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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

Filed by the Registrant  x

Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

x	Preliminary proxy statement

 

¨	Confidential, for use of the Commission only

 

¨	Definitive proxy statement

 

¨	Definitive additional materials

 

¨	Soliciting material pursuant to §240.14a-12

NETLOGIC MICROSYSTEMS, INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than Registrant)

Payment of filing fee (Check the appropriate box):

 

x	No fee required.

 

¨	Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

(1)

Title of each class of securities to which transaction applies:

 

(2)

Aggregate number of securities to which transaction applies:

 

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

(4)

Proposed maximum aggregate value of transaction:

 

(5)

Total fee paid:

 

 

¨	Fee paid previously with preliminary materials.

 

¨	Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration number, or the Form or Schedule and the date of its filing.

 

(1)

Amount Previously Paid:

 

(2)

Form, Schedule or Registration Statement No.:

 

(3)

Filing Party:

 

(4)

Date Filed:

 

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Preliminary Copy

 

NETLOGIC MICROSYSTEMS, INC.

1875 Charleston Road

Mountain View, CA 94043

[•], 2009

Dear Stockholder:

On May 31, 2009, NetLogic Microsystems, Inc. and its wholly owned subsidiary Roadster Merger Corporation, or merger sub, entered into an agreement and plan of merger and reorganization to acquire RMI Corporation, a provider of high-performance and low-power multi-core, multi-threaded processors. The agreement provides for NetLogic to pay the RMI stockholders as acquisition consideration a combination of cash and shares of NetLogic common stock at closing and, subject to the attainment of revenue milestones for the acquired business, at the end of a twelve-month post-closing earn-out period. The value of the consideration to be paid at closing as specified in the merger agreement is $181.35 million plus $2.0 million as an advance earn-out payment. The value of the maximum remaining earn-out consideration as specified in the merger agreement is $68.0 million. In addition, the agreement provides for NetLogic to issue common stock, restricted stock units and stock options as equity incentives (most of which are subject to vesting requirements based on continued employment) to employees of RMI.

The actual number of shares and amount of cash payable by NetLogic as acquisition consideration will depend on several variables, including the applicable closing price for our common stock, as more fully explained in the accompanying proxy statement. The exact number of shares of common stock to be issued (and total amount of cash to be paid) at the closing date and the end of the earn-out measurement period is not presently known. The maximum number of shares of common stock that we would be required to issue as acquisition consideration (including the earn-out portion, assuming attainment of all objectives) is approximately 9,050,000 shares, although based on the recent prices for our common stock we expect the actual number of shares that will be issued to be between [            ] and [            ]. Similarly, although we expect the actual number of shares to be issued as incentive awards to be between [            ] and [            ], the maximum number of additional shares of common stock that we would be required to issue to continuing RMI employees as incentive awards is approximately 4,030,000 shares (assuming full vesting and exercise of all stock options and restricted stock units to be issued and an applicable closing price of $26.97 per share). We currently have approximately 22,177,000 shares of common stock outstanding so the issuance of the maximum of 13,080,000 shares would represent a roughly 59.0% increase in the number of shares of NetLogic common stock outstanding prior to the merger. In all events, the total number of shares that we may be required to issue in connection with the merger will exceed 20% of the number of shares issued and outstanding prior to the merger, and therefore, under the Nasdaq Listing Rules we must obtain the approval of our stockholders for the shares that could be issued in the transaction. This is also a condition to the obligation of each party to consummate the merger.

 

 

You are cordially invited to attend the special meeting of NetLogic stockholders to be held on [•], 2009, [•] a.m., Pacific time, at the offices of [            ]. At the Special Meeting, we will ask you to consider and vote on the proposal to approve the issuance of a maximum of 13,080,000 shares of NetLogic common stock in connection with the proposed acquisition of RMI.

Your vote is very important. We cannot complete the merger and the other transactions contemplated by the merger agreement unless the proposed issuance of NetLogic common stock is approved by the affirmative vote of a majority of the shares of NetLogic common stock present in person and voting on the proposal or represented by proxy and voting on the proposal.

The accompanying proxy statement will provide you with information regarding the merger and other transactions contemplated by the merger agreement and information about RMI. We urge all of our stockholders to read this proxy statement in its entirety, including the section entitled “Risk Factors” beginning on page 8.

On behalf of our board of directors, we thank you for your support and appreciate your consideration of this matter. We look forward to seeing you at the special meeting.

Sincerely,

Ronald S. Jankov

President and Chief Executive Officer

First mailed to stockholders on

or about [•], 2009

YOUR VOTE IS IMPORTANT.

PLEASE REMEMBER TO PROMPTLY RETURN YOUR PROXY.

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ADDITIONAL INFORMATION

This proxy statement incorporates important business and financial information about NetLogic Microsystems, Inc. from other documents that are not included in this proxy statement. However, these documents have been furnished to you with this proxy statement. For a listing of the documents incorporated by reference into and accompanying this proxy statement, see “Where You Can Find More Information; Incorporation by Reference” beginning on page 96 of this proxy statement. Additional copies of these documents are available to you without charge upon your written or oral request. Please note that copies of the documents furnished with this proxy statement or requested by you will not include exhibits, unless the exhibits are specifically incorporated by reference into the documents or this proxy statement. You can obtain these documents through the Securities and Exchange Commission website at www.sec.gov or by requesting them in writing or by telephone at the address below:

 

By mail:		NetLogic Microsystems, Inc.
		1875 Charleston Road
		Mountain View, California 94043
		Attention: Office of the Secretary
By telephone:		(650) 961-6676

You should rely only on the information contained in this proxy statement. We have not authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should disregard anything included in an earlier document that is inconsistent with what is in, or incorporated by reference into, this proxy statement.

You should assume that the information in this proxy statement is accurate only as of the date indicated on the front cover of this proxy statement. The business, financial condition, results or operations and prospects described in this proxy statement may have changed since that date and may change again.

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NETLOGIC MICROSYSTEMS, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

To be held on [•], 2009

To the Stockholders of NetLogic Microsystems, Inc.:

The special meeting of stockholders of NetLogic Microsystems, Inc., or NetLogic, will be held on [•], 2009, at [•] a.m., Pacific time, at the offices of [            ]. The special meeting is being held for the following purposes:

 

1.

To approve the issuance of a maximum of 13,080,000 shares of NetLogic common stock as merger consideration and to new employees in connection with the proposed acquisition by NetLogic of RMI Corporation, or RMI;

 

2.

To vote upon a proposal to adjourn the special meeting of the NetLogic stockholders, including for the purpose of soliciting additional proxies, in the discretion of the proxies or either of them; and

 

3.

To transact any and all other business that may properly come before the special meeting or any adjourned session of the special meeting.

Approval of the first proposal set forth above is required for consummation of the proposed acquisition of RMI and the other transactions contemplated by the Agreement and Plan of Merger Reorganization dated as of May 31, 2009 among NetLogic, RMI and Roadster Merger Corporation, a newly-formed, wholly-owned subsidiary of NetLogic. These matters are described more fully in the attached proxy statement, which includes, as Annex A, the complete text of the merger agreement, and we urge you to read the proxy statement carefully.

The NetLogic board of directors has approved the merger agreement, the merger and the other transactions contemplated by the merger agreement and recommends that NetLogic stockholders vote to approve the issuance of NetLogic common stock in connection with the merger.

Only stockholders who owned shares of NetLogic common stock at the close of business on [•], 2009, the record date for the special meeting, are entitled to notice of, and to vote at, the special meeting and any adjournment or postponement of it.

Your vote is very important. To ensure that you are represented at the special meeting, please register your vote as promptly as possible in accordance with the instructions set forth on the enclosed proxy card. A return addressed envelope is enclosed for your convenience. If you attend the special meeting, you may vote in person even though you have returned a proxy card previously. Your proxy is revocable in accordance with the procedures set forth in the proxy statement.

BY ORDER OF THE BOARD OF DIRECTORS

Roland B. Cortes

Secretary

Mountain View, California

[•], 2009

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TABLE OF CONTENTS

 

		Page
Questions and Answers About the Proposed Transactions and the Special Meeting		i
Summary		1
The Companies		1
The Merger		2
Summary Historical and Pro Forma Financial Data		6
Risk Factors		8
Risks Relating to the Merger		8
Other Risks Relating to NetLogic and the Combined Company		11
Cautionary Statement on Forward-Looking Statements		20
Special Meeting of NetLogic Stockholders		21
General; Date, Time and Place		21
Purpose of the Meeting		21
Record Date; Voting Information		21
Required Votes		21
Quorum		21
Abstentions and Broker Non-Votes		21
Adjournments or Postponement		22
Recommendation of NetLogic’s Board of Directors		22
Solicitation and Voting Procedures		22
Revocability of Proxies		23
Important Notice Regarding the Availability of Proxy Materials		23
The Merger		24
General Description		24
Background of the Merger		24
NetLogic’s Board of Directors’ Reasons for Approval of the Merger		26
Recommendation of NetLogic’s Board of Directors		28
Interests of NetLogic’s Officers and Directors in the Merger		28
Interests of RMI’s Officers and Directors in the Merger		28
Material Federal Income Tax Consequences of the Merger		31
Accounting Treatment		31
Regulatory Approvals		31
Federal Securities Law Consequences; Resale Restrictions		31
No Appraisal or Dissenter’s Rights		32
The Merger Agreement		33
Merger Consideration		33
Escrow		35
Retention, Transition and Future Incentive Awards		35
Options and Warrants		36
Transaction Expenses		36
Representations and Warranties		36
Conduct of Business Pending the Merger		38
No Solicitation		40
Other Covenants		40
Conditions to Consummation of the Merger		41
Termination		42
Indemnification		43

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		Page
Selected Historical Consolidated Financial Information on RMI Corporation		45
Selected Historical Consolidated Financial Information of NetLogic		47
Unaudited Pro Forma Condensed Combined Financial Statements		49
Comparative Historical and Pro Forma Per Share Data		61
Supplemental Unaudited Pro Forma Condensed Combined Financial Data of NetLogic		63
Historical Common Stock Market Price and Dividends		66
RMI’s Business		67
RMI’s Management’s Discussion and Analysis of Financial Condition and Results of Operations		75
Beneficial Ownership of NetLogic Common Stock		93
Certain Relationships and Related Transactions		95
Future Stockholder Proposals		95
Where You Can Find More Information; Incorporation by Reference		96
Index to RMI Financial Statements		F-1
RMI Financial Statements		F-3
Annex A    Agreement and Plan of Merger and Reorganization
*    *    *
Documents Furnished With This Proxy Statement
Annual Report on Form 10-K, filed with the SEC on March 4, 2009
Quarterly Report on Form 10-Q, filed with the SEC on May 5, 2009
Current Report on Form 8-K, filed with the SEC on May 6, 2009
Current Report on Form 8-K, filed with the SEC on June 25, 2009
Current Report on Form 8-K, filed with the SEC on July 20, 2009
Description of NetLogic’s Common Stock, contained in the Registration Statement on Form S-3 filed with the SEC on May 10, 2006
Description of NetLogic’s Series A Junior Participating Preferred Stock Purchase Rights contained in NetLogic’s Registration Statement on Form 8-A filed with the SEC on July 8, 2004

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QUESTIONS AND ANSWERS ABOUT THE

PROPOSED TRANSACTIONS AND THE SPECIAL MEETING

The following are some of the questions you may have as a NetLogic stockholder and answers to those questions. These questions and answers only highlight some of the information contained in this proxy statement. You should read carefully this entire document, including Annex A hereto, to fully understand the proposed transactions and the voting procedures for the special meeting of NetLogic stockholders.

 

Q:	Why am I receiving this proxy statement?

 

A:

NetLogic Microsystems, Inc., or NetLogic, and our wholly owned subsidiary Roadster Merger Corporation, or merger sub, have entered into an Agreement and Plan of Merger and Reorganization, or merger agreement, with RMI Corporation, or RMI, pursuant to which we have agreed to acquire RMI and pay the RMI stockholders a combination of cash and shares of our common stock as consideration in exchange for their RMI stock. The merger agreement also requires us to make available for issuance to RMI employees additional shares of our common stock as retention, transition and future incentive awards. As a result of being listed for trading on the NASDAQ Global Select Market, issuances of our common stock are subject to the NASDAQ Listing Rules. Under Rule 5635(a), we must seek stockholder approval with respect to issuances of our common stock when the shares to be issued are being issued in connection with the acquisition of the stock of another company and are equal to 20% or more of our outstanding common stock before the issuance. NetLogic is holding a special meeting of its stockholders in order to obtain stockholder approval of the issuance of our common stock pursuant to the merger agreement.

 

Q:	What are the proposals on which I am being asked to vote?

 

A.

You are being asked to vote on a proposal to approve the issuance of up to a maximum of 9,050,000 shares of our common stock (equal to approximately 40.8% of our outstanding common stock prior to such issuance) as merger consideration and a maximum of 4,030,000 shares under certain circumstances as equity incentive awards to continuing RMI employees in connection with our proposed acquisition of RMI. You also are being asked to vote to adopt a proposal that would permit the proxies appointed by you, individually or together, to adjourn the special meeting of NetLogic stockholders, including for the purpose of soliciting additional proxies.

 

Q.	How does NetLogic propose to acquire RMI?

 

A.

Subject to our obtaining the requisite stockholder approval and the satisfaction of certain other closing conditions described in this proxy statement, we have agreed to acquire RMI through the merger of merger sub with and into RMI, following which RMI would be a wholly-owned subsidiary of NetLogic.

 

Q.	Who is RMI?

 

A.

RMI is a leading provider of high-performance and low-power multi-core, multi-threaded processors for networking, communications, data center, security, storage, industrial and connected media applications. RMI’s headquarters are located in Cupertino, California with branch and subsidiary offices in Texas, India, Hong Kong, Korea, Japan, Taiwan, China, France and Cayman Islands. Formerly known as Raza Microelectronics, Inc., RMI was incorporated in Delaware in December 2001 and changed its name to RMI Corporation in December 2007.

 

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Q.	What will NetLogic pay the RMI stockholders as merger consideration?

 

A:

The merger agreement provides for NetLogic to pay cash to the holders of RMI common stock and to issue shares of our common stock to the holders of RMI preferred stock as merger consideration upon conversion of their RMI stock in the merger. A portion of the merger consideration is payable upon completion of the acquisition and another portion is payable, subject to the attainment of revenue milestones applicable to the acquired business, at the end of a twelve-month post-closing earn-out period. The formulas for determining the merger consideration payable to RMI stockholders under the merger agreement are complex. The merger agreement provides for the allocation of the calculated value of the merger consideration between the shares of the different classes and series of RMI capital stock. The allocation depends in part on whether the total value of the merger consideration exceeds the aggregate liquidation preference of all shares of RMI capital stock outstanding as of the closing date, determined in a manner consistent with the provisions of RMI’s charter, and, in part, on the average closing price of a share of NetLogic common stock as determined under the merger agreement. In general, RMI common stockholders will receive cash in the amount of the calculated value of the merger consideration that is allocable to the RMI common stock, and the RMI preferred stockholders will receive shares of our common stock in the amount of the calculated value of the merger consideration that is allocable to the RMI preferred stock.

 

Q:	How is the amount of merger consideration to be determined?

 

A:

The value of the merger consideration to be paid at the closing date as specified in the merger agreement is equal to $181.35 million plus $2.0 million as an advance earn-out payment. The total number of shares of our common stock to be issued to the holders of RMI preferred stock at the closing date will be equal to the amount of calculated value that is allocable to the shares of RMI preferred stock divided by the applicable closing price of our common stock. The applicable closing price will generally be the same as the average closing price of our common stock for the 20-trading day period ending on the third trading day prior to the closing date, but it cannot be more than $34.90 or less than $26.97. The total amount of cash to be paid to the holders of RMI common stock at the closing date will be equal to the amount of calculated value that is allocable to the shares of RMI common stock under the merger agreement, plus the $2 million advance earn-out credit referenced above. In calculating the amount of cash payable to the holders of RMI common stock, the collar does not limit the amount of cash they are paid. The size of the cash payment may therefore be greater than or less than the portion of the nominal value allocable to the RMI common stock. The value of the maximum remaining earn-out consideration as specified in the merger agreement is $68.0 million, which will be allocated, determined and paid in the same manner and kind as the merger consideration payable at the closing date but will be reduced by the advance earn-out credit paid to the holders of RMI common stock at the closing date, and may be reduced further by up to $1 million for a special bonus payment to the chief executive officer of RMI in the circumstances specified in the merger agreement.

 

Q:	What is an example of how much cash and how many shares of our common stock would be delivered to RMI stockholders as merger consideration?

 

A:	Solely by way of example, using an average closing price of $32.72, the closing price of our common stock on May 29, 2009, which was the last trading day prior to signing the merger agreement:

 

•

the estimated amount of cash to be paid to the holders of RMI common stock on the closing date would be approximately $8.0 million, and a total of approximately 5,360,000 shares of our common stock would be issued to the holders of RMI preferred stock (without offset for escrow amounts);

 

•

if the maximum earn-out was achieved, the additional amount of cash to be paid by us at full achievement of the earn-out would be approximately $6.5 million, and a total of approximately 1,850,000 additional shares of our common stock would be issued to the holders of RMI preferred stock (calculated without offset for escrow amounts); and

 

•

the total merger consideration value would be approximately $251.35 million.

 

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Q:	What is the maximum number of shares that NetLogic will be required to issue to RMI preferred stockholders as merger consideration?

 

A:

Based on the formulas set forth in the merger agreement, the maximum aggregate number of shares of common stock that we would be required to issue to the holders of RMI preferred stock as merger consideration is approximately 9,050,000 shares, consisting of approximately 6,500,000 shares on the closing date and approximately 2,550,000 shares at the end of the twelve-month earn-out period. These numbers assume that the applicable closing price will be $26.97 per share and that all of the earn-out objectives will be attained. However, based on the average closing price per share of our common stock for the 20-trading day period ending July 23, 2009, the maximum number of shares of common stock to be issued as merger consideration, assuming payment of 100% of the earn-out consideration, would be approximately 6,700,000.

 

Q:	How many additional shares of common stock will NetLogic be required to issue to RMI employees as equity incentive awards?

 

A:	We have agreed in the merger agreement:

 

•

to issue fully vested shares of our common stock with a total value of $8.65 million to specified RMI employees on the closing date;

 

•

to grant within 60 days after the closing date restricted stock units, or RSUs, to acquire $10 million of our common stock to specified employees of RMI who continue as RMI employees or become NetLogic employees, of which 50% will vest after six months and the remaining 50% will vest after 12 months for most employees; and

 

•

to grant within 60 days after the closing date RSUs and/or stock options for $45 million of our common stock to specified employees of RMI who continue as RMI employees or become NetLogic employees, subject to vesting and other terms to be determined by us (with an RSU to acquire one share of our common stock to be equated with an option to purchase two shares).

The number of shares of our common stock to be provided as such retention, transition and future incentive awards will be determined by dividing the total amounts specified above by the applicable closing price of our common stock, as described above. Therefore, the minimum number of additional shares of common stock that we would be required to issue to continuing RMI employees as incentive awards (including shares issuable upon exercise of options) is approximately 1,824,000 shares and the maximum number is approximately 4,030,000 shares. These numbers use the range of applicable closing prices of $26.97 to $34.90 and assume that the $45 million of long-term incentive awards will be in the form of options in the calculation of the maximum and RSUs in the calculation of the minimum. By comparison, using the closing price of a share of our common stock of $32.72 on May 29, 2009 as the applicable closing price, and assuming that 50% of the long-term incentive awards are RSUs, we would issue approximately 2,064,000 shares to the RMI employees.

 

Q:	Will there be any restrictions on the merger consideration applicable after the merger?

 

A:

One hundred percent of the shares of our common stock issued to holders of RMI preferred stock at the closing date will be subject to a complete trading lock-up for six months following the closing date, and fifty percent of the shares will be subject to a complete trading lock-up for one year following the closing date. The merger agreement further provides that 10.2% of the total number of shares of our common stock to be issued at the closing date will be placed into escrow for a period of one year to provide a fund for indemnity against specified damages we might suffer. If total indemnity claims at the end of the one-year period exceed the value of the shares held in escrow, we will have the right to place up to 10% of the earn-out consideration otherwise issuable to the RMI stockholders into escrow, pending the resolution of all claims. In addition, 0.3% of the total number of shares of our common stock to be issued at the closing date will be placed into escrow as a source for reimbursement of the stockholder representative’s expenses.

 

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Q:	Why does NetLogic want to acquire RMI?

 

A:

We believe the combination with RMI presents valuable synergies in products, technologies, skill sets, operations, customer base and organizational cultures that can be leveraged to enable us to build an enterprise greater than the sum of its parts. RMI’s industry-leading multi-core, multi-threaded processors will complement our existing portfolio of advanced knowledge-based processors, content processors, network search engines and 10 to 100 Gigabit Ethernet PHY products. This will allow us to provide a more comprehensive portfolio of differentiated solutions to enhance our customers’ ability to support the complexity and speeds of next-generation converged IP networks. In addition, the combination of the two companies’ R&D centers will bring together critical skill sets in high-speed circuit design, processor architectures, innovative low-power techniques in advanced manufacturing process nodes, as well as software expertise to continue to deliver best-in-class products and solutions, especially in the advanced 40 nanometer process technology in which both companies are currently designing next-generation products.

 

Q:	Are there risks associated with the acquisition of RMI?

 

A:

Yes. The material risks associated with the acquisition that are known to us are discussed in the section entitled “Risk Factors” beginning on page 8. Those risks include, among others, the possibility that we may not be successful in our expansion into the markets currently served by RMI, we may fail to realize the anticipated operational synergies and other expected benefits of the acquisition and we may not be successful in assimilating and retaining RMI’s employees and otherwise integrating its business with our own.

 

Q:	What vote is required to approve the proposals?

 

A:

The proposal to approve the issuance of our common stock in connection with the acquisition of RMI must be approved by the affirmative vote of a majority of the shares of our common stock present in person and voting on the proposal or represented by proxy and voting on the proposal. The proposal to permit the proxies to adjourn the special meeting, including for the purpose of soliciting additional proxies, must be approved by the affirmative vote of the majority of shares of our common stock present in person or represented by proxy at the meeting and entitled to vote on the record date, regardless of whether a quorum is present.

 

Q:	What will happen if the proposed stock issuance is not approved by NetLogic’s stockholders?

 

A:	If our stockholders fail to approve the issuance of shares of our common stock in connection with the merger upon a vote at our special meeting, each of RMI and NetLogic will have the right to terminate the merger agreement.

 

Q:	Will there be any change to the board of directors or the executive officers of NetLogic after the merger?

 

A:	No. Our directors and executive officers immediately following the closing of the merger are expected to be same as our directors and executive officers immediately prior to the closing of the merger.

 

Q	What will happen to my common stock upon completion of the acquisition?

 

A.

Each share of our common stock will be unaffected by the acquisition and will remain outstanding. Holders of our common stock will continue to hold the shares that they currently hold. However, because we will be issuing shares of our common stock at closing to the holders of RMI preferred stock as part of the merger consideration (and additional shares of common stock as incentives to continuing RMI employees), and equity incentive awards upon the consummation of the acquisition each share of existing our common stock will represent a smaller ownership percentage of a larger company.

 

Q:	Will I have appraisal or dissenters’ rights with respect to the acquisition?

 

A:	NetLogic stockholders will not have appraisal or dissenters’ rights with respect to the acquisition of RMI.

 

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Q:	When do you expect the acquisition to be completed?

 

A:

The merger agreement and the merger have been approved by the board of directors of each company. As of July 17, 2009, holders of approximately 92.5% of the outstanding shares of RMI preferred stock and holders of approximately 53.5% of the outstanding shares of RMI common stock had signed written consents approving the merger agreement, the merger and certain related matters, which satisfies the condition for approval of the merger and merger agreement by the RMI stockholders. The closing of the transaction remains subject to closing conditions, including the approval by our stockholders of the issuance of the shares of common stock to be delivered by us in the transaction (which is the subject of this proxy statement), as well as required regulatory filings and reviews. We expect the transaction to close by the end of the third quarter of 2009.

 

Q:	Does NetLogic’s board of directors recommend voting in favor of the proposal?

 

A:

Yes. After careful consideration, our board of directors unanimously determined that the proposed issuance of common stock in the acquisition under the terms of the merger agreement is in the best interests of NetLogic and our stockholders. As a result, our board of directors unanimously recommends that you vote “FOR” the proposal.

 

Q:	Who is entitled to vote at the special meeting?

 

A.

Stockholders of record as of the close of business on [•], 2009, the record date, are entitled to vote on each of the proposals at the special meeting. Each stockholder is entitled to one vote per each share of our common stock held by such stockholder on the record date with respect to each proposal.

 

Q:	How do I vote?

 

A.

You may sign and date each paper proxy card you receive and return it in the prepaid envelope. If you return your signed proxy but do not indicate your voting preferences, we will vote on your behalf “FOR” the proposals specified in this proxy statement. You may also follow the instructions on the proxy card to submit voting instructions for your shares by telephone or via the Internet. Please note that there are separate telephone and Internet voting arrangements depending upon whether shares are registered in your name or in the name of a bank or broker.

 

Q:	If my NetLogic shares are held in “street name” by my broker, will my broker vote my shares for me?

 

A:	Your broker will vote your NetLogic shares with respect to the proposals set forth in the accompanying notice to stockholders only if you provide instructions on how to vote by completing and returning a proxy card or instruction form provided to you by your broker.

 

Q:	How may I revoke or change my vote?

 

A:

You have the right to revoke your proxy any time before the meeting by notifying our corporate secretary of your revocation or returning a later-dated proxy. The last vote received chronologically will supersede any prior vote. You may also revoke your proxy by voting in person at the special meeting. Attendance at the meeting, without voting at the meeting, will not in and of itself serve as a revocation of your proxy.

 

Q:	What happens if I abstain from voting?

 

A:

If an executed proxy card is returned and the stockholder has explicitly abstained from voting on any proposal, the shares represented by the proxy will be considered present at the special meeting for the purpose of determining a quorum. In addition, while they will not count as votes cast in favor of the proposal, they will count as votes cast on the proposal to approve the stock issuance in connection with the acquisition of RMI. As a result, an abstention on the proposal will have the same effect as a vote “AGAINST” the proposal.

 

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Q:	Where can I find additional information about the special meeting and the proposed acquisition of RMI?

 

A:

This proxy statement includes important information about the merger and the other transactions contemplated by the merger agreement and the special meeting of the stockholders of NetLogic. A copy of the merger agreement is attached as Annex A to this proxy statement. Our stockholders should read this information carefully and in its entirety.

 

Q:	What should I do now?

 

A:

After carefully reading and considering the information contained in this proxy statement, including the Annex A, please fill out and sign the proxy card, and then mail your completed and signed proxy card in the enclosed prepaid envelope as soon as possible so that your shares of our common stock may be voted at the special meeting. Alternatively, you may follow the instructions on the proxy card and submit instructions on voting your shares of our common stock by telephone or over the Internet. Your proxy card or your telephone or Internet directions will instruct the persons identified as your proxy to vote your shares at the NetLogic stockholders meeting as directed by you. If you hold your shares of our common stock through a broker or other nominee, you should follow the instructions provided by your broker or other nominee when instructing them on how to vote your shares of our common stock.

 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained in this document, including Annex A hereto. Some of the risks described below relate principally to the business and the industry in which our business, including the acquired RMI business, will operate after the merger, while others relate principally to the merger and the proposed issuance of our common stock. We have also disclosed a number of material risks facing NetLogic under Item 1A of our annual report on Form 10-K for the year ended December 31, 2008, which we filed with the Securities and Exchange Commission on March 4, 2009, and in our subsequently filed quarterly reports on Form 10-Q, which are incorporated herein by reference.

The risks described below are not the only risks that we will face following the merger. Additional risks and uncertainties not currently known to us may also materially and adversely affect our business operations and financial condition or the price of our common stock following completion of the merger.

Risks Relating to the Merger

Cash expenditures and capital commitments associated with our proposed acquisition of RMI and other recent acquisitions may create significant liquidity and cash flow risks for us, and we may incur substantial debt in order to satisfy our obligations.

Our principal sources of liquidity are our cash and cash equivalents and our credit facility of $55 million with a group of banks executed in June 2009. As of June 30, 2009, our adjusted cash and cash equivalent balance totaled $25.3 million, after accounting for the $100 million purchase consideration paid on July 17, 2009 for assets related to the network search engine business of Integrated Device Technology, Inc. and the $37 million borrowings under the credit facility to partially finance the acquisition. The cash expenditures required in connection with the RMI acquisition are substantial. The merger agreement requires us to pay cash to holders of RMI common stock as part of the merger consideration payable at closing and, if applicable, the earn-out portion of the merger consideration, which amounts will increase as the average closing price of our common stock increases and could be substantial under some circumstances. We have also loaned approximately $15.0 million to RMI as a short-term bridge loan to allow RMI to meet its working capital needs and fund its operations in the ordinary course of business. In addition, we have also incurred and may continue to incur significant transaction expenses in connection with the IDT asset purchase, the RMI acquisition and other transactions.

Under the senior secured credit facility, we are required to satisfy certain financial ratio and other covenants such as:

 

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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);

 

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a minimum fixed charge covenant requiring 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;

 

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a minimum consolidated quick ratio covenant requiring 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

 

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a covenant requiring us and our subsidiaries to maintain at all times at least $20 million of unencumbered cash and cash equivalents.

Violation of those covenants would place us in default, so we must manage our financial condition carefully. Although in recent years we have generated sufficient net cash from our operations to meet our capital requirements, we will be substantially larger with greater operating cash needs as a result of the RMI acquisition.

 

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If actual results fail to meet our expectations regarding the revenues and expenses of these acquired businesses, our historical cash flows may not be sufficient to meet our capital requirements. If additional funding is required for operations, to cure loan defaults or for other purposes, we may attempt to seek funds from time to time through public or private equity or debt financing, although additional funds may not be available on terms acceptable to us or at all. We may also decide to raise additional capital at such times and upon such terms as management considers favorable and in our interests, and we have a $150 million shelf registration statement which we could use for this purpose. Under the terms of the merger agreement, however, we have agreed to limit the total amount of capital raised through equity financings prior to the closing of the merger to $50.0 million. Any such additional capital-raising transactions would be likely to further dilute the interests of our stockholders, as described below.

We will issue a large number of shares of common stock in connection with the merger, which will result in substantial dilution to our existing stockholders.

In connection with the acquisition of RMI, we have agreed to issue shares of our common stock as merger consideration to RMI stockholders and as incentive stock awards to RMI employees. We may issue up to 6,500,000 shares as merger consideration at closing and, if the maximum earn-out is achieved, up to 2,550,000 additional shares at the end of the twelve-month earn-out period, for a maximum of 9,050,000 shares, although we believe the actual number of shares that we issue will be lower than this. We may issue up to 690,000 shares of common stock in the form of restricted stock and restricted stock units to RMI employees at or shortly following the closing, and an additional 3,340,000 shares pursuant to employee stock options granted to RMI employees after the closing, for a maximum of 4,030,000 shares, although we believe the actual number of shares that we issue will be lower than this. The issuance of a total of 13,080,000 shares (as merger consideration and equity incentive awards) in connection with the merger would represent a roughly 59.0% increase in the number of shares of our common stock outstanding prior to the merger, which would be the maximum dilutive effect of the transactions. In all events, our issuance of shares of common stock in connection with the acquisition of RMI will result in substantial percentage dilution of our existing stockholders’ ownership interests, and because a substantial portion of the purchase price will be classified as goodwill and other intangible assets, the tangible net book value per share of our common stock will be materially lower after the completion of the acquisition. Our issuance of these shares also may have an adverse impact on our net income per share in fiscal periods that include (or follow) the date of the acquisition, as we anticipate that the transaction will be dilutive on the basis of net earnings per common share for the foreseeable future following the acquisition.

The actual value of the merger consideration we will pay to RMI stockholders may exceed the nominal value allocated to it by the formulas in the merger agreement.

Under the merger agreement, the number of shares of common stock we will issue as merger consideration at closing is calculated based on a fixed nominal dollar amount of merger consideration and a variable price per share of our common stock, which we refer to as the applicable closing price. The applicable closing price is generally equal to the average of the closing prices of our common stock for each day during a 20-trading day period that ends on the third trading day prior to the closing date, but the applicable closing price cannot be less than $26.97 or greater than $34.90. Because the average closing price is calculated over a 20-trading day period, the market price of our stock at the end of that period could be significantly higher or lower than the average, particularly if the market price experiences a sharp decline or increase towards the end of the period. Moreover, in the event that the average closing price falls outside the collar, the market price of our common stock at closing may be significantly higher or lower than the applicable closing price, even if the market price of our stock at closing is roughly equal to the average closing price. The amount of cash to be paid is determined with reference to the calculated average closing price without regard to the price collar and therefore is not subject to these stipulated limitations on value. To the extent that the average closing price or (in the case of the stock portion of the consideration) the market price of our common stock on the closing date exceeds the applicable closing price, the market value of the stock portion and the total amount of the cash portion of the merger consideration paid at closing will exceed the nominal value allocated to each such portion by the formulas in the merger agreement, which may cause the total value of the merger consideration paid by us at closing to exceed the nominal value of $181.35 million specified in the merger agreement.

 

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Similarly, the number of shares that we will issue in the earn-out (to the extent the revenue milestones are achieved) is determined in reference to the applicable closing price. The market price of our common stock may have changed significantly over the 12- to 15-month period between the closing date and the date the earn-out is paid. If the market price of our common stock increases substantially during this period, the market value of the stock portion of the earn-out consideration may be significantly greater than the amount allocated to it by the formulas in the merger agreement. As a result, the total value of the earn-out consideration paid by us may exceed the nominal value of $70.0 million specified in the merger agreement (including the $2.0 million of advance earn-out credit paid to the holders of RMI common stock at closing).

The calculation of the merger consideration will not be adjusted in the event the value of the business or assets of RMI declines before the merger is completed.

The calculation of the number of shares of our common stock and the amount of cash we will pay as merger consideration will not be adjusted in the event that the value of RMI’s business declines prior to the consummation of the acquisition. We will not be required to consummate the merger if RMI experiences a “company material adverse effect” (as this term is described below in “The Merger Agreement—Conditions to Consummation of the Merger”). However, we will not be permitted to terminate the merger agreement or resolicit the vote of our stockholders because of any changes in the value of the RMI business that do not rise to the level of a company material adverse effect or otherwise cause RMI to fail to satisfy a condition to closing.

If the conditions to the closing of the acquisition are not met, the acquisition will not occur, which could adversely impact the market price of our common stock as well as our business, financial condition and results of operations.

Specified conditions must be satisfied or waived before the acquisition can be completed, including, without limitation, obtaining the requisite approval of our stockholders with respect to our proposed issuance of common stock in the acquisition. These conditions are summarized in the section in this proxy statement entitled “The Merger Agreement—Conditions to the Consummation of the Merger” and are described in detail in the merger agreement attached to and included in this proxy statement as Annex A. We cannot assure you that each of the conditions will be satisfied.

If the conditions are not satisfied or waived in a timely manner and the acquisition is delayed, we may lose some or all of the intended or perceived benefits of the transaction which could cause our stock price to decline and harm our business. If the acquisition is not completed for any reason, our stock price may decline to the extent that the current market price reflects a market assumption that the acquisition will be completed.

In addition, we will be required to pay our costs related to the acquisition even if the acquisition is not completed, such as amounts payable to legal and financial advisors and independent accountants, and such costs could be significant. All of these costs will be incurred whether or not the transaction is completed.

As shares of our common stock issued in the acquisition become eligible for resale, the sale of those shares could adversely impact our stock price.

All of the shares of our common stock issued as merger consideration on the closing date will be subject to a complete trading lock-up for six months following the closing date, and 50% of such shares will be subject to a complete trading lock-up for one year following the closing date. In addition, 50% of the restricted stock units that we will issue to certain RMI employees will vest six months following the closing date and the remaining 50% will vest one year following the closing date. These equity incentive shares will be registered and will therefore generally not be subject to resale restrictions under federal securities laws. Accordingly, a substantial number of shares of our common stock will become eligible for resale six and 12 months after the closing date. Our stock price may suffer a significant decline as a result of the sudden increase in the number of shares sold in the public market or market perception that the increased number of shares available for sale will exceed the demand for our common stock.

 

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The integration of NetLogic and RMI may not be completed successfully, cost-effectively or on a timely basis.

After completing the acquisition of RMI, we will have significantly more assets and employees to manage than we did prior to the acquisition. The integration process will require us to significantly expand the scope of our operations and financial systems. Our management will be required to devote a significant amount of time and attention to the process of integrating the operations of NetLogic and RMI. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include, among others:

 

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the diversion of management’s attention from the day-to-day operations of the combined company;

 

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the management of a significantly larger company than before completion of the acquisition;

 

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the assimilation of RMI employees and the integration of two business cultures;

 

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challenges in attracting and retaining key personnel;

 

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the integration of information, accounting, finance, sales, billing, payroll and regulatory compliance systems;

 

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challenges in keeping existing customers and obtaining new customers; and

 

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challenges in combining product offerings and sales and marketing activities.

There is no assurance that we will successfully or cost-effectively integrate RMI’s operations with our own. For example, the costs of achieving systems integration may substantially exceed our current estimates. As a non-public company, RMI has not had to comply with the requirements of the Sarbanes-Oxley Act of 2002 for internal control and other procedures. Bringing its systems into compliance with those requirements may cause us to incur substantial additional expense. In addition, the integration process may cause an interruption of, or loss of momentum in, the activities of our business after completion of the acquisition. If our management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer and its results of operations and financial condition may be harmed.

Other Risk Factors Relating to NetLogic and the Combined Company

Both companies have a history of net losses, and the combined company may not be profitable after the completion of the transaction.

We reported net income of $3.6 million, $2.6 million and $0.6 million during the years ended December 31, 2008, 2007 and 2006, and net losses in years prior to fiscal 2005. At December 31, 2008, we had an accumulated deficit of approximately $76.0 million. RMI reported net losses of $19.3 million, $20.6 million and $34.3 million during the years ended December 31, 2008, 2007 and 2006, and net losses in years prior to fiscal 2005. At December 31, 2008, RMI had an accumulated deficit of approximately $178.0 million. To sustain profitability, we will have to continue to generate greater total revenue and control costs and expenses following the acquisition of RMI. We may not be able to generate greater total revenue, or limit our costs and expenses, sufficiently to sustain profitability on a quarterly or annual basis. There can be no assurances that we will continue to be profitable following the acquisition of RMI.

In order to be successful, we must retain and motivate key employees, which will be more difficult in light of uncertainty regarding the acquisition, and failure to do so could prevent us from realizing the expected benefits of the acquisition of RMI.

In order to be successful, the combined company must retain and motivate executives and other key employees. The market for highly skilled employees is limited, and the loss of key employees could have a significant impact on our operations. Employee retention may be a particularly challenging issue in connection with the merger. Employees of NetLogic or RMI may experience uncertainty about their future role with the

 

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combined company until or after strategies with regard to the combined company are announced or executed. This circumstance may adversely affect our ability to attract and retain key management, marketing and technical personnel. We also must continue to motivate employees and keep them focused on the strategies and goals of the combined company, which may be particularly difficult due to the potential distractions of the merger, including morale challenges posed by workforce reductions. The loss of key personnel could lead to loss of customers and a decline in revenues and prevent us from realizing the expected benefits from the acquisition of RMI.

We may not be able to realize the anticipated synergies and other benefits we expect to achieve from the acquisition of RMI within the timeframe that is currently expected, or at all.

Strategic transactions like our proposed acquisition of RMI create numerous uncertainties and risks. As a result, the combined company may not be able to realize the expected revenue growth and other benefits and synergies that we seek to achieve from the proposed acquisition. We believe that the businesses conducted by us and RMI are complementary in a number of respects and that the combined company can take advantage of synergies, economies of scale and other benefits in the following areas, among others:

 

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market expansion;

 

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increased sales to existing customers;

 

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product and technology synergies;

 

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operational and manufacturing synergies;

 

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research and development synergies;

 

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expansion of intellectual property and patent portfolio;

 

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geographic synergies; and

 

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cultural synergies.

However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and actual results may deviate from our expectations for a variety of reasons, including those discussed below in this section of the proxy statement.

We may not be successful in our expansion into the markets currently served by RMI and in addressing the new opportunities we expect to arise out of the combination.

RMI designs and develops high performance, power-optimized processor solutions for several target markets: infrastructure equipment, enterprise systems, security and storage appliances, data center systems and industrial and connected media devices. While we believe RMI’s business is complementary to our own, its products serve different markets than ours do, and we do not have experience competing in these markets. The success of our expansion into these new markets will depend on a number of factors, including:

 

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our ability to leverage each company’s successes to provide synergistic solutions to key customers and applications;

 

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our ability to assimilate and retain key RMI personnel who have expertise in conducting RMI’s business;

 

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our ability to preserve and grow RMI’s existing customer, distributor and ecosystem partner relationships;

 

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our ability to design and develop innovative products and solutions in these new markets and to continue RMI’s success in achieving “design wins” with key customers;

 

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our ability to provide high quality customer services and support; and

 

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our ability to compete effectively against a larger number and broader range of competitors resulting from our entry into new markets.

 

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In addition to the markets currently served by RMI, we anticipate that the combined company will be poised to address new opportunities in areas such as high-performance switching and routing control plane processing and the high-volume, ultra low-power embedded processing market for enterprise, industrial and connected media applications. If we are unsuccessful in expanding into these new market opportunities, we may not achieve the sales and revenue growth we had expected from the acquisition.

Uncertainties associated with the acquisition or the combined company may cause delays in customer orders or even loss of customers, which could offset any benefits we may realize from the diversification of our customer base.

In response to the announcement of the proposed transaction, or due to the diversion of management’s attention, current and potential customers of RMI and NetLogic may delay or defer decisions concerning their use of our products and services. In particular, prospective customers could be reluctant to purchase the combined company’s products due to uncertainty about the direction of the combined company’s product offerings and our willingness to support and service existing products. To the extent that the acquisition creates uncertainty among those persons and organizations contemplating purchases such that one large customer, or a significant group of smaller customers, delays, defers or changes purchases in connection with the planned merger, our results of operations would be adversely affected. Further, customer assurances may be made by us and RMI to address our respective customers’ uncertainty about the direction of the combined company’s product and related support offerings which may result in additional obligations of the combined company.

Both NetLogic and RMI receive a substantial portion of their respective revenues from a limited number of customers, and we expect that the operating results of the combined company will continue to depend on these customers following the acquisition.

Each of NetLogic and RMI receives a substantial portion of its revenues from a limited number of customers, and in the case of NetLogic, Cisco in particular. During the years ended December 31, 2008 and 2007, Cisco and its contract manufacturers accounted for 38% and 50% of our total revenue, respectively. During the years ended December 31, 2008 and 2007, the three largest end customers of RMI by revenue accounted for 33% and 38% of RMI’s total revenue, respectively. In addition, because our respective market segments are complementary, we and RMI sell products and services to overlapping customer bases. The combination of our companies will not reduce our dependency on sales to the key customers that we share. We expect that our financial performance following the acquisition of RMI will continue to depend in large part upon our relationship with Cisco and several other key customers of NetLogic and RMI. We cannot assure you that existing or potential customers will not develop their own solutions, purchase competitive products or acquire companies that use alternative methods in their systems. The loss of a key customer, a reduction in sales to any key customer or the inability of the combined company to attract new customers could negatively impact our revenues and results of operations.

Because NetLogic and RMI sell products on a purchase order basis and rely on estimated forecasts of customers’ needs, our results of operations following the acquisition will depend in part on the accuracy of our forecasts and our ability to accommodate changes in customer orders.

Historically, neither NetLogic nor RMI has obtained firm, long-term purchase commitments from its customers. Even after purchase orders are received, customers may cancel or reschedule these orders or request a decrease in production quantities. Any rescheduling, cancellation or decrease could subject us to a number of risks, most notably that projected sales will not materialize on schedule or at all, leading to unanticipated revenue shortfalls and excess or obsolete inventory which we may be unable to sell to other customers. RMI has in the past had customers dramatically increase their requested production quantities in excess of their previously stated forecasts and with little or no advance notice. If we do not timely fulfill RMI’s customer demands in full, its customers may cancel their orders with us, and we may be subject to liquidated damages or customer claims for cost of replacement.

 

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Like NetLogic, RMI places orders with the manufacturers of its products according to its estimates of customer demand. Because of the lead time associated with fabrication of RMI’s semiconductors, forecasts of demand for its products must be made in advance of customer orders. This process will require us to make multiple demand forecast assumptions with respect to both the customers and the end-users of the equipment and devices into which RMI’s processors are incorporated. The difficulty of accurately forecasting RMI’s end-user demand is compounded by the fact that RMI’s products are not sold directly to end users. Our demand forecast accuracy can be adversely affected by a number of factors outside of our control, including inaccurate forecasting and changes in orders placed by the customers of RMI’s products, changes in market conditions, adverse changes in product order mix and customer demand for RMI products.

If we overestimate customer demand for RMI products, we may purchase products from manufacturers that we may not be able to sell and may over-budget company operations. Conversely, if we underestimate customer demand or if sufficient manufacturing capacity were unavailable, we would forego revenue opportunities and could lose market share in the markets served by RMI’s products. In addition, our inability to meet customer requirements for RMI products could lead to delays in product shipments, force customers to identify alternative sources and otherwise adversely affect our ongoing relationships with customers of RMI products. If we are unable to adequately respond to changes made to purchase orders and production demands of customers of RMI products following the acquisition, existing RMI and NetLogic customer relationships may be adversely affected and we may not achieve the revenue growth that we expect to result from the acquisition.

There is no assurance that we will be able to continue or expand upon RMI’s past success with customer design wins following the acquisition.

RMI has achieved strategic design wins at a wide range of leading customers such as Alcatel-Lucent, Aruba, CheckPoint, Cisco, Datang Mobile, Dell, Fujitsu, HP, Huawei, Huawei-Symantec, H3C, IBM, Juniper, LG, McAfee, Motorola, NEC, Samsung, Sun and ZTE, among others. There is no assurance that we will be able to replicate or improve upon RMI’s success in obtaining design wins from these and other customers following the acquisition. This uncertainty is compounded by the fact that RMI does not have long-term commitments from any of its existing customers. These bid selection processes can be lengthy, as the customers of RMI products usually require a comprehensive technical evaluation of its products before they incorporate them into their designs. If a customer’s system designer initially chooses a competitor’s product, it becomes significantly more difficult to sell RMI’s products for use in that system because changing suppliers can involve significant cost, time, effort and risk for RMI’s customers. Our failure to win a competitive bid can result in foregoing revenues from a given customer’s product line for the life of that product. In addition, design opportunities may be infrequent or may be delayed. We expect to invest significant time and resources and to incur significant expenses to design RMI products to ensure compliance with relevant specifications, but even with these efforts we may have limited success in securing customer design wins for a number of reasons, including our management’s lack of experience with the markets served by RMI’s products, our failure to retain key RMI personnel involved in the customer design process and our failure to establish employee incentives and otherwise operate the RMI business in a manner that continues to place high priority on customer design wins. Our ability to compete in the markets in which RMI currently competes will depend, in large part, on our ability to continue to design products to ensure compliance with RMI customers’ and potential customers’ specifications and to secure design wins.

Even if we are successful in achieving customer design wins for RMI products, we may not realize the revenue growth and other benefits we expect to achieve from the acquisition.

The nature of the design process for RMI products requires that significant expenses be incurred prior to recognizing revenues associated with those expenses, which may harm our financial results. Even if a customer designs one of RMI’s products into its product offering, we cannot be assured that its product will be commercially successful, that we will receive any revenues from that manufacturer or that a successor design will include an RMI product. As a result, we may be unable to accurately forecast the volume and timing of

 

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orders and revenues associated with any new product introductions, which could adversely affect our results of operations. If we are unable to realize the revenue growth we expect to achieve from customer design wins for RMI products, we may not achieve the operational results we anticipate following the acquisition and our business may be adversely impacted.

We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration for RMI’s semiconductor solutions, which may result in reduced manufacturing yields, delays in product deliveries, increased expenses and loss of design wins and sales.

NetLogic has substantial experience in transitioning the manufacturing processes for its products to each new generation of smaller geometry process technologies and believes that it will be necessary to migrate RMI’s products to such smaller geometries as well. Any transition would require us to redesign the applicable product and require us and our foundry partners to use new or modified manufacturing processes for the product. The smallest geometry process that RMI has used for any semiconductors to date is 80 nanometer, but we expect the next generation semiconductors to be based on a 40 nanometer process. Because of our lack of experience with RMI’s products and technology, we may not be as successful in migrating RMI’s products to smaller geometry process technologies as we have been with our own products. We will also depend on our relationships with foundry subcontractors to transition to smaller geometry processes successfully. If we experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration for RMI products, we may experience reduced manufacturing yields, delays in product deliveries, increased expenses and loss of design wins and sales, any of which could prevent us from realizing the anticipated benefits from the acquisition.

We expect to rely on third-party technologies for the development of RMI’s products, and our inability to use these technologies in the future could harm our ability to compete in RMI’s markets.

RMI relies on third parties for technologies that are integrated into its products, such as wafer fabrication and assembly and test technologies used by its contract manufacturers, as well as licensed MIPS architecture technologies. If we are unable to continue to use or license these technologies on reasonable terms, or if these technologies fail to operate properly following the acquisition, we may not be able to secure alternatives in a timely manner, and our ability to remain competitive in the markets served by RMI would be harmed. In addition, the MIPS license requires that certain improvements be made available to the community of all of MIPS’ licensees, which could conceivably reduce the proprietary advantage that we will have with this architecture. If we are unable to license technology from third parties on commercially reasonable terms in order to continue to develop current products or to develop future products for the markets served by RMI, we may not be able to develop these products in a timely manner or at all.

Like NetLogic, RMI has lengthy sales cycles, which creates a number of risks that might prevent us from achieving the revenue growth we expect from the acquisition.

The time between which a design win is achieved for an RMI product and the time the product is shipped to the customer is lengthy. Design wins for RMI’s advanced solutions can take from 18 to 36 months to ramp up to volume production and typically have a life cycle of five to seven years. In anticipation of product orders for RMI products, we may incur substantial costs before the sales cycle is complete and before we receive any customer payments. As a result, in the event that a sale is not completed or is cancelled or delayed, we may have incurred substantial expenses, making it more difficult for us to become profitable or otherwise negatively impacting our financial results. Furthermore, because of the lengthy sales cycle of RMI products, our receipt of revenue from our selling efforts may be substantially delayed, our ability to forecast our future revenue may be more limited and our revenue may fluctuate significantly from quarter to quarter.

The development schedule for RMI products is influenced by a number of factors, many of which will be beyond our control. If we are unable to execute upon the development plans for existing and future generations of RMI products, the shipment of RMI products could be delayed, we may miss a product life cycle for a customer

 

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of an RMI product and the opportunity for sales to that customer could be impacted for several years. Consequently, the RMI brand name may be impaired, our reputation may be damaged and customers of RMI products may be reluctant to buy RMI products from us, which could harm our ability to retain existing customers and attract new customers and prevent us from recognizing the anticipated revenue growth from the acquisition of RMI.

The average selling prices of NetLogic’s and RMI’s products have declined in the past and may continue to decline following the acquisition, which could reduce the combined company’s revenue and gross margin.

The average selling prices of the respective products of NetLogic and RMI have generally declined over the course of their commercial lives, principally due to the supply of competing products, reduction in demand from customers, pressure from customers to reduce prices and product cycle changes. We expect these trends to continue in the combined company. Declining average selling prices on RMI products can adversely affect our future operating results and prevent us from realizing the expected growth from the acquisition. For the combined company to achieve the operating results we expect following the acquisition, we will need to develop and introduce new products and product enhancements for the RMI business on a timely basis, while controlling costs. If we are unable to offset any reductions in our average selling prices by increasing our sales volumes and achieving corresponding production cost reductions, or if we fail to develop and introduce new products and enhancements on a timely basis, our revenue and operating results will suffer.

If we are unable to continue to develop or maintain RMI’s existing relationships with its distributors and ecosystem partners, we may not achieve the growth of sales and revenues we anticipate from the acquisition and our operating results may suffer.

A significant portion of sales of RMI products are made through third-party distribution agreements. Termination of a distributor relationship following our acquisition of RMI, either by us or by the distributor, could result in a temporary or permanent loss of revenues, until a replacement distributor can be established to service the affected end-user customers or territories. We may not be successful in finding suitable alternative distributors on satisfactory terms or at all and this could adversely affect our ability to sell in certain locations or to certain end-user customers. These arrangements with distributors typically include price protection provisions if list prices are reduced for RMI products. Additionally, if we terminate an existing arrangement with a distributor of RMI products, we may be obligated to repurchase unsold products.

RMI also has developed important relationships with third parties, which RMI refers to as ecosystem partners, that provide operating systems, tool support, reference designs and other services designed for specific uses with RMI’s semiconductors. We believe that these relationships enhance the ability of purchasers of RMI products to introduce their products into market quickly. If we are unable to develop or maintain these relationships, our ability of the combined company to compete in the markets for RMI’s products would be impaired.

We will continue to face strong competition within the semiconductor industry following the acquisition of RMI, which could adversely affect our revenue growth and operating results.

The semiconductor industry is extremely competitive. Although the acquisition of RMI may increase our customer base and resources, many of NetLogic’s and RMI’s current competitors will continue to have more diverse customer bases and greater financial and other resources than the combined company will have. Our competitors may be able to better anticipate customer and industry demands and to respond more quickly and efficiently to those demands, such as with product offerings, financial discounts or other incentives. We cannot assure you that the combined company will be able to compete effectively against these competitors.

Our acquisition of RMI will expose us to a new field of competitors with which we may have limited familiarity. Because NetLogic and RMI provide semiconductor solutions for distinct, although complementary, market segments, the combined company will face significantly more competition than either company faced before the acquisition. Within our target markets, we currently compete primarily with Renesas Technology,

 

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Corp., LSI Corporation, Applied Micro Circuits Corporation, Broadcom Corporation, Marvell Technology Group Ltd., Cortina Systems, Inc. and Vitesse Semiconductor Corporation. Within its target markets, RMI currently faces competition from a number of established companies, including Broadcom Corporation, Cavium Networks, Inc., Freescale Semiconductor, Inc., Hifn, Inc., Intel Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc., Samsung Semiconductor and others. As we enter new markets and pursue additional applications for our products, we expect to face competition from an even larger number of competitors. If we cannot compete successfully, our business, operating results and financial condition could be significantly harmed.

The cyclical nature of the semiconductor and communications industries could adversely affect the operating results and business of the combined company.

Historically, there have been significant downturns in this industry segment, characterized by reduced demand for integrated circuits and accelerated erosion of average selling prices. At times, these downturns have lasted for prolonged periods of time. Furthermore, from time to time, the semiconductor industry also has experienced periods of increased demand and production constraints, in which event we may not be able to have our products produced in sufficient quantities, if at all, to satisfy our customers’ needs. It is likely that the communications integrated circuit business will experience similar downturns in the future and that, during such times, our business could be affected adversely. It is also likely that the semiconductor industry will experience periods of strong demand. We may have difficulty in obtaining enough products to sell to our customers or may face substantial increases in the wafer prices charged by our foundries. RMI’s business is also subject to the cyclicality of the communications industry and we expect that this will continue in the combined company. The communications industry has, in the past, experienced pronounced downturns and is currently in the midst of a pronounced downturn, and these cycles may continue in the future. To respond to a downturn, many networking equipment providers may slow their research and development activities, cancel or delay new product development, reduce their inventories and take a cautious approach to acquiring RMI’s products, which would have a significant negative impact on our business.

Our operating results will depend in part on the growth of developing sectors of the connected media market served by RMI.

RMI’s business is highly dependent on developing sectors of the connected media market, including portable media players, personal navigation devices, automobile infotainment devices and home media players. The connected media market is highly competitive and is characterized by, among other things, frequent introductions of new products and short product life cycles. If the target markets for the RMI products within the consumer electronics market do not grow as rapidly or to the extent anticipated, the combined company’s business could suffer. RMI currently derives a significant portion of its revenues from the sale of its semiconductor solutions for use in emerging connected media applications. Our ability to sustain and increase revenue is in large part dependent on the continued growth of these rapidly evolving market sectors, whose future is largely uncertain. Many factors could impede or interfere with the expansion of these connected media market sectors, including a slowdown in overall consumer spending, consumer demand in these sectors, general economic conditions, other competing consumer electronic products and insufficient interest in new technology innovations. Any of these dynamics in the consumer electronics market could harm future sales of the RMI products and prevent us from realizing the anticipated benefits of our acquisition of RMI.

RMI’s business is subject to seasonality, which may cause us to experience greater fluctuation of our revenues following the acquisition.

RMI sells a significant number of its semiconductors into the connected media device market. RMI’s customers who manufacture products for the consumer electronics market typically experience seasonality in the sales of their products, which in turn may affect the timing and volume of orders for RMI’s semiconductors. RMI typically experiences slower rates of growth in sales during its first fiscal quarter ending March 31 and higher sales growth rates in RMI’s other fiscal quarters as a result of the seasonality of demand associated with the

 

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connected media markets into which RMI sells its products. To the extent customers for the RMI products experience greater seasonality in the sales of their connected media products containing RMI’s semiconductors, our operating results may vary significantly from quarter to quarter.

Our gross margins may fluctuate in future periods, which could have a significant impact on the combined company’s financial results.

RMI’s products are incorporated in equipment and devices that are sold to end users in each of the following market segments of the global connectivity network: infrastructure equipment, enterprise systems, security and storage appliances, data center systems and industrial and connected media devices. The gross margins that RMI has historically realized from these sales heavily depend on the proportion of its revenues that are attributable to each of these three segments. For example, manufacturers’ gross margins for product sales to the connected media device segment are typically lower than the margins realized from sales to the infrastructure equipment and enterprise systems segments. As a result, the gross margins on RMI products may vary from quarter to quarter as a result of changes in the proportion of its sales to each of these three segments of the global connectivity network and its ability to reduce costs as the average selling prices of its products decline. The gross margins on RMI products may also fluctuate as a result of changes in general market conditions and overall customer demand for its products. To the extent that we experience fluctuating or declining gross margins on RMI products in any particular period following the acquisition, our business, results of operations and financial condition could suffer.

The reliance of NetLogic and RMI on a limited number of overlapping third-party subcontractors, and TSMC in particular, for the manufacture, assembly, packaging and testing of their products makes the combined company susceptible to significant operational risks.

Like NetLogic, RMI does not manufacture, assemble, package or test its products, and must rely on third-party subcontractors to perform these services. RMI currently relies on Taiwan Semiconductor Manufacturing Company, or TSMC, to produce all of RMI’s silicon wafers, other than those used in RMI’s XL7110 product, for which RMI relies upon United Microelectronics Corporation, or UMC. RMI also relies on Advanced Semiconductor Engineering, or ASE, and ISE to assemble, package and test all of RMI’s semiconductors, and RMI relies upon JSI Shipping to provide supply chain management services. Because of its reliance on a limited number of third-party subcontractors for these services, RMI faces many of the same risks as we do in this regard, and we expect these risks to continue to be present in the combined company. These risks include, among others:

 

•

if these subcontractors do not provide high-quality products, services and production and test capacity for RMI products in a timely manner, or if one or more of these subcontractors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer orders for RMI products on a timely basis, our relationships with customers of RMI products could suffer, our growth following the acquisition could be limited;

 

•

we do not expect to have long-term supply contracts with any third-party subcontractors for RMI’s products and we cannot be assured that adequate capacity will be available, or will be available on commercially acceptable terms, to meet future demand for RMI products;

 

•

we would face significant challenges associated with moving our semiconductor production from the existing manufacturers of RMI’s products to another manufacturer with whom we do not have a pre-existing relationship, and we may not be able to make any such arrangement in a timely fashion or at all;

 

•

TSMC and other third-party contractors for our and RMI’s products are concentrated primarily in Taiwan, an area subject to earthquakes and other disruptions which could cause significant delays in the production or shipment of our products; and

 

•

we and our wafer foundries have experienced, and are likely to continue to experience manufacturing defects and reduced manufacturing yields related to errors or problems in our wafer foundries’ manufacturing processes or the interrelationship of their processes with our designs, which may affect the quality or reliability of our products.

 

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Any of these problems, to the extent that they prevent us from satisfying customer orders for RMI products or create delays may adversely impact our relationships with customers for RMI’s products and limit our revenue growth following the acquisition.

A significant portion of the customers, contract manufacturers and operations of the combined company will be located outside of the United States, which subjects us to additional risks, including increased complexity and costs of managing international operations and geopolitical instability.

Like NetLogic, RMI conducts, and expects to continue to conduct, a significant amount of business outside the United States, particularly in Asia and Europe. Both companies have international operations in India and China. RMI also has a number of sales offices located outside the United States. During the years ended December 31, 2008 and 2007, sales in Asia represented 79% and 81% of RMI’s total revenue, respectively. Even customers that are based in the United States often use contract manufacturers based in Asia to manufacture their systems and it is the contract manufacturers that purchase products directly from RMI. As a result of the international nature of our business and the concentration of our manufacturing operations in Taiwan, the combined company will face numerous challenges, including increased complexity and costs of managing international operations and geopolitical instability.

Our failure to protect RMI’s intellectual property rights adequately could impair our ability to compete effectively or to defend ourselves from litigation, which could harm our business, financial condition and results of operations.

Like NetLogic, RMI relies primarily on patent, copyright, trademark and trade secret laws, as well as confidentiality and nondisclosure agreements and other methods, to protect its proprietary technologies and know-how. RMI has 63 issued patents and 63 pending patent applications in the United States, and two issued and 15 pending foreign patent applications. Even if the pending patent applications are granted, the rights granted may not be meaningful or provide it with any commercial advantage. For example, these patents could be opposed, contested, circumvented or designed around by RMI’s competitors or be declared invalid or unenforceable in judicial or administrative proceedings. The failure of RMI’s patents to adequately protect its technology might make it easier for its competitors to offer similar products or technologies. RMI’s foreign patent protection is generally not as comprehensive as RMI’s United States patent protection and may not protect its intellectual property in some countries where its products are sold or may be sold in the future. Many United States-based companies have encountered substantial intellectual property infringement in foreign countries, including countries where RMI sells products. Even if foreign patents are granted, effective enforcement in foreign countries may not be available. As a result, RMI’s intellectual property rights and patent portfolio may have less value than we have anticipated.

Some of the software used with RMI’s products, as well as that of some of RMI’s customers, may be derived from so called “open source” software that is generally made available to the public by its authors and/or other third parties. This open source software is often made available to RMI under licenses, such as the GNU General Public License, which impose certain obligations on RMI in the event RMI were to make available derivative works of the open source software. These obligations may require us in the future to make source code for RMI’s derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license historically used to protect RMI’s intellectual property. In addition, there is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the determination of which works are subject to the terms of such licenses. In the event the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work.

 

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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

Certain statements in this proxy statement which are not historical facts may constitute “forward-looking statements” that involve risks and uncertainties. These forward-looking statements address, among other things, the anticipated effects of the acquisition of RMI. Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Actual results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors. These factors include, but are not limited to, the following:

 

•

the possibility that the parties may be unable to achieve expected synergies and operating efficiencies in the proposed transaction within the expected time-frames or at all;

 

•

integration of the operations of RMI with those of NetLogic may be more difficult, time-consuming or costly than expected and may not be as successful as the parties anticipate;

 

•

revenues of the combined business following the transaction may be lower than expected;

 

•

operating costs, customer loss and business disruption (including, without limitation, difficulties in maintaining relationships with employees, customers, clients or suppliers) of the combined business may be greater than expected following the transaction;

 

•

the ability to retain key employees of RMI and NetLogic subsequent to the completion of the transaction;

 

•

the conditions to the completion of the transaction may not be satisfied;

 

•

regulatory approvals required for the transaction might not be obtained on the terms expected and obtaining any such approvals or any other necessary regulatory reviews may not occur on the anticipated schedule;

 

•

the parties might not be able to meet expectations regarding the timing, completion and effects of the transaction;

 

•

RMI and NetLogic are subject to intense competition;

 

•

the failure of either RMI or NetLogic to protect its intellectual property rights may weaken the competitive position of the combined company;

 

•

in the future third parties may assert claims, including, without limitation, intellectual property infringement claims, that could materially adversely affect the operating results of the combined company; and

 

•

other factors described in this proxy statement under “Risk Factors.”

All forward-looking statements in this proxy statement are qualified in their entirety by this cautionary statement, and no person undertakes any obligation to update publicly any forward-looking statement for any reason, except as required by law, even as new information becomes available or other events occur in the future. Readers are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof.

 

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SPECIAL MEETING OF NETLOGIC STOCKHOLDERS

General; Date, Time and Place

This proxy statement is being furnished in connection with the solicitation of proxies on behalf of NetLogic’s board of directors for use at a special meeting of the NetLogic stockholders to be held on [•], 2009, at [•] a.m., local time, or at any adjournments or postponements thereof. The special meeting will be held at the offices of [            ]. If you need directions to the location of the special meeting in order to attend the meeting and vote in person, please contact NetLogic’s Vice President, General Counsel and Secretary, Roland Cortes, at (650) 961-6676.

Purpose of Meeting

The special meeting is being held to request that stockholders consider and vote upon a proposal to approve the issuance of a maximum of 13,080,000 shares of our common stock in connection with our proposed acquisition of RMI as described in this proxy statement. In addition, you are also being asked to approve any adjournment of the special meeting, including for the purpose of soliciting additional proxies, in the discretion of the proxies (or either of them).

We do not expect a vote to be taken on any other matters at the special meeting. If any other matters are properly presented at the special meeting for consideration, however, the holders of the proxies, if properly authorized, will have discretion to vote on these matters in accordance with their best judgment.

Record Date; Voting Information

The record date for the special meeting is [•], 2009. If you were a stockholder of record of our common stock at the close of business on the record date, you are entitled to notice of, and to vote at, the special meeting and any adjournments thereof. At the close of business on the record date, [•] shares of our common stock were outstanding and entitled to vote. Stockholders are entitled to one vote on each matter submitted to the stockholders for each share of our common stock held as of the record date.

Required Votes

The proposal to approve the issuance of our common stock in connection with the acquisition of RMI must be approved by the affirmative vote of a majority of the shares present in person and voting on the proposal or represented by proxy and voting on the proposal.

The adoption of the proposal to permit the proxies to adjourn the special meeting, including for the purpose of soliciting additional proxies, requires the affirmative vote of the majority of the shares of our common stock present in person or represented by proxy at the meeting and entitled to vote on the record date, regardless of whether a quorum is present.

Quorum

Shares entitled to vote at the special meeting may take action on a matter at the special meeting only if a quorum of those shares exists with respect to that matter. The presence at the meeting, in person or when authorized, by means of remote communication or represented by proxy, of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting will constitute a quorum for the transaction of business at the special meeting.

Abstentions and Broker Non-Votes

Under the Delaware General Corporation Law, an abstaining vote and a broker “non-vote” are counted as present and are, therefore, included for purposes of determining whether a quorum of shares is present at the

 

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special meeting. A broker “non-vote” occurs when a broker or other nominee holding shares for a beneficial owner signs and returns a proxy with respect to shares of common stock held in a fiduciary capacity (typically referred to as being held in “street name”) but does not vote on a particular matter because the nominee does not have the discretionary voting power with respect to that matter and has not received instructions from the beneficial owner. Under the rules that govern brokers who are voting with respect to shares held in street name, brokers have the discretion to vote such shares on routine matters but not on non-routine matters. The proposals that NetLogic stockholders are being asked to vote on at the special meeting are not considered routine matters and accordingly brokers or other nominees may not vote without instructions.

Broker non-votes are considered present but not entitled to vote on proposals. Broker non-votes will not affect the outcome of the vote on the proposal to approve the issuance of our common stock in connection with the acquisition of RMI because broker non-votes are excluded from the tabulation of votes cast on the proposal. Broker non-votes will, however, have the same effect as votes “AGAINST” the proposal to permit the proxies to adjourn the special meeting, because the required vote for that proposal is a majority of the shares present in person or by proxy at the meeting.

Abstentions are counted as present and entitled to vote for purposes of establishing a quorum. An abstention will have the same effect as a vote “AGAINST” the proposal to approve the issuance of our common stock in connection with the acquisition of RMI because abstentions are included in the tabulation of votes cast on the proposal. An abstention will also have the same effect as a vote “AGAINST” the proposal to permit the proxies to adjourn the special meeting.

Adjournment or Postponement

If a quorum is not present at the special meeting, the stockholders entitled to vote at the meeting, present in person or represented by proxy, have the power to cause the meeting to be adjourned, including for the purpose of soliciting additional proxies, from time to time, without notice other than announcement at the meeting, until a quorum is present or represented by proxy. At an adjourned meeting at which a quorum is present or represented by proxy any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjournment meeting, a notice of the adjourned meeting will be given to each stockholder of record entitled to vote at the adjourned meeting.

Recommendation of NetLogic’s Board of Directors

Our board of directors has unanimously adopted and approved the merger agreement and believes that our acquisition of RMI pursuant to the terms of the merger agreement, including the proposed issuance of our common stock in connection with the acquisition, is in our and our stockholders’ best interests. For a description of the factors considered by our board of directors in making its determination with respect to the acquisition, see the section in this proxy statement entitled “The Merger – NetLogic’s Board of Directors’ Reasons for the Merger.”

OUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ISSUANCE OF NETLOGIC COMMON STOCK IN CONNECTION WITH THE ACQUISITION OF RMI.

Solicitation and Voting Procedures

To vote in person, a stockholder must attend the special meeting, and then complete and submit the ballot provided at the meeting. To vote by proxy, a stockholder must mark, sign, and date the enclosed proxy card and mail it to our transfer agent or submit proxy instructions electronically by using the Internet and logging on to www.eproxy.com/netl/ as provided on the proxy card. The board of directors has appointed Ronald Jankov and

 

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Roland Cortes as holders of the proxies submitted in response to the solicitation pursuant to this proxy statement. An automated system administered by our transfer agent tabulates stockholder votes submitted by proxy, and an officer of NetLogic will tabulate votes cast in person at the special meeting.

The cost of soliciting proxies, including expenses in connection with preparing and mailing of this proxy statement, will be borne by us. Copies of solicitation material will be furnished to brokerage houses, fiduciaries and custodians holding shares in their names that are beneficially owned by others so that they may forward this solicitation material to such beneficial owners. We will reimburse brokerage firms and other persons representing beneficial owners of common stock for their expenses in forwarding proxy material to such beneficial owners. Solicitation of proxies by mail may be supplemented by telephone, telegram, electronic facsimile transmission and other electronic means, and personal solicitation by our directors, officers or employees. No additional compensation will be paid to our directors, officers or employees for such solicitation. We have retained Wells Fargo Shareowner Services to assist in the distribution of proxies for a fee estimated to be approximately $5,000 plus reasonable out-of-pocket expenses. We have retained [            ] to assist us in the solicitation of proxies, and [            ] will receive fees of approximately $[            ] for this service, in addition to reimbursement of out-of-pocket expenses.

Copies of certain reports and statements that we have previously filed with the Securities and Exchange Commission, or SEC, are being mailed to stockholders with this proxy statement. Additional copies of these SEC filings may be obtained by any stockholder without charge by making a request through our website “Investor Information” pages at www.netlogicmicro.com or by written request addressed to: Investor Relations, NetLogic Microsystems, Inc., 1875 Charleston Road, Mountain View, California 94043.

Revocability of Proxies

You can revoke your proxy at any time before the voting at the special meeting by sending a properly signed written notice of your revocation to the Secretary of NetLogic, by submitting another proxy that is properly signed and bearing a later date, by following the specified procedures for submitting a proxy electronically and changing your vote, or by voting in person at the special meeting. Attendance at the special meeting will not itself revoke an earlier submitted proxy. You should direct any written notices of revocation and related correspondence to NetLogic Microsystems, Inc., 1875 Charleston Road, Mountain View, California 94043, Attention: Secretary.

*    *    *

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR THE STOCKHOLDER MEETING TO BE HELD ON [•], 2009

This Proxy Statement and the Proxy Card and are available at

[http://www.netlogicmicro.com/proxymaterials.htm.]

 

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THE MERGER

At the NetLogic special meeting, our stockholders will be asked to consider and vote upon a proposal to approve the issuance of shares of our common stock in connection with our proposed acquisition of RMI. Set forth below in this section, and in the section entitled “Merger Agreement” beginning on page 33 below, is a discussion of the proposed transaction, including a description of the terms and conditions of the merger agreement. You should review these sections carefully in connection with your consideration of the proposal.

General Description

On May 31, 2009, NetLogic and merger sub entered into the merger agreement with RMI for the acquisition of RMI through the merger of merger sub with and into RMI. The parties intend for the merger to constitute a tax-free reorganization for federal income tax purposes.

The merger agreement provides for merger consideration consisting of the issuance of shares of our common stock to the holders of RMI preferred stock, the payment of cash to the holders of RMI common stock, and an escrow of a portion of the shares of our common stock issued to the RMI preferred stockholders as a source of indemnity for future claims. Merger consideration will be paid at the closing date of the acquisition and, subject to the attainment of earn-out objectives applicable to the acquired business during the 12-month period following the closing date, within 90 days after the first anniversary of the closing date.

As soon as practicable after satisfaction or waiver, to the extent permitted in the merger agreement, of all conditions to the merger, RMI and merger sub will file a certificate of merger with the Secretary of State of the State of Delaware and make all other filings or recordings required by Delaware law in connection with the merger. At the effective time, merger sub will merge with and into RMI, and RMI will be the surviving corporation in the merger and will become our wholly-owned subsidiary. The closing of the merger is currently anticipated prior to the end of the third quarter of 2009.

Background of the Merger

On January 22, 2009, Ron Jankov, our President and Chief Executive Officer, met with Behrooz Abdi, RMI’s President and Chief Executive Officer and a member of its board of directors, at RMI’s headquarters in Cupertino, California to discuss ideas for strategic partnerships, investment and other business opportunities.

Thereafter, between January 29 and February 6, 2009, Kelvin Khoo, our Senior Director of Business Development, met on three occasions with Mark Litvack, RMI’s Director of Business Development, to discuss the potential for joint business arrangements.

On February 11, 2009, Mr. Abdi met with Mr. Jankov at our headquarter in Mountain View, California. Mr. Abdi advised Mr. Jankov that RMI intended to raise additional equity capital and proposed that NetLogic invest in the financing. Mr. Jankov indicated that NetLogic might have an interest in doing so.

On February 12, 2009, Steven Geiser, RMI’s Chief Financial Officer, and Mr. Litvack met with Niall Bartlett, our Vice President of Corporate Development, and Mr. Khoo at our office to present RMI’s investor presentation. At that meeting, the parties also discussed the possibility of entering into a business agreement in connection with our investment in the proposed financing.

On February 13, 2009, we provided a draft of a business agreement to RMI. Subsequently, multiple meetings and calls between Mr. Litvack and Mr. Khoo took place to negotiate the key terms of the business agreement.

On March 10, 2009, Mr. Jankov and Mr. Abdi had a phone conversation during which they discussed a possible combination of NetLogic and RMI.

 

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On March 11, 2009, Mr. Abdi, Mr. Geiser and Mr. Litvack met with Mr. Jankov, Mike Tate, our Chief Financial Officer, and Mr. Khoo at our office for RMI to present a business overview and details on RMI’s ultra low-power processor product to NetLogic.

On March 18, 2009, Messrs. Abdi, Geiser and Litvack visited our office to present the financial and customer overview of the RMI business to Messrs. Jankov, Tate and Khoo. The next day, Messrs. Tate and Khoo visited RMI’s office to present a corporate overview of NetLogic to Messrs. Abdi, Geiser and Litvack.

Mr. Khoo and Mr. Litvack met three times between March 20 and April 1, 2009 to discuss at a high level the terms and conditions of a potential acquisition of RMI by NetLogic. On April 6, 2009, Mr. Jankov and Mr. Abdi had a phone conversation to discuss some of the key terms for the potential acquisition. Mr. Khoo and Mr. Litvack met again on April 9, 2009 to continue discussions of proposed acquisition terms.

On April 14, 2009, Mr. Abdi and Mr. Litvack visited our office to present details on RMI’s business to Messrs. Jankov, Tate and Khoo. Following the meeting, Mr. Jankov and Mr. Abdi had a dinner meeting with Bruce Dunlevie, a member of RMI’s board of directors.

We held a meeting of our board of directors on April 15, 2009 at which members of our management presented an overview of RMI’s business and a preliminary financial and strategic analysis of RMI. The presentation included revenue projections based on assumptions of RMI’s management and financial, statistical and other information concerning RMI’s products, customers, strategic partners and competitors. The opportunity to acquire RMI, as well as certain network search engine assets of IDT, was discussed by our board of directors at the meeting.

On April 17, 2009, the companies executed an amendment to their Mutual Non-Disclosure Agreement dated June 8, 2008 to particularly address the continuing negotiations regarding the proposed merger. On the same date, we provided RMI with a non-binding letter of intent to acquire all of the outstanding capital stock and rights to acquire capital stock of RMI for $165 million in shares of our common stock and the issuance of $55 million in restricted stock units and/or options to acquire shares of our common stock to continuing RMI employees. This proposal provided that pricing for our common stock would be based on the average closing price of our common stock over the 20-trading day period ending on the third trading day prior to the closing date.

On April 19, 2009, Messrs. Geiser and Litvack met with Messrs. Tate and Khoo at our office to present a financial analysis of the RMI business.

On April 22, 2009, at a regularly schedule meeting of our board of directors, Messrs. Jankov, Tate and Khoo provided our board of directors with an update on the negotiations between the two companies.

On April 24, 2009, Mr. Khoo and Mr. Litvack met to discuss the terms of the non-binding letter of intent submitted by NetLogic on April 17, 2009. Mr. Jankov and Mr. Abdi had a follow-up phone conversation to discuss the terms of the non-binding letter of intent on April 26, 2009.

On April 27, 2009, we provided RMI with a revised non-binding letter of intent. This proposal provided for the payment to RMI of merger consideration totaling $180 million up front, payment of up to $70 million in additional earn-out consideration and the issuance of $65 million of shares of our common stock to continuing RMI employees in the form of stock options and restricted stock units. In addition, this proposal incorporated a price collar concept that would establish an upper and lower limit on the applicable closing price of our common stock for the purpose of valuing the shares of our common stock issued as merger consideration and equity incentive awards, and that the average closing price be determined based on the 20-trading day period ending May 6, 2009.

 

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On April 28, 2009, Mr. Jankov met for dinner with Mr. Abdi and RMI directors Henry Kressel, Bruce Dunlevie and Don Schrock. The next day, RMI provided NetLogic with its response to the non-binding letter of intent. RMI proposed modifications to the earn-out, the price collar and other legal terms and requested that we provide to RMI a $15 million interim bridge loan.

On May 5, 2009, NetLogic provided RMI with a revised non-binding letter of intent. This version of the letter of intent included revised proposals on the earn-out and the collar as well as changes to the termination, escrow, indemnification and other legal terms. Following this, Mr. Tate, Mr. Khoo and representatives of Bingham McCutchen LLP, or Bingham, our legal advisor, met with Mr. Geiser, L. William Caraccio, RMI’s General Counsel, Mr. Litvack and representatives of Pillsbury Winthrop Shaw Pittman LLP, or Pillsbury, RMI’s legal advisor, at the offices of Bingham to discuss and negotiate the key terms of the letter of intent. The same individuals resumed their negotiations on May 6, 2009.

On May 7, 2009, NetLogic and RMI executed a letter of intent setting forth substantially the same financial terms as would later be reflected in the merger agreement.

Between May 8 and May 31, 2009, NetLogic personnel and attorneys from Bingham and other law firms representing NetLogic in the transaction conducted a due diligence review of RMI.

At various dates and times between May 25 and May 31, 2009, representatives of NetLogic and its attorneys from Bingham met with RMI’s representatives and its attorneys from Pillsbury at Bingham’s offices to negotiate the key terms of the merger agreement.

On May 30, 2009, our board of directors held a special meeting to discuss the proposed acquisition terms and merger agreement. During this meeting:

 

•

Roland Cortes, our General Counsel, updated the board of directors on developments in negotiations since the board of directors’ previous meeting on April 15, 2009;

 

•

Mr. Tate, Mr. Cortes and a representative of Bingham presented to the board of directors the results of the due diligence review of RMI conducted by NetLogic and the law firms representing NetLogic in the transaction;

 

•

A representative of Bingham outlined the key terms of the merger agreement and the legal duties and responsibilities of the board of directors; and

 

•

Mr. Tate discussed the likely financial impact of the acquisition upon our financial condition, results of operations, cash flow and stockholders’ equity.

After extensive discussion and deliberation on the proposed transaction, our board of directors unanimously determined that the merger agreement and the merger were advisable and in the best interests of our stockholders, approved the merger agreement and its execution and resolved to recommend that our stockholders approve the issuance of shares of our common stock in connection with the acquisition.

On May 31, 2009, NetLogic and RMI executed the merger agreement.

NetLogic’s Board of Directors’ Reasons for Approval of the Merger

We believe the combination with RMI presents significant opportunities to grow our business and address substantially larger markets while taking advantage of a number of sales, marketing and research and development synergies.

 

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Market Expansion

The growth drivers that are opening up new opportunities for our knowledge-based processor and high performance physical layer products such as the rapid growth in converged IP traffic and demand for the support of advanced IP services, including video, 3G/4G, voice-over-IP and enhanced security, are also opening up new market growth opportunities for RMI’s high-performance multi-core, multi-threaded processors. RMI has established a leadership position in the high value and rapidly growing market for “data-in-flight” networking, communications, security and storage applications. We also believe that RMI’s technology and products can address new opportunities in high-performance switching and routing control plane processing. Beyond that, we believe that over time there will be opportunities in the high-volume, ultra low-power embedded processing market for enterprise, industrial and connected media applications.

Increased Sales to Existing Customers

As our respective market segments are complementary, we expect to be able to offer a broader mix of solutions, services and support to key customers. RMI has design wins at a wide range of leading customers such as Alcatel-Lucent, Aruba, CheckPoint, Cisco, Datang Mobile, Dell, Fujitsu, HP, Huawei, Huawei-Symantec, H3C, IBM, Juniper, LG, McAfee, Motorola, NEC, Samsung, Sun and ZTE, among others, many of which are also customers of ours. In addition, we believe the combined entity will lessen the concern of some larger customers regarding the long-term financial viability of a stand-alone RMI and give them greater confidence about designing in RMI’s products.

Product and Technology Synergies

The acquisition will provide us with an expanded portfolio of highly advanced products for existing as well as new customers. Our ability to provide a more comprehensive portfolio of truly differentiated platform-level solutions combining products currently offered by us alongside RMI’s will further strengthen our customers’ ability to support the complexity and speeds of next-generation converged IP networks.

Product Leadership

RMI offers a family of highly innovative multi-core, multi-threaded processors that deliver best-in-class performance, low-power profile and scalability for advanced networking, communications, data center, security, storage, industrial and connected media applications. The sophisticated architectural innovations of RMI’s processors have allowed RMI to achieve greater performance in advanced data plane and control plane processing applications compared to competing architectures, while also achieving much lower power consumption. In addition, RMI has successfully executed on delivering products in advanced technology nodes, including the recently introduced XLP processor which will be developed on TSMC’s 40 nanometer node, allowing additional power and performance capabilities.

R&D Team and Skill Set Synergies

The combination of our and RMI’s R&D centers will bring together critical skill sets in high-speed circuit design, processor architectures and innovative low-power techniques in advanced manufacturing process nodes, as well as software expertise that will enable us to accelerate the product roadmaps of both companies and continue to deliver best-in-class products and solutions. For example, both companies are designing full custom circuits using TSMC’s advanced 40 nanometer process technology. This will enhance our ability to leverage our respective design methodologies, IP portfolio and operational expertise to bring products to market more quickly and efficiently on this advanced product node.

Expand Intellectual Property and Patent Portfolio

The acquisition of RMI will expand our intellectual property portfolio and will add approximately 63 issued U.S. patents in the areas of high-performance and low-power processor design and development.

 

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Operational and Manufacturing Leverage

Because both companies utilize TSMC as the primary fabrication partner and many of the same packaging and assembly suppliers, we believe that we can achieve benefits of scale from the combination and reduce costs for our products by joining forces and driving operational leverages in the cost structure of the combined company. We also believe that we can improve RMI’s manufacturing yields by sharing our expertise.

Geographic Synergies

We believe there are substantial synergies due to the proximity of our headquarters in Silicon Valley, and our respective international design centers in India and China.

Cultural Similarities

We believe both companies share common corporate cultures and values that are driven by strong technical excellence, innovation and execution, resulting in successful track records of delivering best-in-class products to our respective customers.

Recommendation of NetLogic’s Board of Directors

After careful consideration, our board of directors resolved that the transactions contemplated by the merger agreement are in the best interests of the stockholders of NetLogic and approved the merger agreement, the merger, the issuance of shares of our common stock in connection with the merger and the other transactions contemplated by the merger agreement. The NetLogic board of directors recommends that the stockholders of NetLogic vote “FOR” approval of the issuance of shares of our common stock in connection with the merger.

Interest of NetLogic’s Officers and Directors in the Merger

Our directors and officers will receive no extra or special benefit that is not shared on a pro rata basis by all other holders of our common stock in connection with the merger.

Interest of RMI’s Officers and Directors in the Merger

Some of RMI’s officers have interests in the merger that are different from, or in addition to, the interests of NetLogic and RMI’s stockholders generally. These officers include Behrooz Abdi, William Caraccio, Steven Geiser, Kai-Yeung (Sunny) Siu and Nazar Zaidi, and their interests in the merger are discussed below.

CEO Incentive Compensation

Behrooz Abdi, the chief executive officer of RMI, may be entitled to receive up to $1 million of shares of our common stock otherwise payable to the RMI preferred stockholders as special incentive consideration if RMI achieves certain post-closing performance targets. Mr. Abdi will only receive this special incentive consideration if:

 

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he remains employed by RMI during the 12-month earn-out measurement period;

 

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the amount of revenue recognized by RMI during the 12-month period is greater than 75% of the revenue target for the earn-out; and

 

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the total amount of merger consideration otherwise payable to the RMI preferred stockholders exceeds a specified amount that represents the minimum amount necessary to provide a return on investment to the RMI preferred stockholders.

 

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If the amount of revenue recognized is greater than 75% of the revenue target and the other conditions are satisfied, Mr. Abdi will receive a nominal amount of special earn-out consideration equal to $40,000 for each percentage point above 75%, up to a maximum amount of $1 million. The special incentive consideration will be paid to Mr. Abdi in shares of our common stock valued based on the applicable closing price of our common stock (determined as described below in “The Merger Agreement—Merger Consideration”).

Acceleration of Vesting of RMI Options and Restricted Stock

Each of the RMI officers listed above currently holds unvested options to purchase RMI common stock which are subject to monthly vesting contingent on the officer continuing to be employed by RMI. Additionally, Mr. Siu holds shares of restricted stock obtained upon the early exercise of his unvested options which are subject to monthly vesting contingent on his continued employment by RMI. Mr. Abdi holds RMI options that provide for accelerated vesting upon a change of control of RMI, referred to as “single trigger acceleration.” Messrs. Caraccio, Geiser, Siu and Zaidi hold RMI options and/or restricted stock that provide for accelerated vesting upon termination without cause within six months or a year after a change in control of RMI, referred to as “double trigger acceleration.” Because the merger will constitute a change in control of RMI, these officers would be eligible to receive the benefit of vesting acceleration either upon the change in control of RMI or upon termination as a result of the merger. The merger agreement provides that all outstanding shares of RMI common stock will be cancelled upon the merger, and that all options to purchase RMI common stock will be cancelled unless exercised prior to the merger. RMI has advised us that it intends to accelerate the vesting of options and restricted stock held by Messrs. Abdi, Caraccio, Siu and Zaidi that are subject to single trigger acceleration or double trigger acceleration immediately prior to the merger. However, a significant number of these officers’ respective unvested options have per share exercise prices that are higher than the projected per-share merger consideration for RMI’s common stock. Accordingly, these officers may elect not to exercise many of the options subject to accelerated vesting. In any event, the accelerated vesting will provide Mr. Siu with the ability to receive merger consideration (based on the applicable closing price used for determining merger consideration) for his unvested restricted stock.

Employment and Severance Arrangements

We anticipate entering into an employment agreement with each officer providing for at-will employment with us (or with RMI). Messrs. Abdi, Zaidi and Siu will be offered employment for no specific duration. Messrs. Caraccio and Geiser will be offered employment for a six-month transitionary period. Each agreement will likely include a standard set of basic provisions such as benefits (confirming that each officer is eligible to participate in any employee benefits plans available to other employees at their level) and arbitration (mandating the submission of any matters in dispute to “JAMS” for final and binding arbitration). The employment agreements will also set forth the terms of each of the equity incentive awards that the officers would receive, as described in the paragraphs below, as well as the terms of any bonus program in which they are eligible to participate. We anticipate that the RMI officers will be eligible to participate in our 2010 bonus program under which, based on performance during the year, the officers may earn cash bonuses ranging from 25% of annual base salary for Messrs. Zaidi and Siu up to 75% of his annual base salary for Mr. Abdi.

 

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We expect to offer each of the RMI officers listed below the position specified, with an annualized base salary in the amount shown.

 

Name		Title		Salary
Behrooz Abdi		Executive Vice President and General Manager		$	350,000
Nazar Zaidi		VP of Engineering, CPS		$	240,000
Sunny Siu		President and General Manager, APAC		$	195,000
L. William Caraccio		VP of Legal Affairs		$	300,000
Steven Geiser		VP of Finance		$	230,000

Messrs. Caraccio and Geiser have employment agreements with RMI that provide for six months of base salary as a severance benefit if these officers are terminated within a set period following a change in control of RMI. RMI will terminate the employment of Messrs. Caraccio and Geiser upon the closing triggering severance payments of $150,000 to Mr. Caraccio and $115,000 to Mr. Geiser. We will enter into new employment agreements with Messrs. Caraccio and Geiser for the a period of six months for the annualized respectively salaries identified above.

Mr. Abdi has an employment agreement with RMI that provides for one year of base salary as a severance benefit if he is terminated within a set period following a change in control of RMI. Mr. Abdi is expected to remain employed and enter into a new employment agreement with NetLogic, or RMI, after the merger. The new employment agreement will provide for one year of base salary and payment of health benefits for a period of time as a severance benefit if his employment is involuntarily terminated without cause. Additionally, following the involuntary termination without cause of his employment, the vesting of any outstanding stock options and restricted stock units held by Mr. Abdi will accelerate by up to two years. The new employment agreements for Messrs. Zaidi and Siu will also provide for acceleration by up to two years of the vesting of any outstanding stock options and restricted stock held by the employee, if his employment is involuntarily terminated without cause.

Equity Incentives — Retention and Transition Shares

The merger agreement provides that we will reserve a number of shares of our common stock equal to $18.65 million divided by the applicable closing price for issuance to specified RMI employees that continue to be employed by RMI, NetLogic or an affiliate of NetLogic on and after the merger, as described below under “The Merger Agreement – Retention, Transition and Future Incentive Awards.” Approximately half of these shares reserved for this purpose, which we refer to as “retention shares,” will be issued as fully vested shares to those continuing RMI employees who are employed on the closing date. The remaining portion of these shares, which we refer to as “transition shares,” will be issued as restricted stock units subject to vesting over six months to one year from the closing date, contingent on continued employment by RMI. The vesting of the restricted stock units will accelerate if the continuing RMI employee is involuntarily terminated without cause before the one year anniversary of the closing date. Each of the RMI officers listed above will be offered employment with us and, as a result of their employment, is expected to receive a portion of the retention shares and transition shares.

The maximum number of retention shares and transition shares (collectively) that each RMI officer is expected to receive is as follows: Mr. Abdi — 148,313 shares; Mr. Caraccio — 52,836 shares; Mr. Geiser — 64,887 shares; Mr. Hass — 50,056 shares; Mr. Hoeppner — 10,011 shares; Mr. Longoria — 6,952 shares; Mr. Siu — 24,101 shares; and Mr. Zaidi — 65,814 shares. These maximum numbers were determined based on a presumed $26.97 per share value for our common stock, which is the lowest applicable closing price and produces the maximum number of shares of subject to the awards.

 

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Equity Incentives — Future Incentive Awards

The merger agreement provides for us to reserve a number of shares of our common stock for grants of restricted stock units and options to continuing RMI employees who are expected to be employed with us for a period greater than six months after the closing, as part of their compensation package for post-merger services (see “The Merger Agreement — Retention, Transition and Future Incentive Awards” below). The post-merger equity awards to be provided to such continuing RMI employees will be individually determined by us, based on the post-merger positions and services to be provided by such continuing RMI employees. It is expected that most of the RMI officers listed above who continue to be employed by us will receive grants of restricted stock units and stock options shortly following the closing. The restricted stock units are expected to vest over a four-year period from the date of grant. We expect that all of the grants of options to the RMI officers will be subject to monthly vesting over a five-year period from the date of grant, with one-fifth of the issued options vesting on the one-year anniversary of the date of the grant.

Indemnification Agreements

Under the merger agreement, we have agreed to assume the indemnification obligations of RMI to its present and former directors and officers pursuant the terms of RMI’s certificate of incorporation and bylaws and any indemnification agreements with these individuals in effect prior to the date of the merger agreement. The merger agreement also provides that, during the six-year period following the merger, we will maintain in effect the existing policy of directors’ and officers’ liability insurance maintained by RMI prior to the effective time on the terms set forth in the merger agreement.

Material Federal Income Tax Consequences of the Merger

The parties intend for the merger to qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended, which is referred to in this proxy statement as “the code,” and not to result in the recognition of income, gain or loss to us. In any event, because our stockholders do not participate in the merger, our stockholders will not recognize gain or loss in connection with the merger.

Accounting Treatment

The merger will be accounted for under the purchase method of accounting as a “purchase of a business” in accordance with Statement of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations. Under the purchase method of accounting, the assets acquired and liabilities assumed from RMI as of the date of acquisition (i.e., the completion of the merger) will be recorded in our books at their respective fair values. Any excess of the purchase price over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed will be recorded as goodwill.

Regulatory Approvals

Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or the HSR Act, and the rules promulgated under the HSR Act by the Federal Trade Commission, the parties must file notification and report forms with the U.S. Federal Trade Commission and the Antitrust Division of the Department of Justice and observe specified waiting period requirements before consummating the acquisition. NetLogic and RMI have filed the requisite notification and report forms with the Federal Trade Commission and the Antitrust Division.

Federal Securities Law Consequences; Resale Restrictions

The shares of our common stock to be issued in the merger to the holders of RMI preferred stock will be issued in a transaction pursuant to an exemption from registration requirements under Section 5 of the Securities Act of 1933. Therefore, these shares of our common stock will be “restricted securities” and will not be

 

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registered under the Securities Act upon issuance and will not be freely transferable. RMI stockholders may not sell their shares of our common stock acquired in connection with the merger except pursuant to:

 

•

an effective registration statement under the Securities Act covering the resale of those shares; or

 

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an exemption under the Securities Act.

Under Rule 144 of the Securities Act, RMI stockholders who are not affiliates of ours at the time of a proposed sales of our stock (and have not been affiliates for the prior 90 days) will be permitted to sell their stock without registration if they sell the stock for their own account after holding it for at least six months, provided that we have made available adequate current public information concerning NetLogic. If they have held their NetLogic common stock for a full year, they will be permitted to sell the stock for their own account without restrictions. RMI stockholders who are affiliates of ours (or who have been affiliates within 90 days prior to a proposed resale of their shares) will be permitted to sell their shares of our stock if they satisfy certain requirements of Rule 144, including with respect to volume limitations, manner of sale and the filing of a Form 144 with the SEC, and further provided that we have made available adequate current public information concerning NetLogic.

In addition, the terms of the merger agreement provide that all shares of our common stock issued as merger consideration will be subject to lock-up restrictions prohibiting sales or other liquidity transactions. One hundred percent of the shares of our common stock issued to a RMI stockholder as merger consideration will be subject to restrictions prohibiting sales or other liquidity transactions until the six month anniversary date of the closing date and 50% of the shares of our common stock issued to a RMI preferred stockholder will be subject to restrictions prohibiting sales or other liquidity transactions for an additional six months following such six month anniversary date.

Certain RMI stockholders have entered into standstill agreements with us pursuant to which such RMI stockholders agreed that during the period commencing on the closing date until the merger is completed or the merger agreement is terminated, such RMI stockholder and its related persons will not directly or indirectly:

 

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purchase or otherwise acquire any shares of our common stock;

 

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offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, make any short sale or otherwise dispose of or transfer any shares of our common stock; or

 

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enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of any shares of our common stock, whether any such swap or transaction is to be settled by delivery of our common stock or other securities, in cash or otherwise.

No Appraisal or Dissenters’ Rights

No stockholder of NetLogic will be entitled to exercise appraisal rights or to demand payment for their shares in connection with our acquisition of RMI.

 

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THE MERGER AGREEMENT

The discussion in this proxy statement of the terms and conditions of the merger agreement is subject to and is qualified in its entirety by reference to the merger agreement, a copy of which is attached as Annex A to this proxy statement and is incorporated into this proxy statement by reference.

Merger Consideration

Overview

The merger agreement provides for merger consideration consisting of the issuance of shares of our common stock to the holders of RMI preferred stock and the payment of cash to the holders of RMI common stock. A portion of the shares of our common stock issuable to the RMI preferred stockholders will be placed in escrow as a source of indemnity for future claims, and another portion of the shares of our common stock issuable to the RMI preferred stockholders will be placed in escrow as a source of payment for the expenses of the RMI stockholders’ representative. Merger consideration will be paid at the closing date of the acquisition and, subject to the attainment of earn-out objectives applicable to the acquired business during the 12-month period following the closing date, within 90 days after the first anniversary of the closing date.

Closing Payment

The merger agreement specifies formulas for the allocation of the calculated value of the merger consideration between the shares of the different series of RMI preferred stock and the shares of RMI common stock. These formulas provide that the value of the applicable merger consideration is equal to a stated nominal amount of $179 million, divided by the applicable closing price of our common stock, which quotient is then multiplied by the average closing price of our common stock. In addition, the merger agreement provides for the RMI common stockholders to receive at closing an additional component of merger consideration referred to as the “applicable directed common consideration,” the actual value of which is calculated in a similar fashion to the applicable merger consideration, but based on a stated nominal amount of $2.35 million. Accordingly, the total nominal amount of merger consideration payable at closing is $181.35 million.

For purposes of these formulas, the applicable closing price will generally be equal to the average closing price of our common stock for the 20-trading day period in which the last day will be the third trading day prior to the closing date. If, however, the average closing price is more than $34.90, then the applicable closing price will be $34.90, and if the average closing price is less than $26.97, then the applicable closing price will be $26.97. The upper and lower limits establish a range of applicable closing prices between $26.97 and $34.90. If the average closing price falls within the limits of this price collar, the average closing price and the applicable share price will be the same, and the value of the applicable merger consideration to be paid at the closing date will be equal to $179 million, or $181.35 including the applicable directed common consideration. If the average closing price does not fall within the collar, the calculated value of the applicable merger consideration will be a different amount than the nominal value specified in the merger agreement.

Holders of RMI preferred stock will receive shares of our common stock as their form of merger consideration. The number of shares of our common stock they will receive at the closing date will be equal to the amount of calculated value of the applicable merger consideration that is allocated to the RMI preferred stock, divided by the applicable closing price of our common stock. One hundred percent of the shares of our common stock issued as merger consideration on the closing date will be subject to a complete trading lock-up for six months following the closing date, and 50% of the shares will be subject to a complete trading lock-up for one year following the closing date.

Holders of RMI common stock will receive payments of cash as their form of merger consideration. The amount of cash to be paid to the holders of RMI common stock at the closing date as merger consideration will be equal to the amount of calculated value of the applicable merger consideration that is allocable to the RMI

 

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common stock under the merger agreement. In calculating the amount of cash payable to the holders of RMI common stock, the collar does not limit the amount of cash they are paid. The size of the cash payment may therefore be greater than or less than the portion of the nominal value allocable to the RMI common stock. RMI common stockholders will also receive at closing a cash payment for the applicable directed common consideration. Finally, although it is not counted as part of the merger consideration payable to the RMI stockholders at closing, the holders RMI common stock will receive at closing an additional $2.0 million cash payment as advance earn-out credit. This $2.0 million advance payment will later be deducted from any earn-out amount otherwise payable to the RMI common stockholders at the end of the earn-out period.

Earn-out Payment

We will issue up to $70 million in cash and shares of our common stock payable as nominal earn-out consideration, which will be allocated, determined and paid in the same manner and kind as the merger consideration payable at the closing date but will be reduced by the $2 million advance earn-out credit paid to the holders of RMI common stock at the closing date. The portion of the earn-out consideration payable to the holders of RMI preferred stock may be reduced by up to $1 million for a special bonus payment to the chief executive officer of RMI as described above. Earn-out consideration, if any, will be paid within 90 days after the end of the 12-month earn-out measurement period.

The merger agreement provides a formula to determine the nominal amount of earn-out consideration payable to the former RMI stockholders at the end of the 12-month period, based on the amount of gross revenue recognized by the surviving corporation in relation to an agreed upon revenue target. If the amount of revenue recognized during the twelve-month period is less than or equal to 75% of the revenue target, no earn-out consideration will be paid. If the amount of revenue recognized is greater than 75% of the revenue target, the RMI stockholders will receive a nominal amount of earn-out consideration that increases as the percentage gets closer to 100%, up to a maximum amount of $70 million. Specifically, the formula provides that, if the calculated percentage is greater than 75%, then the nominal amount of earn-out consideration is equal to $2.4 million for each percentage point above 75% and by an additional $3.4 million for each percentage point above 90%. For example, if the amount of recognized revenue is 80% of the target, the nominal earn-out amount would be $12 million, i.e. 5.0 multiplied by $2.4 million. If the amount of recognized revenue is 95% of the target, the nominal earn-out amount would be $53 million, i.e. the sum of (a) 15.0 multiplied by $2.4 million, plus (b) 5.0 multiplied by $3.4 million. Because the amount of earn-out consideration paid in cash and shares of our common stock is determined in the same manner as the merger consideration payable at closing, the actual amount of cash paid and the number of shares to be issued will vary. However, as of the closing date, once we know the applicable closing price and the average closing price, we will know the maximum amount payable.

In the event that we elect to divest, discontinue or make certain modifications to the RMI’s business in a manner that would materially adversely impair RMI’s ability to achieve the maximum earn-out amount, the merger agreement provides for us to pay the maximum earn-out amount as if it had been fully achieved.

Sample Calculations

The following examples illustrate how different average closing prices of our common stock would affect the relative allocations of total merger consideration among the holders of RMI preferred stock and RMI common stock and the approximate total value of the merger consideration. The average closing prices used in these examples were chosen solely for the sake of providing a range of sample calculations. In each example, the amounts shown are estimates. For the sake of simplicity, escrow offsets are ignored, figures have been rounded and we have assumed that:

 

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there will be no change in the number of outstanding shares of each class and series of RMI stock between May 31, 2009, the date of the merger agreement, and the closing date; and

 

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•

all of the earn-out objectives will be achieved, such that the nominal value of the earn-out consideration is $70.0 million.

 

Average Closing Price		Applicable Closing Price			Amount of Cash Payable to RMI Common Stockholders		Number of Shares Issuable to RMI Preferred Stockholders		Total Value of Merger Consideration
$20.00		$	26.97		$5.9 million, all of which is payable at closing		9,050,000 shares, of which 6,500,000 are issuable at closing and 2,550,000 are issuable at end of earn-out period		$186.9 million
$30.00		$	30.00		$14.4 million, of which $8.0 million is payable at closing and $6.4 million is payable at end of earn-out period		7,900,000 shares, of which 5,850,000 are issuable at closing and 2,050,000 are issuable at end of earn-out period		$251.4 million
$40.00		$	34.90		$21.6 million, of which $9.1 million is payable at closing and $12.5 million is payable at end of earn-out period		6,660,000 shares, of which 5,020,000 are issuable at closing and 1,640,000 are issuable at end of earn-out period		$288.0 million

Escrow

Shares of our common stock with a value equal to 10.2% of the amount payable to the holders of RMI preferred stock at the closing will be held in escrow until the twelve-month anniversary of the closing date. These shares are intended to compensate us for losses, if any, that we may incur if RMI breaches any of the representations or warranties or covenants made by RMI in the merger agreement or for any other matters specifically set forth in the merger agreement as a matter to be indemnified. An additional number of shares of our common stock with a value equal to 0.3% of the amount payable to the holders of RMI preferred stock at the closing will also be held in escrow until the twelve-month anniversary of the closing date. These shares are intended to provide reimbursement to the stockholders’ representative for expenses. Collectively, these escrow shares will reduce by 10.5% of the number of the shares of our common stock otherwise issuable to holders of RMI preferred stock on the closing date. The escrow shares not subject to a claim by us or used to reimburse the RMI stockholders’ representative will be released on the twelve month anniversary of the closing date and distributed to the former holders of RMI preferred stock in proportion to their pro rata share of the escrow shares.

We and the RMI stockholders’ representative will enter into an escrow agreement with Wells Fargo Bank, N.A., as escrow agent, in connection with the escrow arrangements contemplated by the merger agreement.

Retention, Transition and Future Incentive Awards

The merger agreement includes covenants providing for us to make available a number of additional shares of our common stock for issuance to continuing RMI employees as equity incentives. Based on the terms that are specified in the merger agreement, these equity incentive awards fall into three categories, which we refer to as retention, transaction and future incentive awards, respectively. We have agreed, in particular:

 

•

to issue fully vested shares of our common stock with a total value of $8.65 million to specified RMI employees, including the officers of RMI identified under “The Merger—Interest of RMI’s Officers and Directors in the Merger” above, on the closing date;

 

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to grant within 60 days after the closing date restricted stock units, or RSUs, to acquire a total of $10 million of our common stock to specified employees of RMI who continue as RMI employees or become our employees, of which 50% will vest after six months and the remaining 50% will vest after 12 months for most employees; and

 

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•

to grant within 60 days after the closing date RSUs and/or stock options to acquire a total of $45 million of our common stock to specified employees of RMI who continue as RMI employees or become our employees, subject to vesting and other terms to be determined by us.

The number of shares of our common stock to be provided as such retention, transition and future incentive awards will be determined by dividing the total dollar amounts specified above by the applicable closing price of our common stock, which will be determined as described above under “—Merger Consideration.” For purposes of calculating the number of shares issuable as future incentive awards in the third bullet-point above, an RSU to acquire one share of our common stock is equated with an option to purchase two shares of our common stock. Also, to determine the number of shares to be issued in each of the three phases, the dollar amount specified is divided by the applicable closing price of our common stock. This share calculation is therefore subject to the effect of the price collar in a similar manner as the merger consideration.

Options and Warrants

We will not be assuming any outstanding stock options or warrants to purchase capital stock of RMI in the merger. All outstanding and unexercised warrants and options are to be terminated as of the closing date. RMI has also agreed to terminate its stock option plan prior to the closing.

RMI represented to us that, as of the date we entered into the merger agreement, there were options outstanding to purchase approximately 40 million shares of its common stock and warrants outstanding to purchase approximately 7.3 million shares of its capital stock (including both common and preferred stock). RMI has informed us that it intends to take the requisite action under its stock option plan, including providing the appropriate notices to its option holders, to cause all outstanding options to be cancelled automatically at closing, to the extent they have not been exercised. RMI has informed us that some of the outstanding warrants will terminate by their terms at closing, to the extent they have not been exercised. With respect to the remaining warrants, RMI has informed us that it intends to pay approximately $500,000 in aggregate to the warrant holders in exchange for the cancellation of those warrants at or before the closing and the release of RMI and NetLogic from any related claims.

Transaction Expenses

We will pay all fees, costs and expenses incurred by us or merger sub in connection with the merger agreement and the transactions contemplated therein whether or not the merger is consummated. If the merger is consummated, all reasonable fees, costs and expenses of RMI and the stockholders’ representative incurred in connection with the merger will be treated as transaction expenses under the merger agreement and, to the extent not already paid by RMI, will be paid by us after the closing date. If the merger is not consummated, RMI will bear all of its own expenses in connection with the merger agreement and the transactions contemplated therein. Any fees related to antitrust filings shall be split by us and RMI.

Representations and Warranties

RMI made representations and warranties to us and merger sub concerning the matters listed below, among others, subject in some cases to exceptions and qualifications set forth in a disclosure schedule to the merger agreement:

 

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the due organization and good standing of RMI and its subsidiaries;

 

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the respective capitalization of RMI and its subsidiaries, and the ownership of their respective capital stock;

 

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the accuracy of the securityholder lists made available to us and the absence of any undisclosed agreements with or among RMI’s securityholders;

 

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•

the absence of any liens or other restrictions on the shares of RMI capital stock to be delivered to us upon consummation of the merger;

 

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RMI’s authority to enter into and perform the merger agreement and the related agreements;

 

•

the absence of any conflict with or violation of RMI’s organizational documents, agreements with third parties, governmental permits or laws;

 

•

the absence of any required consents, approvals or filings with any governmental authorities, subject to specified exceptions;

 

•

the accuracy of RMI’s financial statements and their preparation in accordance with generally accepted accounting principles, or GAAP;

 

•

the absence of certain significant events since March 31, 2009, including, among others, the declaration or payment of dividends, the adoption or amendment of any employee benefit plan, the modification of material terms of employment for any employee, and acquisitions or dispositions of property or capital expenditures above specified amounts;

 

•

RMI’s and its subsidiaries’ compliance with applicable tax laws;

 

•

RMI’s title to its assets;

 

•

the accuracy and completeness of the disclosed list of material contracts;

 

•

the absence of material defaults under those contracts;

 

•

the accuracy and completeness of RMI’s disclosures regarding intellectual property;

 

•

the accuracy and completeness of the disclosed list of employee benefit plans, and RMI’s compliance with certain laws regarding employee benefits, including the Employee Retirement Income Security Act of 1974 and Section 409A of the code;

 

•

the accuracy and completeness of RMI’s disclosures regarding intellectual property;

 

•

the absence of any infringement by RMI of the intellectual property of third parties;

 

•

the accuracy and quality of RMI’s accounts receivables;

 

•

the absence of any recent or threatened terminations of relationships with RMI by its suppliers;

 

•

the validity and effectiveness of RMI’s insurance policies and the absence of any undisclosed claims under those policies;

 

•

the accuracy of the RMI’s disclosures concerning its employees, and RMI’s compliance with labor laws;

 

•

the absence of any undisclosed litigation or threatened claims against RMI;

 

•

RMI’s and its subsidiaries’ compliance with environmental laws;

 

•

RMI’s and its subsidiaries’ material compliance with all other applicable laws, including the U.S. Foreign Corrupt Practices Act;

 

•

the vote of RMI’s stockholders required to approve the merger;

 

•

the accuracy of the information to be provided by RMI to us for use in our filings with the SEC, including this proxy statement;

 

•

RMI’s board of directors’ determination that the merger is fair and in the best interests of the RMI Stockholders, and its recommendation to the RMI stockholders;

 

•

the absence of certain relationships and transactions with related parties;

 

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the absence of any discussions with any third party regarding an acquisition of RMI; and

 

•

the accuracy and completeness of RMI’s disclosures.

We and merger sub made representations and warranties to RMI concerning the following matters, among others:

 

•

the due organization and good standing of NetLogic and merger sub;

 

•

their respective authority to enter into and perform the merger agreement and the related agreements;

 

•

the absence of conflicts or violations with respect to organizational documents, certain material agreements, governmental permits or laws;

 

•

the absence of any required consents, approvals or filings with any governmental authorities, subject to specified exceptions;

 

•

the due authorization and valid issuance of the shares issuable to the RMI stockholders as merger consideration;

 

•

the exemption of the issuance from registration under federal securities laws;

 

•

the compliance of our SEC filings with applicable federal securities laws and regulations and the accuracy of the information contained in such filings;

 

•

the absence of any brokers or finders; and

 

•

the accuracy and completeness of their disclosures, including information provided for use in the information statement to be sent to RMI’s stockholders.

Conduct of Business Pending the Merger

From the date of the merger agreement until the earlier of the termination of the merger agreement or the effective time of the merger, RMI has agreed to, and agreed to cause each of its subsidiaries to, conduct their respective businesses in the ordinary course and in a manner consistent with past practice, and to use all reasonable efforts to maintain and preserve intact the business organization and the goodwill or RMI and its subsidiaries, and to preserve existing relationships with customers, suppliers, licensees and other third parties. RMI has also agreed not to take specific actions without our prior written consent, including, among others:

 

•

amend or otherwise change its organizational documents or the organizational documents of any of its subsidiaries;

 

•

issue, grant, sell, dispose of, or encumber or otherwise mortgage, pledge or subject to any lien, any capital stock or other securities of RMI or any of its subsidiaries, with certain exceptions;

 

•

sell, lease, dispose of, or encumber or otherwise mortgage, pledge or subject to any lien (including the grant of any exclusive license) any assets or properties of RMI or any of its subsidiaries, with certain exceptions;

 

•

incur, assume or guarantee any indebtedness for itself or any person, with certain exceptions;

 

•

declare any dividend or other distribution, split, combine, recapitalize or reclassify any of its capital stock;

 

•

amend the terms or change the period of exercisability of any securities of RMI or any of its subsidiaries, or re-acquire any securities of RMI or any of its subsidiaries, with certain exceptions;

 

•

acquire any corporation, partnership or other business organization or division or business thereof;

 

•

make or commit to make any capital expenditures or purchase of fixed assets which are in excess of $250,000 individually, or $500,000 in the aggregate;

 

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•

enter into, amend or waive any material contract other than in the ordinary course of business and consistent with past practices that involve total obligations of less than $250,000, excluding product sales and inventory purchases;

 

•

fail to provide any notices, assurances or support required by any contract relating to any intellectual property in order to ensure that no condition under such contract occurs which could result in, or could increase the likelihood of, any transfer or loss by it of any material intellectual property;

 

•

materially modify its standard warranty terms for its products or any product warranties in any manner that is adverse to RMI or any of its subsidiaries;

 

•

enter into or amend any contract pursuant to which any other party is granted exclusive marketing or other exclusive rights of any time or scope with respect to any of its products or technology;

 

•

increase in any manner the compensation payable to any director, officer, consultant or employee, grant any severance or termination pay to, or terminate or amend any RMI employee plan, materially change the coverage or benefits available under any bonus, profit sharing, thrift, compensation, equity, pension, retirement, deferred compensation or other plan or agreement, with certain exceptions;

 

•

take any action to materially change accounting or tax reporting policies or procedures, with certain exceptions;

 

•

pay, discharge or satisfy any claims, liabilities or obligations in excess of $250,000 other than in certain circumstances;

 

•

materially modify the payment terms or payment schedule of any receivables other than in the ordinary course of business consistent with past practices;

 

•

adopt a plan of complete or partial liquidation, dissolution or other similar transaction (other than the merger agreement with us);

 

•

revalue in any material respect any assets or properties with a value that exceeds $250,000;

 

•

transfer to any person any rights to any intellectual property owned by RMI or any of its subsidiaries other than in the ordinary course of business consistent with past practices;

 

•

enter into any contract, understanding or commitment with non-competition restrictions;

 

•

take any action which would adversely affect the ability of the parties to consummate the transactions contemplated by the merger agreement;

 

•

take any action that would make any of the representations or warranties of RMI or any of its subsidiaries contained in the merger agreement untrue or incorrect in any material respect or otherwise prevent RMI or any of its Subsidiaries from performing, or cause RMI or any of its Subsidiaries not to perform, its covenants thereunder; or

 

•

take, or agree in writing or otherwise to take, any of the actions described above.

We have also agreed not to take certain actions prior to the effective time of the merger without the prior written consent of RMI, including, among others:

 

•

issue, grant or sell more than $50,000,000 of capital stock in one or more equity financings;

 

•

sell, lease or dispose of any of our or our subsidiaries’ businesses, assets or properties in an aggregate amount in excess of $25,000,000;

 

•

acquire (by merger, consolidation or acquisition of stock or assets or otherwise) any corporation, partnership or other business organization or division or business thereof in exchange for consideration in excess of $10,000,000;

 

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•

adopt a plan of complete or partial liquidation, dissolution, merger, restructuring, reorganization or other similar transaction (other than the merger agreement with RMI);

 

•

take any action which would adversely affect the ability of the parties to consummate the transactions contemplated by the merger agreement or any of its subsidiaries from materially performing, or cause us or any of our subsidiaries not to materially perform, our covenants under the merger agreement; or

 

•

take, or agree in writing or otherwise to take, any of the actions described above.

No Solicitation

RMI has agreed that, from and after the date of the merger agreement, it will not, and will not authorize, encourage or permit any officer, director, employee, stockholder, agent, representative or affiliate of RMI to, directly or indirectly:

 

•

solicit, initiate or knowingly encourage any inquiries or proposals that constitute, or be expected to lead to an acquisition proposal; or

 

•

engage in negotiations or discussions concerning, or provide any non-public information to any person or entity relating to any acquisition proposal.

The merger agreement prohibited RMI’s board of directors from withdrawing, amending or modifying its approval or recommendation of the merger agreement or the merger at any time prior to obtaining the required stockholder approval, unless RMI’s board of directors determined in good faith, after consultation with its outside legal counsel, that the failure to do so was reasonably likely to result in a breach of fiduciary duties to RMI stockholders under applicable law. Such stockholder approval was obtained by RMI on June 1, 2009.

Other Covenants

The merger agreement contains customary covenants of the parties concerning confidentiality, reasonable access to information before closing, public disclosure of the transactions contemplated by the merger agreement, cooperation with respect to regulatory filings, and reasonable efforts to consummate the transactions contemplated by the merger agreement. The parties have further agreed to the following additional covenants, among others:

 

•

RMI agreed to terminate its 401(k) plan and other employee benefit plans prior to the closing;

 

•

we agreed to provide to employees of RMI and its subsidiaries who become our employees or remain employees of the surviving corporation employee benefits and compensation plans and programs that are no less favorable in the aggregate than those provided to our similarly situated employees;

 

•

RMI agreed to submit the merger agreement to its stockholders for approval and adoption by written consent promptly following the execution of the merger agreement, which consent was obtained on June 1, 2009;

 

•

we agreed to prepare and file a proxy statement with the SEC and to give notice of and convene a meeting of its stockholders;

 

•

we agreed to provide, during the six-year period following the consummation of the merger, all rights to indemnification existing on the closing date in favor of RMI’s officers and directors, and to ensure that the surviving corporation fulfills its obligations to those officers and directors under RMI’s certificate of incorporation and bylaws as in effect on the closing date; and

 

•

we agreed to prepare and file a registration statement on Form S-8 on or before the closing date with respect to all the shares of our common stock issuable as retention, transition and future incentive awards.

 

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Conditions to Consummation of the Merger

Conditions to Each Party’s Obligations to Effect the Merger

The respective obligations of each party to consummate the transactions contemplated by the merger agreement are subject to the satisfaction (or waiver) of each of the following conditions at or prior to the closing:

 

•

the merger agreement shall have been approved and adopted by the requisite vote of the stockholders of RMI, and our stockholders shall have approved the issuance of the shares of our common stock to be issued in connection with the merger;

 

•

all approvals, authorizations or clearances required under any applicable antitrust laws with respect to any antitrust filings shall have been obtained and all requirements under the antitrust laws shall have been satisfied; and

 

•

no temporary restraining order, preliminary or permanent injunction or other order or judgment preventing the consummation of the merger shall have been issued by any court of competent jurisdiction and remain in effect.

Conditions to NetLogic’s and Merger Sub’s Obligations to Effect the Merger

The obligations of NetLogic and merger sub to consummate the transactions contemplated by the merger agreement are subject to the satisfaction (or waiver) at or prior to the closing of the following additional conditions:

 

•

that the representations and warranties of RMI contained in the merger agreement be true, complete and correct on the date of the merger agreement and on and as of the effective time with the same force and effect as if made as of such date, with certain exceptions;

 

•

that RMI not have materially breached its covenants under the merger agreement required to be performed and complied with as of the effective time;

 

•

that all required consents, approvals, orders or authorizations of, or registrations, declarations or filings with, any governmental authority have been obtained or made;

 

•

that no change has occurred since the date of the merger agreement that is materially adverse to RMI’s financial condition, properties, assets, liabilities or business operations or might materially impair the ability of RMI to consummate the merger, other than changes in general economic conditions and conditions affecting RMI’s industry that do not affect RMI disproportionately, events caused by the execution, delivery or performance of the merger agreement and certain other disclosed adverse conditions or events (any such material adverse change is referred to as a “company material adverse effect”);

 

•

that there be no threatened or pending action or proceeding before any court or governmental authority that would result in the merger being rescinded following consummation, that seeks to prohibit or impose any limitations on our ownership or operation of RMI’s business or assets, that could be reasonably be expected to result in a company material adverse effect (as described in the preceding bullet point) or, in the case of an action brought by a governmental entity, that challenges or seeks to restrain or prohibit the consummation of the merger;

 

•

that RMI have obtained the approval of the holders of at least 75% of its capital stock with respect to the merger agreement and transactions contemplated thereby, including the approval of the holders of at least 80% of RMI’s preferred stock and the holders of at least a majority of RMI’s common stock;

 

•

that holders of no more than 5% of RMI’s preferred stock and 30% of RMI’s common stock have exercised appraisal rights under Delaware law;

 

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that (a) each member of a specified group of key RMI employees, (b) at least three out of five other specified key RMI employees and (c) at least 75% of all other RMI employees to whom we or the surviving corporation have extended offers of employment shall have agreed to accept such offers of employment;

 

•

that we have received executed copies of certain closing certificates and other documents, including a complete and accurate preliminary schedule indicating the allocation of merger consideration payable at closing and the nominal earn-out consideration; and

 

•

that all outstanding options and warrants to purchase shares of RMI stock have been terminated and we have received reasonably satisfactory documentation evidencing such termination.

Conditions to RMI’s Obligations to Effect the Merger

The obligations of RMI to consummate the transactions contemplated by the merger agreement are subject to the satisfaction (or waiver) at or prior to the closing of the following additional conditions:

 

•

that the representations and warranties of NetLogic and merger sub contained in the merger agreement be true, complete and correct on the date of the merger agreement and on and as of the effective time with the same force and effect as if made as of such date, with certain exceptions;

 

•

that neither we nor merger sub have breached our covenants under the merger agreement that are required to be performed or complied with as of the effective time;

 

•

that no change have occurred since the date of the merger agreement that is materially adverse to our financial condition, properties, assets, liabilities or business operations or might materially impair our ability to consummate the merger, other than changes in general economic conditions and conditions affecting our industry that do not affect us disproportionately, events caused by the execution, delivery or performance of the merger agreement and certain other disclosed adverse conditions or events (any such change is referred to as a “parent material adverse effect”);

 

•

that there be no threatened or pending action or proceeding before any court or governmental authority that would result in the merger being rescinded following consummation, that seeks to prohibit or impose any limitations on our ownership or operation of RMI’s business or assets, that could be reasonably be expected to result in a parent material adverse effect (as described in the preceding bullet point) or, in the case of an action brought by a governmental entity, that challenges or seeks to restrain or prohibit the consummation of the merger;

 

•

that the shares of our common stock to be issued in the merger be approved for listing on the Nasdaq Global Market or such exchange as our common stock may then be listed; and

 

•

that RMI have received a written opinion from its counsel Pillsbury Winthrop Shaw Pittman LLP, counsel to RMI, to the effect that the merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the code.

Termination

The bases on which the merger agreement may be terminated and the merger may be abandoned at any time prior to the effective time include the following:

 

•

by mutual written consent duly authorized by the boards of directors of NetLogic and RMI;

 

•

by either RMI or us if the merger shall not have been consummated by October 31, 2009, referred to as the end date, unless the action, or failure to act, of such party has been a principal cause of the failure of the merger to occur before the end date and constitutes a breach of the merger agreement;

 

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•

by either RMI or us if a governmental authority shall have issued or enacted any legal requirement or taken any other action (including, without limitation, the failure to have taken an action), in any case having the effect of permanently restraining, enjoining or otherwise prohibiting the merger, which legal requirement is final and nonappealable, as applicable;

 

•

by RMI, (a) upon a breach of any representation, warranty, covenant or agreement set forth in the merger agreement by us or merger sub, or (b) if any representation or warranty of NetLogic or merger sub shall have become untrue, in either case such that the conditions set forth in the merger agreement would not be satisfied as of the time of the breach or as of the time such representation or warranty shall have become untrue; but if the inaccuracy in our or merger sub’s representations and warranties or breach by us or merger sub is curable prior to the end date through the exercise of reasonable efforts, then RMI may not terminate the merger agreement sooner than 15 days following the receipt of written notice from RMI by us of the breach;

 

•

by us, (a) upon a breach of any representation, warranty, covenant or agreement set forth in the merger agreement by RMI or the stockholders’ representative, or (b) if any representation or warranty of RMI shall have become untrue, in either case such that the conditions set forth in the merger agreement would not be satisfied as of the time of the breach or as of the time such representation or warranty shall have become untrue; but if the inaccuracy in RMI’s representations and warranties or breach by RMI or the stockholders’ representative is curable by RMI or the stockholders’ representative prior to the end date through the exercise of reasonable efforts, then we may not terminate the merger agreement solely for the reasons set forth in this provision sooner than 15 days following the receipt of written notice from us by RMI of the breach;

 

•

by us, if a “company material adverse effect” (as described above in “—Conditions to Consummation of the Merger”) shall have occurred, or we first become aware of a company material adverse effect, after the date of the merger agreement; or

 

•

by RMI, if our board of directors fails to include our board of directors’ recommendation to adopt and approve the matters set forth in this proxy statement or changes its recommendation.

Indemnification

The merger agreement provides that any RMI preferred stockholder who accepts payment of the applicable portion of the merger consideration agrees that NetLogic, merger sub and our respective directors, officers, employees, agents and representatives shall have full recourse against, and be entitled to be compensated and reimbursed from, the escrow funds for any and all damages and losses arising from or relating to:

 

•

any fraud, misrepresentation or breach or failure of any representation or warranty made by RMI or the stockholders’ representative in the merger agreement or in any officers certificate to be true and correct in all respects as of the date of the merger agreement and as of the closing date;

 

•

any post-closing claim for material breach or non-fulfillment of any covenant or agreement made or to be performed by RMI prior to the closing in the merger agreement or in any agreement or instrument entered into by RMI in connection with the merger agreement;

 

•

any inaccuracy in the allocation schedule delivered to us by the stockholders’ representative setting forth the allocation of the merger consideration among the RMI stockholders; and

 

•

any indemnity payments to any person having acted or claiming to have acted as a broker, finder or financial advisor for any RMI stockholder, to the extent not otherwise included in the transaction expenses; and

 

•

the extent to which the costs of obtaining third party consents exceed an amount specified in the merger agreement;

 

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specified third-party intellectual property claims (to the extent described below); and

 

•

any consideration paid by us or the surviving corporation with respect to “excess dissenting shares,” which are any dissenting shares in excess of 2.5% of the number of shares of RMI preferred stock and 15% of the number of shares of RMI common stock.

Except in the case of fraud or intentional misrepresentation, or a breach of the representation regarding delivery of shares of RMI stock free and clear of any liens, our sole and exclusive remedy for indemnification claims is recourse against the shares our common stock deposited in escrow. In addition to the shares deposited in escrow at closing, we have a right, solely to the extent the aggregate amount of claims made against the escrow consideration during the escrow period exceeds the total amount of the escrow funds, to withhold from, and place into escrow, a portion of the earn-out consideration otherwise payable to the former RMI stockholders at the end of the 12-month earn-out period, up to a maximum of 10% of the earned amount, for any and all damages arising from or related to the matters in the first two bullet-points above. This earn-out set-off is deposited into the escrow and treated as escrow funds under the escrow agreement and the merger agreement.

The escrow shares are deemed to have a per share value equal to the applicable closing price for purposes of satisfying indemnification claims.

Indemnification is not available to us until the aggregate cumulative amount of all damages suffered by us and subject to indemnification claims under the merger agreement (other than damages relating to the specified intellectual property claims) exceeds $500,000, in which event we may recover the entire amount of cumulative damages. Similarly, indemnification is not available to us for damages relating to the specified intellectual property claims unless and until the aggregate cumulative amount of all damages suffered by us arising out of those claims exceeds $250,000, in which event we are entitled to recover 50% of the damages in excess of the $250,000 deductible.

In order to bring a claim for indemnification under the merger agreement, we must deliver an officer’s certificate to the RMI stockholders’ representative that describes the nature and amount of the claim. The stockholders’ representative has 30 days after receipt of the officer’s certificate to deliver a written objection to all or part of the officer’s certificate. The written objection must include the basis of the objection and the amount in dispute. We then have 30 days to respond in a written statement to the objection. If any claims remain in dispute at the end of this 30-day period, the parties have agreed to attempt in good faith for 30 days to resolve the dispute. If no agreement is reached at the end of this 30-day period, either party may demand arbitration of the matter, which is to be conducted in accordance with the commercial rules of Judicial Arbitration & Mediation Services, or JAMS. The decision of the arbitrators as to the validity and amount of any claim shall be binding and conclusive upon the parties. The non-prevailing party pays the arbitration costs and fees of JAMS and the arbitration expenses of the prevailing party, other than attorneys’ fees and costs.

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION ON RMI

The following table sets forth certain of RMI’s consolidated financial data. The consolidated financial data as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 is derived from RMI’s audited consolidated financial statements. The audited consolidated financial statements as of December 31, 2008 and 2007, and for the years ended December 31, 2008, 2007 and 2006 are included elsewhere in this proxy statement. The selected balance sheet data as of December 31, 2006, 2005 and 2004 and selected statements of operations data for the years ended December 31, 2005 and 2004 are derived from our audited financial statements not included in this proxy statement. The consolidated financial information as of and for the three month periods ended March 31, 2009 and 2008 is derived from RMI’s unaudited consolidated financial statements, which are included elsewhere in this proxy statement and which, in RMI’s opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of RMI’s financial position and results of operations for such period. Interim results for the three months ended March 31, 2009 are not necessarily indicative of results for the remainder of the fiscal year or for any future period.

The selected historical financial data below should be read in conjunction with the consolidated financial statements and related notes and “RMI Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere herein.

 

		Year Ended December 31,																				Three Months Ended March 31,
		2008				2007				2006				2005				2004				2009				2008
		(in thousands)
Consolidated Statements of Operations Data:
Revenue		$	78,946			$	64,345			$	30,053			$	13,295			$	12,495			$	17,053			$	20,464
Cost of revenue			31,806				33,654				22,180				8,034				8,621				6,712				8,180
Gross profit			47,140				30,691				7,873				5,261				3,874				10,341				12,284
Operating expenses:
Research and development			38,875				34,195				26,134				23,815				29,908				8,734				9,657
In-process research and development			—				—				3,130				—				—				—				—
Selling, general and administrative			25,551				18,957				12,330				9,880				7,355				6,018				5,678
Total operating expenses			64,426				53,152				41,594				33,695				37,263				14,752				15,335
Loss from operations			(17,286	)			(22,461	)			(33,721	)			(28,434	)			(33,389	)			(4,411	)			(3,051	)
Interest expense			(1,940	)			(1,937	)			(1,354	)			(2,138	)			(1,288	)			(311	)			(587	)
Other income (expense), net			57				855				904				776				224				(51	)			77
Loss before income taxes			(19,169	)			(23,543	)			(34,171	)			(29,796	)			(34,453	)			(4,773	)			(3,561	)
Provision for income taxes			103				222				94				—				—				257				51
Net loss before extraordinary item			(19,272	)			(23,765	)			(34,265	)			(29,796	)			(34,453	)			(5,030	)			(3,612	)
Extraordinary gain on the resolution of acquisition price contingency			—				3,185				—				—				—				—				—
Net loss		$	(19,272	)		$	(20,580	)		$	(34,265	)		$	(29,796	)		$	(34,453	)		$	(5,030	)		$	(3,612	)

 

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		December 31,															March 31,
		2008			2007			2006			2005			2004			2009
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents		$	14,188		$	14,785		$	18,326		$	13,633		$	36,196		$	11,055
Working capital			13,731			11,685			12,132			5,590			33,099			9,780
Total assets			46,469			42,817			49,002			23,099			50,219			42,532
Line of credit			489			277			—			—			—			2,489
Contingent acquisition price liability			—			—			3,765			3,765			3,765			—
Notes payable and intellectual property license obligation			6,336			10,580			8,861			13,607			12,838			5,101
Shareholders’ equity			27,592			19,097			27,337			1,317			27,842			23,653

 

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION ON NETLOGIC

The following table sets forth certain of our consolidated financial data. The consolidated financial data as of and for the years ended December 31, 2008, 2007, 2006, 2005 and 2004, is derived from our audited consolidated financial statements. The selected balance sheet data as of December 31, 2008 and 2007 and selected statements of operations data for the years ended December 31, 2008, 2007 and 2006 are derived from our audited financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 incorporated by reference into this proxy statement. The selected balance sheet data as of December 31, 2006, 2005 and 2004 and selected statements of operations data for the years ended December 31, 2005 and 2004 are derived from our audited financial statements not included in this proxy statement. The consolidated financial information as of and for the three month periods ended March 31, 2009 and 2008 is derived from our unaudited consolidated financial statements, which are included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 incorporated by reference into this proxy statement and which, in our opinion, include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of our financial position and results of operations for such period. Interim results for the three months ended March 31, 2009 are not necessarily indicative of results for the remainder of the fiscal year or for any future period.

The selected historical financial data below should be read in conjunction with the consolidated financial statements for those periods and their accompanying notes.

 

		Year Ended December 31,																				Three Months Ended March 31,
		2008				2007				2006				2005				2004				2009				2008
		(in thousands, except per share data)
Consolidated Statements of Operations Data:
Revenue		$	139,927			$	109,033			$	96,806			$	81,759			$	47,833			$	30,366			$	34,180
Cost of revenue			61,616				44,732				36,762				33,415				26,664				13,544				15,383
Gross profit			78,311				64,301				60,044				48,344				21,169				16,822				18,797
Operating expenses:
Research and development			51,607				45,175				36,578				21,939				19,425				12,198				12,206
In-process research and development			—				1,610				10,700				—				—				—				—
Selling, general and administrative			26,567				19,672				15,455				10,936				9,932				6,814				6,464
Total operating expenses			78,174				66,457				62,733				32,875				29,357				19,012				18,670
Income (loss) from operations			137				(2,156	)			(2,689	)			15,469				(8,188	)			(2,190	)			127
Interest income			1,595				4,431				3,737				1,568				382				181				483
Interest expense			—				—				—				(203	)			(4,076	)			—				—
Other income (expense), net			(92	)			32				3				(16	)			(149	)			(8	)			4
Income (loss) before income taxes			1,640				2,307				1,051				16,818				(12,031	)			(2,017	)			614
Provision for (benefit from) income taxes			(1,937	)			(288	)			459				379				—				1,900				(513	)
Net income (loss)		$	3,577			$	2,595			$	592			$	16,439			$	(12,031	)		$	(3,917	)		$	1,127
Net income (loss) per share - basic		$	0.17			$	0.13			$	0.03			$	0.93			$	(1.17	)		$	(0.18	)		$	0.05
Net income (loss) per share - diluted		$	0.16			$	0.12			$	0.03			$	0.87			$	(1.17	)		$	(0.18	)		$	0.05
Shares used in calculation - basic			21,472				20,747				19,758				17,725				10,318				21,838				21,239
Shares used in calculation - diluted			22,314				21,938				21,107				18,992				10,318				21,838				22,064

 

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		December 31,															March 31,
		2008			2007			2006			2005			2004			2009
		(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents and short-term investments		$	96,541		$	50,689		$	89,879		$	65,788		$	41,411		$	88,875
Working capital			87,853			63,956			95,986			65,162			45,283			95,019
Total assets			245,771			203,151			157,769			85,529			59,454			229,804
Software licenses and other obligations			1,219			2,528			2,625			687			1,317			815
Stockholders’ equity			200,267			171,888			142,524			68,656			48,102			200,493

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The following unaudited pro forma condensed combined consolidated financial statements are based on the historical financial statements of NetLogic and RMI after giving effect to the agreement for our merger with RMI, and the assumptions, reclassifications and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements.

The unaudited pro forma condensed combined balance sheet as of March 31, 2009 is presented as if the merger with RMI had occurred on March 31, 2009. The unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2009, and year ended December 31, 2008, are presented as if the RMI merger had occurred on January 1, 2008 with recurring merger-related adjustments reflected in each of the periods.

Determination of the RMI purchase price and allocations of the RMI purchase price used in the unaudited pro forma condensed combined financial statements are based upon preliminary estimates and assumptions. These preliminary estimates and assumptions could change significantly during the purchase price measurement period as we finalize the valuations of the net tangible assets and intangible assets. Any change could result in material variances between our future financial results and the amounts presented in these unaudited condensed combined financial statements, including variances in fair values recorded, as well as expenses associated with these items.

The unaudited pro forma condensed combined financial statements are prepared for illustrative purposes only and are not necessarily indicative of or intended to represent the results that would have been achieved had the transaction been consummated as of the dates indicated or that may be achieved in the future. The unaudited pro forma condensed combined financial statements do not reflect any operating efficiencies and associated cost savings that we may achieve with respect to the combined companies.

The unaudited pro forma condensed combined financial statements should be read in conjunction with our historical consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2008, Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, the historical financial statements of RMI for the year ended December 31, 2008 (pages F-2 to F-38), the historical unaudited financial statements of RMI as of and for the three months ended March 31, 2009 (pages F-39 to F-62), and other information pertaining to NetLogic and RMI contained in this proxy statement.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET

MARCH 31, 2009

(in thousands)

 

		Historical
		NetLogic at March 31, 2009				RMI at March 31, 2009				Pro Forma Adjustments (Note 4)						Pro Forma Combined
ASSETS
Current assets:
Cash and cash equivalents		$	69,134			$	11,055			$	(16,702	)		(a)		$	63,487
Short-term investments			19,741				—				—						19,741
Accounts receivables, net			8,283				8,807				—						17,090
Inventories			10,900				5,406				2,600			(b)			18,906
Deferred income taxes			2,908				—				—						2,908
Prepaid expenses and other current assets			3,890				2,105				—						5,995
Total current assets			114,856				27,373				(14,102	)					128,127
Property and equipment, net			4,826				4,108				—						8,934
Goodwill			68,712				7,163				26,035			(c)			101,910
Intangible asset, net			36,213				3,496				146,204			(c)			185,913
Other assets			5,197				392				26,702			(c)			32,291
Total assets		$	229,804			$	42,532			$	184,839					$	457,175
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	8,297			$	2,184			$	—					$	10,481
Accrued liabilities			10,141				8,024				8,902			(d)			27,067
Deferred margin			625				295				(295	)		(e)			625
Line of credit			—				2,489				(2,489	)		(a)			—
Notes payable, current			—				4,601				452			(f)			5,053
Software licenses and other obligations, current			774				—				—						774
Total current liabilities			19,837				17,593				6,570						44,000
Notes payable, long-term			—				500				(12	)		(f)			488
Software licenses and other obligations, long-term			41				—				—						41
Other liabilities			9,433				786				11,788			(g)			22,007
Total liabilities			29,311				18,879				18,346						66,536
Stockholders’ equity:
Preferred stock, common stock and additional paid-in capital of NetLogic stockholders			280,380				—				200,383			(h)			480,763
Preferred stock, common stock and additional paid-in capital of RMI stockholders			—				206,693				(206,693	)		(h)			—
Accumulated other comprehensive income			11				—				—						11
Accumulated deficit			(79,898	)			(183,040	)			172,803			(h)			(90,135	)
Total stockholders’ equity			200,493				23,653				166,493						390,639
Total liabilities and stockholders’ equity		$	229,804			$	42,532			$	184,839					$	457,175

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

YEAR ENDED DECEMBER 31, 2008

(in thousands, except per share data)

 

		Historical								Pro Forma Adjustments (Note 4)				Pro Forma Combined
		NetLogic for Year Ended December 31, 2008				RMI for Year Ended December 31, 2008
Revenue		$	139,927			$	78,946			$	—			$	218,873
Cost of revenue			61,616				31,806				21,883	(i)			115,305
Gross profit			78,311				47,140				(21,883	)			103,568
Operating expenses:
Research and development			51,607				38,875				—				90,482
Selling, general and administrative			26,567				25,551				2,152	(i)			54,270
Total operating expenses			78,174				64,426				2,152				144,752
Income (loss) from operations			137				(17,286	)			(24,035	)			(41,184	)
Interest and other income (expense), net			1,503				(1,883	)			1,430	(j)			1,050
Income (loss) before income taxes			1,640				(19,169	)			(22,605	)			(40,134	)
Provision for (benefit from) income taxes			(1,937	)			103				(9,042	) (k)			(10,876	)
Net income (loss)		$	3,577			$	(19,272	)		$	(13,563	)		$	(29,258	)
Net income (loss) per share—Basic		$	0.17											$	(1.09	)
Net income (loss) per share—Diluted		$	0.16											$	(1.09	)
Shares used in calculation—Basic			21,472								5,248	(l)			26,720
Shares used in calculation—Diluted			22,314								4,406	(l)			26,720

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2009

(in thousands, except per share data)

 

		Historical								Pro Forma Adjustments (Note 4)				Pro Forma Combined
		NetLogic for Three Months Ended March 31, 2009				RMI for Three Months Ended March 31, 2009
Revenue		$	30,366			$	17,053			$	—			$	47,419
Cost of revenue			13,544				6,712				4,890	(i)			25,146
Gross profit			16,822				10,341				(4,890	)			22,273
Operating expenses:
Research and development			12,198				8,734				—				20,932
Selling, general and administrative			6,814				6,018				626	(i)			13,458
Total operating expenses			19,012				14,752				626				34,390
Loss from operations			(2,190	)			(4,411	)			(5,516	)			(12,117	)
Interest and other income (expense), net			173				(362	)			229	(j)			40
Loss before income taxes			(2,017	)			(4,773	)			(5,287	)			(12,077	)
Provision for (benefit from) income taxes			1,900				257				(2,115	) (k)			42
Net loss		$	(3,917	)		$	(5,030	)		$	(3,172	)		$	(12,119	)
Net loss per share—Basic		$	(0.18	)										$	(0.45	)
Net loss per share—Diluted		$	(0.18	)										$	(0.45	)
Shares used in calculation—Basic			21,838								5,248	(l)			27,086
Shares used in calculation—Diluted			21,838								5,248	(l)			27,086

 

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NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

1. Preliminary Fair Value of Consideration Transferred

On May 31, 2009, we entered into an Agreement and Plan of Merger Reorganization with RMI. The value of the merger consideration to be paid at the closing date as specified in the merger agreement is equal to $181.35 million plus $2.0 million as an advance earn-out payment. The total number of shares of our common stock to be issued to the holders of RMI preferred stock at the closing date will be equal to the amount of calculated value that is allocable to the shares of RMI preferred stock divided by the applicable closing price of our common stock. The applicable closing price will generally be the same as the average closing price of our common stock for the 20-trading day period ending on the third trading day prior to the closing date, but it cannot be more than $34.90 or less than $26.97. The total amount of cash to be paid to the holders of RMI common stock at the closing date will be equal to the amount of calculated value that is allocable to the shares of RMI common stock under the merger agreement, plus the $2 million advance earn-out credit referenced above. In calculating the amount of cash payable to the holders of RMI common stock, the collar does not limit the amount of cash they are paid. The size of the cash payment may therefore be greater than or less than the portion of the nominal value allocable to the RMI common stock.

The value of the maximum remaining earn-out consideration as specified in the merger agreement is $68.0 million, which will be allocated, determined and paid in the same manner and kind as the merger consideration payable at the closing date but will be reduced by the advance earn-out credit paid to the holders of RMI common stock at the closing date, and may be reduced further by up to $1 million for a special bonus payment to the chief executive officer of RMI in the circumstances specified in the merger agreement. The earn-out is based on the achievement of a specified revenue target for a 12-month period after the closing date.

One hundred percent of the shares of our common stock issued as merger consideration at the closing date will be subject to a lock-up for six months following the closing date, and 50% of the shares will be subject to a lock-up for one year following the closing date. Earn-out consideration will be paid within 90 days after the end of the 12-month earn-out measurement period.

The following examples illustrate how different average closing prices of our common stock would affect the relative allocations of total merger consideration among the holders of RMI preferred stock and RMI common stock and the approximate total value of the merger consideration. The average closing prices used in these examples were chosen solely for the sake of providing a range of sample calculations. In each example, the amounts shown are estimates. For the sake of simplicity, escrow offsets are ignored, figures have been rounded and we have assumed that:

 

•

there will be no change in the number of outstanding shares of each class and series of RMI stock between May 31, 2009, the date of the merger agreement, and the closing date; and

 

•

all of the earn-out objectives will be achieved, such that the nominal value of the earn-out consideration is $70.0 million.

 

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Average Closing Price		Applicable Closing Price			Amount of Cash Payable to RMI Common Stockholders		Number of Shares Issuable to RMI Preferred Stockholders		Total Value of Merger Consideration
$20.00		$	26.97		$5.9 million, all of which is payable at closing		9,050,000 shares, of which 6,500,000 are issuable at closing and 2,550,000 are issuable at end of earn-out period		$186.9 million
$30.00		$	30.00		$14.4 million, of which $8.0 million is payable at closing and $6.4 million is payable at end of earn-out period		7,900,000 shares, of which 5,850,000 are issuable at closing and 2,050,000 are issuable at end of earn-out period		$251.4 million
$40.00		$	34.90		$21.6 million, of which $9.1 million is payable at closing and $12.5 million is payable at end of earn-out period		6,660,000 shares, of which 5,020,000 are issuable at closing and 1,640,000 are issuable at end of earn-out period		$288.0 million

Based on the formulas set forth in the merger agreement, the maximum number of shares of common stock that we would be required to issue as merger consideration (including the earn-out portion, assuming attainment of all objectives) is approximately 9,050,000 shares.

For purposes of the preparation of these pro forma condensed combined financial statements, we applied the average closing price for a 20-day period ending on June 25, 2009, the third trading day prior to the most recent quarter end date, and our stock price as of June 30, 2009 on RMI’s outstanding capital stock as of June 30, 2009. Based on this average closing price of $36.54 per share, an estimated 5,200,000 shares will be issued to RMI preferred shareholders and approximately $8.8 million will be paid to RMI common shareholders at closing. Additionally, we estimate that an earn-out of $11.8 million will be achieved during an earn-out period of September 1, 2009 through August 31, 2010, which would be settled by issuing approximately 300,000 shares of our common stock. The total purchase price can change based on the average closing price for our common stock prior to closing. Any differences between the fair value of the consideration issued will be recorded as goodwill.

2. Preliminary Purchase Price Determination

The merger-date fair value of the total consideration to be transferred, assuming a closing date of March 31, 2009, is estimated as follows (in thousands):

 

Payments to RMI preferred shareholders in stock		$	191,346
Payments to RMI common shareholders in cash			8,813
Acquisition-related contingent consideration			11,788
Total		$	211,947

In accordance with SFAS 141(R), a liability will be recognized for the estimated merger date fair value of the acquisition-related contingent consideration based on the probability of the achievement of the revenue target. Any change in the fair value of the acquisition-related contingent consideration subsequent to the merger date, including changes from events after the acquisition date, such as changes in our estimate of the revenue expected to be achieved and changes in our stock price, will be recognized in earnings in the period the estimated fair value changes. The fair value estimate assumes probability-weighted revenues are achieved over an assumed earn-out period of September 1, 2009 through August 31, 2010. Actual achievement of revenues at or below 75% of the revenue range for this assumed earn-out period would reduce the liability to zero. If the amount of revenue recognized is greater than 75% of the revenue target, the RMI stockholders will receive a nominal amount of earn-out consideration that increases as the percentage gets closer to 100%, up to a maximum amount of $70 million. Specifically, the formula provides that, if the calculated percentage is greater than 75%, then the nominal

 

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amount of earn-out consideration is equal to $2.4 million for each percentage point above 75% and by an additional $3.4 million for each percentage point above 90%. For example, if the amount of recognized revenue is 80% of the target, the nominal earn-out amount would be $12 million, i.e. 5.0 multiplied by $2.4 million. If the amount of recognized revenue is 95% of the target, the nominal earn-out amount would be $53 million, i.e. the sum of (a) 15.0 multiplied by $2.4 million, plus (b) 5.0 multiplied by $3.4 million. Similarly, the number of shares that we will issue in the earn-out (to the extent the revenue milestones are achieved) is determined in reference to the applicable closing price. The market price of our common stock may have changed significantly over the 12- to 15-month period between the closing date and the date the earn-out is paid. If the market price of our common stock increases substantially during this period, the market value of the stock portion of the earn-out consideration may be significantly greater than the amount allocated to it by the formulas in the merger agreement. As a result, the total value of the earn-out consideration paid by us may exceed the nominal value of $70.0 million specified in the merger agreement (including the $2.0 million of advance earn-out credit paid to the holders of RMI common stock at closing). A change in the fair value of the acquisition-related contingent consideration could have a material impact on our statement of operations and financial position in the period of the change in estimate. The pro forma income statements have not been adjusted to give effect to the potential change in acquisition-related contingent consideration liability.

We estimated the fair value of the acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measurement is based on significant inputs not observed in the market and thus represents a Level 3 measurement as defined by SFAS No. 157, Fair Value Measurements. Level 3 instruments are valued based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

As retention incentive awards, under the definitive agreement we have agreed (i) to issue fully vested shares of our common stock with a total nominal value of $8.65 million to specified RMI employees at the closing date for services through the consummation of the merger, (ii) to grant restricted stock units to employees of RMI to vest over 12 months of employment with us, and (iii) to grant restricted stock units and/or stock options to employees of RMI, subject to vesting and other terms to be determined by us. The number of shares of our common stock to be provided will be determined by dividing the total amount specified in each of clauses (i), (ii) and (iii) by the applicable closing price. The maximum number of additional shares of common stock that we would be required to issue to continuing RMI employees as incentive awards is approximately 4,030,000 shares, of which 690,000 shares would be in the form of unrestricted stock and restricted stock units and 3,340,000 shares would be subject to employee stock options. We will not be assuming any outstanding stock options or warrants to purchase capital stock of RMI in the merger. We will record the estimated stock-based compensation expense of $8.65 million relating to the fully vested shares of common stock in our statement of operations at the issue date. We will record the stock-based compensation expense associated with the restricted stock units and/or stock options that are subject to future service requirements in our statement of operations over the future service period. We have not included any of the stock-based compensation expense relating to these three types of retention incentive awards in the pro-forma condensed combined statements of operations.

 

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3. Preliminary Allocation of Consideration Transferred

The merger will be accounted for as a business combination under Statement of Financial Accounting Standards No. 141(R), Business Combinations (“SFAS 141(R)”). The estimated total purchase price of $211.9 million was allocated to the net tangible and intangible assets acquired and liabilities assumed based on their fair values as of the date of the completion of the acquisition as follows (in thousands):

 

Current assets:
Inventory		$	8,006
Other current assets			14,078
Property and equipment			4,108
Deferred tax assets			26,702
Other non-current tangible assets			392
Amortizable intangible assets:
Existing and core technology			81,300
Customer contracts and related relationships			16,500
Composite intangible assets			1,500
Tradenames and trademarks			2,200
Non competition agreements			300
Backlog			2,700
In-process research and development			45,200
Accounts payable and accrued liabilities			(10,208	)
Deferred tax liabilities, current			(6,302	)
Notes payable			(5,541	)
RMI’s direct acquisition related costs payable			(1,400	)
Other long-term liabilities
Deferred tax liabilities			(518	)
Other			(268	)
Goodwill			33,198
Total		$	211,947

As of the effective date of the merger, inventories are required to be measured at fair value. We do not have detailed information at this time as to the specific finished goods relating to each stage of completion of work-in-progress. The preliminary fair value adjustment to inventory of $2.6 million is based on assumptions applied at an aggregate level to the March 31, 2009 RMI inventory balance.

Existing and core technology consisted of products which have reached technological feasibility and relate to the multi-core, multi-threaded processing products (XLR and XLS) and the ultra low-power processing products (Au 1xxx). The value of the developed technology was determined by discounting estimated net future cash flows of these products. We will amortize the existing and core technology on a straight-line basis over estimated lives of 3 to 7 years.

Customer relationships relate to our ability to sell existing and future versions of products to existing RMI customers. The fair value of the customer relationships was determined by discounting estimated net future cash flows from the customer contracts. We will amortize customer relationships on a straight-line basis over an estimated life of 10 years.

Composite intangible assets relate to matured legacy products. The fair value of the developed technology was determined by discounting estimated net future cash flows of these products. We will amortize the composite intangible assets on a straight-line basis over an estimated life of 2 years.

 

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Tradename and trademarks represents various RMI brands, registered product names and marks. The fair value of tradename and trademarks was determined by estimating a benefit from owning the asset rather than paying a royalty to a third party for the use of the asset. We will amortize the asset on a straight-line basis over an estimated life of 3 years.

Non-competition agreements were valued by determining the difference in net future cash flows with and without the covenant not to compete. We will amortize the assets on a straight-line basis over an estimated life of 2.5 years.

The backlog fair value relates to the estimated selling cost to generate backlog at an expected closing date in the quarter ending September 30, 2009. The fair value of backlog at closing will be amortized over an estimated life of 4 months.

In-process research and development, or IPRD, consisted of the in-process project to complete development of the XLP product. The value assigned to IPRD was determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The fair values of IPRD were determined using the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculations was derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the product’s development and success as well as the product’s stage of completion. Acquired IPRD assets are initially recognized at fair value and are classified as indefinite-lived assets until the successful completion or abandonment of the associated research and development efforts. Accordingly, during the development period after the acquisition date, these assets will not be amortized as charges to earnings; instead this asset will be subject to periodic asset value impairment testing. Upon successful completion of the development process for the acquired IPRD project, the asset would then be considered a finite-lived intangible asset and amortization of the asset will commence over its expected life of 8 years. The project is expected to be completed in the third quarter of 2010.

At the merger date, notes payable assumed will be recorded at fair value. Fair value is determined by discounting future cash payments at a market borrowing rate.

The deferred tax liability associated with the estimated fair value adjustments of assets to be acquired and liabilities to be assumed is recorded using the estimated weighted average statutory tax rate in the jurisdictions where the fair value adjustments may occur.

Of the total estimated purchase price paid at the time of acquisition, approximately $33.2 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 is not deductible for tax purposes. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets was the acquisition of an assembled workforce of experienced semiconductor engineers, synergies in products, technologies, skillsets, operations, customer base and organizational cultures that can be leveraged to enable us to build an enterprise greater than the sum of its parts. In accordance with SFAS 142, 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 expense for the amount impaired during the fiscal quarter in which the determination is made.

Upon completion of the fair value assessment after the merger, we anticipate that the final purchase price allocation will differ from the preliminary allocation outlined above. Additionally, the fair value of assets acquired and liabilities assumed may be materially impacted by the results of RMI’s operations up to the date of

 

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completion of the merger. The actual amounts recorded may differ materially from the information presented herein. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities, with any residual amount recorded as goodwill.

4. Pro Forma Adjustments

The pro forma adjustments included in the unaudited pro forma condensed combined consolidated balance sheet and statements of operations are as follows:

 

(a)

To record payment of the following (in thousands):

 

Initial cash purchase consideration for RMI		$	8,813
Direct acquisition costs and fees			5,400
Settlement of RMI’s outstanding line of credit			2,489
Total		$	16,702

 

(b)

To record acquired finished good inventories at estimated selling prices less selling cost and acquired work-in-progress inventories at estimated selling prices less estimated manufacturing and selling cost.

 

(c)

To eliminate RMI’s acquired intangible assets and goodwill and to record acquired intangible assets, goodwill and deferred tax assets resulting from the transaction.

 

(d)

To record other direct acquisition costs of $1.4 million for legal fees payable by RMI and direct acquisition costs of $1.2 million for legal, accounting, valuation and other professional services payable by us, and deferred tax liabilities resulting from the transaction.

 

(e)

To eliminate RMI’s deferred margin arising from transactions which require no further performance effort.

 

(f)

To record assumed notes payable at fair value by discounting remaining future payments at our estimated cost of borrowing.

 

(g)

To record the initial recognition of RMI acquisition-related contingent consideration liability.

 

(h)

To record the following adjustments to stockholders’ equity:

 

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				NetLogic’s preferred stock, common stock and additional paid-in capital			RMI’s preferred stock, common stock and additional paid-in capital				NetLogic’s other compre- hensive income			NetLogic’s accumulated deficit				RMI’s accumulated deficit				Total
				(in thousands)
Historical balances, as reported
NetLogic stockholder’s equity				$	280,380		$	—			$	11		$	(79,898	)		$	—			$	200,493
RMI stockholders’ equity					—			206,693				—			—				(183,040	)			23,653
Pro forma adjustments:
Record NetLogic’s issuance of common stock in connection with payment of initial stock consideration					191,346			—				—			—				—				191,346
Eliminate RMI’s historical equity					—			(206,693	)			—			—				183,040				(23,653	)
Record fully vested common stock issued at closing for services through the consummation of the merger against NetLogic’s accumulated deficit					9,037			—				—			(9,037	)			—				—
Record direct acquisition costs and fees due at closing against NetLogic’s accumulated deficit					—			—				—			(1,200	)			—				(1,200	)
Total adjustments to stockholders’ equity					200,383			(206,693	)			—			(10,237	)			183,040				166,493
Pro forma combined				$	480,763		$	—			$	11		$	(90,135	)		$	—			$	390,639

 

(i)

To eliminate RMI’s historical amortization of intangible assets and to record amortization of estimated intangible assets recorded as a result of the RMI acquisition.

 

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		Estimated Value			Expected Life		Expense for Twelve Months Ended December 31, 2008				Expense for Three Months Ended March 31, 2009
		(in thousands, except expected life data)
Amortization of intangible assets included in cost of revenue
Elimination of historical charges							$	(1,397	)		$	(256	)
Addition of estimated amortization charges for:
Existing and core technology		$	81,300		3-7 years			19,830				4,958
Composite intangible assets			1,500		2 years			750				188
Backlog			2,700		4 months			2,700				—
							$	21,883			$	4,890
Amortization of intangible assets included in selling, general and administrative expenses
Elimination of historical charges							$	(351	)		$	—
Addition of estimated amortization charges for:
Customer contracts and related relationships		$	16,500		10 years			1,650				413
Tradenames and trademarks			2,200		3 years			733				183
Non-competition agreements			300		2.5 years			120				30
							$	2,152			$	626

 

(j)

To eliminate RMI’s historical debt service costs in connection with the line of credit and to record the notes payable and related interest expense on the notes payable at fair value.

 

		Expense for Twelve Months Ended December 31, 2008				Expense for Three Months Ended March 31, 2009
		(in thousands)
Elimination of historical debt servicing costs		$	1,936			$	311
Interest expense on notes payable at fair value			(506	)			(82	)
Total		$	1,430			$	229

 

(k)

To record the income tax impact at the weighted average estimated statutory income tax rates of 40% for the three months ended March 31, 2009 and 40% for the year ended December 31, 2008, applicable to the jurisdictions in which the pro forma adjustment are expected to be recorded.

 

(l)

To record the preliminary estimates of shares issued as initial consideration payment in connection with the merger and to eliminate the anti-dilutive effect of potential common shares.

Employment Agreements

We have negotiated employment agreements associated with certain key employees. No pro forma adjustments have been recorded as these agreements do not materially differ from existing arrangements in place prior to the merger.

Pre-Acquisition Contingencies

We have evaluated and continue to evaluate pre-acquisition contingencies related to RMI that existed as of the acquisition date. If these pre-acquisition contingencies that existed as of the acquisition date become probable in nature and estimable during the remainder of the measurement period, amounts recorded for such matters will be made in the measurement period as an adjustment to goodwill and, if subsequent to the measurement period, in our results of operations.

 

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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA

The following table sets forth certain historical and pro forma per share data for NetLogic and RMI. The historical data for NetLogic is derived from and should be read together with our audited consolidated financial statements and related notes thereto contained in our Form 10-K for the fiscal year ended December 31, 2008, and our unaudited condensed consolidated financial statements and related notes thereto contained in our Form 10-Q for the period ended March 31, 2009, parts of which are incorporated by reference into this proxy statement and are described under the section entitled “Where You Can Find More Information; Incorporation By Reference.” The historical data for RMI is derived from RMI’s audited financial statements for the year ended December 31, 2008 and unaudited financial statements for the period ended March 31, 2009, which are included elsewhere in this proxy statement and shares used in calculation of basic and diluted data prepared by RMI management.

The pro forma data for NetLogic and equivalent pro forma data for RMI are derived from and should be read together with the unaudited pro forma condensed combined financial statements of NetLogic, which are included elsewhere in this proxy statement, shares used in calculation of basic and diluted data for NetLogic prepared by our management, and shares used in calculation of basic and diluted data for RMI prepared by RMI management. For purposes of calculating the equivalent pro forma data for RMI, an assumed exchange ratio of 0.025 as if the exchange occurred on June 30, 2009, is applied to our pro forma combined data.

We completed our acquisition of net assets associated with the network search engine business of Integrated Device Technology, Inc. on July 17, 2009. Our historical results prior to that date do not include the effects of the acquisition of the NWD assets. The audited statement of net assets acquired and statement of revenues and expenses for the year ended March 31, 2009, and unaudited pro forma financial information related to the closing of the acquisition of the NWD assets has been included in our Form 8-K filing on July 20, 2009, which is incorporated by reference into this proxy statement. For informational purposes, the effects of combining the acquisition of the NWD assets on a pro forma basis have been separately included in the supplemental pro forma condensed combined financial data presented elsewhere in this proxy statement.

This summary of comparative historical and pro forma per share data is being provided for illustrative purposes only. The business of NetLogic and RMI may have performed differently had the merger occurred prior to the period presented. In addition, since the unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of purchase consideration and fair values of assets acquired and liabilities assumed, the actual amounts recorded may differ materially from the information presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had NetLogic and RMI been combined during the period presented or of the future results of NetLogic following the merger.

 

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		Historical NetLogic				Historical RMI				Pro Forma Combined				Pro Forma Equivalent of one RMI share (1)
Net income (loss) per share - basic:
Year ended December 31, 2008		$	0.17			$	(0.09	)		$	(1.09	)		$	(0.03	)
Three months ended March 31, 2009		$	(0.18	)		$	(0.02	)		$	(0.45	)		$	(0.01	)
Net income (loss) per share - diluted:
Year ended December 31, 2008		$	0.16			$	(0.09	)		$	(1.09	)		$	(0.03	)
Three months ended March 31, 2009		$	(0.18	)		$	(0.02	)		$	(0.45	)		$	(0.01	)
Net asset value per share
At March 31, 2009		$	8.77			$	0.11			$	13.90			$	0.35
Shares used net asset per share calculation (in millions)			22.9				225.1				28.1

 

(1)	The pro forma equivalent of one RMI share amounts were calculated by applying the exchange ratio of 0.025 to the pro forma combined per share data. The exchange ratio does not include the cash consideration payable to RMI common stock holders.

 

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SUPPLEMENTAL UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA OF NETLOGIC

We completed our acquisition of net assets associated with the network search engine business of Integrated Device Technology, Inc. on July 17, 2009. Our historical results prior to that date do not include the effects of the acquisition of the NWD assets. The audited statement of net assets acquired and statement of revenues and expenses for the year ended March 31, 2009, and unaudited pro forma financial information related to the closing of the acquisition of the NWD assets has been included in our Form 8-K filing on July 20, 2009, which is incorporated by reference in this proxy statement.

The supplemental unaudited pro forma condensed combined financial data are based on unaudited pro forma condensed combined financial data of NetLogic and RMI presented in “Unaudited Pro Forma Condensed Combined Financial Statements,” giving the effects of combining the acquisition of the NWD assets on a pro forma basis and have been separately included in the supplemental unaudited pro forma condensed combined financial data presented in the tables below labeled “Pro Forma Combined – including NWD Assets.” The statements of operations data related to the NWD Assets for the year ended March 31, 2009 and for the three months ended March 31, 2009 have been included in the pro forma combined data as if the acquisition had occurred on January 1, 2008 while the balance sheet data related to the NWD Assets acquired as of March 31, 2009 have been included in the pro forma combined data as if the acquisition occurred on that date.

The supplemental unaudited pro forma condensed combined financial data should be read in conjunction with the respective consolidated financial statements of those periods and their accompanying notes, either incorporated by reference to this proxy statement or included elsewhere herein, the unaudited pro forma condensed combined financial data of NetLogic and RMI included elsewhere herein, and the unaudited pro forma financial information of NetLogic and the NWD Assets, incorporated by reference in this proxy statement.

This summary pro forma data is being provided for illustrative purposes only. NetLogic, RMI and the acquired NWD Assets may have performed differently had the merger occurred prior to the period presented. In addition, since the unaudited pro forma condensed combined financial statements have been prepared based on preliminary estimates of purchase consideration and fair values of assets acquired and liabilities assumed, the actual amounts recorded may differ materially from the information presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had NetLogic, RMI and the acquired NWD Assets been combined during the period presented or of our future results following the merger.

 

					Historical
As of March 31, 2009		Pro Forma Combined			NWD Assets at March 31, 2009			Pro Forma Adjustments (Note 1)							Pro Forma Combined - including NWD Assets
		(in thousands)
Balance Sheet Data:
Cash and cash equivalents and short-term investments		$	83,228		$	—		$	(63,688	)		(a	)		$	19,540
Working capital			84,127			8,125			(68,611	)		(b	)			23,641
Total assets			457,175			8,812			28,013			(c	)			494,000
Line of credit, notes payable, software licenses and other obligations			6,356			—			36,625			(d	)			42,981
Stockholders’ equity			390,639			8,812			(9,437	)		(e	)			390,014

 

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						Historical
For year ended December 31, 2008		Pro Forma Combined				NWD Assets for the Year Ended March 31, 2009				Pro Forma Adjustments (Note 1)							Pro Forma Combined - including NWD Assets
		(in thousands, except per share data)
Statements of Operations Data:
Revenue		$	218,873			$	63,591			$	—						$	282,464
Net loss		$	(29,258	)		$	(4,330	)		$	(10,444	)		(f	)		$	(44,032	)
Net loss per share—basic and diluted		$	(1.09	)													$	(1.65	)
Shares used in calculation—basic and diluted			26,720															26,720

 

						Historical
For the three months ended March 31, 2009		Pro Forma Combined				NWD Assets for the Three Months Ended March 31, 2009				Pro Forma Adjustments (Note 1)							Pro Forma Combined - including NWD Assets
		(in thousands, except per share data)
Statements of Operations Data:
Revenue		$	47,419			$	8,231			$	—						$	55,650
Net loss		$	(12,119	)		$	(5,986	)		$	(2,518	)		(f	)		$	(20,623	)
Net loss per share—basic and diluted		$	(0.45	)													$	(0.76	)
Shares used in calculation—basic and diluted			27,086															27,086

 

Note 1: NWD Assets Pro Forma Adjustments

The pro forma adjustments, included in the unaudited pro forma condensed combined consolidated balance sheet and statement of operations, are as follows:

 

(a)

To record payment of estimated cash consideration of the acquisition of the NWD Assets of $100,000,000, payment of our credit facility fee of $688,000, net of proceeds from the facility drawdown of $37,000,000 to partially finance the acquisition of the NWD Assets at close. A portion of facility fees related to a line of credit (of $313,000) is recorded as a deferred charge while the remaining balance (of $375,000) is recorded as reductions to the notes payable balances.

 

(b)

To record the following adjustments to working capital:

 

Net cash outflow described in (a)		$	(63,688	)
Adjustments to record acquired inventory at fair value			5,700
Direct acquisition costs payable			(625	)
Direct financing costs payable			(200	)
Current portion of notes payable drawn to partially finance the merger consideration			(10,000	)
Portion of credit facility fees recorded as a discount to the current portion of notes payable			202
Total		$	(68,611	)

 

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(c)

To record the following adjustments to total assets:

 

Net cash outflow described in (a)		$	(63,688	)
Adjustments to record acquired inventory at fair value			5,700
Acquired intangible assets			62,600
Goodwill			22,888
Deferred charges associated with facility fees paid for line of credit			313
Deferred charges associated with direct financing costs			200
Total		$	28,013

 

(d)

To record the facility drawdown of $37,000,000, offset by a portion of the credit facility fee ($375,000) recorded as a discount to notes payable.

 

(e)

To eliminate IDT’s investment in the NWD Assets of $8,812,000 and to record charges against the accumulated deficit for direct acquisition costs incurred of $625,000.

 

(f)

To record the following adjustments to net loss:

 

		Expense for the Twelve Months Ended December 31, 2008				Expense for the Three Months Ended March 31, 2009
Amortization of intangible assets		$	8,782			$	2,196
Amortization of deferred charges			171				43
Accretion of debt discounts			202				38
Interest expense			2,244				456
Income tax effect of the above items			(955	)			(215	)
Total		$	10,444			$	2,518

 

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HISTORICAL COMMON STOCK MARKET PRICE AND DIVIDENDS

Historical market price data for RMI has not been presented as there is no established trading market in RMI common stock.

Shares of our common stock are traded on the Global Select Market of the NASDAQ Stock Market under the symbol “NETL”. The following table sets forth, for the periods indicated, the intra-day high and low per share sale prices of our common stock, as reported on the Global Select Market.

 

		Price Range Per Share
		High			Low
Fiscal 2009
Second quarter		$	38.50		$	26.77
First quarter		$	28.57		$	19.68
Fiscal 2008
Fourth quarter		$	30.45		$	14.42
Third quarter		$	39.10		$	26.98
Second quarter		$	40.26		$	23.44
First quarter		$	32.90		$	20.15
Fiscal 2007
Fourth quarter		$	38.69		$	27.46
Third quarter		$	37.25		$	26.76
Second quarter		$	35.17		$	26.08

Dividends

RMI has never paid cash dividends on its common stock and does not anticipate paying any cash dividends in the foreseeable future. The merger agreement prohibits the declaration and payment of dividends by RMI prior to closing without our consent.

NetLogic has never paid cash dividends on our common stock, and we do not anticipate paying any cash dividends in the foreseeable future. We expect to retain earnings, if any, to fund the development and growth of its business. Under a credit agreement dated June 19, 2009 with a syndication of banks, we are prohibited from the declaration and payment of dividends.

 

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RMI’S BUSINESS

Overview

RMI is a leading fabless semiconductor company that provides high performance, power-optimized processor solutions for several target markets: infrastructure equipment, enterprise systems, security and storage appliances, data center systems and industrial and connected media devices. RMI’s processors enable secure delivery, use and sharing of information and rich media content. Its proprietary architecture and innovative processor designs deliver high throughput, increased processing capacity and advanced functionality within a given power budget. RMI’s processors can replace a number of single function semiconductors with a highly integrated, multi-function processing solution that is scalable and programmable, allowing its customers to rapidly and cost-effectively bring a wide variety of product offerings to market.

From the company’s launch in 2002, RMI has been primarily engaged in the design and development of high performance processor solutions. RMI offers a family of high-performance multi-core, multi-threaded XLP™, XLR^® and XLS^® Processors targeted at carrier-class infrastructure systems and equipment, including 3G/4G mobile wireless infrastructure, enterprise networking, data center, security and storage markets. The XLR Processor family was introduced in May 2005, the XLS Processor family was introduced in February 2007, and the XLP Processor family was announced in May 2009. In addition, RMI offers a family of ultra low-power processors, originating from the ultra low-power processor product line RMI acquired from Advanced Micro Devices, Inc. in July 2006, which is targeted at high-volume enterprise networked client, industrial and connected media applications. RMI introduced its Au1210^® and Au1250^® Processors targeted at connected media applications in January 2007. In February 2009, RMI introduced its Au1300^® Processor family, targeted at mobile media devices with 3D graphics acceleration, performance up to 800 MHz and power rates of less than  ¹/2 watt at speed. RMI shipped its one-millionth processor in October 2005, its five-millionth processor in February 2008 and its eight-millionth processor in March 2009.

RMI sells directly to OEMs, ODMs and distributors, as well as to contract manufacturers who build products for the OEMs who are its customers. To further accelerate the adoption of its processor solutions, RMI has developed an extensive ecosystem of partners that facilitate delivery of end-to-end solutions. In 2008, RMI’s products were incorporated into the product offerings of more than 200 companies.

RMI’s Solution

RMI offers highly scalable processor solutions that allow system designers the flexibility to optimize performance, power consumption and cost for a wide variety of applications across all three segments of the evolving global connectivity network: infrastructure equipment, enterprise systems and connected media devices.

RMI believes its solutions offer the following key features and benefits to its customers:

 

•

High performance with low power usage. In the infrastructure equipment and enterprise systems markets, RMI offers multi-core processors with proprietary four-way multi-threaded processor core architecture. RMI’s multi-threading capability allows each thread to act as a virtual central processing unit, or vCPU™, within the processor core, thereby making each processor core capable of much higher throughput. With up to eight processor cores and up to 32 vCPUs enabled by four-way multi-threading, its products can achieve a throughput rate up to 40Gbps. RMI’s XLR, XLS and XLP Processors offer processing speeds of up to 1.4GHz, 1.5GHz and over 2.0GHz, respectively. RMI’s proprietary processor architecture also implements a high-speed Memory Distributed Interconnect® network, consisting of a Fast Messaging NetworkTM and point-to-point interconnects, enabling high-speed communication between cores, accelerators and network interfaces and more efficient memory access. Autonomous Acceleration Engines® enable its processors to offload computationally intensive software code from the processing core to an on-chip hardware component for faster and more power-efficient execution. As a result, RMI processors can perform multiple complex and specialized tasks

 

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such as network traffic prioritization and application and content inspection without utilizing processor core resources. RMI’s architecture allows its customers to maximize processor utilization and throughput at a specified power budget for each target application. In the connected media device market, its power-optimized single-core processor solutions offer media-rich and multi-application processing capabilities at high processing speeds up to 700 MHz. For very low power applications, these processor solutions consume less than 450 mW at 600 MHz. RMI’s autonomous Media Acceleration Engines® off-load processor-intensive tasks, such as video transcoding, to an on-chip hardware component, leaving ample available processing capacity for its customers to implement and run a variety of additional multimedia applications simultaneously and without degrading performance.

 

•

High level of integration. RMI’s solutions can replace a number of single function semiconductors through a highly integrated processing solution which provides its customers with greater ease of design and faster time-to-market for their products. In addition, all of its products incorporate security processing engines or algorithms for secure connectivity and communications. In the communications equipment market, RMI’s processor architecture integrates network accelerators, memory access accelerators, compression and decompression engines, and high performance network interconnects. This allows RMI’s customers to develop systems with fewer semiconductor components as well as systems that perform a broader range of functions. This level of integration eliminates the need for separate co-processors, digital signal processors and the associated complexity of software for each additional processing component.

 

•

Scalable platform solutions. RMI provides a scalable platform of processing solutions that spans a wide range of performance and functional requirements and end-market applications. RMI’s processor solutions achieve scalability through various combinations of its innovative processor architecture, optimized processing capacity utilization, programmability, and software- and pin-compatibility. Specifically, RMI’s enterprise and infrastructure customers can meet their various and increasing performance requirements by selecting from its broad range of processor solutions that incorporate or utilize different numbers of processor cores and vCPUs with minimal changes to the software code and system design. This enables RMI’s customers to leverage their investment in common software tools and code implementation to easily customize its solutions for use in their evolving product offerings.

 

•

Accelerated time to market. RMI’s processor solutions feature comprehensive software development kits, full reference designs, device drivers, support for standards-based operating systems, such as Linux and Windows CE, and a simple programming environment based on the commonly used C/C++ programming language. This allows RMI’s customers to quickly migrate existing software to run on RMI’s processors and more easily develop applications to satisfy varying functional requirements, thereby accelerating the time to market for their products. RMI has also developed strong relationships with third parties that form the ecosystem required for RMI’s customers to deliver an end-to-end solution quickly. This ecosystem consists of providers of operating systems, software tools, applications, development boards and supporting devices designed for specific applications of RMI’s products.

RMI’s Products

RMI offers a range of high performance, highly integrated, feature-rich SoC processor solutions. These processor solutions provide high throughput, power efficiency, application and content awareness and security for the evolving global connectivity network. RMI’s products serve the infrastructure equipment, enterprise systems and connected media markets within this network with a wide range of feature and performance configurations.

 

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XLR^® Processor Family

RMI’s multi-core, multi-threaded XLR Processor™^® family is a high throughput, feature-rich processor solution for a wide variety of high-performance infrastructure equipment, enterprise networking, security and storage systems. RMI’s XLR Processors enable applications, such as integrated security, triple-play Web services, virtualized storage, load balancing and server offload, as well as content and application aware, multi-service routing and switching. RMI’s processors are fully programmable using standard C/C++ programming language, which eliminates the need for microcoding or proprietary scripting. RMI’s industry-standard interfaces provide an extensive set of connectivity options. All XLR Processors are software- and pin- compatible and available in a variety of power options, enabling scalable system designs within a single platform.

XLS™^® Processor Family

RMI’s XLS Processor™^® family offers mid- to entry- level derivative versions of XLR’s multi-core, multi-threaded architecture. RMI’s XLS Processor leverages the XLR’s performance, scalability and technology innovations and incorporates additional advanced connectivity standards. XLS Processors address applications that demand smaller form factor and lower power consumption. RMI’s XLS Processors are pin compatible within each series and software compatible across all XLS and XLR processor families.

XLP™ Processor Family

RMI’s latest generation XLP Processor™ family is based on the XLR Processor multi-core, multi-threaded architecture. The XLP Processor family will feature a multi-issue design and up to three times higher throughput per watt than the XLR processors with memory cache systems, internal and peripheral interconnects expanded to match the higher throughput. The XLP Processors are expected to enable applications, such as integrated security, quad-play Web services, virtualized storage, load balancing and server offload, as well as content and application aware, multi-service routing and switching. The XLP processors are designed on an advanced 40nm process and are expected to be available for sampling to customers in the fourth quarter of 2009.

XL^®7110 Processor

RMI’s XL7110 Processor is a legacy product that RMI acquired in July 2003 from SandCraft Inc.

Ultra Low-Power Processor Family

RMI’s ultra low-power processor family, previously marketed by RMI under the Alchemy^® name, consists of high performance, feature-rich, very low power processor solutions targeted at portable applications that deliver a rich multimedia experience to end users. RMI’s media processors integrate a variety of peripheral components, such as memory, LCD display and camera controllers, wireless interfaces, AES security cryptography engine and a fully integrated media acceleration engine. RMI’s processors support all digital video formats, including MPEG, DivX, and WMV9, and deliver full D1 or high definition performance, all without the need to transcode content between source and target applications. RMI’s processors also support widely used operating systems such as WinCE 5.0, 6.0 and Linux.

RMI’s Technology

RMI believes its advanced processor technologies enable its multi-core, multi-threaded processor solutions to deliver very high performance per watt to its customers. It believes this is accomplished by tight integration of key technologies and an innovative architecture. RMI has leveraged its technology advantages across its product platform.

 

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High Performance Processor Core Technology, Multi-threading

RMI believes its expertise is in designing high speed, low power processor cores and incorporating them in high performance, scalable processor solutions. RMI’s XLR Processor design is the industry’s first multi-core, multi-threaded implementation of the MIPS64^® instruction set architecture. Its processor solutions significantly improve throughput by incorporating onto a single chip multiple sets of identical 4-way multi-threaded processor cores. Each of the four tightly integrated hardware threads on RMI’s core acts as a vCPU. Unlike single-threaded designs, RMI’s multi-core, multi-threaded architecture is well suited for a network-oriented, layer 4 through 7 processing environment and is capable of significantly reducing the performance delays associated with memory latency. RMI’s use of multi-threading reduces the overall number of cores needed to be placed on a SoC to achieve a desired performance level, thus reducing processor cost, die size and internal interconnect complexity.

Low Power Design

RMI employs low power chip design techniques across RMI’s product families. These design techniques include extensive clock gating, low voltage, low leakage cell libraries, memory controllers that automatically enable configurable DDR memory power management and overall system power awareness. RMI optimizes the power performance ratio of RMI’s multi-core, multi-threaded processors through the use of advanced manufacturing process technologies and dynamic frequency control, and RMI plans to introduce extensive power gating technology into its next generation processor solutions. In addition, given the importance of power efficiency in the enterprise networked client, industrial and connected media devices, RMI’s ultra low-power processors implement fast branch resolution technology and a tightly coupled system bus to further decrease total power consumption.

Fast Messaging Network™ Technology

RMI’s Fast Messaging Network is an innovative way of enabling point-to-point on-chip communications, allowing its multi-core, multi-threaded architecture to deliver highly efficient parallel data processing performance. The Fast Messaging Network works in conjunction with RMI’s on-chip Memory Distributed Interconnect™^® and I/O Distributed Interconnect™^® networks to connect all cores, caches, I/O and processing agents within the SoC. The Fast Messaging Network eliminates data locks and relieves system loading by supporting hundreds of millions of in-flight messages and packet descriptors between all on-chip elements. The result is a highly scalable on-chip communications architecture designed to eliminate communications bottlenecks between processor cores, acceleration engines, interfaces and memory and thereby maximize processor throughput.

Autonomous Acceleration Engines^®: Network, Compression and Security

RMI’s processors are equipped with a variety of highly-optimized autonomous acceleration engines that offload key functions from the processor cores and thereby streamline processing efficiency. In RMI’s XLR, XLS and XLP processors, a proprietary Autonomous Network Acceleration Engine^® interface supports higher-layer programmable parsing, packet direction management, checksum verification and load-balanced packet distribution across the multiple processor threads. In RMI’s XLS and XLP processors, a proprietary Compression/Decompression Engine offloads the compression functions to an autonomous IP block, freeing up additional processing capacity within each core for greater efficiency and throughput. In its ultra low-power processors, Autonomous Security Acceleration Engines^® and Advanced Encryption Standard Cryptography Engines enable RMI to completely off-load encryption/decryption and authentication-related hashing operations from its processor cores. Unlike solutions that integrate security within the processor core, its use of autonomous on-chip security engines enables device manufacturers to avoid slowing down the processor with the security function and frees up processing power for other device requirements.

 

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Media Acceleration Engine™ Technology

RMI’s proprietary, low power Media Acceleration Engine incorporated in RMI’s ultra low-power processors enables the play back of premium video content at very high resolution. The computational demand of decoding high-quality MPEG/WMV video content is typically a major challenge for traditional processors. With most traditional devices, native D1 (720x480 resolution) video content must be transcoded to a lower bit-rate and resolution because of insufficient processing power or excessive power consumption required to play high-quality, rich media. Transcoding, traditionally requiring the use of additional digital signal processor blocks, can take as long as the playback time of the file itself, which diminishes the user experience. RMI’s Media Acceleration Engine addresses this challenge by supporting most digital media codecs and delivering up to 720p resolution without the need for a digital signal processor to transcode content. In addition, RMI’s Media Acceleration Engine offloads power-intensive tasks such as motion compensation, scaling, color space conversion and filtering from the processor core, thus freeing the core to handle additional user interface functions, advanced audio processing and other demands.

RMI’s Customers

RMI sells its products to OEMs worldwide, either directly or through contract manufacturing organizations, ODMs and distributors. In 2008, RMI’s products were incorporated through sales to its OEMs or distributors into the product offerings of more than 200 companies, including Aruba Networks, Cisco Systems, Dell, Digital Cube, Hewlett-Packard, Huawei, H3C, Juniper Networks, McAfee, Samsung, and Thinkware.

RMI receives a substantial portion of its revenues from a limited number of customers. For the years ended 2008 and 2007, its top five customers accounted for 44.5% and 51.3% of its revenues, respectively.

RMI’s Sales and Marketing

RMI sells its products worldwide through multiple channels that include distributors, independent sales representatives and direct sales. RMI’s direct sales personnel are based in the United States, China, Japan, Korea, Taiwan and Europe. RMI also has field applications engineering and technical marketing personnel based in each of these countries that support all of its channels. These personnel provide technical support and assistance to existing and potential customers in designing, testing and qualifying products that incorporate RMI’s products. RMI intends to expand its direct sales and support staffing in key regions as opportunities develop.

RMI’s sales cycle typically runs six to 18 months for connected media devices and 12 months to more than three years for infrastructure equipment and enterprise systems. This cycle involves RMI’s technical marketing, sales and field application engineers actively engaging with the system design, engineering and procurement groups at each customer. If successful, this process results in the customer’s decision to use RMI’s product in their system, followed by a lengthy period of design-in, testing and verification that precedes the first volume shipments of RMI’s product to the customer. Once one of RMI’s products is incorporated into a customer’s design, it is likely to be used for the life cycle of the customer’s product since a redesign generally would be time consuming and expensive.

RMI’s Research and Development

RMI devotes substantial resources to its research and development activities to further enhance the performance, integration and cost effectiveness of its products and to develop new products for existing and emerging markets. RMI works closely with its customers to understand and meet their requirements and align its research and development efforts to meet market requirements and future direction. Frequent interaction between its silicon, software and systems design teams gives RMI a comprehensive view necessary to deliver complex, high-performance, low-power products to its customers.

 

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RMI’s hardware and software engineering design teams are located in Cupertino, California, Austin, Texas, Bangalore, India, and Beijing, China. RMI also uses contractors for specific skills or to supplement RMI’s existing resources, as needed.

RMI’s Manufacturing

RMI uses third-party foundries and assembly and test contractors to manufacture, assemble and test RMI’s semiconductor products. This outsourced manufacturing approach significantly reduces RMI’s capital requirements and allows it to focus its resources on the design, development and marketing of its products. RMI’s engineers work closely with RMI’s foundries and other contractors to increase yields, lower manufacturing costs and improve quality.

RMI currently outsources wafer manufacturing of all of its products to Taiwan Semiconductor Manufacturing Company, or TSMC, with the exception of the XL7110, which is manufactured by United Microelectronics Corporation, or UMC. Both TSMC and UMC are located in Taiwan. RMI works closely with TSMC and UMC to forecast on a monthly basis its manufacturing capacity and lead time requirements. RMI’s SoCs are currently fabricated using complementary metal-oxide semiconductor, or CMOS, process technology in several advanced, sub-micron feature sizes.

RMI’s products are shipped from its third-party foundries to third-party assembly and test facilities where they are assembled into finished packages and tested. RMI outsources all product packaging and substantially all testing requirements for these products to several assembly and test subcontractors, including ASE Electronics in Taiwan and Singapore and ISE in the United States. RMI’s products are designed to use standard packages and to be tested with widely available test equipment.

RMI has implemented significant quality assurance and test procedures to assure high levels of product quality for its customers. RMI’s designs are subjected to extensive circuit simulation under extreme conditions of temperature, voltage and processing before being committed to manufacture. RMI have completed and have been awarded ISO 9001:2000 certification. In addition, all of RMI’s independent foundries and assembly and test subcontractors have been awarded ISO 9001 certification.

RMI’s Competition

RMI competes primarily with other suppliers of high performance processor products used in infrastructure equipment, enterprise systems and connected media device applications. With respect to the infrastructure equipment and enterprise systems markets, RMI’s principal competitors include AMCC, AMD, Broadcom, Cavium Networks, Freescale, Hifn, Intel, Marvell, and PMC-Sierra. With respect to the connected media device markets, RMI’s principal competitors include Freescale, Intel, nVidia, Samsung, Sigma Designs, Marvell, CSR PLC and Texas Instruments. RMI also faces competition from a number of private companies in the markets in which it participates, including Tilera and others.

The markets for RMI’s products are highly competitive and are characterized by rapid technological change, declining average selling price and continuously evolving customer requirements. RMI believes that the principal competitive factors in its markets include:

 

•

the ability to develop processing solutions and architectures that are technologically superior to those offered by competitors;

 

•

product performance, feature set and cost;

 

•

time to market;

 

•

the ability to provide a reliable supply of products in sufficient quantities to meet customer forecasts and purchase orders;

 

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•

initial product adoption into customer designs and leveraging initial design commitments to expand customer relationships;

 

•

the quality and diversity of ecosystem partners that provide reference designs, tool support and other services to customers; and

 

•

product roadmap.

RMI believes that it currently competes favorably with respect to each of these factors. Many of RMI’s present or potential competitors may have greater name recognition and deeper penetration of RMI’s target markets, broader and more diversified products and services, larger scale sales forces and budgets, more established relationships with customers, better sales channels and greater financial, technical and other resources. Increased competition could harm RMI’s business by, for example, increasing pressure on its profit margins or causing it to lose customers. In addition, delivery of products with defects or reliability, quality or compatibility problems may damage RMI’s reputation and competitive position.

RMI’s Intellectual Property and Proprietary Rights

RMI relies on a combination of intellectual property rights, including patents, trade secrets, copyrights and trademarks and contractual protections.

RMI has 63 issued patents and 63 pending patent applications in the United States, and two issued and 15 pending foreign patent applications. The 63 issued patents in the United States expire in the years beginning in 2017 through 2029. The two issued foreign patents expire in 2022 and 2024. RMI’s issued patents and pending patent applications relate to multi-core and multi-threaded microprocessor design techniques, integrated SoC components, architectures and design techniques and other processing solutions concepts, as well as certain hardware and software technology patents not directly related to its principal product lines. RMI focuses its patent efforts in the United States, and, when justified by cost and strategic importance, it files corresponding foreign patent applications in strategic jurisdictions such as China, India, Japan, Hong Kong, Taiwan and Europe.

In addition to its own intellectual property, RMI also relies on third-party technologies for the development of its products. RMI licenses certain technology from MIPS Technologies, Inc., pursuant to a license agreement entered into in July 2003 wherein RMI was granted a non-exclusive, worldwide license to MIPS Technologies’ micro-processor core technology to develop, implement and use in its products. The term of the agreement will expire in July 2017. The agreement permits RMI to continue selling in perpetuity products developed during the term of the agreement containing the licensed technology.

RMI’s Employees

As of March 31, 2009, RMI had 288 employees consisting of 153 employees in research and development, 91 employees in sales and marketing, 24 employees in general and administration and 20 employees in operations. A total of 107 of these employees were located outside of the United States. In addition, RMI had 31 independent contractors, primarily serving a research and development function. None of RMI’s employees is represented by labor unions or covered by a collective bargaining agreement. RMI has not experienced any work stoppages, and it considers its employee relations to be good.

RMI’s Facilities

RMI subleases approximately 52,000 rentable square feet of office space in Cupertino, California and leases approximately 16,000 rentable square feet of office space in Austin, Texas, pursuant to leases that expire in March 2010 and December 2010, respectively. RMI leases approximately 13,360 square feet of office space for research and development in Bangalore, India and leases additional office space used for research and

 

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development, marketing and customer development and technical support activities in Shenzhen, Beijing and Shanghai, China. RMI also maintains international customer development and technical support offices in Seoul, South Korea Taipei, Taiwan, Tokyo, Japan, and Toulouse, France.

Legal Proceedings

In June 2009, EL & Associates, a semiconductor design firm based in Pleasanton, CA, filed a lawsuit against RMI in Santa Clara Superior Court for non-payment of amounts allegedly owed under a purchase order and statement of work, or SOW, dated January 14, 2008. Pursuant to the SOW, the plaintiff was to perform certain testability analysis, test insertion and pattern generation services relating to the RMI’s Au1300^® processor design, in exchange for milestone-based payments totaling $80,000. RMI completed two milestone payments totaling $20,000. Thereafter, as a result of plaintiff’s continued poor performance under the SOW, RMI ceased making further payments and in May 2008 the plaintiff ceased further work on the project. The complaint filed against RMI alleges breach of contract, promissory estoppel, fraud, common counts and quantum meruit and seeks damages in the amount of $174,719 plus unspecified interest, attorneys’ fees and exemplary damages according to proof. RMI does not believe the plaintiff’s allegations have merit and intends to vigorously defend against them in court.

Other than the EL & Associates lawsuit, RMI is not currently a party to any material litigation, and is not aware of any pending or threatened litigation against it that would adversely affect its business, operating results, financial condition or cash flows.

 

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RMI MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

RMI is a leading fabless semiconductor company that provides high performance, power-optimized processor solutions for several target markets: several target markets: infrastructure equipment, enterprise systems, security and storage appliances, data center systems and industrial and connected media devices. RMI’s processors enable secure delivery, use and sharing of information and rich media content. RMI’s proprietary architecture and innovative processor designs deliver high throughput, increased processing capacity and advanced functionality within a given power budget. RMI’s processors can replace a number of single function semiconductors with a highly integrated, multi-function solution that is scalable and programmable, allowing its customers to rapidly and cost-effectively bring a wide variety of product offerings to market.

From the company’s launch in 2002, RMI has been primarily engaged in the design and development of high performance processor solutions. In July 2003, RMI began commercial shipments of its XL7110 Processor, which it acquired from SandCraft, Inc., for use in enterprise systems applications. Currently, RMI’s initial efforts were focused on the development of multi-core, multi-threaded processor solutions targeted at the infrastructure equipment and enterprise system markets. Currently, RMI markets a family of high-performance multi-core, multi-threaded XLP™, XLR^® and XLS^® Processors targeted at carrier-class infrastructure systems and equipment, including 3G/4G mobile wireless infrastructure, enterprise networking, data center, security and storage markets. The XLR Processor family was introduced in May 2005, the XLS Processor family was introduced in February 2007, and the XLP Processor family was announced in May 2009. In addition, RMI offers a family of ultra low-power processors, originating from the ultra low-power processor product line RMI acquired from Advanced Micro Devices, Inc. in July 2006, which is targeted at high-volume enterprise networked client, industrial and connected media applications. RMI introduced its Au1210^® and Au1250^® Processors targeted at connected media applications in January 2007. In February 2009, RMI introduced its Au1300^® Processor family, targeted at mobile media devices with 3D graphics acceleration, performance up to 800 MHz and power rates of less than  ¹/2 watt at speed. RMI shipped its one-millionth processor in October 2005, its five-millionth processor in February 2008 and its eight-millionth processor in March 2009. Since its inception, RMI has invested heavily in new product development and has not yet achieved profitability on a quarterly or annual basis, except for the fourth quarter of 2007. RMI’s revenue has grown from $30.1 million in 2006 to $78.9 million in 2008 and $17.1 million in the three months ended March 31, 2009, driven primarily by increasing demand for its products in its target markets as well as the acquisition of the ultra low-power processor product line in 2006.

RMI does not have long-term purchase commitments from any of its customers or distributors, as sales of its products are generally made under individual purchase orders. However, RMI believes that once one of its products is incorporated into a customer’s design, it is likely to remain designed in for the life cycle of that customer’s product because a redesign would generally be time consuming and expensive for its customers. Conversely, if RMI fails to achieve initial customer adoption, it may be disadvantaged in pursuing future sales opportunities to that customer for a lengthy period of time.

Over the life cycle of its products, RMI typically experiences declining average selling prices, which can vary in significance depending on the type of product. RMI typically experiences more rapid decline in average selling prices of its products sold in the connected media devices market as compared to the infrastructure equipment and enterprise systems markets. In addition, its average selling prices may decline as a result of competitive pricing pressures and a change in the mix of its products and customers. RMI partially offsets generally declining average selling prices, and the potential impact lower selling prices may have on gross margin, by increasing the mix of higher average selling price products, which generally have higher gross margins, increasing sales to the higher average selling price market segments, such as enterprise systems and infrastructure equipment, introducing higher performance products which have higher average selling prices, reducing product costs by negotiating reduced prices from its suppliers, and implementing process improvements that increase product yields and reduce production costs.

 

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It is difficult for RMI to forecast the demand for its products, in part because of the highly complex supply chain between its products and the end-user of the equipment and devices that incorporate its products. In addition, demand for new features changes rapidly. Due to its lengthy product development and sales cycles, it is critical for RMI to anticipate changes in demand for its various product features and the applications they serve to allow sufficient time for product design. RMI’s failure to accurately forecast demand can lead to product shortages that can impede production by its customers and harm RMI’s relationship with these customers or lead to excess or obsolete inventory.

Revenue

RMI derives revenue primarily from sales of semiconductor products. It has experienced revenue growth due to an increase in the number of its products, an expansion of its customer base and an increase in the number of product designs that incorporate its products within any one customer. To date, RMI has derived a substantial portion of its revenues from a relatively small number of customers. Its customers representing greater than 10% of revenue since 2006 were:

 

		Year ended December 31,									Three months ended March 31,
End Customer		2008			2007			2006			2009			2008
Percentage of total revenue
Huawei		*			*			*			17	%		*
Dell		11	%		11	%		*			13	%		*
Digital Cube		*			11	%		*			*			13	%
Cisco Systems		11	%		17	%		44	%		*			12	%
Thinkware		11	%		*			*			*			12	%

 

*	Less than 10% of total revenue.

RMI anticipates that sales of its products to these customers will decline over time on a percentage basis as total revenue grows, but RMI expects these customers will continue to account for a significant portion of its revenue. The loss of one or more of RMI’s principal customers or the reduction or deferral of purchases of its products by one of these customers could cause its revenue to decline materially, if it is unable to increase its revenues from other customers.

RMI generally recognizes revenue from sales to direct customers and contract manufacturers as title and risk of loss passes upon shipment. For sales to direct customers and contract manufacturers when title and risk of loss do not pass upon shipment, RMI obtains evidence of delivery prior to recognizing revenue.

RMI uses distributors to provide valuable assistance to end-users in delivery of its products and related services. RMI’s distributors are used extensively to support its international sales logistics in Asia. Total revenue through distributors was $31.1 million, $28.2 million, and $5.6 million in 2008, 2007, and 2006, respectively, and $4.8 million and $9.2 million for the three months ended March 31, 2009 and 2008, respectively, which accounted for 39%, 44%, 19%, 28%, and 45% of revenue, respectively. RMI has purchase agreements with its distributors. However, these purchase agreements do not commit the distributor to purchase specific quantities of its products. Furthermore, RMI believes that distributors do not have long-term contracts with any of their OEM or ODM customers. In accordance with standard market practice, its distributor agreements limit the distributor’s ability to return product up to a portion of purchases in the preceding quarter and limit price protection for inventory on-hand if it subsequently lowers prices on its products. RMI recognizes sales through distributors at the time of shipment to end customers.

RMI derives the largest portion of its revenues from sales to foreign OEMs, ODMs, contract manufacturers, and distributors, particularly in Asia. It believes that a substantial majority of its revenue will continue to come

 

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from customers and contract manufacturers located in Asia, where most of the devices that use its products are manufactured. As a result of this regional customer concentration, RMI may be subject to economic and political events and other developments that impact its customers in Asia. Since its sales are denominated in U.S. dollars, foreign currency fluctuations may alter the cost of RMI’s products to, and demand from, its foreign customers. Further, weakness of the U.S. dollar against a foreign currency will increase the cost of RMI’s foreign operations when stated in U.S. dollars in its financial statements.

Geographic revenue data

The following table is based on the geographic location to which RMI ships products. For sales to its distributors, their geographic location may be different from the geographic locations of the ultimate end customers. Sales by geography for the periods indicated were (in thousands):

 

		Year ended December 31,									Three months ended March 31,
		2008			2007			2006			2009			2008
United States		$	10,960		$	7,536		$	4,812		$	2,562		$	2,573
Asia/Pacific			62,325			51,810			21,614			13,549			16,136
Rest of the World			5,661			4,999			3,627			942			1,755
Total revenues		$	78,946		$	64,345		$	30,053		$	17,053		$	20,464

Cost of Revenue

The following table sets forth the significant components of RMI’s total cost of revenue for the periods presented (in thousands):

 

		Year ended December 31,									Three months ended March 31,
		2008			2007			2006			2009			2008
Cost of product revenue		$	30,409		$	28,112		$	13,302		$	6,456		$	7,756
Purchase price in excess of standard cost			—			1,920			4,604			—			—
Amortization of purchased technology			1,397			3,622			4,274			256			424
Total cost of revenue		$	31,806		$	33,654		$	22,180		$	6,712		$	8,180

Cost of product revenue

Cost of product revenue includes all costs associated with the production of RMI’s products, including amounts paid to third parties for outsourced wafer fabrication, assembly, and test services and warehousing and shipping logistics, and overhead costs associated with manufacturing planning and the management of its contract manufacturers. Additionally, royalties paid to technology licensors, inventory valuation charges taken for excess and obsolete inventory, and changes in product cost due to changes in sort, assembly and test yields are included in cost of product revenue. Additionally, starting in the second half of 2008, RMI began to capitalize and amortize to cost of product revenue the cost of masks sets used in the production of its products. Prior to that time, it expensed cost of mask sets to R&D expense as incurred.

RMI currently purchases products and services from its suppliers in U.S. dollars. A substantial portion of its costs of product revenue is purchased from suppliers located in foreign countries. The costs associated with its suppliers located in foreign countries are denominated in the currency of their location. Fluctuation in the U.S. dollar against foreign currencies will cause its suppliers’ costs to fluctuate when stated in U.S. dollars. These fluctuations could cause the prices at which RMI purchases product from those suppliers to vary. To date, RMI is not aware of price changes from its suppliers based on fluctuations of a supplier’s foreign currency denominated costs.

 

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Purchase price in excess of standard cost

In connection with the acquisition of the ultra low-power processor product line from AMD in July 2006, RMI acquired existing inventory related to this product line. Upon acquisition of this inventory, the amount RMI was required to record as the cost of this inventory is equal to its fair value, which is approximately equivalent to its selling price at the time of acquisition. Accordingly, the recorded cost for the acquired inventory was significantly higher than what RMI believes would be the cost to manufacture these products. RMI believes it has a reasonable basis to estimate the standard cost of these products because it continued to develop and sell these products once the initial inventory reserves were exhausted. RMI refers to the difference between its standard cost of these products and the recorded cost of the acquired inventory as the purchase price in excess of standard cost. RMI has estimated that its purchase price in excess of standard cost was $1.9 million and $4.6 million for the years ended December 31, 2007 and 2006, respectively and was fully amortized as of the end of 2007.

Amortization of purchased technology

Amortization of purchased technology represents the amortization of existing technology acquired in RMI’s business combinations accounted for using the purchase method of accounting. In connection with the acquisition of the ultra low-power processor product line from AMD in July 2006, RMI recorded a core technology intangible asset of $5.7 million. It records the amortization to cost of revenue in proportion to the economic benefits consumed based on the discounted estimated cash flows over the estimated useful life of the asset, which is three years. RMI expects to have fully amortized the purchased technology acquired from AMD in 2009. In connection with the acquisition of the assets of SandCraft, it also recorded a core technology intangible asset of $2.3 million. It recorded the amortization to cost of revenue on a straight line basis over the expected useful life of three years. The core technology intangible asset from SandCraft was fully amortized in 2006. In July 2003, RMI obtained a nonexclusive intellectual property license for a term of seven years. This license was amended in July 2008 to extend the term to July 2017. This intellectual property license is used to integrate the licensed technology into its products. Amortization is being recorded to cost of revenue. The initial license fee was amortized on a straight line basis over the initial terms. Upon amendment in July 2008, the unamortized license fee was summed with the amendment license fee and the total is being amortized using a straight-line method over the 9 year period from July 2008 to July 2017.

Gross Margin

The following table sets forth the gross profit and gross margin for the periods presented (dollars, in thousands):

 

		Gross Profit Amount																				Gross Margin															GM Percent Change
		Year Ended December 31,												Three Months Ended March 31,								Year Ended December 31,									Three Months Ended March 31,						2008 vs. 2007			2007 vs. 2006			Q1-09 vs. Q1-08
		2008				2007				2006				2009				2008				2008			2007			2006			2009			2008
Product		$	48,537			$	36,233			$	16,751			$	10,597			$	12,708			61.5	%		56.3	%		55.7	%		62.1	%		62.1	%		9.2	%		1.0	%		0.0	%
Purchase price in excess of standard cost			—				(1,920	)			(4,604	)			—				—
Amortization of purchased technology			(1,397	)			(3,622	)			(4,274	)			(256	)			(424	)
Total gross profit		$	47,140			$	30,691			$	7,873			$	10,341			$	12,284			59.7	%		47.7	%		26.2	%		60.6	%		60.0	%		25.2	%		82.1	%		1.0	%

Generally, its gross profit and gross margin, excluding the purchase price in excess of standard cost and amortization of purchased technology, have increased over time, primarily due to cost reductions and economies of scale resulting from an increase in unit volume. This trend may not continue in the future, and will depend on a variety of factors including: (1) overall customer demand for its products; (2) product mix; (3) average selling prices; (4) competitive product offerings; (4) its ability to attain volume manufacturing pricing; (5) its ability to improve sort, assembly, and test efficiencies and yields of its products; and (5) its ability to properly forecast demand and thereby limit inventory surplus or obsolescence.

 

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Operating Expenses

Research and development

The following table sets forth RMI’s research and development expenses for the periods presented (dollars in thousands):

 

		Year ended December 31,												Three months ended March 31,
		2008				2007				2006				2009				2008
Research and development expenses		$	38,875			$	34,195			$	26,134			$	8,734			$	9,657
Percentage of total revenue			49.2	%			53.1	%			87.0	%			51.2	%			47.2	%

RMI’s research and development expenses primarily consist of personnel costs, contract consultants, cost of wafer purchases and fabrication masks for prototype products, engineering design tools, and intellectual property license fees and other costs associated with design and development of its products. Personnel costs include share-based compensation expense related to stock options calculated under SFAS 123R.

RMI believes that its future performance will depend in large part on its ability to maintain and enhance its current product line, develop new products that achieve market acceptance, maintain technological competitiveness, and meet an expanding range of customer requirements. Intellectual property license fees and other costs associated with design and development occur irregularly and are expensed at the time of purchase, which may cause its research and development expenses to fluctuate. RMI expects research and development expenses to increase in absolute dollars in the future as it increases its product development and enhancements, although RMI generally expects these expenses to decrease as a percentage of revenue. As a percentage of revenue, these expenses will fluctuate from one period to another.

Sales, general and administrative

The following table sets forth RMI’s sales, general and administrative expenses for the period presented (dollars in thousands):

 

		Year ended December 31,												Three months ended March 31,
		2008				2007				2006				2009				2008
Sales,general & administrative		$	24,547			$	18,183			$	12,169			$	6,018			$	5,590
Percentage of total revenue			31.1	%			28.3	%			40.5	%			35.3	%			27.3	%

RMI’s sales, general and administrative expenses primarily consist of personnel costs, including contract labor and other compensation, sales commissions to independent sales representatives, and costs associated with customer support, promotional activities, travel, business insurance, professional fees, and related facilities costs. Personnel costs include share-based compensation expenses related to stock options calculated under SFAS 123R.

RMI expects sales, general and administrative expenses to increase in absolute dollars in the future as it expands its target markets and introduces new products, although it generally expects these expenses to decrease as a percentage of revenue.

In-process research and development

RMI’s methodology for allocating the purchase price for purchase acquisitions to in-process research and development (“IPR&D”) is determined through established valuation techniques and analysis, as applied in the semiconductor industry. The IPR&D expense in 2006, which is related to the acquisition of the AMD product line, was primarily for the development of the ultra low-power processor’s next generation product. This IPR&D was expensed upon the acquisition of the ultra low-power processor product line because technological

 

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feasibility had not been established and no future alternative uses existed. Total IPR&D expense of $3.1 million was charged to product development expenses on the date the assets were acquired.

The fair value of the existing purchased technology, as well as the technology under development, is determined using the income approach, which discounts expected future cash flows to present value. The discount rate used in the present value calculation was derived from a weighted average cost of capital analysis. RMI considers this pricing model for acquired products and technology to be standard within the semiconductor industry.

The key assumptions underlying the valuation of RMI’s 2006 ultra low-power processor product line purchase acquisition for which in-process research and development was recorded were as follows: 1) estimated cost to complete technology at time of acquisition was approximately $5.8 million; and 2) risk adjusted discount rate of 40%. Other key assumptions include an expected completion date of approximately one year and revenue and expense projections, assuming that the product has entered the market.

Interest expense and other income, net

The following table sets forth RMI’s interest expenses and other income, net for the periods presented (in thousands):

 

		Year ended December 31,												Three months ended March 31,
		2008				2007				2006				2009				2008
Interest expense		$	(1,940	)		$	(1,937	)		$	(1,354	)		$	(311	)		$	(587	)
Interest income			487				983				902				34				130
Change in fair value of contingent debt milestone derivative liability			(352	)			(118	) <