 2010.
In February 2007, the FASB issued Financial Accounting Standards
(SFAS) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The statement permits
entities to choose to measure many financial instruments and
certain other items at fair value that are currently not
required to be measured at fair value. We will be required to
adopt SFAS 159 in the first quarter of fiscal 2009 and do
not expect that the adoption will have a material impact on our
financial condition or results of operations.
In June 2007, the FASB ratified Emerging Issues Task Force
consensus on EITF Issue
No. 07-3,
Accounting for Non-refundable Advanced Payments for Goods
or Services to be Used in Future Research and Development
Activities. EITF Issue
No. 07-3
requires that these payments be deferred and capitalized and
expensed as goods are delivered or as the related services are
performed. We will be required to adopt
EITF 07-3
in the first quarter of fiscal 2009 and do not expect that the
adoption will have a material impact on our financial condition
or results of operations.
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 Accounting Research Bulletin 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 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
Activities an 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.
Results
of Operations
Net
Revenues
Fiscal
2008 Compared to Fiscal 2007; Fiscal 2007 Compared to Fiscal
2006
The following table summarizes our net revenues:
|
|
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|
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|
|
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|
|
|
|
|
|
|
2008
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|
|
Change
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|
|
2007
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|
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Change
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|
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2006
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|
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|
(Dollars in millions)
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|
|
Multiservice access DSP products
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$
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55.8
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|
|
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53
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%
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$
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36.3
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|
|
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(3
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)%
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$
|
37.4
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|
High-performance analog products
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41.9
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|
|
12
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%
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37.5
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|
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(12
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)%
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|
|
42.7
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|
WAN communications products
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|
|
63.0
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17
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%
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54.0
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|
|
|
(3
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)%
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55.8
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|
|
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|
|
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Net revenues
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$
|
160.7
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|
|
|
26
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%
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|
$
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127.8
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|
|
|
(6
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)%
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|
$
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135.9
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34
The 26% increase in our net revenues for fiscal 2008 is driven
by an increase in revenues from leveraging our intellectual
property portfolio by selling non-core patents, as well as an
increase in product sales. During fiscal 2008, we recognized
$16.4 million from the sale of patents compared to
$2 million in fiscal 2007. The remaining $18.5 million
of the increase in revenues represents higher product shipments
across each of our product families. Net revenues from our
multiservice access products increased $19.5 million, or
53%, reflecting a combination of increased sales volumes across
our newer VoIP product families, including our multiservice
access carrier and enterprise products, as well as an increase
in revenues recorded on the sale of intellectual property. 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 $4.4 million, or
12%, reflecting a benefit from increased demand for our
switching and signal conditioning products. Net revenues from
our WAN communications products increased $9.0 million, or
17% 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, synchronous optical networking applications and DSL
transceivers.
The 6% decrease in our net revenues for fiscal 2007 compared to
fiscal 2006 reflects lower sales volumes across each of our
product families. Net revenues from our multiservice access DSP
products decreased $1.1 million, or 3%, reflecting a
decrease in sales in our legacy products mostly offset by
increased sales volumes across our newer VoIP product families
as well as $2 million in revenues recorded on the sale of
intellectual property. We experienced increased sales volumes of
our newer VoIP product families, as telecommunication service
providers install equipment to transmit their voice traffic over
IP data networks. Net revenues from our high-performance analog
products decreased by $5.2 million, or 12%, mostly due to
decreased shipments of our physical media dependent devices
serving fiber optic markets somewhat offset by increased
shipments of video infrastructure products serving standard and
high definition broadcast video markets. Sales of our WAN
communications products decreased by $1.8 million, or 3%,
primarily resulting from a slowdown in consumption of our
products in access and metropolitan area network applications
such as T/E carrier transmission products. These decreases were
partially offset by an increase in demand for our ATM/MPLS
network processor products for use in wireless, enterprise and
broadband infrastructure applications.
Gross
Margin
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2008
|
|
|
Change
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|
2007
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|
|
Change
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|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Gross margin
|
|
$
|
113.1
|
|
|
|
32
|
%
|
|
$
|
85.5
|
|
|
|
(7
|
)%
|
|
$
|
92.3
|
|
Percent of net revenues
|
|
|
70
|
%
|
|
|
|
|
|
|
67
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%
|
|
|
|
|
|
|
68
|
%
|
Gross margin represents net revenues less cost of goods sold. As
a fabless semiconductor company, we use third parties (including
TSMC, Jazz and Amkor) 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; and sustaining engineering
expenses pertaining to products sold.
Our gross margin for fiscal 2008 increased $27.6 million
over fiscal 2007. $14.3 million of this increase in gross
margin is due to an increase in non-core patent sales with
associated revenues growing from $2 million in fiscal 2007
to $16.4 million in fiscal 2008. Additionally, our gross
margin for fiscal 2008 increased as a result of increased
product sales. Our gross margin as a percent of net product
revenues for fiscal 2008 increased 1% from fiscal 2007 primarily
as a result of a change in the provision for excess and obsolete
inventories. The provision decreased $0.9 million net for
fiscal 2008 compared to an increase in the provision of
$1.8 million in fiscal 2007. These benefits were partially
offset by a $2.4 million reduction in the benefit related
to the sale of inventory previously written down to a zero cost
basis in 2001. Our gross margin for fiscal 2007 decreased
$6.8 million over fiscal 2006, principally reflecting the
6% decrease in our net revenues. Our gross margin as a percent
of net revenues for fiscal 2007 decreased 1% from fiscal 2006
primarily as a result of a $1.5 million reduction in the
benefit related to the sale of inventory previously written down
to a zero cost basis in 2001. In addition, the change in
provision for
35
excess and obsolete inventories was an increase in the provision
of $1.8 million in fiscal 2007 compared to a net decrease
of $0.6 million for fiscal 2006.
Our gross margin benefited from the sale of inventories with an
original cost of $1.6 million (fiscal 2008),
$4.0 million (fiscal 2007), and $5.5 million (fiscal
2006) that we had written down to a zero cost basis during
fiscal 2001. These sales resulted from renewed demand for
certain products that was not anticipated at the time of the
write-downs. The previously written-down inventories were
generally sold at prices which exceeded their original cost.
In fiscal 2001, we recorded an aggregate of $83.5 million
of inventory write-downs, reducing the cost basis of the
affected inventories to zero. The fiscal 2001 inventory
write-downs resulted from the sharply reduced end-customer
demand for network infrastructure equipment during that period.
As a result of these market conditions, we experienced a
significant number of order cancellations and a decline in the
volume of new orders beginning in the fiscal 2001 first quarter.
The inventories written down in fiscal 2001 principally
consisted of multiservice access processors and DSL transceivers.
We assess the recoverability of our inventories at least
quarterly through a review of inventory levels in relation to
foreseeable demand (generally over twelve 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.
From the time of the fiscal 2001 inventory write-downs through
October 3, 2008, we scrapped a portion of these inventories
having an original cost of $39.9 million and sold a portion
of these inventories with an original cost of
$37.6 million. The sales resulted from increased demand
beginning in the first quarter of fiscal 2002 which was not
anticipated at the time of the write-downs. As of
October 3, 2008, we continued to hold inventories with an
original cost of $6.0 million which were previously written
down to a zero cost basis. We currently intend to hold these
remaining inventories and will sell these inventories if we
continue to experience a renewed demand for these products.
While there can be no assurance that we will be able to do so,
if we are able to sell a portion of the inventories which are
carried at zero cost basis, our gross margin will be favorably
affected by an amount equal to the original cost of the
zero-cost basis inventory sold. To the extent that we do not
experience renewed demand for the remaining inventories, they
will be scrapped as they become obsolete.
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
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|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Research and development expenses
|
|
$
|
56.2
|
|
|
|
(2
|
)%
|
|
$
|
57.4
|
|
|
|
(10
|
)%
|
|
$
|
64.1
|
|
Percent of net revenues
|
|
|
35
|
%
|
|
|
|
|
|
|
45
|
%
|
|
|
|
|
|
|
47
|
%
|
36
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 $1.2 million decrease in R&D expenses from
fiscal 2008 to fiscal 2007 principally reflects a
$1.1 million decrease in depreciation expense, principally
resulting from certain assets reaching the end of their
depreciable lives. In addition, the decrease in R&D
expenses reflects a $0.6 million decrease in compensation
and personnel-related costs, including stock compensation,
resulting from our expense reduction actions and a
$0.6 million decrease in the cost of our facilities. These
decreases in R&D were partially offset by a
$0.8 million increase in employee separation costs which
consist of severance benefits payable to certain former
employees as a result of organizational changes.
The $6.7 million decrease in R&D expenses from fiscal
2007 to fiscal 2006 principally reflects a $4.0 million
decrease in compensation and personnel-related costs and a
$0.5 million decrease in the cost of our facilities
resulting from our expense reduction actions. The decrease in
R&D expenses also reflects a $1.4 million decrease in
depreciation expense, principally resulting from certain assets
reaching the end of their depreciable lives, and a
$0.6 million decrease in the cost of materials, photomasks
and preproduction devices.
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
Change
|
|
|
2007
|
|
|
Change
|
|
|
2006
|
|
|
|
(Dollars in millions)
|
|
|
Selling, general and administrative expenses
|
|
$
|
47.0
|
|
|
|
8
|
%
|
|
$
|
43.4
|
|
|
|
(8
|
)%
|
|
$
|
47.0
|
|
Percent of net revenues
|
|
|
29
|
%
|
|
|
|
|
|
|
34
|
%
|
|
|
|
|
|
|
35
|
%
|
Our selling, general and administrative (SG&A) expenses
include personnel costs, 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
$3.6 million increase in our SG&A expenses for fiscal
2008 compared to fiscal 2007 reflects an increase of
approximately $0.3 million, net in labor and benefits,
including stock compensation, due to an increase in the cost of
benefits offered to our employees, as well as $0.9 million
in employee separation costs which consist of severance benefits
payable to certain former employees as a result of
organizational changes. Additionally, we experienced a
$1.7 million increase in professional fees. The increase in
professional fees is primarily due to expenses incurred in
conjunction with business development activities and effecting a
reverse stock split.
The $3.6 million decrease in our SG&A expenses for
fiscal 2007 compared to fiscal 2006 reflects a $1.3 million
decrease in personnel-related costs and a $0.6 million
decrease in the cost of our facilities, all of which are a
result of our expense reduction actions. In addition, insurance
costs decreased $0.4 million and commissions expense
decreased $0.8 million as a result of a reduction in the
usage of outside sales representatives.
Special
Charges
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Restructuring charges
|
|
$
|
0.2
|
|
|
$
|
4.7
|
|
|
$
|
2.6
|
|
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.
37
Activity and liability balances related to the Mindspeed
restructuring plans through October 3, 2008 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Restructuring balance, September 29, 2006
|
|
$
|
953
|
|
|
$
|
714
|
|
|
$
|
1,667
|
|
Charged to costs and expenses
|
|
|
2,191
|
|
|
|
2,533
|
|
|
|
4,724
|
|
Non cash charges
|
|
|
(61
|
)
|
|
|
|
|
|
|
(61
|
)
|
Cash payments
|
|
|
(2,851
|
)
|
|
|
(1,995
|
)
|
|
|
(4,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007
|
|
|
232
|
|
|
|
1,252
|
|
|
|
1,484
|
|
Charged to costs and expenses
|
|
|
(40
|
)
|
|
|
251
|
|
|
|
211
|
|
Non cash charges
|
|
|
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
Cash payments
|
|
|
(186
|
)
|
|
|
(1,430
|
)
|
|
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the first quarter of fiscal 2009, we announced a
restructuring plan. We anticipate incurring special charges of
between $2.7 and $3.2 million dollars during the first and
second quarters of fiscal 2009, primarily associated with
severance costs for affected employees. When we complete these
restructuring actions, we estimate we will achieve annualized
savings of between $4.6 and $5.1 million dollars.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Interest expense
|
|
$
|
(2.4
|
)
|
|
$
|
(2.2
|
)
|
|
$
|
(2.2
|
)
|
Interest expense for fiscal 2008, 2007 and 2006 represents
interest on our convertible senior notes issued in December 2004
and July 2008. The interest expense increase for fiscal 2008, as
compared to fiscal 2007, is a result of our extinguishment and
reissuance of $15 million of our convertible notes which
occurred in July of 2008. The interest rate on these convertible
senior notes increased from 3.75% to 6.5%.
Other
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Other income, net
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
0.9
|
|
Other income principally consists of interest income, foreign
exchange gains and losses, franchise taxes and other
non-operating gains and losses. The decrease in other income in
fiscal 2007 as compared to fiscal 2006 principally reflects
lower interest income resulting from the lower cash, cash
equivalent and marketable security balances.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In millions)
|
|
|
Provision for income taxes
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
|
$
|
1.8
|
|
Our provision for income taxes for fiscal years 2008, 2007 and
2006 principally consisted of income taxes incurred by our
foreign subsidiaries. As a result of our recent operating losses
and the potential 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 fiscal
2008, 2007, and 2006 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 2009 will
principally consist of income taxes related to our foreign
operations.
38
As of October 3, 2008, we had a valuation allowance of
$248.3 million against our U.S. federal and state
deferred tax assets (which reduces their carrying value to zero)
because we do not expect to realize these deferred tax assets
through the reduction of future income tax payments. As of
October 3, 2008, we had U.S. federal net operating
loss carryforwards of approximately $630.9 million,
including the net operating loss carryforwards we retained in
the distribution.
Liquidity
and Capital Resources
Cash generated by operating activities was $26.7 million
for fiscal 2008 compared to cash used in operating activities of
$10.0 million for fiscal 2007 and $15.9 million for
fiscal 2006. Operating cash flows for fiscal 2008 reflect our
net income of $7.2 million, non-cash charges (depreciation,
stock compensation, inventory provisions and other) of
$11.8 million, and net working capital decreases of
approximately $7.6 million. Operating cash flows for fiscal
2007 reflect our net loss of $21.9 million, partially
offset by non-cash charges (depreciation, stock compensation,
inventory provisions and other) of $14.8 million, and net
working capital increases of approximately $2.9 million.
The net working capital decreases for fiscal 2008 included a
$5.4 million increase in accounts payable, a
$1.1 million increase in accrued expenses and other current
liabilities mainly due to the timing of vendor payments. These
amounts were partially offset by a $0.3 million increase in
inventories.
Cash used in investing activities of $8.7 million consisted
of capital expenditures of $7.5 million and cash payments
related to the acquisition of assets from Ample Communications
of $1.2 million. Cash provided by investing activities of
$2.3 million for fiscal 2007 consisted of net sales of
marketable securities (net of purchases) of $11.3 million,
partially offset by capital expenditures of $4.1 million
and the acquisition of assets from Ample Communications of
$4.9 million. Cash provided by investing activities of
$25.2 million for fiscal 2006 principally consisted of net
sales of marketable securities (net of purchases) of
$29.7 million, partially offset by capital expenditures of
$4.5 million.
Cash used in financing activities of $0.7 million for
fiscal 2008 consisted of $0.8 million in debt issuance
costs related to our new 6.5% senior convertible debt
partially offset by proceeds from the exercise of stock options
of $0.1 million. Cash provided by financing activities of
$3.4 million for fiscal 2007 consisted of proceeds from the
exercise of stock options. Cash provided by financing activities
of $5.3 million for fiscal 2006 consisted of proceeds from
the exercise of stock options.
Revolving
Credit Facility and Convertible Senior Notes
Revolving
Credit Facility
On September 30, 2008, we entered into a loan and security
agreement with Silicon Valley Bank, or SVB. Under the loan and
security agreement, SVB has agreed to provide us with a
three-year revolving credit line of up to $15.0 million,
subject to availability against certain eligible accounts
receivable, for the purposes of (i) working capital;
(ii) funding our general business requirements; and
(iii) repaying or repurchasing our 3.75% Convertible
Senior Notes due in 2009. Our indebtedness to SVB under the loan
and security agreement is guaranteed by three of our domestic
subsidiaries and secured by substantially all of the domestic
assets of the company and such subsidiaries, other than
intellectual property.
Any indebtedness under the loan and security agreement bears
interest at a variable rate ranging from prime plus
0.25 percent to a maximum rate of prime plus
1.25 percent, as determined in accordance with the interest
rate grid set forth in the loan and security agreement. The loan
and security agreement contains affirmative and negative
covenants which, among other things, require us to maintain a
minimum tangible net worth and to deliver to SVB specified
financial information, including annual, quarterly and monthly
financial information, and limit our ability to (or to permit
any subsidiaries to), subject to certain exceptions and
limitations: (i) merge with or acquire other companies;
(ii) create liens on our property; (iii) incur debt
obligations; (iv) enter into transactions with affiliates,
except on an arms length basis; (v) dispose of
property; and (vi) issue dividends or make distributions.
As of October 3, 2008, we were in compliance with all
required covenants. At October 3, 2008, we had no
outstanding borrowings under our credit facility with SVB.
39
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, of
which only $10.5 million is currently outstanding, 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 an 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, 2008 and
November 18, 2009, the amount of the additional cash
payment would be equal to such average stock price times a
multiplier of up to 11.95 (59.75 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 October 3, 2008, the liability
under the fundamental change adjustment has been recorded at its
estimated fair value and is not significant.
On July 30, 2008, we entered into separate exchange
agreements with certain holders of our existing 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 convertible senior notes due 2013. The
exchanges closed on August 1, 2008. We paid at the closing
an aggregate of approximately $0.1 million in accrued and
unpaid interest on the existing notes that were exchanged for
the new notes, as well as $0.9 million in transaction fees.
In October 2008, we repurchased $20.5 million aggregate
principal amount of our convertible senior notes due 2009, for
cash of $17.3 million. The repurchases occurred in two
separate transactions on October 16 and October 23, 2008.
40
6.50% Convertible
Senior Notes due 2013
We issued the convertible senior notes due 2013, or new notes,
pursuant to an indenture, dated as of August 1, 2008,
between us and Wells Fargo Bank, N.A., as trustee.
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.
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.
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 October 3, 2008, the liability
under the fundamental change adjustment has been recorded at its
estimated fair value and is not significant.
If there is an event of default under 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. completed 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 our
company, its wholly owned subsidiary. 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 our 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 our common
stock. Following the distribution, we began operations as an
independent, publicly held company.
In the distribution, we issued to Conexant a warrant to purchase
six million shares (30 million shares on a
pre-June 30, 2008 one-for-five reverse stock split basis)
of our common stock at a price of $17.04 per share ($3.408 on a
pre-June 30, 2008 one-for-five reverse stock split basis),
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
41
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 and
cash equivalent balances and cash generated from product sales
and the sales of our non-core intellectual property. As of
October 3, 2008, our cash and cash equivalents totaled
$43.0 million. Our working capital at October 3, 2008
was $50.3 million.
In order to sustain profitability and positive cash flows from
operations, we may need to further reduce operating expenses
and/or
maintain increased revenues. Through fiscal 2008, we have
completed a series of cost reduction actions which have improved
our operating cost structure. These expense reductions alone may
not allow us to sustain the profitability we achieved in the
fourth quarter of fiscal 2008. 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 the level of
which may decrease due to general economic conditions, and
uncertainty, over which we have no control. 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 be able to sustain profitability.
We believe that our existing sources of liquidity, along with
cash expected to be generated from product sales and the sales
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 twelve months, including the
repayment of the remaining $10.5 million in senior
convertible debt due in November 2009. From time to time,
we may acquire our debt securities through 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 appropriate. 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 our
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 particularly in light of recent
economic conditions in the capital markets.
42
Contractual
Obligations
The following table summarizes the future payments we are
required to make under contractual obligations as of
October 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
|
(In millions)
|
|
|
Long-term debt
|
|
$
|
46.0
|
|
|
$
|
|
|
|
$
|
31.0
|
|
|
$
|
15.0
|
|
|
$
|
|
|
Interest expense on long-term debt
|
|
|
6.6
|
|
|
|
2.1
|
|
|
|
2.5
|
|
|
|
2.0
|
|
|
|
|
|
Operating leases
|
|
|
16.3
|
|
|
|
7.7
|
|
|
|
6.7
|
|
|
|
1.5
|
|
|
|
0.4
|
|
Purchase obligations
|
|
|
7.6
|
|
|
|
3.1
|
|
|
|
4.5
|
|
|
|
|
|
|
|
|
|
Employee severance
|
|
|
0.9
|
|
|
|
0.8
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
77.4
|
|
|
$
|
13.7
|
|
|
$
|
44.8
|
|
|
$
|
18.5
|
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of $46.0 million aggregate
principal amount of our convertible senior notes.
$31.0 million of the notes bear interest at a rate of
3.75%, payable semiannually in arrears each May 18 and
November 18, and mature on November 18, 2009. During
October 2009, we repurchased $20.5 million of these notes.
The remaining $15.0 million of the notes bear interest at a
rate of 6.5%, payable semiannually in arrears each February 1
and August 1, and mature on August 1, 2013.
In June 2007, we extended our Sublease with Conexant pursuant to
which we lease our headquarters in Newport Beach, California.
The Sublease, which had been amended and restated in March 2005,
had an initial term through June 2008. The Sublease was extended
for an additional two year term (through June 2010) for a
reduced amount of space. Rent payable under the Sublease for the
next 12 months is approximately $3.4 million. Rent
payable is subject to annual increases of 3%, plus a prorated
portion of operating expenses associated with the leased
property. We estimate our minimum future obligation under the
Sublease at approximately $10.2 million over the remainder
of the lease term, but actual costs under the Sublease will vary
based upon Conexants actual costs. In addition, each year
we may elect to purchase certain services from Conexant based on
a prorated portion of Conexants actual costs.
We lease our other facilities and certain equipment under
non-cancelable operating leases. The leases expire at various
dates through 2014 and contain various provisions for rental
adjustments, including, in certain cases, adjustments based on
increases in the Consumer Price Index. The leases generally
contain renewal provisions for varying periods of time. Although
we have entered into non-cancelable subleases with anticipated
rental income totaling $0.9 million and extending to
various dates through fiscal 2011, we have not reduced the
amount of our contractual obligations under the related
operating leases to take into account the anticipated rental
income.
Purchase obligations are comprised of commitments to purchase
design tools and software for use in product development, which
will be spent between fiscal 2009 and fiscal 2012. We have not
included open purchase orders for inventory or other expenses
issued in the normal course of business in the purchase
obligations shown above.
In addition to the obligations included in the table above, we
have a $0.4 million liability related to post-retirement
benefits for employees at one of our international locations.
The timing of the related payments is not known.
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
43
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 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our cash and cash equivalents consist of commercial paper and
highly-liquid money market funds. 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 the 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
October 3, 2008, the carrying value of our cash and cash
equivalents approximates fair value.
Our long-term debt consists of our revolving credit facility and
our convertible senior notes. Our convertible senior notes bear
interest at fixed rates of 3.75% and 6.5%. Consequently, our
results of operations and cash flows are not subject to any
significant interest rate risk relating to our convertible
senior notes. Advances under our credit facility bear interest
at a variable rate ranging from prime plus 0.25 percent to
a maximum rate of prime plus 1.25 percent, as determined in
accordance with the interest rate grid set forth in the loan and
security agreement. If the prime rate increased, thereby
increasing our effective borrowing rate by the same amount, cash
interest expense related to the credit facility would increase
dependent on any outstanding borrowings. There were no
borrowings on the credit facility during fiscal 2008.
Foreign
Exchange Risk
We transact business in various foreign currencies and we face
foreign exchange 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 exchange 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
October 3, 2008, we held no foreign currency forward
exchange contracts. Based on our overall currency rate exposure
at October 3, 2008, a 10% change in currency rates would
not have a material effect on our consolidated financial
position, results of operations or cash flows.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
Receivables, net of allowances for doubtful accounts of $342
(2008) and $353 (2007)
|
|
|
14,398
|
|
|
|
13,584
|
|
Inventories
|
|
|
16,187
|
|
|
|
15,023
|
|
Other current assets
|
|
|
3,138
|
|
|
|
3,763
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
76,756
|
|
|
|
58,166
|
|
Property, plant and equipment, net
|
|
|
12,600
|
|
|
|
13,147
|
|
Intangible assets, net
|
|
|
2,480
|
|
|
|
3,200
|
|
Goodwill
|
|
|
2,429
|
|
|
|
2,324
|
|
License agreements, net
|
|
|
3,347
|
|
|
|
1,798
|
|
Other assets
|
|
|
2,992
|
|
|
|
3,444
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
100,604
|
|
|
$
|
82,079
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
11,265
|
|
|
$
|
7,117
|
|
Deferred income on sales to distributors
|
|
|
4,869
|
|
|
|
4,226
|
|
Accrued compensation and benefits
|
|
|
6,778
|
|
|
|
5,286
|
|
Accrued income tax
|
|
|
412
|
|
|
|
752
|
|
Restructuring
|
|
|
8
|
|
|
|
1,478
|
|
Other current liabilities
|
|
|
3,147
|
|
|
|
3,493
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,479
|
|
|
|
22,352
|
|
Convertible senior notes
|
|
|
45,648
|
|
|
|
45,037
|
|
Other liabilities
|
|
|
519
|
|
|
|
444
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
72,646
|
|
|
|
67,833
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6 and 7)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 25,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 100,000 shares
authorized; 23,852 (2008) and 23,152 (2007) issued
shares(1)
|
|
|
239
|
|
|
|
232
|
|
Additional paid-in capital(1)
|
|
|
269,487
|
|
|
|
263,427
|
|
Accumulated deficit
|
|
|
(227,043
|
)
|
|
|
(234,480
|
)
|
Accumulated other comprehensive loss
|
|
|
(14,725
|
)
|
|
|
(14,933
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
27,958
|
|
|
|
14,246
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
100,604
|
|
|
$
|
82,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 financial statements.
45
MINDSPEED
TECHNOLOGIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
144,349
|
|
|
$
|
125,805
|
|
|
$
|
135,919
|
|
Intellectual Property
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
160,699
|
|
|
|
127,805
|
|
|
|
135,919
|
|
Cost of goods sold
|
|
|
47,625
|
|
|
|
42,334
|
|
|
|
43,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
113,074
|
|
|
|
85,471
|
|
|
|
92,327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
56,217
|
|
|
|
57,447
|
|
|
|
64,104
|
|
Selling, general and administrative
|
|
|
46,984
|
|
|
|
43,385
|
|
|
|
46,970
|
|
Special charges
|
|
|
211
|
|
|
|
4,724
|
|
|
|
2,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
103,412
|
|
|
|
105,556
|
|
|
|
113,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating gain/(loss)
|
|
|
9,662
|
|
|
|
(20,085
|
)
|
|
|
(21,297
|
)
|
Interest expense
|
|
|
(2,360
|
)
|
|
|
(2,240
|
)
|
|
|
(2,231
|
)
|
Other income, net
|
|
|
544
|
|
|
|
522
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
7,846
|
|
|
|
(21,803
|
)
|
|
|
(22,665
|
)
|
Provision for income taxes
|
|
|
611
|
|
|
|
111
|
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
|
$
|
(24,514
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share, basic(1)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) per share, diluted(1)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of net income/(loss) per share, in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic(1)
|
|
|
23,046
|
|
|
|
22,156
|
|
|
|
21,107
|
|
Diluted(1)
|
|
|
23,202
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
|
(1) |
|
Share and per share amounts have been adjusted to reflect the
Companys one-for-five stock split which occurred on
June 30, 2008. See Note 1. |
See accompanying notes to consolidated financial statements.
46
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
|
$
|
(24,514
|
)
|
Adjustments required to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,173
|
|
|
|
5,681
|
|
|
|
6,977
|
|
Provision for bad debts
|
|
|
(12
|
)
|
|
|
(131
|
)
|
|
|
(15
|
)
|
Inventory provisions
|
|
|
(900
|
)
|
|
|
1,790
|
|
|
|
(586
|
)
|
Stock compensation
|
|
|
5,506
|
|
|
|
7,301
|
|
|
|
7,516
|
|
Other noncash items, net
|
|
|
79
|
|
|
|
176
|
|
|
|
(51
|
)
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(741
|
)
|
|
|
1,361
|
|
|
|
1,585
|
|
Inventories
|
|
|
(264
|
)
|
|
|
2,554
|
|
|
|
(7,692
|
)
|
Accounts payable
|
|
|
5,380
|
|
|
|
(5,096
|
)
|
|
|
863
|
|
Deferred income on sales to distributors
|
|
|
646
|
|
|
|
(177
|
)
|
|
|
986
|
|
Accrued expenses and other current liabilities
|
|
|
1,076
|
|
|
|
(1,398
|
)
|
|
|
274
|
|
Other
|
|
|
1,517
|
|
|
|
(189
|
)
|
|
|
(1,223
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
26,695
|
|
|
|
(10,042
|
)
|
|
|
(15,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(7,514
|
)
|
|
|
(4,074
|
)
|
|
|
(4,488
|
)
|
Acquisition of assets, net of cash acquired
|
|
|
(1,172
|
)
|
|
|
(4,875
|
)
|
|
|
|
|
Purchases of available-for-sale marketable securities
|
|
|
|
|
|
|
(15,682
|
)
|
|
|
(37,597
|
)
|
Sales of available-for-sale marketable securities
|
|
|
|
|
|
|
26,100
|
|
|
|
65,585
|
|
Maturities of held-to-maturity marketable securities
|
|
|
|
|
|
|
863
|
|
|
|
1,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) investing activities
|
|
|
(8,686
|
)
|
|
|
2,332
|
|
|
|
25,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options and warrants
|
|
|
111
|
|
|
|
3,412
|
|
|
|
5,296
|
|
Deferred financing costs
|
|
|
(805
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
(694
|
)
|
|
|
3,412
|
|
|
|
5,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rates on cash
|
|
|
(78
|
)
|
|
|
118
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
17,237
|
|
|
|
(4,180
|
)
|
|
|
14,641
|
|
Cash and cash equivalents at beginning of period
|
|
|
25,796
|
|
|
|
29,976
|
|
|
|
15,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
|
$
|
29,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE
LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock(1)
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital(1)
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
Balance at September 30, 2005
|
|
|
20,770
|
|
|
$
|
208
|
|
|
$
|
237,834
|
|
|
$
|
(188,052
|
)
|
|
$
|
(16,164
|
)
|
|
$
|
33,826
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,514
|
)
|
|
|
|
|
|
|
(24,514
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
497
|
|
|
|
497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(24,017
|
)
|
Common stock repurchased and retired
|
|
|
(23
|
)
|
|
|
|
|
|
|
(259
|
)
|
|
|
|
|
|
|
|
|
|
|
(259
|
)
|
Issuance of common stock
|
|
|
1,370
|
|
|
|
14
|
|
|
|
6,396
|
|
|
|
|
|
|
|
|
|
|
|
6,410
|
|
Compensation expense related to employee stock plans
|
|
|
23
|
|
|
|
|
|
|
|
7,516
|
|
|
|
|
|
|
|
|
|
|
|
7,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 29, 2006
|
|
|
22,140
|
|
|
|
222
|
|
|
|
251,487
|
|
|
|
(212,566
|
)
|
|
|
(15,667
|
)
|
|
|
23,476
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,914
|
)
|
|
|
|
|
|
|
(21,914
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734
|
|
|
|
734
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,180
|
)
|
Issuance of common stock
|
|
|
1,018
|
|
|
|
10
|
|
|
|
4,702
|
|
|
|
|
|
|
|
|
|
|
|
4,712
|
|
Common stock repurchased and retired
|
|
|
(6
|
)
|
|
|
|
|
|
|
(63
|
)
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
7,301
|
|
|
|
|
|
|
|
|
|
|
|
7,301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2007
|
|
|
23,152
|
|
|
|
232
|
|
|
|
263,427
|
|
|
|
(234,480
|
)
|
|
|
(14,933
|
)
|
|
|
14,246
|
|
Cumulative effect of adopting FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2007
|
|
|
23,152
|
|
|
|
232
|
|
|
|
263,427
|
|
|
|
(234,278
|
)
|
|
|
(14,933
|
)
|
|
|
14,448
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,235
|
|
|
|
|
|
|
|
7,235
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,443
|
|
Issuance of common stock
|
|
|
700
|
|
|
|
7
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
565
|
|
Common stock repurchased and retired
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
5,506
|
|
|
|
|
|
|
|
|
|
|
|
5,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 3, 2008
|
|
|
23,852
|
|
|
$
|
239
|
|
|
$
|
269,487
|
|
|
$
|
(227,043
|
)
|
|
$
|
(14,725
|
)
|
|
$
|
27,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 financial statements.
48
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Description
of Business
|
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 (30 million shares on a
pre-June 30, 2008 one-for-five reverse stock split basis)
of Mindspeed common stock at a price of $17.04 per share ($3.408
on a pre-June 30, 2008 one-for-five reverse stock split
basis), 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 12), 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.
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 sustain profitability and positive cash flows from
operations, the Company may need to further reduce operating
expenses
and/or
maintain increased revenues. Through fiscal 2008, the Company
has completed a series of cost reduction actions which have
improved its operating cost structure. These expense reductions
alone may not allow the Company to sustain the profitability it
achieved in the fourth quarter of fiscal 2008. 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 level of which may
decrease due to general economic conditions, and uncertainty,
over which the Company has no control. The Company may not be
successful in achieving the necessary revenue growth or it may
be unable to sustain past and future expense reductions in
subsequent periods. The Company may not be able to sustain
profitability.
49
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company believes that its existing sources of liquidity,
along with cash expected to be generated from product sales and
the sales 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 twelve months,
including the repayment of the remaining $10.5 million in
senior convertible debt due in November 2009. 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), 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
on favorable terms, or at all particularly in light of recent
economic conditions in the capital markets.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Fiscal Periods The Company maintains a
fifty-two/fifty-three week fiscal year ending on the Friday
closest to September 30. Fiscal year 2008 comprised
53 weeks and ended on October 3, 2008. Fiscal year
2007 and 2006 comprised 52 weeks and ended on September 28
and September 29, respectively.
Use of Estimates The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Among the significant
estimates affecting the Companys 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.
Management regularly evaluates our estimates and assumptions
based upon historical experience and various other factors that
the Company believes 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, the Companys future
results of operations may be affected.
Revenue Recognition The Companys
products are often integrated with software that is essential to
the functionality of the equipment. Additionally, the Company
provides unspecified software upgrades and enhancements through
its maintenance contracts for many of its products. Accordingly,
the Company accounts for revenue in accordance with Statement of
Position
No. 97-2,
Software Revenue Recognition, and all related
interpretations. For sales of products where software is
incidental to the equipment, the Company applies the provisions
of Staff Accounting Bulletin No. 104, Revenue
Recognition, and all related interpretations.
The Company generates revenues from direct product sales, sales
to distributors, maintenance contracts, development agreements
and the sale and license of intellectual property. The Company
recognizes 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. In instances where final
acceptance of the product, system, or solution is specified by
the customer, revenue is deferred until all acceptance criteria
have been met. Technical support services revenue is deferred
and recognized ratably over the period during which the services
are to be performed. Advanced services revenue is recognized
upon delivery or completion of performance.
Revenues are recognized 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.
50
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenues are recognized on sales to distributors based on the
rights granted to these distributors in the Distribution
agreements. The Company has 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 the Companys 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, the Company
credits 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,
recognition of revenue is deferred until the products are resold
by the distributor, at which time the Companys final net
sales price is fixed and the distributors right to return
the products expires. At the time of shipment to these
distributors, (i) a trade receivable at the invoiced
selling price is recorded because there is a legally enforceable
obligation from the distributor to pay the Company currently for
product delivered, (ii) inventory is relieved for the
carrying value of products shipped because legal title has
passed to the distributor, and (iii) deferred revenue and
deferred cost of inventory are recorded under the Deferred
income on sales to distributors caption in the liability
section of the Companys consolidated balance sheets. The
Company evaluates the deferred cost of inventory component of
this account for possible impairment by considering potential
obsolescence of products that might be returned and by
considering the potential of resale prices of these products
being below the Companys cost. By reviewing deferred
inventory costs in the manners discussed above, the Company
ensures 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 that
is recognized 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 3 Supplemental Financial
Statement Data to these consolidated financial statements.
Revenues from other distributors are recognized 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.
Cash and Cash Equivalents The Company
considers all highly liquid investments with insignificant
interest rate risk and original maturities of three months or
less from the date of purchase to be cash equivalents. The
carrying amounts of cash and cash equivalents approximate their
fair values.
Inventories Inventories are stated at the
lower of cost or market. Cost is computed using the average cost
method on a currently adjusted standard basis (which
approximates actual cost); market is based upon estimated net
realizable value. The valuation of inventories at the lower of
cost or market requires the use of estimates as to the amounts
of current inventories that will be sold. These estimates are
dependent on the Companys assessment of current and
expected orders from its customers, and orders generally are
subject to cancellation with limited advance notice prior to
shipment.
Property, Plant and Equipment Property, plant
and equipment is stated at cost. Depreciation is based on
estimated useful lives (principally ten years for furniture and
fixtures; three to five years for machinery and
51
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
equipment and photomasks; three years for computer software; and
the shorter of the remaining terms of the leases or the
estimated economic useful lives of the improvements for land and
leasehold improvements). Significant renewals and betterments
are capitalized and replaced units are written off. Maintenance
and repairs are charged to expense.
Goodwill Goodwill is recorded when the
purchase price paid for an acquisition exceeds the estimated
fair value of the net identified tangible and intangible assets
acquired. The Company performs a two-step process on an annual
basis, or more frequently if necessary, to determine
1) whether the fair value of the relevant reporting unit
exceeds carrying value and 2) to measure the amount of an
impairment loss, if any. The Company completed this process in
July 2008 and determined that there was no impairment to
goodwill.
Intangible Assets, net Intangible assets,
net, consist of backlog, and developed technology and are
amortized on a straight-line basis over estimated useful lives
of three months to five years.
License Agreements License agreements consist
mainly of licenses of intellectual property that the Company
uses in certain of its products. These licensed assets are
amortized on a straight-line basis over the estimated production
life cycle of each respective product, usually ranging from
three to five years. The Company expects to record amortization
of its license agreements of $836,000 (2009), $835,000 (2010),
$642,000 (2011), $606,000 (2012) and $428,000 (2013), and
the weighted average remaining life was 30 months.
Impairment of Long-Lived Assets The Company
continually monitors events or changes in circumstances that
could indicate that the carrying amount of long-lived assets to
be held and used, including intangible assets, may not be
recoverable. The determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. When impairment
is indicated for a long-lived asset, the amount of impairment
loss is the excess of net book value over fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell. As of October 3,
2008, the Company identified no circumstances that indicated a
potential impairment of any of its long-lived assets.
Foreign Currency Translation and
Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign
currency transaction costs. The functional currency of the
Companys principal foreign subsidiaries is the local
currency. Assets and liabilities denominated in foreign
functional currencies are translated into U.S. dollars at
the rates of exchange in effect at the balance sheet dates and
income and expense items are translated at the average exchange
rates prevailing during the period. The resulting foreign
currency translation adjustments are accumulated as a component
of other comprehensive income. For the remainder of the
Companys foreign subsidiaries, the functional currency is
the U.S. dollar. Inventories, property, plant and
equipment, cost of goods sold and depreciation for those
operations are remeasured from foreign currencies into
U.S. dollars at historical exchange rates; other accounts
are translated at current exchange rates. Gains and losses
resulting from those remeasurements are included in earnings.
Gains and losses resulting from foreign currency transactions
are recognized currently in earnings.
Research and Development Research and
development costs, other than software development costs, are
expensed as incurred. Development costs for software to be sold
or marketed are capitalized following attainment of
technological feasibility. No development costs that qualify for
capitalization were incurred during any of the periods presented.
Product Warranties The Companys
products typically carry a warranty for periods of up to five
years. The Company establishes reserves for estimated product
warranty costs in the period the related revenue is recognized,
based on historical experience and any known product warranty
issues. Product warranty reserves are not significant in any of
the periods presented.
Stock-Based Compensation Effective
October 1, 2005, the Company adopted SFAS No. 123
(revised 2004), Share-Based Payment (SFAS 123R)
to account for stock-based compensation. SFAS 123R requires
that the Company account for all stock-based compensation
transactions using a fair-value method and recognize the
52
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the Companys common stock at the grant
date. The Company estimates the fair value of stock options
granted using the Black-Scholes option pricing model. The use of
the Black-Scholes model requires a number of estimates,
including the expected option term, the expected volatility in
the price of the Companys common stock, the risk-free rate
of interest and the dividend yield on the Companys common
stock. Judgment is 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. The
financial statements include amounts that are based on the
Companys best estimates and judgments.
Other Income, net Other income consists of
interest income, foreign exchange gains and losses, franchise
taxes and other non-operating gains and losses.
Income Taxes The provision for income taxes
is determined in accordance with SFAS No. 109,
Accounting For Income Taxes. Deferred tax assets and
liabilities are determined based on the temporary differences
between the financial reporting and tax bases of assets and
liabilities, applying enacted statutory tax rates in effect for
the year in which the differences are expected to reverse. A
valuation allowance is recorded when it is more likely than not
that some or all of the deferred tax assets will not be realized.
On September 29, 2007, the Company adopted FIN 48,
which is a change in accounting for income taxes. FIN 48
contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with
SFAS 109. The first step is to evaluate the tax position
for recognition by determining if the weight of available
evidence indicates that it is more likely than not that the
position will be sustained on audit, including resolution of
related appeals or litigation processes, if any. The second step
is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon settlement. The Company
will classify the liability for unrecognized tax benefits as
current to the extent that the Company anticipates payment (or
receipt) of cash within one year. The Company recognizes
interest and penalties related to unrecognized tax benefits in
the tax provision.
Per Share Information Basic income/(loss) per
share is computed by dividing net income by the weighted average
number of shares outstanding. In computing diluted earnings per
share, the weighted average number of shares outstanding is
adjusted to additionally reflect the effect of potentially
dilutive securities such as stock options, warrants, convertible
senior notes and unvested restricted stock units. The dilutive
effect of stock options, warrants and unvested restricted stock
units is computed using the treasury stock method, which assumes
any proceeds that could be obtained upon the exercise of stock
options, warrants and vesting of restricted stock units would be
used to purchase common shares at the average market price for
the period. The assumed proceeds include the purchase price the
grantee pays, the hypothetical windfall tax benefit that the
Company receives upon assumed exercise or vesting and the
hypothetical average unrecognized compensation expense for the
period. The Company calculates the assumed proceeds from excess
tax benefits based on the as-if deferred tax assets
calculated under the provision of SFAS 123(R).
For the year ended October 3, 2008, potentially dilutive
securities consisted of stock options and restricted stock and
resulted in 0.2 million potential common shares. Stock
options, warrants and convertible senior notes to purchase
approximately 13.5 million shares for the year ended
October 3, 2008 were outstanding but were not included in
the computation of diluted earnings per share because the effect
would have been anti-dilutive.
Because the Company incurred a net loss in fiscal 2007 and
fiscal 2006, the potential dilutive effect of the Companys
outstanding stock options, stock warrants and convertible senior
notes was not included in the computation of diluted loss per
share because these securities were antidilutive.
Reclassifications Certain reclassifications
have been made to 2007 financial statements to conform to the
2008 presentation.
Concentrations Financial instruments that
potentially subject the Company to a concentration of credit
risk consist principally of cash and cash equivalents and trade
accounts receivable. Cash and cash equivalents consist of
53
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
demand deposits and money market funds maintained with several
financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. Generally, these
deposits may be redeemed upon demand and are maintained with
high credit quality financial institutions and therefore have
minimal credit risk. The Companys trade accounts
receivable primarily are derived from sales to manufacturers of
network infrastructure equipment and electronic component
distributors. Management believes that credit risks on trade
accounts receivable are moderated by the diversity of its end
customers and geographic sales areas. The Company performs
ongoing credit evaluations of its customers financial
condition and requires collateral, such as letters of credit and
bank guarantees, whenever deemed necessary.
The following individual customers accounted for 10% or more of
net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Customer A
|
|
|
16
|
%
|
|
|
15
|
%
|
|
|
11
|
%
|
Customer B
|
|
|
11
|
%
|
|
|
16
|
%
|
|
|
17
|
%
|
Customer C
|
|
|
3
|
%
|
|
|
7
|
%
|
|
|
11
|
%
|
The following individual customers accounted for 10% or more of
total accounts receivable at fiscal year ends:
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Customer B
|
|
|
9
|
%
|
|
|
24
|
%
|
Customer C
|
|
|
1
|
%
|
|
|
16
|
%
|
Customer D
|
|
|
20
|
%
|
|
|
0
|
%
|
Customer E
|
|
|
11
|
%
|
|
|
4
|
%
|
Customer F
|
|
|
0
|
%
|
|
|
13
|
%
|
Supplemental Cash Flow Information Interest
paid was $1.8 million, $1.7 million, and
$1.7 million for fiscal 2008, fiscal 2007, and fiscal 2006,
respectively. Income taxes paid, net of refunds received were
$222,000, $2.3 million, and ($36,000) during fiscal 2008,
fiscal 2007, and fiscal 2006, respectively. Non-cash investing
activities in fiscal 2008 and fiscal 2007 consisted of the
purchase of $306,000 and $979,000, respectively of property and
equipment from suppliers on account. Assets acquired consist of
amounts paid and received during 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.
Comprehensive Income/(Loss) Accumulated other
comprehensive income/(loss) at October 3, 2008,
September 28, 2007 and September 29, 2006 consists of
foreign currency translation adjustments. Foreign currency
translation adjustments are not presented net of any tax effect
as the Company does not expect to incur any tax liability or
realize any benefit related thereto.
Recent Accounting Standards In September
2006, the FASB issued Financial Accounting Standards (SFAS)
No. 157, Fair Value Measurement, which defines
fair value, establishes a framework for measuring fair value and
expands disclosures regarding assets and liabilities measured at
fair value. In February 2008, the FASB issued FASB Staff
Position (FSP)
157-1,
Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That
Address Fair Value Measurements for Purposes of Lease
Classification or Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157
(FSP 157-2).
FSP 157-1
amends SFAS 157 to remove certain leasing transactions from
its scope.
FSP 157-2
delays the effective date of SFAS 157 for all nonfinancial
assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2010. The measurement
and disclosure requirements related to financial assets and
financial liabilities are effective for us in the first quarter
of fiscal 2009. The adoption of SFAS 157 for financial
assets and financial liabilities is not expected to have a
material impact on our results of operations or financial
position. The Company is currently assessing the impact that
SFAS 157 will have on its results of operations and
financial position when it is applied to nonfinancial assets and
nonfinancial liabilities beginning in the first quarter of
fiscal 2010.
54
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, the FASB issued Financial Accounting Standards
(SFAS) No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. The statement permits
entities to choose to measure many financial instruments and
certain other items at fair value that are currently not
required to be measured at fair value. The Company will be
required to adopt SFAS 159 in the first quarter of fiscal
2009 and does not expect that the adoption will have a material
impact on its financial condition or results of operations.
In June 2007, the FASB ratified Emerging Issues Task Force
consensus on EITF Issue
No. 07-3,
Accounting for Non-refundable Advanced Payments for Goods
or Services to be Used in Future Research and Development
Activities. EITF Issue
No. 07-3
requires that these payments be deferred and capitalized and
expensed as goods are delivered or as the related services are
performed. The Company will be required to adopt
EITF 07-3
in the first quarter of fiscal 2009 and does not expect that the
adoption will have a material impact on its financial condition
or results of operations.
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. 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 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
Activities an 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. We 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 our 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.
|
|
3.
|
Supplemental
Financial Statement Data
|
Inventories
Inventories at fiscal year ends consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Work-in-process
|
|
$
|
8,620
|
|
|
$
|
7,497
|
|
Finished goods
|
|
|
7,567
|
|
|
|
7,526
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,187
|
|
|
$
|
15,023
|
|
|
|
|
|
|
|
|
|
|
55
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company assesses the recoverability of inventories through
an ongoing review of inventory levels in relation to sales
backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable
demand, the value of inventory that at the time of the review is
not expected to be sold is written down. The amount of the
write-down is the excess of historical cost over estimated
realizable value (generally zero). Once established, these
write-downs are considered permanent adjustments to the cost
basis of the excess inventory.
The assessment of the recoverability of inventories, and the
amounts of any write-downs, are based on currently available
information and assumptions about future demand (generally over
twelve months) and market conditions. Demand for the
Companys 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.
The Company may retain and make available for sale some or all
of the inventories which have been written down. In the event
that actual demand is higher than originally projected, the
Company may be able to sell a portion of these inventories in
the future. The Company generally scraps inventories which have
been written down and are identified as obsolete.
The Companys gross margin included a benefit of
$1.6 million (2008), $4.0 million (2007) and
$5.5 million (2006) from the sale of inventories that
the Company had written down to a zero cost basis during fiscal
2001. As of October 3, 2008, the Company continued to hold
inventories with an original cost of $6.0 million which
were previously written down to a zero cost basis.
Deferred
Income on Shipments to Distributors
Deferred income on shipments to distributors is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
September 28,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred revenue on shipments to distributors
|
|
$
|
5,387
|
|
|
$
|
4,953
|
|
Deferred cost of inventory on shipments to distributors
|
|
|
(576
|
)
|
|
|
(808
|
)
|
Reserves
|
|
|
58
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Deferred income on sales to distributors
|
|
$
|
4,869
|
|
|
$
|
4,226
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
Property, plant and equipment at fiscal year ends consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery and equipment
|
|
$
|
73,229
|
|
|
$
|
74,072
|
|
Leasehold improvements
|
|
|
3,702
|
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,931
|
|
|
|
77,613
|
|
Accumulated depreciation and amortization
|
|
|
(64,331
|
)
|
|
|
(64,466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,600
|
|
|
$
|
13,147
|
|
|
|
|
|
|
|
|
|
|
56
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 (see Note 15). These
intangible assets consist of backlog (approximately $100,000),
developed technology (approximately $3,100,000) and goodwill
(approximately $2,429,000). The Company expects to record
amortization of its intangible assets of $620,000 in fiscal 2009
through fiscal 2012. The weighted average remaining life of the
amortizable intangible assets is approximately 48 months.
The components of the provision for income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Foreign
|
|
|
99
|
|
|
|
566
|
|
|
|
2,137
|
|
State and local
|
|
|
10
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
109
|
|
|
|
576
|
|
|
|
2,147
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
502
|
|
|
|
(465
|
)
|
|
|
(298
|
)
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
502
|
|
|
|
(465
|
)
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
611
|
|
|
$
|
111
|
|
|
$
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income taxes computed at the
U.S. federal statutory income tax rate to the provision for
income taxes on continuing operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. federal statutory tax at 35%
|
|
$
|
2,733
|
|
|
$
|
(7,642
|
)
|
|
$
|
(7,933
|
)
|
State taxes, net of federal effect
|
|
|
739
|
|
|
|
(1,481
|
)
|
|
|
(3,612
|
)
|
Foreign income taxes in excess of U.S.
|
|
|
420
|
|
|
|
(293
|
)
|
|
|
(524
|
)
|
Research and development credits
|
|
|
|
|
|
|
(2,592
|
)
|
|
|
(3,443
|
)
|
Valuation allowance
|
|
|
(33,837
|
)
|
|
|
13,992
|
|
|
|
17,187
|
|
Reversal of research and development credits, federal and state
|
|
|
29,041
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,515
|
|
|
|
(1,873
|
)
|
|
|
174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
611
|
|
|
$
|
111
|
|
|
$
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes consists of the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
7,328
|
|
|
$
|
(22,926
|
)
|
|
$
|
(29,418
|
)
|
Foreign
|
|
|
518
|
|
|
|
1,123
|
|
|
|
6,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,846
|
|
|
$
|
(21,803
|
)
|
|
$
|
(22,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred income tax assets and liabilities at fiscal year-ends
consist of the tax effects of temporary differences related to
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
12,118
|
|
|
$
|
14,083
|
|
Deferred revenue
|
|
|
1,999
|
|
|
|
1,831
|
|
Accrued compensation and benefits
|
|
|
1,292
|
|
|
|
1,256
|
|
Product returns and allowances
|
|
|
745
|
|
|
|
801
|
|
Net operating losses
|
|
|
232,890
|
|
|
|
233,909
|
|
Research and development and investment credits
|
|
|
|
|
|
|
36,021
|
|
Foreign deferred taxes
|
|
|
1,113
|
|
|
|
1,615
|
|
Property, plant and equipment
|
|
|
|
|
|
|
673
|
|
Other
|
|
|
5,244
|
|
|
|
6,547
|
|
Valuation allowance
|
|
|
(248,299
|
)
|
|
|
(282,136
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,102
|
|
|
|
14,600
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
379
|
|
|
|
|
|
Deferred state taxes
|
|
|
5,610
|
|
|
|
12,985
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
5,989
|
|
|
|
12,985
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,113
|
|
|
$
|
1,615
|
|
|
|
|
|
|
|
|
|
|
Based upon the Companys operating losses and expected
future operating results, management determined that it is more
likely than not that the U.S. federal and state deferred
tax assets as of October 3, 2008 and September 28,
2007 will not be realized through the reduction of future income
tax payments. Consequently, the Company has established a
valuation allowance for its net U.S. federal and state
deferred tax assets as of those dates. Foreign deferred tax
assets consist mainly of research and development credits and
are expected to be realized through a reduction of future tax
payments, therefore no valuation allowance has been established
for these deferred tax assets.
Through the Distribution date, Mindspeeds results of
operations were included in Conexants consolidated federal
and state income tax returns. The provision for income taxes and
the related deferred tax assets and liabilities for periods
prior to the Distribution were calculated as if Mindspeed had
filed separate tax returns as an independent company.
In connection with the Distribution, Mindspeed and Conexant
entered into a tax allocation agreement which provides, among
other things, for the allocation between Conexant and Mindspeed
of federal, state, local and foreign tax liabilities relating to
Mindspeed. The tax allocation agreement also allocates the
liability for any taxes that may arise in connection with the
Distribution. The tax allocation agreement generally provides
that Conexant will be responsible for any such taxes. However,
Mindspeed will be responsible for any taxes imposed on
Mindspeed, Conexant or Conexant stockholders if either the
Distribution fails to qualify as a reorganization for
U.S. federal income tax purposes or the Distribution of
Mindspeed Technologies common stock is disqualified as a
tax-free transaction to Conexant for U.S. federal income
tax purposes and such failure or disqualification is
attributable to post-Distribution transaction actions by
Mindspeed, its subsidiaries or its stockholders.
58
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of October 3, 2008, Mindspeed had U.S. federal net
operating loss carryforwards of approximately
$630.9 million, which expire at various dates through 2029,
and aggregate state net operating loss carryforwards of
approximately $139.9 million, which expire at various dates
through 2029.
The deferred tax assets as of October 3, 2008 include a
deferred tax asset of $11 million representing net
operating losses arising from the exercise of stock options by
Mindspeed employees. To the extent the Company realizes any tax
benefit for the net operating losses attributable to the stock
option exercises, such amount would be credited directly to
stockholders equity.
To date, the Company has not performed a formal study of
potential research and development credits. If, at any time in
the future, the Company determines it appropriate to conduct a
formal study of potential research and development credits,
completion of a study may have an effect on the Companys
estimate of this unrealized tax benefit.
The Company has not provided for U.S. taxes or foreign
withholding taxes on approximately $700,000 of undistributed
earnings from its foreign subsidiaries because such earnings are
to be reinvested indefinitely. If these earnings were
distributed, foreign tax credits may become available under
current law to reduce the resulting U.S. income tax
liability.
On July 13, 2006, the FASB issued 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 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.
FIN 48 is effective for fiscal years beginning after
December 15, 2006.
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 deferred tax assets 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.
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 October 3,
2008.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
2008
|
|
|
Balance as of September 29, 2007
|
|
$
|
28,917
|
|
Increases in tax positions for prior years
|
|
|
7,589
|
|
Increases in tax positions for current year
|
|
|
|
|
|
|
|
|
|
Balance at October 3, 2008
|
|
$
|
36,506
|
|
|
|
|
|
|
The Company does not anticipate that unrecognized tax benefits
will significantly increase or decrease within 12 months of
the reporting date.
59
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company is currently open to audit under the statute of
limitations by the taxing authorities for the years ending
September 30, 2004 to 2008 in our foreign jurisdictions.
|
|
5.
|
Revolving
Credit Facility and Convertible Senior Notes
|
Revolving
Credit Facility
On September 30, 2008, the Company entered into a loan and
security agreement (the Loan and Security Agreement) with
Silicon Valley Bank (SVB). Under the Loan and Security
Agreement, SVB has agreed to provide the Company with a
three-year revolving credit line of up to $15.0 million,
subject to availability against certain eligible accounts
receivable, for the purposes of (i) working capital;
(ii) funding its general business requirements; and
(iii) repaying or repurchasing its convertible senior Notes
due in 2009. The indebtedness of the Company to SVB under the
Loan and Security Agreement is guaranteed by three domestic
subsidiaries of the Company and secured by substantially all of
the domestic assets of the Company and such subsidiaries other
than intellectual property.
Any indebtedness under the Loan and Security Agreement bears
interest at a variable rate ranging from prime plus
0.25 percent to a maximum rate of prime plus
1.25 percent, as determined in accordance with the interest
rate grid set forth in the Loan and Security Agreement. The Loan
and Security Agreement contains affirmative and negative
covenants which, among other things, require the Company to
maintain a minimum tangible net worth and to deliver to SVB
specified financial information, including annual, quarterly and
monthly financial information, and limit the Companys
ability to (or to permit any subsidiaries to), subject to
certain exceptions and limitations: (i) merge with or
acquire other companies; (ii) create liens on its property;
(iii) incur debt obligations; (iv) enter into
transactions with affiliates, except on an arms length
basis; (v) dispose of property; and (vi) issue
dividends or make distributions.
As of October 3, 2008, the Company was in compliance with
all required covenants. Proceeds from the credit facility will
be used to maintain liquidity and fund working capital
requirements, on an as needed basis. At October 3, 2008,
the Company had no outstanding borrowings under the credit
facility with SVB.
3.75% Convertible
Senior Notes due 2009
In December 2004, the Company sold $46.0 million aggregate
principal amount of convertible senior notes due 2009 for net
proceeds (after discounts and commissions) of approximately
$43.9 million. The notes are senior unsecured obligations
of the Company, 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 Company 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 the Companys common
stock. Upon conversion, the Company may, at its 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 the Company undergoes certain fundamental changes (as defined
in the indenture), holders of notes may require the Company 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
60
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
notes, the Company will be required to increase the number of
shares issuable upon conversion by up to 11.95 shares
(59.75 on a pre-June 30, 2008 one-for-five reverse stock
split basis) per $1,000 principal amount of notes. The number of
additional shares, if any, will be determined by the table set
forth in the indenture governing the notes. In the event of a
non-stock change of control constituting a public acquirer
change of control (as defined in the indenture), the
Company may, in lieu of issuing additional shares or 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, the Companys contingent
obligation to issue additional shares or make additional cash
payment upon conversion following a fundamental change is an
embedded derivative. As of October 3, 2008, the
estimated fair value of the Companys liability under the
fundamental change adjustment was not significant.
In connection with the sale of the notes, the Company granted
the purchasers certain registration rights. The Companys
Form S-3
registration statement covering the resale of the notes and the
sale of shares issuable upon conversion of the notes was
declared effective by the SEC on April 6, 2005.
Upon completion of the sale of the notes, the $50 million
Credit Agreement with Conexant was terminated. The Company had
made no borrowings under the credit facility, and no portion of
the related warrant is, or will become, exercisable.
As of October 3, 2008, the stated value of the convertible
senior notes due 2009 was $31 million and the estimated
fair value of these notes was approximately $26 million.
6.50% Convertible
Senior Notes due 2013
On July 30, 2008, the Company entered into separate
exchange agreements with certain holders of our existing
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 convertible senior notes due 2013 (the
new notes). The exchanges closed on August 1, 2008. The
Company paid at the closing an aggregate of approximately
$100,000 in accrued and unpaid interest on the existing notes
that were exchanged for the new notes, as well as approximately
$900,000 in transaction fees.
The Company issued the new notes pursuant to an indenture, dated
as of August 1, 2008, between it and Wells Fargo Bank,
N.A., as trustee. Following the completion of the exchange,
$31 million in aggregate principal amount of the
3.75% Convertible Senior 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, the Company will be required to repay the
outstanding principal of the new notes.
The new notes are convertible at the option of the holders, at
any time on or prior to maturity, into shares of the
Companys 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.
For financial accounting purposes, the Companys contingent
obligation to issue additional shares or make additional cash
payment upon conversion following a fundamental change is an
embedded derivative. As of
61
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 3, 2008, the estimated fair value of the
Companys liability under the fundamental change adjustment
was not significant.
If there is an event of default under 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.
As of October 3, 2008, the estimated fair value of the
convertible senior notes due 2013 was approximately
$15 million.
In June 2007, the Company extended its Sublease with Conexant
pursuant to which the Company leases its headquarters in Newport
Beach, California. The Sublease, which had been amended and
restated in March 2005, had an initial term through June 2008.
The Sublease has been extended for an additional two year term
(through June 2010) for a reduced amount of space. Rent
payable under the Sublease for the next 12 months is
approximately $3.4 million. Rent payable is subject to
annual increases of 3%, plus a prorated portion of operating
expenses associated with the leased property. The Company
estimates its minimum future obligation under the Sublease at
approximately $10.2 million over the remainder of the lease
term, but actual costs under the Sublease will vary based upon
Conexants actual costs. In addition, each year the Company
may elect to purchase certain services from Conexant based on a
prorated portion of Conexants actual costs.
The Company leases its other facilities and certain equipment
under non-cancelable operating leases. The leases expire at
various dates through 2014 and contain various provisions for
rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time.
Amounts due under facility leases were approximately
$8.0 million (2008), $8.8 million (2007), and
$7.7 million (2006) including $6.5 million (2008),
$6.6 million (2007), and $6.5 million (2006) paid
to Conexant under the Sublease. As of October 3, 2008, the
Companys minimum future obligations under operating leases
(including the estimated minimum future obligation under the
Sublease) are as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2009
|
|
$
|
7,577
|
|
2010
|
|
|
5,770
|
|
2011
|
|
|
944
|
|
2012
|
|
|
726
|
|
2013
|
|
|
753
|
|
Thereafter
|
|
|
373
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
16,143
|
|
|
|
|
|
|
62
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
The Company has made guarantees and indemnities, under which it
may be required to make payments to a guaranteed or indemnified
party, in relation to certain transactions. In connection with
the Distribution, the Company generally assumed responsibility
for all contingent liabilities and then-current and future
litigation against Conexant or its subsidiaries related to
Mindspeed. The Company may also be responsible for certain
federal income tax liabilities under the tax allocation
agreement between Mindspeed and Conexant, which provides that
the Company will be responsible for certain taxes imposed on
Mindspeed, Conexant or Conexant stockholders. In connection with
the sales of its products, the Company provides intellectual
property indemnities to its customers. In connection with
certain facility leases, the Company has indemnified its lessors
for certain claims arising from the facility or the lease. The
Company indemnifies its 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
guarantees and indemnities to customers in connection with
product sales generally are subject to limits based upon the
amount of the related product sales. Some customer guarantees
and indemnities, and the majority of other guarantees and
indemnities, do not provide for any limitation of the maximum
potential future payments the Company could be obligated to
make. The Company has not recorded any liability for these
guarantees and indemnities in the accompanying consolidated
balance sheets.
The Companys authorized capital consists of
100,000,000 shares of common stock, par value $0.01 per
share, and 25,000,000 shares of preferred stock, par value
$0.01 per share, of which 2,500,000 shares are designated
as Series A junior participating preferred stock (Junior
Preferred Stock).
The Company has a preferred share purchase rights plan to
protect stockholders rights in the event of a proposed
takeover of the Company. Pursuant to the preferred share
purchase right (a Right) attached to each share of common stock,
the holder may, in certain takeover-related circumstances,
become entitled to purchase from the Company 5/100th of a
share of Junior Preferred Stock at a price of $20, subject to
adjustment. Also, in certain takeover-related circumstances,
each Right (other than those held by an acquiring person) will
generally be exercisable for shares of the Companys common
stock or stock of the acquiring person having a then-current
market value of twice the exercise price. In certain events,
each Right may be exchanged by the Company for one share of
common stock or 5/100th of a share of Junior Preferred
Stock. The Rights expire on June 26, 2013, unless earlier
exchanged or redeemed at a redemption price of $0.01 per Right,
subject to adjustment.
63
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warrants
In the Distribution, Mindspeed issued to Conexant a warrant to
purchase six million shares (30 million shares on a
pre-June 30, 2008 one-for-five reverse stock split basis)
of Mindspeed common stock at a price of $17.04 per share ($3.408
per share on a pre-June 30, 2008 one-for-five reverse stock
split basis), exercisable through June 27, 2013. The
$89 million fair value of the warrant (estimated by
management at the time of the Distribution using the
Black-Scholes option pricing model) was recorded as a return of
capital to Conexant. As of October 3, 2008, the entire
warrant remains outstanding.
The warrant held by 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. In the event that the Company
issues, or is deemed to have issued, shares of its common stock,
or securities convertible into its common stock, at prices below
the current market price of its 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 the common stock at the time of the issuance of such
securities.
|
|
10.
|
Stock-Based
Compensation
|
Effective October 1, 2005, the Company adopted Financial
Accounting Standards (SFAS) 123R, Share-Based
Payment using the modified prospective
application. The Company elected the transition method
described in FASB Staff Position (FSP)
FAS 123R-3
related to accounting for the tax effects of share-based payment
awards to employees. SFAS 123R requires that the Company
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. As required by
SFAS 123R, our stock-based compensation expense for fiscal
2008, fiscal 2007 and fiscal 2006 includes the fair value of new
awards, modified awards and any unvested awards outstanding at
October 1, 2005. The fair value of restricted stock awards
is based upon the market price of our common stock at the grant
date. The Company estimates the fair value of stock option
awards, as of the grant date, using the Black-Scholes
option-pricing model. The fair value of each award is recognized
on a straight-line basis over the vesting or service period.
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 recent operating losses and
the possibility of future operating results, no income tax
benefits have been recognized for any U.S. federal and
state operating losses including 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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Weighted-average fair value of options granted
|
|
$
|
1.84
|
|
|
$
|
5.80
|
|
|
$
|
7.65
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
64
|
%
|
|
|
74
|
%
|
|
|
77
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option life
|
|
|
3.2 years
|
|
|
|
3.3 years
|
|
|
|
3.4 years
|
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
4.7
|
%
|
|
|
4.7
|
%
|
64
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost of goods sold
|
|
$
|
173
|
|
|
$
|
385
|
|
Research and development
|
|
|
2,267
|
|
|
|
2,587
|
|
Selling, general and administrative
|
|
|
3,066
|
|
|
|
4,260
|
|
Special charges
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
5,506
|
|
|
$
|
7,301
|
|
|
|
|
|
|
|
|
|
|
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. As of October 3,
2008, an aggregate of 339,000 shares of the Companys
common stock were available for issuance under these plans. 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 Plan each year and (3) fixed the total number of
shares authorized for issuance under the Directors Stock Plan at
288,000 (1,440,000 on a pre-June 30, 2008 one-for-five
reverse stock split basis).
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 six
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. During the years ended September 30, 2007 and 2006,
the Company issued 7,000 (35,000 on a pre-June 30, 2008
one-for-five reverse stock split basis) and 21,600 shares
(108,000 shares on a
65
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pre-June 30, 2008 one-for-five reverse stock split basis)
of its common stock under the employee stock purchase plan for
net proceeds of $81,000 and $298,000, respectively.
From time to time, the Company may issue, and has previously
issued stock based awards outside of these plans pursuant to
stand-alone agreements and in accordance with NASDAQ Marketplace
Rule 4350(i)(1)(A)(iv).
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 (shares
in thousands and adjusted to reflect our June 30, 2008
one-for-five reverse stock split):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
Outstanding at September 30, 2005
|
|
|
5,216
|
|
|
$
|
11.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2005
|
|
|
3,821
|
|
|
$
|
11.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
205
|
|
|
|
13.55
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(602
|
)
|
|
|
8.80
|
|
|
|
|
|
|
$
|
4.4 million
|
|
Forfeited or expired
|
|
|
(380
|
)
|
|
|
15.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 29, 2006
|
|
|
4,439
|
|
|
$
|
11.60
|
|
|
|
4.3 years
|
|
|
$
|
1.9 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 29, 2006
|
|
|
3,734
|
|
|
$
|
11.30
|
|
|
|
3.9 years
|
|
|
$
|
1.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
491
|
|
|
|
10.85
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(422
|
)
|
|
|
8.05
|
|
|
|
|
|
|
$
|
1.2 million
|
|
Forfeited or expired
|
|
|
(526
|
)
|
|
|
13.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 28, 2007
|
|
|
3,982
|
|
|
$
|
11.65
|
|
|
|
4.0 years
|
|
|
$
|
1.4 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 28, 2007
|
|
|
3,308
|
|
|
$
|
11.55
|
|
|
|
3.3 years
|
|
|
$
|
1.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
495
|
|
|
|
4.20
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(18
|
)
|
|
|
5.97
|
|
|
|
|
|
|
$
|
33,000
|
|
Forfeited or expired
|
|
|
(931
|
)
|
|
|
12.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 3, 2008
|
|
|
3,528
|
|
|
$
|
10.50
|
|
|
|
3.7 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 3, 2008
|
|
|
2,704
|
|
|
$
|
11.59
|
|
|
|
2.6 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
3,433
|
|
|
$
|
10.65
|
|
|
|
3.6 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 3, 2008, there was unrecognized compensation
expense of $2.0 million related to unvested stock options,
which the Company expects to recognize over a weighted-average
period of 1.4 years.
66
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes all options to purchase Mindspeed
common stock outstanding at October 3, 2008 (shares in
thousands and adjusted to reflect our June 30, 2008
one-for-five reverse stock split):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Shares
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
$ 2.08 - $ 4.85
|
|
|
640
|
|
|
|
2.0
|
|
|
$
|
4.01
|
|
|
|
172
|
|
|
$
|
4.63
|
|
5.02 - 9.90
|
|
|
971
|
|
|
|
0.9
|
|
|
|
8.60
|
|
|
|
912
|
|
|
|
8.64
|
|
10.00 - 19.90
|
|
|
1,803
|
|
|
|
2.6
|
|
|
|
12.69
|
|
|
|
1,506
|
|
|
|
12.90
|
|
20.05 - 29.96
|
|
|
76
|
|
|
|
0.2
|
|
|
|
22.37
|
|
|
|
76
|
|
|
|
22.37
|
|
30.27 - 49.45
|
|
|
38
|
|
|
|
2.8
|
|
|
|
40.10
|
|
|
|
38
|
|
|
|
40.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.08 - 49.45
|
|
|
3,528
|
|
|
|
1.8
|
|
|
|
10.50
|
|
|
|
2,704
|
|
|
|
11.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
The Companys stock incentive plans also provide for awards
of restricted shares of common stock and other stock-based
incentive awards and from time to time the Company has used
restricted stock awards for incentive or retention purposes.
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.
Restricted stock grants, adjusted for our one-for-five stock
split which occurred on June 30, 2008, totaled
772,000 shares (2008), 556,000 shares (2007) and
833,000 shares (2006). Many of the Companys
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 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 following
table summarizes restricted stock award activity (shares in
thousands and adjusted to reflect our June 30, 2008
one-for-five reverse stock split):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested shares at September 29, 2006
|
|
|
735
|
|
|
$
|
12.70
|
|
Granted
|
|
|
556
|
|
|
|
9.55
|
|
Vested
|
|
|
(531
|
)
|
|
|
11.55
|
|
Forfeited
|
|
|
(122
|
)
|
|
|
12.20
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at September 28, 2007
|
|
|
638
|
|
|
$
|
10.85
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
772
|
|
|
|
4.49
|
|
Vested
|
|
|
(594
|
)
|
|
|
7.64
|
|
Forfeited
|
|
|
(134
|
)
|
|
|
8.87
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at October 3, 2008
|
|
|
682
|
|
|
$
|
6.69
|
|
|
|
|
|
|
|
|
|
|
67
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total fair value of shares vested during the year ended
October 3, 2008 was $3.4 million. As of
October 3, 2008, there was unrecognized compensation
expense of $2.0 million related to unvested restricted
stock awards, which the Company expects to recognize over a
weighted-average period of 0.9 years.
|
|
11.
|
Employee
Benefit Plans
|
The Company sponsors a 401(k) retirement savings plan for its
eligible employees. The Company matches a portion of employee
contributions and can fund the matching contribution in shares
of its common stock or in cash. In fiscal 2008, the Company
issued 70,000 shares (adjusted to reflect our June 30,
2008 one-for five reverse stock split) and contributed $914,000
in cash to fund the matching contributions. In fiscal 2007 and
fiscal 2006, the Company issued 122,000 shares, and
66,000 shares, respectively, of its common stock (adjusted
to reflect our June 30, 2008 one-for-five reverse stock
split) to fund the matching contributions. The Company
recognized expenses under the retirement savings plans, of
$1.4 million (2008), $1.2 million (2007), and
$0.8 million (2006).
Special charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
2006
|
|
Restructuring charges
|
|
$
|
211
|
|
|
$
|
4,724
|
|
|
$
|
2,550
|
|
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 October 3, 2008 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Restructuring balance, September 29, 2006
|
|
$
|
953
|
|
|
$
|
714
|
|
|
$
|
1,667
|
|
Charged to costs and expenses
|
|
|
2,191
|
|
|
|
2,533
|
|
|
|
4,724
|
|
Non cash charges
|
|
|
(61
|
)
|
|
|
|
|
|
|
(61
|
)
|
Cash payments
|
|
|
(2,851
|
)
|
|
|
(1,995
|
)
|
|
|
(4,846
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 28, 2007
|
|
|
232
|
|
|
|
1,252
|
|
|
|
1,484
|
|
Charged to costs and expenses
|
|
|
(40
|
)
|
|
|
251
|
|
|
|
211
|
|
Non cash charges
|
|
|
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
Cash payments
|
|
|
(186
|
)
|
|
|
(1,430
|
)
|
|
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 3, 2008
|
|
$
|
6
|
|
|
$
|
2
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
Related
Party Transactions
|
The Company leases its headquarters and principal design center
in Newport Beach, California from Conexant. For the years ended
October 3, 2008, September 28, 2007, and
September 29, 2006, rent and operating expenses paid to
Conexant were $6.5 million, $6.6 million, and
$6.5 million, respectively.
The Company made no sales to Conexant during the years ended
October 3, 2008, September 28, 2007 and
September 29, 2006. At October 3, 2008, the Company
had a liability to Conexant of $185,000 associated with the
rental of our facility. The Company had no liability to Conexant
at September 28, 2007 and September 29, 2006.
68
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Segment
and Other Information
|
The Company operates a single business segment which designs,
develops and sells semiconductor networking solutions for
communications applications in enterprise, access, metropolitan
and wide-area networks. Revenues by product line are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Multiservice access DSP products
|
|
$
|
55,752
|
|
|
$
|
36,340
|
|
|
$
|
37,404
|
|
High-performance analog products
|
|
|
41,900
|
|
|
|
37,482
|
|
|
|
42,742
|
|
WAN communications products
|
|
|
63,047
|
|
|
|
53,983
|
|
|
|
55,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,699
|
|
|
$
|
127,805
|
|
|
$
|
135,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area are presented based upon the country
of destination. Revenues by geographic area are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
United States
|
|
$
|
51,775
|
|
|
$
|
39,036
|
|
|
$
|
41,151
|
|
Other Americas
|
|
|
6,317
|
|
|
|
7,197
|
|
|
|
4,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
58,092
|
|
|
|
46,233
|
|
|
|
45,661
|
|
Malaysia
|
|
|
7,097
|
|
|
|
8,841
|
|
|
|
16,999
|
|
Taiwan
|
|
|
5,803
|
|
|
|
6,937
|
|
|
|
7,088
|
|
China
|
|
|
49,574
|
|
|
|
35,343
|
|
|
|
35,501
|
|
Japan
|
|
|
8,040
|
|
|
|
7,411
|
|
|
|
7,376
|
|
Other Asia-Pacific
|
|
|
11,999
|
|
|
|
8,576
|
|
|
|
6,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific
|
|
|
82,513
|
|
|
|
67,108
|
|
|
|
73,718
|
|
Europe, Middle East and Africa
|
|
|
20,094
|
|
|
|
14,464
|
|
|
|
16,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
160,699
|
|
|
$
|
127,805
|
|
|
$
|
135,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
No other foreign country represented 10% or more of net revenues
for any of the periods presented. 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.
Long-lived assets consist of property, plant and equipment,
license agreements, goodwill and intangible assets and other
long-term assets. Long-lived assets by geographic area at fiscal
year-ends are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
18,912
|
|
|
$
|
19,074
|
|
Europe, Middle East and Africa
|
|
|
1,237
|
|
|
|
1,262
|
|
Asia-Pacific
|
|
|
2,175
|
|
|
|
2,233
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,324
|
|
|
$
|
22,569
|
|
|
|
|
|
|
|
|
|
|
On September 25, 2007, the Company, through its
wholly-owned subsidiary, Mindspeed Development Sub, Inc.
(Buyer), completed its acquisition of certain assets of Ample
Communications, Inc. (Ample), pursuant to an Asset Purchase
Agreement, dated as of September 4, 2007, between Buyer and
Silicon Valley Bank as agent for itself and Gold Hill Lending
Group 03, LP (Seller).
69
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pursuant to the terms of the Asset Purchase Agreement, the
Company paid $4.6 million for certain of Amples
assets, including intellectual property, inventory, accounts
receivable, backlog and certain contract rights. During the time
between signing and closing, the Company advanced certain funds
to Seller solely to enable Seller and its representatives to
service and maintain the assets to be purchased. The preliminary
purchase price was as follows (in thousands):
|
|
|
|
|
Total cash consideration
|
|
$
|
5,401
|
|
Acquisition related transaction costs
|
|
|
667
|
|
Less cash acquired
|
|
|
20
|
|
|
|
|
|
|
Total preliminary purchase price
|
|
$
|
6,048
|
|
|
|
|
|
|
Acquisition related transaction costs include Mindspeeds
estimate of legal and accounting fees and other external costs
directly related to the transaction.
Net assets acquired consist of the following:
|
|
|
|
|
Inventories, net
|
|
$
|
359
|
|
Accounts receivable
|
|
|
5
|
|
Certain identified fixed assets
|
|
|
160
|
|
Intangible assets
|
|
|
3,200
|
|
Goodwill
|
|
|
2,324
|
|
|
|
|
|
|
Total assets acquired
|
|
$
|
6,048
|
|
|
|
|
|
|
During 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,
|
|
Purchase Price
|
|
October 3,
|
|
|
2007
|
|
Adjustments
|
|
2008
|
|
Goodwill
|
|
$
|
2,324
|
|
|
$
|
105
|
|
|
$
|
2,429
|
|
Identifiable intangible assets consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Average
|
|
|
|
Estimated
|
|
|
Remaining
|
|
|
|
Fair Value
|
|
|
Useful Life
|
|
|
Backlog
|
|
$
|
100
|
|
|
|
3 months
|
|
Developed technology
|
|
|
3,100
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
3,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During October 2008, the Company repurchased $20.5 million
aggregate principal amount of its
3.75 percent Convertible Senior Notes due in November
2009, for cash of $17.3 million. The repurchases occurred
in two separate transactions on October 16 and October 23,
2008.
In addition, in the first quarter of fiscal 2009, the Company
announced a restructuring plan. The Company anticipates
incurring special charges of between $2.7 and $3.2 million
dollars during the first and second quarters of fiscal 2009,
primarily associated with severance costs for affected
employees. When these restructuring actions are completed, the
Company estimates it will achieve annualized savings of between
$4.6 and $5.1 million dollars.
70
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mindspeed Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Mindspeed Technologies, Inc. and subsidiaries (the
Company) as of October 3, 2008 and
September 28, 2007, and the related consolidated statements
of income, stockholders equity, and cash flows for each of
the three years in the period ended October 3, 2008. Our
audits also included the financial statement schedule listed in
the Index at Item 15(a) (2). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company and subsidiaries at October 3, 2008 and
September 28, 2007, and the results of their operations and
their cash flows for each of the three years in the period ended
October 3, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our
opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 4 to the consolidated financial
statements, the Company adopted the provisions of Financial
Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
interpretation of FASB Statement No. 109, in fiscal
2008.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Companys internal control over financial reporting as of
October 3, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated December 15, 2008,
expressed an unqualified opinion on the Companys internal
control over financial reporting.
Deloitte &
Touche LLP
Costa Mesa, CA
December 15, 2008
71
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None
|
|
Item 9A.
|
Controls
and Procedures
|
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 October 3, 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 October 3, 2008, these disclosure
controls and procedures were effective.
Managements
Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal
control over financial reporting is a process to provide
reasonable assurance regarding the reliability of our financial
reporting for external purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting includes policies and procedures that:
(i) pertain to maintaining records that in reasonable
detail accurately and fairly reflect our transactions;
(ii) provide reasonable assurance that transactions are
recorded as necessary for preparation of our financial
statements and that receipts and expenditures of company assets
are made in accordance with management authorization; and
(iii) provide reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could
have a material effect on our financial statements would be
prevented or detected on a timely basis. Because of its inherent
limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
There were no changes in our internal control over financial
reporting during the fiscal quarter ended October 3, 2008
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Our management evaluated the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon that evaluation, management concluded
that the companys internal control over financial
reporting was effective as of October 3, 2008. The
Companys effectiveness of internal control over financial
reporting as of October 3, 2008 has been audited by
Deloitte & Touche LLP, an independent registered public
accounting firm, and Deloitte & Touche has issued a report
on the Companys internal control over financial reporting.
72
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mindspeed Technologies, Inc.:
We have audited the internal control over financial reporting of
Mindspeed Technologies, Inc. and subsidiaries (the
Company) as of October 3, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Managements Report on
Internal Control over Financial Reporting. Our responsibility is
to express an opinion on the Companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of October 3, 2008, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended October 3, 2008, of
the Company and our report dated December 15, 2008,
expressed an unqualified opinion on those consolidated financial
statements and financial statement schedule and included an
explanatory paragraph regarding the Companys adoption of
Financial Accounting Standards Board (FASB)
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an interpretation of FASB Statement
No. 109, in fiscal 2008.
Deloitte &
Touche LLP
Costa Mesa, CA
December 15, 2008
73
|
|
Item 9B.
|
Other
Information
|
The following disclosure would otherwise be filed on
Form 8-K
under the heading Item 5.02. Departure of Directors
or Certain Officers; Election of Directors; Appointment of
Certain Officers; Compensatory Arrangements of Certain
Officers.
On December 11, 2008, we entered into a special bonus
letter agreement with Raouf Y. Halim, our chief executive
officer and a director of our company. Pursuant to the letter
agreement, Mr. Halim received a special cash bonus of
$600,000. Mr. Halim will be deemed to earn 25% of the
special bonus for each quarter of continuous service to our
company. Any unearned portion of the special bonus must be
repaid to us if Mr. Halim voluntarily leaves the company or
is terminated for cause on or prior to the first anniversary
date of the letter agreement. In the event of a change of
control (as defined in the employment agreement we entered into
with Mr. Halim), 100% of the special bonus shall be deemed
earned. The description of the letter agreement is qualified in
its entirety by the full text of the letter agreement filed
herewith as Exhibit 10.37 and incorporated herein by
reference.
PART III
Certain information required by Part III is omitted from
this Annual Report and is incorporated herein by reference to
the Companys definitive Proxy Statement for the 2009
Annual Meeting of Stockholders (the Proxy Statement) to be filed
with the SEC.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item is incorporated herein by
reference from the sections entitled Board of
Directors Election of Directors,
Executive Officers, Board Governance
Matters and Other Matters
Section 16(a) Beneficial Ownership Reporting
Compliance in the Proxy Statement.
We have adopted a code of ethics entitled Code of Business
Conduct and Ethics, that applies to all employees,
including our executive officers and directors. A copy of the
Code of Business Conduct and Ethics is posted on our website
(www.mindspeed.com). In addition, we will provide
to any person without charge a copy of the Code of Business
Conduct and Ethics upon written request to our secretary at the
address above. We intend to disclose future amendments to
certain provisions of our Code of Business Conduct and Ethics,
or waivers of such provisions granted to executive officers and
directors, on our web site within four business days following
the date of such amendment or waivers.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated herein by
reference to the sections entitled Executive Officer and
Director Compensation, Board of
Directors Compensation Committee Interlocks and
Insider Participation, and Compensation Committee
Report in the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated herein by
reference to the sections entitled Equity Compensation
Plan Information and Security Ownership of Certain
Beneficial Owners and Management in the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this Item is incorporated by
reference to the sections entitled Certain Relationships
and Related Transactions and Board Governance
Matters in the Proxy Statement.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this Item is incorporated herein by
reference to the section entitled Principal Accounting
Fees and Services in the Proxy Statement.
74
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a)(1) Financial Statements
The following consolidated financial statements of the Company
for the three fiscal years ended October 3, 2008 are
included herewith:
Consolidated Balance Sheets, Consolidated Statements of
Operations, Consolidated Statements of Cash Flows, Consolidated
Statements of Stockholders Equity and Comprehensive Loss,
Notes to Consolidated Financial Statements, and Report of
Independent Registered Public Accounting Firm
(2) Supplemental Schedules
Schedule II
Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is not present in amounts sufficient to require
submission of the schedule, or because the required information
is included in the consolidated financial statements or notes
thereto.
(3) Exhibits
|
|
|
|
|
|
2
|
.1
|
|
Asset Purchase Agreement, dated as of September 4, 2007, by
and between Silicon Valley Bank, as agent for itself and Gold
Hill Lending Group 03, LP and Mindspeed Development Sub, Inc.,
filed as Exhibit 2.1 to the Registrants Current
Report on
Form 8-K
dated September 25, 2007, is incorporated herein by
reference.
|
|
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 fiscal year ended September 30, 2005, is
incorporated herein by reference.
|
|
4
|
.1
|
|
Specimen certificate for the Registrants Common Stock, par
value $.01 per share, filed as Exhibit 4.1 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
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 4.1 to the Registrants Current
Report on
Form 8-K
dated June 11, 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
|
|
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
|
.8
|
|
Form of 3.75% Convertible Senior Notes due 2009, attached
as Exhibit A to the Indenture (Exhibit 4.7 hereto), is
incorporated herein by reference.
|
75
|
|
|
|
|
|
4
|
.9
|
|
Indenture, dated as of August 1, 2008, between the
Registrant and Wells Fargo Bank, N.A., filed as Exhibit 4.1
to the Registrants Current Report on
Form 8-K
dated August 4, 2008, is incorporated herein by reference.
|
|
4
|
.10
|
|
Form of 6.50% Convertible Senior Notes due 2013, attached
as Exhibit A to the Indenture (Exhibit 4.9 hereto), is
incorporated herein by reference.
|
|
10
|
.1
|
|
Distribution Agreement dated as of June 27, 2003, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.1 to the Registrants Current Report on
Form 8-K
dated July 1, 2003, is incorporated herein by reference.
|
|
10
|
.2
|
|
Employee Matters Agreement dated as of June 27, 2003, by
and between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.2 to the Registrants Current Report on
Form 8-K
dated July 1, 2003, is incorporated herein by reference.
|
|
10
|
.3
|
|
Amendment No. 1 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated January 13, 2005, filed as
Exhibit 3.2 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended September 30, 2005, is
incorporated herein by reference.
|
|
10
|
.4
|
|
Amendment No. 2 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated July 1, 2005, filed as
Exhibit 3.2 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended September 30, 2005, is
incorporated herein by reference.
|
|
10
|
.5
|
|
Amendment No. 3 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated January 9, 2006, filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended December 30, 2005, is
incorporated herein by reference.
|
|
10
|
.6
|
|
Tax Allocation Agreement dated as of June 27, 2003, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.3 to the Registrants Current Report on
Form 8-K
dated July 1, 2003, is incorporated herein by reference.
|
|
10
|
.7
|
|
Amended and Restated Sublease, dated March 24, 2005, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2005, is incorporated
herein by reference.
|
|
10
|
.8
|
|
Form of Exchange Agreement, dated as of July 30, 2008, by
and between the Company and the holders of the Registrants
6.50% Convertible Senior Notes due 2013, filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
dated August 4, 2008, is incorporated herein by reference.
|
|
*10
|
.9
|
|
Form of Employment Agreement of the Registrant.
|
|
*10
|
.10
|
|
Schedule identifying parties to and terms of agreements with the
Registrant substantially identical to the form of Employment
Agreement filed as Exhibit 10.9 hereto.
|
|
*10
|
.11
|
|
Form of Indemnification Agreement entered into between the
Registrant and the Chief Executive Officer, Chief Financial
Officer and each of the directors of the Registrant, filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended April 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.12
|
|
Mindspeed Technologies, Inc. 2003 Employee Stock Purchase Plan,
filed as Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.13
|
|
Mindspeed Technologies, Inc. 2003 Non-Qualified Employee Stock
Purchase Plan, filed as Exhibit 10.2 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.14
|
|
Mindspeed Technologies, Inc. 2003 Stock Option Plan, as amended
and restated, filed as Exhibit 10.7 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
*10
|
.15
|
|
Mindspeed Technologies, Inc. 2003 Long-Term Incentives Plan, as
amended and restated, filed as Exhibit 10.6 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
*10
|
.16
|
|
Form of Stock Option Award under the Mindspeed Technologies,
Inc. 2003 Long-Term Incentives Plan, filed as Exhibit 10.4
to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
76
|
|
|
|
|
|
*10
|
.17
|
|
Stock Option Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan, filed as
Exhibit 10.5 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.18
|
|
Form of Restricted Stock Award under the Mindspeed Technologies,
Inc. 2003 Long-Term Incentives Plan, filed as Exhibit 10.6
to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.19
|
|
Restricted Stock Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan, filed as
Exhibit 10.19 to the Registrants Annual Report on
Form 10-K
for the fiscal year ended October 1, 2004, is incorporated
herein by reference.
|
|
*10
|
.20
|
|
Form of Restricted Stock Unit Award under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan.
|
|
*10
|
.21
|
|
Restricted Stock Unit Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan.
|
|
*10
|
.22
|
|
Mindspeed Technologies, Inc. Directors Stock Plan, as amended
and restated, filed as Exhibit 10.8 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
*10
|
.23
|
|
Form of Stock Option Award under the Mindspeed Technologies,
Inc. Directors Stock Plan, filed as Exhibit 10.7 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.24
|
|
Stock Option Terms and Conditions under the Mindspeed
Technologies, Inc. Directors Stock Plan, filed as
Exhibit 10.8 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.25
|
|
Form of Restricted Shares Award under the Mindspeed
Technologies, Inc. Directors Stock Plan, filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2006, is
incorporated herein by reference.
|
|
*10
|
.26
|
|
Restricted Shares Terms and Conditions under the Mindspeed
Technologies, Inc. Directors Stock Plan, filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended March 31, 2006, is
incorporated herein by reference.
|
|
*10
|
.27
|
|
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
|
.28
|
|
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
|
.29
|
|
Mindspeed Technologies, Inc. Retirement Savings Plan, filed as
Exhibit 10.9 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended July 1, 2005, is incorporated
herein by reference.
|
|
*10
|
.30
|
|
Mindspeed Technologies, Inc. Deferred Compensation Plan, as
amended and restated.
|
|
*10
|
.31
|
|
Agreement, dated January 31, 2007, by and between Bradley
W. Yates and the Registrant, filed as Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended December 29, 2006, is
incorporated herein by reference.
|
|
*10
|
.32
|
|
Confidential Severance and General Release Agreement, effective
as of October 10, 2008, by and between Thomas Stites and
the Registrant.
|
|
*10
|
.33
|
|
Summary of Director Compensation Arrangements.
|
|
*10
|
.34
|
|
Non-Qualified Stock Option Award Agreement, dated July 25,
2008 by and between the Registrant and Bret W. Johnsen, filed as
Exhibit 10.5 to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
*10
|
.35
|
|
Summary of Cash Bonus Arrangement, filed as Exhibit 10.11
to the Registrants Quarterly Report on
Form 10-Q
for the fiscal quarter ended June 27, 2008, is incorporated
herein by reference.
|
|
*10
|
.36
|
|
Letter Agreement, dated as of November 27, 2008, entered
into between the Registrant and the Chief Executive Officer of
the Registrant, filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated November 29, 2007, is incorporated herein by
reference.
|
77
|
|
|
|
|
|
*10
|
.37
|
|
Letter Agreement, dated as of December 11, 2008, entered
into between the Registrant and the Chief Executive Officer of
the Registrant.
|
|
*10
|
.38
|
|
Letter Agreement, dated as of November 23, 2007, entered
into between the Registrant and Simon Biddiscombe, filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
dated November 29, 2007, is incorporated herein by
reference.
|
|
*10
|
.39
|
|
Amendment to Letter Agreement, dated as of April 15, 2008,
entered into between the Registrant and Simon Biddiscombe, filed
as Exhibit 10.2 to the Registrants Quarterly Report
on
Form 10-Q
for the fiscal quarter ended March 28, 2008, is
incorporated herein by reference.
|
|
10
|
.40
|
|
Loan and Security Agreement, dated as of September 30,
2008, by and between the Registrant and Silicon Valley Bank,
filed as Exhibit 10.1 to the Registrants Current
Report on
Form 8-K
dated October 6, 2008, is incorporated herein by reference.
|
|
12
|
.1
|
|
Statement re: Computation of Ratios.
|
|
21
|
|
|
List of subsidiaries of the Registrant.
|
|
23
|
|
|
Consent of independent registered public accounting firm.
|
|
24
|
|
|
Power of attorney, authorizing certain persons to sign this
Annual Report on
Form 10-K
on behalf of certain directors and officers of the Registrant.
|
|
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. |
|
+ |
|
Certain confidential portions of this exhibit have been omitted
pursuant to a grant of confidential treatment. Omitted portions
have been filed separately with the SEC. |
(b) Exhibits
See subsection (a) (3) above.
(c) Financial Statement Schedules
The financial statement schedule for Mindspeed Technologies,
Inc. is set forth in (a) (2) of Item 15 above.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Annual Report
on
Form 10-K
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Newport Beach, State of California,
on this 15th day of December, 2008.
MINDSPEED TECHNOLOGIES, INC.
Raouf Y. Halim
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed on the
15th day of December, 2008, by the following persons on
behalf of the Registrant and in the capacities indicated:
|
|
|
|
|
Signature
|
|
Title
|
|
|
|
|
/s/ Raouf
Y. Halim
Raouf
Y. Halim
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
|
|
/s/ Bret
W. Johnsen
Bret
W. Johnsen
|
|
Senior Vice President, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
|
|
|
|
/s/
Dwight W. Decker*
Dwight
W. Decker
|
|
Chairman of the Board of Directors
|
|
|
|
/s/
Donald H. Gips*
Donald
H. Gips
|
|
Director
|
|
|
|
/s/
Michael T. Hayashi*
Michael
T. Hayashi*
|
|
Director
|
|
|
|
/s/
Ming Louie*
Ming
Louie
|
|
Director
|
|
|
|
/s/
Thomas A. Madden*
Thomas
A. Madden
|
|
Director
|
|
|
|
/s/
Jerre L. Stead*
Jerre
L. Stead*
|
|
Director
|
|
|
|
|
|
*By:
|
|
/s/ Raouf
Y. Halim
Raouf
Y. Halim,
Attorney-in-Fact**
|
|
|
|
|
|
** |
|
By authority of the power of attorney filed as Exhibit 24
hereto. |
79
SCHEDULE II
VALUATION
AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
End of
|
|
Description
|
|
Year
|
|
|
Expenses
|
|
|
Deductions(1)
|
|
|
Year
|
|
|
|
(In thousands)
|
|
|
Year ended October 3, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
353
|
|
|
$
|
(11
|
)
|
|
$
|
|
|
|
$
|
342
|
|
Reserve for sales returns and allowances
|
|
|
1,589
|
|
|
|
460
|
|
|
|
(494
|
)
|
|
|
1,555
|
|
Year ended September 28, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
447
|
|
|
$
|
(94
|
)
|
|
$
|
|
|
|
$
|
353
|
|
Reserve for sales returns and allowances
|
|
|
1,165
|
|
|
|
780
|
|
|
|
(356
|
)
|
|
|
1,589
|
|
Year ended September 29, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
462
|
|
|
$
|
(15
|
)
|
|
$
|
|
|
|
$
|
447
|
|
Reserve for sales returns and allowances
|
|
|
1,356
|
|
|
|
149
|
|
|
|
(340
|
)
|
|
|
1,165
|
|
|
|
|
(1) |
|
Deductions in the allowance for doubtful accounts reflect
amounts written off. |
80
EXHIBIT INDEX
|
|
|
|
|
|
10
|
.9
|
|
Form of Employment Agreement of the Registrant.
|
|
10
|
.10
|
|
Schedule identifying parties to and terms of agreements with the
Registrant substantially identical to the form of Employment
Agreement filed as Exhibit 10.9 hereto.
|
|
10
|
.20
|
|
Form of Restricted Stock Unit Award under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan.
|
|
10
|
.21
|
|
Restricted Stock Unit Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan.
|
|
10
|
.30
|
|
Mindspeed Technologies, Inc. Deferred Compensation Plan, as
amended and restated.
|
|
10
|
.32
|
|
Confidential Severance and General Release Agreement, effective
as of October 10, 2008, by and between Thomas Stites and
the Registrant.
|
|
10
|
.33
|
|
Summary of Director Compensation Arrangements.
|
|
10
|
.37
|
|
Letter Agreement, dated as of December 11, 2008, entered
into between the Registrant and the Chief Executive Officer of
the Registrant.
|
|
12
|
.1
|
|
Statement re: Computation of Ratios.
|
|
21
|
|
|
List of subsidiaries of the Registrant.
|