e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended December 31, 2008
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-33435
Cavium Networks, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0558625
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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805 East
Middlefield Road
Mountain View, CA 94043
(650) 623-7000
(Address
of principal executive offices)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 par value
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The NASDAQ Stock Market LLC
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(Title of Class)
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Smaller reporting company
o
(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange Act). YES
o NO
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As of June 30, 2008, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the voting stock held by
non-affiliates was $743,418,606, based on the number of shares
held by non-affiliates of the registrant, and based on the
reported last sale price of common stock on The NASDAQ Global
Market for such date. For purposes of determining whether a
stockholder was an affiliate of the registrant at June 30,
2008, the registrant assumed that a stockholder was an affiliate
of the registrant at June 30, 2008 if such stockholder
beneficially owned 10% or more of the registrants common
stock as represented by the filing of Schedule 13G with the
Securities and Exchange Commission
and/or was
affiliated with an executive officer or director of the
registrant at June 30, 2008; provided, however, that
organizations whose ownership exceeds 10% of the
registrants outstanding common stock as of June 30,
2008 that represented on such Schedule that they are registered
investment advisors or investment companies registered under
Section 8 of the Investment Company Act of 1980 were
considered to be non-affiliates. This calculation does not
reflect a determination that persons are affiliates for any
other purposes.
Number of shares of common stock outstanding as of
February 22, 2009: 41,214,542
Documents Incorporated by Reference: Portions
of the Registrants definitive Proxy Statement for its 2009
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this
form 10-K
are incorporated by reference in Part III of this
Form 10-K.
CAVIUM
NETWORKS, INC.
YEAR ENDED DECEMBER 31, 2008
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Such statements are based upon our
managements believes and assumptions and on information
currently available to our management. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
could, would, estimates,
predicts, potential,
continue, strategy,
believes, anticipates,
plans, expects, intends and
variations of such words and similar expressions are intended to
identify forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors, which
may cause our actual results, performance, time frames or
achievements to be materially different from any future results,
performance, time frames or achievements expressed or implied by
the forward-looking statements. These risks, uncertainties and
other factors in this Annual Report on
Form 10-K
are discussed in greater detail under the heading Risk
Factors. Given these risks, uncertainties and other
factors, you should not place undue reliance on these
forward-looking statements. These forward-looking statements
represent our estimates and assumptions only as of the date of
this filing. You should read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
PART I
Overview
We are a provider of highly integrated semiconductor processors
that enable intelligent processing for networking,
communications, storage, wireless, security and video
applications. We refer to our products as enabling intelligent
processing because they allow customers to develop networking,
wireless, storage and electronic equipment that is
application-aware and content-aware and securely processes
voice, video and data traffic at high speeds. Our products also
include a rich suite of embedded security protocols that enable
unified threat management, or UTM, secure connectivity, network
perimeter protection network virtualization, broadband gateways,
3G/4G wireless infrastructure, storage systems, wireless HDMI
cable replacement and embedded video applications. Our products
are systems on a chip, or SoCs, which incorporate single or
multiple processor cores, a highly integrated architecture and
customizable software that is based on a broad range of standard
operating systems. As a result, our products offer high levels
of performance and processing intelligence while reducing
product development cycles for our customers and lowering power
consumption for end market equipment.
We generate the majority of our net revenue from sales of our
products to providers of networking equipment that sell into the
enterprise network, data center, broadband and consumer, and
access and service provider markets. With the acquisition of
Star Semiconductor Corporation (Star) in August 2008
and W&W Communications, Inc. (W&W) in
December 2008 we expect to expand the sale of our products to
providers of electronic equipment that sell into the connected
home & office and video system markets. Our products
are used in a broad array of networking equipment, including
routers, switches, content-aware switches, UTM and other
security appliances, application-aware gateways,
voice/video/data, or triple-play, gateways, wireless local area
network, or WLAN, and 3G/Wimax/LTE access and aggregation
devices, storage networking equipment, servers and intelligent
network interface cards, IP surveillance systems, Digital video
recorders, wireless HDMI cable replacement systems, video
conferencing systems and connected home and office equipment
such as print servers, wireless routers and broadband gateways.
1
Industry
Background
Traffic on the Internet and enterprise networks is rapidly
increasing due to trends that include greater adoption of
Multimedia, Video, IPTV and rich, interactive internet
applications, VoIP, video over broadband, file sharing, greater
use of web-based services and the proliferation of stored
content accessed through networks. Enterprises, service
providers and consumers are demanding networking and electronic
equipment that can take advantage of these trends, and address
the significant market opportunities and life-style changes that
these new applications provide. As a result, there is growing
pressure on providers of networking equipment, wireless, storage
and electronic equipment to rapidly introduce new products with
enhanced functionality while reducing their design and
manufacturing costs. Providers of networking, wireless, storage
and electronic equipment are increasingly seeking advanced
processing solutions from third-party vendors to access the best
available technology and reduce development costs.
Video on demand, IPTV,
peer-to-peer
(P2P) video, and Internet video are forecast to account for
nearly 90 percent of all consumer IP traffic in 2012
according to Cisco Systems Inc.s Visual Networking Index
forecast. New media rich applications for both consumer and
enterprises like YouTube, MySpace, high definition
(HD) movie downloads, video conferencing, distance
learning and telemedicine are the major drivers of this growth.
Currently, Internet video on the PC is the primary driver of
this growth. Moving forward, Internet delivery of video to the
TV followed by cost effective, HD interactive video
communications is expected to fuel the future growth of video
traffic over the Internet. This growth of video over the network
is driving many of our customers in the networking and
communications space to acquire video technology, applications
and expertise. To address the future needs of our customers we
have acquired differentiated, low-latency video encoding
technology via our purchase of W&W.
The processing needs of advanced networking systems can be
described in the context of the Open System Interconnection, or
OSI, Model, which divides network activities, equipment, and
protocols into seven layers. According to this model, Layers 1
through 3 are the physical, data link and network layers,
respectively, which provide the protocols to ensure the
transmission of data between the source and destination
regardless of the content and type of data processed.
Traditionally, network infrastructure products have focused on
Layer 1 through 3 products that route and switch data traffic
based solely on the source and destination address contained in
the packet header. Processors that provide Layer 1 through 3
solutions are widely available from many vendors. Layers 4
through 7 are the transport, session, presentation and
application layers, which provide the protocols to enable the
reliable
end-to-end
communication of application information. Intelligent processing
generally takes place in Layers 4 through 7. In order to provide
this intelligence, advanced networking systems must include
processors that enable extensive inspection of the application
and data content, or deep packet inspection, and make
intelligent switching and routing decisions based upon that
inspection. To address customer demands, providers of networking
equipment must offer products that include functionality such as
intelligent routing or switching of network traffic prioritized
by application and data content, and security services.
Processors required for Layer 4 through 7 processing are
significantly more complex than processors that provide only
Layer 1 through 3 solutions.
The processing needs of the digital video market can be
categorized into five distinct market segments namely capture,
process, transport, receive and display. Our networking products
currently serve only in the video traffic transport market with
its single and multicore processors. The video transport market
includes equipment used in cable networks, satellite networks
and the Internet such as routers, switches and content
load-balancers that support the bandwidth, low-latency and
quality of service required for video. Video processing
technology is required to play in the capture, process and
display segments of the market. The video capture market
includes all types of video recording equipment ranging from
high-end broadcast quality cameras to IP cameras for video
surveillance, video conferencing and personal use camcorders, IP
cameras and webcams. The video process market needs high-channel
density and transrating and transcoding for video infrastructure
equipment such as cable head-end video systems, IMS gateways,
broadcast systems, multi-channel digital video recorders (DVRs),
video conference multi-point control unit and gateways. The
video display market includes LCD screens and flat panels,
plasma displays and projectors where high quality 1080p HD
encode and decode and low latency are required for display and
wireless connectivity. Networking, wireless, storage and
electronic equipment providers address the need for next
generation systems using a variety of approaches. These
approaches include internally designed custom semiconductor
products, such as ASICs, DSPs, FPGAs or other proprietary chips,
multiple chip offerings, general purpose MPUs
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from merchant suppliers, software-based solutions or a
combination of these approaches. While these approaches have
been adequate for the basic layer 1 through 3 processing, they
are less effective as the need for Layer 4 through 7
intelligent processing increases and line rates continue to
increase. As a result, providers of networking equipments are
increasingly turning to third-party vendors for high
performance, power-efficient and cost-effective intelligent
processing products.
Products
We offer highly integrated semiconductors that provide
intelligent Layer 4 through 7 processing for enterprise network,
data center, broadband and consumer, and access and service
provider markets. Our products provide scalable, low-power, high
performance processors that integrate single or multiple cores,
hardware accelerators and input/output interfaces into a single
chip and are available across a wide range of price and
performance points. All of our products are compatible with
standards-based operating systems and general purpose software
to enable ease of programming, and are supported by our
ecosystem partners.
The chart below sets out key product lines, available versions,
descriptions and primary target equipment for each of our
product families.
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Product Lines
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Available
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Target End
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Product Families
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(# of MIPS Cores)
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Configurations
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Description
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Markets
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OCTEON Plus
Multi-core
MIPS64
Processors
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CN58XX(16)
CN57XX (12)
CN56XX (12)
CN55XX(6)
CN54XX(6)
CN52XX(4)
CN50XX(2)
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Network Services Processor
Storage Services Processor
Secure Communication Processor
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Multi-core MIPS64 Processors with
2-16 cores,
integrated L4-L7 hardware acceleration and networking interfaces
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OCTEON
Multi-core
MIPS64
Processors
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CN38XX(16)
CN36XX(4)
CN31XX(2)
CN30XX(1)
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Network Services Processor
Secure Communication Processor
Communication Processor
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Multi-core MIPS64 Processors with
2-16 cores,
integrated L4-L7 hardware acceleration and networking interfaces
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Enterprise Network
Access and Service Provider
Data Center
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NITROX
Security
Processors
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CN2XXX
CN1XXX
CN5XX
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i/s/w: IPsec, SSL or WLAN Security
versions
p: Multi-protocol version
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Standalone Security Processors, with
wide range of interface connectivity
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Enterprise Network
Data Center
Access and Service Provider
Broadband and Consumer
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OCTEON
Broadband Communication Processors
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CN50XX(2)
CN31XX(2)
CN30XX(1)
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Network Services Processor
Secure Communication Processor
Communication Processor
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Cost-effective Single & Dual core
MIPS-based Communication Processors with integrated Networking,
Security, QoS acceleration and built-in interfaces
Performance: 100Mbps to 1Gbps
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Broadband and Consumer
Enterprise and Consumer
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3
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Product Lines
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Available
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Target End
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Product Families
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(# of MIPS Cores)
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Configurations
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Description
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Markets
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ECONA ARM
processors
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CNS11XX
CNS21XX
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Gateway processor
Embedded processor
Content processor
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Cost effective ARM based processors with
integrated peripherals, networking and Layer 7 acceleration
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Broadband and consumer
Connected home & office
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PureVu Video processors
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CNW31XX
CNW35XX
CNW36XX
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Video Conferencing
Embedded
Wireless HD
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HD Video conferencing
Digital Video recorders
Embedded applications
Wireless HDMI cable replacement
applications
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Enterprise and service provider
Connected home & office
Video capture, process and display
segments
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Our OCTEON and OCTEON Plus processor family provides integrated
Layer 4 through 7 data and security processing (with additional
capabilities at Layers 2 and 3) at line speeds from 100Mbps
to 20Gbps. OCTEON processors integrate control plane processing,
packet processing, security processing and content acceleration
in a single chip. This integration shortens the data paths,
eliminates redundant packet processing, simplifies board design
and reduces the cost and power consumption compared to
alternative products that use multiple chips. Our OCTEON
processors are targeted for use in a wide variety of OEM
networking equipment, including routers, switches, content-aware
switches, UTM, and other security appliances, application-aware
gateways, voice/video/data, or triple-play, gateways, WLAN and
3G access and aggregation devices, storage networking equipment,
servers and intelligent network interface cards.
Our OCTEON Plus family of processors approximately doubles the
application performance available in our previous generation of
OCTEON processors. The OCTEON Plus processor family added new
interfaces and acceleration features for packet processing,
quality of service and content processing for multimedia aware
networking and 3G, 4G, and WiMax wireless applications. The
OCTEON Plus processor family expanded OCTEONs core target
markets with the new category called the Storage Services
Processor, or SSP family. The OCTEON SSP provides hardware
acceleration for storage applications such as iSCSI, RAID 6 and
data de-duplication. The new OCTEON SSP family is aimed at iSCSI
targets, Fiber Channel to iSCSI bridges and disk arrays.
Our NITROX processor family offers stand-alone security
processors that provide the functionality required for secure
communication in a single chip. These single chip,
custom-designed processors provide the complete security
protocol processing, encryption and authentication algorithms to
reduce the load on the system processor and increase total
system throughput. The NITROX family consists of products with
up to 24 security processors on a chip that are used in a wide
variety of OEM networking equipment, including security
appliances, UTM appliances, Layer 4 through 7 load balancers,
and other applications.
Our OCTEON broadband communication processor family targets
wired and wireless broadband gateway applications, with
performance requirements ranging from 100Mbps to 1Gbps. The
MIPS64-based SoC OCTEON processors integrate single or dual
64-bit CPUs, and provide high performance security processing
for applications requiring up to a 1Gbps line rate. These
processors are primarily used for broadband routers, WLAN access
points and UTM appliances.
The ECONA family consists of two main product lines based upon
the distinct performance, feature, and cost requirements of the
target network connected home and office markets. The ECONA
CNS1XXX provides an integrated ARM CPU, comprehensive I/Os and
hardware offload blocks for high performance home and office
routers and gateways. The ECONA CNS2XXX provides even greater
integration for the most cost and power sensitive home and
office network applications. These processors implement the
ARMtm
core processor technology
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along with innovative hardware offload engines to provide up to
Gigabit rate processing in the 0.5-1.5W power range.
Additionally, optional advanced features such as L7 content
inspection hardware are available to provide value added product
features for the network connected home and office. The ECONA
processor families are targeted for use in a wide variety of
network connected home and office applications ranging from
retail and small office wired to 802.11n WLAN routers. The ECONA
CNS2XXX family provides the best solution for price and power
sensitive applications such as IP cameras and home and office
equipment.
The PureVu CNW3XXX product family consists of the CNW31XX,
CNW35XX and the CNW36XX product lines, which are differentiated
based on HD and standard definition (SD)
capabilities and number of video ports. All PureVu CNW3XXX
processors are register-programmed and software compatible. An
SDK provides Linux driver support and an extensive API set for
the target applications. Our family of PureVu CNW3XXX video
processors offer the industrys lowest latency, high
channel density and low power solution for interactive and
recording video applications. These processors integrate an
H.264 encoder and decoder on a single chip with support for
1080p60 encode/decode, as well as encoding and decoding multiple
HD, SD and CIF streams. Through our Super Low Latency (SLL)
Technologytm
many demanding interactive video applications are possible,
using the CNW3XXX processors. The PureVu CNW3XXX processors are
targeted for use in either highly interactive video applications
or in high channel- density video recording applications or in
applications that require both low latency and high
channel-density; including video conferencing, wireless HDMI
adapters, video surveillance DVRs and video servers, and single
or multi-sensor HD and SD IP cameras.
In addition to our processors, we also market and sell discrete
software stacks designed to help our customers build products
around our SoCs in a more time and cost efficient manner. The
stacks include applications for security functions and other
commonly used protocols. We intend to continue to build our
software portfolio to address the needs of our customers who do
not possess internal software design efforts, or choose to use
those efforts on more customized systems architectures.
Customers
We primarily sell our products to providers of networking,
wireless, storage and electronic equipment, either directly or
through contract manufacturing organizations and distributors.
By providing comprehensive systems-level products along with our
ecosystem partners, we provide our customers with products that
empower their next-generation networking systems more quickly
and at lower cost than other alternatives.
We currently rely, and expect to continue to rely, on a limited
number of customers for a significant portion of our revenue.
Cisco systems, Inc. accounted for 29% and F5 Networks, Inc. and
Sumitomo Corporation each accounted for 11% of net revenue in
2008.
Sales and
Marketing
We currently sell our products through our direct sales and
applications support organization to providers of networking
equipment, original design manufacturers and contract
electronics manufacturers, as well as through arrangements with
distributors that fulfill third-party orders for our products.
We work directly with our customers system designers to create
demand for our products by providing them with
application-specific product information for their system
design, engineering and procurement groups. Our technical
marketing, sales and field application engineers actively engage
potential customers during their design processes to introduce
them to our product capabilities and target applications. We
design products in an effort to meet the increasingly complex
and specific design requirements of our customers. We typically
undertake a multi-month sales and development process with our
customer system designers and management. If successful, this
process culminates in a customer decision to use our product in
their system, which we refer to as a design win. Volume
production can begin from nine months to three years after the
design win depending on the complexity of our customers
product and other factors. Once one of our products is
incorporated into a customers design, it is likely to be
used for the life cycle of the customers product. We
believe this to be the case because a redesign would generally
be time consuming and expensive.
5
Manufacturing
We use third-party foundries and assembly and test contractors
to manufacture, assemble and test our semiconductor products.
This outsourced manufacturing approach allows us to focus our
resources on the design, sales and marketing of our products.
Our foundries are responsible for procurement of the raw
materials used in the production of our products. Our engineers
work closely with our foundries and other contractors to
increase yields, lower manufacturing costs and improve quality.
Integrated Circuit Fabrication. Our integrated
circuits are fabricated using complementary metal-oxide
semiconductor, or CMOS processes, which provide greater
flexibility to engage independent foundries to manufacture our
integrated circuits. By outsourcing manufacturing, we are able
to avoid the cost associated with owning and operating our own
manufacturing facility, which would not be feasible for a
company at our stage of development. We currently outsource a
substantial percentage of our integrated circuit manufacturing
to Taiwan Semiconductor Manufacturing Company, or TSMC, with the
remaining manufacturing outsourced to United Microelectronics
Corporation, or UMC and Fujitsu Microelectronics or Fujitsu. We
work closely with TSMC, UMC and Fujitsu to forecast on a monthly
basis our manufacturing capacity requirements. Our integrated
circuits are currently fabricated in several advanced,
sub-micron
manufacturing processes. Because finer manufacturing processes
lead to enhanced performance, smaller size and lower power
requirements, we continually evaluate the benefits and
feasibility of migrating to smaller geometry process technology
in order to reduce cost and improve performance.
Assembly and Test. Our products are shipped
from our third-party foundries to third-party assembly and test
facilities where they are assembled into finished integrated
circuit packages and tested. We outsource all product packaging
and substantially all testing requirements for these products to
several assembly and test subcontractors, including ASE
Electronics in Taiwan and Singapore, as well as ISE in the
United States. Our products are designed to use standard
packages and to be tested with widely available test equipment.
Quality Assurance. We have implemented
significant quality assurance and test procedures to assure high
levels of product quality for our customers. Our designs are
subjected to extensive circuit simulation under extreme
conditions of temperature, voltage and processing before being
committed to manufacture. We have completed and have been
awarded ISO 9001 certification and ISO 9001:2000 certification.
In addition, all of our independent foundries and assembly and
test subcontractors have been awarded ISO 9001 certification.
Research
and Development
We believe that our future success depends on our ability to
introduce enhancements to our existing products and to develop
new products for both existing and new markets. Our research and
development efforts are directed largely to the development of
additional high-performance multi-core microprocessor
semiconductors. We are also focused on incorporating functions
currently provided by stand-alone semiconductors into our
products. We have assembled a team of highly skilled
semiconductor and embedded software design engineers who have
strong design expertise in high performance multi-core
microprocessor design, along with embedded software, security
and networking expertise. Our engineering design teams are
located in Mountain View, California, Marlborough,
Massachusetts, Beijing, China, Hsin-Chu, Taiwan, Madrid, Spain
and Hyderabad and Chennai, India. As of December 31, 2008,
we had 238 employees in our research and development group.
Our research and development expenses were $27.2 million,
$19.5 million and $18.7 million for the years ended
December 31, 2008, 2007 and 2006 respectively.
Business
Combinations
During the year ended December 31, 2008, we completed three
acquisitions for approximately $18.9 million in
consideration, including acquisition related expenses. On
May 20, 2008, we acquired certain assets of Parallogic
Corporation (Parallogic) for approximately
$1.3 million. The acquisition of Parallogic allows us to
gain access to Parallogics developed multi-core software
technology focused on gigabit packet processing and security
applications. On August 1, 2008, we acquired substantially
all of the assets of Star for approximately $9.6 million.
The acquisition of Star provides us with a highly experienced
stand-alone SOC processor team based in Taiwan. On
December 23, 2008, we acquired W&W for approximately
$8.0 million. Additionally, in order to effect the
6
acquisition of W&W, we assumed and immediately paid-off
W&Ws notes payable of approximately $8.9 million
as defined in the merger agreement. The acquisition of W&W
allows us to gain access to the W&Ws developed
technology and its design team for the emerging consumer market
for high definition encoding semiconductors. For a complete
discussion on our 2008 acquisitions, see Note 5
Business Combinations in Item 8, of this Annual
Report, which is incorporated herein by reference.
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and intellectual property. To accomplish this, we
rely on a combination of intellectual property rights, including
patents, trade secrets, copyrights and trademarks, and
contractual protections.
As of December 31, 2008, we had 15 issued and 29 pending
patent applications in the United States, and two issued and 28
pending foreign patent applications. The 15 issued patents in
the United States expire in the years beginning in 2023 through
2025. The two issued foreign patents expire in 2022. Our issued
patents and pending patent applications relate to security
processors, multi-core microprocessor processing and other
processing concepts. We focus our patent efforts in the United
States, and, when justified by cost and strategic importance, we
file corresponding foreign patent applications in strategic
jurisdictions such as Japan and Europe. Our patent strategy is
designed to provide a balance between the need for coverage in
our strategic markets and the need to maintain costs at a
reasonable level. We believe our issued patents and patent
applications, to the extent the applications are issued, may be
used defensively by us in the event of future intellectual
property claims.
We may not receive competitive advantages from any rights
granted under our patents. We do not know whether any of our
patent applications will result in the issuance of any patents
or whether the examination process will require us to narrow the
scope of our claims. To the extent any of our applications
proceed to issuance as a patent, any such future patent may be
opposed, contested, circumvented, designed around by a third
party, or found to be unenforceable or invalidated. In addition,
our future patent applications may not be issued with the scope
of the claims sought by us, if at all, or the scope of claims we
are seeking may not be sufficiently broad to protect our
proprietary technologies. Others may develop technologies that
are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around patents
owned or licensed by us. If our products, patents or patent
applications are found to conflict with any patent held by third
parties, we could be prevented from selling our products, our
patents may be declared invalid or our patent applications may
not result in issued patents.
In addition to our own intellectual property, we also rely on
third-party technologies for the development of our products. We
license certain technology from MIPS Technologies, Inc.,
pursuant to a license agreement entered into in December 2003
wherein we were granted a non-exclusive, worldwide license to
MIPS Technologies microprocessor core technology to
develop, implement and use in our products. The term of the
agreement was extended by an additional two years and will
consequently expire in December 2010. The agreement permits us
to continue selling in perpetuity products developed during the
term of the agreement containing the licensed technology.
Following the termination of the agreement, we will evaluate
whether to enter into a new agreement with MIPS Technologies or
engage other third parties for alternative technology solutions.
We obtained a registration for our OCTEON and NITROX trademark
in the United States. We also have a license from MIPS
Technologies, Inc. to use cnMIPS as a trademark.
In addition, we generally control access to and use of our
proprietary software and other confidential information through
the use of internal and external controls, including contractual
protections with employees, contractors, customers and partners.
We rely in part on United States and international copyright
laws to protect our software. All employees and consultants are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us. We
also require them to agree to disclose and assign to us all
inventions conceived or made in connection with the employment
or consulting relationship. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
invention assignment terms of their agreements. Despite measures
taken to protect our intellectual property, unauthorized parties
may copy aspects of our products or obtain and use information
that we regard as proprietary.
7
Despite our efforts to protect our trade secrets and proprietary
rights through patents, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, as we expand our
international operations, effective patent, copyright, trademark
and trade secret protection may not be available or may be
limited in foreign countries. If we fail to protect our
intellectual property and other proprietary rights, our business
could be harmed.
Third parties could claim that our products or technologies
infringe their proprietary rights. The semiconductor industry is
characterized by the existence of a large number of patents,
trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual
property rights. We expect that the potential for infringement
claims against us may further increase as the number of products
and competitors in our market increase. Litigation in this
industry is often protracted and expensive. Questions of
infringement in the semiconductor industry involve highly
technical and subjective analyses. In addition, litigation may
become necessary in the future to enforce our granted patents
and other intellectual property rights, to protect our trade
secrets, to determine the validity and scope of the proprietary
rights of others, or to defend against claims of infringement or
invalidity, and we may not prevail in any future litigation. The
results of any litigation are inherently uncertain. Any
successful infringement claim or litigation against us could
have a significant adverse impact on our business.
We may be required to seek licenses under patents or
intellectual property rights owned by third parties. However, we
cannot be certain that third parties will offer licenses to us
or that the terms of any licenses offered to us will be
acceptable. If we fail to obtain such third-party license for
our products, we could incur substantial liabilities or be
forced to suspend sales of our products. Any litigation could
cause us to incur substantial expenses, reduce our sales, and
divert the efforts of our technical and management personnel,
whether or not a court decided such litigation in our favor. In
the event we receive an adverse result in any litigation, we
could be required to pay substantial damages, cease sale of
products, expend significant resources to develop alternative
technology and discontinue the use of processes requiring the
relevant technology.
We have not to date been notified of any litigation related to
intellectual property.
Competition
We compete with numerous domestic and international
semiconductor companies, many of which have greater financial
and other resources with which to pursue marketing, technology
development, product design, manufacturing, quality, sales and
distribution of their products. Our ability to compete
effectively depends on defining, designing and regularly
introducing new products that anticipate the processing and
integration needs of our customers next-generation
products and applications.
In the networking, wireless, storage and connected home and
office markets we consider our primary competitors to be other
companies that provide embedded processor products to the
market, including Broadcom Corporation, Freescale Semiconductor,
Inc., Intel Corporation, Marvell Technology Group Ltd.,
PMC-Sierra, Inc., RMI Corporation, and to a lesser extent, Hifn,
Inc. Most of these competitors offer products that differ in
functionality and processing speeds and address some or all of
our four target end markets. In comparison we offer a broad
array of highly integrated, intelligent solutions at various
performance levels and prices for each of our end markets. Our
products generally include a multiple number of processor cores,
greater integration of L4-L7 hardware acceleration and
interfaces, and efficient power consumption for networking,
communication and security applications. In the video capture,
process and display market segments we consider our competition
to be companies that provide video encode and decode solutions,
including TI DSPs and SOCs for H.264 encoding and Amimon for
wireless replacement of HDMI cables and wireless video displays.
Our competitors include public companies with broader product
lines, a large installed base of customers and greater resources
compared to us. We expect continued competition from existing
suppliers as well as from potential new entrants into our
markets. Our ability to compete depends on a number of factors,
including our success in identifying new and emerging markets,
applications and technologies and developing products for these
markets; our products performance and cost effectiveness
relative to that of our competitors; our success
functionality and features not previously available in the
marketplace; our ability to recruit good talent including
software engineers and chip designers; and our ability to
protect our intellectual property.
8
Backlog
Sales of our products are generally made pursuant to purchase
orders. We typically include in backlog only those customer
orders for which we have accepted purchase orders and which we
expect to ship within the next twelve months. Since orders
constituting our current backlog are subject to changes in
delivery schedules or cancellation with limited or no penalties,
we believe that the amount of our backlog is not necessarily an
accurate indication of our future revenues.
Employees
As of December 31, 2008, we had 347 regular employees
located in the United States, India, Asia and Europe, which was
comprised of: 18 employees in manufacturing operations, 238
in engineering, research and development, 91 in sales, marketing
and administrative. None of our employees is represented by a
labor union and we consider current employee relations to be
good.
Executive
Officers of the Registrant
The following sets forth certain information regarding our
executive officers as of February 26, 2009:
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Syed B. Ali
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President, Chief Executive Officer, Director and Chairman of the
Board of Directors
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Arthur D. Chadwick
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Vice President of Finance and Administration, Chief Financial
Officer and Secretary
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Anil K. Jain
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Corporate Vice President, IC Engineering
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Rajiv Khemani
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Vice President and General Manager of Networking and
Communications Division
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Sandeep Vij
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Vice President and General Manager of Broadband and Consumer
Division
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Syed B. Ali is one of our founders and has served as our
President, Chief Executive Officer and Chairman of the Board of
Directors since the inception of the Company in 2000. From 1998
to 2000, Mr. Ali was Vice President of Marketing and Sales
at Malleable Technologies, a communication chip company of which
he was a founding management team member. Malleable Technologies
was acquired by PMC Sierra, a communication IC company in 2000.
From 1994 to 1998, Mr. Ali was an Executive Director at
Samsung Electronics. Prior to that, he had various positions at
Wafer Scale Integration, a division of SGS-Thompson, Tandem
Computer, and American Microsystems. He received a BE
(Electrical Engineering) from Osmania University, in Hyderabad,
India and an MSE from the University of Michigan.
Arthur D. Chadwick has served as our Vice President of
Finance and Administration, Chief Financial Officer and
Secretary since December 2004. Prior to joining us, from 1989 to
2004, Mr. Chadwick served as the Senior Vice President of
Finance and Administration and Chief Financial Officer at
Pinnacle Systems, a provider of digital video processing
solutions. From 1979 through 1989, Mr. Chadwick served in
various financial and management roles at American Microsystems,
Austrian Microsystems, Gould Semiconductor and AMI-Philippines.
Mr. Chadwick received a BS degree in Mathematics and an MBA
in Finance, both from the University of Michigan.
Anil K. Jain has served as our Corporate Vice President
of IC Engineering since January 2001, and is a founding
management team member. Prior to joining us, from 1998 to 2000
he was at Compaq Computer, a computer manufacturer. From 1980 to
1998, Mr. Jain served at Digital Equipment Corporation, or
DEC, as Senior Consulting Engineer when DEC was acquired by
Compaq Computer. He received a BS degree in Electrical
Engineering from Punjab Engineering College in Chandigarh India,
and an MSEE from the University of Cincinnati.
Rajiv Khemani has served as our Vice President and
General Manager of Networking and Communications Division since
February 2009 and has served as our Vice President of Marketing
and Sales since January 2007 and has served as our Vice
President of Marketing since June 2003. Prior to joining us,
from 1998 to May 2003, he worked for Intel Corporation, a
microprocessor IC company. From 2002 to 2003, he served as
General Manager of
9
Intels high-end network processor business unit. From 1999
to 2002, he served as Director of Marketing in Intels
network processor division. He joined Intel through Intels
acquisition of Netboost, a network processor startup. Prior to
Netboost, Mr. Khemani held engineering, marketing and
management positions at Network Appliance and Sun Microsystems.
He received a bachelor degree in Computer Engineering from the
Indian Institute of Technology, New Delhi, an MS in Computer
Science from New York University and an MBA from Stanford
University Graduate School of Business.
Sandeep Vij has served as our Vice President and General
Manager of Broadband and Consumer Division since February 2009
and has served as our Vice President of Strategic Markets and
Business Development since he joined the Company in May 2008.
From 1996 to April 2008, Mr. Vij was on the executive staff
of Xilinx Inc., a digital programmable logic manufacturer. From
2007-2008 he
served as Vice President of Worldwide Marketing, Services and
Support at Xilinx. From 2001 to 2007, he served as Vice
President of Worldwide Marketing at Xilinx. From 1997 to 2001,
he served as Vice President and General Manager, General
Products Division at Xilinx where he held profit and loss
responsibility for their high-volume FPGA products. Mr. Vij
joined Xilinx in 1996 as Director of FPGA Marketing. From 1990
to 1996, Mr. Vij worked at Altera Corp. in a variety of
marketing and management roles. Mr. Vij serves on the board
of directors of Coherent, Inc., a laser and photonics company.
Mr. Vij received his MS in electrical engineering from
Stanford University and BS in electrical engineering from
San Jose State University.
Corporate
Information
We were incorporated in California in November 2000 and
reincorporated in Delaware in February 2007. Our principal
offices are located at 805 East Middlefield Road, Mountain View,
California 94043, and our telephone number is
(650) 623-7000.
Our Web site address is www.caviumnetworks.com. Information
found on, or accessible through, our Web site is not a part of,
and is not incorporated into, this Annual Report on
Form 10-K.
Unless the context requires otherwise, references in this Annual
Report on
Form 10-K
to the company, we, us and
our refer to Cavium Networks, Inc.
Available
Information
We file electronically with the United States Securities and
Exchange Commission, or SEC, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. We make available on our website at
http://www.caviumnetworks.com,
free of charge, copies of these reports as soon as reasonably
practicable after filing these reports with, or furnishing them
to, the SEC.
The following risks and uncertainties may have a material
adverse effect on our business, financial condition or results
of operations. Investors should carefully consider the risks
described below before making an investment decision. The risks
described below are not the only ones we face. Additional risks
not presently known to us or that we currently believe are
immaterial may also significantly impair our business
operations. Our business could be harmed by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and investors may lose all or part of their
investment.
Risks
Related to Our Business and Industry
We had
a limited history of profitability, and we may not achieve or
sustain profitability in the future, on a quarterly or annual
basis.
We were established in 2000. Our first quarter of profitability
since then was the quarter ended September 30, 2007 and we
remained profitable until the quarter ended December 31,
2008. We experienced net income of $1.5 million and
$2.2 million for the years ended December 31, 2008 and
2007, respectively. As of December 31, 2008, our
accumulated deficit was $57.2 million. We expect to make
significant expenditures related to the development of our
products and expansion of our business, including research and
development and sales and administrative expenses. As a public
company, we also incur significant legal, accounting and other
expenses. Additionally, we may encounter unforeseen
difficulties, complications, product delays and other unknown
factors
10
that require additional expenditures. As a result of these
increased expenditures, we may have to generate and sustain
substantially increased revenue to achieve profitability. Our
revenue growth trends in prior periods may not be sustainable.
Accordingly, we may not be able to achieve or maintain
profitability and we may continue to incur losses in the future.
We
face intense competition and expect competition to increase in
the future, which could reduce our revenue and customer
base.
The market for our products is highly competitive and we expect
competition to intensify in the future. This competition could
make it more difficult for us to sell our products, and result
in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses and failure to increase, or the
loss of, market share or expected market share, any of which
would likely seriously harm our business, operating results and
financial condition. For instance, semiconductor products have a
history of declining prices as the cost of production is
reduced. However, if market prices decrease faster than product
costs, gross and operating margins can be adversely affected.
Currently, we face competition from a number of established
companies, including Broadcom Corporation, Freescale
Semiconductor, Inc., Intel Corporation, Marvell Technology Group
Ltd., PMC-Sierra, Inc. and others. We also face competition from
a number of private or smaller companies, including RMI
Corporation and to a lesser extent, Hifn, Inc. and others. In
addition, in the video capture, process and display market
segments we consider our competition to be companies that
provide video encode and decode solutions, including TI DSPs and
SOCs for H.264 encoding and Amimon for wireless replacement of
HDMI cables and wireless video displays.
A few of our current competitors operate their own fabrication
facilities and have, and some of our potential competitors could
have, longer operating histories, greater name recognition,
larger customer bases and significantly greater financial,
technical, sales, marketing and other resources than we have.
Potential customers may prefer to purchase from their existing
suppliers rather than a new supplier regardless of product
performance or features.
We expect increased competition from other established and
emerging companies both domestically and internationally. Our
current and potential competitors may also establish cooperative
relationships among themselves or with third parties. If so, new
competitors or alliances that include our competitors may emerge
that could acquire significant market share. We expect these
trends to continue as companies attempt to strengthen or
maintain their market positions in an evolving industry. In the
future, further development by our competitors could cause our
products to become obsolete. We expect continued competition
from incumbents as well as from new entrants into the markets we
serve. Our ability to compete depends on a number of factors,
including:
our success in identifying new and emerging
markets, applications and technologies;
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our products performance and cost effectiveness relative
to that of our competitors products;
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our ability to deliver products in large volume on a timely
basis at a competitive price;
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our success in utilizing new and proprietary technologies to
offer products and features previously not available in the
marketplace;
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our ability to recruit design and application engineers and
sales and marketing personnel; and
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our ability to protect our intellectual property.
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In addition, we cannot assure you that existing customers or
potential customers will not develop their own products,
purchase competitive products or acquire companies that use
alternative methods to enable networking, communication or
security applications to facilitate network-aware processing in
their systems. Any of these competitive threats, alone or in
combination with others, could seriously harm our business,
operating results and financial condition.
11
Our
customers may cancel their orders, change production quantities
or delay production, and if we fail to forecast demand for our
products accurately, we may incur product shortages, delays in
product shipments or excess or insufficient product
inventory.
We generally do not obtain firm, long-term purchase commitments
from our customers. Because production lead times often exceed
the amount of time required to fulfill orders, we often must
build in advance of orders, relying on an imperfect demand
forecast to project volumes and product mix. Our demand forecast
accuracy can be adversely affected by a number of factors,
including inaccurate forecasting by our customers, changes in
market conditions, adverse changes in our product order mix and
demand for our customers products. Even after an order is
received, our customers may cancel these orders or request a
decrease in production quantities. Any such cancellation or
decrease subjects us to a number of risks, most notably that our
projected sales will not materialize on schedule or at all,
leading to unanticipated revenue shortfalls and excess or
obsolete inventory which we may be unable to sell to other
customers. Alternatively, if we are unable to project customer
requirements accurately, we may not build enough products, which
could lead to delays in product shipments and lost sales
opportunities in the near term, as well as force our customers
to identify alternative sources, which could affect our ongoing
relationships with these customers. We have in the past had
customers dramatically increase their requested production
quantities with little or no advance notice. If we do not timely
fulfill customer demands, our customers may cancel their orders
and we may be subject to customer claims for cost of
replacement. Either underestimating or overestimating demand
would lead to insufficient, excess or obsolete inventory, which
could harm our operating results, cash flow and financial
condition, as well as our relationships with our customers.
Adverse
changes in general economic or political conditions in any of
the major countries in which we do business could adversely
affect our operating results.
As our business has grown to both customers located in the
United States as well as customers located outside of the United
States, we have become increasingly subject to the risks arising
from adverse changes in both the domestic and global economic
and political conditions. For example, the direction and
relative strength of the U.S. and International economies
remains uncertain due to softness in the housing markets,
difficulties in the financial services sector and credit markets
and continuing geopolitical uncertainties. If economic growth in
the United States and other countries economies continues
to slow, the demand for our customers products could
decline, which would then decrease demand for our products.
Furthermore, if economic conditions in the countries into which
our customers sell their products continue to deteriorate, some
of our customers may decide to postpone or delay certain
development programs, which would then delay their need to
purchase our products. This could result in a reduction in sales
of our products or in a reduction in the growth of our product
sales. Any of these events would likely harm investors view of
our business, our results of operations and financial condition.
We
receive a substantial portion of our revenues from a limited
number of customers, and the loss of, or a significant reduction
in, orders from one or a few of our major customers would
adversely affect our operations and financial
condition.
We receive a substantial portion of our revenues from a limited
number of customers. We received an aggregate of approximately
57%, 56% and 56% of our net revenues from our top five customers
for the years ended December 31, 2008, 2007 and 2006,
respectively. We anticipate that we will continue to be
dependent on a limited number of customers for a significant
portion of our revenues in the immediate future and in some
cases the portion of our revenues attributable to certain
customers may increase in the future. However, we may not be
able to maintain or increase sales to certain of our top
customers for a variety of reasons, including the following:
our agreements with our customers do not require
them to purchase a minimum quantity of our products;
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some of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty; and
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many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products.
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In the past, we have relied in significant part on our strategic
relationships with customers that are technology leaders in our
target markets. We intend to continue expanding such
relationships and forming new strategic relationships but we
cannot assure you that we will be able to do so. These
relationships often require us to develop new products that may
involve significant technological challenges. Our customers
frequently place considerable pressure on us to meet their tight
development schedules. Accordingly, we may have to devote a
substantial amount of our resources to our strategic
relationships, which could detract from or delay our completion
of other important development projects. Delays in development
could impair our relationships with our other strategic
customers and negatively impact sales of the products under
development. Moreover, it is possible that our customers may
develop their own product or adopt a competitors solution
for products that they currently buy from us. If that happens,
our sales would decline and our business, financial condition
and results of operations could be materially and adversely
affected.
In addition, our relationships with some customers may also
deter other potential customers who compete with these customers
from buying our products. To attract new customers or retain
existing customers, we may offer certain customers favorable
prices on our products. In that event, our average selling
prices and gross margins would decline. The loss of a key
customer, a reduction in sales to any key customer or our
inability to attract new significant customers could seriously
impact our revenue and materially and adversely affect our
results of operations.
We
expect our operating results to fluctuate.
We expect our revenues and expense levels to vary in the future,
making it difficult to predict our future operating results. In
particular, we experience variability in demand for our products
as our customers manage their product introduction dates and
their inventories. Given the current global economic
uncertainty, the demand for our products may be more varied and
difficult to ascertain in a timely and efficient manner.
Additional factors that could cause our results to fluctuate
include, among other things:
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our ability to retain, recruit and hire key executives,
technical personnel and other employees in the positions and
numbers, and with the experience and capabilities that we need;
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fluctuations in demand, sales cycles, product mix and prices for
our products;
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the timing of our product introductions, and the variability in
lead time between the time when a customer begins to design in
one of our products and the time when the customers end
system goes into production and they begin purchasing our
products;
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the forecasting, scheduling, rescheduling or cancellation of
orders by our customers;
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our ability to successfully define, design and release new
products in a timely manner that meet our customers needs;
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changes in manufacturing costs, including wafer, test and
assembly costs, mask costs, manufacturing yields and product
quality and reliability;
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the timing and availability of adequate manufacturing capacity
from our manufacturing suppliers;
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the timing of announcements by our competitors or us;
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future accounting pronouncements and changes in accounting
policies;
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volatility in our stock price, which may lead to higher stock
compensation expenses;
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general economic and political conditions in the countries where
we operate or our products are sold or used; costs associated
with litigation, especially related to intellectual
property; and
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productivity and growth of our sales and marketing force.
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Unfavorable changes in any of the above factors, most of which
are beyond our control, could significantly harm our business
and results of operations.
13
We may
not sustain our growth rate, and we may not be able to manage
any future growth effectively.
We have experienced significant growth in a short period of
time. Our revenues increased from approximately
$7.4 million in 2004 to approximately $19.4 million in
2005, $34.2 million in 2006, $54.2 million in 2007 and
$86.6 million in 2008. We may not achieve similar growth
rates in future periods. You should not rely on our operating
results for any prior quarterly or annual periods as an
indication of our future operating performance. If we are unable
to maintain adequate revenue growth, our financial results could
suffer and our stock price could decline.
To manage our growth successfully and to continue handling the
responsibilities of being a public company, we believe we must
effectively, among other things:
recruit, hire, train and manage additional
qualified engineers for our research and development activities,
especially in the positions of design engineering, product and
test engineering, and applications engineering;
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add additional sales personnel and expand sales offices;
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expand our administrative, financial and operational systems,
procedures and controls; and
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enhance our information technology support for enterprise
resource planning and design engineering by adapting and
expanding our systems and tool capabilities, and properly
training new hires as to their use.
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If we are unable to manage our growth effectively, we may not be
able to take advantage of market opportunities or develop new
products and we may fail to satisfy customer requirements,
maintain product quality, execute our business plan or respond
to competitive pressures.
The
average selling prices of products in our markets have
historically decreased over time and will likely do so in the
future, which could harm our revenues and gross
profits.
Average selling prices of semiconductor products in the markets
we serve have historically decreased over time. Our gross
profits and financial results will suffer if we are unable to
offset any reductions in our average selling prices by reducing
our costs, developing new or enhanced products on a timely basis
with higher selling prices or gross profits, or increasing our
sales volumes. Additionally, because we do not operate our own
manufacturing, assembly or testing facilities, we may not be
able to reduce our costs as rapidly as companies that operate
their own facilities, and our costs may even increase, which
could also reduce our margins. We have reduced the prices of our
products in anticipation of future competitive pricing
pressures, new product introductions by us or our competitors
and other factors. We expect that we will have to do so again in
the future.
We may
be unsuccessful in developing and selling new products or in
penetrating new markets.
We operate in a dynamic environment characterized by rapidly
changing technologies and industry standards and technological
obsolescence. Our competitiveness and future success depend on
our ability to design, develop, manufacture, assemble, test,
market and support new products and enhancements on a timely and
cost effective basis. A fundamental shift in technologies in any
of our product markets could harm our competitive position
within these markets. Our failure to anticipate these shifts, to
develop new technologies or to react to changes in existing
technologies could materially delay our development of new
products, which could result in product obsolescence, decreased
revenues and a loss of design wins to our competitors. The
success of a new product depends on accurate forecasts of
long-term market demand and future technological developments,
as well as on a variety of specific implementation factors,
including:
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timely and efficient completion of process design and transfer
to manufacturing, assembly and test processes;
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the quality, performance and reliability of the product; and
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effective marketing, sales and service.
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If we fail to introduce new products that meet the demand of our
customers or penetrate new markets that we target our resources
on, our revenues will likely decrease over time and our
financial condition could suffer.
14
Additionally, if we concentrate resources on a new market that
does not prove profitable or sustainable, our financial
condition could decline.
Fluctuations
in the mix of products sold may adversely affect our financial
results.
Because of the wide price differences among our processors, the
mix and types of performance capabilities of processors sold
affect the average selling price of our products and have a
substantial impact on our revenue. Generally, sales of higher
performance products have higher gross margins than sales of
lower performance products. We currently offer both higher and
lower performance products in our NITROX, OCTEON, ECONA ARM and
PureVu Video product families. To the extent our sales mix
shifts toward increased sales of lower performance products; our
overall gross margins will be negatively affected. Fluctuations
in the mix and types of our products may also affect the extent
to which we are able to recover our fixed costs and investments
that are associated with a particular product, and as a result
can negatively impact our financial results.
The
semiconductor and communications industries have historically
experienced significant fluctuations with prolonged downturns,
which could impact our operating results, financial condition
and cash flows
The semiconductor industry has historically exhibited cyclical
behavior, which at various times has included significant
downturns in customer demand. We began to see such a downturn in
the fourth quarter of 2008 and expect this downturn to continue
at least into 2009. Because a significant portion of our
expenses is fixed in the near term or is incurred in advance of
anticipated sales, we may not be able to decrease our expenses
rapidly enough to offset any unanticipated shortfall in
revenues. If this situation were to occur, it could adversely
affect our operating results, cash flow and financial condition.
Furthermore, the semiconductor industry has periodically
experienced periods of increased demand and production
constraints. If this happens in the future, we may not be able
to produce sufficient quantities of our products to meet the
increased demand. We may also have difficulty in obtaining
sufficient wafer, assembly and test resources from our
subcontract manufacturers. Any factor adversely affecting the
semiconductor industry in general, or the particular segments of
the industry that our products target, may adversely affect our
ability to generate revenue and could negatively impact our
operating results.
The communications industry has, in the past, experienced
pronounced downturns, and these cycles may continue in the
future. To respond to a downturn, many networking equipment
providers may slow their research and development activities,
cancel or delay new product development, reduce their
inventories and take a cautious approach to acquiring our
products, which would have a significant negative impact on our
business. If this situation were to occur, it could adversely
affect our operating results, cash flow and financial condition.
In the future, any of these trends may also cause our operating
results to fluctuate significantly from year to year, which may
increase the volatility of the price of our stock.
Our
products must meet exact specifications, and defects and
failures may occur, which may cause customers to return or stop
buying our products.
Our customers generally establish demanding specifications for
quality, performance and reliability that our products must
meet. However, our products are highly complex and may contain
defects and failures when they are first introduced or as new
versions are released. If defects and failures occur in our
products during the design phase or after, we could experience
lost revenues, increased costs, including warranty expense and
costs associated with customer support, delays in or
cancellations or rescheduling of orders or shipments, product
returns or discounts, diversion of management resources or
damage to our reputation and brand equity, and in some cases
consequential damages, any of which would harm our operating
results. In addition, delays in our ability to fill product
orders as a result of quality control issues may negatively
impact our relationship with our customers. We cannot assure you
that we will have sufficient resources, including any available
insurance, to satisfy any asserted claims.
15
We may
have difficulty selling our products if our customers do not
design our products into their systems, and the nature of the
design process requires us to incur expenses prior to
recognizing revenues associated with those expenses which may
adversely affect our financial results.
One of our primary focuses is on winning competitive bid
selection processes, known as design wins, to
develop products for use in our customers products. We
devote significant time and resources in working with our
customers system designers to understand their future
needs and to provide products that we believe will meet those
needs and these bid selection processes can be lengthy. If a
customers system designer initially chooses a
competitors product, it becomes significantly more
difficult for us to sell our products for use in that system
because changing suppliers can involve significant cost, time,
effort and risk for our customers. Thus, our failure to win a
competitive bid can result in our foregoing revenues from a
given customers product line for the life of that product.
In addition, design opportunities may be infrequent or may be
delayed. Our ability to compete in the future will depend, in
large part, on our ability to design products to ensure
compliance with our customers and potential
customers specifications. We expect to invest significant
time and resources and to incur significant expenses to design
our products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a
new product without any assurance that our customers
system designers will select our product for use in their
applications. We often are required to anticipate which product
designs will generate demand in advance of our customers
expressly indicating a need for that particular design. Even if
our customers system designers select our products, a
substantial period of time will elapse before we generate
revenues related to the significant expenses we have incurred.
The reasons for this delay generally include the following
elements of our product sales and development cycle timeline and
related influences:
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our customers usually require a comprehensive technical
evaluation of our products before they incorporate them into
their designs;
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it can take from nine months to three years from the time our
products are selected to commence commercial shipments; and our
customers may experience changed market conditions or product
development issues. The resources devoted to product development
and sales and marketing may not generate material revenue for
us, and from time to time, we may need to write off excess and
obsolete inventory if we have produced product in anticipation
of expected demand. We may spend resources on the development of
products that our customers may not adopt. If we incur
significant expenses and investments in inventory in the future
that we are not able to recover, and we are not able to
compensate for those expenses, our operating results could be
adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions but still hold
higher cost products in inventory, our operating results would
be harmed.
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Additionally, even if system designers use our products in their
systems, we cannot assure you that these systems will be
commercially successful or that we will receive significant
revenue from the sales of processors for those systems. As a
result, we may be unable to accurately forecast the volume and
timing of our orders and revenues associated with any new
product introductions.
If
customers do not believe our products solve a critical need, our
revenues will decline.
Our products are used in networking and security equipment
including routers, switches, UTM appliances, intelligent
switches, application-aware gateways, triple-play gateways, WLAN
and 3G access and aggregation devices, storage networking
equipment, servers, intelligent network interface cards, IP
surveillance systems, wireless HDMI cable replacement systems,
video conferencing systems and connected home and office
equipment.
In order to meet our growth and strategic objectives, providers
of networking equipment must continue to incorporate our
products into their systems and the demands for their systems
must grow as well. Our future depends in large part on factors
outside our control, and the sale of next-generation networks
may not meet our revenue growth and strategic objectives.
16
In the
event we terminate one of our distributor arrangements, it could
lead to a loss of revenues and possible product
returns.
A portion of our sales is made through third-party distribution
agreements. Termination of a distributor relationship, either by
us or by the distributor, could result in a temporary or
permanent loss of revenues, until a replacement distributor can
be established to service the affected end-user customers. We
may not be successful in finding suitable alternative
distributors on satisfactory terms or at all and this could
adversely affect our ability to sell in certain locations or to
certain end-user customers. Additionally, if we terminate our
relationship with a distributor, we may be obligated to
repurchase unsold products. We record a reserve for estimated
returns and price credits. If actual returns and credits exceed
our estimates, our operating results could be harmed. Our
arrangements with our distributors typically also include price
protection provisions if we reduce our list prices.
We
rely on our ecosystem partners to enhance our product offerings
and our inability to continue to develop or maintain such
relationships in the future would harm our ability to remain
competitive.
We have developed relationships with third parties, which we
refer to as ecosystem partners, which provide operating systems,
tool support, reference designs and other services designed for
specific uses with our SoCs. We believe that these relationships
enhance our customers ability to get their products to
market quickly. If we are unable to continue to develop or
maintain these relationships, we might not be able to enhance
our customers ability to commercialize their products in a
timely fashion and our ability to remain competitive would be
harmed.
The
loss of any of our key personnel could seriously harm our
business, and our failure to attract or retain specialized
technical, management or sales and marketing talent could impair
our ability to grow our business.
We believe our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled
managerial, engineering, sales and marketing personnel. The loss
of any key employees or the inability to attract, retain or
motivate qualified personnel, including engineers and sales and
marketing personnel, could delay the development and
introduction of and harm our ability to sell our products. We
believe that our future success is highly dependent on the
contributions of Syed Ali, our co-founder, President and Chief
Executive Officer, and others. None of our employees have
fixed-term employment contracts; they are all at-will employees.
The loss of the services of Mr. Ali, other executive
officers or certain other key personnel could materially and
adversely affect our business, financial condition and results
of operations. For instance, if any of these individuals were to
leave our company unexpectedly, we could face substantial
difficulty in hiring qualified successors and could experience a
loss in productivity during the search for and while any such
successor is integrated into our business and operations.
There is currently a shortage of qualified technical personnel
with significant experience in the design, development,
manufacturing, marketing and sales of integrated circuits. In
particular, there is a shortage of engineers who are familiar
with the intricacies of the design and manufacture of networking
processors, and competition for these engineers is intense. Our
key technical personnel represent a significant asset and serve
as the source of our technological and product innovations. We
may not be successful in attracting, retaining and motivating
sufficient numbers of technical personnel to support our
anticipated growth.
To date, we have relied primarily on our direct marketing and
sales force to drive new customer design wins and to sell our
products. Because we are looking to expand our customer base and
grow our sales to existing customers, we will need to hire
additional qualified sales personnel in the near term and beyond
if we are to achieve revenue growth. The competition for
qualified marketing and sales personnel in our industry, and
particularly in Silicon Valley, is very intense. If we are
unable to hire, train, deploy and manage qualified sales
personnel in a timely manner, our ability to grow our business
will be impaired. In addition, if we are unable to retain our
existing sales personnel, our ability to maintain or grow our
current level of revenues will be adversely affected. Further,
if we are unable to integrate and retain personnel acquired
through our various acquisitions, we may not be able to fully
capitalize on such acquisitions.
Stock options and restricted stock units generally comprise a
significant portion of our compensation packages for all
employees. The FASB requirement to expense the fair value of
stock options awarded to employees
17
beginning in the first quarter of our fiscal 2006 has increased
our operating expenses and may cause us to reevaluate our
compensation structure for our employees. Our inability to
attract, retain and motivate additional key employees could have
an adverse effect on our business, financial condition and
results of operations.
In addition, we rely on stock-based awards as one means for
recruiting, motivating and retaining highly skilled talent. If
the value of such stock awards does not appreciate as measured
by the performance of the price of our common stock or if our
share-based compensation otherwise ceases to be viewed as a
valuable benefit, our ability to attract, retain, and motivate
employees could be weakened, which could harm our results of
operations. The decline in the trading price of our common stock
has resulted in the exercise price of a portion of our
outstanding options to exceed the current trading price of our
common stock, thus lessening the effectiveness of these
stock-based awards. Consequently, we may not continue to
successfully attract and retain key personnel which would harm
our business.
We
have a limited operating history, and we may have difficulty
accurately predicting our future revenues for the purpose of
appropriately budgeting and adjusting our
expenses.
We were established in 2000. Our first quarter of profitability
since then was the quarter ended September 30, 2007 and we
remained profitable until the quarter ended December 31,
2008. We experienced net income of $1.5 million and
$2.2 million for the year ended December 31, 2008 and
2007, respectively. Since we have only five quarters of
operating profitability, we do not have an extended history from
which to predict and manage profitability. Our limited operating
experience, a dynamic and rapidly evolving market in which we
sell our products, our dependence on a limited number of
customers, as well as numerous other factors beyond our control,
including general market conditions, impede our ability to
forecast quarterly and annual revenues accurately. As a result,
we could experience budgeting and cash flow management problems,
unexpected fluctuations in our results of operations and other
difficulties, any of which could make it difficult for us to
gain and maintain profitability and could increase the
volatility of the market price of our common stock.
Some
of our operations and a significant portion of our customers and
contract manufacturers are located outside of the United States,
which subjects us to additional risks, including increased
complexity and costs of managing international operations and
geopolitical instability.
We have international sales offices and research and development
facilities and we conduct, and expect to continue to conduct, a
significant amount of our business with companies that are
located outside the United States, particularly in Asia and
Europe. Even customers of ours that are based in the
U.S. often use contract manufacturers based in Asia to
manufacture their systems, and it is the contract manufacturers
that purchase products directly from us. As a result of our
international focus, we face numerous challenges, including:
increased complexity and costs of managing
international operations;
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longer and more difficult collection of receivables;
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difficulties in enforcing contracts generally;
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geopolitical and economic instability and military conflicts;
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limited protection of our intellectual property and other assets;
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compliance with local laws and regulations and unanticipated
changes in local laws and regulations, including tax laws and
regulations;
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trade and foreign exchange restrictions and higher tariffs;
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travel restrictions;
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timing and availability of import and export licenses and other
governmental approvals, permits and licenses, including export
classification requirements;
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foreign currency exchange fluctuations relating to our
international operating activities;
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transportation delays and limited local infrastructure and
disruptions, such as large scale outages or interruptions of
service from utilities or telecommunications providers;
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difficulties in staffing international operations;
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heightened risk of terrorism;
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local business and cultural factors that differ from our normal
standards and practices;
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differing employment practices and labor issues;
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regional health issues (e.g., SARS) and natural
disasters; and
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work stoppages.
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We
outsource our wafer fabrication, assembly, testing, warehousing
and shipping operations to third parties, and rely on these
parties to produce and deliver our products according to
requested demands in specification, quantity, cost and
time.
We rely on third parties for substantially all of our
manufacturing operations, including wafer fabrication, assembly,
testing, warehousing and shipping. We depend on these parties to
supply us with material of a requested quantity in a timely
manner that meets our standards for yield, cost and
manufacturing quality. We do not have any long-term supply
agreements with our manufacturing suppliers. Any problems with
our manufacturing supply chain could adversely impact our
ability to ship our products to our customers on time and in the
quantity required, which in turn could cause an unanticipated
decline in our sales and possibly damage our customer
relationships.
The fabrication of integrated circuits is a complex and
technically demanding process. Our foundries could, from time to
time, experience manufacturing defects and reduced manufacturing
yields. Changes in manufacturing processes or the inadvertent
use of defective or contaminated materials by our foundries
could result in lower than anticipated manufacturing yields or
unacceptable performance. Many of these problems are difficult
to detect at an early stage of the manufacturing process and may
be time consuming and expensive to correct. Poor yields from our
foundries, or defects, integration issues or other performance
problems in our products could cause us significant customer
relations and business reputation problems, harm our financial
results and result in financial or other damages to our
customers. Our customers could also seek damages from us for
their losses. A product liability claim brought against us, even
if unsuccessful, would likely be time consuming and costly to
defend.
Our products are manufactured at a limited number of locations.
If we experience manufacturing problems at a particular
location, we would be required to transfer manufacturing to a
backup location or supplier. Converting or transferring
manufacturing from a primary location or supplier to a backup
fabrication facility could be expensive and could take one to
two quarters. During such a transition, we would be required to
meet customer demand from our then-existing inventory, as well
as any partially finished goods that can be modified to the
required product specifications. We do not seek to maintain
sufficient inventory to address a lengthy transition period
because we believe it is uneconomical to keep more than minimal
inventory on hand. As a result, we may not be able to meet
customer needs during such a transition, which could delay
shipments, cause a production delay or stoppage for our
customers, result in a decline in our sales and damage our
customer relationships. In addition, we have no long-term supply
contracts with the foundries that we work with. Availability of
foundry capacity has in the recent past been reduced due to
strong demand. The ability of each foundry to provide us with
semiconductor devices is limited by its available capacity and
existing obligations. Foundry capacity may not be available when
we need it or at reasonable prices which could cause us to be
unable to meet customer needs, delay shipments, because a
production delay or stoppage for our customers, result in a
decline in our sales and harm our financial results.
In addition, a significant portion of our sales are to customers
that practice
just-in-time
order management from their suppliers, which gives us a very
limited amount of time in which to process and complete these
orders. As a result, delays in our production or shipping by the
parties to whom we outsource these functions could reduce our
sales, damage our customer relationships and damage our
reputation in the marketplace, any of which could harm our
business, results of operations and financial condition.
19
Any
increase in the manufacturing cost of our products could reduce
our gross margins and operating profit.
The semiconductor business exhibits ongoing competitive pricing
pressure from customers and competitors. Accordingly, any
increase in the cost of our products, whether by adverse
purchase price variances or adverse manufacturing cost
variances, will reduce our gross margins and operating profit.
We do not have any long-term supply agreements with our
manufacturing suppliers and we typically negotiate pricing on a
purchase order by purchase order basis. Consequently, we may not
be able to obtain price reductions or anticipate or prevent
future price increases from our suppliers.
Some of our competitors may be better financed than we are, may
have long-term agreements with our main foundries and may induce
our foundries to reallocate capacity to those customers. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use several independent
foundries to manufacture substantially all of our semiconductor
products, most of our components are not manufactured at more
than one foundry at any given time, and our products typically
are designed to be manufactured in a specific process at only
one of these foundries. Accordingly, if one of our foundries is
unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. We cannot assure you that any of our existing
or new foundries will be able to produce integrated circuits
with acceptable manufacturing yields, or that our foundries will
be able to deliver enough semiconductor devices to us on a
timely basis, or at reasonable prices. These and other related
factors could impair our ability to meet our customers
needs and have a material and adverse effect on our operating
results.
In order to secure sufficient foundry capacity when demand is
high and mitigate the risks described in the foregoing
paragraph, we may enter into various arrangements with suppliers
that could be costly and harm our operating results, such as
nonrefundable deposits with or loans to foundries in exchange
for capacity commitments and contracts that commit us to
purchase specified quantities of integrated circuits over
extended periods. We may not be able to make any such
arrangement in a timely fashion or at all, and any arrangements
may be costly, reduce our financial flexibility, and not be on
terms favorable to us. Moreover, if we are able to secure
foundry capacity, we may be obligated to use all of that
capacity or incur penalties. These penalties may be expensive
and could harm our financial results.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. Any
inability to provide reliable financial reports or prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires
management and our auditors to evaluate and assess the
effectiveness of our internal control over financial reporting.
These Sarbanes-Oxley Act requirements may be modified,
supplemented or amended from time to time. Implementing these
changes may take a significant amount of time and may require
specific compliance training of our personnel. In the future, we
may discover areas of our internal controls that need
improvement. If our auditors or we discover a material weakness,
the disclosure of that fact, even if quickly remedied, could
reduce the markets confidence in our financial statements
and harm our stock price. We may not be able to effectively and
timely implement necessary control changes and employee training
to ensure continued compliance with the Sarbanes-Oxley Act and
other regulatory and reporting requirements. Our rapid growth in
recent periods and our possible future expansion through
acquisitions, present challenges to maintain the internal
control and disclosure control standards applicable to public
companies. If we fail to maintain effective internal controls,
we could be subject to regulatory scrutiny and sanctions and
investors could lose confidence in the accuracy and completeness
of our financial reports.
We
rely on third-party technologies for the development of our
products and our inability to use such technologies in the
future would harm our ability to remain
competitive.
We rely on third parties for technologies that are integrated
into our products, such as wafer fabrication and assembly and
test technologies used by our contract manufacturers, as well as
licensed MIPS and ARM architecture technologies. If we are
unable to continue to use or license these technologies on
reasonable terms, or if these
20
technologies fail to operate properly, we may not be able to
secure alternatives in a timely manner and our ability to remain
competitive would be harmed. In addition, if we are unable to
successfully license technology from third parties to develop
future products, we may not be able to develop such products in
a timely manner or at all.
Our
failure to protect our intellectual property rights adequately
could impair our ability to compete effectively or to defend
ourselves from litigation, which could harm our business,
financial condition and results of operations.
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as confidentiality and nondisclosure
agreements and other methods, to protect our proprietary
technologies and know-how. We have been issued 15 patents in the
United States and two patents in foreign countries and have an
additional 29 patent applications pending in the United States
and 28 patent applications pending in foreign countries. Even if
the pending patent applications are granted, the rights granted
to us may not be meaningful or provide us with any commercial
advantage. For example, these patents could be opposed,
contested, circumvented or designed around by our competitors or
be declared invalid or unenforceable in judicial or
administrative proceedings. The failure of our patents to
adequately protect our technology might make it easier for our
competitors to offer similar products or technologies. Our
foreign patent protection is generally not as comprehensive as
our U.S. patent protection and may not protect our
intellectual property in some countries where our products are
sold or may be sold in the future. Many
U.S.-based
companies have encountered substantial intellectual property
infringement in foreign countries, including countries where we
sell products. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available.
Monitoring unauthorized use of our intellectual property is
difficult and costly. Although we are not aware of any
unauthorized use of our intellectual property in the past, it is
possible that unauthorized use of our intellectual property may
have occurred or may occur without our knowledge. We cannot
assure you that the steps we have taken will prevent
unauthorized use of our intellectual property.
Our failure to effectively protect our intellectual property
could reduce the value of our technology in licensing
arrangements or in cross-licensing negotiations, and could harm
our business, results of operations and financial condition. We
may in the future need to initiate infringement claims or
litigation. Litigation, whether we are a plaintiff or a
defendant, can be expensive, time consuming and may divert the
efforts of our technical staff and managerial personnel, which
could harm our business, whether or not such litigation results
in a determination favorable to us.
Some of the software used with our products, as well as that of
some of our customers, may be derived from so called open
source software that is generally made available to the
public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License,
which impose certain obligations on us in the event we were to
make available derivative works of the open source software.
These obligations may require us to make source code for the
derivative works available to the public,
and/or
license such derivative works under a particular type of
license, rather than the forms of license customarily used to
protect our intellectual property. In addition, there is little
or no legal precedent for interpreting the terms of certain of
these open source licenses, including the determination of which
works are subject to the terms of such licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software, in the event the
copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work.
Assertions
by third parties of infringement by us of their intellectual
property rights could result in significant costs and cause our
operating results to suffer.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights and
positions, which has resulted in protracted and expensive
litigation for many companies. We expect that in the future we
may receive, communications from various industry participants
alleging our infringement of their patents, trade secrets or
other intellectual property rights. Any lawsuits resulting from
such allegations could subject
21
us to significant liability for damages and invalidate our
proprietary rights. Any potential intellectual property
litigation also could force us to do one or more of the
following:
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stop selling products or using technology that contain the
allegedly infringing intellectual property;
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lose the opportunity to license our technology to others or to
collect royalty payments based upon successful protection and
assertion of our intellectual property against others; incur
significant legal expenses;
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pay substantial damages to the party whose intellectual property
rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing
intellectual property; or
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attempt to obtain a license to the relevant intellectual
property from third parties, which may not be available on
reasonable terms or at all.
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Any significant impairment of our intellectual property rights
from any litigation we face could harm our business and our
ability to compete.
Our customers could also become the target of litigation
relating to the patent and other intellectual property rights of
others. This could trigger technical support and indemnification
obligations in some of our licenses or customer agreements.
These obligations could result in substantial expenses,
including the payment by us of costs and damages relating to
claims of intellectual property infringement. In addition to the
time and expense required for us to provide support or
indemnification to our customers, any such litigation could
disrupt the businesses of our customers, which in turn could
hurt our relationships with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for
indemnification will not be made or that if made, such claims
would not have a material adverse effect on our business,
operating results or financial conditions.
Our
third-party contractors are concentrated primarily in Taiwan and
Japan, an area subject to earthquake and other risks. Any
disruption to the operations of these contractors could cause
significant delays in the production or shipment of our
products.
Substantially all of our products are manufactured by
third-party contractors located in Taiwan and to a lesser extent
manufactured by a third party contractor located in Japan. The
risk of an earthquake in Taiwan, Japan and elsewhere in the
Pacific Rim region is significant due to the proximity of major
earthquake fault lines to the facilities of our foundries and
assembly and test subcontractors. For example, several major
earthquakes have occurred in Taiwan and Japan since our
incorporation in 2000. Although our third-party contractors did
not suffer any significant damage as a result of these most
recent earthquakes, the occurrence of additional earthquakes or
other natural disasters could result in the disruption of our
foundry or assembly and test capacity. Any disruption resulting
from such events could cause significant delays in the
production or shipment of our products until we are able to
shift our manufacturing, assembling or testing from the affected
contractor to another third-party vendor. We may not be able to
obtain alternate capacity on favorable terms, if at all.
We may
experience difficulties in transitioning to new wafer
fabrication process technologies or in achieving higher levels
of design integration, which may result in reduced manufacturing
yields, delays in product deliveries and increased
expenses.
In order to remain competitive, we expect to continue to
transition our semiconductor products to increasingly smaller
line width geometries. This transition requires us to modify our
designs to work with the manufacturing processes of our
foundries. We periodically evaluate the benefits, on a
product-by-product
basis, of migrating to new process technologies to reduce cost
and improve performance. We may face difficulties, delays and
expenses as we continue to transition our products to new
processes. We are dependent on our relationships with our
foundry contractors to transition to new processes successfully.
We cannot assure you that the foundries that we use will be able
to effectively manage the transition or that we will be able to
maintain our existing foundry relationships or develop new ones.
If any of our foundry contractors or we experience significant
delays in this transition or fail to efficiently implement this
transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of
which could harm our relationships with our customers and our
results of operations. As new processes become more prevalent,
we expect to continue to integrate greater levels of
22
functionality, as well as customer and third-party intellectual
property, into our products. However, we may not be able to
achieve higher levels of design integration or deliver new
integrated products on a timely basis.
Our
acquisition strategy may result in unanticipated accounting
charges or otherwise adversely affect our results of operations,
and result in difficulties in assimilating and integrating the
operations, personnel, technologies and products of acquired
companies or businesses, or be dilutive to existing
shareholders.
In May 2008, we acquired certain assets of Parallogic, in August
2008 we acquired substantially all of the assets of Star, in
December 2008, we acquired W&W and we may in the future
acquire companies or assets of companies that we believe to be
complementary to our business, including for the purpose of
expanding our new product design capacity, introducing new
design, market or application skills or enhancing and expanding
our existing product lines. In connection with any such future
acquisitions, we may need to use a significant portion of our
available cash, issue additional equity securities that would
dilute current stockholders percentage ownership and incur
substantial debt or contingent liabilities. Such actions could
adversely impact our operating results and the market price of
our common stock. In addition, difficulties may occur in
assimilating and integrating the operations, personnel,
technologies, and products of acquired companies or businesses.
In addition, key personnel of an acquired company may decide not
to work for us. Moreover, to the extent we acquire a company
with existing products; those products may have lower gross
margins than our customary products, which could adversely
affect our gross margin and operating results. If an acquired
company also has inventory that we assume, we will be required
to write up the carrying value of that inventory to fair value.
When that inventory is sold, the gross margins for those
products are reduced and our gross margins for that period are
negatively affected. Furthermore, the purchase price of any
acquired businesses may exceed the current fair values of the
net tangible assets of such acquired businesses. As a result, we
would be required to record material amounts of goodwill, and
acquired in-process research and development charges and other
intangible assets, which could result in significant impairment
and acquired in-process research and development charges and
amortization expense in future periods. These charges, in
addition to the results of operations of such acquired
businesses, could have a material adverse effect on our
business, financial condition and results of operations. We
cannot forecast the number, timing or size of future
acquisitions, or the effect that any such acquisitions might
have on our operating or financial results.
Our
investment portfolio may become impaired by further
deterioration of the capital markets.
Our cash equivalents at December 31, 2008 consisted
primarily of money market instruments, which are invested
primarily in United States treasury securities, bonds of
government agencies, and corporate bonds. We follow an
established investment policy and set of guidelines to monitor,
manage and limit our exposure to interest rate and credit risk.
The policy sets forth credit quality standards and limits our
exposure to any one issuer, as well as our maximum exposure to
various asset classes.
As a result of current adverse financial market conditions,
investments in some financial instruments, such as structured
investment vehicles,
sub-prime
mortgage-backed securities and collateralized debt obligations,
may pose risks arising from liquidity and credit concerns. As of
December 31, 2008, we had no direct holdings in these
categories of investments and our indirect exposure to these
financial instruments through our holdings in money market
instruments was immaterial. As of December 31, 2008, we had
no impairment charge associated with our cash equivalents
relating to such adverse financial market conditions. Although
we believe our current investment portfolio has very little risk
of impairment, we cannot predict future market conditions or
market liquidity and can provide no assurance that our
investment portfolio will remain unimpaired.
We may
need to raise additional capital, which might not be available
or which, if available, may be on terms that are not favorable
to use.
We believe our existing cash balances and cash expected to be
generated from our operations will be sufficient to meet our
working capital, capital expenditures and other needs for at
least the next twelve months. In the future, we may need to
raise additional funds, and we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at
all. If we issue equity securities to raise additional funds,
the ownership percentage of our
23
stockholders would be reduced, and the new equity securities may
have rights, preferences or privileges senior to those of
existing holders of our common stock. If we borrow money, we may
incur significant interest charges, which could harm our
profitability. Holders of debt would also have rights,
preferences or privileges senior to those of existing holders of
our common stock. If we cannot raise needed funds on acceptable
terms, we may not be able to develop or enhance our products,
take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, which could harm our
business, operating results and financial condition.
Our
future effective tax rates could be affected by the allocation
of our income among different geographic regions, which could
affect our future operating results, financial condition and
cash flows.
We are in the process of expanding our international operations
and staff to better support our expansion into international
markets. This expansion includes the implementation of an
international structure that includes, among other things, a
research and development cost-sharing arrangement, certain
licenses and other contractual arrangements between us and our
wholly-owned domestic and foreign subsidiaries. As a result of
these changes, we anticipate that our consolidated pre-tax
income will be subject to foreign tax at relatively lower tax
rates when compared to the United States federal statutory tax
rate and, as a consequence, our effective income tax rate is
expected to be lower than the United States federal statutory
rate. Our future effective income tax rates could be adversely
affected if tax authorities challenge our international tax
structure or if the relative mix of United States and
international income changes for any reason. Accordingly, there
can be no assurance that our income tax rate will be less than
the United States federal statutory rate.
Risks
Related to our Common Stock
The
market price of our common stock may be volatile, which could
cause the value of your investment to decline.
The trading prices of the securities of technology companies
have been highly volatile. Further, our common stock has a
limited trading history. Since our initial public offering in
May 2007 through December 31, 2008, our stock price has
fluctuated from a low of $8.88 to a high of $35.60. We cannot
predict the extent to which the trading market will continue to
develop or how liquid the market may become. The trading price
of our common stock is therefore likely to be highly volatile
and could be subject to wide fluctuations in price in response
to various factors, some of which are beyond our control. These
factors include:
quarterly variations in our results of operations
or those of our competitors;
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general economic conditions and slow or negative growth of
related markets;
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announcements by us or our competitors of design wins,
acquisitions, new products, significant contracts, commercial
relationships or capital commitments;
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our ability to develop and market new and enhanced products on a
timely basis;
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commencement of, or our involvement in, litigation;
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disruption to our operations;
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the emergence of new sales channels in which we are unable to
compete effectively;
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any major change in our board of directors or management;
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changes in financial estimates including our ability to meet our
future revenue and operating profit or loss projections;
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changes in governmental regulations; and
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changes in earnings estimates or recommendations by securities
analysts.
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Furthermore, the stock market in general, and the market for
semiconductor and other technology companies in particular, have
experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. These broad market and industry factors may
seriously harm the
24
market price of our common stock, regardless of our actual
operating performance. These trading price fluctuations may also
make it more difficult for us to use our common stock as a means
to make acquisitions or to use options to purchase our common
stock to attract and retain employees. In addition, in the past,
following periods of volatility in the overall market and the
market price of a companys securities, securities class
action litigation has often been instituted against these
companies. This litigation, if instituted against us, could
result in substantial costs and a diversion of our
managements attention and resources.
A
limited number of stockholders may have the ability to influence
the outcome of director elections and other matters requiring
stockholder approval.
Our directors, executive officers and principal stockholders and
their affiliates beneficially owned approximately 47% of our
outstanding common stock as of December 31, 2008. These
stockholders, if they acted together, could exert substantial
influence over matters requiring approval by our stockholders,
including electing directors, adopting new compensation plans
and approving mergers, acquisitions or other business
combination transactions. This concentration of ownership may
discourage, delay or prevent a change of control of our company,
which could deprive our stockholders of an opportunity to
receive a premium for their stock as part of a sale of our
company and might reduce our stock price. These actions may be
taken even if they are opposed by our other stockholders.
Delaware
law and our amended and restated certificate of incorporation
and bylaws contain provisions that could delay or discourage
takeover attempts that stockholders may consider
favorable.
Provisions in our amended and restated certificate of
incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management.
These provisions include the following:
the division of our board of directors into three
classes;
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the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors or
due to the resignation or departure of an existing board member;
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the prohibition of cumulative voting in the election of
directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
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the requirement for the advance notice of nominations for
election to the board of directors or for proposing matters that
can be acted upon at a stockholders meeting;
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the ability of our board of directors to alter our bylaws
without obtaining stockholder approval;
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the ability of the board of directors to issue, without
stockholder approval, up to 10,000,000 shares of preferred
stock with terms set by the board of directors, which rights
could be senior to those of our common stock;
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the elimination of the rights of stockholders to call a special
meeting of stockholders and to take action by written consent in
lieu of a meeting;
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the required approval of at least
662/3%
of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or repeal the provisions of
our amended and restated certificate of incorporation regarding
the election and removal of directors and the inability of
stockholders to take action by written consent in lieu of a
meeting; and
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the required approval of at least a majority of the shares
entitled to vote at an election of directors to remove directors
without cause.
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In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These provisions in our amended and restated certificate of
incorporation and bylaws and under Delaware law could discourage
potential takeover attempts, could reduce the price that
investors are willing to pay for shares of our common stock in
the future and could potentially result in the market price
being lower than they would without these provisions.
25
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Item 1B.
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Unresolved
Staff Comments
|
Not applicable.
Our principal executive offices are located in a leased facility
in Mountain View, California, consisting of approximately
32,500 square feet of office space under lease that expires
at the end of August 2011. This facility accommodates our
principal software engineering, sales, marketing, operations and
finance and administrative activities. In connection with our
acquisition of W&W, we assumed W&Ws lease of
office space in Sunnyvale, California consisting of
approximately 10,553 square feet that expires in January
2011. We also occupy space in Marlborough, Massachusetts,
consisting of approximately 74,735 square feet of office
space under a lease that expires at the end of April 2013, which
accommodates our product design team. Internationally, we also
lease offices in Hyderabad and Chennai, India, consisting of
approximately 14,286 square feet that expires at the end of
May 2013, which accommodates our product design team. In
addition, we lease office spaces that are not considered
principal offices in Beijing, China, Hsin-Chu, Taiwan and
Madrid, Spain which accommodates our product design teams. We do
not own any real property. We believe that our leased facilities
are adequate to meet our current needs and that additional
facilities are available for lease to meet future needs.
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Item 3.
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Legal
Proceedings
|
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. As of the date
of this Annual Report on
Form 10-K,
we are not currently a party to any legal proceedings the
outcome of which, if determined adversely to us, would
individually or in the aggregate have a material adverse effect
on our business, operating results, financial condition or cash
flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of our security holders
during the fourth quarter ended December 31, 2008.
Part II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
Information for Common Stock
Our common stock has been quoted on The NASDAQ Global Market
under the symbol CAVM since our initial public
offering on May 2, 2007. Prior to that time, there was no
public market for our common stock. As of February 19,
2009, there were approximately 160 holders of record of our
common stock.
The following table sets forth for the indicated periods the
high and low sales prices of our common stock as reported by The
NASDAQ Global Market.
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High
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Low
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First Quarter 2008
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$
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23.20
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$
|
14.22
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Second Quarter 2008
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$
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26.10
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$
|
16.32
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Third Quarter 2008
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|
$
|
20.71
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|
$
|
12.33
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Fourth Quarter 2008
|
|
$
|
14.42
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|
$
|
8.88
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Second Quarter 2007 (from May 7, 2007)
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|
$
|
26.27
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|
$
|
16.44
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Third Quarter 2007
|
|
$
|
35.60
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|
|
$
|
21.53
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Fourth Quarter 2007
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|
$
|
34.75
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|
$
|
21.63
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26
Dividend
Policy
We have never paid any cash dividends on our common stock. Our
board of directors currently intends to retain any future
earnings to support operations and to finance the growth and
development of our business and does not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to our dividend policy will be made
at the discretion of our board.
Stock
Performance Graph(1)
The graph set forth below shows a comparison of the cumulative
total stockholder return on our common stock between May 2,
2007 (the date of our initial public offering) and
December 31, 2008, with the cumulative total return of
(i) the NASDAQ Computer Index and (ii) the NASDAQ
Composite Index, over the same period. This graph assumes the
investment of $100,000 on May 2, 2007 in our common stock,
the NASDAQ Computer Index and the NASDAQ Composite Index, and
assumes the reinvestment of dividends, if any. The graph assumes
the initial value of our common stock on May 2, 2007 was
the closing sales price of $16.45 per share. The stockholder
return shown in the graph below is not necessarily indicative
of, nor is it intended to forecast, the potential future
performance of our common stock, and we do not make or endorse
any predictions as to future stockholder returns. Information
used in the graph was obtained from Yahoo, Inc., a source
believed to be reliable, but we are not responsible for any
errors or omissions in such information.
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5/2/2007
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12/31/2007
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6/30/2008
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12/31/2008
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Cavium Networks
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100.0
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139.9
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127.7
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63.9
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Nasdaq Composite Index
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100.0
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103.7
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|
89.6
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|
61.7
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Nasdaq Computer Index
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100.0
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|
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|
115.8
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|
97.0
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|
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61.8
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(1) |
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This Section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934 Act, as amended, whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing. |
27
Recent
Sales of Unregistered Securities
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(a)
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Sales of
Unregistered Securities
|
On December 23, 2008, we issued an aggregate of
338,245 shares of our common stock to certain shareholders
of W&W in connection with our acquisition of W&W. No
cash was paid to us for such issuance of our common stock. The
issuance of the shares was deemed to be exempt from registration
under Section 4(2) of the Securities Act of 1933, as
amended.
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(b)
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Use of
Proceeds from Public Offering of Common Stock
|
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File
No. 333-140660),
that was declared effective by the SEC on May 1, 2007. We
registered 7,762,500 shares of our common stock with a
proposed maximum aggregate offering price of
$104.8 million, all of which we sold. The offering was
completed after the sale of all 7,762,500 shares. Morgan
Stanley & Co. Incorporated and Lehman Brothers Inc.
were the joint book-running managing underwriters of our initial
public offering and Thomas Weisel Partners LLC,
Needham & Company, LLC and JMP Securities LLC acted as
co-managers. As of December 31, 2008, $67.4 million of
the approximately $94.7 million in net proceeds received by
us in the offering, after deducting approximately
$7.3 million in underwriting discounts, commissions, and
$2.8 million in other offering costs, were invested in
various interest-bearing instruments, and $27.3 million of
the net proceeds had been used for acquisitions, general
corporate purposes, including the repayment of the outstanding
balances under the term loan with Silicon Valley Bank, and
general and administrative and manufacturing expenses. None of
the expenses or payments were paid, directly or indirectly, to
directors, officers or persons owning 10% or more of our common
stock, or to our affiliates other than payments in the ordinary
course of business to officers for salaries and to non-employee
directors as compensation for board or board committee service.
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(c)
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Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
|
None
28
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Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements and related notes thereto and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations section and other
financial information included elsewhere in this Annual Report
on
Form 10-K.
The consolidated statements of operations data for each of the
years ended December 31, 2008, 2007 and 2006, and the
summary consolidated balance sheet data as of December 31,
2008 and 2007, are derived from our audited consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2005 and 2004, and the summary
consolidated balance sheet data as of December 31, 2006,
2005 and 2004, are derived from audited consolidated financial
statements which are not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of the
results to be expected in any future period.
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Year Ended December 31,
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2008
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|
|
2007
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2006
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2005
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2004
|
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(In thousands, except per share data)
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Consolidated Statements of Operations Data:
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Net revenue
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$
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86,609
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|
$
|
54,203
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|
$
|
34,205
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|
|
$
|
19,377
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|
|
$
|
7,411
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Cost of revenue(1)(2)
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|
35,639
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|
|
|
19,898
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|
|
|
13,092
|
|
|
|
7,865
|
|
|
|
3,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
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|
|
50,970
|
|
|
|
34,305
|
|
|
|
21,113
|
|
|
|
11,512
|
|
|
|
4,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Operating expenses:
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|
|
|
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|
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|
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|
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Research and development(2)
|
|
|
27,180
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|
|
|
19,548
|
|
|
|
18,651
|
|
|
|
16,005
|
|
|
|
12,010
|
|
Sales, general and administrative(2)
|
|
|
22,111
|
|
|
|
14,688
|
|
|
|
10,058
|
|
|
|
6,840
|
|
|
|
3,752
|
|
In-process research and development
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,610
|
|
|
|
34,236
|
|
|
|
28,709
|
|
|
|
22,845
|
|
|
|
15,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) from operations
|
|
|
360
|
|
|
|
69
|
|
|
|
(7,596
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)
|
|
|
(11,333
|
)
|
|
|
(11,431
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Other income (expense), net:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Interest expense
|
|
|
(499
|
)
|
|
|
(622
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)
|
|
|
(707
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)
|
|
|
(183
|
)
|
|
|
(388
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
(411
|
)
|
|
|
|
|
Interest income and other
|
|
|
2,576
|
|
|
|
3,458
|
|
|
|
345
|
|
|
|
355
|
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total other income (expense), net
|
|
|
2,077
|
|
|
|
2,263
|
|
|
|
(829
|
)
|
|
|
(239
|
)
|
|
|
(302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Income (loss) before income tax expense and cumulative effect of
change in accounting principle
|
|
|
2,437
|
|
|
|
2,332
|
|
|
|
(8,425
|
)
|
|
|
(11,572
|
)
|
|
|
(11,733
|
)
|
Income tax expense
|
|
|
930
|
|
|
|
142
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
1,507
|
|
|
|
2,190
|
|
|
|
(8,985
|
)
|
|
|
(11,572
|
)
|
|
|
(11,733
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
|
$
|
(11,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.82
|
)
|
Shares used in computing basic net income (loss) per common share
|
|
|
40,385
|
|
|
|
29,006
|
|
|
|
8,066
|
|
|
|
7,319
|
|
|
|
6,459
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.82
|
)
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
42,566
|
|
|
|
32,432
|
|
|
|
8,066
|
|
|
|
7,319
|
|
|
|
6,459
|
|
|
|
|
(1) |
|
Includes acquired intangible asset amortization of $1,737, $860,
$1,116, $1,007 and $254, in the years ended December 31,
2008, 2007, 2006, 2005, and 2004, respectively. |
29
|
|
|
(2) |
|
Includes stock-based compensation expense as follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008(3)
|
|
|
2007(3)
|
|
|
2006(3)
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
179
|
|
|
$
|
43
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
2,684
|
|
|
|
805
|
|
|
|
396
|
|
|
|
10
|
|
|
|
|
|
Sales, general and administrative
|
|
|
3,194
|
|
|
|
1,021
|
|
|
|
340
|
|
|
|
75
|
|
|
|
85
|
|
|
|
|
(3) |
|
We applied the provisions of SFAS 123(R) in 2008, 2007 and
2006. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
77,027
|
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
|
$
|
7,879
|
|
|
$
|
18,381
|
|
Working capital
|
|
|
90,335
|
|
|
|
105,048
|
|
|
|
11,689
|
|
|
|
6,160
|
|
|
|
17,718
|
|
Total assets
|
|
|
151,164
|
|
|
|
134,610
|
|
|
|
29,962
|
|
|
|
20,219
|
|
|
|
28,731
|
|
Preferred stock warrant liability
|
|
|
|
|
|
|
|
|
|
|
701
|
|
|
|
1,184
|
|
|
|
|
|
Capital lease and technology license obligations
|
|
|
4,735
|
|
|
|
8,530
|
|
|
|
3,580
|
|
|
|
3,087
|
|
|
|
|
|
Notes payable
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
|
1,162
|
|
|
|
|
|
|
|
39
|
|
|
|
74
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
|
|
|
|
72,437
|
|
|
|
61,820
|
|
|
|
62,339
|
|
Common stock and additional paid-in capital
|
|
|
185,784
|
|
|
|
175,580
|
|
|
|
3,740
|
|
|
|
1,261
|
|
|
|
641
|
|
Total stockholders equity (deficit)
|
|
$
|
128,561
|
|
|
$
|
116,850
|
|
|
$
|
(57,180
|
)
|
|
$
|
(50,674
|
)
|
|
$
|
(39,776
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion should be read in conjunction with
the Consolidated Financial Statements and the related notes that
appear elsewhere in the document.
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Forward-looking statements are based
on our managements beliefs and assumptions and on
information currently available to our management. In some
cases, you can identify forward-looking statements by terms such
as may, will, should,
could, would, estimate,
project, predict, potential,
continue, strategy, believe,
anticipate, plan, expect,
intend and similar expression intended to identify
forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors, which may cause
our actual results, performance, time frames or achievements to
be materially difference from any future results, performance,
time frames or achievements expressed or implied by the
forward-looking statements. We discuss many of these risks,
uncertainties and other factors in this Annual Report on
Form 10-K
in greater detail under the heading Risk Factors.
Given these risks, uncertainties and other factors, you should
not place undue reliance on these forward-looking statements.
Also, these forward-looking statements represent our estimates
and assumptions only as of the date of this filing. You should
read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
30
Overview
We are a provider of highly integrated semiconductor products
that enable intelligent processing for networking,
communications, storage, wireless and security applications. We
market and sell our products to providers of networking
equipment that sell their products into the enterprise network,
data center, broadband and consumer, and access and service
provider markets. Our products are used in a broad array of
networking equipment, including routers, switches, content-aware
switches, unified threat management, or UTM and other security
appliances, application-aware gateways, voice/video/data, or
triple-play, gateways, wireless local area network, or WLAN and
third-generation, or 3G access and aggregation devices, storage
networking equipment, servers and intelligent network interface
cards. We focus our resources on the design, sales and marketing
of our products, and outsource the manufacturing of our products.
From our incorporation in 2000 through 2003, we were primarily
engaged in the design and development of our first processor
family, NITROX, which we began shipping commercially in 2003. In
2004, we introduced and commenced commercial shipments of NITROX
Soho. In 2006, we commenced our first commercial shipments of
our OCTEON family of multi-core MIPS64 processors. We introduced
a number of new products within all three of these product
families in 2006. In 2007 we introduced our new line of OCTEON
based storage services processors designed to address the
specific needs in the storage market, as well as other new
products in the OCTEON and NITROX families. In 2008, we expanded
our OCTEON and NITROX product families with new products
including wireless services processors to address the needs for
wireless infrastructure equipment.
We acquired W&W in the fourth quarter of 2008. Total merger
consideration was approximately $8.0 million. This
acquisition launches us into the high growth video processor
market with a broad product line called
PureVutm.
The
PureVutm
family of video processors and modules incorporate proprietary
and patent pending video technology that produce perceptual
lossless video quality and deliver practically zero latency with
extremely low power and cost. Through the acquisition of
substantially all of the assets of Star in the third quarter of
2008 for a purchase price of approximately $9.6 million, we
also added the Star ARM-based processors to our portfolio to
address connected home and office applications. For a complete
discussion on our 2008 acquisitions, see Note 5
Business Combinations in Item 8, of this Annual
Report, which is incorporated herein by reference.
Since inception, we have invested heavily in new product
development and achieved our first quarter of profitability
during the quarter ended September 30, 2007. Our net
revenue has grown from $19.4 million in 2005 to
$34.2 million in 2006, $54.2 million in 2007, and
$86.6 million in 2008, driven primarily by demand in the
enterprise network and data center markets, and more recently by
increased demand in the broadband and consumer markets. We
expect sales of our products for use in the enterprise network
and data center markets to continue to represent a substantial
portion of our revenue in the foreseeable future. However, we
expect sales into those markets to decline as a percentage of
overall sales as sales in the broadband and consumer and the
access and service provider markets are expected to increase at
a faster rate than the expected increase in sales into the
enterprise network and data center markets.
We primarily sell our products to OEMs, either directly or
through their contract manufacturers. Contract manufacturers
purchase our products only when an OEM incorporates our product
into the OEMs product, not as commercial
off-the-shelf
products. Our customers products are complex and require
significant time to define, design and ramp to volume
production. Accordingly, our sales cycle is long. This cycle
begins with our technical marketing, sales and field application
engineers engaging with our customers system designers and
management, which is typically a multi-month process. If we are
successful, a customer will decide to incorporate our product in
its product, which we refer to as a design win. Because the
sales cycles for our products are long, we incur expenses to
develop and sell our products, regardless of whether we achieve
the design win and well in advance of generating revenue, if
any, from those expenditures. We do not have long-term purchase
commitments from any of our customers, as sales of our products
are generally made under individual purchase orders. However,
once one of our products is incorporated into a customers
design, it is likely to remain designed in for the life cycle of
its product. We believe this to be the case because a redesign
would generally be time consuming and expensive. We have
experienced revenue growth due to an increase in the number of
our products, an expansion of our customer base, an increase in
the number of average design wins within any one customer and an
increase in the average revenue per design win.
31
Key
Business Metrics
Design Wins. We closely monitor design wins by
customer and end market on a periodic basis. We consider design
wins to be a key ingredient in our future success, although the
revenue generated by each design can vary significantly. Our
long-term sales expectations are based on internal forecasts
from specific customer design wins based upon the expected time
to market for end customer products deploying our products and
associated revenue potential.
Pricing and Margins. Pricing and margins
depend on the features of the products we provide to our
customers. In general, products with more complex configurations
and higher performance tend to be priced higher and have higher
gross margins. These configurations tend to be used in high
performance applications that are focused on the enterprise
network, data center, and access and service provider markets.
We tend to experience price decreases over the life cycle of our
products, which can vary by market and application. In general,
we experience less pricing volatility with customers that sell
to the enterprise and data center markets.
Sales Volume. A typical design win can
generate a wide range of sales volumes for our products,
depending on the end market demand for our customers
products. This can depend on several factors, including the
reputation, market penetration, the size of the end market that
the product addresses, and the marketing and sales effectiveness
of our customer. In general, our customers with greater market
penetration and better branding tend to develop products that
generate larger volumes over the product life cycle. In
addition, some markets generate large volumes if the end market
product is adopted by the mass market.
Customer Product Life Cycle. We typically
commence commercial shipments from nine months to three years
following the design win. Once our product is in production,
revenue from a particular customer may continue for several
years. We estimate our customers product life cycles based
on the customer, type of product and end market. In general,
products that go into the enterprise network and data center
take longer to reach volume production but tend to have longer
lives. Products for other markets, such as broadband and
consumer, tend to ramp relatively quickly, but generally have
shorter life cycles. We estimate these life cycles based on our
managements experience with providers of networking
equipment and the semiconductor market as a whole.
Critical
Accounting Policies and Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our
consolidated financial statements, which have been prepared in
accordance with United States generally accepted accounting
principles, or GAAP. These accounting principles require us to
make certain estimates and judgments that can affect the
reported amounts of assets and liabilities as of the dates of
the consolidated financial statements, the disclosure of
contingencies as of the dates of the consolidated financial
statements, and the reported amounts of revenue and expenses
during the periods presented. We base our estimates on
historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities. If actual results or events
differ materially from those contemplated by us in making these
estimates, our reported financial condition and results of
operations for future periods could be materially affected. See
Risk Factors for certain matters that may affect our
future financial condition or results of operations.
An accounting policy is deemed to be critical if it requires an
accounting estimate to be made based on assumptions about
matters that are uncertain at the time the estimate is made, if
different estimates reasonably could have been used, or if the
changes in estimate that are reasonably likely to occur could
materially impact the financial statements. Our management has
discussed the development, selection and disclosure of these
estimates with the Audit Committee of our Board of Directors.
See Note 1 to our audited consolidated financial statements
for a more comprehensive discussion of our significant
accounting policies. We believe the following critical
accounting policies reflect significant judgments and estimates
used in the preparation of our consolidated financial statements:
|
|
|
|
|
revenue recognition;
|
|
|
|
product warranty accrual;
|
|
|
|
stock-based compensation;
|
32
|
|
|
|
|
inventory valuation;
|
|
|
|
accounting for income taxes;
|
|
|
|
mask costs;
|
|
|
|
business combinations; and
|
|
|
|
goodwill and purchased intangible assets.
|
Revenue
Recognition
We derive our revenue primarily from sales of semiconductor
products. We recognize revenue from product sales applying the
provisions of Staff Accounting Bulletin No. 104
Revenue Recognition, (SAB 104).
Under SAB 104, we recognize revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
price is deemed fixed or determinable and free of contingencies
and significant uncertainties, and collection is probable. Our
price is considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be
delivered at specified prices, which is often memorialized with
a customer purchase order. Our agreements with non-distributor
customers do not include rights of return or acceptance
provisions. We assess the ability to collect from our customers
based on a number of factors, including credit worthiness and
any past transaction history of the customers.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if we
conclude we can reasonably estimate the credits for returns and
price adjustments issuable. We record an estimated allowance, at
the time of shipment, based on the historical patterns of
returns and pricing credits of sales recognized upon shipment.
The credits issued to distributors or other customers were not
material in the years ended December 31, 2008, 2007 and
2006.
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if it cannot reasonably estimate the level of returns
and credits issuable.
We also derive a small portion of our revenue in the form of
license and maintenance fees through licensing our software
products. The value of any support services is recognized as
services revenue on a straight-line basis over the term of the
related support period, which is typically one year.
In addition, we also enter into development agreements with some
of our customers. Development revenue is recognized under the
proportional performance method, with the associated costs
included in cost of sales. We estimate the proportional
performance of the development contracts based on an analysis of
progress toward completion. We periodically evaluate the actual
status of each project to ensure that the estimates to complete
each contract remain accurate. A provision for estimated losses
on contracts is made in the period in which the loss becomes
probable and can be reasonably estimated. To date, we have not
recorded any such losses. If the amount billed exceeds the
amount of revenue recognized, the excess amount is recorded as
deferred revenue. Revenue recognized in any period is dependent
on our progress toward completion of projects in progress. To
the extent we are unable to estimate the proportional
performance then the revenue is recognized on a completed
contract basis.
Warranty
Accrual
Our products are subject to a one-year warranty period and we
provide for the estimated future costs of replacement upon
shipment of the product in the accompanying statements of
operations. Our warranty accrual is estimated based on
historical claims compared to historical revenue and our
expectations regarding future experience. Our actual warranty
costs in the future may vary from our historical warranty costs,
which could result in adjustments to our warranty reserves in
future periods.
Stock-Based
Compensation
We apply the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123(R)),
using the prospective transition method, which requires us to
apply the provisions of SFAS 123(R) only to awards granted,
modified, repurchased or cancelled after the adoption date.
33
Under SFAS 123(R), share-based compensation expense is
measured at the grant date based on the fair value of the award
and is recognized as compensation expense net of an estimated
forfeiture rate over the vesting period. We use the
Black-Scholes option-pricing model to determine the fair value
of stock options, which require various subjective assumptions,
including expected volatility, expected term and the risk-free
interest rates. We estimate the expected volatility based on the
historical stock price volatility of comparable companies over
the estimated expected term of our share-based awards. We use
the simplified method as permitted under the provisions of Staff
Accounting Bulletin No. 110, Year-End Help for
Existing Employee Stock Options, to determine the expected
term of our share-based awards. We calculate the expected
forfeiture rate based on average historical trends. The
assumptions used in calculating the fair value of share-based
payment awards represent managements best estimates and
judgment. If factors change and we use different assumptions,
our stock-based compensation expense could be materially
different in the future. If our actual forfeiture rate is
materially different from our estimate, the stock-based
compensation expense could be significantly different from what
we have recorded in the current period.
Inventory
Valuation
We write down inventory based on aging and forecasted demand.
These factors are impacted by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction and require management to make estimates
that may include uncertain elements. If actual market conditions
or demand for our products are less favorable than those
projected, additional inventory write-downs may be required,
which would negatively affect gross margins in the period when
such write-downs are recorded.
Accounting
for Income Taxes
As part of the process of preparing our consolidated financial
statements, we are required to compute income taxes in each of
the jurisdictions in which we operate. This process involves
estimating our actual current tax exposure, including assessing
the risks associated with tax audits, and assessing temporary
differences resulting from different treatment of items for tax
and accounting purposes. These differences result in deferred
tax assets and liabilities. We must then assess the likelihood
that our deferred tax assets will be recovered from future
taxable income and, to the extent we believe that recovery is
not likely, we must establish a valuation allowance. Significant
judgment is required in determining the valuation allowance
recorded against our deferred tax assets. In assessing the
valuation allowance, we consider all available evidence
including past operating results and estimates of future taxable
income. Our net deferred tax assets relate predominantly to our
United States tax jurisdiction. We currently maintain a full
valuation allowance on our net deferred tax assets. The
valuation allowance was determined in accordance with the
provisions of SFAS No. 109, which requires an
assessment of both positive and negative evidence when
determining whether it is more likely than not that deferred tax
assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. Our expected U.S. loss,
among other considerations, provides negative evidence under
SFAS No. 109 and accordingly, a full valuation
allowance was recorded against our net deferred tax assets. We
intend to maintain a full valuation allowance on our net
deferred tax assets until sufficient positive evidence exists to
support reversal of the valuation allowance.
If our assumptions and consequently our estimates change in the
future, the valuation allowances we have established may be
increased or decreased, resulting in a respective increase or
decrease in income tax expense.
We adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes, or FIN 48, on January 1, 2007. We
believe that our reserve for uncertain tax positions, including
related interest, is adequate. The amounts ultimately paid upon
resolution of audits could be materially different from the
amounts previously included in our income tax expense and
therefore could have a material impact on our tax provision, net
income and cash flows.
In the event that actual results differ from these estimates or
we adjust these estimates in future periods, we may need to
record additional income tax expense or establish an additional
valuation allowance, which could materially impact our financial
position and results of operations.
Mask
Costs
We incur costs for the fabrication of masks used by our contract
manufacturers to manufacture wafers that incorporate our
products. We capitalize the costs of fabrication masks that are
reasonably expected to be used during
34
production manufacturing. Such amounts are included within
property and equipment and are generally depreciated over a
period of 12 months. If we do not reasonably expect to use
the fabrication mask during production manufacturing, the
related mask costs are expensed to research and development in
the period in which the costs are incurred.
Business
Combinations
We account for business combinations in accordance with
SFAS No. 141, Business Combinations
(SFAS 141), which requires the purchase method
of accounting for business combinations. In accordance with
SFAS 141, we determine the recognition of intangible assets
based on the following criteria: (i) the intangible asset
arises from contractual or other rights; or (ii) the
intangible is separable or divisible from the acquired entity
and capable of being sold, transferred, licensed, returned or
exchanged. In accordance with SFAS 141, we allocate the
purchase price of business combinations to the tangible assets,
liabilities and intangible assets acquired, including in-process
research and development (IPR&D), based on
their estimated fair values. The excess purchase price over
those fair values is recorded as goodwill. Management makes
valuation assumptions that require significant estimates,
especially with respect to intangible assets. Critical estimates
in valuing certain intangible assets include, but are not
limited to future expected cash flows from customer contracts,
customer lists, and distribution agreements and acquired
developed technologies, expected costs to develop IPR&D
into commercially viable products, estimated cash flows from
projects when completed and discount rates. We estimate fair
value based upon assumptions we believe to be reasonable, but
which are inherently uncertain and unpredictable and, as a
result, actual results may differ from estimates. Other
estimates associated with the accounting for acquisitions may
change as additional information becomes available regarding the
assets acquired and liabilities assumed. Effective
January 1, 2009, we are required to account for business
combinations in accordance with the SFAS No. 141
(revised 2007), or SFAS No. 141R, Business
Combinations, which replaces SFAS No 141.
Goodwill
and Purchased Intangible Assets
Goodwill is measured as the excess of the cost of an acquisition
over the sum of the amounts assigned to tangible and
identifiable intangible assets and liabilities assumed. We
review goodwill and finite-lived purchased intangible assets for
impairment at least annually and whenever changes in events or
changes in circumstances indicate that the carrying value of the
assets may not be fully recoverable. Applying the provisions of
SFAS No. 142, Goodwill and Intangible
Assets, we perform goodwill impairment test at the Company
level, which is the sole reporting unit. If the fair value of
the reporting unit exceeds the carrying value of the reporting
unit, goodwill is not impaired. We did not record any impairment
charges relating to the carrying value of goodwill during the
years ended December 31, 2008 and 2007. Applying the
provisions of SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets we perform
impairment of finite-lived intangibles for the carrying value
and the remaining useful lives of the assets. During the years
ended December 31, 2008, 2007 and 2006 we did not record
any impairment charges. Significant management judgment is
required in the forecasts of future operating results that are
used in the evaluation of carrying value of goodwill and
finite-lived intangible assets. If our actual results, or the
plans and estimates used in future impairment analyses, are
lower than the original estimates used to assess the
recoverability of these assets, we could incur additional
impairment charges.
Results
of Operations
Net Revenue. Our net revenue consists of
primarily sales of our semiconductor products to providers of
networking equipment and their contract manufacturers and
distributors. Initial sales of our products for a new design are
usually made directly to providers of networking equipment as
they design and develop their product. Once their design enters
production, they often outsource their manufacturing to contract
manufacturers that purchase our products directly from us or
from our distributors. We price our products based on market and
competitive conditions and periodically reduce the price of our
products, as market and competitive conditions change, and as
manufacturing costs are reduced. We do not experience different
margins on direct sales to providers of networking equipment and
indirect sales through contract manufacturers because in all
cases we negotiate product pricing directly with the providers
of networking equipment. To date, all of our revenue has been
denominated in United States dollars.
35
We also derive revenue in the form of license and maintenance
fees through licensing our software products, which helps our
customers build products around our SoCs in a more time and cost
efficient manner. Revenue from such arrangements totaled
$2.2 million, $1.1 million and $740,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.
Our customers representing greater than 10% of revenue for each
of the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Cisco
|
|
|
29
|
%
|
|
|
23
|
%
|
|
|
19
|
%
|
F5 Networks
|
|
|
11
|
|
|
|
18
|
|
|
|
21
|
|
Sumitomo
|
|
|
11
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
Represents less than 10% of consolidated net revenue |
Our distributors are used primarily to support international
sale logistics in Asia, including importation and credit
management. Total net revenue through distributors was
$29.4 million, $13.2 million and $10.5 million
for the years ended December 31, 2008, 2007 and 2006,
respectively, which accounted for 33.9%, 24.4%, and 30.7% of net
revenue for the years ended December 31, 2008, 2007 and
2006, respectively. While we have purchase agreements with our
distributors, the distributors do not have long-term contracts
with any of the equipment providers. Our distributor agreements
limit the distributors ability to return product up to a
portion of purchases in the preceding quarter. Given our
experience, along with our distributors limited
contractual return rights, we believe we can reasonably estimate
expected returns from our distributors. Accordingly, we
recognize sales through distributors at the time of shipment,
reduced by our estimate of expected returns.
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if we cannot reasonably estimate the level of returns
and credits issuable. During the quarter ended June 30,
2007, we signed a distribution agreement with Avnet, Inc. to
distribute our products primarily in the United States. Given
the terms of the distribution agreement, for sales to Avnet,
revenue and costs are deferred until products are sold by Avnet
to their end customers. For the year ended December 31,
2008, 3.6% of our net revenues were from products sold by Avnet.
For the year ended December 31, 2007, less than 1% of our
net revenues were from products sold by Avnet. Revenue
recognition depends on notification from Avnet that product has
been sold to Avnets end customers.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased our products. For sales to our distributors, their
geographic location may be different from the geographic
locations of the ultimate end customers. Sales by geography for
the periods indicated were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
44,787
|
|
|
$
|
32,748
|
|
|
$
|
19,483
|
|
Japan
|
|
|
11,559
|
|
|
|
2,732
|
|
|
|
2,612
|
|
Taiwan
|
|
|
11,533
|
|
|
|
10,500
|
|
|
|
7,403
|
|
China
|
|
|
6,206
|
|
|
|
3,367
|
|
|
|
2,290
|
|
Other countries
|
|
|
12,524
|
|
|
|
4,856
|
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue and Gross Margin. We outsource
wafer fabrication, assembly and test functions of our products.
A significant portion of our cost of revenue consists of
payments for the purchase of wafers and for assembly and test
services, amortization of acquired intangibles and amortization
related to capitalized mask costs. To a lesser extent, cost of
revenue includes expenses relating to our internal operations
that manage our contractors,
36
stock-based compensation, the cost of shipping and logistics,
royalties, inventory valuation expenses for excess and obsolete
inventories, warranty costs and changes in product cost due to
changes in sort, assembly and test yields. In general, our cost
of revenue associated with a particular product declines over
time as a result of yield improvements, primarily associated
with design and test enhancements.
We use third-party foundries and assembly and test contractors,
which are primarily located in Asia, to manufacture, assemble
and test our semiconductor products. We purchase processed
wafers on a per wafer basis from our fabrication suppliers,
which are currently TSMC, UMC and Fujitsu. We also outsource the
sort, assembly, final testing and other processing of our
product to third-party contractors, primarily ASE and ISE. We
negotiate wafer fabrication on a purchase order basis and do not
have long-term agreements with any of our third-party
contractors. A significant disruption in the operations of one
or more of these contractors would impact the production of our
products which could have a material adverse effect on our
business, financial condition and results of operations.
Cost of revenue also includes amortized costs related to certain
acquired technology assets in 2004 and 2005, and our
acquisitions of Parallogic in May 2008, Star in August 2008 and
W&W in December 2008. In August 2004, we acquired certain
assets of Brecis Communications Corporation, which included the
purchase of its secure communication processor product line. We
capitalized a total of $2.3 million of developed technology
and amortized that amount on a straight-line basis over the
expected useful life of three years. In April 2005, we acquired
Menlo Logic, LLC, which included the purchase of technology used
for secure communication. We capitalized a total of
$1.1 million of developed technology and amortized that
amount on a straight-line basis over the expected useful life of
three years. In May 2008, we acquired certain assets of
Parallogic. The acquisition included identifiable intangible
assets of approximately $450,000, which consisted of
intellectual property related to the developed technology as
well as incremental value associated with existing customer
relationships. We capitalized identifiable intangibles and are
amortizing the amount on a straight-line basis over the expected
useful life of one to five years. In August 2008, we acquired
substantially all of the assets of Star, which included the
purchase of identifiable intangible assets of $5.3 million.
We capitalized the intangible assets and are amortizing the
amount on a straight-line basis over the expected useful lives
of less than a year to seven years. In December 2008, we
acquired W&W, which included the purchase of identifiable
intangible assets of $10.1 million. We capitalized the
intangible assets and are amortizing the amount on a
straight-line basis over the expected useful lives of less than
a year to six years. The total intangible assets amortization
expense included in cost of revenue was $1.7 million,
$860,000 and $1.1 million for the years ended
December 31, 2008, 2007 and 2006, respectively. In
addition, in the year ended December 31, 2008, we incurred
$470,000 expense related to the fair value adjustment of Star
and W&W inventory.
In addition, we incur costs for the fabrication of masks used by
our contract manufacturers to manufacture wafers that
incorporate our products. The cost of fabrication mask sets has
increased as we began transitioning from a 130-nanometer to a
90-nanometer process in our next-generation products in 2007.
During the years ended December 31, 2008, 2007 and 2006, we
capitalized $4.2 million, $3.6 million and $694,000 of
mask costs, respectively. As our product processes continue to
mature and as we develop more history and experience, we expect
to capitalize most or all of our mask costs in the future. We
amortize the cost of fabrication masks that we reasonably expect
to use for production manufacturing over a
12-month
period. Total amortized expenses for the masks included in cost
of revenue was $3.5 million, $1.5 million and none for
the years ended December 31, 2008, 2007 and 2006,
respectively. The unamortized balance of capitalized mask costs
at December 31, 2008 and December 31, 2007 was
$2.1 million and $2.2 million, respectively. We
anticipate that a large percentage of our total mask costs will
be capitalized and amortized to cost of revenue.
Our revenue, cost of revenue, gross profit and gross margin for
the years ended December 31, 2008, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net revenue
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
Cost of revenue
|
|
|
35,639
|
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
$
|
50,970
|
|
|
$
|
34,305
|
|
|
$
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
58.9
|
%
|
|
|
63.3
|
%
|
|
|
61.7
|
%
|
37
Our gross margin has been and will continue to be affected by a
variety of factors, including the product mix, the cost of
fabrication masks that are capitalized and amortized, average
sales prices of our products, the amortization expense
associated with the acquired intangible assets, the timing of
cost reductions for fabricated wafers and assembly and test
service costs, inventory valuation charges and the timing and
changes in sort, assembly and test yields. Overall product
margin is impacted by the mix between higher performance, higher
margin products and lower performance, lower margin products. In
addition, we typically experience lower yields and higher
associated costs on new products, which improve as production
volumes increase.
Research and Development Expenses. Research
and development expenses primarily include personnel costs,
engineering design development software and hardware tools,
allocated facilities expenses and depreciation of equipment used
in research and development and stock-based compensation under
SFAS 123(R).
We expect research and development expenses to continue to
increase in total dollars. Additionally, as a percentage of
revenue, these costs fluctuate from one period to another. Total
research and development expenses for the years ended
December 31, 2008, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Research and development expenses
|
|
$
|
27,180
|
|
|
$
|
19,548
|
|
|
$
|
18,651
|
|
Percent of total revenue
|
|
|
31.4
|
%
|
|
|
36.1
|
%
|
|
|
54.5
|
%
|
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses primarily include personnel costs, accounting and legal
fees, information systems, sales commissions, trade shows,
marketing programs, depreciation, allocated facilities expenses
and, stock-based compensation under SFAS 123(R). We expect
sales, general and administrative expenses to increase in
absolute dollars. Total sales, general and administrative costs
for the years ended December 31, 2008, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Sales, general and administrative
|
|
$
|
22,111
|
|
|
$
|
14,688
|
|
|
$
|
10,058
|
|
Percent of total revenue
|
|
|
25.5
|
%
|
|
|
27.1
|
%
|
|
|
29.4
|
%
|
Other Income (Expense), Net. Other income
(expense), net primarily includes interest income on cash and
cash equivalents and, to a lesser extent, includes an interest
expense component associated with the installment payment of
capital leases. For the years ended December 31, 2007 and
2006 it also includes net adjustments we made to record our
preferred stock warrants at fair value in accordance with FASB
Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5.
Upon the closing of our initial public offering in May 2007,
these warrants were converted into warrants to purchase shares
of our common stock and, as a result, we were no longer required
to re-measure the warrants to fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Interest income and other
|
|
$
|
2,576
|
|
|
$
|
3,458
|
|
|
$
|
345
|
|
Interest expense
|
|
|
(499
|
)
|
|
|
(622
|
)
|
|
|
(707
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
$
|
2,077
|
|
|
$
|
2,263
|
|
|
$
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Provision for Income Taxes. The following
table presents the provision for income taxes and the effective
tax rates for the three years ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Income (loss) before income taxes
|
|
$
|
2,437
|
|
|
$
|
2,332
|
|
|
$
|
(8,425
|
)
|
Income tax expense
|
|
|
930
|
|
|
|
142
|
|
|
|
560
|
|
Effective tax rate
|
|
|
38.2
|
%
|
|
|
6.1
|
%
|
|
|
−6.6
|
%
|
We recorded income tax expense of $930,000, $142,000 and 560,000
for the years ended December 31, 2008, 2007 and 2006,
respectively. The provision for the years ended
December 31, 2008 and 2007 was primarily due to the federal
alternative minimum tax on profits in the United States adjusted
by certain non-deductible items, international taxes and state
income taxes. The provision at December 31, 2006 was
primarily related to alternative minimum tax on profit in
connection with establishing the international business
structure.
Fiscal
2008 Compared to Fiscal 2007
Net Revenue. Our net revenue was
$86.6 million in 2008 as compared to $54.2 million in
2007, an increase of 59.8%. Of the 59.8% net revenue growth,
48.4% resulted from growth in broadband and consumer and
enterprise network and data center markets and 10.3% resulted
from the growth in access and service provider markets. The
revenue growth in 2008 in each of the markets as described is
mainly attributable to the new product introductions which drove
the volume increases. The remaining 1.1% revenue growth resulted
from the software and services markets.
In 2008, we derived 33.9% of our revenue from distributors
compared to 24.4% in 2007.
Cost of Revenue and Gross Margin. Gross margin
decreased by 4.4 percentage points to 58.9% in 2008 from
63.3% in 2007. The decline in gross margin in 2008 compared to
2007 was primarily due to sales mix shift in 2008 towards
increased sales of lower performance, lower margin products. In
addition, to a lesser extent, the gross margin decline was due
to amortization costs related to the acquired intangible assets
and fair value adjustment of the acquired inventory from Star.
Research and Development Expenses. Research
and development expenses increased by $7.6 million, or 39%,
to $27.2 million in 2008 from $19.5 million in 2007.
The increase was primarily the result of higher salaries and
benefit expenses of $3.4 million and stock-based
compensation expenses of $1.9 million due to increased
headcount. In addition, design tools accounted for
$0.8 million of the increase and professional services and
other miscellaneous expenses accounted for $1.5 million.
Research and development headcount increased to 238 at the end
of 2008 from 127 at the end of 2007.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $7.4 million, or 51%, to
$22.1 million in 2008 from $14.7 million in 2007. Of
the $7.4 million increase, stock-based compensation expense
and salaries, benefits and commissions each accounted for
$2.2 million resulting primarily from the increased
headcount. In addition, accounting and legal fees and other
services accounted for $1.9 million of the increase, and
depreciation and other expenses accounted for the remaining
$1.1 million. Sales, general and administrative headcount
increased to 91 at the end of 2008 from 60 at the end of 2007.
In-process research and development. In the
year ended December 31, 2008, we recorded $1.3 million
in-process research and development (IPR&D)
expense related to our acquisition of W&W Communications,
Inc. completed in December, 2008. The amount was expensed
immediately as it relates to the acquisition of existing
technology project which had not reached technological
feasibility at the time of acquisition, and had no future
alternative use. The fair value of the IPR&D was determined
based on an income approach using the discounted cash flow
method. A discount rate of 24% used to value the project was
based on implied rate of return of the transaction, adjusted to
reflect additional risks inherent in the acquired project.
Income Tax Expense. Income tax expense
increased by $0.8 million to $0.9 million in 2008 from
$0.1 million in 2007. The increase was primarily due to
higher federal alternative minimum tax on profits generated in
the
39
United States in 2008 compared to 2007. In addition, the income
tax expense was adjusted by certain non-deductible items,
international taxes and state income taxes.
Other Income (Expense), Net. Other income
(expense), net, decreased by $0.2 million to
$2.1 million in 2008 from $2.3 million in 2007. The
decrease was primarily due to decrease in interest income
resulting from lower interest rates in 2008 compared to 2007.
Subsequent to our initial public offering in 2007, we are not
required to record warrant revaluation expense associated with
the preferred stock warrants, which, partially offsets the
decline in 2008.
Fiscal
2007 Compared to Fiscal 2006
Net Revenue. Our net revenue was
$54.2 million in 2007 as compared to $34.2 million in
2006, an increase of 58.5%. The majority of the increase in
sales from 2006 to 2007 related to an increase in sales of
$15.5 million to existing customers, primarily a result of
new design wins reaching commercial production. In each of 2007
and 2006, a substantial majority of our sales were to customers
that sell into the enterprise network and data center markets.
In 2007, we derived 24.4% of our revenue from distributors
compared to 31.0% in 2006.
Cost of Revenue and Gross Margin. Gross margin
increased 1.6 percentage points to 63.3% in 2007 from 61.7%
in 2006. The increase in gross margin in 2007 compared to 2006
was primarily due to a shift in product mix to more complex,
higher performance products which generally have higher margins.
In addition, manufacturing costs improved during 2007 due to
lower unit wafer, assembly and test costs.
Research and Development Expenses. Research
and development expenses increased $0.9 million, or 4.8%,
to $19.5 million in 2007 from $18.7 million in 2006.
The increase included higher salaries and benefit expenses of
$1.9 million and stock-based compensation expenses of
$0.6 million. Professional services and other miscellaneous
expenses accounted for $1.3 million, offset by a decrease
in tools and masks costs of $3.0 million. Research and
development headcount increased to 127 at the end of 2007 from
104 at the end of 2006.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $4.6 million, or 46%, to
$14.7 million in 2007 from $10.1 million in 2006. Of
the $4.6 million increase, salaries, benefits and
commissions accounted for $2.1 million, accounting and
legal fees and other services accounted for $1.4 million,
stock-based compensation expense accounted for
$0.6 million, and depreciation and allocated facilities
accounted for $0.5 million. Accounting and legal fees were
primarily the result of the development and implementation of
our international structure and other costs associated with
being a public company. Sales, general and administrative
headcount increased to 60 at the end of 2007 from 47 at the end
of 2006.
Income Tax Expense. Income tax expense
decreased $0.5 million to $0.1 million in 2007 from
$0.6 million in 2006. The decrease is due to an income tax
provision of $0.6 million related to alternative minimum
tax on profit in connection with establishing our international
structure in 2006, offset by the increase in the alternative
minimum tax on profit generated in 2007.
Other Income (Expense), Net. Other income
(expense), Net, increased $3.1 million to net other income
of $2.3 million in 2007 from net expense of
$0.8 million in 2006. The increase was primarily due to an
increase in interest income as a result of higher cash balances,
offset by warrant revaluation expenses recognized to record our
preferred stock warrants at fair value and interest expense
attributable to the $4.0 million drawn against our term
loan.
Quarterly
Results of Operations
The following table sets forth our unaudited consolidated
statements of operations data for each of the eight quarters in
the period ended December 31, 2008. The quarterly data have
been prepared on the same basis as the audited consolidated
financial statements. You should read this information together
with our consolidated financial statements and related notes
included elsewhere in this Annual Report. We anticipate that the
rate of new orders may vary significantly from quarter to
quarter. Consequently, if anticipated sales and shipments in any
quarter do not occur when expected, expenses and inventory
levels could be disproportionately high, and our operating
results for that quarter and future quarters may be adversely
affected. In addition, because of our limited operating history
and the rapidly evolving nature of our business, we believe that
period-to-period
comparisons of revenue and operating
40
results, including gross margin and operating expenses as a
percentage of total revenue, are not necessarily meaningful and
should not be relied upon as indications of future performance.
Although we have experienced significant percentage growth in
revenue, we do not believe that our historical growth rates are
likely to be sustainable or necessarily indicative of future
growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
22,180
|
|
|
$
|
24,525
|
|
|
$
|
21,562
|
|
|
$
|
18,342
|
|
|
$
|
16,231
|
|
|
$
|
14,165
|
|
|
$
|
12,666
|
|
|
$
|
11,141
|
|
Cost of revenue
|
|
|
11,145
|
|
|
|
10,099
|
|
|
|
7,808
|
|
|
|
6,587
|
|
|
|
5,811
|
|
|
|
5,207
|
|
|
|
4,698
|
|
|
|
4,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
11,035
|
|
|
|
14,426
|
|
|
|
13,754
|
|
|
|
11,755
|
|
|
|
10,420
|
|
|
|
8,958
|
|
|
|
7,968
|
|
|
|
6,959
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
8,306
|
|
|
|
6,593
|
|
|
|
6,461
|
|
|
|
5,820
|
|
|
|
5,705
|
|
|
|
4,796
|
|
|
|
4,721
|
|
|
|
4,326
|
|
Sales, general and administrative
|
|
|
6,158
|
|
|
|
5,944
|
|
|
|
5,454
|
|
|
|
4,555
|
|
|
|
4,021
|
|
|
|
3,976
|
|
|
|
3,482
|
|
|
|
3,209
|
|
In-process research and development
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,783
|
|
|
|
12,537
|
|
|
|
11,915
|
|
|
|
10,375
|
|
|
|
9,726
|
|
|
|
8,772
|
|
|
|
8,203
|
|
|
|
7,535
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from operations
|
|
|
(4,748
|
)
|
|
|
1,889
|
|
|
|
1,839
|
|
|
|
1,380
|
|
|
|
694
|
|
|
|
186
|
|
|
|
(235
|
)
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(96
|
)
|
|
|
(115
|
)
|
|
|
(135
|
)
|
|
|
(153
|
)
|
|
|
(50
|
)
|
|
|
(73
|
)
|
|
|
(291
|
)
|
|
|
(208
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
(224
|
)
|
Interest income and other
|
|
|
476
|
|
|
|
499
|
|
|
|
609
|
|
|
|
992
|
|
|
|
1,265
|
|
|
|
1,307
|
|
|
|
817
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
380
|
|
|
|
384
|
|
|
|
474
|
|
|
|
839
|
|
|
|
1,215
|
|
|
|
1,234
|
|
|
|
177
|
|
|
|
(363
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax expense
|
|
|
(4,368
|
)
|
|
|
2,273
|
|
|
|
2,313
|
|
|
|
2,219
|
|
|
|
1,909
|
|
|
|
1,420
|
|
|
|
(58
|
)
|
|
|
(939
|
)
|
Income tax (benefit) expense
|
|
|
(11
|
)
|
|
|
454
|
|
|
|
240
|
|
|
|
247
|
|
|
|
(59
|
)
|
|
|
110
|
|
|
|
34
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,357
|
)
|
|
$
|
1,819
|
|
|
$
|
2,073
|
|
|
$
|
1,972
|
|
|
$
|
1,968
|
|
|
$
|
1,310
|
|
|
$
|
(92
|
)
|
|
$
|
(996
|
)
|
Net (loss) income per common share, basic and diluted
|
|
$
|
(0.11
|
)
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
(0.12
|
)
|
Revenue has increased sequentially in each of the quarters
presented except for the fourth quarter of 2008 due to increases
in the number of products sold to new and existing customers and
international expansion. The revenue growth in 2008 is
attributable to the increase in sales in the enterprise network
and date center markets as well as broadband and consumer
markets. Sales in the fourth quarter were negatively impacted
due to the global economic downturn. In 2007 the revenue growth
was primarily due to increase in sales into the enterprise
network and data center markets. To date, we have not
experienced any material impact from any seasonal effects on an
annual or quarterly basis.
Gross margin percentages have fluctuated from quarter to quarter
due to changing product mix, selling prices and manufacturing
costs. The gross margin percentage remained flat from the first
quarter of 2008 to the second quarter of 2008. The gross margin
percentage decreased slightly from the second quarter of 2008 to
the third quarter of 2008 due primarily to increase in
amortization costs resulting from the acquisitions completed in
2008. The gross margin decline from the third quarter of 2008 to
the fourth quarter of 2008 was due primarily to lower revenue
combined with higher manufacturing costs and amortization costs
resulting from the acquisitions completed in 2008. The gross
margin percentage increased from the first quarter of 2007 to
the fourth quarter of 2007 due to a change in product mix. If
our mix changes toward lower margin products or if we are
required due to competitive reasons or global market conditions
to reduce pricing without a corresponding decrease in costs, our
margins could decrease in the future.
Operating expenses in each of the quarters in 2008 and 2007 have
generally increased. The increases were primarily related to the
salaries, benefits and stock-based compensation costs resulting
from the increased headcount and during the second half of 2008
primarily for the additional headcount resulting from our
acquisitions. In addition, sales, general and administrative
expenses increases in 2008 and 2007 are due to higher accounting
and
41
legal costs related to the development and implementation of our
international structure and cost associated with being a public
company.
Liquidity
and Capital Resources
In May 2007, we received net proceeds of approximately
$94.7 million (after underwriters discounts of
$7.3 million and additional offering related costs of
approximately $2.8 million). Our other primary sources of
cash historically have been cash generated from operations, cash
collections from customers, and cash received from the exercise
of employee stock options. As of December 31, 2008, we had
cash and cash equivalents of $77.0 million and net accounts
receivable of $14.1 million.
Following is a summary of our working capital and cash and cash
equivalents as of December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Working capital
|
|
$
|
90,335
|
|
|
$
|
105,048
|
|
|
$
|
11,689
|
|
Cash and cash equivalents
|
|
|
77,027
|
|
|
|
98,462
|
|
|
|
10,154
|
|
Following is a summary of our cash flows from operating
activities, investing activities and financing activities for
the years ended December 31, 2008, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
10,627
|
|
|
$
|
6,176
|
|
|
$
|
(7,819
|
)
|
Net cash (used in) investing activities
|
|
|
(29,120
|
)
|
|
|
(5,772
|
)
|
|
|
(2,075
|
)
|
Net cash (used in) provided by financing activities
|
|
|
(2,942
|
)
|
|
|
87,904
|
|
|
|
12,169
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities increased by
$4.5 million in 2008 compared to 2007. The increase in our
cash flow from operations was primarily due to higher non-cash
expense addition in 2008 compared to 2007. The non-cash
additions were mainly attributable to the higher stock-based
compensation due to increased headcount and higher amortization
expenses resulting from the intangibles acquired in connection
with the acquisitions completed in 2008. Changes in operating
activities in 2008 in comparison to 2007 were primarily driven
by increases of $6.1 million in inventory and
$3.9 million in accounts receivable, partially offset by
increase in changes in other assets and liabilities of
$0.3 million.
Net cash provided by operating activities was $6.2 million
for the year ended December 31, 2007, primarily consisting
of our net income of $2.2 million and $8.8 million in
non-cash operating expenses, offset by $4.8 million in net
cash used by changes in operating activities. Non-cash operating
expenses consisted of depreciation and amortization expense of
$6.2 million, stock-based compensation of
$1.9 million, and $0.6 million of warrant revaluation
expense. Changes in operating activities from 2006 were
primarily driven by an increase of $2.5 million in accounts
receivable due to increased revenue and increase of
$4.5 million in inventory as we ramp up the production of
new products, offset by the increase of $1.8 million in
accounts payable and $0.8 million in deferred revenue.
Cash
Flows from Investing Activities
Net cash used in investing activities increased by
$23.3 million in 2008 compared to 2007. The increase was
primarily the result of $19.8 million in net cash paid for
the acquisitions completed in 2008. In addition,
$3.5 million of the increase in 2008 was the result of cash
used for mask costs and other capital expenditures.
Net cash used in investing activities increased by
$3.7 million to $5.8 million in 2007 from
$2.1 million in 2006. The increase is due to the purchase
of masks and design tools to support our product development and
production needs.
42
Cash
Flows from Financing Activities
Net cash used in financing activities was $2.9 million for
the year ended December 31, 2008 compared to net cash
provided by financing activities of $87.9 million in 2007.
In 2008, we paid $3.8 million in principal payments of
capital lease and technology license obligations. These
increases were partially offset by proceeds from stock option
exercises. Net cash provided by financing activities in the year
ended December 31, 2007, was primarily due to net proceeds
of $94.7 million initial public offering.
Net cash provided by financing activities was $87.9 million
for 2007 compared to $12.2 million for 2006. The increase
in 2007 is primarily due to net cash provided from our initial
public offering of $94.7 million, $1.1 million from
issuance of common stock upon exercises of stock options, offset
by the repayment of the term loan with Silicon Valley Bank of
$4.0 million and principal payments of capital lease and
technology license obligations of $3.8 million.
Cash equivalents consist primarily of an investment in a money
market fund. As of December 31, 2008, we have not
experienced any impairment charges due to such concentration of
credit risk. We believe that our $77.0 million of cash and
cash equivalents at December 31, 2008 and expected cash
flow from operations will be sufficient to fund our projected
operating requirements for at least twelve months. Our future
capital requirements will depend on many factors, including our
rate of revenue growth, the expansion of our engineering, sales
and marketing activities, the timing and extent of our expansion
into new territories, the timing of introductions of new
products and enhancements to existing products and the
continuing market acceptance of our products. Although we
currently are not a party to any agreement or letter of intent
with respect to potential material investments in, or
acquisitions of, complementary businesses, services or
technologies, we may enter into these types of arrangements in
the future, which could also require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us or at all.
Indemnities
In the ordinary course of business, we have entered into
agreements with customers that include indemnity provisions.
Based on historical experience and information known as of
December 31, 2008, we believe our exposure related to the
above indemnities at December 31, 2008 is not material. We
also enter into indemnification agreements with our officers and
directors and our certificate of incorporation and bylaws
include similar indemnification obligations to our officers and
directors. It is not possible to determine the amount of our
liability related to these indemnification agreements and
obligations to our officers and directors due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have, nor do we
currently have, any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance
sheet arrangements or other contractually narrow or limited
purposes.
Contractual
Obligations
The following is a summary of our contractual obligations as of
December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
1 to 2 Years
|
|
|
3 to 5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating lease obligations
|
|
$
|
1,835
|
|
|
$
|
3,532
|
|
|
$
|
1,323
|
|
|
$
|
|
|
|
$
|
6,690
|
|
Capital lease obligations
|
|
|
2,862
|
|
|
|
2,183
|
|
|
|
|
|
|
|
|
|
|
|
5,045
|
|
Purchase obligations
|
|
|
4,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,882
|
|
|
$
|
5,715
|
|
|
$
|
1,323
|
|
|
$
|
|
|
|
$
|
15,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
We adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes, or FIN 48 on January 1, 2007. As
of December 31, 2008, we had $4.0 million of total
gross unrecognized tax benefits and related interest. The timing
of any payments which could result from these unrecognized tax
benefits will depend upon a number of factors. Accordingly, the
timing of payment cannot be estimated. We do not expect a
significant tax payment related to these obligations to occur
within the next 12 months.
In addition to the contractual obligations noted in the table
above, we also have the following funding commitments:
In connection with our acquisition of certain assets of
Parallogic, we are obligated to make two installment payments of
$220,000 each at the completion of certain milestones or the
18th and
36th
month anniversaries of the acquisition date, whichever comes
first. Of the $440,000, $220,000 was recorded as acquisition
related payables in accrued expenses and other current
liabilities and the remaining $220,000 was recorded in other
non-current liabilities. In January 2009, we paid the first
installment of $220,000 due to Parallogics achievement of
the first milestone as defined in the Asset Purchase Agreement.
As of February 26, 2009, Parallogic has not achieved the
second milestone as defined in the Asset Purchase Agreement.
As of December 31, 2008, in connection with our acquisition
of W&W, we recorded a total of purchase consideration
related liabilities of $4.3 million. Of the
$4.3 million, $3.8 million relates to the unpaid
portion of the cash consideration and $475,000 relates to the
unpaid portion of acquisition related expenses. As of
February 26, 2009, we paid $3.4 million and we expect
to pay the remaining $900,000 by the end of 2009.
Recent
Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007) or
SFAS 141R, Business Combinations, which replaces
SFAS No 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process
research and development at fair value, and requires the
expensing of acquisition-related costs as incurred.
SFAS 141R is effective for financial statements issued for
fiscal years beginning after December 15, 2008 and will
apply prospectively to business combinations completed on or
after that date. The adoption of SFAS No. 141R could have a
material effect on our financial position and results of
operations as the release of any valuation allowance for
acquired tax attributes subsequent to adoption would benefit the
tax provision as opposed to recording the benefit to goodwill.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160.
SFAS No. 160 clarifies that a noncontrolling or
minority interest in a subsidiary is considered an ownership
interest and, accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated
financial statements. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. We are
currently evaluating the impact, if any, of adopting this
standard on our financial position, results of operations and
liquidity.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible
Assets, or
FSP 142-3.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Asset.
FSP 142-3
is intended to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the
period of expected cash flows used to measure the fair value of
the asset under SFAS 141R, Business Combinations,
and other guidance under U.S. GAAP.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008. We are currently evaluating the impact, if any, of the
adoption of
FSP 142-3
on our consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, or
FSP 157-3.
FSP 157-3
clarified the application of SFAS 157.
FSP 157-3
demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of
this standard did not have an impact on our consolidated
financial statements.
44
In November 2008, the FASB ratified EITF Issue
No. 08-7,
Accounting for Defensive Intangible Assets, or
EITF 08-7.
EITF 08-7
applies to defensive intangible assets, which are acquired
intangible assets that the acquirer does not intend to actively
use but intends to hold to prevent its competitors from
obtaining access to them. As these assets are separately
identifiable,
EITF 08-7
requires an acquiring entity to account for defensive intangible
assets as a separate unit of accounting. Defensive intangible
assets must be recognized at fair value in accordance with
SFAS 141R and SFAS 157.
EITF 08-7
is effective for defensive intangible assets acquired in fiscal
years beginning on or after December 15, 2008. We are
currently evaluating the potential impact, if any, of the
adoption of
EITF 08-7
on our consolidated results of operations and financial
condition.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Foreign
Currency Risk
All of our sales are denominated in United States dollars. We
therefore have no foreign currency risk associated with sale of
products. Our international sales and marketing operations incur
expenses that are denominated in foreign currencies. These
expenses could be materially affected by currency fluctuations;
however, we do not consider this currency risk to be material as
the related costs do not constitute a significant portion of our
total spending. We outsource our wafer fabrication, assembly,
testing, warehousing and shipping operations; however all
expenses related thereto are denominated in United States
dollars.
Interest
Rate Risk
We had cash and cash equivalents of $77.0 million at
December 31, 2008, which was held for working capital
purposes. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any
material exposure to changes in the fair value of these
investments as a result of changes in interest rates due to
their short term nature. Declines in interest rates, however,
will reduce future investment income.
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cavium Networks, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Cavium
Networks, Inc. and its subsidiaries at December 31, 2008
and December 31, 2007, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2008, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial
statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in Managements Report on
Internal Control over Financial Reporting under Item 9A.
Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the
Companys internal control over financial reporting based
on our integrated audit (which was an integrated audit in 2008).
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal
control over financial reporting was maintained in all material
respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design
and operating effectiveness of internal control based on the
assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our
opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 2, 2009
47
CAVIUM
NETWORKS, INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except
|
|
|
|
share and per share data)
|
|
|
Assets
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
77,027
|
|
|
$
|
98,462
|
|
Accounts receivable, net of allowances of $203 and $177,
respectively
|
|
|
14,054
|
|
|
|
9,768
|
|
Inventories
|
|
|
17,281
|
|
|
|
9,573
|
|
Prepaid expenses and other current assets
|
|
|
1,298
|
|
|
|
946
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
109,660
|
|
|
|
118,749
|
|
Property and equipment, net
|
|
|
11,115
|
|
|
|
11,608
|
|
Intangible assets, net
|
|
|
16,958
|
|
|
|
4,096
|
|
Goodwill
|
|
|
12,925
|
|
|
|
|
|
Other assets
|
|
|
506
|
|
|
|
157
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
151,164
|
|
|
$
|
134,610
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
7,309
|
|
|
$
|
5,311
|
|
Accrued expenses and other current liabilities
|
|
|
7,697
|
|
|
|
2,253
|
|
Deferred revenue
|
|
|
1,700
|
|
|
|
1,666
|
|
Capital lease and technology license obligations, current portion
|
|
|
2,619
|
|
|
|
4,471
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
19,325
|
|
|
|
13,701
|
|
Capital lease and technology license obligations, net of current
portion
|
|
|
2,116
|
|
|
|
4,059
|
|
Other non-current liabilities
|
|
|
1,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
22,603
|
|
|
|
17,760
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001:
|
|
|
|
|
|
|
|
|
10,000,000 shares authorized, no shares issued and
outstanding as of December 31, 2008 and 2007
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001:
|
|
|
|
|
|
|
|
|
200,000,000 shares authorized; 41,183,010 and
40,307,361 shares issued and outstanding; as of
December 31,2008 and 2007, respectively
|
|
|
41
|
|
|
|
40
|
|
Additional paid-in capital
|
|
|
185,743
|
|
|
|
175,540
|
|
Accumulated deficit
|
|
|
(57,223
|
)
|
|
|
(58,730
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
128,561
|
|
|
|
116,850
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
151,164
|
|
|
$
|
134,610
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except per share data)
|
|
|
Net revenue
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
Cost of revenue
|
|
|
35,639
|
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
50,970
|
|
|
|
34,305
|
|
|
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
27,180
|
|
|
|
19,548
|
|
|
|
18,651
|
|
Sales, general and administrative
|
|
|
22,111
|
|
|
|
14,688
|
|
|
|
10,058
|
|
In-process research and development
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
50,610
|
|
|
|
34,236
|
|
|
|
28,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
360
|
|
|
|
69
|
|
|
|
(7,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(499
|
)
|
|
|
(622
|
)
|
|
|
(707
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
(573
|
)
|
|
|
(467
|
)
|
Interest income and other
|
|
|
2,576
|
|
|
|
3,458
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,077
|
|
|
|
2,263
|
|
|
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
2,437
|
|
|
|
2,332
|
|
|
|
(8,425
|
)
|
Income tax expense
|
|
|
930
|
|
|
|
142
|
|
|
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
Shares used in computing basic net income (loss) per common share
|
|
|
40,385
|
|
|
|
29,006
|
|
|
|
8,066
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
42,566
|
|
|
|
32,432
|
|
|
|
8,066
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Mandatorily Redeemable Convertible
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Equity/
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except share data)
|
|
|
Balance at December 31, 2005
|
|
|
21,091,375
|
|
|
$
|
61,820
|
|
|
|
8,739,315
|
|
|
$
|
9
|
|
|
$
|
1,252
|
|
|
$
|
(51,935
|
)
|
|
$
|
(50,674
|
)
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
33,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
568,766
|
|
|
|
|
|
|
|
1,349
|
|
|
|
|
|
|
|
1,349
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
141
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
(32,599
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
(20
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
745
|
|
Issuance of common stock in connection with warrants exercise
|
|
|
|
|
|
|
|
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B preferred stock in connection with
warrants exercises
|
|
|
179,976
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
134
|
|
Issuance of Series D preferred stock, net of issuance costs
of $15
|
|
|
1,032,037
|
|
|
|
8,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D preferred stock in connection with
warrants exercises
|
|
|
60,809
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
130
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,985
|
)
|
|
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
22,364,197
|
|
|
|
72,437
|
|
|
|
9,365,600
|
|
|
|
9
|
|
|
|
3,731
|
|
|
|
(60,920
|
)
|
|
|
(57,180
|
)
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
717,212
|
|
|
|
1
|
|
|
|
1,451
|
|
|
|
|
|
|
|
1,452
|
|
Common stock issued in connection with vesting of restricted
stock units
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
110
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
(14,585
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
(10
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,908
|
|
|
|
|
|
|
|
1,908
|
|
Issuance of Series B preferred stock in connection with
warrants exercises
|
|
|
181
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock due to IPO
|
|
|
(22,364,378
|
)
|
|
|
(72,440
|
)
|
|
|
22,364,378
|
|
|
|
22
|
|
|
|
72,418
|
|
|
|
|
|
|
|
72,440
|
|
Issuance of common stock for IPO, net of issuance cost of $2,790
|
|
|
|
|
|
|
|
|
|
|
7,762,500
|
|
|
|
8
|
|
|
|
94,660
|
|
|
|
|
|
|
|
94,668
|
|
IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
1,272
|
|
Common stock
warrants-net
exercise
|
|
|
|
|
|
|
|
|
|
|
86,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
40,307,361
|
|
|
|
40
|
|
|
|
175,540
|
|
|
|
(58,730
|
)
|
|
|
116,850
|
|
Common stock issued in connection with exercises of stock options
|
|
|
|
|
|
|
|
|
|
|
516,759
|
|
|
|
1
|
|
|
|
857
|
|
|
|
|
|
|
|
858
|
|
Common stock issued in connection with vesting of restricted
stock units
|
|
|
|
|
|
|
|
|
|
|
25,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
(4,480
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
(4
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,182
|
|
|
|
|
|
|
|
6,182
|
|
Issuance of common stock in connection with business acquisition
|
|
|
|
|
|
|
|
|
|
|
338,245
|
|
|
|
|
|
|
|
3,098
|
|
|
|
|
|
|
|
3,098
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,507
|
|
|
|
1,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
41,183,010
|
|
|
$
|
41
|
|
|
$
|
185,743
|
|
|
$
|
(57,223
|
)
|
|
$
|
128,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
CAVIUM
NETWORKS, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
6,057
|
|
|
|
1,869
|
|
|
|
745
|
|
Amortization of warrant costs to interest expense
|
|
|
|
|
|
|
149
|
|
|
|
143
|
|
Revaluation of warrants to fair value
|
|
|
|
|
|
|
574
|
|
|
|
467
|
|
Depreciation and amortization
|
|
|
11,978
|
|
|
|
6,221
|
|
|
|
5,009
|
|
In-process research and development
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
(20
|
)
|
|
|
10
|
|
Changes in assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(3,901
|
)
|
|
|
(2,520
|
)
|
|
|
(3,412
|
)
|
Inventories
|
|
|
(6,063
|
)
|
|
|
(4,528
|
)
|
|
|
(2,919
|
)
|
Prepaid expenses and other current assets
|
|
|
(66
|
)
|
|
|
(322
|
)
|
|
|
(41
|
)
|
Other assets
|
|
|
(275
|
)
|
|
|
49
|
|
|
|
(101
|
)
|
Accounts payable
|
|
|
1,360
|
|
|
|
1,836
|
|
|
|
125
|
|
Deferred revenue
|
|
|
35
|
|
|
|
825
|
|
|
|
408
|
|
Accrued expenses and other current and non-current liabilities
|
|
|
(1,324
|
)
|
|
|
(147
|
)
|
|
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
10,627
|
|
|
|
6,176
|
|
|
|
(7,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(8,965
|
)
|
|
|
(4,925
|
)
|
|
|
(2,075
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(19,824
|
)
|
|
|
|
|
|
|
|
|
Purchases of IP licenses and intangible assets
|
|
|
(331
|
)
|
|
|
(847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) investing activities
|
|
|
(29,120
|
)
|
|
|
(5,772
|
)
|
|
|
(2,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows (used in) provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Repayment) proceeds from term loan financing
|
|
|
|
|
|
|
(4,000
|
)
|
|
|
4,000
|
|
Proceeds from issuance of convertible preferred stock, net of
issuance cost
|
|
|
|
|
|
|
|
|
|
|
8,965
|
|
Proceeds from initial public offering, net of bankers
discount and commission
|
|
|
|
|
|
|
97,459
|
|
|
|
|
|
Payments of initial public offering costs
|
|
|
|
|
|
|
(2,791
|
)
|
|
|
|
|
Proceeds from issuance of common stock upon exercise of options
|
|
|
858
|
|
|
|
1,092
|
|
|
|
1,361
|
|
Principal payment of capital lease and technology license
obligations
|
|
|
(3,796
|
)
|
|
|
(3,846
|
)
|
|
|
(2,915
|
)
|
Repurchases of shares of unvested common stock
|
|
|
(4
|
)
|
|
|
(10
|
)
|
|
|
(20
|
)
|
Proceeds from issuance of convertible preferred stock in
connection with warrant exercise
|
|
|
|
|
|
|
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(2,942
|
)
|
|
|
87,904
|
|
|
|
12,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(21,435
|
)
|
|
|
88,308
|
|
|
|
2,275
|
|
Cash and cash equivalents, beginning of period
|
|
|
98,462
|
|
|
|
10,154
|
|
|
|
7,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
77,027
|
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
499
|
|
|
$
|
473
|
|
|
$
|
564
|
|
Cash paid for taxes
|
|
$
|
909
|
|
|
$
|
469
|
|
|
$
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in connection with the acquisition of
W&W
|
|
$
|
3,098
|
|
|
$
|
|
|
|
$
|
|
|
Accrual for acquisition related costs
|
|
$
|
4,709
|
|
|
$
|
|
|
|
$
|
|
|
Capital lease and technology license obligations
|
|
$
|
723
|
|
|
$
|
9,812
|
|
|
$
|
3,408
|
|
Vesting of early exercised options
|
|
$
|
70
|
|
|
$
|
110
|
|
|
$
|
141
|
|
Additions to property and equipment included in accounts payable
and accrued expenses
|
|
$
|
|
|
|
$
|
1,057
|
|
|
$
|
486
|
|
Net exercise of common stock warrants
|
|
$
|
|
|
|
$
|
462
|
|
|
$
|
|
|
Conversion of mandatorily redeemable convertible preferred stock
to common stock
|
|
$
|
|
|
|
$
|
72,440
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Organization
and Significant Accounting Policies
|
Organization
Cavium Networks, Inc., (the Company), was
incorporated in the state of California on November 21,
2000 and was reincorporated in the state of Delaware effective
February 6, 2007. The Company designs, develops and markets
semiconductor processors for intelligent and secure networks.
During the year ended December 31, 2008, the Company
completed purchases of Parallogic Corporation
(Parallogic), Star Semiconductor Corporation
(Star), and W&W Communications, Inc.
(W&W) for approximately $18.9 million in
consideration, including acquisition related expenses. For a
complete discussion on the 2008 acquisitions, see
Note 5 Business Combinations, which is
incorporated herein by reference.
Initial
Public Offering
In May 2007, the Company completed its initial public offering,
or IPO, of common stock in which it sold and issued
7,762,500 shares of common stock, including
1,012,500 shares of underwriters over-allotment, at
an issue price of $13.50 per share. A total of
$104.8 million in gross proceeds was raised from the IPO,
or approximately $94.7 million in net proceeds after
deducting underwriting discounts and commissions of
$7.3 million and other offering costs of $2.8 million.
Upon the closing of the IPO, all shares of convertible preferred
stock outstanding automatically converted into
22,364,378 shares of common stock, and 102,619 warrants to
purchase mandatorily redeemable convertible preferred stock were
converted into warrants to purchase common stock.
Basis
of Consolidation
The consolidated financial statements include the accounts of
Cavium Networks, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been
eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in its consolidated financial
statements and accompanying notes. Management bases its
estimates on historical experience and on various other
assumptions it believes to be reasonable under the
circumstances, the results of which form the basis of making
judgments about the carrying values of assets and liabilities.
Actual results could differ from those estimates.
Summary
of Significant Accounting Policies
Cash &
Cash Equivalents
The Company considers all highly liquid investments with an
original or remaining maturity of 90 days or less at the
date of purchase to be cash equivalents. Cash equivalents
consist primarily of an investment in a money market fund. As of
December 31, 2008, we have not experienced any impairment
charges due to such concentration of credit risk.
Allowance
for Doubtful Accounts
The Company reviews its allowance for doubtful accounts by
assessing individual accounts receivable over a specific age and
amount, and all other balances on a pooled basis based on
historical collection experience and economic risk assessment.
The Companys allowance for doubtful accounts was $34,000
and $38,000 as of December 31, 2008 and 2007, respectively.
52
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Inventories
Inventories consist of
work-in-process
and finished goods. Inventories not related to an acquisition
are stated at the lower of cost (determined using the
first-in,
first-out method), or market value (estimated net realizable
value). The Company writes down inventory by establishing
inventory reserves based on aging and forecasted demand. These
factors are impacted by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction and require estimates that may include
uncertain elements. Actual demand may differ from forecasted
demand and such differences may have a material effect on
recorded inventory values. Inventory reserves, once established,
are not reversed until the related inventories have been sold or
scrapped.
Inventory obtained through the purchases of Star and W&W,
were recorded at fair market value less estimated costs to sell
that inventory. The Company uses management estimates to
determine the fair value of the inventory as of the respective
acquisition date. The methodology involves stepping up the value
of acquired finished goods from cost to expected sales value
less variable costs to dispose. The total increase in inventory
value related to recording it at fair value resulting from the
Star and W&W acquisitions was approximately $709,000, which
will be amortized through cost of sales over the estimated turn
period of that inventory. As of December 31, 2008,
approximately $470,000 of the inventory step up has been
expensed to the statement of operations, as cost of revenues,
since the inventory was shipped to the customer.
Property
and Equipment
Property and equipment are stated at cost and depreciated over
their estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of
estimated useful lives or unexpired lease term. Additions and
improvements that increase the value or extend the life of an
asset are capitalized. Upon retirement or sale, the cost of
assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
credited or charged to income. Repairs and maintenance costs are
expensed as incurred.
|
|
|
|
|
|
|
Estimated
|
|
|
|
Useful Lives
|
|
|
Software, computer and other equipment
|
|
|
1 to 5 years
|
|
Mask costs and test equipment
|
|
|
1 to 3 years
|
|
Furniture, office equipment and leasehold improvements
|
|
|
1 to 5 years
|
|
The Company capitalizes the cost of fabrication masks that are
reasonably expected to be used during production manufacturing.
Such amounts are included within property and equipment and are
generally depreciated over a period of twelve months. If the
Company does not reasonably expect to use the fabrication mask
during production manufacturing, the related mask costs are
expensed to research and development in the period in which the
costs are incurred. The Company has capitalized
$4.2 million, $3.6 million and $694,000 of mask costs
for the years ended December 31, 2008, 2007 and 2006,
respectively.
Impairment
of Long-Lived Assets
The Company reviews long-lived assets, including property and
equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. According to the Companys
accounting policy, when such indicators are present, if the
undiscounted cash flows expected to be generated from operations
from those long-lived assets are less than the carrying value of
those long-lived assets, the Company compares the fair value of
the assets (estimated using discounted future net cash flows to
be generated from the lowest common level of operations
utilizing the assets) to the carrying value of the long-lived
assets to determine any impairment charges. The Company reduces
the carrying value of the long-lived assets if the carrying
value of the long-lived assets is greater than their fair value.
No impairment to the carrying value of long-lived assets was
identified by the Company during the years ended
December 31, 2008, 2007 and 2006.
53
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, other assets, accounts payable, accrued expenses and
liabilities, approximate their fair values due to their
short-term nature.
Concentration
of Risk
The Companys products are currently manufactured,
assembled and tested by third-party contractors in Asia. There
are no long-term agreements with any of these contractors. A
significant disruption in the operations of one or more of these
contractors would impact the production of the Companys
products for a substantial period of time, which could have a
material adverse effect on the Companys business,
financial condition and results of operations.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents
and accounts receivable. The Company deposits cash and cash
equivalents with credit worthy financial institutions. The
Company has not experienced any losses on its deposits of cash
and cash equivalents. Management believes that the financial
institutions are reputable and, accordingly, minimal credit risk
exists.
A majority of the Companys accounts receivable are derived
from revenue earned from customers headquartered in the United
States. The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company provides an allowance
for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. Summarized below are
individual customers whose accounts receivable balances or
revenues were 10% or higher of respective total consolidated
amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Percentage of total net revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
29
|
%
|
|
|
23
|
%
|
|
|
19
|
%
|
Customer B
|
|
|
11
|
|
|
|
18
|
|
|
|
21
|
|
Customer C
|
|
|
11
|
|
|
|
*
|
|
|
|
*
|
|
|
|
|
* |
|
Represents less than 10% of the net revenue for the respective
period end. |
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Percentage of gross accounts receivable:
|
|
|
|
|
|
|
|
|
Customer D
|
|
|
21
|
%
|
|
|
23
|
%
|
Customer E
|
|
|
10
|
|
|
|
13
|
|
Intangible
Assets
Prepaid technology licenses and acquired technologies, which
includes technology acquired from other companies either as a
result of acquisitions or licensing, are capitalized and
amortized on the straight-line method over the estimated useful
life of the technologies, which generally range from one to
seven years depending on the nature of the intangible assets.
Technology licenses payable in installments are capitalized
using the present value of the payments.
Goodwill
Goodwill arising from business combinations is capitalized.
Goodwill is not amortized but is subject to an impairment test
at least annually. Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets
(SFAS 142) prohibits the amortization of
goodwill. The Company reviews goodwill annually at
54
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the beginning of its fourth quarter and whenever events or
changes in circumstances indicate the carrying value of the
assets may not be recoverable in accordance with SFAS 142.
For goodwill, the Company performs a two step impairment test.
In the first step, the Company compares the fair value of its
one reporting unit to its carrying value. The Company determines
the fair value of the reporting unit by taking the market
capitalization of the reporting unit as determined through
quoted market prices. If the fair value of the reporting unit
exceeds the carrying value of the reporting unit, goodwill is
not impaired and no further testing is performed. If the
carrying value of the reporting unit exceeds the fair value of
the reporting unit, then the Company must perform the second
step of the impairment test in order to determine the implied
fair value. If the carrying value of the reporting units
goodwill exceeds its implied fair value, the Company records an
impairment charge equal to the difference. No impairment to the
carrying value of goodwill was identified by the Company during
the years ended December 31, 2008 and 2007.
Revenue
Recognition
The Company derives its revenue primarily from sales of
semiconductor products. The Company applies the provisions of
Staff Accounting Bulletin No. 104 Revenue
Recognition, (SAB 104) for product
revenue derived by the sale of semiconductor products. Under
SAB 104, the Company recognizes revenue when all of the
following criteria have been met: (i) persuasive evidence
of a binding arrangement exists, (ii) delivery has
occurred, (iii) the price is deemed fixed or determinable
and free of contingencies and significant uncertainties, and
(iv) collection is probable. The price is considered fixed
or determinable at the execution of an agreement, based on
specific products and quantities to be delivered at specified
prices, which is often memorialized with a customer purchase
order. Agreements with non-distributor customers do not include
rights of return or acceptance provisions. The Company assesses
the ability to collect from the Companys customers based
on a number of factors, including credit worthiness and any past
transaction history of the customer.
Shipping charges billed to customers are included in product
revenue and the related shipping costs are included in cost of
revenue. The Company generally recognizes revenue at the time of
shipment to the Companys customers. Revenue consists
primarily of sales of the Companys products to networking
original equipment manufacturers, or OEMs, their contract
manufacturers or its distributors. Initial sales of the
Companys products for a new design are usually made
directly to networking OEMs as they design and develop their
product. Once their design enters production, they often
outsource their manufacturing to contract manufacturers that
purchase the Companys products directly from the Company
or from the Companys distributors.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if the
Company concludes it can reasonably estimate the credits for
returns and price adjustments issuable. The Company records an
estimated allowance, at the time of shipment, based on the
Companys historical patterns of returns and pricing
credits of sales recognized upon shipment. The credits issued to
distributors or other customers were not material in the three
years ended December 31, 2008, 2007 and 2006.
Revenue and costs relating to sales to distributors are deferred
if the Company grants more than limited rights of returns and
price credits or if it cannot reasonably estimate the level of
returns and credits issuable. The Companys distribution
agreement with Avnet, Inc. to distribute the Companys
products primarily in the United States. Given the terms of the
distribution agreement, for sales to Avnet revenue and costs are
deferred until products are sold by Avnet to its end customers.
For the years ended December 31, 2008 and 2007, 3.6% and
less than 1%, respectively, of the Companys net revenues
were from products sold by Avnet. Revenue recognition depends on
notification from the distributor that product has been sold to
Avnets end customers. Avnet reports to the Company, on at
least a monthly basis, the product resale price, quantity and
end customer shipment information, as well as inventory on hand.
Reported distributor inventory on hand is reconciled monthly to
the Companys deferred revenue and cost balances. Deferred
income on shipments to Avnet is included in deferred revenue.
Accounts receivable from Avnet is recognized and inventory is
relieved when title to inventories transfers, which typically
takes place at the time of shipment, which is the point in time
at which the Company has a legal enforceable right to collection
under normal payment terms.
55
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company also derives revenue in the form of license and
maintenance fees through licensing its software products.
Revenue from such arrangements is recorded by applying the
provisions of Statement of Position, or
SOP No. 97-2,
Software Revenue Recognition , as amended by
SOP No. 98-9,
Modification of
SOP No. 97-2,
Software Revenue Recognition with Respect to Certain
Transactions. Revenue from such arrangements totaled
$2.2 million, $1.1 million and $740,000 for the years
ended December 31, 2008, 2007 and 2006, respectively. The
value of any support services is recognized as services revenue
on a straight-line basis over the term of the related support
period, which is typically one year.
The Company also enters into development agreements with some of
its customers. Development revenue is recognized under the
proportional performance method, with the associated costs
included in cost of revenue. The Company estimates the
proportional performance of the development contracts based on
an analysis of progress toward completion. The Company
periodically evaluates the actual status of each project to
ensure that the estimates to complete each contract remain
accurate. If the amount billed exceeds the amount of revenue
recognized, the excess amount is recorded as deferred revenue.
Revenue recognized in any period is dependent on progress toward
completion of projects in progress. To the extent the Company is
unable to estimate the proportional performance then the revenue
is recognized on a completed performance basis. Revenue from
such arrangements totaled $3.0 million and
$3.0 million for the years ended December 31, 2008 and
2007, respectively, and none for the year ended
December 31, 2006.
Total deferred revenue was $1.7 million as of
December 31, 2008 and December 31, 2007, which
includes deferred revenue associated with license and
maintenance fees, development revenue and deferred income on
shipment to Avnet.
Warranty
Accrual
The Companys products are subject to a one-year warranty
period. The Company provides for the estimated future costs of
replacement upon shipment of the product as cost of revenue. The
warranty accrual is estimated based on historical claims
compared to historical revenue. The following table presents a
reconciliation of the Companys product warranty liability,
which is included within accrued expenses and other current
liabilities in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
261
|
|
|
$
|
161
|
|
Accruals
|
|
|
144
|
|
|
|
241
|
|
Settlements and adjustments made
|
|
|
(251
|
)
|
|
|
(141
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
154
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
Indemnities
In the ordinary course of business the Company enters into
agreements with customers that include indemnity provisions.
Based on historical experience and other available information
the Company believes its exposure related to the above indemnity
provisions were immaterial for each of the periods presented.
Research
and Development
Research and development costs are expensed as incurred and
primarily include personnel costs, prototype expenses, which
include the cost of fabrication mask costs not reasonably
expected to be used in production manufacturing, and allocated
facilities costs as well as depreciation of equipment used in
research and development.
56
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Advertising
The Company expenses advertising costs as incurred. Advertising
costs were $367,000, $345,000 and $214,000 for the years ended
December 31, 2008, 2007 and 2006 respectively.
Operating
Leases
The Company recognizes rent expense on a straight-line basis
over the term of the lease. The difference between rent expense
and rent paid is recorded as accrued rent in accrued expenses
and other current and non-current liabilities components of the
consolidated balance sheets.
Income
Taxes
The Company provides for deferred income taxes under the asset
and liability method. Under this method, deferred tax assets,
including those related to tax loss carryforwards and credits,
and liabilities are determined based on the differences between
the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded to reduce deferred tax assets when management cannot
conclude that it is more likely than not that the net deferred
tax asset will be recovered. The Company currently maintains a
full valuation allowance on its net deferred tax assets. The
valuation allowance was determined in accordance with the
provisions of SFAS No. 109 which requires an
assessment of both positive and negative evidence when
determining whether it is more likely than not that deferred tax
assets are recoverable; such assessment is required on a
jurisdiction by jurisdiction basis. The Companys expected
U.S. loss, among other considerations, provides negative
evidence under SFAS No. 109 and accordingly, a full
valuation allowance was recorded against its net deferred tax
assets. The Companys net deferred tax assets relate
predominantly to its United States tax jurisdiction. The Company
intends to maintain a full valuation allowance on its net
deferred tax assets until sufficient positive evidence exists to
support reversal of the valuation allowance.
Accounting
for Stock-Based Compensation
The Company applies the fair value recognition provisions of
SFAS 123(R) using the prospective transition method, which
requires it to apply the provisions of SFAS 123(R) only to
awards granted, modified, repurchased or cancelled after the
adoption date. Under this transition method, the Companys
stock-based compensation expense recognized during the
year-ended December 31, 2006 is based on the grant date
fair value of stock option awards the Company grants or modifies
on or after January 1, 2006. The Company recognizes this
expense on a straight-line basis over the options vesting
periods. The Company estimates the grant date fair value of
stock option awards under the provisions of SFAS 123(R)
using the Black-Scholes option valuation model.
For the years ended December 31, 2008, 2007 and 2006, the
Company recorded stock-based compensation expense of
$6.1 million, $1.9 million and $745,000, respectively.
In future periods, stock-based compensation expense may increase
as the Company issues additional stock-based awards to continue
to attract and retain key employees. SFAS 123(R) also
requires that the Company recognize stock-based compensation
expense only for the portion of stock options that are expected
to vest, based on the Companys estimated forfeiture rate.
If the actual number of future forfeitures differs from that
estimated by management, the Company may be required to record
adjustments to stock-based compensation expense in future
periods.
The Company accounts for stock-based compensation arrangements
with non-employees in accordance with SFAS 123 and Emerging
Issues Task Force, or EITF,
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, using a fair value approach. The fair
value of the stock options granted to non-employees was
estimated using the Black-Scholes option valuation model. This
model utilizes the estimated fair value of the Companys
common stock, the contractual term of the option, the expected
volatility of the price of the Companys common stock,
risk-free interest rates and the expected dividend yields of the
Companys common stock. Stock-based compensation expense
related
57
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
to non-employees was $12,000, $114,000, and $70,000 and for the
year ended December 31, 2008, 2007 and 2006, respectively.
The following table presents the detail of stock-based
compensation expense amounts included in the consolidated
statement of operations for each of the last years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
179
|
|
|
$
|
43
|
|
|
$
|
9
|
|
Research and development
|
|
|
2,684
|
|
|
|
805
|
|
|
|
396
|
|
Sales, general and administrative
|
|
|
3,194
|
|
|
|
1,021
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
6,057
|
|
|
$
|
1,869
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation cost capitalized as part of
inventory as of December 31, 2008 and 2007 was $168,000 and
$43,000, respectively.
Other
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity that
are not the result of transactions with stockholders. For the
year ended 2008, 2007 or 2006, there are no components of
comprehensive income (loss) which are excluded from the net loss
and, therefore, no separate statement of comprehensive income
(loss) has been presented.
Foreign
Currency Remeasurement
The Company uses the United States dollar as the functional
currency for all of its subsidiaries. Assets and liabilities
denominated in
non-U.S. dollars
are remeasured into U.S. dollars at
end-of-period
exchange rates for monetary assets and liabilities, and
historical exchange rates for nonmonetary assets and
liabilities. Net revenue and expenses are remeasured at average
exchange rates in effect during each period, except for those
revenue, cost of sales and expenses related to the nonmonetary
assets and liabilities, which are remeasured at historical
exchange rates. Gains or losses from foreign currency
remeasurement are included in Other income (expense),
net in its Consolidated Financial Statements and to date
have not been significant. The aggregate foreign exchange loss
included in determining net income was $118,000 for the year
ended December 31, 2008. The impact of foreign exchange
gain/loss was not material for the years ended December 31,
2007 and 2006.
Preferred
Stock Warrant Liability
The Company applied FASB Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5
to its preferred stock warrants.
FSP 150-5
requires us to classify these warrants as current liabilities
and to adjust the value of these warrants to their fair value at
the end of each reporting period. We recorded $573,000, and
$467,000 warrant revaluation expense for the years ended
December 31, 2007 and 2006, respectively.
Upon our initial public offering in May 2007, all outstanding
warrants to purchase mandatorily redeemable convertible
preferred stock converted to warrants to purchase common stock.
As a result, the aggregate fair value of these warrants was
reclassified from current liabilities to additional paid-in
capital at that time and no further revaluation was required.
Recent
Accounting Pronouncements
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
SFAS No. 141R, which replaces SFAS No 141. The
statement retains the purchase method of accounting for
58
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R
is effective for financial statements issued for fiscal years
beginning after December 15, 2008 and will apply
prospectively to business combinations completed on or after
that date. The adoption of SFAS No. 141R could have a
material effect on the Companys financial position and
results of operations as the release of any valuation allowance
for acquired tax attributes subsequent to adoption would benefit
the tax provision as opposed to recording the benefit to
goodwill.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160.
SFAS No. 160 clarifies that a noncontrolling or
minority interest in a subsidiary is considered an ownership
interest and, accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated
financial statements. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
will assess the impact of SFAS 160 if and when a future
event occurs.
In April 2008, the FASB issued
FSP 142-3,
Determination of the Useful Life of Intangible
Assets, or
FSP 142-3.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
SFAS No. 142, Goodwill and Other Intangible
Asset.
FSP 142-3
is intended to improve the consistency between the useful life
of a recognized intangible asset under FAS 142 and the
period of expected cash flows used to measure the fair value of
the asset under FAS 141R, and other guidance under
U.S. GAAP.
FSP 142-3
is effective for fiscal years beginning after December 15,
2008. The Company is currently evaluating the impact, if any, of
the adoption of
FSP 142-3
on its consolidated financial statements.
In October 2008, the FASB issued FASB Staff Position
FAS 157-3,
Determining the Fair Value of a Financial Asset When the
Market for That Asset Is Not Active, or
FSP 157-3.
FSP 157-3
clarified the application of SFAS 157.
FSP 157-3
demonstrated how the fair value of a financial asset is
determined when the market for that financial asset is inactive.
FSP 157-3
was effective upon issuance, including prior periods for which
financial statements had not been issued. The implementation of
this standard did not have an impact on its consolidated
financial statements.
In November 2008, the FASB ratified EITF Issue
No. 08-7,
Accounting for Defensive Intangible Assets, or
EITF 08-7.
EITF 08-7
applies to defensive intangible assets, which are acquired
intangible assets that the acquirer does not intend to actively
use but intends to hold to prevent its competitors from
obtaining access to them. As these assets are separately
identifiable,
EITF 08-7
requires an acquiring entity to account for defensive intangible
assets as a separate unit of accounting. Defensive intangible
assets must be recognized at fair value in accordance with
SFAS 141(R) and SFAS 157.
EITF 08-7
is effective for defensive intangible assets acquired in fiscal
years beginning on or after December 15, 2008. The Company
is currently evaluating the potential impact, if any, of the
adoption of
EITF 08-7
on its consolidated financial statements.
|
|
2.
|
Net
Income (Loss) Per Common Share
|
The Company calculates net income (loss) per share in accordance
with SFAS No. 128 or SFAS 128, Earnings Per
Share. Under SFAS 128, basic net income (loss) per
common share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the
period (excluding shares subject to repurchase). Diluted net
income (loss) per common share is computed by dividing net
income (loss) by the weighted-average number of common and
potentially dilutive common equivalent shares outstanding during
the period. Potentially dilutive securities, composed of
incremental common shares issuable upon the exercise of stock
options and common stock subject to repurchase, are included in
diluted net income per share for the year ended
December 31, 2008, 2007 and 2006, respectively.
59
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table sets forth the computation of income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
1,507
|
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
40,385
|
|
|
|
29,006
|
|
|
|
8,066
|
|
Dilutive effect of employee stock plans
|
|
|
2,181
|
|
|
|
3,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
42,566
|
|
|
|
32,432
|
|
|
|
8,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
|
0.04
|
|
|
|
0.08
|
|
|
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
|
0.04
|
|
|
|
0.07
|
|
|
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average outstanding options, common stock
subject to repurchase and convertible preferred stock were
excluded from the computation of diluted net income (loss) per
common share for the periods presented because including them
would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Options to purchase common stock
|
|
|
643
|
|
|
|
701
|
|
|
|
5,094
|
|
Convertible preferred stock (as converted basis)
|
|
|
|
|
|
|
|
|
|
|
22,364
|
|
Convertible stock warrants (as converted basis)
|
|
|
|
|
|
|
|
|
|
|
103
|
|
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or
SFAS No. 157. SFAS No. 157 defines fair
value, establishes a framework and provides guidance regarding
the methods used for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 was effective for the Company as of
January 1, 2008. In February 2008, the FASB issued FASB
Staff Position
No. FAS 157-2,
Effective Date of FASB Statement No. 157, which
provides a one year deferral of the effective date of
SFAS 157 for non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in
the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of
SFAS 157 with respect to its financial assets and
liabilities only.
Fair value is defined under SFAS 157 as the exchange price
that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction
between market participants on the measurement date. Valuation
techniques used to measure fair value under SFAS 157 must
maximize the use of observable inputs and minimize the use of
unobservable inputs. The standard describes a fair value
hierarchy based on three levels of inputs, of which the first
two are considered observable and the last unobservable, that
may be used to measure fair value which are the following:
|
|
|
|
|
Level 1 Quoted prices in active markets for
identical assets or liabilities.
|
|
|
|
Level 2 Inputs other than Level 1 that are
observable, either directly or indirectly, such as quoted prices
for similar assets or liabilities; quoted prices in markets that
are not active; or other inputs that are observable or can be
corroborated by observable market data for substantially the
full term of the assets or liabilities.
|
|
|
|
Level 3 Unobservable inputs that are supported
by little or no market activity and that are significant to the
fair value of the assets or liabilities.
|
The adoption of this statement did not have a material impact on
the Companys consolidated results of operations and
financial condition.
60
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and
Financial Liabilities, or SFAS No. 159,
which permits entities to choose to measure eligible financial
instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized
gains and losses on items for which the fair value option has
been elected are reported in earnings at each subsequent
reporting date. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. Effective
January 1, 2008, the Company adopted SFAS No. 159
The Fair Value Option for Financial Assets and Financial
Liabilities (SFAS 159). SFAS 159
allows an entity the irrevocable option to elect fair value for
the initial and subsequent measurement for specified financial
assets and liabilities on a
contract-by-contract
basis. The Company did not elect to adopt the fair value option
for assets or liabilities under this Statement.
In accordance with SFAS 157, the Company determined the
fair value hierarchy of its financial assets (cash equivalents)
in the money market fund as Level 1, which approximated
$63.6 million as of December 31, 2008.
|
|
4.
|
Balance
Sheet Components
|
Inventories
Inventories are stated at the lower of cost (determined using
the
first-in,
first-out method), or market value (estimated net realizable
value) and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Work-in-process
|
|
$
|
14,411
|
|
|
$
|
8,092
|
|
Finished goods
|
|
|
2,870
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,281
|
|
|
$
|
9,573
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Mask costs and test equipment
|
|
$
|
11,016
|
|
|
$
|
5,587
|
|
Software, computer and other equipment
|
|
|
15,402
|
|
|
|
12,738
|
|
Furniture, office equipment and leasehold improvements
|
|
|
121
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,539
|
|
|
|
18,382
|
|
Less: accumulated depreciation and amortization
|
|
|
(15,424
|
)
|
|
|
(6,774
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,115
|
|
|
$
|
11,608
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $8.7 million,
$4.8 million and $2.2 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
Capital leases which are time-based subscription design tools
are included in property and equipment, and they were
$8.9 million and $7.9 million at December 31,
2008 and 2007, respectively. Amortization expense related to
assets recorded under capital lease was $2.8 million,
$1.6 million and $1.0 million for the years ended
December 31, 2008, 2007 and 2006, respectively.
61
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued compensation and related benefits
|
|
$
|
1,191
|
|
|
$
|
1,010
|
|
Acquisition related payables
|
|
|
4,489
|
|
|
|
|
|
Accrued restructuring
|
|
|
389
|
|
|
|
|
|
Accrued warranty
|
|
|
154
|
|
|
|
261
|
|
Refundable deposits related to unvested employee stock option
exercises
|
|
|
|
|
|
|
70
|
|
Professional fees
|
|
|
835
|
|
|
|
285
|
|
Income tax payable
|
|
|
54
|
|
|
|
231
|
|
Other
|
|
|
585
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,697
|
|
|
$
|
2,253
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Accrued rent
|
|
$
|
187
|
|
|
$
|
|
|
Acquisition related payables
|
|
|
220
|
|
|
|
|
|
Accrued restructuring
|
|
|
464
|
|
|
|
|
|
Income tax payable
|
|
|
291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,162
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Parallogic
Corporation
On May 20, 2008, the Company acquired certain assets of
Parallogic, a privately held company. The aggregate purchase
price consisted of cash consideration of approximately
$1.3 million, including direct acquisition costs of
approximately $61,000. The Company paid $826,000 in cash at the
time of close of the acquisition. The remaining two subsequent
payments of $220,000 each are due at the completion of certain
milestones or the
18th and
36th
month anniversaries of the acquisition date, whichever comes
first. Of the $440,000, $220,000 was recorded as acquisition
related payables in accrued expenses and other current
liabilities and the remaining $220,000 was recorded in other
non-current liabilities. In January 2009, the Company paid the
first installment of $220,000 due to Parallogics
achievement of the first milestone as defined in the Asset
Purchase Agreement. As of February 26, 2009, Parallogic has
not achieved the second milestone as defined in the Asset
Purchase Agreement.
Identifiable intangible assets of approximately $450,000 consist
of intellectual property related to the developed technology as
well as incremental value associated with existing customer
relationships. The developed technology acquired from Parallogic
is the multi-core software focused on gigabit packet processing
and security applications.
62
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total purchase price was allocated to tangible and
identifiable intangible assets based on their estimated fair
value as of May 20, 2008. The excess of the purchase price
over the tangible and identifiable intangible assets were
recorded as goodwill. The purchase price allocation was as
follows (in thousands):
|
|
|
|
|
Net tangible assets
|
|
$
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships
|
|
|
76
|
|
Developed technology
|
|
|
374
|
|
Goodwill
|
|
|
816
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
1,266
|
|
|
|
|
|
|
The fair value assigned to developed technology and customer
relationships were based upon future discounted cash flows
related to the assets projected income streams using a
discount rate of 20% and 15% respectively. Factors considered in
estimating the discounted cash flows to be derived from
developed technology and customer relationships include risk
related to the characteristics and applications of the
technology, existing and future markets and an assessment of the
age of the technology within its life span. The Company is
amortizing the purchased intangible assets to cost of revenue on
a straight-line basis over its estimated useful life of one to
five years.
The results of operations from Parallogic have been included in
the Companys consolidated statements of operations only
since the date of acquisition. Pro forma results of operations
for the acquisition have not been presented as the effect has
not been significant.
Of the total purchase price, approximately $0.8 million was
allocated to goodwill, which represents the excess of the
purchase price over the estimated fair value of the underlying
net tangible and identifiable intangible assets acquired. The
goodwill was attributed to the premium paid for the opportunity
to expand and better serve the addressable market and achieve
greater long-term growth opportunities. All of the
$0.8 million allocated to the goodwill is expected to be
deductible for tax purposes. With this acquisition the Company
believes it will be better positioned to deliver professional
services for customers to help reduce the
time-to-market
for design wins and provide high-performance tuning. In
accordance with SFAS No. 142, goodwill will not be
amortized, but instead will be tested for impairment at least
annually and more frequently if certain indicators are present.
Star
Semiconductor Corporation
On August 1, 2008, the Company acquired substantially all
of the intangible assets and inventory and certain other
tangible assets of Star, a Taiwan-based design house in Hsinchu
that builds highly integrated ARM-based SOC processors for the
broadband, connected home and SOHO market segments. The Company
paid approximately $9.6 million in cash, including
acquisition related expenses of approximately $0.8 million.
Included in the purchase price was $1.0 million that was
placed in escrow for 60 days after the close in order to
indemnify the Company for certain matters, including breaches of
representations and warranties and covenants made by Star.
Subsequent to 60 days after the close of the acquisition,
the escrow was closed. The acquisition will provide the Company
with a highly experienced stand-alone SOC processor team based
in Taiwan. The results of operations from Star have been
included in the Companys consolidated statements of
operations only since the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations. Under the purchase method of
accounting, the total estimated purchase price was allocated to
the tangible and identifiable intangible assets and liabilities
assumed based on their relative fair values. The excess of the
purchase price over the net tangible and identifiable intangible
assets was recorded as goodwill. In accordance with
SFAS No. 142, goodwill will not be amortized, but
instead will be tested for impairment at least annually and more
frequently if certain indicators are present. All of the
$3.3 million allocated to goodwill is expected to be
deductible for state income tax purposes but not for federal
purposes. While the Company has
63
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accrued all acquisition costs that it is aware of, any
adjustments to these costs will be adjusted to goodwill. The
purchase price allocation will be finalized in 2009. The total
purchase price was as follows:
|
|
|
|
|
Cash consideration
|
|
$
|
8,790
|
|
Acquisition related expenses(1)
|
|
|
786
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,576
|
|
|
|
|
|
|
|
|
|
(1) |
|
Acquisition related expenses include legal and accounting fees
and other external costs directly related to the acquisition. |
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
Net tangible assets
|
|
$
|
973
|
|
Identifiable intangible assets
|
|
|
5,295
|
|
Goodwill
|
|
|
3,308
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
9,576
|
|
|
|
|
|
|
The following table represents details of the purchased
intangible assets as part of the acquisition:
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
|
|
|
Intangible Assets
|
|
Life (In years)
|
|
|
Amount
|
|
|
Existing technology product
|
|
|
4.0
|
|
|
$
|
3,849
|
|
Core technology product
|
|
|
4.0
|
|
|
|
467
|
|
Existing technology license
|
|
|
0.2
|
|
|
|
507
|
|
Customer contracts and relationships
|
|
|
7.0
|
|
|
|
307
|
|
Trade name
|
|
|
2.0
|
|
|
|
82
|
|
Order backlog
|
|
|
0.2
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
5,295
|
|
|
|
|
|
|
|
|
|
|
The fair value of the existing technology- product, existing
technology-license and the customer contracts and relationships
was determined based on an income approach using the discounted
cash flow method. The discount rate of 18.0% used to value the
existing technology - product and discount rate of 20.0% used to
value the customer contracts and relationships was estimated
using a discount rate based on implied rate of return of the
transaction, adjusted for the specific risk profile of each
asset. The discount rate of 4.5% used to value the existing
technology-license was based on a short-term risk free interest
rate. The remaining useful life was estimated based on
historical product development cycles, the projected rate of
technology attrition, and the patterns of project economic
benefit of the assets.
The fair value of core technology and trade name was determined
using a variation of income approach known as the profit
allocation method. The estimated savings in profit were
determined using a 3.0% profit allocation rate and a discount
rate of 18.0%. The estimated useful life was determined based on
the future economic benefit expected to be received from the
asset.
The fair value of order backlog was determined using a cost
approach where the fair value was based on estimated sales and
marketing expenses expected to be incurred to regenerate the
order backlog. The estimated useful life was determined based on
the future economic benefit expected to be received from the
asset.
W&W
Communications, Inc.
On December 23, 2008 the Company completed the acquisition
of W&W. Total merger consideration was approximately
$8.0 million, which consisted of cash consideration of
approximately $3.9 million, 338,245
64
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unregistered common shares of the Company valued at
approximately $3.1 million (the fair value of Caviums
stock of $9.16 per share was derived using an average closing
price of the Companys shares of common stock on the
announcement date and for the two days prior to, and two days
subsequent to the public announcement of the acquisition on
November 20, 2008) and direct acquisition costs of
approximately $1.0 million. Additionally, in order to
effect the acquisition of W&W, the Company assumed and
immediately paid-off W&Ws notes payable of
approximately $8.9 million as defined in the merger
agreement. As the notes payable were immediately paid-off, the
$8.9 million has been presented as a cash outflow and
included in Acquisition of businesses, net of cash
acquired within the cash flows used in investing
activities section of the consolidated statement of cash flows.
The acquisition allows the Company to strategically acquire
W&Ws developed technology and its design team for the
emerging consumer market for high definition encoding
semiconductors. In connection with the acquisition, the Company
recorded approximately $853,000 of restructuring costs related
to the contractual operating lease obligations of a W&W
facility in accordance with EITF Issue
No. 95-3,
Recognition of Liabilities in Connection with Purchase
Business Combinations or
EITF 95-3.
The costs associated with the obligation was recognized as a
liability assumed in the purchase business combination and
included in the purchase price allocation. The results of
operations from W&W have been included in the
Companys consolidated statements of operations only since
the date of acquisition.
The acquisition was accounted for using the purchase method of
accounting in accordance with SFAS No. 141,
Business Combinations. Under the purchase method of
accounting, the total estimated purchase price was allocated to
the tangible and identifiable intangible assets and liabilities
assumed based on their relative fair values. The excess of the
purchase price over the net tangible and identifiable intangible
assets was recorded as goodwill. In accordance with
SFAS No. 142, goodwill will not be amortized, but
instead will be tested for impairment at least annually and more
frequently if certain indicators are present. None of the
$8.8 million allocated to goodwill is expected to be
deductible for federal or state income tax purposes. While the
Company has accrued all acquisition costs that it is aware of,
any adjustments to these costs will be adjusted to goodwill. The
purchase price allocation will be finalized in 2009. The total
purchase price was as follows:
|
|
|
|
|
|
|
Amount
|
|
|
|
(In thousands)
|
|
|
Total purchase price of the acquisition of W&W is as
follows:
|
|
|
|
|
Cash
consideration(1)
|
|
$
|
3,894
|
|
Value of common stock issued
|
|
|
3,098
|
|
Acquisition related
expenses(2)
|
|
|
969
|
|
|
|
|
|
|
Total purchase price
|
|
$
|
7,961
|
|
|
|
|
|
|
|
|
|
(1)
|
|
As of December 31, 2008, of
the total cash consideration of $3.9 million, $100,000 was
paid at the close of the acquisition and the remaining
$3.8 million was not paid and was recorded as acquisition
related payables in accrued expenses and other current
liabilities. This amount is expected to be paid in 2009.
|
|
(2)
|
|
Acquisition related expenses
include legal and accounting fees and other external costs
directly related to the acquisition, of which $494,000 was paid
at the close of the acquisition and the remaining $475,000 was
not paid and was recorded as acquisition related payables in
accrued expenses and other current liabilities.
|
65
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The purchase price allocation was as follows (in thousands):
|
|
|
|
|
|
|
As Adjusted
|
|
|
Cash and cash equivalents
|
|
$
|
283
|
|
Inventories, net
|
|
|
836
|
|
Other assets
|
|
|
230
|
|
Goodwill
|
|
|
8,801
|
|
In-process research and development
|
|
|
1,319
|
|
Other intangibles, net
|
|
|
10,114
|
|
Accounts payable
|
|
|
(1,445
|
)
|
Accrued expenses
|
|
|
(2,464
|
)
|
Accrued restructuring
|
|
|
(853
|
)
|
Notes payable
|
|
|
(8,860
|
)
|
|
|
|
|
|
Total purchase price
|
|
$
|
7,961
|
|
|
|
|
|
|
The fair value of intangible assets of $10.1 million has
been allocated to the following identifiable intangible asset
categories:
|
|
|
|
|
|
|
|
|
|
|
Estimated Useful
|
|
|
|
|
Intangible Assets
|
|
Life (In years)
|
|
|
Amount
|
|
|
|
|
|
|
(In thousands)
|
|
|
Existing technology
|
|
|
1-5
|
|
|
$
|
7,768
|
|
Core technology
|
|
|
5.0
|
|
|
|
1,306
|
|
Customer contracts and relationships
|
|
|
6.0
|
|
|
|
583
|
|
Order backlog
|
|
|
0.6
|
|
|
|
457
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
10,114
|
|
|
|
|
|
|
|
|
|
|
Of the $11.4 million of acquired intangible assets,
$1.3 million was assigned to in-process research and
development or IPR&D. In accordance with FASB
Interpretation No. 4, Applicability of FASB Statement
No. 2 to Business Combinations Accounted for by the
Purchase Method, the IPR&D was expensed immediately as
it relates to the acquisition of an in-process technology
project which had not reached technological feasibility at the
time of acquisition, and had no future alternative use. The fair
value of the IPR&D was determined based on an income
approach using the discounted cash flow method. A discount rate
of 24% used to value the project was based on the implied rate
of return of the transaction, adjusted to reflect additional
risks inherent in the acquired project. As of December 31,
2008, the Company estimates that an additional investment of
approximately $2.5 million will be required to complete the
project. The Company expects to complete the project by the end
of 2009 and to benefit from the IPR&D project beginning in
2010.
The fair value of the existing technology and customer contracts
and relationships was determined based on an income approach
using the discounted cash flow method. A discount rate of 18%
was used to value the existing technology and a discount rate of
20% was used to value the customer contracts and relationships
and was estimated using a discount rate based on implied rate of
return of the transaction, adjusted for the specific risk
profile of each asset. The remaining useful life of existing
technology was estimated based on historical product development
cycles, the projected rate of technology attrition, and the
patterns of project economic benefit of the assets. The
remaining useful life of customer contracts and relationships
was estimated based on customer attrition, new customer
acquisition and future economic benefit of the asset.
The fair value of core technology was determined using a
variation of income approach known as the profit allocation
method. The estimated savings in profit were determined using a
5% profit allocation rate and a discount
66
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
rate of 20%. The estimated useful life was determined based on
the future economic benefit expected to be received from the
asset.
The fair value of order backlog was determined using a cost
approach where the fair value was based on estimated sales and
marketing expenses expected that would have to be incurred to
regenerate the order backlog. The estimated useful life was
determined based on the future economic benefit expected to be
received from the asset.
Pro
forma financial information
The unaudited financial information in the table below
summarizes the combined results of operations of the Company,
Star and W&W, on a pro forma basis, as though the companies
had been combined as of the beginning of each of the periods
presented. The pro forma financial information is presented for
informational purposes only and is not indicative of the results
of operations that would have been achieved if the acquisitions
had taken place at the beginning of each of the periods
presented. The pro forma financial information for all periods
presented includes the purchase accounting adjustments on
historical Star and W&W inventory, adjustments to
depreciation on acquired property and equipment, amortization
charges from acquired intangible assets and related tax effects.
The unaudited pro forma financial information for the year ended
December 31, 2008 combines the results for the Company for
the year ended December 31, 2008, which include the results
of Star subsequent to August 1, 2008 (the acquisition date)
and W&W subsequent to December 23, 2008 (the
acquisition date), and the historical results for Star for the
seven months ended July 31, 2008 and W&W from
January 1, 2008 to December 23, 2008. The unaudited
pro forma financial information for the year ended
December 31, 2007 combines the historical results of the
Company, Star and W&W for the year ended December 31,
2007. The following table summarizes the pro forma financial
information (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2008
|
|
2007
|
|
Net revenue
|
|
$
|
91,036
|
|
|
$
|
58,793
|
|
Net loss
|
|
$
|
(10,775
|
)
|
|
$
|
(11,299
|
)
|
Net loss per common share, basic
|
|
$
|
(0.26
|
)
|
|
$
|
(0.39
|
)
|
Net loss per common share, diluted
|
|
$
|
(0.26
|
)
|
|
$
|
(0.39
|
)
|
67
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Goodwill
and Intangible Assets, Net
|
Goodwill
The increase in goodwill of $12.9 million during the year
ended December 31, 2008 was due primarily as a result of
the acquisitions completed in 2008. (See Note 5)
Intangible
assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Existing and core technology product
|
|
$
|
17,614
|
|
|
$
|
3,343
|
|
Technology license
|
|
|
9,536
|
|
|
|
9,205
|
|
Customer contracts and relationships
|
|
|
966
|
|
|
|
|
|
Trade name
|
|
|
82
|
|
|
|
|
|
Order backlog
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,738
|
|
|
|
12,548
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Existing and core technology product
|
|
|
(4,398
|
)
|
|
|
(3,235
|
)
|
Technology license
|
|
|
(6,787
|
)
|
|
|
(5,217
|
)
|
Customer contracts and relationships
|
|
|
(65
|
)
|
|
|
|
|
Trade name
|
|
|
(17
|
)
|
|
|
|
|
Order backlog
|
|
|
(513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,958
|
|
|
$
|
4,096
|
|
|
|
|
|
|
|
|
|
|
Amortization expenses were $3.3 million, $1.5 million
and $2.8 million for the years ended December 31,
2008, 2007 and 2006, respectively. The weighted-average
remaining estimated lives for intangible assets are
approximately 3.8 years for existing and core
technology-product and 1.9 years for technology license.
The weighted average remaining estimated life of intangible
assets in total is approximately 2.7 years. Future
amortization expenses are estimated to be $5.7 million for
2009, $4.2 million for 2010, $3.1 million for 2011,
$2.5 million for 2012 and $1.6 million thereafter.
In connection with the acquisition of W&W, the Company
recorded restructuring liabilities of approximately $853,000 in
accordance with
EITF 95-3
(see Note 5). Of the $853,000, $389,000 and $464,000 was
recorded as accrued restructuring in accrued expenses and other
current liabilities and in other non-current liabilities,
respectively. The liabilities are related an operating lease
commitment for one W&W facility, which the Company will no
longer occupy. The Company expects the obligation to be settled
by the end of January 2011 with payments of approximately
$389,000 in 2009, $426,000 in 2010 and $38,000 in 2011.
A summary of the accrued restructuring is as follows (in
thousands):
|
|
|
|
|
Accrued restructuring beginning balance
|
|
$
|
|
|
Additions
|
|
|
853
|
|
Cash payments
|
|
|
|
|
|
|
|
|
|
Accrued restructuring ending balance
|
|
$
|
853
|
|
Less: current portion
|
|
|
389
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
464
|
|
|
|
|
|
|
68
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Common
and Preferred Stock
As of December 31, 2008, the Company is authorized to issue
200,000,000 shares of $0.001 par value common stock
and 10,000,000 shares of $0.001 par value preferred
stock. The Company has the authority to issue preferred stock in
one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights,
dividend rates, conversion rights, voting rights, terms of
redemption and liquidation preferences. As of December 31,
2008 and 2007, no shares of preferred stock were outstanding.
2007
Stock Incentive Plan
Upon completion of its IPO in May 2007, the Company adopted the
2007 Stock Incentive Plan, the 2007 Plan, which reserved
5,000,000 shares of the Companys common stock. The
number of shares of the common stock reserved for issuance will
automatically increase on January 1st, from January 1,
2008 through January 1, 2017, by the lesser of (i) 5%
of the total number of shares of the common stock outstanding on
the applicable January 1st date or
(ii) 5,000,000 shares. The board of directors may also
act, prior to the first day of any fiscal year, to increase the
number of shares as the board of directors shall determine,
which number shall be less than each of (i) and (ii). The
maximum number of shares that may be issued pursuant to the
exercise of incentive stock options under the 2007 Plan is equal
to 10,000,000 shares. As of December 31, 2008, there
were 4,466,013 shares reserved for issuance under the 2007
Plan. The 2007 Plan provides for the grant of incentive stock
options, non-statutory stock options, restricted stock awards,
restricted stock unit awards, stock appreciation rights,
performance stock awards, and other forms of equity compensation
(collectively, stock awards), and performance cash
awards, all of which may be granted to employees (including
officers), directors, and consultants or affiliates. Awards
granted under the 2007 Plan vest at the rate specified by the
plan administrator, typically with 1/8th of the shares
vesting six months after the date of grant and 1/48th of
the shares vesting monthly thereafter over the next three and
one half years. The term of awards expires seven to ten years
from the date of grant. As of December 31, 2008,
2,622,995 shares have been granted under the 2007 Plan.
2001
Stock Incentive Plan
As of December 31, 2008, the Companys 2001 Stock
Incentive Plan, the 2001 Plan, reserved 410,303 shares of
the Companys common stock for issuance to employees,
officers, consultants and advisors of the Company. Options
granted under the 2001 Plan were either incentive stock options
or non-statutory stock options as determined by the
Companys board of directors. Options granted under the
2001 Plan vest at the rate specified by the plan administrator,
typically with 1/8th of the shares vesting six months after
the date of grant and 1/48th of the shares vesting monthly
thereafter over the next three and one half years to four and
one half years. The term of option expires ten years from the
date of grant. No shares were granted under the 2001 Plan in
2008.
Under the Companys 2001 Plan, certain employees have the
right to early-exercise unvested stock options, subject to
rights held by the Company to repurchase unvested shares in the
event of voluntary or involuntary termination. For options
granted prior to March 2005, the Company has the right to
repurchase any such shares at the shares original purchase
price. For options granted after March 2005, the Company has the
right to repurchase such shares at the lower of market value or
the original purchase price.
For those options granted prior to March 2005, in accordance
with
EITF 00-23,
Working Group Work Plan Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and FASB Interpretation No. 44
Accounting for Certain Transactions involving Stock
Compensation, the Company accounts for cash received in
consideration for the early-exercise of unvested stock options
as a current liability, included as a component of accrued
liabilities in the Companys consolidated balance sheets.
For those shares issued in connection with options granted prior
to March 2005, there were none and 123,895 unvested
69
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares outstanding as of December 31, 2008 and 2007,
respectively, and none and $70,000 related liabilities,
respectively.
Detail related to activity of all unvested shares of common
stock is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Unvested Shares
|
|
|
Exercise/Purchase
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance as of December 31, 2005
|
|
|
1,062,970
|
|
|
$
|
0.56
|
|
Issued
|
|
|
400,023
|
|
|
|
2.95
|
|
Vested
|
|
|
(558,184
|
)
|
|
|
0.60
|
|
Repurchased
|
|
|
(32,599
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
872,210
|
|
|
$
|
1.63
|
|
Issued
|
|
|
80,397
|
|
|
|
5.64
|
|
Vested
|
|
|
(501,360
|
)
|
|
|
1.59
|
|
Repurchased
|
|
|
(14,585
|
)
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
436,662
|
|
|
$
|
2.45
|
|
Issued
|
|
|
|
|
|
|
0.00
|
|
Vested
|
|
|
(286,303
|
)
|
|
|
1.94
|
|
Repurchased
|
|
|
(4,795
|
)
|
|
|
0.84
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
145,564
|
|
|
$
|
3.5
|
|
|
|
|
|
|
|
|
|
|
Detail related to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Shares Outstanding
|
|
|
Exercise Price
|
|
|
Balance at December 31, 2005
|
|
|
2,470,170
|
|
|
$
|
0.72
|
|
Options granted
|
|
|
2,434,750
|
|
|
|
3.42
|
|
Options exercised
|
|
|
(602,634
|
)
|
|
|
2.26
|
|
Options cancelled and forfeited
|
|
|
(80,882
|
)
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
4,221,404
|
|
|
$
|
2.05
|
|
Options granted
|
|
|
546,575
|
|
|
|
15.31
|
|
Options exercised
|
|
|
(742,212
|
)
|
|
|
1.97
|
|
Options cancelled and forfeited
|
|
|
(105,766
|
)
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,920,001
|
|
|
$
|
3.86
|
|
Options granted
|
|
|
2,124,475
|
|
|
|
16.32
|
|
Options exercised
|
|
|
(516,759
|
)
|
|
|
1.58
|
|
Options cancelled and forfeited
|
|
|
(130,263
|
)
|
|
|
12.15
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
5,397,454
|
|
|
$
|
8.78
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value for options exercised during the
year ended December 31, 2008 and 2007 were
$10.5 million and $15.2 million, respectively,
representing the difference between the closing price of the
Companys common stock at the date of exercise and the
exercise price paid.
70
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table summarizes information about stock options
outstanding as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Shares
|
|
|
Term
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
$0.20-0.80
|
|
|
280,522
|
|
|
|
5.44
|
|
|
$
|
0.31
|
|
|
|
280,522
|
|
|
$
|
0.31
|
|
|
|
|
|
1.02-1.50
|
|
|
959,138
|
|
|
|
6.61
|
|
|
|
1.05
|
|
|
|
814,711
|
|
|
|
1.04
|
|
|
|
|
|
3.04-3.04
|
|
|
1,436,561
|
|
|
|
7.17
|
|
|
|
3.04
|
|
|
|
799,723
|
|
|
|
3.04
|
|
|
|
|
|
3.74-8.52
|
|
|
485,198
|
|
|
|
8.01
|
|
|
|
6.95
|
|
|
|
197,833
|
|
|
|
6.62
|
|
|
|
|
|
14.42-14.80
|
|
|
1,409,981
|
|
|
|
6.23
|
|
|
|
14.78
|
|
|
|
240,261
|
|
|
|
14.80
|
|
|
|
|
|
16.32-20.33
|
|
|
358,000
|
|
|
|
6.02
|
|
|
|
17.88
|
|
|
|
43,453
|
|
|
|
18.81
|
|
|
|
|
|
20.98-25.23
|
|
|
300,000
|
|
|
|
6.41
|
|
|
|
21.58
|
|
|
|
44,057
|
|
|
|
21.57
|
|
|
|
|
|
28.46-31.54
|
|
|
168,054
|
|
|
|
8.58
|
|
|
|
28.91
|
|
|
|
61,781
|
|
|
|
28.61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.20-31.54
|
|
|
5,397,454
|
|
|
|
6.74
|
|
|
$
|
8.78
|
|
|
|
2,482,341
|
|
|
$
|
4.74
|
|
|
$
|
24,399,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
2,482,341
|
|
|
|
6.75
|
|
|
$
|
4.74
|
|
|
|
|
|
|
|
|
|
|
$
|
17,325,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
5,205,792
|
|
|
|
6.74
|
|
|
$
|
8.59
|
|
|
|
|
|
|
|
|
|
|
$
|
24,113,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value for options outstanding at
December 31, 2008 was $24.4 million representing the
difference between the exercise price and $10.51, the closing
price of the Companys common stock on December 31,
2008, as reported on The NASDAQ Global Market, for all in the
money options outstanding.
The fair value of each employee option grant for the year ended
December 31, 2008 and 2007 under SFAS 123(R) was
estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions.
|
|
|
|
|
|
|
For the Year Ended
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
Risk-free interest rate
|
|
1.31%-3.32%
|
|
3.29%-4.72%
|
Expected life
|
|
4-5 years
|
|
4-6 years
|
Dividend yield
|
|
0%
|
|
0%
|
Volatility
|
|
55%-63%
|
|
55%-56%
|
The Company determined that it was not practical to calculate
the historical volatility of its share price since the
Companys securities were not publicly traded prior to May
2007 and before which there was no readily determinable market
value for its stock; Further, the Company is a high-growth
technology company whose future operating results are not
comparable to its prior operating results. Therefore, the
Company estimated its expected volatility based on reported
market value data for a group of publicly traded companies,
which it selected from certain market indices, that the Company
believed was relatively comparable after consideration of their
size, stage of life cycle, profitability, growth, and risk and
return on investment. The expected term represents the period
that stock-based awards are expected to be outstanding, giving
consideration to the contractual terms of the stock-based
awards, vesting schedules and expectations of future employee
behavior as influenced by changes to the terms of our
stock-based awards. For the year ended December 31, 2008,
the Company used the simplified method of determining the
expected term as permitted by the provisions of Staff Accounting
Bulletin No. 110, Year-End Help for Expensing
Employee Stock Options.
The estimated weighted-average grant date fair value of options
granted during the twelve months ended December 31, 2008
and 2007 were $7.87 and $9.62, respectively. There were
$16.6 million and $6.0 million of
71
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrecognized compensation cost as of December 31, 2008 and
2007, respectively. The unrecognized compensation cost at
December 31, 2008 is expected to be recognized over a
weighted average period of 2.67 years and 2.47 years,
respectively.
Restricted
Stock Unit Awards
The company began issuing restricted stock units, or RSUs, in
the fourth quarter of 2007. Shares are issued on the date the
restricted stock units vest, and the fair value of the
underlying stock on the dates of grant is recognized as
stock-based compensation over a three or four-year vesting
period. Below is the information as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date Fair
|
|
|
|
Number of Shares
|
|
|
Value Per Share
|
|
|
Balance as of December 31, 2006
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
12,500
|
|
|
|
31.54
|
|
Issued and released
|
|
|
(500
|
)
|
|
|
31.54
|
|
Cancelled and forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
12,000
|
|
|
$
|
31.54
|
|
Granted
|
|
|
300,820
|
|
|
|
16.82
|
|
Issued and released
|
|
|
(25,125
|
)
|
|
|
20.07
|
|
Cancelled and forfeited
|
|
|
(6,762
|
)
|
|
|
16.54
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2008
|
|
|
280,933
|
|
|
$
|
17.16
|
|
|
|
|
|
|
|
|
|
|
Expected to vest as of December 31, 2008
|
|
|
257,980
|
|
|
$
|
17.16
|
|
The total intrinsic value of the RSUs issued as of
December 31, 2008 was $2.7 million, representing the
closing price of the Companys stock on December 31,
2008, multiplied by the number of non-vested RSUs expected to
vest as of December 31, 2008.
For RSUs, stock-based compensation expense is calculated based
on the market price of the Companys common stock on the
date of grant, multiplied by the number of RSUs granted. The
grant date fair value of RSUs, less estimated forfeitures, is
recognized on a straight-line basis, over the vesting period.
As of December 31, 2008, there was $4.1 million of
unrecognized compensation cost related to restricted stock units
granted under the Companys 2007 Equity Incentive Plan. The
unrecognized compensation cost is expected to be recognized over
a weighted average period of 3.3 years.
The Company recorded income tax expense of $930,000, $142,000
and 560,000 for the years ended December 31, 2008, 2007 and
2006, respectively. The provision for the years ended
December 31, 2008 and 2007 was primarily due to the federal
alternative minimum tax on profits in the United States adjusted
by certain non-deductible items, international taxes and state
income taxes. The provision at December 31, 2006 was
primarily related to alternative minimum tax on profit in
connection with establishing the international business
structure.
The domestic and foreign components of income (loss) before
income tax expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
14,131
|
|
|
$
|
11,037
|
|
|
$
|
17,877
|
|
Foreign
|
|
|
(11,694
|
)
|
|
|
(8,705
|
)
|
|
|
(26,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,437
|
|
|
$
|
2,332
|
|
|
$
|
(8,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
865
|
|
|
$
|
97
|
|
|
$
|
560
|
|
Foreign
|
|
|
65
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
930
|
|
|
$
|
142
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
930
|
|
|
$
|
142
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate differs from the United
States federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Income tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
1.6
|
|
|
|
1.1
|
|
|
|
|
|
Non-deductible in-process research and development
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
Non-deductible stock compensation costs
|
|
|
10.4
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax
|
|
|
33.0
|
|
|
|
2.5
|
|
|
|
6.6
|
|
Change in valuation allowance
|
|
|
(228.6
|
)
|
|
|
(160.4
|
)
|
|
|
(140.0
|
)
|
Foreign net operating losses not benefited
|
|
|
166.0
|
|
|
|
129.0
|
|
|
|
106.0
|
|
Other
|
|
|
3.4
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
38.2
|
%
|
|
|
6.1
|
%
|
|
|
6.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of the temporary differences that give rise to
deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Tax credits
|
|
|
4,481
|
|
|
$
|
5,987
|
|
Net operating loss carryforwards
|
|
|
6,340
|
|
|
|
3,092
|
|
Capitalized research and development
|
|
|
85
|
|
|
|
115
|
|
Depreciation and amortization
|
|
|
3,610
|
|
|
|
2,834
|
|
Stock compensation
|
|
|
2,372
|
|
|
|
714
|
|
Other
|
|
|
1,485
|
|
|
|
1,011
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
18,373
|
|
|
|
13,753
|
|
Less: valuation allowance
|
|
|
(14,430
|
)
|
|
|
(13,753
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
3,943
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Other
|
|
|
(3,943
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
73
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2008, the Company had total net
operating loss carryforwards for federal and state income tax
purposes of $32.7 million and $60.3 million,
respectively. If not utilized, these net federal and state
operating loss carryforwards will expire beginning in 2023 and
2013, respectively. The federal net operating loss carryforwards
of $32.7 million are comprised of acquired net operating
losses of $16.5 million and the remaining amount for stock
option deductions which will be credited to equity when
realized. The state net operating loss carryforwards of
$60.3 million are comprised of acquired net operating
losses of $16.5 million and stock option deductions of
$25 million, which will be credited to equity when realized.
SFAS No. 141R will change how business acquisitions
are accounted for and will impact financial statements both on
the acquisition date and in subsequent periods.
SFAS No. 160 will change the accounting and reporting
for minority interests, which will be recharacterized as
noncontrolling interests and classified as a component of
equity. SFAS No. 141R and SFAS No. 160 are
effective for the Company beginning in the first quarter of
2009. Early adoption is not permitted. The adoption of
SFAS No. 141R could have a material effect on the
Companys financial position and results of operations as
the release of any valuation allowance for acquired tax
attributes subsequent to adoption would benefit the tax
provision as opposed to recording the benefit to goodwill. The
Company is currently evaluating the impact that
SFAS No. 160 will have on its consolidated financial
statements.
The Company is tracking the portion of its deferred tax assets
attributable to stock option benefits in a separate memo account
pursuant to SFAS No. 123R. Therefore, these amounts
are no longer included in the Companys gross or net
deferred tax assets. Pursuant to SFAS No. 123R,
footnote 82, the stock option benefits of approximately
$9.4 million will only be recorded to equity when they
reduce cash taxes payable.
The Company also had federal and other state research and
development tax credit carryforwards of approximately
$6.1 million and $5.5 million, respectively. The
federal and other state tax credit carryforwards will expire
commencing 2022 and 2020, respectively, except for the
California research tax credits which carry forward
indefinitely. The Company also has federal alternative minimum
tax credits of approximately $0.4 million, which have no
expiration date. The Company currently maintains a full
valuation allowance on its net deferred tax assets.
The Companys net deferred tax assets relate predominantly
to its United States tax jurisdiction. The valuation allowance
is determined in accordance with the provisions of
SFAS No. 109 which requires an assessment of both
positive and negative evidence when determining whether it is
more likely than not that deferred tax assets are recoverable;
such assessment is required on a jurisdiction by jurisdiction
basis. The expected U.S. loss, among other considerations,
provides negative evidence under SFAS No. 109 and
accordingly, a full valuation allowance was recorded against its
net deferred tax assets. The Company intends to maintain a full
valuation allowance on its net deferred tax assets until
sufficient positive evidence exists to support reversal of the
valuation allowance. During 2008 and 2007, the Company
maintained a full valuation allowance on its deferred tax
assets. At December 31, 2006, 2007 and 2008 the valuation
allowance against the Companys deferred tax assets was
$19.1 million, $13.1 million and $14.4 million,
respectively.
The Company has reviewed whether the utilization of its net
operating losses and research credits were subject to a
substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar
state provisions. Utilization of these carryforwards are
restricted and result in some amount of these carryforwards
expiring prior to benefiting the Company.
Undistributed earnings of our foreign subsidiary of
approximately $0.3 million and $0.2 million at
December 31, 2008 and 2007, respectively, are considered to
be indefinitely reinvested and, accordingly, no provisions for
federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, the Company would be subject to both U.S. income
taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
74
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, on
January 1, 2007. At December 31, 2008, the Company had
$4.0 million of unrecognized tax benefits, of which
$0.3 million, if recognized, would reduce the
Companys effective tax rate.
The Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31, 2008, the Company had $19,000 in accrued
interest
and/or
penalties.
The following table summarizes the activity related to the
unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of the year
|
|
$
|
3,574
|
|
|
$
|
3,264
|
|
Gross increases related to prior years tax positions
|
|
|
147
|
|
|
|
40
|
|
Gross increases related to current years tax positions
|
|
|
312
|
|
|
|
270
|
|
Settlements
|
|
|
|
|
|
|
|
|
Expiration of the statute of limitations for the assessment of
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the end of the year
|
|
$
|
4,033
|
|
|
$
|
3,574
|
|
|
|
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $4.0 million
at December 31, 2008 was $0.3 million of tax benefits
that, if recognized, would reduce the Companys annual
effective tax rate. The Company also accrued potential penalties
and interest of $19,000 related to these unrecognized tax
benefits in 2008. The Company does not expect its unrecognized
tax benefits to change significantly over the next
12 months.
The Company is in the process of expanding its international
operations and staff to better support its expansion into
international markets. This expansion includes the
implementation of an international structure that includes,
among other things, a research and development cost-sharing
arrangement, certain licenses and other contractual arrangements
between the Company and its wholly-owned domestic and foreign
subsidiaries. The Companys foreign subsidiaries have
acquired certain rights to sell the existing intellectual
property and intellectual property that will be developed or
licensed in the future. The existing rights were transferred for
an initial payment. As a result of these changes and an
expanding customer base in Asia, the Company expects that an
increasing percentage of its consolidated pre-tax income will be
derived from, and reinvested in, its Asian operations. The
Company anticipates that this pre-tax income will be subject to
foreign tax at relatively lower tax rates when compared to the
United States federal statutory tax rate and as a consequence,
the Companys effective income tax rate is expected to be
lower than the United States federal statutory rate.
The Companys major tax jurisdictions are the United States
federal government and the state of California. The Company
files income tax returns in the United States federal
jurisdiction, the state of California and various state and
foreign tax jurisdictions in which it has a subsidiary or branch
operation. The United States federal corporation income tax
returns beginning with the 2000 tax year remain subject to
examination by the Internal Revenue Service, or IRS. The
California corporation income tax returns beginning with the
2000 tax year remain subject to examination by the California
Franchise Tax Board. There are no on-going tax audits in the
major tax jurisdictions.
The Company has established a defined contribution savings plan
under Section 401(k) of the Internal Revenue Code. This
plan covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a portion
of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the
board of directors. For the year ended December 31, 2008,
the Company matched 50% of the employees contribution up
to $2,000 per employee. The Companys defined contribution
expense was $266,000 in 2008.
75
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise for which
separate financial information is available and evaluated
regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and
in assessing performance. The Company is organized as, and
operates in, one reportable segment: the development and sale of
semiconductor processor solutions for next-generation
intelligent networking equipment. The chief operating
decision-maker is the Chief Executive Officer. The
Companys Chief Executive Officer reviews financial
information presented on a consolidated basis, accompanied by
information about revenue by customer and geographic region, for
purposes of evaluating financial performance and allocating
resources. The Company and its Chief Executive Officer evaluate
performance based primarily on revenue to the customers and in
the geographic locations in which the Company operates. Revenue
is attributed by geographic location based on the bill-to
location of customer. The Companys long-lived assets are
primarily located in the United States of America and not
allocated to any specific region. Therefore, geographic
information is presented only for total revenue.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased the Companys products. For sales to the
distributors, their geographic location may be different from
the geographic locations of the ultimate end users. Sales by
geography for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
44,787
|
|
|
$
|
32,748
|
|
|
$
|
19,483
|
|
Japan
|
|
|
11,559
|
|
|
|
2,732
|
|
|
|
2,612
|
|
Taiwan
|
|
|
11,533
|
|
|
|
10,500
|
|
|
|
7,403
|
|
China
|
|
|
6,206
|
|
|
|
3,367
|
|
|
|
2,290
|
|
Other countries
|
|
|
12,524
|
|
|
|
4,856
|
|
|
|
2,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
86,609
|
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Commitments
and Contingencies
|
The Company is not currently a party to any legal proceedings
that management believes would have a material adverse effect on
the consolidated financial position, results of operations or
cash flows of the Company.
The Company leases its facilities under non-cancelable operating
leases, which contain renewal options and escalation clauses,
and expire through April 2013. The Company also acquires certain
assets under capital leases.
76
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum commitments under non-cancelable capital and operating
lease agreements, excluding accrued restructuring liability (See
Note 7) as of December 31, 2008 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease
|
|
|
|
|
|
|
|
|
|
and Technology
|
|
|
|
|
|
|
|
|
|
License
|
|
|
Operating
|
|
|
|
|
|
|
Obligations
|
|
|
Leases
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2009
|
|
$
|
2,862
|
|
|
|
1,835
|
|
|
$
|
4,697
|
|
2010
|
|
|
2,039
|
|
|
|
1,886
|
|
|
|
3,925
|
|
2011
|
|
|
144
|
|
|
|
1,646
|
|
|
|
1,790
|
|
2012
|
|
|
|
|
|
|
1,042
|
|
|
|
1,042
|
|
2013
|
|
|
|
|
|
|
281
|
|
|
|
281
|
|
thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,045
|
|
|
$
|
6,690
|
|
|
$
|
11,735
|
|
Less: Interest component
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payment
|
|
|
4,735
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(2,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations
|
|
$
|
2,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred under operating leases was
$1.6 million, $997,000 and $797,000 for the years ended
December 31, 2008, 2007 and 2006, respectively.
The capital lease and technology license obligations include
future cash payments payable primarily for license agreements
with outside vendors. The more significant ones are summarized
as follows:
|
|
|
|
|
One of the license agreements, which was entered into in June
2007, is with Cadence Design Systems for its electronic design
automation software that is used in the design of the
Companys products. The term of the license is two years
and it expires in June 2009. As of December 31, 2008,
$690,000 of the total $920,000 due under this license agreement
was paid.
|
|
|
|
A second license agreement is with MIPS Technologies, Inc.,
which includes a non-exclusive, non-transferable right to
develop multiple licensed MIPS cores that implement the MIPS
architecture. This second license agreement required the Company
to pay $1.9 million after the completion of its IPO for an
automatic two-year extension of the license. The term of the
license, including the two-year extension, is seven years and
expires in December 2010. As of December 31, 2008, there
are no remaining payments due under this license agreement.
|
|
|
|
A third license agreement, which was entered into in October
2007, with Synopsys was for certain design tools totaling
$7.0 million, with 12 installment payments. The term of the
license is three years which will expire in October 2010. The
present value of the installment payments has been capitalized
and is amortized over three years, and included within capital
lease and technology license obligations on consolidated balance
sheets. As of December 31, 2008, $2.9 million of the
total $7.0 million due under the license agreement was paid.
|
|
|
|
A fourth license agreement, which was entered into in October
2008, with Synopsys was for certain design tools totaling
$575,000. The term of the license is three years which will
expire in October 2011. As of December 31, 2008, $48,000
due under the license agreement was paid.
|
77
Schedule II
Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Additions
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
38
|
|
|
$
|
|
|
|
$
|
(4
|
)
|
|
$
|
34
|
|
Allowance for customer returns
|
|
|
139
|
|
|
|
70
|
|
|
|
(40
|
)
|
|
|
169
|
|
Income tax valuation allowance
|
|
|
13,136
|
|
|
|
1,294
|
|
|
|
|
|
|
|
14,430
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
|
$
|
38
|
|
Allowance for customer returns
|
|
|
34
|
|
|
|
434
|
|
|
|
(329
|
)
|
|
|
139
|
|
Income tax valuation allowance
|
|
|
19,078
|
|
|
|
|
|
|
|
(5,942
|
)
|
|
|
13,136
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
73
|
|
|
$
|
55
|
|
|
$
|
(60
|
)
|
|
$
|
68
|
|
Allowance for customer returns
|
|
|
37
|
|
|
|
123
|
|
|
|
(126
|
)
|
|
|
34
|
|
Income tax valuation allowance
|
|
|
23,474
|
|
|
|
|
|
|
|
(4,396
|
)
|
|
|
19,078
|
|
All other schedules are omitted because they are inapplicable or
the requested information is shown in the consolidated financial
statements of the registrant or related notes thereto.
78
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Cavium Networks, Incs management is responsible for
establishing and maintaining adequate internal control over
financial reporting for Cavium (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act of 1934, as amended). Caviums
internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with U.S. generally
accepted accounting principles. Caviums internal control
over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of Cavium;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of Cavium are
being made only in accordance with authorizations of management
and directors of Cavium; and (iii) provide reasonable
assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of Caviums
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Our management does not expect that our disclosure controls or
our internal control over financial reporting will prevent or
detect all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not
absolute, assurance that the control systems objectives
will be met. The design of a control system must reflect the
fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Further,
because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also
be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Projections of any evaluation of controls
effectiveness to future periods are subject to risks. Over time,
controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or
procedures.
Caviums management assessed the effectiveness of
Caviums internal control over financial reporting as of
December 31, 2008, utilizing the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework. Based on the
assessment by Caviums management, we determined that
Caviums internal control over financial reporting was
effective as of December 31, 2008. Management reviewed the
results of their assessment with our Audit Committee. The
effectiveness of the Companys internal control over
financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears
herein.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting (as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Exchange Act of 1934, as amended) during the fourth
quarter of 2008 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
79
Disclosure
Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e) of
the Exchange Act of 1934, as amended) as of the end of the
period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to
management as appropriate to allow for timely decisions
regarding required disclosure.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
Certain information required by Part III is omitted from
this Annual Report on
Form 10-K
since we intend to file our definitive proxy statement for our
2009 annual meeting of stockholders, pursuant to
Regulation 14A of the Securities Exchange Act, not later
than 120 days after the end of the fiscal year covered by
this Annual Report on
Form 10-K,
and certain information to be included in the proxy statement is
incorporated herein by reference.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to directors
and executive officers may be found under the caption
Executive Officers of the Registrant in Part I,
Item 1 of this Annual Report on
Form 10-K,
and in the section entitled Proposal 1
Election of Directors appearing in the Proxy Statement.
Such information is incorporated herein by reference.
The information required by this Item with respect to our audit
committee and audit committee financial expert may be found in
the section entitled Proposal 1 Election
of Directors Audit Committee appearing in the
Proxy Statement. Such information is incorporated herein by
reference.
The information required by this Item with respect to compliance
with Section 16(a) of the Securities Exchange Act of 1934
and our code of ethics may be found in the sections entitled
Section 16(a) Beneficial Ownership Reporting
Compliance and Proposal 1 Election
of Directors Code of Ethics, respectively,
appearing in the Proxy Statement. Such information is
incorporated herein by reference.
We have adopted the Cavium Networks, Inc. Code of Business
conduct and Ethics that applies to all officers, directors and
employees. The Code of Business conduct and Ethics is available
on our website at
http://investor.caviumnetworks.com.
If we make any substantive amendments to the Code of Business
Conduct and Ethics or grant any waivers from a provision of the
Code to any executive officer or director, we will promptly
disclose the nature of the amendment or waiver on our website.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is included in our proxy
statement for our 2009 annual meeting of stockholders under the
sections entitled Executive Compensation,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report and is incorporated herein by reference.
The information required by this item is included in our proxy
statement for our 2008 annual meeting of stockholders under the
sections entitled Executive Compensation,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report and is incorporated herein by reference.
80
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item relating to security
ownership of certain beneficial owners and management is
included in our proxy statement for our 2009 annual meeting of
stockholders under the section entitled Security Ownership
of Certain Beneficial Owners and Management and is
incorporated herein by reference.
The information required by this item with respect to securities
authorized for issuance under our equity compensation plans is
incorporated herein by reference to the information from the
proxy statement for our 2009 annual meeting of stockholders
under the section entitled Equity Compensation Plan
Information and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is included in our proxy
statement for our 2009 annual meeting of stockholders under the
sections entitled Transactions with Related Persons
and Information Regarding the Board of Directors and
Corporate Governance and is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this item is incorporated herein by
reference to the information included in our proxy statement for
our 2009 annual meeting of stockholders under the section
entitled Proposal 2 Ratification of
Selection of Auditors.
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules
|
Index to Consolidated Financial Statements
a. The following documents are filed as part of this report:
|
|
|
|
|
|
|
|
|
Financial Statements:
|
|
|
46
|
|
|
|
See Index to Financial Statements in Item 8 of this Annual
Report on Form 10-K, which is incorporated herein by reference.
|
|
|
|
|
|
|
Financial Statement Schedule:
|
|
|
78
|
|
|
|
Schedule II Valuation and Qualifying Accounts
and Reserve
|
|
|
|
|
|
|
Exhibits:
|
|
|
83
|
|
|
|
The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as a part of this Annual
Report on Form 10-K.
|
|
|
|
|
81
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 2, 2009.
Cavium Networks, Inc.
Syed Ali
President and Chief Executive Officer
Arthur Chadwick
Chief Financial Officer, Vice President of Finance and
Administration and Secretary
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Syed
Ali
Syed
Ali
|
|
President, Chief Executive Officer and Director (Principal
Executive Officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Arthur
Chadwick
Arthur
Chadwick
|
|
Chief Financial Officer, Vice President of Finance and
Administration and Secretary (Principal Financial and
Accounting Officer)
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Kris
Chellam
Kris
Chellam
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ John
Jarve
John
Jarve
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Anthony
Pantuso
Anthony
Pantuso
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ C.N.
Reddy
C.N.
Reddy
|
|
Director
|
|
March 2, 2009
|
|
|
|
|
|
/s/ Anthony
Thornley
Anthony
Thornley
|
|
Director
|
|
March 2, 2009
|
82
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
|
|
|
3
|
.1*
|
|
Amended and Restated Certificate of Incorporation of the
Registrant
|
|
|
|
|
|
|
|
|
|
|
|
3
|
.2
|
|
Amended and Restated Bylaws of the Registrant
|
|
S-1/A
|
|
333-140660
|
|
3.5
|
|
|
4/13/2007
|
|
|
4
|
.1
|
|
Reference is made to exhibits 3.1 and 3.2
|
|
|
|
|
|
|
|
|
|
|
|
4
|
.2
|
|
Form of the Registrants Common Stock Certificate
|
|
S-1/A
|
|
333-140660
|
|
4.2
|
|
|
4/24/2007
|
|
|
4
|
.3
|
|
Third Amended and Restated Investors Rights Agreement,
dated December 8, 2004, as amended on October 25, 2005
and August 9, 2006, by and among the Registrant and certain
of its security holders
|
|
S-1
|
|
333-140660
|
|
4.3
|
|
|
2/13/2007
|
|
|
10
|
.1
|
|
Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers
|
|
S-1
|
|
333-140660
|
|
10.1
|
|
|
2/13/2007
|
|
|
10
|
.2
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
|
|
S-1
|
|
333-140660
|
|
10.2
|
|
|
2/13/2007
|
|
|
10
|
.3*
|
|
2007 Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.4
|
|
Form of Option Agreement under 2007 Equity Incentive Plan
|
|
10-Q
|
|
001-33435
|
|
10.24
|
|
|
5/2/2008
|
|
|
10
|
.5
|
|
Form of Option Grant Notice and Form of Exercise Notice under
2007 Equity Incentive Plan
|
|
S-1
|
|
333-140660
|
|
10.4
|
|
|
2/13/2007
|
|
|
10
|
.6
|
|
Form of Restricted Stock Unit Award under 2007 Equity Incentive
Plan
|
|
10-Q
|
|
333-33435
|
|
10.25
|
|
|
8/8/2008
|
|
|
10
|
.7*
|
|
Restricted Stock Unit Retention Plan
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.8
|
|
Executive Employment Agreement, dated January 2, 2001,
between the Registrant and Syed Ali
|
|
S-1
|
|
333-140660
|
|
10.5
|
|
|
2/13/2007
|
|
|
10
|
.9*
|
|
Amendment to Executive Employment Agreement, dated
December 24, 2008, between the Registrant and Syed Ali
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.10
|
|
Employment Offer Letter, dated December 27, 2004, between
the Registrant and Arthur Chadwick
|
|
S-1
|
|
333-140660
|
|
10.6
|
|
|
2/13/2007
|
|
|
10
|
.11
|
|
Employment Offer Letter, dated January 22, 2001, between
the Registrant and Anil K. Jain
|
|
S-1
|
|
333-140660
|
|
10.7
|
|
|
2/13/2007
|
|
|
10
|
.12*
|
|
Amendment to Offer Letter, dated December 24, 2008, between
the Registrant and Anil Jain
|
|
|
|
|
|
|
|
|
|
|
|
10
|
.13
|
|
Employment Offer Letter, dated May 6, 2003, between the
Registrant and Rajiv Khemani
|
|
S-1
|
|
333-140660
|
|
10.8
|
|
|
2/13/2007
|
|
|
10
|
.14
|
|
Employment Offer Letter, dated May 1, 2008, between the
Registrant and Sandeep Vij
|
|
10-Q
|
|
001-33435
|
|
10.23
|
|
|
5/2/2008
|
|
|
10
|
.15*
|
|
Amendment to Offer Letter, dated December 23, 2008, between
the Registrant and Sandeep Vij
|
|
|
|
|
|
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
|
|
|
10
|
.16
|
|
Letter Agreement, dated November 4, 2005, between the
Registrant and Kris Chellam
|
|
S-1
|
|
333-140660
|
|
10.9
|
|
|
2/13/2007
|
|
|
10
|
.17
|
|
Letter Agreement, dated September 1, 2006, between the
Registrant and Anthony Thornley
|
|
S-1
|
|
333-140660
|
|
10.10
|
|
|
2/13/2007
|
|
|
10
|
.18
|
|
Lease Agreement, dated April 15, 2005, between the
Registrant and MB Technology Park, LLC
|
|
S-1
|
|
333-140660
|
|
10.11
|
|
|
2/13/2007
|
|
|
10
|
.19
|
|
First Amendment to Lease Agreement, dated March 6 2008, between
the Registrant and MB Technology Park, LLC
|
|
10-K
|
|
001-33435
|
|
10.12
|
|
|
3/10/2008
|
|
|
10
|
.20
|
|
Letter Agreement, dated March 15, 2007, between the
Registrant and AVM Capital, L.P.
|
|
S-1/A
|
|
333-140660
|
|
10.20
|
|
|
3/16/2007
|
|
|
#10
|
.21
|
|
Master Technology License Agreement, dated December 30,
2003, between the Registrant and MIPS Technologies, Inc.
|
|
S-1/A
|
|
333-140660
|
|
10.21
|
|
|
4/6/2007
|
|
|
10
|
.22
|
|
Asset Purchase Agreement by and between Cavium Networks, Inc.,
Cavium International, Cavium (Taiwan) Ltd., and Star
Semiconductor Corporation, dated July 15, 2008
|
|
8-K
|
|
001-33435
|
|
10.1
|
|
|
7/16/2008
|
|
|
10
|
.23
|
|
Agreement and Plan of Merger and Reorganization by and between
Cavium Networks, Inc., WWC Acquisition Corporation, WWC I,
LLC, and W&W Communications, Inc., dated November 19,
2008
|
|
8-K
|
|
001-33435
|
|
10.26
|
|
|
11/20/2008
|
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
|
23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
and Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith |
|
# |
|
Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission. |
|
|
|
Management contract or compensatory plan or arrangement. |
84