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 2, 2009
Commission file number:
001-31650
MINDSPEED TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
(State of
incorporation)
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01-0616769
(I.R.S. Employer
Identification No.)
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4000 MacArthur Boulevard, East Tower
Newport Beach, California
(Address of principal
executive offices)
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92660-3095
(Zip
code)
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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 o
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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)
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Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No 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 $36 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 October 30, 2009 was 28,773,947.
Documents
Incorporated by Reference
Portions of the Registrants Proxy Statement for the 2010
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A within 120 days after the end of the
2009 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 continued upgrade and expansion
of legacy networks, and the build-out of networks in developing
countries;
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our expectation that OEMs will outsource more of their
semiconductor component requirements to semiconductor suppliers;
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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 belief that we can maximize our return on our research and
development spending by focusing our investment in what we
believe are key high-growth markets;
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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 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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our expectations regarding the growth in Chinas
telecommunications industry;
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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 repay the remaining
$10.5 million in senior convertible debt and 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
2010 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 and the possibility of future 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 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 effects of a downturn in the semiconductor industry and the
general economy at large, including the impact of slower
economic activity, an increase in bankruptcy filings, 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 value of our intellectual property, our ability to continue
recognizing patent-related revenues from the sale or licensing
of our intellectual property and our plans to pursue our current
intellectual property strategy;
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our belief that the loss of any single patent, license, trade
secret, know-how, trademark or copyright would not materially
affect our business or financial condition;
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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 and the effects on future demand and market
conditions on inventory write-downs;
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our beliefs regarding the end-markets for sales of products to
original equipment manufacturers and third-party manufacturing
service providers in the Asia-Pacific region;
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our intention to continue to expand our international business
activities, including possible expansion or establishment of
design and operations centers abroad;
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our expectations regarding fluctuations in our growth patterns;
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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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cash requirements and terms and availability of financing;
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future operating losses;
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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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pricing pressures and other competitive factors;
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successful development and introduction of new products;
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doing business internationally and 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;
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business acquisitions and investments; and
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our ability to utilize our net operating loss carryforwards and
certain other tax attributes.
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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 solutions for communications
applications in the wireline and wireless network
infrastructure, which includes todays separate but
interrelated and converging enterprise, broadband access,
metropolitan and wide area networks. Our products are classified
into three focused product families: multiservice access,
high-performance analog and wide area networking communications.
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Multiservice Access products include low-power multi-core
digital signal processor (DSP)
system-on-a-chip
(SoC) products for carrier-class triple-play edge gateways,
metro trunking gateways and other Voice-over-IP (VoIP) and
multi-play service platforms in the carrier infrastructure. Our
products are also used in broadband customer-premises equipment
(CPE) gateways and other equipment that carriers are deploying
in order to deliver voice, data and video services to
residential subscribers.
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High-Performance Analog products include high-density
crosspoint switches, optical drivers and other devices, plus
timing, equalization and signal-conditioning solutions for
next-generation fiber access networks including ethernet passive
optical networking (EPON) equipment. Our high-performance analog
technology also helps address switching, timing and
signal-conditioning challenges in enterprise storage equipment,
and is being used in the broadcast-video network transition to
3G high-definition (HD) transmission.
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Wide Area Networking (WAN) Communications products
include a broad portfolio for legacy requirements in the
existing circuit-switched network, as well as emerging 3G
wireless backhaul applications.
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Our products are sold to original equipment manufacturers (OEMs)
for use in a variety of network infrastructure equipment,
including voice and media gateways, high-speed routers,
switches, access multiplexers, cross-connect systems, add-drop
multiplexers, digital loop carrier equipment, IP private branch
exchanges (PBXs), optical modules, broadcast video systems and
wireless base station equipment. Service providers use this
equipment for:
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packet processing in high-speed multi-service access
applications including advanced VoIP and triple-play (voice,
data and video) service delivery;
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high-speed analog transmission and switching for next-generation
optical networking, enterprise storage and broadcast video
transmission applications with difficult switching, timing and
synchronization requirements; and
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WAN communications over the public switched telephone network
(PSTN), which furnishes much of the Internets underlying
long-distance infrastructure.
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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 have
cultivated and continue to initiate and foster close
relationships with leading network infrastructure OEMs to
understand emerging markets, technologies and standards. We
focus our research and development (R&D) 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.
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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. 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 approximately 6.1 million shares of our common
stock at a price of $16.74 per share (adjusted to reflect a
change in the number of shares and exercise price, which
resulted from the offering of common stock that we completed in
the fourth quarter of fiscal 2009), exercisable for a period of
ten years after the distribution. 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.
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, plus
switching and signal timing and conditioning
solutions that are highly optimized for the
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 areas of the
broadly defined communications network: enterprise networks,
broadband access service areas including wireless and wireline
infrastructure networks 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 enables voice
and data communications and access to outside networks, and is
deployed primarily in the offices of commercial enterprises,
including specialized commercial segments, such as broadcast
video production, which have demanding network requirements. An
enterprise network may be comprised of many local area networks,
as well as client workstations, centralized database management
systems, storage area networks (SANs) and other components. In
enterprise networks, communications semiconductors facilitate
the processing and transmission of voice, data and video traffic
in converged IP (internet protocol) 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 private branch exchanges (PBXs), SAN routers,
director class switches and emerging wireless base station
systems for enhanced mobile enterprise service delivery. In
addition, a major trend in the broadcast video segment of the
enterprise networking 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, and enabling the
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computationally complex processing that is required in order for
carriers to meet cellular data service demands with limited
available spectrum. Typical network infrastructure equipment
found at the edge of the broadband access service area that use
our products include optical node units, optical line terminals,
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, including inexpensive mobile backhaul services
for wireless communications carriers. 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 converging digital and
optical networks that connect individuals and businesses
globally. These new higher-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. 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 low-power semiconductor hardware and 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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low-power semiconductor device architectures, including
mixed-signal devices and application-specific multi-core SoC
solutions that combine core central processing units, digital
signal processors and programmable hardware-accelerated protocol
engines plus analog signal processing capabilities;
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highly optimized signal processing algorithms and communications
protocols, which we implement in semiconductor devices,
including echo-cancellation, wideband voice and advanced video
technologies;
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critical software drivers and application software to perform
signal, packet and transmission processing tasks, plus
programming tools, which customers can use to add their own
proprietary value to designs based on our SoCs;
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specialized analog semiconductor products, which solve difficult
system challenges in synchronous optical network (SONET) and
dense wavelength division multiplexing (DWDM) telecommunications
equipment, broadcast video systems, and enterprise applications
including PCI Express, Serial-Attached SCSI (SAS)/Serial ATA
(SATA) and Ethernet blade servers plus 10G Ethernet local area
network switching;
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traditional transmission components for the PSTN which continues
to provide the underlying long-distance backbone for
todays Internet infrastructure.
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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 as carriers seek to maximize
the return on the capital and operational investments in their
network infrastructure; and
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growing consumer and business demand for VoIP and other
bandwidth-intensive services and applications, such as wireless
data transfer and video/multimedia content delivery.
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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. This upgrade and
expansion cycle, along with the development of new,
next-generation networks, requires the development of a variety
of new equipment created from advanced semiconductor solutions.
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In certain countries, we expect that service providers will
continue the build-out of telecommunication networks, many of
which were previously government owned and are now often taking
the lead on new technology deployment, ahead of more established
regions in terms of creating high-growth market opportunities
for the latest advances.
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We also believe that many technologies developed to solve
high-speed optical networking challenges also apply to
challenges in other portions of the network infrastructure. For
instance, high-speed backplanes for DWDM equipment have
sophisticated timing and signal-conditioning requirements that
are similar to those required in enterprise storage and
broadcast video transmission applications. In both cases,
advanced silicon is a critical enabler for system designs.
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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 shifting their focus and investment
from internal application specific integrated circuit
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 Growth 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
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these applications will grow at faster rates than the markets
for network infrastructure equipment, in general. This key
attribute is expected to make the enterprise, broadband access
and metro service areas the most attractive markets 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 groups 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 and Intellectual Property
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, and combine
the programmability of alternative general-purpose DSP solutions
with the superior performance and power efficiency of a
multi-processor solution with selected application-specific
fixed-function acceleration. Our multi-core SoC expertise is
also becoming increasingly important as network infrastructure
equipment requires more and more computational complexity to
solve difficult multi-layered signal processing challenges. To
enable the integration of more and more processing cores into
SoC devices, we have developed proprietary intellectual property
for managing large arrays of DSPs, including task-scheduling
technology that has been field-proven and steadily enhanced
through several generations of triple-play edge gateways used
for complex packet-processing applications.
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.
Through our efforts in building a large product portfolio, we
have developed and we maintain a broad intellectual property
portfolio consisting of sophisticated algorithms and other
specialized technology, such as the advanced echo-cancellation
techniques that have been used in voice ports of carrier
telecommunications equipment that our products have enabled. We
periodically enter into strategic arrangements to leverage our
portfolio by licensing or selling our intellectual property.
9
Additionally, we have aligned with key strategic partners to
collaborate on advanced multi-core SoC architectures that we
believe are critical for next-generation, ultra-low-power
communications processing solutions. For instance, our work with
ARM Holdings plc has resulted in 12 generations of
power-efficiency advances, initially for carrier-class
convergence processors and more recently for triple-play
home-gateway platforms. Power efficiency is becoming
increasingly important as our customers adopt a variety of
energy-efficiency initiatives, including the European Union
energy-consumption guidelines for broadband equipment.
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: multiservice access DSP products,
high-performance analog 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.
Multiservice
Access DSP 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, PBXs and integrated access devices.
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
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next-generation broadband customer-premises equipment enabling
service providers to deliver sophisticated multimedia content to
their subscribers.
The Comcerto 1000 series of low-power embedded packet processers
address a wide variety of applications ranging from high-end
VoIP enabled home gateways, small-to-midsized business high
performance security appliances to Ethernet powered 802.11n
enterprise access points. The Comcerto 1000 series of processors
delivers scalability, high-performance packet handling
capabilities, increased VPN and SSL throughput and industry
leading quality of service hardware features.
High-Performance
Analog Products
Our high-performance analog transmission devices and switching
products support storage area network, fiber-to-the-premise and
broadcast video, as well as mainstream synchronous optical
network
(SONET)/synchronous
digital hierarchy 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.
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
transceivers which enable service providers to deliver Internet
access at data transmission rates of
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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- 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, wireless backhaul 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 46% of our revenues for
fiscal 2009. For fiscal 2009, distributors Avnet, Inc. and
Alltek Technology Corporation accounted for 16% and 14%,
respectively, of our net revenues.
Our top five direct OEM customers for fiscal year 2009 were
Alcatel-Lucent, Cisco Systems Inc., Huawei Technologies Co.
Ltd., Samsung Electronics Co. and Zhongxing Telecom Equipment
Corp. Huawei Technologies Co. Ltd. and Zhongxing Telecom
Equipment Corp. accounted for 13% and 12%, respectively, of our
net revenues. While our direct sales to the remaining top five
direct OEM customers accounted for a total of approximately 4%
of our fiscal 2009 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
2009 also included Nortel Networks, Inc. and Nokia Siemens
Networks.
Our customer base is widely dispersed geographically. Revenues
derived from customers located in the Americas, Europe and the
Asia-Pacific region were 29%, 10% and 61%, respectively, of our
total revenues for fiscal 2009. We believe a 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 17 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 98 employees as of
October 31, 2009, located in three domestic and seven
international sales locations. Our marketing, sales and field
applications engineering teams, augmented by 13 electronic
component distributors and four sales representative
organizations, focus on marketing and selling semiconductor
networking solutions to worldwide network infrastructure OEMs.
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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.
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. We have
recently begun using TSMC for many of our specialty process
products. 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., Advanced
Semiconductor Engineering, Inc. (ASE) 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 United States
(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, Cavium Networks Inc., Exar Corporation, Freescale
Semiconductor, Inc., Gennum Corporation, Infineon Technologies
A.G., Maxim Integrated Products, Inc., PMC-Sierra, Inc., Texas
Instruments Inc., 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;
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compliance with industry standards;
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design wins;
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market acceptance of our, or our competitors products;
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production efficiencies; and
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general economic conditions.
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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, or stronger, presence in key markets;
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greater name recognition;
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more secure supply chain;
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lower cost alternatives to our products;
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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 may incur 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, 2009, we had
303 employees engaged in research and development
activities. We perform research and product development
activities at our headquarters in Newport Beach, California and
at 10 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 $50.7 million, $56.2 million
and $57.4 million on research and development activities in
fiscal years 2009, 2008 and 2007, respectively. The decreases in
our research and development expenses reflect the workforce
reductions and other cost reduction actions have implemented.
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
14
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, we do not
believe that any 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, 2009, we had 486 full-time
employees, approximately 331 of whom were engineers. Our
employees are not covered by any collective bargaining
agreements and we have not experienced a work stoppage in the
past six 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
15
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 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.
In fiscal 2009, we used $5.4 million cash in operating
activities. Although in fiscal 2008 we generated
$26.7 million in cash from operating activities, our
operating activities used cash in fiscal 2009, as well as in
periods prior to 2008. Our principal sources of liquidity are
our existing cash balances and cash generated from product sales
and sales and licensing of intellectual property. As of
October 2, 2009, our cash and cash equivalents totaled
$20.9 million. In November 2009, we repaid the
$10.5 million outstanding balance of our 3.75% convertible
senior notes, and have no other principal payments on debt due
in the next 12 months. We believe that our existing sources
of liquidity, along with cash expected to be generated from
product sales and the sale and licensing of intellectual
property and our existing line of credit with Silicon Valley
Bank, will be sufficient to fund our operations, research and
development efforts, anticipated capital expenditures, working
capital and other financing requirements for at least the next
12 months. However, this may not be the case. If we incur
operating losses and negative cash flows in the future, we may
need to further reduce our operating costs or obtain alternate
sources of financing, or both. We have completed transactions
that involved the issuance of equity and 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 or licensing of intellectual
property as we have in previous periods.
We
have incurred operating losses in the past and we may incur
losses in future periods.
We incurred a net loss of $22.0 million in fiscal 2009.
Although we generated net income of $7.2 million in fiscal
2008, we incurred losses in periods prior to fiscal 2008, we
have incurred losses in fiscal 2009, and we may continue to
incur losses and negative cash flows in future periods.
In order to regain and 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. In the first quarter of fiscal 2010, we
announced a restructuring plan. These expense reductions alone
may not allow us to return to profitability, or to sustain the
profitability we achieved in the fourth quarter of fiscal 2008.
Our ability to achieve the necessary revenue growth to return to
profitability 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 regain profitability or sustain
the profitability we achieved in prior 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, such as the current downturn.
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
16
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 deterioration due to credit conditions
resulting from the current financial crisis affecting the
banking system and financial markets and other factors, slower
economic activity, concerns about inflation and deflation,
volatility in 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 further
slow spending on our products and services, which would delay
and lengthen sales cycles. Furthermore, during challenging
economic times, our customers may face issues gaining timely
access to sufficient credit or could even need to file for
bankruptcy. Either of these circumstances could result in an
impairment of their ability to make timely payments to us. If
these circumstances were to occur, we may be required to
increase our allowance for doubtful accounts and our days sales
outstanding would be negatively impacted. Additionally, in
periods of high volatility, semiconductor companies, being
several steps removed from the end consumer in the supply chain,
traditionally experience growth patterns different from those
experienced by end customers. This can manifest itself in
periods of growth in excess of their customers followed by
periods of under-shipment before the volatility settles down.
However, given recent economic conditions, it is possible that
any correlation will continue to be less predictable and will
result in increased volatility in our operating results and
stock price. We cannot predict the timing, strength or duration
of any economic slowdown or subsequent economic recovery
worldwide, in the semiconductor industry or in the wired and
wireless communications markets. If the economy or markets in
which we operate do not continue at their present levels or
continue to deteriorate, we may record additional charges
related to restructuring costs and our business, financial
condition and results of operations will likely be materially
and adversely affected. Additionally, the combination of our
lengthy sales cycle coupled with challenging macroeconomic
conditions could have a synergistic negative impact on the
results of our operations.
The
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 regain and 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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the issuance and sale of additional shares of common stock;
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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
17
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.
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, financial instability, 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.
We may
not be able to attract and retain qualified personnel necessary
for the design, development, sale and support of our products.
Our success could be negatively affected if key personnel
leave.
Our future success depends on our ability to attract, retain and
motivate qualified personnel, including executive officers and
other key management, technical and support personnel. As the
source of our technological and product innovations, our key
technical personnel represent a significant asset. The
competition for such personnel can be intense in the
semiconductor industry. We may not be able to attract and retain
qualified management and other personnel necessary for the
design, development, sale and support of our products.
18
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 operations 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
U.S. under work visas. The visas permit qualified foreign
nationals working in specialty occupations, such as certain
categories of engineers, to reside in the U.S. 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 and ASE, 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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the effects of disputes or litigation involving our third-party
foundries;
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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 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.
19
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. Products shipped to international destinations,
primarily in the Asia-Pacific region and Europe, were
approximately 76% of our net revenues for fiscal 2009 and 68% of
our net revenues for fiscal 2008. China is a particularly
important international market for us, as more than 41% of our
fiscal 2009 revenue came from customers in China. In addition,
we have design centers, customer support centers, and rely on
suppliers, located outside the U.S., including foundries and
assembly and test service providers located in the Asia-Pacific
region. We intend to continue to expand our international
business activities and may open other design centers and
customer support centers abroad. Our international sales and
operations are subject to a number of risks inherent in selling
and operating abroad which could adversely impact our
international sales and could make our international operations
more expensive. 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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wage inflation;
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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 U.S. 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 contents of
our products, 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, Japanese yen, 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, or stronger, presence in key markets;
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greater name recognition;
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more secure supply chain;
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lower cost alternatives to our products;
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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.
21
Our
success depends on our ability to develop competitive new
products in a timely manner and keep abreast of the rapid
technological changes in our market.
Our operating results will depend largely on our ability to
continue to introduce new and enhanced semiconductor products on
a timely basis as well as our ability to keep abreast of rapid
technological changes in our markets. Our products could become
obsolete sooner than we expect because of faster than
anticipated, or unanticipated, changes in one or more of the
technologies related to our products. The introduction of new
technology representing a substantial advance over current
technology could adversely affect demand for our existing
products. Currently accepted industry standards are also subject
to change, which may also contribute to the obsolescence of our
products. If we are unable to develop and introduce new or
enhanced products in a timely manner, our business may be
adversely affected.
Successful product development and introduction depends on
numerous factors, including, among others:
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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.
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 the 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 46% of our revenues for fiscal 2009 and 52% of our
revenues for fiscal 2008.
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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 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
(SG&A) 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 from Conexant, we generally
assumed responsibility for all contingent liabilities and
litigation against Conexant or its subsidiaries related to our
business.
If we
are not successful in protecting our intellectual property
rights, it may harm our ability to compete.
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as employee and third-party nondisclosure
and confidentiality agreements and other methods, to protect our
proprietary technologies and processes. We may be required to
engage in litigation to enforce or protect our intellectual
property rights, which may require us to expend significant
resources and to divert the efforts and attention of our
management from our business operations; in particular:
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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 U.S., 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
24
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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ability to use our net operating loss carryforwards;
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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
ability to utilize our net operating loss carryforwards and
certain other tax attributes may be limited.
As of October 2, 2009, we had net operating loss
carryforwards of approximately $651.2 million for federal
income tax purposes. Under Section 382 of the Internal
Revenue Code, if a corporation undergoes an ownership
change, the corporations ability to use its
pre-change net operating loss carryforwards and other pre-change
tax attributes to offset its post-change income may be
significantly limited. An ownership change is generally defined
as a greater than 50% change in equity ownership by value over a
three-year period. In August 2009, our board of directors
adopted a shareholder rights agreement that is designed to help
preserve our ability to utilize fully certain tax assets
primarily associated with net operating loss carryforwards under
Section 382 of the Internal Revenue Code. Even with this
rights agreement in place, we may experience an ownership change
in the future as a result of shifts in our stock ownership,
including upon the issuance of our common stock, the exercise of
stock options or warrants or as a result of any conversion of
our convertible notes into shares of our common stock, among
other things. If we were to trigger an ownership change in the
future, our ability to use any net operating loss carryforwards
existing at that time could be significantly limited.
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 Annual
Report on
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.
25
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 approximately
6.1 million shares of our common stock at a price of $16.74
per share (adjusted to reflect a change in the number of shares
and exercise price, which resulted from our common stock
offering completed in the fourth quarter of fiscal 2009),
exercisable through June 27, 2013, representing
approximately 16% of our outstanding common stock on a fully
diluted basis. The warrant may be transferred or sold in whole
or part at any time. If Conexant sells the warrant or if
Conexant or a transferee of the warrant exercises the warrant
and sells a substantial number of shares of our common stock in
the future, or if investors perceive that these sales may occur,
the market price of our common stock could decline or market
demand for our common stock could be sharply reduced. After
repayment of the remaining $10.5 million of 3.75%
convertible senior notes due in November 2009, we have
$15.0 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
3.2 million shares 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 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
26
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 stockholders rights
agreements 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 stockholders rights agreements and the
Delaware General Corporation Law contain several provisions that
would make more difficult an acquisition of control of us in a
transaction not approved by our board of directors. Our restated
certificate of incorporation and amended and restated bylaws
include provisions such as:
|
|
|
|
|
the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;
|
|
|
|
the exclusive responsibility of the board of directors to fill
vacancies on the board of directors;
|
|
|
|
the ability of our board of directors to issue shares of our
preferred stock in one or more series without further
authorization of our stockholders;
|
|
|
|
a prohibition on stockholder action by written consent;
|
|
|
|
a requirement that stockholders provide advance notice of any
stockholder nominations of directors or any proposal of new
business to be considered at any meeting of stockholders;
|
|
|
|
a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of
our restated certificate of incorporation or amended and
restated bylaws;
|
|
|
|
elimination of the right of stockholders to call a special
meeting of stockholders; and
|
|
|
|
a fair price provision.
|
Our stockholders rights agreements give 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 stockholders rights agreements and the
provisions in our restated certificate of incorporation and
amended and restated bylaws, Section 203 of the Delaware
General Corporation Law generally provides that a corporation
shall not engage in any business combination with any interested
stockholder during the three-year period following the time that
such stockholder becomes an interested stockholder, unless a
majority of the directors then in office approves either the
business combination or the transaction that results in the
stockholder becoming an interested stockholder or specified
stockholder approval requirements are met.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
At October 31, 2009, we occupied our headquarters located
in Newport Beach, California (which includes design and sales
offices), 10 design centers and nine sales locations. These
facilities had an aggregate floor space of approximately
186,000 square feet, all of which is leased, consisting of
approximately 107,000 square feet at our headquarters,
57,000 square feet at our design centers and
22,000 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.
27
|
|
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 2, 2009.
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.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
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
|
|
Fiscal 2009
|
|
|
|
|
|
|
|
|
Quarter ended January 2, 2009
|
|
$
|
1.95
|
|
|
$
|
0.56
|
|
Quarter ended April 3, 2009
|
|
$
|
1.63
|
|
|
$
|
0.71
|
|
Quarter ended July 3, 2009
|
|
$
|
2.39
|
|
|
$
|
1.61
|
|
Quarter ended October 2, 2009
|
|
$
|
3.06
|
|
|
$
|
1.96
|
|
Recent
Share Prices and Holders
The last reported sale price of our common stock on
November 23, 2009 was $4.56 and there were approximately
29,541 holders of record of our common stock. However, many
holders shares are listed under their brokerage
firms names.
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.
Use of
Proceeds from Sale of Registered Securities
In August 2009, we issued and sold 4,750,000 shares of
our common stock at a public offering price of $2.05 per share.
We received approximately $8.9 million in net proceeds from
this offering. On November 17, 2009, the full amount of the
net proceeds was applied to the repayment of the remaining
$10.5 million outstanding under our 3.75% convertible
senior notes.
28
|
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct. 2,
|
|
|
Oct. 3,
|
|
|
Sept. 28,
|
|
|
Sept. 29,
|
|
|
Sept. 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
121,552
|
|
|
$
|
144,349
|
|
|
$
|
125,805
|
|
|
$
|
135,919
|
|
|
$
|
111,777
|
|
Intellectual Property
|
|
|
5,000
|
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
126,552
|
|
|
|
160,699
|
|
|
|
127,805
|
|
|
|
135,919
|
|
|
|
111,777
|
|
Cost of goods sold (including impairments and other charges of
$3,667 in fiscal 2009)
|
|
|
49,981
|
|
|
|
47,625
|
|
|
|
42,334
|
|
|
|
43,592
|
|
|
|
33,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
76,571
|
|
|
|
113,074
|
|
|
|
85,471
|
|
|
|
92,327
|
|
|
|
78,073
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
50,650
|
|
|
|
56,217
|
|
|
|
57,447
|
|
|
|
64,104
|
|
|
|
71,355
|
|
Selling, general and administrative
|
|
|
41,582
|
|
|
|
46,984
|
|
|
|
43,385
|
|
|
|
46,970
|
|
|
|
41,871
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,481
|
|
Special charges(1)
|
|
|
6,896
|
|
|
|
211
|
|
|
|
4,724
|
|
|
|
2,550
|
|
|
|
5,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99,128
|
|
|
|
103,412
|
|
|
|
105,556
|
|
|
|
113,624
|
|
|
|
139,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/income
|
|
|
(22,557
|
)
|
|
|
9,662
|
|
|
|
(20,085
|
)
|
|
|
(21,297
|
)
|
|
|
(61,633
|
)
|
Interest expense
|
|
|
(1,803
|
)
|
|
|
(2,360
|
)
|
|
|
(2,240
|
)
|
|
|
(2,231
|
)
|
|
|
(1,788
|
)
|
Other income, net
|
|
|
2,811
|
|
|
|
544
|
|
|
|
522
|
|
|
|
863
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes
|
|
|
(21,549
|
)
|
|
|
7,846
|
|
|
|
(21,803
|
)
|
|
|
(22,665
|
)
|
|
|
(62,259
|
)
|
Provision for income taxes
|
|
|
482
|
|
|
|
611
|
|
|
|
111
|
|
|
|
1,849
|
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(22,031
|
)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
|
$
|
(24,514
|
)
|
|
$
|
(62,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income per share, basic
|
|
$
|
(0.91
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(3.06
|
)
|
(Loss)/income per share, diluted
|
|
$
|
(0.91
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
$
|
(1.16
|
)
|
|
$
|
(3.06
|
)
|
Shares used in computation of net (loss)/ income per share, in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,156
|
|
|
|
23,046
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
20,438
|
|
Diluted
|
|
|
24,156
|
|
|
|
23,202
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
20,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oct. 2,
|
|
Oct. 3,
|
|
Sept. 28,
|
|
Sept. 29,
|
|
Sept. 30,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
|
$
|
29,976
|
|
|
$
|
15,335
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,260
|
|
|
|
40,094
|
|
Working capital
|
|
|
14,086
|
|
|
|
50,277
|
|
|
|
35,814
|
|
|
|
50,880
|
|
|
|
59,332
|
|
Total assets
|
|
|
62,560
|
|
|
|
100,604
|
|
|
|
82,079
|
|
|
|
96,542
|
|
|
|
105,504
|
|
Long-term debt
|
|
|
15,000
|
|
|
|
45,648
|
|
|
|
45,037
|
|
|
|
44,618
|
|
|
|
44,219
|
|
Stockholders equity
|
|
|
17,265
|
|
|
|
27,958
|
|
|
|
14,246
|
|
|
|
23,476
|
|
|
|
33,826
|
|
|
|
|
(1) |
|
Special charges consist of asset impairments and restructuring
charges. |
29
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
We design, develop and sell semiconductor solutions for
communications applications in the wireline and wireless network
infrastructure, which includes todays separate but
interrelated and converging enterprise, broadband access,
metropolitan and wide area networks. Our products are classified
into three focused product families. Our multiservice access DSP
products include ultra-low-power multi-core DSP system-on-a-chip
products for
carrier-class
triple-play edge gateways, metro trunking gateways and
Voice-over-IP (VoIP) and multi-play service platforms in the
carrier infrastructure. Our products are also used in broadband
customer-premises
equipment gateways and other equipment that carriers are
deploying in order to deliver voice, data and video services to
residential subscribers. Our high-performance analog (HPA)
products, including high-density crosspoint switches, optical
drivers and other devices, plus timing, equalization and
signal-conditioning
solutions for next-generation fiber access networks including
ethernet passive optical networking equipment. Our HPA
technology also helps address switching, timing and
signal-conditioning challenges being used in enterprise storage
equipment, and is helping to drive the broadcast-video network
transition to 3G high-definition transmission. Our wide area
networks (WAN) communications products, which include a broad
portfolio for legacy requirements in the existing
circuit-switched network, as well as emerging 3G wireless
backhaul applications.
Our products are sold to OEMs for use in a variety of network
infrastructure equipment, including voice and media gateways,
high-speed routers, switches, access multiplexers, cross-connect
systems, add-drop multiplexers, digital loop carrier equipment,
IP private branch exchanges, optical modules, broadcast video
systems and wireless base station equipment. Service providers
use this equipment for:
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packet processing in high-speed multi-service access
applications including advanced VoIP and triple-play (voice,
data and video) service delivery;
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high-speed analog transmission and switching for next-generation
optical networking, enterprise storage and broadcast video
transmission applications with difficult switching, timing and
synchronization requirements; and
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WAN communications over the public switched telephone network,
which furnishes much of the Internets underlying
long-distance infrastructure.
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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..
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 believe our diverse portfolio of semiconductor
solutions has us well positioned to capitalize on some of the
most significant trends in telecommunications spending,
including: next generation network convergence; VoIP/fiber
access deployment in developing and developed markets; 3G
wireless infrastructure build-out; and the migration of
broadcast video to high definition.
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 46% of our revenues for fiscal 2009. Our revenue
is well diversified globally, with 71% of fiscal 2009 revenue
coming from outside of the Americas. We believe a 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 are particularly
leveraged in China, where fiber deployments are being rolled out
by the countrys major telecommunications carriers. Through
our OEM
30
customers, we have started shipping into the
fiber-to-the-building
(FTTB) deployments of China Telecom and China Unicom. In the
fourth quarter of fiscal 2009, 39% of our revenue was derived
from China.
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
$50.7 million on research and development in fiscal 2009.
We seek to maximize our return on our research and development
spending by focusing our research and development investment in
what we believe are key growth markets, including VoIP and other
high-bandwidth multi-service access applications, plus
high-performance analog applications, such as optical networking
and
broadcast-video
transmission, and wireless infrastructure solutions for base
station processing and backhaul 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. We
recognized our first revenues from the sale of patents during
the fourth quarter of fiscal 2007 and continued to recognize
patent-related revenues in fiscal 2009. We anticipate continuing
this intellectual property strategy in future periods.
We are dependent upon third parties for the development,
manufacturing, 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 achieve sustained profitability
and positive cash flows from operations, we may need to 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. In the first quarter of fiscal 2010, we
announced a new restructuring plan. We anticipate incurring
special charges of between approximately $900,000 and
$1.0 million dollars during the first quarter of fiscal
2010, associated with a facilities consolidation as well as
severance costs for affected employees. We expect to realize the
full benefit of these reductions beginning in the fiscal 2010
second quarter. However, we intend to reinvest substantially all
of such cost savings back into our research and development
programs. Consequently, we do not expect that the 2010
restructuring plan will result in a long-term reduction in our
operating expenses.
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.
31
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates
affecting our consolidated financial statements are those
relating to inventories, revenue recognition, allowances for
doubtful accounts,
stock-based
compensation, income taxes and impairment of long-lived assets.
We regularly evaluate our estimates and assumptions based upon
historical experience and various other factors that we believe
to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other
sources. To the extent actual results differ from those
estimates, our future results of operations may be affected.
Inventories We assess the recoverability of
our inventories at least quarterly through a review of inventory
levels in relation to foreseeable demand (generally over
12 months). Foreseeable demand is based upon all available
information, including sales backlog and forecasts, product
marketing plans and product life cycles. When the inventory on
hand exceeds the foreseeable demand, we write down the value of
those inventories which, at the time of our review, we expect to
be unable to sell. The amount of the inventory write-down is the
excess of historical cost over estimated realizable value. Once
established, these write-downs are considered permanent
adjustments to the cost basis of the excess inventory.
Our products are used by OEMs that have designed our products
into network infrastructure equipment. For many of our products,
we gain these design wins through a lengthy sales cycle, which
often includes providing technical support to the OEM customer.
In the event of the loss of business from existing OEM
customers, we may be unable to secure new customers for our
existing products without first achieving new design wins. When
the quantities of inventory on hand exceed foreseeable demand
from existing OEM customers into whose products our products
have been designed, we generally will be unable to sell our
excess inventories to others, and the estimated realizable value
of such inventories to us is generally zero.
We base our assessment of the recoverability of our inventories,
and the amounts of any write-downs, on currently available
information and assumptions about future demand and market
conditions. Demand for our products may fluctuate significantly
over time, and actual demand and market conditions may be more
or less favorable than those projected by management. In the
event that actual demand is lower than originally projected,
additional inventory write-downs may be required.
Stock-Based Compensation We account for
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. We classify compensation expense
related to these awards in our consolidated statement of
operations based on the department to which the recipient
reports.
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 Financial Accounting Standards Board (FASB)
Accounting Standards Codification
985-605,
Software Revenue Recognition, or ASC
985-605, and
all related interpretations. For sales of products where
software not included or is incidental to the equipment, we
apply the provisions of Accounting Standards Codification 605,
Revenue Recognition, or ASC 605, and all related
interpretations.
32
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 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
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 and Uncertain Tax
Positions 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. In July 2006, the FASB issued
interpretations that clarify the
33
accounting for uncertainty in income taxes recognized in an
entitys financial statements in accordance with FASB
Accounting Standards Codification 740, Income Taxes, or ASC 740
and prescribe a recognition threshold and measurement attributes
for financial statement disclosure of tax positions taken or
expected to be taken on a tax return. Under the new
interpretations, 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, the new
interpretations provide guidance on de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The application of tax laws
and regulations is subject to legal and factual interpretation,
judgment and uncertainty. Tax laws and regulations themselves
are subject to change as a result of changes in fiscal policy,
changes in legislation, the evolution of regulations and court
rulings. Therefore, the actual liability for U.S. or
foreign taxes may be materially different from our estimates,
which could result in the need to record additional tax
liabilities or potentially reverse previously recorded tax
liabilities.
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. We recorded asset impairment charges on certain
long-lived assets totaling $5.5 million in the second
quarter of fiscal 2009. For further information on these asset
impairments see Notes 13 and 14 to our consolidated
financial statements.
Recent
Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board, or FASB,
established the Accounting Standards Codification, or
Codification, as the source of authoritative GAAP recognized by
the FASB. The Codification is effective in the first interim and
annual periods ending after September 15, 2009 and had no
effect on our consolidated financial statements.
In September 2006, the FASB issued provisions under Accounting
Standards Codification
820-10, Fair
Value Measurements and Disclosures, or ASC
820-10, in
order to increase consistency and comparability in fair value
measurements by defining fair value, establishing a framework
for measuring fair value in generally accepted accounting
principles, and expanding disclosures about fair value
measurements. The new provisions emphasize that fair value is
market-based measurement, not an entity-specific measurement.
They also clarify the extent to which fair value is used to
measure recognized assets and liabilities, the inputs used to
develop measurements, and the effect of certain measurements on
earnings for the period. The provisions issued in September 2006
are effective for financial statements issued for fiscal years
beginning after November 15, 2007 and are applied on a
prospective basis. In February 2008, the FASB released
additional provisions under ASC
820-10 which
delayed the effective date of the September 2006 provisions for
all nonfinancial assets and nonfinancial liabilities, except
those that are recognized or disclosed at fair value in the
financial statements on a recurring basis. In October 2008, the
FASB issued more provisions under ASC
820-10,
which clarify the application of the September 2006 provisions
in a market that is not active. On October 4, 2008, we
adopted the September 2006 provisions for financial assets and
liabilities recognized or disclosed at fair value on a recurring
and non-recurring basis and the October 2008 provisions.
Consistent with the February 2008 updates, we elected to defer
the adoption of the September 2006 provisions for non-financial
assets and liabilities measured at fair value on a non-recurring
basis until October 3, 2009. The adoption of ASC
820-10 for
non-financial assets and liabilities is not expected to have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued provisions under Accounting
Standard Codification 825, Financial Instruments, that provide
companies with an option to report selected financial assets and
liabilities at fair value.
34
The standards objective is to reduce both complexity in
accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities
differently. The standard requires companies to provide
additional information that will help investors and other users
of financial statements to more easily understand the effect of
a companys choice to use fair value on its earnings. It
also requires a company to display the fair value of those
assets and liabilities for which the company has chosen to use
fair value on the face of the balance sheet. The new standard
does not eliminate disclosure requirements included in other
accounting standards. On October 4, 2008, we adopted this
new standard but did not elect the fair value option for any
additional financial assets or liabilities that we held at that
date.
In June 2007, the FASB issued provisions under Accounting
Standards Codification 730, Research & Development,
relating to the accounting for non-refundable advanced payments
for goods or services to be used in future research and
development activities. The new provisions require that these
payments be deferred and capitalized and expensed as goods are
delivered or as the related services are performed. On
October 4, 2008, we adopted these provisions. The adoption
did not have a material impact on our consolidated financial
statements.
In April 2009, the FASB issued three related accounting
provisions: (i) Accounting Standards Codification
820-10-65,
Fair Value Measurements and Disclosures Transition
and Open Effective Date Information, or
ASC 820-10-65,
(ii) Accounting Standards Codification
320-10-65,
Investments Debt and Equity Securities
Transition and Open Effective Date Information, or ASC
320-10-65,
and (iii) Accounting Standards Codification
825-10-65,
Financial Instruments Transition and Open Effective
Date Information, or ASC
825-10-65,
which will be effective for interim and annual periods ending
after June 15, 2009. ASC
820-10-65
provides guidance on how to determine the fair value of assets
and liabilities in the current economic environment and
reemphasizes that the objective of a fair value measurement
remains an exit price. If we were to conclude that there has
been a significant decrease in the volume and level of activity
of the asset or liability in relation to normal market
activities, quoted market values may not be representative of
fair value and we may conclude that a change in valuation
technique or the use of multiple valuation techniques may be
appropriate. ASC
320-10-65
modifies the requirements for recognizing
other-than-temporarily
impaired debt securities and revise the existing impairment
model for such securities, by modifying the current intent and
ability indicator in determining whether a debt security is
other-than-temporarily
impaired. ASC
825-10-65
enhances the disclosure of relevant instruments for both interim
and annual periods. The adoption of these provisions did not
have a material impact on our consolidated financial statements.
In May 2009, the FASB issued Accounting Standards Codification
855-10,
Subsequent Events, which defined the period after the balance
sheet date during which a reporting entity shall evaluate events
or transactions that may occur for potential recognition or
disclosure in the financial statements and the circumstances
under which a company shall recognize events or transactions
occurring after the balance sheet date in its financial
statements. This standard also requires a company to disclose
the date through which subsequent events have been evaluated for
recognition or disclosure in the financial statements. We
reflected the recognition and disclosure requirements of this
standard in this Annual Report on
Form 10-K.
In December 2007, the FASB issued provisions under Accounting
Standards Codification 805, Business Combinations, or ASC 805,
which established principles and requirements for the acquirer
of a business to recognize and measure in its financial
statements the identifiable assets (including in-process
research and development and defensive assets) acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. Prior to the adoption of ASC 805, in-process research
and development costs were immediately expensed and acquisition
costs were capitalized. Under ASC 805, all acquisition
costs are expensed as incurred. The standard also provides
guidance for recognizing and measuring the goodwill acquired in
the business combination and determines what information to
disclose to enable users of financial statements to evaluate the
nature and financial effects of the business combination. In
April 2009, the FASB updated ASC 805 to amend the provisions for
the initial recognition and measurement, subsequent measurement
and accounting, and disclosures for assets and liabilities
arising from contingencies in business combinations. This update
also eliminates the distinction between contractual and
non-contractual contingencies. ASC 805 is effective for
financial statements issued for fiscal years beginning after
December 15, 2008. We will be required to adopt ASC 805 in
the first quarter of fiscal 2010. We expect ASC 805 will have an
impact on our consolidated financial statements, but the nature
and magnitude of the specific effects will depend upon the
nature, terms and size of the acquisitions we consummate after
the effective date.
35
In September 2009, the Emerging Issues Task Force reached a
consensus on Accounting Standards Update, or ASU,
2009-13,
Revenue Recognition (Topic 605) Multiple-Deliverable
Revenue Arrangements, or
ASU 2009-13
and ASU
2009-14,
Software (Topic 985) Certain Revenue Arrangements
That Include Software Elements, or ASU
2009-14. ASU
2009-13
modifies the requirements that must be met for an entity to
recognize revenue from the sale of a delivered item that is part
of a multiple-element arrangement when other items have not yet
been delivered. ASU
2009-13
eliminates the requirement that all undelivered elements must
have either: i) vendor specific objective evidence (VSOE)
of fair value or ii) third-party evidence (TPE) before an
entity can recognize the portion of an overall arrangement
consideration that is attributable to items that already have
been delivered. In the absence of VSOE or TPE of the standalone
selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to
estimate the selling prices of those elements. Overall
arrangement consideration will be allocated to each element
(both delivered and undelivered items) based on their relative
selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entitys
estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU
2009-14
modifies the software revenue recognition guidance to exclude
from its scope tangible products that contain both software and
non-software components that function together to deliver a
products essential functionality. These new updates are
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. We are currently evaluating
the impact that the adoption of these ASUs will have on our
consolidated financial statements.
Results
of Operations
Net
Revenues
Fiscal
2009 Compared to Fiscal 2008; Fiscal 2008 Compared to Fiscal
2007
The following table summarizes our net revenues:
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2009
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|
Change
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2008
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Change
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2007
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(Dollars in millions)
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Multiservice access DSP products
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$
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49.5
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|
2
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%
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|
$
|
48.4
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|
41
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%
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|
$
|
34.3
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|
High-performance analog products
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39.1
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|
(7
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)%
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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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|
WAN communications products
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|
33.0
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|
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(39
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)%
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|
54.0
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|
0
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%
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|
54.0
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Intellectual property
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5.0
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(70
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)%
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|
16.4
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720
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%
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|
2.0
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Net revenues
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$
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126.6
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(21
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)%
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$
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160.7
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26
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%
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|
$
|
127.8
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The 21% decrease in our net revenues for fiscal 2009 compared to
fiscal 2008 reflects declines in two of our product families,
with the largest decrease in demand occurring in our WAN
communications products, as well as a decrease in revenues from
the sale and licensing of intellectual property. These declines
were partially offset by an increase in revenues in our
multiservice access DSP products. Net revenues from our
multiservice access DSP products increased $1.1 million, or
2%, mainly reflecting an increase in shipments for
fiber-to-the-building (FTTB) deployments, particularly in Asia,
partially offset by decreased demand at one of our large
strategic North American customers. We are experiencing
increased sales volumes of our VoIP product families as
telecommunication service providers install equipment to
transmit their voice traffic over IP data networks. We believe
we are benefiting from the deployment of
IP-based
networks both in new network buildouts and the replacement of
circuit-switched networks. Net revenues from our
high-performance analog products decreased $2.8 million, or
7%, when comparing fiscal 2009 to fiscal 2008. Within
high-performance analog, we are experiencing a benefit from
increased demand for our crosspoint switches, which are used in
telecommunications applications. This benefit was offset by weak
economic conditions affecting our physical media devices, which
are used in infrastructure equipment for
fiber-to-the-premise
deployments, metropolitan area networks and wide area networks.
Net revenues from our WAN communications products decreased
$21.0 million, or 39%, mainly reflecting a dramatic
decrease in demand due to weak economic conditions, particularly
in North America and Europe. This decrease in demand was
primarily in our ATM/MPLS network processor products, our
T/E carrier
transmission products and our Carrier Ethernet products.
36
The 26% increase in our net revenues for fiscal 2008 compared to
fiscal 2007 was driven by an increase in revenues from the sale
and licensing of intellectual property, as well as an increase
in product sales. During fiscal 2008, we recognized
$16.4 million from the sale and licensing of patents
compared to $2.0 million in fiscal 2007. The remaining
$18.5 million of the increase in revenues represents higher
product shipments in our multiservice access DSP and
high-performance analog product families. Net revenues from our
multiservice access DSP products increased $14.1 million,
or 41%, reflecting a combination of increased sales volumes
across our newer VoIP product families, including our
multiservice access carrier products for FTTB deployments,
particularly in Asia. We believe we benefitted 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 did not change in fiscal 2008
when compared to fiscal 2007.
Gross
Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Change
|
|
2008
|
|
Change
|
|
2007
|
|
|
(Dollars in millions)
|
|
Gross margin
|
|
$
|
76.6
|
|
|
|
(32
|
)%
|
|
$
|
113.1
|
|
|
|
32
|
%
|
|
$
|
85.5
|
|
Percent of net revenues
|
|
|
61
|
%
|
|
|
|
|
|
|
70
|
%
|
|
|
|
|
|
|
67
|
%
|
Gross margin represents net revenues less cost of goods sold. As
a fabless semiconductor company, we use third parties (including
TSMC, Amkor and ASE) 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 supply chain management; engineering expenses
pertaining to products sold; and any applicable asset impairment
charges.
Our gross margin for fiscal 2009 decreased $36.5 million
from fiscal 2008, principally reflecting a decrease in revenues,
as well as asset impairment charges recorded in the second
quarter of 2009. Our 2009 product sales decreased
$22.8 million, or 16%, compared to 2008 and our sale or
licensing of intellectual property decreased $11.4 million,
or 70%. The decrease in our gross margin as a percent of net
revenues for fiscal 2009 compared to fiscal 2008 is primarily
due to the drop in revenues from the sale or licensing of
intellectual property, which have little associated cost, as
well as product mix changes and reduced levels of overhead
absorption caused by a lower level of product sales in 2009. The
decrease in gross margin in fiscal 2009 was also impacted by
asset impairment charges of $3.7 million recorded in fiscal
2009. Asset impairments consisted of $2.4 million related
to the write-down of the carrying value of technology developed
by Ample Communications, a $1.1 million
write-down
of Ample Communications related inventory, and an approximate
$300,000 write-down of certain manufacturing related fixed
assets. Gross margin as a percent of net revenues for fiscal
2009 includes an approximate 3% effect from these asset
impairments.
Our gross margin for fiscal 2008 increased $27.6 million
from fiscal 2007. $14.3 million of this increase in gross
margin was due to an increase in intellectual property sales
with associated revenues growing from $2.0 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
revenues for fiscal 2008 increased 3% from fiscal 2007 primarily
as a result of this increase in intellectual property revenues,
which have little associated cost.
Our gross margin benefited from the sale of inventories with an
original cost of $1.5 million (fiscal 2009),
$1.6 million (fiscal 2008), and $4.0 million (fiscal
2007) 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. As
of October 2, 2009, we continued to hold inventories with
an original cost of $3.8 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.
37
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Change
|
|
2008
|
|
Change
|
|
2007
|
|
|
(Dollars in millions)
|
|
Research and development expenses
|
|
$
|
50.7
|
|
|
|
(10
|
)%
|
|
$
|
56.2
|
|
|
|
(2
|
)%
|
|
$
|
57.4
|
|
Percent of net revenues
|
|
|
40
|
%
|
|
|
|
|
|
|
35
|
%
|
|
|
|
|
|
|
45
|
%
|
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 $5.5 million decrease in R&D expenses for
fiscal 2009 compared to fiscal 2008 is primarily driven by a
$4.5 million decrease in compensation and personnel-related
costs mainly due to a focused effort to reduce costs associated
with our workforce, including headcount reductions associated
with our restructuring activities. In addition, R&D expense
in fiscal 2008 included $817,000 related to severance benefits
payable to certain former employees as a result of
organizational changes, which were not incurred in fiscal 2009.
The $1.2 million decrease in R&D expenses for fiscal
2008 compared 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 $604,000 decrease in compensation and
personnel-related costs, resulting from our expense reduction
actions and a $587,000 decrease in the cost of our facilities.
These decreases in R&D were partially offset by an $817,000
increase in employee separation costs which consist of severance
benefits payable to certain former employees as a result of
organizational changes.
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
Change
|
|
2008
|
|
Change
|
|
2007
|
|
|
(Dollars in millions)
|
|
Selling, general and administrative expenses
|
|
$
|
41.6
|
|
|
|
(11
|
)%
|
|
$
|
47.0
|
|
|
|
8
|
%
|
|
$
|
43.4
|
|
Percent of net revenues
|
|
|
33
|
%
|
|
|
|
|
|
|
29
|
%
|
|
|
|
|
|
|
34
|
%
|
Our selling, general and administrative (SG&A) expenses
include personnel costs, independent sales representative
commissions, 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
$5.4 million decrease in our SG&A expenses in fiscal
2009 compared to fiscal 2008 reflects a $2.0 million
decrease in compensation and personnel-related costs, including
stock compensation expense mainly due to a focused effort to
reduce costs associated with our workforce, including headcount
reductions associated with our restructuring activities. In
addition, SG&A expense decreased $1.2 million as a
result of decreased spending on professional fees in fiscal 2009
and a $761,000 decrease in commissions paid to our sales
representatives. In addition, SG&A expense decreased
$571,000 in fiscal 2009 due to a decrease in expenses incurred
related to severance benefits payable to former officers and
employees.
The $3.6 million increase in our SG&A expenses for
fiscal 2008 compared to fiscal 2007 reflects an increase of
$294,000 in labor and benefits, including stock compensation,
due to an increase in the cost of benefits offered to our
employees, as well as $931,000 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.
Special
Charges
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(Dollars in millions)
|
|
|
Asset impairments
|
|
$
|
2.9
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring charges
|
|
|
4.0
|
|
|
|
0.2
|
|
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges
|
|
$
|
6.9
|
|
|
$
|
0.2
|
|
|
$
|
4.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Asset
Impairments
During fiscal 2009, we recorded asset impairment charges of
$2.9 million. Included in this amount are asset impairment
charges of approximately $500,000 related to software and
property and equipment that we determined to abandon or scrap,
as well as asset impairment charges of $2.4 million to
write-down the carrying value of goodwill related to our
acquisition of certain assets of Ample Communications. In the
second quarter of fiscal 2009, our Ample reporting unit
experienced a severe decline in sales and profitability due to a
significant decline in demand that we believe was a result of
the downturn in global economic conditions, as well as a
bankruptcy filed by the reporting units most significant
customer. The drop in market demand resulted in significant
declines in unit sales. Due to these market and economic
conditions, our Ample reporting unit experienced a significant
decline in market value. As a result, we concluded that there
were sufficient factual circumstances for interim impairment
analyses. Accordingly, in the second quarter of fiscal 2009, we
performed a goodwill impairment assessment. Based on the results
of our assessment of goodwill for impairment, we determined that
the carrying value of the Ample reporting unit exceeded its
estimated fair value. Therefore, we performed a second step of
the impairment test to estimate the implied fair value of
goodwill. The required analysis indicated that there would be no
remaining implied value attributable to goodwill in the Ample
reporting unit and we impaired the entire goodwill balance of
$2.4 million.
Restructuring
Charges
Mindspeed Second Quarter Fiscal 2009 Restructuring
Plan In the second quarter of fiscal 2009, we
announced the implementation of cost reduction measures with
most of the savings expected to be derived from focused
reductions in the areas of sales, general and administrative and
wide area networking communication spending, including the
closure of our Dubai facility. During fiscal 2009, we incurred
special charges of $1.1 million in connection with this
restructuring, primarily related to severance costs for affected
employees. As of the end of fiscal 2009, this restructuring plan
was complete and we do not expect to incur significant
additional costs related to this restructuring plan in future
periods.
Activity and liability balances related to our second quarter
fiscal 2009 restructuring plan through October 2, 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility and
|
|
|
|
|
|
|
Reductions
|
|
|
Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
1,047
|
|
|
$
|
87
|
|
|
$
|
1,134
|
|
Cash payments
|
|
|
(969
|
)
|
|
|
|
|
|
|
(969
|
)
|
Non-cash charges
|
|
|
|
|
|
|
(87
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
78
|
|
|
$
|
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents employee severance benefits. We expect to pay these
obligations over their respective terms, which expire at various
dates through fiscal 2010.
Mindspeed First Quarter Fiscal 2009 Restructuring
Plan During the first quarter of fiscal 2009, we
implemented a restructuring plan under which we reduced our
workforce by approximately 6%. In connection with this reduction
in workforce we recorded a charge of $2.4 million for
severance benefits payable to the affected employees. In
December 2008, we vacated approximately 70% of our Massachusetts
facility and recorded a charge related to contractual
obligations on this space of approximately $400,000. As of the
end of fiscal 2009, this restructuring plan was complete and we
do not expect to incur significant additional costs related to
this restructuring plan in future periods.
39
Activity and liability balances related to our first quarter
fiscal 2009 restructuring plan through October 2, 2009 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
2,405
|
|
|
$
|
368
|
|
|
$
|
2,773
|
|
Cash payments
|
|
|
(2,115
|
)
|
|
|
(190
|
)
|
|
|
(2,305
|
)
|
Non-cash charges
|
|
|
(3
|
)
|
|
|
(92
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
287
|
|
|
$
|
86
|
|
|
$
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents obligations under non-cancelable leases, employee
severance benefits and other contractual commitments. We expect
to pay these obligations over their respective terms, which
expire at various dates through fiscal 2011.
Mindspeed Restructuring Plans In fiscal 2006
and 2007, we implemented a number of cost reduction initiatives
to improve our operating cost structure. These cost reduction
initiatives included workforce reductions, significant
reductions in capital spending and the consolidation of certain
facilities. Activity under these initiatives was minimal in
fiscal 2009 and there is no remaining accrued restructuring
balance related to these plans at October 2, 2009.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in millions)
|
|
Interest expense
|
|
$
|
(1.8
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
(2.2
|
)
|
Interest expense for fiscal 2009, 2008 and 2007 represents
interest on our convertible senior notes issued in December 2004
and July 2008. In October 2008, we repurchased
$20.5 million aggregate principal amount of our 3.75%
convertible senior notes, thereby decreasing our interest
expense related to these notes for the remainder of fiscal 2009.
The interest expense increase for fiscal 2008, as compared to
fiscal 2007, is a result of our extinguishment and reissuance of
$15.0 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in millions)
|
|
Other income, net
|
|
$
|
2.8
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
Other income principally consists of interest income, foreign
exchange gains and losses, franchise taxes and other
non-operating gains and losses. The increase in other income in
fiscal 2009 principally reflects the $2.9 million gain we
recorded in connection with the extinguishment of
$20.5 million aggregate principle amount of our 3.75%
convertible senior notes for cash of $17.3 million. In
connection with the extinguishment, approximately $300,000 in
debt discount and debt issuance costs were written off.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(Dollars in millions)
|
|
Provision for income taxes
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
|
$
|
0.1
|
|
Our provision for income taxes for fiscal years 2009, 2008 and
2007 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
2009, 2008 and 2007 will not be realized. Accordingly, we have
not recognized any income tax benefits relating to our
U.S. federal and state operating losses for those periods
and we do not expect to recognize any income tax benefits
relating to future
40
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 2010 will principally
consist of income taxes related to our foreign operations.
As of October 2, 2009, we had a valuation allowance of
$257.0 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 2, 2009, we had U.S. federal net operating
loss carryforwards of approximately $651.2 million,
including the net operating loss carryforwards we retained in
the distribution. We can provide no assurances that we will be
able to retain or fully utilize such net operating loss
carryforwards, or that such net operating loss carryforwards
will not be significantly limited in the future.
Liquidity
and Capital Resources
Our principal sources of liquidity are our existing cash and
cash equivalent balances, cash generated from product sales and
the sales or licensing of our intellectual property, and our
line of credit with Silicon Valley Bank. As of October 2,
2009, our cash and cash equivalents totaled $20.9 million.
Our working capital at October 2, 2009 was
$14.1 million.
In order to regain and sustain profitability and positive cash
flows from operations, we may need to further reduce operating
expenses
and/or
increase revenues. We have completed a series of cost reduction
actions which have improved our operating expense structure, and
we will continue to perform additional actions, when necessary.
In the first quarter of fiscal 2010, we announced a
restructuring plan. These expense reductions alone may not allow
us to return to the profitability we achieved in the fourth
quarter of fiscal 2008. Our ability to achieve the necessary
revenue growth to return to profitability 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
regain or sustain profitability.
We believe that our existing sources of liquidity, along with
cash expected to be generated from product sales and the sale
and licensing of intellectual property, will be sufficient to
fund our operations research and development efforts,
anticipated capital expenditures, working capital and other
financing requirements for the next 12 months. In November
2009, we repaid the $10.5 million outstanding balance of
our 3.75% senior convertible debt, and have no other
principal payments on currently outstanding debt due in the
next 12 months. 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.
Cash used in operating activities was $5.4 million for
fiscal 2009 compared to cash generated by operating activities
of $26.7 million for fiscal 2008 and cash used in operating
activities of $10.0 million for fiscal 2007. Operating cash
flows for fiscal 2009 reflect our net loss of
$22.0 million, non-cash charges (depreciation and
amortization, asset impairments, restructuring charges, stock
compensation, inventory provisions, gain on debt extinguishment
and other) of $16.4 million, and net working capital
decreases of approximately $200,000. 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.
The significant components of the fiscal 2009 $200,000 net
working capital decrease include a $6.9 million decrease in
accounts receivable, which is due to both the timing of sales
and the timing of collections. Our net days
41
sales outstanding decreased from 36 days in the fourth
quarter of fiscal 2008 to 20 days in the fourth quarter of
fiscal 2009. In addition, our inventory balance decreased
$4.6 million during 2009 due to our focused efforts in
decreasing our inventory on hand and increasing our inventory
turns. Mostly offsetting the decrease in accounts receivable and
inventory was a $5.0 million decrease in accounts payable,
due to reduced levels of inventory purchases and the timing of
vendor payments. In addition, deferred income on shipments to
distributors decreased $2.3 million because of a decrease
in inventory being held by our distributors.
Cash used in investing activities of $8.1 million for
fiscal 2009 consisted solely of payments made for capital
expenditures. Cash used in investing activities of
$8.7 million for fiscal 2008 consisted of capital
expenditures of $7.5 million and cash payments related to
the acquisition of assets from Ample of $1.2 million.
Cash used in financing activities of $8.6 million in fiscal
2009 consisted of two significant items. First, in the first
quarter of fiscal 2009, we paid $17.3 million to retire
$20.5 million in principle amount of our 3.75% convertible
senior notes due in November 2009 and paid approximately
$300,000 of debt issuance costs related to both our revolving
credit facility and the issuance of our 6.5% convertible senior
notes due in 2013. Partially offsetting these uses of cash is
$8.9 million in net proceeds we received from the sale of
our common stock in an offering that was completed in the fourth
quarter of fiscal 2009. In the first quarter of fiscal 2010, we
used $10.5 million in cash to repay the remaining amount
outstanding under our 3.75% convertible senior notes. Cash used
in financing activities of $694,000 for fiscal 2008 consisted of
$805,000 in debt issuance costs related to our new 6.5%
convertible senior notes partially offset by proceeds from the
exercise of stock options of $111,000.
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, which was amended
effective March 2, 2009. 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 November
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% to a
maximum rate of prime plus 1.25%, 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, in
certain circumstances, 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 2, 2009, we were in compliance with all
required covenants and had no outstanding borrowings under our
revolving credit facility with SVB.
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 in November
2009 for net proceeds (after discounts and commissions) of
approximately $43.9 million. The notes are senior unsecured
obligations, ranking equal in right of payment with all future
unsecured indebtedness. The notes bear interest at a rate of
3.75%, payable semiannually in arrears each May 18 and
November 18. The notes were 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
42
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 of common stock, which is equal to
a conversion rate of approximately 86.58 shares 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 of common stock, which was equal to
approximately 71.17 shares 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. 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 2, 2009, the liability under the fundamental change
adjustment has been recorded at its estimated fair value which
is zero based on our current stock price.
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 $15.0 million of the existing notes agreed to exchange
their notes for $15.0 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 $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.
In October 2008, we repurchased $20.5 million aggregate
principal amount of our 3.75% 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. The related debt discount and debt
issuance costs totaling approximately $300,000 were written off.
The repurchase resulted in a gain on debt extinguishment of
$2.9 million. On November 17, 2009 we repaid the
remaining $10.5 million outstanding under our 3.75%
convertible senior notes. No fundamental changes occurred prior
to the repayment of our 3.75% convertible senior notes.
6.50% Convertible
Senior Notes due 2013
We issued the convertible senior notes due in August 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. At October 2, 2009,
$15.0 million in aggregate principal amount of our 6.50%
convertible senior notes were outstanding.
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.
43
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 2, 2009, the liability
under the fundamental change adjustment has been recorded at its
estimated fair value and is zero based on our current stock
price.
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) are 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 outstanding shares
of common stock of our company, its wholly owned subsidiary.
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 of our common stock at a price of $17.04 per
share, exercisable for a period of ten years after the
distribution. The warrant may be transferred or sold in whole or
part at any time. The warrant contains antidilution provisions
that provide for adjustment of the exercise price, and the
number of shares issuable under the warrant, upon the occurrence
of certain events. If we issue, or are deemed to have issued,
shares of our common stock, or securities convertible into our
common stock, at prices below the current market price of our
common stock (as defined in the warrants) at the time of the
issuance of such securities, the warrants exercise price
will be reduced and the number of shares issuable under the
warrant will be increased. The amount of such adjustment if any,
will be determined pursuant to a formula specified in the
warrant and will depend on the number of shares issued, the
offering price and the current market price of our common stock
at the time of the issuance of such securities. Adjustments to
the warrant pursuant to these antidilution provisions may result
in significant dilution to the interests of our existing
stockholders and may adversely affect the market price of our
common stock. The antidilution provisions may also limit our
ability to obtain additional financing on terms favorable to us.
In conjunction with the equity offering we completed in the
fourth quarter of fiscal 2009, the warrant was adjusted to
represent the right to purchase approximately 6.1 million
shares of our common stock at a price of $16.74 per share.
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.
44
Contractual
Obligations
The following table summarizes the future payments we are
required to make under contractual obligations as of
October 2, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
|
(In millions)
|
|
|
Long-term debt
|
|
$
|
25.5
|
|
|
$
|
10.5
|
|
|
$
|
15.0
|
|
|
$
|
|
|
|
$
|
|
|
Interest expense on long-term debt
|
|
|
4.2
|
|
|
|
1.2
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
8.6
|
|
|
|
5.6
|
|
|
|
1.9
|
|
|
|
1.1
|
|
|
|
|
|
Purchase obligations
|
|
|
7.5
|
|
|
|
4.9
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Employee severance
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1.1
|
|
|
|
0.4
|
|
|
|
0.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47.7
|
|
|
$
|
23.4
|
|
|
$
|
23.2
|
|
|
$
|
1.1
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of $25.5 million aggregate
principal amount of our convertible senior notes.
$10.5 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. See
Note 18 to our consolidated financial statements for a
discussion regarding payment of our 3.75% convertible senior
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 $2.6 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 $3.9 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 $385,000 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 $505,000 liability related to post-retirement benefits
for employees at two 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 our business. We
may also be responsible for certain federal income tax
liabilities under a 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
45
the maximum extent permitted under the laws of the State of
Delaware. The duration of the guarantees and indemnities varies,
and in many cases is indefinite. The majority of our guarantees
and indemnities do not provide for any limitation of the maximum
potential future payments we could be obligated to make. We have
not recorded any liability for these guarantees and indemnities
in the accompanying consolidated balance sheets.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
At October 2, 2009, our cash and cash equivalents consisted
solely of cash. 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. As of October 2, 2009, the carrying
value of our cash and cash equivalents approximates fair value.
At October 2, 2009, our debt consisted of our short-term
and long-term 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. In addition, we have a long-term
revolving credit facility. Advances under our credit facility
bear interest at a variable rate ranging from prime plus 0.25%
to a maximum rate of prime plus 1.25%, as determined in
accordance with the interest rate grid set forth in the loan and
security agreement. If the prime rate increases, 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. Because there were no
outstanding borrowings on the credit facility as of
October 2, 2009, any change in the prime interest rate
would not have a material effect on our obligations under the
credit facility.
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 2, 2009, we held no foreign currency
forward exchange contracts. Based on our overall currency rate
exposure at October 2, 2009, a 10% change in currency rates
would not have a material effect on our consolidated financial
position, results of operations or cash flows.
46
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share amounts)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
Receivables, net of allowances for doubtful accounts of $144
(2009) and $342 (2008)
|
|
|
7,662
|
|
|
|
14,398
|
|
Inventories
|
|
|
10,902
|
|
|
|
16,187
|
|
Deferred tax assets current
|
|
|
1,574
|
|
|
|
144
|
|
Prepaid expenses and other current assets
|
|
|
2,529
|
|
|
|
2,994
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
43,558
|
|
|
|
76,756
|
|
Property, plant and equipment, net
|
|
|
11,018
|
|
|
|
12,600
|
|
Intangible assets, net
|
|
|
|
|
|
|
2,480
|
|
Goodwill
|
|
|
|
|
|
|
2,429
|
|
License agreements, net
|
|
|
6,505
|
|
|
|
3,347
|
|
Other assets
|
|
|
1,479
|
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
62,560
|
|
|
$
|
100,604
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,338
|
|
|
$
|
11,265
|
|
Accrued compensation and benefits
|
|
|
5,788
|
|
|
|
6,778
|
|
Accrued income tax
|
|
|
525
|
|
|
|
412
|
|
Deferred income on sales to distributors
|
|
|
2,604
|
|
|
|
4,869
|
|
Deferred revenue
|
|
|
1,106
|
|
|
|
562
|
|
Restructuring
|
|
|
448
|
|
|
|
8
|
|
Convertible senior notes short term
|
|
|
10,486
|
|
|
|
|
|
Other current liabilities
|
|
|
2,177
|
|
|
|
2,585
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
29,472
|
|
|
|
26,479
|
|
Convertible senior notes long term
|
|
|
15,000
|
|
|
|
45,648
|
|
Other liabilities
|
|
|
823
|
|
|
|
519
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
45,295
|
|
|
|
72,646
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 7 and 8)
|
|
|
|
|
|
|
|
|
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; 28,756 (2009) and 23,852 (2008) issued and
outstanding shares
|
|
|
288
|
|
|
|
239
|
|
Additional paid-in capital
|
|
|
280,919
|
|
|
|
269,487
|
|
Accumulated deficit
|
|
|
(249,074
|
)
|
|
|
(227,043
|
)
|
Accumulated other comprehensive loss
|
|
|
(14,868
|
)
|
|
|
(14,725
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
17,265
|
|
|
|
27,958
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
62,560
|
|
|
$
|
100,604
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2,
|
|
|
October 3,
|
|
|
Sept. 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
121,552
|
|
|
$
|
144,349
|
|
|
$
|
125,805
|
|
Intellectual Property
|
|
|
5,000
|
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
126,552
|
|
|
|
160,699
|
|
|
|
127,805
|
|
Cost of goods sold (including impairments and other charges of
$3,667 in fiscal 2009)
|
|
|
49,981
|
|
|
|
47,625
|
|
|
|
42,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
76,571
|
|
|
|
113,074
|
|
|
|
85,471
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
50,650
|
|
|
|
56,217
|
|
|
|
57,447
|
|
Selling, general and administrative
|
|
|
41,582
|
|
|
|
46,984
|
|
|
|
43,385
|
|
Special charges
|
|
|
6,896
|
|
|
|
211
|
|
|
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
99,128
|
|
|
|
103,412
|
|
|
|
105,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss)/gain
|
|
|
(22,557
|
)
|
|
|
9,662
|
|
|
|
(20,085
|
)
|
Interest expense
|
|
|
(1,803
|
)
|
|
|
(2,360
|
)
|
|
|
(2,240
|
)
|
Other income, net
|
|
|
2,811
|
|
|
|
544
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes
|
|
|
(21,549
|
)
|
|
|
7,846
|
|
|
|
(21,803
|
)
|
Provision for income taxes
|
|
|
482
|
|
|
|
611
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(22,031
|
)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income per share, basic
|
|
$
|
(0.91
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income per share, diluted
|
|
$
|
(0.91
|
)
|
|
$
|
0.31
|
|
|
$
|
(0.99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of net (loss)/income per share, in
thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,156
|
|
|
|
23,046
|
|
|
|
22,156
|
|
Diluted
|
|
|
24,156
|
|
|
|
23,202
|
|
|
|
22,156
|
|
See accompanying notes to consolidated financial statements.
48
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2,
|
|
|
October 3,
|
|
|
Sept. 28,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income
|
|
$
|
(22,031
|
)
|
|
$
|
7,235
|
|
|
$
|
(21,914
|
)
|
Adjustments required to reconcile net (loss)/income to net cash
(used in)/provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
6,106
|
|
|
|
7,173
|
|
|
|
5,681
|
|
Asset impairments
|
|
|
5,498
|
|
|
|
|
|
|
|
|
|
Restructuring charges
|
|
|
4,031
|
|
|
|
140
|
|
|
|
4,663
|
|
Stock compensation
|
|
|
2,675
|
|
|
|
5,506
|
|
|
|
7,301
|
|
Provision for bad debts
|
|
|
(11
|
)
|
|
|
(12
|
)
|
|
|
(131
|
)
|
Inventory provisions
|
|
|
657
|
|
|
|
(900
|
)
|
|
|
1,790
|
|
Gain on debt extinguishment
|
|
|
(2,880
|
)
|
|
|
|
|
|
|
|
|
Other noncash items, net
|
|
|
352
|
|
|
|
79
|
|
|
|
176
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
6,903
|
|
|
|
(741
|
)
|
|
|
1,361
|
|
Inventories
|
|
|
4,628
|
|
|
|
(264
|
)
|
|
|
2,554
|
|
Accounts payable
|
|
|
(5,069
|
)
|
|
|
5,380
|
|
|
|
(5,096
|
)
|
Deferred income on sales to distributors
|
|
|
(2,265
|
)
|
|
|
646
|
|
|
|
(177
|
)
|
Restructuring
|
|
|
(3,391
|
)
|
|
|
(1,616
|
)
|
|
|
(4,846
|
)
|
Accrued expenses and other current liabilities
|
|
|
(1,379
|
)
|
|
|
2,546
|
|
|
|
(1,209
|
)
|
Other
|
|
|
791
|
|
|
|
1,523
|
|
|
|
(195
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by operating activities
|
|
|
(5,385
|
)
|
|
|
26,695
|
|
|
|
(10,042
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,058
|
)
|
|
|
(7,514
|
)
|
|
|
(4,074
|
)
|
Acquisition of assets, net of cash acquired
|
|
|
|
|
|
|
(1,172
|
)
|
|
|
(4,875
|
)
|
Purchases of
available-for-sale
marketable securities
|
|
|
|
|
|
|
|
|
|
|
(15,682
|
)
|
Sales of
available-for-sale
marketable securities
|
|
|
|
|
|
|
|
|
|
|
26,100
|
|
Maturities of
held-to-maturity
marketable securities
|
|
|
|
|
|
|
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by investing activities
|
|
|
(8,058
|
)
|
|
|
(8,686
|
)
|
|
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Extinguishment of convertible debt
|
|
|
(17,320
|
)
|
|
|
|
|
|
|
|
|
Proceeds from equity financing, net of offering costs of $791
|
|
|
8,947
|
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
(256
|
)
|
|
|
(805
|
)
|
|
|
|
|
Proceeds from exercise of stock options and warrants
|
|
|
|
|
|
|
111
|
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by financing activities
|
|
|
(8,629
|
)
|
|
|
(694
|
)
|
|
|
3,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rates on cash
|
|
|
(70
|
)
|
|
|
(78
|
)
|
|
|
118
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(22,142
|
)
|
|
|
17,237
|
|
|
|
(4,180
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
43,033
|
|
|
|
25,796
|
|
|
|
29,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss
|
|
|
Equity
|
|
|
|
(In thousands)
|
|
|
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
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,031
|
)
|
|
|
|
|
|
|
(22,031
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22,174
|
)
|
Sale of common stock, net of offering costs
|
|
|
4,750
|
|
|
|
47
|
|
|
|
8,806
|
|
|
|
|
|
|
|
|
|
|
|
8,853
|
|
Issuance of common stock
|
|
|
195
|
|
|
|
2
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
Common stock repurchased and retired
|
|
|
(41
|
)
|
|
|
|
|
|
|
(49
|
)
|
|
|
|
|
|
|
|
|
|
|
(49
|
)
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
2,676
|
|
|
|
|
|
|
|
|
|
|
|
2,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 2, 2009
|
|
|
28,756
|
|
|
$
|
288
|
|
|
$
|
280,919
|
|
|
$
|
(249,074
|
)
|
|
$
|
(14,868
|
)
|
|
$
|
17,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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
outstanding shares of common stock of its wholly owned
subsidiary, Mindspeed. 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
$100.0 million. Mindspeed issued to Conexant a warrant to
purchase approximately 6.1 million shares of Mindspeed
common stock at a price of $16.74 per share (adjusted to reflect
a change in the number of shares and exercise price, which
resulted from the offering of common stock that the Company
completed in fourth quarter fiscal 2009), exercisable for a
period beginning one year and ending ten years after the
Distribution. Following the Distribution, Mindspeed began
operations as an independent, publicly held company.
In order to regain and sustain profitability and positive cash
flows from operations, the Company may need to further reduce
operating expenses
and/or
maintain increased revenues. The Company has completed a series
of cost reduction actions which have improved its operating cost
structure, and will continue to perform additional actions, when
necessary. These expense reductions alone may not allow the
Company to return to the profitability it achieved in the fourth
quarter of fiscal 2008. The Companys ability to achieve
the necessary revenue growth to return to profitability 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 regain or sustain
profitability.
The Company believes that its existing sources of liquidity,
along with cash expected to be generated from product sales and
the sale or licensing of intellectual property, will be
sufficient to fund its operations, research and development
efforts, anticipated capital expenditures, working capital and
other financing requirements for the next 12 months,
including the repayment of the remaining $10.5 million
aggregate principal amount of convertible senior notes due in
November 2009 (see Note 18 to these consolidated financial
statements). 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
|
Basis of Presentation The consolidated
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
(See Note 14 to these consolidated financial statements),
necessary to present fairly the Companys financial
position, results of
51
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
operations and cash flows in accordance with generally accepted
accounting principles in the United States of America. The
Company has evaluated the impact of subsequent events on these
consolidated financial statements through November 24, 2009.
In June 2009, the Financial Accounting Standards Board, or FASB,
established the Accounting Standards Codification, or
Codification, as the source of authoritative GAAP recognized by
the FASB. The Codification is effective in the first interim and
annual periods ending after September 15, 2009 and had no
effect on the Companys consolidated financial statements.
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.
Fiscal Periods The Company maintains a
fifty-two/fifty-three week fiscal year ending on the Friday
closest to September 30. Fiscal year 2009 comprised
52 weeks and ended on October 2, 2009. Fiscal year
2008 comprised 53 weeks and ended on October 3, 2008.
Fiscal year 2007 comprised 52 weeks and ended on
September 28, 2007.
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 FASB
Accounting Standards Codification
985-605,
Software Revenue Recognition, or ASC
985-605, and
all related interpretations. For sales of products where
software is incidental to the equipment, the Company applies the
provisions of Accounting Standards Codification 605, Revenue
Recognition, or ASC 605, 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 probable. 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.
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
52
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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 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 historical cost. Depreciation is
based on estimated useful lives (principally ten years for
furniture and fixtures; three to five years for machinery and
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.
53
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. See Note 14 to these consolidated
financial statements for a discussion of the impairment of
goodwill recorded by the Company during the fiscal year ended
October 2, 2009.
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. See Note 13 to these
consolidated financial statements for a discussion of the
impairment of certain intangible assets recorded by the Company
during the fiscal year ended October 2, 2009.
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 $818,000 (2010), $1.2 million
(2011), $1.4 million (2012), $1.1 million
(2013) and $873,000 (2014), and the weighted average
remaining life was 72 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. See Notes 13 and
14 to these consolidated financial statements for a discussion
of the impairment of certain long-lived assets recorded by the
Company during the year ended October 2, 2009. Other than
the impairments discussed in Notes 13 and 14 to these
consolidated financial statements, no further impairments were
identified by the Company during the fiscal year ended
October 2, 2009.
Foreign Currency Translation and
Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign
currency transaction costs. The functional currency of
substantially all of the Companys 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 were capitalized
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 The Company accounts
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 the Companys
common stock at the grant date. The
54
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The Company
classifies compensation expense related to these awards in the
consolidated statement of operations based on the department to
which the recipient reports.
Business Segments 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. The Companys Chief Executive Officer is
considered to be the Companys chief operating decision
maker.
Fair Value Measurements The Company applies
the provisions of Accounting Standards Codification 820, Fair
Value Measurements and Disclosures, or ASC 820, in measuring the
fair value of financial assets and financial liabilities and for
non-financial assets and non-financial liabilities that the
Company recognizes or discloses at fair value on a recurring
basis (at least annually). ASC 820 defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements. This pronouncement
does not require any new fair value measurements, but provides
guidance on how to measure fair value by providing a fair value
hierarchy used to classify the source of the information. See
Note 5 to these consolidated financial statements for more
information.
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 Accounting Standards
Codification 740, Income Taxes, or ASC 740. 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.
Subsequent to September 29, 2007, the Company used a
two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with ASC 740. 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 Accounting Standards
Codification 718, Compensation Stock Compensation.
For the year ended October 3, 2008, potentially dilutive
securities consisted of stock options and restricted stock and
resulted in 156,000 potential common shares. Stock options,
warrants and convertible senior notes to
55
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2009 and
fiscal 2007, 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 anti-dilutive.
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 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Customer A
|
|
|
16
|
%
|
|
|
11
|
%
|
|
|
16
|
%
|
Customer B
|
|
|
14
|
%
|
|
|
16
|
%
|
|
|
15
|
%
|
Customer C
|
|
|
13
|
%
|
|
|
6
|
%
|
|
|
5
|
%
|
Customer D
|
|
|
12
|
%
|
|
|
5
|
%
|
|
|
5
|
%
|
The following individual customers accounted for 10% or more of
total accounts receivable at fiscal year ends:
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Customer A
|
|
|
19
|
%
|
|
|
9
|
%
|
Customer B
|
|
|
10
|
%
|
|
|
8
|
%
|
Customer E
|
|
|
10
|
%
|
|
|
9
|
%
|
Customer F
|
|
|
5
|
%
|
|
|
11
|
%
|
Customer G
|
|
|
0
|
%
|
|
|
20
|
%
|
Supplemental Cash Flow Information Interest
paid was approximately $1.7 million, $1.8 million, and
$1.7 million for fiscal 2009, fiscal 2008 and fiscal 2007,
respectively. Income taxes paid, net of refunds received were
approximately $576,000, $222,000, and $2.3 million during
fiscal 2009, fiscal 2008 and fiscal 2007, respectively. Non-cash
investing activities in fiscal 2009 and fiscal 2008 consisted of
the purchase of $234,000 and $306,000, respectively of property
and equipment from suppliers on account as well as the license
of approximately $571,000 of intellectual property on account in
fiscal 2009. Assets acquired consisted 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 2, 2009,
October 3, 2008 and September 28, 2007 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 provisions under Accounting Standards
Codification
820-10, Fair
Value Measurements and Disclosures, or ASC
820-10, in
order to increase consistency and comparability in fair value
measurements by defining fair value, establishing a framework
for measuring fair
56
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value in generally accepted accounting principles, and expanding
disclosures about fair value measurements. The new provisions
emphasize that fair value is market-based measurement, not an
entity-specific measurement. They also clarify the extent to
which fair value is used to measure recognized assets and
liabilities, the inputs used to develop measurements, and the
effect of certain measurements on earnings for the period. The
provisions issued in September 2006 are effective for financial
statements issued for fiscal years beginning after
November 15, 2007 and are applied on a prospective basis.
In February 2008, the FASB released additional provisions under
ASC 820-10
which delayed the effective date of the September 2006
provisions for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at
fair value in the financial statements on a recurring basis. In
October 2008, the FASB issued more provisions under ASC
820-10 which
clarify the application of the September 2006 provisions in a
market that is not active. On October 4, 2008, the Company
adopted the September 2006 provisions for financial assets and
liabilities recognized or disclosed at fair value on a recurring
and non- recurring basis and the October 2008 provisions.
Consistent with the February 2008 updates, the Company elected
to defer the adoption of the September 2006 provisions for
nonfinancial assets and liabilities measured at fair value on a
non-recurring basis until October 3, 2009. The adoption of
ASC 820-10
for non-financial assets and liabilities is not expected to have
a material impact on the Companys consolidated financial
statements.
In February 2007, the FASB issued provisions under Accounting
Standard Codification 825, Financial Instruments, that provide
companies with an option to report selected financial assets and
liabilities at fair value. The standards objective is to
reduce both complexity in accounting for financial instruments
and the volatility in earnings caused by measuring related
assets and liabilities differently. The standard requires
companies to provide additional information that will help
investors and other users of financial statements to more easily
understand the effect of a companys choice to use fair
value on its earnings. It also requires a company to display the
fair value of those assets and liabilities for which the company
has chosen to use fair value on the face of the balance sheet.
The new standard does not eliminate disclosure requirements
included in other accounting standards. On October 4, 2008,
the Company adopted this new standard but did not elect the fair
value option for any additional financial assets or liabilities
that it held at that date.
In June 2007, the FASB issued provisions under Accounting
Standards Codification 730, Research & Development,
relating to the accounting for non-refundable advanced payments
for goods or services to be used in future research and
development activities. The new provisions require that these
payments be deferred and capitalized and expensed as goods are
delivered or as the related services are performed. On
October 4, 2008, the Company adopted these provisions. The
adoption did not have a material impact on its consolidated
financial statements.
In April 2009, the FASB issued three related accounting
provisions: (i) Accounting Standards Codification
820-10-65,
Fair Value Measurements and Disclosures Transition
and Open Effective Date Information, or ASC
820-10-65,
(ii) Accounting Standards Codification
320-10-65,
Investments Debt and Equity Securities
Transition and Open Effective Date Information, or ASC
320-10-65,
and (iii) Accounting Standards Codification
825-10-65,
Financial Instruments Transition and Open Effective
Date Information, or ASC
825-10-65,
which will be effective for interim and annual periods ending
after June 15, 2009. ASC
820-10-65
provides guidance on how to determine the fair value of assets
and liabilities in the current economic environment and
reemphasizes that the objective of a fair value measurement
remains an exit price. If the Company were to conclude that
there has been a significant decrease in the volume and level of
activity of the asset or liability in relation to normal market
activities, quoted market values may not be representative of
fair value and the Company may conclude that a change in
valuation technique or the use of multiple valuation techniques
may be appropriate. ASC
320-10-65
modifies the requirements for recognizing
other-than-temporarily
impaired debt securities and revise the existing impairment
model for such securities, by modifying the current intent and
ability indicator in determining whether a debt security is
other-than-temporarily
impaired. ASC
825-10-65
enhances the disclosure of relevant instruments for both interim
and annual periods. The adoption of these provisions did not
have a material impact on the Companys consolidated
financial statements.
57
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In May 2009, the FASB issued Accounting Standards Codification
855-10,
Subsequent Events, which defined the period after the balance
sheet date during which a reporting entity shall evaluate events
or transactions that may occur for potential recognition or
disclosure in the financial statements and the circumstances
under which a company shall recognize events or transactions
occurring after the balance sheet date in its financial
statements. This standard also requires a company to disclose
the date through which subsequent events have been evaluated for
recognition or disclosure in the financial statements. The
Company reflected the recognition and disclosure requirements of
this standard in this Annual Report on
Form 10-K.
In December 2007, the FASB issued provisions under Accounting
Standards Codification 805, Business Combinations, or ASC 805,
which established principles and requirements for the acquirer
of a business to recognize and measure in its financial
statements the identifiable assets (including in-process
research and development and defensive assets) acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree. Prior to the adoption of ASC 805, in-process research
and development costs were immediately expensed and acquisition
costs were capitalized. Under ASC 805, all acquisition costs are
expensed as incurred. The standard also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of financial statements to evaluate the nature and
financial effects of the business combination. In April 2009,
the FASB updated ASC 805 to amend the provisions for the initial
recognition and measurement, subsequent measurement and
accounting, and disclosures for assets and liabilities arising
from contingencies in business combinations. This update also
eliminates the distinction between contractual and
non-contractual contingencies. ASC 805 is effective for
financial statements issued for fiscal years beginning after
December 15, 2008. The Company will be required to adopt
ASC 805 in the first quarter of fiscal 2010. The Company expects
ASC 805 will have an impact on its consolidated financial
statements, but the nature and magnitude of the specific effects
will depend upon the nature, terms and size of the acquisitions
the Company consummates after the effective date.
In September 2009, the Emerging Issues Task Force reached a
consensus on Accounting Standards Update, or ASU,
2009-13,
Revenue Recognition (Topic 605) Multiple-Deliverable
Revenue Arrangements, or ASU
2009-13 and
ASU 2009-14,
Software (Topic 985) Certain Revenue Arrangements
That Include Software Elements, or ASU
2009-14. ASU
2009-13
modifies the requirements that must be met for an entity to
recognize revenue from the sale of a delivered item that is part
of a multiple-element arrangement when other items have not yet
been delivered. ASU
2009-13
eliminates the requirement that all undelivered elements must
have either: i) vendor specific objective evidence (VSOE)
of fair value or ii) third-party evidence, or TPE, before
an entity can recognize the portion of an overall arrangement
consideration that is attributable to items that already have
been delivered. In the absence of VSOE or TPE of the standalone
selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to
estimate the selling prices of those elements. Overall
arrangement consideration will be allocated to each element
(both delivered and undelivered items) based on their relative
selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entitys
estimated selling price. The residual method of allocating
arrangement consideration has been eliminated. ASU
2009-14
modifies the software revenue recognition guidance to exclude
from its scope tangible products that contain both software and
non-software components that function together to deliver a
products essential functionality. These new updates are
effective for revenue arrangements entered into or materially
modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted. The Company is currently
evaluating the impact that the adoption of these ASUs will have
on its consolidated financial statements.
58
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Supplemental
Financial Statement Data
|
Inventories
Inventories at fiscal year ends consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Work-in-process
|
|
$
|
4,124
|
|
|
$
|
8,620
|
|
Finished goods
|
|
|
6,778
|
|
|
|
7,567
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,902
|
|
|
$
|
16,187
|
|
|
|
|
|
|
|
|
|
|
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
12 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
$1.5 million (2009), $1.6 million (2008) and
$4.0 million (2007) from the sale of inventories that
the Company had written down to a zero cost basis during fiscal
2001. As of October 2, 2009, the Company continued to hold
inventories with an original cost of $3.8 million, which
were written down to a zero cost basis during fiscal 2001.
Deferred
Income on Shipments to Distributors
Deferred income on shipments to distributors is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred revenue on shipments to distributors
|
|
$
|
2,984
|
|
|
$
|
5,387
|
|
Deferred cost of inventory on shipments to distributors
|
|
|
(422
|
)
|
|
|
(576
|
)
|
Reserves
|
|
|
42
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
Deferred income on sales to distributors
|
|
$
|
2,604
|
|
|
$
|
4,869
|
|
|
|
|
|
|
|
|
|
|
59
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Property,
Plant and Equipment
Property, plant and equipment at fiscal year ends consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Machinery and equipment
|
|
$
|
73,825
|
|
|
$
|
73,229
|
|
Leasehold improvements
|
|
|
3,840
|
|
|
|
3,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,665
|
|
|
|
76,931
|
|
Accumulated depreciation and amortization
|
|
|
(66,647
|
)
|
|
|
(64,331
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,018
|
|
|
$
|
12,600
|
|
|
|
|
|
|
|
|
|
|
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 12 to these
consolidated financial statements for further information
related to this acquisition. These intangible assets consist of
backlog (approximately $100,000), developed technology
(approximately $3.1 million) and goodwill (approximately
$2.4 million). See Notes 13 and 14 to these
consolidated financial statements for a discussion of the
impairment of developed technology and goodwill recorded by the
Company during the fiscal year ended October 2, 2009.
The components of the provision for income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
1,147
|
|
|
$
|
99
|
|
|
$
|
566
|
|
State and local
|
|
|
22
|
|
|
|
10
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,169
|
|
|
|
109
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(687
|
)
|
|
|
502
|
|
|
|
(465
|
)
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(687
|
)
|
|
|
502
|
|
|
|
(465
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
482
|
|
|
$
|
611
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
U.S. federal statutory tax at 35%
|
|
$
|
(7,542
|
)
|
|
$
|
2,733
|
|
|
$
|
(7,642
|
)
|
State taxes, net of federal effect
|
|
|
(827
|
)
|
|
|
739
|
|
|
|
(1,481
|
)
|
Foreign income taxes in excess of U.S.
|
|
|
298
|
|
|
|
420
|
|
|
|
(293
|
)
|
Research and development credits
|
|
|
|
|
|
|
|
|
|
|
(2,592
|
)
|
Valuation allowance
|
|
|
8,773
|
|
|
|
(33,837
|
)
|
|
|
13,992
|
|
Reversal of research and development credits, federal and state
|
|
|
|
|
|
|
29,041
|
|
|
|
|
|
Other
|
|
|
(220
|
)
|
|
|
1,515
|
|
|
|
(1,873
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
482
|
|
|
$
|
611
|
|
|
$
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)/income before income taxes consists of the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
(22,015
|
)
|
|
$
|
7,328
|
|
|
$
|
(22,926
|
)
|
Foreign
|
|
|
466
|
|
|
|
518
|
|
|
|
1,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(21,549
|
)
|
|
$
|
7,846
|
|
|
$
|
(21,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities at fiscal year-ends
consist of the tax effects of temporary differences related to
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
10,267
|
|
|
$
|
12,118
|
|
Deferred revenue
|
|
|
1,213
|
|
|
|
1,999
|
|
Accrued compensation and benefits
|
|
|
1,275
|
|
|
|
1,292
|
|
Product returns and allowances
|
|
|
516
|
|
|
|
745
|
|
Net operating losses
|
|
|
241,489
|
|
|
|
232,890
|
|
Stock options
|
|
|
3,932
|
|
|
|
|
|
Foreign deferred taxes
|
|
|
1,801
|
|
|
|
1,113
|
|
Property, plant and equipment
|
|
|
510
|
|
|
|
|
|
Other
|
|
|
3,933
|
|
|
|
5,244
|
|
Valuation allowance
|
|
|
(257,072
|
)
|
|
|
(248,299
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
7,864
|
|
|
|
7,102
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
|
|
|
|
379
|
|
Deferred state taxes
|
|
|
6,063
|
|
|
|
5,610
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
6,063
|
|
|
|
5,989
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,801
|
|
|
$
|
1,113
|
|
|
|
|
|
|
|
|
|
|
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 2, 2009 and October 3, 2008
will not be realized through the reduction of future income tax
payments. Consequently, the Company has
61
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
As of October 2, 2009, Mindspeed had U.S. federal net
operating loss carryforwards of approximately
$651.2 million, which expire at various dates through 2030,
and aggregate state net operating loss carryforwards of
approximately $157.3 million, which expire at various dates
through 2030. Sections 382 and 383 of the Internal Revenue
Code of 1986, as amended, provide for limitations on the
utilization of net operating loss and research and development
credit carryforwards if the Company were to undergo an ownership
change, as defined in Section 382.
The deferred tax assets as of October 2, 2009 include a
deferred tax asset of $10.9 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 $400,000 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 interpretations that
clarify the accounting for uncertainty in income taxes
recognized in an entitys financial statements in
accordance with Accounting Standards Codification 740, Income
Taxes, and prescribe a recognition threshold and measurement
attributes for financial statement disclosure of tax positions
taken or expected to be taken on a tax return. Under the new
interpretations, 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, the new
interpretations provide guidance on
de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The new interpretations are
effective for fiscal years beginning after December 15,
2006.
The Company adopted these interpretations on September 29,
2007. As a result of the adoption 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,
62
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$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 would 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 2,
2009.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Balance as of October 3, 2008
|
|
$
|
36,506
|
|
Increases in tax positions for current year
|
|
|
526
|
|
|
|
|
|
|
Balance at October 2, 2009
|
|
$
|
37,032
|
|
|
|
|
|
|
The unrecognized tax benefits of $37.0 million at
October 2, 2009 included $1.0 million of tax benefits
that, if recognized, would reduce our annual effective tax rate.
The remaining $36.0 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 does not anticipate that unrecognized tax benefits will
significantly increase or decrease within 12 months of the
reporting date.
The Company is currently open to audit under the statute of
limitations by the taxing authorities for the years ended
September 30, 2005 to 2009 in our foreign jurisdictions.
|
|
5.
|
Fair
Value Measurements
|
On October 4, 2008, the Company adopted certain provisions
under Accounting Standards Codification 820, Fair Value
Measurements and Disclosures, or ASC 820, for financial assets
and financial liabilities and for non-financial assets and
non-financial liabilities that we recognize or disclose at fair
value on a recurring basis (at least annually). As of the date
of adoption, these included cash equivalents and convertible
senior notes. Consistent with the provisions of ASC 820, the
Company elected to defer the provisions which relate to
non-financial assets and non-financial liabilities that the
Company does not recognize or disclose at fair value on a
recurring basis.
ASC 820 defines fair value as the price that would be received
from the sale of an asset or paid to transfer a liability (an
exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. ASC 820 establishes a
three-level hierarchy for disclosure that is based on the extent
and level of judgment used to estimate the fair value of assets
and liabilities.
|
|
|
|
|
Level 1 uses unadjusted quoted prices that are available in
active markets for identical assets or liabilities. The
Companys Level 1 assets include investments in money
market funds.
|
|
|
|
Level 2 uses inputs other than quoted prices included in
Level 1 that are either directly or indirectly observable
through correlation with market data. These include quoted
prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets or liabilities in
markets that are not active; and inputs to valuation models or
other pricing methodologies that do not require significant
judgment because the inputs used in the model, such as interest
rates and volatility, can be corroborated by readily observable
market data. The Companys Level 2 liabilities include
convertible senior notes.
|
63
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
Level 3 uses one or more significant inputs that are
unobservable and supported by little or no market activity, and
reflect the use of significant management judgment. Level 3
assets and liabilities include those whose fair value
measurements are determined using pricing models, discounted
cash flow methodologies or similar valuation techniques and
significant management judgment or estimation. The Company does
not have any assets or liabilities that are valued using inputs
identified under a Level 3 hierarchy.
|
The following table represents financial assets that we measured
at fair value on a recurring basis. We have classified these
assets and liabilities in accordance with the fair value
hierarchy set forth in ASC 820 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Total Fair Value
|
|
|
for Identical
|
|
Observable
|
|
as of
|
|
|
Instruments
|
|
Inputs
|
|
October 2,
|
October 2, 2009
|
|
(Level 1)
|
|
(Level 2)
|
|
2009
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
20,891
|
|
|
|
|
|
|
$
|
20,891
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible debt
|
|
|
|
|
|
$
|
25,096
|
|
|
$
|
25,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Active Markets
|
|
Significant Other
|
|
Total Fair Value
|
|
|
for Identical
|
|
Observable
|
|
as of
|
|
|
Instruments
|
|
Inputs
|
|
October 3,
|
October 3, 2008
|
|
(Level 1)
|
|
(Level 2)
|
|
2008
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
43,033
|
|
|
|
|
|
|
$
|
43,033
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible debt
|
|
|
|
|
|
$
|
41,161
|
|
|
$
|
41,161
|
|
The following table sets forth the carrying amount and estimated
fair values of financial assets and liabilities (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2, 2009
|
|
October 3, 2008
|
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
20,891
|
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
|
$
|
43,033
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior convertible debt
|
|
$
|
25,486
|
|
|
$
|
25,096
|
|
|
$
|
46,000
|
|
|
$
|
41,161
|
|
|
|
6.
|
Revolving
Credit Facility and Convertible Senior Notes
|
Revolving
Credit Facility
On September 30, 2008, the Company entered into a loan and
security agreement with Silicon Valley Bank (SVB), which was
amended effective March 2, 2009. 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 3.75% 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.
64
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Any indebtedness under the loan and security agreement bears
interest at a variable rate ranging from prime plus 0.25% to a
maximum rate of prime plus 1.25%, 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, in certain circumstances, 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 2, 2009, 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 2, 2009,
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 in November
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 notes were due November 18, 2009.
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 its 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 of common stock, which is equal to
a conversion rate of approximately 86.58 shares 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 of common stock, which was equal to
approximately 71.17 shares 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 notes, the Company 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
the Companys 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. The
Companys 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
(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), the Company may, in lieu of making an additional
cash payment upon conversion as required by the indenture, elect
to adjust the conversion
65
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 2, 2009, the
liability under the fundamental change adjustment has been
recorded at its estimated fair value, which is zero based on the
Companys current stock price.
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 Securities and Exchange Commission
(SEC) on April 6, 2005.
Upon completion of the sale of the notes, the $50.0 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.
In October 2008, the Company repurchased $20.5 million
aggregate principal amount of its 3.75% 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. The related debt discount and debt
issuance costs totaling approximately $300,000 were written off.
The repurchase resulted in a gain on debt extinguishment of
$2.9 million. At October 2, 2009, $10.5 million
in aggregate principal amount of the Companys 3.75%
convertible senior notes were outstanding. See Note 18 to
these consolidated financial statements for information
regarding the payment of this remaining outstanding amount.
6.50% Convertible
Senior Notes due 2013
On July 30, 2008, the Company entered into separate
exchange agreements with certain holders of its existing
convertible senior notes due in November 2009, pursuant to which
holders of an aggregate of $15.0 million of the existing
notes agreed to exchange their notes for $15.0 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 convertible senior notes due in August
2013, or new notes, pursuant to an indenture, dated as of
August 1, 2008, between it 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, the Company will be required to repay the
outstanding principal of the new notes. As of October 2,
2009, $15.0 million in aggregate principal amount of the
Companys 6.50% convertible senior notes were outstanding.
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, the Company generally has the right to deliver
to the holders thereof, at its option: (i) cash;
(ii) shares of its 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 its common stock, and
upon other events. If the Company undergoes certain fundamental
changes prior to maturity of the new notes, the holders thereof
will have the right, at their option, to require it 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 its
common stock
66
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and, under certain circumstances, receive additional shares of
its 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 October 2, 2009, the
liability under the fundamental change adjustment has been
recorded at its estimated fair value, which is zero based on the
Companys current stock price.
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 the Company fails 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 the Company to
repurchase all or any portion of the new notes then held by such
holder.
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 $2.6 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 $3.9 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
$6.6 million (2009), $8.0 million (2008) and
$8.8 million (2007), including $5.2 million (2009),
$6.5 million (2008) and $6.6 million
(2007) due to Conexant under the Sublease. As of
October 2, 2009, the Companys minimum future
obligations under operating leases (including the estimated
minimum future obligation under the Sublease) are as follows (in
thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2010
|
|
$
|
5,524
|
|
2011
|
|
|
1,140
|
|
2012
|
|
|
708
|
|
2013
|
|
|
704
|
|
2014
|
|
|
361
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
8,437
|
|
|
|
|
|
|
67
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,
our facilities, 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
100.0 million shares of common stock, par value $0.01 per
share, and 25.0 million shares of preferred stock, par
value $0.01 per share, of which 2.5 million shares are
designated as Series A Junior Participating Preferred Stock
(Series A Junior Preferred Stock) and 3.5 million
shares are designated as Series B Junior Participating
Preferred Stock (Series B 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 Series A 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 Series A 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.
68
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also has a Section 382 Rights Agreement
intended to protect the Companys net operating loss
carryforwards (NOLs) to reduce potential future federal income
tax obligations. However, if the Company were to experience an
Ownership Change, as defined in Section 382 of
the Internal Revenue Code, its ability to use the NOLs will be
significantly limited, and the timing of the usage of the NOLs
could be significantly limited, which could therefore
significantly impair the value of that asset. Pursuant to each
preferred share purchase right under the Section 382 Rights
Agreement, attached to each share of common stock, the holder
may, upon an Ownership Change and subject to certain
other conditions, become entitled to purchase from the Company a
unit consisting of
1/100th of
a share of Series B Junior Preferred Stock at a price of
$15 per unit, subject to adjustment. Each unit of Series B
Junior Preferred Stock has a minimum preferential quarterly
dividend of $0.01 per unit (or any higher per share dividend
declared on the common stock), a liquidation preference equal to
$1.00 per unit and the per share amount paid in respect of each
share of common stock and the right to one vote, voting together
with common stock. The preferred share purchase rights under the
Section 382 Rights Agreement expire on August 9, 2012,
unless earlier redeemed or exchanged, or Section 382 of the
Internal Revenue Code is repealed.
Warrants
In the Distribution, Mindspeed issued to Conexant a warrant to
purchase six million shares of Mindspeed common stock at a price
of $17.04 per share, exercisable through June 27, 2013. The
$89.0 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 2, 2009, 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. In August 2009, the Company issued and sold
4,750,000 shares of its common stock at a public offering
price of $2.05 per share which was below the current market
price of our stock. Due to these antidilution provisions, the
number of shares related to this warrant was adjusted to
represent the right to purchase approximately 6.1 million
and the price was adjusted to $16.74 per share.
|
|
11.
|
Stock-Based
Compensation
|
Effective October 1, 2005, the Company adopted standards
under Accounting Standards Codification 718,
Compensation Stock Compensation, or ASC 718, using
the modified prospective application. The Company
elected the transition method related to accounting for the tax
effects of share-based payment awards to employees. ASC 718
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 ASC 718, the Companys
stock-based compensation expense for fiscal 2009, fiscal 2008
and fiscal 2007 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.
69
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
Weighted-average fair value of options granted
|
|
$
|
1.08
|
|
|
$
|
1.84
|
|
|
$
|
5.80
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
87
|
%
|
|
|
64
|
%
|
|
|
74
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option life
|
|
|
2.8 years
|
|
|
|
3.2 years
|
|
|
|
3.3 years
|
|
Risk-free interest rate
|
|
|
1.4
|
%
|
|
|
2.8
|
%
|
|
|
4.7
|
%
|
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 ASC 718 was allocated as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost of goods sold
|
|
$
|
85
|
|
|
$
|
173
|
|
Research and development
|
|
|
765
|
|
|
|
2,267
|
|
Selling, general and administrative
|
|
|
1,825
|
|
|
|
3,066
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,675
|
|
|
$
|
5,506
|
|
|
|
|
|
|
|
|
|
|
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 2,
2009, an aggregate of 2.2 million shares of the
Companys common stock were available for issuance under
these plans. On March 10, 2009, the stockholders of the
Company approved a plan amendment, which included an increase in
the authorized number of shares reserved for issuance under the
2003 Long-Term Incentives Plan to approximately 6.7 million
shares.
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 of its common
70
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 ASC
718, 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 and 21,600 shares 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 Listing
Rule 5635(c).
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). On
April 10, 2009, the Company offered current eligible
employees of Mindspeed and its subsidiaries the right to
exchange certain unexercised options to purchase shares of the
Companys common stock. The offer period on the exchange
program ended on May 15, 2009, at which time the Company
exchanged 754,000 previously issued stock options for 250,000
new stock options with an exercise price of $1.70, the market
price of the Companys common stock on that date. The
Company has chosen to account for this transaction under the
bifurcated approach and recorded an insignificant amount of
incremental compensation expense in conjunction with this
exchange.
71
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity under all
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
Number of
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
Shares
|
|
Exercise Price
|
|
Contractual Term
|
|
Value
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,294
|
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Forfeited or expired
|
|
|
(1,694
|
)
|
|
|
11.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 2, 2009
|
|
|
3,128
|
|
|
$
|
6.48
|
|
|
|
4.9 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 2, 2009
|
|
|
1,461
|
|
|
$
|
10.84
|
|
|
|
2.8 years
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 2, 2009, there was unrecognized compensation
expense of $1.9 million related to unvested stock options,
which the Company expects to recognize over a weighted-average
period of 1.4 years.
The following table summarizes all options to purchase Mindspeed
common stock outstanding at October 2, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$0.75 - $4.85
|
|
|
1,849
|
|
|
|
3.0
|
|
|
$
|
2.59
|
|
|
|
245
|
|
|
$
|
4.13
|
|
5.02 - 9.75
|
|
|
356
|
|
|
|
2.1
|
|
|
|
8.32
|
|
|
|
340
|
|
|
|
8.36
|
|
10.00 - 19.65
|
|
|
885
|
|
|
|
1.2
|
|
|
|
12.66
|
|
|
|
838
|
|
|
|
12.72
|
|
20.07 - 27.82
|
|
|
16
|
|
|
|
1.3
|
|
|
|
21.99
|
|
|
|
16
|
|
|
|
21.99
|
|
32.20 - 47.50
|
|
|
22
|
|
|
|
2.6
|
|
|
|
44.17
|
|
|
|
22
|
|
|
|
44.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.75 - 47.50
|
|
|
3,128
|
|
|
|
2.2
|
|
|
|
6.48
|
|
|
|
1,461
|
|
|
|
10.84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
72
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 totaled 211,000 shares (2009),
772,000 shares (2008) and 556,000 shares (2007).
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 following table summarizes restricted stock
award activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
211
|
|
|
|
1.86
|
|
Vested
|
|
|
(472
|
)
|
|
|
6.61
|
|
Forfeited
|
|
|
(50
|
)
|
|
|
7.02
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares at October 2, 2009
|
|
|
371
|
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
The total fair value of shares vested during the year ended
October 2, 2009 was $598,000. As of October 2, 2009,
there was unrecognized compensation expense of $729,000 related
to unvested restricted stock awards, which the Company expects
to recognize over a weighted-average period of 1.1 years.
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).
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
73
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes 13 and 14 to these consolidated financial
statements for a discussion of the impairment of developed
technology and goodwill recorded by the Company during the
fiscal year ended October 2, 2009.
|
|
13.
|
Asset
Impairments and Other Charges
|
Included within cost of goods sold for the fiscal year ended
October 2, 2009 are asset impairments and other charges of
$3.7 million recorded in the second quarter of fiscal 2009.
These charges include a $2.4 million write-down of the
carrying value of developed technology related to the
Companys acquisition of certain assets of Ample in the
fourth quarter of fiscal 2007. Management evaluated the
recoverability of the assets related to Ample to determine
whether their value was impaired, based upon the future cash
flows expected to be generated by the associated products over
the remainder of their life cycles. Because the estimated
undiscounted cash flows were less than the carrying value of the
related assets, management determined that such assets were
impaired. The Company recorded an impairment charge equal to the
full book value of the assets by comparing the estimated fair
value of the asset to their carrying value. The fair value was
determined by computing the present value of the expected future
74
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cash flows using a discount rate of 20%, which management
believes is commensurate with the underlying risks associated
with the projected cash flows. Management believes the
assumptions used in the discounted cash flow model represent a
reasonable estimate of the fair value of the assets.
In addition, in the fiscal year ended October 2, 2009,
asset impairments and other charges within cost of goods sold
includes a $1.1 million write-down of Ample related
inventory due to a decrease in demand for these products
recorded during the second quarter of fiscal 2009. The Company
assesses the recoverability of its inventories at least
quarterly through a review of inventory levels in relation to
foreseeable demand (generally over 12 months). Foreseeable
demand is based upon all available information, including sales
backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable
demand, the Company writes down the value of those inventories
which, at the time of its review, the Company expects to be
unable to sell. The amount of the inventory 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.
Also, in the second quarter of fiscal 2009, the Company recorded
other asset impairments within cost of goods sold totaling
approximately $300,000 associated with manufacturing related
property and equipment that the Company determined to abandon or
scrap.
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
($ in thousands)
|
|
|
Asset impairments
|
|
$
|
2,865
|
|
|
$
|
|
|
|
$
|
|
|
Restructuring charges
|
|
|
4,031
|
|
|
|
211
|
|
|
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges
|
|
$
|
6,896
|
|
|
$
|
211
|
|
|
$
|
4,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Impairments
In addition to the $3.7 million in asset impairments and
other charges discussed in Note 13 to these consolidated
financial statements, during fiscal year 2009, the Company
recorded asset impairment charges of $2.9 million. Included
in this amount are asset impairment charges of approximately
$500,000 related to software and property and equipment that the
Company determined to abandon or scrap, as well as asset
impairment charges of $2.4 million to write-down the
carrying value of goodwill related to the Companys
acquisition of certain assets of Ample in the fourth quarter of
fiscal 2007. In the second quarter of fiscal 2009, the Ample
reporting unit experienced a severe decline in sales and
profitability due to a significant decline in demand that the
Company believes was a result of the downturn in global economic
conditions, as well as a bankruptcy filed by the reporting
units most significant customer. The drop in market demand
resulted in significant declines in unit sales. Due to these
market and economic conditions, the Ample reporting unit
experienced a significant decline in market value. As a result,
the Company concluded that there were sufficient factual
circumstances for interim impairment analyses. Accordingly, in
the second quarter of fiscal 2009, the Company performed an
assessment of goodwill for impairment. Based on the results of
its assessment of goodwill for impairment, the Company
determined that the carrying value of the Ample reporting unit
exceeded its estimated fair value. Therefore, the Company
performed a second step of the impairment test to estimate the
implied fair value of goodwill. The required analysis indicated
that there would be no remaining implied value attributable to
goodwill in the Ample reporting unit and the Company impaired
the entire goodwill balance of $2.4 million.
75
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Restructuring
Charges
Mindspeed Second Quarter Fiscal 2009 Restructuring
Plan In the second quarter of fiscal 2009, the
Company announced the implementation of cost reduction measures
with most of the savings expected to be derived from focused
reductions in the areas of sales, general and administrative and
wide area networking communication spending, including the
closure of its Dubai facility. During fiscal 2009, the Company
incurred special charges of $1.1 million in connection with
this restructuring primarily related to severance costs for
affected employees. As of the end of fiscal 2009, this
restructuring plan was complete and the Company does not expect
to incur significant additional costs related to this
restructuring plan in future periods.
Activity and liability balances related to the Companys
second quarter fiscal 2009 restructuring plan through
October 2, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility and
|
|
|
|
|
|
|
Reductions
|
|
|
Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
1,047
|
|
|
$
|
87
|
|
|
$
|
1,134
|
|
Cash payments
|
|
|
(969
|
)
|
|
|
|
|
|
|
(969
|
)
|
Non-cash charges
|
|
|
|
|
|
|
(87
|
)
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
78
|
|
|
$
|
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents employee severance benefits. The Company expects to
pay these obligations over their respective terms, which expire
at various dates through fiscal 2010.
Mindspeed First Quarter Fiscal 2009 Restructuring
Plan During the first quarter of fiscal 2009,
the Company implemented a restructuring plan under which it
reduced its workforce by approximately 6%. In connection with
this reduction in workforce, the Company recorded a charge of
$2.4 million for severance benefits payable to the affected
employees. In December 2008, the Company vacated approximately
70% of its Massachusetts facility and recorded a charge related
to contractual obligations on this space of approximately
$400,000. As of the end of fiscal 2009, this restructuring plan
was complete and the Company does not expect to incur
significant additional costs related to this restructuring plan
in future periods.
Activity and liability balances related to the Companys
first quarter fiscal 2009 restructuring plan through
October 2, 2009 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
2,405
|
|
|
$
|
368
|
|
|
$
|
2,773
|
|
Cash payments
|
|
|
(2,115
|
)
|
|
|
(190
|
)
|
|
|
(2,305
|
)
|
Non-cash charges
|
|
|
(3
|
)
|
|
|
(92
|
)
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
287
|
|
|
$
|
86
|
|
|
$
|
373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents obligations under non-cancelable leases, employee
severance benefits and other contractual commitments. The
Company expects to pay these obligations over their respective
terms, which expire at various dates through fiscal 2011.
Mindspeed Restructuring Plans In fiscal 2006
and 2007, the Company implemented a number of cost reduction
initiatives to improve its operating cost structure. These cost
reduction initiatives included workforce reductions, significant
reductions in capital spending and the consolidation of certain
facilities. Activity under these initiatives was minimal in
fiscal 2009 and there is no remaining accrued restructuring
balance related to these plans at October 2, 2009.
76
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
15.
|
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 2009, the Company
contributed $1.2 million in cash, which was used to buy
shares of the Companys common stock, to fund the matching
contributions. In fiscal 2008, the Company issued
70,000 shares of its common stock and contributed $914,000
in cash, which was used to buy shares of the Companys
common stock, to fund the matching contributions. In fiscal
2007, the Company issued 122,000 shares of its common stock
to fund the matching contributions. The Company recognized
expenses under the retirement savings plans of $1.2 million
(2009), $1.4 million (2008) and $1.2 million
(2007).
|
|
16.
|
Related
Party Transactions
|
The Company leases its headquarters and principal design center
in Newport Beach, California from Conexant. For the years ended
October 2, 2009, October 3, 2008 and
September 28, 2007, rent and operating expenses paid to
Conexant were $5.2 million, $6.5 million, and
$6.6 million, respectively.
At October 2, 2009 and October 3, 2008, the Company
had a liability to Conexant of $160,000 and $185,000,
respectively, associated with the rental of its facility.
|
|
17.
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
Multiservice access DSP products
|
|
$
|
49,452
|
|
|
$
|
48,402
|
|
|
$
|
34,340
|
|
High-performance analog products
|
|
|
39,084
|
|
|
|
41,900
|
|
|
|
37,482
|
|
WAN communications products
|
|
|
33,016
|
|
|
|
54,047
|
|
|
|
53,983
|
|
Intellectual property
|
|
|
5,000
|
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,552
|
|
|
$
|
160,699
|
|
|
$
|
127,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues by geographic area are presented based upon the country
of destination. Revenues by geographic area are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
United States
|
|
$
|
30,571
|
|
|
$
|
51,775
|
|
|
$
|
39,036
|
|
Other Americas
|
|
|
6,531
|
|
|
|
6,317
|
|
|
|
7,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
37,102
|
|
|
|
58,092
|
|
|
|
46,233
|
|
Malaysia
|
|
|
6,949
|
|
|
|
7,097
|
|
|
|
8,841
|
|
Taiwan
|
|
|
3,699
|
|
|
|
5,803
|
|
|
|
6,937
|
|
China
|
|
|
52,266
|
|
|
|
49,574
|
|
|
|
35,343
|
|
Japan
|
|
|
4,257
|
|
|
|
8,040
|
|
|
|
7,411
|
|
Other Asia-Pacific
|
|
|
10,094
|
|
|
|
11,999
|
|
|
|
8,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific
|
|
|
77,265
|
|
|
|
82,513
|
|
|
|
67,108
|
|
Europe, Middle East and Africa
|
|
|
12,185
|
|
|
|
20,094
|
|
|
|
14,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,552
|
|
|
$
|
160,699
|
|
|
$
|
127,805
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
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 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):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
15,663
|
|
|
$
|
18,912
|
|
Europe, Middle East and Africa
|
|
|
1,191
|
|
|
|
1,237
|
|
Asia-Pacific
|
|
|
2,146
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
19,000
|
|
|
$
|
22,324
|
|
|
|
|
|
|
|
|
|
|
On October 9, 2009, the Company committed to the
implementation of a restructuring plan. The plan consists
primarily of a facilities consolidation and secondarily of a
targeted headcount reduction. The restructuring plan is expected
to be substantially completed during the fiscal first quarter of
2010. The Company made the decision to implement the
restructuring in furtherance of its efforts to consolidate
facilities and to continue to reallocate resources from certain
selling, general and administrative functions to research and
development. The Company currently expects to incur total
special charges and to make cash expenditures ranging from
approximately $900,000 to $1.0 million resulting from these
actions, primarily related to the impairment of a portion of the
Companys headquarters in Newport Beach, California.
On November 17, 2009, the Company repaid the remaining
$10.5 million outstanding under its 3.75% convertible
senior notes.
78
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 2, 2009 and
October 3, 2008, and the related consolidated statements of
operations, stockholders equity and comprehensive loss,
and cash flows for each of the three years in the period ended
October 2, 2009. 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 these financial
statements 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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, 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
Mindspeed Technologies, Inc. and subsidiaries at October 2,
2009 and October 3, 2008, and the results of their
operations and their cash flows for each of the three years in
the period ended October 2, 2009, 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.
Deloitte &
Touche LLP
Costa Mesa, CA
November 24, 2009
79
|
|
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 2, 2009. 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 2, 2009, 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 2, 2009
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