UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended
December 31,
2009
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-33435
Cavium Networks, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0558625
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification no.
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805 East Middlefield Road
Mountain View, CA 94043
(650) 623-7000
(Address of principal
executive offices)
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, $0.001 par value
(Title of Class)
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The NASDAQ Stock Market LLC
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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 þ NO o
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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. 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 þ
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
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Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). YES o NO þ
As of June 30, 2009, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the voting stock held by
non-affiliates was $621,033,565, based on the number of shares
held by non-affiliates of the registrant, and based on the
reported last sale price of common stock on The NASDAQ Global
Market for such date. For purposes of determining whether a
stockholder was an affiliate of the registrant at June 30,
2009, the registrant assumed that a stockholder was an affiliate
of the registrant at June 30, 2009 if such stockholder
beneficially owned 10% or more of the registrants common
stock as represented by the filing of Schedule 13G with the
Securities and Exchange Commission
and/or was
affiliated with an executive officer or director of the
registrant at June 30, 2009; provided, however, that
organizations whose ownership exceeds 10% of the
registrants outstanding common stock as of June 30,
2009 that represented on such Schedule that they are registered
investment advisors or investment companies registered under
Section 8 of the Investment Company Act of 1980 were
considered to be non-affiliates. This calculation does not
reflect a determination that persons are affiliates for any
other purposes.
Number of shares of common stock outstanding as of
February 22, 2010: 43,642,323
Documents Incorporated by Reference: Portions
of the Registrants definitive Proxy Statement for its 2010
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this
form 10-K
are incorporated by reference in Part III of this
Form 10-K.
CAVIUM
NETWORKS, INC.
YEAR ENDED DECEMBER 31, 2009
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
2
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Such statements are based upon our
managements beliefs and assumptions and on information
currently available to our management. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
could, would, estimates,
predicts, potential,
continue, strategy, beliefs,
anticipates, plans, expects,
intends and variations of such words and similar
expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties
and other factors, which may cause our actual results,
performance, time frames or achievements to be materially
different from any future results, performance, time frames or
achievements expressed or implied by the forward-looking
statements. These risks, uncertainties and other factors in this
Annual Report on
Form 10-K
are discussed in greater detail under the heading Risk
Factors. Given these risks, uncertainties and other
factors, you should not place undue reliance on these
forward-looking statements. These forward-looking statements
represent our estimates and assumptions only as of the date of
this filing. You should read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
3
PART I
Overview
We are a provider of highly integrated semiconductor processors
that enable intelligent processing for networking,
communications, storage, wireless, security, video and connected
home and office applications. We refer to our products as
enabling intelligent processing because they allow customers to
develop networking, wireless, storage and electronic equipment
that is application-aware and content-aware and securely
processes voice, video and data traffic at high speeds. Our
products also include a rich suite of embedded security
protocols that enable unified threat management, or UTM, secure
connectivity, network perimeter protection, Deep Packet
Inspection or DPI, network virtualization, broadband gateways,
3G/4G wireless infrastructure, storage systems, wireless HDMI
cable replacement and embedded video applications. Our products
are systems on a chip, or SoCs, which incorporate single or
multiple processor cores, a highly integrated architecture and
customizable software that is based on a broad range of standard
operating systems. As a result, our products offer high levels
of performance and processing intelligence while reducing
product development cycles for our customers and lowering power
consumption for end market equipment.
We generate the majority of our net revenue from sales of our
products to providers of networking equipment that sell into the
enterprise network, data center, broadband and consumer, access
and service provider markets. Our products are used in a broad
array of networking equipment, including routers, switches,
content-aware switches, UTM and other security appliances,
application-aware gateways, voice/video/data, or triple-play,
gateways, wireless local area network, or WLAN, and
3G/Wimax/Long Term Evolution, or LTE access, aggregation and
gateway devices, storage networking equipment, servers and
intelligent network interface cards, Internet protocol, or IP
surveillance systems, digital video recorders, wireless HDMI
cable replacement systems, video conferencing systems and
connected home and office equipment such as print servers,
wireless routers and broadband gateways. The acquisition of
MontaVista Software, Inc. (MontaVista) in December
2009 complements our broad portfolio of multi-core processors to
deliver integrated and optimized embedded solutions to the
market. Our MontaVista software products generate a majority of
revenue from sales of software subscriptions of embedded Linux
operating system, related development tools, support and
professional services.
Industry
Background
Traffic on the Internet, wireless networks and enterprise
networks is rapidly increasing due to trends that include
greater adoption of multimedia, video, smart-phones, IPTV and
rich, interactive Internet applications, voice over IP, or VoIP,
video over broadband, file sharing, greater use of web-based
services and the proliferation of stored content accessed
through networks. Enterprises, service providers and consumers
are demanding networking and electronic equipment that can take
advantage of these trends, and address the significant market
opportunities and life-style changes that these new applications
provide. As a result, there is growing pressure on providers of
networking equipment, wireless, storage and electronic equipment
to rapidly introduce new products with enhanced functionality
while reducing their design and manufacturing costs. Providers
of networking, wireless, storage and electronic equipment are
increasingly seeking advanced processing solutions from
third-party vendors to access the best available technology and
reduce development costs.
Video on demand, IPTV, peer-to-peer (P2P) video, and Internet
video are forecast to account for nearly 90 percent of all
consumer IP traffic in 2012 according to Cisco Systems
Inc.s Visual Networking Index forecast. New media rich
applications for both consumers and enterprises, like YouTube,
Hulu, MySpace, high definition (HD) movie downloads,
video conferencing, online gaming, distance learning and
telemedicine are the major drivers of this growth. Currently,
Internet video on the PC is the primary driver of this growth.
Moving forward, Internet delivery of video to the TV and mobile
devices followed by cost effective, HD interactive video
communications is expected to fuel the future growth of video
traffic over the Internet. This growth of video over the network
is driving many of our customers in the networking and
communications space to acquire video technology, applications
and expertise. To address the future needs of our customers we
acquired differentiated, low-latency video encoding technology
via our purchase of W&W Communications, Inc.
(W&W) in 2008.
4
The processing needs of advanced networking systems can be
described in the context of the Open System Interconnection, or
OSI, Model, which divides network activities, equipment, and
protocols into seven layers. According to this model, Layers 1
through 3 are the physical, data link and network layers,
respectively, which provide the protocols to ensure the
transmission of data between the source and destination
regardless of the content and type of data processed.
Traditionally, network infrastructure products have focused on
Layer 1 through 3 products that route and switch data traffic
based solely on the source and destination address contained in
the packet header. Processors that provide Layer 1 through 3
solutions are widely available from many vendors. Layers 4
through 7 are the transport, session, presentation and
application layers, which provide the protocols to enable the
reliable end-to-end communication of application information.
Intelligent processing generally takes place in Layers 4 through
7. In order to provide this intelligence, advanced networking
systems must include processors that enable extensive inspection
of the application and data content, or deep packet inspection,
and make intelligent switching and routing decisions based upon
that inspection. To address customer demands, providers of
networking equipment must offer products that include
functionality such as intelligent routing or switching of
network traffic prioritized by application and data content, and
security services. Processors required for Layer 4 through 7
processing are significantly more complex than processors that
provide only Layer 1 through 3 solutions.
The processing needs of the digital video market can be
categorized into five distinct market segments namely capture,
process, transport, receive and display. Our networking products
currently serve only in the video traffic transport market with
its single and multicore processors. The video transport market
includes equipment used in cable networks, satellite networks
and the Internet such as routers, switches and content
load-balancers that support the bandwidth, low-latency and
quality of service required for video. Video processing
technology is required to play in the capture, process and
display segments of the market. The video capture market
includes all types of video recording equipment ranging from
high-end broadcast quality cameras to IP cameras for video
surveillance, video conferencing and personal use camcorders, IP
cameras and webcams. The video process market needs high-channel
density and transrating and transcoding for video infrastructure
equipment such as cable head-end video systems, IP Multimedia
Subsystem, or IMS, gateways, broadcast systems, multi-channel
digital video recorders (DVRs), video conference multi-point
control unit and gateways. The video display market includes LCD
screens and flat panels, plasma displays and projectors where
high quality 1080p HD encode and decode and low latency are
required for display and wireless connectivity. Networking,
wireless, storage and electronic equipment providers address the
need for next generation video systems using a variety of
approaches. These approaches include internally designed custom
semiconductor products, such as application-specific integrated
circuits, or ASICs, digital signal processors, or DSPs,
field-programmable gate arrays, or FPGAs, or other proprietary
chips, multiple chip offerings, general purpose central
processing units, or CPUs, from merchant suppliers,
software-based solutions or a combination of these approaches.
While these approaches have been adequate for the basic layer 1
through 3 processing, they are less effective as the need for
Layer 4 through 7 intelligent processing increases and line
rates continue to increase. As a result, providers of networking
equipments are increasingly turning to third-party vendors for
high performance, power-efficient and cost-effective intelligent
processing products.
Products
Octeon®,
Octeon
Plus®,
Octeon
II®,
Nitrox®
and Pure
VuTM
are trademarks or registered trademarks of Cavium Networks, Inc.
We offer highly integrated semiconductors that provide single or
multiple cores of processors, along with intelligent Layer 4
through 7 processing for enterprise network, data center,
broadband and consumer, and access and service provider markets.
Our products provide scalable, low-power, high performance
processors that integrate single or multiple cores, hardware
accelerators and input/output interfaces into a single chip and
are available across a wide range of price and performance
points. All of our products are compatible with standards-based
operating systems and general purpose software to enable ease of
programming, and are supported by our ecosystem partners. Our
MontaVista Software products offer commercial grade embedded
Linux operating systems, development tools, support and
services. Our software embedded Linux products provide a high
quality operating system and productivity tools across a wide
range of embedded processors that are sold by us.
Our OCTEON, OCTEON Plus and OCTEON II Multi-core MIPS64
processor families provide integrated Layer 4 through 7 data and
security processing (with additional capabilities at Layers 2
and 3) at line speeds from
5
100Mbps to 40Gbps. OCTEON processors integrate control plane
processing, packet processing, security processing and content
acceleration, as well as a broad set of input/output interfaces
in a single chip. This integration shortens the data paths,
eliminates redundant packet processing, simplifies board design
and reduces the cost and power consumption compared to
alternative products that use multiple chips. Our OCTEON
processors have been adopted in a wide variety of original
equipment manufacturer, or OEM, networking equipment, including
routers, switches, content-aware switches, UTM, and other
security appliances, application-aware gateways,
voice/video/data, or triple-play, gateways, WLAN and 3G/4G
access and aggregation devices, storage networking equipment,
servers and intelligent network interface cards.
The OCTEON Plus and OCTEON II processor families incorporate new
interfaces and acceleration features for packet processing,
quality of service and content processing for multimedia aware
networking and 3G, 4G, and WiMax wireless applications over the
previous generations. The OCTEON Plus and OCTEON II processor
families also expanded OCTEONs core target markets in
storage, wireless and control plane applications. The OCTEON
Plus and OCTEON II processor families also provide hardware
acceleration for storage applications such as iSCSI, RAID 6 and
data de-duplication and are aimed at iSCSI targets, Fiber
Channel to iSCSI bridges and disk arrays.
Our NITROX processor family offers stand-alone security
processors and Layer 7 content processors that provide the
functionality required for Layer 3 to Layer 7 secure
communication in a single chip. These single chip,
custom-designed processors provide complete security protocol
processing, encryption, authentication algorithms and
intelligent deep packet inspection to reduce the load on the
system processor and increase total system throughput. The
NITROX family consists of products with up to 24 security
processors on a chip that are used in a wide variety of OEM
networking equipment, including security appliances, UTM
appliances, Layer 4 through 7 load balancers, and other
applications. The NITROX DPI Layer 7 content processor family
includes our patented deep packet inspection technology and is
used in routers/switches, wireless infrastructure equipment, UTM
appliances and Layer 4 - 7 load balancers.
Our OCTEON Plus broadband communication processor family
consists of single and dual core processors that target wired
and wireless broadband gateway applications, with performance
requirements ranging from 100Mbps to 1Gbps. The MIPS64-based SoC
OCTEON processors integrate single or dual 64-bit CPUs, and
provide high performance security processing for applications
requiring up to a 1Gbps line rate. These processors are
primarily used for broadband routers, WLAN access points and UTM
appliances.
The ECONA family consists of three main product lines based upon
the distinct performance, feature, and cost requirements of the
target network connected home and office markets. The ECONA
CNS1XXX provides an integrated ARM CPU, comprehensive
input/output, or I/O, options and hardware offload blocks for
high performance home and office routers and gateways. The ECONA
CNS2XXX provides greater integration for the most cost and power
sensitive home and office network applications. These processors
implement the
ARM9tm
core processor technology along with innovative hardware offload
engines to provide up to Gigabit rate processing in the 0.5-1.5W
power range. The ECONA CNS3XXX is the latest generation in this
family that scales the performance, range of input/output
connectivity options and hardware acceleration from the previous
generation. The ECONA3XXX series implements a dual-core
architecture with the ARM11
MPCoretm
processor. A range of I/O options are available for glue-less
connectivity to a host of consumer devices. In addition, a
significant amount of hardware acceleration over 10
separate accelerators are integrated to provide very
high performance at the lowest power consumption for most of the
advanced applications in the connected home and office including
networked storage, security gateways, wireless access, printers,
portable media devices and other networked appliances.
The PureVu CNW3XXX product family consists of the CNW31XX,
CNW35XX and the CNW36XX product lines, which are differentiated
based on HD and standard definition, or SD, video processing
capabilities and number of video ports. All PureVu CNW3XXX
processors are register-programmed and software compatible. A
software development kit, or SDK, provides Linux driver support
and an extensive application programming interface, or API, set
for the target applications. Our family of PureVu CNW3XXX video
processors offer the industrys lowest end-to-end
encode-decode latency, high channel density and low power
solution for interactive and recording video applications. These
processors integrate an H.264 encoder and decoder on a single
chip with support for 1080p60 encode/decode, as well as encoding
and decoding multiple HD, SD and CIF streams. Through our Super
Low Latency (SLL)
Technologytm
many demanding interactive video applications are possible on
6
CNW3XXX processors. The PureVu CNW3XXX processors are targeted
for use in either highly interactive video applications, such as
gaming, or in high channel-density video recording applications
or in applications that require both low latency and high
channel-density; including video conferencing, wireless HDMI
adapters, integrated wireless display capability for notebook
PCs and netbooks, video surveillance DVRs and video servers,
gaming, and single or multi-sensor HD and SD IP cameras.
The MontaVista software products include embedded Linux
operating systems, support, development tools and professional
services. The MontaVista software product line helps our
customers build products around our SoCs in a more time and cost
efficient manner. The MontaVista embedded Linux operating system
is available in multiple editions based upon the target market.
Our MontaVista Linux MVL6 product includes commercial grade
Linux operating systems with pre-packaged open source packages
and development tools that reduce development time and cost of
building products. In addition to our MontaVista software
products we also market and sell discrete software stacks
designed to help our customers build products with fewer
development resources. Furthermore, we offer customized
professional services that help our customers build feature rich
products using our processor and Linux expertise.
Customers
We primarily sell our products to providers of networking,
wireless, storage and consumer electronic equipment, either
directly or through contract manufacturing organizations and
distributors. By providing comprehensive systems-level products
along with our ecosystem partners, we provide our customers with
products that empower their next-generation networking systems
more quickly and at lower cost than other alternatives.
We currently rely, and expect to continue to rely, on a limited
number of customers for a significant portion of our revenue.
Cisco Systems, Inc. accounted for 24% and Actiontec Electronics,
Inc. accounted for 10% of net revenue in 2009.
Sales and
Marketing
We currently sell our products through our direct sales and
applications support organization to providers of networking
equipment, original design manufacturers and contract
electronics manufacturers, as well as through arrangements with
distributors that fulfill third-party orders for our products.
We work directly with our customers system designers to
create demand for our products by providing them with
application-specific product information for their system
design, engineering and procurement groups. Our technical
marketing, sales and field application engineers actively engage
potential customers during their design processes to introduce
them to our product capabilities and target applications. We
design products in an effort to meet the increasingly complex
and specific design requirements of our customers. We typically
undertake a multi-month sales and development process with our
customer system designers and management. If successful, this
process culminates in a customer decision to use our product in
their system, which we refer to as a design win. Volume
production can begin from nine months to three years after the
design win depending on the complexity of our customers
product and other factors. Once one of our products is
incorporated into a customers design, it is likely to be
used for the life cycle of the customers product. We
believe this to be the case because a redesign would generally
be time consuming and expensive.
Manufacturing
We use third-party foundries and assembly and test contractors
to manufacture, assemble and test our semiconductor products.
This outsourced manufacturing approach allows us to focus our
resources on the design, sales and marketing of our products.
Our foundries are responsible for procurement of the raw
materials used in the production of our products. Our engineers
work closely with our foundries and other contractors to
increase yields, lower manufacturing costs and improve quality.
Integrated Circuit Fabrication. Our integrated
circuits are fabricated using complementary metal-oxide
semiconductor, or CMOS processes, which provide greater
flexibility to engage independent foundries to manufacture our
integrated circuits. By outsourcing manufacturing, we are able
to avoid the cost associated with owning
7
and operating our own manufacturing facility, which would not be
feasible for a company at our stage of development. We currently
outsource a substantial percentage of our integrated circuit
manufacturing to Taiwan Semiconductor Manufacturing Company, or
TSMC, with the remaining manufacturing outsourced to United
Microelectronics Corporation, or UMC, Fujitsu Microelectronics,
or Fujitsu, and Samsung Electronics, or Samsung. We work closely
with TSMC, UMC, Fujitsu and Samsung to forecast on a monthly
basis our manufacturing capacity requirements. Our integrated
circuits are currently fabricated in several advanced,
sub-micron manufacturing processes. Because finer manufacturing
processes lead to enhanced performance, smaller size and lower
power requirements, we continually evaluate the benefits and
feasibility of migrating to smaller geometry process technology
in order to reduce cost and improve performance.
Assembly and Test. Our products are shipped
from our third-party foundries to third-party assembly and test
facilities where they are assembled into finished integrated
circuit packages and tested. We outsource all product packaging
and substantially all testing requirements for these products to
several assembly and test subcontractors, including ASE
Electronics in Taiwan, Malaysia and Singapore, as well as ISE
Labs, Inc, in the United States. Our products are designed to
use standard packages and to be tested with widely available
test equipment.
Quality Assurance. We have implemented
significant quality assurance and test procedures to assure high
levels of product quality for our customers. Our designs are
subjected to extensive circuit simulation under extreme
conditions of temperature, voltage and processing before being
committed to manufacture. We have completed and have been
awarded ISO 9001 certification and ISO 9001:2000 certification.
In addition, all of our independent foundries and assembly and
test subcontractors have been awarded ISO 9001 certification.
Research
and Development
We believe that our future success depends on our ability to
introduce enhancements to our existing products and to develop
new products for both existing and new markets. Our research and
development efforts are directed largely to the development of
additional high-performance multi-core microprocessor
semiconductors. We are also focused on incorporating functions
currently provided by stand-alone semiconductors into our
products. We have assembled a team of highly skilled
semiconductor and embedded software design engineers who have
strong design expertise in high performance multi-core
microprocessor design, along with embedded software, security
and networking expertise. Our engineering design teams are
located in Mountain View, California, Marlborough,
Massachusetts, Beijing, China, Hsin-Chu, Taiwan, Madrid, Spain
and Hyderabad, Chennai and Bangalore, India. As of
December 31, 2009, we had 304 employees in our
research and development group. Our research and development
expenses were $42.7 million, $27.2 million and
$19.5 million for the years ended December 31, 2009,
2008 and 2007 respectively.
Business
Combinations
In the third quarter of 2008, we acquired substantially all of
the assets of Star Semiconductor Corporation (Star)
for a purchase price of approximately $9.6 million. With
the acquisition of Star, we also added the Star ARM-based
processors to our portfolio to address connected home and office
applications and have since introduced our ECONA line of
dual-core ARM processors for that address a large variety of
connected home and office applications. In the fourth quarter of
2008, we acquired W&W for a total purchase price of
approximately $8.3 million. Additionally, in order to
effect the acquisition of W&W, we assumed and immediately
paid-off W&Ws notes payable of approximately
$8.9 million as defined in the merger agreement. This
acquisition launched us into the video processor market with a
broad product line called PureVu. The PureVu family of video
processors and modules incorporate proprietary and patent
pending video technology that produces perceptual lossless video
quality and delivers sub-frame latency with extremely low power
and cost. These products address the need for video processing
in wireless displays, teleconferencing, gaming and other
applications. In the fourth quarter of 2009, we acquired
MontaVista for a total purchase price of approximately
$45.2 million. In addition per the merger agreement, we
paid approximately $6.0 million, consisting of a mix of
shares of our common stock and cash to certain individuals in
connection with the termination of MontaVistas 2006
Retention compensation Plan. This acquisition complements our
broad portfolio of multi-core processors to deliver integrated
and optimized embedded solutions to the market. For a complete
discussion on our 2008 and 2009 acquisitions, see
Note 5 Business Combinations in Item 8, of
this Annual Report, which is incorporated herein by reference.
8
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and intellectual property. To accomplish this, we
rely on a combination of intellectual property rights, including
patents, trade secrets, copyrights and trademarks, and
contractual protections.
As of December 31, 2009, we had 21 issued and 24 pending
patent applications in the United States, and four issued and 18
pending foreign patent applications. The 21 issued patents in
the United States expire in the years beginning in 2023 through
2025. The two issued foreign patents expire in 2022. Our issued
patents and pending patent applications relate to security
processors, multi-core microprocessor processing and other
processing concepts. We focus our patent efforts in the United
States, and, when justified by cost and strategic importance, we
file corresponding foreign patent applications in strategic
jurisdictions such as Japan and Europe. Our patent strategy is
designed to provide a balance between the need for coverage in
our strategic markets and the need to maintain costs at a
reasonable level. We believe our issued patents and patent
applications, to the extent the applications are issued, may be
used defensively by us in the event of future intellectual
property claims.
We may not receive competitive advantages from any rights
granted under our patents. We do not know whether any of our
patent applications will result in the issuance of any patents
or whether the examination process will require us to narrow the
scope of our claims. To the extent any of our applications
proceed to issuance as a patent, any such future patent may be
opposed, contested, circumvented, designed around by a third
party, or found to be unenforceable or invalidated. In addition,
our future patent applications may not be issued with the scope
of the claims sought by us, if at all, or the scope of claims we
are seeking may not be sufficiently broad to protect our
proprietary technologies. Others may develop technologies that
are similar or superior to our proprietary technologies,
duplicate our proprietary technologies, or design around patents
owned or licensed by us. If our products, patents or patent
applications are found to conflict with any patent held by third
parties, we could be prevented from selling our products, our
patents may be declared invalid or our patent applications may
not result in issued patents.
In addition to our own intellectual property, we also rely on
third-party technologies for the development of our products. We
license certain technology from MIPS Technologies, Inc.,
pursuant to a license agreement entered into in December 2003
wherein we were granted a non-exclusive, worldwide license to
MIPS Technologies microprocessor core technology to
develop, implement and use in our products. The term of the
agreement was extended by an additional two years and will
consequently expire in December 2010. The agreement permits us
to continue selling in perpetuity products developed during the
term of the agreement containing the licensed technology.
Following the termination of the agreement, we will evaluate
whether to exercise our option to renew the agreement with MIPS
Technologies or engage other third parties for alternative
technology solutions.
We obtained a registration for our OCTEON and NITROX trademark
in the United States. We also have a license from MIPS
Technologies, Inc. to use cnMIPS as a trademark.
In addition, we generally control access to and use of our
proprietary software and other confidential information through
the use of internal and external controls, including contractual
protections with employees, contractors, customers and partners.
We rely in part on United States and international copyright
laws to protect our software. All employees and consultants are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us. We
also require them to agree to disclose and assign to us all
inventions conceived or made in connection with the employment
or consulting relationship. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
invention assignment terms of their agreements. Despite measures
taken to protect our intellectual property, unauthorized parties
may copy aspects of our products or obtain and use information
that we regard as proprietary.
Despite our efforts to protect our trade secrets and proprietary
rights through patents, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, as we expand our
international operations, effective patent, copyright, trademark
and trade secret protection may not be available or may be
limited in foreign countries. If we fail to protect our
intellectual property and other proprietary rights, our business
could be harmed.
Third parties could claim that our products or technologies
infringe their proprietary rights. The semiconductor industry is
characterized by the existence of a large number of patents,
trademarks and copyrights and by frequent
9
litigation based on allegations of infringement or other
violations of intellectual property rights. We expect that the
potential for infringement claims against us may further
increase as the number of products and competitors in our market
increase. Litigation in this industry is often protracted and
expensive. Questions of infringement in the semiconductor
industry involve highly technical and subjective analyses. In
addition, litigation may become necessary in the future to
enforce our granted patents and other intellectual property
rights, to protect our trade secrets, to determine the validity
and scope of the proprietary rights of others, or to defend
against claims of infringement or invalidity, and we may not
prevail in any future litigation. The results of any litigation
are inherently uncertain. Any successful infringement claim or
litigation against us could have a significant adverse impact on
our business.
We may be required to seek licenses under patents or
intellectual property rights owned by third parties. However, we
cannot be certain that third parties will offer licenses to us
or that the terms of any licenses offered to us will be
acceptable. If we fail to obtain such third-party license for
our products, we could incur substantial liabilities or be
forced to suspend sales of our products. Any litigation could
cause us to incur substantial expenses, reduce our sales, and
divert the efforts of our technical and management personnel,
whether or not a court decided such litigation in our favor. In
the event we receive an adverse result in any litigation, we
could be required to pay substantial damages, cease sale of
products, expend significant resources to develop alternative
technology and discontinue the use of processes requiring the
relevant technology.
We have not to date been notified of any litigation related to
intellectual property.
Competition
We compete with numerous domestic and international
semiconductor companies, many of which have greater financial
and other resources with which to pursue marketing, technology
development, product design, manufacturing, quality, sales and
distribution of their products. Our ability to compete
effectively depends on defining, designing and regularly
introducing new products that anticipate the processing and
integration needs of our customers next-generation
products and applications.
In the networking, wireless, storage and connected home and
office markets we consider our primary competitors to be other
companies that provide embedded processor products to the
market, including Broadcom Corporation, Freescale Semiconductor,
Inc., Intel Corporation, Marvell Technology Group Ltd.,
PMC-Sierra, Inc., and NetLogic Microsystems, Inc. Most of these
competitors offer products that differ in functionality and
processing speeds and address some or all of our four target end
markets. In comparison we offer a broad array of highly
integrated, intelligent solutions at various performance levels
and prices for each of our end markets. Our products generally
include a multiple number of processor cores, greater
integration of L4-L7 hardware acceleration and interfaces, and
efficient power consumption for networking, communication,
security and video applications. In the video capture, process
and display market segments we consider our competition to be
companies that provide video encode and decode solutions,
including TI DSPs and SOCs for H.264 encoding and AMIMON, Inc.
for wireless replacement of HDMI cables and wireless video
displays.
In the embedded commercial Linux operating system and
professional services markets, we consider the primary
competitors for our MontaVista software products to be Wind
River Systems, Inc., a subsidiary of Intel Corporation and, to a
lesser extent, Canonical Programming, Inc. and Mentor Graphics
Corporation.
Our competitors include public companies with broader product
lines, a large installed base of customers and greater resources
compared to us. We expect continued competition from existing
suppliers as well as from potential new entrants into our
markets. Our ability to compete depends on a number of factors,
including our success in identifying new and emerging markets,
applications and technologies and developing products for these
markets; our products performance and cost effectiveness
relative to that of our competitors; our success in
product functionality and features not previously available in
the marketplace; our ability to recruit good talent including
software engineers and chip designers; and our ability to
protect our intellectual property.
Backlog
Sales of our products are generally made pursuant to purchase
orders. We typically include in backlog only those customer
orders for which we have accepted purchase orders and which we
expect to ship within the next
10
twelve months. Since orders constituting our current backlog are
subject to changes in delivery schedules or cancellation with
limited or no penalties, we believe that the amount of our
backlog is not necessarily an accurate indication of our future
revenues.
Geographic
Information
For geographic financial information, see Note 11.
Segment Information in Item 8, of this Annual Report,
which is incorporated herein by reference.
Employees
As of December 31, 2009, we had 467 regular employees
located in the United States, India and other countries in Asia
and Europe, which was comprised of: 18 employees in
manufacturing operations, 304 in engineering, research and
development, and 145 in sales, marketing and administrative.
None of our employees is represented by a labor union and we
consider current employee relations to be good.
Executive
Officers of the Registrant
The following sets forth certain information regarding our
executive officers as of February 26, 2010:
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Syed B. Ali
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President, Chief Executive Officer, Director and Chairman of the
Board of Directors
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Arthur D. Chadwick
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Vice President of Finance and Administration, Chief Financial
Officer and Secretary
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Anil K. Jain
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Corporate Vice President, IC Engineering
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Rajiv Khemani
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Vice President and General Manager of Networking and
Communications Division
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Syed B. Ali is one of our founders and has served as our
President, Chief Executive Officer and Chairman of the Board of
Directors since the inception of the Company in 2000. From 1998
to 2000, Mr. Ali was Vice President of Marketing and Sales
at Malleable Technologies, a communication chip company of which
he was a founding management team member. Malleable Technologies
was acquired by PMC Sierra, a communication IC company in 2000.
From 1994 to 1998, Mr. Ali was an Executive Director at
Samsung Electronics. Prior to that, he had various positions at
Wafer Scale Integration, a division of SGS-Thompson, Tandem
Computer, and American Microsystems. He received a BE
(Electrical Engineering) from Osmania University, in Hyderabad,
India and an MSE from the University of Michigan.
Arthur D. Chadwick has served as our Vice President of
Finance and Administration, Chief Financial Officer and
Secretary since December 2004. Prior to joining us, from 1989 to
2004, Mr. Chadwick served as the Senior Vice President of
Finance and Administration and Chief Financial Officer at
Pinnacle Systems, a provider of digital video processing
solutions. From 1979 through 1989, Mr. Chadwick served in
various financial and management roles at American Microsystems,
Austrian Microsystems, Gould Semiconductor and AMI-Philippines.
Mr. Chadwick received a BS degree in Mathematics and an MBA
in Finance, both from the University of Michigan.
Anil K. Jain has served as our Corporate Vice President
of IC Engineering since January 2001, and is a founding
management team member. Prior to joining us, from 1998 to 2000
he was at Compaq Computer, a computer manufacturer. From 1980 to
1998, Mr. Jain served at Digital Equipment Corporation, or
DEC, as Senior Consulting Engineer when DEC was acquired by
Compaq Computer. He received a BS degree in Electrical
Engineering from Punjab Engineering College in Chandigarh India,
and an MSEE from the University of Cincinnati.
Rajiv Khemani has served as our Vice President and
General Manager of Networking and Communications Division since
February 2009 and has served as our Vice President of Marketing
and Sales since January 2007 and has served as our Vice
President of Marketing since June 2003. Prior to joining us,
from 1998 to May 2003, he worked for Intel Corporation, a
microprocessor IC company. From 2002 to 2003, he served as
General Manager of Intels high-end network processor
business unit. From 1999 to 2002, he served as Director of
Marketing in Intels network processor division. He joined
Intel through Intels acquisition of Netboost, a network
processor startup.
11
Prior to Netboost, Mr. Khemani held engineering, marketing
and management positions at Network Appliance and Sun
Microsystems. He received a bachelor degree in Computer
Engineering from the Indian Institute of Technology, New Delhi,
an MS in Computer Science from New York University and an MBA
from Stanford University Graduate School of Business.
Corporate
Information
We were incorporated in California in November 2000 and
reincorporated in Delaware in February 2007. Our principal
offices are located at 805 East Middlefield Road, Mountain View,
California 94043, and our telephone number is
(650) 623-7000.
Our Web site address is www.caviumnetworks.com. Information
found on, or accessible through, our Web site is not a part of,
and is not incorporated into, this Annual Report on
Form 10-K.
Unless the context requires otherwise, references in this Annual
Report on
Form 10-K
to the company, we, us and
our refer to Cavium Networks, Inc. and its
wholly-owned subsidiaries on a consolidated basis.
Available
Information
We file electronically with the United States Securities and
Exchange Commission, or SEC, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. We make available on our website at
http://www.caviumnetworks.com,
free of charge, copies of these reports as soon as reasonably
practicable after filing these reports with, or furnishing them
to, the SEC.
The following risks and uncertainties may have a material
adverse effect on our business, financial condition or results
of operations. Investors should carefully consider the risks
described below before making an investment decision. The risks
described below are not the only ones we face. Additional risks
not presently known to us or that we currently believe are
immaterial may also significantly impair our business
operations. Our business could be harmed by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and investors may lose all or part of their
investment.
Risks
Related to Our Business and Industry
We
have a limited history of profitability, and we may not achieve
or sustain profitability in the future, on a quarterly or annual
basis.
We were established in 2000. Our first quarter of profitability
since then was the quarter ended September 30, 2007 and we
remained profitable until the quarter ended December 31,
2008. We incurred a net loss of $21.4 million for the year
ended December 31, 2009 and net income of $1.5 million
and $2.2 million for the years ended December 31, 2008
and 2007, respectively. As of December 31, 2009, our
accumulated deficit was $78.6 million. We expect to make
significant expenditures related to the development of our
products and expansion of our business, including research and
development and sales and administrative expenses. As a public
company, we also incur significant legal, accounting and other
expenses. Additionally, we may encounter unforeseen
difficulties, complications, product delays and other unknown
factors that require additional expenditures. As a result of
these increased expenditures, we may have to generate and
sustain substantially increased revenue to achieve
profitability. Our revenue growth trends in prior periods may
not be sustainable. Accordingly, we may not be able to achieve
or maintain profitability and we may continue to incur losses in
the future.
We
face intense competition and expect competition to increase in
the future, which could reduce our revenue and customer
base.
The market for our products is highly competitive and we expect
competition to intensify in the future. This competition could
make it more difficult for us to sell our products, and result
in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses and failure to increase, or the
loss of, market share or expected market share, any of which
would likely seriously harm our business, operating results and
financial condition. For instance, semiconductor products have a
history of declining prices as the cost of production is
12
reduced. However, if market prices decrease faster than product
costs, gross and operating margins can be adversely affected.
Currently, we face competition from a number of established
companies, including Broadcom Corporation, Freescale
Semiconductor, Inc., Intel Corporation, Marvell Technology Group
Ltd., PMC-Sierra, Inc., and NetLogic Microsystems, Inc. In
addition, in the video capture, process and display market
segments we consider our competition to be companies that
provide video encode and decode solutions, including Texas
Instruments digital signal processors and SOCs for H.264
encoding and Amimon for wireless replacement of HDMI cables and
wireless video displays.
A few of our current competitors operate their own fabrication
facilities and have, and some of our potential competitors could
have, longer operating histories, greater name recognition,
larger customer bases and significantly greater financial,
technical, sales, marketing and other resources than we have.
Potential customers may prefer to purchase from their existing
suppliers rather than a new supplier regardless of product
performance or features.
We expect increased competition from other established and
emerging companies both domestically and internationally. Our
current and potential competitors may also establish cooperative
relationships among themselves or with third parties. If so, new
competitors or alliances that include our competitors may emerge
that could acquire significant market share. We expect these
trends to continue as companies attempt to strengthen or
maintain their market positions in an evolving industry. In the
future, further development by our competitors could cause our
products to become obsolete. We expect continued competition
from incumbents as well as from new entrants into the markets we
serve. Our ability to compete depends on a number of factors,
including:
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our success in identifying new and emerging markets,
applications and technologies;
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our products performance and cost effectiveness relative
to that of our competitors products;
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our ability to deliver products in large volume on a timely
basis at a competitive price;
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our success in utilizing new and proprietary technologies to
offer products and features previously not available in the
marketplace;
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our ability to recruit design and application engineers and
sales and marketing personnel; and
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our ability to protect our intellectual property.
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In addition, we cannot assure you that existing customers or
potential customers will not develop their own products,
purchase competitive products or acquire companies that use
alternative methods to enable networking, communication or
security applications to facilitate network-aware processing in
their systems. Any of these competitive threats, alone or in
combination with others, could seriously harm our business,
operating results and financial condition.
Our
customers may cancel their orders, change production quantities
or delay production, and if we fail to forecast demand for our
products accurately, we may incur product shortages, delays in
product shipments or excess or insufficient product
inventory.
We generally do not obtain firm, long-term purchase commitments
from our customers. Because production lead times often exceed
the amount of time required to fulfill orders, we often must
build in advance of orders, relying on an imperfect demand
forecast to project volumes and product mix. Our demand forecast
accuracy can be adversely affected by a number of factors,
including inaccurate forecasting by our customers, changes in
market conditions, adverse changes in our product order mix and
demand for our customers products. Even after an order is
received, our customers may cancel these orders or request a
decrease in production quantities. Any such cancellation or
decrease subjects us to a number of risks, most notably that our
projected sales will not materialize on schedule or at all,
leading to unanticipated revenue shortfalls and excess or
obsolete inventory which we may be unable to sell to other
customers. Alternatively, if we are unable to project customer
requirements accurately, we may not build enough products, which
could lead to delays in product shipments and lost sales
opportunities in the near term, as well as force our customers
to identify alternative sources, which could affect our ongoing
relationships with these customers. We have in the past had
customers dramatically increase their requested production
quantities with little or no advance notice. If we do not timely
fulfill customer demands, our customers
13
may cancel their orders. Either underestimating or
overestimating demand would lead to insufficient, excess or
obsolete inventory, which could harm our operating results, cash
flow and financial condition, as well as our relationships with
our customers.
Adverse
changes in general economic or political conditions in any of
the major countries in which we do business could adversely
affect our operating results.
As our business has grown to both customers located in the
United States as well as customers located outside of the United
States, we have become increasingly subject to the risks arising
from adverse changes in both the domestic and global economic
and political conditions. For example, the direction and
relative strength of the U.S. and international economies
remains uncertain due to softness in the housing markets,
difficulties in the financial services sector and credit markets
and continuing geopolitical uncertainties. If economic growth in
the United States and other countries economies continues
to slow, the demand for our customers products could
decline, which would then decrease demand for our products.
Furthermore, if economic conditions in the countries into which
our customers sell their products continue to deteriorate, some
of our customers may decide to postpone or delay certain
development programs, which would then delay their need to
purchase our products. This could result in a reduction in sales
of our products or in a reduction in the growth of our product
sales. Any of these events would likely harm investors view of
our business, and our results of operations and financial
condition.
We
receive a substantial portion of our revenues from a limited
number of customers, and the loss of, or a significant reduction
in, orders from one or a few of our major customers would
adversely affect our operations and financial
condition.
We receive a substantial portion of our revenues from a limited
number of customers. We received an aggregate of approximately
52%, 57% and 56% of our net revenues from our top five customers
for the years ended December 31, 2009, 2008 and 2007,
respectively. We anticipate that we will continue to be
dependent on a limited number of customers for a significant
portion of our revenues in the immediate future and in some
cases the portion of our revenues attributable to certain
customers may increase in the future. However, we may not be
able to maintain or increase sales to certain of our top
customers for a variety of reasons, including the following:
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our agreements with our customers do not require them to
purchase a minimum quantity of our products;
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some of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty; and
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many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products.
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In the past, we have relied in significant part on our strategic
relationships with customers that are technology leaders in our
target markets. We intend to continue expanding such
relationships and forming new strategic relationships but we
cannot assure you that we will be able to do so. These
relationships often require us to develop new products that may
involve significant technological challenges. Our customers
frequently place considerable pressure on us to meet their tight
development schedules. Accordingly, we may have to devote a
substantial amount of our resources to our strategic
relationships, which could detract from or delay our completion
of other important development projects. Delays in development
could impair our relationships with our other strategic
customers and negatively impact sales of the products under
development. Moreover, it is possible that our customers may
develop their own product or adopt a competitors solution
for products that they currently buy from us. If that happens,
our sales would decline and our business, financial condition
and results of operations could be materially and adversely
affected.
In addition, our relationships with some customers may also
deter other potential customers who compete with these customers
from buying our products. To attract new customers or retain
existing customers, we may offer certain customers favorable
prices on our products. In that event, our average selling
prices and gross margins would decline. The loss of a key
customer, a reduction in sales to any key customer or our
inability to attract new significant customers could seriously
impact our revenue and materially and adversely affect our
results of operations.
14
We
expect our operating results to fluctuate.
We expect our revenues and expense levels to vary in the future,
making it difficult to predict our future operating results. In
particular, we experience variability in demand for our products
as our customers manage their product introduction dates and
their inventories. Given the current global economic
uncertainty, the demand for our products may be more varied and
difficult to ascertain in a timely and efficient manner.
Additional factors that could cause our results to fluctuate
include, among other things:
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our ability to retain, recruit and hire key executives,
technical personnel and other employees in the positions and
numbers, and with the experience and capabilities that we need;
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fluctuations in demand, sales cycles, product mix and prices for
our products;
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the timing of our product introductions, and the variability in
lead time between the time when a customer begins to design in
one of our products and the time when the customers end
system goes into production and they begin purchasing our
products;
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the forecasting, scheduling, rescheduling or cancellation of
orders by our customers;
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our ability to successfully define, design and release new
products in a timely manner that meet our customers needs;
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changes in manufacturing costs, including wafer, test and
assembly costs, mask costs, manufacturing yields and product
quality and reliability;
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the timing and availability of adequate manufacturing capacity
from our manufacturing suppliers;
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the timing of announcements by our competitors or us;
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future accounting pronouncements and changes in accounting
policies;
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volatility in our stock price, which may lead to higher stock
compensation expenses;
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general economic and political conditions in the countries where
we operate or our products are sold or used; costs associated
with litigation, especially related to intellectual property; and
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productivity and growth of our sales and marketing force.
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Unfavorable changes in any of the above factors, most of which
are beyond our control, could significantly harm our business
and results of operations.
We may
not sustain our growth rate, and we may not be able to manage
any future growth effectively.
We have experienced significant growth in a short period of
time. Our net revenues increased from approximately
$7.4 million in 2004 to approximately $19.4 million in
2005, $34.2 million in 2006, $54.2 million in 2007,
$86.6 million in 2008 and $101.2 million in 2009. We
may not achieve similar growth rates in future periods. You
should not rely on our operating results for any prior quarterly
or annual periods as an indication of our future operating
performance. If we are unable to maintain adequate revenue
growth, our financial results could suffer and our stock price
could decline.
To manage our growth successfully and to continue handling the
responsibilities of being a public company, we believe we must
effectively, among other things:
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recruit, hire, train and manage additional qualified engineers
for our research and development activities, especially in the
positions of design engineering, product and test engineering,
and applications engineering;
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enhance our information technology support for enterprise
resource planning and design engineering by adapting and
expanding our systems and tool capabilities, and properly
training new hires as to their use;
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expand our administrative, financial and operational systems,
procedures and controls; and
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add additional sales personnel and expand sales offices.
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If we are unable to manage our growth effectively, we may not be
able to take advantage of market opportunities or develop new
products and we may fail to satisfy customer requirements,
maintain product quality, execute our business plan or respond
to competitive pressures.
The
average selling prices of products in our markets have
historically decreased over time and will likely do so in the
future, which could harm our revenues and gross
profits.
Average selling prices of semiconductor products in the markets
we serve have historically decreased over time. Our gross
profits and financial results will suffer if we are unable to
offset any reductions in our average selling prices by reducing
our costs, developing new or enhanced products on a timely basis
with higher selling prices or gross profits, or increasing our
sales volumes. Additionally, because we do not operate our own
manufacturing, assembly or testing facilities, we may not be
able to reduce our costs as rapidly as companies that operate
their own facilities, and our costs may even increase, which
could also reduce our margins.
We may
be unsuccessful in developing and selling new products or in
penetrating new markets.
We operate in a dynamic environment characterized by rapidly
changing technologies and industry standards and technological
obsolescence. Our competitiveness and future success depend on
our ability to design, develop, manufacture, assemble, test,
market and support new products and enhancements on a timely and
cost effective basis. A fundamental shift in technologies in any
of our product markets could harm our competitive position
within these markets. Our failure to anticipate these shifts, to
develop new technologies or to react to changes in existing
technologies could materially delay our development of new
products, which could result in product obsolescence, decreased
revenues and a loss of design wins to our competitors. The
success of a new product depends on accurate forecasts of
long-term market demand and future technological developments,
as well as on a variety of specific implementation factors,
including:
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timely and efficient completion of process design and transfer
to manufacturing, assembly and test processes;
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the quality, performance and reliability of the product; and
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effective marketing, sales and service.
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If we fail to introduce new products that meet the demand of our
customers or penetrate new markets that we target our resources
on, our revenues will likely decrease over time and our
financial condition could suffer. Additionally, if we
concentrate resources on a new market that does not prove
profitable or sustainable, our financial condition could decline.
Fluctuations
in the mix of products sold may adversely affect our financial
results.
Because of the wide price differences among our processors, the
mix and types of performance capabilities of processors sold
affect the average selling price of our products and have a
substantial impact on our revenue. Generally, sales of higher
performance products have higher gross margins than sales of
lower performance products. We currently offer both higher and
lower performance products in our NITROX, OCTEON, ECONA ARM and
PureVu Video product families. During 2008 and in the first two
quarters of 2009, we experienced a sales mix shift towards
increased sales of lower performance, lower margin products,
which negatively affected our overall gross margins. In the
third and fourth quarters of 2009 compared to the first two
quarters of 2009, the product mix moved towards higher
performance and higher margin products. If the sales mix shifts
back to lower performance, lower margin products, our overall
gross margins will be negatively affected. Fluctuations in the
mix and types of our products may also affect the extent to
which we are able to recover our fixed costs and investments
that are associated with a particular product, and as a result
can negatively impact our financial results.
The
semiconductor and communications industries have historically
experienced significant fluctuations with prolonged downturns,
which could impact our operating results, financial condition
and cash flows
The semiconductor industry has historically exhibited cyclical
behavior, which at various times has included significant
downturns in customer demand, including in late 2008 through
2009. Because a significant portion of our
16
expenses is fixed in the near term or is incurred in advance of
anticipated sales, we may not be able to decrease our expenses
rapidly enough to offset any unanticipated shortfall in
revenues. If this situation were to occur, it could adversely
affect our operating results, cash flow and financial condition.
Furthermore, the semiconductor industry has periodically
experienced periods of increased demand and production
constraints. If this happens in the future, we may not be able
to produce sufficient quantities of our products to meet the
increased demand. We may also have difficulty in obtaining
sufficient wafer, assembly and test resources from our
subcontract manufacturers. Any factor adversely affecting the
semiconductor industry in general, or the particular segments of
the industry that our products target, may adversely affect our
ability to generate revenue and could negatively impact our
operating results.
The communications industry has, in the past, experienced
pronounced downturns, and these cycles may continue in the
future. To respond to a downturn, many networking equipment
providers may slow their research and development activities,
cancel or delay new product development, reduce their
inventories and take a cautious approach to acquiring our
products, which would have a significant negative impact on our
business. If this situation were to occur, it could adversely
affect our operating results, cash flow and financial condition.
In the future, any of these trends may also cause our operating
results to fluctuate significantly from year to year, which may
increase the volatility of the price of our stock.
Our
products must meet exact specifications, and defects and
failures may occur, which may cause customers to return or stop
buying our products.
Our customers generally establish demanding specifications for
quality, performance and reliability that our products must
meet. However, our products are highly complex and may contain
defects and failures when they are first introduced or as new
versions are released. If defects and failures occur in our
products during the design phase or after, we could experience
lost revenues, increased costs, including warranty expense and
costs associated with customer support, delays in or
cancellations or rescheduling of orders or shipments, product
returns or discounts, diversion of management resources or
damage to our reputation and brand equity, and in some cases
consequential damages, any of which would harm our operating
results. In addition, delays in our ability to fill product
orders as a result of quality control issues may negatively
impact our relationship with our customers. We cannot assure you
that we will have sufficient resources, including any available
insurance, to satisfy any asserted claims.
We may
have difficulty selling our products if our customers do not
design our products into their systems, and the nature of the
design process requires us to incur expenses prior to
recognizing revenues associated with those expenses which may
adversely affect our financial results.
One of our primary focuses is on winning competitive bid
selection processes, known as design wins, to
develop products for use in our customers products. We
devote significant time and resources in working with our
customers system designers to understand their future
needs and to provide products that we believe will meet those
needs and these bid selection processes can be lengthy. If a
customers system designer initially chooses a
competitors product, it becomes significantly more
difficult for us to sell our products for use in that system
because changing suppliers can involve significant cost, time,
effort and risk for our customers. Thus, our failure to win a
competitive bid can result in our foregoing revenues from a
given customers product line for the life of that product.
In addition, design opportunities may be infrequent or may be
delayed. Our ability to compete in the future will depend, in
large part, on our ability to design products to ensure
compliance with our customers and potential
customers specifications. We expect to invest significant
time and resources and to incur significant expenses to design
our products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a
new product without any assurance that our customers
system designers will select our product for use in their
applications. We often are required to anticipate which product
designs will generate demand in advance of our customers
expressly indicating a need for that particular design. Even if
our customers system designers select our products, a
substantial period of time will elapse before we generate
revenues related to the significant expenses we have incurred.
17
The reasons for this delay generally include the following
elements of our product sales and development cycle timeline and
related influences:
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our customers usually require a comprehensive technical
evaluation of our products before they incorporate them into
their designs;
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it can take from nine months to three years from the time our
products are selected to commence commercial shipments; and our
customers may experience changed market conditions or product
development issues. The resources devoted to product development
and sales and marketing may not generate material revenue for
us, and from time to time, we may need to write off excess and
obsolete inventory if we have produced product in anticipation
of expected demand. We may spend resources on the development of
products that our customers may not adopt. If we incur
significant expenses and investments in inventory in the future
that we are not able to recover, and we are not able to
compensate for those expenses, our operating results could be
adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions but still hold
higher cost products in inventory, our operating results would
be harmed.
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Additionally, even if system designers use our products in their
systems, we cannot assure you that these systems will be
commercially successful or that we will receive significant
revenue from the sales of processors for those systems. As a
result, we may be unable to accurately forecast the volume and
timing of our orders and revenues associated with any new
product introductions.
If
customers do not believe our products solve a critical need, our
revenues will decline.
Our products are used in networking and security equipment
including routers, switches, UTM appliances, intelligent
switches, application-aware gateways, triple-play gateways, WLAN
and 3G access and aggregation devices, storage networking
equipment, servers, intelligent network interface cards, IP
surveillance systems, wireless HDMI cable replacement systems,
video conferencing systems and connected home and office
equipment.
In order to meet our growth and strategic objectives, providers
of networking equipment must continue to incorporate our
products into their systems and the demands for their systems
must grow as well. Our future depends in large part on factors
outside our control, and the sale of next-generation networks
may not meet our revenue growth and strategic objectives.
In the
event we terminate one of our distributor arrangements, it could
lead to a loss of revenues and possible product
returns.
A portion of our sales is made through third-party distribution
agreements. Termination of a distributor relationship, either by
us or by the distributor, could result in a temporary or
permanent loss of revenues, until a replacement distributor can
be established to service the affected end-user customers. We
may not be successful in finding suitable alternative
distributors on satisfactory terms or at all and this could
adversely affect our ability to sell in certain locations or to
certain end-user customers. Additionally, if we terminate our
relationship with a distributor, we may be obligated to
repurchase unsold products. We record a reserve for estimated
returns and price credits. If actual returns and credits exceed
our estimates, our operating results could be harmed. Our
arrangements with our distributors typically also include price
protection provisions if we reduce our list prices.
We
rely on our ecosystem partners to enhance our product offerings
and our inability to continue to develop or maintain such
relationships in the future would harm our ability to remain
competitive.
We have developed relationships with third parties, which we
refer to as ecosystem partners, which provide operating systems,
tool support, reference designs and other services designed for
specific uses with our SoCs. We believe that these relationships
enhance our customers ability to get their products to
market quickly. If we are unable to continue to develop or
maintain these relationships, we might not be able to enhance
our customers ability to commercialize their products in a
timely fashion and our ability to remain competitive would be
harmed.
18
The
loss of any of our key personnel could seriously harm our
business, and our failure to attract or retain specialized
technical, management or sales and marketing talent could impair
our ability to grow our business.
We believe our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled
managerial, engineering, sales and marketing personnel. The loss
of any key employees or the inability to attract, retain or
motivate qualified personnel, including engineers and sales and
marketing personnel, could delay the development and
introduction of and harm our ability to sell our products. We
believe that our future success is highly dependent on the
contributions of Syed Ali, our co-founder, President and Chief
Executive Officer, and others. None of our employees have
fixed-term employment contracts; they are all at-will employees.
The loss of the services of Mr. Ali, other executive
officers or certain other key personnel could materially and
adversely affect our business, financial condition and results
of operations. For instance, if any of these individuals were to
leave our company unexpectedly, we could face substantial
difficulty in hiring qualified successors and could experience a
loss in productivity during the search for and while any such
successor is integrated into our business and operations.
There is currently a shortage of qualified technical personnel
with significant experience in the design, development,
manufacturing, marketing and sales of integrated circuits. In
particular, there is a shortage of engineers who are familiar
with the intricacies of the design and manufacture of multi-core
networking processors, and competition for these engineers is
intense. Our key technical personnel represent a significant
asset and serve as the source of our technological and product
innovations. We may not be successful in attracting, retaining
and motivating sufficient numbers of technical personnel to
support our anticipated growth.
To date, we have relied primarily on our direct marketing and
sales force to drive new customer design wins and to sell our
products. Because we are looking to expand our customer base and
grow our sales to existing customers, we will need to hire
additional qualified sales personnel in the near term and beyond
if we are to achieve revenue growth. The competition for
qualified marketing and sales personnel in our industry, and
particularly in Silicon Valley, is very intense. If we are
unable to hire, train, deploy and manage qualified sales
personnel in a timely manner, our ability to grow our business
will be impaired. In addition, if we are unable to retain our
existing sales personnel, our ability to maintain or grow our
current level of revenues will be adversely affected. Further,
if we are unable to integrate and retain personnel acquired
through our various acquisitions, we may not be able to fully
capitalize on such acquisitions.
Stock options and restricted stock units generally comprise a
significant portion of our compensation packages for all
employees. The FASB requirement to expense the fair value of
stock options awarded to employees beginning in the first
quarter of our fiscal 2006 has increased our operating expenses
and may cause us to reevaluate our compensation structure for
our employees. Our inability to attract, retain and motivate
additional key employees could have an adverse effect on our
business, financial condition and results of operations.
In addition, we rely on stock-based awards as one means for
recruiting, motivating and retaining highly skilled talent. If
the value of such stock awards does not appreciate as measured
by the performance of the price of our common stock or if our
share-based compensation otherwise ceases to be viewed as a
valuable benefit, our ability to attract, retain, and motivate
employees could be weakened, which could harm our results of
operations. The decline in the trading price of our common stock
would result in the exercise price of a portion of our
outstanding options to exceed the current trading price of our
common stock, thus lessening the effectiveness of these
stock-based awards. Consequently, we may not continue to
successfully attract and retain key personnel which would harm
our business.
We
have a limited operating history, and we may have difficulty
accurately predicting our future revenues for the purpose of
appropriately budgeting and adjusting our
expenses.
We were established in 2000. Our first quarter of profitability
since then was the quarter ended September 30, 2007 and we
remained profitable until the quarter ended December 31,
2008. Since we had only five quarters of operating
profitability, we do not have an extended history from which to
predict and manage profitability. Our limited operating
experience, a dynamic and rapidly evolving market in which we
sell our products, our dependence on a limited number of
customers, as well as numerous other factors beyond our control,
including general market conditions, impede our ability to
forecast quarterly and annual revenues accurately. As a result,
we could experience
19
budgeting and cash flow management problems, unexpected
fluctuations in our results of operations and other
difficulties, any of which could make it difficult for us to
attain and maintain profitability and could increase the
volatility of the market price of our common stock.
Some
of our operations and a significant portion of our customers and
contract manufacturers are located outside of the United States,
which subjects us to additional risks, including increased
complexity and costs of managing international operations and
geopolitical instability.
We have international sales offices and research and development
facilities and we conduct, and expect to continue to conduct, a
significant amount of our business with companies that are
located outside the United States, particularly in Asia and
Europe. Even customers of ours that are based in the United
States often use contract manufacturers based in Asia to
manufacture their systems, and it is the contract manufacturers
that purchase products directly from us. As a result of our
international focus, we face numerous challenges, including:
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increased complexity and costs of managing international
operations;
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longer and more difficult collection of receivables;
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difficulties in enforcing contracts generally;
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geopolitical and economic instability and military conflicts;
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limited protection of our intellectual property and other assets;
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compliance with local laws and regulations and unanticipated
changes in local laws and regulations, including tax laws and
regulations;
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trade and foreign exchange restrictions and higher tariffs;
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travel restrictions;
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timing and availability of import and export licenses and other
governmental approvals, permits and licenses, including export
classification requirements;
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foreign currency exchange fluctuations relating to our
international operating activities;
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transportation delays and limited local infrastructure and
disruptions, such as large scale outages or interruptions of
service from utilities or telecommunications providers;
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difficulties in staffing international operations;
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heightened risk of terrorism;
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local business and cultural factors that differ from our normal
standards and practices;
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differing employment practices and labor issues;
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regional health issues (e.g., SARS) and natural disasters; and
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work stoppages.
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We
outsource our wafer fabrication, assembly, testing, warehousing
and shipping operations to third parties, and rely on these
parties to produce and deliver our products according to
requested demands in specification, quantity, cost and
time.
We rely on third parties for substantially all of our
manufacturing operations, including wafer fabrication, assembly,
testing, warehousing and shipping. We depend on these parties to
supply us with material of a requested quantity in a timely
manner that meets our standards for yield, cost and
manufacturing quality. We do not have any long-term supply
agreements with our manufacturing suppliers. Any problems with
our manufacturing supply chain could adversely impact our
ability to ship our products to our customers on time and in the
quantity required, which in turn could cause an unanticipated
decline in our sales and possibly damage our customer
relationships.
The fabrication of integrated circuits is a complex and
technically demanding process. Our foundries could, from time to
time, experience manufacturing defects and reduced manufacturing
yields. Changes in manufacturing
20
processes or the inadvertent use of defective or contaminated
materials by our foundries could result in lower than
anticipated manufacturing yields or unacceptable performance.
Many of these problems are difficult to detect at an early stage
of the manufacturing process and may be time consuming and
expensive to correct. Poor yields from our foundries, or
defects, integration issues or other performance problems in our
products could cause us significant customer relations and
business reputation problems, harm our financial results and
result in financial or other damages to our customers. Our
customers could also seek damages from us for their losses. A
product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to
defend.
Our products are manufactured at a limited number of locations.
If we experience manufacturing problems at a particular
location, we would be required to transfer manufacturing to a
backup location or supplier. Converting or transferring
manufacturing from a primary location or supplier to a backup
fabrication facility could be expensive and could take one to
two quarters. During such a transition, we would be required to
meet customer demand from our then-existing inventory, as well
as any partially finished goods that can be modified to the
required product specifications. We do not seek to maintain
sufficient inventory to address a lengthy transition period
because we believe it is uneconomical to keep more than minimal
inventory on hand. As a result, we may not be able to meet
customer needs during such a transition, which could delay
shipments, cause a production delay or stoppage for our
customers, result in a decline in our sales and damage our
customer relationships. In addition, we have no long-term supply
contracts with the foundries that we work with. Availability of
foundry capacity has in the recent past been reduced due to
strong demand. The ability of each foundry to provide us with
semiconductor devices is limited by its available capacity and
existing obligations. Foundry capacity may not be available when
we need it or at reasonable prices which could cause us to be
unable to meet customer needs, delay shipments, because a
production delay or stoppage for our customers, result in a
decline in our sales and harm our financial results.
In addition, a significant portion of our sales are to customers
that practice
just-in-time
order management from their suppliers, which gives us a very
limited amount of time in which to process and complete these
orders. As a result, delays in our production or shipping by the
parties to whom we outsource these functions could reduce our
sales, damage our customer relationships and damage our
reputation in the marketplace, any of which could harm our
business, results of operations and financial condition.
Any
increase in the manufacturing cost of our products could reduce
our gross margins and operating profit.
The semiconductor business exhibits ongoing competitive pricing
pressure from customers and competitors. Accordingly, any
increase in the cost of our products, whether by adverse
purchase price variances or adverse manufacturing cost
variances, will reduce our gross margins and operating profit.
We do not have any long-term supply agreements with our
manufacturing suppliers and we typically negotiate pricing on a
purchase order by purchase order basis. Consequently, we may not
be able to obtain price reductions or anticipate or prevent
future price increases from our suppliers.
Some of our competitors may be better financed than we are, may
have long-term agreements with our main foundries and may induce
our foundries to reallocate capacity to those customers. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use several independent
foundries to manufacture substantially all of our semiconductor
products, most of our components are not manufactured at more
than one foundry at any given time, and our products typically
are designed to be manufactured in a specific process at only
one of these foundries. Accordingly, if one of our foundries is
unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. We cannot assure you that any of our existing
or new foundries will be able to produce integrated circuits
with acceptable manufacturing yields, or that our foundries will
be able to deliver enough semiconductor devices to us on a
timely basis, or at reasonable prices. These and other related
factors could impair our ability to meet our customers
needs and have a material and adverse effect on our operating
results.
In order to secure sufficient foundry capacity when demand is
high and mitigate the risks described in the foregoing
paragraph, we may enter into various arrangements with suppliers
that could be costly and harm our operating results, such as
nonrefundable deposits with or loans to foundries in exchange
for capacity commitments and contracts that commit us to
purchase specified quantities of integrated circuits over
extended periods. We may not be able to make any such
arrangement in a timely fashion or at all, and any arrangements
may be costly, reduce
21
our financial flexibility, and not be on terms favorable to us.
Moreover, if we are able to secure foundry capacity, we may be
obligated to use all of that capacity or incur penalties. These
penalties may be expensive and could harm our financial results.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. Any
inability to provide reliable financial reports or prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires
management and our independent registered public accounting firm
to evaluate and assess the effectiveness of our internal control
over financial reporting. These Sarbanes-Oxley Act requirements
may be modified, supplemented or amended from time to time.
Implementing these changes may take a significant amount of time
and may require specific compliance training of our personnel.
In the future, we may discover areas of our internal controls
that need improvement. If our independent registered public
accounting firm or we discover a material weakness, the
disclosure of that fact, even if quickly remedied, could reduce
the markets confidence in our financial statements and
harm our stock price. We may not be able to effectively and
timely implement necessary control changes and employee training
to ensure continued compliance with the Sarbanes-Oxley Act and
other regulatory and reporting requirements. Our rapid growth in
recent years and our possible future expansion through
acquisitions, present challenges to maintain the internal
control and disclosure control standards applicable to public
companies. If we fail to maintain effective internal controls,
we could be subject to regulatory scrutiny and sanctions and
investors could lose confidence in the accuracy and completeness
of our financial reports.
Our
acquisition strategy may result in unanticipated accounting
charges or otherwise adversely affect our results of operations,
and result in difficulties in assimilating and integrating the
operations, personnel, technologies and products of acquired
companies or businesses, or be dilutive to existing
shareholders.
In May 2008, we acquired certain assets of Parallogic
Corporation, in August 2008 we acquired substantially all of the
assets of Star Semiconductor Corporation, in December 2008, we
acquired W&W Communications, Inc., in December 2009 we
acquired MontaVista Software, Inc. and we may in the future
acquire companies or assets of companies that we believe to be
complementary to our business, including for the purpose of
expanding our new product design capacity, introducing new
design, market or application skills or enhancing and expanding
our existing product lines. In connection with any such future
acquisitions, we may need to use a significant portion of our
available cash, issue additional equity securities that would
dilute current stockholders percentage ownership and incur
substantial debt or contingent liabilities. Such actions could
adversely impact our operating results and the market price of
our common stock. In addition, difficulties may occur in
assimilating and integrating the operations, personnel,
technologies, and products of acquired companies or businesses.
In addition, key personnel of an acquired company may decide not
to work for us. Moreover, to the extent we acquire a company
with existing products; those products may have lower gross
margins than our customary products, which could adversely
affect our gross margin and operating results. If an acquired
company also has inventory that we assume, we will be required
to write up the carrying value of that inventory to fair value.
When that inventory is sold, the gross margins for those
products are reduced and our gross margins for that period are
negatively affected. Furthermore, the purchase price of any
acquired businesses may exceed the current fair values of the
net tangible assets of such acquired businesses. As a result, we
would be required to record material amounts of goodwill, and
acquired in-process research and development charges and other
intangible assets, which could result in significant impairment
and acquired in-process research and development charges and
amortization expense in future periods. These charges, in
addition to the results of operations of such acquired
businesses and potential restructuring costs associated with an
acquisition, could have a material adverse effect on our
business, financial condition and results of operations. We
cannot forecast the number, timing or size of future
acquisitions, or the effect that any such acquisitions might
have on our operating or financial results.
We
rely on third-party technologies for the development of our
products and our inability to use such technologies in the
future would harm our ability to remain
competitive.
We rely on third parties for technologies that are integrated
into our products, such as wafer fabrication and assembly and
test technologies used by our contract manufacturers, as well as
licensed MIPS and ARM architecture
22
technologies. If we are unable to continue to use or license
these technologies on reasonable terms, or if these technologies
fail to operate properly, we may not be able to secure
alternatives in a timely manner and our ability to remain
competitive would be harmed. In addition, if we are unable to
successfully license technology from third parties to develop
future products, we may not be able to develop such products in
a timely manner or at all.
Our
failure to protect our intellectual property rights adequately
could impair our ability to compete effectively or to defend
ourselves from litigation, which could harm our business,
financial condition and results of operations.
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as confidentiality and nondisclosure
agreements and other methods, to protect our proprietary
technologies and know-how. We have been issued 21 patents in the
United States and four patents in foreign countries and have an
additional 24 patent applications pending in the United States
and 18 patent applications pending in foreign countries. Even if
the pending patent applications are granted, the rights granted
to us may not be meaningful or provide us with any commercial
advantage. For example, these patents could be opposed,
contested, circumvented or designed around by our competitors or
be declared invalid or unenforceable in judicial or
administrative proceedings. The failure of our patents to
adequately protect our technology might make it easier for our
competitors to offer similar products or technologies. Our
foreign patent protection is generally not as comprehensive as
our U.S. patent protection and may not protect our
intellectual property in some countries where our products are
sold or may be sold in the future. Many
U.S.-based
companies have encountered substantial intellectual property
infringement in foreign countries, including countries where we
sell products. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available.
Monitoring unauthorized use of our intellectual property is
difficult and costly. Although we are not aware of any
unauthorized use of our intellectual property in the past, it is
possible that unauthorized use of our intellectual property may
have occurred or may occur without our knowledge. We cannot
assure you that the steps we have taken will prevent
unauthorized use of our intellectual property.
Our failure to effectively protect our intellectual property
could reduce the value of our technology in licensing
arrangements or in cross-licensing negotiations, and could harm
our business, results of operations and financial condition. We
may in the future need to initiate infringement claims or
litigation. Litigation, whether we are a plaintiff or a
defendant, can be expensive, time consuming and may divert the
efforts of our technical staff and managerial personnel, which
could harm our business, whether or not such litigation results
in a determination favorable to us.
Some of the software used with our products, as well as that of
some of our customers, may be derived from so called open
source software that is generally made available to the
public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License,
which impose certain obligations on us in the event we were to
make available derivative works of the open source software.
These obligations may require us to make source code for the
derivative works available to the public,
and/or
license such derivative works under a particular type of
license, rather than the forms of license customarily used to
protect our intellectual property. In addition, there is little
or no legal precedent for interpreting the terms of certain of
these open source licenses, including the determination of which
works are subject to the terms of such licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software, in the event the
copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work.
Assertions
by third parties of infringement by us of their intellectual
property rights could result in significant costs and cause our
operating results to suffer.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights and
positions, which has resulted in protracted and expensive
litigation for many companies. We expect that in the future we
may receive communications from various industry participants
alleging our infringement of their patents, trade secrets or
other intellectual property rights. Any lawsuits resulting from
such allegations could subject
23
us to significant liability for damages and invalidate our
proprietary rights. Any potential intellectual property
litigation also could force us to do one or more of the
following:
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stop selling products or using technology that contain the
allegedly infringing intellectual property;
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lose the opportunity to license our technology to others or to
collect royalty payments based upon successful protection and
assertion of our intellectual property against others; incur
significant legal expenses;
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pay substantial damages to the party whose intellectual property
rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing
intellectual property; or
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attempt to obtain a license to the relevant intellectual
property from third parties, which may not be available on
reasonable terms or at all.
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Any significant impairment of our intellectual property rights
from any litigation we face could harm our business and our
ability to compete.
Our customers could also become the target of litigation
relating to the patent and other intellectual property rights of
others. This could trigger technical support and indemnification
obligations in some of our licenses or customer agreements.
These obligations could result in substantial expenses,
including the payment by us of costs and damages relating to
claims of intellectual property infringement. In addition to the
time and expense required for us to provide support or
indemnification to our customers, any such litigation could
disrupt the businesses of our customers, which in turn could
hurt our relationships with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for
indemnification will not be made or that if made, such claims
would not have a material adverse effect on our business,
operating results or financial conditions.
Our
third-party contractors are concentrated primarily in Asia, an
area subject to earthquake and other risks. Any disruption to
the operations of these contractors could cause significant
delays in the production or shipment of our
products.
Substantially all of our products are manufactured by
third-party contractors located in Taiwan and to a lesser extent
manufactured by third party contractors located in Japan,
Malaysia and Korea. The risk of an earthquake in any of those
countries or elsewhere in Asia is significant due to the
proximity of major earthquake fault lines to the facilities of
our foundries and assembly and test subcontractors. For example,
several major earthquakes have occurred in Taiwan and Japan
since our incorporation in 2000. Although our third-party
contractors did not suffer any significant damage as a result of
these most recent earthquakes, the occurrence of additional
earthquakes or other natural disasters could result in the
disruption of our foundry or assembly and test capacity. Any
disruption resulting from such events could cause significant
delays in the production or shipment of our products until we
are able to shift our manufacturing, assembling or testing from
the affected contractor to another third-party vendor. We may
not be able to obtain alternate capacity on favorable terms, if
at all.
We may
experience difficulties in transitioning to new wafer
fabrication process technologies or in achieving higher levels
of design integration, which may result in reduced manufacturing
yields, delays in product deliveries and increased
expenses.
In order to remain competitive, we expect to continue to
transition our semiconductor products to increasingly smaller
line width geometries. This transition requires us to modify our
designs to work with the manufacturing processes of our
foundries. We periodically evaluate the benefits, on a
product-by-product
basis, of migrating to new process technologies to reduce cost
and improve performance. We may face difficulties, delays and
expenses as we continue to transition our products to new
processes. We are dependent on our relationships with our
foundry contractors to transition to new processes successfully.
We cannot assure you that the foundries that we use will be able
to effectively manage the transition or that we will be able to
maintain our existing foundry relationships or develop new ones.
If any of our foundry contractors or we experience significant
delays in this transition or fail to efficiently implement this
transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of
which could harm our relationships with our customers and our
results of operations. As new processes become more prevalent,
we expect to continue to integrate greater levels of
24
functionality, as well as customer and third-party intellectual
property, into our products. However, we may not be able to
achieve higher levels of design integration or deliver new
integrated products on a timely basis.
Our
investment portfolio may become impaired by further
deterioration of the capital markets.
Our cash equivalents at December 31, 2009 consisted
primarily of an investment in a money market fund, which is
invested primarily in United States treasury securities, bonds
of government agencies, and corporate bonds. We follow an
established investment policy and set of guidelines to monitor,
manage and limit our exposure to interest rate and credit risk.
The policy sets forth credit quality standards and limits our
exposure to any one issuer, as well as our maximum exposure to
various asset classes.
As a result of current adverse financial market conditions,
investments in some financial instruments, such as structured
investment vehicles, sub-prime mortgage-backed securities and
collateralized debt obligations, may pose risks arising from
liquidity and credit concerns. As of December 31, 2009, we
had no direct holdings in these categories of investments and
our indirect exposure to these financial instruments through our
holdings in money market instruments was immaterial. As of
December 31, 2009, we had no impairment charge associated
with our cash equivalents relating to such adverse financial
market conditions. Although we believe our current investment
portfolio has very little risk of impairment, we cannot predict
future market conditions or market liquidity and can provide no
assurance that our investment portfolio will remain unimpaired.
We may
need to raise additional capital, which might not be available
or which, if available, may be on terms that are not favorable
to use.
We believe our existing cash balances and cash expected to be
generated from our operations will be sufficient to meet our
working capital, capital expenditures and other needs for at
least the next 12 months. In the future, we may need to
raise additional funds, and we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at
all. If we issue equity securities to raise additional funds,
the ownership percentage of our stockholders would be reduced,
and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common
stock. If we borrow money, we may incur significant interest
charges, which could harm our profitability. Holders of debt
would also have rights, preferences or privileges senior to
those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to
develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or
unanticipated requirements, which could harm our business,
operating results and financial condition.
Our
future effective tax rates could be affected by the allocation
of our income among different geographic regions, which could
affect our future operating results, financial condition and
cash flows.
We may further expand our international operations and staff to
better support our international markets. As a result, we
anticipate that our consolidated pre-tax income will be subject
to foreign tax at relatively lower tax rates when compared to
the United States federal statutory tax rate and, as a
consequence, our effective income tax rate is expected to be
lower than the United States federal statutory rate. Our future
effective income tax rates could be adversely affected if tax
authorities challenge our international tax structure or if the
relative mix of United States and international income changes
for any reason, or US tax laws were to change in the future.
Accordingly, there can be no assurance that our income tax rate
will be less than the United States federal statutory rate.
We may
incur impairments to goodwill or long-lived
assets.
We review our long-lived assets, including goodwill and other
intangible assets, for impairment annually in the fourth quarter
or whenever events or changes in circumstances indicate that the
carrying amount of these assets may not be recoverable.
Significant negative industry or economic trends, including a
significant decline in the market price of our common stock,
reduced estimates of future cash flows for our reporting units
or disruptions to our business could lead to an impairment
charge of our long-lived assets, including goodwill and other
intangible assets.
Our valuation methodology for assessing impairment requires
management to make judgments and assumptions based on historical
experience and to rely heavily on projections of future
operating performance. We operate in highly competitive
environments and projections of future operating results and
cash flows may vary
25
significantly from results. Additionally, if our analysis
results in an impairment to our goodwill, we may be required to
record a charge to earnings in our financial statements during a
period in which such impairment is determined to exist, which
may negatively impact our results of operations.
Risks
Related to our Common Stock
The
market price of our common stock may be volatile, which could
cause the value of your investment to decline.
The trading prices of the securities of technology companies
have been highly volatile. Further, our common stock has a
limited trading history. Since our initial public offering in
May 2007 through December 31, 2009, our stock price has
fluctuated from a low of $7.61 to a high of $35.60. We cannot
predict the extent to which the trading market will continue to
develop or how liquid the market may become. The trading price
of our common stock is therefore likely to be highly volatile
and could be subject to wide fluctuations in price in response
to various factors, some of which are beyond our control. These
factors include:
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|
|
|
|
quarterly variations in our results of operations or those of
our competitors;
|
|
|
|
general economic conditions and slow or negative growth of
related markets;
|
|
|
|
announcements by us or our competitors of design wins,
acquisitions, new products, significant contracts, commercial
relationships or capital commitments;
|
|
|
|
our ability to develop and market new and enhanced products on a
timely basis;
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|
|
commencement of, or our involvement in, litigation;
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|
|
|
disruption to our operations;
|
|
|
|
the emergence of new sales channels in which we are unable to
compete effectively;
|
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|
|
any major change in our board of directors or management;
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|
|
changes in financial estimates including our ability to meet our
future revenue and operating profit or loss projections;
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changes in governmental regulations; and
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|
changes in earnings estimates or recommendations by securities
analysts.
|
Furthermore, the stock market in general, and the market for
semiconductor and other technology companies in particular, have
experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. These broad market and industry factors may
seriously harm the market price of our common stock, regardless
of our actual operating performance. These trading price
fluctuations may also make it more difficult for us to use our
common stock as a means to make acquisitions or to use options
to purchase our common stock to attract and retain employees. In
addition, in the past, following periods of volatility in the
overall market and the market price of a companys
securities, securities class action litigation has often been
instituted against these companies. This litigation, if
instituted against us, could result in substantial costs and a
diversion of our managements attention and resources.
Future
sales of our common stock in the public market could cause our
stock price to fall.
Sales of a substantial number of shares of our common stock in
the public market, or the perception that these sales might
occur, could depress the market price of our common stock and
could impair our ability to raise capital through the sale of
additional equity securities. As of December 31, 2009, we
had 43,507,161 shares of common stock outstanding, all of
which shares were eligible for sale in the public market,
subject in some cases to the volume limitations and manner of
sale requirements under Rule 144.
In addition, we have filed registration statements on
Form S-8
under the Securities Act of 1933, as amended, to register the
shares of our common stock reserved for issuance under our stock
option plans, and intend to file additional registration
statements on
Form S-8
to register the shares automatically added each year to the
share reserves under these plans.
26
Pursuant to the terms of a Registration Rights Agreement dated
December 14, 2009 we entered into with the selling
stockholders, we have filed a registration statement under the
Securities Act, registering the resale of the
1,467,612 shares of common stock we issued to the selling
stockholders pursuant to that certain Agreement and Plan of
Merger and Reorganization, dated November 6, 2009, among
Cavium Networks, MV Acquisition Corporation, a Delaware
corporation and wholly owned subsidiary of Cavium Networks,
Mantra, LLC, a Delaware limited liability company and wholly
owned subsidiary of Cavium Networks, MontaVista Software, Inc.,
a Delaware corporation and with respect to sections 9 and
10.1 of the Merger Agreement, Thomas Kelly as the MontaVista
stockholders agent.
A
limited number of stockholders may have the ability to influence
the outcome of director elections and other matters requiring
stockholder approval.
Our directors, executive officers and principal stockholders and
their affiliates beneficially owned approximately 17.4% of our
outstanding common stock as of December 31, 2009. These
stockholders, if they acted together, could exert substantial
influence over matters requiring approval by our stockholders,
including electing directors, adopting new compensation plans
and approving mergers, acquisitions or other business
combination transactions. This concentration of ownership may
discourage, delay or prevent a change of control of our company,
which could deprive our stockholders of an opportunity to
receive a premium for their stock as part of a sale of our
company and might reduce our stock price. These actions may be
taken even if they are opposed by our other stockholders.
Delaware
law and our amended and restated certificate of incorporation
and bylaws contain provisions that could delay or discourage
takeover attempts that stockholders may consider
favorable.
Provisions in our amended and restated certificate of
incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management.
These provisions include the following:
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|
|
the division of our board of directors into three classes;
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|
|
the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors or
due to the resignation or departure of an existing board member;
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|
|
the prohibition of cumulative voting in the election of
directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
|
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|
|
the requirement for the advance notice of nominations for
election to the board of directors or for proposing matters that
can be acted upon at a stockholders meeting;
|
|
|
|
the ability of our board of directors to alter our bylaws
without obtaining stockholder approval;
|
|
|
|
the ability of the board of directors to issue, without
stockholder approval, up to 10,000,000 shares of preferred
stock with terms set by the board of directors, which rights
could be senior to those of our common stock;
|
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|
|
the elimination of the rights of stockholders to call a special
meeting of stockholders and to take action by written consent in
lieu of a meeting;
|
|
|
|
the required approval of at least
662/3%
of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or repeal the provisions of
our amended and restated certificate of incorporation regarding
the election and removal of directors and the inability of
stockholders to take action by written consent in lieu of a
meeting; and
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|
|
|
the required approval of at least a majority of the shares
entitled to vote at an election of directors to remove directors
without cause.
|
In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These provisions in our amended and restated certificate of
incorporation and bylaws and under Delaware law could discourage
potential takeover attempts, could reduce the price that
investors are willing to pay for shares of our common stock in
the future and could potentially result in the market price
being lower than they would without these provisions.
27
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Our principal executive offices are located in a leased facility
in Mountain View, California, consisting of approximately
32,500 square feet of office space under lease that expires
at the end of August 2011. This facility accommodates our
principal software engineering, sales, marketing, operations and
finance and administrative activities. In connection with our
acquisition of MontaVista, we assumed MontaVistas lease of
office space in Sunnyvale, California consisting of
approximately 82,000 square feet that expires in January
2013. In connection with our acquisition of W&W, we assumed
W&Ws lease of office space in Sunnyvale, California
consisting of approximately 10,553 square feet that expires
in January 2011. We also occupy space in Marlborough,
Massachusetts, consisting of approximately 74,735 square
feet of office space under a lease that expires at the end of
April 2013, which accommodates our product design team.
Internationally, we also lease offices in Hyderabad, Chennai and
Bangalore, India, consisting of approximately 14,286 square
feet that expires at the end of May 2013, which accommodates our
product design team. In addition, we lease office spaces that
are not considered principal offices in Beijing, China,
Hsin-Chu, Taiwan and Madrid, Spain which accommodates our
product design teams. We do not own any real property. We
believe that our leased facilities are adequate to meet our
current needs and that additional facilities are available for
lease to meet future needs.
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Item 3.
|
Legal
Proceedings
|
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. As of the date
of this Annual Report on
Form 10-K,
we are not currently a party to any legal proceedings the
outcome of which, if determined adversely to us, would
individually or in the aggregate have a material adverse effect
on our business, operating results, financial condition or cash
flows.
Part II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information for Common Stock
Our common stock has been quoted on The NASDAQ Global Market
under the symbol CAVM since our initial public
offering on May 2, 2007. Prior to that time, there was no
public market for our common stock. As of February 22,
2010, there were approximately 157 holders of record of our
common stock.
The following table sets forth for the indicated periods the
high and low sales prices of our common stock as reported by The
NASDAQ Global Market.
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High
|
|
Low
|
|
First Quarter 2009
|
|
$
|
12.44
|
|
|
$
|
7.61
|
|
Second Quarter 2009
|
|
$
|
17.53
|
|
|
$
|
11.40
|
|
Third Quarter 2009
|
|
$
|
22.03
|
|
|
$
|
16.13
|
|
Fourth Quarter 2009
|
|
$
|
24.41
|
|
|
$
|
18.52
|
|
First Quarter 2008
|
|
$
|
23.20
|
|
|
$
|
14.22
|
|
Second Quarter 2008
|
|
$
|
26.10
|
|
|
$
|
16.32
|
|
Third Quarter 2008
|
|
$
|
20.71
|
|
|
$
|
12.33
|
|
Fourth Quarter 2008
|
|
$
|
14.42
|
|
|
$
|
8.88
|
|
28
Dividend
Policy
We have never paid any cash dividends on our common stock. Our
board of directors currently intends to retain any future
earnings to support operations and to finance the growth and
development of our business and does not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to our dividend policy will be made
at the discretion of our board.
Stock
Performance Graph(1)
The graph set forth below shows a comparison of the cumulative
total stockholder return on our common stock between May 2,
2007 (the date of our initial public offering) and
December 31, 2009, with the cumulative total return of
(i) the NASDAQ Computer Index and (ii) the NASDAQ
Composite Index, over the same period. This graph assumes the
investment of $100,000 on May 2, 2007 in our common stock,
the NASDAQ Computer Index and the NASDAQ Composite Index, and
assumes the reinvestment of dividends, if any. The graph assumes
the value of our common stock on May 2, 2007 was the
closing sales price of $16.45 per share. The stockholder return
shown in the graph below is not necessarily indicative of, nor
is it intended to forecast, the potential future performance of
our common stock, and we do not make or endorse any predictions
as to future stockholder returns. Information used in the graph
was obtained from Yahoo, Inc., a source believed to be reliable,
but we are not responsible for any errors or omissions in such
information.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/2/2007
|
|
|
12/31/2007
|
|
|
12/31/2008
|
|
|
12/31/2009
|
Cavium Networks
|
|
|
|
100.0
|
|
|
|
|
139.9
|
|
|
|
|
63.9
|
|
|
|
|
144.9
|
|
Nasdaq Composite Index
|
|
|
|
100.0
|
|
|
|
|
103.7
|
|
|
|
|
61.7
|
|
|
|
|
88.7
|
|
Nasdaq Computer Index
|
|
|
|
100.0
|
|
|
|
|
115.8
|
|
|
|
|
61.8
|
|
|
|
|
105.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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(1) |
|
This Section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934 Act, as amended, whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing. |
Recent
Sales of Unregistered Securities
|
|
(a)
|
Sales of
Unregistered Securities
|
On December 14, 2009, in connection with our acquisition of
MontaVista, we issued an aggregate of 1,592,193 shares of
our common stock to certain MontaVista stockholders and
34,626 shares of our common stock
29
to certain participants in connection with the termination of
MontaVistas 2006 Retention Compensation Plan. No cash was
paid to us for such issuance of our common stock. The shares of
common stock were offered and sold in reliance on an exemption
from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended.
|
|
(b)
|
Use of
Proceeds from Public Offering of Common Stock
|
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File
No. 333-140660),
that was declared effective by the SEC on May 1, 2007. We
registered 7,762,500 shares of our common stock with a
proposed maximum aggregate offering price of
$104.8 million, all of which we sold. The offering was
completed after the sale of all 7,762,500 shares. Morgan
Stanley & Co. Incorporated and Lehman Brothers Inc.
were the joint book-running managing underwriters of our initial
public offering and Thomas Weisel Partners LLC,
Needham & Company, LLC and JMP Securities LLC acted as
co-managers. As of December 31, 2009, $55.0 million of
the approximately $94.7 million in net proceeds received by
us in the offering, after deducting approximately
$7.3 million in underwriting discounts, commissions, and
$2.8 million in other offering costs, were invested in
various interest-bearing instruments, and $39.7 million of
the net proceeds had been used for acquisitions, general
corporate purposes, including the repayment of the outstanding
balances under the term loan with Silicon Valley Bank, and
general and administrative and manufacturing expenses. None of
the expenses or payments was paid, directly or indirectly, to
directors, officers or persons owning 10% or more of our common
stock, or to our affiliates other than payments in the ordinary
course of business to officers for salaries and to non-employee
directors as compensation for board or board committee service.
|
|
(c)
|
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
None
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements and related notes thereto and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations section and other
financial information included elsewhere in this Annual Report
on
Form 10-K.
The consolidated statements of operations data for each of the
years ended December 31, 2009, 2008 and 2007, and the
summary consolidated balance sheet data as of December 31,
2009 and 2008, are derived from our audited consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2006 and 2005, and the summary
consolidated balance sheet data as of December 31, 2007,
2006 and 2005, are derived from audited consolidated financial
statements which are not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of the
results to be expected in any future period.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
101,214
|
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
Cost of revenue(1)(2)
|
|
|
51,112
|
|
|
|
35,639
|
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
7,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,102
|
|
|
|
50,970
|
|
|
|
34,305
|
|
|
|
21,113
|
|
|
|
11,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
42,682
|
|
|
|
27,180
|
|
|
|
19,548
|
|
|
|
18,651
|
|
|
|
16,005
|
|
Sales, general and administrative(2)
|
|
|
28,651
|
|
|
|
22,111
|
|
|
|
14,688
|
|
|
|
10,058
|
|
|
|
6,840
|
|
In-process research and development
|
|
|
|
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
71,333
|
|
|
|
50,610
|
|
|
|
34,236
|
|
|
|
28,709
|
|
|
|
22,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(21,231
|
)
|
|
|
360
|
|
|
|
69
|
|
|
|
(7,596
|
)
|
|
|
(11,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except per share data)
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(244
|
)
|
|
|
(499
|
)
|
|
|
(622
|
)
|
|
|
(707
|
)
|
|
|
(183
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
(411
|
)
|
Interest income and other
|
|
|
330
|
|
|
|
2,576
|
|
|
|
3,458
|
|
|
|
345
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
86
|
|
|
|
2,077
|
|
|
|
2,263
|
|
|
|
(829
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense and cumulative effect of
change in accounting principle
|
|
|
(21,145
|
)
|
|
|
2,437
|
|
|
|
2,332
|
|
|
|
(8,425
|
)
|
|
|
(11,572
|
)
|
Income tax expense
|
|
|
249
|
|
|
|
930
|
|
|
|
142
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
(21,394
|
)
|
|
|
1,507
|
|
|
|
2,190
|
|
|
|
(8,985
|
)
|
|
|
(11,572
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,394
|
)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
(0.52
|
)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
Shares used in computing basic net income (loss) per common share
|
|
|
41,435
|
|
|
|
40,385
|
|
|
|
29,006
|
|
|
|
8,066
|
|
|
|
7,319
|
|
Net income (loss) per common share, diluted
|
|
$
|
(0.52
|
)
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
41,435
|
|
|
|
42,566
|
|
|
|
32,432
|
|
|
|
8,066
|
|
|
|
7,319
|
|
|
|
|
(1) |
|
Includes acquired intangible asset amortization of $5,381,
$1,737, $860, $1,116, and $1,007, in the years ended
December 31, 2009, 2008, 2007, 2006, and 2005, respectively. |
|
(2) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009(3)
|
|
2008(3)
|
|
2007(3)
|
|
2006(3)
|
|
2005
|
|
|
(In thousands)
|
|
Cost of revenue
|
|
$
|
373
|
|
|
$
|
179
|
|
|
$
|
43
|
|
|
$
|
9
|
|
|
$
|
|
|
Research and development
|
|
|
5,574
|
|
|
|
2,684
|
|
|
|
805
|
|
|
|
396
|
|
|
|
10
|
|
Sales, general and administrative
|
|
|
5,780
|
|
|
|
3,194
|
|
|
|
1,021
|
|
|
|
340
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
11,727
|
|
|
$
|
6,057
|
|
|
$
|
1,869
|
|
|
$
|
745
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
We applied the accounting guidance requiring the recognition of
stock-based compensation expense beginning in the year ended
2006. |
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
|
(In thousands)
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,918
|
|
|
$
|
77,027
|
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
|
$
|
7,879
|
|
Working capital
|
|
|
65,897
|
|
|
|
90,335
|
|
|
|
105,048
|
|
|
|
11,689
|
|
|
|
6,160
|
|
Total assets
|
|
|
199,795
|
|
|
|
151,164
|
|
|
|
134,610
|
|
|
|
29,962
|
|
|
|
20,219
|
|
Preferred stock warrant liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
1,184
|
|
Capital lease and technology license obligations
|
|
|
9,012
|
|
|
|
4,735
|
|
|
|
8,530
|
|
|
|
7,580
|
|
|
|
3,087
|
|
Other non-current liabilities
|
|
|
2,569
|
|
|
|
1,162
|
|
|
|
|
|
|
|
39
|
|
|
|
74
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,437
|
|
|
|
61,820
|
|
Common stock and additional paid-in capital
|
|
|
234,990
|
|
|
|
185,784
|
|
|
|
175,580
|
|
|
|
3,740
|
|
|
|
1,261
|
|
Total stockholders equity (deficit)
|
|
$
|
156,373
|
|
|
$
|
128,561
|
|
|
$
|
116,850
|
|
|
$
|
(57,180
|
)
|
|
$
|
(50,674
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the Consolidated Financial Statements and the related notes that
appear elsewhere in the document.
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Forward-looking statements are based
on our managements beliefs and assumptions and on
information currently available to our management. In some
cases, you can identify forward-looking statements by terms such
as may, will, should,
could, would, estimate,
project, predict, potential,
continue, strategy, believe,
anticipate, plan, expect,
intend and similar expression intended to identify
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors, which may cause
our actual results, performance, time frames or achievements to
be materially difference from any future results, performance,
time frames or achievements expressed or implied by the
forward-looking statements. We discuss many of these risks,
uncertainties and other factors in this Annual Report on
Form 10-K
in greater detail under the heading Risk Factors.
Given these risks, uncertainties and other factors, you should
not place undue reliance on these forward-looking statements.
Also, these forward-looking statements represent our estimates
and assumptions only as of the date of this filing. You should
read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
Octoen®,
Octoen
Plus®,
Octoen
II®,
Nitrox®
and Pure
VuTM
are trademarks or registered trademarks of Cavium Networks, Inc.
Overview
We are a provider of highly integrated semiconductor processors
that enable intelligent processing for networking,
communications, storage, wireless, security, video and connected
home and office applications. We refer to our products as
enabling intelligent processing because they allow customers to
develop networking, wireless, storage and electronic equipment
that is application-aware and content-aware and securely
processes voice, video and data traffic at high speeds. Our
products also include a rich suite of embedded security
protocols that enable unified threat management, or UTM, secure
connectivity, network perimeter protection, Deep Packet
Inspection or DPI, network virtualization, broadband gateways,
3G/4G wireless infrastructure, storage systems, wireless HDMI
cable replacement and embedded video applications. Our products
are systems on a chip, or SoCs, which incorporate single or
multiple processor cores, a highly integrated architecture and
customizable software
32
that is based on a broad range of standard operating systems. As
a result, our products offer high levels of performance and
processing intelligence while reducing product development
cycles for our customers and lowering power consumption for end
market equipment. We focus our resources on the design, sales
and marketing of our products, and outsource the manufacturing
of our products.
From our incorporation in 2000 through 2003, we were primarily
engaged in the design and development of our first processor
family, NITROX, which we began shipping commercially in 2003. In
2004, we introduced and commenced commercial shipments of NITROX
Soho. In 2006, we commenced our first commercial shipments of
our OCTEON family of multi-core
MIPS64®
processors. We introduced a number of new products within all
three of these product families in 2006. In 2007 we introduced
our new line of OCTEON based storage services processors
designed to address the specific needs in the storage market, as
well as other new products in the OCTEON and NITROX families. In
2008, we expanded our OCTEON and NITROX product families with
new products including wireless services processors to address
the needs for wireless infrastructure equipment. In 2009, we
announced the next generation OCTEON II Internet Application
Processor (IAP) family multi-core
MIPS64®
processors, with one to 32 cores to address next generation
networking applications support converged voice, video, data
mobile traffic and services. In addition, in 2009, we expanded
our NITROX product family offering to include the NITROX DPI
processor, which facilitates several significant enhancements
and increased performance.
In the third quarter of 2008, we acquired substantially all of
the assets of Star for a purchase price of approximately
$9.6 million. With the acquisition of Star, we also added
the Star ARM-based processors to our portfolio to address
connected home and office applications and have since introduced
our ECONA line of dual-core ARM processors for that address a
large variety of connected home and office applications.
In the fourth quarter of 2008, we acquired W&W for a total
purchase price of approximately $8.3 million. This
acquisition launched us into the video processor market with a
broad product line called PureVu. The PureVu family of video
processors and modules incorporate proprietary and patent
pending video technology that produces perceptual lossless video
quality and delivers sub-frame latency with extremely low power
and cost. These products address the need for video processing
in wireless displays, teleconferencing, gaming and other
applications.
In the fourth quarter of 2009, we acquired MontaVista for a
total purchase price of approximately $45.2 million. In
addition, per the merger agreement, we paid approximately
$6.0 million, consisting of a mix of shares of our common
stock and cash to certain individuals in connection with the
termination of MontaVistas 2006 Retention Compensation
Plan. This acquisition complements our broad portfolio of
multi-core processors to deliver integrated and optimized
embedded solutions to the market. For a complete discussion on
our 2008 and 2009 acquisitions, see Note 5 Business
Combinations in Item 8, of this Annual Report, which
is incorporated herein by reference.
Since inception, we have invested heavily in new product
development and our net revenue has grown from
$19.4 million in 2005 to $34.2 million in 2006,
$54.2 million in 2007, $86.6 million in 2008, and
$101.2 million in 2009 driven primarily by demand in the
enterprise network and data center markets, and more recently in
2009 the revenue growth was mainly due to increased demand in
the broadband and consumer markets. We expect sales of our
products for use in the enterprise network and data center
markets to continue to represent a significant portion of our
revenue in the foreseeable future, however, we do expect growth
in the broadband and consumer as well as the access and servicer
provider markets.
We primarily sell our products to OEMs, either directly or
through their contract manufacturers. Contract manufacturers
purchase our products only when an OEM incorporates our product
into the OEMs product, not as commercial off-the-shelf
products. Our customers products are complex and require
significant time to define, design and ramp to volume
production. Accordingly, our sales cycle is long. This cycle
begins with our technical marketing, sales and field application
engineers engaging with our customers system designers and
management, which is typically a multi-month process. If we are
successful, a customer will decide to incorporate our product in
its product, which we refer to as a design win. Because the
sales cycles for our products are long, we incur expenses to
develop and sell our products, regardless of whether we achieve
the design win and well in advance of generating revenue, if
any, from those expenditures. We do not have long-term purchase
commitments from any of our customers, as sales of our products
are generally made under individual purchase orders. However,
once one of our products is incorporated into a customers
design, it is likely to remain designed in for the life cycle of
the product.
33
We believe this to be the case because a redesign would
generally be time consuming and expensive. We have experienced
revenue growth due to an increase in the number of our products,
an expansion of our customer base, an increase in the number of
average design wins within any one customer and an increase in
the average revenue per design win.
Key
Business Metrics
Design Wins. We closely monitor design wins by
customer and end market on a periodic basis. We consider design
wins to be a key ingredient in our future success, although the
revenue generated by each design can vary significantly. Our
long-term sales expectations are based on internal forecasts
from specific customer design wins based upon the expected time
to market for end customer products deploying our products and
associated revenue potential.
Pricing and Margins. Pricing and margins
depend on the features of the products we provide to our
customers. In general, products with more complex configurations
and higher performance tend to be priced higher and have higher
gross margins. These configurations tend to be used in high
performance applications that are focused on the enterprise
network, data center, and access and service provider markets.
We tend to experience price decreases over the life cycle of our
products, which can vary by market and application. In general,
we experience less pricing volatility with customers that sell
to the enterprise and data center markets.
Sales Volume. A typical design win can
generate a wide range of sales volumes for our products,
depending on the end market demand for our customers
products. This can depend on several factors, including the
reputation, market penetration, the size of the end market that
the product addresses, and the marketing and sales effectiveness
of our customer. In general, our customers with greater market
penetration and better branding tend to develop products that
generate larger volumes over the product life cycle. In
addition, some markets generate large volumes if the end market
product is adopted by the mass market.
Customer Product Life Cycle. We typically
commence commercial shipments from nine months to three years
following the design win. Once our product is in production,
revenue from a particular customer may continue for several
years. We estimate our customers product life cycles based
on the customer, type of product and end market. In general,
products that go into the enterprise network and data center
take longer to reach volume production but tend to have longer
lives. Products for other markets, such as broadband and
consumer, tend to ramp relatively quickly, but generally have
shorter life cycles. We estimate these life cycles based on our
managements experience with providers of networking
equipment and the semiconductor market as a whole.
Critical
Accounting Policies and Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting
principles, or GAAP. These accounting principles require us to
make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the dates of
the consolidated financial statements, the disclosure of
contingencies as of the dates of the consolidated financial
statements, and the reported amounts of revenue and expenses
during the periods presented. We base our estimates on
historical experience and on various other assumptions 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. If actual results or events
differ materially from those contemplated by us in making these
estimates, our reported financial condition and results of
operations for future periods could be materially affected. See
Risk Factors for certain matters that may affect our
future financial condition or results of operations.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are uncertain at the time the estimate is made, if
different estimates reasonably could have been used, or if the
changes in estimate that are reasonably likely to occur could
materially impact the financial statements. Our management has
discussed the development, selection and disclosure of these
estimates with the Audit Committee of our Board of Directors.
See Note 1 to our audited consolidated financial statements
for a more
34
comprehensive discussion of our significant accounting policies.
We believe the following critical accounting policies reflect
significant judgments and estimates used in the preparation of
our consolidated financial statements:
|
|
|
|
|
revenue recognition;
|
|
|
|
stock-based compensation;
|
|
|
|
inventory valuation;
|
|
|
|
accounting for income taxes;
|
|
|
|
mask costs;
|
|
|
|
business combinations; and
|
|
|
|
goodwill and purchased intangible assets.
|
Revenue
Recognition
We derive our revenue primarily from sales of semiconductor
products. We recognize revenue from product sales when
persuasive evidence of an arrangement exists, delivery has
occurred, the price is deemed fixed or determinable and free of
contingencies and significant uncertainties, and collection is
probable. Our price is considered fixed or determinable at the
execution of an agreement, based on specific products and
quantities to be delivered at specified prices, which is often
memorialized with a customer purchase order. Our agreements with
non-distributor customers do not include rights of return or
acceptance provisions. We assess the ability to collect from our
customers based on a number of factors, including credit
worthiness and any past transaction history of the customers.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if we
conclude we can reasonably estimate the credits for returns and
price adjustments issuable. We record an estimated allowance, at
the time of shipment, based on the historical patterns of
returns and pricing credits of sales recognized upon shipment.
The credits issued to distributors or other customers were not
material in the years ended December 31, 2009, 2008 and
2007.
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if it cannot reasonably estimate the level of returns
and credits issuable.
We also derive a small portion of our revenue in the form of
license, maintenance and support fees through licensing our
software products. The value of any support services is
recognized as services revenue on a straight-line basis over the
term of the related support period, which is typically one year.
In addition, we also enter into development agreements with some
of our customers. Development revenue is recognized under the
proportional performance method, with the associated costs
included in cost of sales. We estimate the proportional
performance of the development contracts based on an analysis of
progress toward completion. We periodically evaluate the actual
status of each project to ensure that the estimates to complete
each contract remain accurate. A provision for estimated losses
on contracts is made in the period in which the loss becomes
probable and can be reasonably estimated. To date, we have not
recorded any such losses. If the amount billed exceeds the
amount of revenue recognized, the excess amount is recorded as
deferred revenue. Revenue recognized in any period is dependent
on our progress toward completion of projects in progress. To
the extent we are unable to estimate the proportional
performance then the revenue is recognized on a completed
contract basis.
Stock-Based
Compensation
We apply the fair value recognition provisions of stock-based
compensation, and accordingly, use the prospective transition
method, which requires us to determine fair value only for
awards granted, modified, repurchased or cancelled after the
adoption date. The share-based compensation expense is measured
at the grant date based on the fair value of the award and is
recognized as compensation expense net of an estimated
forfeiture rate over the vesting period. We use the
Black-Scholes option-pricing model to determine the fair value
of stock options, which require various subjective assumptions,
including expected volatility, expected term and the risk-
35
free interest rates. We estimate the expected volatility based
on the historical stock price volatility of comparable companies
over the estimated expected term of our share-based awards. We
use the simplified method as permitted under the provisions of
stock-based compensation to determine the expected term of our
share-based awards. We calculate the expected forfeiture rate
based on average historical trends. The assumptions used in
calculating the fair value of share-based payment awards
represent managements best estimates and judgment. If
factors change and we use different assumptions, our stock-based
compensation expense could be materially different in the
future. If our actual forfeiture rate is materially different
from our estimate, the stock-based compensation expense could be
significantly different from what we have recorded in the
current period.
Inventory
Valuation
We write down inventory based on aging and forecasted demand.
These factors are impacted by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction and require management to make estimates
that may include uncertain elements. If actual market conditions
or demand for our products are less favorable than those
projected, additional inventory write-downs may be required,
which would negatively affect gross margins in the period when
such write-downs are recorded.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to compute income taxes in each of
the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure, including assessing
the risks associated with tax audits, and assessing temporary
differences resulting from different treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and, to the extent we believe that recovery is
not likely, we must establish a valuation allowance. Significant
judgment is required in determining the valuation allowance
recorded against our deferred tax assets. In assessing the
valuation allowance, we consider all available evidence
including past operating results and estimates of future taxable
income. Our net deferred tax assets relate predominantly to our
United States tax jurisdiction. We currently maintain a full
valuation allowance on our deferred tax assets in the United
States. The valuation allowance was determined in accordance
with the provisions of income taxes, which requires an
assessment of both positive and negative evidence when
determining whether it is more likely than not that deferred tax
assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. Our expected U.S. loss,
among other considerations, provides negative evidence and
accordingly, a full valuation allowance was recorded against our
deferred tax assets. We intend to maintain a full valuation
allowance on our deferred tax assets until sufficient positive
evidence exists to support reversal of the valuation allowance.
If our assumptions and consequently our estimates change in the
future, the valuation allowances we have established may be
increased or decreased, resulting in a respective increase or
decrease in income tax expense.
We believe that our reserve for uncertain tax positions,
including related interest, is adequate. The amounts ultimately
paid upon resolution of audits could be materially different
from the amounts previously included in our income tax expense
and therefore could have a material impact on our tax provision,
net income and cash flows.
In the event that actual results differ from these estimates or
we adjust these estimates in future periods, we may need to
record additional income tax expense or establish an additional
valuation allowance, which could materially impact our financial
position and results of operations. If we determine, based on
future profitability, that these deferred tax assets are more
likely than not to be realized, a release of all, or part, of
the related valuation allowance could result in an immediate
material income tax benefit in the period of release.
Mask
Costs
We incur costs for the fabrication of masks used by our contract
manufacturers to manufacture wafers that incorporate our
products. We capitalize the costs of fabrication masks that are
reasonably expected to be used during production manufacturing.
Such amounts are included within property and equipment and are
generally depreciated over a period of 12 months. If we do
not reasonably expect to use the fabrication mask during
production manufacturing, the related mask costs are expensed to
research and development in the period in which the costs are
incurred.
36
Business
Combinations
We account for business combinations using the purchase method
of accounting. We determine the recognition of intangible assets
based on the following criteria: (i) the intangible asset
arises from contractual or other rights; or (ii) the
intangible is separable or divisible from the acquired entity
and capable of being sold, transferred, licensed, returned or
exchanged. In accordance with the guidance provided under
business combinations, we allocate the purchase price of
business combinations to the tangible assets, liabilities and
intangible assets acquired, including in-process research and
development (IPR&D), based on their estimated
fair values. The excess purchase price over those fair values is
recorded as goodwill. Management makes valuation assumptions
that require significant estimates, especially with respect to
intangible assets. Critical estimates in valuing certain
intangible assets include, but are not limited to future
expected cash flows from customer contracts, customer lists, and
distribution agreements and acquired developed technologies,
expected costs to develop IPR&D into commercially viable
products, estimated cash flows from projects when completed and
discount rates. We estimate fair value based upon assumptions we
believe to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from
estimates. Other estimates associated with the accounting for
acquisitions may change as additional information becomes
available regarding the assets acquired and liabilities assumed.
Goodwill
and Purchased Intangible Assets
Goodwill is measured as the excess of the cost of an acquisition
over the sum of the amounts assigned to tangible and
identifiable intangible assets and liabilities assumed. We
review goodwill and finite-lived purchased intangible assets for
impairment at least annually and whenever changes in events or
changes in circumstances indicate that the carrying value of the
assets may not be fully recoverable. Applying the provisions of
Intangibles Goodwill and Other, we
perform goodwill impairment test at the Company level, which is
the sole reporting unit. If the fair value of the reporting unit
exceeds the carrying value of the reporting unit, goodwill is
not impaired. We did not record any impairment charges relating
to the carrying value of goodwill during the years ended
December 31, 2009 and 2008. In addition to the goodwill
impairment, we also perform impairment of finite-lived
intangibles for the carrying value and the remaining useful
lives of the assets. If the carrying value or the remaining
useful life of the intangible assets is not recoverable, we
record a charge equal to the difference between carrying and
fair value. During the years ended December 31, 2009, 2008
and 2007 we did not record any impairment charges related to the
carrying values of finite lived intangible assets. In the year
ended December 31, 2009, we recorded amortization expense
of approximately $1.3 million related to the reduction of
the estimated remaining useful life of one of the intangible
assets acquired in the acquisition of W&W. Significant
management judgment is required in the forecasts of future
operating results that are used in the evaluation of carrying
value of goodwill and finite-lived intangible assets. If our
actual results, or the plans and estimates used in future
impairment analyses, are lower than the original estimates used
to assess the recoverability of these assets, we could incur
additional impairment charges.
Results
of Operations
Net Revenue. Our net revenue consists
primarily of sales of our semiconductor products to providers of
networking equipment and their contract manufacturers and
distributors. Initial sales of our products for a new design are
usually made directly to providers of networking equipment as
they design and develop their product. Once their design enters
production, they often outsource their manufacturing to contract
manufacturers that purchase our products directly from us or
from our distributors. We price our products based on market and
competitive conditions and periodically reduce the price of our
products, as market and competitive conditions change, and as
manufacturing costs are reduced. We do not experience different
margins on direct sales to providers of networking equipment and
indirect sales through contract manufacturers because in all
cases we negotiate product pricing directly with the providers
of networking equipment. To date, all of our revenue is
denominated in U.S. dollars.
We also derive revenue in the form of license and maintenance
fees through licensing our software products, which help our
customers build products around our SoCs in a more time and cost
efficient manner. Revenue from such arrangements totaled
$2.8 million, $2.2 million and $1.1 million for
the years ended December 31, 2009, 2008 and 2007,
respectively.
37
Our end customers representing greater than 10% of revenue for
each of the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cisco
|
|
|
24
|
%
|
|
|
29
|
%
|
|
|
23
|
%
|
Actiontec
|
|
|
10
|
|
|
|
*
|
|
|
|
*
|
|
F5 Networks
|
|
|
*
|
|
|
|
11
|
|
|
|
18
|
|
Sumitomo
|
|
|
*
|
|
|
|
11
|
|
|
|
*
|
|
|
|
|
* |
|
Represents less than 10% of consolidated net revenue |
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if we cannot reasonably estimate the level of returns
and credits issuable. During the quarter ended June 30,
2007, we signed a distribution agreement with Avnet to
distribute our products primarily in the United States. Given
the terms of the distribution agreement, for sales to Avnet,
revenue and costs are deferred until products are sold by Avnet
to their end customers. For the year ended December 31,
2009, 5.5% of our net revenues were from products sold by Avnet.
For the year ended December 31, 2008, 3.6% of our net
revenues were from products sold by Avnet. For the year ended
December 31, 2007, less than 1% of our net revenues were
from products sold by Avnet. Revenue recognition depends on
notification from Avnet that product has been sold to
Avnets end customers.
Our distributors, other than Avnet, Inc. are used primarily to
support international sale logistics in Asia, including
importation and credit management. Total net revenue through
distributors was $38.6 million, $29.4 million and
$13.2 million for the years ended December 31, 2009,
2008 and 2007, respectively, which accounted for 38.2%, 33.9%,
and 24.4% of net revenue for the years ended December 31,
2009, 2008 and 2007, respectively. While we have purchase
agreements with our distributors, the distributors do not have
long-term contracts with any of the equipment providers. Our
distributor agreements limit the distributors ability to
return product up to a portion of purchases in the preceding
quarter. Given our experience, along with our distributors
limited contractual return rights, we believe we can reasonably
estimate expected returns from our distributors. Accordingly, we
recognize sales through distributors at the time of shipment,
reduced by our estimate of expected returns.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased our products. For sales to our distributors, their
geographic location may be different from the geographic
locations of the ultimate end customers. Sales by geography for
the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
40,623
|
|
|
$
|
44,787
|
|
|
$
|
32,748
|
|
Hong Kong
|
|
|
18,231
|
|
|
|
3,643
|
|
|
|
500
|
|
Taiwan
|
|
|
15,224
|
|
|
|
11,533
|
|
|
|
10,500
|
|
Japan
|
|
|
10,802
|
|
|
|
11,559
|
|
|
|
2,732
|
|
China
|
|
|
5,958
|
|
|
|
6,206
|
|
|
|
3,367
|
|
Other countries
|
|
|
10,376
|
|
|
|
8,881
|
|
|
|
4,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,214
|
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue and Gross Margin. We outsource
wafer fabrication, assembly and test functions of our products.
A significant portion of our cost of revenue consists of
payments for the purchase of wafers and for assembly and test
services, amortization of acquired intangibles and amortization
related to capitalized mask costs. To a lesser extent, cost of
revenue includes expenses relating to our internal operations
that manage our contractors, stock-based compensation, the cost
of shipping and logistics, royalties, inventory valuation
expenses for excess and
38
obsolete inventories, warranty costs and changes in product cost
due to changes in sort, assembly and test yields. In general,
our cost of revenue associated with a particular product
declines over time as a result of yield improvements, primarily
associated with design and test enhancements.
We use third-party foundries and assembly and test contractors,
which are primarily located in Asia, to manufacture, assemble
and test our semiconductor products. We purchase processed
wafers on a per wafer basis from our fabrication suppliers,
which are currently TSMC, UMC, Fujitsu and Samsung. We also
outsource the sort, assembly, final testing and other processing
of our product to third-party contractors, primarily ASE and
ISE. We negotiate wafer fabrication on a purchase order basis
and do not have long-term agreements with any of our third-party
contractors. A significant disruption in the operations of one
or more of these contractors would impact the production of our
products which could have a material adverse effect on our
business, financial condition and results of operations.
Cost of revenue also includes amortized costs related to certain
acquired technology assets in our acquisitions of Parallogic in
May 2008, Star in August 2008, W&W in December 2008 and
MontaVista in December 2009. In May 2008, we acquired certain
assets of Parallogic. The acquisition included identifiable
intangible assets of approximately $450,000, which consisted of
intellectual property related to the developed technology as
well as incremental value associated with existing customer
relationships. We capitalized identifiable intangibles and are
amortizing the amount on a straight-line basis over the expected
useful life of one to five years. In August 2008, we acquired
substantially all of the assets of Star, which included the
purchase of identifiable intangible assets of $5.3 million.
We capitalized the intangible assets and are amortizing the
amount on a straight-line basis over the expected useful lives
of less than a year to seven years. In December 2008, we
acquired W&W, which included the purchase of identifiable
intangible assets of $10.1 million. We capitalized the
intangible assets and are amortizing the amount on a
straight-line basis over the expected useful lives of less than
a year to six years. In December 2009, we acquired MontaVista,
which included the purchase of identifiable intangible assets of
$14.9 million. We capitalized the intangible assets and are
amortizing the amount on a straight-line basis over the expected
useful lives of five to seven years. The total intangible assets
amortization expense included in cost of revenue was
$5.4 million, $1.7 million and $860,000 for the years
ended December 31, 2009, 2008 and 2007, respectively. In
addition, in the year ended December 31, 2009, we incurred
$315,000 expense related to the fair value adjustment of
W&W inventory and in the year ended December 31, 2008,
we incurred $470,000 expense related to the fair value
adjustment of Star and W&W inventory.
In addition, we incur costs for the fabrication of masks used by
our contract manufacturers to manufacture wafers that
incorporate our products. The cost of fabrication mask sets
increased in the years ended December 31, 2007 and 2008 as
we began transitioning from a 130-nanometer to a 90-nanometer
process in our next-generation products in 2007. During the
years ended December 31, 2009, 2008 and 2007, we
capitalized $680,000, $4.2 million and $3.6 million of
mask costs, respectively. As our product processes continue to
mature and as we develop more history and experience, we expect
to capitalize most or all of our mask costs in the future. We
amortize the cost of fabrication masks that we reasonably expect
to use for production manufacturing over a
12-month
period. Total amortized expenses for the masks included in cost
of revenue were $2.1 million, $3.5 million and
$1.5 million for the years ended December 31, 2009,
2008 and 2007, respectively. The unamortized balance of
capitalized mask costs at December 31, 2009 and
December 31, 2008 was $510,000 and $2.1 million,
respectively. We anticipate that a large percentage of our total
mask costs will be capitalized and amortized to cost of revenue.
Our revenue, cost of revenue, gross profit and gross margin for
the years ended December 31, 2009, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
101,214
|
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
Cost of revenue
|
|
|
51,112
|
|
|
|
35,639
|
|
|
|
19,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
50,102
|
|
|
$
|
50,970
|
|
|
$
|
34,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
49.5
|
%
|
|
|
58.9
|
%
|
|
|
63.3
|
%
|
39
Our gross margin has been and will continue to be affected by a
variety of factors, including the product mix, average sales
prices of our products, the amortization expense associated with
the acquired intangible assets, the timing of cost reductions
for fabricated wafers and assembly and test service costs,
inventory valuation charges, the cost of fabrication masks that
are capitalized and amortized, and the timing and changes in
sort, assembly and test yields. Overall product margin is
impacted by the mix between higher performance, higher margin
products and lower performance, lower margin products. In
addition, we typically experience lower yields and higher
associated costs on new products, which improve as production
volumes increase.
Research and Development Expenses. Research
and development expenses primarily include personnel costs,
engineering design development software and hardware tools,
allocated facilities expenses and depreciation of equipment used
in research and development and stock-based compensation.
We expect research and development expenses to continue to
increase in total dollars. Additionally, as a percentage of
revenue, these costs fluctuate from one period to another. Total
research and development expenses for the years ended
December 31, 2009, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Research and development expenses
|
|
$
|
42,682
|
|
|
$
|
27,180
|
|
|
$
|
19,548
|
|
Percent of total revenue
|
|
|
42.2
|
%
|
|
|
31.4
|
%
|
|
|
36.1
|
%
|
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses primarily include personnel costs, accounting and legal
fees, information systems, sales commissions, trade shows,
marketing programs, depreciation, allocated facilities expenses
and stock-based compensation. We expect sales, general and
administrative expenses to increase in absolute dollars. Total
sales, general and administrative costs for the years ended
December 31, 2009, 2008 and 2007 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Sales, general and administrative
|
|
$
|
28,651
|
|
|
$
|
22,111
|
|
|
$
|
14,688
|
|
Percent of total revenue
|
|
|
28.3
|
%
|
|
|
25.5
|
%
|
|
|
27.1
|
%
|
Other Income (Expense), Net. Other income
(expense), net primarily includes interest income on cash and
cash equivalents and, to a lesser extent, includes an interest
expense component associated with the installment payment of
capital leases. For the year ended December 31, 2007 it
also includes net adjustments we made to record our preferred
stock warrants at fair value. Upon the closing of our initial
public offering in May 2007, these warrants were converted into
warrants to purchase shares of our common stock and, as a
result, we were no longer required to re-measure the warrants to
fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Interest income and other
|
|
$
|
330
|
|
|
$
|
2,576
|
|
|
$
|
3,458
|
|
Interest expense
|
|
|
(244
|
)
|
|
|
(499
|
)
|
|
|
(622
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
86
|
|
|
$
|
2,077
|
|
|
$
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Provision for Income Taxes. The following
table presents the provision for income taxes and the effective
tax rates for the three years ended December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Income (loss) before income taxes
|
|
$
|
(21,145
|
)
|
|
$
|
2,437
|
|
|
$
|
2,332
|
|
Income tax expense
|
|
|
249
|
|
|
|
930
|
|
|
|
142
|
|
Effective tax rate
|
|
|
(1.2
|
)%
|
|
|
38.2
|
%
|
|
|
6.1
|
%
|
We recorded income tax expense of $249,000, $930,000 and
$142,000 for the years ended December 31, 2009, 2008 and
2007, respectively. The provision for the year ended
December 31, 2009 primarily consists of international and
state income taxes. The provision for the years ended
December 31, 2008 and 2007 was primarily due to the federal
alternative minimum tax on profits in the United States adjusted
by certain non-deductible items, international taxes and state
income taxes.
Fiscal
2009 Compared to Fiscal 2008
Net Revenue. Our net revenue was
$101.2 million in 2009 as compared to $86.6 million in
2008, an increase of 16.9% or $14.6 million. The increase
in net revenue in 2009 was mainly attributable to an increase in
sales of $14.8 million in broadband and consumer markets
due to increase in demand for our products from our existing and
new customers combined with revenue generated from our
acquisitions completed in 2008. In addition, approximately
$935,000 of the increase was contributed from our acquisition
completed in December 2009. The increase was partially offset by
a sales decline of $0.3 million in the data center and
access and service provider and enterprise network markets, as a
result of the overall 2009 global economic downturn.
In 2009, we derived 38.2% of our revenue from distributors
compared to 33.9% in 2008.
Cost of Revenue and Gross Margin. Gross margin
decreased by 9.4 percentage points to 49.5% in 2009 from
58.9% in 2008. The decline in gross margin in 2009 compared to
2008 was primarily due to a sales mix shift in the first half of
2009 towards increased sales of lower performance, lower margin
products particularly in the broadband and consumer markets. In
addition, to a lesser extent, the gross margin decline was due
to higher amortization costs of acquired intangible assets
resulting from the acquisitions completed in 2008 and 2009.
Research and Development Expenses. Research
and development expenses increased by $15.5 million, or
57%, to $42.7 million in 2009 from $27.2 million in
2008. The increase was primarily the result of higher salaries
and benefit expenses of $9.1 million and stock-based
compensation expenses of $2.9 million due to increased
headcount. In addition, professional services and other
miscellaneous expenses accounted for $3.1 million and
design tools accounted for $0.4 million of the increase in
2009. Research and development headcount increased to 304 at the
end of 2009 from 238 at the end of 2008.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $6.5 million, or 30%, to
$28.7 million in 2009 from $22.1 million in 2008. Of
the $6.5 million increase, stock-based compensation expense
and salaries, benefits and commissions accounted for
$4.4 million resulting primarily from the increased
headcount. In addition, accounting and legal fees and other
services primarily related to the acquisition completed in 2009
accounted for $958,000 of the increase, and depreciation and
other expenses accounted for the remaining $1.1 million.
Sales, general and administrative headcount increased to 145 at
the end of 2009 from 91 at the end of 2008.
Income Tax Expense. Income tax expense
decreased by $680,000 to $249,000 in 2009 from $930,000 in 2008.
The decrease was primarily due to net operating loss incurred in
2009 compared to taxable income generated in 2008 in the United
States, which was offset in part by higher international taxes
and state income taxes in 2009 compared to 2008.
Other Income (Expense), Net. Other income
(expense), net, decreased by $2.0 million to $86,000 in
2009 from $2.1 million in 2008. The decrease was mainly due
to a decrease in interest income resulting from lower
41
interest rates in 2009 compared to 2008. The 2009 decrease in
interest rate is a reflection of the current interest rate
environment.
Fiscal
2008 Compared to Fiscal 2007
Net Revenue. Our net revenue was
$86.6 million in 2008 as compared to $54.2 million in
2007, an increase of 59.8%. Of the 59.8% net revenue growth,
48.4% resulted from growth in broadband and consumer and
enterprise network and data center markets and 10.3% resulted
from the growth in access and service provider markets. The
revenue growth in 2008 in each of the markets as described is
mainly attributable to the new product introductions which drove
the volume increases. The remaining 1.1% revenue growth resulted
from the software and services markets.
In 2008, we derived 33.9% of our revenue from distributors
compared to 24.4% in 2007.
Cost of Revenue and Gross Margin. Gross margin
decreased by 4.4 percentage points to 58.9% in 2008 from
63.3% in 2007. The decline in gross margin in 2008 compared to
2007 was primarily due to sales mix shift in 2008 towards
increased sales of lower performance, lower margin products. In
addition, to a lesser extent, the gross margin decline was due
to amortization costs related to the acquired intangible assets
and fair value adjustment of the acquired inventory from Star
Research and Development Expenses. Research
and development expenses increased by $7.6 million, or 39%,
to $27.2 million in 2008 from $19.5 million in 2007.
The increase was primarily the result of higher salaries and
benefit expenses of $3.4 million and stock-based
compensation expenses of $1.9 million due to increased
headcount. In addition, design tools accounted for
$0.8 million of the increase and professional services and
other miscellaneous expenses accounted for $1.5 million.
Research and development headcount increased to 238 at the end
of 2008 from 127 at the end of 2007.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $7.4 million, or 51%, to
$22.1 million in 2008 from $14.7 million in 2007. Of
the $7.4 million increase, stock-based compensation expense
and salaries, benefits and commissions each accounted for
$2.2 million resulting primarily from the increased
headcount. In addition, accounting and legal fees and other
services accounted for $1.9 million of the increase, and
depreciation and other expenses accounted for the remaining
$1.1 million. Sales, general and administrative headcount
increased to 91 at the end of 2008 from 60 at the end of 2007.
In-process research and development. In the
year ended December 31, 2008, we recorded $1.3 million
in-process
research and development (IPR&D) expense
related to our acquisition of W&W Communications, Inc.
completed in December 2008. The amount was expensed immediately
as it relates to the acquisition of existing technology project
which had not reached technological feasibility at the time of
acquisition, and had no future alternative use. The fair value
of the IPR&D was determined based on an income approach
using the discounted cash flow method. A discount rate of 24%
used to value the project was based on implied rate of return of
the transaction, adjusted to reflect additional risks inherent
in the acquired project.
Income Tax Expense. Income tax expense
increased by $0.8 million to $0.9 million in 2008 from
$0.1 million in 2007. The increase was primarily due to
higher federal alternative minimum tax on profits generated in
the United States in 2008 compared to 2007. In addition,
the income tax expense was adjusted by certain non-deductible
items, international taxes and state income taxes.
Other Income (Expense), Net. Other income
(expense), net, decreased by $0.2 million to
$2.1 million in 2008 from $2.3 million in 2007. The
decrease was primarily due to decrease in interest income
resulting from lower interest rates in 2008 compared to 2007.
Subsequent to our initial public offering in 2007, we are not
required to record warrant revaluation expense associated with
the preferred stock warrants, which, partially offsets the
decline in 2008.
42
Quarterly
Results of Operations
The following table sets forth our unaudited consolidated
statements of operations data for each of the eight quarters in
the period ended December 31, 2009. The quarterly data have
been prepared on the same basis as the audited consolidated
financial statements. You should read this information together
with our consolidated financial statements and related notes
included elsewhere in this Annual Report. We anticipate that the
rate of new sales orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any
quarter do not occur when expected, expenses and inventory
levels could be disproportionately high, and our operating
results for that quarter and future quarters may be adversely
affected. In addition, because of the rapidly evolving nature of
our business, we believe that period-to-period comparisons of
revenue and operating results, including gross margin and
operating expenses as a percentage of total revenue should not
be relied upon as indications of future performance. Although we
have experienced significant percentage growth in revenue, we do
not believe that our historical growth rates are necessarily
indicative of future growth. Net income (loss) per common share,
basic and diluted, for the four quarters of each fiscal year may
not sum to the total for the fiscal year because of the
different number of shares outstanding during each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
32,134
|
|
|
$
|
25,894
|
|
|
$
|
22,804
|
|
|
$
|
20,382
|
|
|
$
|
22,180
|
|
|
$
|
24,525
|
|
|
$
|
21,562
|
|
|
$
|
18,342
|
|
Cost of revenue
|
|
|
15,592
|
|
|
|
12,567
|
|
|
|
12,139
|
|
|
|
10,814
|
|
|
|
11,145
|
|
|
|
10,099
|
|
|
|
7,808
|
|
|
|
6,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
16,542
|
|
|
|
13,327
|
|
|
|
10,665
|
|
|
|
9,568
|
|
|
|
11,035
|
|
|
|
14,426
|
|
|
|
13,754
|
|
|
|
11,755
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
11,788
|
|
|
|
10,629
|
|
|
|
10,274
|
|
|
|
9,991
|
|
|
|
8,306
|
|
|
|
6,593
|
|
|
|
6,461
|
|
|
|
5,820
|
|
Sales, general and administrative
|
|
|
9,341
|
|
|
|
6,647
|
|
|
|
6,526
|
|
|
|
6,137
|
|
|
|
6,158
|
|
|
|
5,944
|
|
|
|
5,454
|
|
|
|
4,555
|
|
In-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
21,129
|
|
|
|
17,276
|
|
|
|
16,800
|
|
|
|
16,128
|
|
|
|
15,783
|
|
|
|
12,537
|
|
|
|
11,915
|
|
|
|
10,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(4,587
|
)
|
|
|
(3,949
|
)
|
|
|
(6,135
|
)
|
|
|
(6,560
|
)
|
|
|
(4,748
|
)
|
|
|
1,889
|
|
|
|
1,839
|
|
|
|
1,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(44
|
)
|
|
|
(54
|
)
|
|
|
(67
|
)
|
|
|
(79
|
)
|
|
|
(96
|
)
|
|
|
(115
|
)
|
|
|
(135
|
)
|
|
|
(153
|
)
|
Interest income and other
|
|
|
102
|
|
|
|
4
|
|
|
|
90
|
|
|
|
134
|
|
|
|
476
|
|
|
|
499
|
|
|
|
609
|
|
|
|
992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
58
|
|
|
|
(50
|
)
|
|
|
23
|
|
|
|
55
|
|
|
|
380
|
|
|
|
384
|
|
|
|
474
|
|
|
|
839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(4,529
|
)
|
|
|
(3,999
|
)
|
|
|
(6,112
|
)
|
|
|
(6,505
|
)
|
|
|
(4,368
|
)
|
|
|
2,273
|
|
|
|
2,313
|
|
|
|
2,219
|
|
Income tax (benefit) expense
|
|
|
(2
|
)
|
|
|
167
|
|
|
|
56
|
|
|
|
28
|
|
|
|
(11
|
)
|
|
|
454
|
|
|
|
240
|
|
|
|
247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,527
|
)
|
|
$
|
(4,166
|
)
|
|
$
|
(6,168
|
)
|
|
$
|
(6,533
|
)
|
|
$
|
(4,357
|
)
|
|
$
|
1,819
|
|
|
$
|
2,073
|
|
|
$
|
1,972
|
|
Net income (loss) per common share, basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.15
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
(0.11
|
)
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
Liquidity
and Capital Resources
In May 2007, we received net proceeds of approximately
$94.7 million (after underwriters discounts of
$7.3 million and additional offering related costs of
approximately $2.8 million). Our other primary sources of
cash historically have been cash generated from operations and
cash received from the exercise of employee stock options. As of
December 31, 2009, we had cash and cash equivalents of
$58.9 million and net accounts receivable of
$22.0 million.
43
Following is a summary of our working capital and cash and cash
equivalents as of December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Working capital
|
|
$
|
65,897
|
|
|
$
|
90,335
|
|
|
$
|
105,048
|
|
Cash and cash equivalents
|
|
|
58,918
|
|
|
|
77,027
|
|
|
|
98,462
|
|
Following is a summary of our cash flows from operating
activities, investing activities and financing activities for
the years ended December 31, 2009, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(375
|
)
|
|
$
|
10,627
|
|
|
$
|
6,176
|
|
Net cash used in investing activities
|
|
|
(17,047
|
)
|
|
|
(29,120
|
)
|
|
|
(5,772
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(687
|
)
|
|
|
(2,942
|
)
|
|
|
87,904
|
|
Cash
Flows from Operating Activities
Net cash flows from operating activities decreased by
$11.0 million in 2009 compared to 2008. The decrease was
primarily due to a net loss of $21.4 million in 2009
compared to net income of $1.5 million in 2008, which was
offset in part by non-cash expenses that were $7.2 million
higher in 2009 compared to 2008. The increase in non-cash
expenses was mainly attributable to the higher stock-based
compensation expense due to increased headcount as a result of
our acquisitions completed in 2008 and 2009 and higher
amortization expenses resulting from the intangibles acquired in
connection with such acquisitions. In addition, changes in
assets and liabilities, net increased by $4.7 million in
2009 compared to 2008.
Net cash provided by operating activities increased by
$4.5 million in 2008 compared to 2007. The increase in our
cash flow from operations was primarily due to higher non-cash
expense addition in 2008 compared to 2007. The non-cash
additions were mainly attributable to the higher stock-based
compensation due to increased headcount and higher amortization
expenses resulting from the intangibles acquired in connection
with the acquisitions completed in 2008. Changes in operating
activities in 2008 in comparison to 2007 were primarily driven
by increases of $6.1 million in inventory and
$3.9 million in accounts receivable, partially offset by
increase in payables and accrued expenses of $0.3 million.
Cash
Flows from Investing Activities
Net cash used in investing activities decreased by
$12.1 million in 2009 compared to 2008. The decrease was
mainly due to lower cash payments in 2009 compared to the cash
payments in 2008 for the acquisitions completed in 2009 and
2008. In addition, lower cash used for purchases of property and
equipment in 2009 compared to 2008 contributed to the overall
decrease.
Net cash used in investing activities increased by
$23.3 million in 2008 compared to 2007. The increase was
primarily the result of $19.8 million in net cash paid for
the acquisitions completed in 2008. In addition,
$3.5 million of the increase in 2008 was the result of cash
used for mask costs and other capital expenditures.
Cash
Flows from Financing Activities
Net cash used in financing activities decreased by
$2.3 million in 2009 compared to 2008. The decrease was
mainly due to higher cash proceeds from stock option exercises
combined with lower cash used for principal payments of capital
lease and technology license obligations in 2009 compared to
2008.
Net cash used in financing activities was $2.9 million for
the year ended December 31, 2008 compared to net cash
provided by financing activities of $87.9 million in 2007.
In 2008, we paid $3.8 million in principal payments of
capital lease and technology license obligations. These
increases were partially offset by proceeds from stock
44
option exercises. Net cash provided by financing activities in
the year ended December 31, 2007, was primarily due to net
proceeds of $94.7 million from our initial public offering.
Cash equivalents consist primarily of an investment in a money
market fund. We believe that our $58.9 million of cash and
cash equivalents at December 31, 2009 and expected cash
flow from operations, if any, will be sufficient to fund our
projected operating requirements for at least twelve months. Our
future capital requirements will depend on many factors,
including our rate of revenue growth, the expansion of our
engineering, sales and marketing activities, the timing and
extent of our expansion into new territories, the timing of
introductions of new products and enhancements to existing
products and the continuing market acceptance of our products.
Although we currently are not a party to any agreement with
respect to potential material investments in, or acquisitions
of, complementary businesses, services or technologies, we may
enter into these types of arrangements in the future, which
could also require us to seek additional equity or debt
financing. Additional funds may not be available on terms
favorable to us or at all.
Indemnities
In the ordinary course of business, we have entered into
agreements with customers that include indemnity provisions.
Based on historical experience and information known as of
December 31, 2009, we believe our exposure related to the
above indemnities at December 31, 2009 is not material. We
also enter into indemnification agreements with our officers and
directors and our certificate of incorporation and bylaws
include similar indemnification obligations to our officers and
directors. It is not possible to determine the amount of our
liability related to these indemnification agreements and
obligations to our officers and directors due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have, nor do we
currently have, any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Contractual
Obligations
The following is a summary of our contractual obligations as of
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
1 Year
|
|
|
1 to 2 Years
|
|
|
3 to 5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
Operating lease obligations
|
|
$
|
2,846
|
|
|
$
|
3,512
|
|
|
$
|
310
|
|
|
$
|
|
|
|
$
|
6,668
|
|
Capital lease obligations
|
|
|
3,544
|
|
|
|
5,942
|
|
|
|
|
|
|
|
|
|
|
|
9,486
|
|
Purchase obligations
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,900
|
|
|
$
|
9,454
|
|
|
$
|
310
|
|
|
$
|
|
|
|
$
|
16,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the liability for uncertain tax
positions was $649,000. The timing of any payments which could
result from these unrecognized tax benefits will depend upon a
number of factors. Accordingly, the timing of payment cannot be
estimated.
In addition to the contractual obligations noted in the table
above, we also have the following funding commitments:
As of December 31, 2009, of the $10.9 million cash
consideration, $2.3 million was unpaid. We paid
$1.2 million and we expect to pay the remaining
$1.1 million by the end of 2010.
45
Recent
Accounting Pronouncements
See Recent Accounting Pronouncements in
Note 1 Organization and Significant Accounting
Policies in Item 8, of this Annual Report, which is
incorporated herein by reference.
Item 7A. Quantitative
and Qualitative Disclosure About Market Risk
Foreign
Currency Risk
Most of our sales are denominated in United States dollars. We
therefore have minimal foreign currency risk associated with
sale of products. Our international sales and marketing
operations incur expenses that are denominated in foreign
currencies. These expenses could be materially affected by
currency fluctuations; however, we do not consider this currency
risk to be material as the related costs do not constitute a
significant portion of our total spending. We outsource our
wafer fabrication, assembly, testing, warehousing and shipping
operations; however all expenses related thereto are denominated
in United States dollars.
Interest
Rate Risk
We had cash and cash equivalents of $58.9 million at
December 31, 2009, which was held for working capital
purposes. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any
material exposure to changes in the fair value of these
investments as a result of changes in interest rates due to
their short term nature. Declines in interest rates, however,
will reduce future investment income.
46
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this
Annual Report
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and
Stockholders of Cavium Networks, Inc.
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Cavium
Networks, Inc. and its subsidiaries at December 31, 2009
and December 31, 2008, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting under Item 9A.
Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based
on our integrated audits (which were integrated audits in 2009
and 2008). We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 1 to the consolidated financial
statements, the Company changed the manner in which it accounts
for business combinations in 2009.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
San Jose,
California
March 1, 2010
48
CAVIUM
NETWORKS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands, except share and per share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
58,918
|
|
|
$
|
77,027
|
|
Accounts receivable, net of allowances of $367 and $203,
respectively
|
|
|
21,958
|
|
|
|
14,054
|
|
Inventories
|
|
|
17,965
|
|
|
|
17,281
|
|
Prepaid expenses and other current assets
|
|
|
2,168
|
|
|
|
1,298
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
101,009
|
|
|
|
109,660
|
|
Property and equipment, net
|
|
|
14,972
|
|
|
|
11,115
|
|
Intangible assets, net
|
|
|
25,388
|
|
|
|
16,958
|
|
Goodwill
|
|
|
56,607
|
|
|
|
12,925
|
|
Other assets
|
|
|
1,819
|
|
|
|
506
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
199,795
|
|
|
$
|
151,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
10,784
|
|
|
$
|
7,309
|
|
Accrued expenses and other current liabilities
|
|
|
8,444
|
|
|
|
7,697
|
|
Deferred revenue
|
|
|
12,613
|
|
|
|
1,700
|
|
Capital lease and technology license obligations, current portion
|
|
|
3,271
|
|
|
|
2,619
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
35,112
|
|
|
|
19,325
|
|
Capital lease and technology license obligations, net of current
portion
|
|
|
5,741
|
|
|
|
2,116
|
|
Other non-current liabilities
|
|
|
2,569
|
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
43,422
|
|
|
|
22,603
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001:
|
|
|
|
|
|
|
|
|
10,000,000 shares authorized, no shares issued and
outstanding as of December 31, 2009 and 2008
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001:
|
|
|
|
|
|
|
|
|
200,000,000 shares authorized; 43,507,161 and
41,183,010 shares issued and outstanding; as of
December 31, 2009 and 2008, respectively
|
|
|
44
|
|
|
|
41
|
|
Additional paid-in capital
|
|
|
234,946
|
|
|
|
185,743
|
|
Accumulated deficit
|
|
|
(78,617
|
)
|
|
|
(57,223
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
156,373
|
|
|
|
128,561
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
199,795
|
|
|
$
|
151,164
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
101,214
|
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
Cost of revenue
|
|
|
51,112
|
|
|
|
35,639
|
|
|
|
19,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,102
|
|
|
|
50,970
|
|
|
|
34,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
42,682
|
|
|
|
27,180
|
|
|
|
19,548
|
|
Sales, general and administrative
|
|
|
28,651
|
|
|
|
22,111
|
|
|
|
14,688
|
|
In-process research and development
|
|
|
|
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
71,333
|
|
|
|
50,610
|
|
|
|
34,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
(21,231
|
)
|
|
|
360
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(244
|
)
|
|
|
(499
|
)
|
|
|
(622
|
)
|
Interest income and other
|
|
|
330
|
|
|
|
2,576
|
|
|
|
3,458
|
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
86
|
|
|
|
2,077
|
|
|
|
2,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
(21,145
|
)
|
|
|
2,437
|
|
|
|
2,332
|
|
Income tax expense
|
|
|
249
|
|
|
|
930
|
|
|
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,394
|
)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
(0.52
|
)
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
Shares used in computing basic net income (loss) per common share
|
|
|
41,435
|
|
|
|
40,385
|
|
|
|
29,006
|
|
Net income (loss) per common share, diluted
|
|
$
|
(0.52
|
)
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
41,435
|
|
|
|
42,566
|
|
|
|
32,432
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Mandatorily Redeemable
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders
|
|
|
|
Convertible Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity/
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
|
Balance as of December 31, 2006
|
|
|
22,364,197
|
|
|
$
|
72,437
|
|
|
|
|
9,365,600
|
|
|
$
|
9
|
|
|
$
|
3,731
|
|
|
$
|
(60,920
|
)
|
|
$
|
(57,180
|
)
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
717,212
|
|
|
|
1
|
|
|
|
1,451
|
|
|
|
|
|
|
|
1,452
|
|
Common stock issued in connection with vesting of restricted
stock units
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(14,585
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,908
|
|
|
|
|
|
|
|
1,908
|
|
Issuance of Series B preferred stock in connection with
warrants exercises
|
|
|
181
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock due to IPO
|
|
|
(22,364,378
|
)
|
|
|
(72,440
|
)
|
|
|
|
22,364,378
|
|
|
|
22
|
|
|
|
72,418
|
|
|
|
|
|
|
|
72,440
|
|
Issuance of common stock for IPO, net of issuance cost of $2,790
|
|
|
|
|
|
|
|
|
|
|
|
7,762,500
|
|
|
|
8
|
|
|
|
94,660
|
|
|
|
|
|
|
|
94,668
|
|
Reclassification of warrant liability upon IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
1,272
|
|
Common stock
warrants-net
exercise
|
|
|
|
|
|
|
|
|
|
|
|
86,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
40,307,361
|
|
|
|
40
|
|
|
|
175,540
|
|
|
|
(58,730
|
)
|
|
|
116,850
|
|
Common stock issued in connection with exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
|
516,759
|
|
|
|
1
|
|
|
|
857
|
|
|
|
|
|
|
|
858
|
|
Common stock issued in connection with vesting of restricted
stock units
|
|
|
|
|
|
|
|
|
|
|
|
25,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(4,480
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,182
|
|
|
|
|
|
|
|
6,182
|
|
Issuance of common stock in connection with business acquisition
|
|
|
|
|
|
|
|
|
|
|
|
338,245
|
|
|
|
|
|
|
|
3,098
|
|
|
|
|
|
|
|
3,098
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
41,183,010
|
|
|
|
41
|
|
|
|
185,743
|
|
|
|
(57,223
|
)
|
|
|
128,561
|
|
Common stock issued in connection with exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
|
523,932
|
|
|
|
1
|
|
|
|
2,438
|
|
|
|
|
|
|
|
2,439
|
|
Common stock issued in connection with vesting of restricted
stock units
|
|
|
|
|
|
|
|
|
|
|
|
175,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(2,502
|
)
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
(15
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,768
|
|
|
|
|
|
|
|
11,768
|
|
Issuance of common stock in connection with business acquisition
|
|
|
|
|
|
|
|
|
|
|
|
1,592,193
|
|
|
|
2
|
|
|
|
34,294
|
|
|
|
|
|
|
|
34,296
|
|
Issuance of common stock for settlement of liabilities
|
|
|
|
|
|
|
|
|
|
|
|
34,626
|
|
|
|
|
|
|
|
718
|
|
|
|
|
|
|
|
718
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,394
|
)
|
|
|
(21,394
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
|
|
|
|
$
|
|
|
|
|
|
43,507,161
|
|
|
$
|
44
|
|
|
$
|
234,946
|
|
|
$
|
(78,617
|
)
|
|
$
|
156,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(21,394
|
)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
11,727
|
|
|
|
6,057
|
|
|
|
1,869
|
|
Amortization of warrant costs to interest expense
|
|
|
|
|
|
|
|
|
|
|
149
|
|
Revaluation of warrants to fair value
|
|
|
|
|
|
|
|
|
|
|
574
|
|
Depreciation and amortization
|
|
|
14,802
|
|
|
|
11,978
|
|
|
|
6,221
|
|
In-process research and development
|
|
|
|
|
|
|
1,319
|
|
|
|
|
|
Other
|
|
|
39
|
|
|
|
|
|
|
|
(20
|
)
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(6,726
|
)
|
|
|
(3,901
|
)
|
|
|
(2,520
|
)
|
Inventories
|
|
|
(651
|
)
|
|
|
(6,063
|
)
|
|
|
(4,528
|
)
|
Prepaid expenses and other current assets
|
|
|
22
|
|
|
|
(66
|
)
|
|
|
(322
|
)
|
Other assets
|
|
|
(421
|
)
|
|
|
(275
|
)
|
|
|
49
|
|
Accounts payable
|
|
|
(457
|
)
|
|
|
1,360
|
|
|
|
1,836
|
|
Deferred revenue
|
|
|
3,743
|
|
|
|
35
|
|
|
|
825
|
|
Accrued expenses and other current and non-current liabilities
|
|
|
(1,059
|
)
|
|
|
(1,324
|
)
|
|
|
(147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
(375
|
)
|
|
|
10,627
|
|
|
|
6,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(3,431
|
)
|
|
|
(8,965
|
)
|
|
|
(4,925
|
)
|
Note receivable
|
|
|
(450
|
)
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(12,487
|
)
|
|
|
(19,824
|
)
|
|
|
|
|
Purchases of intangible assets
|
|
|
(679
|
)
|
|
|
(331
|
)
|
|
|
(847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(17,047
|
)
|
|
|
(29,120
|
)
|
|
|
(5,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of term loan financing
|
|
|
|
|
|
|
|
|
|
|
(4,000
|
)
|
Proceeds from initial public offering, net of bankers
discount and commission
|
|
|
|
|
|
|
|
|
|
|
97,459
|
|
Payments of initial public offering costs
|
|
|
|
|
|
|
|
|
|
|
(2,791
|
)
|
Proceeds from issuance of common stock upon exercise of options
|
|
|
2,439
|
|
|
|
858
|
|
|
|
1,092
|
|
Principal payment of capital lease and technology license
obligations
|
|
|
(3,111
|
)
|
|
|
(3,796
|
)
|
|
|
(3,846
|
)
|
Repurchases of shares of unvested common stock
|
|
|
(15
|
)
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(687
|
)
|
|
|
(2,942
|
)
|
|
|
87,904
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(18,109
|
)
|
|
|
(21,435
|
)
|
|
|
88,308
|
|
Cash and cash equivalents, beginning of period
|
|
|
77,027
|
|
|
|
98,462
|
|
|
|
10,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
58,918
|
|
|
$
|
77,027
|
|
|
$
|
98,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
243
|
|
|
$
|
499
|
|
|
$
|
473
|
|
Cash paid for taxes
|
|
$
|
372
|
|
|
$
|
909
|
|
|
$
|
469
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the acquisition
|
|
$
|
34,296
|
|
|
$
|
3,098
|
|
|
$
|
|
|
Issuance of common stock for settlement of liabilities
|
|
$
|
718
|
|
|
$
|
|
|
|
$
|
|
|
Accrual for acquisition related costs
|
|
$
|
2,268
|
|
|
$
|
4,709
|
|
|
$
|
|
|
Capital lease and technology license obligations
|
|
$
|
9,036
|
|
|
$
|
723
|
|
|
$
|
9,812
|
|
Vesting of early exercised options
|
|
$
|
|
|
|
$
|
70
|
|
|
$
|
110
|
|
Additions to property and equipment included in accounts payable
and accrued expenses
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,057
|
|
Net exercise of common stock warrants
|
|
$
|
|
|
|
$
|
|
|
|
$
|
462
|
|
Conversion of mandatorily redeemable convertible preferred stock
to common stock
|
|
$
|
|
|
|
$
|
|
|
|
$
|
72,440
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Significant Accounting Policies
|
Organization
Cavium Networks, Inc., (the Company), was
incorporated in the state of California on November 21,
2000 and was reincorporated in the state of Delaware effective
February 6, 2007. The Company designs, develops and markets
semiconductor processors for intelligent and secure networks.
During the year ended December 31, 2008, the Company
completed purchases of Parallogic Corporation
(Parallogic), Star Semiconductor Corporation
(Star), and W&W Communications, Inc.
(W&W) for approximately $18.9 million in
consideration, including acquisition related expenses. In
December 2009, the Company completed the purchase of MontaVista
Software, Inc. (MontaVista) for approximately
$45.2 million in consideration. For a complete discussion
on the 2008 and 2009 acquisitions, see Note 5
Business Combinations.
Initial
Public Offering
In May 2007, the Company completed its initial public offering,
or IPO, of common stock in which it sold and issued
7,762,500 shares of common stock, including
1,012,500 shares of underwriters over-allotment, at
an issue price of $13.50 per share. A total of
$104.8 million in gross proceeds was raised from the IPO,
or approximately $94.7 million in net proceeds after
deducting underwriting discounts and commissions of
$7.3 million and other offering costs of $2.8 million.
Upon the closing of the IPO, all shares of convertible preferred
stock outstanding automatically converted into
22,364,378 shares of common stock, and 102,619 warrants to
purchase mandatorily redeemable convertible preferred stock were
converted into warrants to purchase common stock.
Basis
of Consolidation
The consolidated financial statements include the accounts of
Cavium Networks, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in its consolidated financial
statements and accompanying notes. Management bases its
estimates on historical experience and on various other
assumptions it believes to be reasonable under the
circumstances, the results of which form the basis of making
judgments about the carrying values of assets and liabilities.
Actual results could differ from those estimates.
Summary
of Significant Accounting Policies
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original or remaining maturity of 90 days or less at the
date of purchase to be cash equivalents. Cash equivalents
consist primarily of an investment in a money market fund. As of
December 31, 2009, we have not experienced any impairment
charges due to such concentration of credit risk.
Allowance
for Doubtful Accounts
The Company reviews its allowance for doubtful accounts by
assessing individual accounts receivable over a specific age and
amount. The Companys allowance for doubtful accounts was
$24,000 and $34,000 as of December 31, 2009 and 2008,
respectively.
53
Inventories
Inventories consist of
work-in-process
and finished goods. Inventories not related to an acquisition
are stated at the lower of cost (determined using the
first-in,
first-out method), or market value (estimated net realizable
value). Inventories from acquisitions are stated at fair value
at the date of acquisition. The Company writes down inventory by
establishing inventory reserves based on aging and forecasted
demand. These factors are impacted by market and economic
conditions, technology changes, new product introductions and
changes in strategic direction and require estimates that may
include uncertain elements. Actual demand may differ from
forecasted demand and such differences may have a material
effect on recorded inventory values. Inventory reserves, once
established, are not reversed until the related inventories have
been sold or scrapped.
Property
and Equipment
Property and equipment are stated at cost and depreciated over
their estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of
estimated useful lives or unexpired lease term. Additions and
improvements that increase the value or extend the life of an
asset are capitalized. Upon retirement or sale, the cost of
assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
credited or charged to income. Repairs and maintenance costs are
expensed as incurred.
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
Useful Lives
|
|
Software, computer and other equipment
|
|
|
|
|
|
|
1 to 5 years
|
|
Mask costs and test equipment
|
|
|
|
|
|
|
1 to 3 years
|
|
Furniture, office equipment and leasehold improvements
|
|
|
|
|
|
|
1 to 5 years
|
|
The Company capitalizes the cost of fabrication masks that are
reasonably expected to be used during production manufacturing.
Such amounts are included within property and equipment and are
generally depreciated over a period of twelve months. If the
Company does not reasonably expect to use the fabrication mask
during production manufacturing, the related mask costs are
expensed to research and development expense in the period in
which the costs are incurred. The Company has capitalized
$680,000, $4.2 million and $3.6 million of mask costs
for the years ended December 31, 2009, 2008 and 2007,
respectively.
Impairment
of Long-Lived Assets
The Company reviews long-lived assets, including property and
equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. According to the Companys
accounting policy, when such indicators are present, if the
undiscounted cash flows expected to be generated from operations
from those long-lived assets are less than the carrying value of
those long-lived assets, the Company compares the fair value of
the assets (estimated using discounted future net cash flows to
be generated from the lowest common level of operations
utilizing the assets) to the carrying value of the long-lived
assets to determine any impairment charges. The Company reduces
the carrying value of the long-lived assets if the carrying
value of the long-lived assets is greater than their fair value.
No impairment to the carrying value of long-lived assets was
identified by the Company during the years ended
December 31, 2009, 2008 and 2007.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, other assets, accounts payable, accrued expenses and
other current liabilities, approximate their fair values due to
their short-term nature.
Concentration
of Risk
The Companys products are currently manufactured,
assembled and tested by third-party contractors in Asia. There
are no long-term agreements with any of these contractors. A
significant disruption in the operations of one or
54
more of these contractors would impact the production of the
Companys products for a substantial period of time, which
could have a material adverse effect on the Companys
business, financial condition and results of operations.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents
and accounts receivable. The Company deposits cash with credit
worthy financial institutions. The Company has not experienced
any losses on its deposits of cash. Management believes that the
financial institutions are reputable and, accordingly, minimal
credit risk exists. The Company follows an established
investment policy and set of guidelines to monitor, manage and
limit the Companys exposure to interest rate and credit
risk. The policy sets forth credit quality standards and limits
the Companys exposure to any one issuer, as well as the
maximum exposure to various asset classes.
A majority of the Companys accounts receivable are derived
from customers headquartered in the United States. The Company
performs ongoing credit evaluations of its customers
financial condition and, generally, requires no collateral from
its customers. The Company provides an allowance for doubtful
accounts receivable based upon the expected collectability of
accounts receivable. Summarized below are individual customers
whose accounts receivable balances or end customers whose
revenues were 10% or higher of respective total consolidated
amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cisco
|
|
|
24
|
%
|
|
|
29
|
%
|
|
|
23
|
%
|
Actiontec
|
|
|
10
|
|
|
|
*
|
|
|
|
*
|
|
F5 Networks
|
|
|
*
|
|
|
|
11
|
|
|
|
18
|
|
Sumitomo
|
|
|
*
|
|
|
|
11
|
|
|
|
*
|
|
|
|
|
* |
|
Represents less than 10% of the net revenue for the respective
period end. |
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Percentage of gross accounts receivable:
|
|
|
|
|
|
|
|
|
Flextronics
|
|
|
14
|
%
|
|
|
21
|
%
|
Jabil Circuit
|
|
|
*
|
|
|
|
10
|
%
|
|
|
|
* |
|
Represents less than 10% of the gross accounts receivable for
the respective period end. |
Intangible
Assets
Prepaid technology licenses and acquired technologies, which
includes technology acquired from other companies either as a
result of acquisitions or licensing, are capitalized and
amortized on the straight-line method over the estimated useful
life of the technologies, which generally range from one to
seven years depending on the nature of the intangible assets.
Technology licenses payable in installments are capitalized
using the present value of the payments.
Goodwill
Goodwill arising from business combinations is capitalized.
Goodwill is not amortized but is subject to an impairment test
at least annually. In accordance with the guidance provided
under intangibles-goodwill and other, the Company reviews
goodwill annually at the beginning of its fourth quarter and
whenever events or changes in circumstances indicate the
carrying value of the assets may not be recoverable. For
goodwill, the Company performs a two step impairment test. In
the first step, the Company compares the fair value of its one
reporting unit to its carrying value. The Company determines the
fair value of the reporting unit by taking the market
capitalization of the reporting unit as determined through
quoted market prices. If the fair value of the reporting unit
exceeds the carrying value of the reporting unit, goodwill is
not impaired and no further testing is performed. If the
carrying value of the reporting unit exceeds the fair value of
the reporting unit, then the Company must perform
55
the second step of the impairment test in order to determine the
implied fair value. If the carrying value of the reporting
units goodwill exceeds its implied fair value, the Company
records an impairment charge equal to the difference. No
impairment to the carrying value of goodwill was identified by
the Company during the years ended December 31, 2009 and
2008.
Revenue
Recognition
The Company derives its revenue primarily from sales of
semiconductor products. The Company recognizes revenue when all
of the following criteria have been met: (i) persuasive
evidence of a binding arrangement exists, (ii) delivery has
occurred, (iii) the price is deemed fixed or determinable
and free of contingencies and significant uncertainties, and
(iv) collection is probable. The price is considered fixed
or determinable at the execution of an agreement, based on
specific products and quantities to be delivered at specified
prices, which is often memorialized with a customer purchase
order. Agreements with non-distributor customers do not include
rights of return or acceptance provisions. The Company assesses
the ability to collect from the Companys customers based
on a number of factors, including credit worthiness and any past
transaction history of the customer.
Shipping charges billed to customers are included in product
revenue and the related shipping costs are included in cost of
revenue. The Company generally recognizes revenue at the time of
shipment to the Companys customers. Revenue consists
primarily of sales of the Companys products to networking
original equipment manufacturers, or OEMs, their contract
manufacturers or distributors. Initial sales of the
Companys products for a new design are usually made
directly to networking OEMs as they design and develop their
product. Once their design enters production, they often
outsource their manufacturing to contract manufacturers that
purchase the Companys products directly from the Company
or from the Companys distributors.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if the
Company concludes it can reasonably estimate the credits for
returns and price adjustments issuable. The Company records an
estimated allowance, at the time of shipment, based on the
Companys historical patterns of returns and pricing
credits of sales recognized upon shipment. The credits issued to
distributors or other customers were not material in the three
years ended December 31, 2009, 2008 and 2007.
Revenue and costs relating to sales to distributors are deferred
if the Company grants more than limited rights of returns and
price credits or if it cannot reasonably estimate the level of
returns and credits issuable. The Company has a distribution
agreement with Avnet, Inc. to distribute the Companys
products primarily in the United States. Given the terms of the
distribution agreement, for sales to Avnet revenue and costs are
deferred until products are sold by Avnet to its end customers.
For the years ended December 31, 2009 and 2008, 5.5% and
3.6%, respectively, of the Companys net revenues were from
products sold by Avnet. Revenue recognition depends on
notification from the distributor that product has been sold to
Avnets end customers. Avnet reports to the Company, on at
least a monthly basis, the product resale price, quantity and
end customer shipment information, as well as inventory on hand.
Reported distributor inventory on hand is reconciled monthly to
the Companys deferred revenue and cost balances. Deferred
income on shipments to Avnet is included in deferred revenue.
Accounts receivable from Avnet is recognized and inventory is
relieved when title to inventories transfers, which typically
takes place at the time of shipment, which is the point in time
at which the Company has a legal enforceable right to collection
under normal payment terms.
The Company also derives revenue from licensing software and
providing software maintenance and support and training. Revenue
from such arrangements is recorded by applying the provisions of
the software revenue recognition, and accordingly, recognizes
revenue when all of the revenue recognition criteria are met.
Revenue from such arrangements totaled $2.8 million,
$2.2 million and $1.1 million for the years ended
December 31, 2009, 2008 and 2007, respectively. If the
software arrangements contain support services, the value of
such support services is recognized as services revenue on a
straight-line basis over the term of the related support period,
which is typically one year.
When a software arrangement contains multiple elements, the
Company allocates total revenue from the arrangement to each of
the respective elements when vendor-specified objective evidence
(VSOE) of fair value exists for all of the
undelivered elements in the arrangement. The Company establishes
VSOE for each element to
56
be the price charged when the same element is sold separately.
For the maintenance and support services elements, the Company
establishes VSOE by using the substantive renewal rate for such
services in the software arrangement.
The Company also enters into professional service agreements
with some of its customers. Professional services engagements
are billed on either a fixed-fee or
time-and-materials
basis. For fixed-fee arrangements, professional services revenue
is recognized under the proportional performance method, with
the associated costs included in cost of revenue. The Company
estimates the proportional performance of the arrangements based
on an analysis of progress toward completion. The Company
periodically evaluates the actual status of each project to
ensure that the estimates to complete each contract remain
accurate, and a loss is recognized when the total estimated
project cost exceeds project revenue. If the amount billed
exceeds the amount of revenue recognized, the excess amount is
recorded as deferred revenue. Revenue recognized in any period
is dependent on progress toward completion of projects in
progress. To the extent the Company is unable to estimate the
proportional performance then the revenue is recognized on a
completed performance basis. Revenue for
time-and-materials
engagements is recognized as the effort is incurred. Revenue
from such service arrangements totaled $2.6 million,
$3.0 million and $3.0 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Deferred
revenue
The Company records deferred revenue for customer billings and
advance payments received from customers before the performance
obligations have been completed
and/or
services have been performed. The Company also records deferred
revenue, net of deferred costs for the deferred income on
shipments to Avnet. Total deferred revenue was
$12.6 million as of December 31, 2009 and
$1.7 million as of December 31, 2008.
Warranty
Accrual
The Companys products are subject to a one-year warranty
period. The Company provides for the estimated future costs of
replacement upon shipment of the product as cost of revenue. The
warranty accrual is estimated based on historical claims
compared to historical revenue. The following table presents a
reconciliation of the Companys product warranty liability,
which is included within accrued expenses and other current
liabilities in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
154
|
|
|
$
|
261
|
|
Accruals
|
|
|
695
|
|
|
|
144
|
|
Settlements and adjustments made
|
|
|
(640
|
)
|
|
|
(251
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
209
|
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
Indemnities
In the ordinary course of business the Company enters into
agreements with customers that include indemnity provisions.
Based on historical experience and other available information
the Company believes its exposure related to the above indemnity
provisions were immaterial for each of the periods presented.
Research
and Development
Research and development costs are expensed as incurred and
primarily include personnel costs, prototype expenses, which
include the cost of fabrication mask costs not reasonably
expected to be used in production manufacturing, and allocated
facilities costs as well as depreciation of equipment used in
research and development.
Advertising
The Company expenses advertising costs as incurred. Advertising
costs were $396,000, $367,000 and $345,000 for the years ended
December 31, 2009, 2008 and 2007 respectively.
57
Operating
Leases
The Company recognizes rent expense on a straight-line basis
over the term of the lease. The difference between rent expense
and rent paid is recorded as deferred rent in accrued expenses
and other current and non-current liabilities components of the
consolidated balance sheets.
Income
Taxes
The Company provides for deferred income taxes under the asset
and liability method. Under this method, deferred tax assets,
including those related to tax loss carryforwards and credits,
and liabilities are determined based on the differences between
the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded to reduce deferred tax assets when management cannot
conclude that it is more likely than not that the net deferred
tax asset will be recovered. The Company currently maintains a
full valuation allowance on net deferred tax assets in the
United States. The valuation allowance was determined in
accordance with the provisions of income taxes which requires an
assessment of both positive and negative evidence when
determining whether it is more likely than not that deferred tax
assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. The Companys expected
U.S. loss, among other considerations, provides negative
evidence and accordingly, a full valuation allowance was
recorded against its deferred tax assets. The Companys
deferred taxes relate predominantly to its United States tax
jurisdiction. The Company intends to maintain a full valuation
allowance on its deferred tax assets in the United States until
sufficient positive evidence exists to support reversal of the
valuation allowance.
Accounting
for Stock-Based Compensation
The Company applies the fair value recognition provisions of
stock-based compensation, and accordingly, use the prospective
transition method, which requires us to determine fair value
only to awards granted, modified, repurchased or cancelled after
the adoption date. The Company recognizes this expense on a
straight-line basis over the options vesting periods. The
Company estimates the grant date fair value of stock option
awards using the Black-Scholes option valuation model.
For the years ended December 31, 2009, 2008 and 2007, the
Company recorded stock-based compensation expense of
$11.7 million, $6.1 million and $1.9 million,
respectively. In future periods, stock-based compensation
expense may increase as the Company issues additional
stock-based awards to continue to attract and retain key
employees. The Company recognizes stock-based compensation
expense only for the portion of stock options that are expected
to vest, based on the Companys estimated forfeiture rate.
If the actual number of future forfeitures differs from that
estimated by management, the Company may be required to record
adjustments to stock-based compensation expense in future
periods.
The Company accounts for stock options issued to nonemployees in
accordance with the provisions of the equity-based payments to
non-employees. The fair value of the stock options granted to
non-employees was estimated using the Black-Scholes option
valuation model. This model utilizes the estimated fair value of
the Companys common stock, the contractual term of the
option, the expected volatility of the price of the
Companys common stock, risk-free interest rates and the
expected dividend yields of the Companys common stock.
Stock-based compensation expense related to non-employees was
immaterial.
The following table presents the detail of stock-based
compensation expense amounts included in the consolidated
statement of operations for each of the last years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
373
|
|
|
$
|
179
|
|
|
$
|
43
|
|
Research and development
|
|
|
5,574
|
|
|
|
2,684
|
|
|
|
805
|
|
Sales, general and administrative
|
|
|
5,780
|
|
|
|
3,194
|
|
|
|
1,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
11,727
|
|
|
$
|
6,057
|
|
|
$
|
1,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
The total stock-based compensation cost capitalized as part of
inventory as of December 31, 2009 and 2008 was $209,000 and
$168,000, respectively.
Other
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity that
are not the result of transactions with stockholders. For the
year ended 2009, 2008 or 2007, there are no components of
comprehensive income (loss) which are excluded from the net
income (loss) and, therefore, no separate statement of
comprehensive income (loss) has been presented.
Foreign
Currency Translation
The Company uses the United States dollar as the functional
currency for most of its subsidiaries. Assets and liabilities
denominated in
non-U.S. dollars
are remeasured into U.S. dollars at
end-of-period
exchange rates for monetary assets and liabilities, and
historical exchange rates for nonmonetary assets and
liabilities. Net revenue and expenses are remeasured at average
exchange rates in effect during each period, except for those
revenue, cost of sales and expenses related to the nonmonetary
assets and liabilities, which are remeasured at historical
exchange rates. The aggregate foreign exchange gain was $77,000
and a loss of $118,000, for the year ended December 31,
2009 and 2008, respectively, which was included in interest
income and other in the consolidated statements of operations.
Recent
Accounting Pronouncements
In September 2009, the FASB issued Update
No. 2009-13
or ASU
2009-13,
which updates the guidance currently included under topic ASC
605-25,
Multiple Element Arrangements. ASU
2009-13
relates to the final consensus reached by FASB on a new revenue
recognition guidance regarding revenue arrangements with
multiple deliverables. The new accounting guidance addresses how
to determine whether an arrangement involving multiple
deliverables contains more than one unit of accounting, and how
the arrangement consideration should be allocated among the
separate units of accounting. The new accounting guidance is
effective for fiscal years beginning after June 15, 2010
and may be applied retrospectively or prospectively for new or
materially modified arrangements. In addition, early adoption is
permitted. The Company is currently evaluating the potential
impact, if any, of the new accounting guidance on its
consolidated financial statements.
In August 2009, the FASB issued Update
No. 2009-05
or ASU
2009-05,
which amends topic ASC 820, Fair Value Measurements and
Disclosures to provide additional authoritative guidance for the
fair value measurement of liabilities. The guidance is effective
for the first reporting period (including interim periods)
beginning after issuance. The Company implemented ASU
2009-05 in
the fourth quarter of fiscal 2009. The adoption of
ASU 2009-05
did not have any impact on the Companys consolidated
financial statements.
In June 2009, the Financial Accounting Standards Board
(FASB) approved the FASB Accounting Standards
Codification (the Codification) as the single source
of authoritative nongovernmental GAAP. All existing accounting
standard documents, such as FASB, American Institute of
Certified Public Accountants, Emerging Issues Task Force and
other related literature, excluding guidance from the Securities
and Exchange Commission (SEC), will be superseded by
the Codification. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will
become nonauthoritative. The Codification does not change GAAP,
but instead introduces a new structure that will combine all
authoritative standards into a comprehensive, topically
organized online database. The Codification will be effective
for interim or annual periods ending after September 15,
2009. The Company implemented the Codification during the
quarter ended September 30, 2009. As the Codification was
not intended to change or alter existing GAAP, the
implementation of the Codification did not have any impact on
the Companys consolidated financial statements.
In May 2009, the FASB issued topic Accounting Standards
Codification (ASC)
855-10
(formerly Statement of Financial Accounting Standards (SFAS)
No. 165, Subsequent Events), which establishes general
standards of accounting for and disclosure of events that occur
after the balance sheet date, but before the financial
statements are issued or available to be issued
(subsequent events). ASC
855-10
requires disclosure of the date through which the entity has
evaluated subsequent events and the basis for that date. For
public entities, this is the date the financial statements are
issued. ASC
855-10 does
not apply to subsequent events or transactions that are within
the scope of other GAAP and will not result in significant
changes in the subsequent events reported by the Company. ASC
855-10 is
effective for interim or annual periods ending after
June 15, 2009.
59
In April 2009, the FASB issued topic ASC
825-10-65
(formerly FSP
FAS 107-1
and APB28-1, Interim Disclosures about Financial Instruments),
which requires disclosures about fair value of financial
instruments in interim periods of publicly traded companies that
were previously only required to be disclosed in annual
financial statements. The provisions of ASC
825-10-65
are effective for the interim reporting period ending after
June 15, 2009. The Company implemented ASC
825-10-65
during the quarter ended June 30, 2009. The adoption of ASC
825-10-65
did not have any impact on the Companys consolidated
financial statements.
Effective January 1, 2009, the Company adopted the
FASBs updated guidance related to business combinations
ASC 805 (formerly SFAS 141R, Business Combiantions). The
updated guidance establishes principles and requirements for how
the acquirer of a business recognizes and measures in its
financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the
acquiree. The updated standard also provides guidance for
recognizing and measuring the goodwill acquired in the business
combination and determines what information to disclose to
enable users of the financial statements to evaluate the nature
and financial effects of the business combination. The updated
standard also provides guidance for recognizing changes in an
acquirers existing income tax valuation allowances and tax
uncertainty accruals that result from a business combination
transaction as adjustments to income tax expense. The updated
guidance had a material impact on the Companys
consolidated financial statements during the year ended
December 31, 2009. In December 2009, the Company completed
its acquisition of MontaVista Software, Inc. Under the updated
guidance the Company expensed the transaction costs of $958,000
associated with the MontaVista acquisition, while under the
prior accounting standards such costs would have been
capitalized. Therefore, the adoption of the updated guidance
related to business combinations has had and likely will
continue to have a material impact on the Companys future
consolidated financial statements.
In April 2009, the FASB issued updated guidance related to
business combinations to address application issues regarding
initial recognition and measurement, subsequent measurement and
accounting and disclosure of assets and liabilities arising from
contingencies in a business combination. In circumstances where
the acquisition-date fair value for a contingency cannot be
determined during the measurement period and it is concluded
that it is probable that an asset or liability exists as of the
acquisition date and the amount can be reasonably estimated, a
contingency is recognized as of the acquisition date based on
the estimated amount. This updated guidance is effective for
assets or liabilities arising from contingencies in business
combinations completed by the Company on or after
January 1, 2009. Adoption of this guidance did not have any
impact on the Companys financial statements.
|
|
2.
|
Net
Income (Loss) Per Common Share
|
The Company calculates basic net income (loss) per common share
by dividing net income (loss) by the weighted average number of
common shares outstanding during the reporting period (excluding
shares subject to repurchase). Diluted net income (loss) per
common share is computed by dividing net income (loss) by the
weighted-average number of common and potentially dilutive
common equivalent shares outstanding during the reporting
period. Potentially dilutive securities are composed of
incremental common shares issuable upon the exercise of stock
options and restricted stock units.
The following table sets forth the computation of net income
(loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
(21,394
|
)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
41,435
|
|
|
|
40,385
|
|
|
|
29,006
|
|
Dilutive effect of employee stock plans
|
|
|
|
|
|
|
2,181
|
|
|
|
3,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
41,435
|
|
|
|
42,566
|
|
|
|
32,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
(0.52
|
)
|
|
|
0.04
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
|
(0.52
|
)
|
|
|
0.04
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
The following weighted average outstanding options and
restricted stock units were excluded from the computation of
diluted net income (loss) per common share for the periods
presented because including them would have had an anti-dilutive
effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
|
(In thousands)
|
|
Options to purchase common stock and restricted stock units
|
|
|
8,412
|
|
|
|
643
|
|
|
|
701
|
|
At December 31, 2009 and 2008, all of the Companys
investments were classified as cash equivalents and is comprised
of highly liquid investment in a money market fund. In
accordance with the guidance provided under fair value
measurements and disclosures, the Company determined the fair
value hierarchy of its money market fund as Level 1 input
(Level 1 inputs are quoted prices in active markets for
identical assets or liabilities), which approximated
$49.1 million and $63.6 million as of
December 31, 2009 and 2008, respectively.
|
|
4.
|
Balance
Sheet Components
|
Inventories
Inventories are stated at the lower of cost (determined using
the
first-in,
first-out method), or market value (estimated net realizable
value) and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Work-in-process
|
|
$
|
14,492
|
|
|
$
|
14,411
|
|
Finished goods
|
|
|
3,473
|
|
|
|
2,870
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,965
|
|
|
$
|
17,281
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Mask costs and test equipment
|
|
$
|
11,791
|
|
|
$
|
11,016
|
|
Software, computer and other equipment
|
|
|
19,352
|
|
|
|
15,402
|
|
Furniture, office equipment and leasehold improvements
|
|
|
466
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,609
|
|
|
|
26,539
|
|
Less: accumulated depreciation and amortization
|
|
|
(16,637
|
)
|
|
|
(15,424
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,972
|
|
|
$
|
11,115
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $7.7 million,
$8.7 million and $4.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
The Company leases certain design tools under time-based capital
lease arrangements which are included in property and equipment,
and they were $11.2 million and $8.9 million at
December 31, 2009 and 2008, respectively. Amortization
expense related to assets recorded under capital leasing
agreements was $3.0 million, $2.8 million and
$1.6 million for the years ended December 31, 2009,
2008 and 2007, respectively.
61
Accrued
expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued compensation and related benefits
|
|
$
|
3,577
|
|
|
$
|
1,191
|
|
Acquisition related payables
|
|
|
2,268
|
|
|
|
4,489
|
|
Restructuring related payables
|
|
|
623
|
|
|
|
389
|
|
Accrued warranty
|
|
|
209
|
|
|
|
154
|
|
Professional fees
|
|
|
688
|
|
|
|
835
|
|
Income tax payable
|
|
|
567
|
|
|
|
54
|
|
Other
|
|
|
512
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,444
|
|
|
$
|
7,697
|
|
|
|
|
|
|
|
|
|
|
Other
non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Accrued rent
|
|
$
|
884
|
|
|
$
|
187
|
|
Acquisition related payables
|
|
|
|
|
|
|
220
|
|
Restructuring related payables
|
|
|
1,036
|
|
|
|
464
|
|
Income tax payable
|
|
|
649
|
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,569
|
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
Parallogic
Corporation
On May 20, 2008, the Company acquired certain assets of
Parallogic, a privately held company. The aggregate purchase
price consisted of cash consideration of approximately
$1.3 million, including direct acquisition costs of
approximately $61,000. The Company paid $826,000 in cash at the
time of close of the acquisition. The remaining two subsequent
payments of $220,000 each were due at the completion of certain
milestones or the 18 th and 36 th month anniversaries of the
acquisition date, whichever comes first. In 2009, the Company
paid two installments of $220,000 each due to Parallogics
achievement of the milestones as defined in the merger agreement.
Identifiable intangible assets of approximately $450,000 consist
of intellectual property related to the developed technology as
well as incremental value associated with existing customer
relationships. The developed technology acquired from Parallogic
is multi-core software focused on gigabit packet processing and
security applications.
The total purchase price was allocated to tangible and
identifiable intangible assets based on their estimated fair
value as of May 20, 2008. The excess of the purchase price
over the tangible and identifiable intangible assets was
recorded as goodwill. The purchase price allocation was as
follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Net tangible assets
|
|
$
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
76
|
|
Developed technology
|
|
|
374
|
|
Goodwill
|
|
|
816
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
62
The fair value assigned to developed technology and customer
relationships were based upon future discounted cash flows
related to the assets projected income streams using a
discount rate of 20% and 15% respectively. Factors considered in
estimating the discounted cash flows to be derived from
developed technology and customer relationships include risk
related to the characteristics and applications of the
technology, existing and future markets and an assessment of the
age of the technology within its life span. The Company is
amortizing the purchased intangible assets to cost of revenue on
a straight-line basis over theirs estimated useful life of one
to five years.
The results of operations from Parallogic have been included in
the Companys consolidated statements of operations only
since the date of acquisition. Pro forma results of operations
for the acquisition have not been presented as the effect has
not been significant.
Of the total purchase price, approximately $816,000 was
allocated to goodwill, which represents the excess of the
purchase price over the estimated fair value of the underlying
net tangible and identifiable intangible assets acquired. The
goodwill was attributed to the premium paid for the opportunity
to expand and better serve the addressable market and achieve
greater long-term growth opportunities. All of the $816,000
allocated to goodwill is expected to be deductible for tax
purposes. With this acquisition the Company believes it will be
better positioned to deliver professional services for customers
to help reduce the
time-to-market
for design wins and provide high-performance tuning. The
goodwill will not be amortized, but instead will be tested for
impairment at least annually and more frequently if certain
indicators are present.
Star
Semiconductor Corporation
On August 1, 2008, the Company acquired substantially all
of the intangible assets and inventory and certain other
tangible assets of Star, a Taiwan-based design house in Hsinchu
that builds highly integrated ARM-based
system-on-a-chip,
or SOC, processors for the broadband, connected home and small
office/home office market segments. The Company paid
approximately $9.6 million in cash, including acquisition
related expenses of approximately $808,000. Included in the
purchase price was $1.0 million that was placed in escrow
for 60 days after the close in order to indemnify the
Company for certain matters, including breaches of
representations and warranties and covenants made by Star.
Subsequent to 60 days after the close of the acquisition,
the escrow was closed. The acquisition will provide the Company
with a highly experienced stand-alone SOC processor team based
in Taiwan. The results of operations from Star have been
included in the Companys consolidated statements of
operations only since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting, and, accordingly, the total estimated purchase price
was allocated to the tangible and identifiable intangible assets
and liabilities assumed based on their relative fair values. The
excess of the purchase price over the net tangible and
identifiable intangible assets was recorded as goodwill. The
recorded goodwill will not be amortized, but instead will be
tested for impairment at least annually and more frequently if
certain indicators are present. All of the $3.3 million
allocated to goodwill is expected to be deductible for state
income tax purposes but not for federal purposes. While the
Company has accrued all acquisition costs that it is aware of,
any adjustments to these costs will be adjusted to goodwill. The
purchase price was finalized in the third quarter of 2009. The
total purchase price was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Total purchase price of the acquisition of Star is as
follows:
|
|
|
|
|
Cash consideration
|
|
$
|
8,790
|
|
Acquisition related expenses(1)
|
|
|
808
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,598
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition related expenses include legal and accounting fees
and other external costs directly related to the acquisition. |
63
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
|
As Adjusted
|
|
|
Net tangible assets
|
|
$
|
973
|
|
Identifiable intangible assets
|
|
|
5,295
|
|
Goodwill
|
|
|
3,330
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,598
|
|
|
|
|
|
|
The following table represents details of the purchased
intangible assets as part of the acquisition (in thousands):
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Useful life
|
|
|
|
Intangible Assets
|
|
(in Years)
|
|
Amount
|
|
|
Existing technology product
|
|
4.0
|
|
$
|
3,849
|
|
Core technology product
|
|
4.0
|
|
|
467
|
|
Existing technology license
|
|
0.2
|
|
|
507
|
|
Customer contracts and relationships
|
|
7.0
|
|
|
307
|
|
Trade name
|
|
2.0
|
|
|
82
|
|
Order backlog
|
|
0.2
|
|
|
83
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
5,295
|
|
|
|
|
|
|
|
|
The fair value of the existing technology product,
existing technology-license and the customer contracts and
relationships was determined based on an income approach using
the discounted cash flow method. The discount rate of 18.0% used
to value the existing technology product and discount
rate of 20.0% used to value the customer contracts and
relationships was estimated using a discount rate based on
implied rate of return of the transaction, adjusted for the
specific risk profile of each asset. The discount rate of 4.5%
used to value the existing technology-license was based on a
short-term risk free interest rate. The remaining useful life
was estimated based on historical product development cycles,
the projected rate of technology attrition, and the patterns of
projected economic benefit of the assets.
The fair value of core technology and trade name was determined
using a variation of income approach known as the profit
allocation method. The estimated savings in profit were
determined using a 3.0% profit allocation rate and a discount
rate of 18.0%. The estimated useful life was determined based on
the future economic benefit expected to be received from the
assets.
The fair value of order backlog was determined using a cost
approach where the fair value was based on estimated sales and
marketing expenses expected to be incurred to regenerate the
order backlog. The estimated useful life was determined based on
the future economic benefit expected to be received from the
asset.
W&W
Communications, Inc.
On December 23, 2008, the Company completed the acquisition
of W&W Communications, Inc. (W&W). Total
merger consideration was approximately $8.3 million, which
consisted of cash consideration of approximately
$3.9 million, 338,245 unregistered common shares of the
Company valued at approximately $3.1 million (the fair
value of Caviums stock of $9.16 per share was derived
using an average closing price of the Companys shares of
common stock on the announcement date and for the two days prior
to, and two days subsequent to the public announcement of the
acquisition on November 20, 2008) and direct
acquisition costs of approximately $1.3 million.
Additionally, in order to effect the acquisition of W&W,
the Company assumed and immediately paid-off W&Ws
notes payable of approximately $8.9 million. As the notes
payable were immediately paid-off, the $8.9 million has
been presented as a cash outflow and included in
Acquisition of businesses, net of cash acquired
within the cash flows used in investing activities section of
the consolidated statement of cash flows for the year ended
December 31, 2008. The acquisition allowed the Company to
strategically acquire W&Ws developed technology and
its design team for the emerging consumer market for high
definition encoding semiconductors. In connection with the
acquisition, the Company recorded approximately $880,000 of
restructuring costs related to the contractual operating lease
obligations of a W&W facility in accordance with the
guidance provided under business
64
combinations. The costs associated with the obligation were
recognized as a liability assumed in the purchase business
combination and included in the purchase price allocation. The
results of operations from W&W have been included in the
Companys consolidated statements of operations only since
the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting, and accordingly, the total estimated purchase price
was allocated to the tangible and identifiable intangible assets
and liabilities assumed based on their relative fair values. The
excess of the purchase price over the net tangible and
identifiable intangible assets was recorded as goodwill. The
recorded goodwill will not be amortized, but instead will be
tested for impairment at least annually and more frequently if
certain indicators are present. None of the $8.9 million
allocated to goodwill is deductible for federal or state income
tax purposes. While the Company has accrued all acquisition
costs that it is aware of, any adjustments to these costs will
be adjusted to goodwill. The purchase price allocation was
finalized in the fourth quarter of 2009. The total purchase
price was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Total purchase price of the acquisition of W&W is as
follows:
|
|
|
|
|
Cash consideration(1)
|
|
$
|
3,891
|
|
Value of common stock issued
|
|
|
3,098
|
|
Acquisition related expenses(2)
|
|
|
1,262
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
8,251
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the total cash consideration of $3.9 million,
$0.1 million was paid in fiscal 2008 and $3.8 million
was paid in fiscal 2009. |
|
(2) |
|
Acquisition related expenses of $1.3 million include legal
and accounting fees and other external costs directly related to
the acquisition, of which $0.5 million was paid in fiscal
2008 and the remaining $0.8 million was paid in fiscal 2009. |
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
|
As Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
283
|
|
Inventories
|
|
|
829
|
|
Other assets
|
|
|
224
|
|
Goodwill
|
|
|
8,887
|
|
In-process research and development
|
|
|
1,319
|
|
Other intangibles
|
|
|
10,114
|
|
Accounts payable
|
|
|
(1,357
|
)
|
Accrued expenses
|
|
|
(2,438
|
)
|
Accrued restructuring
|
|
|
(750
|
)
|
Notes payable
|
|
|
(8,860
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
8,251
|
|
|
|
|
|
|
The fair value of intangible assets of $10.1 million has
been allocated to the following identifiable intangible asset
categories:
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Useful Life
|
|
|
|
Intangible Assets
|
|
(in Years)
|
|
Amount
|
|
|
|
|
|
(In thousands)
|
|
|
Existing technology
|
|
1-5
|
|
$
|
7,768
|
|
Core technology
|
|
5.0
|
|
|
1,306
|
|
Customer contracts and relationships
|
|
6.0
|
|
|
583
|
|
Order backlog
|
|
0.6
|
|
|
457
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
10,114
|
|
|
|
|
|
|
|
|
65
Of the $11.4 million of acquired intangible assets,
$1.3 million was assigned to in-process research and
development or IPR&D. The acquired IPR&D was expensed
immediately as it relates to the acquisition of an
in-process
technology project which had not reached technological
feasibility at the time of acquisition, and had no future
alternative use. The fair value of the IPR&D was determined
based on an income approach using the discounted cash flow
method. A discount rate of 24% used to value the project was
based on the implied rate of return of the transaction, adjusted
to reflect additional risks inherent in the acquired project.
The Company expects to benefit from the IPR&D project
beginning in 2010.
The fair value of the existing technology and customer contracts
and relationships was determined based on an income approach
using the discounted cash flow method. A discount rate of 18%
was used to value the existing technology and a discount rate of
20% was used to value the customer contracts and relationships
and was estimated using a discount rate based on implied rate of
return of the transaction, adjusted for the specific risk
profile of each asset. The remaining useful life of existing
technology was estimated based on historical product development
cycles, the projected rate of technology attrition, and the
patterns of project economic benefit of the assets. The
remaining useful life of customer contracts and relationships
was estimated based on customer attrition, new customer
acquisition and future economic benefit of the asset.
The fair value of core technology was determined using a
variation of income approach known as the profit allocation
method. The estimated savings in profit were determined using a
5% profit allocation rate and a discount rate of 20%. The
estimated useful life was determined based on the future
economic benefit expected to be received from the asset.
The fair value of order backlog was determined using a cost
approach where the fair value was based on estimated sales and
marketing expenses expected that would have to be incurred to
regenerate the order backlog. The estimated useful life was
determined based on the future economic benefit expected to be
received from the asset.
MontaVista
Software, Inc.
On December 14, 2009, the Company completed the acquisition
of MontaVista. Pursuant to the merger agreement, the Company
paid approximately $10.9 million in cash and issued
1,592,193 common shares of the Company valued at approximately
$34.3 million based on the Companys December 14,
2009 closing stock price per share. Included in the purchase
price was approximately $1.1 million in cash and
160,000 shares of the Companys common stock that were
placed in escrow for a limited period after closing in order to
indemnify the Company for certain matters, including breaches of
representations and warranties and covenants made by MontaVista
in the merger agreement. In addition per the merger agreement,
the Company paid approximately $6.0 million, consisting of
a mix of shares of the Companys common stock and cash to
certain individuals in connection with the termination of
MontaVistas 2006 Retention Compensation Plan.
The Company accounted for this business combination by applying
the acquisition method, and accordingly, the estimated purchase
price was allocated to the tangible assets and identifiable
intangible assets acquired and liabilities assumed based on
their relative fair values. The excess of the purchase price
over the net tangible and identifiable intangible assets and
liabilities assumed was recorded as goodwill. The final purchase
price allocation may differ based upon the final purchase price.
The purchase price allocation will be finalized in 2010. The
total purchase price was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Cash consideration(1)
|
|
$
|
10,948
|
|
Value of Caviums common stock issued
|
|
|
34,296
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
45,244
|
|
|
|
|
|
|
|
|
|
(1) |
|
As of December 31, 2009, of the total cash consideration of
$10.9 million, $8.6 million was paid and the remaining
$2.3 million was not paid and was recorded as acquisition
related liabilities in accrued expenses and other current
liabilities. This amount is expected to be paid in 2010. |
66
The preliminary purchase price allocation was as follows (in
thousands):
|
|
|
|
|
|
|
Amount
|
|
|
Cash and cash equivalents
|
|
$
|
1,207
|
|
Accounts receivable
|
|
|
1,185
|
|
Prepaid expenses and other assets
|
|
|
1,299
|
|
Property and equipment
|
|
|
729
|
|
Goodwill
|
|
|
43,574
|
|
Identifiable intangibles
|
|
|
14,909
|
|
Accounts payable and accrued liabilities
|
|
|
(10,490
|
)
|
Deferred revenue
|
|
|
(7,169
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
45,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Useful Life
|
|
|
|
Intangible Assets
|
|
(in Years)
|
|
Amount
|
|
|
|
|
|
(In thousands)
|
|
|
Existing technology
|
|
5.0
|
|
$
|
1,295
|
|
Subscriber base
|
|
7.0
|
|
|
10,485
|
|
Customer contracts and relationships
|
|
6.0
|
|
|
2,215
|
|
Tradename/Trademarks
|
|
5.0
|
|
|
914
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
$
|
14,909
|
|
|
|
|
|
|
|
|
The fair value of the subscriber base as well as the customer
contracts and related relationships were determined based on an
income approach using the discounted cash flow method. A
discount rate of 12.0% was used to value the subscriber base as
well as the customer contracts and related relationships. In
each case, the discount rate was estimated using a discount rate
based on the implied rate of return of the transaction, adjusted
for the specific risk profile of each asset. The remaining
useful life of the subscriber base as well as the customer
contracts and related relationships were estimated based on
projected customer attrition and new customer acquisition, and
the pattern of projected economic benefit of the asset.
The fair values of the existing technology and the trade
name / trademarks were determined using a variation of
the income approach known as the profit allocation method. To
estimate the fair value of the existing technology an estimated
savings in profit was determined using a 3.0% profit allocation
rate and a 12.0% discount rate. The remaining useful life for
the existing technology was based on historical product
development cycles, the projected rate of technology attrition,
and the pattern of projected economic benefit of the asset. To
estimate the fair value of the trade name / trademarks
an estimated savings in profit was determined using a 1.0%
profit allocation rate and a 14.0% discount rate. The remaining
useful life for the trade name / trademarks was
determined based on the future economic benefit expected to be
received from the asset. In each case, the discount rate was
estimated using a discount rate based on the implied rate of
return of the transaction, adjusted for the specific risk
profile of each asset.
Of the total purchase price, $43.6 million has been
allocated to goodwill. Goodwill represents the excess of the
purchase price over the fair value of the underlying net
tangible and identifiable intangible assets acquired and
liabilities assumed and goodwill is not deductible for tax
purposes. The acquisition of MontaVista is intended to
complement Companys broad portfolio of multi-core
processors to deliver integrated and optimized embedded
solutions to the market. These new opportunities, among other
factors were the reasons for the establishment of the purchase
price, resulting in the recognition of a significant amount of
goodwill. Goodwill amounts are not amortized, but rather are
tested for impairment at least annually. In the event that the
Company determines that the value of goodwill has become
impaired, the Company will record an accounting charge for the
amount of impairment during the fiscal quarter in which such
determination is made.
Pro
forma financial information
The unaudited financial information in the table below
summarizes the combined results of operations of the Company,
Star, W&W and MontaVista, on a pro forma basis, as though
the companies had been combined as of the beginning of each of
the periods presented. The pro forma financial information is
presented for informational purposes only and is not indicative
of the results of operations that would have been achieved if
the acquisitions had
67
taken place at the beginning of each of the periods presented.
The pro forma financial information for all periods presented
includes the purchase accounting adjustments on historical Star
and W&W inventory, adjustments to depreciation on acquired
property and equipment, amortization charges from acquired
intangible assets and related tax effects.
The unaudited pro forma financial information for the year ended
December 31, 2009 combines the historical results of the
Company and MontaVista subsequent to December 14, 2009 (the
acquisition date), and the historical results for MontaVista
from January 1, 2009 to December 14, 2009. In 2009,
approximately $935,000 of revenue resulted from MontaVista
subsequent to the acquisition date. The unaudited pro forma
financial information for the year ended December 31, 2008
combines the results for the Company for the year ended
December 31, 2008, which include the results of Star
subsequent to August 1, 2008 (the acquisition date) and
W&W subsequent to December 23, 2008 (the acquisition
date), and the historical results for Star for the seven months
ended July 31, 2008, W&W from January 1, 2008 to
December 23, 2008 and MontaVista for the year ended
December 31, 2008. The following table summarizes the pro
forma financial information (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
Net revenue
|
|
$
|
128,442
|
|
|
$
|
124,862
|
|
Net loss
|
|
$
|
(36,998
|
)
|
|
$
|
(20,720
|
)
|
Net loss per common share, basic
|
|
$
|
(0.86
|
)
|
|
$
|
(0.49
|
)
|
Net loss per common share, diluted
|
|
$
|
(0.86
|
)
|
|
$
|
(0.49
|
)
|
|
|
6.
|
Goodwill
and Intangible Assets, Net
|
Goodwill
The following table presents the changes in the carrying amount
of goodwill:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of the year
|
|
$
|
12,925
|
|
|
$
|
|
|
Additions
|
|
|
43,574
|
|
|
|
12,925
|
|
Adjustments
|
|
|
108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
56,607
|
|
|
$
|
12,925
|
|
|
|
|
|
|
|
|
|
|
During 2009, the addition of $43.6 million was related to
the acquisition completed in 2009 and the adjustments of
$108,000 was related to prior acquisitions completed in 2008.
During 2008, the addition of $12.9 million was related to
the acquisitions completed in 2008. (See Note 5)
Intangible
assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Existing and core technology product
|
|
$
|
27,750
|
|
|
$
|
17,614
|
|
Technology license
|
|
|
10,196
|
|
|
|
9,536
|
|
Customer contracts and relationships
|
|
|
3,181
|
|
|
|
966
|
|
Trade name
|
|
|
996
|
|
|
|
82
|
|
Order backlog
|
|
|
540
|
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,663
|
|
|
|
28,738
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Existing and core technology product
|
|
|
(8,027
|
)
|
|
|
(4,398
|
)
|
Technology license
|
|
|
(8,389
|
)
|
|
|
(6,787
|
)
|
Customer contracts and relationships
|
|
|
(253
|
)
|
|
|
(65
|
)
|
Trade name
|
|
|
(66
|
)
|
|
|
(17
|
)
|
Order backlog
|
|
|
(540
|
)
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,388
|
|
|
$
|
16,958
|
|
|
|
|
|
|
|
|
|
|
68
Amortization expenses were $7.1 million, $3.3 million
and $1.5 million for the years ended December 31,
2009, 2008 and 2007, respectively. In the year ended
December 31, 2009, the Company recorded amortization
expense of approximately $1.3 million related to the
reduction of the estimated remaining useful life of one of the
intangible assets acquired in the acquisition of W&W. The
weighted-average remaining estimated lives for intangible assets
are approximately 4.1 years for existing and core
technology-product and 1.9 years for technology license.
The weighted average remaining estimated life of intangible
assets in total is approximately 2.9 years. Future
amortization expenses are estimated to be $6.3 million for
2010, $5.2 million for 2011, $4.5 million for 2012,
$3.7 million for 2013 and $5.7 million thereafter.
In connection with the acquisition of W&W, the Company
recorded restructuring liabilities of approximately $880,000. In
the third quarter of 2009, the Company made certain changes in
estimates of approximately $190,000 to its restructuring accrual
as a result of completion of a
sub-lease
agreement. The liabilities are related to an operating lease
commitment for one W&W facility, which the Company no
longer occupies. The Company expects the W&W obligation to
be settled by the end of January 2011 with payments of
approximately, $442,000 in 2010 and $37,000 in 2011. The Company
expects
sub-lease
income of approximately $158,000 in 2010.
The Company assumed a facility related restructuring liability
fair valued at approximately $1.3 million from MontaVista.
The lease restructuring was initiated by MontaVista before the
contemplation of the acquisition by the Company and was related
to the operating lease facility for the portion that MontaVista
no longer occupies. This liability assumed is reflected as an
addition to the Companys Excess Facility Related Cost in
the table below. The Company expects the MontaVista obligation
to be settled by the end of January 2013 with payments of
approximately, $434,000 each in 2010, 2011 and 2012,
respectively, and $36,000 in 2013. Of the $1.7 million net
balance as of December 31, 2009, $623,000 was recorded as
restructuring related payables in accrued expenses and other
current liabilities and the remaining $1.0 million was
recorded in other non-current liabilities.
In connection with a workforce reduction action in the three
months ended June 30, 2009, the Company incurred
approximately $316,000 in expenses primarily related to
severance and related costs. These charges were recorded as
operating expenses and the Company fully paid the amount by the
end of June, 2009.
A summary of the accrued restructuring liabilities, net of
related activities, as of December 31, 2009 is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
Excess Facility
|
|
|
|
|
|
|
Benefits
|
|
|
Related Costs
|
|
|
Total
|
|
|
Accrued restructuring January 1, 2009
|
|
$
|
|
|
|
$
|
853
|
|
|
$
|
853
|
|
Additions
|
|
|
316
|
|
|
|
1,364
|
|
|
|
1,680
|
|
Cash payments and other non-cash adjustments
|
|
|
(316
|
)
|
|
|
(558
|
)
|
|
|
(874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued restructuring, net December 31, 2009
|
|
$
|
|
|
|
$
|
1,659
|
|
|
$
|
1,659
|
|
Less: current portion
|
|
|
|
|
|
|
623
|
|
|
|
623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
|
|
|
$
|
1,036
|
|
|
$
|
1,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
and Preferred Stock
As of December 31, 2009, the Company is authorized to issue
200,000,000 shares of $0.001 par value common stock
and 10,000,000 shares of $0.001 par value preferred
stock. The Company has the authority to issue preferred stock in
one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of
redemption and liquidation preferences. As of December 31,
2009 and 2008, no shares of preferred stock were outstanding.
2007
Stock Incentive Plan
Upon completion of its IPO in May 2007, the Company adopted the
2007 Stock Incentive Plan, the 2007 Plan, which reserved
5,000,000 shares of the Companys common stock. The
number of shares of the common stock reserved for issuance will
automatically increase on January 1st, from January 1,
2008 through January 1, 2017, by
69
the lesser of (i) 5% of the total number of shares of the
common stock outstanding on the applicable
January 1st date or (ii) 5,000,000 shares.
The board of directors may also act, prior to the first day of
any fiscal year, to increase the number of shares as the board
of directors shall determine, which number shall be less than
each of (i) and (ii). The maximum number of shares that may
be issued pursuant to the exercise of incentive stock options
under the 2007 Plan is equal to 10,000,000 shares. As of
December 31, 2009, there were 3,023,692 shares
reserved for issuance under the 2007 Plan. The 2007 Plan
provides for the grant of incentive stock options, non-statutory
stock options, restricted stock awards, restricted stock unit
awards, stock appreciation rights, performance stock awards, and
other forms of equity compensation (collectively, stock
awards), and performance cash awards, all of which may be
granted to employees (including officers), directors, and
consultants or affiliates. Awards granted under the 2007 Plan
vest at the rate specified by the plan administrator, typically
with
1/8th of
the shares vesting six months after the date of grant and
1/48th of
the shares vesting monthly thereafter over the next three and
one half years. The term of awards expires seven to ten years
from the date of grant. As of December 31, 2009,
6,424,374 shares have been granted under the 2007 Plan.
2001
Stock Incentive Plan
As of December 31, 2009, the Companys 2001 Stock
Incentive Plan, the 2001 Plan, reserved 449,808 shares of
the Companys common stock for issuance to employees,
officers, consultants and advisors of the Company. Options
granted under the 2001 Plan were either incentive stock options
or non-statutory stock options as determined by the
Companys board of directors. Options granted under the
2001 Plan vest at the rate specified by the plan administrator,
typically with
1/8th of
the shares vesting six months after the date of grant and
1/48th of
the shares vesting monthly thereafter over the next three and
one half years to four and one half years. The term of option
expires ten years from the date of grant. No shares were granted
under the 2001 Plan in 2009.
Under the Companys 2001 Plan, certain employees have the
right to early-exercise unvested stock options, subject to
rights held by the Company to repurchase unvested shares in the
event of voluntary or involuntary termination. For options
granted prior to March 2005, the Company has the right to
repurchase any such shares at the shares original purchase
price. For options granted after March 2005, the Company has the
right to repurchase such shares at the lower of market value or
the original purchase price.
Detail related to activity of all unvested shares of common
stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
Number of Unvested
|
|
|
Exercise/Purchase
|
|
|
|
Shares Outstanding
|
|
|
Price
|
|
|
Balance as of December 31, 2006
|
|
|
872,210
|
|
|
$
|
1.63
|
|
Issued
|
|
|
80,397
|
|
|
|
5.64
|
|
Vested
|
|
|
(501,360
|
)
|
|
|
1.59
|
|
Repurchased
|
|
|
(14,585
|
)
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
436,662
|
|
|
$
|
2.45
|
|
Issued
|
|
|
|
|
|
|
0.00
|
|
Vested
|
|
|
(286,303
|
)
|
|
|
1.94
|
|
Repurchased
|
|
|
(4,795
|
)
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
145,564
|
|
|
$
|
3.50
|
|
Issued
|
|
|
|
|
|
|
|
|
Vested
|
|
|
(101,391
|
)
|
|
|
3.00
|
|
Repurchased
|
|
|
(2,502
|
)
|
|
|
5.99
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
41,671
|
|
|
$
|
4.59
|
|
|
|
|
|
|
|
|
|
|
70
Detail related to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
|
Weighted Average
|
|
|
|
Outstanding
|
|
|
Exercise Price
|
|
|
Balance as of December 31, 2006
|
|
|
4,221,404
|
|
|
$
|
2.05
|
|
Options granted
|
|
|
546,575
|
|
|
|
15.31
|
|
Options exercised
|
|
|
(742,212
|
)
|
|
|
1.97
|
|
Options cancelled and forfeited
|
|
|
(105,766
|
)
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,920,001
|
|
|
$
|
3.86
|
|
Options granted
|
|
|
2,124,475
|
|
|
|
16.32
|
|
Options exercised
|
|
|
(516,759
|
)
|
|
|
1.58
|
|
Options cancelled and forfeited
|
|
|
(130,263
|
)
|
|
|
12.15
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
5,397,454
|
|
|
$
|
8.78
|
|
Options granted
|
|
|
3,032,486
|
|
|
|
11.39
|
|
Options exercised
|
|
|
(523,932
|
)
|
|
|
4.65
|
|
Options cancelled and forfeited
|
|
|
(336,911
|
)
|
|
|
14.93
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
7,569,097
|
|
|
$
|
9.84
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value for options exercised during the
year ended December 31, 2009 and 2008 were
$9.9 million and $10.5 million, respectively,
representing the difference between the closing price of the
Companys common stock at the date of exercise and the
exercise price paid.
The following table summarizes information about stock options
outstanding as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Aggregrate
|
|
Exercise Prices
|
|
of Shares
|
|
|
Term
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Intrinsic Value
|
|
|
$0.20-1.02
|
|
|
973,255
|
|
|
|
5.36
|
|
|
$
|
0.87
|
|
|
|
973,255
|
|
|
$
|
0.87
|
|
|
|
|
|
1.50-1.50
|
|
|
47,344
|
|
|
|
5.97
|
|
|
|
1.50
|
|
|
|
47,344
|
|
|
|
1.50
|
|
|
|
|
|
3.04-3.04
|
|
|
1,297,733
|
|
|
|
6.20
|
|
|
|
3.04
|
|
|
|
1,045,262
|
|
|
|
3.04
|
|
|
|
|
|
3.74-8.52
|
|
|
898,960
|
|
|
|
6.39
|
|
|
|
7.76
|
|
|
|
487,011
|
|
|
|
7.49
|
|
|
|
|
|
10.32-10.32
|
|
|
1,888,851
|
|
|
|
5.71
|
|
|
|
10.32
|
|
|
|
363,910
|
|
|
|
10.32
|
|
|
|
|
|
12.56-14.42
|
|
|
169,869
|
|
|
|
6.05
|
|
|
|
13.79
|
|
|
|
40,539
|
|
|
|
13.83
|
|
|
|
|
|
14.80-14.80
|
|
|
1,209,733
|
|
|
|
5.19
|
|
|
|
14.80
|
|
|
|
501,062
|
|
|
|
14.80
|
|
|
|
|
|
16.32-31.54
|
|
|
1,083,352
|
|
|
|
5.12
|
|
|
|
21.11
|
|
|
|
309,926
|
|
|
|
22.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.20-31.54
|
|
|
7,569,097
|
|
|
|
5.67
|
|
|
$
|
9.84
|
|
|
|
3,768,309
|
|
|
$
|
7.00
|
|
|
$
|
106,570,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
3,768,309
|
|
|
|
5.67
|
|
|
$
|
7.00
|
|
|
|
|
|
|
|
|
|
|
$
|
63,798,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
7,380,831
|
|
|
|
5.67
|
|
|
$
|
9.75
|
|
|
|
|
|
|
|
|
|
|
$
|
104,569,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value for options outstanding at
December 31, 2009 was $106.6 million representing the
difference between the weighted average exercise price and
$23.83, the closing price of the Companys common stock on
December 31, 2009, as reported on The NASDAQ Global Market,
for all in the money options outstanding.
71
The fair value of each employee option grant for the years ended
December 31, 2009, 2008 and 2007 was estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions.
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
1.52% - 2.19%
|
|
1.31% - 3.32%
|
|
3.29% - 4.72%
|
Expected life
|
|
4-5 years
|
|
4-5 years
|
|
4-6 years
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Volatility
|
|
58% to 64%
|
|
55% to 63%
|
|
55% to 56%
|
The Company determined that it was not practical to calculate
the historical volatility of its share price since the
Companys securities were not publicly traded prior to May
2007 and before which there was no readily determinable market
value for its stock; Further, the Company is a high-growth
technology company whose future operating results are not
comparable to its prior operating results. Therefore, the
Company estimated its expected volatility based on reported
market value data for a group of publicly traded companies,
which it selected from certain market indices, that the Company
believed was relatively comparable after consideration of their
size, stage of life cycle, profitability, growth, and risk and
return on investment. The expected term represents the period
that stock-based awards are expected to be outstanding, giving
consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as influenced by changes to the terms of our
stock-based awards. For the year ended December 31, 2009,
the Company used the simplified method of determining the
expected term as permitted by the provisions of stock-based
compensation
The estimated weighted-average grant date fair value of options
granted during the twelve months ended December 31, 2009
and 2008 were $5.77 and $7.87, respectively. There was
$22.3 million and $16.6 million of unrecognized
compensation cost as of December 31, 2009 and 2008,
respectively. The unrecognized compensation cost at
December 31, 2009 and 2008 is expected to be recognized
over a weighted average period of 2.69 years and
2.67 years, respectively.
Restricted
Stock Unit Awards
The company began issuing restricted stock units, or RSUs, in
the fourth quarter of 2007. Shares are issued on the date the
restricted stock units vest, and the fair value of the
underlying stock on the dates of grant is recognized as
stock-based compensation over a three or four-year vesting
period. Below is the information as of December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Number of
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
per Share
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
12,500
|
|
|
|
31.54
|
|
Issued and released
|
|
|
(500
|
)
|
|
|
31.54
|
|
Cancelled and forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
12,000
|
|
|
$
|
31.54
|
|
Granted
|
|
|
300,820
|
|
|
|
16.82
|
|
Issued and released
|
|
|
(25,125
|
)
|
|
|
20.07
|
|
Cancelled and forfeited
|
|
|
(6,762
|
)
|
|
|
16.54
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
280,933
|
|
|
$
|
17.16
|
|
Granted
|
|
|
768,893
|
|
|
|
16.48
|
|
Issued and released
|
|
|
(175,902
|
)
|
|
|
13.10
|
|
Cancelled and forfeited
|
|
|
(31,388
|
)
|
|
|
14.25
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2009
|
|
|
842,536
|
|
|
$
|
17.49
|
|
|
|
|
|
|
|
|
|
|
Expected to vest as of December 31, 2009
|
|
|
779,425
|
|
|
$
|
17.49
|
|
72
The total intrinsic value of the RSUs issued as of
December 31, 2009 was $20.1 million, representing the
closing price of the Companys stock on December 31,
2009, multiplied by the number of non-vested RSUs expected to
vest as of December 31, 2009.
For RSUs, stock-based compensation is calculated based on the
market price of the Companys common stock on the date of
the grant, multiplied by the number of RSUs granted. The grant
date fair value of RSUs, less estimated forfeitures, is
recognized on a straight-line basis, over the vesting period.
As of December 31, 2009 and 2008, there was
$13.1 million and $4.1 million of unrecognized
compensation cost related to restricted stock units granted
under the Companys 2007 Equity Incentive Plan. The
unrecognized compensation cost at December 31, 2009 and
2008 is expected to be recognized over a weighted average period
of 3.3 years and 3.3 years, respectively.
The Company recorded income tax expense of $249,000, $930,000
and $142,000 for the years ended December 31, 2009, 2008
and 2007, respectively. The provision for the year ended
December 31, 2009 primarily consists of international and
state income taxes. The provision for the years ended
December 31, 2008 and 2007 was primarily due to the federal
alternative minimum tax on profits in the Companys United
States profits adjusted by certain non-deductible items,
international taxes and state income taxes.
The domestic and foreign components of income (loss) before
income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(8,978
|
)
|
|
$
|
14,131
|
|
|
$
|
11,037
|
|
Foreign
|
|
|
(12,167
|
)
|
|
|
(11,694
|
)
|
|
|
(8,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(21,145
|
)
|
|
$
|
2,437
|
|
|
$
|
2,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
(47
|
)
|
|
$
|
865
|
|
|
$
|
97
|
|
Foreign
|
|
|
296
|
|
|
|
65
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
249
|
|
|
$
|
930
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate differs from the United
States federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
|
Income tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
(0.4
|
)
|
|
|
1.6
|
|
|
|
1.1
|
|
Non-deductible in-process research and development
|
|
|
|
|
|
|
18.4
|
|
|
|
|
|
Non-deductible stock compensation costs
|
|
|
(2.2
|
)
|
|
|
10.4
|
|
|
|
|
|
Alternative minimum tax
|
|
|
|
|
|
|
33.0
|
|
|
|
2.5
|
|
Change in valuation allowance
|
|
|
(10.5
|
)
|
|
|
(228.6
|
)
|
|
|
(160.4
|
)
|
Foreign net operating losses not benefited
|
|
|
(21.7
|
)
|
|
|
166.0
|
|
|
|
129.0
|
|
Other
|
|
|
(0.4
|
)
|
|
|
3.4
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
(1.2
|
)%
|
|
|
38.2
|
%
|
|
|
6.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73
The tax effects of the temporary differences that give rise to
deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax credits
|
|
$
|
14,020
|
|
|
$
|
4,481
|
|
Net operating loss carryforwards
|
|
|
22,428
|
|
|
|
6,340
|
|
Capitalized research and development
|
|
|
36
|
|
|
|
85
|
|
Depreciation and amortization
|
|
|
3,179
|
|
|
|
3,610
|
|
Stock compensation
|
|
|
4,789
|
|
|
|
2,372
|
|
Other
|
|
|
2,867
|
|
|
|
1,485
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
47,319
|
|
|
|
18,373
|
|
Less: valuation allowance
|
|
|
(39,601
|
)
|
|
|
(14,430
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
7,718
|
|
|
|
3,943
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(7,474
|
)
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
244
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009, the Company had total net
operating loss carryforwards for federal and state income tax
purposes of $88.9 million and $115.2 million,
respectively. If not utilized, these net federal and state
operating loss carryforwards will expire beginning in 2020 and
2015, respectively. The federal net operating loss carryforwards
of $88.9 million are comprised of stock option deductions
of $30.9 million, which will be credited to equity when
realized. The state net operating loss carryforwards of
$115.2 million are comprised of stock option deductions of
$31.7 million, which will be credited to equity when
realized.
The Company is tracking the portion of its deferred tax assets
attributable to stock option benefits in a separate memo account
pursuant to the accounting guidance for stock-based
compensation. Therefore, these amounts are no longer included in
the Companys gross or net deferred tax assets. Pursuant to
the guidance under stock-based compensation, the stock option
benefits of approximately $11.8 million will only be
recorded to equity when they reduce cash taxes payable.
The Company also had federal and other state research and
development tax credit carryforwards of approximately
$8.4 million and $9.1 million, respectively. The
federal and other state tax credit carryforwards will expire
commencing 2022 and 2019, respectively, except for the
California research tax credits which carry forward
indefinitely. The Company also has federal alternative minimum
tax credits of approximately $0.7 million, which have no
expiration date. The Company currently maintains a full
valuation allowance on its deferred tax assets in the United
States.
The Companys net deferred tax assets relate predominantly
to its United States tax jurisdiction. The valuation allowance
is determined in accordance with the provisions of income taxes
which requires an assessment of both positive and negative
evidence when determining whether it is more likely than not
that deferred tax assets are recoverable; such assessment is
required on a jurisdiction by jurisdiction basis. The expected
U.S. loss, among other considerations, provides negative
evidence, and accordingly, a full valuation allowance was
recorded against its deferred tax assets. The Company intends to
maintain a full valuation allowance on its deferred tax assets
in the United States until sufficient positive evidence exists
to support reversal of the valuation allowance. During 2008 and
2009, the Company maintained a full valuation allowance on its
deferred tax assets in the United States. At December 31,
2009, 2008 and 2007 the valuation allowance against the
Companys deferred tax assets was $39.6 million,
$14.4 million and $13.1 million, respectively.
The Company has reviewed whether the utilization of its net
operating losses and research credits are subject to a
substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and
74
similar state provisions. Utilization of these carryforwards are
restricted and result in some amount of these carryforwards
expiring prior to benefiting the Company.
Undistributed earnings of our foreign subsidiary of
approximately $0.3 million and $0.3 million at
December 31, 2009 and 2008, respectively, are considered to
be indefinitely reinvested and, accordingly, no provisions for
federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
The following table summarizes the activity related to the
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of the year
|
|
$
|
4,033
|
|
|
$
|
3,574
|
|
|
$
|
3,264
|
|
Gross increases related to prior years tax positions
|
|
|
117
|
|
|
|
147
|
|
|
|
40
|
|
Gross increases related to current years tax positions
|
|
|
699
|
|
|
|
312
|
|
|
|
270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
4,849
|
|
|
$
|
4,033
|
|
|
$
|
3,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $4.9 million
at December 31, 2009 was $0.6 million of tax benefits
that, if recognized, would reduce the Companys annual
effective tax rate. The Companys practice is to recognize
interest
and/or
penalties related to income tax matters in income tax expense.
The Company also accrued potential penalties and interest of
$29,000, $19,000 and $9,600 related to these unrecognized tax
benefits in 2009, 2008 and 2007, respectively. Of the $4.9
million at December 31, 2009, approximately $2.7 million is
related to tax positions for which it is reasonably possible
that the statute of limitations will expire in various
jurisdictions within the next twelve months.
The Company in the future may expand its international
operations and staff to better support its expansion into
international markets. The Companys foreign subsidiaries
have acquired certain rights to sell the existing intellectual
property and intellectual property that will be developed or
licensed in the future. The existing rights were transferred for
an initial payment. As a result of these changes and an
expanding customer base in Asia, the Company expects that an
increasing percentage of its consolidated pre-tax income will be
derived from, and reinvested in, its Asian operations. The
Company anticipates that this pre-tax income will be subject to
foreign tax at relatively lower tax rates when compared to the
United States federal statutory tax rate and as a consequence,
the Companys effective income tax rate is expected to be
lower than the United States federal statutory rate.
The Companys major tax jurisdictions are the United States
federal government, the state of California and Singapore. The
Company files income tax returns in the United States federal
jurisdiction, the state of California and various state and
foreign tax jurisdictions in which it has a subsidiary or branch
operation. The United States federal corporation income tax
returns beginning with the 2000 tax year remain subject to
examination by the Internal Revenue Service, or IRS. The
California corporation income tax returns beginning with the
2000 tax year remain subject to examination by the California
Franchise Tax Board. There are no on-going tax audits in the
major tax jurisdictions.
The Company has established a defined contribution savings plan
under Section 401(k) of the Internal Revenue Code. This
plan covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a portion
of their annual compensation on a pre-tax basis. The Company
matches 50% of the employees contribution up to $2,000 per
employee. Company contributions to the plan may be made at the
discretion of the board of directors. For the years ended
December 31, 2009, 2008 and 2007 the Companys defined
contribution expense was $37,000, $266,000 and none,
respectively.
75
In accordance with the guidance provided under segment
reporting, operating segments are defined as components of an
enterprise for which separate financial information is available
and evaluated regularly by the chief operating decision-maker,
or decision-making group, in deciding how to allocate resources
and in assessing performance. The Company is organized as, and
operates in, one reportable segment. As of December 31,
2009, the Companys reportable segments have not changed as
a result of the MontaVista acquisition which was closed on
December 14, 2009. The chief operating decision-maker is
the Chief Executive Officer. The Companys Chief Executive
Officer reviews financial information presented on a
consolidated basis, accompanied by information about revenue by
customer and geographic region, for purposes of evaluating
financial performance and allocating resources. The Company and
its Chief Executive Officer evaluate performance based primarily
on revenue to the customers and in the geographic locations in
which the Company operates. Revenue is attributed by geographic
location based on the bill-to location of customer. The
Companys long-lived assets are primarily located in the
United States of America and not allocated to any specific
region. Therefore, geographic information is presented only for
total revenue.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased the Companys products. For sales to the
distributors, their geographic location may be different from
the geographic locations of the ultimate end users. Sales by
geography for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
40,623
|
|
|
$
|
44,787
|
|
|
$
|
32,748
|
|
Hong Kong
|
|
|
18,231
|
|
|
|
3,643
|
|
|
|
500
|
|
Taiwan
|
|
|
15,224
|
|
|
|
11,533
|
|
|
|
10,500
|
|
Japan
|
|
|
10,802
|
|
|
|
11,559
|
|
|
|
2,732
|
|
China
|
|
|
5,958
|
|
|
|
6,206
|
|
|
|
3,367
|
|
Other countries
|
|
|
10,376
|
|
|
|
8,881
|
|
|
|
4,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
101,214
|
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Commitments
and Contingencies
|
The Company is not currently a party to any legal proceedings
that management believes would have a material adverse effect on
the consolidated financial position, results of operations or
cash flows of the Company.
The Company leases its facilities under non-cancelable operating
leases, which contain renewal options and escalation clauses,
and expire through April 2013. The Company also acquires certain
assets under capital leases.
76
Minimum commitments under non-cancelable capital and operating
lease agreements, excluding those leases included in the accrued
restructuring liability (See Note 7) as of
December 31, 2009 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease
|
|
|
|
|
|
|
|
|
|
and Technology
|
|
|
|
|
|
|
|
|
|
License
|
|
|
Operating
|
|
|
|
|
|
|
Obligations
|
|
|
Leases
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2010
|
|
$
|
3,544
|
|
|
$
|
2,846
|
|
|
$
|
6,390
|
|
2011
|
|
|
3,441
|
|
|
|
2,126
|
|
|
|
5,567
|
|
2012
|
|
|
2,501
|
|
|
|
1,386
|
|
|
|
3,887
|
|
2013
|
|
|
|
|
|
|
310
|
|
|
|
310
|
|
thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,486
|
|
|
$
|
6,668
|
|
|
$
|
16,154
|
|
Less: Interest component
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payment
|
|
|
9,012
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(3,271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations
|
|
$
|
5,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred under operating leases was
$2.2 million, $1.6 million and $997,000 for the years
ended December 31, 2009, 2008 and 2007, respectively.
The capital lease and technology license obligations include
future cash payments payable primarily for license agreements
with outside vendors. The significant obligations which have
outstanding payments as of December 31, 2009 relates to a
license agreement, which was entered into in October 2009 was
for certain design tools totaling $9.5 million, with 12
installment payments. The term of the license is three years
which will expire in October 2012. The present value of the
installment payments has been capitalized and is amortized over
three years, and included within capital lease and technology
license obligations on consolidated balance sheets. As of
December 31, 2009, $713,000 of the total $9.5 million
due under the license agreement was paid.
77
Schedule II
Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
Balance at
|
|
|
Beginning
|
|
|
|
|
|
End of
|
Description
|
|
of Period
|
|
Additions
|
|
Deductions
|
|
Period
|
|
|
(In thousands)
|
|
Year ended December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
34
|
|
|
$
|
|
|
|
$
|
(10
|
)
|
|
$
|
24
|
|
Allowance for customer returns
|
|
|
169
|
|
|
|
1,291
|
|
|
|
(1,117
|
)
|
|
|
343
|
|
Income tax valuation allowance
|
|
|
14,430
|
|
|
|
25,171
|
|
|
|
|
|
|
|
39,601
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
38
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
34
|
|
Allowance for customer returns
|
|
|
139
|
|
|
|
695
|
(1)
|
|
|
(665
|
)(1)
|
|
|
169
|
|
Income tax valuation allowance
|
|
|
13,136
|
|
|
|
1,294
|
|
|
|
|
|
|
|
14,430
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
|
$
|
38
|
|
Allowance for customer returns
|
|
|
34
|
|
|
|
434
|
|
|
|
(329
|
)
|
|
|
139
|
|
Income tax valuation allowance
|
|
|
19,078
|
|
|
|
|
|
|
|
(5,942
|
)
|
|
|
13,136
|
|
|
|
|
(1) |
|
Certain reclassifications have been made to 2008 amounts to
conform to 2009 presentation. |
All other schedules are omitted because they are inapplicable or
the requested information is shown in the consolidated financial
statements of the registrant or related notes thereto.
78
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Cavium Networks, Inc.s management is responsible for
establishing and maintaining adequate internal control over
financial reporting for Cavium (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act of 1934, as amended). Caviums
internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles. Caviums internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Cavium;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Cavium are
being made only in accordance with authorizations of management
and directors of Cavium; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of Caviums
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management does not expect that our disclosure controls or
our internal control over financial reporting will prevent or
detect all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
Caviums management assessed the effectiveness of
Caviums internal control over financial reporting as of
December 31, 2009, utilizing the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on the
assessment by Caviums management, we determined that
Caviums internal control over financial reporting was
effective as of December 31, 2009. Management reviewed the
results of their assessment with our Audit Committee. The
effectiveness of the Companys internal control over
financial reporting as of December 31, 2009 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act of 1934, as amended) during the fourth
quarter of 2009 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
79
Disclosure
Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act of 1934, as amended) as of the end of the
period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to
management as appropriate to allow for timely decisions
regarding required disclosure.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
Certain information required by Part III is omitted from
this Annual Report on
Form 10-K
since we intend to file our definitive proxy statement for our
2010 annual meeting of stockholders, pursuant to
Regulation 14A of the Securities Exchange Act, not later
than 120 days after the end of the fiscal year covered by
this Annual Report on
Form 10-K,
and certain information to be included in the proxy statement is
incorporated herein by reference.
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|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to directors
and executive officers may be found under the caption
Executive Officers of the Registrant in Part I,
Item 1 of this Annual Report on
Form 10-K,
and in the section entitled Proposal 1
Election of Directors appearing in the Proxy Statement.
Such information is incorporated herein by reference.
The information required by this Item with respect to our audit
committee and audit committee financial expert may be found in
the section entitled Proposal 1 Election
of Directors Audit Committee appearing in the
Proxy Statement. Such information is incorporated herein by
reference.
The information required by this Item with respect to compliance
with Section 16(a) of the Securities Exchange Act of 1934
and our code of ethics may be found in the sections entitled
Section 16(a) Beneficial Ownership Reporting
Compliance and Proposal 1 Election
of Directors Code of Ethics, respectively,
appearing in the Proxy Statement. Such information is
incorporated herein by reference.
We have adopted the Cavium Networks, Inc. Code of Business
conduct and Ethics that applies to all officers, directors and
employees. The Code of Business conduct and Ethics is available
on our website at
http://investor.caviumnetworks.com.
If we make any substantive amendments to the Code of Business
Conduct and Ethics or grant any waivers from a provision of the
Code to any executive officer or director, we will promptly
disclose the nature of the amendment or waiver on our website.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is included in our proxy
statement for our 2010 annual meeting of stockholders under the
sections entitled Executive Compensation,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report and is incorporated herein by reference.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item relating to security
ownership of certain beneficial owners and management is
included in our proxy statement for our 2010 annual meeting of
stockholders under the section
80
entitled Security Ownership of Certain Beneficial Owners
and Management and is incorporated herein by reference.
The information required by this item with respect to securities
authorized for issuance under our equity compensation plans is
incorporated herein by reference to the information from the
proxy statement for our 2010 annual meeting of stockholders
under the section entitled Equity Compensation Plan
Information and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is included in our proxy
statement for our 2010 annual meeting of stockholders under the
sections entitled Transactions with Related Persons
and Information Regarding the Board of Directors and
Corporate Governance and is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this item is incorporated herein by
reference to the information included in our proxy statement for
our 2010 annual meeting of stockholders under the section
entitled Proposal 2 Ratification of
Selection of Auditors.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
Index to Consolidated Financial Statements
a. The following documents are filed as part of this report:
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Statements:
|
|
|
47
|
|
|
|
|
|
See Index to Financial Statements in Item 8 of this Annual
Report on
Form 10-K,
which is incorporated herein by reference.
|
|
|
|
|
|
|
|
|
Financial Statement Schedule:
|
|
|
78
|
|
|
|
|
|
Schedule II Valuation and Qualifying Accounts
and Reserve
|
|
|
|
|
|
|
|
|
Exhibits:
|
|
|
83
|
|
|
|
|
|
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as a part of this Annual
Report on
Form 10-K.
|
|
|
|
|
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 1, 2010.
Cavium Networks, Inc.
Syed Ali
President and Chief Executive Officer
Arthur Chadwick
Chief Financial Officer, Vice President of Finance
and Administration and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Syed
Ali
Syed
Ali
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 1, 2010
|
|
|
|
|
|
/s/ Arthur
Chadwick
Arthur
Chadwick
|
|
Chief Financial Officer, Vice President of Finance and
Administration and Secretary (Principal Financial and
Accounting Officer)
|
|
March 1, 2010
|
|
|
|
|
|
/s/ Kris
Chellam
Kris
Chellam
|
|
Director
|
|
March 1, 2010
|
|
|
|
|
|
/s/ Sanjay
Mehrotra
Sanjay
Mehrotra
|
|
Director
|
|
March 1, 2010
|
|
|
|
|
|
/s/ Anthony
Pantuso
Anthony
Pantuso
|
|
Director
|
|
March 1, 2010
|
|
|
|
|
|
/s/ C.N.
Reddy
C.N.
Reddy
|
|
Director
|
|
March 1, 2010
|
|
|
|
|
|
/s/ Anthony
Thornley
Anthony
Thornley
|
|
Director
|
|
March 1, 2010
|
82
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
|
|
|
2
|
.1
|
|
Agreement and Plan of Merger and Reorganization by and between
the Registrant, MV Acquisition Corporation, Mantra, LLC, and
MontaVista Software, Inc., dated November 6, 2009.
|
|
8-K
|
|
001-33435
|
|
2.1
|
|
11/10/2009
|
|
2
|
.2
|
|
Amendment No. 1 to Agreement and Plan of Merger and
Reorganization by and between the Registrant, MV Acquisition
Corporation, Mantra, LLC, and MontaVista Software, Inc., dated
December 14, 2009.
|
|
8-K
|
|
001-33435
|
|
10.1
|
|
12/18/2009
|
|
3
|
.1
|
|
Amended and Restated Certificate of Incorporation of the
Registrant
|
|
10-K
|
|
001-33435
|
|
3.1
|
|
3/2/2009
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
S-1/A
|
|
333-140660
|
|
3.5
|
|
4/13/2007
|
|
4
|
.1
|
|
Reference is made to exhibits 3.1 and 3.2
|
|
|
|
|
|
|
|
|
|
4
|
.2
|
|
Form of the Registrants Common Stock Certificate
|
|
S-1/A
|
|
333-140660
|
|
4.2
|
|
4/24/2007
|
|
4
|
.3
|
|
Third Amended and Restated Investors Rights Agreement,
dated December 8, 2004, as amended on October 25, 2005
and August 9, 2006, by and among the Registrant and certain
of its security holders
|
|
S-1
|
|
333-140660
|
|
4.3
|
|
2/13/2007
|
|
4
|
.4
|
|
Registration Rights Agreement by and between the Registrant and
certain stockholders of MontaVista Software, Inc., dated
December 14, 2009.
|
|
8-K
|
|
001-33435
|
|
4.1
|
|
12/18/2009
|
|
10
|
.1
|
|
Form of Indemnity Agreement entered into between the Registrant
and its directors and officers
|
|
S-1
|
|
333-140660
|
|
10.1
|
|
2/13/2007
|
|
10
|
.2
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
|
|
S-1
|
|
333-140660
|
|
10.2
|
|
2/13/2007
|
|
10
|
.3
|
|
2007 Equity Incentive Plan
|
|
10-K
|
|
001-33435
|
|
3.1
|
|
3/2/2009
|
|
10
|
.4
|
|
Form of Option Agreement under 2007 Equity Incentive Plan
|
|
10-Q
|
|
001-33435
|
|
10.24
|
|
5/2/2008
|
|
10
|
.5
|
|
Form of Option Grant Notice and Form of Exercise Notice under
2007 Equity Incentive Plan
|
|
S-1
|
|
333-140660
|
|
10.4
|
|
2/13/2007
|
|
10
|
.6
|
|
Form of Restricted Stock Unit Award under 2007 Equity Incentive
Plan
|
|
10-Q
|
|
333-33435
|
|
10.25
|
|
8/8/2008
|
|
10
|
.7
|
|
Restricted Stock Unit Retention Plan
|
|
10-K
|
|
001-33435
|
|
10.7
|
|
3/2/2009
|
|
10
|
.8
|
|
Executive Employment Agreement, dated January 2, 2001,
between the Registrant and Syed Ali
|
|
S-1
|
|
333-140660
|
|
10.5
|
|
2/13/2007
|
|
10
|
.9
|
|
Amendment to Executive Employment Agreement, dated
December 24, 2008, between the Registrant and Syed Ali
|
|
10-K
|
|
001-33435
|
|
10.9
|
|
3/2/2009
|
|
10
|
.10
|
|
Employment Offer Letter, dated December 27, 2004, between
the Registrant and Arthur Chadwick
|
|
S-1
|
|
333-140660
|
|
10.6
|
|
2/13/2007
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.11
|
|
Employment Offer Letter, dated January 22, 2001, between
the Registrant and Anil K. Jain
|
|
S-1
|
|
333-140660
|
|
10.7
|
|
2/13/2007
|
|
10
|
.12
|
|
Amendment to Offer Letter, dated December 24, 2008, between
the Registrant and Anil Jain
|
|
10-K
|
|
001-33435
|
|
10.12
|
|
3/2/2009
|
|
10
|
.13
|
|
Employment Offer Letter, dated May 6, 2003, between the
Registrant and Rajiv Khemani
|
|
S-1
|
|
333-140660
|
|
10.8
|
|
2/13/2007
|
|
10
|
.14
|
|
Employment Offer Letter, dated May 1, 2008, between the
Registrant and Sandeep Vij
|
|
10-Q
|
|
001-33435
|
|
10.23
|
|
5/2/2008
|
|
10
|
.15
|
|
Amendment to Offer Letter, dated December 23, 2008, between
the Registrant and Sandeep Vij
|
|
10-K
|
|
001-33435
|
|
10.15
|
|
3/2/2009
|
|
10
|
.16
|
|
Letter Agreement, dated November 4, 2005, between the
Registrant and Kris Chellam
|
|
S-1
|
|
333-140660
|
|
10.9
|
|
2/13/2007
|
|
10
|
.17
|
|
Letter Agreement, dated September 1, 2006, between the
Registrant and Anthony Thornley
|
|
S-1
|
|
333-140660
|
|
10.10
|
|
2/13/2007
|
|
10
|
.18
|
|
Letter Agreement, dated July 15, 2009, between the
Registrant and Sanjay Mehrotra
|
|
8-K
|
|
001-33435
|
|
10.1
|
|
7/24/2009
|
|
10
|
.19
|
|
2009 Executive Officer Salaries
|
|
10-Q
|
|
001-33435
|
|
10.1
|
|
5/7/2009
|
|
10
|
.20
|
|
Lease Agreement, dated April 15, 2005, between the
Registrant and MB Technology Park, LLC
|
|
S-1
|
|
333-140660
|
|
10.11
|
|
2/13/2007
|
|
10
|
.21
|
|
First Amendment to Lease Agreement, dated March 6 2008, between
the Registrant and MB Technology Park, LLC
|
|
10-K
|
|
001-33435
|
|
10.12
|
|
3/10/2008
|
|
10
|
.22
|
|
Letter Agreement, dated March 15, 2007, between the
Registrant and AVM Capital, L.P.
|
|
S-1/A
|
|
333-140660
|
|
10.20
|
|
3/16/2007
|
|
#10
|
.23
|
|
Master Technology License Agreement, dated December 30,
2003, between the Registrant and MIPS Technologies, Inc.
|
|
S-1/A
|
|
333-140660
|
|
10.21
|
|
4/6/2007
|
|
10
|
.24
|
|
Asset Purchase Agreement by and between the Registrant, Cavium
International, Cavium (Taiwan) Ltd., and Star Semiconductor
Corporation, dated July 15, 2008.
|
|
8-K
|
|
001-33435
|
|
10.1
|
|
7/16/2008
|
|
10
|
.25
|
|
Agreement and Plan of Merger and Reorganization by and between
the Registrant, WWC Acquisition Corporation, WWC I, LLC,
and W&W Communications, Inc., dated November 19, 2008.
|
|
8-K
|
|
001-33435
|
|
10.26
|
|
11/20/2008
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm
|
|
|
|
|
|
|
|
|
|
31
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
|
|
|
31
|
.2*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
32
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
and Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith |
|
# |
|
Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission. |
|
|
|
Management contract or compensatory plan or arrangement. |
85