Attached files

file filename
EX-10.8 - OFFER LETTER WITH DENNIS BENCALA - IKANOS COMMUNICATIONS, INC.dex108.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - IKANOS COMMUNICATIONS, INC.dex311.htm
EX-10.9 - OFFER LETTER WITH JOHN QUIGLEY - IKANOS COMMUNICATIONS, INC.dex109.htm
EX-32.1 - CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350 - IKANOS COMMUNICATIONS, INC.dex321.htm
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO RULES 13A-14(A) AND 15D-14(A) - IKANOS COMMUNICATIONS, INC.dex312.htm
EX-10.6 - SEPARATION AND RELEASE AGREEMENT WITH MICHAEL GULETT - IKANOS COMMUNICATIONS, INC.dex106.htm
EX-10.7 - SEPARATION AND RELEASE AGREEMENT WITH CORY J. SINDELAR - IKANOS COMMUNICATIONS, INC.dex107.htm
Table of Contents

 

 

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 July 4, 2010

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: 0-51532

 

 

IKANOS COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   73-1721486

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

47669 Fremont Boulevard

Fremont, CA 94538

(Address of principal executive office and zip code)

(510) 979-0400

(Registrant’s telephone number including area code)

 

 

Indicate by check mark whether 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) had been subject to such filing requirements for the past 90 days.     Yes  x    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  ¨

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 definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    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  x

The number of shares outstanding of the Registrant’s Common Stock, $ 0.001 par value, was 54,764,560 as of August 6, 2010.

 

 

 


Table of Contents

IKANOS COMMUNICATIONS, INC.

FORM 10-Q

TABLE OF CONTENTS

 

         Page No.
PART I:   FINANCIAL INFORMATION   
Item 1.   Financial Statements (unaudited)    3
  Condensed Consolidated Balance Sheets as of July 4, 2010 and January 3, 2010    3
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended July 4, 2010 and June 28, 2009    4
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 4, 2010 and June 28, 2009    5
  Notes to Unaudited Condensed Consolidated Financial Statements    6
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations    14
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    21
Item 4.   Controls and Procedures    22
PART II:   OTHER INFORMATION   
Item 1.   Legal Proceedings    22
Item 1A.   Risk Factors    23
Item 6.   Exhibits    37
  Signatures    38

 

2


Table of Contents

PART I: FINANCIAL INFORMATION

 

Item 1. Financial Statements

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands and unaudited)

 

     July 4,
2010
   January 3,
2010
Assets      

Current assets:

     

Cash and cash equivalents

   $ 16,243    $ 13,317

Short-term investments

     1,514      14,223

Accounts receivable, net

     38,965      34,995

Inventory

     27,796      35,050

Prepaid expenses and other current assets

     3,077      2,155
             

Total current assets

     87,595      99,740

Property and equipment, net

     7,372      7,502

Intangible assets, net

     21,014      25,359

Goodwill

     8,633      8,633

Other assets

     3,121      1,766
             
   $ 127,735    $ 143,000
             
Liabilities and Stockholders’ Equity      

Current liabilities:

     

Accounts payable

   $ 21,802    $ 26,641

Accrued liabilities

     20,835      17,050
             

Total current liabilities

     42,637      43,691

Long-term liabilities

     125      2,193
             

Total liabilities

     42,762      45,884

Commitments and contingencies (Note 8)

     

Stockholders’ equity

     84,973      97,116
             
   $ 127,735    $ 143,000
             

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

3


Table of Contents

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, and unaudited)

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Revenue

   $ 55,615      $ 22,429      $ 112,998      $ 43,163   

Cost of revenue (1)

     42,456        13,139        77,894        25,393   
                                

Gross profit

     13,159        9,290        35,104        17,770   
                                

Operating expenses:

        

Research and development (2)

     16,144        9,591        33,216        18,454   

Selling, general and administrative (3)

     7,691        6,042        15,478        11,680   

Restructuring charges

     —          279        1,483        546   
                                

Total operating expenses

     23,835        15,912        50,177        30,680   
                                

Loss from operations

     (10,676 )     (6,622 )     (15,073 )     (12,910 )

Interest income and other, net

     (7 )     220        55        457   
                                

Loss before provision for income taxes

     (10,683 )     (6,402 )     (15,018 )     (12,453 )

Provision for income taxes

     42        43        110        80   
                                

Net loss

   $ (10,725 )   $ (6,445 )   $ (15,128 )   $ (12,533 )
                                

Basic and diluted net loss per share

   $ (0.20 )   $ (0.22 )   $ (0.28 )   $ (0.43 )
                                

Weighted average number of shares (basic and diluted)

     54,511        29,397        54,287        29,298   
                                

 

        

Includes stock-based compensation expense as follows:

        

(1) Cost of revenue

   $ 26      $ 68      $ 62      $ 149   

(2) Research and development

     445        687        1,126        1,419   

(3) Selling, general and administrative

     476        583        1,077        1,285   

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

4


Table of Contents

IKANOS COMMUNICATIONS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands and unaudited)

 

     Six Months Ended  
     July 4,
2010
    June 28,
2009
 

Cash flows from operating activities:

    

Net loss

   $ (15,128 )   $ (12,533 )

Adjustments to reconcile net loss to net cash used by operating activities:

    

Depreciation and amortization

     1,933        2,778   

Stock-based compensation expense

     2,265        2,853   

Amortization of intangible assets and acquired technology

     4,345        2,155   

Changes in assets and liabilities:

    

Accounts receivable, net

     (3,970 )     3,539   

Inventory

     7,254        1,604   

Prepaid expenses and other assets

     (2,277 )     (1,621 )

Accounts payable and accrued liabilities

     (3,263 )     (2,560 )
                

Net cash used by operating activities

     (8,841 )     (3,785 )
                

Cash flows from investing activities:

    

Purchases of property and equipment

     (1,803 )     (183 )

Purchases of investments

     —          (6,610 )

Maturities and sales of investments

     12,628        19,130   
                

Net cash provided by investing activities

     10,825        12,337   
                

Cash flows from financing activities:

    

Net proceeds from issuances of common stock and exercise of stock options

     942        232   
                

Net increase in cash and cash equivalents

     2,926        8,784   

Cash and cash equivalents at beginning of period

     13,317        27,219   
                

Cash and cash equivalents at end of period

   $ 16,243      $ 36,003   
                

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

5


Table of Contents

IKANOS COMMUNICATIONS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Ikanos and Summary of Significant Accounting Policies

The Company

Ikanos Communications, Inc. (Ikanos or the Company) was incorporated in the State of California in April 1999 and reincorporated in the State of Delaware in September 2005. Ikanos Communications, Inc. is a leading provider of advanced broadband semiconductor and software products for the digital home. The Company has developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. Expertise in the creation and integration of unique digital signal processor (DSP) algorithms with advanced digital, analog and mixed signal semiconductors is important to offering high performance, high-density and low-power asymmetric DSL (ADSL) and very-high-bit rate DSL (VDSL) products. In addition, flexible communications processor architectures with wire speed packet processing capabilities enable high-performance end-user devices for distributing advanced services in the home. These products thus support service providers’ multi-play deployment plans to the digital home while keeping their capital and operating expenditures low.

Since its inception, the Company has only been profitable in the third and fourth quarters of 2005. The Company incurred net losses of $10.7 million and $15.1 million for the three and six months ended July 4, 2010 and had an accumulated deficit of $236.0 million as of July 4, 2010. To achieve consistent profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for its business. Existing cash, cash equivalents, short-term investments and cash flows expected to be generated from future operations, if any, are expected to be sufficient to meet anticipated cash needs for at least the next twelve months.

Future capital requirements will depend upon many factors including its rate of revenue growth, its ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of its products. Additionally in the future, the Company may become party to agreements with respect to potential investments in, or acquisitions of, other complementary businesses, products or technologies, which could also require it to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to its stockholders. Additional debt would result in increased interest expenses and could result in covenants that would restrict its operations. The Company has not made arrangements to obtain debt financing, and there is no assurance that such financing, if required, will be available in amounts or on acceptable terms, if at all.

If there continue to be further declines in demand for certain products, including ADSL products, or if our results fall short of our projected revenue, operating income and cash flow forecasts for the remainder of 2010 or if the Company is unable to meet future expectations or rebuild its technology and product leadership while driving new product future revenue growth, its goodwill, intangible assets and other long lived assets may be impaired. If the Company were to record an impairment, the charges might be material to its results of operations and financial position.

The Company’s fiscal year ends on the Sunday closest to December 31. The Company’s fiscal quarters end on the Sunday closest to the end of the applicable calendar quarter, except in a 53-week fiscal year, in which case the additional week falls into the fourth quarter of that fiscal year.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements have been prepared without audit in accordance with the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been condensed or omitted in accordance with these rules and regulations. References in this Report on Form 10-Q to “authoritative guidance” are to the Accounting Standards Codification (ASC) issued by the Financial Accounting Standards Board (FASB) in June 2009. The information in this report should be read in conjunction with our audited financial statements and notes thereto included in our Annual Report on Form 10-K filed with the SEC on March 18, 2010.

 

6


Table of Contents

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to state fairly our financial position, results of operations and cash flows for the interim periods presented. The operating results for the three and six month periods ended July 4, 2010 are not necessarily indicative of the results that may be expected for the year ending January 2, 2011 or for any other future period.

Use of Estimates

The preparation of the Company’s consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions. The Company believes that the estimates, judgments and assumptions upon which it relies are reasonable based upon information available to it at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenue and expenses during the periods presented. To the extent that there are material differences between these estimates and actual results, the Company’s financial statements would have been affected. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Summary of Significant Accounting Policies

Our significant accounting policies are described in Note 1 to our audited Consolidated Financial Statements for the fiscal year ended January 3, 2010, included in our Annual Report on Form 10-K. There have not been any significant changes to the accounting policies.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash, cash equivalents, investments and accounts receivable. Cash and cash equivalents are held with a limited number of financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Management believes that the financial institutions that hold the Company’s investments are credit worthy and, accordingly, minimal credit risk exists with respect to those investments. Short-term investments include a diversified portfolio of government agency bonds. Long-term investments, comprised of auction rate securities, are included in Other assets in the Condensed Consolidated Balance Sheets. All investments are classified as available-for-sale. The Company does not hold or issue financial instruments for trading purposes.

Credit risk with respect to accounts receivable is concentrated due to the number of large orders placed by a small number of customers in any particular reporting period. Four customers represented 23%, 16%, 13% and 10% of accounts receivable at July 4, 2010. Four customers represented 18%, 15%, 10% and 10% of accounts receivable at January 3, 2010. Four customers accounted for 18%, 14%, 13%, and 11% of revenue for the three months ended July 4, 2010. Four customers accounted for 15%, 13%, 10%, and 10% of revenue for the six months ended July 4, 2010. Four customers accounted for 22%, 17%, 13%, and 11% of revenue for the three months ended June 28, 2009. Three customers accounted for 30%, 18%, and 12% of revenue for the six months ended June 28, 2009.

Concentration of Suppliers

The Company subcontracts the manufacture, assembly and test of its products to third-parties located primarily in Asia. As a result of this geographic concentration, a disruption in the manufacturing process resulting from a natural disaster or other unforeseen event could have a material adverse effect on the Company’s financial position and results of operations. Additionally, a small number of sources manufacture, assemble and test the Company’s products. The Company does not have long-term contracts. Also, each product generally has only one foundry and one assembly and test provider. An inability to obtain these products and services in the amounts needed and on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruptions in product shipments or increases in product costs and, therefore, could have a material adverse effect on the Company’s financial position and results of operations.

 

7


Table of Contents

Concentration of Other Risk

The semiconductor industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company’s results of operations are affected by a wide variety of factors, including general economic conditions; economic conditions specific to the semiconductor industry; demand for the Company’s products; the timely introduction of new products; implementation of new manufacturing technologies; manufacturing capacity; the availability of materials and supplies; competition; the ability to safeguard patents and intellectual property in a rapidly evolving market; and reliance on assembly and wafer fabrication subcontractors and on independent distributors and sales representatives. As a result, the Company may experience substantial period-to-period fluctuations in future periods due to the factors mentioned above, factors described in the section titled “Item 1A. Risk Factors” or other factors.

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owner sources. The components of comprehensive loss are as follows (in thousands):

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Net loss

   $ (10,725 )   $ (6,445 )   $ (15,128 )   $ (12,533 )

Other comprehensive loss–unrealized loss on marketable securities

     (31     44        (82 )     (67 )
                                

Comprehensive loss

   $ (10,756 )   $ (6,401 )   $ (15,210 )   $ (12,600 )
                                

Net Loss per Share

Under the provisions of ASC 260-10, basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Potentially dilutive securities have been excluded from the computation of diluted net loss per share if their inclusion is anti-dilutive. The calculation of basic and diluted net loss per share is as follows (in thousands, except per share amounts):

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Net loss

   $ (10,725 )   $ (6,445 )   $ (15,128 )   $ (12,533 )
                                

Weighted average number of shares, basic and diluted outstanding

     54,511        29,397        54,287        29,298   
                                

Basic and diluted net loss per share

   $ (0.20 )   $ (0.22 )   $ (0.28 )   $ (0.43 )
                                

The following potential common shares have been excluded from the calculation of diluted net loss per share as their effect would have been anti-dilutive (in thousands):

 

     Three Months Ended    Six Months Ended
     July 4,
2010
   June 28,
2009
   July 4,
2010
   June 28,
2009

Anti-dilutive securities:

           

Warrants to purchase common stock

   2,016    —      2,016    —  

Weighted average restricted stock units

   1,147    629    1,218    783

Weighted-average options to purchase common stock

   8,169    2,319    8,443    2,244
                   
   11,332    2,948    11,677    3,027
                   

 

8


Table of Contents

Recent Accounting Pronouncements

In January 2010, the FASB issued updated guidance related to fair value measurements and disclosures, which requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. In addition, in the reconciliation for fair value measurements using significant unobservable inputs, or Level 3, a reporting entity should disclose separately information about purchases, sales, issuances and settlements (that is, on a gross basis rather than one net number). The updated guidance also requires that an entity provide fair value measurement disclosures for each class of assets and liabilities and disclosures about the valuation techniques and inputs used to measure fair value for both recurring and non-recurring fair value measurements for Level 2 and Level 3 fair value measurements. The updated guidance is effective for interim and annual financial reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements, which are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The implementation of this guidance had no impact and is not expected to have any impact on the Company’s consolidated financial position, results of operations or cash flows.

Note 2 – Investments and Fair Value Measurements

The following is a summary of the Company’s investments (in thousands):

 

     July 4, 2010
     Cost    Gross
Unrealized
Gain
   Estimated
Fair
value

Short-term investments - U.S. government agencies

   $ 1,511    $ 3    $ 1,514
                    

Long-term investments - auction rate securities

   $ 705    $ —      $ 705
                    
     January 3, 2010
     Cost    Gross
Unrealized
Gain
   Estimated
Fair
value

U.S. government agencies

   $ 11,988    $ 82    $ 12,070

Corporate bonds and notes

     2,151      2      2,153
                    

Total short-term investments

   $ 14,139    $ 84    $ 14,223
                    

Long-term investments - auction rate securities

   $ 705    $ —      $ 705
                    

The contractual maturities of investments held at July 4, 2010 are as follows (in thousands):

 

     Cost    Estimated Fair Value

Due within one year

   $ 1,511    $ 1,514

Due after one year

     705      705
             
   $ 2,216    $ 2,219
             

There was no unrealized loss on investments aggregated by category as of July 4, 2010 and as of January 3, 2010.

Marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses and permanent declines in value, if any, on available-for-sale securities are reported in other income or expense as incurred. Estimated fair values were determined for each individual security in the investment portfolio. The declines in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.

A portion of the Company’s available-for-sale portfolio is composed of auction rate securities, which were written down to their net realizable value in 2008. The auction rate securities have a cost value of $0.7 million and a face value of $5.0 million. During 2009 we sold auction rate securities with a face value of $2.2 million and with a cost basis of $0.3 million for $1.5 million, realizing a gain of $1.2 million. The funds related to the remaining auction rate securities will not be available until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

 

9


Table of Contents

Fair Value Measurements

ASC 820-20 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, authoritative guidance establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: observable inputs such as quoted prices in active markets (Level 1); inputs other than the quoted prices in active markets that are observable either directly or indirectly (Level 2); and unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions (Level 3). This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, the Company measures certain financial assets, mainly comprised of marketable securities, at fair value.

The Company’s cash and investment instruments are classified within all three levels of the fair value hierarchy. The types of Level 1 instruments, valued based on quoted market prices in active markets, include money market securities. Level 2 types of instruments are valued based on quoted prices of identical or similar instruments in markets that are less than active or for which all inputs are observable. These include investment-grade U.S. government agencies, commercial paper and corporate bonds and notes. Level 3 types of instruments, valued based on unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions, include auction rate securities. The fair value hierarchy of our marketable securities as of July 4, 2010 and January 3, 2010 is as follows (in thousands):

 

     July 4, 2010
     Level 1    Level 2    Level 3    Total

Money market funds (a)

   $ 2,379    $ —      $ —      $ 2,379

U.S. government agencies

     —        1,514      —        1,514

Auction rate securities

     —        —        705      705
                           
   $ 2,379    $ 1,514    $ 705    $ 4,598
                           
     January 3, 2010
     Level 1    Level 2    Level 3    Total

Money market funds (a)

   $ 43    $ —      $ —      $ 43

U.S. government agencies

     —        12,070      —        12,070

Corporate bonds and notes

     —        2,153      —        2,153

Auction rate securities

     —        —        705      705
                           
   $ 43    $ 14,223    $ 705    $ 14,971
                           

 

(a) Money market funds are classified as Cash equivalents.

The Company valued the auction rate securities using a DCF model. Assumptions used in valuing each of the auction rate securities include the stated maturity dates between the years 2025 and 2050, the stated coupon rate and an estimated discount rate. The discount rate is an estimate of what the Company believes the security must be discounted to in order to sell today. It is based on a number of factors, including the credit rating of the issuer and the insurance provider for the security.

There have been no changes in Level 3 securities for the three months ended July 4, 2010.

Note 3 – Inventory

Inventory consisted of the following (in thousands):

     July 4, 2010    January 3, 2010

Finished goods

   $ 10,138    $ 11,015

Work-in-process

     16,563      22,470

Purchased parts and raw materials

     1,095      1,565
             
   $ 27,796    $ 35,050
             

The Company wrote down inventory by $12.9 million during the second quarter of 2010 due to a reduction in our revenue forecast.

 

10


Table of Contents

Note 4 – Property and Equipment

Property and equipment consisted of the following (in thousands):

     July 4, 2010     January 3, 2010  

Machinery and equipment

   $ 18,318      $ 19,386   

Software

     4,615        4,161   

Computer equipment

     4,761        4,483   

Furniture and fixtures

     918        888   

Leasehold improvements

     869        677   

Construction in progress

     252        137   
                
     29,733        29,732   

Less: Accumulated depreciation and amortization

     (22,361     (22,230
                
   $ 7,372      $ 7,502   
                

Depreciation and amortization expense for property and equipment was $1.2 million and $1.3 million for the three months ended July 4, 2010 and June 28, 2009, respectively. Depreciation and amortization expense for property and equipment was $1.9 million and $2.8 million for the six months ended July 4, 2010 and June 28, 2009, respectively.

Note 5 – Intangible Assets

The carrying value of intangible assets is as follows (in thousands):

     July 4, 2010
     Gross
Carrying Amount
   Accumulated
Amortization
    Net
Amount
   Useful
life (Years)

Existing technology

   $ 23,184    $ (13,514 )   $ 9,670    3

Customer relationships

     13,946      (6,512     7,434    4

In-process research and development

     3,910      —          3,910    *
                        
   $ 41,040    $ (20,026   $ 21,014   
                        

 

     January 3, 2010
     Gross
Carrying Amount
   Accumulated
Amortization
    Net
Amount
   Useful
life (Years)

Existing technology

   $ 23,184    $ (10,938   $ 12,246    3

Customer relationships

     13,946      (4,743     9,203    4

In-process research and development (IPR&D)

     3,910      —          3,910    *
                        
   $ 41,040    $ (15,681   $ 25,359   
                        

 

* Technical feasibility of IPR&D has not been reached and, therefore, a useful life has not been determined.

For the three months ended July 4, 2010 and June 28, 2009, the amortization of intangible assets was $2.0 million and $1.1 million, respectively. For the six months ended July 4, 2010 and June 28, 2009, the amortization of intangible assets was $4.3 million and $2.2 million, respectively. The estimated future amortization of purchased intangible assets as of July 4, 2010 is $4.0 million for the remainder of 2010, $6.7 million in 2011, $5.0 million in 2012 and $1.4 million in 2013.

Note 6 – Accrued Liabilities

Accrued liabilities consisted of the following (in thousands):

 

     July 4, 2010    January 3, 2010

Accrued compensation and related benefits

   $ 4,774    $ 6,344

Accrued rebates

     2,516      1,983

Royalties

     2,110      1,200

Excess lease liability

     1,496      1,496

Warranty accrual

     986      660

Restructuring

     329      298

Other accrued liabilities

     8,624      5,069
             
   $ 20,835    $ 17,050
             

 

11


Table of Contents

The following table summarizes the activity related to warranty (in thousands):

 

     Six Months Ended  
     July 4, 2010     June 28, 2009  

Balance, beginning of period

   $ 660      $ 745   

Provision

     360        109   

Usage

     (34     (412
                

Balance, end of period

   $ 986      $ 442   
                

Note 7 – Restructuring Charges

During the first quarter of 2010, the Company implemented a plan to restructure its work force and reduce its cost structure subsequent to its 2009 acquisition of the Conexant Broadband Access product line. Restructuring charges, consisting of severance and benefits costs, were $1.5 million for the six months ended July 4, 2010. The Company expects the remaining severance and benefit costs to be paid in 2010. A summary of the restructuring activity follows (in thousands):

     Severance and Benefits  

Balance as of January 3, 2010

   $ 298  

Restructuring charges

     1,483   

Cash payments

     (1,452
        

Balance as of July 4, 2010

   $ 329   
        

See Note 11 – Subsequent Events – concerning restructuring during the third quarter of 2010.

Note 8 – Commitments and Contingencies

Lease Obligations

The Company leases office facilities under non-cancelable operating leases with various expiration dates through 2014. Rent expense for the three months ended July 4, 2010 and June 28, 2009 was $0.8 million and $0.3 million, respectively. Rent expense for the six months ended July 4, 2010 and June 28, 2009 was $1.5 million and $0.6 million, respectively. The terms of the facility leases provide for rental payments on a graduated scale. The Company recognizes rent expense on a straight-line basis over the lease period and has accrued for rent expense incurred but not paid. Future minimum lease payments as of July 4, 2010 under non-cancelable leases with original terms in excess of one year are $2.1 million for the remainder of 2010, $2.5 million in 2011, $0.9 million in 2012, $0.6 million in 2013 and $0.5 million 2014.

Purchase Commitments

As of July 4, 2010, the Company had $8.4 million of inventory purchase obligations with various suppliers that are expected to be paid by the end of 2010.

Indemnities, Commitments and Guarantees

During its normal course of business, the Company has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to the Company’s customers in connection with the sales of its products, indemnities for liabilities associated with the infringement of other parties’ technology based upon the Company’s products, and indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments that the Company could be obligated to make. The Company believes its internal development processes and other policies and practices minimize the occurrence of events that may trigger potential future payments under such indemnities, commitments and guarantees. The Company has not recorded any liability for these indemnities, commitments and guarantees in the accompanying consolidated balance sheets. The Company does, however, accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is probable and the amount of the loss can be reasonably estimated, in accordance with ASC 450-20.

In addition, the Company indemnifies its officers and directors under the terms of indemnity agreements entered into with them, as well as pursuant to its certificate of incorporation, bylaws and applicable Delaware law. To date, the Company has not incurred any costs related to these indemnity agreements.

 

12


Table of Contents

Litigation

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against the Company, its directors and two former executive officers, as well as the lead underwriters for its initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged material misrepresentations and omissions made by the Company in connection with both its initial public offering in September 2005 and its follow-on offering in March 2006. On June 25, 2007, Ikanos filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. The Company filed an opposition to the motion on July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. Oral argument on the motion for leave to amend has not yet been scheduled. The Company cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, other than set forth above, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows or financial position.

Note 9 – Significant Customer Information and Segment Reporting

ASC 280-10 establishes standards for the manner in which public companies report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. The method for determining the information to report is based on the way management organizes the operating segments within the Company for making operating decisions and assessing financial performance.

The Company’s chief operating decision-maker is considered to be the Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by disaggregated information about revenue by geographic region for purposes of making operating decisions and assessing financial performance. On this basis, the Company is organized and operates in a single segment: the design, development, marketing and sale of semiconductors.

The following table summarizes revenue by geographic region, based on the country in which the customer’s headquarters office is located (in thousands):

 

     Three Months Ended      Six Months Ended  
     July 4, 2010     June 28, 2009      July 4, 2010     June 28, 2009  

Asia

   $ 34,780    63   $ 9,721    43    $ 74,375    66   $ 18,908    44

Europe

     19,453    35        9,879    44         35,432    31        19,586    45   

North America

     1,382    2        2,829    13         3,191    3        4,669    11   
                                                     
   $ 55,615    100   $ 22,429    100    $ 112,998    100   $ 43,163    100
                                                     

The Company divides its products into three product families: Broadband DSL, Communications Processors and Other. Broadband DSL consists of the Company’s central office products, DSL modem-only customer premise equipment products and the DSL value of the Company’s integrated devices. Communications Processors includes the Company’s stand alone processors and the processor-only value of the Company’s integrated devices. Other includes products that do not fall into the other two product families. Revenue by product family is as follows (in thousands):

 

     Three Months Ended      Six Months Ended  
     July 4, 2010     June 28, 2009      July 4, 2010     June 28, 2009  

Broadband DSL

   $ 35,259    63   $ 14,555    65    $ 68,940    61   $ 29,118    67

Communications Processors

     10,291    19        7,874    35         26,195    23        14,045    33   

Other

     10,065    18        —      —           17,863    16        —      —     
                                                     
   $ 55,615    100   $ 22,429    100    $ 112,998    100   $ 43,163    100
                                                     

 

13


Table of Contents

The distribution of long-lived assets (excluding goodwill, intangible assets and other assets) is as follows (in thousands):

 

     July 4,
2010
   January  3,
2010

United States

   $ 4,367    $ 4,881

Asia

     2,909      2,531

Other

     96      90
             
   $ 7,372    $ 7,502
             

Note 10 – Related Party Transaction and Technology License Agreement

On May 7, 2010, the Company entered into a technology license agreement with Sandbridge Technologies, Inc. (“Sandbridge”), a related party. Tallwood Venture Capital is an investor with board of director representation in both Sandbridge and Ikanos. Pursuant to the technology license agreement, the Company agreed to pay Sandbridge $1.0 million for a perpetual license to use the Sandbridge 2.0 core processor. The Company paid Sandbridge $0.4 million in the second quarter of 2010 and will pay the remaining balance during the third and fourth quarters. The Company will also pay royalties to Sandbridge based on unit sales of future products that embed this technology.

Note 11 – Subsequent Event—Restructuring

On August 3, 2010 the Board of Directors of Ikanos approved a corporate restructuring plan (“Plan”) that will include a reduction in force and may include the closing of three overseas offices. The objective of the Plan is to better align Ikanos’ operating expenses with its revised revenue forecast and to reallocate sufficient engineering resources to the continued development of its broadband technology and products.

The reduction in force will occur in the third and fourth quarters of 2010 and is currently expected to result in a headcount reduction of approximately 20%. In addition, Ikanos is contemplating the closure of three overseas offices as part of the Plan. The timing for completion of the Plan will depend, in part, on local rules and regulations.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, as more fully described in Part II, Item 1.A “Risk Factors” in this quarterly report on Form 10-Q. These forward-looking statements may be identified by terms such as “anticipate,” “expect,” “intend,” “believe,” “will,” “plan,” “may,” “can,” “allow” and the negative of these terms, and similar expressions. These forward-looking statements include, without limitation, statements regarding: our expectation that a small number of customers will continue to account for a substantial portion of our revenue; future revenue growth and fluctuations in our operating results; our average selling prices and gross margins; our ability to compete; anticipated features and benefits of our technology and products; benefits of our outsourced manufacturing model; anticipated benefits of our acquisitions such as our purchases of DSL technology and broadband access product line; our existing and expected cash, potential uses of cash and timing with respect to any such use, the sufficiency of our cash equivalents and cash flows to meet our anticipated cash needs for at least the next twelve months; our belief in the effectiveness of our internal controls; our expectation that significant customer concentration in a small number of OEM customers will continue for the foreseeable future; legal proceedings; our expectation regarding our foreign currency exposure; future costs and expenses and financing requirements; and the timing and anticipated impact of our restructuring plan. The forward-looking statements made in this Form 10-Q are made as of the filing date with the Securities and Exchange Commission and future events or circumstances could cause results that differ significantly from the forward-looking statements included here. Accordingly, we caution readers not to place undue reliance on these statements and, except as required by law, we assume no obligation to update any such forward-looking statements.

The following discussion and analysis should be read in conjunction with the condensed financial statements and notes thereto in Part I, Item 1 above and with our financial statements and notes thereto for the year ended January 3, 2010 contained in our Annual Report on Form 10-K filed on March 18, 2010.

 

14


Table of Contents

Overview

Ikanos Communications, Inc. is a leading provider of advanced broadband semiconductor and software products for the digital home. Our broadband DSL, communications processors and other offerings power access infrastructure and customer premises equipment (CPE) for many of the world’s leading network equipment manufacturers and telecommunications service providers. Our products are at the core of digital subscriber line access multiplexers (DSLAMs), optical network terminals (ONTs), concentrators, modems, voice over Internet Protocol (VoIP) terminal adapters, integrated access devices (IADs) and residential gateways (RGs). Our products have been deployed by service providers in Asia, Europe and North America.

We believe that we can offer advanced products by continuing to push existing limits in silicon, systems and software. We have developed programmable, scalable chip architectures, which form the foundation for deploying and delivering multi-play services. Expertise in the creation and integration of digital signal processor (DSP) algorithms with advanced digital, analog and mixed signal semiconductors enables us to offer high performance, high-density and low-power asymmetric DSL (ADSL) and very-high-bitrate DSL (VDSL) products. In addition, flexible communications processor architectures with wirespeed packet processing capabilities enable high-performance end-user devices for distributing advanced services in the home. These products thus support service providers’ multi-play deployment plans to the digital home while keeping their capital and operating expenditures low.

We outsource all of our semiconductor fabrication, assembly and test functions, which allows us to focus on the design, development, sales and marketing of our products and reduces the level of our capital investment. Our customers consist primarily of original design manufacturers (ODMs), contract manufacturers (CMs), network equipment manufacturers (NEMs) and original equipment manufacturers (OEMs), who in turn sell our semiconductors as part of their product-solutions to the service provider market.

Since the Company’s inception, we have only been profitable in the third and fourth quarters of 2005. We incurred net losses of $10.7 million and $15.1 million for the three and six months ended July 4, 2010 and had an accumulated deficit of $236.0 million as of July 4, 2010. To achieve consistent profitability, the Company will need to generate and sustain higher revenue, while maintaining cost and expense levels appropriate and necessary for its business. Existing cash, cash equivalents, short-term investments and cash flows expected to be generated from future operations, if any, are expected to be sufficient to meet anticipated cash needs for at least the next twelve months.

We were incorporated in April 1999, and through December 31, 2001, we were engaged principally in research and development. We began commercial shipment of our products in the fourth quarter of 2002. Over the last three years, our revenue was $107.5 million in 2007, $106.5 million in 2008 and $130.7 million in 2009.

Quarterly revenue fluctuations are characteristic of our industry and affect our business, especially due to the concentration of our revenue among a few customers. These quarterly fluctuations can result from a mismatch of supply and demand. Specifically, service providers purchase equipment based on planned deployment. However, service providers may deploy equipment more slowly than initially planned, while OEMs continue for a time to manufacture equipment at rates higher than the rate at which equipment is deployed. As a result, periodically and usually without significant notice, service providers will reduce orders with OEMs for new equipment, and OEMs in turn will reduce orders for our products, which will adversely impact the quarterly demand for our products, even when deployment rates may be increasing.

Furthermore, our future revenue growth depends upon new service providers beginning to deploy new platforms with our products, among other factors. It is inherently difficult to predict if and when platforms will pass qualification, when service providers will begin to deploy the equipment and at what rate, because we do not control the qualification criteria or process, and the systems manufacturers and service providers do not always share all of the information available to them regarding qualification and deployment decisions. The team of engineers, DSL products, technology, patents and other intellectual property allow us to extend our market leadership as well as accelerate our digital home initiatives and next generation VDSL2 development.

On August 24, 2009, we acquired from Conexant Systems, Inc., its Broadband Access product line (BBA), which includes the backlog, customer relationships, product-related intellectual property, patents, fixed assets and inventory of the product line, for a total purchase price of $53.1 million in cash and the assumption of approximately $6.4 million in employee and lease related liabilities. Adding the BBA products and engineers to Ikanos’ existing portfolio of VDSL solutions has more than doubled our size, expanded our reach into new geographic and product markets and added new research and development capabilities to the existing engineering team. The addition of the BBA products is expected to allow us to develop semiconductor and software products for new markets within the digital home in addition to serving our Broadband DSL and Communications Processors businesses and to reduce costs through economies of scale.

 

15


Table of Contents

On April 27, 2010, Michael Gulett resigned as our Chief Executive Officer and President and as a member of our Board of Directors. Diosdado P. Banatao, the chairman of our Board of Directors, was appointed executive chairman and assumed the role of interim President and Chief Executive Officer while we began our search for a new Chief Executive Officer and President. On June 14, 2010, Cory Sindelar resigned as Chief Financial Officer. Dennis Bencala has been appointed Chief Financial Officer. On June 30, 2010, Paul Hansen resigned from our Board of Directors. James Smaha, a current director, replaced Mr. Hansen on the Audit Committee of our Board of Directors and Fred Lax, also a current director, was appointed chairman of the Audit Committee. On August 3, 2010, Mr. Banatao resigned as our interim President and Chief Executive Officer. Mr. Banatao will continue to serve as executive chairman of our Board of Directors. On August 3, 2010, our Board of Directors appointed John Quigley, our Sr. Vice President, Global Engineering, as our Chief Executive Officer and President effective August 3, 2010 and also elected him to the Board of Directors.

Critical Accounting Policies and Estimates

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that may have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly. We also discuss our critical accounting estimates with the Audit Committee of the Board of Directors. We believe that the assumptions, judgments and estimates involved in the accounting for revenue, cost of revenue, marketable securities, accounts receivable, inventories, warranty, income taxes, impairment of goodwill and related intangibles, acquisitions and stock-based compensation expense have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

The critical accounting policies, are described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended January 3, 2010, and have not changed materially as of July 4, 2010.

Subsequent Event

On August 3, 2010 our Board of Directors of Ikanos approved a corporate restructuring plan (“Plan”) that will include a reduction in force and may include the closing of three overseas offices. The objective of the Plan is to better align Ikanos’ operating expenses with its revised revenue forecast and to reallocate sufficient engineering resources to the continued development of its broadband technology and products.

The reduction in force will occur in the third and fourth quarters of 2010 and is currently expected to result in a headcount reduction of approximately 20% and an anticipated annual operational cost savings of approximately $15 million in 2011. In addition, we are contemplating the closure of three overseas offices as part of the Plan. The timing for completion of the Plan will depend, in part, on local rules and regulations.

Results of Operations

Revenue

Our revenue is derived from sales of our semiconductor products. Revenue from product sales is generally recognized upon shipment, net of sales returns, rebates and allowances. Revenue from product sales to distributors is recognized when the distributor has sold through to the end customer. As is typical in our industry, the selling prices of our products generally decline over time. Therefore, our ability to increase revenue is dependent upon our ability to increase unit sales volumes of existing products and to introduce and sell new products in greater quantities. Our ability to increase unit sales volume is dependent primarily upon our ability to increase and fulfill current customer demand and obtain new customers. The continuing effects of the worldwide recession have adversely affected the businesses of service providers around the world, causing them to re-evaluate how they employ capital. Consequently the rate at which broadband infrastructure is upgraded may slow or delay new broadband programs.

 

16


Table of Contents

Revenue increased by $33.2 million, or 148%, to $55.6 million in the three months ended July 4, 2010 from $22.4 million in the three months ended June 28, 2009. Revenue increased by $69.8 million, or 162%, to $113.0 million in the six months ended July 4, 2010 from $43.2 million in the six months ended June 28, 2009. The increase in revenue is primarily related to our August 2009 acquisition of the BBA product line.

We generally sell our products to OEMs through a combination of our direct sales force and third-party sales representatives. Sales are generally made under short-term, non-cancelable purchase orders. We also have volume purchase agreements, and certain customers who provide us with non-binding forecasts. Although certain OEM customers may provide us with rolling forecasts, our ability to predict future sales in any given period is limited and subject to change based on demand for our OEM customers’ systems and their supply chain decisions. Historically, a small number of OEM customers, the composition of which has varied over time, have accounted for a substantial portion of our revenue. We expect that significant customer concentration will continue for the foreseeable future, but it may diversify across more carrier customers as we expect more service providers world-wide to begin deployments of broadband solutions and Gateway products. The following direct customers each accounted for more than 10% of our revenue for the years indicated. Sales made to OEMs are based on information that we receive at the time of ordering.

 

           Three Months Ended     Six Months Ended  

Our Direct Customer

  

OEM Customer

       July 4,    
2010
        June 28,    
2009
        July 4,    
2010
        June 28,    
2009
 

Alcatel-Lucent and its CMs

   Alcatel-Lucent    18   *   15   *

Flextronics

   2Wire    14      *      10      *   

Sagemcom

   Sagemcom    13      22      13      30   

Paltek

   Sumitomo    11      17      10      12   

NEC Corporation

   NEC Corporation    *      13      *      18   

Benchmark Electronics

   Motorola    *      11      *      *   

 

* Less than 10%

Revenue by Region as a Percentage of Total Revenue

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Asia

   63 %   43 %   66 %   44 %

Europe

   35      44      31      45   

North America

   2      13      3      11   

The table above reflects sales to our direct customers based on where they are headquartered. It does not necessarily reflect carrier deployment of our products as we do not sell directly to them. Asian revenue increased substantially, both in terms of absolute dollars and percentage of total revenue in the first and second quarters of 2010 versus the same periods in 2009. Although revenue to Japan and Korea improved, revenue to China was especially strong. Revenue from European sales improved in both quarters of 2010 versus the same periods in 2009, but was lower as a percentage of total revenue.

Revenue by Product Family as a Percentage of Total Revenue

The Company divides its products into three product families: Broadband DSL, Communications Processors and Other. Broadband DSL consists of the Company’s central office products, DSL modem-only customer premise equipment products and the DSL value of the Company’s integrated devices. Communications Processors includes the Company’s stand alone processors and the processor-only value of the Company’s integrated devices. Other includes products that do not fall into the other two product families. Revenue by product family is as follows (in thousands):

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Broadband DSL

   63 %   65 %   61 %   67 %

Communications Processors

   19      35      23      33   

Other

   18      —        16      —     

 

17


Table of Contents

Cost and Operating Expenses

 

     Three Months Ended    Six Months Ended
     July 4,
2010
   June  28,
2009
   %
Change
   July 4,
2010
   June  28,
2009
   %
Change

Cost of revenue

   $ 42,456    $ 13,139    223    $ 77,894    $ 25,393    207

Research and development

     16,144      9,591    68      33,216      18,454    80

Sales, general and administrative

     7,691      6,042    27      15,478      11,680    32

Restructuring charges

     —        279    nm      1,483      546    nm

Cost and Operating Expenses as a Percentage of Total Revenue:

 

     Three Months Ended     Six Months Ended  
     July 4,
2010
    June 28,
2009
    July 4,
2010
    June 28,
2009
 

Cost of revenue

   76 %   59 %   69 %   59 %

Research and development

   29      43      29      43   

Sales, general and administrative

   14      27      14      27   

Restructuring charges

   —        1      1      1   

Cost of Revenue

Our cost of revenue consists primarily of the cost of silicon wafers purchased from third-party foundries and third-party costs associated with assembling, testing and shipping of our semiconductors. Because we do not have formal, long-term pricing agreements with our outsourcing partners, our wafer costs and services are subject to price fluctuations based on the cyclical demand for semiconductors among other factors. In addition, after we purchase wafers from foundries, we also incur yield loss related to manufacturing these wafers into usable die. Manufacturing yield is the percentage of acceptable product resulting from the manufacturing process, as identified when the product is tested. When our manufacturing yields decrease, our cost per unit increases. All of these potential issues in our manufacturing process could have a significant adverse impact on our cost of revenue. Cost of revenue also includes accruals for actual and estimated warranty obligations and write-downs of excess and obsolete inventories, payroll and related personnel costs, licensed third-party intellectual property, depreciation of equipment, stock-based compensation expenses and amortization of acquisition-related intangibles.

Cost of revenue increased to $42.5 million for the three months ended July 4, 2010 compared to $13.1 million for the three months ended June 28, 2009. Cost of revenue increased to $77.9 million for the six months ended July 4, 2010 as compared to $25.4 million for the six months ended June 28, 2009. The increase in cost of revenue for both the three and six month periods ended July 4, 2010 compared to the same period last year is directly attributable to our increased sales volume, which was primarily due to our acquisition of the BBA product line. Our gross margins were 24% for the three months ended July 4, 2010 as compared to 41% for the year ago period. Our gross margins were 31% for the six months ended July 4, 2010 compared to 41% for the year ago period. This margin decline was primarily due to our write down of inventory by $12.9 million during the second quarter of 2010 which resulted from changes in our revenue forecast due to a sustained decline in the market for ADSL products. This charge adversely affected gross margin by 23% and 11%, for the three and six months ended July 4, 2010. Margins were also adversely affected by product mix as sales to China and Europe, whose margins are lower, increased while sales to Japan, whose margins are generally higher, declined as a percent of total sales.

Research and development expenses

All research and development (R&D) costs are expensed as incurred and generally consist of compensation and associated costs of employees engaged in research and development; contractors; tape-out costs; reference board development; development testing, evaluation kits and tools; stock based compensation expenses and depreciation expense. Before releasing new products, we incur charges for mask sets, amortization of acquisition-related intangibles, prototype wafers, mask set revisions, bring-up boards and other qualification materials, which we refer to as tape-out costs. These tape-out costs cause our research and development expenses to fluctuate because they are not incurred uniformly every quarter.

R&D expenses increased $6.5 million, or 68%, to $16.1 million for the three months ended July 4, 2010 compared to $9.6 million for the three months ended June 28, 2009. The increase in R&D costs is directly related to our acquisition of the BBA product line. Major cost increases included: (1) higher personnel costs of $4.9 million, (2) higher tape out costs of $1.0 million, (3) higher back end costs of $0.9 million and (4) higher facilities costs of $0.6 million.

 

18


Table of Contents

R&D expenses increased $14.8 million, or 80%, to $33.2 million for the six months ended July 4, 2010 compared to $18.5 million for the six months ended June 28, 2009. The increase in R&D costs is directly related to our acquisition of the BBA product line. Major cost increases included: (1) higher personnel costs of $10.1 million, (2) higher tape out costs of $1.4 million, (3) higher back end costs of $1.9 million and (4) higher facilities costs of $1.1 million.

The majority of our R&D personnel are located in the United States or India. As of July 4, 2010, we had 329 people engaged in research and development of which 116 were located in India, 169 were located in the United States, 34 were located in China and 10 were located in other facilities. As of June 28, 2009, we had 137 people engaged in research and development of whom 65 were located in India, 63 were located in the United States and 9 in other facilities. The increase in R&D personnel was directly related to our acquisition of the BBA product line.

Selling, general and administrative expenses

Selling, general and administrative (SG&A) expenses generally consist of compensation and related expenses for personnel; public company costs; legal, recruiting and auditing fees; and deprecation. SG&A expenses increased by $1.7 million for the three months ended July 4, 2010, or 27%, to $7.7 million compared to $6.0 million for the three months ended June 28, 2009. The increase in SG&A costs is directly attributable to the acquisition of the BBA product line. This resulted in higher personnel costs of $2.0 million and higher intangible assets amortization of $0.5 million. These costs were offset by lower legal and auditing costs of $0.7 million and $0.3 million of business development costs related to our acquisition of the BBA product line.

SG&A expenses increased by $3.8 million for the six months ended July 4, 2010, or 33%, to $15.5 million compared to $11.7 million for the six months ended June 28, 2009. The increase in SG&A costs is directly attributable to the acquisition of the BBA product line. This resulted in higher personnel costs of $3.3 million, increased intangible asset amortization costs of $1.0 million. These costs were offset by lower legal and auditing costs of $0.8 million and $0.3 million of business development costs related to the acquisition of the BBA product line.

As of July 4, 2010, SG&A headcount was 105 compared to 71 at June 28, 2009.

Restructuring

During the first quarter of 2010, we implemented a plan to restructure our work force and reduce our cost structure subsequent to our 2009 acquisition of the BBA product line. Restructuring charges, consisting of severance and benefits costs, were $1.5 million. We expect the remaining severance and benefit costs of $0.3 million to be paid in 2010.

Interest Income and Other, Net

Interest income and other, net consists primarily of interest income earned on our cash, cash equivalents and investments, as well as other non-operating expenses including gains and losses on foreign exchange and the sales of fixed assets. Interest income was $0.1 million for the three months ended July 4, 2010 as compared to $0.2 million for the three months ended June 28, 2009. The decrease was due to lower investment balances and lower interest rates. Interest income for the second quarter of 2010 was offset by foreign exchange losses of $0.1 million. Interest income and other, net decreased to $0.2 million for the six months ended July 4, 2010 compared to $0.5 million for the six months ended June 28, 2009. The decrease was due to a lower balance of cash and investments and losses on foreign exchange.

Provision for Income Taxes

Income taxes are comprised mostly of foreign income taxes and state minimum taxes. The Company maintains a full valuation allowance for its tax assets as a result of recurring losses. The provision for income taxes was immaterial for the three and six month periods ended July 4, 2010 and June 28, 2009, respectively.

Net Loss

As a result of the above factors, we had a net loss of $10.7 million for the three months ended July 4, 2009 compared to a net loss of $6.4 million for the three months ended June 28, 2009. We had a net loss of $15.1 million for the six months ended July 4, 2010 compared to a net loss of $12.5 million for the six months ended June 28, 2009.

Liquidity and Capital Resources

Year-to-date, cash and investments decreased by $9.7 million to $18.5 million as of July 4, 2010 versus $28.2 million as of January 3, 2010.

 

19


Table of Contents

Since December 31, 2006 we have had a steady decline in cash and investments as we have experienced operating losses in each year. In response to market conditions and a decline in demand for certain products, the Company initiated a worldwide restructuring plan to align our operating expenses with our revised revenue forecast to achieve profitability while reallocating engineering resources to the continued development of innovative broadband and technology.

If there continue to be further declines in demand for certain products, including ADSL products, or if our results fall short of our projected revenue, operating income and cash flow forecasts for the remainder of 2010 or if we are unable to meet future expectations or rebuild our technology and product leadership while driving new product future revenue growth, our goodwill, intangible assets and other long lived assets may be impaired. If we were to record an impairment, the charges might be material to the results of operations and our financial position.

As of July 4, 2010, we have funded our operations primarily through cash from private and public offerings of our common stock, cash generated from the sale of our products and proceeds from the exercise of stock options and stock purchased under our employee stock purchase plan. Our uses of cash include payroll and payroll-related expenses, manufacturing costs, purchases of equipment, tools and software and operating expenses, such as tape outs, marketing programs, travel, professional services and facilities and related costs. We have used, and intend to continue to use, the net proceeds for working capital and general corporate purposes.

The following table summarizes our statement of cash flows for the six months ended July 4, 2010 and June 28, 2009 (in millions):

 

     Six Months Ended  
     July 4, 2010     June 28, 2009  

Statements of Cash Flows Data:

    

Cash and cash equivalents - beginning of period

   $ 13.3      $ 27.2   

Net cash used by operating activities

     (8.8 )     (3.6 )

Net cash provided by investing activities

     10.8        12.3   

Net cash provided by financing activities

     0.9        0.1   
                

Cash and cash equivalents - end of period

   $ 16.2      $ 36.0   
                

Operating Activities

For the six months ended July 4, 2010, we used $8.8 million of net cash in operating activities, while incurring a net loss of $15.1 million. Included in the net loss was approximately $8.5 million in various non-cash expenses consisting of depreciation and amortization, stock based compensation expense and amortization of intangible assets and acquired technology. Net inventory decreased $7.3 million. Cash flow from operating activities was adversely affected by increases in accounts receivable and prepaid and other assets of $4.0 million and 2.3 million, respectively, and a decrease in accounts payable and accrued liabilities of $3.3 million.

For the six months ended June 28, 2009, we used $3.6 million of net cash in operating activities, while incurring a net loss of $12.5 million. Included in the net loss was approximately $7.8 million in various non-cash expenses consisting of depreciation and amortization, stock based compensation expense and amortization of intangible assets and acquired technology. Operating cash flows also benefited from a decrease in accounts receivable of $3.5 million and inventory of $1.6 million. Prepaid and other assets increased by $1.6 million while accounts payable and accrued liabilities fell by $2.6 million.

Investing Activities

Investing activities provided $10.8 million for the six months ended July 4, 2010, primarily consisting of the maturities and sales of short-term investments of $12.6 million offset by capital expenditures of $1.8 million. Investing activities provided $12.3 million for the six months ended June 28, 2009, primarily consisting of the sales of short-term investments of $19.1 million offset by purchases of short term investments amounting to $6.6 million.

We have classified our investment portfolio as “available for sale,” and our investment objectives are to preserve principal and provide liquidity, while maximizing yields without significantly increasing risk. We may sell an investment at any time if the quality rating of the investment declines; the yield on the investment is no longer attractive; or we are in need of cash. We have used cash to acquire businesses and technologies that enhance and expand our product offering and, we anticipate that we will continue to do so in the future. The nature of these transactions makes it difficult to predict the amount and timing of such cash requirements. We anticipate that we will continue to purchase necessary property and equipment in the normal course of our business. The amount and timing of these purchases and the related cash outflows in future periods depend on a number of factors, including the hiring of employees, the rate of change of computer hardware and software used in our business and our business outlook.

 

20


Table of Contents

Financing Activities

Our financing activities provided $0.9 million for the six months ended July 4, 2010 primarily resulting from the purchase of stock under our employee stock purchase plan and from the exercise of employee stock options. Our financing activities provided $0.1 million for the six months ended June 28, 2009 primarily resulting from the exercise of employee stock options.

We believe that our existing cash, cash equivalents and cash flows expected to be generated from future operations, if any, will be sufficient to meet our anticipated cash needs for at least the next twelve months. Our future capital requirements will depend upon many factors including our rate of revenue growth, our ability to develop future revenue streams, the timing and extent of spending to support development efforts, the expansion of sales and marketing activities, the timing of introductions of new products and enhancements to existing products, the costs to ensure access to adequate manufacturing capacity and the continuing market acceptance of our products. Additionally in the future, we may become party to agreements with respect to potential investments in, or acquisitions of, other complementary businesses, products or technologies, which could also require us to seek additional equity or debt financing. The sale of additional equity securities or convertible debt securities would result in additional dilution to our stockholders. Additional debt would result in increased interest expenses and could result in covenants that would restrict our operations. We have not made arrangements to obtain debt financing, and there is no assurance that such financing, if required, will be available in amounts or on terms acceptable to us, if at all.

Contractual Commitments and Off-Balance Sheet Arrangements

We do not use off balance sheet arrangements with unconsolidated entities or related parties, nor do we use other forms of off balance sheet arrangements such as special purpose entities and research and development arrangements. Accordingly, our liquidity and capital resources are not subject to off balance sheet risks from unconsolidated entities.

We lease certain office facilities, equipment and software under non-cancelable operating leases. The following table summarizes our contractual obligations as of July 4, 2010, and the effect those obligations are expected to have on our liquidity and cash flow in future periods (in millions):

     Total    Remainder
of 2010
   2011 and
2012
   2013 and
2014

Operating lease payments

   $ 6.6    $ 2.1    $ 3.4    $ 1.1

Software

     5.2      1.3      3.9      —  

Technology license agreement

     1.7      1.7      —        —  

Inventory purchase obligations

     8.4      8.4      —        —  
                           
   $ 21.9    $ 13.5    $ 7.3    $ 1.1
                           

For the purpose of this table, purchase obligations for the purchase of goods or services are defined as agreements that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. Our purchase orders are based on our current manufacturing needs and are fulfilled by our vendors within short time horizons. In addition, we have purchase orders that represent authorizations to purchase rather than binding agreements. We do not have significant agreements for the purchase of raw materials or other goods specifying minimum quantities or set prices that exceed our expected requirements.

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant, and we are unable to estimate the maximum potential impact of these indemnification provisions on our future consolidated results of operations.

Recent Accounting Pronouncements

Recent accounting pronouncements are detailed in Note 1 to our Condensed Consolidated Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

All market risk sensitive instruments were entered into for non-trading purposes. We do not use derivative financial instruments for speculative trading purposes. As of July 4, 2010, we did not hold derivative financial instruments.

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments in our investment portfolio. The primary objectives of our investment activities are to preserve principal and meet liquidity needs, while maximizing yields and without significantly increasing risk. Our investment policy specifies credit quality standards for our investments and limits the amount of credit exposure to any single issue, issuer, or type of investment. Our investments consist primarily of U.S. government notes and bonds, auction rate securities and commercial paper. All investments are carried at market value.

 

21


Table of Contents

As of July 4, 2010, we had cash, cash equivalents and investments totaling $18.5 million. These amounts were invested primarily in money market funds and short-term investments that are held for working capital purposes. We do not enter into investments for trading or speculative purposes. If the return on our cash equivalents and investments were to change by one hundred basis points, the effect would be to increase/decrease investment income by de minimis.

Investment Risk

Our marketable securities portfolio as of July 4, 2010 was $4.6 million, consisting of money market funds of $2.4 million, U.S. government agency securities of $1.5 million and auction rate securities of $0.7 million. The auction rate securities have a face value of $5.0 million and have failed at auction since the third quarter of 2007. The funds associated with these securities will not be accessible until a successful auction occurs, a buyer is found outside of the auction process or the underlying securities have matured.

Foreign Currency Risk

Our revenue and cost, including subcontractor manufacturing expenses, are predominately denominated in U.S. dollars. An increase of the U.S. dollar relative to the currencies of the countries in which our customers operate would make our products more expensive to them and increase pricing pressure or reduce demand for our products. We also incur a portion of our expenses in currencies other than the U.S. dollar, including the Euro, the Japanese yen, Korean won, Indian rupee, Singapore dollar, Chinese Yuan and the Taiwanese dollar. We do not currently enter into forward exchange contracts to hedge exposure denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. If exchange rates were to change by ten percent, the effect would be to change 2010 projected operating expenses by approximately $0.8 million.

 

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer (collectively, our “certifying officers”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as required by Rules 13a-15(b) or 15d-15(b) of the Securities Exchange Act of 1934, as amended. Based on their evaluation, our certifying officers concluded that these disclosure controls and procedures were effective.

We believe that a system of internal controls, no matter how well designed and operated, is based in part upon certain assumptions about the likelihood of future events, and can be affected by limitations inherent in all internal controls systems including the realities that human judgment in decision-making can be faulty, that persons responsible for establishing controls need to consider their relative costs and benefits, that breakdowns can occur because of human failures such as simple error or mistake, and that controls can be circumvented by collusion of two or more people. Accordingly, we believe that our system of internal controls, while effective, can only provide reasonable, not absolute, assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. There was no change in our internal control over financial reporting during the three months ended July 4, 2009 that our certifying officers concluded materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

 

Item 1. Legal Proceedings

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against us, our directors and two former executive officers, as well as the lead underwriters for its initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged material misrepresentations and omissions made by us in connection with both our initial public offering in September 2005 and its follow-on offering in March 2006. On June 25, 2007, We filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We filed an opposition to the motion on July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. Oral argument on the motion for leave to amend has not yet been scheduled. We cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its financial statements.

 

22


Table of Contents

Additionally, from time to time, we are a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, other than that set forth above, we do not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows or financial position.

 

Item 1A. Risk Factors

Our business and operating results are impacted by risks and uncertainties, including the following risk factors, as well as the other information in this quarterly report on Form 10-Q, and in our other filings with the SEC. Additional risks and uncertainties not presently known to us may also affect our business. If any of these known or unknown risks or uncertainties actually occurs, it may materially and adversely affect us, our business, financial condition and results of operations and the market price of our common stock.

Risks Related to Our Customers and Markets

Our quarterly operating results have fluctuated significantly over time and are likely to continue to do so, principally due to the nature of telecommunication service providers’ capital spending cycles, their purchasing practices, the design win process as well as other factors. As a result, we may fail to meet or exceed our revenue forecasts or the expectations of securities analysts or investors, which could cause the market price of our common stock to decline.

The telecommunications semiconductor industry is highly cyclical and subject to rapid change and, from time to time, has experienced significant downturns. These downturns are characterized by decreases in product demand and excess inventories held by our customers, OEMs, and their customers, the telecommunications service providers (also called “service providers”). To respond to these downturns, many service providers slow their capital expenditures, change their purchasing practices to use refurbished rather than new equipment – thereby reducing the demand for new semiconductors by our direct customers, cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies from OEMs, usually with very little notice.

Quarterly fluctuations in revenue are characteristic of our industry. And given the concentration of our revenue among a relatively small number of significant customers and given their buying patterns, we have experienced, and are likely to experience again, significant quarterly fluctuations of revenue.

We win our supply relationships by working with OEMs and service providers to have our semiconductors and software designed into systems that will be deployed by service providers over multiple quarters. At any given time, as is currently the case, we are competing for one or more of these design wins. If we are not successful in obtaining these design wins, our revenue results would be negatively affected, in some cases for an extended period of time. Even when we are designed into OEMs’ equipment, service provider deployments can be affected by various factors, including but not limited to the OEMs’ test and evaluation cycle, demand for DSL-based broadband services, government regulatory actions and competitors’ efforts to protect or gain market share. These factors may result in deployment delays from six months to over a year. We are aware of such deployment delays currently affecting various customers.

The semiconductor industry also periodically experiences increased demand and production capacity constraints, which may affect our ability to ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor or broadband communications industry, which could cause the market price of our common stock to decline.

Historically, our expenses have fluctuated, and are likely to continue to fluctuate, due to factors including new product releases and acquisitions.

Our expenses are also subject to quarterly fluctuations resulting from various factors. Fluctuations in our operating expenses may be due to a number of factors, including, but not limited to, higher expenses associated with new product releases, costs of design tools, large up-front license fees to third parties for intellectual property integrated into our products, as well as extraordinary expenses related to acquisitions of other businesses, such as the recent acquisition of and the Broadband Access product line from Conexant Systems last year. Other factors are identified throughout this Risk Factors section. As a result, quarter to quarter comparisons of our operating expenses and results should not be relied on as an indicator of future performance. If our operating results do not meet the expectations of securities analysts or investors for any quarter or other reporting period, the market price of our common stock may decline.

 

23


Table of Contents

General macroeconomic conditions could dampen demand for services based upon our products.

Our business is not directly tied to the reported causes of the recession that began in the last half of 2008. However, we believe that consumer-targeted broadband services, which are deployed using our technology, are part of most households’ discretionary spending. If individual consumers decide not to install—or decide to discontinue purchasing—broadband services in their homes in order to save money in an uncertain economy, the resulting drop in demand could cause telecommunications service providers to reduce or stop placing orders for OEM equipment containing our products. Accordingly, the OEMs’ demand for our products could drop further, potentially having a materially negative effect on our revenue.

We have had a history of losses, and future losses may cause the market price of our common stock to decline. We may not be able to reduce our expenses or generate sufficient revenue in the future to achieve or sustain profitability.

Since our inception, we have only been profitable on a GAAP basis in the third and fourth quarter of 2005. Prior to the third quarter of 2005, we incurred significant net losses, and we incurred net losses in the past seventeen quarters. Beginning in 2006, accounting rules required us to report stock-based compensation as an expense, which has comprised a substantial portion of our quarterly and annual losses, as reported on a GAAP basis. We have an accumulated deficit of $236.0 million as of July 4, 2010. To achieve profitability again, we will need to generate and sustain higher revenue and to improve our gross margins while maintaining expense levels appropriate and necessary for our business. Because many of our expenses are fixed in the short term, or are incurred in advance of anticipated sales, we may not be able to continue to hold down our expenses in a timely manner to offset any lower-than-forecasted revenue shortfall as we experienced in the fourth quarter of 2006 or the third quarter of 2008. We may not be able to achieve profitability again and, even if it were able to attain profitability again, we may not be able to sustain profitability on an on-going quarterly or an annual basis in the future.

The general tightening of the capital markets could potentially limit our access to financial resources.

If we continue to operate at a loss and the cash on our balance sheet continues to decline, there is a possibility that we could have to seek and evaluate alternative sources of financing in order to fund operations. Recently, we have explored the availability of debt financing, and if general economic conditions worsen again, we believe it would be very difficult to borrow funds on terms favorable to it, if at all, due to the limited availability of credit in the current economic environment. The unavailability of credit along with limits on other financing alternatives could thus negatively impact our business. Even if we were able to secure debt financing, the terms could be unfavorable to us, and we may be subject to various restrictive covenants, which could limit our ability to operate our business.

Our success is dependent upon achieving new design wins into commercially successful systems sold by our OEM and ODM customers.

Our products are generally incorporated into our OEM and ODM customers’ systems at the design stage. As a result, we rely on OEMs to select our products to be designed into their systems, which we refer to as a “design win.” Our customers may only open their systems to new designs on an annual or less-frequent basis. We often incur significant expenditures over multiple fiscal quarters in attempting to obtain a design win without any assurance that an OEM will select our product for design into its own system. If we are not included in a new design, the next opportunity to win a design with that customer may not occur for a year or more. Additionally, in some instances, we are dependent on third parties to obtain or provide information that we need to achieve a design win. Some of these third parties may not supply this information to us on a timely basis, if at all. Furthermore, even if an OEM designs one of our products into its system offering, we cannot be assured that its equipment will be commercially successful or that it will receive any orders and, accordingly, revenue as a result of that design win. Our OEM customers are typically not obligated to purchase our products and can choose at any time to stop using them if their own systems are not commercially successful, if they decide to pursue other systems strategies, or for any other reason. If we are unable to achieve design wins or if our OEM customers’ systems incorporating our products are not commercially successful, our revenue would suffer.

If demand for our semiconductor products declines or does not grow, we will be unable to increase or sustain our revenue, and our operating results will be harmed.

We currently expect our existing commercially available semiconductor products, including the product lines that we acquired from Conexant, to account for substantially all of our revenue for the foreseeable future. If we are unable to design or develop new products or market recently developed products and technology to meet our customers’ demand in a timely manner, if demand for our semiconductors declines or fails to grow, or if the broadband, communication processor or other markets addressable by our products do not materialize as expected, it would harm our business. In addition to being affected by global macroeconomic factors, the markets for our products are characterized by frequent introduction of new features and technologies and by significant price competition. If we or our OEM customers are unable to manage product transitions in a timely and cost-effective manner, our revenue would suffer. In addition, frequent technology changes and introduction of next generation products may result in inventory obsolescence, which would increase our cost of revenue and adversely affect our operating performance.

 

24


Table of Contents

The average selling prices and gross margins of our products are subject to declines, which may harm our revenue and profitability.

Our products are subject to rapid declines in average selling prices due to competitive pressures, including lowering average selling prices in order to maintain or increase market share. We have lowered our prices significantly at times to gain or maintain market share, and we expect that we will reduce prices again in the future. Offering reduced prices to one customer could likely impact our average selling prices to all customers. In addition, we have not been able to reduce our costs of goods sold as rapidly as our prices have declined. Our financial results, in particular (but not limited to) gross margins, will suffer if we are unable to maintain or increase pricing, or are unable to offset any future reductions in our average selling prices by increasing our sales volumes, by reducing our manufacturing costs or by developing new or enhanced products that command higher prices or better gross margins on a timely basis.

An OEM customer or a service provider may decide to cancel, delay or change its product plans, which could cause us to lose or delay anticipated sales.

Even if an OEM customer selects one of our products to incorporate into its equipment, we have no assurances that the customer will ultimately market and sell its equipment or that such efforts by the customer will be successful. The delays inherent in our lengthy sales and product deployment cycles increase the risk that an OEM customer or service provider will decide to cancel or change its product plans. From time to time, we have experienced changes and cancellations in the purchase plans of our OEM customers. A cancellation or change in plans by an OEM customer or service provider could cause us to not achieve anticipated revenue and result in volatility of the market price of our common stock. In addition, our anticipated sales could be lost or substantially reduced if a significant OEM customer or service provider reduces or delays orders during our sales cycle or chooses not to release equipment that contains our products.

Our product sales mix is subject to frequent and unexpected changes, which may impact our revenue and margin.

Our product margins vary widely by product. As a result, a change in the sales mix of our products could have an impact on the forecasted revenue and margins for the quarter. Our Broadband DSL product family generally has higher margins as compared to our Communication Processor product family. Furthermore, the product margins within our Broadband DSL product line can vary based on the type and performance of deployment being used as customers typically pay higher selling prices for higher performance. While we make estimates of what we believe the product mix will be in a given quarter, actual results can be materially different than our estimates.

Our focus on moving away from lower-margin products may not yield the intended benefits we seek to achieve.

We believe it is in the best interests of the Company and its investors to concentrate our development and sales and marketing efforts on products that will yield gross margins at or above the historic levels previously reported by the Company. The discontinuation of lower-margin products over time is intended to fund development of new generations of communications semiconductors that outperform our competition. However, we may not be able to accomplish the end-of-life of all lower margin products in a timely manner, or at all, depending upon customer commitments and other business requirements. The failure to do so would negatively affect our gross margins, diminish our ability to fund product research and development and otherwise be detrimental to our business plans.

Because we depend on a relatively small number of significant customers for a substantial portion of our revenue, the loss of any of our key customers, our inability to continue to sell existing and new products to our key customers in significant quantities or our failure to attract new significant customers could adversely impact our revenue and harm our business.

We derive a substantial portion of our revenue from sales to a relatively small number of customers. As a result, the loss of any significant customer or a decline in business with any significant customer would materially and adversely affect our financial condition and results of operations. The following customers accounted for more than 10% of our revenue for any one of the periods indicated. We have indicated the OEM customer based on information that we receive at the time of ordering.

 

Direct Customer

  

OEM Customer

  

2008

   

2009

   

Six Months Ended
July 4, 2010

 

Alcatel-Lucent and its CMs

  

Alcatel-Lucent

   11   *   15

Sagemcom

  

Sagemcom

   21      19      13   

Flextronics

  

2Wire

   *      *      10   

Paltek Corporation

  

Sumitomo Electric Industries

   23      12      10   

NEC Corporation of America

  

NEC Corporation

   25      11      *   

 

* Less than 10%

 

25


Table of Contents

A small group of OEM customers historically has accounted for a substantial portion of our revenue; the composition of this group has varied, and we expect that it will continue to vary over time. Further, we expect that this small group of customers will continue to account for a substantial portion of our revenue for the foreseeable future. Accordingly, our future operating results will continue to depend on the success of our largest OEM customers and on our ability to sell existing and new products to these customers in significant quantities. Demand for our semiconductor products is based on service provider demand for its OEM customers’ systems products. Accordingly, a reduction in growth of service provider deployment of product that uses our semiconductors would adversely affect our product sales and business.

In addition, our relationships with some of our larger OEM customers may also deter other potential customers who compete with these customers from buying our products. To attract new customers or retain existing OEM customers, we have offered and may continue to offer certain customers favorable prices on our products. If these prices are lower than the prices paid by other existing OEM customers, we may have to offer the same lower prices to certain of these customers. In that event, our average selling prices would decline. The loss of a key customer, a reduction in sales to any major customer, or our inability to attract new significant customers in the absence of any offsetting sales would harm our business.

Recent changes in our senior management positions could negatively affect our operations and relationships with our customers and employees.

On April and June 2010, our President and Chief Executive Officer and Chief Financial Officer resigned, respectively. The Chairman of our Board of Directors served as our interim President and Chief Executive Officer while a search for a permanent replacement was conducted. Since April, a majority of our senior executives have resigned or been replaced. Our Board of Directors appointed a new Chief Financial Officer in June 2010 and a new President and chief Executive Officer in August 2010. Changes in the services of senior management or technical personnel could impact our customer relationships, employee morale, and our ability to operate in compliance with existing internal controls and regulations and harm our business. If the integration of this new member to our senior management team does not go as smoothly as anticipated, it could negatively affect our business.

In addition, we recently announced a corporate restructuring plan which will include a reduction in work force of approximately 20% and may include the closure of three of our overseas offices. The changes in senior management and the multiple restructurings and reductions in force over the past year have had, and may continue to, negatively affect employee morale.

Because competition for qualified personnel is intense in our industry, we may not be able to recruit and retain necessary personnel, which could impact the development or sales or our products.

Our future success depends on our ability to continue to attract, retain and motivate other senior management and qualified technical personnel, particularly software engineers, digital circuit designers, mixed-signal circuit designers and systems and algorithms engineers. Competition for these employees is intense. If we are unable to retain our existing personnel, or attract and train additional qualified personnel, our growth may be limited due to our lack of capacity to develop and market our products. All of our key employees are employed on an “at will” basis. The loss of any of these key employees could slow our product development processes and sales efforts or harm investors’ perception of our business. We may also incur increased operating expenses and be required to divert the attention of other senior executives to recruit replacements for key personnel. Also, we may have difficulty attracting personnel as stock options and other forms of incentive equity grants generally comprise a significant portion of our compensation packages for all employees, and as long as the price of our common stock remains depressed, it may make it more difficult for us to attract and retain key employees, which could harm our ability to provide technologically competitive products.

Because of the rapid technological development in our industry and the intense competition it faces, our products tend to become outmoded or obsolete in a relatively short period of time, which requires us to provide frequent updates and/or replacements to existing products. If we do not successfully manage the transition process to next generation semiconductor products, our operating results may be harmed.

Our industry is characterized by rapid technological innovation and intense competition. Accordingly, our success depends in part on our ability to develop next generation semiconductor products in a timely and cost-effective manner. The development of new semiconductor products is expensive, complex and time consuming. If we do not rapidly develop our new, well-differentiated semiconductor products ahead of our competitors, we may lose both existing and potential customers to competitors. Further, if a competitor develops a new, less expensive product using a different technological approach to delivering broadband services over existing networks, our products would no longer be competitive. Conversely, even if we are successful in rapidly developing new semiconductor products ahead of competitors and we do not cost-effectively manage our inventory levels of existing products when making the transition to the new semiconductor products, our financial results could be negatively affected by high levels of obsolete inventory. If any of the foregoing were to occur, then our operating results would be harmed.

 

26


Table of Contents

Risks Related to the Tallwood Investment

Tallwood Investors may exercise significant influence over us, including through their ability to elect three members of our Board of Directors.

The common stock owned by Tallwood Investors represents approximately 44% of the outstanding shares of our common stock (excluding the exercise of the warrants). Assuming the full exercise of the 7.8 million warrants, the Securities owned by the Tallwood Investors will represent 51% of the outstanding shares of our common stock. Until the third anniversary of the closing of the issuance of the Securities to the Tallwood Investors, the Tallwood Investors have agreed to vote all of their shares in excess of the shares constituting 35% of our Company’s outstanding common stock in the same proportion as the votes cast by all the other Ikanos stockholders. Our Company and the Tallwood Investors have entered into a “Stockholder Agreement”, which, among other things, contains certain governance arrangements and various provisions relating to board composition, stock ownership, transfers by the Tallwood Investors and their affiliates, voting and other matters. Subject to certain exceptions, the Tallwood Investors are permitted under the terms of the Stockholder Agreement to maintain their ownership interest in our Company in subsequent equity offerings by Ikanos. As a result, the Tallwood Investors may have the ability to significantly influence the outcome of any matter submitted for the vote of Ikanos’ stockholders. The Certificate of Designation of the Series A Preferred Stock provides that the Tallwood Investors have the right to designate three directors to our Board of Directors while the Tallwood Investors hold at least 35% of the outstanding our common stock, and a number of directors to Ikanos’ Board of Directors proportional to the Tallwood Investors’ ownership position in Ikanos after such time as the Tallwood Investors hold less than 35% of the outstanding our common stock. As a result, the directors elected to our Board of Directors by the Tallwood Investors may exercise significant influence on matters considered by our Board of Directors. The Stockholder Agreement also includes restraints on the ability of Tallwood Investors to transfer and vote their shares and to acquire additional shares of our Common Stock. The Tallwood Investors may have interests that diverge from, or even conflict with, those of Ikanos and its other stockholders.

The market price of our common stock may decline as a result of future sales of the Securities by the Tallwood Investors.

We are unable to predict the potential effects of the Tallwood Investors ownership of 44% of our outstanding common on the trading activity in and market price of our common stock. Pursuant to the Stockholder Agreement, we have granted the Tallwood Investors and their permitted transferees registration rights for the resale of the shares of our common stock and shares of our common stock underlying the Warrants, in each case, included in the Securities. Under the terms of the registration rights, we have filed a registration statement which permits the resale of such securities into the public market, and any such resale would increase the number of shares of our common stock available for public trading. Sales by the Tallwood Investors or their permitted transferees of a substantial number of shares of our common stock in the public market, or the perception that such sales might occur, could have a material adverse effect on the price of our common stock.

Holders of our common stock will not be entitled to elect a certain number of directors of our Company while the Tallwood Investors control a voting share of our Series A Preferred (the “Voting Share”).

As the holder of the Voting Share, Tallwood III Partners, L.P., has the right to designate three members out of seven members to our Board of Directors while the Tallwood Investors hold at least 35% of the outstanding Ikanos Common Stock, and a number of directors to our Board of Directors proportional to the Tallwood Investors’ ownership position in Ikanos after such time as the Tallwood Investors hold less than 35% of the Company’s outstanding Common Stock. During the time they control the Voting Share, the Tallwood Investors will be able to exert significant influence, and potentially control, over us and may have interests that diverge from, or even conflict with, those of Ikanos and its other stockholders.

Risks Related to Our Operations and Technology

We rely on third-party technologies for the development of our products, and our inability to use such technologies in the future would harm our ability to remain competitive.

We rely on third parties for technologies that are integrated into some of our products, including the memory cells, input/output cells, hardware interfaces and core processor logic. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly, we may not be able to secure alternatives in a timely manner and our ability to remain competitive would be harmed. While we have not experienced material warranty costs in any period as a result of the issue related to this intellectual property, there can be no assurance that it will not in the future experience material damages from this or other licensed intellectual property. Failure to use the technologies we have purchased could also result in unfavorable impairment costs. In addition, if we are unable to successfully license technology from third parties to develop future products, we may not be able to develop such products in a timely manner or at all.

 

27


Table of Contents

We are a fabless semiconductor company and may rely on one wafer foundry and one assembly and test subcontractor to manufacture, package and test each of our products, and our failure to secure and maintain sufficient capacity with these subcontractors, or if a subcontractor ceases operations, or other such developments could impair our relationships with customers and decrease sales, which would negatively impact our market share and operating results.

We are a fabless semiconductor company in that it we do not own or operate a fabrication or manufacturing facility. Currently, nine wafer foundries and six outside factory subcontractors, located in Austria, China, Israel, Korea, Malaysia, Singapore, Thailand, Taiwan, and the United States manufacture, assemble and test all of our semiconductor devices in current production. While we work with multiple suppliers, generally only one foundry and one assembly and test subcontractor may be used for a single product. Accordingly, we are greatly dependent on a limited number of suppliers to deliver quality products on time.

In past periods of high demand in the semiconductor market, we have experienced delays in meeting our capacity demand and as a result were unable to deliver products to our customers on a timely basis. In addition, we have experienced similar delays due to technical and quality control problems. Furthermore, our costs for manufacturing services or components have increased from time to time without significant notice.

In the fall of 2008, we received notice that one of our subcontractors would close a fabrication facility where two of our products were made. The fabrication facility has ceased manufacturing products. Accordingly, we made arrangements for our subcontractor to build an adequate supply of the two products fabricated at this facility sufficient to meet our anticipated demand for the remaining lifetime of these products. Customers will have to migrate to chips manufactured at the new fabrication facility, which could cause delays or loss in customers.

In the future, if any of these events occur, or if the facilities of any of its subcontractors suffer any damage, power outages, financial difficulties or any other disruption due to natural disasters, terrorist acts or otherwise, we may be unable to meet our customer demand on a timely basis, or at all, and we may be required to incur additional costs and may need to successfully qualify an alternative facility in order to not disrupt our business. We typically require several months or more to qualify a new facility or process before it can begin shipping products. If we cannot accomplish this qualification in a timely manner, we would experience a significant interruption in supply of the affected products which could in turn cause our costs of revenue to increase and our overall revenue to decrease. If we are unable to secure sufficient capacity at our subcontractors’ existing facilities, or in the event of a closure or significant delay at any of these facilities, our relationships with customers would be harmed and our market share and operating results would suffer as a result. In addition, we do not have formal pricing agreements with our subcontractors regarding the pricing for the products and services that they provide. If their pricing for the products and services they provide increases and we are unable to pass along such increases to our OEM customers, our operating results would be adversely affected.

In the event we seek to use new wafer foundries to manufacture a portion of our semiconductor products, we may not be able to bring the new foundries on-line rapidly enough and may not achieve anticipated cost reductions.

As indicated above, we use of a limited number of independent wafer foundries to manufacture all of our semiconductor products exposes us to risks of delay, increased costs and customer dissatisfaction in the event that any of these foundries were unable to provide it with our semiconductor requirements. Particularly during times when semiconductor manufacturing capacity is limited, we may seek to qualify additional wafer foundries to meet our requirements. In order to bring these new foundries on-line, our customers may need to qualify product from the new facility, which could take several months or more. Once qualified, these new foundries would then require an additional number of months to actually begin producing semiconductors to meet our needs, by which time the temporary requirement for additional capacity may have passed or the opportunities previously identified may have been lost to our competitors. Furthermore, even if these new foundries offer better pricing than existing manufacturers, if they prove to be less reliable than existing manufacturers, we would not achieve some or all of the anticipated cost reductions.

When demand for manufacturing capacity is high, we may take various actions to try to secure sufficient capacity, which could be costly and negatively impact our operating results.

The ability of each of our subcontractors’ manufacturing facilities to provide us with semiconductors is limited by its available capacity and existing obligations. Although we have purchase order commitments to supply specified levels of products to our OEM customers, we do not have a guaranteed level of production capacity from any of our subcontractors’ facilities that we depend upon to produce semiconductors. Facility capacity may not be available when we need it or at reasonable prices. We place our orders on the basis of our OEM customers’ purchase orders or our forecast of customer demand, and our subcontractors may not be able to meet our requirements in a timely manner. In addition, our subcontractors have also allocated capacity to the production of other companies’ products and reduced deliveries to us on short notice. It is possible that our subcontractors’ other customers that are larger and better financed than we are, or that have long-term agreements with our subcontractors, may have induced the subcontractors to reallocate capacity to them. If this reallocation were to occur again, it would impair our ability to deliver products on a timely basis.

 

28


Table of Contents

In addition, due to the weak global economy, some of our subcontractors laid off employees over the past year and/or shortened work schedules. These reductions in labor and factory operations have resulted in sporadic capacity constraints that could impair our ability to obtain finished products in time to meet customer demand.

In order to secure sufficient manufacturing facility capacity when demand is high and mitigate the risks described in the foregoing paragraphs, we may enter into various arrangements with subcontractors that could be costly and negatively affect our operating results, including:

 

   

option payments or other prepayments to a subcontractor;

 

   

nonrefundable deposits with or loans to subcontractors in exchange for capacity commitments;

 

   

contracts that commit us to purchase specified quantities of components over extended periods;

 

   

purchase of testing equipment for specific use at subcontractors’ facilities;

 

   

issuance of equity securities to a subcontractor; and

 

   

other contractual relationships with subcontractors.

We may not be able to make any such arrangements in a timely fashion or at all, and any arrangements may be costly, reduce our financial flexibility and not be on terms favorable to us. Moreover, if we are able to secure facility capacity, it may be obligated to use all of that capacity or incur penalties. These penalties and obligations may be expensive and could harm our business.

If our subcontractors’ manufacturing facilities do not achieve satisfactory quality or yields, our relationships with our customers and our reputation will be harmed, and our revenue, gross margin and operating results could decline.

Defects in our products may not be always detected by the testing processes performed by our subcontractors or by our staff. Those defects can result from a variety of causes, including but not limited to manufacturing problems or intellectual property licensed from third parties. If defects are discovered after it has shipped products, we have experienced, and could continue to experience, warranty and consequential damages claims from our customers.

We incorporate third party intellectual property into our products. That intellectual property consists of elements of the semiconductor, such as the processor core, standard external interfaces, as well as applications that run on our products. From time to time, our customers have discovered errors or defects arising from these third party intellectual property designs. We and our contract manufacturers attempt to catch these defects in the testing process, but are not always successful. As a result, we have to work with our customers to resolve the issues that they experience when integrating our products into their systems. If we are unable to deliver quality products, our reputation would be harmed, which could result in the loss of, future orders and business with our customers. If any of these adverse risks are realized and we are not able to offset the lost opportunities, our revenue, margins and operating results would decline.

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. We have experienced difficulties in achieving acceptable yields on some of our products, particularly with new products, which frequently involve newer manufacturing processes and smaller geometry features than previous generations. Maintaining high numbers of shippable die per wafer is critical to our operating results, as decreased yields can result in higher per unit cost, shipment delays and increased expenses associated with resolving yield problems.

Although we work closely with our subcontractors to minimize the likelihood of defects that cause reduced manufacturing yields, the subcontractors’ facilities have from time to time experienced lower than anticipated manufacturing yields that have, in turn, resulted in our inability to meet our customer demand. We have been experiencing manufacturing defect rates for one of our products that are higher than the rates it experiences with our other products. We believe that our operations and quality teams have been able to reduce the defect rate for this product to a normal level. However, if we experience these issues again in the future, our revenues could be materially reduced and our warranty-related costs could be materially higher than currently anticipated.

It is common for yields in semiconductor fabrication facilities to fluctuate in times of high demand or due to poor 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, regardless of when the problems are detected, they may be time consuming and expensive to correct. In addition, because we purchase wafers, our exposure to low wafer yields from our subcontractors’ wafer foundries are increased. Poor yields from the wafer foundries or defects, integration issues or other performance problems in our products could cause our significant customer relations and business reputation problems, or force us to sell our products at lower gross margins and therefore harm our financial results. Conversely, unexpected yield improvements could result in us holding excess inventory that would also increase our product cost and negatively impact our profitability.

 

29


Table of Contents

We base orders for inventory on the forecasts of our OEM customers’ demand and if our forecasts are inaccurate, our financial condition and liquidity would suffer.

We place orders with its suppliers based on the forecasts of our OEM customers’ demand. Our forecasts are based on multiple assumptions, each of which may introduce errors into our estimates. In the past, when the demand for our OEM customers’ products increased significantly, we were not able to meet demand on a timely basis, and we expended a significant amount of time working with our customers to allocate limited supply and maintain positive customer relations. As our network of distributors increases, we increase the possibility that we may receive orders from these distributors that have a delivery date sooner than our manufacturing subcontractors can build and deliver product to us. In the past, we have experienced situations in which lead times discussed with customers were shorter than the manufacturing lead times available for the products ordered by those customers. We have had to work with these customers and our manufacturing subcontractors, to better align our ability to deliver products with our customers’ expectations.

If we underestimate or are otherwise surprised by increases in customer demand, we may forego revenue opportunities, lose market share and damage customer relationships. Conversely, if we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell. As a result, as experienced in the Second Quarter of Fiscal 2010, we would have excess or obsolete inventory, resulting in a decline in the value of our inventory, which would increase our cost of revenue, negatively affect gross margins, and create a drain on our liquidity. Our failure to accurately manage inventory against demand would adversely affect our financial results.

To remain competitive, we need to continue to reduce the cost of our semiconductor chips, which includes migrating to smaller geometrical processes, and our failure to do so may harm our business.

We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometrical processes, which are measured in microns or nanometers. We have designed our products to be manufactured in 0.8 micron to 0.065 micron geometry processes. We may migrate some of our current products to smaller geometry process technologies, and over time, we are likely to migrate to even smaller geometries. A smaller geometry generally reduces our production costs, which may enable us to be competitive in our pricing. The transition to smaller geometries requires us to work with our subcontractors to modify the manufacturing processes for our products, to develop new and more complex quality assurance tests and to redesign some products. 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 product costs and 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 customers, which would have a negative impact on our sales. Additionally, upfront expenses associated with smaller geometry process technologies such as for masks and tooling can be significantly higher than those for the processes that we currently use, and our migration to these newer process technologies can result in significantly higher research and development expenses.

The complexity of our products could result in unforeseen delays or expenses and in undetected defects or bugs, which could damage our reputation with current or prospective customers and adversely affect the market acceptance of new products.

Highly complex products such as those that we offer frequently contain defects (commonly referred to as “bugs”), particularly when they are first introduced or as new versions are released. In the past, we have experienced, and may in the future experience, defects or bugs in our products. These defects or bugs may originate in third party intellectual property incorporated into our products as well as in technology or software designed by our engineers. Some customers do not detect defects that are experienced later by other customers due to variations in how each customer integrates our semiconductors into their equipment. If any of our products contains defects or bugs, or have reliability, quality or compatibility problems, our reputation may be damaged; and our OEM 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 or bugs could interrupt or delay sales or shipment of our products to our customers.

Third-party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesign our products or seek licenses from third parties, and harm our business. In addition, any litigation required to defend such claims could result in significant expenses and diversion of our resources.

 

30


Table of Contents

Companies in the semiconductor industry and intellectual property holding companies (also called “patent trolls”) often aggressively protect and pursue their intellectual property rights. From time to time, we receive, and we are likely to continue to receive in the future, notices that claim our products infringe upon other parties’ proprietary rights. We are also aware that one of our customers was recently sued by a patent holder that alleges that certain products which were acquired as part of the BBA product line acquisition, infringe a patent held by that party. At this time, we have not been named as a party to that litigation. While we do not believe that we are currently infringing the proprietary rights of the party in the pending litigation, or any other third parties, we may in the future be engaged in litigation with parties who claim that we have infringed their patents or misappropriated or misused their trade secrets or who may seek to invalidate one or more of our patents, and it is possible that we would not prevail in any future lawsuits. An adverse determination in any of these types of claims could prevent us from manufacturing or selling some of our products, could increase our costs of products and could expose us to significant liability. Any of these claims could harm our business. For example, in a patent or trade secret action, a court could issue a preliminary or permanent injunction that would require us to withdraw or recall certain products from the market or redesign certain products offered for sale or that are under development. In addition, we may be liable for damages for past infringement and royalties for future use of the technology and we may be liable for treble damages if infringement is found to have been willful. Even if claims against us are not valid or successfully asserted, these claims could result in significant costs and a diversion of management and personnel resources to defend.

Any potential dispute involving our patents or other intellectual property could also include our manufacturing subcontractors and OEM customers and/or service providers using our products, which could trigger our indemnification obligations to one or more of them and result in substantial expense to us.

In any potential dispute involving our patents or other intellectual property, our manufacturing subcontractors and OEM customers could also become the target of litigation. Because we often indemnify our customers for intellectual property claims made against them for products incorporating our technology, any litigation could trigger technical support and indemnification obligations in some of our license agreements, which could result in substantial expenses such as increased legal expenses, damages for past infringement or royalties for future use. From time to time, we receive notices that customers have received potential infringement notices from third parties. While we have not incurred any indemnification expenses as a result of notices received to date, any future indemnity claim could adversely affect our relationships with our OEM customers and result in substantial costs to us.

We face intense competition in the semiconductor industry and the broadband communications markets, which could reduce our market share and negatively impact our revenue.

The semiconductor industry and the broadband communications markets are intensely competitive. In the VDSL or VDSL-like technology, PON and communications processing markets, we currently competes or expects to compete with, among others, Broadcom Corporation, BroadLight, Inc., Cavium Networks, Inc., Freescale Semiconductor, Inc., Lantiq Deutschland GmbH, Marvell Technology Group Ltd., PMC-Sierra, Inc., Realtek Semiconductor Corp and TrendChip Technologies Corp. We expect competition to continue to increase. Competition has resulted and may continue to result in declining average selling prices for our products and market share.

We consider other companies that have access to DMT technology as potential competitors in the future, and 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 semiconductors. To remain competitive, we need to provide products that are designed to meet our customers’ needs. Our products must:

 

   

achieve optimal product performance;

   

comply with industry standards;

   

be cost-effective for its customers’ use in their systems;

   

meet functional specifications;

   

be introduced timely to the market; and

   

be supported by a high-level of customer service and support.

Many of our competitors may have stronger manufacturing subcontractor relationships than we have. In addition, many of our competitors have extensive technology libraries that could enable them to incorporate broadband or communications processing technologies into a system on a chip, creating a more attractive product line than ours. Many of them also have longer operating histories, greater name recognition, larger customer bases, and significantly greater financial, sales and marketing, manufacturing, distribution, technical and other resources than we do. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. In addition, current and potential competitors have established or may establish financial or strategic relationships among themselves or with existing or potential customers, resellers or other third parties. Accordingly, new competitors or alliances among competitors could emerge and rapidly acquire significant market share. Existing or new competitors may also develop alternative technologies that more effectively address our markets with products that offer enhanced features and functionality, lower power requirements, greater levels of semiconductor integration or lower cost. We cannot assure that we will be able to compete successfully against current or new competitors, in which case we may lose market share in our existing markets and our revenue may fail to increase or may decline.

 

31


Table of Contents

Other data transmission technologies and communications processing technologies may compete effectively with the service provider services addressed by our products, which could adversely affect our revenue and business.

Our revenue currently is dependent upon the increase in demand for service provider services that use broadband technology and integrated residential gateways. Besides xDSL and other DMT-based technologies, service providers can decide to deploy PON or fiber. In this case, fiber is used to connect directly to the residence instead of using the existing copper phone line. As such, if a service provider decides to deploy FTTH, our xDSL products are not required. For example, a major service provider in Korea announced its intention to use more FTTH deployments in the future. Such deployments of fiber may be in lieu of xDSL products. If more service providers decide to use FTTH deployments, it could harm our xDSL business. Furthermore, residential gateways compete against a variety of different data distribution technologies, including Ethernet routers, set-top boxes provided by cable and satellite providers, wireless (WiFi and WiMax) and emerging power line and multimedia over coax alliance technologies. If any of these competing technologies proves to be more reliable, faster or less expensive than, or has any other advantages over the broadband technologies we provide, the demand for our products may decrease and our business would be harmed.

If we are unable to develop, introduce or to achieve market acceptance of our new semiconductor products, our operating results would be adversely affected.

Our future success depends on our ability to develop new semiconductor products and transition to new products and technologies, introduce these products in a cost-effective and timely manner and convince OEMs to select our products for design into their new systems. Our historical quarterly results have been, and we expect that our future results will continue to be, dependent on the introduction of a relatively small number of new products over the next several quarters and the timely completion and delivery of those products to customers. The development of new semiconductor products is complex, and from time to time we have experienced delays in completing the development and introduction of new products. We have in the past invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. In addition, we have substantially expanded our product line, and the resulting product development and support demands on our engineering organization, through the recently-completed acquisition of the BBA product line from Conexant.

Our ability to develop and deliver new semiconductor products successfully will depend on various factors, including our ability to:

 

   

successfully integrate certain technologies acquired in acquisitions into our product lines;

 

   

accurately predict market requirements and evolving industry standards;

 

   

accurately define new semiconductor products;

 

   

timely complete and introduce new product designs or features;

 

   

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 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 OEM customers’ products.

If we are unable to develop and introduce new semiconductor products successfully and in a cost-effective and timely manner, we will not be able to attract new customers or retain our existing customers, which would harm our business.

Rapidly changing standards and regulations could make our products obsolete, which would cause our revenue and operating results to suffer.

We design our products to conform to regulations established by governments and to standards set by industry standards bodies worldwide such as the Committee T1E1.4 (now known as NIPP-NAI) of the ATIS (accredited by ANSI), and worldwide by both the IEEE and the ITU-T. Because our products are designed to conform to current specific industry standards, if competing standards emerge that are preferred by our customers, we would have to make significant expenditures to develop new products. If our customers adopt new or competing industry standards with which our products are not compatible, or the industry groups adopt standards or governments issue regulations with which our products are not compatible, our existing products would become less desirable to our customers, and our revenue and operating results would suffer.

If we fail to secure or protect our intellectual property rights, competitors may be able to use our technologies, which could weaken our competitive position, reduce our revenue or increase our cost.

 

32


Table of Contents

Our success will depend, in part, on our ability to protect our intellectual property. We rely on a combination of patent, copyright, trademark and trade secret laws, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. Our pending patent applications may not result in issued patents, and our existing and future patents may not be sufficiently broad to protect our proprietary technologies or may be held invalid or unenforceable in court. While we are not currently aware of misappropriation of our existing technology, policing unauthorized use of our technology is difficult and we cannot be certain that the steps we have taken will prevent the misappropriation or unauthorized use of our technologies, particularly in foreign countries where we have not applied for patent protections and, even if such protections were available, the laws may not protect our proprietary rights as fully as United States law. The patents we have obtained or licensed, or may obtain or license in the future, may not be adequate to protect our proprietary rights. Our competitors may independently develop or may have already developed technology similar to us, duplicate our products or design around any patents issued to us or our other intellectual property. In addition, we have been, and may be, required to license our patents as a result of our participation in various standards organizations. If competitors appropriate our technology and it is not adequately protected, our competitive position would be harmed, our legal costs would increase and our revenue would be harmed.

Changes in current or future laws or regulations or the imposition of new laws or regulations by federal or state agencies or foreign governments could impede the sale of our products or otherwise harm our business.

The effects of regulation on our customers or the industries in which they operate may materially and adversely impact our business. For example, India’s government is currently considering regulation that may limit or prohibit sales of certain telecommunications products manufactured in China. While the rule-making process is not final, if the rules apply to equipment containing our semiconductor products, such regulation could reduce sales of our products and have a negative effect on our operating results.

In addition, the Ministry of Internal Affairs and Communications in Japan, the Ministry of Communications and Information in Korea, various national regulatory agencies in Europe, as well as the European Commission in the European Union, along with the U.S. Federal Communications Commission have broad jurisdiction over our target markets. Although the laws and regulations of these and other federal or state agencies may not be directly applicable to our products, they do apply to much of the equipment into which our products are incorporated. Governmental regulatory agencies worldwide may affect the ability of telephone companies to offer certain services to their customers or other aspects of their business, which may in turn impede sales of our products.

In addition to the laws and regulations specific to telecommunications equipment, other laws and regulations affect our business. For instance, changes in tax, employment and import/export laws and regulations, and changes their enforcement, commonly occur in the various countries in which we operate. If changes in those law and regulations, or in the enforcement of those laws and regulations, occur in a manner we did not anticipate, those changes could cause us to have increased operating costs or to pay higher taxes, and thus have a negative effect on our operating results.

Compliance with the requirements imposed by Section 404 of the Sarbanes-Oxley Act, referred to as SOX, could harm our operating results, ability to operate our business and our investors’ view of our company.

If we do not maintain the adequacy of our internal controls, as standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we has effective internal control over financial reporting in accordance with Section 404 of SOX. There is a risk that neither our company, nor our independent registered public accounting firm, will be able to conclude that our internal control over financial reporting is effective as required by Section 404 of SOX. In addition, during the course of our testing we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by SOX for compliance with the requirements of Section 404. Effective internal controls particularly those related to revenue recognition, valuation of inventory and warranty provisions, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

Compliance with changing regulation of corporate governance and public disclosure may result in additional expenses.

 

33


Table of Contents

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, the Investor Protection and Securities Reform Act of 2010, SEC regulations and NASDAQ rules, are creating uncertainty for companies such as ours. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and corporate governance practices. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our ongoing efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our management’s required assessment of our internal control over financial reporting and our independent registered public accounting firm’s attestation of the effectiveness of internal control over financial reporting have required the commitment of significant financial and managerial resources. We expect these efforts to require the continued commitment of significant resources. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

We are highly dependent upon manufacturing, development and marketing activities outside of the United States, and as our international manufacturing, development and sales operations expand, we will be increasingly exposed to various legal, business, political and economic risks associated with our international operations.

We currently obtain substantially all of our manufacturing, assembly and testing services from suppliers and subcontractors located outside the United States, and have a significant portion of our research and development team located in China, India and France. In addition, 98% of our revenue for the six months ended July 4, 2010 and 92% of our revenue for the year ended January 3, 2010 were derived from sales to customers outside the United States. We have expanded our international business activities and may open other design and operational centers abroad. International operations are subject to many other inherent risks, including but not limited to:

 

   

political, social and economic instability, including war and terrorist acts;

 

   

exposure to different legal standards, particularly with respect to intellectual property;

 

   

trade and travel restrictions;

 

   

the imposition of governmental controls and restrictions or unexpected changes in regulatory requirements;

 

   

burdens of complying with a variety of foreign laws;

 

   

import and export license requirements and restrictions of the United States and each other country in which we operate;

 

   

foreign technical standards;

 

   

changes in tariffs;

 

   

difficulties in staffing and managing international operations;

 

   

foreign currency exposure and fluctuations in currency exchange rates;

 

   

difficulties in collecting receivables from foreign entities or delayed revenue recognition; and

 

   

potentially adverse tax consequences.

Because we are currently substantially dependent on our foreign sales, research and development and operations, any of the factors described above could significantly harm our ability to produce quality products in a timely and cost effective manner, and increase or maintain our foreign sales.

Fluctuations in exchange rates between and among the Euro, the Indian rupee, the Japanese yen, the Korean won, the Singapore dollar and the U.S. dollar, and, as well as other currencies in which we do business, may adversely affect our operating results.

 

34


Table of Contents

We maintain extensive operations internationally. We have offices in China, India and other offices in France, Germany, Japan, Korea, Singapore and Taiwan. We incur a portion of our expenses in currencies other than the U.S. dollar, including the Chinese Yuan, the Euro, the Indian rupee, the Korean won, the Japanese yen, Singapore dollar and the Taiwanese dollar. As a result, we may experience foreign exchange gains or losses due to the volatility of these currencies compared to the U.S. dollar. Because we report our results in U.S. dollars, the difference in exchange rates in one period compared to another directly impacts period to period comparisons of our operating results. In addition, our sales have been historically denominated in U.S. dollars. Currency exchange rates have been especially volatile in the recent past and these currency fluctuations may make it difficult for us to predict and/or provide guidance on our results. Currently, we have not implemented any strategies to mitigate risks related to the impact of fluctuations in currency exchange rates and we cannot predict future currency exchange rate changes.

Several of the facilities that manufacture our products, most of our OEM customers and the service providers they serve, and our California facility are located in regions that are subject to earthquakes and other natural disasters.

Several of our subcontractors’ facilities that manufacture, assemble and test our products, and four of our subcontractor’s wafer foundries, are located in Malaysia, Singapore and Taiwan. Several large customers are located in Japan and Korea. The Asia-Pacific region has experienced significant earthquakes and other natural disasters in the past, including a recent major earthquake in Taiwan, and could be subject to additional seismic activities. Any earthquake or other natural disaster in these areas could significantly disrupt these manufacturing facilities’ production capabilities and could result in our experiencing a significant delay in delivery, or substantial shortage of wafers, in particular, and possibly in higher wafer prices, and our products in general. Our headquarters in California are also located near major earthquake fault lines. If there is a major earthquake or any other natural disaster in a region where one of our facilities is located, it could significantly disrupt our operations.

Changes in our tax rates could affect our future results.

Our future effective tax rates could be favorably or unfavorably affected by the absolute amount and future geographic distribution of our pre-tax income, our ability to successfully shift our operating activities to foreign operations and the amount and timing of inter-company payments from our foreign operations subject to U.S. income taxes related to the transfer of certain rights and functions.

Risks Related to Our Common Stock

The market price of our common stock has been and may continue to be volatile, and holders of our common stock may not be able to resell shares at or above the price paid, or at all.

The market price of our common stock has fluctuated substantially since our initial public offering and is likely to continue to be highly volatile and subject to wide fluctuations. Fluctuations have occurred and may continue to occur in response to various factors, many of which we cannot control, including:

 

   

quarter-to-quarter variations in our operating results;

 

   

announcements of changes in our senior management;

 

   

the gain or loss of one or more significant customers or suppliers;

 

   

announcements of technological innovations or new products by our competitors, customers or our Company;

 

   

the gain or loss of market share in any of our markets;

 

   

general economic and political conditions and specific conditions in the semiconductor industry and broadband technology markets, including seasonality in sales of consumer products into which our products are incorporated;

 

   

continuing international conflicts and acts of terrorism;

 

   

changes in earnings estimates or investment recommendations by analysts;

 

   

changes in investor perceptions;

 

   

changes in product mix; or

 

   

changes in expectations relating to our products, plans and strategic position or those of our competitors or customers.

The closing sale price of our common stock on the NASDAQ Global Market for the period of January 1, 2007 to July 4, 2010 ranged from a low of $1.02 to a high of $9.34.

In addition, the market prices of securities of semiconductor and other technology companies have been volatile, particularly companies, like ours, with low trading volumes. 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. Accordingly, holders of our common stock may not be able to resell their shares at or above the price paid.

 

35


Table of Contents

If we fail to continue to meet all applicable NASDAQ Global Market requirements, our stock could be delisted from the NASDAQ Global Market. If delisting occurs, it would adversely affect the market liquidity of our common stock and harm our business.

Our common stock is currently traded on the NASDAQ Global Market under the symbol “IKAN.” If we fail to meet any of the continued listing standards of the NASDAQ Global Market, our common stock could be delisted from the NASDAQ Global Market. These continued listing standards include specifically enumerated criteria, including a $1.00 minimum closing bid price.

Our common stock has traded near $1.00 per share in the past. If our common stock trades below $1.00 per share for a period of 30 consecutive business days, there can be no assurance that NASDAQ will not take action to enforce its listing requirements. Any delisting could adversely affect the market price of, and liquidity of the trading market for, our common stock, our ability to obtain financing for the continuation of its operations and could result in the loss of confidence by investors, suppliers and employees.

The pending class action litigation could cause us to incur substantial costs and divert our management’s attention and resources.

In November 2006, three putative class action lawsuits were filed in the United States District Court for the Southern District of New York against us, our directors and two former executive officers, as well as the lead underwriters for its initial and secondary public offerings. The lawsuits were consolidated and an amended complaint was filed on April 24, 2007. The amended complaint sought unspecified damages for certain alleged material misrepresentations and omissions made by the Company in connection with both our initial public offering in September 2005 and its follow-on offering in March 2006. On June 25, 2007, we filed motions to dismiss the amended complaint, and on March 10, 2008, the Court dismissed the case with prejudice. On March 25, 2008, plaintiffs filed a motion for reconsideration, and on June 12, 2008, the District Court denied the motion for reconsideration. On October 15, 2008, plaintiffs appealed the District Court’s dismissal of the amended complaint and denial of its motion for reconsideration to the United States Court of Appeals for the Second Circuit. On September 17, 2009, the Court of Appeals affirmed the District Court’s dismissal of the amended complaint, but vacated its judgment on the motion for reconsideration and remanded the case to the District Court for further proceedings. On May 13, 2010, the District Court granted plaintiffs leave to file a motion to amend the pleadings. Plaintiffs filed a motion for leave to amend the complaint on June 11, 2010. We filed an opposition to the motion on July 11, 2010, and plaintiffs filed a reply in support of the motion on August 10, 2010. We cannot predict the likely outcome of the motion for leave to amend, and an adverse result in the litigation could have a material effect on its financial statements.

Additionally, from time to time, the Company is a party to various legal proceedings and claims arising from the normal course of business activities. Based on current available information, other than set forth above, the Company does not expect that the ultimate outcome of any currently pending unresolved matters, individually or in the aggregate, will have a material adverse effect on its results of operations, cash flows or financial position.

If the securities analyst who currently publishes reports on Ikanos does not continue to publish research or reports about our business, or if he issues an adverse opinion regarding our common stock, the market price of our common 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. We have lost all the securities research coverage with the exception of one analyst. If this analyst issues an adverse opinion regarding our common stock, the stock price would likely decline. If the analyst ceases coverage of our Company or fails to regularly publish reports on us, we could lose further visibility to the financial markets, which in turn could cause the market price of our common stock or trading volume to decline.

Delaware law and our corporate charter and bylaws contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.

Provisions in our certificate of incorporation may have the effect of delaying or preventing a change of control or changes in our management. These provisions include the following:

 

   

the right of our Board of Directors to elect a director to fill a vacancy created by the expansion of our Board of Directors;

 

   

the establishment of a classified Board of Directors requiring that not all members of the board be elected at one time;

 

   

the prohibition of cumulative voting in the election of directors which would otherwise allow less than a majority of stockholders to elect director candidates;

 

   

the requirement for advance notice for nominations for election to the board of directors or for proposing matters that can be acted upon at a stockholders’ meeting;

 

   

the ability of our Board of Directors to alter our bylaws without obtaining stockholder approval;

 

36


Table of Contents
   

the ability of our Board of Directors to issue, without stockholder approval, up to 1,000,000 shares of preferred stock with terms set by the Board of Directors, which rights could be senior to those of common stock;

 

   

the required approval of holders of at least two-thirds of the shares entitled to vote at an election of directors to adopt, amend or repeal our bylaws or amend or repeal the provisions of our certificate of incorporation regarding the election and removal of directors and the ability of stockholders to take action;

 

   

the required approval of holders of a majority of the shares entitled to vote at an election of directors to remove directors for cause; and

 

   

the elimination of the right of stockholders to call a special meeting of stockholders and to take action by written consent.

We are also subject to provisions of the Delaware General Corporation Law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years after the point in time that such stockholder acquired shares constituting 15% or more of our shares, unless the holder’s acquisition of our common stock was approved in advance by our Board of Directors.

 

Item 6. Exhibits

An Exhibit Index has been attached as part of this Quarterly Report on Form 10-Q and is incorporated herein by reference.

 

37


Table of Contents

SIGNATURES

Pursuant to the requirements 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.

 

    IKANOS COMMUNICATIONS, INC.
Dated: August 11, 2010     By:   /s/ John H. Quigley
      John H. Quigley
      President and Chief Executive Officer
      (Principal Executive Officer)
Dated: August 11, 2010     By:   /s/ Dennis A. Bencala
      Dennis A. Bencala
      Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

38


Table of Contents

IKANOS COMMUNICATIONS, INC.

EXHIBITS TO FORM 10-Q QUARTERLY REPORT

For the Quarter Ended July 4, 2010

 

Exhibit

Number

  

Description

10.1    Summary of Registrant’s 2009 Executive Bonus Program. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on March 9, 2010 (File No. 000-51532).
10.2    Compensatory Arrangements of Certain Officers. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on March 2, 2010 (File No. 000-51532).
10.3    Amendment to Compensatory Arrangements of Certain Officers. Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed with the SEC on March 9, 2010 (File No. 000-51532).
10.4    Amended and Restated 2004 Equity Incentive Plan. Incorporated by reference to the Registrant’s Statement on Form S-8 filed with the SEC on March 26, 2010 (File No. 000-51532).
10.5    Separation and Release Agreement with Craig Garen dated as of April 1, 2010. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the SEC on April 2, 2010 (file No. 000-51532)
10.6*    Separation and Release Agreement with Michael Gulett dated as of April 30, 2010.
10.7*    Separation and Release Agreement with Cory J. Sindelar dated as of June 15, 2010.
10.8*    Offer letter with Dennis Bencala dated as of August 2, 2010
10.9*    Offer letter with John Quigley dated as of August 3, 2010.
31.1*    Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*    Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*    Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

* Filed Herewith.

 

39