UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x                    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 29, 2006

or

o                      Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                    to                   

Commission file number: 0-30877

Marvell Technology Group Ltd.

(Exact name of registrant as specified in its charter)

 

Bermuda	77-0481679
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda

(441) 296-6395

(Address, including Zip Code, of Principal Executive Offices and

Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No

The number of shares outstanding of the registrant’s common stock outstanding as of May 31, 2006 was 292,600,141 shares.

 

 

TABLE OF CONTENTS

 

		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements:
		Unaudited Condensed Consolidated Balance Sheets at April 30, 2006 and January 31, 2006
		Unaudited Condensed Consolidated Statements of Income for the three months ended April 30, 2006 and 2005
		Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 30, 2006 and 2005
		Notes to Unaudited Condensed Consolidated Financial Statements
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.		Quantitative and Qualitative Disclosures About Market Risk
Item 4.		Controls and Procedures
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.		Defaults Upon Senior Securities
Item 4.		Submission of Matters to a Vote of Securities Holders
Item 5.		Other Information
Item 6.		Exhibits
Signatures
Exhibit Index

 

 

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PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

ASSETS

		April 30, 2006			January 31, 2006
Current assets:
Cash and cash equivalents		$	529,389		$	348,431
Short-term investments		392,021			572,591
Accounts receivable, net of allowances of $3,054 and $3,028		293,536			245,164
Inventories		204,839			211,374
Prepaid expenses and other current assets		116,854			104,307
Deferred income taxes		18,007			18,007
Total current assets		1,554,646			1,499,874
Property and equipment, net		279,398			260,921
Goodwill		1,558,209			1,558,209
Acquired intangible assets		125,379			111,973
Other noncurrent assets		94,544			82,312
Total assets		$	3,612,176		$	3,513,289
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	150,738		$	196,606
Accrued liabilities		44,482			34,905
Accrued employee compensation		41,158			51,549
Income taxes payable		3,296			3,352
Deferred income		28,640			29,773
Current portion of capital lease obligations		17,032			16,563
Total current liabilities		285,346			332,748
Capital lease obligations, net of current portion		22,561			24,447
Non-current income taxes payable		100,097			85,126
Other long-term liabilities		26,835			24,871
Total liabilities		434,839			467,192
Commitments and contingencies (Notes 6 and 9)
Shareholders’ equity:
Common stock, $0.002 par value; 492,000 shares authorized; 292,381 and 291,388 shares issued and outstanding		585			583
Additional paid-in capital		3,304,563			3,250,169
Deferred stock-based compensation		—			(1,141		)
Accumulated other comprehensive loss		(1,353		)	(1,759		)
Accumulated deficit		(126,458		)	(201,755		)
Total shareholders’ equity		3,177,337			3,046,097
Total liabilities and shareholders’ equity		$	3,612,176		$	3,513,289

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

 

		Three Months Ended April 30,
		2006			2005
Net revenue		$	521,196		$	364,770
Operating costs and expenses:
Cost of goods sold		240,664			175,251
Research and development		124,831			72,409
Selling and marketing		38,133			21,203
General and administrative		16,858			6,877
Amortization of acquired intangible assets		17,351			19,759
Total operating costs and expenses		437,837			295,499
Operating income		83,359			69,271
Interest and other income, net		7,616			3,612
Income before income taxes		90,975			72,883
Provision for income taxes		15,678			9,351
Net income		$	75,297		$	63,532
Net income per share:
Basic		$	0.26		$	0.23
Diluted		$	0.23		$	0.20
Weighted average shares:
Basic		291,851			278,793
Diluted		320,415			310,736

 

See accompanying notes to unaudited condensed consolidated financial statements.

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MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		Three Months Ended April 30,
		2006			2005
Cash flows from operating activities:
Net income		$	75,297		$	63,532
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		15,615			13,431
Stock-based compensation		44,536			871
Amortization of acquired intangible assets		17,351			19,759
Excess tax benefits from stock-based compensation		(697		)	—
Changes in assets and liabilities, net of acquisition:
Accounts receivable		(48,372		)	(4,189		)
Inventories		8,729			15,664
Prepaid expenses and other assets		(25,799		)	(43,800		)
Accounts payable		(45,868		)	(7,428		)
Accrued liabilities and other		2,500			763
Accrued employee compensation		(10,391		)	(360		)
Income taxes payable		14,915			8,086
Deferred income		(1,133		)	2,575
Net cash provided by operating activities		46,683			68,904
Cash flows from investing activities:
Cash paid for acquisition		(24,008		)	—
Purchases of short-term investments		(57,405		)	(99,018		)
Sales and maturities of short-term investments		238,124			48,051
Acquisition costs		(461		)	—
Purchases of property and equipment		(28,948		)	(18,395		)
Net cash provided by (used in) investing activities		127,302			(69,362		)
Cash flows from financing activities:
Proceeds from the issuance of common stock		10,904			20,119
Principal payments on capital lease obligations		(4,628		)	(3,156		)
Excess tax benefits from stock-based compensation		697			—
Net cash provided by financing activities		6,973			16,963
Net increase in cash and cash equivalents		180,958			16,505
Cash and cash equivalents at beginning of period		348,431			166,471
Cash and cash equivalents at end of period		$	529,389		$	182,976
Supplemental cash flow information:
Acquisition of property and equipment under capital lease obligations		$	3,212		$	3,862
Reversal of deferred stock-based compensation		$	1,141		$	—

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

5

 

MARVELL TECHNOLOGY GROUP LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and its Significant Accounting Policies

The Company

 Marvell Technology Group Ltd. (the “Company”), a Bermuda company, was incorporated on January 11, 1995. The Company is a leading global semiconductor provider of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. The Company’s diverse product portfolio includes switching, transceivers, wireless, PC connectivity, gateways, communications controllers, storage and power management solutions that serve diverse applications used in business enterprise, consumer electronics and emerging markets.

Basis of presentation

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal years 2006 and 2005 are comprised of 52-weeks. For presentation purposes only, the financial statements and notes refer to January 31 as the Company’s year-end and April 30, July 31 and October 31 as the Company’s quarter-ends.

The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to fairly state the Company’s financial position as of April 30, 2006, the results of its operations for the three months ended April 30, 2006 and 2005, and its cash flows for the three months ended April 30, 2006 and 2005. These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Company’s audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2006. The January 31, 2006 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States. However, the Company believes the disclosures are adequate to make the information presented not misleading. The results of operations for the three months ended April 30, 2006 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

Revenue recognition

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is reasonably assured. Under these criteria, product revenue is generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances. However, some of the Company’s sales are made through distributors under agreements allowing for price protection and rights of return on product unsold by the distributors. Product revenue on sales made through distributors with rights of return and price protection is deferred until the distributors sell the product to end customers. Additionally, collection is not deemed to be “reasonably assured” if customers receive extended payment terms. As a result, revenue on sales to customers with payment terms substantially greater than the Company’s normal payment terms is deferred and is recognized as revenue as the payments become due. Deferred revenue less the related cost of the inventories is reported as deferred income.

The provision for estimated sales returns and allowances on product sales is recorded in the same period the related revenues are recorded. These estimates are based on historical sales returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates.

The Company also enters into development agreements with some of its customers. Development revenue is recognized under the proportional performance method, with the associated costs included in research and development expense. The Company estimates the proportional performance of its development contracts based on an analysis of progress toward completion.

Revenue from licensed software is recognized when persuasive evidence of an arrangement exists and delivery has occurred, provided that the fee is fixed and determinable and collectibility is probable. Revenue from post-contract customer support and any other future deliverables is deferred and earned over the support period or as contract elements are delivered.

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In arrangements that include a combination of hardware and software products that are also sold separately, where software is more than incidental and essential to the functionality of the product being sold, the Company follows the guidance in Emerging Issues Task Force (“EITF”) Issue No. 03-05, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software,” accounts for the entire arrangement as a sale of software and software-related items and follows the revenue recognition criteria in Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and related interpretations.

The provisions of EITF Issue No. 00-21 “Accounting for Revenue Arrangements with Multiple Deliverables” apply to sales arrangements with multiple arrangements that include a combination of hardware, software and /or services. For multiple element arrangements, revenue is allocated to the separate elements based on fair value. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, the Company defers the fair value of the undelivered elements and the residual revenue is allocated to the delivered elements. If the undelivered elements are essential to the functionality of the delivered elements, no revenue is recognized. Undelivered elements typically are software warranty and maintenance services.

Inventories

Inventories are stated at the lower of cost or market, cost being determined under the first-in, first-out method. Appropriate consideration is given to obsolescence, excessive levels, deterioration and other factors in evaluating net realizable value.

Warranty accrual

The Company’s products are generally subject to warranty, which provides for the estimated future costs of repair, replacement or customer accommodation upon shipment of the product in the accompanying statements of operations. The Company’s products typically carry a standard 90-day warranty with certain exceptions in which the warranty period can range from one to five years. The warranty accrual is estimated based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. For new products, the Company uses a historical percentage for the appropriate class of product.

Stock-based compensation

Effective February 1, 2006 the Company adopted FASB Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options, restricted stock and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. SFAS 123R supersedes Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature. This requirement may reduce future net operating cash flows and increase net financing cash flows. In March 2005 the SEC issued SAB No. 107, Share-Based Payment (“SAB 107”), which provides guidance regarding the interaction of SFAS 123R and certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

      The Company adopted SFAS 123R using the modified prospective method which requires the application of the accounting standard as of February 1, 2006. The Company’s consolidated financial statements as of and for the first quarter of fiscal 2007 reflect the impact of adopting SFAS 123R. In accordance with the modified prospective method, the consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS 123R. See Note 7 “Stock-Based Compensation” for further details.

SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of each award as of the date of grant or assumption using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of the Company’s stock price. Although the Black-Scholes model meets the requirements of SFAS 123R and SAB 107, the fair values generated by the model may not be indicative of the actual fair values of the Company’s awards, as it

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does not consider other factors important to those share-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.

SFAS 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Stock-based compensation expense was recorded net of estimated forfeitures for the three months ended April 30, 2006 such that expense was recorded only for those stock-based awards that are expected to vest. Previously under APB 25 to the extent awards were forfeited prior to vesting, the corresponding previously recognized expense was reversed in the period of forfeiture.

Prior to the adoption of SFAS 123R, the Company accounted for share-based payment awards to employees in accordance with APB 25 and related interpretations, and had adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. In accordance with APB 25, stock-based compensation expense was not recorded in connection with share-based payment awards granted with exercise prices equal to or greater than the fair market value of the Company’s common stock on the date of grant, unless certain modifications were subsequently made. The Company recorded deferred compensation in connection with stock options granted, as well as stock options assumed in acquisitions, with exercise prices less than the fair market value of common stock on the date of grant or assumption in the case of acquisitions. The amount of such deferred compensation per share was equal to the excess of the fair market value over the exercise price on such date. The Company recorded deferred compensation in connection with restricted stock units equal to the fair market value of the common stock on the date of grant. Recorded deferred compensation was recognized as stock-based compensation expense ratably over the applicable vesting periods. In accordance with the provisions of SFAS 123R, all deferred compensation totaling $1.1 million previously recorded has been eliminated with a corresponding reduction in additional paid-in capital.

Reclassifications

Certain amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation.

2. Supplemental Financial Information

Available-for-sale investments

The amortized cost and fair value of available-for-sale investments are presented in the following tables (in thousands):

 

 

 

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Auction rate securities are securities that are structured with short-term reset dates of generally less than 90 days but with legally stated maturities in excess of 90 days. At the end of the reset period, investors can sell or continue to hold the securities at par. These securities are classified in the table below based on their legal stated maturity dates.

The contractual maturities of available-for-sale debt securities classified as short-term investments at April 30, 2006 are presented in the following table (in thousands):

 

 

Included in the Company’s available-for-sale investments are fixed income securities. As market yields increase, those securities with a lower yield-at-cost show a mark-to-market unrealized loss. All unrealized losses are primarily due to changes in interest rates and bond yields. Investments are reviewed periodically to identify possible other-than-temporary impairment. When evaluating the investments, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis and the Company’s ability and intent to hold the investment for a period of time which may be sufficient for anticipated recovery in market value. The Company has the intent and ability to hold these securities for a reasonable period of time sufficient for a forecasted recovery of fair value up to (or beyond) the initial cost of the investment. The Company expects to realize the full value of all of these investments upon maturity or sale. The following table shows the investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

 

		April 30, 2006
		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Corporate debt securities		$	—		$	—		$	28,375		$	(494	)	$	28,375		$	(494	)
U.S. Federal, State, county and municipal debt securities		—			—			102,555			(1,501		)	102,555			(1,501		)
Total temporarily impaired securities		$	—		$	—		$	130,930		$	(1,995	)	$	130,930		$	(1,995	)

 

		January 31, 2006
		Less than 12 months						12 months or more						Total
		Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
Corporate debt securities		$	—		$	—		$	33,661		$	(551	)	$	33,661		$	(551	)
U.S. Federal, State, county and municipal debt securities		5,023			(24		)	102,393			(1,568		)	107,416			(1,592		)
Total temporarily impaired securities		$	5,053		$	(24	)	$	136,054		$	(2,119	)	$	141,077		$	(2,143	)

 

Inventories

The components of inventory are presented in the following table (in thousands):

 

 

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Prepaid expenses and other current assets

The following table presents details of prepaid expenses and other current assets (in thousands):

 

 

Property and equipment

 

 

Goodwill and purchased intangible assets

The carrying amount of the goodwill and intangible assets are as follows (in thousands):

 

 

The increase in purchased intangible assets during the three months ended April 30, 2006 was from the acquisition of the semiconductor division of UTStarcom, Inc. (see Note 3).

Identified intangible assets consist of purchased technology, core technology, supply contract and customer contracts and related relationships. Purchased technology is amortized on a straight-line basis over its estimated useful life of one to five years. Core technology is amortized on a straight-line basis over its estimated useful life of three to four years. The supply contract is amortized on a straight-line basis over its estimated useful life of four years. Customer contracts and related relationships are amortized on a straight-line basis over their estimated useful lives of four to five years. The aggregate amortization expense of identified intangible assets was $17.4 million in the first quarter of fiscal 2007 and $19.8 million in the first quarter of fiscal 2006. The estimated total annual amortization expenses of acquired intangible assets is $45.4 million for the remaining nine months of fiscal 2007, $34.8 million for fiscal 2008, $29.5 million for 2009, $15.4 million for fiscal 2010 and $0.3 million for fiscal 2011.

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Other long-term liabilities

The following table presents details of other long-term liabilities (in thousands):

 

 

Warranty accrual

The following table presents changes in the warranty accrual included in accrued liabilities during the three months ended April 30, 2006 and 2005 (in thousands):

 

 

Net income per share

The Company reports both basic net income per share, which is based upon the weighted average number of common shares outstanding excluding contingently issuable or returnable shares, and diluted net income per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares. The computations of basic and diluted net income per share are presented in the following table (in thousands, except per share amounts):

 

 

Options to purchase 6,542,453 common shares at a weighted average exercise price of $54.38 have been excluded from the computation of diluted net income per share for the three months ended April 30, 2006 based on the treasury stock method calculation. Options to purchase 256,143 common shares at a weighted average exercise price of $39.14 have been excluded from the computation of diluted net income per share for the three months ended April 30, 2005 based on the treasury stock method calculation.

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Comprehensive income

The components of comprehensive income, net of tax, are presented in the following table (in thousands):

 

 

Accumulated other comprehensive income, as presented on the accompanying condensed consolidated balance sheets, consists of the unrealized gains and losses on available-for-sale investments and other, net of tax.

3. Acquisitions

Hard Disk and Tape Drive Controller Semiconductor Division of QLogic Corporation

On November 4, 2005, the Company acquired the hard disk and tape drive controller semiconductor business (the “Business”) of QLogic Corporation. The acquired Business designs and supplies controller chips for data storage peripherals, such as hard disk and tape drives. As a result of the acquisition, the Business will provide controller chip products which the Company believes will be able to provide complementary products to its customers in the hard disk market while improving its ability to address the overall data storage market. These factors contributed to a purchase price that was in excess of the fair value of the Business’ net tangible and intangible assets acquired and, as a result, the Company recorded goodwill in connection with this transaction.

Under terms of the agreement, the Company issued a combination of $184.0 million in cash and 980,499 shares of its common stock valued at $45.6 million for total consideration of $229.6 million. The agreement provides for $12.0 million of the consideration to be placed in escrow for up to one year from the closing date to secure QLogic’s obligations under certain representation and warranty provisions.

The purchase price of the Business was $232.5 million, determined as follows (in thousands):

 

The value of the 980,499 shares of the Company’s common stock issued was determined based on the average price of the Company’s common stock over a 5-day period including the two days before and after August 29, 2005 (the announcement date), or $46.49 per share.

Under the purchase method of accounting, the total purchase price as shown in the table is allocated to the Business’ net tangible and intangible assets based on their fair values as of the date of the completion of the acquisition. Based on the fair values acquired, the purchase price allocation is as follows (in thousands):

 

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Of the purchase price, $79.9 million was allocated to goodwill, $123.3 million to amortizable intangible assets and $25.1 million to net tangible assets acquired. The amortizable intangible assets have useful lives of two to four years. Approximately $4.3 million was allocated to in-process research and development and expensed in the fourth quarter of fiscal 2006. Goodwill represents the excess of the purchase price of the acquired business over the fair value of the net tangible and intangible assets acquired and is not deductible for tax purposes.

The results of operations of the Business have been included in the Company’s consolidated statements of operations since the completion of the acquisition on November 4, 2005. The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of the Business occurred at the beginning of the periods presented (in thousands, except for per share amounts):

 

Semiconductor Division of UTStarcom, Inc.

On February 16, 2006, the Company completed the acquisition of the semiconductor division of UTStarcom, Inc. Under the terms of the agreement, the Company paid $24.0 million in cash and may pay up to an additional $16.0 million in cash if certain defined milestones are achieved. The semiconductor division of UTStarcom focuses on the design and development of personal handyphone systems (PHS) and next generation cellular communications technology. The primary reasons for the acquisition of the semiconductor division of UTStarcom were to strengthen and augment its software engineering workforce and enhance its technological capabilities for emerging cellular strategies, obtain an established product being utilized in wireless communications technology, reduce the time required to develop new products and bring them to market for next generation cellular technology and to complement the Company’s existing wireless offerings.

The purchase price of the acquisition was $24.8 million, determined as follows (in thousands):

 

Under the purchase method of accounting, the total purchase price as shown in the table is allocated to net tangible and intangible assets based on their fair values as of the date of the completion of the acquisition. Based on the fair values acquired, the preliminary purchase price allocation is as follows (in thousands):

 

The Company acquired tangible assets of approximately $2.7 million consisting of inventory and fixed assets. The amortizable intangible assets of $30.8 million were determined based on valuation techniques such as discounted cash flows and weighted average cost of capital methods used in the high technology industry using assumptions and estimates from management. The amortizable intangible assets will be amortized over useful lives ranging from three to four years. The existing technology represents personal handyphone systems technology and other technology that UTStarcom has developed. Core technology represents the combination of

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processes, patents, and trade secrets that are the building blocks for current and planned new products. Customer relationships represent future projected revenue that will be derived from sales of future versions of existing products that will be sold to existing customers. The value determined for the supply contract with UTStarcom represents the fair value of estimated revenues and net operating cash flows to be derived from the supply contract for the duration of the five-year contract.

Approximately $8.7 million has been preliminarily allocated as negative goodwill, calculated as the excess of the fair value of net tangible and intangible assets acquired over the purchase price. Contingent consideration is still outstanding which may result in the recognition of additional costs of up to $16.0 million from the acquisition if the contingency is issuable in cash or becomes issuable. The defined milestones for the contingent consideration are based on the achievement of certain levels of PHS subscribers and are expected to be resolved by September 30, 2006. The negative goodwill will be adjusted once the contingency is resolved. Any contingent payments made will result in additional consideration and reduce the negative goodwill. Accordingly, goodwill may be recorded if the total purchase price exceeds the fair value of the net tangible and intangible assets acquired. If the contingency does not occur, the negative goodwill will be reduced to zero and the amount will be allocated to intangible assets based on their relative fair values.

The unaudited consolidated financial statements include the results of operations of the semiconductor division of UTStarcom commencing as of the acquisition date. No supplemental pro forma information is presented for the acquisition due to the immaterial effect of the acquisition on the Company’s results of operations.

4. Facilities Consolidation Charge

During fiscal 2003, the Company recorded a total of $19.6 million of charges associated with costs of consolidation of its facilities. These charges included $12.6 million in lease abandonment charges relating to the consolidation of its three facilities in California into one location. The lease abandonment charge included the remaining lease commitments of these facilities reduced by the estimated sublease income throughout the duration of the lease term. The Company incurred charges of $1.0 million during the quarter ended April 30, 2002, as a result of duplicate lease and other costs associated with the dual occupation of its current and abandoned facilities. The facilities consolidation charge also included $6.0 million associated with the write-down of certain property and leasehold improvements related to the abandoned facilities, which reduced the carrying amount of the impaired assets. During the quarter ended July 31, 2003, the Company subleased the abandoned facilities. Actual sublease income approximated the estimated sublease income.

As of April 30, 2006, cash payments of $10.1 million, net of sublease income, had been made in connection with these charges relating to the consolidation of the Company’s facilities in California. Approximately $3.4 million is accrued for this facilities consolidation charge, net of sublease income, as of April 30, 2006, of which $0.7 million is the current portion included in accrued liabilities, while the long-term portion, totaling $2.7 million, is payable through 2010 and is included in other long-term liabilities.

A summary of the facilities consolidation accrual related to the fiscal 2003 charge during the three months ended April 30, 2006 is as follows (in thousands):

 

5. Recent Accounting Pronouncements

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS 154”), Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and Statement No. 3. The statement applies to all voluntary changes in accounting principle and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company adopted this standard in the quarter ended April 30, 2006 and the adoption will only impact the consolidated financial statements in periods in which a change in accounting principle is made.

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6. Commitments and Contingencies

Purchase Commitments

The Company’s manufacturing relationships with its foundries allow for the cancellation of all outstanding purchase orders, but requires repayment of all expenses incurred through the date of cancellation. As of April 30, 2006, foundries had incurred approximately $145.0 million of manufacturing expenses on the Company’s outstanding purchase orders. As of April 30, 2006, the Company also had approximately $63.2 million of other outstanding non-cancelable purchase orders for capital purchase obligations.

On February 28, 2005 and as amended on March 31, 2005, the Company entered into an agreement with a foundry to reserve and secure foundry fabrication capacity for a fixed number of wafers at agreed upon prices for a period of five and a half years beginning on October 1, 2005. In return, the Company agreed to pay the foundry $174.2 million over a period of eighteen months. The amendment extends the term of the agreement and the agreed-upon pricing terms until December 31, 2015. As of April 30, 2006, payments totaling $129.0 million (included in prepaid expenses and other current assets and other non current assets) have been made and approximately $44.6 million of the prepayment has been utilized as of April 30, 2006. At April 30, 2006, remaining commitments under the agreement were approximately $45.2 million.

Contingencies

On July 31, 2001, a putative class action suit was filed against two investment banks that participated in the underwriting of the Company’s initial public offering, or IPO, on June 29, 2000. That lawsuit, which did not name the Company or any of its officers or directors as defendants, was filed in the United States District Court for the Southern District of New York. Plaintiffs allege that the underwriters received “excessive” and undisclosed commissions and entered into unlawful “tie-in” agreements with certain of their clients in violation of Section 10(b) of the Securities Exchange Act of 1934. Thereafter, on September 5, 2001, a second putative class action was filed in the Southern District of New York relating to the Company’s IPO. In this second action, plaintiffs named three underwriters as defendants and also named as defendants the Company and two of its officers, one of whom is also a director. Relying on many of the same allegations contained in the initial complaint in which the Company was not named as a defendant, plaintiffs allege that the defendants violated various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In both actions, plaintiffs seek, among other items, unspecified damages, pre-judgment interest and reimbursement of attorneys’ and experts’ fees. These two actions relating to the Company’s IPO have been consolidated with hundreds of other lawsuits filed by plaintiffs against approximately 55 underwriters and approximately 300 issuers across the United States. A consolidated amended class action complaint against the Company and its two officers was filed on April 19, 2002. Subsequently, defendants in the consolidated proceedings moved to dismiss the actions. In February 2003, the trial court issued its ruling on the motions, granting the motions in part, and denying them in part. Thus, the cases may proceed against the underwriters and the Company as to alleged violations of section 11 of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934. Claims against the individual officers have been voluntarily dismissed without prejudice by agreement with plaintiffs. On June 26, 2003, the plaintiffs announced that a settlement among plaintiffs, the issuer defendants and their directors and officers, and their insurers had been structured, a part of which the insurers for all issuer defendants would guarantee up to $1 billion to investors who are class members, depending upon plaintiffs’ success against non-settling parties. The Company’s board of directors has approved the proposed settlement, which will result in the plaintiffs’ dismissing the case against the Company and granting releases that extend to all of its officers and directors. Definitive settlement documentation was completed in early June 2004 and first presented to the court on June 14, 2004. On February 15, 2005, the court issued an opinion preliminarily approving the proposed settlement, contingent upon certain modifications being made to one aspect of the proposed settlement — the proposed “bar order”. The court ruled that it had no authority to deviate from the wording of the Private Securities Litigation Reform Act of 1995 and that any bar order that may issue should the proposed settlement be finally approved must be limited to the express wording of 15 U.S.C. section 78u-4(f)(7)(A). On May 2, 2005 the issuer defendants and plaintiffs jointly submitted an amendment to the settlement agreement conforming the language of the settlement agreement with the court’s February 15, 2005 ruling regarding the bar order. The court on August 31, 2005 issued an order preliminarily approving the settlement and setting a public hearing on its fairness for April 24, 2006 due to difficulties in mailing the required notice to class members. On April 24, 2006, the Court held a public hearing on the fairness of the proposed settlement. The Court took the matter under submission and has not yet ruled. Based on currently available information, the Company does not believe that the ultimate disposition of this lawsuit will have a material adverse impact on its business, results of operations, financial condition or cash flows.

On September 12, 2001, Jasmine Networks, Inc. (“Jasmine”) filed a lawsuit in the Santa Clara County Superior Court asserting claims against Company personnel and the Company for improperly obtaining and using information and technologies during the

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course of the negotiations with Company personnel regarding the potential acquisition of certain Jasmine assets by the Company. The lawsuit claims that Company officers improperly obtained and used such information and technologies after the Company signed a non-disclosure agreement with Jasmine. The Company believes the claims asserted against its officers and it are without merit and the Company intends to defend all claims vigorously.

On June 21, 2005, the Company filed a cross complaint in the above disclosed action in the Santa Clara County Superior Court asserting claims against Jasmine and unnamed Jasmine officers and employees. The cross complaint was later amended to name two individual officers of Jasmine. Among other actions, the cross complaint alleges that Jasmine and its personnel engaged in fraud in connection with their effort to sell to Marvell technology that Jasmine and its personnel wrongfully obtained from a third party in violation of such third party’s rights. The cross complaint seeks declaratory judgment that Marvell’s technology does not incorporate any of Jasmine’s alleged technology. The cross complaint seeks further declaratory judgment that Jasmine and its personnel misappropriated certain aspects of Jasmine’s alleged technology. The Company intends to prosecute the cross complaint against Jasmine and its personnel vigorously. The Company cannot predict the outcome of this litigation. Any litigation could be costly, divert Company management’s attention and could have a material adverse effect on its business, results of operations, financial condition or cash flows.

The Company is also party to other claims and litigation proceedings arising in the normal course of business. Although the legal responsibility and financial impact with respect to such claims and litigation cannot currently be ascertained, the Company does not believe that these matters will result in the payment of monetary damages, net of any applicable insurance proceeds, that, in the aggregate, would be material in relation to the Company’s consolidated financial position or results of operations. There can be no assurance that these matters will be resolved without costly litigation, in a manner that is not adverse to the Company’s financial position, results of operations or cash flows, or without requiring royalty payments in the future, which may adversely impact gross margins.

7. Stock-Based Compensation

Stock Plans

In April 1995, the Company adopted the 1995 Stock Option Plan (the “Option Plan”). The Option Plan, as amended, had 147,575,484 shares of common stock reserved for issuance thereunder as of April 30, 2006. Options granted under the Option Plan generally have a term of ten years and generally must be issued at prices not less than 100% and 85% for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant. Incentive stock options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. The options generally vest 20% one year after the vesting commencement date, and the remaining shares vest one-sixtieth per month over the remaining forty-eight months. Options granted under the Option Plan prior to March 1, 2000 may be exercised prior to vesting. The Company has the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such right expires as the options vest over a five-year period. Options granted under the Option Plan subsequent to March 1, 2000 may only be exercised upon or after vesting.

In August 1997, the Company adopted the 1997 Directors’ Stock Option Plan (the “Directors’ Plan”). The Directors’ Plan had 1,800,000 shares of common stock reserved thereunder as of April 30, 2006. Under the Directors’ Plan, an outside director is granted 30,000 options upon appointment to the Board of Directors. These options vest 20% one year after the vesting commencement date and remaining shares vest one-sixtieth per month over the remaining forty-eight months. An outside director is also granted 6,000 options on the date of each annual meeting of the shareholders. These options vest one-twelfth per month over twelve months after the fourth anniversary of the vesting commencement date. Options granted under the Directors’ Plan may be exercised prior to vesting. The Company has the right to repurchase such shares at their original purchase price if the director is terminated or resigns from the Board of Directors prior to vesting. Such right expires as the options vest over a five-year period.

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Employee Stock Purchase Plan

In June 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan had 16,935,806 shares of common stock reserve for issuance thereunder as of April 30, 2006. Under the Purchase Plan, employees are granted the right to purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of the shares at (i) the participant’s entry date into the two-year offering period, or (ii) the end of each six-month purchase period within the offering period. Participants purchase stock using payroll deductions, which may not exceed 20% of their total cash compensation. Offering and purchase periods begin on December 1 and June 1 of each year. For the three months ended April 30, 2006, the stock-based compensation expense related to the activity under the Purchase Plan was $4.0 million. The Company did not issue any shares under the Purchase Plan in the three months ended April 30, 2006. As of April 30, 2006, there was $7.5 million of unrecognized compensation cost related to the Purchase Plan.

Stock option activity under the Company’s stock option plans for the three months ended April 30, 2006 is summarized below (in thousands, except per share amounts):

		Options Outstanding		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
		(In thousands)							(In thousands)
Balance at January 31, 2006		47,122		$	19.77
Options granted		5,494		$	57.38
Options forfeited/canceled/expired		(595	)	$	25.43
Options exercised		(982	)	$	11.11
Balance at April 30, 2006		51,039		$	23.91
Vested or expected to vest at April 30, 2006		48,247		$	23.24		7.34		$	1,646,715

 

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (the aggregate difference between the closing stock price of the Company’s common stock on April 28, 2006 of $57.09 and the exercise price for in-the-money options) that would have been received by the option holders if all options had been exercised on April 30, 2006. The total intrinsic value of options exercised in the three months ended April 30, 2006 was $47.4 million. Cash received from option exercises for the three months ended April 30, 2006 was $10.9 million.

		Options Outstanding										Options Exercisable
		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price			Average Intrinsic Value			Number Exercisable		Weighted Average Exercise Price			Average Intrinsic Value
		(In thousands)							(In thousands			(In thousands)					(In thousands)
Range of exercise prices:
$0.00 - $9.35		12,100		5.84		$	6.68		$	610,026		5,244		$	4.83		$	274,077
$9.36 - $18.25		12,391		6.41		$	14.93		522,406			7,526		$	14.21		322,745
$18.26 - $24.05		10,218		7.54		$	19.56		383,519			1,962		$	20.20		72,356
$24.06 - $54.21		13,319		9.12		$	42.64		192,477			935		$	31.99		23,469
$54.22 - $66.41		3,011		9.77		$	62.14		—			63		$	59.74		—
		51,039		7.41		$	23.91		$	1,708,428		15,730		$	13.07		$	692,647

 

The aggregate pretax intrinsic values in the preceding table were calculated based on the closing price of the Company’s common stock of $57.09 on April 28, 2006. At April 30, 2006, the weighted average remaining contractual life of the exercisable options was 5.7 years.

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As of April 30, 2006, there was $376.8 million, net of forfeitures, of unrecognized compensation cost related to unvested stock options which is expected to be recognized over a weighted average period of 1.8 years. The Company’s current practice is to issue new shares to satisfy share option exercises.

Total tax benefit attributable to options exercised in the three months ended April 30, 2006 was $0.7 million. The excess tax benefits from stock-based compensation of $0.7 million as reported on the condensed consolidated statement of cash flows in financing activities represents the reduction, in income taxes otherwise payable during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in current and prior periods.

Stock Award Activity

In the first quarter of fiscal 2007, the Company granted 70,000 restricted stock awards to its employees under the 1995 Stock Option Plan. Such awards generally vest over a period of five years from the date of grant. The restricted stock awards have the voting rights of common stock and the shares underlying the restricted are considered issued and outstanding. The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse. The grant of restricted stock awards is deducted from the shares available for grant under the Company’s stock option plan. Restricted stock activity under the Company’s stock option plans for the three months ended April 30, 2006 is summarized below (in thousands, except per share amounts):

 

No restricted stock awards vested during the three months ended April 30, 2006. Based on the closing price of the Company’s stock of $57.09, on April 28, 2006, the total pretax intrinsic value of all outstanding restricted stock was $4.0 million.

The following table presents details of stock-based compensation expenses by functional line item (in thousands):

 

During the quarter ended April 30, 2006, the Company capitalized $0.1 million of stock-based compensation into inventory.

The following assumptions were used for each respective period to calculate the weighted average fair value of each option award on the date of grant using the Black-Scholes option pricing model:

 

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The volatility assumption was determined using the historical volatility of the Company’s common stock for the three months ended April 30, 2006 and 2005. The expected life assumption was determined based on historical exercise patterns of similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules. The risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the awards in effect in effect at the time of grant. The Company has not paid any cash dividends in the past and does not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of zero in its option-pricing models.

The weighted average fair values per share of the of options granted in the three month period ended April 30, 2006 and 2005 was $30.79 and $21.22, respectively.

In accordance with the requirements of the disclosure-only alternative of SFAS 123, set forth below are pro forma statements of operations data of the Company giving effect to the valuation of stock-based awards to employees using the Black-Scholes option pricing model instead of the guidelines provided by APB 25 in the three months ended April 30, 2005 (in thousands, except for per share amounts):

 

8. Related Party Transactions

During the first quarters of fiscal 2007 and 2006, the Company incurred approximately $0.4 million and $0.3 million, respectively, of expenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”), for charter aircraft services provided to MSI. The aircraft provided by ACM to the Company for such services is owned by Estopia Air LLC (“Estopia Air”). The Company’s Chairman, President and Chief Executive Officer, Sehat Sutardja, Ph.D, and the Company’s Director, Secretary and Chief Operating Officer, Weili Dai, through their control and ownership of Estopia Air, own the aircraft provided by ACM. The expenses incurred were the result of the Company’s use of the aircraft for business travel purposes. The cost of such usage was determined based on market prices.

On February 19, 2005, the Company, through its subsidiaries MSI and Marvell Asia Pte. Ltd. (“MAPL”), entered into a development agreement with MagnetoX (“MagnetoX”). The development agreement is substantially on similar terms as other development agreements with other parties. The Company did not recognize any revenue from the development agreement or product revenue during the first quarter of fiscal 2007. Total revenue expected to be recognized from the development agreement is $1.0 million. Herbert Chang, one of the Company’s directors, is Chairman of the Board, President and Chief Executive Officer of MagnetoX. Estopia LLC (“Estopia”) is also a shareholder of MagnetoX. Sehat Sutardja, Ph.D., and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of MagnetoX.

On August 19, 2005, the Company, through its subsidiaries MSI and Marvell International Ltd., entered into a License and Manufacturing Services Agreement (the “License Agreement”) with C2 Microsystems, Inc. (“C2Micro”). The License Agreement is on substantially similar terms as other license and manufacturing services agreements with other third parties. The Company recognized $0.2 million of revenue from the License Agreement with C2 Microsystems during the first quarter of fiscal 2007. Sehat Sutardja, Ph.D., and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of C2Micro. Herbert Chang,

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through his ownership and control of C-Squared venture entities, is also an indirect shareholder of C2Micro. Pantas Sutardja, Ph.D., the Company’s Chief Technology Officer, is also a shareholder of C2Micro.

9. Subsequent Events

On February 21, 2006, the Board of Directors approved a 2 for 1 stock split of the Company’s common stock, to be effected pursuant to the issuance of additional shares as a stock dividend. The stock split is subject to shareholder approval of an increase in the Company’s authorized share capital at the Company’s 2006 Annual General Meeting which is scheduled for June 9, 2006.

Restated quarterly pro forma per share data for the three months ended April 30, 2006 and 2005 would be as follows (unaudited):

 

On May 1, 2006, the Company completed its acquisition of the printer semiconductor business of Avago Technologies Limited and paid $240.0 million in cash upon closing of the transaction. The Company may pay an additional $35.0 million in cash if certain defined milestones are achieved at various intervals through October 2007. The Company may also record a one-time charge for purchased in-process research and development expenses related to the acquisition. The amount of that charge which has not yet been determined, if any, would be recorded in the Company’s second fiscal quarter of fiscal 2007.

On May 1, 2006, the Company completed an asset purchase agreement with a third party to acquire intellectual property and property and equipment. Under terms of the agreement, the Company paid $7.0 million in cash upon closing of the transaction. In addition to the asset purchase, Marvell and the third party agree to enter into certain additional agreements, including a transition services agreement, a product distribution agreement and an intellectual property agreement. The Company may also record a one-time charge for purchased in-process research and development expenses related to the acquisition. The amount of that charge, if any, would be recorded in the Company’s second fiscal quarter of fiscal 2007, but has not yet been determined.

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