n10q.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended Septmber 30, 2009
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
Transition Period from
to
Commission
File Number: 000-50838
NETLOGIC
MICROSYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
77-0455244
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1875
Charleston Rd.
Mountain
View, CA 94043
(650)
961-6676
(Address
and telephone number of principal executive offices)
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 x
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer ¨ Smaller
reporting company ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuance to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes ¨
No x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ¨ No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
|
|
Outstanding
at September 30, 2009
|
Common
Stock, $0.01 par value per share
|
|
22,438,117
shares
|
FORM
10-Q
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Page No.
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Item 1.
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3
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3
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4
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5
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6
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Item 2.
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19
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Item 3.
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30
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Item 4.
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30
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31
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Item 1.
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31
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Item 1A.
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31
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Item 6.
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32
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33
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Item 1.
|
Financial
Statements
|
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
33,374 |
|
|
$ |
83,474 |
|
Short-term
investments
|
|
|
- |
|
|
|
13,067 |
|
Accounts
receivable, net
|
|
|
10,523 |
|
|
|
8,382 |
|
Inventories
|
|
|
21,529 |
|
|
|
13,707 |
|
Deferred
income taxes
|
|
|
2,863 |
|
|
|
3,217 |
|
Prepaid
expenses and other current assets
|
|
|
10,713 |
|
|
|
1,937 |
|
Total
current assets
|
|
|
79,002 |
|
|
|
123,784 |
|
Property
and equipment, net
|
|
|
7,110 |
|
|
|
5,513 |
|
Goodwill
|
|
|
89,965 |
|
|
|
68,712 |
|
Intangible
asset, net
|
|
|
91,411 |
|
|
|
39,538 |
|
Other
assets
|
|
|
20,909 |
|
|
|
8,224 |
|
Total
assets
|
|
$ |
288,397 |
|
|
$ |
245,771 |
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
12,274 |
|
|
$ |
7,618 |
|
Accrued
liabilities
|
|
|
18,143 |
|
|
|
25,920 |
|
Deferred
margin
|
|
|
1,005 |
|
|
|
1,638 |
|
Term
notes, current
|
|
|
9,812 |
|
|
|
- |
|
Software
licenses and other obligations, current
|
|
|
1,608 |
|
|
|
755 |
|
Total
current liabilities
|
|
|
42,842 |
|
|
|
35,931 |
|
Line
of credit and term notes, long-term
|
|
|
18,362 |
|
|
|
- |
|
Software
licenses and other obligations, long-term
|
|
|
1,145 |
|
|
|
464 |
|
Other
liabilities
|
|
|
9,684 |
|
|
|
9,109 |
|
Total
liabilities
|
|
|
72,033 |
|
|
|
45,504 |
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
224 |
|
|
|
219 |
|
Additional
paid-in capital
|
|
|
302,047 |
|
|
|
276,042 |
|
Accumulated
other comprehensive loss
|
|
|
- |
|
|
|
(13 |
) |
Accumulated
deficit
|
|
|
(85,907 |
) |
|
|
(75,981 |
) |
Total
stockholders' equity
|
|
|
216,364 |
|
|
|
200,267 |
|
Total
liabilities and stockholders' equity
|
|
$ |
288,397 |
|
|
$ |
245,771 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
(UNAUDITED)
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$ |
42,314 |
|
|
$ |
38,311 |
|
|
$ |
105,165 |
|
|
$ |
109,034 |
|
Cost
of revenue
|
|
|
21,498 |
|
|
|
16,802 |
|
|
|
49,029 |
|
|
|
48,167 |
|
Gross
profit
|
|
|
20,816 |
|
|
|
21,509 |
|
|
|
56,136 |
|
|
|
60,867 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
16,087 |
|
|
|
13,629 |
|
|
|
42,421 |
|
|
|
38,192 |
|
Selling,
general and administrative
|
|
|
7,740 |
|
|
|
7,195 |
|
|
|
21,912 |
|
|
|
19,904 |
|
Acquisition-related
costs
|
|
|
1,425 |
|
|
|
- |
|
|
|
2,760 |
|
|
|
- |
|
Total
operating expenses
|
|
|
25,252 |
|
|
|
20,824 |
|
|
|
67,093 |
|
|
|
58,096 |
|
(Loss)
income from operations
|
|
|
(4,436 |
) |
|
|
685 |
|
|
|
(10,957 |
) |
|
|
2,771 |
|
Interest
and other income
|
|
|
399 |
|
|
|
421 |
|
|
|
883 |
|
|
|
1,259 |
|
Interest
and other expenses
|
|
|
(595 |
) |
|
|
(18 |
) |
|
|
(660 |
) |
|
|
(111 |
) |
(Loss)
income before income taxes
|
|
|
(4,632 |
) |
|
|
1,088 |
|
|
|
(10,734 |
) |
|
|
3,919 |
|
Benefit
from income taxes
|
|
|
(779 |
) |
|
|
(168 |
) |
|
|
(808 |
) |
|
|
(796 |
) |
Net
(loss) income
|
|
$ |
(3,853 |
) |
|
$ |
1,256 |
|
|
$ |
(9,926 |
) |
|
$ |
4,715 |
|
Net
(loss) income per share-basic
|
|
$ |
(0.17 |
) |
|
$ |
0.06 |
|
|
$ |
(0.45 |
) |
|
$ |
0.22 |
|
Net
(loss) income per share-diluted
|
|
$ |
(0.17 |
) |
|
$ |
0.06 |
|
|
$ |
(0.45 |
) |
|
$ |
0.21 |
|
Shares
used in calculation-basic
|
|
|
22,247 |
|
|
|
21,630 |
|
|
|
21,988 |
|
|
|
21,360 |
|
Shares
used in calculation-diluted
|
|
|
22,247 |
|
|
|
22,760 |
|
|
|
21,988 |
|
|
|
22,379 |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NETLOGIC
MICROSYSTEMS, INC.
(IN
THOUSANDS)
(UNAUDITED)
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(9,926 |
) |
|
$ |
4,715 |
|
Adjustments
to reconcile net (loss) income to net cash provided by operating
activities
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
14,839 |
|
|
|
12,853 |
|
Loss
on disposal of property and equipment
|
|
|
- |
|
|
|
106 |
|
Stock-based
compensation
|
|
|
16,770 |
|
|
|
11,557 |
|
Provision
for (recovery of) doubtful accounts
|
|
|
- |
|
|
|
39 |
|
Provision
for inventory reserves
|
|
|
2,273 |
|
|
|
1,708 |
|
Deferred
income taxes, net
|
|
|
3,381 |
|
|
|
- |
|
Changes
in current assets and liabilities, net of effects of
acquisitions:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,141 |
) |
|
|
236 |
|
Inventories
|
|
|
3,133 |
|
|
|
(1,328 |
) |
Prepaid
expenses and other assets
|
|
|
(7,069 |
) |
|
|
(2,042 |
) |
Accounts
payable
|
|
|
2,839 |
|
|
|
3,753 |
|
Accrued
liabilities
|
|
|
7,712 |
|
|
|
(1,748 |
) |
Deferred
margin
|
|
|
(633 |
) |
|
|
1,485 |
|
Other
long-term liabilities
|
|
|
575 |
|
|
|
992 |
|
Net
cash provided by operating activities
|
|
|
31,753 |
|
|
|
32,326 |
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(646 |
) |
|
|
(1,318 |
) |
Purchase
of short-term investments
|
|
|
(14,633 |
) |
|
|
- |
|
Sales
and maturities of short-term investments
|
|
|
27,700 |
|
|
|
- |
|
Loan
to RMI
|
|
|
(15,000 |
) |
|
|
- |
|
Cash
paid for Aeluros earn-out
|
|
|
(15,501 |
) |
|
|
- |
|
Cash
paid in connection with acquistion
|
|
|
(100,000 |
) |
|
|
- |
|
Net
cash used in investing activities
|
|
|
(118,080 |
) |
|
|
(1,318 |
) |
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit and term notes
|
|
|
37,000 |
|
|
|
- |
|
Proceeds
from issuance of Common Stock
|
|
|
10,179 |
|
|
|
7,990 |
|
Payment
of principal of line of credit and term notes
|
|
|
(8,500 |
) |
|
|
- |
|
Payments
of software license and other obligations
|
|
|
(519 |
) |
|
|
(3,172 |
) |
Payments
of debt issuance costs
|
|
|
(1,095 |
) |
|
|
- |
|
Tax
payments related to vested restricted stock awards
|
|
|
(838 |
) |
|
|
(546 |
) |
Net
cash provided by financing activities
|
|
|
36,227 |
|
|
|
4,272 |
|
Effects
of exchange rate on cash and cash equivalents
|
|
|
- |
|
|
|
(40 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
(50,100 |
) |
|
|
35,240 |
|
Cash
and cash equivalents at beginning of period
|
|
|
83,474 |
|
|
|
50,689 |
|
Cash
and cash equivalents at end of period
|
|
$ |
33,374 |
|
|
$ |
85,929 |
|
Supplemental
disclosures of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment under capital leases and software licenses
obligations
|
|
$ |
3,870 |
|
|
$ |
2,219 |
|
Accrued
debt issuance costs
|
|
$ |
65 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
NetLogic
Microsystems, Inc.
(Unaudited)
1.
Basis of Presentation
The
accompanying unaudited condensed consolidated financial statements of NetLogic
Microsystems, Inc. (“we,” “our” and the “Company”) have been prepared in
accordance with accounting principles generally accepted in the United States of
America and with the instructions for Form 10-Q and Regulation S-X statements.
Accordingly, they do not include all of the information and notes required for
complete financial statements. In the opinion of management, all adjustments,
consisting of only normal recurring items, considered necessary for a fair
statement of the results of operations for the periods are shown.
These
unaudited financial statements should be read in conjunction with the audited
financial statements and accompanying notes included in our Annual Report on
Form 10-K for the year ended December 31, 2008. Operating results for the
three and nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending
December 31, 2009.
We have
evaluated subsequent events through November 9, 2009, which is the date these
financial statements were issued.
Critical
Accounting Policies and Estimates
The
preparation of our unaudited condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We based these estimates and assumptions
on historical experience and evaluate them on an ongoing basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. During the three and nine months ended
September 30, 2009, there were no significant changes to the critical
accounting policies and estimates discussed in our 2008 annual report on Form
10-K with the exception of those discussed below.
Foreign
Currency
Effective
January 1, 2009, the functional currency for all of our foreign
subsidiaries became the United States dollar. Assets and liabilities denominated
in non-U.S. dollars are remeasured into U.S. dollars at end-of-period exchange
rates for monetary assets and liabilities, and historical exchange rates for
nonmonetary assets and liabilities. Revenue and expenses are remeasured at
average exchange rates in effect during the period, except for those revenue and
expenses related to the nonmonetary assets and liabilities, which are measured
at historical exchange rates. The gains or losses from foreign currency
remeasurement are included in interest and other income, net. Such gains or
losses were not material for the three and nine months ended September 30,
2009.
Recently
Issued Accounting Pronouncements
Effective
July 1, 2009, the Company adopted the Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) 105-10, Generally Accepted Accounting
Principles – Overall (“ASC 105-10”). ASC 105-10 establishes the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied by nongovernmental
entities in the preparation of financial statements in conformity with U.S.
GAAP. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative U.S. GAAP for SEC registrants.
All guidance contained in the Codification carries an equal level of authority.
The Codification superseded all existing non-SEC accounting and reporting
standards. All other non-grandfathered, non-SEC accounting literature not
included in the Codification is non-authoritative. The FASB will not issue new
standards in the form of Statements, FASB Staff Positions or Emerging Issues
Task Force Abstracts. Instead, it will issue Accounting Standards Updates
(“ASUs”). The FASB will not consider ASUs as authoritative in their own right.
ASUs will serve only to update the Codification, provide background information
about the guidance and provide the bases for conclusions on the change(s) in the
Codification. References made to FASB guidance throughout this document have
been updated for the Codification.
In April
2009, the FASB issued FASB ASC 805-20, Business Combinations – Identifiable
Assets, Liabilities and Any Noncontrolling Interest (“ASC 805-20”). ASC
805-20 amends the provisions in ASC 805 for the initial recognition and
measurement, subsequent measurement and accounting and disclosure of assets and
liabilities arising from contingencies in a business combination. In
circumstances where the acquisition-date fair value for a contingency cannot be
determined during the measurement period and it is concluded that it is probable
that an asset or liability exists as of the acquisition date and the amount can
be reasonably estimated, a contingency is recognized as of the acquisition date
based on the estimated amount. ASC 805-20 is effective for assets or liabilities
arising from contingencies in business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. We will apply the provisions of ASC 805-20
to our acquisitions when they occur.
Effective
April 1, 2009, the Company adopted FASB ASC 855-10, Subsequent Events – Overall
(“ASC 855-10”). ASC 855-10 establishes general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. It requires
the disclosure of the date through which an entity has evaluated subsequent
events and the basis for that date – that is, whether that date represents the
date the financial statements were issued or were available to be
issued. This disclosure should alert all users of financial statements that
an entity has not evaluated subsequent events after that date in the set of
financial statements being presented. Adoption of ASC 855-10 did not have a
material impact on the Company’s consolidated results of operations or financial
condition.
2.
Basic and Diluted Net Income Per Share
We
compute net income per share in accordance with ASC 260, “Earnings per Share.”
Basic net income per share is computed by dividing net income attributable to
common stockholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period. Diluted net income per share gives
effect to all dilutive potential common shares outstanding during the period
including stock options and warrants using the treasury stock
method.
The
following is a reconciliation of the weighted average number of common shares
used to calculate basic net income per share to the weighted average common and
potential common shares used to calculate diluted net income per share for the
three and nine months ended September 30, 2009 and 2008 (in thousands,
except per share data):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income: basic and diluted
|
|
$ |
(3,853 |
) |
|
$ |
1,256 |
|
|
$ |
(9,926 |
) |
|
$ |
4,715 |
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
common shares outstanding
|
|
|
22,280 |
|
|
|
21,664 |
|
|
|
22,021 |
|
|
|
21,394 |
|
Less:
unvested common shares subject to repurchase
|
|
|
(33 |
) |
|
|
(34 |
) |
|
|
(33 |
) |
|
|
(34 |
) |
Total
shares: basic
|
|
|
22,247 |
|
|
|
21,630 |
|
|
|
21,988 |
|
|
|
21,360 |
|
Add:
stock options and warrants outstanding, if dilutive
|
|
|
- |
|
|
|
1,096 |
|
|
|
- |
|
|
|
985 |
|
Add:
shares subject to repurchase, if dilutive
|
|
|
- |
|
|
|
34 |
|
|
|
- |
|
|
|
34 |
|
Total
shares: diluted
|
|
|
22,247 |
|
|
|
22,760 |
|
|
|
21,988 |
|
|
|
22,379 |
|
Basic
earnings per share
|
|
$ |
(0.17 |
) |
|
$ |
0.06 |
|
|
$ |
(0.45 |
) |
|
$ |
0.22 |
|
Diluted
earnings per share
|
|
$ |
(0.17 |
) |
|
$ |
0.06 |
|
|
$ |
(0.45 |
) |
|
$ |
0.21 |
|
For the
three and nine months ended September 30, 2009 and 2008, employee stock
options to purchase the following numbers of shares of common stock were
excluded from the computation of diluted net income per share as their effect
would be anti-dilutive (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Shares
excluded from the computation of diluted net income per
share
|
|
|
1,822 |
|
|
|
1,828 |
|
|
|
2,480 |
|
|
|
2,215 |
|
3.
Stock-Based Compensation
We have
adopted stock plans that provide for grants to employees of equity-based awards,
which include stock options and restricted stock. In addition, we have an
Employee Stock Purchase Plan (“ESPP”) that allows employees to purchase our
common stock at a discount through payroll deductions. The estimated fair value
of our equity-based awards, less expected forfeitures, is amortized over the
awards’ service period. We also grant stock options and restricted stock to new
employees in accordance with Nasdaq Marketplace rule 5635(c)(4) as an inducement
material to the new employee’s entering into employment with the
Company.
The
following table summarizes stock-based compensation expense recorded for the
periods presented (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cost
of revenue
|
|
$ |
164 |
|
|
$ |
231 |
|
|
$ |
519 |
|
|
$ |
837 |
|
Research
and development
|
|
|
3,733 |
|
|
|
2,739 |
|
|
|
9,345 |
|
|
|
6,534 |
|
Selling,
general and administrative
|
|
|
2,555 |
|
|
|
1,612 |
|
|
|
6,906 |
|
|
|
4,186 |
|
Total
stock-based compensation expense
|
|
$ |
6,452 |
|
|
$ |
4,582 |
|
|
$ |
16,770 |
|
|
$ |
11,557 |
|
In
addition, we capitalized approximately $0.2 million and $0.2 million of
stock-based compensation in inventory as of September 30, 2009 and
December 31, 2008, respectively, which represented indirect manufacturing
costs related to our inventory.
Stock
Options
The
exercise price of each stock option generally equals the market price of our
common stock on the date of grant. Most options vest over four years and expire
no later than ten years from the grant date. During the three and nine months
ended September 30, 2009 we granted stock options to purchase approximately
52,000 and 311,000 shares of common stock, respectively. During the three and
nine months ended September 30, 2008, we granted stock options to purchase
approximately 70,000 and 327,000 shares of common stock, respectively. As of
September 30, 2009 there was approximately $18.1 million of total
unrecognized compensation cost related to unvested stock options granted and
outstanding with a weighted average remaining vesting period of 1.92
years.
Restricted
Stock
During
the three and nine months ended September 30, 2009 we granted restricted
stock units representing the future right to acquire approximately 163,000 and
482,000 shares of common stock, respectively. During the three and nine months
ended September 30, 2008, we granted restricted stock units representing
the right to acquire approximately 177,000 and 425,000 shares of common stock,
respectively. These awards vest over the requisite service period, which ranges
from two to four years. The fair value of the restricted stock was determined
using the fair value of our common stock on the date of the grant. The fair
value of the restricted stock is being amortized on a straight-line basis over
the service period, and is reduced for estimated forfeitures. As of
September 30, 2009, there was approximately $20.3 million of total
unrecognized compensation cost related to unvested restricted stock granted
which is expected to be recognized over a weighted average period of 2.52
years.
Employee
Stock Purchase Plan
Our ESPP
provides that eligible employees may purchase up to $25,000 worth of our common
stock annually over the course of two six-month offering periods. The purchase
price to be paid by participants is 85% of the price per share of our common
stock either at the beginning or the end of each six-month offering period,
whichever is less.
Valuation
Assumptions
The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. This model was developed for use in
estimating the value of publicly traded options that have no vesting
restrictions and are fully transferable. Our employee stock options have
characteristics significantly different from those of publicly traded options as
they have vesting requirements and are not fully transferable. The weighted
average assumptions used in the model are outlined in the following
table:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Stock
Option Plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
2.44 |
% |
|
|
3.33 |
% |
|
|
1.97 |
% |
|
|
3.15 |
% |
Expected
life of options (in years)
|
|
|
5.41 |
|
|
|
5.61 |
|
|
|
5.82 |
|
|
|
5.34 |
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility
|
|
|
56 |
% |
|
|
55 |
% |
|
|
60 |
% |
|
|
58 |
% |
Weighted
average fair value
|
|
$ |
20.49 |
|
|
$ |
17.29 |
|
|
$ |
13.70 |
|
|
$ |
15.47 |
|
Employee
Stock Purchase Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
0.33 |
% |
|
|
2.13 |
% |
|
|
0.30 |
% |
|
|
2.75 |
% |
Expected
life of options (in years)
|
|
|
0.50 |
|
|
|
0.50 |
|
|
|
0.49 |
|
|
|
0.50 |
|
Expected
dividend yield
|
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Volatility
|
|
|
75 |
% |
|
|
51 |
% |
|
|
75 |
% |
|
|
51 |
% |
Weighted
average fair value
|
|
$ |
13.25 |
|
|
$ |
10.22 |
|
|
$ |
9.93 |
|
|
$ |
9.71 |
|
The
computation of the expected volatility assumption used in the Black-Scholes
calculations for new grants is based on a combination of historical and implied
volatilities. When establishing the expected life assumption, we review on a
semi-annual basis the historical employee exercise behavior with respect to
option grants with similar vesting periods.
4.
Income Taxes
During
the three months ended September 30, 2009 and 2008, we recorded an income
tax benefit of $0.8 million and $0.2 million, respectively. The effective
tax rate for the three months ended September 30, 2009 was primarily driven
by a rate differential for book income generated in foreign jurisdictions and
book losses generated in the United States. Included in the benefit
from income taxes for the three months ended September 30, 2009 were charges
totaling $423,000 to correct a tax benefit previously
recognized for the six months ended June 30, 2009. The adjustment related
to disqualifying dispositions of incentive stock options during the quarter
ended June 30, 2009. Management assessed the materiality of this
error on the prior quarter’s financial statements and concluded the error was
not material to the prior or current interim periods.
At
January 1, 2009 and September 30, 2009, we had $15.2 million and $16.2
million of unrecognized tax benefits. Approximately $14.0 million of the balance
as of September 30, 2009 would affect our effective tax rate if
recognized.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of September 30, 2009, we had $1.0 million of accrued
interest and zero penalties related to uncertain tax positions.
The tax
years 1997-2008 remain open to examination by one or more of the major taxing
jurisdictions in which we are subject to taxation on our taxable income. We do
not anticipate that total unrecognized tax benefits will significantly change
due to the settlement of audits and the expiration of statute of limitations
prior to September 30, 2010.
In
February 2009, the California 2009-2010 budget legislature was enacted into law,
allowing companies to elect for income tax purposes to apply a single sales
factor apportionment for years beginning after January 1, 2011. Based
on our anticipated election, we determined a need to establish a valuation
allowance for certain deferred tax assets totaling $3.0 million during the nine
months ended September 30, 2009.
5.
Business Combination
Integrated
Device Technology, Inc., Network Search Engine Business
On
July 17, 2009, we purchased intellectual property and other assets relating
to the network search engine business of Integrated Device Technology, Inc., or
IDT, which we refer to as the “IDT NSE Acquisition”, for $100 million,
pursuant to an Asset Purchase Agreement dated April 30, 2009. We acquired
the IDT NSE Assets to further expand our existing portfolio of knowledge-based
processors and, NETLite processors and netwrok search engines, and to further
strengthen the relationships with our customer base. In October
2009, we received a refund of $1.8 million from IDT based on the final
determination of the actual inventory received.
Allocation
of Consideration Transferred
The
acquisition was accounted for as a business combination under ASC 805 Business
Combinations. The estimated total purchase price of $98.2 million was allocated
to the net tangible and intangible assets based on their fair values as of the
date of the completion of the acquisition as follows (in
thousands):
Inventory
|
|
$ |
13,256 |
|
Amortizable
intangible assets:
|
|
|
|
|
Composite
intangible assets
|
|
|
62,800 |
|
Supply
agreement
|
|
|
872 |
|
Goodwill
|
|
|
21,253 |
|
Total
|
|
$ |
98,181 |
|
As of the
effective date of the acquisition, inventories are required to be measured at
fair value. The preliminary fair value of inventory of $13.3 million was based
on assumptions applied to the IDT NSE inventory acquired. In estimating the fair
value of the inventory, we made assumptions about projected selling prices and
the remaining selling and manufacturing efforts associated with the inventory.
We assumed that (1) selling prices would yield gross margins of
approximately 3.1%, (2) $4.0 million of remaining selling and manufacturing
efforts associated with the inventory, and (3) a profit allowance of $0.5
million (based on management’s assumption of a reasonable margin).
In
conjunction with the IDT NSE Acquisition, we entered into a supply agreement
with IDT. The supply agreement allows us to source certain finished product from
IDT generally at its cost for a contracted period of time. IDT's pricing to us
was considered to be below market price in most cases. Accordingly,
the Company recorded an asset upon the signing of the agreement representing the
difference between IDT prices and estimated market prices for those products
based on quantities we currently estimate we will purchase under the supply
agreement. We will amortize the asset associated with the supply
agreement and increase our inventory carrying value as products are purchased
under the supply agreement. See Note 9 for activity in the supply
agreement asset.
Composite
intangible assets consist of products which have reached technological
feasibility and include search accelerator, network search engine and route
accelerator product families. The value of the developed technology was
determined by discounting estimated net future cash flows of these products.
Composite intangible assets are comprised of acquired IDT existing technology
and customer relationships. Because no future products were planned in the
business acquired, and market participants would continue to sell products
solely under existing relationships until the products are obsolete, both
components of the asset are deemed to have the same useful lives and treated as
a composite asset. There are six composite assets, each represented by a product
line with its own fair value supported by an underlying cashflow projection.
Their respective useful lives of two to nine years are based on the period of
remaining significant cashflow streams by product. We are amortizing these
composite intangible assets on a straight-line basis over the respective
estimated lives. Amortization of composite intangible assets has been included
in cost of revenue.
Of the
total estimated purchase price paid at the time of acquisition, approximately
$21.3 million has been allocated to goodwill. Goodwill represents the excess of
the purchase price of an acquired business over the fair value of the underlying
net tangible and intangible assets and which is only partially deductible for
tax purposes based on the tax jurisdiction. Among the factors that contributed
to a purchase price in excess of the fair value of the net tangible and
intangible assets were expected benefits from economies of scale by combining
the IDT NSE Assets with our business. In accordance with ASC 350 Intangibles –
Goodwill and Other, goodwill will not be amortized but instead be tested for
impairment at least annually and more frequently if certain indicators of
impairment are present. In the event that management determines that the value
of goodwill has become impaired, we will record an impairment charge during the
fiscal quarter in which the determination is made.
Results
of Operations
The amount of
revenue included in our condensed consolidated statement of operations from the
IDT NSE acquisition date to the period ended September 30, 2009 (in
thousands):
Supplemental
Pro Forma Data for IDT NSE Acquisition
The
following table presents the unaudited pro forma results of the Company as
though the IDT NSE acquisition described above occurred at the beginning of the
periods indicated. Adjustments have been made for the estimated amortization of
intangibles, amortization of deferred charges, accretion of debt discounts,
estimated interest expense in connection with debt financing of the acquisition,
and the income tax impact of the pro forma adjustments. The pro forma
information presented does not purport to be indicative of the results that
would have been achieved had the acquisition been made as of those dates nor of
the results which may occur in the future.
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
$ |
42,314 |
|
|
$ |
51,274 |
|
|
$ |
125,568 |
|
|
$ |
164,394 |
|
Net
Income
|
|
|
(3,853 |
) |
|
|
(8,305 |
) |
|
|
(23,297 |
) |
|
|
(8,044 |
) |
Net
Income per share - basic
|
|
|
(0.17 |
) |
|
|
(0.38 |
) |
|
|
(1.06 |
) |
|
|
(0.38 |
) |
Net
Income per share - diluted
|
|
|
(0.17 |
) |
|
|
(0.38 |
) |
|
|
(1.06 |
) |
|
|
(0.38 |
) |
Pending Acquisiton of RMI
Corporation
On June 1, 2009,
pursuant to the Agreement and Plan of Merger Reorganization by and among
NetLogic, Roadster Merger Corporation, RMI Corporation and WP VIII
Representative LLC dated as of May 31, 2009, we loaned $15.0 million to RMI, who
delivered to us a secured promissory note, or Note, due November 30, 2010
bearing interest at a 10% annual rate. The $15.0 million loan to RMI was
reported within “Other assets” balance on the consolidated balance sheet as of
September 30, 2009. We recorded interest income of $375,000 and $500,000
for the three and nine month period ended September 30, 2009. On
October 30, 2009, we completed the acquistion of RMI Corporation. See Note
16, Subsequent Events,
below for further discussion related to our acquisition of RMI
Corporation.
Aeluros,
Inc.
In
October 2007, we acquired all outstanding equity securities of Aeluros,
Inc. (“Aeluros”) a privately-held, fabless provider of industry-leading
10-Gigabit Ethernet physical layer products (“PLPs”). The PLP family extended
our product offerings to the physical layer, or Layer 1, of the Open Systems
Interconnection (“OSI”) reference model, which is a layered abstract description
for communications and computer network protocol design developed as part of the
Open Systems Interconnection initiative. The physical layer provides the
physical and electrical means for transmitting data between different nodes on a
network. We paid $57.1 million in cash. During the fourth quarter of fiscal
2008, we became obligated to pay an additional $15.5 million in cash to the
former Aeluros stockholders due to our attainment of post-acquisition revenue
milestones, subject to certain adjustments as provided in the Aeluros
acquisition agreement. The additional consideration was included in goodwill and
accrued liabilities at December 31, 2008, and was paid to the former
Aeluros stockholders in February 2009. The results of operations relating to
Aeluros have been included in our results of operations since the acquisition
date.
6.
Goodwill and Intangible Assets
The
following table summarizes the components of goodwill, other intangible assets
and related accumulated amortization balances, which were recorded as a result
of prior business combinations (in thousands):
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
Goodwill
|
|
$ |
89,965 |
|
|
$ |
- |
|
|
$ |
89,965 |
|
|
$ |
68,712 |
|
|
$ |
- |
|
|
$ |
68,712 |
|
Other
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Developed
technology
|
|
$ |
34,180 |
|
|
$ |
(17,660 |
) |
|
$ |
16,520 |
|
|
$ |
34,180 |
|
|
$ |
(11,668 |
) |
|
$ |
22,512 |
|
Composite
intangible asset
|
|
|
74,046 |
|
|
|
(7,656 |
) |
|
|
66,390 |
|
|
|
11,246 |
|
|
|
(3,749 |
) |
|
|
7,497 |
|
Patents
and core technology
|
|
|
5,590 |
|
|
|
(2,164 |
) |
|
|
3,426 |
|
|
|
5,590 |
|
|
|
(1,325 |
) |
|
|
4,265 |
|
Customer
relationships
|
|
|
6,900 |
|
|
|
(2,671 |
) |
|
|
4,229 |
|
|
|
6,900 |
|
|
|
(1,636 |
) |
|
|
5,264 |
|
Supply
agreement
|
|
|
872 |
|
|
|
(26 |
) |
|
|
846 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
121,588 |
|
|
$ |
(30,177 |
) |
|
$ |
91,411 |
|
|
$ |
57,916 |
|
|
$ |
(18,378 |
) |
|
$ |
39,538 |
|
For the
nine months ended September 30, 2009, goodwill increased by $21.3 million due to
our IDT NSE acquisition.
As of
September 30, 2009 and December 31, 2008, goodwill represented
approximately 31% and 28% of our total assets.
For the
nine months ended September 30, 2009 and 2008, amortization expense related
to intangible assets was $11.8 million. The amortization expense related to
intangible assets was included in cost of sales because it related to products
sold during such periods, except for the amortization of the customer
relationships of $1.0 million for the nine months ended September 30, 2009
and 2008, which was included in selling, general and administrative
expenses.
As of
September 30, 2009, the estimated future amortization expense of intangible
assets in the table above is as follows, excluding the supply agreement asset.
(in thousands):
Fiscal
Year Ending
|
|
Estimated
Amortization
|
|
2009
(remaining 3 months)
|
|
$ |
5,526 |
|
2010
|
|
|
22,103 |
|
2011
|
|
|
18,800 |
|
2012
|
|
|
11,240 |
|
2013
|
|
|
8,455 |
|
Thereafter
|
|
|
24,441 |
|
Total
|
|
$ |
90,565 |
|
7.
Cash, Cash Equivalents and Short-Term Investments
As of
September 30, 2009 our cash balance was $33.4 million and we did not have
available-for-sale investments. The following is a summary of
available-for-sale investments as of December 31, 2008 (in
thousands):
|
|
December
31, 2008
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Losses
|
|
|
Estimated
Fair
Value
|
|
U.S.
government agency securities
|
|
$ |
16,413 |
|
|
$ |
40 |
|
|
$ |
- |
|
|
$ |
16,453 |
|
Corporate
commercial paper
|
|
|
2,944 |
|
|
|
4 |
|
|
|
- |
|
|
|
2,948 |
|
Money
market funds
|
|
|
61,717 |
|
|
|
- |
|
|
|
- |
|
|
|
61,717 |
|
Total
|
|
$ |
81,074 |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
81,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported
as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
68,047 |
|
|
$ |
4 |
|
|
$ |
- |
|
|
$ |
68,051 |
|
Short-term
investments
|
|
|
13,027 |
|
|
|
40 |
|
|
|
- |
|
|
|
13,067 |
|
Total
|
|
$ |
81,074 |
|
|
$ |
44 |
|
|
$ |
- |
|
|
$ |
81,118 |
|
The fair
value of the Company’s investments at September 30, 2009 and
December 31, 2008, by contractual maturity, was as follows (in
thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Due
in 1 year or less
|
|
$ |
- |
|
|
$ |
19,401 |
|
Net
unrealized holding gains and losses on available-for-sale investments were
included as a separate component of stockholders’ equity.
8.
Fair Value Measurements
ASC 820
defines fair value as the price that would be received from selling an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date. When determining the fair value
measurements for assets and liabilities required or permitted to be recorded at
fair value, we consider the principal or most advantageous market in which we
would transact and consider assumptions that market participants would use when
pricing the asset or liability, such as inherent risk, transfer restrictions,
and risk of nonperformance.
Fair
Value Hierarchy
ASC 820
establishes a fair value hierarchy that requires an entity to maximize the use
of observable inputs and minimize the use of unobservable inputs when measuring
fair value. A financial instrument’s categorization within the fair value
hierarchy is based upon the lowest level of input that is significant to the
fair value measurement. ASC 820 establishes three levels of inputs that may be
used to measure fair value:
Level 1 – Quoted prices in
active markets for identical assets or liabilities.
Level 2 – Observable inputs
other than Level 1 prices such as quoted prices for similar assets or
liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs
to the valuation methodology that are significant to the measurement of fair
value of assets or liabilities.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
We
measure our financial assets, specifically its cash equivalents and short-term
investments, at fair value on a recurring basis. We do not have any financial
liabilities that are measured at fair value on a recurring basis. As of
September 30, 2009 our cash balance was $33.4 million, and we did not have cash
equivalents or short-term investments. The fair value of these
financial assets was determined using the following inputs as of
December 31, 2008 (in thousands):
|
|
|
|
|
Fair
Value Measurements at December 31, 2008 Using
|
|
|
|
Total
|
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level
1)
|
|
|
Significant
Other
Observable
Inputs
(Level
2)
|
|
|
Significant
Other
Unobservable
Inputs
(Level
3)
|
|
Money
market funds (1)
|
|
$ |
61,717 |
|
|
$ |
61,717 |
|
|
$ |
- |
|
|
$ |
- |
|
U.S.
government agency securities (2)
|
|
|
16,453 |
|
|
|
- |
|
|
|
16,453 |
|
|
|
- |
|
Corporate
commercial paper (3)
|
|
|
2,948 |
|
|
|
- |
|
|
|
2,948 |
|
|
|
- |
|
Total
|
|
$ |
81,118 |
|
|
$ |
61,717 |
|
|
$ |
19,401 |
|
|
$ |
- |
|
|
(1 |
) |
Included
in cash and cash equivalents on the condensed consolidated balance
sheet.
|
|
(2 |
) |
$6.3
million of which is included in cash and cash equivalents and $10.1
million of which is included in short-term investments on the condensed
consolidated balance sheet.
|
|
(3 |
) |
Included
in short-term investments on the condensed consolidated balance
sheet.
|
9.
Balance Sheet Components
The
components of our inventory at September 30, 2009 and December 31,
2008 were as follows (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Inventories:
|
|
|
|
|
|
|
Finished
goods
|
|
$ |
8,031 |
|
|
$ |
8,170 |
|
Work-in-progress
|
|
|
13,498 |
|
|
|
5,537 |
|
|
|
$ |
21,529 |
|
|
$ |
13,707 |
|
The
components of our supply agreement, included in intangible assets, at
September 30, 2009 and December 31, 2008 were as follows (in
thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Supply
Agreement:
|
|
|
|
|
|
|
Balance
at beginning of the period
|
|
$ |
872 |
|
|
$ |
- |
|
Adjustment
for inventory received
|
|
|
(26 |
) |
|
|
- |
|
Balance
at end of the period
|
|
$ |
846 |
|
|
$ |
- |
|
The
components of our accrued liabilities at September 30, 2009 and
December 31, 2008 were as follows (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Accrued
Liabilities:
|
|
|
|
|
|
|
Acrrued
payroll and related expenses
|
|
$ |
6,223 |
|
|
$ |
4,784 |
|
Accrued
accounts payable
|
|
|
2,262 |
|
|
|
131 |
|
Accrued
inventory purchases
|
|
|
3,521 |
|
|
|
729 |
|
Accrued
warranty
|
|
|
1,359 |
|
|
|
1,445 |
|
Accrual
for Aeluros earn-out based on post-acquisition revenue
milestone
|
|
|
- |
|
|
|
15,501 |
|
Other
accrued expenses
|
|
|
4,778 |
|
|
|
3,330 |
|
|
|
$ |
18,143 |
|
|
$ |
25,920 |
|
10.
Product Warranties
We
provide a limited product warranty from one to three years from the date of
sale. We provide for the estimated future costs of repair or replacement upon
shipment of the product. Our warranty accrual is estimated based on actual and
historical claims compared to historical revenue and assumes that we have to
replace products subject to a claim. The following table summarizes activity
related to product warranty liability during the three and nine months ended
September 30, 2009 and 2008 (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Warranty
Accrual: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,366 |
|
|
$ |
1,419 |
|
|
$ |
1,445 |
|
|
$ |
1,512 |
|
Provision
for warranty
|
|
|
33 |
|
|
|
84 |
|
|
|
69 |
|
|
|
712 |
|
Settlements
made during the period
|
|
|
(40 |
) |
|
|
(41 |
) |
|
|
(155 |
) |
|
|
(762 |
) |
Ending
balance
|
|
$ |
1,359 |
|
|
$ |
1,462 |
|
|
$ |
1,359 |
|
|
$ |
1,462 |
|
During
the first two quarters of 2006, we provided an additional warranty reserve of
$0.9 million to address a warranty issue related to specific devices sold to one
of our international customers. The devices were tested by both us and the
customer and passed quality assurance inspection at the time they were sold. The
customer subsequently identified malfunctioning systems that included our
devices. No specific warranty reserve was provided for additional units shipped
subsequent to September 30, 2006 as the customer modified the software
associated with its products to remedy the observed malfunction. As of
September 30, 2009, we maintained $0.7 million of warranty reserves for
anticipated replacement costs of the parts sold to this customer.
We
entered into a master purchase agreement with Cisco in November 2005 under which
we provided Cisco and its contract manufacturers a warranty period of as much as
five years (in the case of epidemic failure). The extended warranty period in
the master purchase agreement with Cisco has not had a material impact on our
results of operations or financial condition based on our warranty analysis,
which included an evaluation of our historical warranty cost information and
experience.
11.
Commitments and Contingencies
The
Company leases its facilities under non-cancelable operating leases, which
contain renewal options and escalation clauses, and expires through 2011. The
Company also acquires certain assets under software licenses.
Future
minimum commitments under non-cancelable software licenses and operating leases
agreements, which include common area maintenance charges as of
September 30, 2009, were as follows (in thousands):
|
|
Software
licenses
and
other
obligations
|
|
|
Operating
Leases
|
|
|
Total
|
|
2009
|
|
$ |
122 |
|
|
$ |
253 |
|
|
$ |
375 |
|
2010
|
|
|
1,583 |
|
|
|
1,021 |
|
|
|
2,604 |
|
2011
|
|
|
1,139 |
|
|
|
516 |
|
|
|
1,655 |
|
2012
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
2013
and thereafter
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
2,844 |
|
|
$ |
1,790 |
|
|
$ |
4,634 |
|
Less:
Interest component
|
|
|
(91 |
) |
|
|
|
|
|
|
|
|
Present
value of minimum payments
|
|
|
2,753 |
|
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
(1,608 |
) |
|
|
|
|
|
|
|
|
Long-term
portion of obligations
|
|
$ |
1,145 |
|
|
|
|
|
|
|
|
|
Purchase
Commitments
At
September 30, 2009, we had approximately $13.8 million in firm,
non-cancelable and unconditional purchase commitments with
suppliers.
Contingencies
From time
to time we are party to claims and litigation proceedings arising in the normal
course of business. Currently, we do not believe that there are any claims or
litigation proceeds involving matters that will result in the payment of
monetary damages, net of any applicable insurance proceeds, that, in the
aggregate, would be material in relation to our business, financial position,
results of operations or cash flows. There can be no assurance, however, that
any such matters will be resolved without costly litigation, in a manner that is
not adverse to our business, financial position, results of operations or cash
flows, or without requiring royalty payments in the future that may adversely
impact gross margins.
Indemnities,
Commitments and Guarantees
In the
normal course of business, we have made certain indemnities, commitments and
guarantees under which we may be required to make payments in relation to
certain transactions. These include agreements to indemnify our customers with
respect to liabilities associated with the infringement of other parties’
technology based upon our products, obligation to indemnify our lessors under
facility lease agreements, and obligation to indemnify our directors and
officers to the maximum extent permitted under the laws of the state of
Delaware. The duration of such indemnification obligations, commitments and
guarantees varies and, in certain cases, is indefinite. We have not recorded any
liability for any such indemnification obligations, commitments and
guarantees in the accompanying balance sheets. We do, however, accrue for
losses for any known contingent liability, including those that may arise from
indemnification provisions, when future payment is estimable and
probable.
Under
master purchase agreements signed with Cisco in November 2005, we have agreed to
indemnify Cisco for costs incurred in rectifying epidemic failures, up to the
greater of (on a per claim basis) 25% of all amounts paid to us by Cisco during
the preceding 12 months (approximately $11.8 million at September 30, 2009)
or $9.0 million, plus replacement costs. If we are required to make payments
under the indemnity, our operating results may be adversely
affected.
12.
Comprehensive (Loss) Income
Comprehensive
(loss) income is defined as the change in equity of a business enterprise during
a period from transactions and other events and circumstances from non-owner
sources. The components of comprehensive income were as follows (in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net
(loss) income
|
|
$ |
(3,853 |
) |
|
$ |
1,256 |
|
|
$ |
(9,926 |
) |
|
$ |
4,715 |
|
Currency
translation adjustments
|
|
|
- |
|
|
|
(2 |
) |
|
|
53 |
|
|
|
(24 |
) |
Change
in unrealized gain/loss on short term investments
|
|
|
- |
|
|
|
(16 |
) |
|
|
(40 |
) |
|
|
(16 |
) |
Comprehensive
(loss) income
|
|
$ |
(3,853 |
) |
|
$ |
1,238 |
|
|
$ |
(9,913 |
) |
|
$ |
4,675 |
|
13.
Related Party Transactions
We lease
our headquarters facility in Mountain View, California from an affiliate of
Berg & Berg Enterprises, LLC, which holds shares of our common stock.
We made lease payments under this lease agreement of $253,000 and $356,000 for
the three months ended September 30, 2009 and 2008, respectively, and
$749,000 and $759,000 for the nine months ended September 30, 2009 and
2008, respectively.
14.
Operating Segments and Geographic Information
We
operate as one operating and reportable segment and sell our products directly
to customers in North America, Asia and Europe. Revenue percentages for the
geographic regions reported below were based upon the customer headquarter
locations. Following is a summary of the geographic information related to
revenues for the three and nine months ended September 30, 2009 and 2008
(in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenue:
|
|
|
|
|
|
|
United
States
|
|
|
29 |
% |
|
|
28 |
% |
|
|
30 |
% |
|
|
31 |
% |
Malaysia
|
|
|
32 |
% |
|
|
30 |
% |
|
|
31 |
% |
|
|
32 |
% |
China
|
|
|
24 |
% |
|
|
27 |
% |
|
|
23 |
% |
|
|
23 |
% |
Other
|
|
|
15 |
% |
|
|
15 |
% |
|
|
16 |
% |
|
|
14 |
% |
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
The
following table summarizes customers comprising 10% or more of our gross account
receivable for the periods indicated:
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
Wintec
Industries Inc
|
|
|
56 |
% |
|
|
48 |
% |
Huawei
Technologies Co., Ltd
|
|
|
20 |
% |
|
|
* |
|
Celestica
Corporation
|
|
|
* |
|
|
|
15 |
% |
Sanmina
Corporation
|
|
|
* |
|
|
|
12 |
% |
Jabil
Circuit Incorporated
|
|
|
* |
|
|
|
11 |
% |
*
|
Less
than 10% of gross account
receivable
|
The
following table summarizes customers comprising 10% or more of our revenue for
the periods indicated:
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cisco
|
|
|
40 |
% |
|
|
36 |
% |
|
|
36 |
% |
|
|
39 |
% |
Alcatel-Lucent
|
|
|
15 |
% |
|
|
10 |
% |
|
|
15 |
% |
|
|
10 |
% |
Huawei
Technologies Co., Ltd
|
|
|
* |
|
|
|
* |
|
|
|
10 |
% |
|
|
* |
|
*
|
Less
than 10% of revenue
|
15.
Credit Facility
On
June 19, 2009, we and our material subsidiaries entered into a credit
agreement with a group of lenders led by Silicon Valley Bank to provide $55
million of new credit facilities for a term of three years. The credit
facilities consist of a $25.0 million senior secured revolving credit facility
and $30.0 million of senior secured term loans. The credit agreement is secured
by substantially all of our assets and the assets of our material subsidiaries.
The credit facilities can be prepaid (in whole or in part) and terminated at any
time without premium or penalty.
The net
proceeds of the senior secured term loans were used to finance a portion of the
IDT NSE Acquisition. In addition to the senior secured term loans,
during the three months ended September 30, 2009, the Company drew $7.0 million
from the $25.0 million senior secured revolving credit facility to finance a
small portion of the acquisition. We may draw additional proceeds from the
senior secured revolving credit facility in the future for ongoing working
capital and other general corporate purposes. As of September 30,
2009, $1.0 million was outstanding under the senior secured revolving credit
facility. No amount was outstanding under the senior secured revolving credit
facility as of June 30, 2009.
Any
borrowings under the credit facility will, at our option, bear interest either
at an annual rate equal to (a) the higher of the Silicon Valley Bank
announced prime rate or the Federal Funds Effective Rate plus 0.50% plus a
margin ranging from 0.50% to 1.75% based on the ratio of our reported total
consolidated debt to our consolidated EBITDA, or (b) Eurodollar borrowings
based on the applicable LIBOR interest period (with a LIBOR floor of 1.50%),
plus a margin ranging from 3.00% to 4.00% based on the ratio of our reported
total consolidated debt to our consolidated EBITDA. The revolving credit
facility has an unused line fee payable on the undrawn revolving credit facility
amount set at a rate per annum ranging from 0.30% to 0.50% determined based on
the ratio of our total consolidated debt to our consolidated
EBITDA.
As of
September 30, 2009, the current portion of the liability associated with the
senior secured term loans of $9.8 million, net of the debt discount of $0.2
million, is reported as “Term notes, current”, and the long-term portion of the
liability associated with the senior secured term loans of $17.4 million, net of
the debt discount of $0.1 million is reported as “Line of credit and term notes,
long-term” on the Condensed Consolidated Balance Sheet. The estimated
fair value of the term loan is its carrying value as of September 30,
2009.
Direct
fees and expenses totaling $0.8 million associated with the credit facility
have been capitalized as deferred financing costs, with $0.1 million
amortized as of September 30, 2009. As of September 30, 2009, the long-term
portion of the deferred financing costs was $0.7 million, and is reported
within “Other assets” on the Condensed Consolidated Balance Sheet. The debt fees
capitalized are related to the credit facility. The deferred financing costs are
being amortized using the effective interest method over the three-year term of
the debt. During the three months ended September 30, 2009, we paid
$2.5 million towards the principal of the credit facility.
The senior
secured credit facility includes several quarterly financial covenants and
customary operating covenants, including the following:
|
•
|
|
a
covenant requiring us to maintain the ratio of our total consolidated debt
to our consolidated EBITDA within specified limits, specifically (for the
four trailing quarters ended on the applicable date) 2.25:1 (through March
31, 2010), 2.00:1 (from June 30, 2010 through September 30,
2010) and 1.75:1 (thereafter);
|
|
•
|
|
a
minimum fixed charge covenant regarding the ratio of our consolidated
EBITDA less our capital expenditures to our consolidated interest expense
and other fixed charges to be no less than 1.25:1 at quarter
end;
|
|
•
|
|
a
minimum consolidated quick ratio covenant regarding our consolidated cash
and cash equivalents plus accounts receivable to our consolidated current
liabilities to be no less than 1:1 at quarter end (beginning with the
quarter ending December 31, 2009);
and
|
|
•
|
|
a
covenant requiring us and our subsidiaries to maintain at all times at
least $20 million of unencumbered cash and cash
equivalents.
|
We were
in compliance with the debt covenants under the credit agreement as of
September 30, 2009.
16.
Subsequent Events
On
October 30, 2009, we completed the acquisition of RMI Corporation, a provider of
high-performance and low-power multi-core, multi-threaded processors.
Pursuant to the Agreement and Plan of Merger Reorganization by and among
NetLogic, Roadster Merger Corporation, RMI Corporation and WP VIII
Representative LLC dated as of May 31, 2009, or the merger agreement, on October
30, 2009, Roadster Merger Corporation was merged with and into RMI Corporation,
which now is a wholly-owned subsidiary of NetLogic, and NetLogic delivered
merger consideration of approximately 5.0 million shares of NetLogic common
stock and $12.6 million cash to the paying agent for distribution to the holders
of RMI Corporation capital stock. Approximately 10% of the shares of
NetLogic common stock are being held in escrow as security for claims and
expenses that might arise during the first 12 months following the closing
date.
NetLogic
may be required to pay up to an additional 1.6 million shares of common stock
and $15.9 million cash to the former holders of RMI capital stock as earn-out
consideration based upon achieving specified percentages of revenue targets for
either the 12-month period from October 1, 2009 through September 30, 2010, or
the 12-month period from November 1, 2009 through October 31, 2010, whichever
period results in the higher percentage of the revenue target. The
additional earn-out consideration, if any, net of applicable indemnity claims,
will be paid on or before December 31, 2010.
Forward-looking
Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, which include, without
limitation, statements about the market for our technology, our strategy and
competition. Such statements are based upon current expectations that involve
risks and uncertainties. Any statements contained herein that are not statements
of historical fact may be deemed forward-looking statements. For example, the
words “believes”, “anticipates”, “plans”, “expects”, “intends” and similar
expressions are intended to identify forward-looking statements. In addition,
all the information under Item 3 below constitutes a forward-looking
statement. Our actual results and the timing of certain events may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a discrepancy include, but are not limited to,
those discussed in “Business”, “Risk Factors”, “Management’s Discussion and
Analysis of Financial Condition and Results of Operation” and “Qualitative and
Quantitative Disclosures About Market Risk” in our Annual Report on Form 10-K
filed with the Securities and Exchange Commission on March 4, 2009, under
“Management’s discussion and Analysis of Financial Condition and Results of
Operations” and “Risk Factors” in our quarterly report filed with the Securities
and Exchange Commission on May 5, 2009, under “Management’s discussion and
Analysis of Financial Condition and Results of Operations” and “Risk Factors”
below, and under “Risk Factors” in the preliminary proxy statement filed by us
on Schedule 14A with the Securities and Exchange Commission on
July 24, 2009. All forward-looking statements in this document are based on
information available to us as of the date of this report and we assume no
obligation to update any such forward-looking statements. The following
discussion should be read in conjunction with our condensed financial statements
and the accompanying notes contained in this quarterly report, except as
required by law. Unless expressly stated or the context otherwise requires, the
terms “we”, “our”, “us” and “NetLogic Microsystems” refer to NetLogic
Microsystems, Inc.
Overview
We are a
semiconductor company that designs, develops and sells proprietary
high-performance processors and high-speed integrated circuits that are used by
original equipment manufacturers (OEMs) in routers, switches, wireless
infrastructure equipment, network security appliances, datacenter servers,
network access equipment and network storage devices to accelerate the delivery
of voice, video, data and multimedia content for advanced enterprise,
datacenter, communications and mobile wireless networks. Our knowledge-based
processors, physical layer products (the “PLPs”), and network search engine
products are incorporated in systems used throughout multiple types of networks
that comprise the global Internet infrastructure, including the enterprise,
metro, access, edge and core networking markets, and are designed into systems
offered by leading networking OEMs such as AlaxalA Networks Corporation,
Alcatel-Lucent, ARRIS Group, Inc., Brocade Communication Systems, Inc., Cisco
Systems, Inc., Huawei Technologies Co., Ltd., and Juniper Networks,
Inc.
The
products and technologies we have developed and acquired are targeted to enable
our customers to develop systems that support the increasing speeds and
complexity of the Internet infrastructure. We believe there is a growing need to
include knowledge-based processors and high speed integrated circuits in a
larger number of such systems as networks transition to all Internet Protocol
(IP) packet processing at increasing speeds.
The
equipment and systems that use our products are technically complex. As a
result, the time from our initial customer engagement design activity to volume
production can be lengthy and may require considerable support from our design
engineering, research and development, sales, and marketing personnel in order
to secure the engagement and commence product sales to the customer. Once the
customer’s equipment is in volume production, however, it generally has a life
cycle of three to five years and requires less ongoing support.
In
general, we recognize revenue from sales of our products upon shipment to our
customers or our international stocking sales representatives. Usually, we sell
the initial shipments of a product for a new design engagement directly to the
OEM customer. Once the design enters volume production, the OEM frequently
outsources its manufacturing to contract manufacturers who purchase the products
directly from us.
As a
fabless semiconductor company, our business is less capital intensive than
others because we rely on third parties to manufacture, assemble, and test our
products. In general, we do not anticipate making significant capital
expenditures aside from business acquisitions that we might make from time to
time. In the future, as we launch new products or expand our operations,
however, we may require additional funds to procure product mask sets, order
elevated quantities of wafers from our foundry partners, perform qualification
testing and assemble and test those products.
Because
we purchase all wafers from suppliers with fabrication facilities and outsource
the assembly and testing to third party vendors, a significant portion of our
cost of revenue consists of payments to third party vendors. We do not have
long-term agreements with any of our suppliers and rely upon them to fulfill our
orders.
Recent
Acquisitions
On
October 24, 2007, we completed the acquisition of Aeluros, Inc (the
“Aeluros Acquisition”). The acquisition was accounted for as a business
combination during the fourth quarter of fiscal 2007. We paid $57.1 million in
cash upon the closing of the transaction in exchange for all of the outstanding
equity securities of Aeluros. We reserved 104,770 shares of common stock for
future issuance upon the exercise of unvested employee stock options of Aeluros
that we assumed and are subject to continued employment vesting requirements. In
addition, under the terms of the definitive agreement, we paid $15.5 million
cash in February 2009 based on the attainment of revenue performance milestones
for the acquired business over the one year period following the close of the
transaction.
On
July 17, 2009, we completed the acquisition of the network search engine
business from Integrated Devices Technology, Inc (the “IDT NSE Acquisition”).
The acquisition was accounted for as a business combination during the third
quarter of fiscal 2009. Upon the closing of the transaction, we paid $100.0
million in cash, subject to a price adjustment based on a determination of the
actual amount of inventory received. In October 2009, we received
$1.8 million from IDT based on the final determination of the actual inventory
received.
On
October 30, 2009, we completed the acquisition of RMI Corporation, a provider of
high-performance and low-power multi-core, multi-threaded processors.
Pursuant to the Agreement and Plan of Merger Reorganization by and among
NetLogic, Roadster Merger Corporation, RMI Corporation and WP VIII
Representative LLC dated as of May 31, 2009, or the merger agreement, on October
30, 2009, Roadster Merger Corporation was merged with and into RMI Corporation,
which now is a wholly-owned subsidiary of NetLogic, and NetLogic delivered
merger consideration of approximately 5.0 million shares of NetLogic common
stock and $12.6 million cash to the paying agent for distribution to the holders
of RMI Corporation capital stock. Approximately 10% of the shares of
NetLogic common stock are being held in escrow as security for claims and
expenses that might arise during the first 12 months following the closing
date.
Outlook
and Challenges
Some of
our challenges in fiscal 2009 include improving operating efficiencies in the
light of continued challenging macroeconomic conditions, diversifying our
product offerings, inventory management, integration of IDT NSE Acquisition, and
the integration of RMI Corporation. Our year-over-year quarterly revenue
increased from $38.3 million for our third quarter in 2008 to $42.3 million in
our third quarter in 2009. We had previously experienced consecutive declines in
year-over-year quarterly revenue from $36.5 million for our second quarter in
2008 to $32.5 million in our second quarter in 2009, and $34.1 million in our
first quarter in 2008 to $30.4 million for our first quarter in 2009 due to
decreased demand for our products. We believe the decrease in demand was
primarily due to macroeconomic conditions that decreased customer demand for our
products. In response, we have focused on operating efficiencies and containing
our cash operating expense growth. Our operating expenses grew by $2.4 million
from $22.8 million in the second quarter of 2009 to $25.3 million in the third
quarter of 2009. Stock-based compensation accounted for $0.5 million of the
expense growth while acquisition-related costs incurred were $1.4 million during
the third quarter of 2009. While we expect to continue to remain focused on
maintaining our operating expenses at an appropriate level relative to our
revenue during this period of macroeconomic weakness, we expect to incur more
acquisition-related costs for the remainder of 2009. The integration of RMI
Corporation will add substantial integration costs and challenges requiring
extensive management time and attention, which may detract from the operation
and management of other parts of our business operations. We are
focused on containing these distractions from our business
operations.
During
the three and nine months ended September 30, 2009, our top five customers
accounted for approximately 74% and 72%, respectively, of total product revenue.
Favorable market trends, such as the increasing number of 10 Gigabit ports as
enterprises and datacenters upgrade their legacy networks to better accommodate
the proliferation of video and virtualization applications, growth in the cable
infrastructure area of our business, and the growing mobile wireless
infrastructure and IPTV markets, have enabled us to broaden our customer base
and increase demand for our knowledge-based processors and network search
engines. Additionally, we have further diversified our customer and product
revenues by expanding our product portfolio to address Layer 7 content
processing with our NETL7™ processor family, the Layer 1 physical layer with our
10 Gigabit Ethernet products, and entry level equipment with our
NETLite™ processors.
As an
integral part of our efforts to diversify our product and customer base, as well
as strengthen our competitive positioning, and broaden our technology portfolio
and research and development capabilities, we have entered into strategic
acquisitions of products and technology, including the acquisition of the TCAM2
products and Sahasra algorithmic technology from Cypress, the acquisition of
Aeluros and its PLP products, and the acquisition of RMI Corporation and its
processor products, which we believe will complement our legacy products and
significantly expand the total market opportunity for all of our
products..
Cisco
Business
Cisco and
its contract manufacturers have accounted for a large percentage of our
historical revenue. At Cisco’s request, in 2007, we transitioned into a
just-in-time inventory arrangement covering substantially all of our product
shipments to Cisco and its contract manufacturers. Pursuant to this arrangement
we deliver products to Wintec Industries (“Wintec”) based on orders they place
with us, but we do not recognize product revenue unless and until Wintec reports
that it has delivered the product to Cisco or its contract manufacturer to
incorporate into its end products. Given this arrangement, unless Cisco or its
contract manufacturers take possession of our products from Wintec in accordance
with the schedules provided to us, our predicted future revenue stream could
vary substantially from our forecasts, and our results of operations could be
materially and adversely affected. Additionally, because we own the inventory
physically located at Wintec until it is shipped to Cisco and its contract
manufacturers, our ability to effectively manage inventory levels may be
impaired, causing our total inventory levels to increase. This, in turn,
could increase our expenses associated with excess and obsolete product and
negatively impact our cash flows. During the three and nine months ended
September 30, 2009, our revenues from Cisco and Cisco’s contract
manufactures were $16.8 million and $37.6 million, or approximately 40% and 36%
of total revenue.
Critical
Accounting Policies and Estimates
The
preparation of our condensed unaudited financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We base these estimates and assumptions
on historical experience and evaluate them on an on-going basis to help ensure
they remain reasonable under current conditions. Actual results could
differ from those estimates. There were no changes to our critical accounting
policies and estimates discussed in our 2008 Annual Report on Form
10-K.
Results
of Operations
Comparison
of Three Months Ended September 30, 2009 with Three Months Ended
September 30, 2008
Revenue,
cost of revenue and gross profit
The table
below sets forth data concerning the fluctuations in our revenue, cost of
revenue and gross profit data for the three months ended September 30, 2009
and the three months ended September 30, 2008 (in thousands, except
percentage data):
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Revenue
|
|
$ |
42,314 |
|
|
|
100.0 |
% |
|
$ |
38,311 |
|
|
|
100.0 |
% |
|
$ |
4,003 |
|
|
|
10.4 |
% |
Cost
of revenue
|
|
|
21,498 |
|
|
|
50.8 |
% |
|
|
16,802 |
|
|
|
43.9 |
% |
|
|
4,696 |
|
|
|
27.9 |
% |
Gross
profits
|
|
$ |
20,816 |
|
|
|
49.2 |
% |
|
$ |
21,509 |
|
|
|
56.1 |
% |
|
$ |
(693 |
) |
|
|
-3.2 |
% |
Revenue. Revenue for the
three months ended September 30, 2009 increased by $4.0 million compared
with the three months ended September 30, 2008. Revenue from sales to
Wintec, Cisco and Cisco’s contract manufacturers (collectively “Cisco”)
represented $16.8 million of our total revenue for the three months ended
September 30, 2009, compared with $13.9 million during the three months
ended September 30, 2008. The increase in sales to Cisco was primarily due
to an increase of $4.2 million in revenue from products from our IDT NSE
acquisition and $1.9 million in revenue from sales of our new products to Cisco,
including NL7000 and NL8000. The increase was partially offset by a
decrease of $3.2 million in sales of our NL5000 and network search engine
products. Revenue from non-Cisco customers represented $25.5 million of total
revenue for the three months ended September 30, 2009 compared with $24.4
million in the same quarter of the prior year. During the three months ended
September 30, 2009 and 2008, Alcatel Lucent accounted for 15% and 10%,
respectively, of our total revenue.
Cost of Revenue/Gross Profit/Gross
Margin. Cost of revenue for the three months ended September 30,
2009 increased by $4.7 million compared with that of the three months ended
September 30, 2008. Cost of revenue increased primarily due to an increase
in product sales, amortization of intangible assets, provision for excess and
obsolete inventory, and fair value adjustment related to acquired inventory. The
increases in amortization of intangible assets and fair value adjustment related
to acquired inventory were attributable to our IDT NSE
acquisition. Cost of revenue for the three months ended
September 30, 2009 and 2008 included $4.8 million and $3.0 million,
respectively, of amortization of intangible assets expense, $0.3 million and
$1.1 million of a provision for excess and obsolete inventory, and $2.3 million
and $0.6 million of a fair value adjustment related to acquired
inventory.
Operating
expenses
The table
below sets forth operating expense data for the three months ended
September 30, 2009 and the three months ended September 30, 2008 (in
thousands, except percentage data):
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
16,087 |
|
|
|
38.0 |
% |
|
$ |
13,629 |
|
|
|
35.6 |
% |
|
$ |
2,458 |
|
|
|
18.0 |
% |
Selling,
general and administrative
|
|
|
7,740 |
|
|
|
18.3 |
% |
|
|
7,195 |
|
|
|
18.8 |
% |
|
|
545 |
|
|
|
7.6 |
% |
Acquisition-related
costs
|
|
|
1,425 |
|
|
|
3.4 |
% |
|
|
- |
|
|
|
- |
|
|
|
1,425 |
|
|
|
100.0 |
% |
Total
operating expenses
|
|
$ |
25,252 |
|
|
|
59.7 |
% |
|
$ |
20,824 |
|
|
|
54.4 |
% |
|
$ |
4,428 |
|
|
|
21.3 |
% |
Research and Development
Expenses. Research and development expenses increased for the three
months ended September 30, 2009 compared with the same period in 2008
primarily due to increases in payroll and payroll related expenses of $0.8
million, software licenses expenses of $0.5 million, stock-based compensation
expenses of $1.0 million, and product development and qualification expenses of
$1.4 million. The increases were offset partially by decreases in consulting and
outside vendor expenses of $1.1 million. The increase in payroll and payroll
related expenses and stock-based compensation expenses resulted primarily from
increases in engineering headcount to support our new product development
efforts. The increase in software license expenses was primarily due to
amortization expense for our software licenses used for our internal research
and development projects. The decrease in product development and qualification
expense was primarily due to the production qualification and characterization
of our products. Product development and qualifications costs vary from period
to period depending on the timing of development and tape-out of various
products. The remainder of the increase in research and development expenses was
caused by individually minor items.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $0.5
million during the three months ended September 30, 2009, compared with the
same period in 2008, primarily due to increases in payroll and payroll related
expenses of $0.4 million, stock-based compensation of $0.9 million. These
increases were offset partially by decreases in consulting and outside vendor
expenses of $0.4 million, and commission expenses of $0.2 million. The increase
in payroll and payroll related expenses and stock-based compensation expenses
resulted primarily from increased headcount to support our growing operations in
the sales and marketing areas. The decrease in commission expense was primarily
a result of our decrease in revenue. Selling, general and administrative
expenses also included $0.3 million of amortization expense for the customer
relationship intangible asset in the three months ended September 30, 2009
and 2008. The remainder of the fluctuation in selling, general and
administrative expenses was caused by individually minor items.
Acquisition-Related Costs.
Acquisition-related costs were $1.4 million during the three months ended
September 30, 2009 primarily due to legal fees of $0.9 million, consulting
and outside vendor services of $0.3 million and other professional services of
$0.2 million, related to our acquisitions of RMI and IDT NSE.
Other
items
The table
below sets forth other data for the three months ended September 30, 2009
and the three months ended September 30, 2008 (in thousands, except
percentage data):
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Interest
and other income
|
|
$ |
399 |
|
|
|
0.9 |
% |
|
$ |
421 |
|
|
|
1.1 |
% |
|
$ |
(22 |
) |
|
|
-5.2 |
% |
Interest and Other
Income. Interest and other income decreased by $22,000 for the three
months ended September 30, 2009 compared with the three months ended
September 30, 2008 primarily due to our lower invested balances after
paying approximately $100 million in connection with our IDT NSE acquisition,
and also lower yields on our investments, offset partially by the interest
income related to the loan to RMI. Our cash, cash equivalents and short-term
investments balance decreased from $85.9 million at September 30, 2008 to
$33.4 million at September 30, 2009.
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Three
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Interest
and other expense
|
|
$ |
(595 |
) |
|
|
-1.4 |
% |
|
$ |
(18 |
) |
|
|
0.0 |
% |
|
$ |
(577 |
) |
|
|
3205.6 |
% |
Interest and Other
Expense. Interest adn other expense increased by $0.6 million for
the three months ended September 30, 2009 compared with the three months
ended September 30, 2008 primarily due to interest expense of $0.5
million related to our credit facility.
|
|
Three
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Pretax
Income
|
|
|
Three
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Pretax
Income
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Benefit
from income taxes
|
|
$ |
(779 |
) |
|
|
16.8 |
% |
|
$ |
(168 |
) |
|
|
-15.4 |
% |
|
$ |
(611 |
) |
|
|
363.7 |
% |
Benefit from Income
Taxes. During the three months ended September 30, 2009, we
recorded an income tax benefit of $0.8 million. The effective tax rate for
the three months ended September 30, 2009 was primarily driven by a rate
differential for book income generated in foreign jurisdictions and book losses
generated in the United States. Included in the benefit from income
taxes for the three months ended September 30, 2009 were charges totaling
$423,000 to correct a tax benefit previously recognized for the
six months ended June 30, 2009. The adjustment related to disqualifying
dispositions of incentive stock options during the quarter ended June 30,
2009. Management assessed the materiality of this error on the prior
quarter’s financial statements and concluded the error was not material to the
prior or current interim periods.
Comparison
of Nine Months Ended September 30, 2009 with Nine Months Ended
September 30, 2008
Revenue,
cost of revenue and gross profit
The table
below sets forth data concerning the fluctuations in our revenue, cost of
revenue and gross profit data for the nine months ended September 30, 2009
and the nine months ended September 30, 2008 (in thousands, except
percentage data):
|
|
Nine
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Nine
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Revenue
|
|
$ |
105,165 |
|
|
|
100.0 |
% |
|
$ |
109,034 |
|
|
|
100.0 |
% |
|
$ |
(3,869 |
) |
|
|
-3.5 |
% |
Cost
of revenue
|
|
|
49,029 |
|
|
|
46.6 |
% |
|
|
48,167 |
|
|
|
44.2 |
% |
|
|
862 |
|
|
|
1.8 |
% |
Gross
profits
|
|
$ |
56,136 |
|
|
|
53.4 |
% |
|
$ |
60,867 |
|
|
|
55.8 |
% |
|
$ |
(4,731 |
) |
|
|
-7.8 |
% |
Revenue. Revenue for the nine
months ended September 30, 2009 decreased by $3.9 million compared with the
nine months ended September 30, 2008. Revenue from sales to Wintec, Cisco
and Cisco’s contract manufacturers (collectively “Cisco”) represented $37.6
million of our total revenue for the nine months ended September 30, 2009
compared with $42.9 million during the nine months ended September 30,
2008. The decrease in sales to Cisco was primarily due to a decrease of $12.4
million in revenue from sales of our NL5000 and network search engine products,
although this decline was partially offset by increased revenue of our new
products to Cisco, including NL7000 and NL8000 products which increased $2.8
million, and from products from our IDT NSE acquisition of $4.2
million. Revenue from non-Cisco customers represented $67.6 million
of total revenue for the nine months ended September 30, 2009 compared with
$66.1 million in the same quarter of the prior year. During the nine months
ended September 30, 2009 and 2008, Alcatel Lucent and Huawei accounted for
15% and 10%, and 10% and 8%, respectively, of our total revenue.
Cost of Revenue/Gross Profit/Gross
Margin. Cost of revenue for the nine months ended September 30, 2009
increased by $0.9 million compared with that of the nine months ended
September 30, 2008. Cost of revenue increased primarily due to increases in
amortization of intangible assets, provisions for excess and obsolete inventory,
and fair value adjustment related to acquired inventory. The
increases in amortization of intangible assets and fair value adjustment related
to acquired inventory were attributable to our IDT NSE acquisition. Cost of
revenue for the nine months ended September 30, 2009 and 2008 included
$10.7 million and $9.0 million, respectively, of amortization of intangible
assets expense, $1.4 million and $1.7 million of a provision for excess and
obsolete inventory, and $2.3 million and $1.4 million of a fair value adjustment
related to acquired inventory.
Operating
expenses
The table
below sets forth operating expense data for the nine months ended
September 30, 2009 and the nine months ended September 30, 2008 (in
thousands, except percentage data):
|
|
Nine
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Nine
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
$ |
42,421 |
|
|
|
40.3 |
% |
|
$ |
38,192 |
|
|
|
35.0 |
% |
|
$ |
4,229 |
|
|
|
11.1 |
% |
Selling,
general and administrative
|
|
|
21,912 |
|
|
|
20.8 |
% |
|
|
19,904 |
|
|
|
18.3 |
% |
|
|
2,008 |
|
|
|
10.1 |
% |
Acquisition-related
costs
|
|
|
2,760 |
|
|
|
2.6 |
% |
|
|
- |
|
|
|
- |
|
|
|
2,760 |
|
|
|
100.0 |
% |
Total
operating expenses
|
|
$ |
67,093 |
|
|
|
63.8 |
% |
|
$ |
58,096 |
|
|
|
53.3 |
% |
|
$ |
8,997 |
|
|
|
15.5 |
% |
Research and Development
Expenses. Research and development expenses increased for the nine months
ended September 30, 2009 compared with the same period in 2008 primarily
due to increases in payroll and payroll related expenses of $2.2 million,
stock-based compensation expenses of $2.8 million, software licenses expenses of
$1.2 million, and product development and qualification expenses of $0.3
million. The increase was offset partially by decreases in consulting and
outside vendor expenses of $1.7 million, and travel expenses of $0.4 million.
The increases in payroll and payroll related expenses and stock-based
compensation expenses were primarily due to increases in engineering headcount
to support our new product development efforts. The increase in software license
expenses was primarily due to amortization of software licenses used for our
internal research and development projects. The increase in product development
and qualification expense was primarily due to the production qualification and
characterization of our processors. Product development and qualifications costs
vary from period to period depending on the timing of development and tape-out
of various products. The remainder of the increase in research and development
expenses was caused by individually minor items.
Selling, General and Administrative
Expenses. Selling, general and administrative expenses increased by $2.0
million during the nine months ended September 30, 2009, compared with the
same period in 2008, primarily due to increases in payroll and payroll related
expenses of $1.1 million, stock-based compensation of $2.7 million The increase
was offset partially by decreases in commission expenses of $0.6 million,
consulting and outside vendor services expenses of $0.5
million, other professional service expenses of $0.2 million and
legal expenses of $0.1 million. The increase in payroll and payroll related
expenses and stock-based compensation expenses resulted primarily from increased
headcount to support our growing operations in the sales and marketing areas.
The decrease in commission expense was primarily a result of our decrease in
revenue as well as a more favorable mix of revenues which incur lower
commissions. Selling, general and administrative expenses also included $1.0
million of amortization expense for the customer relationship intangible asset
in the nine months ended September 30, 2009 and 2008. The remainder of the
fluctuation in selling, general and administrative expenses was caused by
individually minor items.
Acquisition-Related Costs.
Acquisition-related costs were $2.8 million during the three months ended
September 30, 2009 primarily due to legal fees of $2.0 million, consulting
and outside vendor services of $0.4 million and other professional services of
$0.3 million, related to our acquisitions of RMI and IDT NSE.
Other
items
The table
below sets forth other data for the nine months ended September 30, 2009
and the nine months ended September 30, 2008 (in thousands, except
percentage data):
|
|
Nine
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Nine
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Interest
and other income
|
|
$ |
883 |
|
|
|
0.8 |
% |
|
$ |
1,259 |
|
|
|
1.2 |
% |
|
$ |
(376 |
) |
|
|
-29.9 |
% |
Interest and Other
Income. Interest and other income decreased by $0.4 million for the
nine months ended September 30, 2009 compared with the nine months ended
September 30, 2008 primarily due to our lower invested balances after
paying approximately $100 million in connection with our IDT NSE acquisition
during the third quarter of 2009, and also lower yields on our investments,
offset by the interest income related to the loan to RMI. Our cash, cash
equivalents and short-term investments balance decreased from $85.9 million at
September 30, 2008 to $33.4 million at September 30,
2009.
|
|
Nine
Months
Ended
September
30,
2009
|
|
|
Percentage
of
Revenue
|
|
|
Nine
Months
Ended
September
30,
2008
|
|
|
Percentage
of
Revenue
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Interest
and other expense
|
|
$ |
(660 |
) |
|
|
-0.6 |
% |
|
$ |
(111 |
) |
|
|
-0.1 |
% |
|
$ |
(549 |
) |
|
|
494.6 |
% |
Interest and Other
Expense. Interest and other expense increased by $0.5 million for
the nine months ended September 30, 2009 compared with the nine months
ended September 30, 2008 primarily due to interest expense of $0.5
million related to our credit facility.
|
|
Nine
Months
Ended
September
30,
2009
|
|
|
Percentage
of
PreTax
Income
|
|
|
Nine
Months
Ended
September
30,
2008
|
|
|
Percentage
of
PreTax
Income
|
|
|
Year-to-Year
Change
|
|
|
Percentage
Change
|
|
Benefit
from income taxes
|
|
$ |
(808 |
) |
|
|
7.5 |
% |
|
$ |
(796 |
) |
|
|
-20.3 |
% |
|
$ |
(12 |
) |
|
|
1.5 |
% |
Benefit from Income
Taxes. During the nine months ended September 30, 2009, we recorded
an income tax benefit of $0.8 million. We established a valuation allowance
of $3.0 million for tax credits that are unlikely to be utilized in California
in light of a legislative change enacted in February 2009 which affected the
rules on state income apportionment for tax years beginning in 2011. Excluding
the aforementioned, our effective tax rate for the nine months ended
September 30, 2009 was primarily driven by a rate differential for book
income generated in foreign jurisdictions and book losses generated in the
United States.
Liquidity
and Capital Resources: Changes in Financial Condition
Our
principal sources of liquidity are our cash and cash equivalents and our senior
secured credit facility of $55 million with a group of banks executed in June
2009. As of September 30, 2009 our cash balance was $33.4
million.
We expect
and have incurred substantial cash outflow requirements in connection with our
recent mergers and acquisitions:
|
•
|
|
On
October 30, 2009, we completed the acquisition of RMI Corporation, or RMI,
a provider of high-performance and low-power multi-core, multi-threaded
processors. Pursuant to the terms of an Agreement and Plan of Merger
Reorganization with RMI executed on May 31, 2009, we issued approximately
5 million shares of common stock to RMI preferred stockholders and paid
$12.6 million to RMI common stockholders at closing. Up to an
additional 1.6 million shares and $15.9 million cash may be payable as
earn-out consideration as specified in the merger agreement, before offset
for any indemnity claims prior to December 31,
2010.
|
|
•
|
|
In
connection with our merger agreement dated May 31, 2009 with RMI, we
provided a bridge loan of $15 million to
RMI.
|
|
•
|
|
On
July 17, 2009, we paid $100 million as purchase consideration for the
IDT NSE Acquisition. The purchase consideration was partially financed
with $37 million of borrowings under the senior secured credit
facility. In October 2009, we received $1.8 million from IDT
based on the final determination of the actual inventory
received.
|
|
•
|
|
We
have incurred significant cash outflow related to transaction costs and
integration expenses in connection with the acquisition of RMI, IDT NSE
and any other acquisitions of approximately $2.7million, and may continue
to incur significant cash outflows related to the integration of RMI
during the next 12 months
|
Under the
senior secured credit facility, we are required to satisfy certain financial
ratio and other covenants, as described in note 15 of the Notes to our Condensed
Consolidated Financial Statements above. We were in compliance with
the debt covenants under the credit agreement as of September 30,
2009.
The
majority of our outstanding debt is related to the financing of the IDT NSE
acquisition, the costs and expenses related to the acquisition and the ongoing
working capital and other general corporate purposes. Additionally, in July
2009, we drew down fully the term notes of $30 million under the senior secured
credit facility. As of September 30, 2009, $27.5 million of term
notes was outstanding. We have the following resources available to obtain
short-term or long-term financing, if we need additional liquidity, as of
September 30, 2009 (in thousands):
|
|
|
|
|
September
30, 2009
|
|
|
June
30, 2009
|
|
|
|
Original
Amount
Available
|
|
|
Used
|
|
|
Available
|
|
|
Used
|
|
|
Available
|
|
Senior
secured credit line
|
|
$ |
25,000 |
|
|
$ |
1,000 |
|
|
$ |
24,000 |
|
|
$ |
- |
|
|
$ |
25,000 |
|
Total
|
|
$ |
25,000 |
|
|
$ |
1,000 |
|
|
$ |
24,000 |
|
|
$ |
- |
|
|
$ |
25,000 |
|
The
Company’s cash and cash equivalents are invested with financial institutions in
deposits that, at times, may exceed federally insured limits. The Company had
not experienced any losses on its deposits of cash and cash equivalents as of
September 30, 2009. However, we believe that the capital and credit markets
have been experiencing unprecedented levels of volatility and disruption and
that recent U.S. sub-prime mortgage defaults have had a significant impact
across various sectors of the financial markets, causing global credit and
liquidity issues. We can provide no assurance that our cash and cash equivalents
will not be adversely affected by these matters in the future.
The table
below sets forth the key components of cash flow for the nine months ended
September 30, 2009 and 2008 (in thousands):
|
|
Nine
Months Ended
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Net
cash provided by operating activities
|
|
$ |
31,753 |
|
|
$ |
32,326 |
|
Net
cash used in investing activities
|
|
$ |
(118,080 |
) |
|
$ |
(1,318 |
) |
Net
cash provided by financing activities
|
|
$ |
36,227 |
|
|
$ |
4,272 |
|
Cash
Flows during the Nine Months Ended September 30, 2009
Our net
cash provided by operating activities was $31.8 million for the nine months
ended September 30, 2009, which primarily consisted of $9.9 million of net
loss, $37.3 million of non-cash operating expenses and $4.4 million in changes
in operating assets and liabilities. Non-cash operating expenses for the nine
months ended September 30, 2009, included stock-based compensation of $16.8
million, depreciation and amortization of $14.8 million, deferred income taxes,
net of $3.4 million, and provision for inventory reserves of $2.3 million.
Changes in operating assets and liabilities were primarily driven by a decrease
in deferred margin of $0.6 million and inventory of $3.1 million, which was
offset partially by an increase in accounts receivables of $2.1 million, prepaid
and other current assets of $7.1 million, accounts payable and accrued
liabilities of $10.6 million and other long-term liabilities of $0.6
million.
Our net
cash used in investing activities was $118.1 million for the nine months
ended September 30, 2009, of which we used $100.0 million for the IDT NSE
acquisition, $15.5 million for the payment of Aeluros post-acquisition revenue
milestone, $15.0 million for the loan to RMI, $14.6 million for the purchase of
short-term investments, and $0.6 million to purchase property and equipment
offset by $27.7 million of sales and maturities of short-term investments. We
expect to make capital expenditures of approximately $0.6 million primarily
for design tools during the remainder of 2009, to support product development
activities. We will use our cash and cash equivalents to fund these
expenditures.
Our net
cash provided by financing activities was $36.2 million for the nine months
ended September 30, 2009, primarily from proceeds of stock option exercises
of $10.2 million, proceeds from line of credit and term notes of $37.0
million, offset by payment of principal of line of credit and term notes of
$8.5 million, payments of debt issuance costs of $1.1 million, prepayments of
software licenses and other obligations of $0.5 million and tax
payments related to vested restricted stock awards of $0.8
million.
Cash
Flows during the Nine Months Ended September 30, 2008
Our net
cash provided by operating activities was $32.3 million for the nine months
ended September 30, 2008,which primarily consisted of $4.7 million of net
income, $26.3 million of non-cash operating expenses and $1.3 million in changes
in operating assets and liabilities. Non-cash items in the nine
months ended September 30, 2008 included depreciation and amortization expense
of $12.9 million, stock-based compensation expense of $11.6 million, and
provision for inventory reserves of $1.7 million. Changes in
operating assets and liabilities were primarily driven by an increase in
accounts payable of $3.8 million, deferred margin of $1.5 million, and inventory
of $1.3 million on higher product sales, offset partially by a decrease in
accrued liabilities of $1.7 million.
Our net
cash used in investing activities was $1.3 million for the nine months
ended September 30, 2008, which was primarily due to purchases of computer
equipment and research and development design tools to support our on-going
R&D projects. We expect to use our cash on hand for capital expenditures of
approximately $0.7 million primarily for design tools during the remainder
of 2008 to support product development activities.
Our net
cash provided by financing activities was $4.3 million for the nine months ended
September 30, 2008, which was primarily due to net proceeds of $8.0 million of
stock option exercises, offset by prepayments of software licenses and other
obligations of $3.2 million and tax payments related to vested restricted stock
awards of $0.5 million.
Capital
Resources
We
believe that our existing cash balance of $33.4 million as of September 30,
2009 and our available secured credit line of $24 million will be
sufficient to meet our anticipated cash needs for at least the next 12
months. Our anticipated cash needs in the next twelve months include the
potential payments to holders of RMI common stock and significant acquisition
and integration costs.
Although
in recent years we have generated sufficient net cash from operations to meet
our capital requirements, we will be substantially larger with greater operating
cash needs as a result of the acquisitions of IDT NSE and RMI Corporation. Our
future cash needs will depend on many factors, including the amount of revenue
we generate, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of
introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products,
and any future business acquisitions that we might undertake. We may seek
additional funding through public or private equity or debt financing, and have
a shelf registration allowing us to sell up to $150 million of our securities
from time to time during the next three years. However, additional funding
could be constrained by the terms and covenants under our senior secured credit
facility and may not be available on terms acceptable to us or at all. We
also might decide to raise additional capital at such times and upon such terms
as management considers favorable and in our interests, including, but not
limited to, from the sale of our debt and/or equity securities (before
reductions for expenses, underwriting discounts and commissions) under our shelf
registration statement, but we cannot be certain that we will be able to
complete offerings of our securities at such times and on such terms as we may
consider desirable for us.
Contractual
Obligations
Our
principal commitments as of September 30, 2009 consisted of operating lease
obligation payments, wafer purchases, and payments on software licenses and
other obligations, which are summarized below (in thousands):
|
|
Total
|
|
|
Less
than
1
year
|
|
|
1
- 3
years
|
|
|
4
-5
years
|
|
|
After
5
years
|
|
Term
notes (1)
|
|
$ |
30,231 |
|
|
$ |
11,725 |
|
|
$ |
18,506 |
|
|
$ |
- |
|
|
$ |
- |
|
Line
of credit (1)
|
|
|
1,014 |
|
|
|
1,014 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Operating
lease obligations
|
|
|
1,790 |
|
|
|
1,016 |
|
|
|
774 |
|
|
|
- |
|
|
|
- |
|
Software
license obligations
|
|
|
2,753 |
|
|
|
1,608 |
|
|
|
1,145 |
|
|
|
- |
|
|
|
- |
|
Wafer
purchases
|
|
|
13,756 |
|
|
|
13,756 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
49,544 |
|
|
$ |
29,119 |
|
|
$ |
20,425 |
|
|
$ |
- |
|
|
$ |
- |
|
(1)
|
Amounts
reflect total anticipated cash payments, including anticipated interest
payments.
|
In
addition to the enforceable and legally binding obligations quantified in the
table above, we have other obligations for goods and services entered into in
the normal course of business. These obligations, however, are either not
enforceable or legally binding, or are subject to change based on our business
decisions.
The
primary objective of our investment activities is to preserve principal while
maximizing the income we receive from our investments without significantly
increasing the risk of loss. Some of the investable securities permitted under
our cash management policy may be subject to market risk for changes in interest
rates. To mitigate this risk, we plan to maintain a portfolio of cash equivalent
and short-term investments in a variety of securities which may include
investment grade commercial paper, money market funds, government debt issued by
the United States of America, state debt, certificates of deposit and investment
grade corporate debt. Presently, we are exposed to minimal market risks
associated with interest rate changes. We manage the sensitivity of our results
of operations to these risks by maintaining investment grade short-term
investments. Our cash management policy does not allow us to purchase or hold
derivative or commodity instruments or other financial instruments for trading
purposes. Additionally, our policy stipulates that we periodically monitor our
investments for adverse material holdings related to the underlying financial
solvency of the issuer. As of September 30, 2009, we did not h