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 1, 2010
Commission file number:
001-31650
MINDSPEED TECHNOLOGIES,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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01-0616769
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(State of
incorporation)
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(I.R.S. Employer
Identification No.)
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4000 MacArthur Boulevard, East Tower
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92660-3095
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Newport Beach, California
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(Zip code)
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(Address of principal executive
offices)
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Registrants telephone number, including area code:
(949) 579-3000
Securities registered pursuant to Section 12(b) of the
Act:
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(Title of Each Class)
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(Name of Each Exchange on Which Registered)
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Common Stock $0.01 par value per share
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The NASDAQ Stock Market LLC
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(including associated Preferred Share Purchase Rights)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the Registrant: (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant
was required to submit and post such
files). Yes o No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) 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. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2 of the
Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
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Smaller
reporting
company þ
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(Do not check if a smaller reporting company)
Indicate by check mark whether the Registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the Registrants voting and
non-voting stock held by non-affiliates of the Registrant as of
the end of its most recently completed second fiscal quarter was
approximately $247.7 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 29, 2010 was 32,228,598.
Documents
Incorporated by Reference
Portions of the Registrants Proxy Statement for the 2011
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A within 120 days after the end of the
2010 fiscal year, are incorporated by reference into
Part III of this
Form 10-K.
TABLE OF CONTENTS
FORWARD-LOOKING
STATEMENTS
This Annual Report on
Form 10-K
contains statements relating to Mindspeed Technologies, Inc.
(including certain projections and business trends) that are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
Securities Act), and Section 21E of the Securities Exchange
Act of 1934, as amended (the Exchange Act), and are subject to
the safe harbor created by those sections. All
statements included in this Annual Report on
Form 10-K,
other than those that are purely historical, are forward-looking
statements. Words such as expect,
believe, anticipate,
outlook, could, target,
project, intend, plan,
seek, estimate, should,
may, assume and continue, as
well as variations of such words and similar expressions, also
identify forward-looking statements. Forward-looking statements
in this Annual Report on
Form 10-K
include, without limitation, statements regarding:
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the ability of our relationships with network infrastructure
original equipment manufacturers to facilitate early adoption of
our products, enhance our ability to obtain design wins and
encourage adoption of our technology in the industry;
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the growth prospects for the network infrastructure equipment
and communications semiconductors markets, including increased
demand for network capacity, the upgrade and expansion of
existing networks, and the build-out of networks in developing
countries;
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our expectation that original equipment manufacturers will
outsource more of their semiconductor component requirements to
semiconductor suppliers;
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our belief that the markets for semiconductor products
addressing the enterprise, broadband access and metro service
areas will grow at faster rates than the markets for network
infrastructure equipment, in general, and our position to
increase our share in those target areas;
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our belief that our diverse portfolio of semiconductor solutions
has positioned us to capitalize on some of the most significant
trends in telecommunications spending;
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our belief that we are well-situated in China and that fiber
deployments are being rolled out by the countrys major
telecommunications carriers;
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our belief that raw materials, parts and supplies required by
our foundry suppliers will remain available in the foreseeable
future;
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our belief that the loss or termination 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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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 growth markets;
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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 increasing trend toward industry consolidation and the
effect it could have on our operating results;
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the sufficiency of our existing sources of liquidity, along with
cash expected from product sales and the sale and licensing of
intellectual property to fund our operations, research and
development efforts, anticipated capital expenditures, working
capital and other financing requirements, including interest
payments on debt obligations, for the next 12 months;
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our estimates regarding our minimum future obligations under our
operating leases and our anticipated rental income;
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the effects of changes in the prime interest rate and currency
rates on our results of operations or cash flows;
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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 timing, expected workforce
reductions, the expected cost savings under our restructuring
plans and the uses of those savings, the timing and amount of
payments, the impact on our business, the amounts of future
charges to complete our restructuring plans, including any
future plans to reduce operating expenses
and/or
increase revenues;
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our intention to continue to expand our international business
activities, including expansion of design and operations centers
abroad, and the challenges associated with such expansion;
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our expectations regarding the cyclical nature of the
semiconductor industry;
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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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fluctuations in our operating results and future operating
losses;
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worldwide political and economic uncertainties and specific
conditions in the markets we address;
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constraints in the supply of wafers and other product components
from our third-party manufacturers;
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fluctuations in the price of our common stock;
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cash requirements and terms and availability of financing;
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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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doing business internationally and our ability to successfully
and cost effectively establish and manage operations in foreign
jurisdictions;
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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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lengthy sales cycles;
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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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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®,
Comcerto®
and
Transcedetm
are registered trademarks or trademarks of Mindspeed
Technologies, Inc. Other brands, names and trademarks contained
in this report are the property of their respective owners.
3
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 enterprise networks, broadband
access networks (fixed and mobile) and metropolitan and wide
area networks. We have organized our solutions for these
interrelated and rapidly converging networks into three product
families: communications convergence processing (formerly known
as multiservice access), high-performance analog and wide area
networking communications. Our communications convergence
processing products include ultra-low-power, multi-core digital
signal processor
system-on-chip
(SoC) solutions for the fixed and mobile (3G/4G) carrier
infrastructure and residential and enterprise platforms. Our
high-performance analog products include high-density crosspoint
switches, optical drivers, equalization and signal-conditioning
solutions that solve difficult switching, timing and
synchronization challenges in next-generation optical
networking, enterprise storage and broadcast video transmission
applications. Our wide area networking (WAN) communications
portfolio helps optimize todays circuit-switched networks
that furnish much of the Internets underlying
long-distance infrastructure.
Our products are sold to original equipment manufacturers (OEMs)
for use in a variety of network infrastructure equipment,
including:
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Communications Convergence Processing
triple-play edge and metro trunking gateways for
Voice-over-Internet
protocol (VoIP) platforms; broadband customer premises equipment
(CPE) gateways and other equipment that carriers use to deliver
voice, data and video services to residential subscribers;
Internet protocol (IP) private branch exchange (PBX) equipment
and security appliances used in the enterprise and 3G/4G mobile
base stations in the carrier infrastructure;
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High-Performance Analog next-generation fiber
access network equipment (including passive optical networking,
or PON, systems); storage and server systems supporting
high-speed PCI Express, Serial Attached SCSI (SAS) and
InfiniBand protocols; and production switches, routers and other
systems that are driving the migration to 3G high-definition
(HD) transmission; and
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WAN Communications circuit-switched
networking equipment that implements asynchronous transfer mode
(ATM) and T1/E1 and T3/E3 communications protocols.
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Our customers include Alcatel-Lucent, Cisco Systems, Inc.,
Huawei Technologies Co. Ltd., Hitachi Ltd., LM Ericsson
Telephone Company, Nokia Siemens Networks and Zhongxing Telecom
Equipment Corp.
We believe the breadth of our product portfolio, combined with
more than three decades of experience in semiconductor hardware,
software and communications systems engineering, provides 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 efforts on applications in
the segments of the telecommunications network which we believe
offer the most attractive growth prospects. Our business is
fabless, which means we outsource all of our manufacturing
needs, and we do not own or operate any semiconductor
manufacturing facilities. We believe being fabless allows us to
minimize operating infrastructure and capital expenditures,
maintain operational flexibility and focus our resources on the
design, development and marketing of our products
the highest value-creation elements of our business model.
Spin-off
from Conexant Systems, Inc.
Mindspeed was originally incorporated in Delaware in 2001 as a
wholly owned subsidiary of Conexant Systems, Inc. On
June 27, 2003, Conexant completed the distribution to
Conexant stockholders of all outstanding shares of common stock
of Mindspeed. 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
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distribution, Conexant contributed cash to our company 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, as adjusted, 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 low-power, multi-core digital
signal processor (DSP) SoC solutions, as well as 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 areas 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 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 and media gateways,
IP private branch exchanges, SAN routers, director-class
switches and emerging enterprise-class 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), including 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 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 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
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for wireless communications carriers. In addition, this portion
of the network provides the communications link between
broadband access service areas and the fiber optic-based, wide
area network. For metro equipment applications, our
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 includes
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 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 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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integration, transmission and receiving of multi-gigabit serial
data streams over optical and copper media to solve difficult
system challenges in synchronous optical network (SONET),
optical transport network (OTN), dense wavelength division
multiplexing (DWDM) telecommunications equipment, broadcast
video systems, and enterprise storage, networking and computing
applications; and
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traditional transmission components for the public switched
telephone network (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 (fixed and mobile) and metro
service areas of the telecommunications network. We believe the
markets for semiconductor products that address these
applications will grow at faster rates than the markets for
network infrastructure equipment, in general. 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.
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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 Genband, 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.
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
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platforms, as well as for our
Transcedetm
products. 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. Our products can be
classified into three focused product families: communications
convergence processing 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.
Communications
Convergence Processing Products
Our software-configurable communications convergence processing
(formerly known as multiservice access) products serve as
bridges for transporting video, voice, fax and modem
transmissions between circuit-switched and packet-based fixed
and mobile networks, and across network boundaries. Our 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 video
and VoIP,
Voice-over-ATM
(VoATM) and
Voice-over-DSL
services, as well as
wireline-to-wireless
connectivity.
Our communications convergence processing products include the
eighth-generation Comcerto family for fiber-access service
delivery, and our
Transcedetm
family of 3G/4G base station baseband processors that extend our
proven multi-core processing expertise into the mobile
infrastructure.
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 5000, 900, 700 and 600
series processors and related software, provide a complete SoC
solution for carrier-class video and
Voice-over-packet
(VoP) applications. All are targeted for use in media gateways
designed to bridge wireless, wireline and enterprise networks.
The Comcerto 300, 500 and 800 series solutions are designed for
access and enterprise voice and data processing applications.
The Comcerto 300 series is targeted at VoIP integration in lower
density access platforms, such as multi-dwelling units (MDUs),
digital subscriber line access multiplexer (DSLAM) equipment and
multi-service access nodes (MSANs), and are widely deployed in
passive optical network/fiber-to-the-building (PON/FTTB)
applications. The Comcerto 500 series is a silicon
PBX-on-a-chip
which supports all required voice processing functionality for
up to 128 channels, including encryption. The Comcerto 800
series enables a new class of
office-in-a-box
systems by combining a high-quality 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.
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The Comcerto 100 series broadband services processor, is
designed to support secure triple-play (voice, video and data)
networks for residential and small office/home office markets.
The Comcerto 100 series processor integrates high-performance
security processing, packet processing and quality of service
(QoS) capabilities for next-generation broadband
customer-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 and
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 secure sockets
layer (SSL) throughput and industry leading QoS hardware
features.
Our Transcede family extends our multi-core processor to deliver
highly integrated baseband solutions for
3G/4G base
stations. Transcede is designed to meet the huge increase in
base station diversity and computational complexity caused by
the mobile Internets migration from a voice- to
data-centric mobile network. Transcede is designed to enable the
development of a wide range of equipment, from picocells and
enterprise femtocells serving a relatively small number of
subscribers to microcells and macrocells serving hundreds or
thousands of subscribers. Demand for this diverse set of
platforms is being driven by the need for carriers to offload
mobile data traffic and bridge todays 3G coverage and
performance gaps, while paving the way for next-generation 4G
and long term evolution (LTE) networks.
The Transcede family includes the T4000, whose processor cores
run at 600 MHz, with less than 12 watt power consumption,
and the T4020, which features 750 MHz processor cores and
typical power consumption less than 15 watts. These devices
enable 64-user picocell on a chip, delivering three
sectors of LTE processing in a single device, while still
providing substantial processing headroom so manufacturers can
deploy their own value-added features as part of an overall
Transcede-based solution. The Transcede family also includes the
Transcede 3000, which is designed for small-cell 3G and 4G base
stations supporting up to 32 users. Mindspeed also offers the
T4005 for 3G/4G macrocell developers who want to combine
Transcedes high-performance Layer One (L1) physical-layer
(PHY) processing capabilities with an existing Layer Two (L2)
media access control (MAC) processing solution. All other
Transcede processors combine L1 PHY and L2 MAC functionality on
the same device to deliver the lowest possible system latency.
High-Performance
Analog Products
Our high-performance analog transmission devices and switching
products support storage area network,
fiber-to-the-premise,
OTN and broadcast video 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, signal conditioners,
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;
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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 8 Gbps 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
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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
OTN systems, add-drop multiplexers, high-density IP switches and
storage-area routers. In addition, we offer crosspoint switches
optimized for standard and high-definition broadcast video
routing and production switching applications.
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 high-performance ATM/MPLS network processors, and T1/E1,
T3/E3 and SONET carrier devices 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 47% of our revenues for
fiscal 2010. For fiscal 2010, distributors Avnet, Inc. and
Alltek Technology Corporation each accounted for 15% of our net
revenues.
Our top direct OEM customer for fiscal year 2010 was Zhongxing
Telecom Equipment Corp. (ZTE), who accounted for 10% of our net
revenues. Huawei Technologies Co. Ltd. and Cisco Systems Inc.
were also significant direct OEM customers and accounted for a
total of 12% of our net revenues. We believe that our
significant indirect network infrastructure OEM customers for
fiscal year 2010 also included Alcatel-Lucent, Genband, Inc.,
Hitachi, Ltd. and Nokia Siemens Networks.
Our customer base is widely dispersed geographically. Revenues
derived from customers located in the Americas region was 26%,
in the Europe region was 7% and in the Asia-Pacific region was
67% of our total revenues for fiscal 2010. 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 that is currently comprised of 105 employees
located in three domestic and eight international sales
locations. Our marketing, sales and field applications
engineering teams, augmented by 13 electronic component
distributors and three sales representative organizations, focus
on marketing and selling semiconductor networking solutions to
worldwide network infrastructure OEMs.
We maintain close working relationships with our customers
throughout their lengthy product development cycle. Our
customers may need six months or longer to test and evaluate our
products and an additional six months or longer to begin volume
production of network infrastructure equipment that incorporates
our products. During this process, we provide broad-based
technical and product design support to our customers through
our field application engineers, product application engineers
and technical marketing personnel. We believe that providing
comprehensive product service and support is critical to
shortening our customers design cycles and maintaining a
competitive position in the network infrastructure equipment
market.
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Operations
and Manufacturing
We are a fabless company, which means we do not own or operate
foundries for wafer fabrication or facilities for device
assembly and final test of our products. Instead, we outsource
wafer fabrication, assembly and testing of our semiconductor
products to independent, third-party contractors. We use
mainstream digital complementary metal- oxide semiconductor
(CMOS) process technology for the majority of our products; we
rely on specialty processes for the remainder of our products.
Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) is our
principal foundry supplier of CMOS wafers and die and produces
some 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 remain
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., Freescale Semiconductor,
Inc., Gennum Corporation, Maxim Integrated Products, Inc.,
PMC-Sierra, Inc., Texas Instruments Inc. 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. 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. We currently have
330 employees engaged in research and development
activities. On research and development activities, we spent
approximately $51.4 million in fiscal 2010,
$50.7 million in fiscal 2009 and $56.2 million in
fiscal 2008. We perform research and product development
activities at our headquarters in Newport Beach, California and
at nine 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 regions 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.
Intellectual
Property
Our success and future revenue growth depend, in part, on the
intellectual property that we own and develop, including
patents, licenses, trade secrets, know-how, trademarks and
copyrights, and on our ability to protect our intellectual
property. We continuously review our patent portfolio to
maximize its value to us, abandoning or selling inapplicable or
less useful patents and filing new patents important to our
product roadmap. Our patent portfolio may be used to avoid,
defend or settle any potential litigation with respect to
various technologies contained in our products. The portfolio
may also provide negotiating leverage in attempts to
cross-license patents or technologies with third parties. We may
also seek to leverage our patent portfolio by licensing or
selling our patents or other intellectual property. We rely
primarily on patent, copyright, trademark and trade secret laws,
as well as employee and third-party nondisclosure and
confidentiality agreements and other methods to protect our
proprietary technologies and processes. In connection with our
participation in the development of various industry standards,
we may be required to reasonably license certain of our patents
to other parties, including
13
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 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
We currently have 519 full-time employees, approximately
354 of whom are engineers. Our employees are not covered by any
collective bargaining agreements and we have not experienced a
work stoppage in the past seven years since our inception. 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 www.mindspeed.com. Our
Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K
and amendments to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, and other
information related to our company, are available free of charge
on this site as soon as reasonably practicable after such
reports are filed with or furnished to the Securities and
Exchange Commission (SEC). Our Code of Business Conduct and
Ethics, Guidelines on Corporate Governance and Board Committee
Charters are also available on our website. We will provide
reasonable quantities of paper copies of filings free of charge
upon request. In addition, we will provide a copy of the Board
Committee Charters to stockholders upon request. No portion of
our Internet website or the information contained in or
connected to the website is incorporated into this Annual Report
on
Form 10-K.
Our business, financial condition and operating results can be
affected by a number of factors, including those listed below,
any one of which could cause our actual results to vary
materially from recent results or from our anticipated future
results. Any of these risks could also materially and adversely
affect our business, financial condition or the price of our
common stock or other securities.
Our
operating results are subject to substantial quarterly and
annual fluctuations.
Although we generated net income in fiscal 2010, we have
incurred significant losses in prior periods. Our revenues and
operating results have fluctuated in the past and may fluctuate
in the future and we may incur losses
14
and negative cash flows in future periods. 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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availability and cost of products from our suppliers;
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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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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.
Our
operating results may be adversely impacted by worldwide
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 fluctuate.
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 characterized by decreases in
product demand, excess customer inventories and accelerated
erosion of prices. The semiconductor industry also periodically
experiences increased demand and production capacity
constraints, which may affect our ability to ship products.
Furthermore, during challenging economic times, our customers
and vendors may face issues gaining timely access to sufficient
credit, which could impact their ability to make timely payments
to us. As a result, we may experience growth patterns that are
different than the end demand for products, particularly during
periods of high volatility. 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.
We cannot predict the timing, strength or duration of any
economic slowdown or the impact it will have on our customers,
our vendors or us. The combination of our lengthy sales cycle
coupled with challenging macroeconomic conditions could have a
compound impact on our business. The impact of market volatility
is not limited to revenue, but may also affect our product gross
margins and other financial metrics. Any downturns in the
semiconductor industry could be severe and prolonged, and any
failure of the industry or wired and wireless communications
markets to fully recover from downturns could seriously impact
our revenue and harm our business, financial condition and
results of operations.
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 Semiconductor. We are also
15
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 customers 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. Any unanticipated
discontinuation of a wafer fabrication process on which we rely
may adversely affect our revenues and our customer relationships.
The foundries and other suppliers on whom we rely may experience
financial difficulties or suffer disruptions in their operations
due to causes beyond our control, including deteriorations in
general economic conditions, labor strikes, work stoppages,
electrical power outages, fire, earthquake, flooding or other
natural disasters. Certain of our suppliers manufacturing
facilities are located near major earthquake fault lines in the
Asia-Pacific region and in California. In the event of a
disruption of the operations of one or more of our suppliers, we
may not have an alternate source immediately available. Such an
event could cause significant delays in shipments until we are
able to shift the products from an affected facility or supplier
to another facility or supplier. The manufacturing processes we
rely on are specialized and are available from a limited number
of suppliers. Alternate sources of manufacturing capacity,
particularly wafer production capacity, may not be available to
us on a timely basis. Even if alternate manufacturing capacity
is available, we may not be able to obtain it on favorable
terms, or at all. Difficulties or delays in securing an adequate
supply of our products on favorable terms, or at all, could
impair our ability to meet our customers requirements and
have a material adverse effect on our operating results.
In addition, the highly complex and technologically demanding
nature of semiconductor manufacturing has caused foundries to
experience, from time to time, lower than anticipated
manufacturing yields, particularly in connection with the
introduction of new products and the installation and
start-up of
new process technologies. Lower than anticipated manufacturing
yields may affect our ability to fulfill our customers
demands for our products on a timely basis. Moreover, lower than
anticipated manufacturing yields may adversely affect our cost
of goods sold and our results of operations.
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The
price of our common stock may fluctuate
significantly.
The price of our common stock is volatile and may fluctuate
significantly. There can be no assurance as to the prices at
which our common stock will trade or that an active trading
market in our common stock will be sustained in the future. The
market price at which our common stock trades may be influenced
by many factors, including:
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our operating and financial performance and prospects, including
our ability to sustain the profitability we achieved in the last
three quarters of fiscal 2010;
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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 may adversely affect the market price of our common
stock. If we 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.
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.
Although we generated $23.8 million in cash through
operating activities during fiscal 2010, we used
$5.4 million cash in operating activities during fiscal
2009. Our principal sources of liquidity are our existing cash
balances and cash generated from product sales and sales and
licensing of intellectual property and our line of credit with
Silicon Valley Bank. As of October 1, 2010, our cash and
cash equivalents totaled $43.7 million. In November 2009,
we repaid the $10.5 million outstanding balance of our
3.75% convertible senior notes, and we have no other principal
payments on debt due in the next 12 months. We believe that
our existing cash balances, 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,
including interest payments on our debt obligations, for at
least the next 12 months. However, 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.
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. There has been an increasing trend toward
industry consolidation in our markets
17
in recent years, particularly among major network equipment and
telecommunications companies. Industry consolidation could
decrease the number of significant customers for our products
thereby increasing our reliance on key customers. In addition,
industry consolidation has generally led, and may continue to
lead, to pricing pressures and loss of market share. 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.
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
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 77% of our net revenues for fiscal 2010 and 76% of
our net revenues for fiscal 2009. China is a particularly
important international market for us, as more than 31% of our
revenue for fiscal 2010 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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existing or future 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.
We may in the future 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 do not enter
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 in the future incur losses in future periods. We believe
that financial stability of suppliers is an important
consideration in our customers purchasing decisions. If
our OEM customers perceive that we lack adequate financial
stability, they may choose semiconductor suppliers that they
believe have a stronger financial position or liquidity.
Current and potential competitors also have established or may
establish financial or strategic relationships among themselves
or with our existing or potential customers, resellers or other
third parties. These relationships may affect customers
purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and
rapidly acquire significant market share. We may not be able to
compete successfully against current and potential competitors.
Our
success depends on our ability to develop competitive new
products in a timely manner and keep abreast of the rapid
technological changes in our market.
Our operating results will depend largely on our ability to
continue to introduce new and enhanced semiconductor products on
a timely basis as well as our ability to keep abreast of rapid
technological changes in our markets. Our products could become
obsolete sooner than we expect because of faster than
anticipated, or unanticipated, changes in one or more of the
technologies related to our products. The introduction of new
technology representing a substantial advance over current
technology could adversely affect demand for our existing
products. Currently accepted industry standards are also subject
to change, which may also contribute to the obsolescence of our
products. If we are unable to develop and introduce new or
enhanced products in a timely manner, our business may be
adversely affected.
Successful product development and introduction depends on
numerous factors, including, among others:
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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.
20
Because
of the lengthy sales cycles of many of our products, we may
incur significant expenses before we generate any revenues
related to those products.
Our customers generally need six months or longer to test and
evaluate our products and an additional six months or more to
begin volume production of equipment that incorporates our
products. These lengthy periods also increase the possibility
that a customer may decide to cancel or change product plans,
which could reduce or eliminate sales to that customer. As a
result of this lengthy sales cycle, we may incur significant
research and development and selling, general and administrative
expenses before we generate any revenues from new products. We
may never generate the anticipated revenues if our customers
cancel or change their product plans as customers may
increasingly do if economic conditions continue to deteriorate.
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 47% of our revenues for fiscal 2010 and 46% of our
revenues for fiscal 2009.
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.
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
21
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
22
experienced, and may in the future experience, errors, defects
and bugs. If any of our products contain production defects or
reliability, safety, quality or compatibility problems that are
significant to our customers, our reputation may be damaged and
customers may be reluctant to buy our products, which could
adversely affect our ability to retain existing customers and
attract new customers. In addition, these defects or bugs could
interrupt or delay sales of affected products to our customers,
which could adversely affect our results of operations.
If defects or bugs are discovered after commencement of
commercial production of a new product, we may be required to
make significant expenditures of capital and other resources to
resolve the problems. This could result in significant
additional development costs and the diversion of technical and
other resources from our other development efforts. We could
also incur significant costs to repair or replace defective
products, and we could be subject to claims for damages by our
customers or others against us. We could also be exposed to
product liability claims or indemnification claims by our
customers. These costs or damages could have a material adverse
effect on our financial condition and results of operations.
We may
make business acquisitions or investments, which involve
significant risk.
We may, from time to time, make acquisitions, enter into
alliances or make investments in other businesses to complement
our existing product offerings, augment our market coverage or
enhance our technological capabilities. However, any such
transactions could result in:
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issuances of equity securities dilutive to our existing
stockholders;
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substantial cash payments;
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the incurrence of substantial debt and assumption of unknown
liabilities;
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large one-time write-offs;
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amortization expenses related to intangible assets;
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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 1, 2010, we had net operating loss
carryforwards of approximately $627.1 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.
23
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.
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, as adjusted, exercisable through
June 27, 2013, representing approximately 14% 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. At October 1, 2010, we had
$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.
One of our directors is a Conexant director. 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,
24
could create, or appear to create, potential conflicts of
interest when directors and officers are faced with decisions
that could have different implications for us and Conexant. For
example, potential conflicts could arise in connection with
decisions involving the warrant to purchase our common stock
issued to Conexant, or with respect to other agreements made
between us and Conexant in connection with the distribution.
Our restated certificate of incorporation includes provisions
relating to the allocation of business opportunities that may be
suitable for both us and Conexant based on the relationship to
the companies of the individual to whom the opportunity is
presented and the method by which it was presented and also
includes provisions limiting challenges to the enforceability of
contracts between us and Conexant.
We may have difficulty resolving any potential conflicts of
interest with Conexant, and even if we do, the resolution may be
less favorable than if we were dealing with an entirely
unrelated third party.
Provisions
in our organizational documents and 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:
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the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;
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the exclusive responsibility of the board of directors to fill
vacancies on the board of directors;
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the ability of our board of directors to issue shares of our
preferred stock in one or more series without further
authorization of our stockholders;
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|
|
a prohibition on stockholder action by written consent;
|
|
|
|
a requirement that stockholders provide advance notice of any
stockholder nominations of directors or any proposal of new
business to be considered at any meeting of stockholders;
|
|
|
|
a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of
our restated certificate of incorporation or amended and
restated bylaws;
|
|
|
|
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.
25
Currently, we occupy our headquarters located in Newport Beach,
California (which includes design and sales offices), eight
design centers and nine sales locations. These facilities had an
aggregate floor space of approximately 160,000 square feet,
all of which is leased, consisting of approximately
97,000 square feet at our headquarters, 47,000 square
feet at our design centers and 16,000 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.
|
|
Item 3.
|
Legal
Proceedings
|
We are currently not engaged in legal proceedings that require
disclosure under this Item.
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 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
|
|
Fiscal 2010
|
|
|
|
|
|
|
|
|
Quarter ended January 1, 2010
|
|
$
|
4.94
|
|
|
$
|
3.10
|
|
Quarter ended April 2, 2010
|
|
$
|
8.56
|
|
|
$
|
4.74
|
|
Quarter ended July 2, 2010
|
|
$
|
10.71
|
|
|
$
|
6.67
|
|
Quarter ended October 1, 2010
|
|
$
|
9.27
|
|
|
$
|
6.09
|
|
Recent
Share Prices and Holders
The last reported sale price of our common stock on
November 18, 2010 was $6.36 and there were approximately
28,067 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.
26
Issuer
Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number (or
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Approximate Dollar
|
|
|
|
|
|
|
|
|
|
Shares (or Units)
|
|
|
Value) of Shares (or
|
|
|
|
Total Number of
|
|
|
Average Price
|
|
|
Purchased as Part of
|
|
|
Units) that May yet be
|
|
|
|
Shares (or Units)
|
|
|
Paid per Share
|
|
|
Publicly Announced
|
|
|
Purchased Under the
|
|
|
|
Purchased(a)
|
|
|
(or Unit)
|
|
|
Plans or Programs
|
|
|
Plans or Programs
|
|
|
July 3, 2010 to July 30, 2010
|
|
|
31
|
|
|
$
|
6.67
|
|
|
|
|
|
|
|
|
|
July 31, 2010 to August 27, 2010
|
|
|
14,693
|
|
|
$
|
6.45
|
|
|
|
|
|
|
|
|
|
August 28, 2010 to October 1, 2010
|
|
|
5,808
|
|
|
$
|
6.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,532
|
|
|
$
|
6.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Represents shares of our common stock withheld from, or
delivered by, employees in order to satisfy applicable tax
withholding obligations in connection with the vesting of
restricted stock. These repurchases were not made pursuant to
any publicly announced plan or program. |
Use of
Proceeds from Sale of Registered Securities
In August 2009, we issued and sold 4.8 million 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.
In March 2010, we issued and sold 2.5 million shares of our
common stock at a public offering price of $7.25 per share.
We received approximately $17.0 million in net proceeds
from this offering. We intend to use the proceeds from this
offering for general corporate purposes, including capital
expenditures, as well as to potentially refinance our
outstanding indebtedness. Pending such uses, the proceeds will
be held in highly liquid investments.
27
|
|
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 report. Our
consolidated selected financial data have been derived from our
audited consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
September 28,
|
|
|
September 29,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
165,379
|
|
|
$
|
121,552
|
|
|
$
|
144,349
|
|
|
$
|
125,805
|
|
|
$
|
135,919
|
|
Intellectual Property
|
|
|
12,800
|
|
|
|
5,000
|
|
|
|
16,350
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
178,179
|
|
|
|
126,552
|
|
|
|
160,699
|
|
|
|
127,805
|
|
|
|
135,919
|
|
Cost of goods sold (including impairments and other charges of
$3,667 in fiscal 2009)
|
|
|
59,840
|
|
|
|
49,981
|
|
|
|
47,625
|
|
|
|
42,334
|
|
|
|
43,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
118,339
|
|
|
|
76,571
|
|
|
|
113,074
|
|
|
|
85,471
|
|
|
|
92,327
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
51,367
|
|
|
|
50,650
|
|
|
|
56,217
|
|
|
|
57,447
|
|
|
|
64,104
|
|
Selling, general and administrative
|
|
|
41,419
|
|
|
|
41,582
|
|
|
|
46,984
|
|
|
|
43,385
|
|
|
|
46,970
|
|
Special charges(1)
|
|
|
2,684
|
|
|
|
6,896
|
|
|
|
211
|
|
|
|
4,724
|
|
|
|
2,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
95,470
|
|
|
|
99,128
|
|
|
|
103,412
|
|
|
|
105,556
|
|
|
|
113,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
22,869
|
|
|
|
(22,557
|
)
|
|
|
9,662
|
|
|
|
(20,085
|
)
|
|
|
(21,297
|
)
|
Interest expense
|
|
|
(1,817
|
)
|
|
|
(3,127
|
)
|
|
|
(5,310
|
)
|
|
|
(5,248
|
)
|
|
|
(4,938
|
)
|
Other income, net
|
|
|
424
|
|
|
|
1,052
|
|
|
|
544
|
|
|
|
522
|
|
|
|
863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
21,476
|
|
|
|
(24,632
|
)
|
|
|
4,896
|
|
|
|
(24,811
|
)
|
|
|
(25,372
|
)
|
Provision for income taxes
|
|
|
406
|
|
|
|
482
|
|
|
|
611
|
|
|
|
111
|
|
|
|
1,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
21,070
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
|
$
|
(24,922
|
)
|
|
$
|
(27,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.70
|
|
|
$
|
(1.04
|
)
|
|
$
|
0.19
|
|
|
$
|
(1.12
|
)
|
|
$
|
(1.29
|
)
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
(1.04
|
)
|
|
$
|
0.18
|
|
|
$
|
(1.12
|
)
|
|
$
|
(1.29
|
)
|
Shares used in computation of net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,260
|
|
|
|
24,156
|
|
|
|
23,046
|
|
|
|
22,156
|
|
|
|
21,107
|
|
Diluted
|
|
|
34,579
|
|
|
|
24,156
|
|
|
|
23,202
|
|
|
|
22,156
|
|
|
|
21,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
October 2,
|
|
October 3,
|
|
September 28,
|
|
September 29,
|
|
|
2010
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
(In thousands)
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,685
|
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
|
$
|
25,796
|
|
|
$
|
29,976
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,260
|
|
Working capital
|
|
|
53,762
|
|
|
|
14,223
|
|
|
|
50,277
|
|
|
|
35,814
|
|
|
|
50,880
|
|
Total assets
|
|
|
108,684
|
|
|
|
62,463
|
|
|
|
100,413
|
|
|
|
82,008
|
|
|
|
96,438
|
|
Long-term debt
|
|
|
13,810
|
|
|
|
13,415
|
|
|
|
40,749
|
|
|
|
37,308
|
|
|
|
33,848
|
|
Long-term capital leases
|
|
|
574
|
|
|
|
269
|
|
|
|
|
|
|
|
|
|
|
|
91
|
|
Stockholders equity
|
|
|
61,636
|
|
|
|
18,890
|
|
|
|
32,666
|
|
|
|
21,904
|
|
|
|
34,142
|
|
|
|
|
(1) |
|
Special charges consist of asset impairments and restructuring
charges. |
28
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
Mindspeed Technologies, Inc. (we or Mindspeed) designs, develops
and sells semiconductor solutions for communications
applications in the wireline and wireless network
infrastructure, which includes enterprise networks, broadband
access networks (fixed and mobile) and metropolitan and wide
area networks. We have organized our solutions for these
interrelated and rapidly converging networks into three product
families: communications convergence processing (formerly known
as multiservice access), high-performance analog and wide area
networking communications. Our communications convergence
processing products include ultra-low-power, multi-core digital
signal processor (DSP)
system-on-chip
(SoC) products for the fixed and mobile (3G/4G) carrier
infrastructure and residential and enterprise platforms. Our
high-performance analog products include high-density crosspoint
switches, optical drivers, equalization and signal-conditioning
solutions that solve difficult switching, timing and
synchronization challenges in next-generation optical
networking, enterprise storage and broadcast video transmission
applications. Our WAN communications portfolio helps optimize
todays circuit-switched networks that furnish much of the
Internets underlying long-distance infrastructure.
Our products are sold to original equipment manufacturers (OEMs)
for use in a variety of network infrastructure equipment,
including:
|
|
|
|
|
Communications Convergence Processing
triple-play edge and metro trunking gateways for
Voice-over-Internet
protocol (VoIP) platforms; broadband customer premises equipment
(CPE) gateways and other equipment that carriers use to deliver
voice, data and video services to residential subscribers;
Internet protocol (IP) private branch exchange (PBX) equipment
and security appliances used in the enterprise and 3G/4G mobile
base stations in the carrier infrastructure;
|
|
|
|
High-Performance Analog next-generation fiber
access network equipment (including passive optical networking,
or PON, systems); storage and server systems supporting
high-speed PCI Express, Serial Attached SCSI (SAS) and
InfiniBand protocols; and production switches, routers and other
systems that are driving the migration to 3G high-definition
(HD) transmission; and
|
|
|
|
WAN communications circuit-switched
networking equipment that implements asynchronous transfer mode
(ATM) and T1/E1 and T3/E3 communications protocols.
|
Our customers include Alcatel-Lucent, Cisco Systems, Inc.,
Huawei Technologies Co. Ltd., Hitachi Ltd., LM Ericsson
Telephone Company, Nokia Siemens Networks and Zhongxing Telecom
Equipment Corp.
We report on a fifty-two/fifty-three week fiscal year ending on
the Friday closest to September 30. Fiscal year 2010
comprised 52 weeks and ended on October 1, 2010.
Fiscal year 2009 comprised 52 weeks and ended on
October 2, 2009. Fiscal year 2008 comprised 53 weeks
and ended on October 3, 2008.
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/4G
wireless infrastructure build-out; the adoption of higher speed
interconnectivity solutions; 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
29
providers, who manufacture products incorporating our
semiconductor networking solutions for OEMs. Sales to
distributors accounted for approximately 47% of our revenues for
fiscal 2010. Our revenue is well diversified globally, with 77%
of fiscal 2010 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 believe we are well-situated in China, where fiber
deployments are being rolled out by the countrys major
telecommunications carriers. Through our OEM customers, we are
shipping into the
fiber-to-the-building
(FTTB) deployments of China Telecom, China Unicom and China
Mobile. In the fourth quarter of fiscal 2010, 24% 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
$51.4 million on research and development in fiscal 2010.
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 multiservice access applications,
high-performance analog applications such as optical networking
and broadcast-video transmission, and wireless infrastructure
solutions for base station processing. We have developed and
maintain a broad intellectual property portfolio, and we may
periodically enter into strategic arrangements to leverage our
portfolio by licensing or selling our intellectual property.
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 upon 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
their other customers 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.
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 has
generally led 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.
Critical
Accounting Policies and Estimates
The preparation of financial statements in accordance with
generally accepted accounting principles in the United States
(GAAP) 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
30
amounts of revenues and expenses during the reporting period.
Among the significant estimates affecting our consolidated
financial statements are those relating to inventories,
stock-based compensation, revenue recognition, 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. In
the event that quantities of inventory on hand exceed
foreseeable demand from existing OEM customers into whose
products our products have been designed, we generally are
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. For the majority of our awards, 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 (ASC)
985-605,
Software Revenue Recognition, and all related interpretations.
For sales of products where software is not included or is
incidental to the equipment, we apply the provisions of
ASC 605, Revenue Recognition, and all related
interpretations.
We generate revenues from direct product sales, sales to
distributors, maintenance contracts, development agreements and
the sale and license of intellectual property. We recognize
revenues when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred;
31
(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 or
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 positive 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. We follow ASC 740, Income Taxes, for
the accounting for uncertainty in income taxes recognized in an
entitys financial statements. ASC 740 prescribes a
recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be
taken on a tax return. Under ASC 740, the impact of an
uncertain income tax position on the income
32
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. See Notes 13 and 14 to our consolidated financial
statements for a discussion of the impairment of certain
long-lived assets.
Recent
Accounting Pronouncements
On October 3, 2009, we adopted
ASC 470-20,
for the accounting of convertible debt instruments that may be
settled in cash upon conversion (including partial cash
settlements), formerly FASB Staff Position APB
14-1. This
standard required retrospective adjustments to prior period
financial statements to conform with current period accounting
treatment. Accordingly, our prior period financial statements
have been adjusted.
ASC 470-20
requires that convertible debt instruments that may be settled
in cash be separated into a debt component and an equity
component. The value assigned to the debt component as of the
issuance date is the estimated fair value of a similar debt
instrument without the conversion feature. The difference
between the proceeds obtained for the instruments and the
estimated fair value assigned to the debt component represents
the equity component. See Note 6 to our consolidated
financial statements for additional information on the adoption
of this accounting standard.
On October 3, 2009, we adopted
ASC 260-10-45-61A,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. This authoritative
guidance provides that before the completion of an awards
requisite service period, all outstanding awards that contain
rights to nonforfeitable dividends in undistributed earnings
with common stock are participating securities and shall be
included in the computation of earnings per share. We determined
that a limited number of our instruments granted in share-based
payment transactions contained rights to nonforfeitable
dividends in undistributed earnings. During the first quarter of
fiscal 2010, we amended the related instruments plan
documents to eliminate this provision and therefore no longer
have any instruments subject to this authoritative guidance. We
have determined that there is no impact to our presentation of
earnings per share in any historical periods by including the
limited number of applicable instruments prior to this plan
amendment.
In January 2010, the FASB issued guidance that expands the
interim and annual disclosure requirements of fair value
measurements, including the information about movement of assets
between Level 1 and 2 of the three-tier fair value
hierarchy established under its fair value measurement guidance.
This guidance also requires separate disclosure for purchases,
sales, issuances and settlements in the reconciliation for fair
value measurements using significant unobservable inputs using
Level 3 methodologies. We adopted the relevant provisions
of this guidance, which did not have a material impact on our
consolidated financial statements.
In April 2010, the FASB reached a consensus on the Milestone
Method of Revenue Recognition, which provides guidance on the
criteria that should be met for determining whether the
milestone method of revenue recognition is appropriate. A vendor
can recognize consideration that is contingent upon the
achievement of a
33
milestone in its entirety as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria
to be considered substantive. The updated guidance is effective
on a prospective basis for milestones achieved in fiscal years,
and interim periods within those years beginning on or after
June 15, 2010, with early adoption permitted. We do not
expect adoption of these provisions to have a material impact on
our consolidated financial statements.
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 have already
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. We do not expect adoption of these provisions to have a
material impact on our consolidated financial statements.
Results
of Operations
Net
Revenues
Fiscal
2010 Compared to Fiscal 2009; Fiscal 2009 Compared to Fiscal
2008
The following table summarizes our net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
Change
|
|
|
2009
|
|
|
Change
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Communications convergence processing products
|
|
$
|
66.9
|
|
|
|
35
|
%
|
|
$
|
49.5
|
|
|
|
2
|
%
|
|
$
|
48.4
|
|
High-performance analog products
|
|
|
54.3
|
|
|
|
39
|
%
|
|
|
39.1
|
|
|
|
(7
|
)%
|
|
|
41.9
|
|
WAN communications products
|
|
|
44.2
|
|
|
|
34
|
%
|
|
|
33.0
|
|
|
|
(39
|
)%
|
|
|
54.0
|
|
Intellectual property
|
|
|
12.8
|
|
|
|
156
|
%
|
|
|
5.0
|
|
|
|
(70
|
)%
|
|
|
16.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
178.2
|
|
|
|
41
|
%
|
|
$
|
126.6
|
|
|
|
(21
|
)%
|
|
$
|
160.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For fiscal 2010, the 41% increase in our net revenues compared
to fiscal 2009 mainly reflects higher sales volume in all three
of our product families, as well as an increase in the sales and
licensing of our intellectual property. Net revenues from our
communications convergence processing products increased
$17.4 million, or 35%, in fiscal 2010 compared to fiscal
2009, mainly reflecting an increase in shipments of our CPE
products, which are used in broadband home gateways and other
equipment used by service providers in
fiber-to-the-home
deployments in order to deliver voice, data and video services
to residential subscribers. Within communications convergence
processing, we also experienced an increase in shipments for
FTTB deployments, particularly to customers in China. Net
revenues from our high-performance analog products increased
$15.2 million, or 39%, when comparing fiscal 2010 to fiscal
2009 due primarily to increased demand for crosspoint switches
primarily related to strength in the optical transport market
and broadcast video market, and increased demand for our
physical media devices as we expanded into the gigabit passive
optical networking (GPON) market. Net revenues from our WAN
communications products increased $11.2 million, or 34%,
mainly reflecting an increase in shipments of our network
processor products and our carrier Ethernet products in fiscal
2010. Net revenues from intellectual property licensing and
sales increased $7.8 million, or 156%, in fiscal 2010
compared to fiscal 2009,
34
due to the sale of certain intellectual property in two
significant transactions in the fourth quarter of fiscal 2010.
We have developed and maintain a broad intellectual property
portfolio, and we may periodically enter into strategic
arrangements to leverage our portfolio by licensing or selling
our patents.
The 21% decrease in our net revenues for fiscal 2009 compared to
fiscal 2008 reflects declines in high-performance analog
products and 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 communications convergence processing products.
Net revenues from our communications convergence processing
products increased $1.1 million, or 2%, mainly reflecting
an increase in shipments for FTTB deployments, particularly in
Asia, partially offset by decreased demand at one of our large
strategic North American customers. We experienced increased
sales volumes from our VoIP product families as
telecommunication service providers install equipment to
transmit their voice traffic over IP data networks. We believe
we benefited 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 experienced 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 significant
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.
Net revenues from intellectual property licensing and sales
decreased $11.4 million, or 70%, in fiscal 2009 compared to
fiscal 2008, due to the magnitude and timing of intellectual
property sales.
Gross
Margin
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
|
2008
|
|
|
(Dollars in millions)
|
|
Gross margin
|
|
$
|
118.3
|
|
|
|
54
|
%
|
|
$
|
76.6
|
|
|
|
(32
|
)%
|
|
$
|
113.1
|
|
Percent of net revenues
|
|
|
66
|
%
|
|
|
|
|
|
|
61
|
%
|
|
|
|
|
|
|
70
|
%
|
Gross margin represents net revenues less cost of goods sold. As
a fabless semiconductor company, we use third parties (including
Taiwan Semiconductor Manufacturing Co., Ltd., Amkor Technology,
Inc. and Advanced Semiconductor Engineering, Inc.) for wafer
fabrication and assembly and test services. Our cost of goods
sold consists predominantly of: purchased finished wafers;
assembly and test services; royalty and other intellectual
property costs; labor and overhead costs associated with product
procurement; amortization of the cost of mask sets purchased;
and sustaining engineering expenses pertaining to products sold.
Our gross margin for fiscal 2010 increased $41.7 million
from fiscal 2009, principally reflecting an increase in both
product and intellectual property revenues in fiscal 2010, as
well as the effect of asset impairment charges recorded in the
second quarter of fiscal 2009. Our fiscal 2010 product sales
increased $43.8 million, or 36%, compared to fiscal 2009
and our sale or licensing of intellectual property increased
$7.8 million, or 156%. The increase in our gross margin as
a percent of net revenues for fiscal 2010 compared to fiscal
2009 was primarily due to the effect of asset impairment charges
incurred in fiscal 2009 and increased sales of higher margin
intellectual property in fiscal 2010.
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 fiscal 2009. Our fiscal 2009 product sales decreased
$22.8 million, or 16%, compared to fiscal 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 was primarily due to the drop in revenues from the sale or
licensing of intellectual property, which had little associated
cost, as well as product mix changes and reduced levels of
overhead absorption caused by a lower level of product sales in
fiscal 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, Inc., a
$1.1 million write-down of Ample Communications related
inventory and an approximate $300,000 write-down of
35
certain manufacturing related fixed assets. Gross margin as a
percent of net revenues for fiscal 2009 included an approximate
3% negative effect from these asset impairments.
Research
and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
|
2008
|
|
|
(Dollars in millions)
|
|
Research and development expenses
|
|
$
|
51.4
|
|
|
|
1
|
%
|
|
$
|
50.7
|
|
|
|
(10
|
)%
|
|
$
|
56.2
|
|
Percent of net revenues
|
|
|
29
|
%
|
|
|
|
|
|
|
40
|
%
|
|
|
|
|
|
|
35
|
%
|
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 $700,000 increase in R&D expenses for fiscal
2010 compared to fiscal 2009 was primarily driven by a
$1.4 million increase in compensation and personnel-related
costs, including stock compensation expense. This increase is
due to both a management bonus accrual in accordance with our
fiscal 2010 cash bonus plan, as well as an increase in headcount
within our communications convergence processing and
high-performance analog groups. This increase was partially
offset by a decrease in the cost of our facilities of almost
$1.1 million, which was mainly the result of entering into
a new corporate headquarters lease at a more favorable rental
rate than we had previously.
The $5.5 million decrease in R&D expenses for fiscal
2009 compared to fiscal 2008 was 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
expenses 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.
Selling,
General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
Change
|
|
2009
|
|
Change
|
|
2008
|
|
|
(Dollars in millions)
|
|
Selling, general and administrative expenses
|
|
$
|
41.4
|
|
|
|
(0
|
)%
|
|
$
|
41.6
|
|
|
|
(11
|
)%
|
|
$
|
47.0
|
|
Percent of net revenues
|
|
|
23
|
%
|
|
|
|
|
|
|
33
|
%
|
|
|
|
|
|
|
29
|
%
|
Our selling, general and administrative (SG&A) expenses
include personnel costs, independent sales representative
commissions and product marketing, applications engineering and
other marketing costs. Our SG&A expenses also include costs
of corporate functions, including accounting, finance, legal,
human resources, information systems and communications. The
$200,000 decrease in our SG&A expenses in fiscal 2010
compared to fiscal 2009 is primarily due to a $549,000 decrease
in the cost of our facilities, which was mainly due to our
entering into a new corporate headquarters lease at a more
favorable rental rate than we had previously. In addition, the
decrease in SG&A in fiscal 2010 as compared to fiscal 2009
is due to a decrease in the cost of our professional fees and
insurance totaling approximately $600,000. These decreases in
SG&A expenses were mostly offset by an increase in
compensation, including stock compensation expense, of
approximately $1.0 million. The increase in compensation,
including stock compensation expense, reflects a decrease in
costs resulting from headcount reductions associated with our
restructuring activities, which is more than offset by an
increase in compensation expense related to a management bonus
accrual in accordance with our fiscal 2010 cash bonus plan, as
well as an increase in stock compensation expense.
The $5.4 million decrease in our SG&A expenses in
fiscal 2009 compared to fiscal 2008 reflected 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 expenses 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.
36
Special
Charges
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
(Dollars in millions)
|
|
|
Asset impairments
|
|
$
|
0.8
|
|
|
$
|
2.9
|
|
|
$
|
|
|
Restructuring charges
|
|
|
1.9
|
|
|
|
4.0
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total special charges
|
|
$
|
2.7
|
|
|
$
|
6.9
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
Impairments
During fiscal 2010, we recorded asset impairment charges of
$828,000. These impairment charges consisted of property and
equipment that we determined to abandon or scrap.
During fiscal 2009, we recorded asset impairment charges of
$2.9 million. Included in this amount were 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 Communications
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 Communications
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 Communications 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 Communications reporting unit and we impaired the
entire goodwill balance of $2.4 million.
We continually monitor and review long-lived assets, including
fixed assets and intangible assets, for possible impairment.
Future impairment tests may result in significant write-downs of
the value of our assets.
Restructuring
Charges
We have from time to time, and may in the future, commit to
restructuring plans to help manage our costs or to help
implement strategic initiatives, among other reasons.
Mindspeed Fourth Quarter of Fiscal 2010 Restructuring
Plan In the fourth quarter of fiscal 2010, we
committed to the implementation of a restructuring plan. The
plan consisted primarily of a targeted headcount reduction in
our WAN product family and selling, general and administrative
functions. The restructuring plan was substantially completed
during the fourth quarter of fiscal 2010. Of the
$1.3 million in charges incurred, $966,000 related to
severance costs for affected employees and $311,000 related to
abandoned technology.
Activity and liability balances related to our fourth quarter of
fiscal 2010 restructuring plan through October 1, 2010 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
966
|
|
|
$
|
311
|
|
|
$
|
1,277
|
|
Cash payments
|
|
|
(265
|
)
|
|
|
|
|
|
|
(265
|
)
|
Non-cash asset write-down
|
|
|
|
|
|
|
(311
|
)
|
|
|
(311
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 1, 2010
|
|
$
|
701
|
|
|
$
|
|
|
|
$
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
The remaining accrued restructuring balance principally
represents employee severance benefits. We expect to pay these
remaining obligations through the second quarter of fiscal 2012.
Mindspeed First Quarter of Fiscal 2010 Restructuring
Plan In the first quarter of fiscal 2010, we
announced the implementation of cost reduction measures
consisting of a facilities consolidation and a targeted
headcount reduction. During fiscal 2010, we incurred special
charges of $860,000 in connection with this restructuring,
primarily related to contractual obligations on vacated space at
our Newport Beach, California headquarters. We do not expect to
incur any significant additional expenses related to this plan
in future periods.
Activity and liability balances related to our first quarter of
fiscal 2010 restructuring plan through October 1, 2010 were
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Charged to costs and expenses
|
|
$
|
287
|
|
|
$
|
573
|
|
|
$
|
860
|
|
Cash payments
|
|
|
(225
|
)
|
|
|
(573
|
)
|
|
|
(798
|
)
|
Non-cash charges/(credits)
|
|
|
(62
|
)
|
|
|
|
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 1, 2010
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 1, 2010, there was no remaining accrued
restructuring balance related to this plan
Mindspeed Second Quarter of 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 2010, this restructuring plan
was complete and we do not expect to incur significant
additional expenses related to this restructuring plan in future
periods.
Activity and liability balances related to our second quarter of
fiscal 2009 restructuring plan from October 2, 2009 through
October 1, 2010 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
78
|
|
|
$
|
|
|
|
$
|
78
|
|
Cash payments
|
|
|
(35
|
)
|
|
|
|
|
|
|
(35
|
)
|
Non-cash charges/(credits)
|
|
|
(35
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 1, 2010
|
|
$
|
8
|
|
|
$
|
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents employee severance benefits. We expect to pay these
remaining obligations in the first quarter of fiscal 2011.
Mindspeed First Quarter of 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. This
restructuring plan is complete and we do not expect to incur
significant additional expenses related to this restructuring
plan in future periods.
38
Activity and liability balances related to our first quarter of
fiscal 2009 restructuring plan from October 2, 2009 through
October 1, 2010 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce
|
|
|
Facility
|
|
|
|
|
|
|
Reductions
|
|
|
and Other
|
|
|
Total
|
|
|
Restructuring balance, October 2, 2009
|
|
$
|
287
|
|
|
$
|
86
|
|
|
$
|
373
|
|
Cash payments
|
|
|
(101
|
)
|
|
|
(80
|
)
|
|
|
(181
|
)
|
Non-cash charges/(credits)
|
|
|
(174
|
)
|
|
|
(6
|
)
|
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring balance, October 1, 2010
|
|
$
|
12
|
|
|
$
|
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The remaining accrued restructuring balance principally
represents employee severance benefits. We expect to pay these
remaining obligations in the first quarter of fiscal 2011.
Interest
Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Interest expense
|
|
$
|
(1.8
|
)
|
|
$
|
(3.1
|
)
|
|
$
|
(5.3
|
)
|
Interest expense for fiscal 2010, 2009 and 2008 primarily
represents interest on our convertible senior notes issued in
December 2004 and July 2008. The decline in our interest expense
charge from fiscal 2008 through fiscal 2010 corresponds to the
decrease in our overall debt balance during that period. In
November 2009, we repaid the remaining $10.5 million due
under our 3.75% convertible senior notes, thereby decreasing our
interest expense related to these notes for the remainder of
fiscal 2010. 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. As a result of adopting
ASC 470-20
on October 3, 2009, we have separately accounted for the
liability and equity components of our convertible senior notes,
retrospectively, which resulted in recognizing interest expense
based on the entitys borrowing rate at the time of
issuance for similar unsecured senior debt without an equity
conversion feature. Pre-tax non-cash interest expense
attributable to the adoption was $546,000 (fiscal 2010),
$1.5 million (fiscal 2009) and $3.7 million
(fiscal 2008). See Note 6 to our consolidated financial
statements for additional information on the adoption of
ASC 470-20.
Other
Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Other income, net
|
|
$
|
0.4
|
|
|
$
|
1.1
|
|
|
$
|
0.5
|
|
Other income principally consists of interest income, foreign
exchange gains and losses and other non-operating gains and
losses, including gains/losses on debt extinguishments. The
decrease in other income in fiscal 2010 compared to fiscal 2009
principally reflects the $1.1 million gain we recorded in
connection with the extinguishment of $20.5 million
aggregate principal amount of our 3.75% convertible senior notes
for cash of $17.3 million in fiscal 2009. See Note 6
to our consolidated financial statements for additional
information on the adoption of
ASC 470-20.
This decrease in other income was partially offset by
approximately $430,000 in net foreign exchange gains recorded in
fiscal 2010 compared to net foreign exchange loss of $217,000 in
fiscal 2009. The increase in other income in fiscal 2009
compared to fiscal 2008 also principally reflects the
$1.1 million gain on debt extinguishment. The gain on debt
extinguishment was partially offset by a $724,000 decrease in
interest income resulting from the lower cash and cash
equivalents balance in fiscal year 2009 compared to fiscal year
2008.
Provision
for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
(Dollars in millions)
|
|
Provision for income taxes
|
|
$
|
0.4
|
|
|
$
|
0.5
|
|
|
$
|
0.6
|
|
39
Our provision for income taxes for fiscal year 2010 principally
consisted of income tax due on operating income generated in the
U.S. A substantial portion of this operating income was
offset by previously generated net operating losses, thereby
reducing the effective tax rate on U.S. earnings. Our
provision for income taxes for fiscal years 2009 and 2008
principally consisted of income taxes incurred by our foreign
subsidiaries.
As of October 1, 2010, we had a valuation allowance of
$249.2 million against our U.S. federal and state
deferred tax assets (which reduces their carrying value to zero)
because we continue to believe that it is unlikely that we will
realize these deferred tax assets through the reduction of
future income tax payments. We have considered both positive and
negative evidence in reaching this determination and placed
considerable weight upon the cumulative losses over the past
three year period. As of October 1, 2010, we had
U.S. federal net operating loss carryforwards of
approximately $627.1 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 1,
2010, our cash and cash equivalents totaled $43.7 million
and working capital was $53.8 million. As of
October 2, 2009, our cash and cash equivalents totaled
$20.9 million and working capital was $14.1 million.
In order to 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, if
necessary. In addition, from time to time, we may commit to
additional restructurings to help implement strategic
initiatives. These restructurings and other cost saving measures
alone may not allow us to sustain the profitability we achieved
in fiscal 2010. Our ability to maintain, or increase, current
revenue levels to sustain profitability will depend on 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 be unable to maintain, or increase current
revenue levels or sustain past and future expense reductions in
subsequent periods. We may not be able to sustain profitability.
We believe that our existing cash balances, 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, including interest payments on debt obligations,
for the next 12 months. In November 2009, we repaid the
$10.5 million outstanding balance of our 3.75% senior
convertible notes, and we 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 generated by operating activities was $23.8 million
for fiscal 2010 compared to cash used in operating activities of
$5.4 million for fiscal 2009 and cash generated by
operating activities of $26.7 million for fiscal 2008.
Operating cash flows for fiscal 2010 reflect our net income of
$21.1 million, non-cash charges (depreciation and
amortization, asset impairments, restructuring charges, stock
compensation, inventory provisions, deferred income tax,
amortization of debt discount and other) of approximately
$14.6 million, and net working capital increases of
approximately $11.9 million. Operating cash flows for
fiscal 2009 reflect our net loss of $25.1 million, non-cash
charges (depreciation and amortization, asset impairments,
restructuring charges, stock compensation, inventory
40
provisions, gain on debt extinguishment, amortization of debt
discount and other) of $19.5 million, and net working
capital decreases of approximately $200,000.
The significant components of the fiscal 2010 $11.9 million
change in net working capital include an $18.0 million
increase in accounts receivable, which is due to various
factors, including an increase in sales volume in fiscal 2010
compared to fiscal 2009, the timing of sales and the timing of
collections. Our net days sales outstanding increased from
20 days in the fourth quarter of fiscal 2009 to
41 days in the fourth quarter of fiscal 2010. In addition,
restructuring related payments made during fiscal 2010 were
$1.3 million lower than payments made in fiscal 2009.
Partially offsetting the increase in accounts receivable and
decrease in restructuring related payments was a
$5.1 million increase in accrued expenses and other current
liabilities, due to our fiscal 2010 management bonus accrual, as
well as the timing of vendor payments. In addition, deferred
income on shipments to distributors increased $2.6 million
because of an increase in inventory being held by our
distributors.
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 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 $5.1 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 $8.0 million for
fiscal 2010 and $8.1 million in fiscal 2009 consisted
solely of payments made for capital expenditures.
Cash provided by financing activities of $7.0 million for
fiscal 2010 principally consisted of three significant items. In
the first quarter of fiscal 2010, we used cash when we paid
$10.5 million to retire the remaining principal amount of
our 3.75% convertible senior notes, which matured in November
2009. Offsetting this use of cash is $17.0 million in net
proceeds we received from the sale of approximately
2.5 million shares of our common stock in an offering that
was completed in the second quarter of fiscal 2010. We also
generated cash from financing activities of $1.6 million in
proceeds received in conjunction with the exercise of stock
options in fiscal 2010. 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 principal
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 6.50% 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 4.8 million shares of
our common stock in an offering that was completed in the fourth
quarter of fiscal 2009.
Revolving
Credit Facility and Convertible Senior Notes
Revolving
Credit Facility
On September 30, 2008, we entered into a loan and security
agreement with Silicon Valley Bank, or SVB. Under the loan and
security agreement, SVB has agreed to provide us with a
three-year revolving credit line of up to $15.0 million,
subject to availability against certain eligible accounts
receivable, for the purposes of: (i) working capital;
(ii) funding our general business requirements; and
(iii) repaying or repurchasing our 3.75% convertible senior
notes due in November 2009. In April 2010, we amended the loan
and security agreement and reduced the maximum amount available
under the revolving credit line from $15.0 million to
$5.0 million. This amendment was initiated in order to
reduce fees due under the agreement. 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
41
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 1, 2010, 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 3.75% convertible senior notes due in
November 2009 for net proceeds (after discounts and commissions)
of approximately $43.9 million. Our adoption of
ASC 470-20
changed the accounting for these convertible senior notes and
the related deferred financing costs. Prior to the issuance of
this accounting standard, we reported the 3.75% convertible
senior notes at their principal amount of $46.0 million,
less an original issuance discount of $2.1 million, in
long-term debt and capitalized debt issuance costs amounting to
approximately $400,000. Upon adoption of
ASC 470-20,
we adjusted the accounting for the convertible senior notes and
the deferred financing costs for all prior periods since initial
issuance of the debt in December 2004. We recorded a discount on
the convertible senior notes in the amount of $17.6 million
as of the date of issuance, which was amortized over the five
year period from December 2004 through November 2009. See
Notes 1 and 6 to our consolidated financial statements for
further information on this adoption.
In July 2008, we entered into separate exchange agreements with
certain holders of our 3.75% convertible senior notes due 2009,
pursuant to which holders of an aggregate principal amount of
$15.0 million of these notes agreed to exchange their notes
for $15.0 million in aggregate principal amount of a new
series of 6.50% convertible senior notes due in August 2013. In
October 2008, we repurchased $20.5 million aggregate
principal amount of our 3.75% convertible senior notes due in
November 2009, for $17.3 million in cash. The repurchases
occurred in two separate transactions on October 16 and
October 23, 2008. During the first quarter of fiscal 2010,
our 3.75% convertible senior notes matured and the remaining
balance of $10.5 million was repaid.
6.50% Convertible
Senior Notes due 2013
We issued the convertible senior notes due in August 2013
pursuant to an indenture, dated as of August 1, 2008,
between us and Wells Fargo Bank, N.A., as trustee.
The convertible senior 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 notes mature on August 1, 2013.
At maturity, we will be required to repay the outstanding
principal amount of the notes. At October 1, 2010,
$15.0 million in aggregate principal amount of our 6.50%
convertible senior notes were outstanding.
The 6.50% convertible senior 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 equal to approximately
$4.74 per share of common stock, which is subject to adjustment
in certain circumstances. Upon conversion of the 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 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 notes, the holders
thereof will have the right, at their option, to require us to
repurchase for cash some or all of their 6.50% convertible
senior notes at a repurchase price equal to 100% of the
principal amount of the notes being repurchased, plus accrued
and unpaid interest (including additional interest, if any) to,
but not including, the repurchase date, or convert the notes
into shares of our common stock and, under certain
circumstances, receive additional shares of our common stock in
the amount provided in the indenture.
For financial accounting purposes, our contingent obligation to
issue additional shares or make additional cash payment upon
conversion following a fundamental change is an embedded
derivative. At October 1, 2010, the liability under
the fundamental change adjustment has been recorded at its
estimated fair value and is not significant.
42
If there is an event of default under the 6.50% convertible
senior notes, the principal of and premium, if any, on all the
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 notes; (ii) fail to deliver shares
of common stock or cash upon conversion of the notes;
(iii) fail to deliver certain required notices under the
notes; (iv) fail, following notice, to cure a breach of a
covenant under the 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 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 notes
will generally have the right, subject to certain limitations,
to require us to repurchase all or any portion of the notes then
held by such holder.
Our adoption of
ASC 470-20
changed the accounting for these 6.50% convertible senior notes
and the related deferred financing costs. Prior to the issuance
of this accounting standard, we reported the notes at their
principal amount of $15.0 million in long-term debt and
capitalized debt issuance costs amounting to approximately
$900,000. Upon adoption of
ASC 470-20,
we adjusted the accounting for the 6.50% convertible senior
notes and the deferred financing costs for all prior periods
since initial issuance of the debt in August 2008. We recorded a
discount on the convertible senior notes in the amount of
$2.0 million as of the date of issuance, which will be
amortized over the five year period from August 2008 through
August 2013. See Notes 1 and 6 to our consolidated
financial statements for further information on this adoption.
Contractual
Obligations
The following table summarizes the future payments we are
required to make under contractual obligations as of
October 1, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
Contractual Obligations
|
|
Total
|
|
|
<1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
>5 Years
|
|
|
|
(In millions)
|
|
|
Long-term debt
|
|
$
|
15.0
|
|
|
$
|
|
|
|
$
|
15.0
|
|
|
$
|
|
|
|
$
|
|
|
Interest expense on long-term debt
|
|
|
2.9
|
|
|
|
1.0
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9.8
|
|
|
|
3.8
|
|
|
|
5.1
|
|
|
|
0.8
|
|
|
|
0.1
|
|
Purchase obligations
|
|
|
6.9
|
|
|
|
5.1
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
Employee severance
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital leases
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36.3
|
|
|
$
|
11.1
|
|
|
$
|
24.3
|
|
|
$
|
0.8
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consists of $15.0 million of convertible
senior notes that bear interest at a rate of 6.50%, payable
semiannually in arrears each February 1 and August 1, and
mature on August 1, 2013.
In March 2010, we entered into a lease agreement with the owner
of our headquarters in Newport Beach, California with a term
beginning in June 2010 and extending through December 2012. We
may, at our option, extend the lease for an additional five-year
term. Rent payable under the lease is approximately
$2.1 million annually, including operating expenses
associated with the leased property. We estimate our minimum
future obligation under the lease at approximately
$4.6 million over the remaining lease term.
We lease our other facilities and certain equipment under
non-cancelable operating leases. The leases expire at various
dates through fiscal 2015 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 $44,000 and extending to
various dates through fiscal 2013, we have not reduced the
amount of our contractual obligations under the related
operating leases to take into account the anticipated rental
income.
43
Purchase obligations are comprised of commitments to purchase
design tools and software for use in product development, which
will be spent between fiscal 2011 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.
Capital leases consist of equipment purchased under capital
lease with payments due through June 2013.
In addition to the obligations included in the table above, we
have a $557,000 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 to Conexant stockholders of all outstanding shares
of common stock of Mindspeed, 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 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
|
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 1, 2010, the carrying
value of our cash and cash equivalents approximated fair value.
At October 1, 2010, our debt consisted of long-term
convertible senior notes. Our convertible senior notes bear
interest at a fixed rate of 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. The
fair value of the debt could increase or decrease if interest
rates decreases or increase, respectively, and that could impact
our ability and cost to negotiate a settlement of such notes
prior to maturity. 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 1, 2010,
any change in the prime interest rate would have no 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. Currently, 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 1, 2010, we held no foreign currency
forward exchange contracts. Based on our overall currency rate
exposure at October 1, 2010, a 10% change in currency rates
would not have a material effect on our consolidated financial
position, results of operations or cash flows.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
As adjusted
|
|
|
|
|
|
|
Note 6
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Current Assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
43,685
|
|
|
$
|
20,891
|
|
Receivables, net of allowances for doubtful accounts of $189
(2010) and $144 (2009)
|
|
|
25,678
|
|
|
|
7,662
|
|
Inventories
|
|
|
10,205
|
|
|
|
10,902
|
|
Deferred tax assets current
|
|
|
2,264
|
|
|
|
1,574
|
|
Prepaid expenses and other current assets
|
|
|
3,035
|
|
|
|
2,529
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
84,867
|
|
|
|
43,558
|
|
Property, plant and equipment, net
|
|
|
12,700
|
|
|
|
11,018
|
|
License agreements, net
|
|
|
9,887
|
|
|
|
6,505
|
|
Other assets
|
|
|
1,230
|
|
|
|
1,382
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
108,684
|
|
|
$
|
62,463
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,303
|
|
|
$
|
6,338
|
|
Accrued compensation and benefits
|
|
|
9,336
|
|
|
|
5,788
|
|
Accrued income tax
|
|
|
1,503
|
|
|
|
525
|
|
Deferred income on sales to distributors
|
|
|
5,199
|
|
|
|
2,604
|
|
Deferred revenue
|
|
|
658
|
|
|
|
1,106
|
|
Restructuring
|
|
|
710
|
|
|
|
448
|
|
Convertible senior notes short term
|
|
|
|
|
|
|
10,349
|
|
Other current liabilities
|
|
|
4,396
|
|
|
|
2,177
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
31,105
|
|
|
|
29,335
|
|
Convertible senior notes long term
|
|
|
13,810
|
|
|
|
13,415
|
|
Other liabilities
|
|
|
2,133
|
|
|
|
823
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
47,048
|
|
|
|
43,573
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 7, 8 and 9)
|
|
|
|
|
|
|
|
|
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; 32,220 (2010) and 28,756 (2009) issued and
outstanding shares
|
|
|
322
|
|
|
|
288
|
|
Additional paid-in capital
|
|
|
318,468
|
|
|
|
296,333
|
|
Accumulated deficit
|
|
|
(257,001
|
)
|
|
|
(278,071
|
)
|
Accumulated other comprehensive loss/(gain)
|
|
|
(153
|
)
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
61,636
|
|
|
|
18,890
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
108,684
|
|
|
$
|
62,463
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As adjusted
|
|
|
As adjusted
|
|
|
|
|
|
|
Note 6
|
|
|
Note 6
|
|
|
|
(In thousands, except per share amounts)
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
165,379
|
|
|
$
|
121,552
|
|
|
$
|
144,349
|
|
Intellectual Property
|
|
|
12,800
|
|
|
|
5,000
|
|
|
|
16,350
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
|
|
178,179
|
|
|
|
126,552
|
|
|
|
160,699
|
|
Cost of goods sold (including impairments and other charges of
$3,667 in fiscal 2009)
|
|
|
59,840
|
|
|
|
49,981
|
|
|
|
47,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
118,339
|
|
|
|
76,571
|
|
|
|
113,074
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
51,367
|
|
|
|
50,650
|
|
|
|
56,217
|
|
Selling, general and administrative
|
|
|
41,419
|
|
|
|
41,582
|
|
|
|
46,984
|
|
Special charges
|
|
|
2,684
|
|
|
|
6,896
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
95,470
|
|
|
|
99,128
|
|
|
|
103,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income/(loss)
|
|
|
22,869
|
|
|
|
(22,557
|
)
|
|
|
9,662
|
|
Interest expense
|
|
|
(1,817
|
)
|
|
|
(3,127
|
)
|
|
|
(5,310
|
)
|
Other income, net
|
|
|
424
|
|
|
|
1,052
|
|
|
|
544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes
|
|
|
21,476
|
|
|
|
(24,632
|
)
|
|
|
4,896
|
|
Provision for income taxes
|
|
|
406
|
|
|
|
482
|
|
|
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
21,070
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.70
|
|
|
$
|
(1.04
|
)
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.65
|
|
|
$
|
(1.04
|
)
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computation of net income/(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,260
|
|
|
|
24,156
|
|
|
|
23,046
|
|
Diluted
|
|
|
34,579
|
|
|
|
24,156
|
|
|
|
23,202
|
|
See accompanying notes to consolidated financial statements.
46
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As adjusted
|
|
|
As adjusted
|
|
|
|
|
|
|
Note 6
|
|
|
Note 6
|
|
|
|
(In thousands)
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
21,070
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
Adjustments required to reconcile net income/(loss) to net cash
(used in)/provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
4,796
|
|
|
|
5,219
|
|
|
|
6,453
|
|
Amortization of license agreements and other intangible assets
|
|
|
1,497
|
|
|
|
887
|
|
|
|
720
|
|
Asset impairments
|
|
|
828
|
|
|
|
5,498
|
|
|
|
|
|
Restructuring charges
|
|
|
1,856
|
|
|
|
4,031
|
|
|
|
140
|
|
Stock compensation
|
|
|
4,239
|
|
|
|
2,675
|
|
|
|
5,506
|
|
Provision for bad debts
|
|
|
45
|
|
|
|
(11
|
)
|
|
|
(12
|
)
|
Inventory provisions
|
|
|
1,497
|
|
|
|
657
|
|
|
|
(900
|
)
|
Deferred income tax
|
|
|
(847
|
)
|
|
|
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
|
|
|
|
(1,121
|
)
|
|
|
|
|
Amortization of debt discount on convertible debt
|
|
|
546
|
|
|
|
1,463
|
|
|
|
3,682
|
|
Other non-cash items, net
|
|
|
210
|
|
|
|
185
|
|
|
|
(653
|
)
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
(17,986
|
)
|
|
|
6,903
|
|
|
|
(741
|
)
|
Inventories
|
|
|
(800
|
)
|
|
|
4,628
|
|
|
|
(264
|
)
|
Accounts payable
|
|
|
1,430
|
|
|
|
(5,069
|
)
|
|
|
5,380
|
|
Deferred income on sales to distributors
|
|
|
2,595
|
|
|
|
(2,265
|
)
|
|
|
646
|
|
Restructuring
|
|
|
(1,283
|
)
|
|
|
(3,391
|
)
|
|
|
(1,616
|
)
|
Accrued expenses and other current liabilities
|
|
|
5,085
|
|
|
|
(1,379
|
)
|
|
|
2,546
|
|
Other
|
|
|
(944
|
)
|
|
|
819
|
|
|
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities
|
|
|
23,834
|
|
|
|
(5,385
|
)
|
|
|
26,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(8,027
|
)
|
|
|
(8,058
|
)
|
|
|
(7,514
|
)
|
Acquisition of assets, net of cash acquired
|
|
|
|
|
|
|
|
|
|
|
(1,172
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(8,027
|
)
|
|
|
(8,058
|
)
|
|
|
(8,686
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from sale of equity
|
|
|
18,300
|
|
|
|
9,738
|
|
|
|
|
|
Offering costs from sale of equity
|
|
|
(1,307
|
)
|
|
|
(791
|
)
|
|
|
|
|
Extinguishment of convertible debt
|
|
|
(10,500
|
)
|
|
|
(17,320
|
)
|
|
|
|
|
Payments made on capital lease obligations
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
Borrowings under line of credit
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
Payments made on borrowings under line of credit
|
|
|
(7,000
|
)
|
|
|
|
|
|
|
|
|
Debt issuance costs
|
|
|
|
|
|
|
(256
|
)
|
|
|
(805
|
)
|
Common stock repurchased and retired
|
|
|
(627
|
)
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
1,564
|
|
|
|
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) financing activities
|
|
|
6,960
|
|
|
|
(8,629
|
)
|
|
|
(694
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of foreign currency exchange rates on cash
|
|
|
27
|
|
|
|
(70
|
)
|
|
|
(78
|
)
|
Net increase/(decrease) in cash and cash equivalents
|
|
|
22,794
|
|
|
|
(22,142
|
)
|
|
|
17,237
|
|
Cash and cash equivalents at beginning of period
|
|
|
20,891
|
|
|
|
43,033
|
|
|
|
25,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
43,685
|
|
|
$
|
20,891
|
|
|
$
|
43,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
47
MINDSPEED
TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE
LOSS/(GAIN)
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Other
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Comprehensive
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Loss/(Gain)
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
|
As adjusted
|
|
|
|
|
|
As adjusted
|
|
|
|
|
|
|
|
|
|
Note 6
|
|
|
Note 6
|
|
|
|
|
|
Note 6
|
|
|
Balance at September 28, 2007
|
|
|
23,152
|
|
|
$
|
232
|
|
|
$
|
278,841
|
|
|
$
|
(257,444
|
)
|
|
$
|
275
|
|
|
$
|
21,904
|
|
Cumulative effect of adopting FIN 48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 28, 2007
|
|
|
23,152
|
|
|
|
232
|
|
|
|
278,841
|
|
|
|
(257,242
|
)
|
|
|
275
|
|
|
|
22,106
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,285
|
|
|
|
|
|
|
|
4,285
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208
|
|
|
|
208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,493
|
|
Issuance of common stock from the exercise of stock options
|
|
|
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
|
|
|
|
284,901
|
|
|
|
(252,957
|
)
|
|
|
483
|
|
|
|
32,666
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,114
|
)
|
|
|
|
|
|
|
(25,114
|
)
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143
|
)
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,257
|
)
|
Sale of equity, net of offering costs
|
|
|
4,750
|
|
|
|
47
|
|
|
|
8,806
|
|
|
|
|
|
|
|
|
|
|
|
8,853
|
|
Issuance of common stock from the exercise of stock options
|
|
|
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
|
|
|
|
296,333
|
|
|
|
(278,071
|
)
|
|
|
340
|
|
|
|
18,890
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,070
|
|
|
|
|
|
|
|
21,070
|
|
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(493
|
)
|
|
|
(493
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,577
|
|
Sale of equity, net of offering costs
|
|
|
2,524
|
|
|
|
25
|
|
|
|
16,968
|
|
|
|
|
|
|
|
|
|
|
|
16,993
|
|
Issuance of common stock from the exercise of stock options
|
|
|
1,024
|
|
|
|
10
|
|
|
|
1,554
|
|
|
|
|
|
|
|
|
|
|
|
1,564
|
|
Common stock repurchased and retired
|
|
|
(84
|
)
|
|
|
(1
|
)
|
|
|
(626
|
)
|
|
|
|
|
|
|
|
|
|
|
(627
|
)
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
4,239
|
|
|
|
|
|
|
|
|
|
|
|
4,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at October 1, 2010
|
|
|
32,220
|
|
|
$
|
322
|
|
|
$
|
318,468
|
|
|
$
|
(257,001
|
)
|
|
$
|
(153
|
)
|
|
$
|
61,636
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mindspeed Technologies, Inc. (Mindspeed or the Company) designs,
develops and sells semiconductor solutions for communications
applications in the wireline and wireless network
infrastructure, which includes enterprise networks, broadband
access networks (fixed and mobile) and 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, as adjusted,
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.
|
|
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 intercompany accounts and transactions among Mindspeed and
its subsidiaries have been eliminated in consolidation.
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 2010 comprised
52 weeks and ended on October 1, 2010. Fiscal year
2009 comprised 52 weeks and ended on October 2, 2009.
Fiscal year 2008 comprised 53 weeks and ended on
October 3, 2008.
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 its 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
semiconductor products are often integrated with software that
is essential to the functionality of the semiconductor products.
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
49
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the following fundamental criteria are met: (i) persuasive
evidence of an arrangement exists; (ii) delivery has
occurred; (iii) the 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 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 manner 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. See Note 3 for detail of this
account balance.
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.
50
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 on a first-in, first-out basis); 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.
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 beginning upon the first shipment. The
Company expects to record amortization of its license agreements
of $2.2 million (fiscal 2011), $2.7 million
(fiscal 2012), $2.3 million (fiscal 2013),
$1.5 million (fiscal 2014) and $1.0 million
(fiscal 2015), and the weighted average remaining life was
51 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 for a discussion of the impairment of certain long-lived
assets.
Foreign Currency Translation and
Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign
currency transaction costs. The functional currency of
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.
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 recognizes 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 Company estimates the fair
value of stock options granted using the Black-Scholes
option-pricing model. The use
51
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 the Company expects 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 solutions for communications applications in the
wireline and wireless network infrastructure, which includes
enterprise networks, broadband access networks (fixed and
mobile) and metropolitan and wide area networks. The
Companys Chief Executive Officer is considered to be its
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 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.
The Company uses 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/(loss) 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, shares to be issued under the
Companys employee stock purchase plan and unvested
restricted stock units. The dilutive effect of stock options,
warrants, unvested restricted stock units and shares to be
issued under the employee stock purchase plan is computed under
the provision of ASC 718, Compensation Stock
Compensation, using the treasury stock method. Under
ASC 718, the Company is also required to add back the
after-tax amount to net income of interest recognized, as well
as the weighted average common share equivalents associated with
the conversion of its convertible senior notes for all periods
in which the securities were determined to be dilutive to the
number of shares outstanding to be used in the calculation of
diluted
52
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings per share. A reconciliation of the numerators and
denominators of basic and diluted earnings per share consisted
of the following (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
As adjusted
|
|
|
As adjusted
|
|
|
|
|
|
|
note 6
|
|
|
note 6
|
|
|
Earnings per share basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
21,070
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
Basic weighted average common shares outstanding
|
|
|
30,260
|
|
|
|
24,156
|
|
|
|
23,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic
|
|
$
|
0.70
|
|
|
$
|
(1.04
|
)
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income/(loss)
|
|
$
|
21,070
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
Add: Interest expense on convertible notes, net of tax
|
|
|
1,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, adjusted
|
|
$
|
22,578
|
|
|
$
|
(25,114
|
)
|
|
$
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
30,260
|
|
|
|
24,156
|
|
|
|
23,046
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible senior notes
|
|
|
3,165
|
|
|
|
|
|
|
|
|
|
Dilutive stock awards
|
|
|
1,154
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding
|
|
|
34,579
|
|
|
|
24,156
|
|
|
|
23,202
|
|
Earnings per share diluted
|
|
$
|
0.65
|
|
|
$
|
(1.04
|
)
|
|
|
0.18
|
|
Stock options, warrants and securities issuable pursuant to
contingent stock agreements to purchase approximately
11.7 million shares as of October 1, 2010 were
outstanding, but not included in the computation of diluted
earnings per share for the fiscal year ended October 1,
2010 because the effect would have been anti-dilutive.
Because the Company incurred a net loss in fiscal 2009, 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.
For the year ended October 3, 2008, potentially dilutive
securities consisted of stock options and restricted stock
awards and resulted in an additional 156,000 potential common
shares. Stock options, warrants and convertible senior notes to
purchase approximately 13.5 million shares for the year
ended October 3, 2008 were outstanding, but were not
included in the computation of diluted earnings per share
because the effect would have been anti-dilutive.
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
customers and geographic sales areas. The Company performs
ongoing credit evaluations of its customers financial
condition.
53
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following direct customers accounted for 10% or more of net
revenues in the fiscal years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Customer A
|
|
|
15
|
%
|
|
|
16
|
%
|
|
|
11
|
%
|
Customer B
|
|
|
15
|
%
|
|
|
14
|
%
|
|
|
16
|
%
|
Customer C
|
|
|
10
|
%
|
|
|
12
|
%
|
|
|
5
|
%
|
Customer D
|
|
|
7
|
%
|
|
|
13
|
%
|
|
|
6
|
%
|
The following direct customers accounted for 10% or more of
total accounts receivable at fiscal year ends:
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
Customer A
|
|
|
25
|
%
|
|
|
19
|
%
|
Customer B
|
|
|
5
|
%
|
|
|
10
|
%
|
Customer C
|
|
|
12
|
%
|
|
|
6
|
%
|
Customer E
|
|
|
7
|
%
|
|
|
10
|
%
|
Supplemental Cash Flow Information Interest
paid was approximately $1.2 million, $1.7 million and
$1.8 million for fiscal 2010, fiscal 2009 and fiscal 2008,
respectively. Income taxes paid, net of refunds received, were
approximately $7,000, $576,000 and $222,000 during fiscal 2010,
fiscal 2009 and fiscal 2008, respectively. Non-cash investing
activities in fiscal 2010, fiscal 2009 and fiscal 2008 consisted
of the purchase of $307,000, $234,000 and $306,000,
respectively, of property and equipment from suppliers on
account, the license of approximately $3.9 million and
$571,000 of intellectual property on account in fiscal 2010 and
fiscal 2009, respectively, and the purchase of $1.1 million
of equipment through capital leasing arrangements in fiscal
2010.
Non-cash
financing activities in fiscal 2010 consisted of vesting of
restricted stock issued to employees totaling $2.9 million.
Comprehensive Income/(Loss) Accumulated other
comprehensive income/(loss) at October 1, 2010,
October 2, 2009 and October 3, 2008 consisted 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 On
October 3, 2009, the Company adopted
ASC 470-20,
for the accounting of convertible debt instruments that may be
settled in cash upon conversion (including partial cash
settlements), formerly FASB Staff Position APB
14-1. This
standard required retrospective adjustments to prior period
financial statements to conform with current period accounting
treatment. Accordingly, the Companys prior period
financial statements have been adjusted.
ASC 470-20
requires that convertible debt instruments that may be settled
in cash be separated into a debt component and an equity
component. The value assigned to the debt component as of the
issuance date is the estimated fair value of a similar debt
instrument without the conversion feature. The difference
between the proceeds obtained for the instruments and the
estimated fair value assigned to the debt component represents
the equity component. See Note 6 for additional information
on the adoption of this accounting standard.
On October 3, 2009, the Company adopted
ASC 260-10-45-61A,
Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. This authoritative
guidance provides that before the completion of an awards
requisite service period, all outstanding awards that contain
rights to nonforfeitable dividends in undistributed earnings
with common stock are participating securities and shall be
included in the computation of earnings per share. The Company
determined that a limited number of its instruments granted in
share-based payment transactions contained rights to
nonforfeitable dividends in undistributed earnings. During the
first quarter of fiscal 2010, the Company amended the related
instruments plan documents to eliminate this provision and
therefore no longer have any instruments subject to this
authoritative guidance. The Company has determined that there is
no impact to its presentation of earnings per share in any
historical periods by including the limited number of applicable
instruments prior to this plan amendment.
54
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In January 2010, the FASB issued guidance that expands the
interim and annual disclosure requirements of fair value
measurements, including the information about movement of assets
between Level 1 and 2 of the three-tier fair value
hierarchy established under its fair value measurement guidance.
This guidance also requires separate disclosure for purchases,
sales, issuances and settlements in the reconciliation for fair
value measurements using significant unobservable inputs using
Level 3 methodologies. The Company adopted the relevant
provisions of this guidance, which did not have a material
impact on its consolidated financial statements.
In April 2010, the FASB reached a consensus on the Milestone
Method of Revenue Recognition, which provides guidance on the
criteria that should be met for determining whether the
milestone method of revenue recognition is appropriate. A vendor
can recognize consideration that is contingent upon the
achievement of a milestone in its entirety as revenue in the
period in which the milestone is achieved only if the milestone
meets all criteria to be considered substantive. The updated
guidance is effective on a prospective basis for milestones
achieved in fiscal years, and interim periods within those years
beginning on or after June 15, 2010, with early adoption
permitted. The Company does not expect adoption of these
provisions to have a material impact on its consolidated
financial statements.
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. The Company does not expect adoption of these provisions
to have a material impact on its consolidated financial
statements.
|
|
3.
|
Supplemental
Financial Statement Data
|
Inventories
Inventories at fiscal year ends consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Work-in-process
|
|
$
|
4,681
|
|
|
$
|
4,124
|
|
Finished goods
|
|
|
5,524
|
|
|
|
6,778
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,205
|
|
|
$
|
10,902
|
|
|
|
|
|
|
|
|
|
|
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. Once established, these write-downs are
considered permanent adjustments to the cost basis of the excess
inventory.
55
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
Deferred
Income on Shipments to Distributors
Deferred income on shipments to distributors at fiscal year ends
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred revenue on shipments to distributors
|
|
|
|
|
|
$
|
5,674
|
|
|
$
|
2,984
|
|
Deferred cost of inventory on shipments to distributors
|
|
|
|
|
|
|
(528
|
)
|
|
|
(422
|
)
|
Reserves
|
|
|
|
|
|
|
53
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income on sales to distributors
|
|
|
|
|
|
$
|
5,199
|
|
|
$
|
2,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
Property, plant and equipment at fiscal year ends consisted of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Machinery and equipment
|
|
$
|
78,347
|
|
|
$
|
73,825
|
|
Leasehold improvements
|
|
|
3,775
|
|
|
|
3,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82,122
|
|
|
|
77,665
|
|
Accumulated depreciation and amortization
|
|
|
(69,422
|
)
|
|
|
(66,647
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
12,700
|
|
|
$
|
11,018
|
|
|
|
|
|
|
|
|
|
|
The components of the provision for income taxes were as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
734
|
|
|
$
|
1,147
|
|
|
$
|
99
|
|
State and local
|
|
|
356
|
|
|
|
22
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
1,090
|
|
|
|
1,169
|
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(684
|
)
|
|
|
(687
|
)
|
|
|
502
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
(684
|
)
|
|
|
(687
|
)
|
|
|
502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
406
|
|
|
$
|
482
|
|
|
$
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
U.S. federal statutory tax at 35%
|
|
$
|
7,516
|
|
|
$
|
(8,621
|
)
|
|
$
|
1,714
|
|
State taxes, net of federal effect
|
|
|
306
|
|
|
|
(704
|
)
|
|
|
886
|
|
Foreign income taxes in excess of U.S.
|
|
|
(159
|
)
|
|
|
298
|
|
|
|
420
|
|
Valuation allowance
|
|
|
(7,220
|
)
|
|
|
9,779
|
|
|
|
(33,825
|
)
|
Reversal of research and development credits, federal and state
|
|
|
|
|
|
|
|
|
|
|
29,041
|
|
Other
|
|
|
(37
|
)
|
|
|
(270
|
)
|
|
|
1,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$
|
406
|
|
|
$
|
482
|
|
|
$
|
611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income/(loss) before income taxes consisted of the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
United States
|
|
$
|
20,877
|
|
|
$
|
(25,098
|
)
|
|
$
|
4,378
|
|
Foreign
|
|
|
599
|
|
|
|
466
|
|
|
|
518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,476
|
|
|
$
|
(24,632
|
)
|
|
$
|
4,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities at fiscal year-ends
consisted of the tax effects of temporary differences related to
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
9,418
|
|
|
$
|
10,267
|
|
Deferred revenue
|
|
|
2,105
|
|
|
|
1,213
|
|
Accrued compensation and benefits
|
|
|
1,509
|
|
|
|
1,275
|
|
Product returns and allowances
|
|
|
562
|
|
|
|
516
|
|
Net operating losses
|
|
|
233,227
|
|
|
|
241,416
|
|
Stock options
|
|
|
3,364
|
|
|
|
3,932
|
|
Foreign deferred taxes
|
|
|
2,484
|
|
|
|
1,801
|
|
Property, plant and equipment
|
|
|
1,635
|
|
|
|
510
|
|
Amortization
|
|
|
1,912
|
|
|
|
1,950
|
|
Other
|
|
|
1,957
|
|
|
|
2,011
|
|
Valuation allowance
|
|
|
(249,220
|
)
|
|
|
(256,341
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
8,953
|
|
|
|
8,550
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred state taxes
|
|
|
5,998
|
|
|
|
6,063
|
|
Other
|
|
|
471
|
|
|
|
686
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
6,469
|
|
|
|
6,749
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,484
|
|
|
$
|
1,801
|
|
|
|
|
|
|
|
|
|
|
Based upon the Companys history of operating losses,
management determined that it is more likely than not that the
U.S. federal and state deferred tax assets as of
October 1, 2010 and October 2, 2009 will not be
realized through the reduction of future income tax payments.
Consequently, the Company has established a valuation
57
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 1, 2010, Mindspeed had U.S. federal net
operating loss carryforwards of approximately
$627.1 million, which expire at various dates through 2029,
and aggregate state net operating loss carryforwards of
approximately $159.0 million, which expire at various dates
through 2029. 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 1, 2010 included a
deferred tax asset of $8.6 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 $411,000 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
58
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
September 29, 2007 the Company had approximately
$28.9 million of total unrecognized tax benefits. Of this
total, $474,000 represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the
effective tax rate. The remaining $28.4 million of
unrecognized tax benefits, if recognized, would have no impact
on the effective tax rate and 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 1,
2010.
A reconciliation of the beginning and ending amount of
unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
Total
|
|
|
Balance as of October 2, 2009
|
|
$
|
37,032
|
|
Increases in tax positions for current year
|
|
|
4,828
|
|
|
|
|
|
|
Balance at October 1, 2010
|
|
$
|
41,860
|
|
|
|
|
|
|
The unrecognized tax benefits of $41.9 million at
October 1, 2010 included $1.0 million of tax benefits
that, if recognized, would reduce the Companys annual
effective tax rate. The remaining $40.9 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 October 1, 2010.
The Company is currently open to audit under the statute of
limitations by the taxing authorities for the years ended
September 30, 2006 to 2010 in the Companys foreign
jurisdictions.
|
|
5.
|
Fair
Value Measurements
|
On October 4, 2008, the Company adopted certain provisions
under ASC 820, Fair Value Measurements and Disclosures, 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.
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.
|
|
|
|
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
|
59
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
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 the Company
measured at fair value in accordance with ASC 825,
Financial Instruments. The Company has classified these assets
in accordance with the fair value hierarchy set forth in
ASC 820 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
for Identical
|
|
|
Total Fair Value
|
|
|
|
Instruments
|
|
|
as of
|
|
October 1, 2010
|
|
(Level 1)
|
|
|
October 1, 2010
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
22,174
|
|
|
$
|
22,174
|
|
Money market fund
|
|
|
16,007
|
|
|
|
16,007
|
|
Government money market fund
|
|
|
5,504
|
|
|
|
5,504
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
43,685
|
|
|
$
|
43,685
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
|
|
|
|
|
|
|
Active Markets
|
|
|
|
|
|
|
for Identical
|
|
|
Total Fair Value
|
|
|
|
Instruments
|
|
|
as of
|
|
October 2, 2009
|
|
(Level 1)
|
|
|
October 2, 2009
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
20,891
|
|
|
$
|
20,891
|
|
|
|
|
|
|
|
|
|
|
Total cash and cash equivalents
|
|
$
|
20,891
|
|
|
$
|
20,891
|
|
|
|
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). Under the
loan and security agreement, SVB 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 November 2009. In April 2010,
the Company amended the loan and security agreement and reduced
the maximum amount available under the revolving credit line
from $15.0 million to $5.0 million. This amendment was
initiated in order to reduce fees due under the agreement. The
indebtedness of the Company to SVB under the loan and security
agreement is guaranteed by three domestic subsidiaries of the
Company and secured by substantially all of the domestic assets
of the Company and such subsidiaries, other than intellectual
property.
Any indebtedness under the loan and security agreement bears
interest at a variable rate ranging from prime plus 0.25% 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.
60
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of October 1, 2010, 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 1, 2010,
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 3.75% convertible senior notes due 2009 for
net proceeds (after discounts and commissions) of approximately
$43.9 million. The notes were senior unsecured obligations
of the Company, ranking equal in right of payment with all
future unsecured indebtedness. The convertible senior notes had
an interest rate of 3.75%, payable semiannually in arrears each
May 18 and November 18. The notes were due
November 18, 2009.
In July 2008, $15.0 million of the 3.75% convertible senior
notes were exchanged as discussed below. In October 2008, the
Company repurchased $20.5 million aggregate principal
amount of the notes due in November 2009, for $17.3 million
in cash. The repurchases occurred in two separate transactions
on October 16 and October 23, 2008. During the first
quarter of fiscal 2010, the 3.75% convertible senior notes
matured and the remaining balance of $10.5 million was
repaid.
6.50% Convertible
Senior Notes due 2013
On July 30, 2008, the Company entered into separate
exchange agreements with certain holders of its 3.75%
convertible senior notes, pursuant to which holders of an
aggregate of $15.0 million of the notes agreed to exchange
their notes for $15.0 million in aggregate principal amount
of a new series of 6.50% convertible senior notes due 2013 (the
Exchange Offer). The Exchange Offer closed on
August 1, 2008. The Company paid at the closing an
aggregate of approximately $100,000 in accrued and unpaid
interest on the 3.75% convertible senior notes that were
exchanged for the 6.50% convertible senior notes, as well as
approximately $900,000 in transaction fees.
The Company issued the convertible senior notes due in August
2013 pursuant to an indenture, dated as of August 1, 2008,
between it and Wells Fargo Bank, N.A., as trustee.
The convertible senior 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 notes mature on August 1, 2013.
At maturity, the Company will be required to repay the
outstanding principal of the notes. As of October 1, 2010,
$15.0 million in aggregate principal amount of the
Companys 6.50% convertible senior notes were outstanding.
The 6.50% convertible senior 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 equal to
approximately $4.74 per share of common stock, which is subject
to adjustment in certain circumstances. Upon conversion of the
notes, the Company generally has the right to deliver to the
holders thereof, at the Companys option: (i) cash;
(ii) shares of the Companys common stock; or
(iii) a combination thereof. The initial conversion price
of the 6.50% convertible senior notes will be adjusted to
reflect stock dividends, stock splits, issuances of rights to
purchase shares of the Companys common stock, and upon
other events. If the Company undergoes certain fundamental
changes prior to maturity of the notes, the holders thereof will
have the right, at their option, to require it to repurchase for
cash some or all of their 6.50% convertible senior notes at a
repurchase price equal to 100% of the principal amount of the
notes being repurchased, plus accrued and unpaid interest
(including additional interest, if any) to, but not including,
the repurchase date, or convert the notes into shares of its
common stock 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 1, 2010, the
liability under the fundamental change adjustment has been
recorded at its estimated fair value and is not significant.
61
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If there is an event of default under the notes, the principal
of and premium, if any, on all the 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 the Company:
(i) are delinquent in making certain payments due under the
notes; (ii) fail to deliver shares of common stock or cash
upon conversion of the notes; (iii) fail to deliver certain
required notices under the notes; (iv) fail, following
notice, to cure a breach of a covenant under the 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 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 notes will generally
have the right, subject to certain limitations, to require the
Company to repurchase all or any portion of the notes then held
by such holder. As of October 1, 2010, the Company is in
compliance with these covenants.
As of October 1, 2010, the carrying value of the 6.50%
convertible senior notes was $13.8 million, which consisted
of the principal amount of $15.0 million, less an
unamortized debt discount of $1.2 million. The estimated
fair value of these notes as of October 1, 2010 was
approximately $26.1 million. Key assumptions used in the
calculation of this fair value include a volatility of 65%,
based on the implied volatility of a Mindspeed publicly traded
call option, a debt discount rate of 7.0% and discount for lack
of marketability of 10%.
Impact
of Adoption of New Accounting Standard
ASC 470-20,
the new accounting standard for convertible debt that may be
settled in cash upon conversion, changed the accounting for the
Companys convertible notes and the related debt issuance
costs. Prior to the issuance of this accounting standard, the
Company reported the 3.75% convertible senior notes at their
principal amount of $46.0 million, less an original
issuance discount of $2.1 million, in long-term debt and
capitalized debt issuance costs amounting to approximately
$400,000. Upon adoption of the new accounting standard as of
October 3, 2009, the Company adjusted the accounting for
these convertible notes and the related deferred financing costs
for all prior periods since their initial issuance, as described
in Note 2 to these consolidated financial statements. The
Company determined that the estimated fair value of debt
instruments similar to its 3.75% convertible senior notes,
without the conversion feature, was $28.4 million at the
time of issuance. The resulting $17.6 million discount on
the debt was amortized through interest expense over the period
from December 2004 through November 2009, which represented the
expected life of the debt. The equity component, recorded as
additional paid-in capital, was $15.6 million as of the
date of issuance, which represents the difference between the
proceeds from issuance of the 3.75% senior convertible
notes and the fair value of the debt as of the date of issuance.
Additionally, the Company reclassified approximately $146,000 of
the deferred financing costs to equity as equity issuance costs,
which will not be amortized to the statement of operations.
On July 30, 2008, the Company completed the Exchange Offer.
Prior to the issuance of
ASC 470-20,
the Company reported the 6.50% convertible senior notes at their
principal amount of $15.0 million in long-term debt and
capitalized debt issuance costs amounting to approximately
$900,000. Upon adoption of the new accounting standard as of
October 3, 2009, the Company also adjusted the accounting
for these convertible notes and the related deferred financing
costs for all prior periods since their initial issuance. The
Company determined that the estimated fair value of debt
instruments similar to its 6.50% convertible senior notes,
without the conversion feature, was $13.0 million at the
time of issuance. The resulting $2.0 million discount on
the debt will be amortized through interest expense over the
period from August 2008 through August 2013, which represents
the expected life of the debt. In conjunction with the exchange,
the Company recorded a gain of approximately $200,000
representing the difference between the fair value of the debt
component of the newly issued instrument and the book value of
the old debt instrument, less unamortized issuance costs. The
carrying amount of the equity component upon the Exchange Offer
was $2.0 million; however, there was no net change to
additional paid-in capital.
62
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. In accordance with
ASC 470-20,
the Company recorded a gain of $1.1 million related to
these repurchases. The gain was calculated as the difference
between the fair value of the liability component of the notes
immediately before settlement, and the book value of the notes
net of unamortized debt issuance costs. To measure the fair
value of the repurchased notes as of the settlement dates, the
Company calculated an implied interest rate of approximately 17%
using Level 2 observable inputs. See Note 5 for
information regarding Level 2 observable inputs. This rate
was applied to the repurchased portion of the notes using the
same present value technique used in the valuation performed as
of the issuance date. No value was allocated to the equity
component of the instrument at the time of these extinguishments.
The October 2, 2009 consolidated balance sheet, the
consolidated statement of operations for fiscal 2009 and 2008
and the consolidated statements of cash flows for fiscal 2009
and 2008 have been adjusted for the change in accounting
principle as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
As Previously
|
|
|
|
|
October 2, 2009
|
|
Reported
|
|
Adjustment
|
|
As Adjusted
|
|
|
(In thousands)
|
|
Other assets long term
|
|
$
|
1,479
|
|
|
$
|
(97
|
)
|
|
$
|
1,382
|
|
Total assets
|
|
|
62,560
|
|
|
|
(97
|
)
|
|
|
62,463
|
|
Convertible senior notes short term
|
|
|
10,486
|
|
|
|
(137
|
)
|
|
|
10,349
|
|
Total current liabilities
|
|
|
29,472
|
|
|
|
(137
|
)
|
|
|
29,335
|
|
Convertible senior notes long term
|
|
|
15,000
|
|
|
|
(1,585
|
)
|
|
|
13,415
|
|
Total liabilities
|
|
|
45,295
|
|
|
|
(1,722
|
)
|
|
|
43,573
|
|
Additional paid-in capital
|
|
|
280,919
|
|
|
|
15,414
|
|
|
|
296,333
|
|
Accumulated deficit
|
|
|
(249,074
|
)
|
|
|
(13,789
|
)
|
|
|
(262,863
|
)*
|
Total stockholders equity
|
|
|
17,265
|
|
|
|
1,625
|
|
|
|
18,890
|
|
Total liabilities and stockholders equity
|
|
$
|
62,560
|
|
|
$
|
(97
|
)
|
|
$
|
62,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations
|
|
As Previously
|
|
|
|
|
Year Ended October 2, 2009
|
|
Reported
|
|
Adjustment
|
|
As Adjusted
|
|
|
(In thousands, except per share amounts)
|
|
Interest expense
|
|
$
|
(1,803
|
)
|
|
$
|
(1,324
|
)
|
|
$
|
(3,127
|
)
|
Other income, net
|
|
|
2,811
|
|
|
|
(1,759
|
)
|
|
|
1,052
|
|
Loss before income taxes
|
|
|
(21,549
|
)
|
|
|
(3,083
|
)
|
|
|
(24,632
|
)
|
Net loss
|
|
$
|
(22,031
|
)
|
|
$
|
(3,083
|
)
|
|
$
|
(25,114
|
)
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic
|
|
$
|
(0.91
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.04
|
)
|
Net loss per share, diluted
|
|
$
|
(0.91
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(1.04
|
)
|
Shares used in computation of net loss per share, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
24,156
|
|
|
|
24,156
|
|
|
|
24,156
|
|
Diluted
|
|
|
24,156
|
|
|
|
24,156
|
|
|
|
24,156
|
|
63
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Operations
|
|
As Previously
|
|
|
|
|
Year Ended October 3, 2008
|
|
Reported
|
|
Adjustment
|
|
As Adjusted
|
|
|
(In thousands, except per share amounts)
|
|
Interest expense
|
|
$
|
(2,360
|
)
|
|
$
|
(2,950
|
)
|
|
$
|
(5,310
|
)
|
Other income, net
|
|
|
544
|
|
|
|
|
|
|
|
544
|
|
Income before income taxes
|
|
|
7,846
|
|
|
|
(2,950
|
)
|
|
|
4,896
|
|
Net income
|
|
$
|
7,235
|
|
|
$
|
(2,950
|
)
|
|
$
|
4,285
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share, basic
|
|
$
|
0.31
|
|
|
$
|
(0.12
|
)
|
|
$
|
0.19
|
|
Net income per share, diluted
|
|
$
|
0.31
|
|
|
$
|
(0.13
|
)
|
|
$
|
0.18
|
|
Shares used in computation of net income per share, in thousands:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
23,046
|
|
|
|
23,046
|
|
|
|
23,046
|
|
Diluted
|
|
|
23,202
|
|
|
|
23,202
|
|
|
|
23,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
As Previously
|
|
|
|
|
Year Ended October 2, 2009
|
|
Reported
|
|
Adjustment
|
|
As Adjusted
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(22,031
|
)
|
|
$
|
(3,083
|
)
|
|
$
|
(25,114
|
)
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
(2,880
|
)
|
|
|
1,759
|
|
|
|
(1,121
|
)
|
Amortization of debt discount on convertible debt
|
|
|
|
|
|
|
1,463
|
|
|
|
1,463
|
|
Other non-cash items, net*
|
|
|
352
|
|
|
|
(167
|
)
|
|
|
185
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
791
|
|
|
|
28
|
|
|
|
819
|
|
Net cash used in operating activities
|
|
$
|
(5,385
|
)
|
|
|
|
|
|
$
|
(5,385
|
)
|
|
|
|
* |
|
Includes the amortization of debt issuance costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Cash Flows
|
|
As Previously
|
|
|
|
|
Year Ended October 3, 2008
|
|
Reported
|
|
Adjustment
|
|
As Adjusted
|
|
|
(In thousands)
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,235
|
|
|
$
|
(2,950
|
)
|
|
$
|
4,285
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on debt extinguishment
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of debt discount on convertible debt
|
|
|
|
|
|
|
3,682
|
|
|
|
3,682
|
|
Other non-cash items, net*
|
|
|
79
|
|
|
|
(732
|
)
|
|
|
(653
|
)
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
1,523
|
|
|
|
|
|
|
|
1,523
|
|
Net cash provided by operating activities
|
|
$
|
26,695
|
|
|
|
|
|
|
$
|
26,695
|
|
|
|
|
* |
|
Includes the amortization of debt issuance costs |
64
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth balance sheet information related
to the notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
|
2010
|
|
|
2009
|
|
|
3.75% convertible senior notes
|
|
|
|
|
|
|
|
|
Principal value of the liability component
|
|
$
|
|
|
|
$
|
10,500
|
|
Unamortized value of the liability component
|
|
|
|
|
|
|
151
|
|
|
|
|
|
|
|
|
|
|
Net carrying value of the liability component
|
|
$
|
|
|
|
$
|
10,349
|
|
6.50% convertible senior notes
|
|
|
|
|
|
|
|
|
Principal value of the liability component
|
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Unamortized value of the liability component
|
|
|
1,190
|
|
|
|
1,585
|
|
|
|
|
|
|
|
|
|
|
Net carrying value of the liability component
|
|
$
|
13,810
|
|
|
$
|
13,415
|
|
The following table sets forth interest expense information
related to the notes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
October 1,
|
|
|
October 2,
|
|
|
October 3,
|
|
|
|
2010
|
|
|
2009
|
|
|
2008
|
|
|
3.75% convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense coupon
|
|
$
|
48
|
|
|
$
|
432
|
|
|
$
|
1,636
|
|
Interest expense debt discount amortization
|
|
|
151
|
|
|
|
1,080
|
|
|
|
3,620
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
199
|
|
|
$
|
1,512
|
|
|
$
|
5,256
|
|
Effective interest rate on the liability component for the period
|
|
|
14.68
|
%
|
|
|
13.20
|
%
|
|
|
12.12
|
%
|
6.50% convertible senior notes
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense coupon
|
|
$
|
975
|
|
|
$
|
975
|
|
|
$
|
163
|
|
Interest expense debt discount amortization
|
|
|
395
|
|
|
|
383
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,370
|
|
|
$
|
1,358
|
|
|
$
|
225
|
|
Effective interest rate on the liability component for the period
|
|
|
9.13
|
%
|
|
|
9.05
|
%
|
|
|
8.56
|
%
|
The estimated amortization expense for the debt discount related
to the 6.50% convertible senior notes through the remaining
expected life is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
|
|
2011
|
|
2012
|
|
2013
|
|
Estimated debt discount amortization expense
|
|
$
|
406
|
|
|
$
|
418
|
|
|
$
|
366
|
|
In March 2010, the Company entered into a lease agreement with
the owner of its headquarters in Newport Beach, California with
a term beginning in June 2010 and extending through December
2012. The Company may, at its option, extend the lease for an
additional five-year term. Rent payable under the lease is
approximately $2.1 million annually, including operating
expenses associated with the leased property. The Company
estimates its minimum future obligation under the lease at
approximately $4.6 million over the remaining lease term.
The Company leases its other facilities and certain equipment
under non-cancelable operating leases. The leases expire at
various dates through fiscal 2015 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.
65
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Amounts due under facility leases were approximately
$4.8 million (fiscal 2010), $6.6 million (fiscal
2009) and $8.0 million (fiscal 2008), including
$3.8 million (fiscal 2010), $5.2 million (fiscal
2009) and $6.5 million (fiscal 2008) due to
Conexant under a sublease agreement. As of October 1, 2010,
the Companys minimum future obligations under operating
leases (including the estimated minimum future obligations under
sublease agreements) were as follows (in thousands):
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2011
|
|
$
|
3,855
|
|
2012
|
|
|
3,505
|
|
2013
|
|
|
1,561
|
|
2014
|
|
|
647
|
|
2015
|
|
|
192
|
|
Thereafter
|
|
|
88
|
|
|
|
|
|
|
Total minimum future lease payments
|
|
$
|
9,848
|
|
|
|
|
|
|
Purchase obligations are comprised of commitments to purchase
design tools and software for use in product development, which
will be spent between fiscal 2011 and fiscal 2012. Amounts due
under purchase obligations as of October 1, 2010 are
approximately $5.1 million (fiscal 2011) and
$1.8 million (fiscal 2012).
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against Mindspeed, including those
pertaining to product liability, intellectual property, the
Companys facilities, environmental, safety and health, and
employment matters.
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. As of October 1, 2010, the
Company was not engaged in any other legal proceedings that are
expected, individually or in the aggregate, to have a material
adverse effect on its results of operations or financial
condition.
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
66
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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.
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 1, 2010, 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
4.8 million shares of its common stock at a public offering
price of $2.05 per share which was below the current market
price of the Companys 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.
67
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Accumulated
Other Comprehensive Loss/(Gain)
|
During fiscal 2010, the Companys management determined
that its previously reported accumulated deficit and accumulated
other comprehensive loss/(gain) as of October 2, 2009 and
October 3, 2008 should be restated to correct an error. In
accordance with
ASC 830-30,
Foreign Currency Matters Translation of Financial
Statements, when a substantial liquidation of an investment in a
foreign entity occurs, the cumulative translation adjustment
amount attributable to that entity and included in accumulated
other comprehensive loss/(gain) within stockholders equity
shall be removed from the separate component of equity and
reported as part of the gain or loss on liquidation of the
investment. In fiscal 2002 and 2003, the Company closed design
centers in Israel and the United Kingdom. These closures
constituted a substantial liquidation of these foreign entities
and, accordingly, the cumulative translation adjustments should
have been reported as part of the gain or loss at that time. The
Companys accompanying fiscal 2009 and fiscal 2008
consolidated statements of stockholders equity and
comprehensive loss/(gain) and consolidated balance sheet have
been restated to reflect these corrections. The corrections had
no impact on the Companys consolidated statements of
operations for any of the years presented.
The following table presents the effects of the corrections on
the Companys consolidated statements of stockholders
equity and comprehensive loss/(gain) and consolidated balance
sheet for the year ended October 2, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
Reported
|
|
As Restated
|
|
Accumulated deficit
|
|
$
|
(262,863
|
)*
|
|
$
|
(278,071
|
)
|
Accumulated other comprehensive loss/(gain)
|
|
|
(14,868
|
)
|
|
|
340
|
|
|
|
|
* |
|
as adjusted, see Note 6 |
The following table presents the effects of the adjustments on
the Companys consolidated statement of stockholders
equity and comprehensive loss/(gain) for the year ended
October 3, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
Reported
|
|
As Restated
|
|
Accumulated deficit
|
|
$
|
(237,749
|
)*
|
|
$
|
(252,957
|
)
|
Accumulated other comprehensive loss/(gain)
|
|
|
(14,725
|
)
|
|
|
483
|
|
|
|
|
* |
|
as adjusted, see Note 6 |
The following table presents the effects of the adjustments on
the Companys consolidated statement of stockholders
equity and comprehensive loss/(gain) for the year ended
September 28, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
Reported
|
|
As Restated
|
|
Accumulated deficit
|
|
$
|
(242,236
|
)*
|
|
$
|
(257,444
|
)
|
Accumulated other comprehensive loss/(gain)
|
|
|
(14,933
|
)
|
|
|
275
|
|
|
|
|
* |
|
as adjusted, see Note 6 |
|
|
12.
|
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 2010,
fiscal 2009 and fiscal 2008 includes the fair
68
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
value of new awards, modified awards and any unvested awards.
The fair value of restricted stock awards is based upon the
market price of the Companys common stock at the grant
date. The Company estimates the fair value of stock 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 equity awards that are ultimately expected to vest.
The Company estimates forfeiture rates of 10% to 12.5% depending
on the characteristics of the award.
As a result of the Companys history of operating losses
and of the uncertainty regarding 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 its 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
Weighted-average fair value of options granted
|
|
$
|
3.23
|
|
|
$
|
1.08
|
|
|
$
|
1.84
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
95
|
%
|
|
|
87
|
%
|
|
|
64
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option life
|
|
|
2.8 years
|
|
|
|
2.8 years
|
|
|
|
3.2 years
|
|
Risk-free interest rate
|
|
|
1.3
|
%
|
|
|
1.4
|
%
|
|
|
2.8
|
%
|
The expected option term was estimated at issuance 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):
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost of goods sold
|
|
$
|
159
|
|
|
$
|
85
|
|
Research and development
|
|
|
1,004
|
|
|
|
765
|
|
Selling, general and administrative
|
|
|
3,076
|
|
|
|
1,825
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
4,239
|
|
|
$
|
2,675
|
|
|
|
|
|
|
|
|
|
|
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, unrestricted stock, restricted stock, restricted stock
units and other stock-based awards to officers and employees of
the Company. The Directors Stock Plan provides for the grant of
stock options, restricted stock units and other stock-based
awards to the Companys non-employee directors. On
March 10, 2010, the stockholders of the Company approved a
plan amendment, which increased the number of shares authorized
for issuance under the Directors Stock Plan to
69
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
438,000. The authorized number of shares reserved for issuance
under the 2003 Long-Term Incentives Plan is approximately
6.7 million shares. As of October 1, 2010, an
aggregate of 1.3 million shares of the Companys
common stock were available for issuance under these plans.
The Company also has a 2003 Stock Option Plan, under which stock
options were issued in connection with the Distribution. In the
Distribution, each holder of a Conexant stock option (other than
options held by persons in certain foreign locations) received
an option to purchase a number of shares of Mindspeed common
stock. The number of shares subject to, and the exercise prices
of, the outstanding Conexant options and the Mindspeed options
were adjusted so that the aggregate intrinsic value of the
options was equal to the intrinsic value of the Conexant option
immediately prior to the Distribution and the ratio of the
exercise price per share to the market value per share of each
option was the same immediately before and after the
Distribution. As a result of such option adjustments, Mindspeed
issued options to purchase an aggregate of approximately
6.0 million shares of its common stock to holders of
Conexant stock options (including Mindspeed employees) under the
2003 Stock Option Plan. There are no shares available for new
stock option awards under the 2003 Stock Option Plan. However,
any shares subject to the unexercised portion of any terminated,
forfeited or cancelled option are available for future option
grants only in connection with an offer to exchange outstanding
options for new options.
At the Companys annual meeting of stockholders held on
March 10, 2010, the Companys stockholders approved an
employee stock purchase plan and the reservation of
500,000 shares for issuance under the plan. The purpose of
the employee stock purchase plan is to provide eligible
employees with the opportunity to purchase shares of the
Companys common stock through payroll deductions at a
discount from the then current market price. The purchase price
per share at which common stock is purchased on the
participants behalf for each offering period is equal to
the lower of: (i) 85% of the fair market value per share of
common stock on the date of commencement of such offering
period; and (ii) 85% of the fair market value per share of
common stock on the last day of such offering period. Under the
plan, eligible employees may authorize payroll deductions of up
to 10% of eligible compensation for the purchase of common stock
during each semi-annual purchase period. The employee stock
purchase plan, and the right of participants to make purchases
thereunder, is intended to qualify under the provisions of
Sections 421 and 423 of the Internal Revenue Code. The
first offering period under this plan began during the third
quarter of fiscal 2010 and will end in the first quarter of
fiscal 2011.
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, and the Company 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 whereby the remaining unamortized expense of
the exchanged awards is recognized over the original award
period. The Company recorded an insignificant amount of
incremental compensation expense in conjunction with this
exchange.
70
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes stock option activity under all
plans (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Value
|
|
|
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
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
592
|
|
|
|
5.49
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(479
|
)
|
|
|
3.38
|
|
|
|
|
|
|
$
|
2.5 million
|
|
Forfeited or expired
|
|
|
(341
|
)
|
|
|
9.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at October 1, 2010
|
|
|
2,900
|
|
|
$
|
6.41
|
|
|
|
4.8 years
|
|
|
$
|
8.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at October 1, 2010
|
|
|
1,509
|
|
|
$
|
9.00
|
|
|
|
3.2 years
|
|
|
$
|
2.7 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 1, 2010, there was unrecognized compensation
expense of $2.4 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 1, 2010 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 - $ 2.31
|
|
|
1,007
|
|
|
|
6.0
|
|
|
$
|
1.98
|
|
|
|
320
|
|
|
$
|
1.99
|
|
2.88 - 4.85
|
|
|
736
|
|
|
|
6.2
|
|
|
|
4.14
|
|
|
|
223
|
|
|
|
4.23
|
|
5.01 - 9.73
|
|
|
467
|
|
|
|
3.5
|
|
|
|
8.41
|
|
|
|
288
|
|
|
|
8.67
|
|
10.00 - 19.65
|
|
|
653
|
|
|
|
2.4
|
|
|
|
12.76
|
|
|
|
641
|
|
|
|
12.80
|
|
20.07 - 47.50
|
|
|
37
|
|
|
|
1.9
|
|
|
|
35.09
|
|
|
|
37
|
|
|
|
35.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.75 - 47.50
|
|
|
2,900
|
|
|
|
4.8
|
|
|
$
|
6.41
|
|
|
|
1,509
|
|
|
$
|
9.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On March 10, 2010, the Company amended the terms of stock
options held by the Companys Chairman of the Board to
acquire an aggregate of 166,455 shares of the
Companys common stock. The stock options were originally
issued in connection with the Distribution, as discussed above,
and were scheduled to expire on March 31, 2010. In
recognition of past and continuing contributions to the
Companys business, the Company extended the
71
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
exercisability period of these stock options until the earlier
of: (i) 90 days following his resignation, retirement
or removal from the Board; and (ii) scheduled expiration
dates through November 2012. Except for the amendments to the
exercisability period of the stock options, the stock options
will continue to be governed by their original terms and
conditions. Modification of these options resulted in $397,000
of stock compensation expense recorded in the second quarter of
fiscal 2010. Valuation of this modification was based on the
Hull-White Lattice valuation model, which measured the
incremental change in the value of these options as a result of
the modification.
Stock
Awards
The Companys stock incentive plans also provide for awards
of restricted and unrestricted shares of common stock and other
stock-based incentive awards and from time to time the Company
has used stock awards for incentive or retention purposes.
Restricted stock awards have time-based vesting
and/or
performance conditions and are generally subject to forfeiture
if employment terminates prior to the end of the service period
or if the prescribed performance criteria are not met.
Restricted stock awards are valued at the grant date based upon
the market price of the Companys common stock and the fair
value of each award is charged to expense over the service
period. 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.
On March 10, 2010, the Company granted awards of
190,000 shares of unrestricted stock to certain executive
officers of the Company, with vesting subject to satisfaction of
specific market and performance conditions. These awards begin
to vest on the date when the average of the closing price of the
Companys common stock over a consecutive
20-day
trading period reaches certain minimum amounts. On each vesting
trigger date, 8.33% of the shares of common stock underlying
these awards will vest for each completed three month period
from the grant date to the vesting trigger date. An additional
8.33% of the shares of common stock underlying these awards will
vest on each three month anniversary date of the vesting trigger
date. If the vesting trigger price is not achieved prior to the
three year anniversary date of the grant date, these awards will
be forfeited. These unrestricted stock awards were valued using
the Monte Carlo simulation model, which estimates value based on
the probability of vesting achievement.
72
MINDSPEED
TECHNOLOGIES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of each stock award is charged to expense over
the service period. The following table summarizes restricted
stock award activity (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
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
|
|