Attached files
file | filename |
---|---|
EX-31.1 - CERTIFICATION CEO - SIGMA DESIGNS INC | ex31-1.htm |
EX-32.1 - CERTIFICATION CEO - SIGMA DESIGNS INC | ex32-1.htm |
EX-32.2 - CERTIFICATION CFO - SIGMA DESIGNS INC | ex32-2.htm |
EX-31.2 - CERTIFICATION CFO - SIGMA DESIGNS INC | ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(MARK
ONE)
x QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended October 31, 2009
or
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from
to
Commission
file number 001-32207
Sigma
Designs, Inc.
(Exact name of
registrant as specified in its charter)
California
|
94-2848099
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1778
McCarthy Boulevard,
Milpitas,
California 95035
(Address of
principal executive offices including Zip Code)
(408)
262-9003
(Registrant’s
telephone number, including area code)
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 R No £
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 £ No R
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):
Large
accelerated filer £
|
Accelerated
filer R
|
Non-accelerated
filer £
|
Smaller
reporting company £
|
(Do
not check if a smaller reporting company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No
R
As of
December 2, 2009, the Company had 30,734,258 shares of Common Stock
outstanding.
1
SIGMA
DESIGNS, INC.
TABLE
OF CONTENTS
|
Page No. | |
PART
I.
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
Unaudited
Condensed Consolidated Financial Statements:
|
|
Unaudited
Condensed Consolidated Balance Sheets as of October 31, 2009 and January
31, 2009
|
3
|
|
Unaudited
Condensed Consolidated Statements of Operations for the three months and
nine months ended October 31, 2009 and November 1, 2008
|
4
|
|
Unaudited
Condensed Consolidated Statements of Cash Flows for the nine months ended
October 31, 2009 and November 1, 2008
|
5
|
|
Notes
to Unaudited Condensed Consolidated Financial Statements
|
6
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
|
||
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
35
|
Item
4.
|
Controls
and Procedures
|
36
|
PART
II.
|
OTHER
INFORMATION
|
|
Item
1.
|
Legal
Proceedings
|
36
|
Item
1A.
|
Risk
Factors
|
36
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
49
|
Item
3.
|
Defaults
Upon Senior Securities
|
49
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
49
|
Item
5.
|
Other
Information
|
49
|
Item
6.
|
Exhibits
|
50
|
Signatures
|
51
|
|
|
||
Exhibit
index
|
52
|
2
PART
I. FINANCIAL
INFORMATION
ITEM 1. UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In
thousands, except share amounts)
October
31, 2009
|
January
31, 2009
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 142,707 | $ | 90,845 | ||||
Short-term
marketable securities
|
60,355 | 28,862 | ||||||
Accounts
receivable, net
|
17,902 | 30,719 | ||||||
Inventories
|
23,142 | 36,058 | ||||||
Deferred
tax assets
|
1,478 | 1,417 | ||||||
Prepaid
expenses and other current assets
|
8,488 | 5,909 | ||||||
Total
current assets
|
254,072 | 193,810 | ||||||
Long-term
marketable securities
|
32,201 | 72,523 | ||||||
Software,
equipment and leasehold improvements, net
|
21,448 | 21,124 | ||||||
Goodwill
|
9,913 | 9,928 | ||||||
Intangible
assets, net
|
15,435 | 17,520 | ||||||
Deferred
tax assets, net of current portion
|
10,791 | 12,824 | ||||||
Long-term
investments
|
3,550 | 3,000 | ||||||
Other
non-current assets
|
338 | 218 | ||||||
Total
assets
|
$ | 347,748 | $ | 330,947 | ||||
Liabilities
and Shareholders' Equity
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 10,420 | $ | 5,655 | ||||
Accrued
liabilities
|
11,747 | 12,826 | ||||||
Total
current liabilities
|
22,167 | 18,481 | ||||||
Other
long-term liabilities
|
5,031 | 5,801 | ||||||
Long-term
deferred tax liabilities
|
1,669 | 1,415 | ||||||
Total
liabilities
|
28,867 | 25,697 | ||||||
Commitments
and contingencies (Note 7)
|
||||||||
Shareholders'
equity:
|
||||||||
Preferred
stock
|
— | — | ||||||
Common
stock and additional paid-in capital
|
367,868 | 360,908 | ||||||
Treasury
stock
|
(85,941 | ) | (85,941 | ) | ||||
Accumulated
other comprehensive income
|
1,699 | 273 | ||||||
Retained
earnings
|
35,255 | 30,010 | ||||||
Total
shareholders' equity
|
318,881 | 305,250 | ||||||
Total
liabilities and shareholders' equity
|
$ | 347,748 | $ | 330,947 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
3
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Net
revenue
|
$ | 35,464 | $ | 46,760 | $ | 137,990 | $ | 161,854 | ||||||||
Cost
of revenue
|
19,396 | 25,101 | 74,285 | 82,654 | ||||||||||||
Gross
profit
|
16,068 | 21,659 | 63,705 | 79,200 | ||||||||||||
Operating
expenses:
|
||||||||||||||||
Research
and development
|
11,727 | 11,131 | 34,961 | 32,364 | ||||||||||||
Sales
and marketing
|
3,488 | 3,102 | 10,181 | 8,526 | ||||||||||||
General
and administrative
|
5,467 | 3,837 | 12,220 | 13,939 | ||||||||||||
Acquired
in-process research and development
|
— | — | — | 1,571 | ||||||||||||
Total
operating expenses
|
20,682 | 18,070 | 57,362 | 56,400 | ||||||||||||
Income
(loss) from operations
|
(4,614 | ) | 3,589 | 6,343 | 22,800 | |||||||||||
Interest
and other income, net
|
564 | 1,150 | 1,610 | 4,382 | ||||||||||||
Income
(loss) before income taxes
|
(4,050 | ) | 4,739 | 7,953 | 27,182 | |||||||||||
Provision
for (benefit from) income taxes
|
(1,752 | ) | 1,068 | 2,708 | 7,338 | |||||||||||
Net
income (loss)
|
$ | (2,298 | ) | $ | 3,671 | $ | 5,245 | $ | 19,844 | |||||||
Net
income (loss) per share:
|
||||||||||||||||
Basic
|
$ | (0.09 | ) | $ | 0.14 | $ | 0.20 | $ | 0.73 | |||||||
Diluted
|
$ | (0.09 | ) | $ | 0.14 | $ | 0.19 | $ | 0.71 | |||||||
Shares
used in computing net income (loss) per share:
|
||||||||||||||||
Basic
|
26,782 | 26,351 | 26,681 | 27,045 | ||||||||||||
Diluted
|
26,782 | 27,084 | 27,354 | 27,971 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
4
SIGMA
DESIGNS, INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In
thousands)
Nine
Months Ended
|
||||||||
October
31, 2009
|
November
1, 2008
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 5,245 | $ | 19,844 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
and amortization
|
6,816 | 5,631 | ||||||
Acquired
in-process research and development
|
— | 1,571 | ||||||
Share-based
compensation
|
5,552 | 9,935 | ||||||
Provision
for excess and obsolete inventory
|
137 | 1,844 | ||||||
Provision
for sales returns, discounts and doubtful accounts
|
486 | 2,425 | ||||||
Deferred
income taxes
|
2,268 | 1,546 | ||||||
Loss
on disposal of software, equipment and leasehold
improvements
|
114 | 1 | ||||||
Tax
benefit from employee stock option plan
|
(346 | ) | 4,459 | |||||
Excess
tax benefit from share-based compensation
|
(179 | ) | (4,459 | ) | ||||
Accretion
of contributed leasehold improvements
|
(128 | ) | (93 | ) | ||||
Goodwill
adjustment
|
15 | — | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
12,426 | 13,502 | ||||||
Inventories
|
12,982 | (17,562 | ) | |||||
Prepaid
expenses and other current assets
|
669 | (886 | ) | |||||
Other
non-current assets
|
(120 | ) | (108 | ) | ||||
Accounts
payable
|
4,733 | (5,612 | ) | |||||
Accrued
liabilities
|
(1,232 | ) | (4,616 | ) | ||||
Other
long-term liabilities
|
(691 | ) | 2,265 | |||||
Net
cash provided by operating activities
|
48,747 | 29,687 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchase
of marketable securities
|
(52,889 | ) | (85,135 | ) | ||||
Sales
and maturities of marketable securities
|
61,894 | 79,736 | ||||||
Purchases
of software, equipment and leasehold improvements
|
(4,883 | ) | (10,520 | ) | ||||
Net
cash paid in connection with acquisitions
|
— | (18,576 | ) | |||||
Purchases
of long-term investments
|
(524 | ) | — | |||||
Other
|
— | — | ||||||
Net
cash provided by (used in) investing activities
|
598 | (34,495 | ) | |||||
Cash
flows from financing activities:
|
||||||||
Repayment
of bank borrowings
|
||||||||
Net
proceeds from exercises of employee stock options and stock purchase
rights
|
1,754 | 3,260 | ||||||
Proceeds
from issuance of common stock, net of offering costs
|
||||||||
Net
cash provided by (used in) financing activities
|
1,933 | (78,222 | ) | |||||
Effect
of foreign exchange rate changes on cash and cash
equivalents
|
584 | (277 | ) | |||||
Increase
(decrease) in cash and cash equivalents
|
51,862 | (83,307 | ) | |||||
Cash
and cash equivalents at beginning of period
|
90,845 | 174,089 | ||||||
Cash
and cash equivalents at end of period
|
$ | 142,707 | $ | 90,782 | ||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
paid for interest
|
$ | 75 | $ | — | ||||
Cash
paid for income taxes
|
$ | 609 | $ | 104 |
See
accompanying notes to the unaudited condensed consolidated financial
statements
5
SIGMA
DESIGNS, INC.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Organization
and Summary of significant accounting
policies
|
Organization and nature of
operations: Sigma Designs, Inc. (referred to collectively
in these unaudited condensed consolidated financial statements as “Sigma,” “we,”
“our” and “us”) specializes in integrated system-on-chip solutions (“SoC”) for
the IPTV, connected media player, prosumer and industrial audio/video, connected
home technologies and other markets. We sell our products to
manufacturers, designers and to a lesser extent, to distributors who, in turn,
sell to manufacturers.
Basis of
presentation: The unaudited condensed consolidated financial
statements include Sigma Designs, Inc. and its wholly-owned
subsidiaries. All intercompany balances and transactions are
eliminated upon consolidation.
The
unaudited condensed consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
(“US GAAP”) for interim financial information and the rules and regulations of
the Securities and Exchange Commission (“SEC”). They do not include
all disclosures required by US GAAP for complete financial
statements. However, we believe that the disclosures are adequate and
fairly present the information. The information included in this
Quarterly Report on Form 10-Q should be read in conjunction with our audited
consolidated financial statements and notes thereto for the year ended January
31, 2009 included in our Annual Report on Form 10-K and 10-K/A.
During
the third quarter of fiscal year 2010, we adopted the Accounting Standards
Codification, or ASC, issued by the Financial Accounting Standards Board
("FASB"). This standard established only two levels of Generally
Accepted Accounting Principles, or GAAP, authoritative and
nonauthoritative. The ASC became the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the
SEC, which are sources of authoritative GAAP for SEC registrants. All
other non-grandfathered, non-SEC accounting literature not included in the ASC
became nonauthoritative. This standard was effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. We began to use the new guidelines and numbering
system prescribed by the ASC when referring to GAAP in the third quarter of
fiscal year 2010. As the Codification was not intended to change or alter
existing GAAP, it did not have any impact on our consolidated financial
statements.
The
condensed consolidated financial statements included herein are unaudited;
however, they contain all normal recurring accruals and adjustments that, in our
opinion, are necessary to present fairly our consolidated financial position at
October 31, 2009 and January 31, 2009, the consolidated results of our
operations for the three months and nine months ended October 31, 2009 and
November 1, 2008, and the consolidated cash flows for the nine months ended
October 31, 2009 and November 1, 2008. The results of operations for
the three months and nine months ended October 31, 2009 are not necessarily
indicative of the results to be expected for future quarters or the
year.
Accounting
period: Each of our fiscal quarters presented herein includes
13 weeks and ends on the last Saturday of the period. The third
quarter of fiscal 2010 ended on October 31, 2009. The third quarter
of fiscal 2009 ended on
November 1, 2008.
We have
performed an evaluation of subsequent events through December 10, 2009, which is
the date the financial statements were issued.
Income
taxes: Deferred income taxes reflect the net tax effects of
any temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts reported for income tax
purposes, and any operating losses and tax credit carryforwards. Income
taxes are accounted for under an asset and liability approach in accordance with
ASC 740, Accounting for Income
Taxes, (formerly, Statement of Financial Accounting
Standard, “SFAS” No. 109). Deferred tax liabilities are
recognized for future taxable amounts and deferred tax assets are recognized for
future deductions, net of any valuation allowance, to reduce deferred tax assets
to amounts that are considered more likely than not to be realized.
Under ASC
740, Accounting for
Uncertainty in Income Taxes – An Interpretation of FASB Statement No. 109
(formerly, the FASB issued Interpretation No. 48, “FIN 48”), the impact of an
uncertain income tax position on the income tax return must be recognized as the
largest amount that is more-likely-than-not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will not be
recognized if it has less than a 50% likelihood of being sustained.
Additionally, ASC 740 provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure and
transition. For the three months ended October 31, 2009, there was an
increase of $0.4 million in unrecognized tax benefits. For the nine
months ended October 31, 2009, we recorded a net increase of $1.4 million in
unrecognized tax benefits.
6
On
February 20, 2009, the California Budget Act of 2008 was signed into law which
revised certain provisions of the California State Tax Code, including the
option to elect an alternative method to attribute taxable income to California
for tax years beginning on or after January 1, 2011. We now expect
that in years 2011 and beyond, our income subject to tax in California will be
lower than under prior tax law and that our California deferred tax assets are
therefore less likely to be realized. As a result, we recorded a $3.6
million charge in the three months ended May 2, 2009 to reduce our previously
recognized California deferred tax assets.
The
income tax benefit for the three months ended October 31, 2009 was $1.8 million
and the income tax provision for the nine months ended October 31, 2009 was $2.7
million. The income tax provision for the three months and nine
months ended November 1, 2008 was $1.1 million and $7.3 million,
respectively.
Recent accounting
pronouncements:
Recent
Accounting Pronouncements Not Yet Adopted
In August
2009, the FASB issued Accounting Standard Update (“ASU”) No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) -- Measuring Liabilities at Fair Value ("ASU
2009-05"). ASU 2009-05 amends ASC 820, Fair Value Measurements and
Disclosures, to provide further guidance on how to measure the fair value
of a liability. It primarily does three things: 1) sets forth the
types of valuation techniques to be used to value a liability when a quoted
price in an active market for the identical liability is not available, 2)
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability and 3) clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This standard is effective beginning in our fiscal fourth quarter
of 2010. We do not expect the adoption of this standard update to
have a material impact on our consolidated financial statements.
In
September 2009, the FASB reached a consensus on ASU No. 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements ("ASU 2009-13") and ASU
No. 2009-14, Software (Topic
985) – Certain Revenue Arrangements That Include Software Elements ("ASU
2009-14"). ASU 2009-13 modifies the requirements that must be met for
an entity to recognize revenue from the sale of a delivered item that is part of
a multiple-element arrangement when other items have not yet been
delivered. ASU 2009-13 eliminates the requirement that all
undelivered elements must have either: i) vendor-specific objective evidence, or
VSOE or ii) third-party evidence, or TPE, before an entity can recognize the
portion of an overall arrangement consideration that is attributable to items
that already have been delivered. In the absence of VSOE or TPE of
the standalone selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to estimate the
selling prices of those elements. Overall arrangement consideration
will be allocated to each element (both delivered and undelivered items) based
on their relative selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entity’s estimated selling
price. The residual method of allocating arrangement consideration
has been eliminated. ASU 2009-14 modifies the software revenue
recognition guidance to exclude from its scope tangible products that contain
both software and non-software components that function together to deliver a
product’s essential functionality. These new updates are effective
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted. We are currently evaluating the impact that the adoption
of these ASUs will have on our consolidated financial statements.
|
2.
|
Cash, cash equivalents and marketable
securities
|
Cash,
cash equivalents and marketable securities consist of the following (in
thousands):
7
October
31, 2009
|
January
31, 2009
|
|||||||||||||||||||||||
Book
|
Net
unrealized
|
Fair
|
Book
|
Net
unrealized
|
Fair
|
|||||||||||||||||||
Value
|
Gain
|
Value
|
Value
|
Gain
|
Value
|
|||||||||||||||||||
Money
market funds
|
$ | 115,456 | $ | — | $ | 115,456 | $ | 59,213 | $ | — | $ | 59,213 | ||||||||||||
Auction
rate securities
|
42,625 | — | 42,625 | 43,000 | — | 43,000 | ||||||||||||||||||
Corporate
bonds
|
35,578 | 245 | 35,823 | 26,529 | 52 | 26,581 | ||||||||||||||||||
US
agency discount notes
|
12,563 | 37 | 12,600 | 16,015 | 28 | 16,043 | ||||||||||||||||||
Municipal
bonds and notes
|
1,500 | 7 | 1,507 | 15,728 | 33 | 15,761 | ||||||||||||||||||
Total
cash equivalents and marketable securities
|
$ | 207,722 | $ | 289 | $ | 208,011 | $ | 160,485 | $ | 113 | $ | 160,598 | ||||||||||||
Cash
on hand held in the United States
|
11,006 | 1,709 | ||||||||||||||||||||||
Cash
on hand held overseas
|
16,246 | 29,923 | ||||||||||||||||||||||
Total
cash on hand
|
27,252 | 31,632 | ||||||||||||||||||||||
Total
cash, cash equivalents and marketable securities
|
$ | 235,263 | $ | 192,230 | ||||||||||||||||||||
Reported
as:
|
||||||||||||||||||||||||
Cash
and cash equivalents
|
$ | 142,707 | $ | 90,845 | ||||||||||||||||||||
Short-term
marketable securities
|
60,355 | 28,862 | ||||||||||||||||||||||
Long-term
marketable securities
|
32,201 | 72,523 | ||||||||||||||||||||||
$ | 235,263 | $ | 192,230 |
The
amortized cost and estimated fair value of cash equivalents and marketable
securities, by contractual maturity as measured on the date of purchase, are as
follows (in thousands). Actual maturities may differ from
contractual maturities.
October
31, 2009
|
January
31, 2009
|
|||||||||||||||
Book
|
Fair
|
Book
|
Fair
|
|||||||||||||
Value
|
Value
|
Value
|
Value
|
|||||||||||||
Due
in 1 year or less
|
$ | 175,708 | $ | 175,810 | $ | 88,046 | $ | 88,075 | ||||||||
Due
in greater than 1 year
|
32,014 | 32,201 | 72,439 | 72,523 | ||||||||||||
Total
|
$ | 207,722 | $ | 208,011 | $ | 160,485 | $ | 160,598 |
Our
marketable securities include primarily auction rate securities (“ARS”),
corporate commercial paper and bonds and US agency notes. We classify
our marketable securities as available-for-sale and report them at fair market
value with the related unrealized gains and losses included in accumulated other
comprehensive income. We monitor all of our marketable securities for
impairment and, if these securities are reported to have had a decline in fair
value, we use significant judgment to identify events or circumstances that
would likely have a significant adverse effect on the future value of each
investment including: (i) the nature of the investment; (ii) the cause and
duration of any impairment; (iii) the financial condition and near term
prospects of the issuer; (iv) our ability to hold the security for a period of
time sufficient to allow for any anticipated recovery of fair value; (v) the
extent to which fair value may differ from cost; and (vi) a comparison of the
income generated by the securities compared to alternative
investments. We would recognize an impairment charge if a decline in
the fair value of our marketable securities is judged to be
other-than-temporary.
Included
in our marketable securities portfolio at October 31, 2009 were nine ARS that we
purchased at par value of $43.0 million and during our second and third quarter
of fiscal 2010, the issuer of the one of these ARS redeemed a limited portion in
the amount of $0.1 million and $0.3 million, respectively, from
us. As a result, as of October 31, 2009 we held nine auction rate
securities with a par value of $42.6 million. Auction rate
securities are bought and sold in the marketplace through a bidding process
sometimes referred to as a “Dutch auction.” Historically, the fair
value of our ARS has been determined by the frequent auction periods, generally
every 28 days, which provided liquidity at par value for these
investments. However, subsequent to February 2008, all auctions
involving such securities that we hold failed. The result of a failed
auction is that these ARS continue to pay interest in accordance with their
terms as adjusted at each respective auction date. However, liquidity
of the securities will continue to be limited until there is a successful
auction, the issuer redeems the securities, the securities mature or until such
time as other markets for these ARS develop. We cannot be certain
regarding the amount of time it will take for an auction market or other markets
to develop for these securities. In October 2008, we accepted an
offer from our cash investment advisor, UBS, for a comprehensive settlement
agreement in which all the ARS currently in our portfolio could be redeemed at
par value. The offer to redeem will be at our option during a two
year period beginning in June 2010. The offer also gives UBS the
discretion to buy any or all of these securities from us at par value at any
time through June 2012. Additionally, the solution by UBS to the lack
of liquidity of our ARS includes a commitment effective October 2008 through
June 2010 to loan an amount up to 75% of the par value of the
ARS. The interest charged on such loan would be equal to the
proportional amount of interest being paid by the issuers of the ARS borrowed
against. At October 31, 2009, UBS provided an estimated value for the
nine ARS of approximately $37.3 million, which reflects an unrealized loss of
$5.3 million from our carrying value. We have not adopted UBS’
estimated value of our ARS for the reasons described below. As a
result of our review and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the $42.6 million
carrying value of our nine ARS has not been impaired and that we have no
expectation of any material adverse impact on our future results of operations,
liquidity or capital resources associated with holding these
securities.
8
We have
reviewed the prospectuses for each of the nine ARS in our investment portfolio
as of October 31, 2009 and determined that the unprecedented disruption in the
auction process and resulting pattern of interest payments has been in
accordance with their established rules of operation under these
circumstances. The default mechanism called for in the operating
rules of these instruments is designed to adjust their interest payments to a
limit based on the income generated by their underlying student
loans. The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.
As a
result of this review, we reached the conclusion that the securities do have a
strong underlying principle value and that any potential adjustment in their
carrying value would be based upon our ability to endure their lack of
liquidity, the degree of certainty of continuing interest payments and the rate
of return on these securities. Given that we expect considerable
liquidity from our other assets, foresee continuing positive cash flow from
operations and have accepted our investment advisor’s offer to purchase all of
our ARS at par value in June 2010, we do not consider the remaining liquidity
risk and UBS’ default risk to be significant enough to justify a reduction in
the carrying value. The remaining valuation factor that we considered
was the rate of return evidenced by the interest received. We used a
discounted cash flow calculation that reached a valuation that was similar to
other of our recent investments with comparably high credit
ratings.
3.
|
Fair
values of assets and liabilities
|
ASC 820,
Fair Value Measurements
(formerly, SFAS 157), define fair value as “the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (exit price)” and also, establishes
a framework for measuring fair value and expands fair value measurement
disclosure.
Fair
value hierarchy
ASC 820
discusses valuation techniques, such as the market approach (comparable market
prices), the income approach (present value of future income or cash flow), and
the cost approach (cost to replace the service capacity of an asset or
replacement cost). The statement utilizes a fair value hierarchy that
prioritizes the inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
three levels:
|
·
|
Level 1 - Valuation is
based upon quoted prices for identical instruments traded in active
markets.
|
|
·
|
Level 2 - Valuation is
based upon quoted prices for similar instruments in active markets, quoted
prices for identical or similar instruments in markets that are not active
and model-based valuation techniques for which all significant assumptions
are observable in the market.
|
|
·
|
Level 3 - Valuation is
generated from model-based techniques that use significant assumptions not
observable in the market. These unobservable assumptions
reflect our estimate of assumptions that market participants would use in
pricing the asset or liability. Valuation techniques include
use of option pricing models, discounted cash flow models and similar
techniques.
|
Determination
of fair value
Our cash
equivalents and marketable securities, with the exception of our ARS and
convertible note receivable, are classified within Level 1 of the fair value
hierarchy because they are valued using quoted market prices, broker or dealer
quotations or alternative pricing sources with reasonable levels of price
transparency. The types of marketable securities valued based on
quoted market prices in active markets include most U.S. government and agency
securities, sovereign government obligations, money market securities and
certain corporate obligations with a high credit ratings and an ongoing trading
market.
9
Our ARS
holdings are classified within Level 3. We have valued the ARS
through a discounted cash flow model which requires making a significant
assumption as to the expectation of UBS’s offer to redeem all of the ARS at par
value in June 2010 and future interest income from those securities which is not
observable in the market. During the nine months ended October 31,
2009, we recorded no impairment loss relating to the value of ARS and recorded
no realized gains or losses for these ARS. In August 2009, we
purchased a convertible note receivable from a privately-held venture capital
funded technology company with a face value which is equal to its cost of $3.0
million, is convertible into the issuer’s preferred stock under certain
circumstances and bears interest at a rate of 9% per annum with a maturity date
of November 30, 2009. At October 31, 2009 the convertible note
receivable was valued at $3.1 equaling its cost plus accrued
interest. We also purchased shares of preferred stock in this issuer
at a cost of $2.0 million during the fourth quarter of fiscal
2009. Three of our directors hold equity interests in the issuer of
the convertible note receivable and one of these directors is also a director of
the issuer of the convertible note. In the aggregate, these equity
interests do not rise to the level of a material or a controlling interest in
the issuer. Our board of directors appointed one of our independent
directors who has no interest in the issuer to evaluate each investment in this
issuer and recommend appropriate action to our board of
directors. All investment transactions with this issuer were approved
and recommended by this independent director and made as a result of a
negotiation process. This convertible note receivable and all of our
investments in privately-held companies are classified within Level
3. We have valued our convertible note receivable and investments in
privately-held companies at cost, plus accrued interest in the case of the
convertible note receivable, as the inputs are unobservable and significant to
the fair value measurements.
The table
below presents the balances of our financial instruments measured at fair value
on a recurring basis (in thousands):
Fair
Value Measurement at Reporting Date
|
||||||||||||||||
Quoted
Prices In Active Markets for Identical Assets
|
Significant
Observable Inputs
|
Significant
Unobservable Inputs
|
||||||||||||||
Fair
Value
|
(Level
1 )
|
(Level
2)
|
(Level
3)
|
|||||||||||||
Money
market funds
|
$ | 115,456 | $ | 115,456 | $ | — | $ | — | ||||||||
Auction
rate securities
|
42,625 | — | — | 42,625 | ||||||||||||
Corporate
bonds
|
35,823 | 35,823 | — | — | ||||||||||||
US
agency discount notes
|
12,600 | 12,600 | — | — | ||||||||||||
Municipal
bonds and notes
|
1,507 | 1,507 | — | — | ||||||||||||
Total
cash equivalent and marketable securities
|
$ | 208,011 | $ | 165,386 | $ | — | $ | 42,625 | ||||||||
Convertible
note receivable
|
3,068 | — | — | 3,068 | ||||||||||||
Equity
investments in privately-held companies
|
3,550 | — | — | 3,550 | ||||||||||||
Total
financial instruments measured and recorded at fair value
|
$ | 214,629 | $ | 165,386 | $ | — | $ | 49,243 |
The table
below presents the balances of our assets measured at fair value on a recurring
basis on our consolidated condensed balance sheets (in thousands):
Fair
Value Measurement at Reporting Date
|
||||||||||||||||
Assets
|
Fair
Value
|
(Level
1 )
|
(Level
2)
|
(Level
3)
|
||||||||||||
Cash
eqivalents
|
$ | 115,456 | $ | 115,456 | $ | — | $ | — | ||||||||
Short-term
marketable securities
|
60,354 | 17,729 | — | 42,625 | ||||||||||||
Long-term
marketable securities
|
32,201 | 32,201 | — | — | ||||||||||||
Prepaid
expenses and other current assets
|
3,068 | — | — | 3,068 | ||||||||||||
Long-term
investments
|
3,550 | — | — | 3,550 | ||||||||||||
Total
assets measured and recorded at fair value
|
$ | 214,629 | $ | 165,386 | $ | — | $ | 49,243 |
10
The table
below presents a summary of the changes in Level 3 assets measured at fair value
on a recurring basis (in thousands):
|
Fair
Value Measurements
|
|||
|
Using
Significant
|
|||
|
Unobservable
Inputs (Level 3)
|
|||
Beginning
Balance at February 1, 2009
|
$ | 46,501 | ||
Total
realized gains or losses included in net income
|
— | |||
Total
unrealized gain and translation adjustments included in other
comprehensive income
|
49 | |||
Purchases,
sales and settlements, net
|
2,693 | |||
Ending
balance at October 31, 2009
|
$ | 49,243 | ||
The
total amount of total gains or losses for the period included in earnings
attributable to the change in unrealized gains or losses relating to
assets still held at the reporting date
|
$ | — |
|
4.
|
Inventories
|
Inventories
consist of the following (in thousands):
October
31, 2009
|
January
31, 2009
|
|||||||
Wafers
and other purchased materials
|
$ | 13,021 | $ | 22,325 | ||||
Work-in-process
|
2,871 | 2,869 | ||||||
Finished
goods
|
7,250 | 10,864 | ||||||
Total
|
$ | 23,142 | $ | 36,058 |
|
5.
|
Intangible
assets
|
The
change in the gross amount of the acquired intangible assets from January 31,
2009 to October 31, 2009 was as follows (in thousands):
January
31, 2009
|
Cumulative
Translation Adjustments
|
October
31, 2009
|
||||||||||
Developed
technology
|
$ | 18,914 | $ | 310 | $ | 19,224 | ||||||
Trademarks
|
1,478 | 76 | 1,554 | |||||||||
Noncompete
agreements
|
1,400 | — | 1,400 | |||||||||
Customer
relationships
|
1,123 | — | 1,123 | |||||||||
$ | 22,915 | $ | 386 | $ | 23,301 |
Acquired
intangible assets, subject to amortization, were as follows as of October 31,
2009 (in thousands, except for estimated useful life):
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
Estimated
Useful Life
|
||||||||||
Developed
technology
|
$ | 19,224 | $ | 5,975 | $ | 13,249 |
2
to 9 years
|
||||||
Trademarks
|
1,554 | 214 | 1,340 |
5
to 10 years
|
|||||||||
Noncompete
agreements
|
1,400 | 1,400 | — |
3
years
|
|||||||||
Customer
relationships
|
1,123 | 277 | 846 |
7
years
|
|||||||||
$ | 23,301 | $ | 7,866 | $ | 15,435 |
Amortization
expense related to acquired intangible assets was $0.8 million and $2.5 million
for the three and nine months ended October 31, 2009, respectively, and $0.7
million and $2.2 million for the three and nine months ended November 1, 2008,
respectively. As of October 31, 2009, we expect the amortization
expense in future periods to be as follows (in thousands):
11
Developed
|
Customer
|
|||||||||||||||
Fiscal
year
|
Technology
|
Trademarks
|
Relationships
|
Total
|
||||||||||||
Reminder
of 2010
|
$ | 712 | $ | 44 | $ | 40 | $ | 796 | ||||||||
2011
|
2,693 | 178 | 160 | 3,031 | ||||||||||||
2012
|
2,689 | 178 | 160 | 3,027 | ||||||||||||
2013
|
2,689 | 178 | 160 | 3,027 | ||||||||||||
2014
|
1,964 | 119 | 161 | 2,244 | ||||||||||||
Thereafter
|
2,502 | 643 | 165 | 3,310 | ||||||||||||
$ | 13,249 | $ | 1,340 | $ | 846 | $ | 15,435 |
|
6.
|
Product
warranty
|
In
general, we sell our products with a one-year limited warranty that our products
will be free from defects in materials and workmanship. Warranty cost
is estimated at the time revenue is recognized, based on historical activity and
additionally for any specific known product warranty issues. Accrued
warranty cost includes hardware repair and/or replacement and software support
costs and is included in accrued liabilities on the condensed consolidated
balance sheets.
Details
of the change in accrued warranty as of October 31, 2009 and November 1, 2008
are as follows (in thousands):
Balance
|
Balance
|
|||||||||||||||
Beginning
|
End
of
|
|||||||||||||||
Three
Months Ended
|
of
Period
|
Additions
|
Deductions
|
Period
|
||||||||||||
October
31, 2009
|
$ | 1,250 | $ | 123 | $ | (198 | ) | $ | 1,175 | |||||||
November
1, 2008
|
1,590 | 641 | (581 | ) | 1,650 | |||||||||||
Nine
Months Ended
|
||||||||||||||||
October
31, 2009
|
$ | 1,330 | $ | 365 | $ | (520 | ) | $ | 1,175 | |||||||
November
1, 2008
|
1,564 | 1,175 | (1,089 | ) | 1,650 |
|
7.
|
Commitments
and contingencies
|
Commitments
Leases
Our
primary facility in Milpitas, California is leased under a non-cancelable lease
which expires in September 2012. As of October 31, 2009, we also
lease facilities in Canada, Denmark, France, Hong Kong, Singapore and Japan
under non-cancelable leases. Future minimum annual payments under
operating leases are as follows (in thousands):
Operating
|
||||
Fiscal
years
|
Leases
|
|||
Remainder
of fiscal 2010
|
$ | 523 | ||
2011
|
1,938 | |||
2012
|
1,825 | |||
2013
|
1,419 | |||
2014
|
749 | |||
Thereafter
|
2,851 | |||
Total
minimum lease payments
|
$ | 9,305 |
Purchase
commitments
We place
non-cancelable orders to purchase semiconductor products from our suppliers on
an eight to twelve week lead-time basis. As of October 31, 2009, the
total amount of outstanding non-cancelable purchase orders was approximately
$9.8 million.
12
Indemnifications
Our
standard terms and conditions of sale include a patent infringement
indemnification provision for claims from third parties related to our
intellectual property. The terms and conditions of sale generally
limit the scope of the available remedies to a variety of industry-standard
methods including, but not limited to, a right to control the defense or
settlement of any claim, procure the right for continued usage and a right to
replace or modify the infringing products to make them
non-infringing. Such indemnification provisions are accounted for in
accordance with ASC 30, Accounting for Contingencies
(formerly, SFAS 5). To date, we have incurred minimal costs related
to claims under such indemnification provisions.
Royalties
We pay
royalties for the right to sell certain products under various license
agreements. During the three and nine months ended October 31, 2009,
we recorded royalty expense of $0.4 million and $1.6 million, respectively, and
$0.6 million and $1.6 million for the three and nine months ended November 1,
2008, respectively, which was recorded to cost of revenue.
Contingencies
Litigation
We are
not currently a party to any material legal proceedings. From time to
time, we are involved in claims and legal proceedings that arise in the ordinary
course of business. We expect that the number and significance of
these matters will increase as our business expands. In particular,
we could face an increasing number of patent and other intellectual property
claims as the number of products and competitors in our industry
grows. Any claims or proceedings against us, whether meritorious or
not, could be time consuming, result in costly litigation, require significant
amounts of management time, result in the diversion of significant operational
resources, or cause us to enter into royalty or licensing agreements which, if
required, may not be available on terms favorable to us or at all. If
an unfavorable outcome were to occur against us, there exists the possibility of
a material adverse impact on our financial position and results of operations
for the period in which the unfavorable outcome occurs and, potentially, in
future periods.
|
8.
|
Net
income (loss) per share
|
Basic net income
(loss) per share for the periods presented is computed by dividing
net income by the weighted average number of common shares
outstanding. Diluted net income (loss) per share is computed
by including shares subject to repurchase as well as dilutive
options.
The
following table sets forth the basic and diluted net income (loss) per share
computed for the three and nine months ended October 31, 2009 and November 1,
2008 (in thousands, except per share amounts):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Numerator:
|
||||||||||||||||
Net
income (loss), as reported
|
$ | (2,298 | ) | $ | 3,671 | $ | 5,245 | $ | 19,844 | |||||||
Denominator:
|
||||||||||||||||
Weighted
average common shares outstanding - basic
|
26,782 | 26,351 | 26,681 | 27,045 | ||||||||||||
Effect
of dilutive securities:
|
||||||||||||||||
Stock
options
|
- | 733 | 673 | 926 | ||||||||||||
Shares
used in computation - diluted
|
26,782 | 27,084 | 27,354 | 27,971 | ||||||||||||
Net
income (loss) per share:
|
||||||||||||||||
Basic
|
$ | (0.09 | ) | $ | 0.14 | $ | 0.20 | $ | 0.73 | |||||||
Diluted
|
$ | (0.09 | ) | $ | 0.14 | $ | 0.19 | $ | 0.71 |
13
A summary
of the excluded potentially dilutive securities for the three and nine months
ended October 31, 2009 and November 1, 2008 is as follows (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Stock
options excluded because of the effect of including would be
anti-dilutive
|
690 | — | — | — | ||||||||||||
Stock
options excluded because exercise price is in excess of average stock
price
|
2,638 | 1,987 | 2,753 | 1,617 |
|
9.
|
Equity
incentive plans and employee
benefits
|
Stock
option plans
We have
adopted equity
incentive plans that provide for the grant of stock option awards to
employees, directors and consultants which are designed to encourage and reward
their long-term contributions to us and provide an incentive for them to remain
with us. These plans also align our employees’ interest with the
creation of long-term shareholder value. As of October 31, 2009, we
have three stock option plans: the 2003 Director Stock Option Plan (the “2003
Director Plan”), the 2001 Stock Plan (the “2001 Plan”) and the 2009 Stock
Incentive Plan (the “2009 Incentive Plan”). The 2009 Incentive Plan
was approved by our shareholders in July 2009 along with the approval of a
one-time stock option exchange program.
The
exchange program began on August 24, 2009 and concluded on September 22,
2009. Under the exchange program, eligible employees were permitted to
exchange outstanding stock options granted under our 2001 Option Plan prior to
June 2008 with exercise prices equal to or greater than $20.25 per share for a
lesser number of stock options that were granted following the expiration of the
exchange program at a ratio of 1 share in the replacement option for every 1.5
shares exchanged from eligible options. Our directors and executive
officers were not eligible to participate in the option exchange
program. As a result, on September 22, 2009, pursuant to the terms of
the exchange program, we accepted for exchange and cancelled options to purchase
an aggregate of 663,737 shares of our common stock under the 2001 Option
Plan. On September 23, 2009, we issued replacement options to
purchase an aggregate of 442,550 shares of our common stock in exchange for the
options tendered under our 2001 Option Plan. These replacement
options have a strike price of $15.25 with a 5 year vesting schedule and 8-year
term, each commencing on September 23, 3009.
Our 2009
Incentive Plan provides for the grant of stock options, restricted stock,
restricted stock units, other stock-related awards and performance awards that
may be settled in cash, stock or other property. There are 2,900,000
shares of common stock reserved for issuance under the 2009 Incentive
Plan. In addition, up to 1,000,000 shares of common stock that were
subject to stock awards outstanding under the 2001 Plan but terminate prior to
exercise and would otherwise be returned to the share reserves under our
2001Option Plan will become available for issuance under the 2009 Incentive
Plan.
As of October 31, 2009,
2,820,000 shares were available for future grants under the 2009 Incentive
Plan. As of September 23, 2009, the 2001 Option Plan and the 2003
Director Plan were closed for future grants, however, these plans will continue
to govern all outstanding options that we originally granted from each
plan.
14
The total stock option activities and balances of our stock option plans are
summarized as follows:
Weighted
Average
|
Aggregate
|
|||||||||||||||
Number
of
|
Weighted
Average
|
Remaining
|
Intrinsic
|
|||||||||||||
Shares
|
Exercise
Price
|
Contractual
Term
|
Value
|
|||||||||||||
Outstanding
|
Per
Share
|
(Years)
|
(in
thousands)
|
|||||||||||||
Balance,
January 31, 2009
|
4,457,757 | $ | 17.50 | |||||||||||||
Granted
|
264,500 | 11.09 | ||||||||||||||
Cancelled
|
(150,578 | ) | 36.42 | |||||||||||||
Exercised
|
(41,341 | ) | 7.63 | |||||||||||||
Balance,
May 2, 2009
|
4,530,338 | $ | 16.59 | |||||||||||||
Granted
|
143,500 | 14.60 | ||||||||||||||
Cancelled
|
(41,511 | ) | 37.24 | |||||||||||||
Exercised
|
(60,637 | ) | 6.45 | |||||||||||||
Balance,
August 1, 2009
|
4,571,690 | $ | 16.50 | |||||||||||||
Granted
|
522,550 | 15.47 | ||||||||||||||
Cancelled
|
(676,194 | ) | 39.90 | |||||||||||||
Exercised
|
(37,192 | ) | 5.69 | |||||||||||||
Balance,
October 31, 2009
|
4,380,854 | $ | 12.85 | 6.99 | $ | 8,785,363 | ||||||||||
Ending
Vested and Expected to Vest
|
4,079,107 | $ | 12.81 | 6.89 | $ | 8,548,199 | ||||||||||
Ending
Exercisable
|
1,962,721 | $ | 11.75 | 5.34 | $ | 6,979,495 |
The
aggregate intrinsic value in the table above represents the total pretax
intrinsic value, based on our closing stock price of $12.01 as of October 31,
2009, which would have been received by the option holders had all options
holders exercised their options as of that date. The aggregate
exercise date intrinsic value of options that were exercised under our stock
option plans was $0.3 million and $0.9 million for the three months ended
October 31, 2009 and November 1, 2008, respectively, determined as of the date
of option exercise. The aggregate exercise date intrinsic value of
options that were exercised under our stock option plans was $1.0 million and
$12.2 million for the nine months ended October 31, 2009 and November 1, 2008,
respectively, determined as of the date of option exercise. The total
fair value of options which vested during the three months ended October 31,
2009 and November 1, 2008 was $1.3 million and $2.4 million,
respectively. The total fair value of options which vested during the
nine months ended October 31, 2009 and November 1, 2008 was $3.9 million and
$8.2 million, respectively.
15
The
options outstanding and currently exercisable at October 31, 2009 were in the
following exercise price ranges:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||||||
Range
of Exercise Prices Per Share
|
Number
of Shares Outstanding at October 31, 2009
|
Weighted
Average Remaining Life (Years)
|
Weighted
Average Exercise Price
Per
Share
|
Number
of Shares Exercisable at
October
31, 2009
|
Weighted
Average Exercise Price
Per
Share
|
|||||||||||||||||||||
$ | 0.95 | $ | 3.50 | 453,698 | 2.53 | $ | 2.56 | 451,851 | $ | 2.56 | ||||||||||||||||
$ | 4.25 | $ | 8.89 | 447,608 | 4.75 | $ | 7.26 | 435,496 | $ | 7.23 | ||||||||||||||||
$ | 9.35 | $ | 9.89 | 225,931 | 7.17 | $ | 9.66 | 69,023 | $ | 9.78 | ||||||||||||||||
$ | 10.87 | $ | 10.87 | 790,500 | 9.01 | $ | 10.87 | 8316 | 11 | |||||||||||||||||
$ | 11.06 | $ | 11.06 | 531,232 | 6.82 | $ | 11.06 | 325,609 | $ | 11.06 | ||||||||||||||||
$ | 11.09 | $ | 11.40 | 578,606 | 7.45 | $ | 11.26 | 246,884 | $ | 11.40 | ||||||||||||||||
$ | 11.69 | $ | 13.88 | 136,250 | 7.47 | $ | 13.25 | 57,792 | $ | 12.75 | ||||||||||||||||
$ | 15.25 | $ | 15.25 | 442,550 | 7.90 | $ | 15.25 | 0 | $ | - | ||||||||||||||||
$ | 15.32 | $ | 28.63 | 563,913 | 7.97 | $ | 20.65 | 219,720 | $ | 21.92 | ||||||||||||||||
$ | 31.57 | $ | 45.83 | 210,566 | 7.98 | $ | 40.49 | 148,030 | $ | 40.76 | ||||||||||||||||
$ | 0.95 | $ | 45.83 | 4,380,854 | 6.99 | $ | 12.85 | 1,962,721 | $ | 11.75 |
As of
October 31, 2009, the unrecorded share-based compensation balance related to
stock options outstanding excluding estimated forfeitures was $42.6 million
and will be recognized over an estimated weighted average amortization period of
3.65 years. The amortization period is based on the expected
remaining vesting term of the options.
Employee
stock purchase plan
Under our 2001 Employee Stock Purchase Plan (the “2001 Purchase Plan”),
employees are granted the right to purchase shares of common stock at a price
per share that is 85% of the fair market value at the beginning or end of each
six-month offering period, whichever is lower. As of October 31, 2009,
303,440 shares under the 2001 Purchase Plan remain available for future
purchase.
Valuation
and expense of share-based compensation
The fair
value of share-based compensation awards is estimated at the grant date using
the Black-Scholes option valuation model. The determination of fair
value of share-based compensation awards on the date of grant using an
option-pricing model is affected by our stock price as well as assumptions
regarding a number of highly complex and subjective variables. These
variables include, but are not limited to, our expected stock price volatility
over the term of the awards and actual employee stock option exercise
behavior.
The fair
value of each option and employee stock purchase right was estimated on the date
of grant using the Black-Scholes option pricing model with the following
weighted-average assumptions:
Three
Months Ended
|
|||||||
October
31, 2009
|
November
1, 2008
|
||||||
Stock
Options
|
Stock
Purchase Plan
|
Stock
Options
|
Stock
Purchase Plan
|
||||
Expected
volatility
|
58.08%
|
62.60%
|
67.86%
|
95.06%
|
|||
Risk-free
interest rate
|
2.61%
|
0.33%
|
3.03%
|
2.17%
|
|||
Expected
term (in years)
|
5.91
|
0.50
|
5.94
|
0.50
|
|||
Dividend
yield
|
None
|
None
|
None
|
None
|
|||
Weighted
avg. fair value at grant date
|
$9.29
|
$5.35
|
$13.70
|
$5.92
|
|||
Nine
Months Ended
|
|||||||
October
31, 2009
|
November
1, 2008
|
||||||
Stock
Options
|
Stock
Purchase Plan
|
Stock
Options
|
Stock
Purchase Plan
|
||||
Expected
volatility
|
63.08%
|
62.60%
|
70.07%
|
95.06%
|
|||
Risk-free
interest rate
|
2.50%
|
0.33%
|
3.31%
|
2.17%
|
|||
Expected
term (in years)
|
5.91
|
0.50
|
5.74
|
0.50
|
|||
Dividend
yield
|
None
|
None
|
None
|
None
|
|||
Weighted
avg. fair value at grant date
|
$7.51
|
$5.35
|
$17.02
|
$5.92
|
16
The
computation of the expected volatility assumptions used in the Black-Scholes
calculations for new grants and purchase rights is based on the historical
volatility of our stock price, measured over a period equal to the expected term
of the grants or purchase rights. The risk-free interest rate is
based on the yield available on U.S. Treasury STRIPS with an equivalent
remaining term. The expected term life of employee stock options
represents the weighted-average period that the stock options are expected to
remain outstanding and was determined based on historical experience of similar
awards, giving consideration to the contractual terms of the share-based awards
and vesting schedules. The expected term life of purchase rights is
the period of time remaining in the then current offering period. The
dividend yield assumption is based on our history of not paying dividends and
assumption of not paying dividends in the future.
The
following table set forth the share-based compensation expense for the three and
nine months ended October 31, 2009 and November 1, 2008 (in
thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Cost
of revenue
|
$ | 89 | $ | 87 | $ | 254 | $ | 261 | ||||||||
Research
and development expenses
|
1,178 | 1,239 | 3,633 | 3,892 | ||||||||||||
Sales
and marketing expenses
|
384 | 796 | 1,102 | 1,536 | ||||||||||||
General
and administrative expenses
|
560 | 655 | 563 | 4,246 | ||||||||||||
Total
share-based compensation
|
$ | 2,211 | $ | 2,777 | $ | 5,552 | $ | 9,935 |
401(k)
tax deferred savings plan
We maintain a 401(k) tax deferred savings plan
("401(k) Plan") for the benefit of qualified employees who are U.S.
based. Under the 401(k) Plan, U.S. based employees may elect to reduce
their current annual taxable compensation up to the statutorily
prescribed limit, which is $16,500 in calendar year 2009. Employees
age 50 or over may elect to contribute an additional $5,500. We
have a matching contribution program whereby we match employee contributions
made by each employee at a rate of $0.25 per $1.00 contributed. The
matching contributions to the 401(k) Plan totaled $0.1 million and $0.5 million
for the three and nine months ended October 31, 2009,
respectively. The matching contributions to the 401(k) Plan totaled
$0.1 million and $0.4 million for the three and nine months ended November 1,
2008, respectively.
Group
registered retirement savings plan
We
maintain a Group Registered Retirement Savings Plan (“GRRSP”) for the benefit of
qualified employees who are based in Canada. Under the Registered
Retirement Savings Plan (“RRSP”), Canadian based employees may elect to reduce
their annual taxable compensation up to the statutorily prescribed limit which
is $20,000 Canadian in calendar year 2009. We have a matching contribution
program under the GRRSP whereby we match employee contributions made by each
employee up to 2.5% of their annual salary. The matching contributions to
the GRRSP totaled $24,000 and $65,000 for the three and nine months ended
October 31, 2009, respectively. The matching contributions to the
GRRSP totaled $25,000 and $51,000 for the three and nine months ended November
1, 2008, respectively.
Retirement
pension plan
We
maintain a Retirement Pension Plan for the benefit of qualified employees who
are based in Denmark. Under the Retirement Pension Plan, Denmark
based employees may elect to reduce their annual taxable compensation up to
their annual salary. In December 2008, we implemented a contribution
program whereby we will contribute 3.0% of our employee’s annual salary and may
elect to terminate future contributions at our option at any
time. The matching contribution to the Retirement Pension Plan
totaled $31,000 and $80,000 for the three and nine months ended October 31,
2009, respectively.
17
|
10.
|
Significant
customers
|
The
following table sets forth the major customers that accounted for 10% or more of
our net revenue:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
Customer
|
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
||||||||||||
Unihan
Corporation
|
15% | * | 10% | * | ||||||||||||
MTC
Singapore
|
11% | 17% | 20% | 21% | ||||||||||||
Cowin
Worldwide Corporation
|
11% | * | 10% | * | ||||||||||||
Gemtek
Electronics Compontents, LTD
|
* | * | 11% | * | ||||||||||||
Cisco
Systems, Inc. **
|
* | 12% | * | 20% | ||||||||||||
Netgem
|
* | 11% | * | * |
|
*
|
Net
revenue from customer was less than 10% of our total
net revenue in these
periods.
|
|
**
|
Starting
in the third quarter of fiscal 2009, Cisco Systems, Inc. began processing
its orders with us through multiple third-party contract
manufacturers.
|
Five
international customers accounted for 17%, 17%, 16%, 16% and 10%, each of
total accounts receivable at October 31, 2009. Four
international customers accounted for 20%, 13%, 10%
and 10%, each of total accounts receivable at January 31,
2009.
|
11.
|
Segment
and geographical information
|
ASC 280,
Disclosures about Segments of
an Enterprise and Related Information (formerly, SFAS No. 131), provides
annual and interim reporting standards for an enterprise’s business segments and
related disclosures about its products, services, geographical areas and major
customers.
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 in deciding how to allocate resources and in assessing
performance. We are organized as, and operate in, one reportable
segment. Our operating segment consists of our geographically based
entities in the United States, Hong Kong and Singapore. Our chief
operating decision-maker reviews consolidated financial information accompanied
by information about revenue by product group, target market and geographic
region. We do not assess the performance of our geographic regions on
other measures of income or expense such as depreciation and amortization, gross
margin or net income.
The
following table sets forth net revenue for each geographic region based on the
invoiced location of customers (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Asia
|
$ | 27,510 | $ | 26,287 | $ | 103,601 | $ | 86,927 | ||||||||
Europe
|
5,430 | 16,881 | 28,884 | 64,634 | ||||||||||||
North
America
|
2,515 | 3,584 | 5,478 | 10,248 | ||||||||||||
Other
regions
|
9 | 8 | 27 | 45 | ||||||||||||
Net
revenue
|
$ | 35,464 | $ | 46,760 | $ | 137,990 | $ | 161,854 |
18
The
following table sets forth net revenue for each significant country based on the
invoiced location of customers (in thousands):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Taiwan
|
$ | 12,592 | $ | 7,487 | $ | 35,031 | $ | 12,870 | ||||||||
China
|
6,535 | 6,178 | 29,269 | 16,470 | ||||||||||||
France
|
5,156 | 7,586 | 21,775 | 21,410 | ||||||||||||
Singapore
|
3,970 | 7,949 | 27,140 | 33,484 | ||||||||||||
Korea
|
2,511 | 1,901 | 7,292 | 8,909 | ||||||||||||
Japan
|
357 | 1,212 | 1,356 | 10,646 | ||||||||||||
Belgium
|
27 | 2,649 | 57 | 8,230 | ||||||||||||
Netherlands
|
9 | 3,067 | 2 | 24,813 | ||||||||||||
Hungary
|
- | 2,661 | 5,340 | 7,437 | ||||||||||||
Rest
of the world
|
4,307 | 6,070 | 10,728 | 17,585 | ||||||||||||
Net
revenue
|
$ | 35,464 | $ | 46,760 | $ | 137,990 | $ | 161,854 |
12.
|
Subsequent
event
|
On
November 10, 2009, we purchased all of the issued and outstanding share capital,
including vested stock options, of CopperGate Communications Ltd.
("CopperGate") pursuant to an Acquisition Agreement dated October 12, 2009, as
amended by the First Amendment to Acquisition Agreement dated November 10,
2009. Under the terms of the Agreement, we paid approximately $116.0
million in cash, which includes approximately $25.0 million of cash and cash
equivalents of CopperGate at the closing and of which approximately $11.6
million will be held in escrow for a period of 18 months and issued an aggregate
of 3,931,352 shares of our common stock, of which 393,138 shares will be held in
escrow for a period of 18 months. At the closing, we also assumed all
unvested CopperGate options and, as a result, will issue unvested options to
purchase an aggregate of 574,881 shares of our common stock, which options will
vest over time following the closing. Under the terms of the
Agreement, we also agreed to pay up to an aggregate of $5.0 million in cash to
specified CopperGate employees provided that certain milestones are achieved
over a specified period of time.
CopperGate
is a provider of silicon-based modem solutions enabling distribution of
media-rich digital content over all three types of wires in the home: coax,
phone and power. CopperGate solutions are deployed by service
providers enabling the delivery of HDTV, VoIP and fast Internet
services. CopperGate is headquartered in Tel Aviv, Israel with
offices in the U.S. and Taiwan.
The
results of CopperGate will be consolidated in our financial results as of
November 10, 2009.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
You
should read the following discussion in conjunction with our unaudited condensed
consolidated financial statements and related notes in this Form 10-Q and our
Form 10-K previously filed with the Securities and Exchange
Commission. Except for historical information, the following
discussion contains forward-looking statements within the meaning of
Section 27A of the Securities Exchange Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. In some cases, you can identify
forward-looking statements by terms such as “may,” “expect,” “might,” “will,”
“intend,” “should,” “could,” and “estimate,” or the negative of these terms, and
similar expressions intended to identify forward-looking
statements. These forward-looking statements, include, among other
things, statements regarding our capital resources and needs, including the
adequacy of our current cash reserves, revenue, our anticipated benefits from
the acquisition of CopperGate, our expectations that our operating expenses will
increase in absolute dollars as our revenue grows and our expectations that our
gross margin will vary from period to period. These forward-looking
statements involve risks and uncertainties. Our actual results may
differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ
materially from those discussed in the forward-looking statements include, but
are not limited to, those discussed under Part II, Item 1A “Risk Factors”
in this Form 10-Q as well as other information found in the documents we file
from time to time with the Securities and Exchange Commission. Also,
these forward-looking statements represent our estimates and assumptions only as
of the date of this Form 10-Q. Unless required by U.S. federal
securities laws, we do not intend to update any of these forward-looking
statements to reflect circumstances or events that occur after the statement is
made.
19
Overview
We are a
leading fabless provider of highly integrated system-on-chip, or SoC, solutions
that are used to deliver multimedia entertainment throughout the
home. We currently offer four separate product lines: media
processors, home entertainment networking solutions, video image processors and
home automation solutions. Each of these product lines also
contributes to our fully integrated SoC offerings.
Our media
processor product line represents a family of SoC solutions that combine our
semiconductors and software and are a critical component of multiple consumer
applications that process digital video and audio content including IPTV,
connected media players and portable media players. Our media
processors provide high definition digital video decoding for multiple
compression standards, graphics acceleration, audio decoding and display
control. Our software provides control of media processing and system
security management. Together, our media processor semiconductors and
software form a complete SoC solution that we believe provides our
customers with a foundation to quickly develop feature-rich consumer
entertainment products.
Our home
entertainment networking product line consists of our CopperGate silicon based
modem and Ultra-wideband, or UWB, products. Our CopperGate products
enable IP communication across phone lines, coax cables and power lines in order
to enable service providers such as telecommunication carriers, cable operators
and satellite providers to deliver IPTV solutions and other media-rich
applications such as HDTV, VoIP and fast Internet throughout the
home. Our UWB product line provides a high bandwidth radio frequency,
or RF, communication solution based on the WiMedia standard to enable home
networking and connectivity of high definition video signals using wireless and
coax mediums.
Our home
automation product line consists of our Z-Wave products. Our Z-Wave
products utilizes a low-bitrate, low-power, low-cost RF communication technology
that provides an interoperable or connected home security, monitoring and
automation solution, or SMA.
We target
the connected home technologies market with our CopperGate, Z-Wave and UWB
products. The financial results of CopperGate will be included in our
consolidated financial statements beginning in our fourth quarter of fiscal
2010. To date, we have not generated revenue from our UWB
products.
Our video
image processor product line consists of our VXP products. Our VXP
products provide a high performance silicon solution that enables studio-quality
video output for professional and prosumer applications such as audio video
receivers, broadcast studios, digital cinema, digital signage, front-projection
home theatre televisions, HDTV, medical imaging and video conferencing
systems. We target the prosumer and industrial audio/video markets
with our image processor products.
We
believe we are the leading provider of digital media processor SoCs for set-top
boxes in the IPTV market in terms of units shipped. Our digital media
processor SoC solutions are used by leading IPTV set-top box providers, such as
Cisco Systems/Scientific-Atlanta, Motorola, Netgem and
UTStarcom. IPTV set-top boxes incorporating our SoC solutions are
deployed by telecommunications carriers globally including carriers in Asia,
Europe and North America such as AT&T, Deutsche Telekom and
Freebox. We work with these carriers and set-top box providers as
well as with systems software providers, such as Microsoft, to design solutions
that address the carriers' specific requirements regarding features and
performance. Our media processor products are also used by consumer
electronics providers, such as Netgear, Sharp, Sony and Western Digital, in
applications such as digital media adaptors (DMAs), Blu-ray DVD players, HDTVs
and other connected media player devices. Our CopperGate products
primarily consist of home entertainment networking communications SoCs which are
used by leading IPTV set-top box and residential gateway providers, such as
2Wire, Cisco Systems/Scientific-Atlanta and Motorola. These solutions
are deployed by telecommunications carriers globally, but primarily in North
America, such as AT&T, Telus and Bell Aliant. Our VXP video image
processor products are one of the leading solutions for studio-quality video
image processing and are used by leading industry participants such as Polycom,
Sony and Panasonic. Our Z-Wave home automation products are used by
leading industry participants such as Danfoss, Leviton, Schlage and
Trane.
20
Our
primary target markets are IPTV, connected home technologies, connected media
player and, prosumer and industrial audio/video. The IPTV set-top box
market consists of consumer and commercial products that distribute and receive
streaming video using internet protocol, or IP. The connected home
technologies market is served by our home entertainment networking and home
automation product lines. Our home entertainment networking products
are used in IPTV set-top boxes as well as residential gateways, optical network
terminals, multi-dwelling unit masters and network adapters. Our home
automation products are used in a wide variety of home control products such as
thermostats, light switches and door locks. Our UWB products target
wireless high definition audio/video, or HDAV, speaker solutions and wireless
home entertainment networking solutions over coax applications. The
connected media player market consists primarily of digital media adapters,
portable media devices and Blu-ray DVD players that perform playback of digital
media stored on optical or hard disk formats. The prosumer and
industrial audio/video market consists of studio quality audio/video receivers
and monitors, digital projectors and medical video monitors. We also
sell products into other markets such as the HDTV, PC-based add-in and
connectivity markets. We derive minor net revenue from sales of our
products into these other markets.
For each
of the nine months ended October 31, 2009 and November 1, 2008, we derived 99%
of our net revenue from our SoC solutions. Our SoC solutions
primarily consist of highly integrated semiconductors and software that process
digital video and audio content. Our net revenue from sales of our
SoC solutions decreased $24.1 million, or 15%, in the nine months ended October
31, 2009 compared to the corresponding period in the prior fiscal
year. The decrease was primarily due to an approximate 10% decline in
the average selling prices of our SoCs and approximately 5% decline in units
sold. The decline in average selling prices was primarily the result
of certain customers achieving cumulative volume pricing discounts on purchases
of our SoC products.
We do not
enter into long-term commitment contracts with our customers and receive
substantially all of our net revenue based on purchase orders. We
forecast demand for our products based not only on our assessment of the
requirements of our direct customers but also on the anticipated requirements of
the telecommunications carriers that our customers serve. We work
with both our direct customers and these carriers to address the market demands
and the necessary specifications for our technologies. However, our
failure to accurately forecast demand can lead to product shortages that can
impede production by our customers and harm our relationship with these
customers or lead to excess inventory which could negatively impact our future
revenues and gross margins in a particular period.
The
semiconductor industry is highly competitive and, as a result, we expect our
average selling prices to decline over time. Many of our target
markets are characterized by intense price competition. The
willingness of customers to design our SoCs into their products depends to a
significant extent upon our ability to sell our products at competitive
prices. On occasion, we have reduced our prices for individual
customer volume orders as part of our strategy to obtain a competitive position
in our target markets. If we are unable to reduce our costs
sufficiently to offset any declines in product selling prices or are unable to
introduce more advanced products with higher gross margins in a timely manner,
we could see declines in our market share or gross margins. We expect
our gross margins will vary from period to period due to changes in our average
selling prices, volume order discounts, mix of product sales and customers, our
costs, the extent of development fees and provisions for inventory
obsolescence.
In July
2009, our shareholders approved our 2009 Incentive Plan and a one-time stock
option exchange program. The exchange program began on August 24,
2009 and concluded on September 22, 2009. Under the exchange program,
eligible employees were permitted to exchange outstanding stock options granted
under our 2001 Option Plan prior to June 2008 and with exercise prices equal to
or greater than $20.25 per share for a lesser number of stock options that were
granted following the expiration of the exchange program at a ratio of 1 share
in the replacement option for every 1.5 shares exchanged from eligible
options. Our directors and executive officers were not eligible to
participate in the option exchange program. As a result, on September
22, 2009, pursuant to the terms of the exchange program, we accepted for
exchange and cancelled options to purchase an aggregate of 663,737 shares of our
common stock under the 2001 Option Plan. The incremental impact to our
share-based compensation is approximately $0.4 million, which will be expensed
over the remaining expected term. On September 23, 2009, we issued
replacement options to purchase an aggregate of 442,550 shares of our common
stock in exchange for the options tendered under our 2001 Option
Plan. These replacement options have a strike price of $15.25 with a
5-year vesting schedule and 8-year term, each commencing on September 23,
2009.
On
November 10, 2009, we purchased all of the issued and outstanding share capital,
including vested stock options, of CopperGate Communications Ltd. pursuant to an
Acquisition Agreement dated October 12, 2009, as amended by the First Amendment
to Acquisition Agreement dated November 10, 2009. Under the terms of
the Agreement, we paid approximately $116.0 million in cash, which includes
approximately $25.0 million of cash and cash equivalents of CopperGate at the
closing and of which approximately $11.6 million will be held in escrow for a
period of 18 months and issued an aggregate of 3,931,352 shares of our common
stock, of which 393,138 shares will be held in escrow for a period of 18
months. At the closing, we also assumed all unvested CopperGate
options and, as a result, will issue unvested options to purchase an aggregate
of approximately 574,881 shares of our common stock, which options will vest
over time following the closing. Under the terms of the Agreement, we
also agreed to pay up to an aggregate of $5.0 million in cash to specified
CopperGate employees provided that certain milestones are achieved over a
specified period of time. Our ability to integrate CopperGate
successfully into our business and operations could be costly and
time-consuming. The integration process may disrupt our business and,
if implemented ineffectively, preclude us from realizing the anticipated
benefits of the acquisition. CopperGate is headquartered in Tel Aviv,
Israel with offices
in the U.S. and Taiwan.
21
We
believe this transaction will enhance the breadth of our technology so that we
can extend our position as a world-class provider of complete home entertainment
chipset solutions for all forms of media processing and
communications. CopperGate is a leading provider of silicon-based
modem solutions enabling distribution of media-rich
digital content over all three types of wires in the home: coax, phone
and power. CopperGate solutions are deployed by service providers
enabling the delivery of HDTV, VoIP and fast Internet services and our companies
have highly complementary technology platforms that form a portfolio of end to
end solutions. In addition, we believe this transaction further
strengthens our competitive position and expands our footprint with key
customers, as well as enabling cross selling opportunities.
Critical
Accounting Policies and Estimates
Management’s
discussion and analysis of financial condition and results of operations are
based on our unaudited condensed consolidated financial statements which have
been prepared in accordance with United States generally accepted accounting
principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts and disclosures
of the assets and liabilities at the date of the unaudited condensed
consolidated financial statements and also revenue and expenses during the
period reported. By their nature, these estimates and judgments are
subject to an inherent degree of uncertainty. Management bases its
estimates and judgments on historical experience, market trends and other
factors that are believed to be reasonable under the
circumstances. These estimates form the basis for judgments about the
carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from what we anticipate and
different assumptions or estimates about the future could change our reported
results. Management believes the critical accounting policies as
disclosed in our Annual Report on Form 10-K for the year ended January 31, 2009
reflect the more significant judgments and estimates used in preparation of our
annual and interim financial statements.
Results
of Operations
The
following table is derived from our unaudited condensed consolidated financial
statements and sets forth our historical operating results as a percentage of
net revenue for each of the periods indicated
(in thousands, except percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
October 31, |
% of
|
November 1, |
% of
|
October 31, |
% of
|
November 1, |
% of
|
|||||||||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
|||||||||||||||||||||||||
Net
revenue
|
$ | 35,464 | 100 | % | $ | 46,760 | 100 | % | $ | 137,990 | 100 | % | $ | 161,854 | 100 | % | ||||||||||||||||
Cost
of revenue
|
19,396 | 55 | % | 25,101 | 54 | % | 74,285 | 54 | % | 82,654 | 51 | % | ||||||||||||||||||||
Gross
profit
|
16,068 | 45 | % | 21,659 | 46 | % | 63,705 | 46 | % | 79,200 | 49 | % | ||||||||||||||||||||
Operating
expenses:
|
||||||||||||||||||||||||||||||||
Research
and development
|
11,727 | 33 | % | 11,131 | 24 | % | 34,961 | 25 | % | 32,364 | 20 | % | ||||||||||||||||||||
Sales
and marketing
|
3,488 | 10 | % | 3,102 | 7 | % | 10,181 | 7 | % | 8,526 | 5 | % | ||||||||||||||||||||
General
and administrative
|
5,467 | 15 | % | 3,837 | 8 | % | 12,220 | 9 | % | 13,939 | 9 | % | ||||||||||||||||||||
Acquired
in-process research and development
|
— | — | — | — | — | — | 1,571 | 1 | % | |||||||||||||||||||||||
Total
operating expenses
|
20,682 | 58 | % | 18,070 | 39 | % | 57,362 | 41 | % | 56,400 | 35 | % | ||||||||||||||||||||
Income
(loss) from operations
|
(4,614 | ) | (13 | )% | 3,589 | 8 | % | 6,343 | 5 | % | 22,800 | 14 | % | |||||||||||||||||||
Interest
income and other income, net
|
564 | 2 | % | 1,150 | 2 | % | 1,610 | 1 | % | 4,382 | 3 | % | ||||||||||||||||||||
Income
(loss) before income taxes
|
(4,050 | ) | (11 | )% | 4,739 | 10 | % | 7,953 | 6 | % | 27,182 | 17 | % | |||||||||||||||||||
Provision
for (benefit from) income taxes
|
(1,752 | ) | (5 | )% | 1,068 | 2 | % | 2,708 | 2 | % | 7,338 | 5 | % | |||||||||||||||||||
Net
income (loss)
|
$ | (2,298 | ) | (6 | )% | $ | 3,671 | 8 | % | $ | 5,245 | 4 | % | $ | 19,844 | 12 | % |
Net
revenue
Our net
revenue for the three months ended October 31, 2009 decreased $11.3 million, or
24%, compared to the corresponding period in the prior fiscal
year. This decrease was primarily due to an 11% decline in average
selling prices of our SoCs and a 14% decline in units sold. Our net
revenue for the nine months ended October 31, 2009 decreased $23.9 million, or
15%, compared to the corresponding period in the prior fiscal
year. This decrease was primarily due to a 10% decline in average
selling prices of our SoCs and a 5% decline in units sold. The
decline in average selling prices for the three and nine months ended October
31, 2009 was primarily the result of shipments to our larger customers, who
achieved cumulative volume pricing discounts on purchases of our
products.
22
Net
revenue by target market
We sell
our products into four primary target markets, which are the IPTV market, the
connected media player market, the prosumer and industrial audio/video market
and the connected home technologies market. We also sell our
products, to a lesser extent, into several other markets, such as the HDTV and
PC-based add-in markets, which we refer to collectively as our other
market. We expect net revenue from sales into the connected home
technologies market to increase in absolute dollars and as a percentage of total
net revenue in future periods as we begin to sell new products acquired in
connection with the acquisition of CopperGate into this target
market. The following table sets forth our net revenue by target
market and the percentage of net revenue represented by our product sales to
each target market
(in thousands, except percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
October 31, |
%
of
|
November 1, |
%
of
|
|||||||||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
|||||||||||||||||||||||||
IPTV
|
$ | 22,480 | 63% | $ | 35,708 | 77% | $ | 100,015 | 72% | $ | 127,892 | 79% | ||||||||||||||||||||
Connected
media players
|
9,928 | 28% | 7,621 | 16% | 28,600 | 21% | 23,357 | 14% | ||||||||||||||||||||||||
Prosumer
and industrial audio/video
|
1,756 | 5% | 2,035 | 4% | 4,911 | 4% | 5,863 | 4% | ||||||||||||||||||||||||
Connected
home technologies
|
1,118 | 3% | 384 | 1% | 2,766 | 2% | 870 | 1% | ||||||||||||||||||||||||
Other
|
182 | 1% | 1,012 | 2% | 1,698 | 1% | 3,872 | 2% | ||||||||||||||||||||||||
Net
revenue
|
$ | 35,464 | 100% | $ | 46,760 | 100% | $ | 137,990 | 100% | $ | 161,854 | 100% |
IPTV: For the three
months ended October 31, 2009, net revenue from sales of our SoC solutions,
primarily our SMP8630 SoC series, into the IPTV market decreased $13.2 million,
or 37%, from the corresponding period in the prior fiscal year. The
decline was attributable to certain factors affecting our IPTV demand in the
third fiscal quarter of 2010 including continued weakness in the IPTV
market that we have experienced since the beginning of the second half of fiscal
2009 as a result of the general economic downturn, the impact of declining
average selling prices due to certain customers achieving cumulative volume
pricing discounts on purchases of our products and a decrease in units shipped
due to the timing of product deployments by a major telecommunication service
provider. As a result of these factors and as well as the increased
revenue in our connected media player and connected home technologies markets,
our revenue from the IPTV market as a percentage of our total net revenue
decreased 14% for the three months ended October 31, 2009 compared to the
corresponding period in the prior fiscal year.
For the
nine months ended October 31, 2009, net revenue from sales of our SoC solutions,
primarily our SMP8630 SoC series, into the IPTV market decreased $27.9 million,
or 22%, from the corresponding period in the prior fiscal year. The
decline was attributable to certain factors affecting the IPTV demand including
continued weakness in our IPTV market that we have experienced since the
beginning of the second half of fiscal 2009 as a result of the general economic
downturn, the impact of declining average selling prices due to certain
customers achieving cumulative volume pricing discounts on purchases of our
products and a decrease due to the timing of product deployments by a major
telecommunication service provider. As a result of these factors and
as well as the increased revenue in our connected media player and connected
home technologies markets, our revenue from the IPTV market as a percentage of
our total net revenue decreased by 7% for the nine months ended October 31, 2009
compared to the corresponding period in the prior fiscal year.
We expect
our revenue from the IPTV market to fluctuate in future periods as this revenue
is based on IPTV service deployments by telecommunication service providers,
changes in inventory levels at the contract manufacturers that supply them and
competitive market pressures.
Connected media
players: For the three and
nine months ended October 31, 2009, net revenue from sales of our products to
the connected media players market increased $2.3
million, or 30%, and $5.2 million, or 22%, from the corresponding periods
in the prior
fiscal year, respectively. The increase was primarily
attributable to higher sales of our SoCs to customers who incorporate our SoCs
into digital media adapters. For the same reason, our revenue from
the connected media players market as a percentage of our total net revenue for
the three and nine months ended October 31, 2009 compared to the corresponding
period in the prior fiscal year increased 12% and 7%, respectively.
Prosumer and
industrial audio/video: For the three and
nine months ended October 31, 2009, net revenue from sales of our products into
the prosumer and industrial audio/video market decreased $0.3 million, or 14%,
and $1.0 million, or 16%, respectively, from the corresponding periods in the
prior fiscal year. The decline was attributable to an overall
slowdown in the prosumer and industrial audio/video market in the three and nine
months ended October 31, 2009 as a result of the global economic
downturn. Our revenue from sales into the prosumer and industrial
audio/video market as a percentage of total net revenue increased by 1% for the
three months ended October 31, 2009 compared to the corresponding period in the
prior fiscal year and was unchanged for the nine months ended October 31, 2009
compared to the corresponding period in the prior fiscal year.
23
Connected home
technologies: Prior to the
second quarter of fiscal 2010, we referred to our connected home technologies
target market as our wireless target market. We believe the connected
home technologies market addressed by our Z-Wave and UWB product lines more
accurately describes our target market. For the three and nine months
ended October 31, 2009, net revenue from sales of our products into the
connected home technologies market increased $0.7 million and $1.9 million,
respectively, from the corresponding periods in the prior fiscal
year. These increases were the result of our entry into the wireless
home automation market through our acquisition of Zensys Holdings Corporation in
December 2008. For the same reason, our percentage of net revenue
from sales into the connected home technologies market increased to 3% and 2% as
a percentage of our total net revenue for the three and nine months ended
October 31, 2009, respectively. We expect our net revenue from this
market to increase in both absolute dollars and as a percentage of net revenue
as we expand sales of our Z-Wave product line and add sales from our CopperGate
product line.
Other: Our other markets
consist of HDTV, PC add-in boards, development kits, development contracts,
services and other ancillary markets. For the three and nine months
ended October 31, 2009, net revenue decreased $0.8 million, or 82%, and $2.2
million, or 56%, respectively, compared to the corresponding periods in the
prior fiscal year.
Net
revenue by product group
Our
primary product group consists of our SoC solutions. We also derive a
minimal portion of our net revenues from other products and
services. The following table sets forth net revenue in each of our
product groups and the percentage of net revenue represented by each product
group (in thousands, except percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
October 31, |
%
of
|
November 1, |
%
of
|
|||||||||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
|||||||||||||||||||||||||
SoCs
|
$ | 35,042 | 99% | $ | 46,035 | 98% | $ | 136,926 | 99% | $ | 160,981 | 99% | ||||||||||||||||||||
Other
|
422 | 1% | 725 | 2% | 1,064 | 1% | 873 | 1% | ||||||||||||||||||||||||
Net
revenue
|
$ | 35,464 | 100% | $ | 46,760 | 100% | $ | 137,990 | 100% | $ | 161,854 | 100% |
SoCs: Our
SoCs are targeted toward manufacturers and large volume designer and
manufacturer customers building products for the IPTV, connected media player,
prosumer and industrial audio/video and connected home technologies consumer
electronic markets. The decrease of $11.0 million, or 24%, in net
revenue from SoCs for the three months ended October 31, 2009 compared to the
corresponding period in the prior fiscal year was due primarily to an 11%
decline in average selling prices of our SoCs and a 14% decline in units
sold. The decline was attributable to certain factors affecting our
IPTV demand in the third fiscal quarter of 2010 including continued weakness in
the IPTV market that we have experienced since the beginning of the second half
of fiscal 2009 as a result of the general economic downturn, the impact of
declining average selling prices due to certain customers achieving cumulative
volume pricing discounts on purchases of our products and a decrease in units
shipped due to the timing of product deployments by a major telecommunication
service provider.
The
decrease of $24.1 million, or 15%, in net revenue from SoCs for the nine months
ended October 31, 2009 compared to the corresponding period in the prior fiscal
year was due primarily to a 10% decline in average selling prices of our SoCs
and a 5% decline in units sold. The decline was attributable to
certain factors affecting our IPTV demand in the third fiscal quarter of 2010
including continued weakness in the IPTV market that we have experienced since
the beginning of the second half of fiscal 2009 as a result of the general
economic downturn, the impact of declining average selling prices due to certain
customers achieving cumulative volume pricing discounts on purchases of our
products and a decrease in units shipped due to the timing of product
deployments by a major telecommunication service provider.
Other: We derive revenue
from other products and services, including engineering support services for
hardware and software, engineering development for customization of SoCs and
other accessories. The decrease in our net revenue from other
products of $0.3 million, or 42%, for the three months ended October 31, 2009
compared to the corresponding periods in the prior fiscal year was primarily due
to a reduction in nonrecurring engineering fees. The increase in our
net revenue from other products of $0.2 million, or 22% for the nine months
ended October 31, 2009 compared to the corresponding periods in the prior fiscal
year was primarily due to increased sales of software development
kits.
24
Net
revenue by geographic region
The
following table sets forth our net revenue by geographic region and the
percentage of total net revenue represented by each geographic region based on
the invoicing location of each customer (in thousands, except
percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
October 31, |
%
of
|
November 1, |
%
of
|
|||||||||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
|||||||||||||||||||||||||
Asia
|
$ | 27,510 | 78% | $ | 26,287 | 56% | $ | 103,601 | 75% | $ | 86,927 | 54% | ||||||||||||||||||||
Europe
|
5,430 | 15% | 16,881 | 36% | 28,884 | 21% | 64,634 | 40% | ||||||||||||||||||||||||
North
America
|
2,515 | 7% | 3,584 | 8% | 5,478 | 4% | 10,248 | 6% | ||||||||||||||||||||||||
Other
regions
|
9 | * | 8 | * | 27 | * | 45 | * | ||||||||||||||||||||||||
Net
revenue
|
$ | 35,464 | 100% | $ | 46,760 | 100% | $ | 137,990 | 100% | $ | 161,854 | 100% |
|
*
|
These
regions provided less than 1% of our net revenue in these
periods.
|
Asia: Our net revenue
in absolute dollars from Asia increased $1.2 million, or 5%, for the three
months ended October 31, 2009 compared to the corresponding period in the prior
fiscal year. Our net revenue from Asia increased 22% as a percentage
of our total net revenue for the three months ended October 31, 2009 compared to
the corresponding period in the prior fiscal year. The increase in
net revenue from Asia in both absolute dollars and as a percentage of our total
net revenue was primarily attributable to an increase in revenue from Taiwan
which is primarily due to a customer ramping production of their DMA product and another
customer shifting its production orders from a contract manufacturer
located in Europe to contract manufacturers in Asia. These increases
were partially offset by lower sales to a customer in Singapore and an overall
decline in the average selling prices of our SoCs.
Our
net revenue in absolute dollars from Asia increased $16.7 million, or 19%, for
the nine months ended October 31, 2009 compared to the corresponding period in
the prior fiscal year. Our net revenue from Asia increased 21% as a
percentage of our total net revenue for the nine months ended October 31, 2009
compared to the corresponding period in the prior fiscal year. The
increase in net revenue from Asia in both absolute dollars and as a percentage
of our total net revenue was primarily attributable to an increase in revenue
from customers in Taiwan and China which was primarily attributable to a
significant customer shifting their production orders from a contract
manufacturer located in Europe to contract manufacturers in those
countries. In addition, net revenue from Taiwan increased due to a
customer ramping production of their DMA product. This increase in
both absolute dollars and as a percentage of our total net revenue was partially
offset by a decline in the average selling prices of our SoCs.
The
following table sets forth the percentage of total net revenue from countries in
the Asia region that accounted for 10% or more of our net revenue:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Singapore
|
11% | 17% | 20% | 21% | ||||||||||||
China
|
18% | 13% | 21% | 10% | ||||||||||||
Taiwan
|
36% | 16% | 25% | * |
|
*
|
Net
revenue from this country was less than 10% of
our total net revenue in these
periods.
|
Europe: Our
net revenue in absolute dollars from Europe decreased $11.5 million, or 68%, and
$35.8 million, or 55%, for the three and nine months ended October 31, 2009,
respectively, compared to the corresponding periods in the prior fiscal
year. Our net revenue from Europe decreased 21% and 19% as a
percentage of our total net revenue for the three and nine months ended October
31, 2009, respectively, compared to the corresponding periods in the prior
fiscal year. The decrease in our net revenue from Europe in both
absolute dollars and as a percentage of our total net revenue was primarily
attributable to an IPTV customer who incorporates our products into their
finished goods moving their production orders to contract manufacturers located
in Asia starting in the third quarter of fiscal 2009 and also to IPTV customers
whose demand declined including continued weakness in the IPTV market
that we have experienced since the beginning of the second half of fiscal 2009
as a result of the general economic downturn, the impact declining average
selling prices due to certain customers achieving cumulative volume pricing
discounts on purchases of our products and a decrease in units shipped due to
the timing of product deployments by a major telecommunication service
provider.
25
The
following table sets forth the percentage of total net revenue from countries in
Europe that accounted for 10% or more of our net revenue:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
France
|
15% | 16% | 16% | 13% | ||||||||||||
Netherlands
|
* | * | * | 15% |
|
*
|
Net
revenue from this country was less than 10% of our total net revenue
in these periods.
|
North
America: Our net revenue
in absolute dollars from North America decreased $1.1 million, or 30%, and $4.8
million, or 47%, for the three and nine months ended October 31, 2009,
respectively, compared to the corresponding periods in the prior fiscal
year. Our net revenue from North America decreased 1% and 2% as a
percentage of our net revenue for the three and nine months ended October 31,
2009, respectively, compared to the corresponding periods in the prior fiscal
year. The decrease in our net revenue from North America in both
absolute dollars and as a percentage of our net revenue was primarily
attributable to customers who incorporate our products into their finished goods
placing their orders through contract manufacturers located outside of North
America and to a decline in sales to our prosumer/audio video target market due
to the overall slowdown that we have experienced since the beginning of the
second half of fiscal 2009 as a result of the general economic
downturn.
For each
of the three and nine months ended October 31, 2009, our net revenue generated
outside North America was 93% and 96% of our net revenue, respectively, compared
to 92% and 94%, respectively, in the corresponding periods in the prior fiscal
year.
Major
Customers
The
following table sets forth the major customers that accounted for 10% or more of
our net revenue:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
Customer
|
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
||||||||||||
Unihan
Corporation
|
15% | * | 10% | * | ||||||||||||
MTC
Singapore
|
11% | 17% | 20% | 21% | ||||||||||||
Cowin
Worldwide Corporation
|
11% | * | 10% | * | ||||||||||||
Gemtek
Electronics Compontents, LTD
|
* | * | 11% | * | ||||||||||||
Cisco
Systems, Inc. **
|
* | 12% | * | 20% | ||||||||||||
Netgem
|
* | 11% | * | * |
|
*
|
Net
revenue from customer was less than 10% of our total net revenue in
these periods.
|
|
**
|
Starting
in the third quarter of fiscal 2009, Cisco Systems, Inc. began processing
its orders with us through multiple third-party contract
manufacturers.
|
Gross
Profit and Gross Margin
The
following table sets forth our gross profit and gross margin (in thousands,
except percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
|
November 1, | October 31, |
%
|
November 1, | |||||||||||||||||||
2009
|
change
|
2008
|
2009
|
change
|
2008
|
|||||||||||||||||||
Gross
profit
|
$ | 16,068 | -26% | $ | 21,659 | $ | 63,705 | -20% | $ | 79,200 | ||||||||||||||
Gross
margin
|
45.3% | 46.3% | 46.2% | 48.9% |
The $5.6
million and $15.5 million decreases in gross profit, or 1.0 percentage point and
2.7 percentage point decrease in gross margin, for the three and nine months
ended October 31, 2009, respectively, compared to the corresponding periods in
the prior fiscal year was due primarily to an 11% and a 10% decline in our
average selling prices per SoC during the three and nine months ended October
31, 2009, respectively, which was partially offset by a 10% and a 8% decline in
our average costs per SoC unit, respectively. The decline in average
selling prices was primarily the result of certain customers achieving
cumulative volume pricing discounts on purchases of our products. The
decline in our average cost per SoC unit was primarily due to overall cost
reductions from our suppliers as well as improved yields on our highest volume
products. In addition, operations overhead increased $1.0 million, or
26%, for the nine months ended October 31, 2009 compared to the corresponding
period in the prior fiscal year. This increase was due to an increase
in compensation and benefits as a result of an overall increase in headcount,
including personnel added from our acquisition of Zensys in December 2008 and an
increase in amortization of acquired intangibles associated with the Zensys
acquisition.
26
Research
and development expense
Research
and development expense consists primarily of compensation and benefit costs in
connection with our employees engaged in research, design and development
activities, including share-based compensation expense. Development
and design costs consist primarily of costs related to engineering design tools,
mask and prototyping costs, testing and subcontracting costs. In
addition, we incur costs for facilities and equipment and other
items.
The
following table sets forth details of research and development expense for the
three and nine months ended October 31, 2009 and November 1, 2008 (in thousands,
except percentages):
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 7,219 | 20% | $ | 5,911 | 13% | $ | 1,308 | 22% | |||||||||||||||
Share-based
compensation
|
1,178 | 3% | 1,239 | 3% | (61 | ) | -5% | |||||||||||||||||
Depreciation
and amortization
|
1,145 | 3% | 1,347 | 3% | (202 | ) | -15% | |||||||||||||||||
Development
and design costs
|
1,330 | 4% | 1,793 | 4% | (463 | ) | -26% | |||||||||||||||||
Other
|
855 | 2% | 841 | 2% | 14 | 2% | ||||||||||||||||||
Research
and development
|
$ | 11,727 | 33% | $ | 11,131 | 24% | $ | 596 | 5% | |||||||||||||||
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 21,116 | 15% | $ | 17,927 | 11% | $ | 3,189 | 18% | |||||||||||||||
Depreciation
and amortization
|
3,702 | 3% | 3,739 | 2% | (37 | ) | -1% | |||||||||||||||||
Share-based
compensation
|
3,633 | 3% | 3,892 | 2% | (259 | ) | -7% | |||||||||||||||||
Development
and design costs
|
4,125 | 3% | 4,435 | 3% | (310 | ) | -7% | |||||||||||||||||
Acquired
in-process research and development
|
— | 0% | 1,571 | 1% | (1,571 | ) | -100% | |||||||||||||||||
Other
|
2,385 | 2% | 2,371 | 1% | 14 | 1% | ||||||||||||||||||
Research
and development
|
$ | 34,961 | 25% | $ | 33,935 | 21% | $ | 1,026 | 3% |
For the
three and nine months ended October 31, 2009, compensation and benefits
increased primarily due to an overall increase in headcount, including personnel
added from our acquisition of Zensys in December 2008. The decrease
in share-based
compensation expense is primarily due to a decrease in the average value per
share of stock options granted and was partially offset by increases due
to higher headcount. For the three and nine months ended October 31,
2009, depreciation and amortization expenses decreased primarily due to
completion of amortization of the non-compete agreement in connection with our
acquisition of Blue7. For the three and nine months ended
October 31, 2009, development and design costs decreased primarily due to
decreased costs for tape-out and test samples of new
products. Development and design costs vary from period to period
depending on the timing of development and tape-out of new products
Acquired
in-process research and development, or IPR&D, for the nine months ended
November 1, 2008 totaled $1.6 million as a result of the VXP acquisition
completed on February 8, 2008. The amounts allocated to IPR&D
were determined through established valuation techniques used in the high
technology industry and were expensed upon acquisition as it was determined that
the underlying projects had not reached technological feasibility and no
alternative future uses existed. IPR&D was a one-time expense
recognized during the quarter in which we closed the VXP
acquisition.
Sales
and marketing expense
Sales and
marketing expense consists primarily of compensation and benefit costs,
including commissions to our direct sales force, and share-based compensation
expense, trade shows, travel and entertainment expenses and external
commissions.
27
The
following table set forth details of sales and marketing expense for the three
and nine months ended October 31, 2009 and November 1, 2008 (in thousands,
except percentages):
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 1,825 | 5% | $ | 1,280 | 3% | $ | 545 | 43% | |||||||||||||||
Share-based
compensation
|
384 | 1% | 796 | 2% | (412 | ) | -52% | |||||||||||||||||
Trade
shows, travel and entertainment
|
493 | 1% | 243 | 1% | 250 | 103% | ||||||||||||||||||
External
commissions
|
316 | 1% | 538 | 1% | (222 | ) | -41% | |||||||||||||||||
Other
|
470 | 1% | 245 | 1% | 225 | 92% | ||||||||||||||||||
Sales
and marketing
|
$ | 3,488 | 10% | $ | 3,102 | 7% | $ | 386 | 12% | |||||||||||||||
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 5,270 | 4% | $ | 4,149 | 3% | $ | 1,121 | 27% | |||||||||||||||
External
commissions
|
1,119 | 1% | 759 | 0% | 360 | 47% | ||||||||||||||||||
Share-based
compensation
|
1,102 | 1% | 1,536 | 1% | (434 | ) | -28% | |||||||||||||||||
Trade
shows, travel and entertainment
|
1,072 | 1% | 575 | 0% | 497 | 86% | ||||||||||||||||||
Other
|
1,618 | 1% | 1,507 | 1% | 111 | 7% | ||||||||||||||||||
Sales
and marketing
|
$ | 10,181 | 7% | $ | 8,526 | 5% | $ | 1,655 | 19% |
For the
three months ended October 31, 2009, compensation and benefits increased
primarily due to an overall increase in headcount, including personnel added
through our acquisition of Zensys in December 2008. The decrease in
share-based compensation expense is due to a $0.3 million charge in the third
quarter of fiscal 2009 for acceleration of an option that occurred during that
period. Trade show, travel and entertainment expenses increased as a
result of our increased participation in trade shows primarily as a result of
our added product lines and due to an overall increase in headcount attending
trade shows. External commissions decreased due to lower net revenues
of products sold through external sales representatives. Other
expenses increased primarily due to increased costs related to outside service
fees, rent and facilities costs and increased amortization expense related to
our acquisition of Zensys.
For the
nine months ended October 31, 2009, compensation and benefits increased
primarily due to an overall increase in headcount including personnel added
through our acquisition of Zensys in December 2008 which was partially offset by
a decrease in internal commissions due to lower net revenues. The
decrease in share-based compensation expense is primarily due to a $0.3 million
charge in the third quarter of fiscal 2009 for the acceleration of an option
that occurred during that period. Commissions paid to our external
sales representatives increased due to a significant order in our first quarter
of fiscal 2010 from a customer who began to incorporate our SMP8630 series into
its products. Trade show expenses increased as a result of our
increased participation in trade shows primarily as a result of our added
product lines. Travel and entertainment expenses increased primarily
due to an overall increase in headcount attending trade shows.
General
and administrative expense
General
and administrative expense consists primarily of compensation and benefit costs,
including share-based compensation expense, legal and accounting fees, other
professional fees and facilities expenses.
28
The
following table set forth details of general and administrative expense for the
three and nine months ended October 31, 2009 and November 1, 2008 (in thousands,
except percentages):
Three
Months Ended
|
Three
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 1,270 | 4% | $ | 1,039 | 2% | $ | 231 | 22% | |||||||||||||||
Legal
and accounting fees
|
1,762 | 5% | 994 | 2% | 768 | 77% | ||||||||||||||||||
Share-based
compensation
|
560 | 2% | 655 | 1% | (95 | ) | -15% | |||||||||||||||||
Outside
service fees
|
1,110 | 3% | 604 | 1% | 506 | 84% | ||||||||||||||||||
Other
|
765 | 2% | 545 | 1% | 220 | 40% | ||||||||||||||||||
General
and administrative
|
$ | 5,467 | 15% | $ | 3,837 | 8% | $ | 1,630 | 42% | |||||||||||||||
Nine
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||
October 31, |
%
of
|
November 1, |
%
of
|
Increase
|
%
|
|||||||||||||||||||
2009
|
Net
Revenue
|
2008
|
Net
Revenue
|
(Decrease)
|
Change
|
|||||||||||||||||||
Compensation
and benefits
|
$ | 3,640 | 3% | $ | 3,034 | 2% | $ | 606 | 20% | |||||||||||||||
Legal
and accounting fees
|
3,867 | 3% | 3,669 | 2% | 198 | 5% | ||||||||||||||||||
Share-based
compensation
|
563 | 0% | 4,246 | 3% | (3,683 | ) | -87% | |||||||||||||||||
Outside
service fees
|
1,929 | 1% | 1,408 | 1% | 521 | 37% | ||||||||||||||||||
Other
|
2,221 | 2% | 1,582 | 1% | 639 | 40% | ||||||||||||||||||
General
and administrative
|
$ | 12,220 | 9% | $ | 13,939 | 9% | $ | (1,719 | ) | -12% |
For the
three months ended October 31, 2009, compensation and benefits increased
primarily due to an overall increase in headcount. The increase in
legal and accounting fees is primarily due to $0.7 million of legal fees related
to the acquisition of CopperGate. Outside services fees increased
primarily due to $0.8 million of fees related to the acquisition of
CopperGate.
For the
nine months ended October 31, 2009, compensation and benefits increased
primarily due to an overall increase in headcount. The increase in
legal and accounting fees is primarily due to $0.7 million of legal fees related
to the acquisition of CopperGate which was partially offset by a decrease in
audit and internal control consulting expenses resulting from efforts to improve
efficiency. Additionally, in the first and second quarter
of fiscal 2009 we had higher legal and accounting fees as result of the
implementation of our international tax strategy. The decrease in
share-based compensation expense is primarily due to a charge of $2.4 million
during the first quarter of fiscal 2009 for an option granted and fully vested
during that period a $1.1 million reduction due to an option cancellation
recorded in the first quarter of fiscal 2010. Outside services fees
increased primarily due to $0.8 million of fees related to the acquisition of
CopperGate.
Share-based
compensation expense
The
following table sets forth the total share-based compensation expense that is
included in each functional line item in the unaudited condensed consolidated
statements of operations (in thousands, except
percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
October
31, 2009
|
November
1, 2008
|
October
31, 2009
|
November
1, 2008
|
|||||||||||||
Cost
of revenue
|
$ | 89 | $ | 87 | $ | 254 | $ | 261 | ||||||||
Research
and development expenses
|
1,178 | 1,239 | 3,633 | 3,892 | ||||||||||||
Sales
and marketing expenses
|
384 | 796 | 1,102 | 1,536 | ||||||||||||
General
and administrative expenses
|
560 | 655 | 563 | 4,246 | ||||||||||||
Total
share-based compensation
|
$ | 2,211 | $ | 2,777 | $ | 5,552 | $ | 9,935 |
Accounting
for employee stock options grants will continue to have an adverse impact on our
results of operations. Future share-based compensation expense and
unearned share-based compensation will increase to the extent that we grant
additional equity awards to employees. The
decrease in share-based compensation expense for the comparative three month
periods is primarily due to a charge of $0.3 million for the acceleration of an
option in the third quarter of fiscal 2009. The
decrease in share-based compensation expense for the comparative nine month
periods is primarily due to the charge of $2.4 million during the first quarter
of fiscal 2009 for an option granted and fully vested during that period
anda$1.1 million reduction due to a specific option cancellation recorded in the
first quarter of fiscal 2010.
29
Amortization of
intangible assets: Amortization
expense of $0.7 million and $2.1 million for acquired developed technology for
the three and nine months ended October 31, 2009, respectively, and $0.6 million
and $1.7 million, for the corresponding periods of the prior year, is classified
as cost of sales. Amortization expense of zero and $19,000 for
acquired noncompete agreements for the three and nine months ended October 31,
2009, respectively, and $0.1 million and $0.4 million, for the corresponding
periods of the prior year, is classified as research and development
expense. An acquired noncompete agreement was fully amortized in
first quarter of fiscal 2010. Amortization expense of $84,000 and
$258,000 for other purchased intangible assets for the three and nine months
ended October 31, 2009, respectively, and $59,000 and $160,000, for the
corresponding periods of the prior year, is classified as sales and marketing
expense. At October 31, 2009, the unamortized balance from purchased
intangible assets was $15.4 million which will be amortized to future periods
based on their respective remaining estimated useful lives. If we
purchase additional intangible assets in the future, our cost of revenue or
other operating expenses may increase from the amortization of those
assets.
Acquired
intangible assets, subject to amortization, were as follows as of October 31,
2009 (in thousands, except for estimated useful life):
Gross
Value
|
Accumulated
Amortization
|
Net
Value
|
Estimated
Useful Life
|
||||||||||
Developed
technology
|
$ | 19,224 | $ | 5,975 | $ | 13,249 |
2
to 9 years
|
||||||
Trademarks
|
1,554 | 214 | 1,340 |
5
to 10 years
|
|||||||||
Noncompete
agreements
|
1,400 | 1,400 | — |
3
years
|
|||||||||
Customer
relationships
|
1,123 | 277 | 846 |
7
years
|
|||||||||
$ | 23,301 | $ | 7,866 | $ | 15,435 |
Interest
and other income, net
Interest
and other income, net, consists primarily of interest earned on cash equivalents
and marketable securities balances, realized and unrealized gains or losses from
foreign currency transactions and other income.
The
following table sets forth interest and other income, net and the percent change
in interest and other income, net (in thousands, except
percentages):
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||||||||||
%
|
%
|
|||||||||||||||||||||||
October
31, 2009
|
change
|
November
1, 2008
|
October
31, 2009
|
change
|
November
1, 2008
|
|||||||||||||||||||
Interest
and other income, net
|
$ | 564 | -51% | $ | 1,150 | $ | 1,610 | -63% | $ | 4,382 |
The
decrease of $0.6 million, or 51%, and $2.8 million, or 63%, for the three and
nine months ended October 31, 2009, respectively, compared with the
corresponding periods in the prior fiscal year was due primarily to a decrease
in overall interest rates earned on our marketable securities portfolio and in
particular the interest rate yield for our auction rate securities, or ARS, and
was further reduced by foreign exchange losses. Additionally, our
foreign exchange exposure, primarily in the Canadian dollar, Danish krone and
Euro, has increased compared to the corresponding periods in the prior fiscal
year as a result of our expansion into international locations and increased
volatility of the US dollar in relation to those currencies. We
expect our foreign exchange exposure to increase in future periods as a result
of increased exposure to Israeli shekels as a result of our acquisition of
CopperGate.
Provision
for income taxes
On
February 20, 2009, the California Budget Act of 2008 was signed into law which
revised certain provisions of the California State Tax Code, including the
option to elect an alternative method to attribute taxable income to California
for tax years beginning on or after January 1, 2011. We now expect
that in years 2011 and beyond, our income subject to tax in California will be
lower than under prior tax law and that our California deferred tax assets are
therefore no longer more likely than not to be realized. As a result
of this change, we recorded a $3.6 million charge in the first quarter of fiscal
2010 to reduce our previously recognized California deferred tax
assets.
We
recorded an income tax benefit of $1.8 million for the three months ended
October 31, 2009. The income tax benefit for the three months ended
October 31, 2009 is the result of the reduced effective tax rate due to higher
foreign rate benefits realized in low tax jurisdictions. For the nine
months ended October 31, 2009, we recorded a provision for income tax of $2.7
million. For the three and nine months ended November 1, 2008, we recorded
provisions for income taxes of $1.1 million and $7.3 million,
respectively. The effective tax rate for the nine months ended
October 31, 2009 was approximately 34%.
30
Liquidity
and Capital Resources
The
following table sets forth the balances of cash and cash equivalents and
short-term marketable securities (in thousands):
October
31, 2009
|
January
31, 2009
|
|||||||
Cash
and cash equivalents
|
$ | 142,707 | $ | 90,845 | ||||
Short-term
marketable securities
|
60,355 | 28,862 | ||||||
$ | 203,062 | $ | 119,707 |
As of
October 31, 2009, our principal sources of liquidity consisted of cash and cash
equivalents and short-term marketable securities of $203.1 million, which
represents an increase of $83.4 million from $119.7 million at January 31,
2009. The increase in cash and cash equivalents and short-term
marketable securities was primarily due to $48.7 million of cash generated from
our operating activities and reclassification of our auction rate securities of
$42.6 million from long-term marketable securities to short-term marketable
securities, which was partially offset by our investment of $3.0 million in a
privately-held technology company in exchange for a convertible note receivable
and purchases of $4.9 million for software and equipment and leasehold
improvements. In October 2008, we accepted an offer from our cash
investment advisor, UBS, of a comprehensive settlement agreement, in which all
the ARS currently held in our UBS portfolio could be redeemed at par
value. The offer to redeem will be at our option during a two year
period beginning in June 2010. As a result of this offer, we expect
to sell all of our auction rate securities to UBS within nine
months. Accordingly, we have classified our auction rate securities
as short-term marketable securities.
The
following table sets forth the primary net cash inflows and outflows (in
thousands):
Nine
Months Ended
|
||||||||
October
31, 2009
|
November
1, 2008
|
|||||||
Net
cash provided by (used in):
|
||||||||
Operating
activities
|
$ | 48,747 | $ | 29,687 | ||||
Investing
activities
|
598 | (34,495 | ) | |||||
Financing
activities
|
1,933 | (78,222 | ) | |||||
Effect
of foreign rate changes on cash and cash equivalents
|
584 | (277 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
$ | 51,862 | $ | (83,307 | ) |
Cash
flows from operating activities
Net cash
provided by operating activities of $48.7 million for the nine months ended
October 31, 2009 was primarily due to net income of $5.2 million, non-cash
expenses of $14.7 million, a $13.0 million decrease in inventories, a $12.4
million decrease in accounts receivable and a $4.7 million increase in accounts
payable. These amounts were partially offset by a $1.2 million
decrease in accrued liabilities. Non-cash expenses included in net
income in the nine months ended October 31, 2009 consisted primarily of $6.8
million in depreciation and amortization, $5.6 million in share-based
compensation expense and $2.3 million in deferred income taxes.
The
decrease in inventories was the result of successful efforts to reduce the level
of our die bank and resulted in an increase in our annualized rate of inventory
turns to 3.4 for the quarter ended October 31, 2009 compared to 2.6 for the
quarter ended January 31, 2009. The decrease in accounts receivable
was primarily the result of decreased billings due to decreased product
shipments during the third quarter of fiscal 2010. Our days sales
outstanding improved to 46 days at October 31, 2009 compared to 59 days at
January 31, 2009, primarily due to timing of shipments and customer
mix. The increase in accounts payable was primarily due to the timing
of payment for inventories. The decrease in accrued liabilities was
primarily due to the timing of payments for employee compensation.
31
Net cash
provided by operating activities was $29.7 million for the nine months
ended November 1, 2008. The cash provided by our operating activities
for the nine months ended November 1, 2008 was primarily due to net income of
$19.8 million, non-cash expenses of $22.9 million, a $13.5 million decrease in
accounts receivable and a $2.3 million increase in other long-term
liabilities. These amounts were partially offset by a $17.6 million
increase in inventories, a $10.2 million decrease in accounts payable and other
accrued liabilities and a $1.0 million increase in prepaid expenses and other
assets. The increase in inventory for the nine months ended November
1, 2008 was due primarily to strategic purchases of raw
materials. The decrease in accounts payable and accrued liabilities
was due primarily to the timing of payments for inventories, tax liabilities and
software licenses. The increase in prepaid expenses and other assets
was primarily due to purchases of production mask sets to be used in
manufacturing our products. The decrease in accounts receivable for
the nine months ended November 1, 2008 was primarily the result of decreased
billings due to decreased product shipments during the third quarter of fiscal
2009, which was substantially offset by increased sales to customers with
payment terms greater than net 30 days. Non-cash charges included
share-based compensation of $9.9 million in the nine months ended November 1,
2008.
Cash
flows from our operating activities will continue to fluctuate based upon our
ability to grow net revenues while managing the timing of payments to us from
customers and from us to vendors, the timing of inventory purchases and
subsequent sale of our products.
Cash
flows from investing activities
Net cash
provided by investing activities was $0.6 million for the nine months ended
October 31, 2009 which was primarily due to a net reduction of our marketable
securities by $9.0 million which was primarily offset by purchases of software,
equipment and leasehold improvements of $4.9 million, our investment in a
privately-held technology company in exchange for a convertible note receivable
for $3.0 million, and a private equity investment of $0.5 million.
Net cash
used in our investing activities was $34.5 million for the nine months ended
November 1, 2008 which was primarily due to cash paid in connection with
the acquisition of the VXP Group for $18.6 million, purchases of
software, equipment and leasehold improvements of $10.5 million and net
purchases of marketable securities of $5.4 million.
Cash
flows from financing activities
Net cash
provided by financing activities was $1.9 million in the nine months ended
October 31, 2009, which was due to $1.7 million of proceeds from exercises of
employee stock options and employee stock purchases and $0.2 million of excess
tax benefit from share-based compensation.
Net cash
used in financing activities was $78.2 million in the nine months ended
November 1, 2008, which was the result of $85.9 million paid for the purchase of
4.2 million shares of our common stock, partially offset by $4.5 million of
excess tax benefit from share-based compensation and $3.3 million of proceeds
from the exercise of employee stock options.
While we
have generated cash from operations for fiscal 2009, 2008 and 2007 and in the
first nine months of fiscal 2010, it is possible that our operations will
consume cash in future periods. On November 10, 2009, we purchased
all of the issued and outstanding share capital, including vested stock options,
of CopperGate Communications Ltd for approximately $116.0 million in cash, which
includes approximately $25.0 million of cash and cash equivalents of CopperGate
at the closing and of which approximately $11.6 million will be held in escrow
for a period of 18 months and issued an aggregate of 3,931,352 shares of our
common stock, of which 393,138 shares will be held in escrow for a period of 18
months. At the closing, we also assumed all unvested CopperGate
options and, as a result, will issue unvested options to purchase an aggregate
of approximately 574,881 shares of our common stock, which options will vest
over time following the closing. We also agreed to pay up to an
aggregate of $5.0 million in cash to specified CopperGate employees provided
that certain milestones are achieved over a specified period of
time. As of October 31, 2009, we had incurred approximately $1.8
million of expenses associated with this transaction and expect to incur
approximately an additional $2.0 million of expenses in the fourth quarter of
fiscal 2010.
Based on
our currently anticipated cash needs, we believe that our current reserve of
cash, cash equivalents and marketable securities will be sufficient to meet our
anticipated working capital requirements, obligations, capital expenditures,
strategic investments and other cash needs for at least the next twelve
months. However, it is possible that we may need to raise additional
funds to finance our activities during or beyond the next 12 months and our
future capital requirements may vary significantly from those currently
planned. Our cash, cash equivalent and marketable security balances
will continue to fluctuate based upon our ability to grow revenue, the timing of
payments to us from customers and to vendors from us, the timing of inventory
purchases and subsequent manufacture and sale of our products and any use of our
cash to acquire other companies or technologies.
32
Our
marketable securities consist primarily of auction rate securities (“ARS”),
corporate commercial paper and bonds and US agency notes. We monitor
all our marketable securities for impairment and if these securities are
reported to have had a decline in fair value, we use significant judgment to
identify events or circumstances that would likely have a significant adverse
effect on the future value of each investment including: (i) the nature of
the investment; (ii) the cause and duration of any impairment;
(iii) the financial condition and near term prospects of the issuer;
(iv) our ability to hold the security for a period of time sufficient to
allow for any anticipated recovery of fair value; (v) the extent to which
fair value may differ from cost; and (vi) a comparison of the income generated
by the securities compared to alternative investments. We would
recognize an impairment charge if a decline in the fair value of our marketable
securities is judged to be other-than-temporary.
Included
in our marketable securities portfolio at October 31, 2009 were nine ARS that we
purchased at par value of $43.0 million and during the second and third quarters
of fiscal 2010, the issuer of the one of these ARS redeemed a limited portion in
the amount of $0.1 million and $0.3 million, respectively, from
us. As a result, as of October 31, 2009, we held nine ARS with a par
value of $42.6 million and these are all classified as short-term
marketable securities. ARS are bought and sold in the marketplace
through a bidding process sometimes referred to as a “Dutch
auction.” Historically, the fair value of our ARS has been determined
by the frequent auction periods, generally every 28 days, which provided
liquidity at par value for these investments. However, subsequent to
February 2008, all auctions involving such securities that we hold have
failed. The result of the failed auctions is that these ARS will
continue to pay interest in accordance with their terms at each respective
auction date. However, liquidity of the securities will continue to
be limited until there is a successful auction, the issuer redeems the
securities, the securities mature or until such time as other markets for these
ARS develop. We cannot be certain regarding the amount of time it
will take for an auction market or other markets to develop for these
securities. In October 2008, we accepted an offer from our cash
investment advisor, UBS, of a comprehensive settlement agreement, in which all
the ARS currently held in our portfolio could be redeemed at par
value. The offer to redeem will be at our option during a two year
period beginning in June 2010. The offer also gives UBS the
discretion to buy any or all of these securities from us at par value at any
time through June 2012. Additionally, the agreed solution by UBS to
the lack of liquidity of our ARS includes a commitment through June 2010 to loan
us an amount up to 75% of the par value of the ARS. The interest
charged on such loan would be equal to the proportional amount of interest being
paid by the issuers of the ARS borrowed against. At October 31, 2009,
UBS provided an estimated value for the nine ARS of approximately $37.3 million,
which reflects an unrealized loss of $5.3 million from our carrying
value. For the reasons described below, we have not adopted UBS’
estimated value of our ARS.
We have
reviewed the prospectuses for each of the nine ARS in our investment portfolio
as of October 31, 2009 and determined that the unprecedented disruption in the
auction process and resulting pattern of interest payments has
been in accordance with their established rules of operation under these
circumstances. The default mechanism called for in the operating
rules of these instruments is designed to adjust their interest payments to a
limit based on the income generated by their underlying student
loans. The most significant consequences of this mechanism are
the preservation of their AAA credit rating while adjusting to a continuing
stream of interest payments to the security holders at a rate correlating to
contemporary credit market rates. As a result of this review, we
reached the conclusion that the securities do have a strong underlying principle
value and that any potential adjustment in their carrying value would be based
upon our ability to endure their lack of liquidity, the degree of certainty of
continuing interest payments and the rate of return on these
securities.
Given
that we expect considerable liquidity from our other assets, foresee continuing
positive cash flow from operations and have accepted our investment advisor’s
offer to purchase all of our ARS at par value in June 2010, we do not consider
the remaining possible liquidity risk and UBS default risk to be significant
enough to justify a reduction in their carrying value. The remaining
valuation factor that we considered was the rate of return evidenced by the
interest received. We used a discounted cash flow calculation that
reached a valuation that was similar to other of our recent investments with
comparably high credit ratings.
As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the carrying value
of our ARS has not been impaired and that we have no expectation of any material
adverse impact on our future results of operations, liquidity, or capital
resources associated with holding these securities.
Contractual
obligations and commitments
We
generally do not have guaranteed price or quantity commitments from any of our
suppliers. Additionally, we generally acquire products for sale to
our customers based on purchase orders received as well as forecasts from such
customers. Purchase orders with delivery dates greater than 12 weeks
are typically cancelable without penalty from our customers. We
currently place non-cancelable orders to purchase semiconductor wafers and other
materials from our suppliers on an eight to 12 week lead-time
basis.
33
The
following table sets forth the amounts of payments due under specified
contractual obligations as of October 31, 2009 (in thousands):
Payments
Due by Period
|
||||||||||||||||||||
Fiscal
|
Fiscal
|
Fiscal
|
Fiscal
2015
|
|||||||||||||||||
Contractual
Obligations
|
2010
|
2011 - 2012 | 2013 - 2014 |
and
Thereafter
|
Total
|
|||||||||||||||
Operating
leases
|
$ | 523 | $ | 3,763 | $ | 2,168 | $ | 2,851 | $ | 9,305 | ||||||||||
Non-cancelable
purchase orders
|
9,767 | — | — | — | 9,767 | |||||||||||||||
$ | 10,290 | $ | 3,763 | $ | 2,168 | $ | 2,851 | $ | 19,072 |
Recent accounting
pronouncements:
Recent
Accounting Pronouncements Adopted:
During
the third quarter of fiscal year 2010, we adopted Accounting Standards
Codification, or ASC, issued by the FASB. This standard established
only two levels of GAAP, authoritative and nonauthoritative. The ASC
became the source of authoritative, nongovernmental GAAP, except for
rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. All other non-grandfathered,
non-SEC accounting literature not included in the ASC became
nonauthoritative. This standard was effective for financial
statements for interim or annual reporting periods ending after
September 15, 2009. We began to use the new guidelines and numbering
system prescribed by the ASC when referring to GAAP in the third quarter of
fiscal year 2010. As the ASC was not intended to change or alter existing
GAAP, it did not have any impact on our consolidated financial
statements.
Recent
Accounting Pronouncements Not Yet Adopted:
In August
2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value Measurements and
Disclosures (Topic 820) -- Measuring Liabilities at Fair Value ("ASU
2009-05"). ASU 2009-05 amends ASC 820, Fair Value Measurements and
Disclosures, to provide further guidance on how to measure the fair value
of a liability. It primarily does three things: 1) sets forth the
types of valuation techniques to be used to value a liability when a quoted
price in an active market for the identical liability is not available, 2)
clarifies that when estimating the fair value of a liability, a reporting entity
is not required to include a separate input or adjustment to other inputs
relating to the existence of a restriction that prevents the transfer of the
liability and 3) clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. This standard is effective beginning our fiscal fourth quarter of
2010. We do not expect the adoption of this standard update to have a
material impact on our consolidated financial statements.
34
In
September 2009 the FASB reached a consensus on ASU 2009-13, Revenue Recognition (Topic 605) –
Multiple-Deliverable Revenue Arrangements, or ASU 2009-13 and ASU
2009-14, Software (Topic 985)
– Certain Revenue Arrangements That Include Software Elements, or ASU
2009-14. ASU 2009-13 modifies the requirements that must be met for
an entity to recognize revenue from the sale of a delivered item that is part of
a multiple-element arrangement when other items have not yet been
delivered. ASU 2009-13 eliminates the requirement that all
undelivered elements must have either: i) vendor-specific objective evidence, or
VSOE or ii) third-party evidence, or TPE, before an entity can recognize the
portion of an overall arrangement consideration that is attributable to items
that already have been delivered. In the absence of VSOE or TPE of
the standalone selling price for one or more delivered or undelivered elements
in a multiple-element arrangement, entities will be required to estimate the
selling prices of those elements. Overall arrangement consideration
will be allocated to each element (both delivered and undelivered items) based
on their relative selling prices, regardless of whether those selling prices are
evidenced by VSOE or TPE or are based on the entity’s estimated selling
price. The residual method of allocating arrangement consideration
has been eliminated. ASU 2009-14 modifies the software revenue
recognition guidance to exclude from its scope tangible products that contain
both software and non-software components that function together to deliver a
product’s essential functionality. These new updates are effective
for revenue arrangements entered into or materially modified in fiscal years
beginning on or after June 15, 2010. Early adoption is
permitted. We are currently evaluating the impact that the adoption
of these ASUs will have on our consolidated financial statements.
ITEM 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
following discussion about our market risk disclosures involves forward-looking
statements. Actual results could differ materially from those
projected in the forward-looking statements. We face exposure to
market risk from adverse movements in interest rates and foreign currency
exchange rates, which could impact our operations and financial
condition. We do not use derivative financial instruments for
speculative purposes.
Interest Rate
Sensitivity: As of October 31, 2009 and January 31, 2009, we
held approximately $235.3 million and $192.2 million, respectively, of cash,
cash equivalents and short-term and long-term marketable
securities. If short-term interest rates were to decrease 10%, the
decreased interest income associated with these money market funds and
marketable securities would not have a significant impact on our net income and
cash flows.
At
October 31, 2009, we held nine auction rate securities, or ARS, with a cost and
par value of $42.6 million, which are all classified as short-term
marketable securities. Historically, the fair value of our ARS has
been determined by frequent auction periods, generally 28 days, which provided
liquidity at par value for these investments. However, subsequent to
February 2008, all auctions involving such securities held by us have
failed. The result of the failed auctions is that these ARS will
continue to pay interest in accordance with their terms at each respective
auction date; however, liquidity of the securities will continue to be limited
until there is a successful auction, the issuer redeems the securities, the
securities mature or until such time as other markets for these ARS
develop.
As a
result of the auction failures, we have reviewed the prospectuses for each of
the nine ARS in our investment portfolio as of October 31, 2009 and determined
that the unprecedented disruption in the auction process and resulting pattern
of interest payments was in accordance with their established rules of operation
under these circumstances. The default mechanism called for in the
operating rules of these instruments is designed to adjust their interest
payments to a limit based on the income generated by their underlying student
loans. The most significant consequences of this mechanism are the
preservation of their AAA credit rating while adjusting to a continuing stream
of interest payments to the security holders at a rate correlating to
contemporary credit market rates.
As a
result of this review, we reached the conclusion that the securities do have a
strong underlying principle value and that any potential adjustment in their
carrying value would be based upon our ability to endure their lack of
liquidity, the degree of certainty of continuing interest payments and the rate
of return on these securities. Given that we expect considerable
liquidity from our other assets, foresee continuing positive cash flow and have
accepted our investment advisor’s offer to purchase all of our ARS at par value
in June 2010, we do not consider the remaining window of possible lack of
liquidity to be of sufficient risk to justify a reduction in their carrying
value. The remaining valuation factor that we considered was the rate
of return evidenced by the interest received. We used a discounted
cash flow calculation that reached a valuation that was similar to other of our
recent investments with comparably high credit ratings.
As a
result of this judgment process and in accordance with the various accounting
pronouncements in this area, we reached the conclusion that the carrying value
of our ARS has not been impaired and that we have no expectation of any material
adverse impact on our future results of operations, liquidity, or capital
resources associated with holding these securities.
35
Foreign Currency
Exchange Rate Sensitivity: The Canadian dollar, Danish krone
and Euro are the primary financial currencies of our subsidiaries in Canada,
Denmark and France, respectively. As of October 31, 2009, we had not
entered into foreign exchange forward contracts to hedge certain balance sheet
exposures and inter-company balances against future movements in foreign
exchange rates. However, we do maintain certain cash balances and a
long-term investment denominated in the Hong Kong dollar, Canadian dollar, Euro,
Danish krone, Singapore dollar and Japanese yen. If foreign exchange
rates were to weaken against the U.S. dollar immediately and uniformly by 10%
from the exchange rate at October 31, 2009, the fair value of these foreign
currency amounts would decline by $0.4 million. We expect our foreign
exchange exposure to increase in future periods as a result of our acquisition
of CopperGate and the payment of expenses in Israeli shekels.
ITEM 4. CONTROLS
AND PROCEDURES
We are
committed to maintaining disclosure controls and procedures designed to ensure
that information required to be disclosed in our periodic reports filed under
the Securities and Exchange Act of 1934 as amended (the “Exchange Act”), is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives and management necessarily is required
to apply its judgment in evaluating the cost-benefit relationship of possible
controls and procedures and implementing controls and procedures.
As of October 31, 2009,
the end of the period covered by this quarterly report on Form 10-Q, we
have, with the participation of our Chief Executive Officer and our Chief
Financial Officer, evaluated the effectiveness of the design and effectiveness
of our disclosure controls and procedures, as such terms are defined in
Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act. Based
on this evaluation, we have concluded that our disclosure controls and
procedures were effective at a reasonable assurance level as of October 31,
2009.
During
the third quarter ended October 31, 2009, there were no changes in our internal
control over financial reporting (as defined in Rule 13(a) – 15(f) under the
Exchange Act) that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting. We
are continuously seeking to improve the efficiency and effectiveness of our
operations and of our internal controls. This results in refinements
to processes throughout our organization.
PART
II. OTHER INFORMATION
ITEM 1. LEGAL
PROCEEDINGS
We are
not currently a party to any material legal proceedings. From time to
time, we are involved in claims and legal proceedings that arise in the ordinary
course of business. We expect that the number and significance of
these matters will increase as our business expands. In particular,
we could face an increasing number of patent and other intellectual property
claims as the number of products and competitors in our industry
grows. Any claims or proceedings against us, whether meritorious or
not, could be time consuming, result in costly litigation, require significant
amounts of management time, result in the diversion of significant operational
resources, or cause us to enter into royalty or licensing agreements which, if
required, may not be available on terms favorable to us or at all. If
an unfavorable outcome were to occur against us, there exists the possibility of
a material adverse impact on our financial position and results of operations
for the period in which the unfavorable outcome occurs and, potentially, in
future periods.
ITEM 1A.
RISK
FACTORS
If any of
the following risks actually occurs, our business, financial condition and
results of operations could be harmed. In that case, the trading
price of our common stock could decline and you might lose all or part of your
investment in our common stock. The risks and uncertainties described
below are not the only ones we face. You should also refer to the
other information set forth in this 10-Q, including our unaudited condensed
consolidated financial statements and the related notes. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations.
36
Risks
Related to Our Business and Our Industry
We may
not be able to accurately anticipate future market needs or be able to develop
new products or product enhancements to meet such needs or to meet them in a
timely manner.
Our
ability to develop and deliver new products successfully will depend on various
factors, including our ability to:
|
·
|
accurately
predict market requirements and evolving industry
standards;
|
|
·
|
accurately
design new SoC products;
|
|
·
|
timely
complete and introduce new product
designs;
|
|
·
|
timely
qualify and obtain industry interoperability certification of our products
and the equipment into which our products will be
incorporated;
|
|
·
|
ensure
that our subcontractors have sufficient foundry, assembly and test
capacity and packaging materials and achieve acceptable manufacturing
yields;
|
|
·
|
shift
our products to smaller geometry process technologies to achieve lower
cost and higher levels of design integration;
and
|
|
·
|
gain
market acceptance of our products and our customers'
products.
|
If we
fail to anticipate market requirements or to develop new products or product
enhancements to meet those needs in a cost-effective and timely manner, it could
substantially decrease market acceptance and sales of our present and future
products and we may be unable to attract new customers or retain our existing
customers, which would significantly harm our business and financial
results.
Even if
we are able to anticipate, develop and commercially introduce new products and
enhancements, our new products or enhancements may not achieve widespread market
acceptance. Any failure of our products to achieve market acceptance
could adversely affect our business and financial results.
Our
industry is highly competitive and we may not be able to compete effectively,
which would harm our market share and cause our revenue to decline.
The
markets in which we operate are extremely competitive and are characterized by
rapid technological change, continuously evolving customer requirements and
declining average selling prices. We may not be able to compete
successfully against current or potential competitors. Most of our
products compete
with ones offered by large semiconductor providers that have
substantial experience and expertise in video, audio and multimedia technology
and in selling to consumer equipment providers. Many of these
companies have substantially greater engineering, marketing and financial
resources than we have. As a result, our competitors may be able to
respond better to new or emerging technologies or standards and to changes in
customer requirements. Further, some of our competitors are in a
better financial and marketing position from which to influence industry
acceptance of a particular industry standard or competing technology than we
are. Our competitors may also be able to devote greater resources to
the development, promotion and sale of products, and may be able to deliver
competitive products at a lower price. We also may face competition
from newly established competitors, suppliers of products based on new or
emerging technologies and customers who choose to develop their own
SoCs. Additionally, some of our competitors operate their own
fabrication facilities or may have stronger manufacturing partner relationships
than we have. We expect our current customers, particularly in the
IPTV and connected media player markets, to seek additional suppliers of SoCs
for inclusion in their products which will increase competition and could reduce
our market share. If we do not compete successfully, our market share
and net revenue could decline.
37
If
we fail to achieve initial design wins for our products, we may be unable to
recoup our investments in our products and revenue could decline.
We expend
considerable resources in order to achieve design wins for our products,
especially our new products and product enhancements, without any assurance that
a customer will select our product. Once a customer designs a
semiconductor into a product, it is likely to continue to use the same
semiconductor or enhanced versions of that semiconductor from the same supplier
across a number of similar and successor products for a lengthy period of time
due to the significant costs and risks associated with qualifying a new supplier
and potentially redesigning the product to incorporate a different
semiconductor. As a result, if we fail to achieve an initial design
win in a customer's qualification process, we may lose the opportunity for
significant sales to that customer for a number of its products and for a
lengthy period of time, or we would only be able to sell our products to these
customers as a second source which usually means we would only be able to sell a
limited amount of product to them. Also, even if we achieve new
design wins with customers, these manufacturers may not purchase our products in
sufficient volumes to recoup our development costs and they can choose at any
time to stop using our products, for example, if their own products are not
commercially successful. This may cause us to be unable to recoup our
investments in the development of our products and cause our revenue to
decline.
To
remain competitive, we need to continue to transition our SoCs to increasingly
smaller sizes while maintaining or increasing functionality, and our failure to
do so may harm our business.
We
periodically evaluate the benefits, on a product-by-product basis, of migrating
to more advanced technology to reduce the size of our SoCs. The
smaller SoC size reduces our production and packaging costs, which enables us to
be competitive in our pricing. We also continually strive to increase
the functionality of our SoCs, which is essential to competing effectively in
our target markets. The transition to smaller geometries while
maintaining or increasing functionality requires us to work with our contractors
to modify the manufacturing processes for our products and to redesign some
products. This effort requires considerable development investment
and a risk of reduced yields as a new process is brought to acceptable levels of
operating and quality efficiency. In the past, we have experienced
some difficulties in shifting to smaller geometry process technologies or new
manufacturing processes which resulted in reduced manufacturing yields, delays
in product deliveries and increased expenses. We may face similar
difficulties, delays and expenses as we continue to transition our products to
smaller geometry processes, all of which could harm our relationships with our
customers, and our failure to do so would impact our ability to provide
competitive prices to our customers, which would have a negative impact on our
sales.
We
base orders for inventory on our forecasts of our customers' demand and, if our
forecasts are inaccurate, our financial condition and liquidity would
suffer.
We place
orders with our suppliers based on our forecasts of our customers'
demand. Our forecasts are based on multiple assumptions, each of
which may introduce errors into our estimates. When the demand for
our customers' products increases significantly, we may not be able to meet
demand on a timely basis and we may need to expend a significant amount of time
working with our customers to allocate a limited supply and maintain positive
customer relations. If we underestimate customer demand, we may
forego revenue opportunities, lose market share and damage our customer
relationships. Conversely, if we overestimate customer demand, we may
allocate resources to manufacturing products that we may not be able to sell
when we expect to or at all. As a result, we would have excess or
obsolete inventory, resulting in a decline in the value of our inventory, which
would increase our cost of revenue and create a drain on our
liquidity.
We
depend on a limited number of customers and any reduction, delay or cancellation
of an order from these customers or the loss of any of these customers could
cause our revenue to decline.
Our
dependence on a limited number of customers means that the loss of a major
customer or any reduction in orders by a major customer could materially reduce
our net revenue and adversely affect our results of operations. We
expect that sales to relatively few customers will continue to account for a
significant percentage of our net revenue for the foreseeable
future. We have no firm, long-term volume commitments from any of our
major customers and we generally accept purchase commitments from our customers
based upon their purchase orders. Customer purchase orders may be
cancelled and order volume levels can be changed, cancelled or delayed with
limited or no penalties. We have experienced fluctuations in order
levels from period to period and expect that we will continue to experience such
fluctuations and may experience cancellations in the future. We may
not be able to replace the cancelled, delayed or reduced purchase orders with
new orders. Any difficulty in the collection of receivables from key
customers could also harm our business.
For the
nine months ended October 31, 2009, MTC Singapore, Gemtek Electronics
Components, LTD, Unihan Corporation and Cowin Worldwide Corporation accounted
for 20%, 11%, 10% and 10%, respectively, of our net revenue. For the
nine months ended November 1, 2008, MTC Singapore and Cisco Systems, Inc.
accounted for 21% and 20%, respectively, of our net revenue.
38
Our
business also depends on demand for our SoC solutions from the companies, such
as large telecommunication carriers, who are not our direct customers but deploy
IPTV set-boxes that incorporate our SoC solutions. These companies use
multiple set-top box providers, who in turn sometimes use multiple contract
manufacturers to purchase our SoCs and manufacture set-top boxes. Even
though we do not sell our products directly to these companies that ultimately
deploy set-top boxes to consumers, these companies have a significant impact on
the demand for our SoC solutions. For example, a significant number of our
SoCs are incorporated into set-top boxes deployed by AT&T. This
significant concentration on AT&T set-top boxes was increased by our recent
acquisition of CopperGate. A significant percentage of the SoC solutions
sold by CopperGate are also used in set-top boxes
as well as gateways deployed by AT&T. In the past, companies
that deploy set-top boxes incorporating our SoC solution have had significant
fluctuations in demand which has resulted in a decline in our business from our
direct customers, such as original equipment manufacturers and contract
manufacturers. Any decrease in the demand from the companies that deploy
IPTV set-top boxes incorporating our SoC solutions, and in particular AT&T,
could have a material and adverse effect on our net revenue and results of
operation.
If
demand for our SoCs declines or does not grow, we will be unable to increase or
sustain our net revenue.
We expect
our SoCs to account for a substantial majority of our net revenue for the
foreseeable future. For the nine months ended October 31, 2009, sales
of our SoCs represented 99% of our net revenue. Even if the consumer
electronic markets that we target continue to expand, manufacturers of consumer
products in these markets may not choose to utilize our SoCs in their
products. The markets for our products are characterized by frequent
introductions of new technologies, short product life cycles and significant
price competition. If we or our customers are unable to manage
product transitions in a timely and cost effective manner, our net revenue would
suffer. In addition, frequent technological changes and introductions
of next generation products may result in inventory obsolescence which would
increase our cost of revenue and adversely affect our operating
performance. If demand for our SoCs declines or fails to grow or we
are unable to develop new products to meet our customers' demand, our net
revenue could be harmed.
The
timing of our customer orders and product shipments can adversely affect our
operating results and stock price.
Our net
revenue and operating results depend upon the volume and timing of customer
orders received during a given period and the percentage of each order that we
are able to ship and recognize as net revenue during each
period. Customers may change their cycle of product orders from us,
which would affect the timing of our product shipments. For example,
we experienced declines in orders from certain significant customers in the
first two quarters of fiscal 2009 compared to the third and fourth quarters of
fiscal 2008. Any failure or delay in the closing of orders expected
to occur within a quarterly period, particularly from significant customers,
would adversely affect our operating results. Further, to the extent
we receive orders late in any given quarter, we may not be able to ship products
to fill those orders during the same period in which we received the
corresponding order which could have an adverse impact on our operating results
for that period.
We
may face intellectual property claims that could be costly to defend and result
in our loss of significant rights.
The
semiconductor industry is characterized by frequent litigation regarding patent
and intellectual property rights. We believe that it may be
necessary, from time to time, to initiate litigation against one or more third
parties to preserve our intellectual property rights. From time to
time, we have received, and may receive in the future, notices that claim we
have infringed upon, misappropriated or misused other parties' proprietary
rights. Any of the foregoing events or claims could result in
litigation. Any such litigation could result in significant expense
to us and divert the efforts of our technical and management
personnel. In the event of an adverse result in any such litigation,
we could be required to pay substantial damages, cease the manufacture, use and
sale of certain products or expend significant resources to develop
non-infringing technology or to obtain licenses to the technology that is the
subject of the litigation and we may not be successful in such development or in
obtaining such licenses on acceptable terms, if at all. In addition,
patent disputes in the electronics industry have often been settled through
cross-licensing arrangements. Because we do not yet have a large
portfolio of issued patents, we may not be able to settle an alleged patent
infringement claim through a cross-licensing arrangement.
39
We
may not be able to realize all of the anticipated benefits of our acquisition of
CopperGate if we fail to integrate CopperGate successfully, which could reduce
our profitability.
Our
ability to realize the anticipated benefits of our acquisition of CopperGate
will depend, in part, on our ability to integrate the business of CopperGate
successfully and efficiently with our business. The combination of
two independent companies is a complex, costly and time-consuming
process. The integration process may disrupt the business of either
or both of the companies and, if implemented ineffectively, preclude realization
of the full benefits expected by us. If we are not successful in this
integration, our financial results could be adversely impacted. Our
management will be required to dedicate significant time and effort to this
integration process, which could divert their attention from other business
concerns. In addition, the overall integration of the two companies
may result in unanticipated problems, expenses, liabilities, competitive
responses, loss of customer and other relationships, a loss of key employees and
diversion of management’s attention and may cause our stock price to
decline. The difficulties of combining the operations of the two
companies include, among others:
•
|
challenges
associated with minimizing the diversion of management attention from
ongoing business concerns;
|
||
|
•
|
addressing
differences in the business cultures;
|
|
|
•
|
coordinating
geographically separate organizations which may be subject to additional
complications resulting from being geographically distant from our other
operations;
|
|
|
•
|
coordinating
and combining international operations relationships and facilities and
eliminating duplicative operations;
|
|
|
•
|
retaining
key employees and maintaining employee moral;
|
|
|
•
|
unanticipated
changes in general business or market conditions that might interfere with
our ability to carry out all of our integration plans;
|
|
|
•
|
unanticipated
issues in integrating information, communications and other systems;
and
|
|
|
•
|
preserving
important strategic and customer
relationships.
|
In
addition, even if CopperGate’s operations are integrated successfully with ours,
we may not realize the full potential benefits of the transaction, including the
leveraging of manufacturing know-how and combined wafer sourcing, further SoC
integration and combined research and development that are
expected. Such benefits may not be achieved within the anticipated
time frame, or at all.
The
complexity of our products could result in unforeseen delays or expenses and in
undetected defects which could damage our reputation with current or prospective
customers, adversely affect the market acceptance of new products and result in
warranty claims.
Highly
complex products, such as those that we offer, frequently contain defects,
particularly when they are first introduced or as new versions are
released. Our SoCs contain highly sophisticated silicon technology
and complex software. In the past we have experienced, and may in the
future experience, defects in our products, both with our SoCs and the related
software products we offer. If any of our products contain defects or
have reliability, quality or compatibility problems, our reputation may be
damaged and our customers may be reluctant to buy our products which could harm
our ability to retain existing customers and attract new
customers. In addition, these defects could interrupt or delay sales
or shipment of our products to our customers. Manufacturing defects
may not be detected by the testing processes performed by our
subcontractors. If defects are discovered after we have shipped our
products, it could result in unanticipated costs, order cancellations or
deferrals and product recalls, harm our reputation and cause a decline in our
net revenue, income from operations and gross margins.
In
addition, our agreements with most of our customers contain warranty provisions
which provide the customer with a right to damages if a defect is traced to our
products or if we cannot correct errors in our product reported during the
warranty period, and other limitations to our liability. However, any
contractual limitations to our liability may be unenforceable in a particular
jurisdiction. We do not have insurance coverage for any warranty or
product liability claims and a successful claim could require us to pay
substantial damages. A successful warranty or product liability claim
against us, or a requirement that we participate in a product recall could have
adverse effects on our business results.
If
our third-party manufacturers do not achieve satisfactory yields or quality, our
relationships with our customers and our reputation will be harmed, which in
turn would harm our operating results and financial performance.
The
fabrication of semiconductors is a complex and technically demanding
process. Minor deviations in the manufacturing process can cause
substantial decreases in yields and, in some cases, cause production to be
stopped or suspended. Although we work closely with our third-party
manufacturers to minimize the likelihood of reduced manufacturing yields, their
facilities have from time to time experienced lower than anticipated
manufacturing yields that have resulted in our inability to meet our customer
demand. It is not uncommon for yields in semiconductor fabrication
facilities to decrease in times of high demand, in addition to reduced yields
that may result from normal wafer lot loss due to workmanship or operational
problems at these facilities. When these events occur, especially
simultaneously, as happens from time to time, we may be unable to supply our
customers' demand. 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 the wafer foundries or
defects, integration issues or other performance problems in our products could
cause us significant customer relations and business reputation problems or
force us to sell our products at lower gross margins and therefore harm our
financial results.
40
The
average selling prices of semiconductor products have historically decreased
rapidly and will likely do so in the future, which could harm our revenue and
gross margins.
The
semiconductor industry, in general, and the consumer electronics markets that we
target, specifically, are characterized by intense price competition, frequent
introductions of new products and short product life cycles, which can result in
rapid price erosion in the average selling prices for semiconductor
products. A decline in the average selling prices of our products
could harm our revenue and gross margins. The willingness of
customers to design our SoCs into their products depends to a significant extent
upon our ability to sell our products at competitive prices. In the
past, we have reduced our prices to meet customer requirements or to maintain a
competitive advantage. Reductions in our average selling prices to
one customer could impact our average selling prices to all
customers. If we are unable to reduce our costs sufficiently to
offset declines in product prices or are unable to introduce more advanced
products with higher margins in a timely manner, we could experience declines in
our net revenue and gross margins.
We
rely upon patents, trademarks, copyrights and trade secrets to protect our
proprietary rights and if these rights are not sufficiently protected, it could
harm our ability to compete and to generate revenue.
Our
ability to compete may be affected by our ability to protect our proprietary
information. As of October 31, 2009, we held 76 patents and these
patents will expire within the next five to eighteen years. These
patents cover portions of the technology underlying our products. We
have filed certain patent applications and are in the process of preparing
others. We cannot assure you that any additional patents for which we
have applied will be issued or that any issued patents will provide meaningful
protection of our product innovations. Like other semiconductor
companies, we rely primarily on trade secrets and technological know-how in the
conduct of our business. We use measures such as confidentiality
agreements to protect our intellectual property. However, these
methods of protecting our intellectual property may not be
sufficient.
If
the growth of demand in the consumer electronics market does not resume, our
ability to increase our revenue could suffer.
Our
business is highly dependent on developing sectors of the consumer electronics
market, including IPTV, connected media players, prosumer and industrial
audio/video and connected home technologies. The consumer electronics
market is highly competitive and is characterized by, among other things,
frequent introductions of new products and short product life
cycles. The consumer electronics market has been negatively impacted
by a slowdown in overall consumer spending. The worldwide economy,
generally, and consumer spending, specifically, has significantly declined in
recent months, which has negatively impacted our target markets. If
our target markets do not grow as rapidly or to the extent we anticipate, our
business could suffer. We expect the majority of our revenue for the
foreseeable future to come from the sale of our SoC solutions for use in
consumer applications. Our ability to sustain and increase revenue is
in large part dependent on the continued growth of these rapidly evolving market
sectors, whose future is largely uncertain. Many factors could impede
or interfere with the expansion of these consumer market sectors, including
consumer demand in these sectors, general economic conditions, other competing
consumer electronic products, delays in the deployment of telecommunications
video services and insufficient interest in new technology
innovations. In addition, if market acceptance of the consumer
products that utilize our products does not occur as expected, our business
could be harmed.
We
have a history of fluctuating operating results, including a net loss in fiscal
2006 and the three months ended October 31, 2009, and we may not be able to
sustain or increase profitability in the future, which may cause the market
price of our common stock to decline.
We have a
history of fluctuating operating results. We reported a net loss of
$1.6 million in fiscal 2006 and a net loss of $2.3 million for the three months
ended October 31, 2009, net income of $6.2 million in fiscal 2007, net income of
$70.2 million in fiscal 2008, net income of $26.4 million in fiscal 2009 and net
income of $5.2 million in the first three quarters of fiscal 2010. To
return to profitability, we will need to successfully develop new products and
product enhancements and sustain higher revenue while controlling our cost and
expense levels. In recent years, we made significant investments in
our product development efforts and have expended substantial funds to enhance
our sales and marketing efforts and otherwise operate our
business. However, we may not realize the benefits of these
investments. Although we were profitable in our fiscal year 2009 and
the first two quarters of fiscal 2010, we were not profitable in the third
quarter of fiscal 2010. In addition, our net income decreased from
$19.8 million for the nine months ended November 1, 2008 to $5.2 million for the
nine months ended October 31, 2009. We may incur operating losses in
future quarterly periods or fiscal years, which in turn could cause the price of
our common stock to decline.
41
We
have engaged, and may in the future engage in acquisitions of other businesses
and technologies which could divert management's attention and prove difficult
to integrate with our existing business and technology.
We
continue to consider investments in and acquisitions of other businesses,
technologies or products, to improve our market position, broaden our
technological capabilities and expand our product offerings. For
example, in November 2009, we completed the acquisition of CopperGate
Communications Ltd, an Israeli company. As a result, we added
substantial operations in Israel, including 124 employees located in Israel and
an additional 17 employees located outside of Israel. We also
completed the acquisition of Zensys Holdings Corporation in December 2008, the
acquisition of certain assets and 44 new employees of the VXP Group from Gennum
Corporation in February 2008 and the acquisition of Blue7 Communications in
February 2006. In the future, we may not be able to acquire or
successfully identify companies, products or technologies that would enhance our
business. Once we identify a strategic opportunity, the process to
consummate a transaction could divert management's attention from the operation
of our business causing our financial results to decline.
Acquisitions
may require large one-time charges and can result in increased debt or
contingent liabilities, adverse tax consequences, additional stock-based
compensation expense, and the recording and later amortization of amounts
related to certain purchased intangible assets, any of which items could
negatively impact our results of operations. We may also record
goodwill in connection with an acquisition and incur goodwill impairment charges
in the future. In addition, in order to complete acquisitions, we may
issue equity securities and incur debt, which would result in dilution to our
existing shareholders and could negatively impact profitability.
We may
experience difficulties in integrating acquired
businesses. Integrating acquired businesses involves a number of
risks, including:
|
·
|
potential
disruption of our ongoing business and the diversion of management
resources from other business
concerns;
|
|
·
|
unexpected
costs or incurring unknown
liabilities;
|
|
·
|
difficulties
relating to integrating the operations and personnel of the acquired
businesses;
|
|
·
|
adverse
effects on the existing customer relationships of acquired companies;
and
|
|
·
|
adverse
effects associated with entering into markets and acquiring technologies
in areas in which we have little
experience.
|
If we are
unable to successfully integrate the businesses we acquire, our operating
results could be harmed.
The
recent global economic downturn could negatively affect our business, results of
operations and financial condition.
Current
uncertainty in global economic conditions pose a risk to the overall economy as
consumers and businesses may defer purchases in response to tighter credit and
negative financial news, which could negatively affect demand for our products
and other related matters. Consequently, demand for our products
could be different from our expectations due to factors including:
|
·
|
changes
in business and economic conditions including conditions in the credit
market that could affect consumer
confidence;
|
|
·
|
customer
acceptance of our products and those of our
competitors;
|
|
·
|
changes
in customer order patterns including order cancellations;
and
|
|
·
|
changes
in the level of inventory our customers are willing to
hold.
|
There
could also be a number of secondary effects from the current uncertainty in
global economic conditions such as insolvency of suppliers resulting in product
delays, an inability of our customers to obtain credit to finance purchases of
our products or a desire of our customers to delay payment to us for the
purchase of our products. The effects, including those mentioned
above, of the current global economic environment could negatively impact our
business, results of operations and financial condition.
42
Due
to the cyclical nature of the semiconductor industry, our operating results may
fluctuate significantly which could adversely affect the market price of our
common stock.
The
semiconductor industry is highly cyclical and subject to rapid change and
evolving industry standards and, from time to time, has experienced significant
downturns. These downturns are characterized by decreases in product
demand, excess customer inventories and accelerated erosion of
prices. These factors have caused, and could again cause, substantial
fluctuations in our net revenue and in our operating results. Any
downturns in the semiconductor industry may be severe and prolonged and any
failure of this industry to fully recover from downturns could harm our
business. The semiconductor industry also periodically experiences
increased demand and production capacity constraints which may affect our
ability to ship products. Accordingly, our operating results have
varied and may vary significantly as a result of the general conditions in the
semiconductor industry which could cause our stock price to
decline.
The
complexity of our international operations may increase our operating expenses
and disrupt our business.
We
transact business and have operations worldwide. For example, we
derive a substantial portion of our net revenue from our customers outside of
North America and we plan to continue expanding our business in international
markets in the future. For the nine months ended October 31, 2009, we
derived 96% of our revenue from customers outside of North
America. We also have significant international operations, including
a significant operations center in Singapore, research and development
facilities in France, Canada and Denmark and a sales and distribution facility
in Hong Kong. In November 2009, we completed the acquisition of
CopperGate Communications Ltd., and as a result, added substantial operations in
Israel. As a result of our international business, we are affected by
economic, regulatory and political conditions in foreign countries, including
the imposition of government controls, changes or limitations in trade
protection laws, unfavorable changes in tax treaties or laws, varying statutory
equity requirements, difficulties in collecting receivables and enforcing
contracts, natural disasters, labor unrest, earnings expatriation restrictions,
misappropriation of intellectual property, changes in import/export regulations,
tariffs and freight rates, economic instability, public health crises, acts of
terrorism, war and continued unrest in many regions and other factors, which
could have a material impact on our international revenue and global operations.
In particular, in some countries we may experience reduced intellectual property
protection. Our results of operations could also be adversely
affected by exchange rate fluctuations, which could increase the sales price in
local currencies of our products in international markets. Overseas
sales and purchases to date have been denominated in U.S. dollars. We
do not currently engage in any substantial hedging activities to reduce our
exposure to exchange rate risks. Moreover, local laws and customs in
many countries differ significantly from those in the United
States. We also face challenges in staffing and managing our global
operations. If we are unable to manage the complexity of our global
operations successfully, our financial performance and operating results could
suffer.
Our
sales cycle can be lengthy which could result in uncertainty and delays in
generating net revenue.
Because
our products are based on constantly evolving technologies, we have experienced
a lengthy sales cycle for some of our SoCs, particularly those designed for
set-top box applications in the IPTV market. After we have qualified
a product with a customer, the customer will usually test and evaluate our
product with its service provider customer prior to the customer completing the
design of its own equipment that will incorporate our product. Our
customers and the telecommunications carriers our customers serve may need from
three to more than nine months to test, evaluate and adopt our product and an
additional three to more than nine months to begin volume production of
equipment that incorporates our product. Our complete sales cycle
typically ranges from nine to eighteen months, but could be
longer. As a result, we may experience a significant delay between
the time we increase expenditures for research and development, sales and
marketing efforts and inventory and the time we generate net revenue, if any,
from these expenditures. In addition, because we do not have
long-term commitments from our customers, we must repeat our sales process on a
continual basis even for current customers looking to purchase a new
product. As a result, our business could be harmed if a customer
reduces or delays its orders, chooses not to release products incorporating our
SoCs or elects not to purchase a new product or product enhancements from
us.
We
rely on a limited number of independent third-party manufacturers for the
fabrication, assembly and testing of our SoCs and the failure of any of these
third-party manufacturers to deliver products or otherwise perform as requested
could damage our relationships with our customers, decrease our sales and limit
our growth.
We are a
fabless semiconductor company and thus we do not own or operate a fabrication or
manufacturing facility. We depend on independent manufacturers, each
of whom is a third-party manufacturer for numerous companies, to manufacture,
assemble and test our products. We currently rely on Taiwan
Semiconductor Manufacturing Corporation, or TSMC, and Faraday Technology
Company, or Faraday, to produce substantially all of our SoCs. We
rely on Advanced Semiconductor Engineering, Inc., or ASE, to assemble, package
and test substantially all of our products. These third-party
manufacturers may allocate capacity to the production of other companies'
products while reducing product deliveries or the provision of services to us on
short notice or they may increase the prices of the products and services they
provide to us with little or no notice. In particular, other clients
that are larger and better financed than we are or that have long-term
agreements with TSMC or ASE may cause either or both of them to reallocate
capacity to those clients, decreasing the capacity available to us.
43
If we
fail to effectively manage our relationships with TSMC, ASE, Faraday and AST, if
we are unable to secure sufficient capacity at our third-party manufacturers'
facilities or if any of them should experience delays, disruptions or technical
or quality control problems in our manufacturing operations or if we had to
change or add additional third-party manufacturers or contract manufacturing
sites, our ability to ship products to our customers could be delayed, our
relationships with our customers would suffer and our market share and operating
results would suffer. If our third-party manufacturers' pricing for the products
and services they provide increases and we are unable to pass along such
increases to our customers, our operating results would be adversely
affected. Also, the addition of manufacturing locations or additional
third-party subcontractors would increase the complexity of our supply chain
management. Moreover, all of our product manufacturing, assembly and
packaging is performed in Asian countries and is therefore subject to risks
associated with doing business in these countries such as quarantines or
closures of manufacturing facilities due to the outbreak of viruses such as
swine flu, SARS, avian flu or any similar outbreaks. Each of these
factors could harm our business and financial results.
We
may not be able to effectively manage our growth or develop our financial and
managerial control and reporting systems, and we may need to incur significant
expenditures to address the additional operational and control requirements of
our growth, either of which could harm our business and operating
results.
To
continue to grow, we must continue to expand and improve our operational,
engineering, accounting and financial systems, procedures, controls and other
internal management systems. This may require substantial managerial
and financial resources and our efforts in this regard may not be
successful. Our current systems, procedures and controls may not be
adequate to support our future operations. For example, we
implemented a new enterprise resource management system in 2008. We
must integrate the operations of CopperGate into our enterprise resource
management system, which could be costly and time consuming. If we
fail to adequately manage our growth or to improve and develop our operational,
financial and management information systems or fail to effectively motivate or
manage our current and future employees, the quality of our products and the
management of our operations could suffer, which could adversely affect our
operating results.
Our
ability to develop, market and sell products could be harmed if we are unable to
retain or hire key personnel.
Our
future success depends upon our ability to recruit and retain the services of
key executive, engineering, finance and accounting, sales, marketing and support
personnel. The supply of highly qualified individuals, in particular
engineers in very specialized technical areas, or sales people specializing in
the semiconductor industry, is limited and competition for such individuals is
intense. None of our officers or key employees is bound by an
employment agreement for any specific term. The loss of the services
of any of our key employees, the inability to attract or retain key personnel in
the future or delays in hiring required personnel, particularly engineers and
sales people, and the complexity and time involved in hiring and training new
employees, could delay the development and introduction of new products, and
negatively impact our ability to market, sell or support our
products.
If
the recent worsening of credit market conditions continues or increases, it
could have a material adverse impact on our investment portfolio.
Recent
U.S. sub-prime mortgage defaults have had a significant impact across various
sectors of the financial markets, causing global credit and liquidity related
difficulties. Beginning mid 2007, global short-term funding markets
have experienced credit issues, leading to liquidity issues and failed auctions
in the ARS market. If the global credit market continues to
deteriorate, the liquidity of our investment portfolio may be impacted and we
could determine that some of our investments are impaired. This could
materially adversely impact our results of operations and financial
condition.
Included
in our marketable securities portfolio at October 31, 2009 were nine ARS
that we purchased for their par value, $43.0 million, and during fiscal 2010, an
issuer of the one of these ARS redeemed a limited portion in the amount of $0.4
million from us. As a result, as of October 31, 2009, we held nine
auction rate securities with a par value of $42.6 million. Subsequent
to February 2008, all auctions involving the ARS in our investment portfolio
have failed due to insufficient bids from buyers. If these auctions
continue to fail and the credit ratings of these investments deteriorate, the
fair value of these ARS may decline and we may incur impairment charges in
connection with these securities which would negatively affect our reported
earnings, cash flow and financial condition. Although our cash
management advisor, UBS, has indicated that, absent other solutions to the
limited market for our ARS, it will redeem all these securities at par value
upon our request after June 2010, there is a risk that their intention may not
be achieved for reasons outside our control.
44
Litigation
due to stock price volatility or other factors could cause us to incur
substantial costs and divert our management's attention and
resources.
In the
past, securities class action litigation has often been brought against a
company following periods of volatility in the market price of its
securities. Companies such as ours in the semiconductor industry and
other technology industries are particularly vulnerable to this kind of
litigation due to the high volatility of their stock prices. While we
are not aware of any such contemplated class action litigation against us, we
may in the future be the target of securities litigation. Any future
lawsuits to which we may become a party will likely be expensive and time
consuming to investigate, defend and resolve. Such costs, which
include investigation and defense, the diversion of our management’s attention
and resources, and any losses resulting from these claims, could significantly
increase our expenses and adversely affect our profitability and cash
flow.
Our
business may become subject to seasonality, which may cause our revenue to
fluctuate.
Our
business may become subject to seasonality as a result of our target
markets. We sell a significant number of our semiconductor products
into the consumer electronics market. Our customers who manufacture
products for the consumer market typically experience seasonality in the sales
of their products which in turn may affect the timing and volume of orders for
our SoCs. Although we have not experienced seasonality to date in
sales of our products due to the overall growth in demand for our semiconductor
products, we may, in the future, experience lower sales in our first fiscal
quarter and higher sales in our second fiscal quarter as a result of the
seasonality of demand associated with the consumer electronics markets into
which we sell our products. As a result, our operating results may
vary significantly from quarter to quarter.
In
the event we seek or are required to use a new manufacturer to fabricate or to
assemble and test all or a portion of our SoC products, we may not be able to
bring new manufacturers on-line rapidly enough, which could damage our
relationships with our customers, decrease our sales and limit our
growth.
We use a
single wafer foundry to manufacture substantially all of our products and a
single source to assemble and test substantially all of our products which
exposes us to a substantial risk of delay, increased costs and customer
dissatisfaction in the event our third-party manufacturers are unable to provide
us with our SoC requirements. Particularly during times when
semiconductor capacity is limited, we may seek to, and in the event that our
current foundry were to stop producing wafers for us altogether, we would be
required to, qualify one or more additional wafer foundries to meet our
requirements which would be time consuming and costly. In order to
bring these new foundries on-line, we and our customers would need to qualify
their facilities which process could take as long as several
months. Once qualified, these new foundries would then require an
additional number of months to actually begin producing SoCs to meet our needs,
by which time our perceived need for additional capacity may have passed or the
opportunities we previously identified may have been lost to our
competitors. Similarly, qualifying a new provider of assembly,
packaging and testing services would be a lengthy and costly process and, in
both cases, they could prove to be less reliable than our existing manufacturers
which could result in increased costs and expenses as well as delays in
deliveries of our products to our customers.
Our
ability to raise capital in the future may be limited and our failure to raise
capital when needed could prevent us from executing our growth
strategy.
We
believe that our existing cash and cash equivalents, and short-term and
long-term marketable securities will be sufficient to meet our anticipated cash
needs for at least the next 12 months. The timing and amount of our
working capital and capital expenditure requirements may vary significantly
depending on numerous factors, including:
|
·
|
market
acceptance of our products;
|
|
·
|
the
need to adapt to changing technologies and technical
requirements;
|
|
·
|
the
existence of opportunities for expansion;
and
|
|
·
|
access
to and availability of sufficient management, technical, marketing and
financial personnel.
|
45
If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing. During fiscal 2009, we used an aggregate of $85.9 million
to purchase 4.2 million shares of our common stock. In November 2009,
we used approximately $116.0 million in cash (which includes approximately $25
million of CopperGate cash) in connection with our acquisition of
CopperGate. The amount of cash we used for these repurchases and the
acquisition of CopperGate could limit our ability to execute our business plans
and require us to raise additional capital in the future in order to fund any
further repurchases or for other purposes. The sale of additional
equity securities or convertible debt securities would result in additional
dilution to our shareholders. Additional debt would result in
increased expenses and could result in covenants that would restrict our
operations. We have not made arrangements to obtain additional
financing and there is no assurance that financing, if required, will be
available in amounts or on terms acceptable to us, if at all.
Regional instability in Israel may
adversely affect business conditions and may disrupt our operations and
negatively affect our revenues and profitability.
As
a result of our acquisition of CopperGate, we have engineering facilities,
corporate and sales support operations and, as of November 10, 2009, we had 124
employees located in Israel. Accordingly, political, economic and
military conditions in Israel may directly affect our business. Since
the establishment of the State of Israel in 1948, a number of armed conflicts
have taken place between Israel and its Arab neighbors, as well as incidents of
civil unrest. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic
boycott. Although Israel has entered into various agreements with
Egypt, Jordan and the Palestinian Authority, Israel has been and is subject to
civil unrest and terrorist activity, with varying levels of severity since
September 2000. Any future armed conflicts or political
instability in the region may negatively affect business conditions and
adversely affect our results of operations.
In
addition, our business insurance does not cover losses that may occur as a
result of events associated with the security situation in the Middle
East. Although the Israeli government currently covers the
reinstatement value of direct damages that are caused by terrorist attacks or
acts of war, we cannot assure you that this government coverage will be
maintained. Any losses or damages incurred by us could have a
material adverse effect on our business.
Changes
in our effective tax rate or tax liability may have an adverse effect on our
results of operations.
As a
global company, we are subject to taxation in Israel, Singapore, the United
States and various other countries and states. Significant judgment
is required to determine and estimate worldwide tax liabilities. Any
significant change in our future effective tax rates could adversely impact our
consolidated financial position, results of operations and cash
flows. Our future effective tax rates may be adversely affected by a
number of factors including:
|
·
|
changes
in tax laws in the countries in which we operate or the interpretation of
such tax laws;
|
|
·
|
changes
in the valuation of our deferred tax
assets;
|
|
·
|
increases
in expenses not deductible for tax purposes, including write-offs of
acquired in-process research and development, write-offs of expenses
related to acquisitions and impairment of goodwill in connection with
acquisitions;
|
|
·
|
changes
in share-based compensation
expense;
|
|
·
|
changes
in generally accepted accounting principles;
and
|
|
·
|
our
ability to use our tax attributes such as research and development tax
credits and net operating losses of acquired companies to the fullest
extent.
|
During
the first quarter of fiscal 2010, the California Budget Act of 2008 was signed
into law which revised certain provisions of the California State Tax Code,
including the option to elect an alternative method to attribute taxable income
to California for tax years beginning on or after January 1, 2011. We
now expect that in years 2011 and beyond, our income subject to tax in
California will be lower than under prior tax law and that our California
deferred tax assets are therefore less likely to be realized. As a
result, we recorded a $3.6 million charge in the first quarter of fiscal 2010 to
reduce our previously recognized California deferred tax assets.
During
fiscal 2009, we established a foreign operating subsidiary in
Singapore. We anticipate that a portion of 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. Accordingly, there can be no assurance that
our income tax rate will be less than the United States federal statutory
rate.
46
The income tax benefits in Israel to
which we are currently entitled from our approved enterprise program may be
reduced or eliminated by the Israeli government in the future and also require
us to satisfy specified conditions. If they are reduced or if we fail to satisfy
these conditions, we may be required to pay increased taxes and would likely be
denied these benefits in the future.
The Investment Center of
the Ministry of Industry, Trade and Labor has granted “approved enterprise”
status to certain product development programs at our facility in Tel Aviv. Our
taxable income from these approved enterprise programs is exempt from tax for a
period of two years and will be subject to a reduced tax for an additional eight
years thereafter, depending on the percentage of our share capital held by
non-Israelis. The Israeli government may reduce, or eliminate in the future, tax
benefits available to approved enterprise programs. Our approved program and the
resulting tax benefits may not continue in the future at their current levels or
at any level. The termination or reduction of these tax benefits would likely
increase our tax liability. Additionally, the benefits available to an approved
enterprise program are dependent upon the fulfillment of conditions stipulated
under applicable law and in the certificate of approval. If we fail to comply
with these conditions, in whole or in part, or fail to get approval in whole or
in part, we may be required to pay additional taxes for the period in which we
benefited from the tax exemption or reduced tax rates and would likely be denied
these benefits in the future. In either case, the amount by which our taxes
would increase will depend on the difference between the then applicable tax
rate for non-approved enterprises and the rate of tax, if any, that we would
otherwise pay as an approved enterprise, and the amount of any taxable income
that we may earn in the future. The current maximum enterprise tax rate in
Israel is 26%.
We
reported material weaknesses in our controls over financial reporting in fiscal
2005 through 2007. If we are unable to maintain effective internal
control over financial reporting, our ability to report our financial results on
a timely and accurate basis may be adversely affected, which in turn could cause
the market price of our common stock to decline.
As of
January 31, 2009, our management, including our principal executive officer and
principal financial officer, assessed the effectiveness of our internal control
over financial reporting. Based on this assessment, our management
determined that our internal control over financial reporting was effective as
of January 31, 2009. However, prior to fiscal 2008, we had ongoing
material weaknesses in our internal control over financial reporting since
fiscal 2005, the first year in which we were required to evaluate our internal
control over financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002. Further, in September 2006, we announced that our historical
financial statements should no longer be relied upon as a result of our
preliminary determination of an internal review relating to our practices in
administering stock option grants. We continued to have material
weaknesses in our internal control over financial reporting, which resulted from
ineffective internal controls over financial reporting for the year ended
February 2, 2007.
As we add
significant operations in locations other than our headquarters, our controls
must be effectively extended to those locations which involves additional
attention from management and expense to implement proper controls and monitor
their effectiveness. For example, we added significant operations in
Israel as a result of our acquisition of CopperGate in November
2009. We must integrate CopperGate’s operations and its substantial
number of employees into our operations and transition their enterprise systems
into our existing systems. We plan to utilize the one-year phase-in
period for operations of a material acquisition under applicable internal
control over financial reporting regulations. Until we have fully
integrated CopperGate into our internal control over financial reporting, we may
identify material weaknesses relating to CopperGate’s controls that existed at
the time of the acquisition and we may not be able effectively integrate
CopperGate’s internal control into our internal control framework, either of
which could cause us to identify material weaknesses in our internal control
over financial reporting in future periods.
Effective
controls are necessary for us to provide reliable financial reports and
effectively prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, our operating results could be harmed and the market
price of our common stock could decline. We cannot be certain that we
will be able to maintain adequate controls over our financial processes and
reporting in the future. If we identify any material weaknesses in
the future, our ability to report our financial results on a timely and accurate
basis may be adversely affected. In addition, if we cannot maintain
effective internal control over financial reporting and disclosure controls and
procedures, investors may lose confidence in our reported financial information
which could cause the market price of our common stock to decline.
47
The
review of our historical stock option granting practices and the restatement of
our prior financial statements may result in additional litigation, regulatory
proceedings and government enforcement actions which could harm our business,
financial condition, results of operations and cash flows.
Our
historical stock option granting practices and the related restatement of our
historical financial statements, which we completed in connection with the audit
of our financial statements for fiscal 2007, exposed us to greater risks
associated with litigation, regulatory proceedings and government enforcement
actions. We have provided the results of our internal review and
investigation of our stock option practices to the SEC, and in that regard we
have responded to informal requests for documents and additional
information. While we do not believe that the SEC inquiry is still
active, we intend to continue to cooperate with the SEC and any other
governmental agency that may become involved in this matter. We
cannot give any assurance regarding the outcomes from regulatory proceedings or
government enforcement actions relating to our past stock option
practices. These matters could be time consuming, expensive and may
distract management from the conduct of our business. Furthermore, if
we are subject to adverse findings in regulatory proceedings or government
enforcement actions, we could be required to pay damages or penalties or have
other remedies imposed, which could harm our business, financial condition,
results of operations and cash flows.
Risks
Related to Our Common Stock
Our
operating results are subject to significant fluctuations due to many factors
and any of these factors could adversely affect our stock price.
Our
operating results have fluctuated in the past and may continue to fluctuate in
the future due to a number of factors, including:
|
·
|
new
product introductions by us and our
competitors;
|
|
·
|
changes
in our pricing models and product sales
mix;
|
|
·
|
unexpected
reductions in unit sales and average selling prices, particularly if they
occur precipitously;
|
|
·
|
expenses
related to our compliance efforts with Section 404 of the Sarbanes-Oxley
Act of 2002;
|
|
·
|
expenses
related to implementing and maintaining our enterprise resource management
system and other information
technologies;
|
|
·
|
the
level of acceptance of our products by our customers and acceptance of our
customers' products by their end user
customers;
|
|
·
|
shifts
in demand for the technology embodied in our products and those of our
competitors;
|
|
·
|
the
loss of one or more significant
customers;
|
|
·
|
the
timing of, and potential unexpected delays in, our customer orders and
product shipments;
|
|
·
|
inventory
obsolescence;
|
|
·
|
write-downs
of accounts receivable;
|
|
·
|
a
significant increase in our effective tax rate in any particular period as
a result of the exhaustion, disallowance or accelerated recognition of our
net operating loss carryforwards or
otherwise;
|
|
·
|
an
interrupted or inadequate supply of semiconductor chips or other materials
included in our products;
|
|
·
|
technical
problems in the development, production ramp up and manufacturing of
products, which could cause shipping
delays;
|
|
·
|
availability
of third-party manufacturing capacity for production of certain products;
and
|
|
·
|
the
impact of potential economic instability in the United States and
Asia-Pacific region, including the continued effects of the recent
worldwide economic slowdown.
|
In
addition, the market prices of securities of semiconductor and other technology
companies have been volatile. This volatility has significantly
affected the market prices of securities of many technology companies for
reasons frequently unrelated to the operating performance of the specific
companies.
48
Accordingly,
you may not be able to resell your shares of common stock at or above the price
you paid. In the past, we and other companies that have experienced
volatility in the market price of their securities have been, and in the future
we may be, the subject of securities class action litigation.
Our
stock price has demonstrated volatility and continued volatility in the stock
market may cause further fluctuations or decline in our stock
price.
The
market for our common stock has been subject to significant volatility which is
expected to continue. For example, the high and low selling prices
per share of our common stock on the Nasdaq Global Market ranged from a high of
$17.63 on June 22, 2009 to a low of $9.59 on February 3, 2009 during the nine
months ended October 31, 2009. During fiscal 2009, the high and low
selling prices per share of our common stock on the Nasdaq Global Market ranged
from a high of $49.62 on February 4, 2008 to a low of $6.93 on November 21,
2008. This volatility is often unrelated or disproportionate to our
operating performance. These fluctuations, as well as general
economic and market conditions, could cause the market price of our common stock
to decline.
If
securities or industry analysts do not publish research or reports about our
business, or if they issue an adverse opinion regarding our stock, our stock
price and trading volume could decline.
The
trading market for our common stock is influenced by the research and reports
that industry or securities analysts publish about us or our
business. If one or more of the analysts who cover us issue an
adverse opinion regarding our stock, our stock price would likely
decline. If one or more of these analysts cease coverage of our
company or fail to regularly publish reports on us, we could lose visibility in
the financial markets which in turn could cause our stock price or trading
volume to decline.
Provisions
in our organizational documents, our shareholders rights agreement and
California law could delay or prevent a change in control of our company that
our shareholders may consider favorable.
Our
articles of incorporation and bylaws contain provisions that could limit the
price that investors might be willing to pay in the future for shares of our
common stock. Our Board of Directors can authorize the issuance of
preferred stock that can be created and issued by our Board of Directors without
prior shareholder approval, commonly referred to as "blank check" preferred
stock, with rights senior to those of our common stock. The rights of
the holders of our common stock will be subject to, and may be adversely
affected by, the rights of the holders of any preferred stock that we may issue
in the future. The issuance of preferred stock could have the effect
of delaying, deterring or preventing a change in control and could adversely
affect the voting power of your shares. In addition, our Board of
Directors has adopted a rights plan that provides each share of our common stock
with an associated right to purchase from us one one-thousandth share of Series
D participating preferred stock at a purchase price of $58.00 in cash, subject
to adjustment in the manner set forth in the rights agreement. The
rights have anti-takeover effects in that they would cause substantial dilution
to a person or group that attempts to acquire a significant interest in our
company on terms not approved by our Board of Directors. In addition,
provisions of California law could make it more difficult for a third party to
acquire a majority of our outstanding voting stock by discouraging a hostile bid
or delaying or deterring a merger, acquisition or tender offer in which our
shareholders could receive a premium for their shares or a proxy contest for
control of our company or other changes in our management.
ITEM
2. UNREGISTERED SALES OF EQUITY SERCURITIES AND USE OF
PROCEEDS
None.
None.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
49
ITEM 6. EXHIBITS
|
(a)
|
Exhibits
|
The
following exhibits are filed herewith:
|
2.1
|
Acquisition
Agreement, dated as of October 12, 2009, by and among Sigma Designs, Inc.,
CopperGate Communications Ltd., Carmel V.C. 2 Ltd. and Tamir Fishman
Ventures Management II Ltd., as the Holder Representatives, and the
Selling Shareholders (incorporated by reference to exhibit 2.1
filed with the Current Report on Form 8-K on October 14,
2009).
|
|
2.2
|
First
Amendment to Acquisition Agreement, dated as of November 10, 2009, by and
among Sigma Designs, Inc., Carmel V.C. 2 Ltd. and Tamir Fishman Ventures
Management II Ltd. as the Holder Representatives (incorporated by
reference to exhibit 2.2 filed with the Current Report on Form 8-K on
November 12, 2009).
|
|
10.1
|
Sigma
Designs, Inc. 2009 Equity Incentive Plan (incorporated by reference to
exhibit 10.1 filed with the Current Report on Form 8-K on August 4,
2009).
|
|
10.2
|
Form
of Notice of Stock Option Grant and Agreement (incorporated by reference
to exhibit 10.2 filed with the Current Report on Form 8-K on August 4,
2009).
|
|
10.3
|
Form
of Notice of Restricted Stock Award and Agreement (incorporated by
reference to exhibit 10.3 filed with the Current Report on Form 8-K on
August 4, 2009).
|
|
10.4
|
Form
of Voting and Support Agreement (incorporated by reference to exhibit 10.1
filed with the Current Report on Form 8-K on October 14,
2009).
|
|
10.5
|
CopperGate
Communications, Ltd. 2003 Share Option Plan (incorporated by reference to
exhibit 99.1 filed with the Registration Statement on Form S-8 on November
13, 2009).
|
|
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certificate
of President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
|
|
32.2
|
Certificate
of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
|
(1) The
certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for
purposes of Section 18 of the Securities and Exchange Act of 1934 and are
not to be incorporated by reference into any filing of the registrant under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof irrespective of any general incorporation by
reference language contained in any such filing, except to the extent that the
registration specifically incorporates it by reference.
50
SIGNATURES
Pursuant
to the requirement 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.
SIGMA
DESIGNS, INC.
|
|||
Date:
December 10, 2009
|
|||
By:
|
/s/ Thinh
Q. Tran
|
||
Thinh
Q. Tran
|
|||
Chairman
of the Board, President and Chief Executive Officer (Principal Executive
Officer)
|
|||
By:
|
/s/ Thomas
E. Gay III
|
||
Thomas
E. Gay III
|
|||
Chief
Financial Officer and Secretary
(Principal
Financial and Accounting Officer)
|
51
EXHIBIT
INDEX
|
2.1
|
Acquisition
Agreement, dated as of October 12, 2009, by and among Sigma Designs, Inc.,
CopperGate Communications Ltd., Carmel V.C. 2 Ltd. and Tamir Fishman
Ventures Management II Ltd., as the Holder Representatives, and the
Selling Shareholders (incorporated by reference to exhibit 2.1 filed with
the Current Report on Form 8-K on October 14,
2009).
|
|
2.2
|
First
Amendment to Acquisition Agreement, dated as of November 10, 2009, by and
among Sigma Designs, Inc., Carmel V.C. 2 Ltd. and Tamir Fishman Ventures
Management II Ltd. as the Holder Representatives (incorporated by
reference to exhibit 2.2 filed with the Current Report on Form 8-K on
November 12, 2009).
|
|
10.1
|
Sigma
Designs, Inc. 2009 Equity Incentive Plan (incorporated by reference to
exhibit 10.1 filed with the Current Report on Form 8-K on August 4,
2009).
|
|
10.2
|
Form
of Notice of Stock Option Grant and Agreement (incorporated by reference
to exhibit 10.2 filed with the Current Report on Form 8-K on August 4,
2009).
|
|
10.3
|
Form
of Notice of Restricted Stock Award and Agreement (incorporated by
reference to exhibit 10.3 filed with the Current Report on Form 8-K on
August 4, 2009).
|
|
10.4
|
Form
of Voting and Support Agreement (incorporated by reference to exhibit 10.1
filed with the Current Report on Form 8-K on October 14,
2009).
|
|
10.5
|
CopperGate
Communications, Ltd. 2003 Share Option Plan (incorporated by reference to
exhibit 99.1 filed with the Registration Statement on Form S-8 on November
13, 2009).
|
|
31.1
|
Certification
of the President and Chief Executive Officer pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certification
of the Chief Financial Officer and Secretary pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a), as adopted pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certificate
of President and Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
|
|
32.2
|
Certificate
of Chief Financial Officer and Secretary pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (1)
|
(1) The
certificates contained in Exhibits 32.1 and 32.2 are not deemed “filed” for
purposes of Section 18 of the Securities and Exchange Act of 1934 and are
not to be incorporated by reference into any filing of the registrant under the
Securities Act of 1933 or the Securities Exchange Act of 1934, whether made
before or after the date hereof irrespective of any general incorporation by
reference language contained in any such filing, except to the extent that the
registration specifically incorporates it by reference.
52