Mindspeed Technologies, Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2005
Commission file number: 000-50499
MINDSPEED TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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01-0616769 |
(State of incorporation) |
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(I.R.S. Employer
Identification No.) |
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4000 MacArthur Boulevard, East Tower
Newport Beach, California
(Address of principal executive offices) |
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92660-3095
(Zip Code) |
Registrants telephone number, including area code:
(949) 579-3000
Securities registered pursuant to Section 12(b) of the
Act:
None.
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $0.01 par value per share
(including associated Preferred Share Purchase Rights)
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 an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes o No þ
The aggregate market value of the Registrants voting and
non-voting stock held by non-affiliates of the Registrant as of
the end of its most recently completed second fiscal quarter was
approximately $190.5 million. Shares held by each officer
and director and each person owning more than 5% of the
outstanding voting and non-voting stock have been excluded from
this calculation because such persons may be deemed to be
affiliates of the Registrant. This determination of potential
affiliate status is not necessarily a conclusive determination
for other purposes. Shares held include shares of which certain
of such persons disclaim beneficial ownership.
The number of outstanding shares of the Registrants Common
Stock as of October 28, 2005 was 106,030,117.
Documents Incorporated by Reference
Portions of the Registrants Proxy Statement for the 2006
Annual Meeting of Stockholders, to be filed pursuant to
Regulation 14A within 120 days after the end of the
2005 fiscal year, are incorporated by reference into
Part III of this Form 10-K.
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains statements
relating to Mindspeed Technologies, Inc. (including certain
projections and business trends) that are forward-looking
statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the Securities Act), and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and are subject to the safe
harbor created by those sections. All statements included
in this Annual Report on Form 10-K, other than those that
are purely historical, are forward-looking statements. Words
such as expect, believe,
anticipate, outlook, could,
target, project, intend,
plan, seek, estimate,
should, may, assume and
continue, as well as variations of such words and
similar expressions, also identify forward-looking statements.
Forward-looking statements in this Annual Report on
Form 10-K include, without limitation, statements regarding:
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our competitive advantage; |
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the benefits of a fabless operation; |
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the importance of software drivers and application software; |
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the growth prospects for the network infrastructure equipment
and communications semiconductors markets, including increased
network capacity demand, the upgrade and expansion of legacy
networks, the build-out of networks in developing countries, and
the increased outsourcing of component requirements; |
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the growth rate for products in the enterprise, network access
and metro service areas and our position to increase market
share; |
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the focus of our research and development spending on certain
products and our expectation of the growth prospects for those
products; |
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our belief that, during fiscal 2005, the levels of inventories
at our customers and other issues that adversely affected our
revenues late in fiscal 2004 have generally been resolved; |
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our ability to achieve design wins and convert wins into revenue; |
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the availability of raw materials, parts and supplies; |
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competition and the principal competitive factors for
semiconductor suppliers, including time to market, product
quality, reliability and performance, customer support, price
and total system cost, new product innovation and compliance
with industry standards; |
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the continuation of intense price and product competition, and
the resulting declining average selling prices for our products; |
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our investments in research and development; |
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the value of our intellectual property; |
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the importance of attracting and retaining highly skilled,
dedicated personnel; |
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our ability to achieve revenue growth and profitability, or to
achieve positive cash flows from operations, and the expected
period through which we will continue to incur significant
losses and negative cash flows; |
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the importance of providing comprehensive product service and
support; |
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the dependence of our operating results on our ability to
introduce products on a timely basis; |
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the sufficiency of our existing sources of liquidity and
expected sources of cash to fund our operations, research and
development efforts, anticipated capital expenditures, working
capital and other financing requirements for the next twelve
months; |
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our expectation of paying our obligations relating to our
restructuring plans and other obligations over their respective
terms, and our intention to fund those payments from available
cash balances and funds from product sales; |
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the circumstances under which we may need to seek additional
financing, our ability to obtain any such financing and any
consideration of acquisition opportunities; |
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our expectation that our provision for income taxes for fiscal
2006 will principally consist of income taxes related to our
foreign operations; |
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our restructuring plans, including expected workforce reductions
and facilities closures and the timing and amount of payments to
complete the actions, the source of funds for such payments, the
impact on our liquidity and the resulting decreases in our
research and development and selling, general and administrative
expenses; |
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our plans relating to our use of stock-based compensation, the
effectiveness of our incentive compensation programs and the
expected amounts of stock-based compensation expense in future
periods; |
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our belief that the financial stability of suppliers is an
important consideration in our customers purchasing
decisions; |
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the amount and timing of future payments under contractual
obligations; and |
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the impact of recent accounting pronouncements. |
Our expectations, beliefs, anticipations, objectives,
intentions, plans and strategies regarding the future are not
guarantees of future performance and are subject to risks and
uncertainties that could cause actual results, and actual events
that occur, to differ materially from results contemplated by
the forward-looking statement. These risks and uncertainties
include, but are not limited to:
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market demand for our new and existing products and our ability
to increase our revenues; |
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our ability to maintain operating expenses within anticipated
levels; |
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our ability to reduce our cash consumption; |
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availability and terms of capital needed for our business; |
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constraints in the supply of wafers and other product components
from our third-party manufacturers; |
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the ability to attract and retain qualified personnel; |
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successful development and introduction of new products; |
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obtaining design wins and developing revenues from them; |
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pricing pressures and other competitive factors; |
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order and shipment uncertainty; |
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fluctuations in manufacturing yields; |
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product defects; and |
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intellectual property infringement claims by others and the
ability to protect our intellectual property. |
The forward-looking statements in this Annual Report on
Form 10-K are subject to additional risks and
uncertainties, including those set forth in Item 1.
Business under the heading Risk Factors
and those detailed from time to time in our other filings with
the Securities and Exchange Commission. These forward-looking
statements are made only as of the date hereof and, except as
required by law, we undertake no obligation to update or revise
any of them, whether as a result of new information, future
events or otherwise.
Mindspeed® and Mindspeed Technologies® are registered
trademarks of Mindspeed Technologies, Inc. Other brands, names
and trademarks contained in this report are the property of
their respective owners.
For presentation purposes of this Annual Report on
Form 10-K, references made to the years ended
September 30, 2005, September 30, 2004 and
September 30, 2003 relate to the actual fiscal years ended
September 30, 2005, October 1, 2004 and
October 3, 2003, respectively.
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PART I
Mindspeed Technologies, Inc. (we or Mindspeed) designs, develops
and sells semiconductor networking solutions for communications
applications in enterprise, access, metropolitan and wide-area
networks. Our products, ranging from optical network transceiver
solutions to voice and Internet protocol (IP) processors,
are sold to original equipment manufacturers (OEMs) for use in a
variety of network infrastructure equipment, including mixed
media gateways, high-speed routers, switches, access
multiplexers, cross-connect systems, digital loop carrier
equipment, IP private branch exchanges (PBXs) and optical
modules. Service providers and enterprises use this equipment
for the processing, transmission and switching of high-speed
voice, data and video traffic, including advanced services such
as voice over Internet protocol (VoIP), within different
segments of the communications network. Our customers include
Alcatel Data Networks, S.A., Cisco Systems, Inc., McData
Corporation, Nortel Networks, Inc. and Siemens A.G.
We believe the breadth of our product portfolio, combined with
more than three decades of experience in semiconductor hardware,
software and communications systems engineering, provide us with
a competitive advantage. We have proven expertise in signal,
packet and transmission processing technologies, which are
critical core competencies for successfully defining, designing
and implementing advanced semiconductor products for
next-generation network infrastructure equipment. We seek to
cultivate close relationships with leading network
infrastructure OEMs to understand emerging markets, technologies
and standards. We focus our research and development efforts on
applications in the segments of the telecommunications network
which we believe offer the most attractive growth prospects. Our
business is fabless, which means we outsource all of our
manufacturing needs, and we do not own or operate any
semiconductor manufacturing facilities. We believe being fabless
allows us to minimize operating infrastructure and capital
expenditures, maintain operational flexibility and focus our
resources on the design, development and marketing of our
products the highest value-creation elements of our
business model.
Spin-off from Conexant Systems, Inc.
Mindspeed was originally incorporated in Delaware in 2001 as a
wholly owned subsidiary of Conexant Systems, Inc. On
June 27, 2003, Conexant completed the distribution to
Conexant stockholders of all outstanding shares of common stock
of Mindspeed (the distribution). In the distribution, each
Conexant stockholder received one share of our common stock
(including an associated preferred share purchase right) for
every three shares of Conexant common stock held and cash for
any fractional share of our common stock. Following the
distribution, we began operations as an independent, publicly
held company. Our common stock trades on the Nasdaq National
Market under the ticker symbol MSPD.
Prior to the distribution, Conexant transferred to us the assets
and liabilities of its Mindspeed business, including the stock
of certain subsidiaries, and certain other assets and
liabilities which were allocated to us under the Distribution
Agreement entered into between us and Conexant. Also prior to
the distribution, Conexant contributed to us cash in an amount
such that at the time of the distribution our cash balance was
$100 million. We issued to Conexant a warrant to
purchase 30 million shares of our common stock at a
price of $3.408 per share, exercisable for a period of ten
years after the distribution. In connection with the
Distribution, we and Conexant also entered into a Credit
Agreement, an Employee Matters Agreement, a Tax Allocation
Agreement, a Transition Services Agreement and a Sublease.
Industry Overview
Communications semiconductor products are a critical part of
network infrastructure equipment. Network infrastructure OEMs
require advanced communications semiconductor
products such as digital signal processors,
transceivers, framers, packet and cell processors and switching
solutions that are highly optimized for the
equipment employed by their customers. We seek to provide
semiconductor products that enable network infrastructure OEMs
to meet the needs of their service provider and enterprise
customers in terms of system performance, functionality and
time-to-market.
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Our semiconductor products are primarily focused on network
infrastructure equipment applications in three segments of the
broadly defined communications network: enterprise networks;
network access service areas; and metropolitan area networks.
The type and complexity of network infrastructure equipment used
in these segments continues to expand, driven by the need for
the processing, transmission and switching of digital voice,
data and video traffic over multiple communication media, at
numerous transmission data rates and employing different
protocols. We also offer a limited number of products used in
wide-area or long-haul networks.
Enterprise networks include equipment that is deployed
primarily in the offices of commercial enterprises for voice and
data communications and access to outside networks. An
enterprise network may be comprised of many local area networks,
as well as client workstations, centralized database management
systems, storage area networks and other components. In
enterprise networks, communications semiconductors facilitate
the processing and transmission of voice, data and video traffic
in converged IP networks that are replacing the traditional
separate telephone, data and video conferencing networks.
Typical network infrastructure equipment found in enterprise
networks that use our products include voice gateways, IP PBXs,
storage area network (SAN) routers and director class
switches. In addition, a major trend in the broadcast video
market is the switch from analog to digital television
transmission and the conversion from standard-definition
television services to high-definition television (HDTV)
services featuring more detailed images and digital surround
sound. We offer a family of broadcast-video products optimized
for high-speed HDTV routing and production switcher applications.
Network Access service areas of the telecommunications
network refer to the last mile of a
telecommunications or cable service providers physical
network (including copper, fiber optic or wireless transmission)
and the network infrastructure equipment that connects
end-users, typically located at a business or residence, with
metropolitan area and wide-area networks. For this portion of
the network, infrastructure equipment requires semiconductors
that enable reliable, high-speed connectivity capable of
aggregating or disaggregating and transporting multiple forms of
voice, data and video traffic. In addition, communications
semiconductors must accommodate multiple transmission standards
and communications protocols to provide a bridge between
dissimilar access networks, for example, connecting wireless
base station equipment to a wireline network. Typical network
infrastructure equipment found at the edge of the network access
service area that use our products include remote access
concentrators, digital subscriber line (DSL) access
multiplexers, mixed-media gateways, wireless base stations,
digital loop carrier equipment and optical line termination and
media converters.
Metropolitan Area Networks, or metro, service areas of
the telecommunications network refer to the portion of a service
providers physical network that enables high-speed
communications within a city or a larger regional area. In
addition, it provides the communications link between network
access service areas and the fiber optic-based, wide-area
network. For metro equipment applications, communications
semiconductors provide transmission and processing capabilities,
as well as information segmentation and classification, and
routing and switching functionality, to support high-speed
traffic from multiple sources employing different transmission
standards and communications protocols. These functions require
signal conversion, signal processing and packet processing
expertise to support the design and development of highly
integrated mixed-signal devices combining analog and digital
functions with communications protocols and application
software. Typical network infrastructure equipment found in
metro service areas that use our products include add-drop
multiplexers, switches, high-speed routers, digital
cross-connect systems, optical edge devices and multiservice
provisioning platforms.
The telecommunications network, including the Internet, has
evolved into a complex, hybrid series of digital and optical
networks that connect individuals and businesses globally. These
new larger bandwidth, data-centric networks integrate voice,
data and video traffic, operate over both wired and wireless
media, link existing voice and data networks and cross
traditional enterprise, network access, metro and long haul
service area boundaries. Network infrastructure OEMs are
designing faster, more intelligent and more complex equipment to
satisfy the needs of the service providers as they continue to
expand their network coverage and
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service offerings while upgrading and connecting or integrating
existing networks of disparate types. In this demanding
environment, we believe network infrastructure OEMs select as
their strategic partners communications semiconductor suppliers
who can deliver advanced products that provide increased
functionality, lower total system cost and support for a variety
of communications media, operating speeds and protocols.
We believe the breadth of our product portfolio, combined with
our expertise in semiconductor hardware, software and
communications systems engineering, provide us with a
competitive advantage in designing and selling our products to
leading network infrastructure OEMs.
We have proven expertise in signal, packet and transmission
processing technologies. Signal processing involves both signal
conversion and digital signal processing techniques that convert
and compress voice, data and video between analog and digital
representations. Packet processing involves bundling or
segmenting information traffic using standard protocols such as
IP or asynchronous transfer mode (ATM) and enables sharing
of transmission bandwidth across a given communication medium.
Transmission processing involves the transport and receipt of
voice, data and video traffic across copper wire and optical
fiber communications media.
These core technology competencies are critical for developing
semiconductor networking solutions that enable the processing,
transmission and switching of high-speed voice, data and video
traffic, employing multiple communications protocols, across
disparate communications networks. Our core technology
competencies are the foundation for developing our:
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semiconductor device architectures, including digital signal
processors, mixed signal devices and programmable protocol
engines, as well as analog signal processing capabilities; |
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highly optimized signal processing algorithms and communications
protocols, which we implement in semiconductor devices; and |
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critical software drivers and application software to perform
signal, packet and transmission processing tasks. |
We believe the software drivers and application software are an
increasingly important part of the semiconductor networking
solutions we offer to OEMs.
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Increasing Demand for Communications Semiconductors |
We believe the market for network infrastructure equipment in
general, and for communications semiconductors in particular,
offers attractive long-term growth prospects for several reasons:
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We anticipate that demand for network capacity will continue to
increase, driven by: |
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Internet user growth; |
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higher network utilization rates; and |
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the popularity of VoIP and other bandwidth-intensive
applications, such as wireless data transfer and
video/multimedia applications. |
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We believe that incumbent telecommunications carriers and cable
multiple service operators worldwide will continue to upgrade
and expand legacy portions of their networks to accommodate new
service offerings and to reduce operating costs. |
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In developing countries, we expect that service providers will
continue the build-out of telecommunication networks, many of
which were previously government owned. |
Moreover, we expect that network infrastructure OEMs will
outsource more of their semiconductor component requirements to
semiconductor suppliers, allowing the OEMs to reduce their
operating cost
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structure by shifting their focus and investment from internal
application specific integrated circuit
(ASIC) semiconductor design and development to more
strategic systems development.
Strategy
Our objective is to grow our business and to become the leading
supplier of semiconductor networking solutions to leading global
network infrastructure OEMs in key enterprise, network access
and metro service area market segments. To achieve this
objective, we are pursuing the following strategies:
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Focus on Increasing Share in High-Growth, High-Margin
Applications |
We have established strong market positions for our products in
the enterprise, network access and metro service areas of the
telecommunications network. We believe the markets for
semiconductor products that address these applications will grow
at faster rates than the markets for network infrastructure
equipment in general. In addition, products which address
applications in the enterprise, network access and metro service
areas and perform packet processing, transmission processing
and/or signal processing functions typically command higher
average selling prices and higher margins, primarily due to
their functional complexity and their software content. These
two key attributes are expected to make the enterprise, network
access and metro service areas the most attractive market
segments for the foreseeable future. We believe that our three
core technology competencies, coupled with focused investments
in product development, will position us to increase our share
in those target areas.
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Expand Strategic Relationships with Industry-Leading
Global Network Infrastructure OEMs and Maximize Design Win
Share |
We identify and selectively establish strategic relationships
with market leaders in the network infrastructure equipment
industry to develop next-generation products and, in some cases,
customized solutions for their specific needs. We have an
extensive history of working closely with our customers
research and development and marketing teams to understand
emerging markets, technologies and standards, and we invest our
product development resources in those areas. We believe our
close relationships with leading network infrastructure OEMs
facilitate early adoption of our semiconductor products during
development of their system-level products, enhance our ability
to obtain design wins from those customers and encourage
adoption of our technology throughout the industry.
In North America, we have cultivated close relationships with
leading network infrastructure OEMs, including Cisco Systems,
Inc., McData Corporation and Nortel Networks, Inc. Abroad, we
have established close relationships with market leaders such as
Huawei Technologies Co., Ltd., Mitsubishi Electric Corporation,
TrueLight Corporation and Zhongxing Telecom Equipment Corp.
(ZTE) in the Asia-Pacific region and Alcatel Data Networks,
S.A., Nokia Corporation and Siemens A.G. in Europe.
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Capitalize on the Breadth of Our Product Portfolio |
We build on the breadth of our product portfolio of
physical-layer devices, together with our signal and packet
processing devices and communications software expertise, to
increase our share of the silicon content in our customers
products. We offer a range of complementary products that are
optimized to work with each other and provide our customers with
complete information receipt, processing and transmission
functions. These complementary products allow infrastructure
OEMs to source components that provide proven interoperability
from a single semiconductor supplier, rather than requiring OEMs
to combine and coordinate individual components from multiple
vendors. In addition, we offer highly integrated products such
as our family of
Comcertotm
VoIP processor solutions that provide our customers with a
complete hardware and software solution in a single device.
These integrated products perform functions typically requiring
multiple discrete components and software. We believe that this
strategy of offering both complementary and integrated products
increases product performance, speeds time-to-market and lowers
the total system cost for our customers.
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The breadth of our product portfolio also provides a competitive
advantage for serving network convergence applications such as
multiprotocol wireless-to-wireline connectivity. These
applications generally require a combination of processing,
transmission or switching functionality to move high-speed voice
and data traffic using multiple communications protocols across
disparate communications networks.
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Provide Outstanding Technical Support and Customer
Service |
We provide broad-based technical and product design support to
our customers through three dedicated teams: field application
engineers; product application engineers; and technical
marketing personnel. We believe that comprehensive service and
support are critical to shortening our customers design
cycles and maintaining a long-term competitive position within
the network infrastructure equipment market. Outstanding
customer service and support are important competitive factors
for semiconductor component suppliers like us seeking to be the
preferred suppliers to leading network infrastructure OEMs .
Products
We provide network infrastructure OEMs with a broad portfolio of
advanced semiconductor networking solutions, ranging from
physical-layer transceivers and framers to higher-layer network
processors. Our products can be classified into three focused
product families: high-performance analog products; multiservice
access digital signal processor (DSP) products; and
wide-area networking (WAN) communications products. These
three product families are found in a variety of networking
equipment designed to process, transmit and switch voice, data
and video traffic between, and within, the different segments of
the communications network.
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High-Performance Analog Products |
Our high-performance analog transmission devices and switching
products support storage area networking, fiber-to-the-premise
and broadcast video, as well as mainstream synchronous optical
networking (SONET)/synchronous digital hierarchy (SDH) and
packet-over-SONET applications, typically operating at data
transmission rates between 155 megabits per second (Mbps) and
4.25 gigabits per second (Gbps). Our transmission products
include laser drivers, transimpedance amplifiers, post
amplifiers, clock and data recovery circuits,
serializers/deserializers, video reclockers, cable drivers and
line equalizers. These products serve as the connection between
a fiber optic or coaxial cable component interface and the
remainder of the electrical subsystem in various network
equipment and perform a variety of functions, including:
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converting incoming optical signals from fiber optic cables to
electrical signals for processing and transport over a wireline
medium and vice-versa; |
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conditioning the signal to remove unwanted noise or errors; |
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combining lower speed signals from multiple parallel paths into
higher speed serial paths, and vice-versa, for bandwidth
economy; and |
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amplifying and equalizing weaker signals as they pass through a
particular systems equipment, media or network. |
Our switching products include a family of high-speed crosspoint
switches capable of switching traffic within various types of
network switching equipment. These crosspoint switches direct,
or transfer, a large number of high-speed data input streams,
regardless of traffic type, to different connection trunks for
rerouting the information to new destination points in the
network. Crosspoint switches are often used to provide redundant
traffic paths in networking equipment to protect against the
loss of critical data from spurious network outages or failures
that may occur from time-to-time. Target equipment applications
for our switching products include add-drop multiplexers,
high-density IP switches, storage-area routers and optical
cross-connect systems. In addition, we offer crosspoint switches
optimized for standard and high-definition broadcast video
routing and production switching applications at rates up to 1.5
Gbps.
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Multiservice Access DSP Products |
Our software-configurable multiservice access DSP products serve
as bridges for transporting voice, data and video between
circuit-switched networks and packet-based networks. Our
multiservice access DSP device architecture combines the
performance of a digital-signal processor core with the
flexibility of a microcontroller core to support our extensive
suite of modulation techniques, echo cancellers, speech coders
and communications protocols. These products process and
translate voice, data and video signals and perform various
management and reporting functions that help determine the
appropriate amount of bandwidth required for transporting the
signals to the next destination. They compress the signals to
minimize bandwidth consumption and modify or add communications
protocols to accommodate transport of the signals across a
variety of different services and networks. Supported services
include VoIP, voice-over-ATM (VoATM) and voice-over-DSL
services, as well as wireline-to-wireless connectivity.
Our
Comcertotm
family of voice-over-packet (VoP) communications processors
includes a full range of pin-and software-compatible enterprise
and carrier-class voice processing solutions that enable OEMs to
provide scalable systems with customized features. The
high-density members of this family, the Comcerto 600 and
Comcerto 700 series processors and related software, provide a
complete system-on-a-chip solution for
carrier-class VoIP and VoATM applications. The Comcerto 600
is capable of handling more than 256 channels of both VoIP
and VoATM traffic, while the Comcerto 700 supports more than 400
channels. Both are targeted for use in digital loop carriers and
voice and media gateways designed to bridge wireless, wireline
and enterprise networks.
The Comcerto 500 and 800 series solutions are designed for
enterprise voice and data processing applications. The Comcerto
500 series is a silicon PBX-on-a-chip which supports
all required voice processing functionality for up to 64
channels, including encryption. The Comcerto 800 series enables
a new class of office-in-a-box systems by combining
a high-quality VoP subsystem with a high-performance routing and
virtual private network (VPN) engine. The Comcerto 800
series integrates voice processing, packet processing and
encryption functionality into a single device for the rapidly
growing market for VoP enterprise networks. This product is
targeted for use in enterprise voice gateways, IP PBXs and
integrated access devices (IADs).
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Wide-Area Networking Communications Products |
Our WAN communications products include transmission solutions
and high-performance ATM/multi-protocol label switching
(MPLS) network processors that facilitate the aggregation,
processing and transport of voice and data traffic over copper
wire or fiber optic cable to access metropolitan and long-haul
networks.
Our T1/ E1, T3/ E3 and SONET carrier devices incorporate
high-speed analog, digital and mixed-signal circuit technologies
and include multi-port framers and line interface units (LIUs)
or transceivers for 1.5 Mbps to 155 Mbps data
transmission. Framers format data for transmission and extract
data at reception, while LIUs condition signals for transmission
and reception over multiple media. Our link-layer products
include multi-channel, high-level data link channel
(HDLC) communications controllers and multi-channel,
inverse multiplexing over ATM (IMA) traffic controllers.
The IMA protocol enables the aggregation of multiple T1 or DSL
lines to deliver higher data rates using existing ATM
infrastructure while the HDLC protocol is used for the
packetization of data and the transfer of messaging and
signaling information across the network. We also offer a family
of symmetric DSL (SDSL) transceivers which enable service
providers to deliver Internet access at data transmission rates
of 1.5 Mbps to 4.6 Mbps in both directions over copper
wire, supporting telecommuting and branch office functions in
North America.
Our high-performance ATM/ MPLS network processors are designed
to offer advanced protocol translation and traffic management
capabilities. Protocol translation occurs where different types
of networks and protocols interconnect. Traffic management
describes a collection of functions which are used to allocate
optimally network bandwidth and allow service providers to
provide differentiated services over their networks. Our
software-programmable devices operate at data transmission rates
from 1.5 Mbps to 2.5 Gbps. Our network processor devices
address internetworking applications, including ATM segmentation
and reassembly,
9
and a variety of traffic management functions, including traffic
shaping, traffic policing and queue management, required by
these applications.
Our wide-area networking communications products are designed
for use in a variety of equipment including digital loop
carriers, DSL access multiplexers, add-drop multiplexers,
switches, high-speed routers, digital cross-connect systems,
optical edge devices, multiservice provisioning platforms, voice
gateways and wireless base station controllers.
Customers
We market and sell our semiconductor networking solutions
directly to leading network infrastructure OEMs. We also sell
our products indirectly through electronic component
distributors and third-party electronic manufacturing service
providers, which manufacture products incorporating our
semiconductor networking solutions for OEMs. Sales to
distributors accounted for approximately 47% of our revenues for
fiscal 2005. For fiscal 2005, distributors Avnet, Inc. and
Alltek Technology Corporation and manufacturing service
providers Jabil Circuit, Inc. and Sanmina-SCI Corporation
accounted for 16%, 12%, 14% and 11%, respectively, of our net
revenues.
Our top five direct OEM customers for fiscal year 2005 were
Alcatel Data Networks, S.A., Fujitsu Limited, Huawei
Technologies Co., Ltd., Nortel Networks, Inc. and Zhongxing
Telecom Equipment Corp. (ZTE). While our direct sales to these
customers accounted for a total of approximately 9% of our
fiscal 2005 net revenues, we believe indirect sales to
these same customers represent a significant additional portion
of our net revenues. Including indirect sales, we believe that
Cisco Systems, Inc. accounted for approximately 22% of our
fiscal 2005 net revenues and that no other OEM customer
accounted for 10% or more of our net revenues. We believe that
our significant indirect network infrastructure OEM customers
for fiscal year 2005 also included McData Corporation,
Mitsubishi Electric Corporation, Siemens A.G. and TrueLight
Corporation.
Our customer base is widely dispersed geographically. Revenues
derived from customers located in the Americas, Europe, and the
Asia-Pacific region were 38%, 13% and 49%, respectively, of our
total revenues for fiscal 2005. We believe a substantial portion
of the products we sell to OEMs and third-party manufacturing
service providers in the Asia-Pacific region is ultimately
shipped to end-markets in the Americas and Europe. See
Item 8. Financial Statements and Supplementary
Data, including Note 2 and Note 14 of Notes to
Consolidated Financial Statements for additional information on
customers and geographic areas.
Sales, Marketing and Technical Support
We have a worldwide sales, marketing and technical support
organization comprised of 113 employees as of October 28,
2005, located in 6 domestic and 8 international sales locations.
Our marketing, sales and field applications engineering teams,
augmented by 16 electronic component distributors and 20 sales
representative organizations, focus on marketing and selling
semiconductor networking solutions to worldwide network
infrastructure OEMs.
We maintain close working relationships with our customers
throughout their lengthy product development cycle. Our
customers may need six months or longer to test and evaluate our
products and an additional six months or longer to begin volume
production of network infrastructure equipment that incorporates
our products. During this process, we provide broad-based
technical and product design support to our customers through
our field application engineers, product application engineers
and technical marketing personnel. We believe that providing
comprehensive product service and support is critical to
shortening our customers design cycles and maintaining a
competitive position in the network infrastructure equipment
market.
Operations and Manufacturing
We are a fabless company, which means we do not own or operate
foundries for wafer fabrication or facilities for device
assembly and final test of our products. Instead, we outsource
wafer fabrication, assembly and testing of our semiconductor
products to independent, third-party contractors. We use
mainstream digital
10
complementary metal-oxide semiconductor (CMOS) process
technology for the majority of our products; we rely on
specialty processes for the remainder of products. Taiwan
Semiconductor Manufacturing Co., Ltd. (TSMC) is our
principal foundry supplier of CMOS wafers and die. Our primary
foundry supplier for specialty process requirements is Jazz
Semiconductor, Inc. We use several other suppliers for wafers
used in older products. We believe that the raw materials, parts
and supplies required by our foundry suppliers are generally
available at present and will be available in the foreseeable
future.
Semiconductor wafers are usually shipped to third-party
contractors for device assembly and packaging where the wafers
are cut into individual die, packaged and tested before final
shipment to customers. We use Amkor Technology, Inc. and other
third-party contractors, located in the Asia-Pacific region,
Europe and California, to satisfy a variety of assembly and
packaging technology and product testing requirements associated
with the back-end portion of the manufacturing process.
We qualify each of our foundry and back-end process providers.
This qualification process consists of a detailed technical
review of process performance, design rules, process models,
tools and support, as well as analysis of the
subcontractors quality system and manufacturing
capability. We also participate in quality and reliability
monitoring through each stage of the production cycle by
reviewing electrical and parametric data from our wafer foundry
and back-end providers. We closely monitor wafer foundry
production for overall quality, reliability and yield levels.
Competition
The communications semiconductor industry in general, and the
markets in which we compete in particular, are intensely
competitive. We compete worldwide with a number of U.S. and
international suppliers that are both larger and smaller than us
in terms of resources and market share. We expect intense
competition to continue.
Our principal competitors are Agere Systems, Inc., Analog
Devices, Inc., Applied Micro Circuits Corporation, Centillium
Communications, Inc., Conexant Systems, Inc., Gennum
Corporation, Exar Corporation, Freescale Semiconductor, Inc.,
Infineon Technologies A.G., Integrated Device Technology, Inc.,
Maxim Integrated Products, Inc., PMC-Sierra, Inc., Texas
Instruments Incorporated, Transwitch Corporation and Vitesse
Semiconductor Corporation.
We believe that the principal competitive factors for
semiconductor suppliers in each of our served markets are:
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time-to-market; |
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product quality, reliability and performance; |
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customer support; |
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price and total system cost; |
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new product innovation; and |
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compliance with industry standards. |
While we believe that we compete favorably with respect to each
of these factors, many of our current and potential competitors
have certain advantages over us, including:
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stronger financial position and liquidity; |
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longer presence in key markets; |
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greater name recognition; |
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access to larger customer bases; and |
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significantly greater sales and marketing, manufacturing,
distribution, technical and other resources. |
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As a result, these competitors may be able to devote greater
resources to the development, promotion and sale of their
products than we can. Our competitors may also be able to adapt
more quickly to new or emerging technologies and changes in
customer requirements or may be more able to respond to the
cyclical fluctuations or downturns that affect the semiconductor
industry from time to time. Moreover, we have incurred
substantial operating losses, and we anticipate future losses.
If we are not successful in assuring our customers of our
financial stability, our OEM customers may choose semiconductor
suppliers whom they believe have a stronger financial position
or liquidity, which may materially adversely affect our business.
Backlog
Our sales are made primarily pursuant to standard purchase
orders for delivery of products. Because industry practice
allows customers to cancel orders with limited advance notice to
us prior to shipment, we believe that backlog as of any
particular date is not a reliable indicator of our future
revenue levels.
Research and Development
We have significant research, development, engineering and
product design capabilities. As of October 28, 2005, we had
308 employees engaged in research and development activities. We
perform research and product development activities at our
headquarters in Newport Beach, California and at 4 design
centers. Our design centers are strategically located to take
advantage of key technical and engineering talent. Our success
depends to a substantial degree upon our ability to develop and
introduce in a timely fashion new products and enhancements to
our existing products that meet changing customer requirements
and emerging industry standards. We have made and plan to make
substantial investments in research and development and to
participate in the formulation of industry standards. In
addition, we actively collaborate with technology leaders to
define and develop next-generation technologies.
We spent approximately $71.4 million, $79.6 million
and $106.3 million on research and development activities
in fiscal years 2005, 2004 and 2003, respectively. The decreases
in our research and development expenses reflect the workforce
reductions and other cost reduction actions we implemented in
fiscal years 2002 through 2005.
Intellectual Property
Our success and future revenue growth depend, in part, on the
intellectual property that we own and develop, including
patents, licenses, trade secrets, know-how, trademarks and
copyrights, and on our ability to protect our intellectual
property. We continuously review our patent portfolio to
maximize its value to us, abandoning inapplicable or less useful
patents and filing new patents important to our product roadmap.
Our patent portfolio may be used to avoid, defend or settle any
potential litigation with respect to various technologies
contained in our products. The portfolio may also provide
negotiating leverage in attempts to cross-license patents or
technologies with third parties and it may provide licensing
opportunities in the future. We rely primarily on patent,
copyright, trademark and trade secret laws, as well as employee
and third-party nondisclosure and confidentiality agreements and
other methods to protect our proprietary technologies and
processes. In connection with our participation in the
development of various industry standards, we may be required to
reasonably license certain of our patents to other parties,
including competitors that develop products based upon the
adopted industry standards. We have also entered into agreements
with certain of our customers and granted these customers the
right to use our proprietary technology in the event that we
file for bankruptcy protection or take other equivalent actions.
While in the aggregate our intellectual property is considered
important to our operations, no single patent, license, trade
secret, know-how, trademark or copyright is considered of such
importance that its loss or termination would materially affect
our business or financial condition.
Employees
As of October 28, 2005, we had 524 full-time
employees, of whom approximately 350 were engineers. Our
employees are not covered by any collective bargaining
agreements and we have not experienced a work
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stoppage in the past five years. We believe our future success
will depend in large part on our ability to continue to attract,
motivate, develop and retain highly skilled and dedicated
technical, marketing and management personnel.
Cyclicality
The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving technical
standards, short product life cycles and wide fluctuations in
product supply and demand. From time to time these and other
factors, together with changes in general economic conditions,
cause significant upturns and downturns in the industry, and in
our business in particular.
In addition, our operating results are subject to substantial
quarterly and annual fluctuations due to a number of factors,
such as demand for network infrastructure equipment, the timing
of receipt, reduction or cancellation of significant orders,
fluctuations in the levels of component inventories held by our
customers, the gain or loss of significant customers, market
acceptance of our products and our customers products, our
ability to develop, introduce and market new products and
technologies on a timely basis, the availability and cost of
products from our suppliers, new product and technology
introductions by competitors, intellectual property disputes,
and the timing and extent of product development costs.
Risk Factors
Our business, financial condition and operating results can be
affected by a number of factors, including those listed below,
any one of which could cause our actual results to vary
materially from recent results or from our anticipated future
results. Any of these risks could also materially and adversely
affect our business, financial condition or the price of our
common stock or other securities.
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We are incurring substantial operating losses, we
anticipate additional future losses and we must significantly
increase our revenues to become profitable. |
We incurred a net loss of $62.6 million for fiscal 2005
compared to net losses of $93.2 million in fiscal 2004 and
$750.4 million ($177.3 million, before the
$573.2 million cumulative effect of a change in accounting
for goodwill) in fiscal 2003. We expect that we will continue to
incur significant losses and negative cash flows at least
through the first half of fiscal 2006, and we may incur
additional significant losses and negative cash flows in
subsequent periods.
In order to become profitable, or to generate positive cash
flows from operations, we must achieve substantial revenue
growth. Our ability to achieve the necessary revenue growth will
depend on increased demand for network infrastructure equipment
that incorporates our products, which in turn depends primarily
on the level of capital spending by communications service
providers and enterprises. Through fiscal 2005, we have
completed a series of cost reduction actions which have improved
our operating cost structure. However, these expense reductions
alone, without additional revenue growth, will not make us
profitable. We may not be successful in achieving the necessary
revenue growth or the expected expense reductions within the
anticipated time frame, or at all. We may not achieve
profitability or sustain such profitability, if achieved.
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We have substantial cash requirements to fund our
operations, research and development efforts and capital
expenditures. Our capital resources are limited and capital
needed for our business may not be available when we need
it. |
For fiscal 2005, our net cash used in operating activities was
$30.2 million compared to net cash used in operating
activities of $43.2 million for fiscal 2004 and
$125.6 million for fiscal 2003. Our principal sources of
liquidity are our existing cash balances, marketable securities
and cash generated from product sales. As of September 30,
2005, our cash and cash equivalents totaled $15.3 million
and our marketable securities totaled $40.9 million. We
believe that our existing sources of liquidity will be
sufficient to fund our operations, research and development
efforts, anticipated capital expenditures, working capital and
other financing requirements for at least the next twelve
months. However, we cannot assure you that this will be the
case, and
13
if we continue to incur operating losses and negative cash flows
in the future, we may need to reduce further our operating costs
or obtain alternate sources of financing, or both. We may not
have access to additional sources of capital on favorable terms
or at all. If we raise additional funds through the issuance of
equity, equity-based or debt securities, such securities may
have rights, preferences or privileges senior to those of our
common stock and our stockholders may experience dilution of
their ownership interests.
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We operate in the highly cyclical semiconductor industry,
which is subject to significant downturns. |
The semiconductor industry is highly cyclical and is
characterized by constant and rapid technological change, rapid
product obsolescence and price erosion, evolving technical
standards, short product life cycles and wide fluctuations in
product supply and demand. From time to time these and other
factors, together with changes in general economic conditions,
cause significant upturns and downturns in the industry in
general, and in our business in particular. Periods of industry
downturns have been characterized by diminished product demand,
production overcapacity, high inventory levels and accelerated
erosion of average selling prices. These factors have caused
substantial fluctuations in our revenues and our results of
operations in the past and we may experience similar
fluctuations in our business in the future.
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Our operating results are subject to substantial quarterly
and annual fluctuations. |
Our revenues and operating results have fluctuated in the past
and may fluctuate in the future. These fluctuations are due to a
number of factors, many of which are beyond our control. These
factors include, among others:
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changes in end-user demand for the products manufactured and
sold by our customers; |
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the timing of receipt, reduction or cancellation of significant
orders by customers; |
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fluctuations in the levels of component inventories held by our
customers; |
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shifts in our product mix and the effect of maturing products; |
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availability and cost of products from our suppliers; |
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the gain or loss of significant customers; |
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market acceptance of our products and our customers
products; |
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our ability to develop, introduce and market new products and
technologies on a timely basis; |
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the timing and extent of product development costs; |
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new product and technology introductions by us or our
competitors; |
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fluctuations in manufacturing yields; |
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significant warranty claims, including those not covered by our
suppliers; |
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intellectual property disputes; and |
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the effects of competitive pricing pressures, including
decreases in average selling prices of our products. |
The foregoing factors are difficult to forecast, and these, as
well as other factors, could materially adversely affect our
quarterly or annual operating results. If our operating results
fail to meet the expectations of analysts or investors, they
could materially and adversely affect the price of our common
stock.
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We are entirely dependent upon third parties for the
manufacture our products and are vulnerable to their capacity
constraints during times of increasing demand for semiconductor
products. |
We are entirely dependent upon outside wafer fabrication
facilities, known as foundries, for wafer fabrication services.
Our principal suppliers of wafer fabrication services are TSMC
and Jazz. We are also dependent upon third parties, including
Amkor, for the assembly and testing of all of our products.
Under our
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fabless business model, our long-term revenue growth is
dependent on our ability to obtain sufficient external
manufacturing capacity, including wafer production capacity.
Periods of upturns in the semiconductor industry may be
characterized by rapid increases in demand and a shortage of
capacity for wafer fabrication and assembly and test services.
The risks associated with our reliance on third parties for
manufacturing services include:
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the lack of assured supply, potential shortages and higher
prices; |
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increased lead times; |
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limited control over delivery schedules, manufacturing yields,
production costs and product quality; and |
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the unavailability of, or delays in obtaining, products or
access to key process technologies. |
Our standard lead time, or the time required to manufacture our
products (including wafer fabrication, assembly and testing) is
typically 12 to 16 weeks. During periods of manufacturing
capacity shortages, the foundries and other suppliers on whom we
rely may devote their limited manufacturing capacity to fulfill
the production requirements of other clients that are larger or
better financed than we are, or who have superior contractual
rights to enforce manufacture of their products, including to
the exclusion of producing our products.
Additionally, if we are required to seek alternative foundries
or assembly and test service providers, we would be subject to
longer lead times, indeterminate delivery schedules and
increased manufacturing costs, including costs to find and
qualify acceptable suppliers. For example, if we choose to use a
new foundry, the qualification process may take as long as six
months over the standard lead time before we can begin shipping
products from the new foundry.
Wafer fabrication processes are subject to obsolescence, and
foundries may discontinue a wafer fabrication process used for
certain of our products. In such event, we generally offer our
customers a last-time buy program to satisfy their
anticipated requirements for our products. The unanticipated
discontinuation of a wafer fabrication process on which we rely
may adversely affect our revenues and our customer relationships.
The foundries and other suppliers on whom we rely may experience
financial difficulties or suffer disruptions in their operations
due to causes beyond our control, including labor strikes, work
stoppages, electrical power outages, fire, earthquake, flooding
or other natural disasters. Certain of our suppliers
manufacturing facilities are located near major earthquake fault
lines in the Asia-Pacific region and California. In the event of
a disruption of the operations of one or more of our suppliers,
we may not have an alternate source immediately available. Such
an event could cause significant delays in shipments until we
could shift the products from an affected facility or supplier
to another facility or supplier. The manufacturing processes we
rely on are specialized and are available from a limited number
of suppliers. Alternate sources of manufacturing capacity,
particularly wafer production capacity, may not be available to
us on a timely basis. Even if alternate manufacturing capacity
is available, we may not be able to obtain it on favorable
terms, or at all. Difficulties or delays in securing an adequate
supply of our products on favorable terms, or at all, could
impair our ability to meet our customers requirements and
have a material adverse effect on our operating results.
In addition, the highly complex and technologically demanding
nature of semiconductor manufacturing has caused foundries to
experience, from time to time, lower than anticipated
manufacturing yields, particularly in connection with the
introduction of new products and the installation and start-up
of new process technologies. Lower than anticipated
manufacturing yields may affect our ability to fulfill our
customers demands for our products on a timely basis.
Moreover, lower than anticipated manufacturing yields may
adversely affect our cost of goods sold and our results of
operations.
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We are subject to intense competition. |
The communications semiconductor industry in general, and the
markets in which we compete in particular, are intensely
competitive. We compete worldwide with a number of U.S. and
international semiconductor manufacturers that are both larger
and smaller than we are in terms of resources and market share.
We currently face significant competition in our markets and
expect that intense price and product competition will continue.
This competition has resulted, and is expected to continue to
result, in declining average selling prices for our products.
Many of our current and potential competitors have certain
advantages over us, including:
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stronger financial position and liquidity; |
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longer presence in key markets; |
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greater name recognition; |
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more secure supply chain; |
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access to larger customer bases; and |
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significantly greater sales and marketing, manufacturing,
distribution, technical and other resources. |
As a result, these competitors may be able to adapt more quickly
to new or emerging technologies and changes in customer
requirements or may be able to devote greater resources to the
development, promotion and sale of their products than we can.
Moreover, we have incurred substantial operating losses, and we
anticipate future losses. We believe that financial stability of
suppliers is an important consideration in our customers
purchasing decisions. If our OEM customers perceive that we lack
adequate financial stability, they may choose semiconductor
suppliers whom they believe have a stronger financial position
or liquidity.
Current and potential competitors also have established or may
establish financial or strategic relationships among themselves
or with our existing or potential customers, resellers or other
third parties. These relationships may affect customers
purchasing decisions. Accordingly, it is possible that new
competitors or alliances among competitors could emerge and
rapidly acquire significant market share. We may not be able to
compete successfully against current and potential competitors.
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Our success depends on our ability to develop competitive
new products in a timely manner. |
Our operating results will depend largely on our ability to
continue to introduce new and enhanced semiconductor products on
a timely basis. Successful product development and introduction
depends on numerous factors, including, among others:
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our ability to anticipate customer and market requirements and
changes in technology and industry standards; |
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our ability to accurately define new products; |
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our ability to complete development of new products, and bring
our products to market, on a timely basis; |
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our ability to differentiate our products from offerings of our
competitors; and |
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overall market acceptance of our products. |
We may not have sufficient resources to make the substantial
investment in research and development in order to develop and
bring to market new and enhanced products, particularly if we
are required to take further cost reduction actions.
Furthermore, we are required to evaluate expenditures for
planned product development continually and to choose among
alternative technologies based on our expectations of future
market growth. We may be unable to develop and introduce new or
enhanced products in a timely manner, our products may not
satisfy customer requirements or achieve market acceptance, or
we may be unable to
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anticipate new industry standards and technological changes. We
also may not be able to respond successfully to new product
announcements and introductions by competitors.
Research and development projects may experience unanticipated
delays related to our internal design efforts. New product
development also requires the production of photomask sets and
the production and testing of sample devices. In the event we
experience delays in obtaining these services from the wafer
fabrication and assembly and test vendors on whom we rely, our
product introductions may be delayed and our revenues and
results of operations may be adversely affected.
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If we are not able to keep abreast of the rapid
technological changes in our markets, our products could become
obsolete. |
The demand for our products can change quickly and in ways we
may not anticipate because our markets generally exhibit the
following characteristics:
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rapid technological developments; |
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rapid changes in customer requirements; |
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frequent new product introductions and enhancements; |
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declining prices over the life cycle of products; and |
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evolving industry standards. |
Our products could become obsolete sooner than we expect because
of faster than anticipated, or unanticipated, changes in one or
more of the technologies related to our products. The
introduction of new technology representing a substantial
advance over current technology could adversely affect demand
for our existing products. Currently accepted industry standards
are also subject to change, which may also contribute to the
obsolescence of our products. If we are unable to develop and
introduce new or enhanced products in a timely manner, our
business may be adversely affected.
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Uncertainties involving the ordering and shipment of our
products could adversely affect our business. |
Our sales are typically made pursuant to individual purchase
orders and we generally do not have long-term supply
arrangements with our customers. Generally, our customers may
cancel orders until 30 days prior to shipment. In addition,
we sell a substantial portion of our products through
distributors, some of whom have a right to return unsold
products to us. Sales to distributors accounted for
approximately 47% of our net revenues for fiscal 2005.
Because of the significant lead times for wafer fabrication and
assembly and test services, we routinely purchase inventory
based on estimates of end-market demand for our customers
products, which may be subject to dramatic changes and is
difficult to predict. This difficulty may be compounded when we
sell to OEMs indirectly through distributors or contract
manufacturers, or both, as our forecasts of demand are then
based on estimates provided by multiple parties. In addition,
our customers may change their inventory practices on short
notice for any reason. The cancellation or deferral of product
orders, the return of previously sold products or overproduction
due to the failure of anticipated orders to materialize could
result in our holding excess or obsolete inventory, which could
result in write-downs of inventory. Conversely, if we fail to
anticipate inventory needs we may be unable to fulfill demand
for our products, resulting in a loss of potential revenue.
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If network infrastructure OEMs do not design our products
into their equipment, we will be unable to sell those products.
Moreover, a design win from a customer does not guarantee future
sales to that customer. |
Our products are not sold directly to the end-user but are
components of other products. As a result, we rely on network
infrastructure OEMs to select our products from among
alternative offerings to be designed into their equipment. We
may be unable to achieve these design wins. Without
design wins from OEMs, we
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would be unable to sell our products. Once an OEM designs
another suppliers semiconductors into one of its product
platforms, it is more difficult for us to achieve future design
wins with that OEMs product platform because changing
suppliers involves significant cost, time, effort and risk.
Achieving a design win with a customer does not ensure that we
will receive significant revenues from that customer and we may
be unable to convert design wins into actual sales. Even after a
design win, the customer is not obligated to purchase our
products and can choose at any time to stop using our products
if, for example, its own products are not commercially
successful.
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Because of the lengthy sales cycles of many of our
products, we may incur significant expenses before we generate
any revenues related to those products. |
Our customers generally need six months or longer to test and
evaluate our products and an additional six months or more to
begin volume production of equipment that incorporates our
products. These lengthy periods also increase the possibility
that a customer may decide to cancel or change product plans,
which could reduce or eliminate sales to that customer. As a
result of this lengthy sales cycle, we may incur significant
research and development and selling, general and administrative
expenses before we generate any revenues from new products. We
may never generate the anticipated revenues if our customers
cancel or change their product plans.
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We may be subject to claims, or we may be required to
defend and indemnify customers against claims, of infringement
of third-party intellectual property rights or demands that we,
or our customers, license third-party technology, which could
result in significant expense. |
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights. From
time to time, third parties have asserted and may in the future
assert patent, copyright, trademark and other intellectual
property rights against technologies that are important to our
business. The resolution or compromise of any litigation or
other legal process to enforce such alleged third party rights,
including claims arising through our contractual indemnification
of our customers, or claims challenging the validity of our
patents, regardless of its merit or resolution, could be costly
and divert the efforts and attention of our management and
technical personnel. We may not prevail in any such litigation
or other legal process or we may compromise or settle such
claims because of the complex technical issues and inherent
uncertainties in intellectual property disputes and the
significant expense in defending such claims. If litigation or
other legal process results in adverse rulings we could be
required to:
|
|
|
|
|
pay substantial damages for past, present and future use of the
infringing technology; |
|
|
|
cease the manufacture, use or sale of infringing products; |
|
|
|
discontinue the use of infringing technology; |
|
|
|
expend significant resources to develop non-infringing
technology; |
|
|
|
pay substantial damages to our customers or end users to
discontinue use or replace infringing technology with
non-infringing technology; |
|
|
|
license technology from the third party claiming infringement,
which license may not be available on commercially reasonable
terms, or at all; or |
|
|
|
relinquish intellectual property rights associated with one or
more of our patent claims, if such claims are held invalid or
otherwise unenforceable. |
In connection with the distribution, we generally assumed
responsibility for all contingent liabilities and litigation
against Conexant or its subsidiaries related to the Mindspeed
business.
|
|
|
If we are not successful in protecting our intellectual
property rights, it may harm our ability to compete. |
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as employee and third-party nondisclosure
and confidentiality agreements and other methods, to protect our
proprietary technologies
18
and processes. We may be required to engage in litigation to
enforce or protect our intellectual property rights, which may
require us to expend significant resources and to divert the
efforts and attention of our management from our business
operations. In particular:
|
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|
|
|
the steps we take to prevent misappropriation or infringement of
our intellectual property may not be successful; |
|
|
|
any existing or future patents may be challenged, invalidated or
circumvented; or |
|
|
|
the measures described above may not provide meaningful
protection. |
Despite the preventive measures and precautions that we take, a
third party could copy or otherwise obtain and use our
technology without authorization, develop similar technology
independently or design around our patents. In addition,
effective patent, copyright, trademark and trade secret
protection may be unavailable or limited in certain countries.
|
|
|
The complexity of our products may lead to errors, defects
and bugs, which could subject us to significant costs or damages
and adversely affect market acceptance of our products. |
Although we, our customers and our suppliers rigorously test our
products, our products are complex and may contain errors,
defects or bugs when first introduced or as new versions are
released. We have in the past experienced, and may in the future
experience, errors, defects and bugs. If any of our products
contain production defects or reliability, quality or
compatibility problems that are significant to our customers,
our reputation may be damaged and customers may be reluctant to
buy our products, which could adversely affect our ability to
retain existing customers and attract new customers. In
addition, these defects or bugs could interrupt or delay sales
of affected products to our customers, which could adversely
affect our results of operations.
If defects or bugs are discovered after commencement of
commercial production of a new product, we may be required to
make significant expenditures of capital and other resources to
resolve the problems. This could result in significant
additional development costs and the diversion of technical and
other resources from our other development efforts. We could
also incur significant costs to repair or replace defective
products and we could be subject to claims for damages by our
customers or others against us. These costs or damages could
have a material adverse effect on our financial condition and
results of operations.
|
|
|
We may not be able to attract and retain qualified
personnel necessary for the design, development and sale of our
products. Our success could be negatively affected if key
personnel leave. |
Our future success depends on our ability to attract, retain and
motivate qualified personnel, including executive officers and
other key management and technical personnel. As the source of
our technological and product innovations, our key technical
personnel represent a significant asset. The competition for
such personnel can be intense in the semiconductor industry. We
may not be able to attract and retain qualified management and
other personnel necessary for the design, development and sale
of our products.
In periods of poor operating performance, we have experienced,
and may experience in the future, particular difficulty
attracting and retaining key personnel. If we are not successful
in assuring our employees of our financial stability and our
prospects for success, our employees may seek other employment,
which may materially adversely affect our business. Moreover,
our recent expense reduction and restructuring initiatives,
including a series of worldwide workforce reductions, have
significantly reduced the number of our technical employees. The
loss of the services of one or more of our key employees,
including Raouf Y. Halim, our chief executive officer, or
certain key design and technical personnel, or our inability to
attract, retain and motivate qualified personnel could have a
material adverse effect on our ability to operate our business.
Approximately 10% of our engineers are foreign nationals working
in the United States under visas. The visas held by many of our
employees permit qualified foreign nationals working in
specialty occupations, such as certain categories of engineers,
to reside in the United States during their employment. The
number of new visas approved each year may be limited and may
restrict our ability to hire additional qualified technical
19
employees. In addition, immigration policies are subject to
change, and these policies have generally become more stringent
since the events of September 11, 2001. Any additional
significant changes in immigration laws, rules or regulations
may further restrict our ability to retain or hire technical
personnel.
|
|
|
We are subject to the risks of doing business
internationally. |
For fiscal 2005, approximately 71% of our net revenues were from
customers located outside the United States, primarily in
the Asia-Pacific region and Europe. In addition, we have design
centers, and rely on suppliers, located outside the United
States, including foundries and assembly and test service
providers located in the Asia-Pacific region. Our international
sales and operations are subject to a number of risks inherent
in selling and operating abroad which could adversely affect our
ability to increase or maintain our foreign sales. These
include, but are not limited to, risks regarding:
|
|
|
|
|
currency exchange rate fluctuations; |
|
|
|
local economic and political conditions; |
|
|
|
disruptions of capital and trading markets; |
|
|
|
accounts receivable collection and longer payment cycles; |
|
|
|
difficulties in staffing and managing foreign operations; |
|
|
|
potential hostilities and changes in diplomatic and trade
relationships; |
|
|
|
restrictive governmental actions (such as restrictions on the
transfer or repatriation of funds and trade protection measures,
including export duties and quotas and customs duties and
tariffs); |
|
|
|
changes in legal or regulatory requirements; |
|
|
|
difficulty in obtaining distribution and support; |
|
|
|
the laws and policies of the United States and other countries
affecting trade, foreign investment and loans, and import or
export licensing requirements; |
|
|
|
tax laws; and |
|
|
|
limitations on our ability under local laws to protect our
intellectual property. |
Because most of our international sales, other than sales to
Japan (which are denominated principally in Japanese yen), are
currently denominated in U.S. dollars, our products could
become less competitive in international markets if the value of
the U.S. dollar increases relative to foreign currencies.
From time to time we may enter into foreign currency forward
exchange contracts to mitigate the risk of loss from currency
exchange rate fluctuations for foreign currency commitments
entered into in the ordinary course of business. We have not
entered into foreign currency forward exchange contracts for
other purposes. Our financial condition and results of
operations could be adversely affected by currency fluctuations.
|
|
|
We may make business acquisitions or investments, which
involve significant risk. |
We may from time to time make acquisitions, enter into alliances
or make investments in other businesses to complement our
existing product offerings, augment our market coverage or
enhance our technological capabilities. However, any such
transactions could result in:
|
|
|
|
|
issuances of equity securities dilutive to our existing
stockholders; |
|
|
|
the incurrence of substantial debt and assumption of unknown
liabilities; |
|
|
|
large one-time write-offs; |
|
|
|
amortization expenses related to intangible assets; |
20
|
|
|
|
|
the diversion of managements attention from other business
concerns; and |
|
|
|
the potential loss of key employees from the acquired business. |
Integrating acquired organizations and their products and
services may be expensive, time-consuming and a strain on our
resources and our relationships with employees and customers,
and ultimately may not be successful.
Additionally, in periods subsequent to an acquisition, we must
evaluate goodwill and acquisition-related intangible assets for
impairment. When such assets are found to be impaired, they will
be written down to estimated fair value, with a charge against
earnings.
|
|
|
The price of our common stock may fluctuate
significantly. |
The price of our common stock is volatile and may fluctuate
significantly. There can be no assurance as to the prices at
which our common stock will trade or that an active trading
market in our common stock will be sustained in the future. The
market price at which our common stock trades may be influenced
by many factors, including:
|
|
|
|
|
our operating and financial performance and prospects, including
our ability to achieve profitability within the forecasted time
period; |
|
|
|
the depth and liquidity of the market for our common stock; |
|
|
|
investor perception of us and the industry in which we operate; |
|
|
|
the level of research coverage of our common stock; |
|
|
|
changes in earnings estimates or buy/sell recommendations by
analysts; |
|
|
|
general financial and other market conditions; and |
|
|
|
domestic and international economic conditions. |
In addition, public stock markets have experienced, and may in
the future experience, extreme price and trading volume
volatility, particularly in the technology sectors of the
market. This volatility has significantly affected the market
prices of securities of many technology companies for reasons
frequently unrelated to or disproportionately impacted by the
operating performance of these companies. These broad market
fluctuations may adversely affect the market price of our common
stock. If our common stock trades below $1.00 for 30 consecutive
trading days, or if we otherwise do not meet the requirements
for continued quotation on the Nasdaq Stock Market, our common
stock could be delisted, which would adversely affect the
ability of investors to sell shares of our common stock and
could otherwise adversely affect our business.
|
|
|
Substantial sales of the shares of our common stock
issuable upon conversion of our convertible senior notes or
exercise of the warrant issued to Conexant could adversely
affect our stock price or our ability to raise additional
financing in the public capital markets. |
Conexant holds a warrant to acquire 30 million shares of
our common stock at a price of $3.408 per share,
exercisable through June 27, 2013, representing
approximately 17% of our outstanding common stock on a fully
diluted basis. The warrant may be transferred or sold in whole
or part at any time. If Conexant sells the warrant or if
Conexant or a transferee of the warrant exercises the warrant
and sells a substantial number of shares of our common stock in
the future, or if investors perceive that these sales may occur,
the market price of our common stock could decline or market
demand for our common stock could be sharply reduced. As of
September 30, 2005, we have $46.0 million principal
amount of convertible senior notes outstanding. These notes are
convertible at any time, at the option of the holder, into
approximately 432.9004 shares of common stock per $1,000
principal amount of notes or an aggregate of approximately
19.9 million shares of our common stock. The conversion of
the notes and subsequent sale of a substantial number of shares
of our common stock could also adversely affect demand for, and
the market price of, our common stock. Each of
21
these transactions could adversely affect our ability to raise
additional financing by issuing equity or equity-based
securities in the public capital markets.
|
|
|
Antidilution and other provisions in the warrant issued to
Conexant may also adversely affect our stock price or our
ability to raise additional financing. |
The warrant issued to Conexant contains antidilution provisions
that provide for adjustment of the warrants exercise
price, and the number of shares issuable under the warrant, upon
the occurrence of certain events. If we issue, or are deemed to
have issued, shares of our common stock, or securities
convertible into our common stock, at prices below the current
market price of our common stock (as defined in the warrant) at
the time of the issuance of such securities, the warrants
exercise price will be reduced and the number of shares issuable
under the warrant will be increased. The amount of such
adjustment, if any, will be determined pursuant to a formula
specified in the warrant and will depend on the number of shares
issued, the offering price and the current market price of our
common stock at the time of the issuance of such securities.
Adjustments to the warrant pursuant to these antidilution
provisions may result in significant dilution to the interests
of our existing stockholders and may adversely affect the market
price of our common stock. The antidilution provisions may also
limit our ability to obtain additional financing on terms
favorable to us.
Moreover, we may not realize any cash proceeds from the exercise
of the warrant held by Conexant. A holder of the warrant may opt
for a cashless exercise of all or part of the warrant. In a
cashless exercise, the holder of the warrant would make no cash
payment to us, and would receive a number of shares of our
common stock having an aggregate value equal to the excess of
the then-current market price of the shares of our common stock
issuable upon exercise of the warrant over the exercise price of
the warrant. Such an issuance of common stock would be
immediately dilutive to the interests of other stockholders.
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|
|
Some of our directors and executive officers may have
potential conflicts of interest because of their positions with
Conexant or their ownership of Conexant common stock. |
Some of our directors are Conexant directors, and our
non-executive chairman of the board is chairman of the board and
chief executive officer of Conexant. Several of our directors
and executive officers own Conexant common stock and hold
options to purchase Conexant common stock. Service on our board
of directors and as a director or officer of Conexant, or
ownership of Conexant common stock by our directors and
executive officers, could create, or appear to create, potential
conflicts of interest when directors and officers are faced with
decisions that could have different implications for us and
Conexant. For example, potential conflicts could arise in
connection with decisions involving the warrant to purchase our
common stock issued to Conexant, or other agreements entered
into between us and Conexant in connection with the distribution.
Our restated certificate of incorporation includes provisions
relating to the allocation of business opportunities that may be
suitable for both us and Conexant based on the relationship to
the companies of the individual to whom the opportunity is
presented and the method by which it was presented and also
includes provisions limiting challenges to the enforceability of
contracts between us and Conexant.
We may have difficulty resolving any potential conflicts of
interest with Conexant, and even if we do, the resolution may be
less favorable than if we were dealing with an entirely
unrelated third party.
|
|
|
Provisions in our organizational documents and rights plan
and Delaware law will make it more difficult for someone to
acquire control of us. |
Our restated certificate of incorporation, our amended and
restated bylaws, our amended rights agreement and the Delaware
General Corporation Law contain several provisions that would
make more difficult an acquisition of control of us in a
transaction not approved by our board of directors. Our restated
certificate of incorporation and amended and restated bylaws
include provisions such as:
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|
|
the division of our board of directors into three classes to be
elected on a staggered basis, one class each year; |
22
|
|
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|
|
the ability of our board of directors to issue shares of our
preferred stock in one or more series without further
authorization of our stockholders; |
|
|
|
a prohibition on stockholder action by written consent; |
|
|
|
a requirement that stockholders provide advance notice of any
stockholder nominations of directors or any proposal of new
business to be considered at any meeting of stockholders; |
|
|
|
a requirement that a supermajority vote be obtained to remove a
director for cause or to amend or repeal certain provisions of
our restated certificate of incorporation or amended bylaws; |
|
|
|
elimination of the right of stockholders to call a special
meeting of stockholders; and |
|
|
|
a fair price provision. |
Our rights agreement gives our stockholders certain rights that
would substantially increase the cost of acquiring us in a
transaction not approved by our board of directors.
In addition to the rights agreement and the provisions in our
restated certificate of incorporation and amended bylaws,
Section 203 of the Delaware General Corporation Law
generally provides that a corporation shall not engage in any
business combination with any interested stockholder during the
three-year period following the time that such stockholder
becomes an interested stockholder, unless a majority of the
directors then in office approves either the business
combination or the transaction that results in the stockholder
becoming an interested stockholder or specified stockholder
approval requirements are met.
Available Information
We maintain an Internet website at http://www.mindspeed.com. Our
Annual Reports on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K and amendments
to such reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Exchange Act, and other
information related to our company, are available free of charge
on this site as soon as reasonably practicable after such
reports are filed with or furnished to the Securities and
Exchange Commission (SEC). Our Standards of Business Conduct,
Guidelines on Corporate Governance and Board Committee Charters
are also available on our website. We will provide reasonable
quantities of paper copies of filings free of charge upon
request. In addition, we will provide a copy of the Board
Committee Charters to stockholders upon request. No portion of
our Internet website or the information contained in or
connected to the website is incorporated into this Annual Report
on Form 10-K.
At October 28, 2005, we occupied our headquarters located
in Newport Beach, California (which includes design and sales
offices), 4 design centers and 13 sales locations. These
facilities had an aggregate floor space of approximately
259,000 square feet, all of which is leased, consisting of
approximately 193,000 square feet at our headquarters,
45,000 square feet at our design centers and
21,000 square feet at our sales locations. We believe our
properties are well maintained, are in sound operating condition
and contain all the equipment and facilities to operate at
present levels.
Through our design centers, we provide design engineering and
product application support and after-sales service to our OEM
customers. The design centers are strategically located to take
advantage of key technical and engineering talent worldwide.
23
|
|
Item 3. |
Legal Proceedings |
We are currently not engaged in legal proceedings that require
disclosure under this Item.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
No matters were submitted to a vote of our stockholders during
the quarter ended September 30, 2005.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Our common stock is traded on the Nasdaq National Market under
the symbol MSPD. From June 30, 2003 to
December 12, 2003, our common stock was traded on the
American Stock Exchange. Prior to June 30, 2003, we were a
wholly owned subsidiary of Conexant. The following table lists
the high and low sales price of our common stock as reported by
the Nasdaq National Market or the American Stock Exchange, as
applicable, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
Fiscal 2004
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2003
|
|
$ |
7.45 |
|
|
$ |
4.90 |
|
Quarter ended March 31, 2004
|
|
$ |
11.36 |
|
|
$ |
5.73 |
|
Quarter ended June 30, 2004
|
|
$ |
7.75 |
|
|
$ |
4.25 |
|
Quarter ended September 30, 2004
|
|
$ |
4.38 |
|
|
$ |
1.95 |
|
Fiscal 2005
|
|
|
|
|
|
|
|
|
Quarter ended December 31, 2004
|
|
$ |
2.98 |
|
|
$ |
1.81 |
|
Quarter ended March 31, 2005
|
|
$ |
2.88 |
|
|
$ |
2.04 |
|
Quarter ended June 30, 2005
|
|
$ |
2.22 |
|
|
$ |
1.14 |
|
Quarter ended September 30, 2005
|
|
$ |
2.45 |
|
|
$ |
1.15 |
|
The last reported sale price of our common stock on
November 18, 2005 was $2.06 and there were approximately
40,400 holders of record of our common stock. However, many
holders shares are listed under their brokerage
firms names. We estimate our actual number of beneficial
stockholders to be approximately 165,500.
We have never paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business
and do not anticipate paying cash dividends in the foreseeable
future.
We made no repurchases of our equity securities during fiscal
2005.
24
|
|
Item 6. |
Selected Financial Data |
The selected consolidated financial data presented below should
be read in conjunction with Item 7, Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
the notes thereto appearing elsewhere in this Annual Report on
Form 10-K. Our consolidated selected financial data have
been derived from our audited consolidated financial statements.
The selected financial data include our results of operations
and financial position while we were part of Conexant prior to
June 27, 2003. The financial data for periods prior to
June 27, 2003 do not reflect what our results of operations
and financial position would have been if we had operated as an
independent public company during those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
111,777 |
|
|
$ |
119,435 |
|
|
$ |
81,906 |
|
|
$ |
80,036 |
|
|
$ |
305,368 |
|
Cost of goods sold
|
|
|
33,704 |
|
|
|
35,149 |
|
|
|
25,127 |
|
|
|
29,410 |
|
|
|
228,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
78,073 |
|
|
|
84,286 |
|
|
|
56,779 |
|
|
|
50,626 |
|
|
|
76,374 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
71,355 |
|
|
|
79,582 |
|
|
|
106,289 |
|
|
|
167,148 |
|
|
|
196,642 |
|
|
Selling, general and administrative
|
|
|
41,871 |
|
|
|
46,845 |
|
|
|
49,656 |
|
|
|
69,500 |
|
|
|
109,532 |
|
|
Amortization of intangible assets
|
|
|
20,481 |
|
|
|
50,318 |
|
|
|
51,223 |
|
|
|
312,388 |
|
|
|
304,991 |
|
|
Special charges(1)
|
|
|
5,999 |
|
|
|
387 |
|
|
|
27,170 |
|
|
|
168,866 |
|
|
|
7,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
139,706 |
|
|
|
177,132 |
|
|
|
234,338 |
|
|
|
717,902 |
|
|
|
618,830 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(61,633 |
) |
|
|
(92,846 |
) |
|
|
(177,559 |
) |
|
|
(667,276 |
) |
|
|
(542,456 |
) |
Interest expense
|
|
|
(1,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
1,162 |
|
|
|
320 |
|
|
|
1,078 |
|
|
|
(298 |
) |
|
|
(448 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(62,259 |
) |
|
|
(92,526 |
) |
|
|
(176,481 |
) |
|
|
(667,574 |
) |
|
|
(542,904 |
) |
Provision (benefit) for income taxes
|
|
|
370 |
|
|
|
721 |
|
|
|
780 |
|
|
|
699 |
|
|
|
(46,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(62,629 |
) |
|
|
(93,247 |
) |
|
|
(177,261 |
) |
|
|
(668,273 |
) |
|
|
(496,393 |
) |
Cumulative effect of change in accounting for goodwill(2)
|
|
|
|
|
|
|
|
|
|
|
(573,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(62,629 |
) |
|
$ |
(93,247 |
) |
|
$ |
(750,445 |
) |
|
$ |
(668,273 |
) |
|
$ |
(496,393 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
$ |
(0.61 |
) |
|
$ |
(0.95 |
) |
|
$ |
(1.98 |
) |
|
$ |
(7.74 |
) |
|
$ |
(6.09 |
) |
|
Cumulative effect of change in accounting for goodwill(2)
|
|
|
|
|
|
|
|
|
|
|
(6.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(0.61 |
) |
|
$ |
(0.95 |
) |
|
$ |
(8.37 |
) |
|
$ |
(7.74 |
) |
|
$ |
(6.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
Balance Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
59,332 |
|
|
$ |
49,082 |
|
|
$ |
71,783 |
|
|
$ |
(35,430 |
) |
|
$ |
(50,377 |
) |
Total assets
|
|
|
105,504 |
|
|
|
126,300 |
|
|
|
203,889 |
|
|
|
787,111 |
|
|
|
1,250,012 |
|
Long-term debt
|
|
|
44,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
33,826 |
|
|
|
90,927 |
|
|
|
167,134 |
|
|
|
720,323 |
|
|
|
1,155,015 |
|
|
|
(1) |
Special charges consist of asset impairments, restructuring
charges, separation costs and gains and losses on the sale of
certain assets. |
|
(2) |
Effective October 1, 2002, we adopted Statement of
Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets, and recorded an impairment charge
of $573.2 million to write down the carrying value of
goodwill to estimated fair value. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations |
Overview
We design, develop and sell semiconductor networking solutions
for communications applications in enterprise, access,
metropolitan and wide-area networks. Our products, ranging from
optical network transceiver solutions to voice and IP
processors, are classified into three focused product families:
high-performance analog products, multiservice access DSP
products and WAN communications products. Our products are sold
to OEMs for use in a variety of network infrastructure
equipment, including mixed media gateways, high-speed routers,
switches, access multiplexers, cross-connect systems, add-drop
multiplexers, digital loop carrier equipment, IP PBXs and
optical modules. Service providers use this equipment for the
processing, transmission and switching of high-speed voice, data
and video traffic, including advanced services such as VoIP,
within different segments of the communications network. Our
customers include Alcatel Data Networks, S.A., Cisco Systems,
Inc., McData Corporation, Nortel Networks, Inc. and Siemens A.G.
We market and sell our semiconductor products and system
solutions directly to leading network infrastructure OEMs. We
also sell our products indirectly through electronic component
distributors and third-party electronic manufacturing service
providers, who manufacture products incorporating our
semiconductor networking solutions for OEMs. Sales to
distributors accounted for approximately 47% of our revenues for
fiscal 2005. For fiscal 2005, distributors Avnet, Inc. and
Alltek Technology Corporation and manufacturing service
providers Jabil Circuit, Inc. and Sanmina-SCI Corporation
accounted for 16%, 12%, 14% and 11%, respectively, of our net
revenues. Including indirect sales, we believe that Cisco
Systems, Inc. accounted for approximately 22% of our fiscal
2005 net revenues and that no other OEM customer accounted
for 10% or more of our net revenues. For fiscal 2005,
approximately 71% of our total sales were to customers located
outside the United States, primarily in the Asia-Pacific region
and Europe. We believe a substantial portion of the products we
sell to OEMs and third-party manufacturing service providers in
the Asia-Pacific region is ultimately shipped to end markets in
the Americas and Europe.
Trends and Factors Affecting Our Business
During the late 1990s and extending into 2000, the
semiconductor industry in general, and communications
applications in particular, enjoyed unprecedented growth,
benefiting from the rapid expansion of the Internet and other
communication services worldwide. Beginning in fiscal 2001,
we like many of our customers and
competitors were adversely impacted by a global
economic slowdown and an abrupt decline in demand for many of
the end-user products that incorporate our communications
semiconductor products. The impact of weakened end-customer
demand was compounded by higher than normal levels of equipment
and component inventories held by many of our customers. These
conditions represented the worst downturn in the history of the
semiconductor industry, and the market for communications
semiconductor products was impacted more severely than the
industry as a whole. During this period, our annual revenues
decreased from $579.2 million for fiscal 2000 to
$80.0 million in fiscal 2002.
26
In response to this severe downturn in the markets for our
products, we took a number of actions designed to improve our
financial performance. To reduce our operating cost structure,
we implemented workforce reductions, significant decreases in
capital spending, the consolidation of certain facilities and
salary reductions for our senior management team. These actions
reduced our workforce from approximately 1,500 employees in
fiscal 2000 to 524 employees at October 28, 2005. These
actions reduced our combined research and development and
selling, general and administrative expenses from
$306.2 million in fiscal 2001 to $113.2 million in
fiscal 2005.
At the same time, we have sought to maximize our return on our
research and development spending by focusing our research and
development investment in what we believe are key high-growth
markets, including VoIP and high-performance analog
applications. We eliminated research and development spending in
product areas that we believe have a longer return-on-investment
timeframe or that address slower growth markets. For example, in
2002 we ceased research and development efforts directed toward
applications such as high-end optical networking. In fiscal
2005, we terminated research and development programs
principally in our ATM/ MPLS network processor products and, to
a lesser extent, our T/ E carrier transmission products. Over
the past four years, we closed five design centers and we sold
the assets of the NetPlane Systems, Inc. software business.
Our products are components of network infrastructure equipment.
As a result, we rely on network infrastructure OEMs to select
our products from among alternative offerings to be designed
into their equipment. These design wins are an
integral part of the long sales cycle for our products. Our
customers may need six months or longer to test and evaluate our
products and an additional six months or more to begin volume
production of equipment that incorporates our products. We
believe our close relationships with leading network
infrastructure OEMs facilitate early adoption of our products
during development of their products, enhance our ability to
obtain design wins and encourage adoption of our technology by
the industry.
We are dependent upon third parties for the manufacture,
assembly and testing of our products. Our ability to bring new
products to market, to fulfill orders and to achieve long-term
revenue growth is dependent on our ability to obtain sufficient
external manufacturing capacity, including wafer fabrication
capacity. Periods of upturns in the semiconductor industry may
be characterized by rapid increases in demand and a shortage of
wafer fabrication capacity. In such periods, we may experience
longer lead times or indeterminate delivery schedules, which may
adversely affect our ability to fulfill orders for our products.
We may also incur increased manufacturing costs, including costs
of finding acceptable alternative foundries.
In order to achieve profitability, we must achieve substantial
revenue growth. Our ability to achieve the necessary revenue
growth will depend on increased demand for network
infrastructure equipment that incorporates our products, which
in turn depends primarily on the level of capital spending by
communications service providers. We believe the market for
network infrastructure equipment in general, and for
communications semiconductors in particular, offers attractive
long-term growth prospects due to increasing demand for network
capacity, the continued upgrading and expansion of existing
networks and the build-out of telecommunication networks in
developing countries. However, the semiconductor industry is
highly cyclical and is characterized by constant and rapid
technological change, rapid product obsolescence and price
erosion, evolving technical standards, short product life cycles
and wide fluctuations in product supply and demand. These
factors have caused substantial fluctuations in our revenues and
our results of operations in the past, and we may experience
cyclical fluctuations in our business in the future.
Spin-off from Conexant Systems, Inc.
On June 27, 2003, Conexant completed the distribution to
Conexant stockholders of all outstanding shares of common stock
of Mindspeed, then a wholly owned subsidiary of Conexant. In the
distribution, each Conexant stockholder received one share of
our common stock, par value $.01 per share (including an
associated preferred share purchase right), for every three
shares of Conexant common stock held and cash for any fractional
share of our common stock. Following the distribution, we began
operations as an independent, publicly held company. Our common
stock now trades on the Nasdaq National Market under the ticker
symbol MSPD.
27
Prior to the distribution, Conexant transferred to us the assets
and liabilities of its Mindspeed business, including the stock
of certain subsidiaries, and certain other assets and
liabilities which were allocated to us under the Distribution
Agreement entered into between us and Conexant. Also prior to
the distribution, Conexant contributed to us cash in an amount
such that at the time of the distribution our cash balance was
$100 million. We issued to Conexant a warrant to
purchase 30 million shares of our common stock at a
price of $3.408 per share, exercisable for a period of ten
years after the distribution. We and Conexant also entered into
a Credit Agreement, an Employee Matters Agreement, a Tax
Allocation Agreement, a Transition Services Agreement and a
Sublease.
Our consolidated financial statements for periods prior to the
distribution include allocations of certain Conexant expenses.
The expense allocations were determined using methods that we
and Conexant considered to be reasonable reflections of services
provided or the benefit we received. The allocation methods
include specific identification, relative revenues or costs, and
headcount. We believe that the expenses allocated to us are
representative of the operating expenses we would have incurred
had we operated on a stand-alone basis.
Critical Accounting Policies
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Among the significant estimates
affecting our consolidated financial statements are those
relating to inventories, allowances for doubtful accounts,
revenue recognition, impairment of long-lived assets and income
taxes. We regularly evaluate our estimates and assumptions based
upon historical experience and various other factors that we
believe to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. To the extent actual results differ from
those estimates, our future results of operations may be
affected.
Inventories We write down our inventory for
estimated obsolete or unmarketable inventory in an amount equal
to the difference between the cost of inventory and the
estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are
less favorable than our estimates, additional inventory
write-downs may be required. In the event we experience
unanticipated demand and are able to sell a portion of the
inventories we have previously written down, our gross margins
will be favorably affected.
Revenue Recognition We recognize revenues
when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred; (iii) our price to the
customer is fixed or determinable; and (iv) collection of
the sales price is reasonably assured. Delivery occurs when
goods are shipped and title and risk of loss transfer to the
customer, in accordance with the terms specified in the
arrangement with the customer. Revenue recognition is deferred
in all instances where the earnings process is incomplete. We
make certain product sales to electronic component distributors
under agreements allowing for a right to return unsold products.
We defer the recognition of revenue on all sales to these
distributors until the products are sold by the distributors to
a third party. We record a reserve for estimated sales returns
and allowances in the same period as the related revenues are
recognized. We base these estimates on our historical experience
or the specific identification of an event necessitating a
reserve. To the extent actual sales returns differ from our
estimates, our future results of operations may be affected.
Development revenue is recognized when services are performed
and was not significant for any of the periods presented.
Allowance for Doubtful Accounts We maintain
allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments.
Our estimates of such losses are based on an assessment of the
aging of outstanding accounts receivable and a review of
specific customer accounts. If the financial condition of our
customers were to deteriorate, our actual losses may exceed our
estimates and additional allowances would be required.
Impairment of Long-Lived Assets We
continually monitor and review long-lived assets, including
fixed assets, goodwill and intangible assets, for impairment
whenever events or changes in circumstances indicate
28
that the carrying amount of any such asset may not be
recoverable. The determination of recoverability is based on an
estimate of the undiscounted cash flows expected to result from
the use of an asset and its eventual disposition. The estimate
of cash flows is based upon, among other things, certain
assumptions about expected future operating performance, growth
rates and other factors. Our estimates of undiscounted cash
flows may differ from actual cash flows due to, among other
things, technological changes, economic conditions, changes to
our business model or changes in our operating performance. If
the sum of the undiscounted cash flows (excluding interest) is
less than the carrying value, we recognize an impairment loss,
measured as the amount by which the carrying value exceeds the
fair value of the asset.
Deferred Income Taxes We have provided a full
valuation allowance against our U.S federal and state deferred
tax assets. If sufficient evidence of our ability to generate
future U.S federal and/or state taxable income becomes apparent,
we may be required to reduce our valuation allowance, resulting
in income tax benefits in our statement of operations. We
evaluate the realizability of our deferred tax assets and assess
the need for a valuation allowance quarterly.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). Under SFAS 123R, we will no
longer be able to account for share-based compensation
transactions using the intrinsic value method of Accounting
Principles Board (APB) Opinion No. 25. Instead, we
will be required to account for such transactions using a
fair-value method and to recognize the fair value of each award
over the service period. SEC Release No. 33-8568 makes
SFAS 123R effective for fiscal years beginning after
June 15, 2005, and SFAS 123R allows for several
alternative transition methods. We plan to adopt SFAS 123R
as of the beginning of the fiscal 2006 first quarter using
modified prospective application, which will require
that we recognize compensation expense for new awards, modified
awards and for any awards outstanding at the effective date but
vesting after such date. The actual amounts of stock
compensation expense we recognize in periods following the
adoption of SFAS 123R will depend on a number of factors,
including the types of awards made, the specific terms of
awards, changes in the market price of our common stock and
other factors. Although we are currently evaluating the impact
of SFAS 123R on our results of operations, we expect the
adoption of SFAS 123R to materially increase our operating
expenses beginning in fiscal 2006. See Stock-Based
Compensation Programs below.
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an Amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4.
SFAS 151 amends the guidance in ARB No. 43 to clarify
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition, SFAS 151
requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the
production facilities. We must adopt SFAS 151 as of the
beginning of fiscal 2006, and we do not expect that the adoption
of SFAS 151 will have a material impact on our financial
condition or results of operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a
term defined by the statement) to prior periods financial
statements, unless it is impracticable to determine the effect
of a change. It also applies to changes required by an
accounting pronouncement that does not include specific
transition provisions. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We will adopt
SFAS No. 154 as of the beginning of fiscal 2007, and
we do not expect that the adoption of SFAS 154 will have a
material impact on our financial condition or results of
operations.
Stock-Based Compensation Programs
We use stock-based compensation to attract and retain employees
and to provide long-term incentive compensation that aligns the
interests of our employees with those of our stockholders.
Historically, our stock-
29
based compensation consisted principally of stock options.
Eligible employees received grants of stock options at the time
of hire; we also made broad-based stock option grants covering
substantially all of our employees annually. Stock option awards
have exercise prices equal to the market price of our common
stock at the grant date and are subject to time-based vesting
(generally over four years). From time to time we have also used
restricted stock awards with time-based vesting for incentive or
retention purposes.
For fiscal 2006, we have revised our compensation arrangements
to provide both current and long-term incentive compensation.
Stock-based compensation is expected to principally consist of
restricted stock awards. The majority of the restricted stock
awards is intended to provide performance emphasis and incentive
compensation through vesting tied to each employees
performance against individual goals. Additional restricted
stock awards to certain senior management personnel have vesting
tied to improvements in our company operating performance. The
remainder of the restricted stock awards, intended to provide
long-term incentive compensation, is expected to vest ratably
over a period of four years (subject to continued service). From
time to time, we may also grant stock options or other
stock-based awards for incentive or retention purposes. We
expect to formally review, and may further revise, our
compensation arrangements for fiscal 2007 and thereafter based
on regular assessment of the effectiveness of our compensation
arrangements and to keep our overall compensation package at
market levels.
The fair value of restricted stock awards under this program
will be measured based upon the market price of our common stock
at the date of grant. The fair value of each award will be
recognized on a straight-line basis over the vesting or service
period. While the actual amounts of expense we record in each
fiscal period will depend on a number of factors, including the
number of restricted shares awarded, the market price of our
common stock, the vesting periods, the number of awards that
ultimately vest and other factors, we expect that the awards
under this program will significantly increase our operating
expenses beginning in fiscal 2006.
As required by SFAS 123R, our stock compensation expense
for fiscal 2006 and thereafter will also include the value of
unvested awards outstanding at September 30, 2005. We
expect the amount of stock compensation expense for unvested
stock option awards outstanding at September 30, 2005, by
fiscal year, will be approximately $3.5 million (2006),
$1.4 million (2007) and $0.3 million (2008).
However, the actual amounts of such expense will depend on
forfeitures of outstanding awards.
Results of Operations
|
|
|
Fourth Quarter Operating Results |
In the fourth quarter of fiscal 2004, our revenues and operating
loss were adversely affected by a drop in end-customer
demand particularly in China combined
with a build-up in the levels of inventory held by a number of
our key customers. As a result, our fiscal 2004 fourth quarter
net revenues decreased approximately 25%, as compared to the
preceding quarter, to $26.6 million. The revenue decrease
reflects lower sales volume across our multiservice access DSP
products, high-performance analog products and T/ E carrier
products. Our operating loss for the fiscal 2004 fourth quarter
was $26.2 million.
We believe that during fiscal 2005, the levels of inventories at
our customers and other issues that adversely affected our
revenues late in fiscal 2004 have generally been resolved. In
fiscal 2005, our fourth quarter revenues grew 17% year over
year, reaching $31.1 million. Our quarterly operating loss
for the fiscal 2005 fourth quarter decreased to
$4.6 million. The improvement in our operating loss
reflects the revenue growth we achieved, a $4.8 million
decrease in combined quarterly research and development and
selling, general and administrative expenses and a
$12.6 million decrease in amortization of intangible assets.
30
Net Revenues
The following table summarizes our net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Multiservice access DSP products
|
|
$ |
33.1 |
|
|
|
25 |
% |
|
$ |
26.5 |
|
|
|
234 |
% |
|
$ |
7.9 |
|
High-performance analog products
|
|
|
27.1 |
|
|
|
10 |
% |
|
|
24.6 |
|
|
|
12 |
% |
|
|
21.9 |
|
WAN communications products
|
|
|
51.6 |
|
|
|
(24 |
)% |
|
|
68.0 |
|
|
|
34 |
% |
|
|
50.8 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
(76 |
)% |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
111.8 |
|
|
|
(6 |
)% |
|
$ |
119.4 |
|
|
|
46 |
% |
|
$ |
81.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 6% decrease in our revenues for fiscal 2005 compared to
fiscal 2004 reflects lower sales volumes in our WAN
communications products, partially offset by increased shipments
of our multiservice access DSP products and our high performance
analog products. Sales of our multiservice access DSP products
benefited from increased shipments of our Comcerto
series VoIP processors for use in VoIP applications. In our
high performance analog products, we saw increased demand for
our crosspoint switches, including video applications, and our
physical media dependent devices. Revenues from our WAN
communications products reflect lower demand for our T1/ E1 and
T3/ E3 line interface units and DSL transceivers resulting from
a slowdown in consumption of our products in access and
metropolitan area network applications. Sales of WAN
communications products also reflect the lower demand we
experienced for our ATM/ MPLS network processor products for use
in wireless, enterprise and broadband infrastructure
applications.
The 46% increase in our net revenues for fiscal 2004 over fiscal
2003 reflects higher sales volumes in each of our three product
families, led by our multiservice access DSP products and our
WAN communications products. We experienced sharply increased
demand for our multiservice access VoIP solutions used in
carrier infrastructure applications. Our WAN communications
products benefited from higher demand for our
T/E transmission and SONET solutions, including our DS3/ E3
products and HDLC protocol controllers. OEMs use these devices
in next-generation networking equipment designed to increase the
capacity, flexibility and speed of metropolitan area networks.
Revenues from our WAN communications products also reflect
increased demand, in comparison to fiscal 2003 levels, for our
ATM/ MPLS network processor products for use in wireless,
enterprise and broadband infrastructure applications. Our
high-performance analog products benefited from continued demand
for our physical media dependent devices from OEMs in the
Asia-Pacific region, for use in infrastructure equipment for
fiber-to-the-premise deployments and metropolitan area networks.
Gross Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Gross margin
|
|
$ |
78.1 |
|
|
|
(7 |
)% |
|
$ |
84.3 |
|
|
|
48 |
% |
|
$ |
56.8 |
|
Percent of net revenues
|
|
|
70 |
% |
|
|
|
|
|
|
71 |
% |
|
|
|
|
|
|
69 |
% |
Gross margin represents revenues less cost of goods sold. As a
fabless semiconductor company, we use third parties (including
TSMC, Jazz and Amkor) for wafer fabrication and assembly and
test services. Our cost of goods sold consists predominantly of:
purchased finished wafers; assembly and test services; royalty
and other intellectual property costs; labor and overhead costs
associated with product procurement; and sustaining engineering
expenses pertaining to products sold.
Our gross margin for fiscal 2005 compared to fiscal 2004
reflects the 6% decrease in our annual revenues and the adverse
impact of lower manufacturing volumes we experienced in fiscal
2005. These factors were partially offset by a lower provision
for excess and obsolete goods. Our gross margin for fiscal 2004
compared with fiscal 2003 reflects the 46% increase in revenues
combined with the favorable impact of the cost reduction actions
we took in fiscal 2003.
31
Our gross margins also benefited from the sale of inventories
with an original cost of $8.7 million (2005),
$9.0 million (2004) and $4.1 million
(2003) that we had written down to a zero cost basis during
fiscal 2001. These sales resulted from renewed demand for
certain products that was not anticipated at the time of the
write-downs. The previously written-down inventories were
generally sold at prices which exceeded their original cost.
In fiscal 2001, we recorded an aggregate of $83.5 million
of inventory write-downs, reducing the cost basis of the
affected inventories to zero. The fiscal 2001 inventory
write-downs resulted from the sharply reduced end-customer
demand for network infrastructure equipment during that period.
As a result of these market conditions, we experienced a
significant number of order cancellations and a decline in the
volume of new orders beginning in the fiscal 2001 first quarter.
The inventories written down in fiscal 2001 principally
consisted of multiservice access processors and DSL transceivers.
We assess the recoverability of our inventories at least
quarterly through a review of inventory levels in relation to
foreseeable demand (generally over twelve months). Foreseeable
demand is based upon all available information, including sales
backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable
demand, we write down the value of those inventories which, at
the time of our review, we expect to be unable to sell. The
amount of the inventory write-down is the excess of historical
cost over estimated realizable value. Once established, these
write-downs are considered permanent adjustments to the cost
basis of the excess inventory.
Our products are used by OEMs that have designed our products
into network infrastructure equipment. For many of our products,
we gain these design wins through a lengthy sales cycle, which
often includes providing technical support to the OEM customer.
In the event of the loss of business from existing OEM
customers, we may be unable to secure new customers for our
existing products without first achieving new design wins. When
the quantities of inventory on hand exceed foreseeable demand
from existing OEM customers into whose products our products
have been designed, we generally will be unable to sell our
excess inventories to others, and the estimated realizable value
of such inventories to us is generally zero.
From the time of the fiscal 2001 inventory write-downs through
September 30, 2005, we scrapped a portion of these
inventories having an original cost of $36.1 million and
sold a portion of these inventories with an original cost of
$26.4 million. The sales resulted from increased demand
beginning in the first quarter of fiscal 2002 which was not
anticipated at the time of the write-downs. As of
September 30, 2005, we continued to hold inventories with
an original cost of $21.0 million which were previously
written down to a zero cost basis. We currently intend to hold
these remaining inventories and will sell these inventories if
we experience renewed demand for these products. While there can
be no assurance that we will be able to do so, if we are able to
sell a portion of the inventories which are carried at zero cost
basis, our gross margins will be favorably affected by an amount
equal to the original cost of the zero-cost basis inventory
sold. To the extent that we do not experience renewed demand for
the remaining inventories, they will be scrapped as they become
obsolete.
We base our assessment of the recoverability of our inventories,
and the amounts of any write-downs, on currently available
information and assumptions about future demand and market
conditions. Demand for our products may fluctuate significantly
over time, and actual demand and market conditions may be more
or less favorable than those projected by management. In the
event that actual demand is lower than originally projected,
additional inventory write-downs may be required.
Research and Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Research and development
|
|
$ |
71.4 |
|
|
|
(10 |
)% |
|
$ |
79.6 |
|
|
|
(25 |
)% |
|
$ |
106.3 |
|
Percent of net revenues
|
|
|
64 |
% |
|
|
|
|
|
|
67 |
% |
|
|
|
|
|
|
130 |
% |
Our research and development (R&D) expenses consist
principally of direct personnel costs, photomasks, electronic
design automation tools, outside design services and
pre-production evaluation and test costs. The decrease in
R&D expenses for fiscal 2005 compared to fiscal 2004
primarily reflects lower
32
headcount and personnel-related costs resulting from our expense
reduction actions as well as lower supplies costs. As part of
our cost reduction actions, during fiscal 2005 we closed design
centers in Herzlia, Israel and Lisle, Illinois.
The decrease in R&D expenses for fiscal 2004 compared to
2003 primarily reflects the lower headcount and
personnel-related costs that resulted from the expense reduction
actions we initiated in fiscal 2003. During fiscal 2003, we
implemented additional workforce reductions and closed design
centers in San Jose, California and Bristol, United
Kingdom. Also during 2003, we completed the divestiture of the
NetPlane software business. The decrease in R&D expenses for
fiscal 2004 as compared to fiscal 2003 also reflects lower costs
for photomask development, materials and supplies.
Selling, General and Administrative
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Selling, general and administrative
|
|
$ |
41.9 |
|
|
|
(11 |
)% |
|
$ |
46.8 |
|
|
|
(6 |
)% |
|
$ |
49.7 |
|
Percent of net revenues
|
|
|
37 |
% |
|
|
|
|
|
|
39 |
% |
|
|
|
|
|
|
61 |
% |
Our selling, general and administrative (SG&A) expenses
include personnel costs, independent sales representative
commissions, product marketing, applications engineering and
other marketing costs. Our SG&A expenses also include costs
of corporate functions including accounting, finance, legal,
human resources, information systems and communications. The
decrease in our SG&A expenses for fiscal 2005 compared to
fiscal 2004 primarily reflects the positive impact of lower
headcount and personnel-related costs resulting from our expense
reduction and restructuring actions as well as lower selling
costs resulting from lower sales volumes in fiscal 2005.
The decrease in SG&A expenses for fiscal 2004 compared to
fiscal 2003 primarily reflects the positive impact of lower
headcount and personnel-related costs resulting from the expense
reduction actions we initiated during fiscal 2003. The expense
reductions were partially offset by increased selling costs
resulting from higher sales volumes and public company costs.
SG&A expenses for fiscal 2004 also include employee
separation costs of $630,000 for severance benefits payable to
certain former officers of the company as a result of
organizational changes.
Amortization of Intangible Assets and Change in Accounting
for Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
Change | |
|
2004 | |
|
Change | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in millions) | |
Amortization of intangible assets
|
|
$ |
20.5 |
|
|
|
(59 |
)% |
|
$ |
50.3 |
|
|
|
(2 |
)% |
|
$ |
51.2 |
|
Amortization of intangible assets decreased for fiscal 2005, as
compared to fiscal 2004 and 2003, as the remainder of our
intangible assets became fully amortized during the year.
Intangible assets are amortized over periods averaging
approximately five years for each major asset class and
extending to various dates through June 2005. We will not record
any additional amortization expense on our existing intangible
assets in future periods.
We adopted SFAS 142, Goodwill and Other Intangible
Assets, as of the beginning of fiscal 2003. Upon adoption
of SFAS 142, we completed the transition impairment test of
our goodwill required by SFAS 142. Our business consists of
one reporting unit (as defined in SFAS 142) and, for
purposes of the impairment test, we determined its fair value
considering both an income approach and a market approach.
Management determined that the recorded value of goodwill
exceeded its fair value (estimated to be zero) by
$573.2 million. In the first quarter of fiscal 2003, we
recorded a $573.2 million charge reflected in
the accompanying statement of operations as the cumulative
effect of a change in accounting principle to write
down the value of goodwill to estimated fair value. The impaired
goodwill comprises the unamortized balances of goodwill relating
to Maker Communications, Inc., HotRail, Inc., Microcosm
Communications Limited and Applied Telecom, Inc. Conexant
acquired each of these businesses during fiscal 2000 for the
Mindspeed business. The impairment charge resulted from the
sharp decline in the valuations assigned to communications
semiconduc-
33
tor companies as of the time of the transition impairment test
as compared with valuations at the dates of the respective
acquisitions.
Special Charges
Special charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Asset impairments
|
|
$ |
0.8 |
|
|
$ |
|
|
|
$ |
23.4 |
|
Restructuring charges
|
|
|
5.2 |
|
|
|
0.4 |
|
|
|
12.3 |
|
Other special charges
|
|
|
|
|
|
|
|
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6.0 |
|
|
$ |
0.4 |
|
|
$ |
27.2 |
|
|
|
|
|
|
|
|
|
|
|
2005 Impairments During fiscal 2005, we
recorded asset impairment charges totaling $810,000 related to
property and equipment that we determined to abandon or scrap,
including assets associated with the closure of our former
design centers in Herzlia, Israel and Lisle, Illinois.
2003 Impairments During fiscal 2003, we
recorded an impairment charge of $19.1 million to write
down the carrying value of identified intangible assets
(principally developed technology) related to our HotRail, Inc.
subsidiary. In January 2003, we decided to close the HotRail
design center and to curtail investment in selected associated
products. We evaluated the recoverability of the assets of the
HotRail business to determine whether their value was impaired,
based upon the future cash flows expected to be generated by the
affected products over the remainder of their life cycles
(estimated to be approximately five years). The estimated sales
volumes, pricing, gross margin and operating expenses were
consistent with historical trends and other available
information. Since the estimated undiscounted cash flows were
less than the carrying value (approximately $27.4 million)
of the related assets, we determined that the value of such
assets was impaired. We recorded an impairment charge of
$19.1 million, which was determined by comparing the
estimated fair value of the assets to their carrying value. The
fair value of the assets was determined by computing the present
value of the expected future cash flows using a discount rate of
18%, which we believe is commensurate with the underlying risks
associated with the projected cash flows. We believe the
assumptions used in the discounted cash flow model represent a
reasonable estimate of the fair value of the assets. The
write-down established a new cost basis for the impaired assets.
Also during fiscal 2003, we recorded asset impairment charges
totaling $4.3 million related to certain assets that we
determined to abandon or scrap.
We have implemented a number of cost reduction initiatives to
improve our operating cost structure. The cost reduction
initiatives included workforce reductions, significant
reductions in capital spending, the consolidation of certain
facilities and salary reductions for the senior management team.
During fiscal 2005, we completed the cost reduction actions
under the restructuring plans and we realized their full effect
beginning in the fiscal 2004 fourth quarter.
Mindspeed Strategic Restructuring Plan In
fiscal 2002, we initiated a number of cost reduction
actions including workforce reductions, the closure
of Novanet Semiconductor Ltd. and the divestiture of
NetPlane and recorded fiscal 2002 restructuring
charges totaling $23.2 million. In fiscal 2003, we
implemented an additional workforce reduction affecting
approximately 80 employees and closed our design center in
Bristol, England. We recorded fiscal 2003 restructuring charges
of $2.3 million for the workforce reductions, based upon
estimates of the cost of severance benefits for the affected
employees, and $4.6 million for commitments under license
obligations for the purchase of design tools that we determined
would not be
34
used in the future. During fiscal 2003, we completed the
workforce reductions. During fiscal 2005, we reversed $740,000
of previously accrued costs upon the resolution of liabilities
under certain operating leases.
Activity and liability balances related to the Mindspeed
strategic restructuring plan for the three years ended
September 30, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Restructuring balance, September 30, 2002
|
|
$ |
4,090 |
|
|
$ |
14,544 |
|
|
$ |
18,634 |
|
Charged to costs and expenses
|
|
|
2,341 |
|
|
|
4,589 |
|
|
|
6,930 |
|
Cash payments
|
|
|
(6,431 |
) |
|
|
(9,980 |
) |
|
|
(16,411 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
|
|
|
|
9,153 |
|
|
|
9,153 |
|
Expense reversal
|
|
|
|
|
|
|
(38 |
) |
|
|
(38 |
) |
Cash payments
|
|
|
|
|
|
|
(5,149 |
) |
|
|
(5,149 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
|
|
|
|
3,966 |
|
|
|
3,966 |
|
Expense reversal
|
|
|
|
|
|
|
(740 |
) |
|
|
(740 |
) |
Cash payments
|
|
|
|
|
|
|
(1,620 |
) |
|
|
(1,620 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
1,606 |
|
|
$ |
1,606 |
|
|
|
|
|
|
|
|
|
|
|
Mindspeed 2003 Restructuring Plan In March
2003, we announced a number of expense reduction and
restructuring initiatives intended to further improve our
operating cost structure. The actions included the closure of
the HotRail design center in San Jose, California and a
workforce reduction of approximately 130 employees.
Restructuring charges for this plan included an aggregate of
$4.8 million for severance benefits paid to the affected
employees and $1.3 million for costs associated with the
consolidation of certain facilities and lease cancellation and
related costs. Activity and liability balances related to the
Mindspeed 2003 restructuring plan through September 30,
2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
4,077 |
|
|
$ |
1,568 |
|
|
$ |
5,645 |
|
Cash payments
|
|
|
(3,759 |
) |
|
|
(191 |
) |
|
|
(3,950 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
318 |
|
|
|
1,377 |
|
|
|
1,695 |
|
Charged to costs and expenses
|
|
|
689 |
|
|
|
(264 |
) |
|
|
425 |
|
Cash payments
|
|
|
(957 |
) |
|
|
(357 |
) |
|
|
(1,314 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
50 |
|
|
|
756 |
|
|
|
806 |
|
Cash payments
|
|
|
(50 |
) |
|
|
(220 |
) |
|
|
(270 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
536 |
|
|
$ |
536 |
|
|
|
|
|
|
|
|
|
|
|
Mindspeed 2004 Restructuring Plan In October
2004, we announced a restructuring plan intended to reduce our
operating expenses while focusing our research and development
investment in key high-growth markets, including VoIP and
high-performance analog applications. The expense reduction
actions included workforce reductions and the closure of design
centers in Herzlia, Israel and Lisle, Illinois.
Approximately 80% of the expense reductions were derived
from the termination of research and development programs which
we believe had a longer return-on-investment timeframe or that
addressed slower growth markets. The affected research and
development programs were principally our ATM/ MPLS network
processor products and, to a lesser extent, our T/ E carrier
transmission products. The remainder of the cost savings came
from the selling, general and administrative functions. Through
September 30, 2005, we had completed substantially all of
these actions, reducing our workforce by approximately 90
employees.
In connection with these actions, we recorded fiscal 2005
restructuring charges of approximately $5.9 million. The
restructuring charges included an aggregate of $3.4 million
for the workforce reductions,
35
based upon estimates of the cost of severance benefits for the
affected employees, and approximately $2.5 million related
to contractual obligations for the purchase of design tools and
other services in excess of anticipated requirements.
Activity and liability balances related to the Mindspeed 2004
restructuring plan through September 30, 2005 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
3,412 |
|
|
$ |
2,517 |
|
|
$ |
5,929 |
|
Cash payments
|
|
|
(2,575 |
) |
|
|
(1,546 |
) |
|
|
(4,121 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
837 |
|
|
$ |
971 |
|
|
$ |
1,808 |
|
|
|
|
|
|
|
|
|
|
|
Other Restructuring Plans In fiscal 2003, we
reversed $261,000 of previously accrued costs upon the
resolution of liabilities for severance benefits payable under
three additional restructuring plans initiated in fiscal 2001
and 2002. Also in fiscal 2003, we made cash payments of $80,000
to complete the cost reduction actions under one of these plans
and, as of September 30, 2003, we had no remaining
liabilities under these restructuring plans.
Through September 30, 2005, we have paid an aggregate of
$41.1 million in connection with our restructuring plans
(including amounts paid prior to fiscal 2003) and we have a
remaining accrued restructuring balance totaling
$4.0 million (including $509,000 classified as a long-term
liability), principally representing obligations under
non-cancelable leases and other contractual commitments. We
expect to pay these obligations over their respective terms,
which expire at various dates through fiscal 2008. The payments
will be funded from available cash balances and funds from
product sales and are not expected to impact significantly our
liquidity.
Other special charges for fiscal 2003 consist of a
$9.0 million gain on the sale of the assets of NetPlane,
partially offset by losses on other asset sales.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 |
|
2003 |
|
|
| |
|
|
|
|
|
|
(In millions) |
Interest expense
|
|
$ |
(1.8 |
) |
|
$ |
|
|
|
$ |
|
|
Interest expense for fiscal 2005 represents interest on the
$46 million convertible senior notes we issued in December
2004.
Other Income, Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Other income, net
|
|
$ |
1.2 |
|
|
$ |
0.3 |
|
|
$ |
1.1 |
|
Other income, net principally consists of interest income,
foreign exchange gains and losses, franchise taxes and other
non-operating gains and losses. The increase in other income for
fiscal 2005 compared to fiscal 2004 principally reflects higher
interest income, partially offset by the write-off of
capitalized costs associated with the terminated credit
facility. The increase in interest income resulted from higher
invested cash balances and the higher interest rates that
prevailed during fiscal 2005. The decrease in other income for
fiscal 2004 as compared with fiscal 2003 reflects increased
franchise taxes and lower foreign exchange gains, partially
offset by increased interest income resulting from higher
average invested cash balances during fiscal 2004.
36
Provision for Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Provision for income taxes
|
|
$ |
0.4 |
|
|
$ |
0.7 |
|
|
$ |
0.8 |
|
Our provision for income taxes for fiscal years 2005, 2004 and
2003 principally consisted of income taxes incurred by our
foreign subsidiaries. As a result of our recent operating losses
and our expectation of future operating results, we determined
that it is more likely than not that the U.S. federal and
state income tax benefits (principally net operating losses we
can carry forward to future years) which arose during fiscal
2005, 2004 and 2003 will not be realized. Accordingly, we have
not recognized any income tax benefits relating to our
U.S. federal and state operating losses for those periods
and we do not expect to recognize any income tax benefits
relating to future operating losses until we believe that such
tax benefits are more likely than not to be realized. We expect
that our provision for income taxes for fiscal 2006 will
principally consist of income taxes related to our foreign
operations.
As of September 30, 2005, we had a valuation allowance of
$251 million against our U.S. federal and state
deferred tax assets (which reduces their carrying value to zero)
because we do not expect to realize these deferred tax assets
through the reduction of future income tax payments. As of
September 30, 2005, we had U.S. federal net operating
loss carryforwards of approximately $573 million, including
the net operating loss carryforwards we retained in the
distribution.
Quarterly Results of Operations
The following table presents our operating results for each of
the eight fiscal quarters in the period ended September 30,
2005. The information for each of these quarters is derived from
our unaudited interim financial statements which have been
prepared on the same basis as the audited consolidated financial
statements included in this Annual Report on Form 10-K. In
our opinion, all necessary adjustments, which consist only of
normal and recurring accruals as well as the inventory
write-downs and special charges, have been included to fairly
present our unaudited quarterly results. This data should be
read together with our consolidated financial statements and the
notes thereto included in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
|
| |
|
|
Dec. 31, | |
|
Mar. 31, | |
|
June 30, | |
|
Sept. 30, | |
|
Dec. 31, | |
|
Mar. 31, | |
|
June 30, | |
|
Sept. 30, | |
|
|
2003 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2004 | |
|
2005 | |
|
2005 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$ |
26,746 |
|
|
$ |
30,750 |
|
|
$ |
35,360 |
|
|
$ |
26,579 |
|
|
$ |
26,316 |
|
|
$ |
26,644 |
|
|
$ |
27,738 |
|
|
$ |
31,079 |
|
Cost of goods sold
|
|
|
8,128 |
|
|
|
7,899 |
|
|
|
10,155 |
|
|
|
8,967 |
|
|
|
7,982 |
|
|
|
8,316 |
|
|
|
8,207 |
|
|
|
9,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
18,618 |
|
|
|
22,851 |
|
|
|
25,205 |
|
|
|
17,612 |
|
|
|
18,334 |
|
|
|
18,328 |
|
|
|
19,531 |
|
|
|
21,880 |
|
Research and development
|
|
|
20,424 |
|
|
|
20,120 |
|
|
|
19,095 |
|
|
|
19,943 |
|
|
|
19,604 |
|
|
|
18,613 |
|
|
|
16,748 |
|
|
|
16,390 |
|
Selling, general and administrative
|
|
|
11,960 |
|
|
|
10,913 |
|
|
|
12,744 |
|
|
|
11,228 |
|
|
|
10,662 |
|
|
|
10,430 |
|
|
|
10,797 |
|
|
|
9,982 |
|
Amortization of intangible assets
|
|
|
12,476 |
|
|
|
12,631 |
|
|
|
12,609 |
|
|
|
12,602 |
|
|
|
12,676 |
|
|
|
6,981 |
|
|
|
824 |
|
|
|
|
|
Special charges
|
|
|
|
|
|
|
387 |
|
|
|
|
|
|
|
|
|
|
|
5,473 |
|
|
|
508 |
|
|
|
(125 |
) |
|
|
143 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
44,860 |
|
|
|
44,051 |
|
|
|
44,448 |
|
|
|
43,773 |
|
|
|
48,415 |
|
|
|
36,532 |
|
|
|
28,244 |
|
|
|
26,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(26,242 |
) |
|
|
(21,200 |
) |
|
|
(19,243 |
) |
|
|
(26,161 |
) |
|
|
(30,081 |
) |
|
|
(18,204 |
) |
|
|
(8,713 |
) |
|
|
(4,635 |
) |
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140 |
) |
|
|
(545 |
) |
|
|
(553 |
) |
|
|
(550 |
) |
Other income (expense), net
|
|
|
214 |
|
|
|
135 |
|
|
|
(82 |
) |
|
|
53 |
|
|
|
140 |
|
|
|
291 |
|
|
|
360 |
|
|
|
371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(26,028 |
) |
|
|
(21,065 |
) |
|
|
(19,325 |
) |
|
|
(26,108 |
) |
|
|
(30,081 |
) |
|
|
(18,458 |
) |
|
|
(8,906 |
) |
|
|
(4,814 |
) |
Provision (benefit) for income taxes
|
|
|
192 |
|
|
|
281 |
|
|
|
816 |
|
|
|
(568 |
) |
|
|
398 |
|
|
|
(63 |
) |
|
|
561 |
|
|
|
(526 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(26,220 |
) |
|
$ |
(21,346 |
) |
|
$ |
(20,141 |
) |
|
$ |
(25,540 |
) |
|
$ |
(30,479 |
) |
|
$ |
(18,395 |
) |
|
$ |
(9,467 |
) |
|
$ |
(4,288 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$ |
(0.28 |
) |
|
$ |
(0.22 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.25 |
) |
|
$ |
(0.30 |
) |
|
$ |
(0.18 |
) |
|
$ |
(0.09 |
) |
|
$ |
(0.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in computing diluted loss per share
|
|
|
94,612 |
|
|
|
98,239 |
|
|
|
99,467 |
|
|
|
100,242 |
|
|
|
100,804 |
|
|
|
102,075 |
|
|
|
102,698 |
|
|
|
103,183 |
|
37
Our revenues for the fourth quarter of fiscal 2004 were
adversely affected by a drop in end-customer demand
particularly in China combined with a build-up in
the levels of inventory held by a number of our key customers.
We believe that during fiscal 2005, the levels of inventories at
our customers and other issues that adversely affected our
revenues late in fiscal 2004 have generally resolved. The growth
in our quarterly revenues for fiscal 2005 generally reflects
increased shipments of our multiservice access DSP products and
our high performance analog products, offset by lower sales
volumes in our WAN communications products.
Our quarterly R&D and SG&A expenses generally decreased
through fiscal 2004 and 2005 as a result of the workforce
reductions and other cost reduction initiatives we implemented.
Our combined R&D and SG&A expenses of $26.4 million
for the fiscal 2005 fourth quarter reflect the full effect of
the cost savings from the restructuring plans we initiated in
fiscal 2004 and 2005.
Quarterly amortization of intangible assets decreased in fiscal
2005 as the remainder of our intangible assets became fully
amortized.
In fiscal 2004 and fiscal 2005, we recorded special charges for
our restructuring plans. Special charges for fiscal 2005 also
include asset impairments totaling $0.8 million.
Interest expense for fiscal 2005 represents interest on the
$46 million convertible senior notes we issued in December
2004. Other income increased during fiscal 2005 as a result of
higher invested cash balances and increasing interest rates.
In the past, our quarterly operating results have fluctuated due
to a number of factors, many of which are outside our control.
These include changes in the overall demand for network
infrastructure equipment, the timing of new product
introductions, the timing of receipt, reduction or cancellation
of significant orders by customers, supply availability and
other factors that have had a significant impact on our revenues
and gross margins. Significant quarterly fluctuations in results
of operations have also caused significant fluctuations in our
liquidity and working capital, including our cash and cash
equivalents, accounts receivable and payable and inventories.
Liquidity and Capital Resources
Cash used in operating activities was $30.2 million for
fiscal 2005 compared to $43.2 million for fiscal 2004 and
$125.6 million for fiscal 2003. Operating cash flows for
fiscal 2005 reflect our net loss of $62.6 million,
partially offset by non-cash charges (depreciation, amortization
and other) of $31.9 million, and net working capital
decreases of approximately $0.6 million.
The net working capital decreases for fiscal 2005 included a
$3.4 million decrease in accounts receivable resulting from
a decrease in our average collection period and a $767,000
decrease in net inventories. These amounts were partially offset
by a $3.3 million decrease in accounts payable, principally
related to the timing of vendor payments.
Cash used in investing activities of $44.7 million for
fiscal 2005 principally consisted of net purchases of marketable
securities of $40.9 million and capital expenditures of
$4.0 million, partly offset by proceeds from asset sales of
$151,000. Cash used in investing activities of $5.7 million
for fiscal 2004 consisted of payments for capital expenditures,
partially offset by proceeds from sales of assets of $54,000.
Cash provided by investing activities for fiscal 2003 consisted
of proceeds from sales of assets of $9.5 million, partially
offset by capital expenditures of $3.4 million.
Cash provided by financing activities of $46.6 million for
fiscal 2005 consisted of net proceeds of $43.9 million from
the sale of $46 million principal amount of convertible
senior notes and proceeds of $3.1 million from the exercise
of stock options and warrants, partially offset by debt issuance
costs of $433,000. Cash provided by financing activities for
fiscal 2004 consisted of proceeds of $12.5 million from the
exercise of stock options and warrants, partially offset by
deferred financing costs paid. Cash provided by financing
activities of $192.4 million for fiscal 2003 included net
transfers from Conexant of $186.6 million, including a cash
contribution of approximately $94.9 million in connection
with the distribution. Cash
38
provided by financing activities for fiscal 2003 also included
proceeds of $6.1 million from the exercise of stock options
and warrants, partially offset by deferred financing costs paid.
|
|
|
Convertible Senior Notes Offering |
In December 2004, we sold $46.0 million aggregate principal
amount of Convertible Senior Notes due 2009 for net proceeds
(after discounts and commissions) of approximately
$43.9 million. The notes are senior unsecured obligations,
ranking equal in right of payment with all future unsecured
indebtedness. The notes bear interest at a rate of 3.75%,
payable semiannually in arrears each May 18 and November 18. We
used approximately $3.3 million of the proceeds to purchase
U.S. government securities that were pledged to the trustee
for the payment of the first four scheduled interest payments on
the notes when due. We made the first scheduled interest payment
on May 18, 2005.
The notes are convertible, at the option of the holder, at any
time prior to maturity into shares of our common stock. Upon
conversion, we may, at our option, elect to deliver cash in lieu
of shares of our common stock or a combination of cash and
shares of common stock. Effective May 13, 2005, the
conversion price of the notes was adjusted to $2.31 per
share of common stock, which is equal to a conversion rate of
approximately 432.9004 shares of common stock per $1,000
principal amount of notes. Prior to this adjustment, the
conversion price applicable to the notes was $2.81 per
share of common stock, which was equal to approximately
355.8719 shares of common stock per $1,000 principal amount
of notes. The adjustment was made pursuant to the terms of the
indenture governing the notes. The conversion price is subject
to further adjustment under the terms of the indenture to
reflect stock dividends, stock splits, issuances of rights to
purchase shares of common stock and certain other events.
If we undergo certain fundamental changes (as defined in the
indenture), holders of notes may require us to repurchase some
or all of their notes at 100% of the principal amount plus
accrued and unpaid interest. If, upon notice of certain events
constituting a fundamental change, holders of the notes elect to
convert the notes, we will be required to increase the number of
shares issuable upon conversion by up to 78.9 shares per
$1,000 principal amount of notes. The number of additional
shares, if any, will be determined by the table set forth in the
indenture governing the notes. In the event of a non-stock
change of control constituting a public acquirer change of
control (as defined in the indenture), we may, in lieu of
issuing additional shares or making an additional cash payment
upon conversion as required by the indenture, elect to adjust
the conversion price and the related conversion obligation such
that the noteholders will be entitled to convert their notes
into a number of shares of public acquirer common stock.
For financial accounting purposes, our contingent obligation to
issue additional shares or make an additional cash payment upon
conversion following a fundamental change is an embedded
derivative. As of September 30, 2005, the estimated
fair value of our liability under the fundamental change
adjustment was not significant.
In connection with the sale of the notes, we granted the
purchasers certain registration rights. Our Form S-3
registration statement covering the resale of the notes and the
sale of shares issuable upon conversion of the notes was
declared effective by the SEC on April 6, 2005.
Upon completion of the sale of the notes, the $50 million
Credit Agreement with Conexant was terminated. We had made no
borrowings under the credit facility, and no portion of a
warrant related to the credit facility is, or will become,
exercisable.
In the distribution, we issued to Conexant a warrant to
purchase 30 million shares of our common stock at a
price of $3.408 per share, exercisable for a period of ten
years after the distribution. The warrant contains antidilution
provisions that provide for adjustment of the exercise price,
and the number of shares issuable under the warrant, upon the
occurrence of certain events. If we issue, or are deemed to have
issued, shares of our common stock, or securities convertible
into our common stock, at prices below the current market price
of our common stock (as defined in the warrants) at the time of
the issuance of such securities, the warrants
39
exercise price will be reduced and the number of shares issuable
under the warrant will be increased. The amount of such
adjustment, if any, will be determined pursuant to a formula
specified in the warrant and will depend on the number of shares
issued, the offering price and the current market price of our
common stock at the time of the issuance of such securities.
Adjustments to the warrant pursuant to these antidilution
provisions may result in significant dilution to the interests
of our existing stockholders and may adversely affect the market
price of our common stock. The antidilution provisions may also
limit our ability to obtain additional financing on terms
favorable to us.
Moreover, we may not realize any cash proceeds from the exercise
of the warrant held by Conexant. A holder of the warrant may opt
for a cashless exercise of all or part of the warrant. In a
cashless exercise, the holder of the warrant would make no cash
payment to us and would receive a number of shares of our common
stock having an aggregate value equal to the excess of the
then-current market price of the shares of our common stock
issuable upon exercise of the warrant over the exercise price of
the warrant. Such an issuance of common stock would be
immediately dilutive to the interests of other stockholders.
Our principal sources of liquidity are our existing cash
balances, marketable securities and cash generated from product
sales. As of September 30, 2005, our cash and cash
equivalents totaled $15.3 million and our marketable
securities totaled $40.9 million. Our working capital at
September 30, 2005 was $59.3 million.
In order to achieve profitability, or to generate positive cash
flows from operations, we must achieve substantial revenue
growth. Our ability to achieve the necessary revenue growth will
depend on increased demand for network infrastructure equipment
that incorporates our products, which in turn depends primarily
on the level of capital spending by communications service
providers and enterprises. Through fiscal 2005, we have
completed a series of cost reduction actions which have improved
our operating cost structure. However, these expense reductions
alone, without additional revenue growth, will not make us
profitable. We expect to continue to incur significant losses
and negative cash flows at least through the first half of
fiscal 2006 and we may incur additional significant losses and
negative cash flows in subsequent periods.
We believe that our existing sources of liquidity, along with
cash expected to be generated from product sales, will be
sufficient to fund our operations, research and development
efforts, anticipated capital expenditures, working capital and
other financing requirements for at least the next twelve
months. We will need to continue a focused program of capital
expenditures to meet our research and development and corporate
requirements. We may also consider acquisition opportunities to
extend our technology portfolio and design expertise and to
expand our product offerings. In order to fund capital
expenditures, increase our working capital or complete any
acquisitions, we may seek to obtain additional debt or equity
financing. We may also need to seek to obtain additional debt or
equity financing if we experience downturns or cyclical
fluctuations in our business that are more severe or longer than
anticipated or if we fail to achieve anticipated revenue and
expense levels. However, we cannot assure you that such
financing will be available to us on favorable terms, or at all.
Contractual Obligations
The following table summarizes the future payments we are
required to make under contractual obligations as of
September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
Contractual Obligations |
|
Total | |
|
<1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
>5 Years | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Long-term debt
|
|
$ |
46.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
46.0 |
|
|
$ |
|
|
Interest expense on long-term debt
|
|
|
7.8 |
|
|
|
1.7 |
|
|
|
3.5 |
|
|
|
2.6 |
|
|
|
|
|
Operating leases
|
|
|
24.8 |
|
|
|
9.7 |
|
|
|
13.5 |
|
|
|
0.9 |
|
|
|
0.7 |
|
Purchase obligations
|
|
|
8.2 |
|
|
|
3.8 |
|
|
|
4.0 |
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
86.8 |
|
|
$ |
15.2 |
|
|
$ |
21.0 |
|
|
$ |
49.9 |
|
|
$ |
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
Long-term debt consists of $46.0 million aggregate
principal amount of our Convertible Senior Notes. The notes bear
interest at a rate of 3.75%, payable semiannually in arrears
each May 18 and November 18, and mature on
November 18, 2009. U.S. Treasury securities having an
aggregate face amount of approximately $2.6 million are
pledged to the trustee for the payment of the next three
scheduled interest payments on the notes when due.
In March 2005, we amended and restated the Sublease with
Conexant pursuant to which we lease our headquarters in Newport
Beach, California. The Sublease has an initial term extending
through June 2008, and we may, at our option, extend the
Sublease for an additional two-year term. Rent payable under the
Sublease is approximately $3.9 million annually, subject to
annual increases of 3%, plus a prorated portion of operating
expenses associated with the leased property. We estimate our
minimum future obligation under the Sublease at approximately
$6.2 million annually (a total of $17.2 million over
the remainder of the initial lease term), but actual costs under
the Sublease will vary based upon Conexants actual costs.
In addition, each year we may elect to purchase certain services
from Conexant based on a prorated portion of Conexants
actual costs.
We lease our other facilities and certain equipment under
non-cancelable operating leases. The leases expire at various
dates through 2014 and contain various provisions for rental
adjustments, including, in certain cases, adjustments based on
increases in the Consumer Price Index. The leases generally
contain renewal provisions for varying periods of time.
Contractual obligations under operating leases have not been
reduced by anticipated rental income under noncancelable
subleases totaling $2.4 million and extending to various
dates through fiscal 2008.
Off-Balance Sheet Arrangements
We have made guarantees and indemnities, under which we may be
required to make payments to a guaranteed or indemnified party,
in relation to certain transactions. In connection with the
distribution, we generally assumed responsibility for all
contingent liabilities and then-current and future litigation
against Conexant or its subsidiaries related to the Mindspeed
business. We may also be responsible for certain federal income
tax liabilities under the Tax Allocation Agreement between us
and Conexant, which provides that we will be responsible for
certain taxes imposed on us, Conexant or Conexant stockholders.
In connection with certain facility leases, we have indemnified
our lessors for certain claims arising from the facility or the
lease. We indemnify our directors, officers, employees and
agents to the maximum extent permitted under the laws of the
State of Delaware. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. The
majority of our guarantees and indemnities do not provide for
any limitation of the maximum potential future payments we could
be obligated to make. We have not recorded any liability for
these guarantees and indemnities in the accompanying
consolidated balance sheets.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk |
Our cash and cash equivalents consist of demand deposits and
highly-liquid money market funds. Our marketable securities
consist of auction rate securities whose interest rates reset
periodically (generally every seven or twenty-eight days) and
U.S. Treasury securities having maturities of less than
eighteen months. Our main investment objectives are the
preservation of investment capital and the maximization of
after-tax returns on our investment portfolio. Consequently, we
invest in the securities that meet high credit quality standards
and we limit the amount of our credit exposure to any one
issuer. We do not use derivative instruments for speculative or
investment purposes.
Interest
Rate Risk
Our cash and cash equivalents and marketable securities are not
subject to significant interest rate risk due to the short
maturities or variable interest rate characteristics of these
instruments. As of September 30, 2005, the carrying value
of our cash and cash equivalents and marketable securities
approximates fair value.
41
Our long-term debt consists of convertible senior notes which
bear interest at a fixed rate of 3.75%. Consequently, our
results of operations and cash flows are not subject to any
significant interest rate risk relating to our long-term debt.
Foreign
Exchange Risk
We transact business in various foreign currencies and we face
foreign exchange risk on assets and liabilities that are
denominated in foreign currencies. The majority of our foreign
exchange risks are not hedged; however, from time to time, we
may utilize foreign currency forward exchange contracts to hedge
a portion of our exposure to foreign exchange risk. These
hedging transactions are intended to offset the gains and losses
we experience on foreign currency transactions with gains and
losses on the forward contracts, so as to mitigate our overall
risk of foreign exchange gains and losses. We do not enter into
forward contracts for speculative or trading purposes. At
September 30, 2005, we held no foreign currency forward
exchange contracts. Based on our overall currency rate exposure
at September 30, 2005, a 10% change in currency rates would
not have a material effect on our consolidated financial
position, results of operations or cash flows.
42
|
|
Item 8. |
Financial Statements and Supplementary Data |
MINDSPEED TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands, except | |
|
|
per share amounts) | |
ASSETS |
Current Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
15,335 |
|
|
$ |
43,638 |
|
|
Marketable securities
|
|
|
40,094 |
|
|
|
|
|
|
Receivables, net of allowances for doubtful accounts of $462
(2005) and $627 (2004)
|
|
|
16,356 |
|
|
|
19,618 |
|
|
Inventories
|
|
|
10,730 |
|
|
|
11,986 |
|
|
Other current assets
|
|
|
3,389 |
|
|
|
6,114 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
85,904 |
|
|
|
81,356 |
|
Property, plant and equipment, net
|
|
|
14,890 |
|
|
|
20,979 |
|
Intangible assets, net
|
|
|
|
|
|
|
20,385 |
|
Other assets
|
|
|
4,710 |
|
|
|
3,580 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
105,504 |
|
|
$ |
126,300 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
9,776 |
|
|
$ |
13,112 |
|
|
Deferred revenue
|
|
|
3,452 |
|
|
|
3,471 |
|
|
Accrued compensation and benefits
|
|
|
6,722 |
|
|
|
9,282 |
|
|
Restructuring
|
|
|
3,442 |
|
|
|
2,823 |
|
|
Other current liabilities
|
|
|
3,180 |
|
|
|
3,586 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
26,572 |
|
|
|
32,274 |
|
Convertible senior notes
|
|
|
44,219 |
|
|
|
|
|
Other liabilities
|
|
|
887 |
|
|
|
3,099 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
71,678 |
|
|
|
35,373 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Notes 6 and 7)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 25,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par value, 500,000 shares
authorized; 103,852 (2005) and 100,619 (2004) issued
shares
|
|
|
1,039 |
|
|
|
1,006 |
|
|
Additional paid-in capital
|
|
|
237,523 |
|
|
|
231,577 |
|
|
Accumulated deficit
|
|
|
(188,052 |
) |
|
|
(125,423 |
) |
|
Accumulated other comprehensive loss
|
|
|
(16,164 |
) |
|
|
(16,024 |
) |
|
Unearned compensation
|
|
|
(520 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
33,826 |
|
|
|
90,927 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$ |
105,504 |
|
|
$ |
126,300 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
43
MINDSPEED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net revenues
|
|
$ |
111,777 |
|
|
$ |
119,435 |
|
|
$ |
81,906 |
|
Cost of goods sold
|
|
|
33,704 |
|
|
|
35,149 |
|
|
|
25,127 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
78,073 |
|
|
|
84,286 |
|
|
|
56,779 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
71,355 |
|
|
|
79,582 |
|
|
|
106,289 |
|
|
Selling, general and administrative
|
|
|
41,871 |
|
|
|
46,845 |
|
|
|
49,656 |
|
|
Amortization of intangible assets
|
|
|
20,481 |
|
|
|
50,318 |
|
|
|
51,223 |
|
|
Special charges
|
|
|
5,999 |
|
|
|
387 |
|
|
|
27,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
139,706 |
|
|
|
177,132 |
|
|
|
234,338 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(61,633 |
) |
|
|
(92,846 |
) |
|
|
(177,559 |
) |
Interest expense
|
|
|
(1,788 |
) |
|
|
|
|
|
|
|
|
Other income, net
|
|
|
1,162 |
|
|
|
320 |
|
|
|
1,078 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(62,259 |
) |
|
|
(92,526 |
) |
|
|
(176,481 |
) |
Provision for income taxes
|
|
|
370 |
|
|
|
721 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(62,629 |
) |
|
|
(93,247 |
) |
|
|
(177,261 |
) |
Cumulative effect of change in accounting for goodwill
|
|
|
|
|
|
|
|
|
|
|
(573,184 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(62,629 |
) |
|
$ |
(93,247 |
) |
|
$ |
(750,445 |
) |
|
|
|
|
|
|
|
|
|
|
Loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
$ |
(0.61 |
) |
|
$ |
(0.95 |
) |
|
$ |
(1.98 |
) |
|
Cumulative effect of change in accounting for goodwill
|
|
|
|
|
|
|
|
|
|
|
(6.39 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(0.61 |
) |
|
$ |
(0.95 |
) |
|
$ |
(8.37 |
) |
|
|
|
|
|
|
|
|
|
|
Number of shares used in per share computation
|
|
|
102,190 |
|
|
|
98,140 |
|
|
|
89,623 |
|
See accompanying notes to consolidated financial statements.
44
MINDSPEED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended September 30, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(62,629 |
) |
|
$ |
(93,247 |
) |
|
$ |
(750,445 |
) |
Adjustments required to reconcile net loss to net cash used in
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in accounting for goodwill
|
|
|
|
|
|
|
|
|
|
|
573,184 |
|
|
Depreciation
|
|
|
9,140 |
|
|
|
11,263 |
|
|
|
14,629 |
|
|
Amortization of intangible assets
|
|
|
20,481 |
|
|
|
50,318 |
|
|
|
51,223 |
|
|
Asset impairments
|
|
|
810 |
|
|
|
|
|
|
|
23,397 |
|
|
Provision for losses on accounts receivable
|
|
|
(160 |
) |
|
|
(118 |
) |
|
|
(593 |
) |
|
Inventory provisions
|
|
|
489 |
|
|
|
4,697 |
|
|
|
1,239 |
|
|
Stock compensation
|
|
|
588 |
|
|
|
270 |
|
|
|
722 |
|
|
Other noncash items, net
|
|
|
520 |
|
|
|
237 |
|
|
|
(8,526 |
) |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables
|
|
|
3,422 |
|
|
|
(7,848 |
) |
|
|
1,460 |
|
|
|
Inventories
|
|
|
767 |
|
|
|
(12,648 |
) |
|
|
(432 |
) |
|
|
Accounts payable
|
|
|
(3,336 |
) |
|
|
5,002 |
|
|
|
(10,403 |
) |
|
|
Deferred revenue
|
|
|
(19 |
) |
|
|
298 |
|
|
|
(5,553 |
) |
|
|
Accrued expenses and other current liabilities
|
|
|
(376 |
) |
|
|
(1,621 |
) |
|
|
(15,394 |
) |
|
|
Other
|
|
|
94 |
|
|
|
181 |
|
|
|
(88 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(30,209 |
) |
|
|
(43,216 |
) |
|
|
(125,580 |
) |
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of assets
|
|
|
151 |
|
|
|
54 |
|
|
|
9,456 |
|
Capital expenditures
|
|
|
(3,980 |
) |
|
|
(5,791 |
) |
|
|
(3,449 |
) |
Purchases of available-for-sale marketable securities
|
|
|
(76,635 |
) |
|
|
|
|
|
|
|
|
Sales of available-for-sale marketable securities
|
|
|
38,250 |
|
|
|
|
|
|
|
|
|
Purchases of held-to-maturity marketable securities
|
|
|
(3,253 |
) |
|
|
|
|
|
|
|
|
Maturities of held-to-maturity marketable securities
|
|
|
767 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(44,700 |
) |
|
|
(5,737 |
) |
|
|
6,007 |
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale of convertible senior notes
|
|
|
43,930 |
|
|
|
|
|
|
|
|
|
Net transfers and advances from Conexant
|
|
|
|
|
|
|
|
|
|
|
186,584 |
|
Exercise of stock options and warrants
|
|
|
3,109 |
|
|
|
12,534 |
|
|
|
6,085 |
|
Deferred financing costs
|
|
|
(433 |
) |
|
|
(64 |
) |
|
|
(244 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
46,606 |
|
|
|
12,470 |
|
|
|
192,425 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
(28,303 |
) |
|
|
(36,483 |
) |
|
|
72,852 |
|
Cash and cash equivalents at beginning of period
|
|
|
43,638 |
|
|
|
80,121 |
|
|
|
7,269 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$ |
15,335 |
|
|
$ |
43,638 |
|
|
$ |
80,121 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
45
MINDSPEED TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE LOSS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
|
|
|
|
Common Stock | |
|
Additional | |
|
|
|
|
|
Other | |
|
|
|
Total | |
|
|
| |
|
Paid-In | |
|
Conexants | |
|
Accumulated | |
|
Comprehensive | |
|
Unearned | |
|
Stockholders | |
|
|
Shares | |
|
Amount | |
|
Capital | |
|
Net Investment | |
|
Deficit | |
|
Loss | |
|
Compensation | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Balance at September 30, 2002
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
738,036 |
|
|
$ |
|
|
|
$ |
(17,713 |
) |
|
$ |
|
|
|
$ |
720,323 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(718,269 |
) |
|
|
(32,176 |
) |
|
|
|
|
|
|
|
|
|
|
(750,445 |
) |
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
754 |
|
|
|
|
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(749,691 |
) |
Net transfers from Conexant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
189,943 |
|
The Distribution
|
|
|
90,333 |
|
|
|
903 |
|
|
|
208,807 |
|
|
|
(209,710 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
3,212 |
|
|
|
32 |
|
|
|
6,711 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(201 |
) |
|
|
6,542 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2003
|
|
|
93,545 |
|
|
|
935 |
|
|
|
215,518 |
|
|
|
|
|
|
|
(32,176 |
) |
|
|
(16,959 |
) |
|
|
(184 |
) |
|
|
167,134 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(93,247 |
) |
|
|
|
|
|
|
|
|
|
|
(93,247 |
) |
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
935 |
|
|
|
|
|
|
|
935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,312 |
) |
Issuance of common stock
|
|
|
7,074 |
|
|
|
71 |
|
|
|
16,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(158 |
) |
|
|
15,972 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
133 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2004
|
|
|
100,619 |
|
|
|
1,006 |
|
|
|
231,577 |
|
|
|
|
|
|
|
(125,423 |
) |
|
|
(16,024 |
) |
|
|
(209 |
) |
|
|
90,927 |
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,629 |
) |
|
|
|
|
|
|
|
|
|
|
(62,629 |
) |
Currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140 |
) |
|
|
|
|
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,769 |
) |
Issuance of common stock
|
|
|
3,233 |
|
|
|
33 |
|
|
|
5,946 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(737 |
) |
|
|
5,242 |
|
Compensation expense related to employee stock plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
426 |
|
|
|
426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005
|
|
|
103,852 |
|
|
$ |
1,039 |
|
|
$ |
237,523 |
|
|
$ |
|
|
|
$ |
(188,052 |
) |
|
$ |
(16,164 |
) |
|
$ |
(520 |
) |
|
$ |
33,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
46
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
1. |
Description of Business |
Mindspeed Technologies, Inc. (Mindspeed or the Company) designs,
develops and sells semiconductor networking solutions for
communications applications in enterprise, access, metropolitan
and wide-area networks. On June 27, 2003, Conexant Systems,
Inc. (Conexant) completed the distribution (the Distribution) to
Conexant stockholders of all 90,333,445 outstanding shares of
common stock of its wholly owned subsidiary, Mindspeed. In the
Distribution, each Conexant stockholder received one share of
Mindspeed common stock (including an associated preferred share
purchase right) for every three shares of Conexant common stock
held and cash for any fractional share of Mindspeed common
stock. Following the Distribution, Mindspeed began operations as
an independent, publicly held company.
Prior to the Distribution, Conexant transferred to Mindspeed the
assets and liabilities of the Mindspeed business, including the
stock of certain subsidiaries, and certain other assets and
liabilities which were allocated to Mindspeed under the
Distribution Agreement entered into between Conexant and
Mindspeed. Also prior to the Distribution, Conexant contributed
to Mindspeed cash in an amount such that at the time of the
Distribution Mindspeeds cash balance was $100 million
(see Note 13). Mindspeed issued to Conexant a warrant to
purchase 30 million shares of Mindspeed common stock
at a price of $3.408 per share, exercisable for a period
beginning one year and ending ten years after the Distribution.
In connection with the Distribution, Mindspeed and Conexant also
entered into a Credit Agreement, an Employee Matters Agreement,
a Tax Allocation Agreement, a Transition Services Agreement and
a Sublease.
The consolidated financial statements, prepared in accordance
with accounting principles generally accepted in the United
States of America, include the accounts of Mindspeed and each of
its subsidiaries. The consolidated financial statements of
Mindspeed for periods prior to the Distribution include the
assets, liabilities, operating results and cash flows of the
Mindspeed business, including subsidiaries, contributed to
Mindspeed by Conexant. Such financial statements have been
prepared using Conexants historical bases in the assets
and liabilities and the historical operating results of the
Mindspeed business during each respective period. Management
believes the assumptions underlying the consolidated financial
statements are reasonable. However, the financial information
for periods prior to the Distribution may not reflect the
consolidated financial position, operating results, changes in
stockholders equity and cash flows of Mindspeed in the
future or what they would have been had Mindspeed been a
separate, stand-alone entity during the periods presented. All
accounts and transactions among Mindspeeds entities have
been eliminated in consolidation.
The consolidated financial statements for periods prior to the
Distribution include allocations of certain Conexant expenses
(see Note 13). The expense allocations were determined
using methods that Conexant and Mindspeed considered to be
reasonable reflections of the utilization of services provided
or the benefit received by Mindspeed. The allocation methods
include specific identification, relative revenues or costs, or
headcount. Management believes that the expenses allocated to
Mindspeed are representative of the operating expenses it would
have incurred had it operated on a stand-alone basis.
|
|
2. |
Summary of Significant Accounting Policies |
Fiscal Periods The Company maintains a
fifty-two/fifty-three week fiscal year ending on the Friday
closest to September 30. Fiscal years 2005, 2004 and 2003
comprised 52 weeks, 52 weeks and 53 weeks and
ended on September 30, October 1 and October 3,
respectively. For convenience, the accompanying consolidated
financial statements have been shown as ending on the last day
of the calendar month.
Use of Estimates The preparation of financial
statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions
that affect the amounts reported in the consolidated financial
statements and accompanying notes. Among the significant
estimates
47
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
affecting the financial statements are those related to the
allowance for doubtful accounts, inventories, long-lived assets,
income taxes, restructuring costs and litigation. On an ongoing
basis, management reviews its estimates based upon currently
available information. Actual results could differ materially
from those estimates.
Revenue Recognition Revenues are recognized
when the following fundamental criteria are met:
(i) persuasive evidence of an arrangement exists;
(ii) delivery has occurred; (iii) the price to the
customer is fixed or determinable; and (iv) collection of
the sales price is reasonably assured. Delivery occurs when
goods are shipped and title and risk of loss transfer to the
customer, in accordance with the terms specified in the
arrangement with the customer. Revenue recognition is deferred
in all instances where the earnings process is incomplete.
Certain product sales are made to electronic component
distributors under agreements allowing for a right to return
unsold products. Recognition of revenue on all sales to these
distributors is deferred until the products are sold by the
distributors to a third party. A provision for estimated sales
returns and allowances from other customers is made in the same
period as the related revenues are recognized, based on
historical experience or the specific identification of an event
necessitating a reserve. Development revenue is recognized when
services are performed and was not significant for any of the
periods presented.
Cash and Cash Equivalents The Company
considers all highly liquid investments with insignificant
interest rate risk and original maturities of three months or
less from the date of purchase to be cash equivalents. The
carrying amounts of cash and cash equivalents approximate their
fair values.
Inventories Inventories are stated at the
lower of cost or market. Cost is computed using the average cost
method on a currently adjusted standard basis (which
approximates actual cost); market is based upon estimated net
realizable value. The valuation of inventories at the lower of
cost or market requires the use of estimates as to the amounts
of current inventories that will be sold. These estimates are
dependent on the Companys assessment of current and
expected orders from its customers, and orders generally are
subject to cancellation with limited advance notice prior to
shipment.
Property, Plant and Equipment Property, plant
and equipment is stated at cost. Depreciation is based on
estimated useful lives (principally 10 to 27 years for
buildings and improvements; 3 to 5 years for machinery and
equipment; and the shorter of the remaining terms of the leases
or the estimated economic useful lives of the improvements for
land and leasehold improvements). Significant renewals and
betterments are capitalized and replaced units are written off.
Maintenance and repairs are charged to expense.
Goodwill and Intangible Assets Goodwill and
intangible assets principally result from six business
acquisitions completed by Conexant in fiscal 2000 for the
Mindspeed business. Patents, developed technology and other
intangible assets are amortized on a straight-line basis over
estimated useful lives of 2 to 8 years.
Change in Accounting for Goodwill The Company
adopted Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and
SFAS No. 142, Goodwill and Other Intangible
Assets as of the beginning of fiscal 2003. SFAS 141
requires that all business combinations initiated after
June 30, 2001 be accounted for using the purchase method
and provides new criteria for recording intangible assets
separately from goodwill. Upon adoption, the existing goodwill
and intangible assets were evaluated against the new criteria,
which resulted in certain intangible assets with a carrying
value of $4.3 million being subsumed into goodwill.
SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets and requires that
goodwill and intangible assets that have indefinite useful lives
no longer be amortized into results of operations, but instead
be tested at least annually for impairment and written down when
impaired. Upon adoption of SFAS 142, the Company ceased
amortizing goodwill against its results of operations.
During fiscal 2003, the Company completed the transition
impairment test of its goodwill (as of the beginning of fiscal
2003) required by SFAS 142. Mindspeed consists of one
reporting unit (as defined in SFAS 142) and for purposes of
the impairment test, its fair value was determined considering
both an income
48
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
approach and a market approach. Management determined that the
recorded value of goodwill exceeded its fair value (estimated to
be zero) by $573.2 million. The Company recorded a fiscal
2003 charge of $573.2 million reflected in the
accompanying statement of operations as the cumulative effect of
a change in accounting principle to write down the
value of goodwill to estimated fair value.
Impairment of Long-Lived Assets The Company
continually monitors events or changes in circumstances that
could indicate that the carrying amount of long-lived assets to
be held and used, including intangible assets, may not be
recoverable. The determination of recoverability is based on an
estimate of undiscounted future cash flows resulting from the
use of the asset and its eventual disposition. When impairment
is indicated for a long-lived asset, the amount of impairment
loss is the excess of net book value over fair value. Long-lived
assets to be disposed of are reported at the lower of carrying
amount or fair value less costs to sell. During fiscal 2005 and
2003, the Company recorded impairment charges as discussed in
Note 12. As of September 30, 2005, the Company
identified no circumstances that indicated a potential
impairment of any of its long-lived assets.
Foreign Currency Translation and
Remeasurement The Companys foreign
operations are subject to exchange rate fluctuations and foreign
currency transaction costs. The functional currency of the
Companys principal foreign subsidiaries is the local
currency. Assets and liabilities denominated in foreign
functional currencies are translated into U.S. dollars at
the rates of exchange in effect at the balance sheet dates and
income and expense items are translated at the average exchange
rates prevailing during the period. The resulting foreign
currency translation adjustments are accumulated as a component
of other comprehensive income. For the remainder of the
Companys foreign subsidiaries, the functional currency is
the U.S. dollar. Inventories, property, plant and
equipment, cost of goods sold and depreciation for those
operations are remeasured from foreign currencies into
U.S. dollars at historical exchange rates; other accounts
are translated at current exchange rates. Gains and losses
resulting from those remeasurements are included in earnings.
Gains and losses resulting from foreign currency transactions
are recognized currently in earnings.
Research and Development Research and
development costs, other than software development costs, are
expensed as incurred. Development costs for software to be sold
or marketed are capitalized following attainment of
technological feasibility. No development costs that qualify for
capitalization were incurred during any of the periods presented.
Product Warranties The Companys
products typically carry a warranty for periods of up to five
years. The Company establishes reserves for estimated product
warranty costs in the period the related revenue is recognized,
based on historical experience and any known product warranty
issues.
Recent Accounting Standards In December 2004,
the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), Share-Based
Payment (SFAS 123R). Under SFAS 123R, the
Company will no longer be able to account for share-based
compensation transactions using the intrinsic value method of
Accounting Principles Board (APB) Opinion No. 25
Accounting for Stock Issued to Employees. Instead,
the Company will be required to account for such transactions
using a fair-value method and to recognize the fair value of
each award over the service period. Securities and Exchange
Commission (SEC) Release No. 33-8568 makes
SFAS 123R effective for fiscal years beginning after
June 15, 2005, and SFAS 123R allows for several
alternative transition methods. The Company expects to adopt
SFAS 123R as of the beginning of the fiscal 2006 first
quarter using modified prospective application,
which will require that the Company recognize compensation
expense for new awards, modified awards and for any awards
outstanding at the effective date but vesting after such date.
The actual amounts of stock compensation expense the Company
recognizes in periods following the adoption of SFAS 123R
will depend on a number of factors, including the types of
awards made, the specific terms of awards, changes in the market
price of the Companys common stock and other factors.
Although the Company is currently evaluating the impact of
SFAS 123R on its results of operations, the Company expects
the adoption of SFAS 123R to materially increase its
operating expenses beginning in fiscal 2006. See
Stock-Based Compensation below.
49
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, an amendment of Accounting Research
Bulletin (ARB) No. 43, Chapter 4.
SFAS 151 amends the guidance in ARB No. 43 to clarify
that abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage) should be
recognized as current-period charges. In addition, SFAS 151
requires that allocation of fixed production overhead to the
costs of conversion be based on the normal capacity of the
production facilities. The Company must adopt SFAS 151 as
of the beginning of fiscal 2006 and does not expect that the
adoption of SFAS 151 will have a material impact on its
financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, which
replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting
Accounting Changes in Interim Financial Statements.
SFAS No. 154 applies to all voluntary changes in
accounting principle and requires retrospective application (a
term defined by the statement) to prior periods financial
statements, unless it is impracticable to determine the effect
of a change. It also applies to changes required by an
accounting pronouncement that does not include specific
transition provisions. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The Company will adopt
SFAS No. 154 as of the beginning of fiscal 2007 and
does not expect that the adoption of SFAS 154 will have a
material impact on its financial condition or results of
operations.
Stock-Based Compensation As permitted by
SFAS No. 123, Accounting for Stock-Based
Compensation, the Company accounts for stock-based
compensation under APB 25 and related interpretations.
Under the intrinsic value method required by APB 25, the
Company generally recognizes no compensation expense with
respect to stock option awards. The following table illustrates
the effect on net loss and net loss per share as if compensation
expense for all awards of stock-based employee compensation had
been determined under the fair value-based method prescribed by
SFAS 123 (in thousands, except per share amounts).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Net loss, as reported
|
|
$ |
(62,629 |
) |
|
$ |
(93,247 |
) |
|
$ |
(750,445 |
) |
Stock-based employee compensation expense determined under the
fair value method
|
|
|
11,464 |
|
|
|
26,025 |
|
|
|
33,202 |
|
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(74,093 |
) |
|
$ |
(119,272 |
) |
|
$ |
(783,647 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
(0.61 |
) |
|
$ |
(0.95 |
) |
|
$ |
(8.37 |
) |
|
Pro forma
|
|
$ |
(0.73 |
) |
|
$ |
(1.22 |
) |
|
$ |
(8.74 |
) |
For purposes of the pro forma disclosures, compensation expense
includes the estimated fair value of all stock-based
compensation awarded to Mindspeed employees, including options
to purchase Conexant common stock granted to Mindspeed employees
prior to the Distribution. The fair value of each award is
amortized to expense over its vesting period. The decrease in
stock-based employee compensation expense determined under the
fair value method for fiscal years 2005 and 2004 compared to
fiscal 2003 reflects the higher fair values of awards made prior
to the Distribution and the effect of many of those awards
becoming vested.
50
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company estimates the fair value of stock options as of the
date of grant using the Black-Scholes option pricing model. The
Black-Scholes option pricing model requires that management make
estimates of the expected price volatility of the underlying
stock, dividend yield, option life and the risk-free rate of
interest. The following table summarizes the weighted-average
assumptions used and the resulting fair values of options
granted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Weighted-average fair value of options granted
|
|
$ |
1.05 |
|
|
$ |
2.73 |
|
|
$ |
1.79 |
|
Weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
80 |
% |
|
|
98 |
% |
|
|
100 |
% |
|
Dividend yield
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected option life
|
|
|
2.2 years |
|
|
|
3.3 years |
|
|
|
3.5 years |
|
|
Risk-free interest rate
|
|
|
3.9 |
% |
|
|
2.7 |
% |
|
|
2.3 |
% |
The Company estimates the expected life of each award based on
its terms, including vesting provisions. The fiscal 2005 stock
option awards include a broad-based grant of options to purchase
an aggregate of 2.4 million shares at $2.28 per share,
of which 50% vest six months following the grant date and the
remainder vest one year after the grant date. Other stock option
awards generally vest ratably over four years.
As required by SFAS 123R, stock compensation expense for
fiscal 2006 and thereafter will include the value of new awards,
modified awards and unvested awards outstanding at
September 30, 2005. The Company expects the amount of stock
compensation expense for unvested stock option awards
outstanding at September 30, 2005, by fiscal year, will be
approximately $3.5 million (2006), $1.4 million
(2007) and $0.3 million (2008). However, the actual
amounts of such expense will depend on forfeitures of
outstanding awards.
Income Taxes The provision for income taxes
is determined in accordance with SFAS No. 109,
Accounting For Income Taxes. Deferred tax assets and
liabilities are determined based on the temporary differences
between the financial reporting and tax bases of assets and
liabilities, applying enacted statutory tax rates in effect for
the year in which the differences are expected to reverse. A
valuation allowance is recorded when it is more likely than not
that some or all of the deferred tax assets will not be
realized. For periods prior to the Distribution,
Mindspeeds results of operations were included in
Conexants consolidated federal and state income tax
returns. The provision for income taxes for periods prior to the
Distribution is calculated as if Mindspeed had filed separate
tax returns as an independent company. See Note 4.
Loss Per Share Basic loss per share is based
on the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per share also
includes the effect of stock options, warrants and other common
stock equivalents outstanding during the period if such
securities are dilutive. Because the Company incurred a net loss
in each of the periods presented, the potential dilutive effect
of the Companys outstanding stock options, stock warrants
and convertible senior notes was not included in the computation
of diluted loss per share because these securities were
antidilutive. For periods prior to the Distribution, the
weighted-average number of shares outstanding is based on
Conexants weighted-average shares outstanding.
Concentrations Financial instruments that
potentially subject the Company to a concentration of credit
risk consist principally of cash and cash equivalents,
marketable securities and trade accounts receivable. Cash and
cash equivalents consist of demand deposits and money market
funds maintained with several financial institutions. Deposits
held with banks may exceed the amount of insurance provided on
such deposits. Generally, these deposits may be redeemed upon
demand and are maintained with high-credit quality financial
institutions and therefore have minimal credit risk. Marketable
securities consist of U.S. Treasury securities and auction
rate securities, all of which are high investment grade. The
Company, by policy, limits the amount of credit exposure through
diversification and investment in highly rated securities. The
Companys trade accounts receivable primarily are derived
from sales to manufacturers of network
51
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
infrastructure equipment and electronic component distributors.
Management believes that credit risks on trade accounts
receivable are moderated by the diversity of its end customers
and geographic sales areas. The Company performs ongoing credit
evaluations of its customers financial condition and
requires collateral, such as letters of credit and bank
guarantees, whenever deemed necessary.
The following individual customers accounted for 10% or more of
net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Customer A
|
|
|
16 |
% |
|
|
16 |
% |
|
|
22 |
% |
Customer B
|
|
|
14 |
% |
|
|
8 |
% |
|
|
6 |
% |
Customer C
|
|
|
12 |
% |
|
|
8 |
% |
|
|
12 |
% |
Customer D
|
|
|
11 |
% |
|
|
9 |
% |
|
|
7 |
% |
Customer E
|
|
|
|
|
|
|
12 |
% |
|
|
7 |
% |
The following individual customers accounted for 10% or more of
total accounts receivable at fiscal year ends:
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Customer A
|
|
|
14 |
% |
|
|
11 |
% |
Customer B
|
|
|
10 |
% |
|
|
15 |
% |
Customer E
|
|
|
|
|
|
|
13 |
% |
Customer F
|
|
|
19 |
% |
|
|
8 |
% |
Customer G
|
|
|
17 |
% |
|
|
1 |
% |
Supplemental Cash Flow Information Interest
paid was $0.8 million for fiscal 2005; the Company paid no
interest during fiscal 2004 or 2003. Income taxes paid were
$0.4 million, $0.3 million and $0.4 million
during fiscal 2005, 2004 and 2003, respectively.
Comprehensive Loss Accumulated other
comprehensive loss at September 30, 2005 and 2004 consists
of foreign currency translation adjustments. Foreign currency
translation adjustments are not presented net of any tax effect
as the Company does not expect to incur any tax liability or
realize any benefit related thereto.
|
|
3. |
Supplemental Financial Statement Data |
Marketable securities at fiscal year end consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
|
| |
|
|
Amortized | |
|
Fair | |
|
|
Cost | |
|
Value | |
|
|
| |
|
| |
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
Auction rate securities
|
|
$ |
38,385 |
|
|
$ |
38,385 |
|
|
|
|
|
|
|
|
Held-to-maturity securities:
|
|
|
|
|
|
|
|
|
U.S. Treasury securities
|
|
$ |
2,546 |
|
|
$ |
2,526 |
|
Less amounts classified as noncurrent
|
|
|
(837 |
) |
|
|
(825 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,709 |
|
|
$ |
1,701 |
|
|
|
|
|
|
|
|
Available-for-sale marketable securities consist of auction rate
securities with interest at rates that are reset periodically
(generally every seven or twenty-eight days), each having
contractual maturity dates in excess of ten years. These
securities are recorded at fair value in the accompanying
balance sheets; any
52
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
unrealized gains/losses are included in other comprehensive
income, unless a loss is determined to be other than temporary.
As of September 30, 2005, there are no unrealized holding
gains or losses. The Company classifies all available-for-sale
securities as current assets in the accompanying balance sheets
because the Company has the ability and intent to sell these
securities as necessary to meet its liquidity requirements.
Held-to-maturity marketable securities consist of
U.S. Treasury securities having an aggregate face amount of
approximately $2.6 million purchased in connection with the
sale of $46.0 million aggregate principal amount of
Convertible Senior Notes. These securities, which mature at
various dates through November 2006, were pledged to the trustee
for the payment of the first four scheduled interest payments on
the notes when due. Consequently, these securities are
classified as held-to-maturity securities and are recorded at
their amortized cost.
Inventories at fiscal year ends consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Work-in-process
|
|
$ |
5,422 |
|
|
$ |
4,585 |
|
Finished goods
|
|
|
5,308 |
|
|
|
7,401 |
|
|
|
|
|
|
|
|
|
|
$ |
10,730 |
|
|
$ |
11,986 |
|
|
|
|
|
|
|
|
The Company assesses the recoverability of inventories through
an ongoing review of inventory levels in relation to sales
backlog and forecasts, product marketing plans and product life
cycles. When the inventory on hand exceeds the foreseeable
demand, the value of inventory that at the time of the review is
not expected to be sold is written down. The amount of the
write-down is the excess of historical cost over estimated
realizable value (generally zero). Once established, these
write-downs are considered permanent adjustments to the cost
basis of the excess inventory.
The assessment of the recoverability of inventories, and the
amounts of any write-downs, are based on currently available
information and assumptions about future demand (generally over
twelve months) and market conditions. Demand for the
Companys products may fluctuate significantly over time,
and actual demand and market conditions may be more or less
favorable than those projected by management. In the event that
actual demand is lower than originally projected, additional
inventory write-downs may be required.
The Company may retain and make available for sale some or all
of the inventories which have been written down. In the event
that actual demand is higher than originally projected, the
Company may be able to sell a portion of these inventories in
the future. The Company generally scraps inventories which have
been written down and are identified as obsolete.
Our gross margin included a benefit of $8.7 million (2005),
$9.0 million (2004) and $4.1 million
(2003) from the sale of inventories that we had written
down to a zero cost basis during fiscal 2001.
53
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Property, Plant and Equipment |
Property, plant and equipment at fiscal year ends consists of
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Machinery and equipment
|
|
$ |
68,868 |
|
|
$ |
72,090 |
|
Leasehold improvements
|
|
|
3,982 |
|
|
|
3,943 |
|
Construction in progress
|
|
|
706 |
|
|
|
2,253 |
|
|
|
|
|
|
|
|
|
|
|
73,556 |
|
|
|
78,286 |
|
Accumulated depreciation and amortization
|
|
|
(58,666 |
) |
|
|
(57,307 |
) |
|
|
|
|
|
|
|
|
|
$ |
14,890 |
|
|
$ |
20,979 |
|
|
|
|
|
|
|
|
Intangible assets at fiscal year-ends consist of the following
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Gross | |
|
Accumulated | |
|
Gross | |
|
Accumulated | |
|
|
Asset | |
|
Amortization | |
|
Asset | |
|
Amortization | |
|
|
| |
|
| |
|
| |
|
| |
Developed technology
|
|
$ |
227,786 |
|
|
$ |
(227,786 |
) |
|
$ |
228,618 |
|
|
$ |
(210,467 |
) |
Customer base
|
|
|
27,896 |
|
|
|
(27,896 |
) |
|
|
28,045 |
|
|
|
(25,916 |
) |
Other intangible assets
|
|
|
10,679 |
|
|
|
(10,679 |
) |
|
|
10,786 |
|
|
|
(10,681 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
266,361 |
|
|
$ |
(266,361 |
) |
|
$ |
267,449 |
|
|
$ |
(247,064 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The changes in the gross amounts of intangible assets as of
September 30, 2005, as compared with September 30,
2004, reflect the impact of foreign currency translation
adjustments. Intangible assets are amortized over periods
averaging approximately five years for each major asset class
and extending to various dates through June 2005. Amortization
of intangible assets totaled $20.5 million (2005),
$50.3 million (2004) and $51.2 million (2003).
The components of the provision for income taxes are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
Foreign
|
|
|
24 |
|
|
|
357 |
|
|
|
528 |
|
|
State and local
|
|
|
15 |
|
|
|
5 |
|
|
|
252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current
|
|
|
39 |
|
|
|
362 |
|
|
|
780 |
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
331 |
|
|
|
359 |
|
|
|
|
|
|
State and local
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred
|
|
|
331 |
|
|
|
359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
370 |
|
|
$ |
721 |
|
|
$ |
780 |
|
|
|
|
|
|
|
|
|
|
|
54
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A reconciliation of income taxes computed at the
U.S. federal statutory income tax rate to the provision for
income taxes on continuing operations follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
U.S. federal statutory tax at 35%
|
|
$ |
(21,791 |
) |
|
$ |
(32,384 |
) |
|
$ |
(61,768 |
) |
State taxes, net of federal effect
|
|
|
(1,563 |
) |
|
|
(1,165 |
) |
|
|
(4,532 |
) |
Foreign income taxes in excess of U.S.
|
|
|
(866 |
) |
|
|
3,308 |
|
|
|
3,410 |
|
Research and development credits
|
|
|
(2,819 |
) |
|
|
(1,864 |
) |
|
|
|
|
Valuation allowance
|
|
|
26,836 |
|
|
|
32,783 |
|
|
|
63,587 |
|
Other
|
|
|
573 |
|
|
|
43 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
$ |
370 |
|
|
$ |
721 |
|
|
$ |
780 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes consists of the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
(65,749 |
) |
|
$ |
(84,946 |
) |
|
$ |
(169,158 |
) |
Foreign
|
|
|
3,490 |
|
|
|
(7,580 |
) |
|
|
(7,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(62,259 |
) |
|
$ |
(92,526 |
) |
|
$ |
(176,481 |
) |
|
|
|
|
|
|
|
|
|
|
Deferred income tax assets and liabilities at fiscal year-ends
consist of the tax effects of temporary differences related to
the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
$ |
17,151 |
|
|
$ |
21,353 |
|
|
Deferred revenue
|
|
|
1,357 |
|
|
|
1,678 |
|
|
Accrued compensation and benefits
|
|
|
1,641 |
|
|
|
1,625 |
|
|
Product returns and allowances
|
|
|
808 |
|
|
|
828 |
|
|
Net operating losses
|
|
|
207,804 |
|
|
|
187,378 |
|
|
Research and development and investment credits
|
|
|
26,783 |
|
|
|
23,964 |
|
|
Foreign deferred taxes
|
|
|
852 |
|
|
|
1,183 |
|
|
Other
|
|
|
6,013 |
|
|
|
5,144 |
|
|
Valuation allowance
|
|
|
(250,957 |
) |
|
|
(224,045 |
) |
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
11,452 |
|
|
|
19,108 |
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
|
|
|
|
6,959 |
|
|
Property, plant and equipment
|
|
|
674 |
|
|
|
2,016 |
|
|
Deferred state taxes
|
|
|
9,926 |
|
|
|
8,063 |
|
|
Other
|
|
|
|
|
|
|
887 |
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
10,600 |
|
|
|
17,925 |
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
852 |
|
|
$ |
1,183 |
|
|
|
|
|
|
|
|
Based upon the Companys operating losses and expected
future operating results, management determined that it is more
likely than not that the U.S. federal and state deferred
tax assets as of September 30, 2005 and 2004 will not be
realized through the reduction of future income tax payments.
55
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consequently, the Company has established a valuation allowance
for its net U.S. federal and state deferred tax assets as
of those dates.
Through the Distribution date, Mindspeeds results of
operations were included in Conexants consolidated federal
and state income tax returns. The provision for income taxes and
the related deferred tax assets and liabilities for periods
prior to the Distribution were calculated as if Mindspeed had
filed separate tax returns as an independent company.
In connection with the Distribution, Mindspeed and Conexant
entered into a tax allocation agreement which provides, among
other things, for the allocation between Conexant and Mindspeed
of federal, state, local and foreign tax liabilities relating to
Mindspeed. The tax allocation agreement also allocates the
liability for any taxes that may arise in connection with the
Distribution. The tax allocation agreement generally provides
that Conexant will be responsible for any such taxes. However,
Mindspeed will be responsible for any taxes imposed on
Mindspeed, Conexant or Conexant stockholders if either the
Distribution fails to qualify as a reorganization for
U.S. federal income tax purposes or the distribution of
Mindspeed Technologies common stock is disqualified as a
tax-free transaction to Conexant for U.S. federal income
tax purposes and such failure or disqualification is
attributable to post-Distribution transaction actions by
Mindspeed, its subsidiaries or its stockholders.
As of September 30, 2005, Mindspeed had U.S. federal
net operating loss carryforwards of approximately
$572.7 million, which expire at various dates from 2022
through 2025, and aggregate state net operating loss
carryforwards of approximately $83.1 million, which expire
at various dates from 2012 through 2015. Mindspeed also has
U.S. federal and state research and development tax credit
carryforwards of approximately $11.4 million and
$15.4 million, respectively. The U.S. federal credits
expire at various dates from 2022 through 2025, while the state
credits have no expiration date.
The deferred tax assets as of September 30, 2005 include a
deferred tax asset of $9.7 million representing net
operating losses arising from the exercise of stock options by
Mindspeed employees. To the extent the Company realizes any tax
benefit for the net operating losses attributable to the stock
option exercises, such amount would be credited directly to
stockholders equity.
|
|
5. |
Convertible Senior Notes |
In December 2004, the Company sold $46.0 million aggregate
principal amount of Convertible Senior Notes due 2009 for net
proceeds (after discounts and commissions) of approximately
$43.9 million. The notes are senior unsecured obligations
of the Company, ranking equal in right of payment with all
future unsecured indebtedness. The notes bear interest at a rate
of 3.75%, payable semiannually in arrears each May 18 and
November 18. The Company used approximately $3.3 million of
the proceeds to purchase U.S. government securities that
have been pledged to the trustee for the payment of the first
four scheduled interest payments on the notes when due.
The notes are convertible, at the option of the holder, at any
time prior to maturity into shares of the Companys common
stock. Upon conversion, the Company may, at its option, elect to
deliver cash in lieu of shares of its common stock or a
combination of cash and shares of common stock. Effective
May 13, 2005, the conversion price of the notes was
adjusted to $2.31 per share of common stock, which is equal
to a conversion rate of approximately 432.9004 shares of
common stock per $1,000 principal amount of notes. Prior to this
adjustment, the conversion price applicable to the notes was
$2.81 per share of common stock, which was equal to
approximately 355.8719 shares of common stock per $1,000
principal amount of notes. The adjustment was made pursuant to
the terms of the indenture governing the notes. The conversion
price is subject to further adjustment under the terms of the
indenture to reflect stock dividends, stock splits, issuances of
rights to purchase shares of common stock and certain other
events.
56
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
If the Company undergoes certain fundamental changes (as defined
in the indenture), holders of notes may require the Company to
repurchase some or all of their notes at 100% of the principal
amount plus accrued and unpaid interest. If, upon notice of
certain events constituting a fundamental change, holders of the
notes elect to convert the notes, the Company will be required
to increase the number of shares issuable upon conversion by up
to 78.9 shares per $1,000 principal amount of notes. The
number of additional shares, if any, will be determined by the
table set forth in the indenture governing the notes. In the
event of a non-stock change of control constituting a
public acquirer change of control (as defined in the
indenture), the Company may, in lieu of issuing additional
shares or making an additional cash payment upon conversion as
required by the indenture, elect to adjust the conversion price
and the related conversion obligation such that the noteholders
will be entitled to convert their notes into a number of shares
of public acquirer common stock.
For financial accounting purposes, the Companys contingent
obligation to issue additional shares or make an additional cash
payment upon conversion following a fundamental change is an
embedded derivative. As of September 30, 2005,
the estimated fair value of the Companys liability under
the fundamental change adjustment was not significant.
In connection with the sale of the notes, the Company granted
the purchasers certain registration rights. The Companys
Form S-3 registration statement covering the resale of the
notes and the sale of shares issuable upon conversion of the
notes was declared effective by the SEC on April 6, 2005.
Upon completion of the sale of the notes, the $50 million
Credit Agreement with Conexant was terminated. The Company had
made no borrowings under the credit facility, and no portion of
the related warrant is, or will become, exercisable.
As of September 30, 2005, the estimated fair value of the
convertible senior notes was $41.2 million.
The Company leases its headquarters and principal design center
in Newport Beach, California from Conexant. In March 2005, the
Company and Conexant entered into an Amended and Restated
Sublease. As amended, the Sublease has an initial term extending
through June 2008 and the Company may, at its option, extend the
Sublease for an additional two-year term. Rent payable under the
amended Sublease is approximately $3.9 million annually,
subject to annual increases of 3%, plus a prorated portion of
operating expenses associated with the leased property. The
Companys minimum future obligation under the amended
Sublease is estimated at approximately $6.2 million
annually (a total of $17.2 million over the remainder of
the initial lease term), but actual costs will vary based upon
Conexants actual costs. In addition, each year the Company
may elect to purchase certain services from Conexant based on a
prorated portion of Conexants actual costs.
The Company leases its other facilities and certain equipment
under non-cancelable operating leases. The leases expire at
various dates through 2014 and contain various provisions for
rental adjustments including, in certain cases, adjustments
based on increases in the Consumer Price Index. The leases
generally contain renewal provisions for varying periods of time.
Rental expense was approximately $7.3 million (2005),
$6.8 million (2004) and $9.0 million (2003).
Rental expense includes $3.7 million (2005),
$4.5 million (2004) and $1.2 million
(2003) paid to Conexant
57
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the Sublease. As of September 30, 2005, the
Companys minimum future obligations under operating leases
(including the estimated minimum future obligation under the
Sublease) are as follows (in thousands):
|
|
|
|
|
|
Fiscal Year
|
|
|
|
|
2006
|
|
$ |
9,727 |
|
2007
|
|
|
8,088 |
|
2008
|
|
|
5,445 |
|
2009
|
|
|
605 |
|
2010
|
|
|
334 |
|
Thereafter
|
|
|
651 |
|
|
|
|
|
|
Total minimum future lease payments
|
|
$ |
24,850 |
|
|
|
|
|
The minimum future lease payments as of September 30, 2005
include an aggregate of $2.3 million relating to facilities
no longer occupied by the Company, which is included in the
restructuring liability in the accompanying consolidated balance
sheets.
Various lawsuits, claims and proceedings have been or may be
instituted or asserted against Conexant or Mindspeed, including
those pertaining to product liability, intellectual property,
environmental, safety and health, and employment matters. In
connection with the Distribution, Mindspeed assumed
responsibility for all contingent liabilities and current and
future litigation against Conexant or its subsidiaries to the
extent such matters relate to Mindspeed.
The outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of
unfavorably to the Company. Many intellectual property disputes
have a risk of injunctive relief and there can be no assurance
that the Company will be able to license a third partys
intellectual property. Injunctive relief could have a material
adverse effect on the financial condition or results of
operations of the Company. Based on its evaluation of matters
which are pending or asserted, management of the Company
believes the disposition of such matters will not have a
material adverse effect on the financial condition or results of
operations of the Company.
The Company has made guarantees and indemnities, under which it
may be required to make payments to a guaranteed or indemnified
party, in relation to certain transactions. In connection with
the Distribution, the Company generally assumed responsibility
for all contingent liabilities and then-current and future
litigation against Conexant or its subsidiaries related to
Mindspeed. The Company may also be responsible for certain
federal income tax liabilities under the tax allocation
agreement between Mindspeed and Conexant, which provides that
the Company will be responsible for certain taxes imposed on
Mindspeed, Conexant or Conexant stockholders. In connection with
the sales of its products, the Company provides intellectual
property indemnities to its customers. In connection with
certain facility leases, the Company has indemnified its lessors
for certain claims arising from the facility or the lease. The
Company indemnifies its directors, officers, employees and
agents to the maximum extent permitted under the laws of the
State of Delaware. The duration of the guarantees and
indemnities varies, and in many cases is indefinite. The
guarantees and indemnities to customers in connection with
product sales generally are subject to limits based upon the
amount of the related product sales. Some customer guarantees
and indemnities, and the majority of other guarantees and
indemnities, do not provide for any limitation of the maximum
potential future payments the Company could be obligated to
make. The Company has not recorded any liability for these
guarantees and indemnities in the accompanying consolidated
balance sheets.
58
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys authorized capital consists of
500,000,000 shares of common stock, par value
$0.01 per share, and 25,000,000 shares of preferred
stock, par value $0.01 per share, of which
2,500,000 shares are designated as Series A junior
participating preferred stock (Junior Preferred Stock).
The Company has a preferred share purchase rights plan to
protect stockholders rights in the event of a proposed
takeover of the Company. Pursuant to the preferred share
purchase right (a Right) attached to each share of common stock,
the holder may, in certain takeover-related circumstances,
become entitled to purchase from the Company 1/100th of a
share of Junior Preferred Stock at a price of $20, subject to
adjustment. Also, in certain takeover-related circumstances,
each Right (other than those held by an acquiring person) will
generally be exercisable for shares of the Companys common
stock or stock of the acquiring person having a then-current
market value of twice the exercise price. In certain events,
each Right may be exchanged by the Company for one share of
common stock or 1/100th of a share of Junior Preferred
Stock. The Rights expire on June 26, 2013, unless earlier
exchanged or redeemed at a redemption price of $0.01 per
Right, subject to adjustment.
In the Distribution, Mindspeed issued to Conexant a warrant to
purchase 30 million shares of Mindspeed common stock
at a price of $3.408 per share, exercisable through
June 27, 2013. The $89 million fair value of the
warrant (estimated by management at the time of the Distribution
using the Black-Scholes option pricing model) was recorded as a
return of capital to Conexant. As of September 30, 2005,
the entire warrant remains outstanding.
The warrant held by Conexant contains antidilution provisions
that provide for adjustment of the warrants exercise
price, and the number of shares issuable under the warrant, upon
the occurrence of certain events. In the event that the Company
issues, or is deemed to have issued, shares of its common stock,
or securities convertible into its common stock, at prices below
the current market price of its common stock (as defined in the
warrant) at the time of the issuance of such securities, the
warrants exercise price will be reduced and the number of
shares issuable under the warrant will be increased. The amount
of such adjustment, if any, will be determined pursuant to a
formula specified in the warrant and will depend on the number
of shares issued, the offering price and the current market
price of the common stock at the time of the issuance of such
securities.
Also in the Distribution, as a result of adjustments made to an
outstanding warrant to purchase shares of Conexant common stock,
Mindspeed issued to Jazz Semiconductor, Inc. (Jazz) a warrant to
purchase 1,036,806 shares of Mindspeed common stock,
at a price of $2.5746 per share. During fiscal 2005, the
Company issued 478,405 shares of its common stock upon the
exercise of all remaining warrants held by Jazz for aggregate
proceeds of $1.2 million. The Company issued
477,344 shares (2004) and 81,057 shares
(2003) of its common stock upon the exercise of warrants by
Jazz, for aggregate proceeds of $1.2 million and
$0.2 million, respectively.
|
|
10. |
Stock-Based Compensation |
In connection with the Distribution, each holder of a Conexant
stock option (other than options held by persons in certain
foreign locations) received an option to purchase a number of
shares of Mindspeed common stock. The number of shares subject
to, and the exercise prices of, the outstanding Conexant options
and the Mindspeed options were adjusted so that the aggregate
intrinsic value of the options was equal to the intrinsic value
of the Conexant option immediately prior to the Distribution and
the ratio of the exercise price per share to the market value
per share of each option was the same immediately before and
after the Distribution. As a result of such option adjustments,
Mindspeed issued options to purchase an aggregate of
approximately
59
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
29.9 million shares of its common stock to holders of
Conexant stock options (including Mindspeed employees).
The Company has long-term incentive plans that provide for the
grant of stock options, restricted stock and other stock-based
awards to officers and other employees and certain
non-employees. Subsequent to the Distribution and through fiscal
2005, awards of stock-based compensation have principally
consisted of stock options. Stock option awards have an exercise
price not less than the market value at the date of grant and a
term of eight or ten years. The fiscal 2005 stock option awards
include a broad-based grant of options to purchase an aggregate
of 2.4 million shares at $2.28 per share, of which 50%
vest six months following the grant date and the remainder vest
one year after the grant date. Other stock option awards
generally vest ratably over four years. A summary of activity
under Mindspeeds stock option plans follows (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
Number of | |
|
Exercise | |
|
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding at beginning of period
|
|
|
26,859 |
|
|
$ |
2.30 |
|
|
|
30,466 |
|
|
$ |
2.07 |
|
|
|
|
|
|
$ |
|
|
Issued in connection with the Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,936 |
|
|
|
1.98 |
|
Granted
|
|
|
3,143 |
|
|
|
2.26 |
|
|
|
2,839 |
|
|
|
4.31 |
|
|
|
4,251 |
|
|
|
2.69 |
|
Exercised
|
|
|
(1,188 |
) |
|
|
1.59 |
|
|
|
(5,516 |
) |
|
|
2.04 |
|
|
|
(2,977 |
) |
|
|
2.02 |
|
Forfeited or expired
|
|
|
(2,734 |
) |
|
|
2.52 |
|
|
|
(930 |
) |
|
|
2.53 |
|
|
|
(744 |
) |
|
|
2.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
26,080 |
|
|
|
2.30 |
|
|
|
26,859 |
|
|
|
2.30 |
|
|
|
30,466 |
|
|
|
2.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
19,104 |
|
|
|
2.21 |
|
|
|
17,722 |
|
|
|
2.13 |
|
|
|
17,581 |
|
|
|
2.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes all options to purchase Mindspeed
common stock outstanding at September 30, 2005 (shares in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.14 - $ 1.58
|
|
|
3,696 |
|
|
|
5.1 |
|
|
$ |
1.03 |
|
|
|
1,962 |
|
|
$ |
1.03 |
|
1.61 - 2.27
|
|
|
8,271 |
|
|
|
3.6 |
|
|
|
1.82 |
|
|
|
7,985 |
|
|
|
1.81 |
|
2.28 - 2.73
|
|
|
10,636 |
|
|
|
5.8 |
|
|
|
2.45 |
|
|
|
7,430 |
|
|
|
2.42 |
|
2.79 - 4.41
|
|
|
2,803 |
|
|
|
5.7 |
|
|
|
3.54 |
|
|
|
1,439 |
|
|
|
3.76 |
|
4.46 - 23.29
|
|
|
674 |
|
|
|
6.2 |
|
|
|
7.79 |
|
|
|
288 |
|
|
|
7.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.14 - 23.29
|
|
|
26,080 |
|
|
|
5.0 |
|
|
|
2.30 |
|
|
|
19,104 |
|
|
|
2.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The outstanding stock options include options held by Mindspeed
employees to purchase an aggregate of 16.9 million shares
of Mindspeed common stock, which are summarized in the following
table (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding | |
|
Exercisable | |
|
|
| |
|
| |
|
|
|
|
Average | |
|
Weighted- | |
|
|
|
Weighted- | |
|
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
|
|
Number of | |
|
Contractual | |
|
Exercise | |
|
Number of | |
|
Exercise | |
Range of Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$0.14 - $ 1.51
|
|
|
1,687 |
|
|
|
5.2 |
|
|
$ |
1.06 |
|
|
|
841 |
|
|
$ |
1.05 |
|
1.61 - 2.27
|
|
|
4,683 |
|
|
|
4.1 |
|
|
|
1.83 |
|
|
|
4,421 |
|
|
|
1.81 |
|
2.28 - 2.73
|
|
|
7,681 |
|
|
|
6.1 |
|
|
|
2.48 |
|
|
|
4,551 |
|
|
|
2.46 |
|
2.82 - 4.41
|
|
|
2,245 |
|
|
|
6.3 |
|
|
|
3.43 |
|
|
|
893 |
|
|
|
3.59 |
|
4.46 - 16.98
|
|
|
571 |
|
|
|
6.6 |
|
|
|
7.74 |
|
|
|
200 |
|
|
|
7.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.14 - 16.98
|
|
|
16,867 |
|
|
|
5.5 |
|
|
|
2.46 |
|
|
|
10,906 |
|
|
|
2.28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys long-term incentive plans also provide for
awards of restricted shares of common stock and other
stock-based incentive awards. Prior to the Distribution, similar
awards were made to Mindspeed employees under Conexants
long-term incentives plans. Restricted stock awards are subject
to forfeiture if employment terminates during the prescribed
retention period (generally within two years of the date of
award) or, in certain cases, if prescribed performance criteria
are not met. The fair value of restricted stock awards is
charged to expense over the vesting period. Restricted stock
grants totaled 421,000 shares (2005), 51,000 shares
(2004) and 52,000 shares (2003). Mindspeed recorded
compensation expense of $0.4 million (2005),
$0.1 million (2004) and $0.1 million
(2003) for the value of restricted stock awards to
employees, including amounts allocated from Conexant.
|
|
|
Employee Stock Purchase Plan |
The Company has an employee stock purchase plan under which
eligible employees may authorize the Company to withhold up to
10% of their compensation for each pay period to purchase shares
of the Companys common stock, subject to certain
limitations. Through July 2005, purchases were made at specified
intervals during a 24-month offering period at 85% of the lower
of the fair market value on the first day of the 24-month
offering period or on the purchase date. Prior to the
Distribution, Mindspeed employees were eligible to participate
in a similar plan sponsored by Conexant. In 2005, the Company
amended the employee stock purchase plan to provide for
purchases to be made at the end of each offering period, based
on the fair market value of our common stock on the purchase
date. New offerings under the plan provide for a discount of 5%.
The offering periods generally commence on the first trading day
of March and September of each year and are generally six months
in duration, but may be terminated earlier under certain
circumstances. The Company issued 666,000 shares
(2005) and 783,000 shares (2004) of its common
stock under the employee stock purchase plan for net proceeds of
$1.1 million and $2.2 million, respectively.
|
|
11. |
Employee Benefit Plans |
The Company sponsors a 401(k) retirement savings plan for its
eligible employees. Prior to the Distribution, Mindspeed
employees were eligible to participate in similar plans
sponsored by Conexant. The Company matches a portion of employee
contributions and funds the matching contribution in shares of
its common stock. The Company issued 483,000 shares (2005),
220,000 shares (2004) and 118,000 shares
(2003) of its common stock to fund the matching
contributions. The Company recognized expenses under the
61
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
retirement savings plans, including amounts allocated from
Conexant, of $0.9 million (2005), $1.2 million
(2004) and $2.4 million (2003).
Special charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Asset impairments
|
|
$ |
810 |
|
|
$ |
|
|
|
$ |
23,397 |
|
Restructuring charges
|
|
|
5,189 |
|
|
|
387 |
|
|
|
12,314 |
|
Other special charges
|
|
|
|
|
|
|
|
|
|
|
(8,541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
5,999 |
|
|
$ |
387 |
|
|
$ |
27,170 |
|
|
|
|
|
|
|
|
|
|
|
2005 Impairments During fiscal 2005, the
Company recorded asset impairment charges totaling $810,000
related to property and equipment that it determined to abandon
or scrap, including assets associated with the closure of the
Companys former design centers in Herzlia, Israel and
Lisle, Illinois.
2003 Impairments During fiscal 2003, the
Company recorded an impairment charge of $19.1 million to
write down the carrying value of identified intangible assets
(principally developed technology) related to the HotRail
subsidiary. In January 2003, the Company decided to close the
HotRail design center and to curtail investment in selected
associated products. Management evaluated the recoverability of
the assets of the HotRail business to determine whether their
value was impaired, based upon the future cash flows expected to
be generated by the affected products over the remainder of
their life cycles (estimated to be approximately five years).
The estimated sales volumes, pricing, gross margin and operating
expenses were consistent with historical trends and other
available information. Since the estimated undiscounted cash
flows were less than the carrying value (approximately
$27.4 million) of the related assets, management determined
that the value of such assets was impaired. The Company recorded
an impairment charge of $19.1 million, which was determined
by comparing the estimated fair value of the assets to their
carrying value. The fair value of the assets was determined by
computing the present value of the expected future cash flows
using a discount rate of 18%, which management believes is
commensurate with the underlying risks associated with the
projected cash flows. Management believes the assumptions used
in the discounted cash flow model represent a reasonable
estimate of the fair value of the assets. The write-down
established a new cost basis for the impaired assets.
Also during fiscal 2003, the Company recorded asset impairment
charges totaling $4.3 million related to certain assets
that it determined to abandon or scrap.
The Company has implemented a number of cost reduction
initiatives to improve its operating cost structure. The cost
reduction initiatives included workforce reductions, significant
reductions in capital spending, the consolidation of certain
facilities and salary reductions for the senior management team.
The costs and expenses associated with the restructuring
activities are included in special charges in the accompanying
consolidated statements of operations.
Mindspeed Strategic Restructuring Plan In
fiscal 2002, the Company initiated a number of cost reduction
actions including workforce reductions, the closure
of Novanet Semiconductor Ltd. and the divestiture of NetPlane
Systems, Inc. and recorded fiscal 2002 restructuring
charges totaling $23.2 million. In fiscal 2003, the Company
implemented an additional workforce reduction affecting
approximately
62
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
80 employees and closed its design center in Bristol,
England. The Company recorded fiscal 2003 restructuring charges
of $2.3 million for the workforce reductions, based upon
estimates of the cost of severance benefits for the affected
employees, and $4.6 million for commitments under license
obligations for the purchase of design tools that the Company
determined would not be used in the future. During fiscal 2003,
the Company completed the workforce reductions. During fiscal
2005, the Company reversed $740,000 of previously accrued costs
upon the resolution of liabilities under certain operating
leases.
Activity and liability balances related to the Mindspeed
strategic restructuring plan for the three years ended
September 30, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Restructuring balance, September 30, 2002
|
|
$ |
4,090 |
|
|
$ |
14,544 |
|
|
$ |
18,634 |
|
Charged to costs and expenses
|
|
|
2,341 |
|
|
|
4,589 |
|
|
|
6,930 |
|
Cash payments
|
|
|
(6,431 |
) |
|
|
(9,980 |
) |
|
|
(16,411 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
|
|
|
|
9,153 |
|
|
|
9,153 |
|
Expense reversal
|
|
|
|
|
|
|
(38 |
) |
|
|
(38 |
) |
Cash payments
|
|
|
|
|
|
|
(5,149 |
) |
|
|
(5,149 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
|
|
|
|
3,966 |
|
|
|
3,966 |
|
Expense reversal
|
|
|
|
|
|
|
(740 |
) |
|
|
(740 |
) |
Cash payments
|
|
|
|
|
|
|
(1,620 |
) |
|
|
(1,620 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
1,606 |
|
|
$ |
1,606 |
|
|
|
|
|
|
|
|
|
|
|
Mindspeed 2003 Restructuring Plan In March
2003, the Company announced a number of expense reduction and
restructuring initiatives intended to further improve its
operating cost structure. The actions included the closure of
the HotRail design center in San Jose, California and a
workforce reduction of approximately 130 employees.
Restructuring charges for this plan included an aggregate of
$4.8 million for severance benefits paid to the affected
employees and $1.3 million for costs associated with the
consolidation of certain facilities and lease cancellation and
related costs. Activity and liability balances related to the
Mindspeed 2003 restructuring plan through September 30,
2005 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
4,077 |
|
|
$ |
1,568 |
|
|
$ |
5,645 |
|
Cash payments
|
|
|
(3,759 |
) |
|
|
(191 |
) |
|
|
(3,950 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2003
|
|
|
318 |
|
|
|
1,377 |
|
|
|
1,695 |
|
Charged to costs and expenses
|
|
|
689 |
|
|
|
(264 |
) |
|
|
425 |
|
Cash payments
|
|
|
(957 |
) |
|
|
(357 |
) |
|
|
(1,314 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2004
|
|
|
50 |
|
|
|
756 |
|
|
|
806 |
|
Cash payments
|
|
|
(50 |
) |
|
|
(220 |
) |
|
|
(270 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
|
|
|
$ |
536 |
|
|
$ |
536 |
|
|
|
|
|
|
|
|
|
|
|
Mindspeed 2004 Restructuring Plan In October
2004, the Company announced a restructuring plan intended to
reduce its operating expenses while focusing its research and
development investment in key high-growth markets, including
voice-over-Internet protocol (VoIP) and high-performance analog
applications. The expense reduction actions included workforce
reductions and the closure of design centers in Herzlia, Israel
and Lisle, Illinois. Approximately 80% of the expense reductions
were derived from the termination of
63
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
research and development programs which the Company believes had
a longer return-on-investment timeframe or that addressed slower
growth markets. The affected research and development programs
were principally the Companys asynchronous transfer mode
(ATM)/multi-protocol label switching (MPLS) network
processor products and, to a lesser extent, its T/ E carrier
transmission products. The remainder of the cost savings came
from the selling, general and administrative functions. Through
September 30, 2005, the Company had completed substantially
all of these actions, reducing its workforce by approximately 90
employees.
In connection with these actions, the Company recorded fiscal
2005 restructuring charges of approximately $5.9 million.
The restructuring charges included an aggregate of
$3.4 million for the workforce reductions, based upon
estimates of the cost of severance benefits for the affected
employees, and approximately $2.5 million related to
contractual obligations for the purchase of design tools and
other services in excess of anticipated requirements. Activity
and liability balances related to the Mindspeed 2004
restructuring plan through September 30, 2005 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce | |
|
Facility | |
|
|
|
|
Reductions | |
|
and Other | |
|
Total | |
|
|
| |
|
| |
|
| |
Charged to costs and expenses
|
|
$ |
3,412 |
|
|
$ |
2,517 |
|
|
$ |
5,929 |
|
Cash payments
|
|
|
(2,575 |
) |
|
|
(1,546 |
) |
|
|
(4,121 |
) |
|
|
|
|
|
|
|
|
|
|
Restructuring balance, September 30, 2005
|
|
$ |
837 |
|
|
$ |
971 |
|
|
$ |
1,808 |
|
|
|
|
|
|
|
|
|
|
|
Other Restructuring Plans In fiscal 2003, the
Company reversed $261,000 of previously accrued costs upon the
resolution of liabilities for severance benefits payable under
three additional restructuring plans initiated in fiscal 2001
and 2002. Also in fiscal 2003, the Company made cash payments of
$80,000 to complete the cost reduction actions under one of
these plans and, as of September 30, 2003, the Company had
no remaining liabilities under these restructuring plans.
Through September 30, 2005, the Company paid an aggregate
of $41.1 million in connection with its restructuring plans
(including amounts paid prior to fiscal 2003) and has a
remaining accrued restructuring balance totaling
$4.0 million (including $509,000 classified as a long-term
liability), principally representing obligations under
non-cancelable leases and other contractual commitments. The
Company expects to pay these obligations over their respective
terms, which expire at various dates through fiscal 2008. The
payments will be funded from available cash balances and funds
from product sales and are not expected to impact significantly
the Companys liquidity.
Other special charges for fiscal 2003 consist of a
$9.0 million gain on the sale of the assets of NetPlane,
partially offset by losses on other asset sales.
|
|
13. |
Related Party Transactions |
Prior to the Distribution, the Company operated as a wholly
owned subsidiary of Conexant. Conexant maintained a centralized
treasury function and provided funding for Mindspeeds
capital requirements. This funding consisted of Conexants
payment of expenses allocated to Mindspeed and payments made by
Conexant on behalf of Mindspeed for operating expenses, capital
expenditures and acquisitions, offset by Mindspeeds cash
receipts. The financing provided by Conexant took the form of
equity capital advances in Mindspeed, with no formal repayment
or interest arrangements, nor any expectation of any such
arrangements in the future. The equity capital advances have
been presented as additions to Conexants net investment in
the consolidated statements of stockholders equity and
comprehensive loss. Conexant provided the financing from its
cash reserves, cash generated from operations and debt incurred
at the parent level. The
64
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
accompanying consolidated financial statements do not include
any allocation of Conexants debt or the related interest
expense.
The Distribution Agreement between Conexant and Mindspeed
provides for, among other things, the principal corporate
transactions required to effect the separation of Mindspeed from
Conexant, the distribution of Mindspeed common stock and certain
other terms governing the relationship between Conexant and
Mindspeed with respect to or in consequence of the Distribution.
Under the Distribution Agreement, Conexant transferred to
Mindspeed certain specifically identified assets and other
assets used primarily or exclusively in the Mindspeed business.
The Distribution Agreement also provides generally for the
assumption by Mindspeed of all liabilities related to its
business. Pursuant to the Distribution Agreement, Conexant made
a pre-Distribution cash contribution to Mindspeed in an amount
such that at the time of the Distribution Mindspeeds cash
balance was $100 million.
For periods prior to the Distribution, Mindspeeds cost of
goods sold and operating expenses include allocations from
Conexant for certain services which Conexant provided to
Mindspeed and facility rent. Expenses allocated from Conexant
included in the accompanying consolidated statements of
operations for periods prior to the Distribution are as follows
(in thousands):
|
|
|
|
|
|
|
2003 | |
|
|
| |
Cost of goods sold
|
|
$ |
491 |
|
Research and development
|
|
|
3,294 |
|
Selling and marketing
|
|
|
2 |
|
General and administrative
|
|
|
3,470 |
|
|
|
|
|
|
|
$ |
7,257 |
|
|
|
|
|
Operating costs and expenses were allocated based upon specific
identification to the extent possible; the remaining common
costs are allocated on bases that management considered to be
reasonable reflections of the utilization of services provided
to or the benefit received by Mindspeed. The primary methods
used to allocate common costs and expenses were
(i) detailed activity-based analyses or (ii) the
percentage of specifically identified costs incurred by
Mindspeed to the total of all specifically identified costs
incurred by Conexant.
Following the Distribution, Mindspeed and Conexant each provided
certain services to the other under the Transition Services
Agreement. The accompanying consolidated statements of
operations include expenses of $0.1 million (2004) and
$0.4 million (2003) for services purchased from
Conexant under the Transition Services Agreement subsequent to
the Distribution. For fiscal 2005, services under the Transition
Services Agreement were not significant.
Sales to Conexant were $1.2 million (2005),
$1.2 million (2004) and $0.4 million (2003). As
of September 30, 2005, a liability to Conexant of
$0.1 million is included in accounts payable in the
accompanying consolidated balance sheets. As of
September 30, 2004, a receivable from Conexant of
$1.7 million is included in other current assets.
65
MINDSPEED TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14. |
Segment and Other Information |
The Company operates a single business segment which designs,
develops and sells semiconductor networking solutions for
communications applications in enterprise, access, metropolitan
and wide-area networks. Revenues by product line are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Multiservice access DSP products
|
|
$ |
33,048 |
|
|
$ |
26,524 |
|
|
$ |
7,942 |
|
High-performance analog products
|
|
|
27,087 |
|
|
|
24,636 |
|
|
|
21,899 |
|
WAN communications products
|
|
|
51,642 |
|
|
|
67,968 |
|
|
|
50,786 |
|
Other
|
|
|
|
|
|
|
307 |
|
|
|
1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111,777 |
|
|
$ |
119,435 |
|
|
$ |
81,906 |
|
|
|
|
|
|
|
|
|
|
|
Other revenues for fiscal 2003 principally represent revenues of
the NetPlane Systems software business, which the Company sold
in the second quarter of fiscal 2003.
Revenues by geographic area are presented based upon the country
of destination. Revenues by geographic area are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
United States
|
|
$ |
32,764 |
|
|
$ |
38,151 |
|
|
$ |
32,939 |
|
Other Americas
|
|
|
9,602 |
|
|
|
10,050 |
|
|
|
8,823 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Americas
|
|
|
42,366 |
|
|
|
48,201 |
|
|
|
41,762 |
|
Malaysia
|
|
|
16,894 |
|
|
|
14,077 |
|
|
|
2,353 |
|
Taiwan
|
|
|
7,299 |
|
|
|
10,135 |
|
|
|
9,683 |
|
Hong Kong
|
|
|
17,326 |
|
|
|
18,703 |
|
|
|
8,145 |
|
Japan
|
|
|
5,417 |
|
|
|
4,082 |
|
|
|
4,290 |
|
Other Asia-Pacific
|
|
|
7,595 |
|
|
|
6,541 |
|
|
|
3,767 |
|
|
|
|
|
|
|
|
|
|
|
|
Total Asia-Pacific
|
|
|
54,531 |
|
|
|
53,538 |
|
|
|
28,238 |
|
Europe, Middle East and Africa
|
|
|
14,880 |
|
|
|
17,696 |
|
|
|
11,906 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
111,777 |
|
|
$ |
119,435 |
|
|
$ |
81,906 |
|
|
|
|
|
|
|
|
|
|
|
No other foreign country represented 10% or more of net revenues
for any of the periods presented. The Company believes a
substantial portion of the products sold to original equipment
manufacturers (OEMs) and third-party manufacturing service
providers in the Asia-Pacific region are ultimately shipped to
end-markets in the Americas and Europe.
Long-lived assets consist of property, plant and equipment,
goodwill and intangible assets, and other assets. Long-lived
assets by geographic area at fiscal year-ends are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
United States
|
|
$ |
17,144 |
|
|
$ |
39,639 |
|
Europe, Middle East and Africa
|
|
|
1,671 |
|
|
|
4,494 |
|
Asia-Pacific
|
|
|
785 |
|
|
|
811 |
|
|
|
|
|
|
|
|
|
|
$ |
19,600 |
|
|
$ |
44,944 |
|
|
|
|
|
|
|
|
66
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mindspeed Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of
Mindspeed Technologies, Inc. and subsidiaries (the
Company) as of September 30, 2005 and 2004, and
the related consolidated statements of operations, cash flows,
and stockholders equity and comprehensive loss for each of
the three years in the period ended September 30, 2005. Our
audits also included the financial statement schedule listed in
Item 15(a)(2). These financial statements and the financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule based
on our audits.
We conducted our audits in accordance with standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of the Company at September 30, 2005 and 2004, and
the results of its operations and its cash flows for each of the
three years in the period ended September 30, 2005, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set
forth therein.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Companys internal control over
financial reporting as of September 30, 2005, based on the
criteria established in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated
November 21, 2005, expressed an unqualified opinion on
managements assessment of the effectiveness of the
Companys internal control over financial reporting and an
unqualified opinion on the effectiveness of the Companys
internal control over financial reporting.
Deloitte & Touche
LLP
Costa Mesa, California
November 21, 2005
67
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
Not applicable.
|
|
Item 9A. |
Controls and Procedures |
Disclosure Controls and Procedures
Under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief
Financial Officer, we have evaluated the effectiveness of the
design and operation of our disclosure controls and procedures
as of September 30, 2005. Disclosure controls and
procedures are defined under SEC rules as controls and other
procedures that are designed to ensure that information required
to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within required time periods. Based upon that
evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that these disclosure controls and
procedures are effective.
Managements Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over our financial reporting. Internal
control over financial reporting is a process to provide
reasonable assurance regarding the reliability of our financial
reporting for external purposes in accordance with generally
accepted accounting principles. Internal control over financial
reporting includes policies and procedures that:
(i) pertain to maintaining records that in reasonable
detail accurately and fairly reflect our transactions;
(ii) provide reasonable assurance that transactions are
recorded as necessary for preparation of our financial
statements and that receipts and expenditures of company assets
are made in accordance with management authorization; and
(iii) provide reasonable assurance that unauthorized
acquisition, use or disposition of company assets that could
have a material effect on our financial statements would be
prevented or detected on a timely basis. Because of its inherent
limitations, internal control over financial reporting is not
intended to provide absolute assurance that a misstatement of
our financial statements would be prevented or detected.
There were no changes in our internal control over financial
reporting during the fiscal quarter ended September 30,
2005 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
Our management evaluated the effectiveness of our internal
control over financial reporting based on the framework in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon that evaluation, management concluded
that the companys internal control over financial
reporting was effective as of September 30, 2005.
Deloitte & Touche LLP has audited our assessment of our
internal control over financial reporting and their report is
included in herein.
68
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Mindspeed Technologies, Inc.:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that Mindspeed Technologies, Inc. and
subsidiaries (the Company) maintained effective
internal control over financial reporting as of
September 30, 2005, based on the criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express an
opinion on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinions.
A companys internal control over financial reporting is a
process designed by, or under the supervision of, the
companys principal executive and principal financial
officers, or persons performing similar functions, and effected
by the companys board of directors, management, and other
personnel 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 (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) 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 (3) 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 the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, managements assessment that the Company
maintained effective internal control over financial reporting
as of September 30, 2005, is fairly stated, in all material
respects, based on the criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Also in our opinion, the Company maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2005, based on the criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedule as of and for the year ended September 30, 2005,
of the Company and our report dated November 21, 2005,
expressed an unqualified opinion on those financial statements
and the financial statement schedule.
Deloitte & Touche
LLP
Costa Mesa, California
November 21, 2005
69
|
|
Item 9B. |
Other Information |
Not applicable.
PART III
Certain information required by Part III is omitted from
this Annual Report and is incorporated herein by reference from
the Companys definitive Proxy Statement for the 2006
Annual Meeting of Stockholders (the Proxy Statement) to be filed
with the SEC.
|
|
Item 10. |
Directors and Executive Officers of the Registrant |
The information required by this Item is incorporated herein by
reference from the sections entitled Election of
Directors, Executive Officers, Board
Committees and Meetings, Other Matters
Section 16(a) Beneficial Ownership Reporting
Compliance and Other Matters Code of
Ethics in the Proxy Statement.
|
|
Item 11. |
Executive Compensation |
The information required by this Item is incorporated herein by
reference from the sections entitled Executive
Compensation, Option Grants in Last Fiscal
Year, Aggregated Option Exercises in Last Fiscal
Year and Fiscal Year-End Option Values,
Directors Compensation, Certain
Relationships and Related Transactions, Board
Committees and Meetings, Report of the Compensation
and Management Development Committee on Executive
Compensation and Stockholder Return Performance
Graph in the Proxy Statement.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
The information required by this Item is incorporated herein by
reference from the sections entitled Equity Compensation
Plan Information and Security Ownership of Certain
Beneficial Owners and Management in the Proxy Statement.
|
|
Item 13. |
Certain Relationships and Related Transactions |
The information required by this Item is incorporated by
reference from the section entitled Certain Relationships
and Related Transactions in the Proxy Statement.
|
|
Item 14. |
Principal Accountant Fees and Services |
The information required by this Item is incorporated herein by
reference from the section entitled Principal Accountant
Fees and Services in the Proxy Statement.
70
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements
The following consolidated financial statements of the Company
for the fiscal year ended September 30, 2005 are included
herewith:
|
|
|
Consolidated Balance Sheets, |
|
|
Consolidated Statements of Operations, |
|
|
Consolidated Statements of Cash Flows, |
|
|
Consolidated Statements of Stockholders Equity and
Comprehensive Loss, |
|
|
Notes to Consolidated Financial Statements, and |
|
|
Report of Independent Registered Public Accounting Firm |
(2) Supplemental Schedules
Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because the required
information is not present in amounts sufficient to require
submission of the schedule, or because the required information
is included in the consolidated financial statements or notes
thereto.
(3) Exhibits
|
|
|
|
|
|
3 |
.1 |
|
Restated Certificate of Incorporation of the Registrant, filed
as Exhibit 4.1 to the Registrants Registration
Statement on Form S-3 (Registration Statement
No. 333-106146), is incorporated herein by reference. |
|
|
3 |
.2 |
|
Amended and Restated Bylaws of the Registrant. |
|
|
4 |
.1 |
|
Specimen certificate for the Registrants Common Stock, par
value $.01 per share, filed as Exhibit 4.1 to the
Registrants Registration Statement on Form 10 (File
No. 1-31650), is incorporated herein by reference. |
|
|
4 |
.2 |
|
Rights Agreement dated as of June 26, 2003, by and between
the Registrant and Mellon Investor Services LLC, as Rights
Agent, filed as Exhibit 4.1 to the Registrants
Current Report on Form 8-K dated July 1, 2003, is
incorporated herein by reference. |
|
|
4 |
.3 |
|
First Amendment to Rights Agreement, dated as of
December 6, 2004, by and between the Registrant and Mellon
Investor Services LLC, filed as Exhibit 4.4 to the
Registrants Current Report on Form 8-K dated
December 2, 2004, is incorporated herein by reference. |
|
|
4 |
.4 |
|
Common Stock Purchase Warrant dated June 27, 2003, filed as
Exhibit 4.5 to the Registrants Registration Statement
on Form S-3 (Registration Statement No. 333-109523),
is incorporated herein by reference. |
|
|
4 |
.5 |
|
Registration Rights Agreement dated as of June 27, 2003, by
and between the Registrant and Conexant Systems, Inc., filed as
Exhibit 4.6 to the Registrants Registration Statement
on Form S-3 (Registration Statement No. 333-109523),
is incorporated herein by reference. |
|
|
4 |
.6 |
|
Credit Agreement Warrant dated June 27, 2003, issued by the
Registrant to Conexant Systems, Inc., filed as Exhibit 4.5
to the Registrants Registration Statement on Form S-3
(Registration Statement No. 333-109525), is incorporated
herein by reference. |
|
|
4 |
.7 |
|
Registration Rights Agreement dated as of June 27, 2003 by
and between the Registrant and Conexant Systems, Inc., filed as
Exhibit 4.6 to the Registrants Registration Statement
on Form S-3 (Registration Statement No. 333-109525),
is incorporated herein by reference. |
71
|
|
|
|
|
|
4 |
.8 |
|
Indenture, dated as of December 8, 2004, between the
Registrant and Wells Fargo Bank, N.A., filed as Exhibit 4.1
to the Registrants Current Report on Form 8-K dated
December 2, 2004, is incorporated herein by reference. |
|
|
4 |
.9 |
|
Form of 3.75% Convertible Senior Notes due 2009, attached
as Exhibit A to the Indenture (Exhibit 4.8 hereto), is
incorporated herein by reference. |
|
|
4 |
.10 |
|
Registration Rights Agreement, dated as of December 8,
2004, by and between the Registrant and Lehman Brothers Inc.,
filed as Exhibit 4.3 to the Registrants Current
Report on Form 8-K dated December 2, 2004, is
incorporated herein by reference. |
|
|
10 |
.1 |
|
Distribution Agreement dated as of June 27, 2003, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.1 to the Registrants Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by
reference. |
|
|
10 |
.2 |
|
Employee Matters Agreement dated as of June 27, 2003, by
and between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.2 to the Registrants Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by
reference. |
|
|
10 |
.3 |
|
Amendment No. 1 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated January 13, 2005. |
|
|
10 |
.4 |
|
Amendment No. 2 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated July 1, 2005. |
|
|
10 |
.5 |
|
Tax Allocation Agreement dated as of June 27, 2003, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 2.3 to the Registrants Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by
reference. |
|
|
10 |
.6 |
|
Credit Agreement dated as of June 27, 2003, by and among
the Registrant, the subsidiaries of the Registrant from time to
time parties thereto and Conexant Systems, Inc., filed as
Exhibit 2.5 to the Registrants Current Report on
Form 8-K dated July 1, 2003, is incorporated herein by
reference. |
|
|
10 |
.7 |
|
Amendment No. 1 to Credit Agreement dated as of
June 27, 2003, among the Registrant, certain subsidiaries
of the Registrant and Conexant Systems, Inc., dated
December 2, 2004, filed as Exhibit 10.1 to the
Registrants Current Report on Form 8-K dated
December 3, 2004, is incorporated herein by reference. |
|
|
10 |
.8 |
|
Amended and Restated Sublease, dated March 24, 2005, by and
between Conexant Systems, Inc. and the Registrant, filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005, is
incorporated herein by reference. |
|
|
10 |
.9 |
|
Purchase Agreement, dated December 2, 2004, between the
Registrant and Lehman Brothers Inc., filed as Exhibit 10.1
to the Registrants Current Report on Form 8-K dated
December 2, 2004, is incorporated herein by reference. |
|
|
10 |
.10 |
|
Pledge Agreement, dated as of December 8, 2004, by the
Registrant in favor of Wells Fargo Bank, N.A., filed as
Exhibit 10.2 to the Registrants Current Report on
Form 8-K dated December 2, 2004, is incorporated
herein by reference. |
|
|
10 |
.11 |
|
Control Agreement, dated as of December 8, 2004, by and
among the Registrant and Wells Fargo Bank, N.A., in its capacity
as trustee, and Wells Fargo Bank, N.A., in its capacity as
securities intermediary and depositary bank, filed as
Exhibit 10.3 to the Registrants Current Report on
Form 8-K dated December 2, 2004, is incorporated
herein by reference. |
|
|
*10 |
.12 |
|
Form of Employment Agreement between the Registrant and certain
executives of the Registrant, filed as Exhibit 10.8.1 to
the Registrants Registration Statement on Form 10
(File No. 1-31650), is incorporated herein by reference. |
|
|
*10 |
.13 |
|
Schedule identifying parties to and terms of agreements with the
Registrant substantially identical to the Employment Agreement
constituting Exhibit 10.12 hereto. |
72
|
|
|
|
|
|
*10 |
.14 |
|
Form of Indemnification Agreement entered into between the
Registrant and the Chief Executive Officer, Chief Financial
Officer and each of the directors of the Registrant, filed as
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended March 31, 2005, is
incorporated herein by reference. |
|
|
*10 |
.15 |
|
Schedule identifying parties to agreements with the Registrant
substantially identical to the Form of Indemnification Agreement
constituting Exhibit 10.14 hereto. |
|
|
*10 |
.16 |
|
Mindspeed Technologies, Inc. 2003 Employee Stock Purchase Plan,
filed as Exhibit 10.1 to the Registrants Quarterly
Report on Form 10-Q for the quarter ended June 30,
2005, is incorporated herein by reference. |
|
|
*10 |
.17 |
|
Mindspeed Technologies, Inc. 2003 Non-Qualified Employee Stock
Purchase Plan, filed as Exhibit 10.2 to the
Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, is incorporated herein by
reference. |
|
|
*10 |
.18 |
|
Mindspeed Technologies, Inc. 2003 Stock Option Plan, filed as
Exhibit 4.5 to the Registrants Registration Statement
on Form S-3 (Registration Statement No. 333-106146),
is incorporated herein by reference. |
|
|
*10 |
.19 |
|
Mindspeed Technologies, Inc. 2003 Long-Term Incentives Plan, as
amended, filed as Exhibit 10.1 to the Registrants
Current Report on Form 8-K dated February 24, 2005, is
incorporated herein by reference. |
|
|
*10 |
.20 |
|
Form of Stock Option Award under the Mindspeed Technologies,
Inc. 2003 Long-Term Incentives Plan, filed as Exhibit 10.4
to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005, is incorporated herein by
reference. |
|
|
*10 |
.21 |
|
Stock Option Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan, filed as
Exhibit 10.5 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, is
incorporated herein by reference. |
|
|
*10 |
.22 |
|
Form of Restricted Stock Award under the Mindspeed Technologies,
Inc. 2003 Long-Term Incentives Plan, filed as Exhibit 10.6
to the Registrants Quarterly Report on Form 10-Q for
the quarter ended June 30, 2005, is incorporated herein by
reference. |
|
|
*10 |
.23 |
|
Restricted Stock Award Terms and Conditions under the Mindspeed
Technologies, Inc. 2003 Long-Term Incentives Plan, filed as
Exhibit 10.19 to the Registrants Annual Report on
Form 10-K for the year ended September 30, 2004, is
incorporated herein by reference. |
|
|
*10 |
.24 |
|
Mindspeed Technologies, Inc. Directors Stock Plan, filed as
Exhibit 4.6 to the Registrants Registration Statement
on Form S-8 (Registration Statement No. 333-106479),
is incorporated herein by reference. |
|
|
*10 |
.25 |
|
Form of Stock Option Award under the Mindspeed Technologies,
Inc. Directors Stock Plan, filed as Exhibit 10.7 to the
Registrants Quarterly Report on Form 10-Q for the
quarter ended June 30, 2005, is incorporated herein by
reference. |
|
|
*10 |
.26 |
|
Stock Option Terms and Conditions under the Mindspeed
Technologies, Inc. Directors Stock Plan, filed as
Exhibit 10.8 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, is
incorporated herein by reference. |
|
|
*10 |
.27 |
|
Mindspeed Technologies, Inc. Retirement Savings Plan, filed as
Exhibit 10.9 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2005, is
incorporated herein by reference. |
|
|
*10 |
.28 |
|
Mindspeed Technologies, Inc. Deferred Compensation Plan, filed
as Exhibit 10.10 to the Registrants Quarterly Report
on Form 10-Q for the quarter ended June 30, 2005, is
incorporated herein by reference. |
|
|
*10 |
.29 |
|
Confidential Severance Agreement and General Release by and
between Harry Davoody and the Registrant, filed as
Exhibit 10.1 to the Registrants Quarterly Report on
Form 10-Q for the quarter ended June 30, 2004, is
incorporated herein by reference. |
73
|
|
|
|
|
|
12 |
.1 |
|
Statement re: Computation of Ratios. |
|
|
21 |
|
|
List of subsidiaries of the Registrant. |
|
|
23 |
|
|
Consent of independent registered public accounting firm. |
|
|
24 |
|
|
Power of attorney, authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Registrant. |
|
|
31 |
.1 |
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
31 |
.2 |
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.1 |
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
32 |
.2 |
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
* |
Management contract or compensatory plan or arrangement. |
|
|
|
Certain confidential portions of this exhibit have been omitted
pursuant to a request for confidential treatment. Omitted
portions have been filed separately with the SEC. |
(b) Exhibits
See subsection (a)(3) above.
(c) Financial Statement Schedules
Not applicable.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Exchange Act, the Registrant has duly caused this Annual Report
on Form 10-K to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Newport Beach, State
of California, on this
22nd day
of November, 2005.
|
|
|
MINDSPEED TECHNOLOGIES, INC. |
|
|
|
|
|
Raouf Y. Halim |
|
Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this report has been signed on the
22nd day
of November, 2005, by the following persons on behalf of the
Registrant and in the capacities indicated:
|
|
|
|
|
Signature |
|
Title |
|
|
|
|
/s/ Raouf Y. Halim
Raouf
Y. Halim |
|
Chief Executive Officer and Director
(Principal Executive Officer) |
|
/s/ Simon Biddiscombe
Simon
Biddiscombe |
|
Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer) |
|
/s/ Dwight W. Decker*
Dwight
W. Decker |
|
Chairman of the Board of Directors |
|
/s/ Donald R. Beall*
Donald
R. Beall |
|
Director |
|
/s/ Donald H. Gips*
Donald
H. Gips |
|
Director |
|
/s/ Michael T. Hayashi*
Michael
T. Hayashi |
|
Director |
|
/s/ Ming Louie*
Ming
Louie |
|
Director |
|
/s/ Thomas A. Madden*
Thomas
A. Madden |
|
Director |
|
/s/ Jerre L. Stead*
Jerre
L. Stead |
|
Director |
|
*By: |
|
/s/ Raouf Y. Halim
Raouf
Y. Halim,
Attorney-in-Fact** |
|
|
|
|
** |
By authority of the power of attorney filed as Exhibit 24
hereto. |
75
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions | |
|
|
|
|
|
|
Balance at | |
|
Charged to | |
|
|
|
Balance at | |
|
|
Beginning | |
|
Costs and | |
|
|
|
End of | |
Description |
|
of Year | |
|
Expenses | |
|
Deductions(1) | |
|
Year | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Year ended September 30, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
627 |
|
|
$ |
(160 |
) |
|
$ |
(5 |
) |
|
$ |
462 |
|
|
Reserve for sales returns and allowances
|
|
|
922 |
|
|
|
1,206 |
|
|
|
(772 |
) |
|
|
1,356 |
|
Year ended September 30, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
932 |
|
|
$ |
(118 |
) |
|
$ |
(187 |
) |
|
$ |
627 |
|
|
Reserve for sales returns and allowances
|
|
|
430 |
|
|
|
574 |
|
|
|
(82 |
) |
|
|
922 |
|
Year ended September 30, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$ |
1,897 |
|
|
$ |
(593 |
) |
|
$ |
(372 |
) |
|
$ |
932 |
|
|
Reserve for sales returns and allowances
|
|
|
641 |
|
|
|
(39 |
) |
|
|
(172 |
) |
|
|
430 |
|
|
|
(1) |
Deductions in the allowance for doubtful accounts reflect
amounts written off. |
76
EXHIBIT INDEX
|
|
|
|
|
|
3 |
.2 |
|
Amended and Restated Bylaws of the Registrant. |
|
10 |
.3 |
|
Amendment No. 1 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated January 13, 2005. |
|
10 |
.4 |
|
Amendment No. 2 to Employee Matters Agreement dated as of
June 27, 2003, by and between Conexant Systems, Inc. and
the Registrant, dated July 1, 2005. |
|
10 |
.13 |
|
Schedule identifying parties to and terms of agreements with the
Registrant substantially identical to the Employment Agreement
constituting Exhibit 10.12 hereto. |
|
10 |
.15 |
|
Schedule identifying parties to agreements with the Registrant
substantially identical to the Form of Indemnification Agreement
constituting Exhibit 10.14 hereto. |
|
12 |
.1 |
|
Statement re: Computation of Ratios. |
|
21 |
|
|
List of subsidiaries of the Registrant. |
|
23 |
|
|
Consent of independent registered public accounting firm. |
|
24 |
|
|
Power of attorney, authorizing certain persons to sign this
Annual Report on Form 10-K on behalf of certain directors
and officers of the Registrant. |
|
31 |
.1 |
|
Certification of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
31 |
.2 |
|
Certification of Chief Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|
32 |
.1 |
|
Certification of Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32 |
.2 |
|
Certification of Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
77