e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the year ended
December 31, 2007
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OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission file number:
001-33435
Cavium Networks, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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77-0558625
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(State or other jurisdiction
of
incorporation or organization)
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(I.R.S. employer
identification no.)
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805 East Middlefield Road
Mountain View, CA 94043
(650) 623-7000
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Syed B. Ali
President and Chief Executive Officer
Cavium Networks, Inc.
805 East Middlefield Road
Mountain View, CA 94043
(650) 623-7000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Each
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to be so Registered
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Class is to be Registered
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Common Stock, $0.001 par value
(Title of Class)
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The NASDAQ Stock Market LLC
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Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. YES o NO þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. YES o NO þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. YES þ NO o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer,accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer þ
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Smaller reporting
company o
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(Do not check if a smaller
reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). YES o NO þ
As of June 29, 2007, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of the voting stock held by
non-affiliates was $529,476,479, based on the number of shares
held by non-affiliates of the registrant, and based on the
reported last sale price of common stock on The NASDAQ Global
Market for such date. This calculation does not reflect a
determination that persons are affiliates for any other purposes.
Number of shares of common stock outstanding as of March 7,
2008: 40,383,818
Documents Incorporated by Reference: Portions
of the Registrants definitive Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission not later than 120 days after the
end of the fiscal year covered by this
form 10-K
are incorporated by reference in Part III of this
Form 10-K.
CAVIUM
NETWORKS, INC.
YEAR
ENDED DECEMBER 31, 2007
FORM 10-K
ANNUAL
REPORT
TABLE OF
CONTENTS
Forward
Looking Statements
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Such statements are based upon our
managements believes and assumptions and on information
currently available to our management. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
could, would, estimates,
predicts, potential,
continue, strategy,
believes, anticipates,
plans, expects, intends and
variations of such words and similar expressions are intended to
identify forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors, which
may cause our actual results, performance, time frames or
achievements to be materially different from any future results,
performance, time frames or achievements expressed or implied by
the forward-looking statements. These risks, uncertainties and
other factors in this Annual Report on
Form 10-K
are discussed in greater detail under the heading Risk
Factors. Given these risks, uncertainties and other
factors, you should not place undue reliance on these
forward-looking statements. These forward-looking statements
represent our estimates and assumptions only as of the date of
this filing. You should read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
PART I
Overview
We are a provider of highly integrated semiconductor processors
that enable intelligent networking, communications and security
applications. We refer to our products as enabling intelligent
processing because they allow customers to develop networking
equipment that is application-aware and content-aware and
securely processes voice, video and data traffic at high speeds.
Our products also include a rich suite of embedded security
protocols that enable unified threat management, or UTM, secure
connectivity and network perimeter protection. Our products are
systems on a chip, or SoCs, which incorporate single or multiple
processor cores, a highly integrated architecture and
customizable software that is based on a broad range of standard
operating systems. As a result, our products offer high levels
of performance and processing intelligence while reducing
product development cycles for our customers and lowering power
consumption for end market equipment.
We generate the majority of our revenue from sales of our
products to providers of networking equipment that sell into the
enterprise network, data center, broadband and consumer, and
access and service provider markets. Our products are used in a
broad array of networking equipment, including routers,
switches, content-aware switches, UTM and other security
appliances, application-aware gateways, voice/video/data, or
triple-play, gateways, wireless local area network, or WLAN, and
3G access and aggregation devices, storage networking equipment,
servers and intelligent network interface cards.
Industry
Background
Traffic on the Internet and enterprise networks is rapidly
increasing due to trends that include greater adoption of Web
2.0 applications, VoIP, video over broadband, file sharing,
greater use of web-based services, and the proliferation of
stored content accessed through networks. Enterprises and
service providers are demanding networking equipment that can
take advantage of these trends, and address the significant
market opportunities that these new applications provide. As a
result, there is growing pressure on providers of networking
equipment to rapidly introduce new products with enhanced
functionality while reducing their design and manufacturing
costs. Providers of networking equipment are increasingly
seeking advanced processing solutions from third-party vendors
to access the best available technology and reduce development
costs.
1
The processing needs of advanced networking systems can be
described in the context of the Open System Interconnection, or
OSI, Model, which divides network activities, equipment, and
protocols into seven layers. According to this model, Layers 1
through 3 are the physical, data link and network layers,
respectively, which provide the protocols to ensure the
transmission of data between the source and destination
regardless of the content and type of data processed.
Traditionally, network infrastructure products have focused on
Layer 1 through 3 products that route and switch data traffic
based solely on the source and destination address contained in
the packet header. Processors that provide Layer 1 through 3
solutions are widely available from many vendors. Layers 4
through 7 are the transport, session, presentation and
application layers, which provide the protocols to enable the
reliable
end-to-end
communication of application information. Intelligent processing
generally takes place in Layers 4 through 7. In order to provide
this intelligence, advanced networking systems must include
processors that enable extensive inspection of the application
and data content, or deep packet inspection, and make
intelligent switching and routing decisions based upon that
inspection. To address customer demands, providers of networking
equipment must offer products that include functionality such as
intelligent routing or switching of network traffic prioritized
by application and data content, and security services.
Processors required for Layer 4 through 7 processing are
significantly more complex than processors that provide only
Layer 1 through 3 solutions.
Networking equipment providers address the need for advanced
networking systems and the processors using a variety of
approaches for their current networking products, including
internally designed custom semiconductor products, such as
ASICs, FPGAs or other proprietary chips, multiple chip
offerings, general purpose MPUs from merchant suppliers,
software-based solutions or a combination of these approaches.
While these approaches have been adequate for the basic layer 1
through 3 processing, they are less effective as the need for
Layer 4 through 7 intelligent processing increases and line
rates continue to increase. As a result, providers of networking
equipments are increasingly turning to third-party vendors for
high performance, power-efficient and cost-effective intelligent
processing products.
Products
We offer highly integrated semiconductors that provide
intelligent Layer 4 through 7 processing for enterprise network,
data center, broadband and consumer, and access and service
provider markets. Our products provide scalable, low-power, high
performance processors that integrate single or multiple cores,
hardware accelerators and input/output interfaces into a single
chip and are available across a wide range of price and
performance points. All of our products are compatible with
standards-based operating systems and general purpose software
to enable ease of programming, and are supported by our
ecosystem partners.
2
The chart below sets out key product lines, available versions,
descriptions and primary target equipment for each of our
product families.
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Product Lines
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Available
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Product Families
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(# of MIPS Cores)
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Configurations
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Description
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Target End Markets
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OCTEON Plus Multi-core MIPS64 Processors
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CN58XX(16)
CN57XX (12)
CN56XX (12)
CN55XX(6)
CN54XX(6)
CN52XX(4)
CN50XX(2)
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Network Services Processor
Storage Services Processor
Secure Communication Processor
Communication Processor
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Multi-core MIPS64 Processors with 2-16 cores,
integrated L4-L7 hardware acceleration and networking
interfaces
Performance: 1Gbps to 20+ Gbps
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Enterprise Network
Access and Service Provider
Data Center
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OCTEON Multi-core MIPS64 Processors
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CN38XX(16)
CN36XX(4)
CN31XX(2)
CN30XX(1)
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Network Services Processor
Secure Communication Processor
Communication Processor
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Multi-core MIPS64 Processors with 2-16 cores,
integrated L4-L7 hardware acceleration and networking
interfaces
Performance: 1Gbps to 10+ Gbps
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Enterprise Network
Access and Service Provider
Data Center
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NITROX Security Processors
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CN2XXX
CN1XXX
CN5XX
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i/s/w: IPsec, SSL or WLAN Security versions
p: Multi-protocol version
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Standalone Security Processors, with wide range of
interface connectivity
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Enterprise Network
Data Center
Access and Service Provider
Broadband and Consumer
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NITROX Soho/ OCTEON Broadband Communication Processors
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CN50XX(2) CN31XX(2)
CN30XX(1)
CN2XX(1)
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Network Services Processor
Secure Communication Processor
Communication Processor
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Cost-effective Single & Dual core MIPS-based
Communication Processors with integrated Networking, Security,
QoS acceleration and built-in interfaces
Performance: 100Mbps to 1Gbps
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Broadband and Consumer
Enterprise and Consumer
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Our OCTEON and OCTEON Plus processor family provides integrated
Layer 4 through 7 data and security processing (with additional
capabilities at Layers 2 and 3) at line speeds from 100Mbps
to 20Gbps. OCTEON processors integrate control plane processing,
packet processing, security processing and content acceleration
in a single chip. This integration shortens the data paths,
eliminates redundant packet processing, simplifies board design
and reduces the cost and power consumption compared to
alternative products that use multiple chips. Our
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OCTEON processors are targeted for use in a wide variety of OEM
networking equipment, including routers, switches, content-aware
switches, UTM, and other security appliances, application-aware
gateways, voice/video/data, or triple-play, gateways, WLAN and
3G access and aggregation devices, storage networking equipment,
servers and intelligent network interface cards.
Our OCTEON Plus family of processors approximately doubles the
application performance available in our previous generation of
OCTEON processors. The OCTEON Plus processor family adds new
interfaces and acceleration features for packet processing,
quality of service and content processing for multimedia aware
networking and 3G, 4G, WiMax wireless applications. The OCTEON
Plus processor family has expanded OCTEONs core target
markets with a new category called the Storage Services
Processor, or SSP family. The OCTEON SSP provides hardware
acceleration for storage applications such as iSCSI, RAID 6 and
data de-duplication. The new OCTEON SSP family is aimed at iSCSI
targets, Fiber Channel to iSCSI bridges and disk arrays.
Our NITROX processor family offers stand-alone security
processors that provide the functionality required for secure
communication in a single chip. This single chip,
custom-designed processors provide the complete security
protocol processing, encryption and authentication algorithms to
reduce the load on the system processor and increase total
system throughput. The NITROX family consists of products with
up to 24 security processors on a chip that are used in a wide
variety of OEM networking equipment, including security
appliances, UTM appliances, Layer 4 through 7 load balancers,
and other applications.
Our NITROX Soho and OCTEON broadband communication processor
family includes a line of 32-bit and 64-bit broadband
communication processors. The OCTEON broadband communication
processors target wired and wireless broadband gateway
applications, with performance requirements ranging from 100Mbps
to 1Gbps. The NITROX Soho processors are highly integrated
MIPS32-based products delivering a broad range of cost,
performance and power options for applications requiring up to a
100Mbps line rate. The MIPS64-based SoC OCTEON processors
integrate single or dual 64-bit CPUs, and provide high
performance security processing for applications requiring up to
a 1Gbps line rate. The NITROX Soho and OCTEON processors are
primarily used for broadband routers, WLAN access points, access
and UTM appliances.
In addition to our processors, we also market and sell discrete
software stacks designed to help our customers build products
around our SoCs in a more time and cost efficient manner. The
stacks include applications for security functions and other
commonly used protocols. We intend to continue to build our
software portfolio to address the needs of our customers who do
not possess internal software design efforts, or choose to use
those efforts on more customized systems architectures.
Customers
We primarily sell our products to providers of networking
equipment, either directly or through contract manufacturing
organizations and distributors. By providing comprehensive
systems-level products along with our ecosystem partners, we
provide our customers with products that empower their
next-generation networking systems more quickly and at lower
cost than other alternatives.
We currently rely, and expect to continue to rely, on a limited
number of customers for a significant portion of our revenue.
Cisco accounted for 23% of revenue in 2007. F5 Networks
accounted for 18% in 2007. SonicWALL accounted for 6% of revenue
in 2007.
Sales and
Marketing
We currently sell our products through our direct sales and
applications support organization to providers of networking
equipment, original design manufacturers and contract
electronics manufacturers, as well as through arrangements with
distributors that fulfill third-party orders for our products.
We work directly with system designers to create demand for our
products by providing them with application-specific product
information for their system design, engineering and procurement
groups. Our technical marketing, sales and field application
engineers actively engage potential customers during their
design processes to introduce them to our product capabilities
and target applications. We design products in an effort to meet
the increasingly complex and specific design requirements of our
customers. We typically undertake a multi-month
4
sales and development process with our customer system designers
and management. If successful, this process culminates in a
customer decision to use our product in their system, which we
refer to as a design win. Volume production can begin from nine
months to three years after the design win depending on the
complexity of our customers product and other factors.
Once one of our products is incorporated into a customers
design, it is likely to be used for the life cycle of the
customers product. We believe this to be the case because
a redesign would generally be time consuming and expensive.
Manufacturing
We use third-party foundries and assembly and test contractors
to manufacture, assemble and test our semiconductor products.
This outsourced manufacturing approach allows us to focus our
resources on the design, sales and marketing of our products.
Our engineers work closely with our foundries and other
contractors to increase yields, lower manufacturing costs and
improve quality.
Integrated Circuit Fabrication. Our integrated
circuits are fabricated using complementary metal-oxide
semiconductor, or CMOS processes, which provide greater
flexibility to engage independent foundries to manufacture our
integrated circuits. By outsourcing manufacturing, we are able
to avoid the cost associated with owning and operating our own
manufacturing facility, which would not be feasible for a
company at our stage of development. We currently outsource a
substantial percentage of our integrated circuit manufacturing
to Taiwan Semiconductor Manufacturing Company, or TSMC, with the
remaining manufacturing outsourced to United Microelectronics
Corporation, or UMC. We work closely with TSMC and UMC to
forecast on a monthly basis our manufacturing capacity
requirements. Our integrated circuits are currently fabricated
in several advanced,
sub-micron
manufacturing processes. Because finer manufacturing processes
lead to enhanced performance, smaller size and lower power
requirements, we continually evaluate the benefits and
feasibility of migrating to smaller geometry process technology
in order to reduce cost and improve performance.
Assembly and Test. Our products are shipped
from our third-party foundries to third-party assembly and test
facilities where they are assembled into finished integrated
circuit packages and tested. We outsource all product packaging
and substantially all testing requirements for these products to
several assembly and test subcontractors, including ASE
Electronics in Taiwan and Malaysia, as well as ISE in the United
States. Our products are designed to use standard packages and
to be tested with widely available test equipment.
Quality Assurance. We have implemented
significant quality assurance and test procedures to assure high
levels of product quality for our customers. Our designs are
subjected to extensive circuit simulation under extreme
conditions of temperature, voltage and processing before being
committed to manufacture. We have completed and have been
awarded ISO 9001 certification and ISO 9001:2000 certification.
In addition, all of our independent foundries and assembly and
test subcontractors have been awarded ISO 9001 certification.
Research
and Development
We believe that our future success depends on our ability to
introduce enhancements to our existing products and to develop
new products for both existing and new markets. Our research and
development efforts are directed largely to the development of
additional high-performance multi-core microprocessor
semiconductors. We are also focused on incorporating functions
currently provided by stand-alone semiconductors into our
products. We have assembled a team of highly skilled
semiconductor and embedded software design engineers who have
strong design expertise in high performance multi-core
microprocessor design, along with embedded software, security
and networking expertise. Our engineering design teams are
located in Mountain View, California, Marlboro, Massachusetts
and Hyderabad and Chennai, India. As of December 31, 2007,
we had 127 employees in our research and development group.
Our research and development expenses were $19.5 million,
$18.7 million and $16.0 million for the years ended
December 31, 2007, 2006 and 2005 respectively.
Intellectual
Property
Our success depends in part upon our ability to protect our core
technology and intellectual property. To accomplish this, we
rely on a combination of intellectual property rights, including
patents, trade secrets, copyrights and trademarks, and
contractual protections.
5
As of December 31, 2007, we had 13 issued and 24 pending
patent applications in the United States, and two issued and 21
pending foreign patent applications. The 12 issued patents in
the United States expire in the years beginning in 2021 through
2025. The two issued foreign patents expire in 2022. Our issued
patents and pending patent applications relate to security
processors, multi-core microprocessor processing and other
processing concepts. We focus our patent efforts in the United
States, and, when justified by cost and strategic importance, we
file corresponding foreign patent applications in strategic
jurisdictions such as Japan and Europe. Our patent strategy is
designed to provide a balance between the need for coverage in
our strategic markets and the need to maintain costs at a
reasonable level. We believe our issued patents and patent
applications, to the extent the applications are issued, may be
used defensively by us in the event of future intellectual
property claims.
We may not receive competitive advantages from any rights
granted under our patents. We do not know whether any of our
patent applications will result in the issuance of any patents
or whether the examination process will require us to narrow the
scope of our claims. To the extent any of our applications
proceed to issuance as a patent, any such future patent may be
opposed, contested, circumvented, designed around by a third
party, or found to be unenforceable or invalidated. In addition,
our future patent applications may not be issued with the scope
of the claims sought by us, if at all, or the scope of claims we
are seeking may not be sufficiently broad to protect our
proprietary technologies. Others may develop technologies that
are similar or superior to our proprietary technologies,
duplicate our proprietary technologies or design around patents
owned or licensed by us. If our products, patents or patent
applications are found to conflict with any patent held by third
parties, we could be prevented from selling our products, our
patents may be declared invalid or our patent applications may
not result in issued patents.
In addition to our own intellectual property, we also rely on
third-party technologies for the development of our products. We
license certain technology from MIPS Technologies, Inc.,
pursuant to a license agreement entered into in December 2003
wherein we were granted a non-exclusive, worldwide license to
MIPS Technologies microprocessor core technology to
develop, implement and use in our products. The term of the
agreement was extended by an additional two years and will
consequently expire in December 2010. The agreement permits us
to continue selling in perpetuity products developed during the
term of the agreement containing the licensed technology.
Following the termination of the agreement, we will evaluate
whether to enter into a new agreement with MIPS Technologies or
engage other third parties for alternative technology solutions.
We obtained a registration for our NITROX trademark in the
United States. Additionally, we have a pending United States
application for the OCTEON trademark. We also have a license
from MIPS Technologies, Inc. to use cnMIPS as a trademark.
In addition, we generally control access to and use of our
proprietary software and other confidential information through
the use of internal and external controls, including contractual
protections with employees, contractors, customers and partners.
We rely in part on United States and international copyright
laws to protect our software. All employees and consultants are
required to execute confidentiality agreements in connection
with their employment and consulting relationships with us. We
also require them to agree to disclose and assign to us all
inventions conceived or made in connection with the employment
or consulting relationship. We cannot provide any assurance that
employees and consultants will abide by the confidentiality or
invention assignment terms of their agreements. Despite measures
taken to protect our intellectual property, unauthorized parties
may copy aspects of our products or obtain and use information
that we regard as proprietary.
Despite our efforts to protect our trade secrets and proprietary
rights through patents, licenses and confidentiality agreements,
unauthorized parties may still copy or otherwise obtain and use
our software and technology. In addition, we intend to expand
our international operations, and effective patent, copyright,
trademark and trade secret protection may not be available or
may be limited in foreign countries. If we fail to protect our
intellectual property and other proprietary rights, our business
could be harmed.
Third parties could claim that our products or technologies
infringe their proprietary rights. The semiconductor industry is
characterized by the existence of a large number of patents,
trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual
property rights. We expect that the potential for infringement
claims against us may further increase as the number of products
and competitors in our market increase. Litigation in this
industry is often protracted and expensive. Questions of
infringement in the semiconductor industry involve highly
technical and subjective analyses. In addition, litigation may
become
6
necessary in the future to enforce our granted patents and other
intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or
invalidity, and we may not prevail in any future litigation. The
results of any litigation are inherently uncertain. Any
successful infringement claim or litigation against us could
have a significant adverse impact on our business.
We may be required to seek licenses under patents or
intellectual property rights owned by third parties. However, we
cannot be certain that third parties will offer licenses to us
or that the terms of any licenses offered to us will be
acceptable. If we fail to obtain such third-party license for
our products, we could incur substantial liabilities or be
forced to suspend sales of our products. Any litigation could
cause us to incur substantial expenses, reduce our sales, and
divert the efforts of our technical and management personnel,
whether or not a court decided such litigation in our favor. In
the event we receive an adverse result in any litigation, we
could be required to pay substantial damages, cease sale of
products, expend significant resources to develop alternative
technology and discontinue the use of processes requiring the
relevant technology.
We have not to date been notified of any litigation related to
intellectual property.
Competition
We compete with numerous domestic and international
semiconductor companies, many of which have greater financial
and other resources with which to pursue marketing, technology
development, product design, manufacturing, quality, sales and
distribution of their products. Our ability to compete
effectively depends on defining, designing and regularly
introducing new products that anticipate the processing and
integration needs of our customers next-generation
products and applications.
We consider our primary competitors to be other companies that
provide embedded processor products to the market, including
Broadcom Corporation, Freescale Semiconductor, Inc., Intel
Corporation, Marvell Technology Group Ltd., PMC-Sierra, Inc.,
Raza Microelectronics, Inc., P.A. Semi, and to a lesser extent,
Hifn, Inc. Most of these competitors offer products that differ
in functionality and processing speeds and address some or all
of our four target end markets. In comparison we offer a broad
array of highly integrated, intelligent solutions at various
performance levels and prices for each of our end markets. Our
products generally include a multiple number of processor cores,
greater integration of L4-L7 hardware acceleration and
interfaces, and efficient power consumption for networking,
communication and security applications.
Our competitors include public companies with broader product
lines, a large installed base of customers and greater resources
compared to us. We expect continued competition from existing
suppliers as well as from potential new entrants into our
markets. Our ability to compete depends on a number of factors,
including our success in identifying new and emerging markets,
applications and technologies and developing products for these
markets; our products performance and cost effectiveness
relative to that of our competitors; our success
functionality and features not previously available in the
marketplace; our ability to recruit good talent including
software engineers and chip designers; and our ability to
protect our intellectual property.
Backlog
Sales of our products are generally made pursuant to purchase
orders. We typically include in backlog only those customer
orders for which we have accepted purchase orders and which we
expect to ship within the next twelve months. Since orders
constituting our current backlog are subject to changes in
delivery schedules or cancellation with limited or no penalties,
we believe that the amount of our backlog is not necessarily an
accurate indication of our future revenues.
Employees
As of December 31, 2007, we had 202 regular employees
located in the United States, India, Asia and Europe, which was
comprised of: 15 employees in manufacturing operations, 127
in engineering, research and development, 60 in sales, marketing
and administrative. None of our employees is represented by a
labor union and we consider current employee relations to be
good.
7
Executive
Officers of the Registrant
The following sets forth certain information regarding our
executive officers as of March 7, 2008:
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Syed B. Ali
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President, Chief Executive Officer, Director and Chairman of the
Board of Directors
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Arthur D. Chadwick
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Vice President of Finance and Administration and Chief Financial
Officer
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Anil K. Jain
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Vice President of IC Engineering
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Rajiv Khemani
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Vice President of Marketing and Sales
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Syed B. Ali is one of our founders and has served as our
President, Chief Executive Officer and Chairman of the Board of
Directors since the inception of the Company in 2000. From 1998
to 2000, Mr. Ali was Vice President of Marketing and Sales
at Malleable Technologies, a communication chip company of which
he was a founding management team member. Malleable Technologies
was acquired by PMC Sierra, a communication IC company in 2000.
From 1994 to 1998, Mr. Ali was an Executive Director at
Samsung Electronics. Prior to that, he had various positions at
Wafer Scale Integration, a division of SGS-Thompson, Tandem
Computer, and American Microsystems. He received a BSEE from
Osmania University, in Hyderabad, India and an MSEE from the
University of Michigan.
Arthur D. Chadwick has served as our Vice President of
Finance and Administration and Chief Financial Officer since
December 2004. Prior to joining us, from 1989 to 2004,
Mr. Chadwick served as the Senior Vice President of Finance
and Administration and Chief Financial Officer at Pinnacle
Systems, a provider of digital video processing solutions. From
1979 through 1989, Mr. Chadwick served in various financial
and management roles at American Microsystems, Austrian
Microsystems and Gould Semiconductor. Mr. Chadwick received
a BS degree in Mathematics and an MBA in Finance, both from the
University of Michigan.
Anil K. Jain has served as our Vice President of IC
Engineering since January 2001, and is a founding management
team member. Prior to joining us, from 1998 to 2000 he was at
Compaq Computer, a computer manufacturer. From 1980 to 1998,
Mr. Jain served at Digital Equipment Corporation, or DEC,
as Senior Consulting Engineer when DEC was acquired by Compaq
Computer. He received a BS degree in Electrical Engineering from
Punjab Engineering College in Chandigarh India, and an MSEE from
the University of Cincinnati.
Rajiv Khemani has served as our Vice President of
Marketing and Sales since January 2007 and has served as our
Vice President of Marketing since June 2003. Prior to joining
us, from 1998 to May 2003, he worked for Intel Corporation, a
microprocessor IC company. From 2002 to 2003, he served as
General Manager of Intels high-end network processor
business unit. From 1999 to 2002, he served as Director of
Marketing in Intels network processor division. He joined
Intel through Intels acquisition of Netboost, a network
processor startup. Prior to Netboost, Mr. Khemani held
engineering, marketing and management positions at Network
Appliance and Sun Microsystems. He received a bachelor degree in
Computer Engineering from the Indian Institute of Technology,
New Delhi, an MS in Computer Science from New York University
and an MBA from Stanford University Graduate School of Business.
Corporate
Information
We were incorporated in California in November 2000 and
reincorporated in Delaware in February 2007. Our principal
offices are located at 805 East Middlefield Road, Mountain View,
California 94043, and our telephone number is
(650) 623-7000.
Our Web site address is www.caviumnetworks.com. Information
found on, or accessible through, our Web site is not a part of,
and is not incorporated into, this Annual Report on
Form 10-K.
Unless the context requires otherwise, references in this Annual
Report on
Form 10-K
to the company, we, us and
our refer to Cavium Networks, Inc.
Available
Information
We file electronically with the United States Securities and
Exchange Commission, or SEC, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934. We make available on our
8
website at
http://www.caviumnetworks.com,
free of charge, copies of these reports as soon as reasonably
practicable after filing these reports with, or furnishing them
to, the SEC.
The following risks and uncertainties may have a material
adverse effect on our business, financial condition or results
of operations. Investors should carefully consider the risks
described below before making an investment decision. The risks
described below are not the only ones we face. Additional risks
not presently known to us or that we currently believe are
immaterial may also significantly impair our business
operations. Our business could be harmed by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and investors may lose all or part of their
investment.
Risks
Related to Our Business and Industry
We
have a history of losses, and we may not achieve or sustain
profitability in the future, on a quarterly or annual
basis.
We were established in 2000 and have not been profitable in any
fiscal period until the quarter ended September 30, 2007.
We experienced net income of $2.0 million for the three
months ended December 31, 2007 and net income of
$2.2 million for the twelve months ended December 31,
2007. However, as of December 31, 2007, our accumulated
deficit was $58.7 million. We expect to make significant
expenditures related to the development of our products and
expansion of our business, including research and development
and sales and administrative expenses. As a public company, we
will also incur significant legal, accounting and other expenses
that we did not incur as a private company. Additionally, we may
encounter unforeseen difficulties, complications, product delays
and other unknown factors that require additional expenditures.
As a result of these increased expenditures, we may have to
generate and sustain substantially increased revenue to achieve
profitability. Our revenue growth trends in prior periods may
not be sustainable. Accordingly, we may not be able to achieve
or maintain profitability and we may continue to incur
significant losses in the future.
We
face intense competition and expect competition to increase in
the future, which could reduce our revenue and customer
base.
The market for our products is highly competitive and we expect
competition to intensify in the future. This competition could
make it more difficult for us to sell our products, and result
in increased pricing pressure, reduced profit margins, increased
sales and marketing expenses and failure to increase, or the
loss of, market share or expected market share, any of which
would likely seriously harm our business, operating results and
financial condition. For instance, semiconductor products have a
history of declining prices as the cost of production is
reduced. However, if market prices decrease faster than product
costs, gross and operating margins can be adversely affected.
Currently, we face competition from a number of established
companies, including Broadcom Corporation, Freescale
Semiconductor, Inc., Intel Corporation, Marvell Technology Group
Ltd., PMC-Sierra, Inc., Hifn, Inc., and others. We also face
competition from a number of private companies, including Raza
Microelectronics, Inc., P.A. Semi and others. A few of our
current competitors operate their own fabrication facilities and
have, and some of our potential competitors could have, longer
operating histories, greater name recognition, larger customer
bases and significantly greater financial, technical, sales,
marketing and other resources than we have. Potential customers
may prefer to purchase from their existing suppliers rather than
a new supplier regardless of product performance or features.
We expect increased competition from other established and
emerging companies both domestically and internationally. Our
current and potential competitors may also establish cooperative
relationships among themselves or with third parties. If so, new
competitors or alliances that include our competitors may emerge
that could acquire significant market share. We expect these
trends to continue as companies attempt to strengthen or
maintain their market positions in an evolving industry. In the
future, further development by our competitors could cause our
products to become obsolete. We expect continued competition
from incumbents as well as from new entrants into the markets we
serve. Our ability to compete depends on a number of factors,
including:
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our success in identifying new and emerging markets,
applications and technologies;
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our products performance and cost effectiveness relative
to that of our competitors products;
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our ability to deliver products in large volume on a timely
basis at a competitive price;
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our success in utilizing new and proprietary technologies to
offer products and features previously not available in the
marketplace;
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our ability to recruit design and application engineers and
sales and marketing personnel; and
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our ability to protect our intellectual property.
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In addition, we cannot assure you that existing customers or
potential customers will not develop their own products,
purchase competitive products or acquire companies that use
alternative methods to enable networking, communication or
security applications to facilitate network-aware processing in
their systems. Any of these competitive threats, alone or in
combination with others, could seriously harm our business,
operating results and financial condition.
Our
customers may cancel their orders, change production quantities
or delay production, and if we fail to forecast demand for our
products accurately, we may incur product shortages, delays in
product shipments or excess or insufficient product
inventory.
We generally do not obtain firm, long-term purchase commitments
from our customers. Because production lead times often exceed
the amount of time required to fulfill orders, we often must
build in advance of orders, relying on an imperfect demand
forecast to project volumes and product mix. Our demand forecast
accuracy can be adversely affected by a number of factors,
including inaccurate forecasting by our customers, changes in
market conditions, adverse changes in our product order mix and
demand for our customers products. Even after an order is
received, our customers may cancel these orders or request a
decrease in production quantities. Any such cancellation or
decrease subjects us to a number of risks, most notably that our
projected sales will not materialize on schedule or at all,
leading to unanticipated revenue shortfalls and excess or
obsolete inventory which we may be unable to sell to other
customers. Alternatively, if we are unable to project customer
requirements accurately, we may not build enough products, which
could lead to delays in product shipments and lost sales
opportunities in the near term, as well as force our customers
to identify alternative sources, which could affect our ongoing
relationships with these customers. We have in the past had
customers dramatically increase their requested production
quantities with little or no advance notice. If we do not timely
fulfill customer demands, our customers may cancel their orders
and we may be subject to customer claims for cost of
replacement. Either underestimating or overestimating demand
would lead to insufficient, excess or obsolete inventory, which
could harm our operating results, cash flow and financial
condition, as well as our relationships with our customers.
We
receive a substantial portion of our revenues from a limited
number of customers, and the loss of, or a significant reduction
in, orders from one or a few of our major customers would
adversely affect our operations and financial
condition.
We receive a substantial portion of our revenues from a limited
number of customers. We received an aggregate of approximately
56%, 56% and 52% of our revenues from our top five customers for
the years ended December 31, 2007, 2006 and 2005,
respectively. We anticipate that we will continue to be
dependent on a limited number of customers for a significant
portion of our revenues in the immediate future and in some
cases the portion of our revenues attributable to certain
customers may increase in the future. However, we may not be
able to maintain or increase sales to certain of our top
customers for a variety of reasons, including the following:
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our agreements with our customers do not require them to
purchase a minimum quantity of our products;
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some of our customers can stop incorporating our products into
their own products with limited notice to us and suffer little
or no penalty; and
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many of our customers have pre-existing or concurrent
relationships with our current or potential competitors that may
affect the customers decisions to purchase our products.
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In the past, we have relied in significant part on our strategic
relationships with customers that are technology leaders in our
target markets. We intend to pursue the expansion of such
relationships and the formation of new strategic relationships
but we cannot assure you that we will be able to do so. These
relationships often require us to develop new products that may
involve significant technological challenges. Our customers
frequently place considerable pressure on us to meet their tight
development schedules. Accordingly, we may have to devote a
substantial amount of our resources to our strategic
relationships, which could detract from or delay our completion
of other important development projects. Delays in development
could impair our relationships with our strategic customers and
negatively impact sales of the products under development.
Moreover, it is possible that our customers may develop their
own product or adopt a competitors solution for products
that they currently buy from us. If that happens, our sales
would decline and our business, financial condition and results
of operations could be materially and adversely affected.
In addition, our relationships with some customers may also
deter other potential customers who compete with these customers
from buying our products. To attract new customers or retain
existing customers, we may offer certain customers favorable
prices on our products. In that event, our average selling
prices and gross margins would decline. The loss of a key
customer, a reduction in sales to any key customer or our
inability to attract new significant customers could seriously
impact our revenue and materially and adversely affect our
results of operations.
We
expect our operating results to fluctuate.
We expect our revenues and expense levels to vary in the future,
making it difficult to predict our future operating results. In
particular, we experience variability in demand for our products
as our customers manage their product introduction dates and
their inventories.
Additional factors that could cause our results to fluctuate
include, among other things:
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fluctuations in demand, sales cycles, product mix and prices for
our products;
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the timing of our product introductions, and the variability in
lead time between the time when a customer begins to design in
one of our products and the time when the customers end
system goes into production and they begin purchasing our
products;
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the forecasting, scheduling, rescheduling or cancellation of
orders by our customers;
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our ability to successfully define, design and release new
products in a timely manner that meet our customers needs;
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changes in manufacturing costs, including wafer, test and
assembly costs, mask costs, manufacturing yields and product
quality and reliability;
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the timing and availability of adequate manufacturing capacity
from our manufacturing suppliers;
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the timing of announcements by our competitors or us;
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future accounting pronouncements and changes in accounting
policies;
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volatility in our stock price, which may lead to higher stock
compensation expenses;
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general economic and political conditions in the countries where
we operate or our products are sold or used; costs associated
with litigation, especially related to intellectual
property; and
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productivity and growth of our sales and marketing force.
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Unfavorable changes in any of the above factors, most of which
are beyond our control, could significantly harm our business
and results of operations.
We may
not sustain our growth rate, and we may not be able to manage
any future growth effectively.
We have experienced significant growth in a short period of
time. Our revenues increased from approximately
$19.4 million in 2005 to $34.2 million in 2006 and
$54.2 million in 2007. We may not achieve similar growth
rates
11
in future periods. You should not rely on our operating results
for any prior quarterly or annual periods as an indication of
our future operating performance. If we are unable to maintain
adequate revenue growth, our financial results could suffer and
our stock price could decline.
To manage our growth successfully and handle the
responsibilities of being a public company, we believe we must
effectively, among other things:
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recruit, hire, train and manage additional qualified engineers
for our research and development activities, especially in the
positions of design engineering, product and test engineering,
and applications engineering;
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add additional sales personnel and expand sales offices;
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implement and improve our administrative, financial and
operational systems, procedures and controls; and
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enhance our information technology support for enterprise
resource planning and design engineering by adapting and
expanding our systems and tool capabilities, and properly
training new hires as to their use.
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If we are unable to manage our growth effectively, we may not be
able to take advantage of market opportunities or develop new
products and we may fail to satisfy customer requirements,
maintain product quality, execute our business plan or respond
to competitive pressures.
The
average selling prices of products in our markets have
historically decreased over time and will likely do so in the
future, which could harm our revenues and gross
profits.
Average selling prices of semiconductor products in the markets
we serve have historically decreased over time. Our gross
profits and financial results will suffer if we are unable to
offset any reductions in our average selling prices by reducing
our costs, developing new or enhanced products on a timely basis
with higher selling prices or gross profits, or increasing our
sales volumes. Additionally, because we do not operate our own
manufacturing, assembly or testing facilities, we may not be
able to reduce our costs as rapidly as companies that operate
their own facilities, and our costs may even increase, which
could also reduce our margins. We have reduced the prices of our
products in anticipation of future competitive pricing
pressures, new product introductions by us or our competitors
and other factors. We expect that we will have to do so again in
the future.
We may
be unsuccessful in developing and selling new products or in
penetrating new markets.
We operate in a dynamic environment characterized by rapidly
changing technologies and industry standards and technological
obsolescence. Our competitiveness and future success depend on
our ability to design, develop, manufacture, assemble, test,
market and support new products and enhancements on a timely and
cost effective basis. A fundamental shift in technologies in any
of our product markets could harm our competitive position
within these markets. Our failure to anticipate these shifts, to
develop new technologies or to react to changes in existing
technologies could materially delay our development of new
products, which could result in product obsolescence, decreased
revenues and a loss of design wins to our competitors. The
success of a new product depends on accurate forecasts of
long-term market demand and future technological developments,
as well as on a variety of specific implementation factors,
including:
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timely and efficient completion of process design and transfer
to manufacturing, assembly and test processes;
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the quality, performance and reliability of the product; and
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effective marketing, sales and service.
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If we fail to introduce new products that meet the demand of our
customers or penetrate new markets that we target our resources
on, our revenues will likely decrease over time and our
financial condition could suffer.
Fluctuations
in the mix of products sold may adversely affect our financial
results.
Because of the wide price differences among our processors, the
mix and types of performance capabilities of processors sold
affect the average selling price of our products and have a
substantial impact on our revenue.
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Generally, sales of higher performance products have higher
gross margins than sales of lower performance products. We
currently offer both higher and lower performance products
within each of our NITROX and OCTEON product families. To the
extent our sales mix shifts toward increased sales of lower
performance products, our overall gross margins will be
negatively affected. Fluctuations in the mix and types of our
products may also affect the extent to which we are able to
recover our fixed costs and investments that are associated with
a particular product, and as a result can negatively impact our
financial results.
Our
products must meet exact specifications, and defects and
failures may occur, which may cause customers to return or stop
buying our products.
Our customers generally establish demanding specifications for
quality, performance and reliability that our products must
meet. However, our products are highly complex and may contain
defects and failures when they are first introduced or as new
versions are released. If defects and failures occur in our
products during the design phase or after, we could experience
lost revenues, increased costs, including warranty expense and
costs associated with customer support, delays in or
cancellations or rescheduling of orders or shipments, product
returns or discounts, diversion of management resources or
damage to our reputation and brand equity, and in some cases
consequential damages, any of which would harm our operating
results. In addition, delays in our ability to fill product
orders as a result of quality control issues may negatively
impact our relationship with our customers. We cannot assure you
that we will have sufficient resources, including any available
insurance, to satisfy any asserted claims.
We may
have difficulty selling our products if our customers do not
design our products into their systems, and the nature of the
design process requires us to incur expenses prior to
recognizing revenues associated with those expenses which may
adversely affect our financial results.
One of our primary focuses is on winning competitive bid
selection processes, known as design wins, to
develop products for use in our customers products. We
devote significant time and resources in working with our
customers system designers to understand their future
needs and to provide products that we believe will meet those
needs and these bid selection processes can be lengthy. If a
customers system designer initially chooses a
competitors product, it becomes significantly more
difficult for us to sell our products for use in that system
because changing suppliers can involve significant cost, time,
effort and risk for our customers. Thus, our failure to win a
competitive bid can result in our foregoing revenues from a
given customers product line for the life of that product.
In addition, design opportunities may be infrequent or may be
delayed. Our ability to compete in the future will depend, in
large part, on our ability to design products to ensure
compliance with our customers and potential
customers specifications. We expect to invest significant
time and resources and to incur significant expenses to design
our products to ensure compliance with relevant specifications.
We often incur significant expenditures in the development of a
new product without any assurance that our customers
system designers will select our product for use in their
applications. We often are required to anticipate which product
designs will generate demand in advance of our customers
expressly indicating a need for that particular design. Even if
our customers system designers select our products, a
substantial period of time will elapse before we generate
revenues related to the significant expenses we have incurred.
The reasons for this delay generally include the following
elements of our product sales and development cycle timeline and
related influences:
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our customers usually require a comprehensive technical
evaluation of our products before they incorporate them into
their designs;
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it can take from nine months to three years from the time our
products are selected to commence commercial shipments; and our
customers may experience changed market conditions or product
development issues. The resources devoted to product development
and sales and marketing may not generate material revenue for
us, and from time to time, we may need to write off excess and
obsolete inventory if we have produced product in anticipation
of expected demand. We may spend resources on the development of
products that our customers may not adopt. If we incur
significant expenses and investments in inventory in the future
that we are not able to recover, and we are not able to
compensate for those expenses, our operating results could be
adversely affected. In addition, if we sell our products at
reduced prices in anticipation of cost reductions but still hold
higher cost products in inventory, our operating results would
be harmed.
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Additionally, even if system designers use our products in their
systems, we cannot assure you that these systems will be
commercially successful or that we will receive significant
revenue from the sales of processors for those systems. As a
result, we may be unable to accurately forecast the volume and
timing of our orders and revenues associated with any new
product introductions.
If
customers do not believe our products solve a critical need, our
revenues will decline.
Our products are used in networking and security equipment
including routers, switches, UTM appliances, intelligent
switches, application-aware gateways, triple-play gateways, WLAN
and 3G access and aggregation devices, storage networking
equipment, servers, and intelligent network interface cards.
In order to meet our growth and strategic objectives, providers
of networking equipment must continue to incorporate our
products into their systems and the demands for their systems
must grow as well. Our future depends in large part on factors
outside our control, and the sale of next-generation networks
may not meet our revenue growth and strategic objectives.
In the
event we terminate one of our distributor arrangements, it could
lead to a loss of revenues and possible product
returns.
A portion of our sales are made through third-party distribution
agreements. Termination of a distributor relationship, either by
us or by the distributor, could result in a temporary or
permanent loss of revenues, until a replacement distributor can
be established to service the affected end-user customers. We
may not be successful in finding suitable alternative
distributors on satisfactory terms or at all and this could
adversely affect our ability to sell in certain locations or to
certain end-user customers. Additionally, if we terminate our
relationship with a distributor, we may be obligated to
repurchase unsold products. We record a reserve for estimated
returns and price credits. If actual returns and credits exceed
our estimates, our operating results could be harmed. Our
arrangements with our distributors typically also include price
protection provisions if we reduce our list prices.
We
rely on our ecosystem partners to enhance our product offerings
and our inability to continue to develop or maintain such
relationships in the future would harm our ability to remain
competitive.
We have developed relationships with third parties, which we
refer to as ecosystem partners, which provide operating systems,
tool support, reference designs and other services designed for
specific uses with our SoCs. We believe that these relationships
enhance our customers ability to get their products to
market quickly. If we are unable to continue to develop or
maintain these relationships, we might not be able to enhance
our customers ability to commercialize their products in a
timely fashion and our ability to remain competitive would be
harmed.
The
loss of any of our key personnel could seriously harm our
business, and our failure to attract or retain specialized
technical, management or sales and marketing talent could impair
our ability to grow our business.
We believe our future success will depend in large part upon our
ability to attract, retain and motivate highly skilled
managerial, engineering, sales and marketing personnel. The loss
of any key employees or the inability to attract, retain or
motivate qualified personnel, including engineers and sales and
marketing personnel, could delay the development and
introduction of and harm our ability to sell our products. We
believe that our future success is highly dependent on the
contributions of Syed Ali, our co-founder, President and Chief
Executive Officer, and others. None of our employees have
fixed-term employment contracts; they are all at-will employees.
The loss of the services of Mr. Ali, other executive
officers or certain other key personnel could materially and
adversely affect our business, financial condition and results
of operations. For instance, if any of these individuals were to
leave our company unexpectedly, we could face substantial
difficulty in hiring qualified successors and could experience a
loss in productivity during the search for and while any such
successor is integrated into our business and operations.
There is currently a shortage of qualified technical personnel
with significant experience in the design, development,
manufacturing, marketing and sales of integrated circuits. In
particular, there is a shortage of engineers who are familiar
with the intricacies of the design and manufacture of networking
processors, and
14
competition for these engineers is intense. Our key technical
personnel represent a significant asset and serve as the source
of our technological and product innovations. We may not be
successful in attracting, retaining and motivating sufficient
numbers of technical personnel to support our anticipated growth.
To date, we have relied primarily on our direct marketing and
sales force to drive new customer design wins and to sell our
products. Because we are looking to expand our customer base and
grow our sales to existing customers, we will need to hire
additional qualified sales personnel in the near term and beyond
if we are to achieve revenue growth. The competition for
qualified marketing and sales personnel in our industry, and
particularly in Silicon Valley, is very intense. If we are
unable to hire, train, deploy and manage qualified sales
personnel in a timely manner, our ability to grow our business
will be impaired. In addition, if we are unable to retain our
existing sales personnel, our ability to maintain or grow our
current level of revenues will be adversely affected.
Stock options generally comprise a significant portion of our
compensation packages for all employees. The FASB requirement to
expense the fair value of stock options awarded to employees
beginning in the first quarter of our fiscal 2006 has increased
our operating expenses and may cause us to reevaluate our
compensation structure for our employees. Our inability to
attract, retain and motivate additional key employees could have
an adverse effect on our business, financial condition and
results of operations.
We
have a limited operating history, and we may have difficulty
accurately predicting our future revenues for the purpose of
appropriately budgeting and adjusting our
expenses.
We were established in 2000. We have not been profitable in any
fiscal period until the quarter ended September 30, 2007.
We experienced net income of $2.0 million and
$2.2 million for the three months and twelve months ended
December 31, 2007. Since we have only two quarters of
operating profitability, we do not have an extended history from
which to predict and manage profitability. Our limited operating
experience, a dynamic and rapidly evolving market in which we
sell our products, our dependence on a limited number of
customers, as well as numerous other factors beyond our control,
impede our ability to forecast quarterly and annual revenues
accurately. As a result, we could experience budgeting and cash
flow management problems, unexpected fluctuations in our results
of operations and other difficulties, any of which could make it
difficult for us to gain and maintain profitability and could
increase the volatility of the market price of our common stock.
Some
of our operations and a significant portion of our customers and
contract manufacturers are located outside of the United States,
which subjects us to additional risks, including increased
complexity and costs of managing international operations and
geopolitical instability.
We have sales offices and research and development facilities
and we conduct, and expect to continue to conduct, a significant
amount of our business with companies that are located outside
the United States, particularly in Asia and Europe. Even
customers of ours that are based in the United States often use
contract manufacturers based in Asia to manufacture their
systems, and it is the contract manufacturers that purchase
products directly from us. As a result of our international
focus, we face numerous challenges, including:
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increased complexity and costs of managing international
operations;
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longer and more difficult collection of receivables;
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difficulties in enforcing contracts generally;
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geopolitical and economic instability and military conflicts;
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limited protection of our intellectual property and other assets;
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compliance with local laws and regulations and unanticipated
changes in local laws and regulations, including tax laws and
regulations;
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trade and foreign exchange restrictions and higher tariffs;
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travel restrictions;
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timing and availability of import and export licenses and other
governmental approvals, permits and licenses, including export
classification requirements;
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foreign currency exchange fluctuations relating to our
international operating activities;
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transportation delays and limited local infrastructure and
disruptions, such as large scale outages or interruptions of
service from utilities or telecommunications providers;
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difficulties in staffing international operations;
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heightened risk of terrorism;
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local business and cultural factors that differ from our normal
standards and practices;
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differing employment practices and labor issues;
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regional health issues (e.g., SARS) and natural
disasters; and
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work stoppages.
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We
outsource our wafer fabrication, assembly, testing, warehousing
and shipping operations to third parties, and rely on these
parties to produce and deliver our products according to
requested demands in specification, quantity, cost and
time.
We rely on third parties for substantially all of our
manufacturing operations, including wafer fabrication, assembly,
testing, warehousing and shipping. We depend on these parties to
supply us with material of a requested quantity in a timely
manner that meets our standards for yield, cost and
manufacturing quality. We do not have any long-term supply
agreements with our manufacturing suppliers. Any problems with
our manufacturing supply chain could adversely impact our
ability to ship our products to our customers on time and in the
quantity required, which in turn could cause an unanticipated
decline in our sales and possibly damage our customer
relationships.
The fabrication of integrated circuits is a complex and
technically demanding process. Our foundries could, from time to
time, experience manufacturing defects and reduced manufacturing
yields. Changes in manufacturing processes or the inadvertent
use of defective or contaminated materials by our foundries
could result in lower than anticipated manufacturing yields or
unacceptable performance. Many of these problems are difficult
to detect at an early stage of the manufacturing process and may
be time consuming and expensive to correct. Poor yields from our
foundries, or defects, integration issues or other performance
problems in our products could cause us significant customer
relations and business reputation problems, harm our financial
results and result in financial or other damages to our
customers. Our customers could also seek damages from us for
their losses. A product liability claim brought against us, even
if unsuccessful, would likely be time consuming and costly to
defend.
Our products are manufactured at a limited number of locations.
If we experience manufacturing problems at a particular
location, we would be required to transfer manufacturing to a
backup location or supplier. Converting or transferring
manufacturing from a primary location or supplier to a backup
fabrication facility could be expensive and could take one to
two quarters. During such a transition, we would be required to
meet customer demand from our then-existing inventory, as well
as any partially finished goods that can be modified to the
required product specifications. As a result, we may not be able
to meet customer needs during such a transition, which could
delay shipments, cause a production delay or stoppage for our
customers, result in a decline in our sales and damage our
customer relationships. In addition, we have no long-term supply
contracts with the foundries that we work with. Availability of
foundry capacity has in the recent past been reduced due to
strong demand. The ability of each foundry to provide us with
semiconductor devices is limited by its available capacity and
existing obligations. Foundry capacity may not be available when
we need it or at reasonable prices.
In addition, a significant portion of our sales is to customers
that practice
just-in-time
order management from their suppliers, which gives us a very
limited amount of time in which to process and complete these
orders. As a result, delays in our production or shipping by the
parties to whom we outsource these functions could reduce our
sales, damage our customer relationships and damage our
reputation in the marketplace, any of which could harm our
business, results of operations and financial condition.
16
Any
increase in the manufacturing cost of our products could reduce
our gross margins and operating profit.
The semiconductor business exhibits ongoing competitive pricing
pressure from customers and competitors. Accordingly, any
increase in the cost of our products, whether by adverse
purchase price variances or adverse manufacturing cost
variances, will reduce our gross margins and operating profit.
We do not have any long-term supply agreements with our
manufacturing suppliers and we typically negotiate pricing on a
purchase order by purchase order basis. Consequently, we may not
be able to obtain price reductions or anticipate or prevent
future price increases from our suppliers.
Some of our competitors may be better financed than we are, may
have long-term agreements with our main foundries and may induce
our foundries to reallocate capacity to those customers. This
reallocation could impair our ability to secure the supply of
components that we need. Although we use several independent
foundries to manufacture substantially all of our semiconductor
products, most of our components are not manufactured at more
than one foundry at any given time, and our products typically
are designed to be manufactured in a specific process at only
one of these foundries. Accordingly, if one of our foundries is
unable to provide us with components as needed, we could
experience significant delays in securing sufficient supplies of
those components. We cannot assure you that any of our existing
or new foundries will be able to produce integrated circuits
with acceptable manufacturing yields, or that our foundries will
be able to deliver enough semiconductor devices to us on a
timely basis, or at reasonable prices. These and other related
factors could impair our ability to meet our customers
needs and have a material and adverse effect on our operating
results.
In order to secure sufficient foundry capacity when demand is
high and mitigate the risks described in the foregoing
paragraph, we may enter into various arrangements with suppliers
that could be costly and harm our operating results, such as
nonrefundable deposits with or loans to foundries in exchange
for capacity commitments and contracts that commit us to
purchase specified quantities of integrated circuits over
extended periods. We may not be able to make any such
arrangement in a timely fashion or at all, and any arrangements
may be costly, reduce our financial flexibility, and not be on
terms favorable to us. Moreover, if we are able to secure
foundry capacity, we may be obligated to use all of that
capacity or incur penalties. These penalties may be expensive
and could harm our financial results.
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud. Any
inability to provide reliable financial reports or prevent fraud
could harm our business. The Sarbanes-Oxley Act of 2002 requires
management and our auditors to evaluate and assess the
effectiveness of our internal control over financial reporting.
We will be required to adhere to these requirements by the end
of calendar year 2008. These Sarbanes-Oxley Act requirements may
be modified, supplemented or amended from time to time.
Implementing these changes may take a significant amount of time
and may require specific compliance training of our personnel.
In the future, we may discover areas of our internal controls
that need improvement. If our auditors or we discover a material
weakness, the disclosure of that fact, even if quickly remedied,
could reduce the markets confidence in our financial
statements and harm our stock price. We may not be able to
effectively and timely implement necessary control changes and
employee training to ensure continued compliance with the
Sarbanes-Oxley Act and other regulatory and reporting
requirements. Our rapid growth in recent periods, and our
possible future expansion through acquisitions, present
challenges to maintain the internal control and disclosure
control standards applicable to public companies. If we fail to
maintain effective internal controls, we could be subject to
regulatory scrutiny and sanctions and investors could lose
confidence in the accuracy and completeness of our financial
reports. We cannot assure you that we will be able to fully
comply with the requirements of the Sarbanes-Oxley Act or that
management or our auditors will conclude that our internal
controls are effective in future periods.
We
rely on third-party technologies for the development of our
products and our inability to use such technologies in the
future would harm our ability to remain
competitive.
We rely on third parties for technologies that are integrated
into our products, such as wafer fabrication and assembly and
test technologies used by our contract manufacturers, as well as
licensed MIPS architecture
17
technologies. If we are unable to continue to use or license
these technologies on reasonable terms, or if these technologies
fail to operate properly, we may not be able to secure
alternatives in a timely manner and our ability to remain
competitive would be harmed. In addition, if we are unable to
successfully license technology from third parties to develop
future products, we may not be able to develop such products in
a timely manner or at all.
Our
failure to protect our intellectual property rights adequately
could impair our ability to compete effectively or to defend
ourselves from litigation, which could harm our business,
financial condition and results of operations.
We rely primarily on patent, copyright, trademark and trade
secret laws, as well as confidentiality and nondisclosure
agreements and other methods, to protect our proprietary
technologies and know-how. We have been issued 13 patents in the
United States and two patents in foreign countries and have
additional 24 patent applications pending in the United States
and 21 patent applications pending in foreign countries. Even if
the pending patent applications are granted, the rights granted
to us may not be meaningful or provide us with any commercial
advantage. For example, these patents could be opposed,
contested, circumvented or designed around by our competitors or
be declared invalid or unenforceable in judicial or
administrative proceedings. The failure of our patents to
adequately protect our technology might make it easier for our
competitors to offer similar products or technologies. Our
foreign patent protection is generally not as comprehensive as
our United States. patent protection and may not protect our
intellectual property in some countries where our products are
sold or may be sold in the future. Many United States-based
companies have encountered substantial intellectual property
infringement in foreign countries, including countries where we
sell products. Even if foreign patents are granted, effective
enforcement in foreign countries may not be available.
Monitoring unauthorized use of our intellectual property is
difficult and costly. Although we are not aware of any
unauthorized use of our intellectual property in the past, it is
possible that unauthorized use of our intellectual property may
have occurred or may occur without our knowledge. We cannot
assure you that the steps we have taken will prevent
unauthorized use of our intellectual property.
Our failure to effectively protect our intellectual property
could reduce the value of our technology in licensing
arrangements or in cross-licensing negotiations, and could harm
our business, results of operations and financial condition. We
may in the future need to initiate infringement claims or
litigation. Litigation, whether we are a plaintiff or a
defendant, can be expensive, time consuming and may divert the
efforts of our technical staff and managerial personnel, which
could harm our business, whether or not such litigation results
in a determination favorable to us.
Some of the software used with our products, as well as that of
some of our customers, may be derived from so called open
source software that is generally made available to the
public by its authors
and/or other
third parties. Such open source software is often made available
to us under licenses, such as the GNU General Public License,
which impose certain obligations on us in the event we were to
make available derivative works of the open source software.
These obligations may require us to make source code for the
derivative works available to the public,
and/or
license such derivative works under a particular type of
license, rather than the forms of license customarily used to
protect our intellectual property. In addition, there is little
or no legal precedent for interpreting the terms of certain of
these open source licenses, including the determination of which
works are subject to the terms of such licenses. While we
believe we have complied with our obligations under the various
applicable licenses for open source software, in the event the
copyright holder of any open source software were to
successfully establish in court that we had not complied with
the terms of a license for a particular work, we could be
required to release the source code of that work to the public
and/or stop
distribution of that work.
Assertions
by third parties of infringement by us of their intellectual
property rights could result in significant costs and cause our
operating results to suffer.
The semiconductor industry is characterized by vigorous
protection and pursuit of intellectual property rights and
positions, which has resulted in protracted and expensive
litigation for many companies. We expect that in the future we
may receive, particularly as a public company, communications
from various industry participants alleging our infringement of
their patents, trade secrets or other intellectual property
rights. Any lawsuits resulting
18
from such allegations could subject us to significant liability
for damages and invalidate our proprietary rights. Any potential
intellectual property litigation also could force us to do one
or more of the following:
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stop selling products or using technology that contain the
allegedly infringing intellectual property;
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lose the opportunity to license our technology to others or to
collect royalty payments based upon successful protection and
assertion of our intellectual property against others; incur
significant legal expenses;
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pay substantial damages to the party whose intellectual property
rights we may be found to be infringing;
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redesign those products that contain the allegedly infringing
intellectual property; or
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attempt to obtain a license to the relevant intellectual
property from third parties, which may not be available on
reasonable terms or at all.
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Any significant impairment of our intellectual property rights
from any litigation we face could harm our business and our
ability to compete.
Our customers could also become the target of litigation
relating to the patent and other intellectual property rights of
others. This could trigger technical support and indemnification
obligations in some of our licenses or customer agreements.
These obligations could result in substantial expenses,
including the payment by us of costs and damages relating to
claims of intellectual property infringement. In addition to the
time and expense required for us to provide support or
indemnification to our customers, any such litigation could
disrupt the businesses of our customers, which in turn could
hurt our relationships with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for
indemnification will not be made or that if made, such claims
would not have a material adverse effect on our business,
operating results or financial conditions.
Our
third-party contractors are concentrated primarily in Taiwan, an
area subject to earthquake and other risks. Any disruption to
the operations of these contractors could cause significant
delays in the production or shipment of our
products.
Substantially all of our products are manufactured by
third-party contractors located in Taiwan. The risk of an
earthquake in Taiwan and elsewhere in the Pacific Rim region is
significant due to the proximity of major earthquake fault lines
to the facilities of our foundries and assembly and test
subcontractors. For example, several major earthquakes have
occurred in Taiwan since our incorporation in 2000. Although our
third-party contractors did not suffer any significant damage as
a result of these most recent earthquakes, the occurrence of
additional earthquakes or other natural disasters could result
in the disruption of our foundry or assembly and test capacity.
Any disruption resulting from such events could cause
significant delays in the production or shipment of our products
until we are able to shift our manufacturing, assembling or
testing from the affected contractor to another third-party
vendor. We may not be able to obtain alternate capacity on
favorable terms, if at all.
The
semiconductor and communications industries have historically
experienced significant fluctuations with prolonged downturns,
which could impact our operating results, financial condition
and cash flows.
The semiconductor industry has historically exhibited cyclical
behavior, which at various times has included significant
downturns in customer demand. Though we have not yet experienced
any of these industry downturns, we may in the future. Because a
significant portion of our expenses is fixed in the near term or
is incurred in advance of anticipated sales, we may not be able
to decrease our expenses rapidly enough to offset any
unanticipated shortfall in revenues. If this situation were to
occur, it could adversely affect our operating results, cash
flow and financial condition. Furthermore, the semiconductor
industry has periodically experienced periods of increased
demand and production constraints. If this happens in the
future, we may not be able to produce sufficient quantities of
our products to meet the increased demand. We may also have
difficulty in obtaining sufficient wafer, assembly and test
resources from our subcontract manufacturers. Any factor
adversely affecting the semiconductor industry in general, or
the particular segments of the industry that our products
target, may adversely affect our ability to generate revenue and
could negatively impact our operating results.
The communications industry has, in the past, experienced
pronounced downturns, and these cycles may continue in the
future. To respond to a downturn, many networking equipment
providers may slow their research
19
and development activities, cancel or delay new product
development, reduce their inventories and take a cautious
approach to acquiring our products, which would have a
significant negative impact on our business. If this situation
were to occur, it could adversely affect our operating results,
cash flow and financial condition. In the future, any of these
trends may also cause our operating results to fluctuate
significantly from year to year, which may increase the
volatility of the price of our stock.
We may
experience difficulties in transitioning to new wafer
fabrication process technologies or in achieving higher levels
of design integration, which may result in reduced manufacturing
yields, delays in product deliveries and increased
expenses.
In order to remain competitive, we expect to continue to
transition our semiconductor products to increasingly smaller
line width geometries. This transition requires us to modify our
designs to work with the manufacturing processes of our
foundries. We periodically evaluate the benefits, on a
product-by-product
basis, of migrating to new process technologies to reduce cost
and improve performance. We may face difficulties, delays and
expenses as we continue to transition our products to new
processes. We are dependent on our relationships with our
foundry contractors to transition to new processes successfully.
We cannot assure you that the foundries that we use will be able
to effectively manage the transition or that we will be able to
maintain our existing foundry relationships or develop new ones.
If any of our foundry contractors or we experience significant
delays in this transition or fail to efficiently implement this
transition, we could experience reduced manufacturing yields,
delays in product deliveries and increased expenses, all of
which could harm our relationships with our customers and our
results of operations. As new processes become more prevalent,
we expect to continue to integrate greater levels of
functionality, as well as customer and third-party intellectual
property, into our products. However, we may not be able to
achieve higher levels of design integration or deliver new
integrated products on a timely basis.
Any
acquisitions we make could disrupt our business and harm our
financial condition.
In the future, we may choose to acquire companies that are
complementary to our business, including for the purpose of
expanding our new product design capacity, introducing new
design, market or application skills or enhancing and expanding
our existing product lines. In connection with any such future
acquisitions, we may need to use a significant portion of our
available cash, issue additional equity securities that would
dilute current stockholders percentage ownership and incur
substantial debt or contingent liabilities. Such actions could
adversely impact our operating results and the market price of
our common stock. In addition, difficulties in assimilating any
acquired workforce, merging operations or avoiding unplanned
attrition could disrupt or harm our business. Furthermore, the
purchase price of any acquired businesses may exceed the current
fair values of the net tangible assets of the acquired
businesses. As a result, we would be required to record material
amounts of goodwill, and acquired in-process research and
development charges and other intangible assets, which could
result in significant impairment and acquired in-process
research and development charges and amortization expense in
future periods. These charges, in addition to the results of
operations of such acquired businesses, could have a material
adverse effect on our business, financial condition and results
of operations. We cannot forecast the number, timing or size of
future acquisitions, or the effect that any such acquisitions
might have on our operating or financial results.
We may
need to raise additional capital, which might not be available
or which, if available, may be on terms that are not favorable
to use.
We believe our existing cash balances and cash expected to be
generated from our operations will be sufficient to meet our
working capital, capital expenditures and other needs for at
least the next twelve months. In the future, we may need to
raise additional funds, and we cannot be certain that we will be
able to obtain additional financing on favorable terms, if at
all. If we issue equity securities to raise additional funds,
the ownership percentage of our stockholders would be reduced,
and the new equity securities may have rights, preferences or
privileges senior to those of existing holders of our common
stock. If we borrow money, we may incur significant interest
charges, which could harm our profitability. Holders of debt
would also have rights, preferences or privileges senior to
those of existing holders of our common stock. If we cannot
raise needed funds on acceptable terms, we may not be able to
develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or
unanticipated requirements, which could harm our business,
operating results and financial condition.
20
Our
future effective tax rates could be affected by the allocation
of our income among different geographic regions, which could
affect our future operating results, financial condition and
cash flows.
We are in the process of expanding our international operations
and staff to better support our expansion into international
markets. This expansion includes the implementation of an
international structure that includes, among other things, a
research and development cost-sharing arrangement, certain
licenses and other contractual arrangements between us and our
wholly-owned domestic and foreign subsidiaries. As a result of
these changes, we anticipate that our consolidated pre-tax
income will be subject to foreign tax at relatively lower tax
rates when compared to the United States federal statutory tax
rate and, as a consequence, our effective income tax rate is
expected to be lower than the United States federal statutory
rate. Our future effective income tax rates could be adversely
affected if tax authorities challenge our international tax
structure or if the relative mix of United States and
international income changes for any reason. Accordingly, there
can be no assurance that our income tax rate will be less than
the United States federal statutory rate.
Risks
Related to our Common Stock
The
market price of our common stock may be volatile, which could
cause the value of your investment to decline.
The trading prices of the securities of technology companies
have been highly volatile. Further, our common stock has a
limited trading history. Since our initial public offering in
May 2007 through December 31, 2007, our stock price has
fluctuated from a low of $13.50 to a high of $35.60. We cannot
predict the extent to which the trading market will continue to
develop or how liquid the market may become. The trading price
of our common stock is therefore likely to be highly volatile
and could be subject to wide fluctuations in price in response
to various factors, some of which are beyond our control. These
factors include:
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quarterly variations in our results of operations or those of
our competitors;
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general economic conditions and slow or negative growth of
related markets;
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announcements by us or our competitors of design wins,
acquisitions, new products, significant contracts, commercial
relationships or capital commitments;
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our ability to develop and market new and enhanced products on a
timely basis;
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commencement of, or our involvement in, litigation;
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disruption to our operations;
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the emergence of new sales channels in which we are unable to
compete effectively;
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any major change in our board of directors or management;
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changes in financial estimates including our ability to meet our
future revenue and operating profit or loss projections;
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changes in governmental regulations; and
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changes in earnings estimates or recommendations by securities
analysts.
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Furthermore, the stock market in general, and the market for
semiconductor and other technology companies in particular, have
experienced price and volume fluctuations that have often been
unrelated or disproportionate to the operating performance of
those companies. These broad market and industry factors may
seriously harm the market price of our common stock, regardless
of our actual operating performance. These trading price
fluctuations may also make it more difficult for us to use our
common stock as a means to make acquisitions or to use options
to purchase our common stock to attract and retain employees. In
addition, in the past, following periods of volatility in the
overall market and the market price of a companys
securities, securities class action litigation has often been
instituted against these companies. This litigation, if
instituted against us, could result in substantial costs and a
diversion of our managements attention and resources.
21
A
limited number of stockholders may have the ability to influence
the outcome of director elections and other matters requiring
stockholder approval.
Our directors, executive officers and principal stockholders and
their affiliates beneficially own approximately 48% of our
outstanding common stock as of March 7, 2008. These
stockholders, if they acted together, could exert substantial
influence over matters requiring approval by our stockholders,
including electing directors, adopting new compensation plans
and approving mergers, acquisitions or other business
combination transactions. This concentration of ownership may
discourage, delay or prevent a change of control of our company,
which could deprive our stockholders of an opportunity to
receive a premium for their stock as part of a sale of our
company and might reduce our stock price. These actions may be
taken even if they are opposed by our other stockholders.
Delaware
law and our amended and restated certificate of incorporation
and bylaws contain provisions that could delay or discourage
takeover attempts that stockholders may consider
favorable.
Provisions in our amended and restated certificate of
incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management.
These provisions include the following:
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the division of our board of directors into three classes;
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the right of the board of directors to elect a director to fill
a vacancy created by the expansion of the board of directors or
due to the resignation or departure of an existing board member;
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the prohibition of cumulative voting in the election of
directors, which would otherwise allow less than a majority of
stockholders to elect director candidates;
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the requirement for the advance notice of nominations for
election to the board of directors or for proposing matters that
can be acted upon at a stockholders meeting;
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the ability of our board of directors to alter our bylaws
without obtaining stockholder approval;
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the ability of the board of directors to issue, without
stockholder approval, up to 10,000,000 shares of preferred
stock with terms set by the board of directors, which rights
could be senior to those of our common stock;
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the elimination of the rights of stockholders to call a special
meeting of stockholders and to take action by written consent in
lieu of a meeting;
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the required approval of at least
662/3%
of the shares entitled to vote at an election of directors to
adopt, amend or repeal our bylaws or repeal the provisions of
our amended and restated certificate of incorporation regarding
the election and removal of directors and the inability of
stockholders to take action by written consent in lieu of a
meeting; and
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the required approval of at least a majority of the shares
entitled to vote at an election of directors to remove directors
without cause.
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In addition, because we are incorporated in Delaware, we are
governed by the provisions of Section 203 of the Delaware
General Corporation Law. These provisions may prohibit large
stockholders, particularly those owning 15% or more of our
outstanding voting stock, from merging or combining with us.
These provisions in our amended and restated certificate of
incorporation and bylaws and under Delaware law could discourage
potential takeover attempts, could reduce the price that
investors are willing to pay for shares of our common stock in
the future and could potentially result in the market price
being lower than they would without these provisions.
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Item 1B.
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Unresolved
Staff Comments
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Not applicable.
Our principal executive offices are located in a leased facility
in Mountain View, California, consisting of approximately
32,500 square feet of office space under lease that expires
at the end of August 2011. This facility
22
accommodates our principal software engineering, sales,
marketing, operations and finance and administrative activities.
We also occupy space in Marlboro, Massachusetts, consisting of
up to 23,532 square feet under a sublease that expires at
the end of January 2009, which accommodates our product design
team. We also lease offices in Hyderabad and Chennai, India. We
do not own any real property. We believe that our leased
facilities are adequate to meet our current needs and that
additional facilities are available for lease to meet future
needs.
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Item 3.
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Legal
Proceedings
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From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. As of the date
of this Annual Report on
Form 10-K,
we are not currently a party to any legal proceedings the
outcome of which, if determined adversely to us, would
individually or in the aggregate have a material adverse effect
on our business, operating results, financial condition or cash
flows.
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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No matters were submitted to a vote of our security holders
during the fourth quarter ended December 31, 2007.
Part II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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Market
Information for Common Stock
Our common stock has been quoted on The NASDAQ Global Market
under the symbol CAVM since our initial public
offering on May 2, 2007. Prior to that time, there was no
public market for our common stock. As of January 31, 2008,
there were approximately 207 holders of record of our common
stock.
The following table sets forth for the indicated periods the
high and low sales prices of our common stock as reported by The
NASDAQ Global Market.
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High
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Low
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Second Quarter 2007 (from May 2, 2007)
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$
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26.27
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$
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16.44
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Third Quarter 2007
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$
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35.60
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$
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21.53
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Fourth Quarter 2007
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$
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34.75
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$
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21.63
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The closing sale price for our common stock as reported by The
NASDAQ Global Market was $15.33 per share on March 7, 2008.
Dividend
Policy
We have never paid any cash dividends on our common stock. Our
board of directors currently intends to retain any future
earnings to support operations and to finance the growth and
development of our business and does not intend to pay cash
dividends on our common stock for the foreseeable future. Any
future determination related to our dividend policy will be made
at the discretion of our board.
23
Stock
Performance Graph(1)
The graph set forth below shows a comparison of the cumulative
total stockholder return on our common stock between May 2,
2007 (the date of our initial public offering) and
December 31, 2007, with the cumulative total return of
(i) the NASDAQ Computer Index and (ii) the NASDAQ
Composite Index, over the same period. This graph assumes the
investment of $100,000 on May 2, 2007 in our common stock,
the NASDAQ Computer Index and the NASDAQ Composite Index, and
assumes the reinvestment of dividends, if any. The graph assumes
the initial value of our common stock on May 2, 2007 was
the closing sales price of $16.45 per share. The stockholder
return shown in the graph below is not necessarily indicative
of, nor is it intended to forecast, the potential future
performance of our common stock, and we do not make or endorse
any predictions as to future stockholder returns. Information
used in the graph was obtained from Yahoo, Inc., a source
believed to be reliable, but we are not responsible for any
errors or omissions in such information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/2/2007
|
|
|
6/30/2007
|
|
|
9/30/2007
|
|
|
12/31/2007
|
Cavium Networks
|
|
|
|
100.0
|
|
|
|
|
137.5
|
|
|
|
|
197.6
|
|
|
|
|
139.9
|
|
Nasdaq Composite Index
|
|
|
|
100.0
|
|
|
|
|
101.8
|
|
|
|
|
105.6
|
|
|
|
|
103.7
|
|
Nasdaq Computer Index
|
|
|
|
100.0
|
|
|
|
|
104.1
|
|
|
|
|
109.6
|
|
|
|
|
115.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
This Section is not soliciting material, is not
deemed filed with the SEC and is not to be
incorporated by reference in any filing of the Company under the
Securities Act of 1933, as amended, or the Securities Exchange
Act of 1934 Act, as amended, whether made before or after
the date hereof and irrespective of any general incorporation
language in any such filing. |
Recent
Sales of Unregistered Securities
(a) Sales of Unregistered Securities
During the year ended December 31, 2007, we granted stock
options to purchase an aggregate of 361,375 shares of
common stock to our employees and directors under our 2001 Stock
Plan at an exercise price of $8.52 per share. These issuances
were undertaken in reliance upon the exemption from registration
requirements of Rule 701 or Section 4(2) of the
Securities Act.
On July 12, 2007, we issued an aggregate of
28,239 shares of our common stock to Gold Hill Venture
Lending pursuant to its net exercise of warrants to purchase
37,813 shares of our common stock at an exercise price of
$6.58 per share. No cash was paid to us for such issuance of our
common stock.
24
On October 4, 2007, we issued an aggregate of
58,517 shares of our common stock to Silicon Valley Bank
pursuant to its net exercise of warrants to purchase
17,187 shares of our common stock at an exercise price of
$6.58 per share and 47,619 shares at an exercise price of
$2.10 per share. No cash was paid to us for such issuance of our
common stock.
The above issuances were deemed to be exempt from registration
under Rule 506 Regulation D of the Securities Act,
each as a transaction by an issuer not involving any public
offering to accredited investors.
(b) Use of Proceeds from Public Offering of Common
Stock
Our initial public offering of common stock was effected through
a Registration Statement on
Form S-1
(File
No. 333-140660),
that was declared effective by the Securities and Exchange
Commission on May 1, 2007. We registered
7,762,500 shares of our common stock with a proposed
maximum aggregate offering price of $104.8 million, all of
which we sold. The offering was completed after the sale of all
7,762,500 shares. Morgan Stanley & Co.
Incorporated and Lehman Brothers Inc. were the joint
book-running managing underwriters of our initial public
offering and Thomas Weisel Partners LLC, Needham &
Company, LLC and JMP Securities LLC acted as co-managers. Of
this amount, $7.3 million was paid in underwriting
discounts and commissions, and an additional $2.8 million
of expenses were incurred. The net offering proceeds after these
expenses were deducted was $94.7 million.
Management has broad discretion over the uses of the proceeds of
the initial public offering. In May 2007 we used
$3.6 million of the net proceeds to repay the outstanding
balances under the term loan with Silicon Valley Bank. We expect
to use the remaining net proceeds for working capital, capital
expenditures and other general corporate purposes. Pending the
uses described above, we intend to invest the net proceeds in a
variety of short-term, interest-bearing, investment grade
securities. None of the expenses were paid, directly or
indirectly, to directors, officers or persons owning 10% or more
of our common stock, or to our affiliates other than payments in
the ordinary course of business to officers for salaries and to
non-employee directors as compensation for board or board
committee service.
(c) Purchases of Equity Securities by the Issuer and
Affiliated Purchasers
None.
25
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data should be
read in conjunction with our audited consolidated financial
statements and related notes thereto and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations section and other
financial information included elsewhere in this Annual Report
on
Form 10-K.
The consolidated statements of operations data for each of the
years ended December 31, 2007, 2006 and 2005, and the
summary consolidated balance sheet data as of December 31,
2007 and 2006, are derived from our audited consolidated
financial statements included elsewhere in this Annual Report on
Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 2004 and 2003, and the summary
consolidated balance sheet data as of December 31, 2005,
2004 and 2003, are derived from audited consolidated financial
statements which are not included in this Annual Report on
Form 10-K.
Our historical results are not necessarily indicative of the
results to be expected in any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except share and per share data)
|
|
|
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
|
$
|
7,411
|
|
|
$
|
2,433
|
|
Cost of revenue(1)(2)
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
7,865
|
|
|
|
3,080
|
|
|
|
773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34,305
|
|
|
|
21,113
|
|
|
|
11,512
|
|
|
|
4,331
|
|
|
|
1,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development(2)
|
|
|
19,548
|
|
|
|
18,651
|
|
|
|
16,005
|
|
|
|
12,010
|
|
|
|
9,970
|
|
Sales, general and administrative(2)
|
|
|
14,688
|
|
|
|
10,058
|
|
|
|
6,840
|
|
|
|
3,752
|
|
|
|
2,745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,236
|
|
|
|
28,709
|
|
|
|
22,845
|
|
|
|
15,762
|
|
|
|
12,715
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
69
|
|
|
|
(7,596
|
)
|
|
|
(11,333
|
)
|
|
|
(11,431
|
)
|
|
|
(11,055
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(622
|
)
|
|
|
(707
|
)
|
|
|
(183
|
)
|
|
|
(388
|
)
|
|
|
(47
|
)
|
Warrant revaluation expense
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
(411
|
)
|
|
|
|
|
|
|
|
|
Interest income and other
|
|
|
3,458
|
|
|
|
345
|
|
|
|
355
|
|
|
|
86
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,263
|
|
|
|
(829
|
)
|
|
|
(239
|
)
|
|
|
(302
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense and cumulative effect of
change in accounting principle
|
|
|
2,332
|
|
|
|
(8,425
|
)
|
|
|
(11,572
|
)
|
|
|
(11,733
|
)
|
|
|
(11,005
|
)
|
Income tax expense
|
|
|
(142
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative effect of change in accounting
principle
|
|
|
2,190
|
|
|
|
(8,985
|
)
|
|
|
(11,572
|
)
|
|
|
(11,733
|
)
|
|
|
(11,005
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
|
$
|
(11,733
|
)
|
|
$
|
(11,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(2.14
|
)
|
Shares used in computing basic net income (loss) per common share
|
|
|
29,005,743
|
|
|
|
8,065,995
|
|
|
|
7,318,607
|
|
|
|
6,459,050
|
|
|
|
5,130,794
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(2.14
|
)
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
32,431,976
|
|
|
|
8,065,995
|
|
|
|
7,318,607
|
|
|
|
6,459,050
|
|
|
|
5,130,794
|
|
26
|
|
|
(1) |
|
Includes acquired intangible asset amortization of $860, $1,116,
$1,007, $254 and none, in the years ended December 31,
2007, 2006, 2005, 2004 and 2003, respectively. |
|
(2) |
|
Includes stock-based compensation expense as follows: |
|
(3) |
|
We applied the provisions of FAS 123(R) in 2006 and 2007. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007(3)
|
|
|
2006(3)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
43
|
|
|
$
|
9
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Research and development
|
|
|
805
|
|
|
|
396
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative
|
|
|
1,021
|
|
|
|
340
|
|
|
|
75
|
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
|
$
|
7,879
|
|
|
$
|
18,381
|
|
|
$
|
11,384
|
|
Working capital
|
|
|
105,048
|
|
|
|
11,689
|
|
|
|
6,160
|
|
|
|
17,718
|
|
|
|
11,198
|
|
Total assets
|
|
|
134,610
|
|
|
|
29,962
|
|
|
|
20,219
|
|
|
|
28,731
|
|
|
|
17,991
|
|
Preferred stock warrant liability
|
|
|
|
|
|
|
701
|
|
|
|
1,184
|
|
|
|
|
|
|
|
|
|
Capital lease and technology license obligations
|
|
|
8,530
|
|
|
|
3,580
|
|
|
|
3,087
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other non-current liabilities
|
|
|
|
|
|
|
39
|
|
|
|
74
|
|
|
|
|
|
|
|
|
|
Convertible preferred stock
|
|
|
|
|
|
|
72,437
|
|
|
|
61,820
|
|
|
|
62,339
|
|
|
|
41,494
|
|
Common stock and additional paid-in capital
|
|
|
175,580
|
|
|
|
3,740
|
|
|
|
1,261
|
|
|
|
641
|
|
|
|
477
|
|
Total stockholders equity (deficit)
|
|
$
|
116,850
|
|
|
$
|
(57,180
|
)
|
|
$
|
(50,674
|
)
|
|
$
|
(39,776
|
)
|
|
$
|
(28,530
|
)
|
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The information in this Annual Report on
Form 10-K
contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended
(Securities Act), and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange
Act), which are subject to the safe harbor
created by those sections. Such statements are based upon our
managements believes and assumptions and on information
currently available to our management. Any statements contained
herein that are not statements of historical facts may be deemed
to be forward-looking statements. For example, words such as
may, will, should,
could, would, estimates,
predicts, potential,
continue, strategy,
believes, anticipates,
plans, expects, intends and
variations of such words and similar expressions are intended to
identify forward-looking statements. These statements involve
known and unknown risks, uncertainties and other factors, which
may cause our actual results, performance, time frames or
achievements to be materially difference from any future
results, performance, time frames or achievements expressed or
implied by the forward-looking statements. These risks,
uncertainties and other factors in this Annual Report on
Form 10-K
are discussed in greater detail under the heading Risk
Factors. Given these risks, uncertainties and other
factors, you should not place undue reliance on these
forward-looking statements. These forward-looking statements
represent our estimates and assumptions only as of the date of
this filing. You should read this Annual Report on
Form 10-K
completely and with the understanding that our actual future
results may be materially different from what we expect. We
hereby qualify our forward-looking statements by these
cautionary statements. Except as required by law, we assume no
obligation to update these forward-looking statements publicly,
or to update the reasons actual results could differ materially
from those anticipated in these forward-looking statements, even
if new information becomes available in the future.
27
Overview
We are a provider of highly integrated semiconductor products
that enable intelligent processing for networking,
communications and security applications. We market and sell our
products to providers of networking equipment that sell their
products into the enterprise network, data center, broadband and
consumer, and access and service provider markets. Our products
are used in a broad array of networking equipment, including
routers, switches, content-aware switches, UTM and other
security appliances, application-aware gateways,
voice/video/data, or triple-play, gateways, WLAN and 3G access
and aggregation devices, storage networking equipment, servers
and intelligent network interface cards. We focus our resources
on the design, sales and marketing of our products, and
outsource the manufacturing of our products.
From our incorporation in 2000 through 2003, we were primarily
engaged in the design and development of our first processor
family, NITROX, which we began shipping commercially in 2003. In
2004, we introduced and commenced commercial shipments of NITROX
Soho. In 2006, we commenced our first commercial shipments of
our OCTEON family of multi-core MIPS64 processors. We introduced
a number of new products within all three of these product
families in 2006. In 2007 we introduced our new line of OCTEON
based Storage Services Processors designed to address the
specific needs in the storage market, as well as other new
products in the OCTEON and NITROX families. Since inception, we
have invested heavily in new product development and achieved
our first quarter of profitability during the quarter ended
September 30, 2007. Our revenue has grown from
$19.4 million in 2005 to $34.2 million in 2006 and
$54.2 million in 2007, driven primarily by demand in the
enterprise network and data center markets. We expect sales of
our products for use in the enterprise network and data center
markets to continue to represent a substantial portion of our
revenue in the foreseeable future. However, we expect sales into
those markets to decline as a percentage of overall sales as
sales in the broadband and consumer and the access and service
provider markets are expected to increase at a rate faster than
the expected increase in sales into the enterprise network and
data center markets.
We primarily sell our products to OEMs, either directly or
through their contract manufacturers. Contract manufacturers
purchase our products only when an OEM incorporates our product
into the OEMs product, not as commercial
off-the-shelf
products. Our customers products are complex and require
significant time to define, design and ramp to volume
production. Accordingly, our sales cycle is long. This cycle
begins with our technical marketing, sales and field application
engineers engaging with our customers system designers and
management, which is typically a multi-month process. If we are
successful, a customer will decide to incorporate our product in
its product, which we refer to as a design win. Because the
sales cycles for our products are long, we incur expenses to
develop and sell our products, regardless of whether we achieve
the design win and well in advance of generating revenue, if
any, from those expenditures. We do not have long-term purchase
commitments from any of our customers, as sales of our products
are generally made under individual purchase orders. However,
once one of our products is incorporated into a customers
design, it is likely to remain designed in for the life cycle of
its product. We believe this to be the case because a redesign
would generally be time consuming and expensive. We have
experienced revenue growth due to an increase in the number of
our products, an expansion of our customer base, an increase in
the number of average design wins within any one customer and an
increase in the average revenue per design win.
Key
Business Metrics
Design Wins. We closely monitor design wins by
customer and end market on a periodic basis. We consider design
wins to be a key ingredient in our future success, although the
revenue generated by each design can vary significantly. Our
long-term sales expectations are based on internal forecasts
from specific customer design wins based upon the expected time
to market for end customer products deploying our products and
associated revenue potential.
Pricing and Margins. Pricing and margins
depend on the features of the products we provide to our
customers. In general, products with more complex configurations
and higher performance tend to be priced higher and have higher
gross margins. These configurations tend to be used in high
performance applications that are focused on the enterprise
network, data center, and access and service provider markets.
We tend to experience price
28
decreases over the life cycle of our products, which can vary by
market and application. In general, we experience less pricing
volatility with customers that sell to the enterprise and data
center markets.
Sales Volume. A typical design win can
generate a wide range of sales volumes for our products,
depending on the end market demand for our customers
products. This can depend on several factors, including the
reputation, market penetration, the size of the end market that
the product addresses, and the marketing and sales effectiveness
of our customer. In general, our customers with greater market
penetration and better branding tend to develop products that
generate larger volumes over the product life cycle. In
addition, some markets generate large volumes if the end market
product is adopted by the mass market.
Customer Product Life Cycle. We typically
commence commercial shipments from nine months to three years
following the design win. Once our product is in production,
revenue from a particular customer may continue for several
years. We estimate our customers product life cycles based
on the customer, type of product and end market. In general,
products that go into the enterprise network and data center
take longer to reach volume production but tend to have longer
lives. Products for other markets, such as broadband and
consumer, tend to ramp relatively quickly, but generally have
shorter life cycles. We estimate these life cycles based on our
managements experience with providers of networking
equipment and the semiconductor market as a whole.
Critical
Accounting Policies and Estimates
Our managements discussion and analysis of our financial
condition and results of operations are based on our financing
statements, which have been prepared in accordance with United
States generally accepted accounting principles, or GAAP. These
accounting principles require us to make certain estimates and
judgments that can affect the reported amounts of assets and
liabilities as of the dates of the consolidated financial
statements, the disclosure of contingencies as of the dates of
the consolidated financial statements, and the reported amounts
of revenue and expenses during the periods presented. Actual
results may differ from those estimates.
We believe the following to be our critical accounting policies
because they are important to the portrayal of our financial
condition and results of operations and they require critical
management judgments and estimates about matters that are
uncertain:
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revenue recognition;
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product warranty accrual;
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stock-based compensation;
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estimation of fair value of warrants to purchase convertible
preferred stock;
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inventory valuation;
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accounting for income taxes; and
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mask costs.
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If actual results or events differ materially from those
contemplated by us in making these estimates, our reported
financial condition and results of operations for future periods
could be materially affected. See Risk Factors for
certain matters that may affect our future financial condition
or results of operations.
Revenue
Recognition
We derive our revenue primarily from sales of semiconductor
products. We recognize revenue from product sales when
persuasive evidence of an arrangement exists, delivery has
occurred, the price is deemed fixed or determinable and free of
contingencies and significant uncertainties, and collection is
probable. Our price is considered fixed or determinable at the
execution of an agreement, based on specific products and
quantities to be delivered at specified prices, which is often
memorialized with a customer purchase order. Our agreements with
non-distributor customers do not include rights of return or
acceptance provisions. We assess the ability to collect from our
customers based on a number of factors, including credit
worthiness and any past transaction history of the
29
customers. If the customers are not deemed credit worthy, we
defer all revenue from the arrangement until payment is received
and all other revenue recognition criteria have been met.
Shipping charges billed to customers are included in product
revenue and the related shipping costs are included in cost of
product revenue. We generally recognize revenue at the time of
shipment to our customers. Our revenue consists primarily of
sales of our products to providers of networking equipment,
their contract manufacturers or to our distributors. Initial
sales of our products for a new design are usually made directly
to providers of networking equipment as they design and develop
their product. Once their design enters production, they often
outsource their manufacturing to contract manufacturers that
purchase our products directly from us or from our international
distributors.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if we
conclude we can reasonably estimate the credits for returns and
price adjustments issuable. We record an estimated allowance, at
the time of shipment, based on the historical patterns of
returns and pricing credits of sales recognized upon shipment.
The credits issued to distributors or other customers were not
material in the years ended December 31, 2007, 2006 and
2005.
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if it cannot reasonably estimate the level of returns
and credits issuable. During the quarter ended June 30,
2007, we signed a distribution agreement with Avnet, Inc to
distribute our products primarily in the United States. Given
the terms of the distribution agreement, for sales to Avnet
revenue and costs will be deferred until products are sold by
Avnet to their end customers. For the year ended
December 31, 2007, less than 1% of our net revenues were
from products sold by Avnet. Revenue recognition depends on
notification from the distributor that product has been sold to
Avnets end customers. Avnet reports to us, on at least a
monthly basis, the product resale price, quantity and end
customer shipment information, as well as inventory on hand.
Reported distributor inventory on hand is reconciled monthly to
deferred revenue balances. Deferred income on shipments to Avnet
is included in deferred revenue and reflects the effects of any
distributor price adjustments and the amount of gross margin
expected to be realized when Avnet sells those products to their
customers. Accounts receivable from Avnet is recognized and
inventory is relieved when title to inventories transfers, which
typically takes place at the time of shipment, which is the
point in time at which we have a legal enforceable right to
collection under normal payment terms.
We also derive revenue in the form of license and maintenance
fees through licensing our software products. Revenue from such
arrangements totaled $1,128,000, and $740,000 and $181,000 for
the years ended December 31, 2007, 2006 and 2005,
respectively. The value of any support services is recognized as
services revenue on a straight-line basis over the term of the
related support period, which is typically one year.
We also enter into development agreements with some of our
customers. Development revenue is recognized under the
proportional performance method, with the associated costs
included in cost of sales. We estimate the proportional
performance of the development contracts based on an analysis of
progress toward completion. We periodically evaluate the actual
status of each project to ensure that the estimates to complete
each contract remain accurate. A provision for estimated losses
on contracts is made in the period in which the loss becomes
probable and can be reasonably estimated. To date, we have not
recorded any such losses. If the amount billed exceeds the
amount of revenue recognized, the excess amount is recorded as
deferred revenue. Revenue recognized in any period is dependent
on our progress toward completion of projects in progress. To
the extent we are unable to estimate the proportional
performance then the revenue is recognized on a completed
contract basis. Revenue from such arrangements totaled
$3,019,000 for 2007 and none for previous years.
Total deferred revenue was $1,666,000 and $628,000 as of
December 31, 2007 and 2006, respectively, which included
deferred revenue associated with license and maintenance fees,
development revenue and deferred income on shipments to Avnet.
30
Warranty
Accrual
Our products are subject to a one-year warranty period and we
provide for the estimated future costs of replacement upon
shipment of the product in the accompanying statements of
operations. Our warranty accrual is estimated based on
historical claims compared to historical revenue.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for employee stock
options using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, or APB 25, and FASB
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB No. 25, and had adopted the disclosure-only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, or SFAS 123, and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. In
accordance with APB 25, we recognized no stock-based
compensation expense for options granted with an exercise price
equal to or greater than the fair value of the underlying common
stock on the date of grant.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123(R) using the prospective
transition method, which requires us to apply the provisions of
SFAS 123(R) only to awards granted, modified, repurchased
or cancelled after the adoption date. Under this transition
method, our stock-based compensation expense recognized during
the year ended December 31, 2007 is based on the grant date
fair value of stock option awards. We recognize this expense on
a straight-line basis over the options vesting period. We
estimate the grant date fair value of stock option awards under
the provisions of SFAS 123(R) using the Black-Scholes
option valuation model, which requires, among other inputs, an
estimate of the fair value of the underlying common stock on the
date of grant.
The fair value of options granted were estimated at the date of
grant using the following assumptions:
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Year Ended
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December 31,
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2007
|
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Employee and Director Stock Options
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|
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Expected life in years
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4.0-6.0
|
Risk-free interest rate
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3.29%-4.72%
|
Volatility
|
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55%-56.07%
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Dividend yield
|
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Weighted average fair value of grants
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$9.62
|
We determined that it was not practical to calculate the
historical volatility of our share price since our securities
were not publicly traded prior to May 2007 and therefore there
is no readily determinable market value for our stock and we are
a high-growth technology company whose future operating results
are not comparable to prior operating results. Therefore, we
estimated our expected volatility based on reported market value
data for a group of publicly traded companies, which we selected
from market indices that we believed were relatively comparable
in regards to the markets they served, size, stage of life
cycle, risk, profitability and growth profiles. We used the
average expected volatility rates reported by the comparable
group to approximate the volatility over the expected term. The
expected term represents the period that stock-based awards are
expected to be outstanding, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior as influenced by
changes to the terms of our stock-based awards. Upon completing
our initial public offering, or IPO in May 2007, we have used
the simplified method of determining the expected term as
permitted by the provisions of Staff Accounting Bulletin
No. 107, Share-Based Payment and Staff Accounting
Bulletin No. 110, Year-End Help for Expensing
Employee Stock Options.
For the years ended December 31, 2007, 2006 and 2005, we
recorded non-cash stock-based compensation expense of
$1,869,000, $745,000, and $85,000, respectively. The total
stock-based compensation cost capitalized as part of inventory
as of December 31, 2007 and 2006 was $3,000 and $43,000,
respectively. In future periods, stock-based compensation
expense may increase as we issue additional equity-based awards
to continue to attract and
31
retain key employees. SFAS 123(R) also requires that we
recognize compensation expense only for the portion of stock
options that are expected to vest, based on our estimated
forfeiture rate. Our estimated forfeiture rate for the years
ended December 31, 2007 and 2006 was 5%. If the actual
number of future forfeitures differs from that estimated by
management, we may be required to record adjustments to
stock-based compensation expense in future periods.
We account for stock-based compensation arrangements with
non-employees in accordance with SFAS 123(R) and Emerging
Issues Task Force
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, using a fair value approach. The fair
value of the stock options granted to non-employees was
estimated using the Black-Scholes option valuation model. This
model utilizes the estimated fair value of our common stock, the
contractual term of the option, the expected volatility of the
price of our common stock, risk-free interest rates and the
expected dividend yield of our common stock. Stock-based
compensation expense related to non-employees was $114,000,
$70,000 and $62,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
Estimation
of Fair Value of Warrants to Purchase Convertible Preferred
Stock
On July 1, 2005, we adopted FASB Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5.
FSP 150-5
provides that the warrants we have issued to purchase shares of
our convertible preferred stock are subject to the requirements
in
FSP 150-5,
which requires us to classify these warrants as current
liabilities and to adjust the value of these warrants to their
fair value at the end of each reporting period. At the time of
adoption, we recorded a charge in the amount of $100,000 for the
cumulative effect of this change in accounting principle, to
reflect the estimated increase in fair value of these warrants
as of that date. We recorded $573,000, $467,000 and $411,000
warrant revaluation expense for the years ended
December 31, 2007, 2006 and 2005, respectively.
Upon our initial public offering in May 2007, all outstanding
warrants to purchase mandatorily redeemable convertible
preferred stock converted to warrants to purchase common stock.
As a result, the aggregate fair value of these warrants have
been reclassified from current liabilities to additional paid-in
capital.
Inventory
Valuation
We write down inventory based on aging and forecasted demand.
These factors are impacted by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction and require estimates that may include
uncertain elements. Actual demand may differ from forecasted
demand and such differences may have a material effect on
recorded inventory values. Inventory valuation reserves were
$731,000, $366,000 and $155,000 as of December 31, 2007,
2006 and 2005, respectively. Inventory reserves, once
established, are not reversed until the related inventory has
been sold or scrapped.
Accounting
for Income Taxes
We are a multinational corporation operating in multiple tax
jurisdictions. We must determine the allocation of income to
each of these and apply the appropriate tax rates for these
jurisdictions. As of December 31, 2007, we had
approximately $26.3 million and $44.6 million of net
operating loss carry forwards available to offset future taxable
income for United States federal and state purposes,
respectively. These federal and state net operating loss carry
forwards will expire commencing in 2022 and 2012, respectively.
We also have federal and state research and development tax
credit carryforwards of approximately $3.8 million and
$3.5 million, respectively. The federal and other state tax
credit carryforwards will expire commencing 2021 and 2018,
respectively, except for the California research tax credits
which carry forward indefinitely. We also have federal
alternative minimum tax credits of approximately
$0.6 million, which has no expiration date. As part of the
process of preparing our consolidated financial statements, we
are required to estimate our income taxes in each of the
jurisdictions in which we operate. We record this amount as a
provision or benefit for taxes in accordance with
SFAS No. 109, Accounting for Income Taxes. This
process involves estimating our actual current tax exposure,
including assessing the risks associated with tax audits, and
assessing temporary differences resulting from different
treatment of items for tax and accounting purposes. Profit from
non-United
States activities are subject to local country taxes but are not
subject to United States
32
tax until repatriated to the United States. It is our intention
to permanently reinvest most of these earnings outside the
United States.
As of December 31, 2007, we had gross deferred tax assets
of $13.1 million, which were primarily related to federal
and state net operating loss carryforwards and tax credit
carryforwards. We assess the likelihood that our deferred tax
assets will be recovered from future taxable income and, to the
extent that we cannot conclude that recovery is more likely than
not, we establish a valuation allowance. Due to the uncertainty
of our future profitability, we have fully reserved our deferred
tax assets at December 31, 2007. For the year ended
December 31, 2007, we reported $142,000 of income tax
provision. The provision is primarily due to federal alternative
minimum tax on profit in our United States operation, adjusted
by certain non-deductible items. If we determine in the future
that these deferred tax assets are more-likely-than-not to be
realized, a release of all or a portion of the related valuation
allowance would increase income in the period in which that
determination is made.
Undistributed earnings of our foreign subsidiary of
approximately $0.2 million and $0.1 million at
December 31, 2007 and 2006, respectively, are considered to
be indefinitely reinvested and, accordingly, no provisions for
federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, we would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
We adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes, or FIN 48, on January 1, 2007. As
a result of the implementation of FIN 48, we did not
recognize any adjustment to the liability for uncertain tax
positions and therefore did not record any adjustment to the
beginning balance of retained earnings on the consolidated
balance sheet. As of the date of adoption, we recorded a
$3.3 million reduction to deferred tax assets for
unrecognized tax benefits, all of which is currently offset by a
full valuation allowance and therefore did not record any
adjustment to the beginning balance of retained earnings on the
balance sheet.
Our practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31 2007, we had $9,600 in accrued interest
and/or
penalties.
Mask
Costs
We incur costs for the fabrication of masks used by our contract
manufacturers to manufacture wafers that incorporate our
products. We capitalize the costs of fabrication masks that are
reasonably expected to be used during production manufacturing.
Such amounts are included within property and equipment and
depreciated to cost of revenue over a period of 12 months.
If we do not reasonably expect to use the fabrication mask
during production manufacturing, the related mask costs are
expensed to research and development in the period in which the
costs are incurred. We capitalized $3,616,000, $694,000 and none
of mask costs during the years ended December 31, 2007,
2006, and 2005, respectively, and total amortized expenses were
$1,465,000, $0 and $0 for the years ended December 31,
2007, 2006, and 2005, respectively. We expensed non-production
fabrication mask costs totaling $0 million,
$1.2 million and $1.1 million to research and
development for the years ended December 31, 2007, 2006 and
2005, respectively.
Results
of Operations
Revenue. Our revenue consists primarily of
sales of our semiconductor products to providers of networking
equipment and their contract manufacturers and distributors.
Initial sales of our products for a new design are usually made
directly to providers of networking equipment as they design and
develop their product. Once their design enters production, they
often outsource their manufacturing to contract manufacturers
that purchase our products directly from us or from our
distributors. We price our products based on market and
competitive conditions and periodically reduce the price of our
products, as market and competitive conditions change, and as
manufacturing costs are reduced. We do not experience different
margins on direct sales to providers of networking equipment and
indirect sales through contract manufacturers because in all
cases we negotiate product pricing directly with the providers
of networking equipment. To date, all of our revenue has been
denominated in United States dollars.
33
We also derive revenue in the form of license and maintenance
fees through licensing our software products which helps our
customers build products around our SoCs in a more time and cost
efficient manner. Revenue from such arrangements totaled
$1,128,000, and $740,000 and $181,000 for the years ended
December 31, 2007, 2006 and 2005, respectively.
Our customers representing greater than 10% of revenue since
2005 were:
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Year Ended December 31,
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|
2007
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2006
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|
2005
|
|
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F5 Networks
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|
18
|
%
|
|
|
21
|
%
|
|
|
19
|
%
|
Cisco
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|
|
23
|
|
|
|
18
|
|
|
|
*
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|
SonicWALL
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|
|
*
|
|
|
|
*
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|
|
|
12
|
|
Yamaha
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|
|
*
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|
|
|
*
|
|
|
|
11
|
|
|
|
|
* |
|
Represents less than 10% |
Our distributors are used primarily to support international
sale logistics in Asia, including importation and credit
management. Total revenue through distributors was
$13.2 million, $10.5 million and $6.2 million for
the years ended December 31, 2007, 2006 and 2005,
respectively, which accounted for 24.4%, 30.7%, and 32.0% of
revenue for the years ended December 31, 2007, 2006 and
2005, respectively. While we have purchase agreements with our
distributors, the distributors do not have long-term contracts
with any of the equipment providers. Our distributor agreements
limit the distributors ability to return product up to a
portion of purchases in the preceding quarter. Given our
experience, along with our distributors limited
contractual return rights, we believe we can reasonably estimate
expected returns from our distributors. Accordingly, we
recognize sales through distributors at the time of shipment,
reduced by our estimate of expected returns.
Revenue and costs relating to sales to distributors are deferred
if we grant more than limited rights of returns and price
credits or if we cannot reasonably estimate the level of returns
and credits issuable. During the quarter ended June 30,
2007, we signed a distribution agreement with Avnet, Inc. to
distribute our products primarily in the United States. Given
the terms of the distribution agreement, for sales to Avnet,
revenue and costs will be deferred until products are sold by
Avnet to their end customers. For the year ended
December 31, 2007, less than 1% of our net revenues were
from products sold by Avnet. Revenue recognition depends on
notification from Avnet that product has been sold to
Avnets end customers.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased our products. For sales to our distributors, their
geographic location may be different from the geographic
locations of the ultimate end customers. Sales by geography for
the periods indicated were:
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|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
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|
$
|
32,748
|
|
|
$
|
19,483
|
|
|
$
|
10,292
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|
Taiwan
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|
|
10,500
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|
|
|
7,403
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|
|
|
3,085
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|
China
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|
|
3,367
|
|
|
|
2,290
|
|
|
|
1,865
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|
Japan
|
|
|
2,732
|
|
|
|
2,612
|
|
|
|
3,517
|
|
Other countries
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|
|
4,856
|
|
|
|
2,417
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue and Gross Margin. We outsource
wafer fabrication, assembly and test functions of our products.
A significant portion of our cost of revenue consists of
payments for the purchase of wafers and for assembly and test
services. To a lesser extent, cost of revenue includes expenses
relating to our internal operations that manage our contractors,
amortization of mask costs, the cost of shipping and logistics,
royalties, inventory valuation charges taken for excess and
obsolete inventory, warranty costs and changes in product cost
due to
34
changes in sort, assembly and test yields. In general, our cost
of revenue associated with a particular product declines over
time as a result of yield improvements, primarily associated
with design and test enhancements.
We use third-party foundries and assembly and test contractors,
which are primarily located in Asia, to manufacture, assemble
and test our semiconductor products. We purchase processed
wafers on a per wafer basis from our fabrication suppliers,
which are currently TSMC and UMC. We also outsource the sort,
assembly, final testing and other processing of our product to
third-party contractors, primarily ASE and ISE. We negotiate
wafer fabrication on a purchase order basis and do not have
long-term agreements with any of our third-party contractors. A
significant disruption in the operations of one or more of these
contractors would impact the production of our products which
could have a material adverse effect on our business, financial
condition and results of operations.
Cost of revenue also includes amortized costs related to certain
acquired intangible assets in 2004 and 2005. In August 2004, we
acquired certain assets of Brecis Communications Corporation,
which included the purchase of its secure communication
processor product line. We capitalized a total of
$2.3 million of developed technology and are amortizing
that amount on a straight line basis over the expected useful
life of three years. In April 2005, we acquired Menlo Logic,
LLC, which included the purchase of technology used for secure
communication. We capitalized a total of $1.1 million of
developed technology and are amortizing that amount on a
straight line basis over the expected life of three years. The
total purchase price was allocated to tangible and identifiable
intangible assets and liabilities assumed based on their
estimated fair value. The total intangible assets amortization
expense included in cost of revenue was $0.9 million,
$1.1 million and $1.0 million, for the years ended
December 31, 2007, 2006 and 2005, respectively.
In addition, we incur costs for the fabrication of masks used by
our contract manufacturers to manufacture wafers that
incorporate our products. The cost of fabrication mask sets has
increased as we transition from a 130-nanometer to a
90-nanometer process in our next-generation products beginning
in 2007. During the year ended December 31, 2007, we
capitalized $3,616,000 of mask costs. As our product processes
continue to mature and as we develop more history and
experience, we expect that, in the future, a large percentage of
mask costs will be used directly for production manufacturing
and will be capitalized. We amortize the cost of fabrication
masks that we reasonably expect to use for production
manufacturing over a
12-month
period and include them in cost of revenue. Total amortized
expenses for the masks included in the cost of revenue was
$1,465,000 for the year ended December 31, 2007 and none
for the prior years. The balance of capitalized mask costs at
December 31, 2007 was $2,845,000. As our products mature
and there is increasing assurance that any particular product
design will likely go into production, we anticipate that a
large percentage of our total mask costs will be capitalized and
amortized to cost of revenue.
Our revenue, cost of revenue, gross profit and gross margin for
the years ended December 31, 2007, 2006 and 2005 were:
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|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
Cost of revenue
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
7,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
34,305
|
|
|
$
|
21,113
|
|
|
$
|
11,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
63.3
|
%
|
|
|
61.7
|
%
|
|
|
59.4
|
%
|
Our gross margin has been and will continue to be affected by a
variety of factors, including average sales prices of our
products, the product mix, the timing of cost reductions for
fabricated wafers and assembly and test service costs, the cost
and timing of fabrication masks, inventory valuation charges and
the timing and changes in sort, assembly and test yields.
Overall product margin is impacted by the mix between higher
performance, higher margin products and lower performance, lower
margin products. In addition, we typically experience lower
yields and higher associated costs on new products, which
improve as production volumes increase.
Research and Development Expenses. Research
and development expenses primarily include personnel costs, the
cost of fabrication masks for non-production products, MIPS
architecture license fees, engineering design
35
development software and hardware tools, allocated facilities
expenses and depreciation of equipment used in research and
development and, beginning in 2006, stock-based compensation
under SFAS 123(R).
The cost of masks used for non-production manufacturing is
charged to research and development expenses. We expensed
non-production fabrication mask totaling $0 million,
$1.2 million and $1.1 million to research and
development for the years ended December 31, 2007, 2006 and
2005, respectively. As our product processes continue to mature
and as we develop more history and experience, we expect that,
in the future, a lesser percentage of mask costs will be charged
to research and development expense and more will be used
directly for production manufacturing and as a result charged to
cost of revenue.
We expect research and development expenses to continue to
increase in total dollars although we expect these expenses to
generally decrease as a percentage of revenue. Additionally, as
a percentage of revenue, these costs fluctuate from one period
to another. Total research and development expenses for the
years ended December 31, 2007, 2006 and 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Research and development expenses
|
|
$
|
19,548
|
|
|
$
|
18,651
|
|
|
$
|
16,005
|
|
Percent of revenue
|
|
|
36.1
|
%
|
|
|
54.5
|
%
|
|
|
82.6
|
%
|
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses primarily include personnel costs, accounting and legal
fees, information systems, sales commissions, trade shows,
marketing programs, depreciation, allocated facilities expenses
and, beginning in 2006, stock-based compensation under
SFAS 123(R). We plan to continue to increase the size of
our sales and marketing organization to enable us to expand into
existing and new markets. We also plan to continue to invest in
expanding our domestic and international sales and marketing
activities and building brand awareness. In the future, we
expect to incur significant additional, accounting and legal
compliance costs as well as additional insurance, and investor
relations and other costs associated with being a public
company. We expect sales, general and administrative expenses to
increase significantly in absolute dollars and to generally
decrease as a percentage of revenue in the future due to our
expected growth and economies of scale. Total sales, general and
administrative costs for the years ended December 31, 2007,
2006 and 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Sales, general and administrative expenses
|
|
$
|
14,688
|
|
|
$
|
10,058
|
|
|
$
|
6,840
|
|
Percent of revenue
|
|
|
27.1
|
%
|
|
|
29.4
|
%
|
|
|
35.3
|
%
|
Other Income (Expense), Net. Other income
(expense), net primarily includes interest income on cash, cash
equivalents balances and interest expense on notes payable. It
also includes net adjustments we made to record our preferred
stock warrants at fair value in accordance with
FSP 150-5.
We adopted
FSP 150-5
and accounted for the related cumulative effect of the change in
accounting principle on July 1, 2005. Upon the closing of
our initial public offering in May 2007, these warrants were
converted into warrants to purchase shares of our common stock
and, as a result, there were no warrant revaluation expenses
after that.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Interest expense
|
|
$
|
(622
|
)
|
|
$
|
(707
|
)
|
|
$
|
(183
|
)
|
Warrant revaluation expense
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
(411
|
)
|
Interest income and other
|
|
|
3,458
|
|
|
|
345
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
2,263
|
|
|
$
|
(829
|
)
|
|
$
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes. As of
December 31, 2007, we had total net operating loss
carryforwards for federal and state income tax purposes of
$26.3 million and $44.6 million, respectively. If not
utilized, these net
36
federal and state operating loss carryforwards will expire
beginning in 2022 and 2012, respectively. We are tracking the
portion of our deferred tax assets attributable to stock option
benefits in a separate memo account pursuant to
SFAS No. 123R. Therefore, these amounts are no longer
included in our gross or net deferred tax assets. Pursuant to
SFAS No. 123R, footnote, 82, the stock option benefits
of approximately $5.3 million will only be recorded to
equity when they reduce cash taxes payable. We also had federal
and state research and development tax credit carryforwards of
approximately $3.8 million and $3.5 million,
respectively. The federal and state tax credit carryforwards
will expire commencing 2021 and 2018, respectively, except for
the California research tax credits which carry forward
indefinitely. We also have federal alternative minimum tax
credits of approximately $0.6 million, which have no
expiration date. Realization of deferred tax assets is dependent
upon future earnings, if any, the timing and amount of which are
uncertain. Accordingly, our net deferred tax assets have been
fully offset by a valuation allowance. The valuation allowance
decreased by $5.9 million and $4.4 million for the
periods ended December 31, 2007 and 2006, respectively. The
provision for income taxes could be favorably impacted during
2008, or future years, if our results of operations and
forecasts of future profitability improve significantly to
indicate that the deferred tax assets will be realized. Such a
change in expectations could result in a material change to our
valuation allowance assessment and the resulting income tax
provision.
We have reviewed whether the utilization of our net operating
losses and research credits were subject to a substantial annual
limitation due to the ownership change limitations provided by
the Internal Revenue Code and similar state provisions. We do
not expect the disclosed net operating losses and research
credits carryovers to expire before the statute lapses.
Undistributed earnings of our foreign subsidiary of
approximately $0.2 million and $0.1 million at
December 31, 2007 and 2006, respectively, are considered to
be indefinitely reinvested and, accordingly, no provisions for
federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, we would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
We adopted FASB Interpretation 48, Accounting for Uncertainty
in Income Taxes, or FIN 48, on January 1, 2007. As
a result of the implementation of FIN 48, we did not
recognize any adjustment to the liability for uncertain tax
positions and therefore did not record any adjustment to the
beginning balance of retained earnings on the consolidated
balance sheet. As of the date of adoption, we recorded a
$3.3 million reduction to deferred tax assets for
unrecognized tax benefits, all of which is currently offset by a
full valuation allowance and therefore did not record any
adjustment to the beginning balance of retained earnings on the
balance sheet.
Our practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31 2007, we had $9,600 in accrued interest
and/or
penalties.
We had unrecognized tax benefits of $3.6 million at
December 31, 2007, which includes $0.2 million of tax
benefits that, if recognized, would reduce our annual effective
tax rate. We also accrued potential penalties and interest of
$9,600 related to these unrecognized tax benefits during 2007.
We do not expect our unrecognized tax benefits to change
significantly over the next 12 months.
We are in the process of expanding our international operations
and staff to better support our expansion into international
markets. This expansion includes the implementation of an
international structure that includes, among other things, a
research and development cost-sharing arrangement, certain
licenses and other contractual arrangements between us and our
wholly-owned domestic and foreign subsidiaries. Our foreign
subsidiaries have acquired certain rights to sell our
intellectual property and intellectual property that will be
developed or licensed in the future. The existing rights were
transferred for an initial payment. As a result of these changes
and an expanding customer base in Asia, we expect that an
increasing percentage of our consolidated pre-tax income will be
derived from, and reinvested in, our Asian operations. We
anticipate that this pre-tax income will be subject to foreign
tax at relatively lower tax rates when compared to the United
States federal statutory tax rate and as a consequence, our
effective income tax rate is expected to be lower than the
United States federal statutory rate.
Our major tax jurisdictions are the United States federal
government and the state of California. We file income tax
returns in the United States federal jurisdiction, the state of
California and various state and foreign tax jurisdictions in
which we have a subsidiary or branch operation. Our United
States federal corporation income tax
37
returns beginning with the 2000 tax year remain subject to
examination by the Internal Revenue Service (IRS).
Our California corporation income tax returns beginning with the
2000 tax year remain subject to examination by the California
Franchise Tax Board. There are no on-going tax audits in our
major tax jurisdictions.
Fiscal
2007 Compared to Fiscal 2006
Revenue. Our revenue was $54.2 million in
2007 as compared to $34.2 million in 2006, an increase of
58.5%. The majority of the increase in sales from 2006 to 2007
related to an increase in sales of $15.5 million to
existing customers, which were primarily a result of new design
wins reaching commercial production. In each of 2007 and 2006, a
substantial majority of our sales were to customers that sell
into the enterprise network and data center markets. In 2007, we
derived 24.4% of our revenue from distributors compared to 31.0%
in 2006.
Cost of Revenue and Gross Margin. Gross margin
increased 1.6 percentage points to 63.3% in 2007 from 61.7%
in 2006. The increase in gross margin in 2007 compared to 2006
was primarily due to a shift in product mix to more complex,
higher performance products which generally have higher margins.
In addition, manufacturing costs improved during 2007 due to
lower unit wafer, assembly and test costs.
Research and Development Expenses. Research
and development expenses increased $0.9 million, or 4.8%,
to $19.5 million in 2007 from $18.7 million in 2006.
The increase included higher salaries and benefit expenses of
$1.9 million and stock-based compensation expenses of
$0.6 million. Professional services and other miscellaneous
expenses accounted for $1.3 million, offset by a decrease
in tools and masks costs of $3.0 million. Research and
development headcount increased to 127 at the end of 2007 from
104 at the end of 2006.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $4.6 million, or 46%, to
$14.7 million in 2007 from $10.1 million in 2006. Of
the $4.6 million increase, salaries, benefits and
commissions accounted for $2.1 million, accounting and
legal fees and other services accounted for $1.4 million,
stock-based compensation expense accounted for
$0.6 million, and depreciation and allocated facilities
accounted for $0.5 million. Accounting and legal fees were
primarily the result of the development and implementation of
our international structure and other costs associated with
being a public company. Sales, general and administrative
headcount increased to 60 at the end of 2007 from 47 at the end
of 2006.
Income Tax Expense. Income tax expense
decreased $0.5 million to $0.1 million in 2007 from
$0.6 million in 2006. The decrease is due to an income tax
provision of $0.6 million related to alternative minimum
tax on profit in connection with establishing our international
structure in 2006, offset by the increase in the alternative
minimum tax on profit generated in 2007.
Other Income (Expense), Net. Other income
(expense), Net, increased $3.1 million to net other income
of $2.3 million in 2007 from net expense of
$0.8 million in 2006. The increase was primarily due to an
increase in interest income as a result of higher cash balances,
offset by warrant revaluation expenses recognized to record our
preferred stock warrants at fair value and interest expense
attributable to the $4.0 million drawn against our term
loan.
Fiscal
2006 Compared to Fiscal 2005
Revenue. Our revenue was $34.2 million in
2006 as compared to $19.4 million in 2005, an increase of
76.3%. The majority of the increase in sales from 2005 to 2006
related to an increase in sales of $12.1 million to
existing customers, which were primarily a result of new design
wins reaching commercial production. In each of 2005 and 2006, a
substantial majority of our sales were to customers that sell
into the enterprise network and data center markets. In 2006, we
derived 31.0% of our revenue from distributors compared to 32.0%
in 2005.
Cost of Revenue and Gross Margin. Gross margin
increased 2.3 percentage points to 61.7% in 2006 from 59.4%
in 2005. The increase in gross margin in 2006 compared to 2005
was primarily due to a shift in product mix to more complex,
higher performance products which generally have higher margins.
In addition, manufacturing costs improved during 2006 due to
lower unit wafer, assembly and test costs.
Research and Development Expenses. Research
and development expenses increased $2.7 million, or 16.9%,
to $18.7 million in 2006 from $16.0 million in 2005.
The increase included higher salaries and benefit
38
expenses of $2.1 million and stock-based compensation
expenses of $0.4 million. Research and development
headcount increased to 104 at the end of 2006 from 86 at the end
of 2005.
Sales, General and Administrative
Expenses. Sales, general and administrative
expenses increased $3.2 million, or 47.1%, to
$10.1 million in 2006 from $6.8 million in 2005. Of
the $3.2 million increase, salaries, benefits and
commissions accounted for $1.7 million, accounting and
legal fees and other services accounted for $0.6 million,
stock-based compensation expense accounted for
$0.3 million, and depreciation and allocated facilities
accounted for $0.1 million. Accounting and legal fees were
primarily the result of the development and implementation of
our international structure and efforts to prepare to become a
public company. Sales, general and administrative headcount
increased to 47 at the end of 2006 from 36 at the end of 2005.
Income Tax Expense. Income tax expense
increased $0.6 million to $0.6 million in 2006 from $0
in 2005. The increase is due to an income tax provision of
$0.6 million related to alternative minimum tax on profit
in connection with establishing our international business
structure.
Other Income (Expense), Net. Other income
(expense), net, increased $0.6 million to net expense of
$0.8 million in 2006 from net expense of $0.2 million
in 2005. The increase was primarily due to an increase in
interest expense, which was attributable to the
$4.0 million drawn against a Term Loan in June 2006.
Quarterly
Results of Operations
The following table sets forth our unaudited consolidated
statements of operations data for each of the eight quarters in
the period ended December 31, 2007. The quarterly data have
been prepared on the same basis as the audited consolidated
financial statements included elsewhere in this prospectus. You
should read this information together with our consolidated
financial statements and related notes included elsewhere in
this Annual Report. We anticipate that the rate of new orders
may vary significantly from quarter to quarter. Consequently, if
anticipated sales and shipments in any quarter do not occur when
expected, expenses and inventory levels could be
disproportionately high, and our operating results for that
quarter and future quarters may be adversely affected. In
addition, because of our limited operating history and the
rapidly evolving nature of our business, we believe that
period-to-period
comparisons of revenue and operating results, including gross
margin and operating expenses as a percentage of total revenue,
are not necessarily meaningful and should not be relied upon as
indications of future
39
performance. Although we have experienced significant percentage
growth in revenue, we do not believe that our historical growth
rates are likely to be sustainable or necessarily indicative of
future growth.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
Dec. 31
|
|
|
Sep. 30
|
|
|
Jun. 30
|
|
|
Mar. 31
|
|
|
|
(In thousands, except per share data)
|
|
|
Revenue
|
|
$
|
16,231
|
|
|
$
|
14,165
|
|
|
$
|
12,666
|
|
|
$
|
11,141
|
|
|
$
|
9,870
|
|
|
$
|
9,187
|
|
|
$
|
8,099
|
|
|
$
|
7,049
|
|
Cost of revenue
|
|
|
5,811
|
|
|
|
5,207
|
|
|
|
4,698
|
|
|
|
4,182
|
|
|
|
3,457
|
|
|
|
3,878
|
|
|
|
3,135
|
|
|
|
2,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
10,420
|
|
|
|
8,958
|
|
|
|
7,968
|
|
|
|
6,959
|
|
|
|
6,413
|
|
|
|
5,309
|
|
|
|
4,964
|
|
|
|
4,427
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
5,705
|
|
|
|
4,796
|
|
|
|
4,721
|
|
|
|
4,326
|
|
|
|
4,368
|
|
|
|
4,224
|
|
|
|
4,939
|
|
|
|
5,120
|
|
Sales, general and administrative
|
|
|
4,021
|
|
|
|
3,976
|
|
|
|
3,482
|
|
|
|
3,209
|
|
|
|
2,511
|
|
|
|
2,594
|
|
|
|
2,799
|
|
|
|
2,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
9,726
|
|
|
|
8,772
|
|
|
|
8,203
|
|
|
|
7,535
|
|
|
|
6,879
|
|
|
|
6,818
|
|
|
|
7,738
|
|
|
|
7,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
694
|
|
|
|
186
|
|
|
|
(235
|
)
|
|
|
(576
|
)
|
|
|
(466
|
)
|
|
|
(1,509
|
)
|
|
|
(2,774
|
)
|
|
|
(2,847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(50
|
)
|
|
|
(73
|
)
|
|
|
(291
|
)
|
|
|
(208
|
)
|
|
|
(152
|
)
|
|
|
(271
|
)
|
|
|
(199
|
)
|
|
|
(85
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
(349
|
)
|
|
|
(224
|
)
|
|
|
(151
|
)
|
|
|
(13
|
)
|
|
|
(152
|
)
|
|
|
(151
|
)
|
Interest income and other
|
|
|
1,265
|
|
|
|
1,307
|
|
|
|
817
|
|
|
|
69
|
|
|
|
111
|
|
|
|
117
|
|
|
|
36
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
1,215
|
|
|
|
1,234
|
|
|
|
177
|
|
|
|
(363
|
)
|
|
|
(192
|
)
|
|
|
(167
|
)
|
|
|
(315
|
)
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense
|
|
|
1,909
|
|
|
|
1,420
|
|
|
|
(58
|
)
|
|
|
(939
|
)
|
|
|
(658
|
)
|
|
|
(1,676
|
)
|
|
|
(3,089
|
)
|
|
|
(3,002
|
)
|
Income tax benefit (expense)
|
|
|
59
|
|
|
|
(110
|
)
|
|
|
(34
|
)
|
|
|
(57
|
)
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (loss)
|
|
$
|
1,968
|
|
|
$
|
1,310
|
|
|
$
|
(92
|
)
|
|
$
|
(996
|
)
|
|
$
|
(1,216
|
)
|
|
$
|
(1,676
|
)
|
|
$
|
(3,089
|
)
|
|
$
|
(3,004
|
)
|
Net income (loss) per common share, basic and diluted
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
0.00
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.39
|
)
|
Revenue has increased sequentially in each of the quarters
presented due to increases in the number of products sold to new
and existing customers, ongoing development of distributors, and
international expansion. This has led to an increase in sales
primarily into the enterprise network and data center markets.
To date, we have not experienced any material impact from any
seasonal effects on an annual or quarterly basis.
Gross margin percentages have fluctuated from quarter to quarter
due to changing selling prices, product mix and manufacturing
costs. The gross margin percentage in the third quarter of 2006
decreased from that in the second quarter, due to costs
associated with the initial increase in production costs
attributed with new product development. The gross margin
percentage increased from the third quarter of 2006 to the
fourth quarter of 2006 due to improved yield and reduced costs
associated with new products. The gross margin percentage
increased from the first quarter of 2007 to the fourth quarter
of 2007 due to a change in product mix. If our mix changes
toward lower margin products or if we are required due to
competitive reasons to reduce pricing without a corresponding
decrease in costs, our margins could decrease in the future.
Operating expenses have generally increased in each of the
quarters presented as we continued to add personnel and related
costs increased to accommodate the growth in our business.
Research and development expenses in each of the first two
quarters of 2006 were significantly impacted by wafer
fabrication mask expenses associated with new product
development. Sales, general and administrative expenses
increased sequentially in
40
2006 and 2007 due to higher accounting and legal costs related
to the development and implementation of our international
structure, cost associated with being a public company,
increased headcount and increased stock-based compensation.
Liquidity
and Capital Resources
In May 2007, we received net proceeds of approximately
$94.7 million (after underwriters discounts of
$7.3 million and additional offering related costs of
approximately $2.8 million). Our other primary sources of
cash historically have been proceeds from issuances of
convertible preferred stock, cash collections from customers, a
working capital line of credit and term loan and cash received
from the exercise of employee stock options. As of
December 31, 2007, we had cash and cash equivalents of
$98.5 million and net accounts receivable of
$9.8 million.
In October 2005, we entered into a Loan and Security Agreement
with Silicon Valley Bank to provide a revolving line of credit
for $6.0 million collateralized by eligible receivables and
all of our other assets except intellectual property. Borrowings
under the revolving line of credit bore interest at the
banks prime rate plus an applicable margin based on
certain financial ratios of the company at the borrowing date.
On January 25, 2007, we entered into a loan modification
agreement that extended the term of this credit facility through
July 4, 2008. We have since cancelled the line of credit.
In October 2005, we also entered into a Term Loan and Security
Agreement with Silicon Valley Bank and Gold Hill Venture Lending
that provided a $4.0 million term loan line of credit, the
Term Loan. The Term Loan was secured by all of our other assets
except intellectual property. In June 2006, we borrowed
$4.0 million against this Term Loan. In October 2006, we
entered into the First Amendment to the Term Loan. The amendment
reduced the interest rate on the Term Loan to a fixed rate of
10.5%, effective November 1, 2006. In addition, it
eliminated the Gold Hill prepayment fee and final payment fee.
This Term Loan was paid off as of May 3, 2007.
Following is a summary of our working capital and cash and cash
equivalents as of December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Working capital
|
|
$
|
105,048
|
|
|
$
|
11,689
|
|
|
$
|
6,160
|
|
Cash and cash equivalents
|
|
|
98,462
|
|
|
|
10,154
|
|
|
|
7,879
|
|
Following is a summary of our cash flows from operating
activities, investing activities and financing activities for
the years ended December 31, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
6,176
|
|
|
$
|
(7,819
|
)
|
|
$
|
(7,955
|
)
|
Net cash used in investing activities
|
|
|
(5,772
|
)
|
|
|
(2,075
|
)
|
|
|
(2,608
|
)
|
Net cash provided by financing activities
|
|
|
87,904
|
|
|
|
12,169
|
|
|
|
61
|
|
Cash
Flows from Operating Activities
Net cash provided by operating activities was $6.2 million
for the year ended December 31, 2007, primarily consisting
of our net income of $2.2 million and $8.8 million in
non-cash operating expenses, offset by $4.8 million in net
cash used by changes in operating activities. Non-cash operating
expenses consisted of depreciation and amortization expense of
$6.2 million, stock-based compensation of
$1.9 million, and $0.6 million of warrant revaluation
expense. Changes in operating activities from 2006 were
primarily driven by an increase of $2.5 million in accounts
receivable due to increased revenue and increase of
$4.5 million in inventory as we ramp up the production of
new products, offset by the increase of $1.8 million in
accounts payable and $0.8 million in deferred revenue.
Net cash used in operating activities was $7.8 million and
$8.0 million for the year ended December 31, 2006 and
2005, primarily consisting of net loss of $9.0 and
$11.7 million, and $6.4 million and $4.1 million
in non-cash
41
operating expenses, offset by $5.2 million and
$0.4 million in net cash used by changes in operating
activities. The non-cash operating expenses for the year ended
December 31, 2006 and 2005 consisted of deprecation and
amortization expenses of $5.0 million and
$3.3 million, stock-based compensation of $0.7 million
and $0.1 million, and warrant revaluation expense of
$0.5 million and $0.5 million, respectively. The
change in operating activities in 2006 from 2005 were driven by
increase in accounts receivable due to increased revenue and
increase in inventory as we ramped up the production of new
products.
Cash
Flows from Investing Activities
Net cash flows used in investing activities relate to capital
expenditures to support product development and general growth.
Net cash used in investing activities increased by
$3.7 million to $5.8 million in 2007 from
$2.1 million in 2006. The increase is due to the purchase
of masks and design tools to support our product development and
production needs.
Net cash used in investing activities decreased
$0.5 million from $2.6 million in 2005 to
$2.1 million in 2006. Net cash flows used in investing
activities primarily relate to acquisitions in 2005, as well as
capital expenditures in each year to support product development
and general growth.
Cash
Flows from Financing Activities
Net cash provided by financing activities was $87.9 million
for 2007 compared to $12.2 million for 2006. The increase
in 2007 is primarily due to net cash provided from our initial
public offering of $94.7 million, $1.1 million from
issuance of common stock upon exercises of stock options, offset
by the repayment of the Term Loan of $4.0 million and
principal payments of capital lease and technology license
obligations of $3.8 million.
Net cash provided by financing activities was $12.2 million
for 2006 compared to $61,000 for 2005. The increase in 2006 was
due to issuance of additional shares of Series D preferred
stock for net proceeds of $9.0 million, shareholder
exercises of Series B and Series D preferred stock
warrants for net proceeds of $0.8 million, issuance of
common stock upon exercises of stock options of
$1.4 million, and net borrowings of $4.0 million under
our Term Loan agreement, offset by the principal payments of
capital lease and technology license obligations of
$2.9 million.
We believe that our $98.5 million of cash and cash
equivalents at December 31, 2007 and expected cash flow
from operations will be sufficient to fund our projected
operating requirements for at least twelve months. Our future
capital requirements will depend on many factors, including our
rate of revenue growth, the expansion of our engineering, sales
and marketing activities, the timing and extent of our expansion
into new territories, the timing of introductions of new
products and enhancements to existing products and the
continuing market acceptance of our products. Although we
currently are not a party to any agreement or letter of intent
with respect to potential material investments in, or
acquisitions of, complementary businesses, services or
technologies, we may enter into these types of arrangements in
the future, which could also require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us or at all.
Indemnities
In the ordinary course of business, we have entered into
agreements with customers that include indemnity provisions.
Based on historical experience and information known as of
December 31, 2007, we believe our exposure related to the
above indemnities at December 31, 2007 is not material. We
also enter into indemnification agreements with our officers and
directors and our certificate of incorporation and bylaws
include similar indemnification obligations to our officers and
directors. It is not possible to determine the amount of our
liability related to these indemnification agreements and
obligations to our officers and directors due to the limited
history of prior indemnification claims and the unique facts and
circumstances involved in each particular agreement.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have, nor do we
currently have, any relationships with unconsolidated entities
or financial partnerships, such as entities often referred to as
structured finance or special purpose entities,
42
which would have been established for the purpose of
facilitating off-balance sheet arrangements or other
contractually narrow or limited purposes.
Contractual
Obligations
The following is a summary of our contractual obligations as of
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period
|
|
|
|
Less Than
|
|
|
1 to 2
|
|
|
3 to 5
|
|
|
More Than
|
|
|
|
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Operating leases
|
|
$
|
1,266
|
|
|
$
|
2,175
|
|
|
$
|
1,042
|
|
|
$
|
|
|
|
$
|
4,483
|
|
Capital lease and technology license obligations
|
|
|
4,969
|
|
|
|
4,370
|
|
|
|
|
|
|
|
|
|
|
|
9,339
|
|
Purchase commitments
|
|
|
4,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,932
|
|
|
$
|
6,545
|
|
|
$
|
1,042
|
|
|
$
|
|
|
|
$
|
18,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We adopted FIN 48 on January 1, 2007. As of
December 31, 2007, we had $0.2 million of total gross
unrecognized tax benefits and related interest. The timing of
any payments which could result from these unrecognized tax
benefits will depend upon a number of factors. Accordingly, the
timing of payment cannot be estimated. We do not expect a
significant tax payment related to these obligations to occur
within the next 12 months.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework and provides guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. On November 15, 2007, the FASB granted a one year
deferral for non-financial assets and liabilities to comply with
SFAS No. 157; however, the effective date for
financial assets remains intact. We are currently assessing the
impact, if any, of adopting SFAS No. 157 on our
financial position, results of operations and liquidity.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, which permits entities to choose to measure
eligible financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each
subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The
Company plans to adopt this pronouncement in the first quarter
of 2008 and is currently evaluating the impact of this
pronouncement on the Companys consolidated results of
operations and financial position.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), or
SFAS No. 141R, Business Combinations, which
replaces SFAS No 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process
research and development at fair value, and requires the
expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008
and will apply prospectively to business combinations completed
on or after that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160.
SFAS No. 160 clarifies that a noncontrolling or
minority interest in a subsidiary is considered an ownership
interest and, accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated
financial statements. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
is currently evaluating the impact, if any, of adopting this
standard on the Companys financial position, results of
operations and liquidity.
43
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Foreign
Currency Risk
All of our sales are denominated in United States dollars. We
therefore have no foreign currency risk associated with sale of
products. Our international sales and marketing operations incur
expenses that are denominated in foreign currencies. These
expenses could be materially affected by currency fluctuations;
however, we do not consider this currency risk to be material as
the related costs do not constitute a significant portion of our
total spending. We outsource our wafer fabrication, assembly,
testing, warehousing and shipping operations; however all
expenses related thereto are denominated in United States
dollars.
Interest
Rate Risk
We had cash and cash equivalents of $98.5 million at
December 31, 2007, which was held for working capital
purposes. We do not enter into investments for trading or
speculative purposes. We do not believe that we have any
material exposure to changes in the fair value of these
investments as a result of changes in interest rates due to
their short term nature. Declines in interest rates, however,
will reduce future investment income.
44
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this
Annual Report
45
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cavium Networks, Inc.:
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of Cavium
Networks, Inc. and its subsidiaries at December 31, 2007
and December 31, 2006 and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2), presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial
statements, in 2005 the Company changed the manner in which it
accounts for freestanding warrants on preferred shares that are
redeemable and in 2006 the Company changed the manner in which
it accounts for share-based compensation.
/s/ PricewaterhouseCoopers
LLP
San Jose, California
March 10, 2008
46
CAVIUM
NETWORKS, INC.
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
Accounts receivable, net of allowances of $177 and $102,
respectively
|
|
|
9,768
|
|
|
|
7,248
|
|
Inventories
|
|
|
9,573
|
|
|
|
5,006
|
|
Prepaid expenses and other current assets
|
|
|
946
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
118,749
|
|
|
|
22,813
|
|
Property and equipment, net
|
|
|
11,608
|
|
|
|
5,040
|
|
Intangible assets, net
|
|
|
4,096
|
|
|
|
1,902
|
|
Other assets
|
|
|
157
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
134,610
|
|
|
$
|
29,962
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK
AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,311
|
|
|
$
|
2,904
|
|
Accrued expenses and other current liabilities
|
|
|
2,253
|
|
|
|
2,853
|
|
Deferred revenue
|
|
|
1,666
|
|
|
|
628
|
|
Capital lease and technology license obligations, current portion
|
|
|
4,471
|
|
|
|
2,564
|
|
Preferred stock warrant liability
|
|
|
|
|
|
|
701
|
|
Notes payable, current portion
|
|
|
|
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,701
|
|
|
|
11,124
|
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
|
|
|
|
|
2,526
|
|
Capital lease and technology license obligations, net of current
portion
|
|
|
4,059
|
|
|
|
1,016
|
|
Other non-current liabilities
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
17,760
|
|
|
|
14,705
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible preferred stock, par value
$0.001:
|
|
|
|
|
|
|
|
|
None and 22,935,158 shares authorized; none and
22,364,197 shares issued and outstanding; none and $69,623
aggregate liquidation preference; as of December 31, 2007
and 2006
|
|
|
|
|
|
|
72,437
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred stock, par value $0.001:
|
|
|
|
|
|
|
|
|
10,000,000 shares and none authorized, no shares issued and
outstanding as of December 31, 2007 and 2006
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001:
|
|
|
|
|
|
|
|
|
200,000,000 and 40,965,057 shares authorized; 40,307,361
and 9,365,600 shares issued and outstanding; as of
December 31, 2007 and 2006
|
|
|
40
|
|
|
|
9
|
|
Additional paid-in capital
|
|
|
175,540
|
|
|
|
3,731
|
|
Accumulated deficit
|
|
|
(58,730
|
)
|
|
|
(60,920
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit)
|
|
|
116,850
|
|
|
|
(57,180
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, mandatorily redeemable convertible preferred
stock and stockholders equity (deficit)
|
|
$
|
134,610
|
|
|
$
|
29,962
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
47
CAVIUM
NETWORKS, INC.
(In thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
Cost of revenue
|
|
|
19,898
|
|
|
|
13,092
|
|
|
|
7,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
34,305
|
|
|
|
21,113
|
|
|
|
11,512
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
19,548
|
|
|
|
18,651
|
|
|
|
16,005
|
|
Sales, general and administrative
|
|
|
14,688
|
|
|
|
10,058
|
|
|
|
6,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
34,236
|
|
|
|
28,709
|
|
|
|
22,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
69
|
|
|
|
(7,596
|
)
|
|
|
(11,333
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(622
|
)
|
|
|
(707
|
)
|
|
|
(183
|
)
|
Warrant revaluation expense
|
|
|
(573
|
)
|
|
|
(467
|
)
|
|
|
(411
|
)
|
Interest income and other
|
|
|
3,458
|
|
|
|
345
|
|
|
|
355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
2,263
|
|
|
|
(829
|
)
|
|
|
(239
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax expense and cumulative effect of
change in accounting principle
|
|
|
2,332
|
|
|
|
(8,425
|
)
|
|
|
(11,572
|
)
|
Income tax expense
|
|
|
(142
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before cumulative effect of change in
accounting principle
|
|
|
2,190
|
|
|
|
(8,985
|
)
|
|
|
(11,572
|
)
|
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share, basic
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
Shares used in computing basic net income (loss) per common share
|
|
|
29,005,743
|
|
|
|
8,065,995
|
|
|
|
7,318,607
|
|
Net income (loss) per common share, diluted
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
Shares used in computing diluted net income (loss) per common
share
|
|
|
32,431,976
|
|
|
|
8,065,995
|
|
|
|
7,318,607
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
48
CAVIUM
NETWORKS, INC.
CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS EQUITY
(DEFICIT)
(In thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily Redeemable
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
|
|
|
Total
|
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
|
|
|
Stockholders
|
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Equity/
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
20,990,809
|
|
|
$
|
61,735
|
|
|
|
|
8,233,939
|
|
|
$
|
8
|
|
|
|
633
|
|
|
$
|
(154
|
)
|
|
$
|
(40,263
|
)
|
|
$
|
(39,776
|
)
|
Issuance of Series D Preferred Stock, net of issuance costs
of $57
|
|
|
100,566
|
|
|
|
604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
135,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
388,399
|
|
|
|
1
|
|
|
|
341
|
|
|
|
|
|
|
|
|
|
|
|
342
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
197
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(18,645
|
)
|
|
|
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
(4
|
)
|
Interest on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
(2
|
)
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
Stock-based compensation related to variable awards granted to
employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
Reclassification of warrants to liabilities
|
|
|
|
|
|
|
(519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104
|
|
|
|
|
|
|
|
104
|
|
Repayment of note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
|
|
|
|
|
|
52
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,672
|
)
|
|
|
(11,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
21,091,375
|
|
|
|
61,820
|
|
|
|
|
8,739,315
|
|
|
|
9
|
|
|
|
1,252
|
|
|
|
|
|
|
|
(51,935
|
)
|
|
|
(50,674
|
)
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
33,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
568,766
|
|
|
|
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
1,349
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
141
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(32,599
|
)
|
|
|
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
(20
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
|
|
|
|
|
|
|
|
|
|
745
|
|
Issuance of common stock in connection with warrants exercise
|
|
|
|
|
|
|
|
|
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series B preferred stock in connection with
warrants exercises
|
|
|
179,976
|
|
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
|
134
|
|
Issuance of Series D preferred stock, net of issuance costs
of $15
|
|
|
1,032,037
|
|
|
|
8,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Series D preferred stock in connection with
warrants exercises
|
|
|
60,809
|
|
|
|
558
|
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
|
|
|
|
|
|
|
|
|
130
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,985
|
)
|
|
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
22,364,197
|
|
|
|
72,437
|
|
|
|
|
9,365,600
|
|
|
|
9
|
|
|
|
3,731
|
|
|
|
|
|
|
|
(60,920
|
)
|
|
|
(57,180
|
)
|
Common stock issued in connection with early-exercises of stock
options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
717,212
|
|
|
|
1
|
|
|
|
1,451
|
|
|
|
|
|
|
|
|
|
|
|
1,452
|
|
Common stock issued in connection with restricted stock unit
|
|
|
|
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of early-exercised stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
110
|
|
Repurchase of shares of unvested common stock
|
|
|
|
|
|
|
|
|
|
|
|
(14,585
|
)
|
|
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,908
|
|
|
|
|
|
|
|
|
|
|
|
1,908
|
|
Issuance of Series B preferred stock in connection with
warrants exercises
|
|
|
181
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock due to IPO
|
|
|
(22,364,378
|
)
|
|
|
(72,440
|
)
|
|
|
|
22,364,378
|
|
|
|
22
|
|
|
|
72,418
|
|
|
|
|
|
|
|
|
|
|
|
72,440
|
|
Issuance of common stock for IPO, net of issuance cost of $2,790
|
|
|
|
|
|
|
|
|
|
|
|
7,762,500
|
|
|
|
8
|
|
|
|
94,660
|
|
|
|
|
|
|
|
|
|
|
|
94,668
|
|
Reclassification of warrant liability upon IPO
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,272
|
|
|
|
|
|
|
|
|
|
|
|
1,272
|
|
Common stock warrant
exercise-net
exercise
|
|
|
|
|
|
|
|
|
|
|
|
86,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190
|
|
|
|
2,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
|
40,307,361
|
|
|
$
|
40
|
|
|
$
|
175,540
|
|
|
$
|
|
|
|
$
|
(58,730
|
)
|
|
$
|
116,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
CAVIUM
NETWORKS, INC.
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of note receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
104
|
|
Stock-based compensation expense
|
|
|
1,869
|
|
|
|
745
|
|
|
|
85
|
|
Amortization of warrant costs to interest expense
|
|
|
149
|
|
|
|
143
|
|
|
|
52
|
|
Revaluation of warrants to fair value
|
|
|
574
|
|
|
|
467
|
|
|
|
511
|
|
Depreciation and amortization
|
|
|
6,221
|
|
|
|
5,009
|
|
|
|
3,308
|
|
Other
|
|
|
(20
|
)
|
|
|
10
|
|
|
|
81
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(2,520
|
)
|
|
|
(3,412
|
)
|
|
|
(2,084
|
)
|
Inventories
|
|
|
(4,528
|
)
|
|
|
(2,919
|
)
|
|
|
30
|
|
Prepaid expenses and other current assets
|
|
|
(322
|
)
|
|
|
(41
|
)
|
|
|
124
|
|
Other assets
|
|
|
49
|
|
|
|
(101
|
)
|
|
|
(39
|
)
|
Accounts payable
|
|
|
1,836
|
|
|
|
125
|
|
|
|
197
|
|
Deferred revenue
|
|
|
825
|
|
|
|
408
|
|
|
|
220
|
|
Accrued expenses and other current and non-current liabilities
|
|
|
(147
|
)
|
|
|
732
|
|
|
|
1,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
6,176
|
|
|
|
(7,819
|
)
|
|
|
(7,955
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows used in investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(4,925
|
)
|
|
|
(2,075
|
)
|
|
|
(1,503
|
)
|
Acquisition of business
|
|
|
|
|
|
|
|
|
|
|
(1,105
|
)
|
Purchases of IP licenses and intangible assets
|
|
|
(847
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(5,772
|
)
|
|
|
(2,075
|
)
|
|
|
(2,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows provided by financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan financing
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
Repayment of term loan financing
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible preferred stock, net of
issuance cost
|
|
|
|
|
|
|
8,965
|
|
|
|
604
|
|
Proceeds from initial public offering, net of bankers
discount and commission
|
|
|
97,459
|
|
|
|
|
|
|
|
|
|
Payments of initial public offering costs
|
|
|
(2,791
|
)
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock upon exercise of options
|
|
|
1,092
|
|
|
|
1,361
|
|
|
|
407
|
|
Principal payment of capital lease and technology license
obligations
|
|
|
(3,846
|
)
|
|
|
(2,915
|
)
|
|
|
(998
|
)
|
Repurchases of shares of unvested common stock
|
|
|
(10
|
)
|
|
|
(20
|
)
|
|
|
(4
|
)
|
Repayment of receivable from stockholder
|
|
|
|
|
|
|
|
|
|
|
52
|
|
Proceeds from issuance of convertible preferred stock in
connection with warrant exercise
|
|
|
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
87,904
|
|
|
|
12,169
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
88,308
|
|
|
|
2,275
|
|
|
|
(10,502
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
10,154
|
|
|
|
7,879
|
|
|
|
18,381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
98,462
|
|
|
$
|
10,154
|
|
|
$
|
7,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
473
|
|
|
$
|
564
|
|
|
$
|
131
|
|
Cash paid for taxes
|
|
$
|
469
|
|
|
$
|
|
|
|
$
|
|
|
Supplemental disclosure of non-cash activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease and technology license obligations
|
|
$
|
9,812
|
|
|
$
|
3,408
|
|
|
$
|
1,414
|
|
Vesting of early exercised options
|
|
$
|
110
|
|
|
$
|
141
|
|
|
$
|
197
|
|
Additions to property and equipment included in accounts payable
and accrued expenses
|
|
$
|
1,057
|
|
|
$
|
486
|
|
|
$
|
|
|
Net exercise of common stock warrants
|
|
$
|
462
|
|
|
$
|
|
|
|
$
|
|
|
Conversion of mandatorily redeemable convertible preferred stock
to common stock
|
|
$
|
72,440
|
|
|
$
|
|
|
|
$
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
CAVIUM
NETWORKS, INC.
|
|
1.
|
Organization
and Significant Accounting Policies
|
Organization
Cavium Networks, Inc., the Company, was incorporated in the
state of California on November 21, 2000 and was
reincorporated in the state of Delaware effective
February 6, 2007. The Company designs, develops and markets
semiconductor processors for intelligent and secure networks.
Initial
Public Offering
In May 2007, the Company completed its initial public offering,
or IPO, of common stock in which it sold and issued
7,762,500 shares of common stock, including
1,012,500 shares of underwriters over-allotment, at
an issue price of $13.50 per share. A total of
$104.8 million in gross proceeds was raised from the IPO,
or approximately $94.7 million in net proceeds after
deducting underwriting discounts and commissions of
$7.3 million and other offering costs of $2.8 million.
Upon the closing of the IPO, all shares of convertible preferred
stock outstanding automatically converted into
22,364,378 shares of common stock, and 102,619 warrants to
purchase mandatorily redeemable convertible preferred stock were
converted into warrants to purchase common stock.
Summary
of Significant Accounting Policies
Basis
of Consolidation
The consolidated financial statements include the accounts of
Cavium Networks, Inc. and its wholly owned foreign subsidiaries.
All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in its consolidated financial
statements and accompanying notes. Management bases its
estimates on historical experience and on various other
assumptions it believes to be reasonable under the
circumstances, the results of which form the basis of making
judgments about the carrying values of assets and liabilities.
Actual results could differ from those estimates.
Cash &
Cash Equivalents
The Company considers all highly liquid investments with an
original or remaining maturity of 90 days or less at the
date of purchase to be cash equivalents. Cash equivalents
consist primarily of money market instruments.
Allowance
for Doubtful Accounts
The Company reviews its allowance for doubtful accounts by
assessing individual accounts receivable over a specific age and
amount, and all other balances on a pooled basis based on
historical collection experience and economic risk assessment.
The Companys allowance for doubtful accounts was $38,000
and $68,000 as of December 31, 2007 and 2006, respectively.
Inventories
Inventories consist of
work-in-process
and finished goods. Inventories are stated at the lower of cost
(determined using the
first-in,
first-out method), or market value (estimated net realizable
value). The Company writes down inventory by establishing
inventory reserves based on aging and forecasted demand. These
factors are impacted by market and economic conditions,
technology changes, new product introductions and changes in
strategic direction and require estimates that may include
uncertain elements. Actual demand may differ from
51
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
forecasted demand and such differences may have a material
effect on recorded inventory values. Inventory reserves, once
established, are not reversed until the related inventories have
been sold or scrapped.
Property
and Equipment
Property and equipment are stated at cost and depreciated over
their estimated useful lives using the straight-line method.
Leasehold improvements are amortized over the shorter of
estimated useful lives or unexpired lease term. Additions and
improvements that increase the value or extend the life of an
asset are capitalized. Upon retirement or sale, the cost of
assets disposed of and the related accumulated depreciation are
removed from the accounts and any resulting gain or loss is
credited or charged to income. Repairs and maintenance costs are
expensed as incurred.
|
|
|
|
|
Estimated
|
|
|
Useful Lives
|
|
Software and computer equipment
|
|
1 to 5 years
|
Test equipment
|
|
1 to 3 years
|
Furniture, office equipment and leasehold improvements
|
|
1 to 5 years
|
The Company capitalizes the cost of fabrication masks that are
reasonably expected to be used during production manufacturing.
Such amounts are included within property and equipment and
depreciated to cost of revenue generally over a period of twelve
months. If the Company does not reasonably expect to use the
fabrication mask during production manufacturing, the related
mask costs are expensed to research and development in the
period in which the costs are incurred. The Company has
capitalized $3,616,000, $694,000 and none of mask costs in
property and equipment for the years ended December 31,
2007, 2006 and 2005, respectively.
Impairment
of Long-Lived Assets
The Company reviews long-lived assets, including property and
equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets
may not be fully recoverable. According to the Companys
accounting policy, when such indicators are present, if the
undiscounted cash flows expected to be generated from operations
from those long-lived assets are less than the carrying value of
those long-lived assets, the Company compares the fair value of
the assets (estimated using discounted future net cash flows to
be generated from the lowest common level of operations
utilizing the assets) to the carrying value of the long-lived
assets to determine any impairment charges. The Company reduces
the carrying value of the long-lived assets if the carrying
value of the long-lived assets is greater than their fair value.
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, other assets, accounts payable, accrued expenses and
liabilities, approximate their fair values due to their
short-term nature.
Concentration
of Risk
The Companys products are currently manufactured,
assembled and tested by third-party contractors in Asia. There
are no long-term agreements with any of these contractors. A
significant disruption in the operations of one or more of these
contractors would impact the production of the Companys
products for a substantial period of time, which could have a
material adverse effect on the Companys business,
financial condition and results of operations.
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash, cash equivalents
and accounts receivable. The Company deposits cash and cash
equivalents with credit worthy financial institutions. The
Company has not experienced any losses on its deposits of cash
and cash equivalents. Management believes that the financial
institutions are reputable and, accordingly, minimal credit risk
exists.
52
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A majority of the Companys accounts receivable are derived
from revenue earned from customers headquartered in the United
States. The Company performs ongoing credit evaluations of its
customers financial condition and, generally, requires no
collateral from its customers. The Company provides an allowance
for doubtful accounts receivable based upon the expected
collectibility of accounts receivable. Summarized below are
individual customers whose accounts receivable balances or
revenues were 10% or higher of respective total consolidated
amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Percentage of total revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
18
|
%
|
|
|
21
|
%
|
|
|
19
|
%
|
Customer B
|
|
|
23
|
|
|
|
18
|
|
|
|
*
|
|
Customer C
|
|
|
*
|
|
|
|
*
|
|
|
|
12
|
|
Customer D
|
|
|
*
|
|
|
|
*
|
|
|
|
11
|
|
All other customers
|
|
|
44
|
|
|
|
50
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
represent less than 10% of the revenue |
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Percentage of gross accounts receivable:
|
|
|
|
|
|
|
|
|
Customer E
|
|
|
23
|
%
|
|
|
23
|
%
|
Customer F
|
|
|
13
|
|
|
|
*
|
|
All other customers
|
|
|
64
|
|
|
|
73
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
* |
|
Less than 10% of the consolidated accounts receivable for the
respective period end. |
Intangible
Assets
Prepaid technology licenses and acquired technologies, which
includes technology acquired from other companies either as a
result of acquisitions or licensing, are capitalized and
amortized on the straight-line method over the estimated useful
life of the technologies, which generally does not exceed three
years. Technology licenses payable in installments are
capitalized using the present value of the payments.
Revenue
Recognition
The Company derives its revenue primarily from sales of
semiconductor products. The Company recognizes revenue from
product sales when persuasive evidence of a binding arrangement
exists, delivery has occurred, the fee is deemed fixed or
determinable and free of contingencies and significant
uncertainties, and collection is probable. The fee is considered
fixed or determinable at the execution of an agreement, based on
specific products and quantities to be delivered at specified
prices, which is often memorialized with a customer purchase
order. Agreements with non-distributor customers do not include
rights of return or acceptance provisions. The Company assesses
the ability to collect from the Companys customers based
on a number of factors, including credit worthiness and any past
transaction history of the customers. If the customers were not
deemed credit worthy, the Company would defer all revenue from
the arrangement until payment is received and all other revenue
recognition criteria have been met.
53
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Shipping charges billed to customers are included in product
revenue and the related shipping costs are included in cost of
product revenue. The Company generally recognizes revenue at the
time of shipment to the Companys customers. Revenue
consists primarily of sales of the Companys products to
networking Original Equipment Manufacturers, or OEMs, their
contract manufacturers or to its distributors. Initial sales of
the Companys products for a new design are usually made
directly to networking OEMs as they design and develop their
product. Once their design enters production, they often
outsource their manufacturing to contract manufacturers that
purchase the Companys products directly from the Company
or from the Companys distributors.
Revenue is recognized upon shipment for sales to distributors
with limited rights of returns and price protection if the
Company concludes it can reasonably estimate the credits for
returns and price adjustments issuable. The Company records an
estimated allowance, at the time of shipment, based on the
Companys historical patterns of returns and pricing
credits of sales recognized upon shipment. The credits issued to
distributors or other customers were not material in the years
ended December 31, 2007, 2006 and 2005.
Revenue and costs relating to sales to distributors are deferred
if the Company grants more than limited rights of returns and
price credits or if it cannot reasonably estimate the level of
returns and credits issuable. During the quarter ended
June 30, 2007, the Company signed a distribution agreement
with Avnet, Inc. to distribute the Companys products
primarily in the United States. Given the terms of the
distribution agreement, for sales to Avnet revenue and costs
will be deferred until products are sold by Avnet to their end
customers. For the year ended December 31, 2007, less than
1% of the Companys net revenues were from products sold by
Avnet. Revenue recognition depends on notification from the
distributor that product has been sold to Avnets end
customers. Avnet reports to the Company, on at least a monthly
basis, the product resale price, quantity and end customer
shipment information, as well as inventory on hand. Reported
distributor inventory on hand is reconciled monthly to the
Companys deferred revenue balances. Deferred income on
shipments to Avnet is included in deferred revenue and reflects
the effects of any distributor price adjustments and the amount
of gross margin expected to be realized when Avnet sells those
products to their customers. Accounts receivable from Avnet is
recognized and inventory is relieved when title to inventories
transfers, which typically takes place at the time of shipment,
which is the point in time at which the Company has a legal
enforceable right to collection under normal payment terms.
The Company also derives revenue in the form of license and
maintenance fees through licensing its software products.
Revenue from such arrangements is recorded by applying the
provisions of Statement of Position (SOP)
No. 97-2,
Software Revenue Recognition , as amended by
SOP No. 98-9,
Modification of
SOP No. 97-2,
Software Revenue Recognition with Respect to Certain
Transactions. Revenue from such arrangements totaled
$1,128,000, $740,000 and $181,000 for the years ended
December 31, 2007, 2006 and 2005, respectively. The value
of any support services is recognized as services revenue on a
straight-line basis over the term of the related support period,
which is typically one year.
The Company also enters into development agreements with some of
its customers. Development revenue is recognized under the
proportional performance method, with the associated costs
included in cost of revenue. The Company estimates the
proportional performance of the development contracts based on
an analysis of progress toward completion. The Company
periodically evaluates the actual status of each project to
ensure that the estimates to complete each contract remain
accurate. A provision for estimated losses on contracts is made
in the period in which the loss becomes probable and can be
reasonably estimated. To date, the Company has not recorded any
such losses. If the amount billed exceeds the amount of revenue
recognized, the excess amount is recorded as deferred revenue.
Revenue recognized in any period is dependent on our progress
toward completion of projects in progress. To the extent the
Company is unable to estimate the proportional performance then
the revenue is recognized on a completed contract basis. Revenue
from such arrangements totaled $3,019,000 for 2007 and none for
previous years.
Total deferred revenue was $1,666,000 and $628,000 as of
December 31, 2007 and 2006, respectively, which included
deferred revenue associated with license and maintenance fees,
development revenue and deferred income on shipment to Avnet.
54
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Warranty
Accrual
The Companys products are subject to a one-year warranty
period. The Company provides for the estimated future costs of
replacement upon shipment of the product as cost of revenue. The
warranty accrual is estimated based on historical claims
compared to historical revenue. The following table presents a
reconciliation of the Companys product warranty liability,
which is included within accrued expenses and other current
liabilities in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Beginning balance
|
|
$
|
161
|
|
|
$
|
106
|
|
|
$
|
30
|
|
Accruals for warranties issued during the year
|
|
|
241
|
|
|
|
140
|
|
|
|
76
|
|
Settlements made during the year
|
|
|
(141
|
)
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
261
|
|
|
$
|
161
|
|
|
$
|
106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indemnities
In the ordinary course of business the Company enters into
agreements with customers that include indemnity provisions.
Based on historical experience and other available information
the Company believes its exposure related to the above indemnity
provisions were immaterial for each of the periods presented.
Research
and Development
Research and development costs are expensed as incurred and
primarily include personnel costs, prototype expenses, which
include the cost of fabrication mask costs not reasonably
expected to be used in production manufacturing, and allocated
facilities costs as well as depreciation of equipment used in
research and development.
Advertising
The Company expenses advertising costs as incurred. Advertising
costs were $345,000, $214,000 and $125,000 and for the years
ended December 31, 2007, 2006 and 2005, respectively.
Operating
Leases
The Company recognizes rent expense on a straight-line basis
over the term of the lease. The difference between rent expense
and rent paid is recorded as accrued rent in accrued expenses
and other current and non-current liabilities components of the
consolidated balance sheets.
Income
Taxes
The Company provides for deferred income taxes under the asset
and liability method. Under this method, deferred tax assets,
including those related to tax loss carryforwards and credits,
and liabilities are determined based on the differences between
the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the
differences are expected to reverse. A valuation allowance is
recorded to reduce deferred tax assets when management cannot
conclude that it is more likely than not that the net deferred
tax asset will be recovered.
Accounting
for Stock-Based Compensation
Prior to January 1, 2006, the Company accounted for
employee stock options using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or
55
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
APB 25, and Financial Accounting Standards Board, or FASB,
Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of
APB No. 25 , and had adopted the disclosure-only
provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, or SFAS 123, and
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure. In
accordance with APB 25, the Company recognized no stock-based
compensation expense for options granted to employees with an
exercise price equal to or greater than the fair value of the
underlying common stock on the date of grant.
Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123(R) using the
prospective transition method, which requires it to apply the
provisions of SFAS 123(R) only to awards granted, modified,
repurchased or cancelled after the adoption date. Under this
transition method, the Companys stock-based compensation
expense recognized during the year-ended December 31, 2006
is based on the grant date fair value of stock option awards the
Company grants or modifies on or after January 1, 2006. The
Company recognizes this expense on a straight-line basis over
the options vesting periods. The Company estimates the
grant date fair value of stock option awards under the
provisions of SFAS 123(R) using the Black-Scholes option
valuation model.
For the years ended December 31, 2007, 2006 and 2005, the
Company recorded stock-based compensation expense of $1,869,000,
$745,000, and $85,000, respectively. In future periods,
stock-based compensation expense may increase as the Company
issues additional stock-based awards to continue to attract and
retain key employees. SFAS 123(R) also requires that the
Company recognize stock-based compensation expense only for the
portion of stock options that are expected to vest, based on the
Companys estimated forfeiture rate. If the actual number
of future forfeitures differs from that estimated by management,
the Company may be required to record adjustments to stock-based
compensation expense in future periods.
The Company accounts for stock-based compensation arrangements
with non-employees in accordance with SFAS 123 and Emerging
Issues Task Force, or EITF,
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services, using a fair value approach. The fair
value of the stock options granted to non-employees was
estimated using the Black-Scholes option valuation model. This
model utilizes the estimated fair value of the Companys
common stock, the contractual term of the option, the expected
volatility of the price of the Companys common stock,
risk-free interest rates and the expected dividend yields of the
Companys common stock. Stock-based compensation expense
related to non-employees was $114,000, $70,000, $62,000 and for
the year ended December 31, 2007, 2006 and 2005,
respectively.
The following table presents the detail of stock-based
compensation expense amounts included in the consolidated
statement of operations for each of the last years presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Cost of revenue
|
|
$
|
43
|
|
|
$
|
9
|
|
|
$
|
|
|
Research and development
|
|
|
805
|
|
|
|
396
|
|
|
|
10
|
|
Sales, general and administrative
|
|
|
1,021
|
|
|
|
340
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,869
|
|
|
$
|
745
|
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total stock-based compensation cost capitalized as part of
inventory as of December 31, 2007 and 2006 was $3,000 and
$43,000, respectively.
Other
Comprehensive Income (Loss)
Comprehensive income (loss) includes all changes in equity that
are not the result of transactions with stockholders. For the
year ended 2007, 2006 or 2005, there are no components of
comprehensive income (loss)
56
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
which are excluded from the net loss and, therefore, no separate
statement of comprehensive income (loss) has been presented.
Cumulative
Effect of Change in Accounting Principle
On July 1, 2005, we adopted FASB Staff Position
150-5,
Issuers Accounting under FASB Statement No. 150
for Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable, or
FSP 150-5.
FSP 150-5
provides that the warrants we have issued to purchase shares of
our convertible preferred stock are subject to the requirements
in
FSP 150-5,
which requires us to classify these warrants as current
liabilities and to adjust the value of these warrants to their
fair value at the end of each reporting period. At the time of
adoption, we recorded a charge in the amount of $100,000 for the
cumulative effect of this change in accounting principle, to
reflect the estimated increase in fair value of these warrants
as of that date. We recorded $573,000, $467,000 and $411,000
warrant revaluation expense for the years ended
December 31, 2007, 2006 and 2005, respectively.
Upon our initial public offering in May 2007, all outstanding
warrants to purchase mandatorily redeemable convertible
preferred stock converted to warrants to purchase common stock.
As a result, the aggregate fair value of these warrants has been
reclassified from current liabilities to additional paid-in
capital.
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157.
SFAS No. 157 defines fair value, establishes a
framework and provides guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. On November 15, 2007, the FASB granted a one year
deferral for non-financial assets and liabilities to comply with
SFAS No. 157; however, the effective date for
financial assets remains intact. We are currently assessing the
impact, if any, of adopting SFAS No. 157 on our
financial position, results of operations and liquidity.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, which permits entities to choose to measure
eligible financial instruments and certain other items at fair
value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair
value option has been elected are reported in earnings at each
subsequent reporting date. SFAS No. 159 is effective
for fiscal years beginning after November 15, 2007. The
Company plans to adopt this pronouncement in the first quarter
of 2008 and is currently evaluating the impact of this
pronouncement on the Companys consolidated results of
operations and financial position.
In December 2007, the FASB issued Statement of Financial
Accounting Standards No. 141 (revised 2007), or
SFAS No. 141R, Business Combinations, which
replaces SFAS No 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are
recognized in the purchase accounting. It also changes the
recognition of assets acquired and liabilities assumed arising
from contingencies, requires the capitalization of in-process
research and development at fair value, and requires the
expensing of acquisition-related costs as incurred.
SFAS No. 141R is effective for financial statements
issued for fiscal years beginning after December 15, 2008
and will apply prospectively to business combinations completed
on or after that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, or SFAS No. 160.
SFAS No. 160 clarifies that a noncontrolling or
minority interest in a subsidiary is considered an ownership
interest and, accordingly, requires all entities to report such
interests in subsidiaries as equity in the consolidated
financial statements. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company
is currently evaluating the impact, if any, of adopting this
standard on the Companys financial position, results of
operations and liquidity.
57
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Net
Income (Loss) Per Common Share
|
The Company calculates net income (loss) per share in accordance
with SFAS No. 128 (SFAS 128),
Earnings Per Share. Under SFAS 128, basic net income
(loss) per common share is computed by dividing net income
(loss) by the weighted average number of common shares
outstanding during the period (excluding shares subject to
repurchase). Diluted net income (loss) per common share is
computed by dividing net income (loss) by the weighted-average
number of common and potentially dilutive common equivalent
shares outstanding during the period. Potentially dilutive
securities, composed of incremental common shares issuable upon
the exercise of stock options and common stock subject to
repurchase, are included in diluted net income per share for the
year ended December 31, 2007, 2006 and 2005, respectively.
The following table sets forth the computation of income (loss)
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Net income (loss)
|
|
$
|
2,190
|
|
|
$
|
(8,985
|
)
|
|
$
|
(11,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic
|
|
|
29,006
|
|
|
|
8,066
|
|
|
|
7,319
|
|
Dilutive effect of employee stock plans
|
|
|
3,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted
|
|
|
32,432
|
|
|
|
8,066
|
|
|
|
7,319
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.08
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.07
|
|
|
$
|
(1.11
|
)
|
|
$
|
(1.59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following weighted average outstanding options, common stock
subject to repurchase and convertible preferred stock were
excluded from the computation of diluted net income (loss) per
common share for the periods presented because including them
would have had an antidilutive effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Options to purchase common stock and common stock subject to
repurchase
|
|
|
701
|
|
|
|
5,094
|
|
|
|
3,533
|
|
Convertible preferred stock (as converted basis)
|
|
|
|
|
|
|
22,364
|
|
|
|
21,091
|
|
Convertible stock warrants (as converted basis)
|
|
|
|
|
|
|
103
|
|
|
|
316
|
|
Inventories are stated at the lower of cost (determined using
the
first-in,
first-out method), or market value (estimated net realizable
value) and are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Work-in-process
|
|
$
|
8,092
|
|
|
$
|
2,069
|
|
Finished goods
|
|
|
1,481
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
9,573
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
58
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property
and Equipment, Net
|
Property and equipment, net, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Test equipment
|
|
$
|
5,587
|
|
|
$
|
1,418
|
|
Software and computer equipment
|
|
|
12,738
|
|
|
|
7,178
|
|
Furniture, office equipment and leasehold improvements
|
|
|
57
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,382
|
|
|
|
8,636
|
|
Less: accumulated depreciation and amortization
|
|
|
(6,774
|
)
|
|
|
(3,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,608
|
|
|
$
|
5,040
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $4,754,000, $2,192,000
and $842,000 and for the years ended December 31, 2007,
2006 and 2005, respectively.
Capital leases which are time-based subscription design tools
are included in property and equipment, and they were $7,873,000
and $3,623,000 at December 31, 2007 and 2006, respectively.
Amortization expense related to assets recorded under capital
lease was $1,645,000, $1,033,000 and $153,000 for the years
ended December 31, 2007, 2006 and 2005, respectively.
|
|
5.
|
Intangible
Assets, net
|
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Developed technology
|
|
$
|
3,343
|
|
|
$
|
3,343
|
|
Technology license
|
|
|
9,205
|
|
|
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,548
|
|
|
|
8,887
|
|
Less: accumulated amortization
|
|
|
|
|
|
|
|
|
Developed technology
|
|
|
(3,235
|
)
|
|
|
(2,375
|
)
|
Technology license
|
|
|
(5,217
|
)
|
|
|
(4,610
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,096
|
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
|
|
Amortization expenses were $1,467,000, $2,817,000 and $2,466,000
for the years ended December 31, 2007, 2006 and 2005,
respectively. The weighted-average remaining estimated lives for
intangible assets are approximately 0.3 year for developed
technology and 2.2 years for technology license. The
weighted average remaining estimated life of intangible assets
in total is approximately 2.1 years. Future amortization
expenses are estimated to be $1,009,000 for 2008, $1,530,000 for
2009, $1,250,000 for 2010, and $307,000 thereafter.
59
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Accrued
expenses and other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Accrued compensation and related benefit
|
|
$
|
1,010
|
|
|
$
|
851
|
|
Accrued warranty
|
|
|
261
|
|
|
|
161
|
|
Refundable deposits related to unvested employee stock option
exercises
|
|
|
70
|
|
|
|
173
|
|
Professional fees
|
|
|
285
|
|
|
|
583
|
|
Income tax payable
|
|
|
231
|
|
|
|
558
|
|
Other
|
|
|
396
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,253
|
|
|
$
|
2,853
|
|
|
|
|
|
|
|
|
|
|
In October 2005, the Company entered into a loan and security
agreement with Silicon Valley Bank to provide a revolving line
of credit for $6.0 million collateralized by eligible
receivables and all of the Companys other assets except
intellectual property. Borrowings under the revolving line of
credit bore interest at the banks prime rate plus an
applicable margin based on certain financial ratios of the
Company at the borrowing date. The applicable rate of interest
under the revolving line of credit was 10.5% as of
December 31, 2006. On January 25, 2007, the Company
entered into a loan modification agreement that extended the
term of the existing revolving line of credit through
July 4, 2008. The Company cancelled the line of credit in
connection with its initial public offering in May 2007.
In October 2005, the Company also entered into a term loan and
security agreement, the Term Loan, with Silicon Valley Bank and
Gold Hill Venture Lending that provided a $4.0 million term
loan line of credit. The Term Loan was secured by all of the
Companys other assets except intellectual property. Upon
entering into the Term Loan, the Company issued warrants to
purchase a total of 27,500 shares of Series D
convertible preferred stock at a price of $6.58 per share.
In June 2006, the Company borrowed $4.0 million against the
Term Loan. Concurrently, the Company issued additional warrants
to purchase 27,500 shares of Series D convertible
preferred stock at a price of $6.58 per share. On
October 24, 2006 the Company entered into the First
Amendment to the Term Loan. The Term Loan carried a fixed
interest rate of 10.5% as of December 31, 2006. The Company
repaid the Term Loan on May 3, 2007.
All warrants to purchase Series D convertible preferred
stock were converted to warrants to purchase common stock as
detailed in Note 8.
60
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Mandatorily
Redeemable Convertible Preferred Stock and Stockholders
Equity (Deficit)
|
Mandatorily
Redeemable Convertible Preferred Stock
At the closing of the IPO in May 2007, all outstanding
mandatorily redeemable convertible preferred stock converted to
common stock with a conversion ratio of 1 to 1. The following
table sets forth the information about the mandatorily
redeemable convertible preferred stock:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except share data)
|
|
|
Mandatorily redeemable convertible preferred stock, par value
$0.001
|
|
|
|
|
|
|
|
|
Series A: 4,349,995 shares authorized;
4,349,989 shares issued and outstanding at
December 31, 2006 and none was issued and outstanding at
December 31, 2007; none and $7,830 liquidation preference
|
|
$
|
|
|
|
$
|
7,773
|
|
Series B: 7,612,431 shares authorized;
7,564,448 shares issued and outstanding at
December 31, 2006 and none was issued and outstanding at
December 31, 2007; none and $15,885 liquidation preference
|
|
|
|
|
|
|
16,534
|
|
Series C: 6,206,897 shares authorized;
6,206,892 shares issued and outstanding at
December 31, 2006 and none was issued and outstanding at
December 31, 2007; none and $18,000 liquidation preference
|
|
|
|
|
|
|
17,973
|
|
Series D: 4,765,835 shares authorized at
December 31, 2006; 4,242,866 shares issued and
outstanding at December 31, 2006 and none was issued and
outstanding as of December 31, 2007; none and $27,908
liquidation preference
|
|
|
|
|
|
|
30,157
|
|
|
|
|
|
|
|
|
|
|
Total mandatorily redeemable convertible preferred stock
|
|
$
|
|
|
|
$
|
72,437
|
|
|
|
|
|
|
|
|
|
|
Warrants
Pursuant to the amendment with Silicon Valley Bank and Gold Hill
Venture Lending, and upon closing of the companys IPO in
May 2007, all of the outstanding warrants to purchase
mandatorily redeemable convertible preferred stock converted to
warrants to purchase common stock. The following table sets
forth the warrant liability that was reclassified to additional
paid-in-capital.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
Estimated Fair
|
|
|
|
Series of
|
|
of Shares
|
|
|
|
|
|
|
Value Reclassified to
|
|
|
|
Convertible
|
|
Subject to
|
|
|
|
Exercise
|
|
|
Additional Paid-in-capital
|
|
|
|
Preferred Stock
|
|
Warrants
|
|
Issue Date
|
|
Price
|
|
|
Upon IPO
|
|
|
Expiration Date
|
|
B
|
|
|
47,619
|
|
|
November 1, 2002
|
|
$
|
2.10
|
|
|
$
|
568,000
|
|
|
October 31, 2012
|
D
|
|
|
27,500
|
|
|
October 6, 2005
|
|
|
6.58
|
|
|
|
352,000
|
|
|
October 5, 2015
|
D
|
|
|
27,500
|
|
|
June 19, 2006
|
|
|
6.58
|
|
|
|
352,000
|
|
|
October 5, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,619
|
|
|
|
|
|
|
|
|
$
|
1,272,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On May 1, 2007, the Company signed an amendment with
Silicon Valley Bank who held warrants to purchase
47,619 shares of Series B preferred stock and
17,187 shares of Series D preferred stock to convert
the warrants to common stock warrant. As a result, the fair
value of the warrants at the time of the conversion was
$745,000. The remaining warrants to purchase Series D
preferred stock were automatically converted to common stock
warrants at the closing of the IPO on May 7, 2007. The fair
value of the warrants at the conversion was $527,000.
On July 12, 2007, Gold Hill Venture Lending net exercised
the warrant to purchase 37,813 shares of common stock at an
exercise price of $6.58 per share. The Company issued an
aggregate of 28,239 shares of common stock. No cash was
paid to the Company for such issuance of the common stock.
61
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On October 4, 2007, Silicon Valley Bank net exercised
warrants to purchase 17,187 shares of common stock at an
exercise price of $6.58 per share and 47,619 shares at an
exercise price of $2.10 per share. The Company issued an
aggregate of 58,517 shares of common stock. No cash was
paid to the Company for such issuance of the common stock.
In addition, 181 shares of warrants to purchase
Series B preferred stock were exercised in January 2007 and
the remaining 176 shares of warrants to purchase
Series B preferred stock expired on February 15, 2007.
Total outstanding shares of warrants were none and 102,976 at
December 31, 2007 and 2006, respectively.
Common
Stock
In May 2007, the Company completed its IPO in which the Company
sold and issued 7,762,500 shares of common stock, including
1,012,500 shares of the underwriters over-allotment,
at an issue price of $13.50 per share. The Company received
gross proceeds of $104.8 million from the IPO, or
approximately $94.7 million in net proceeds after deducting
underwriting discounts and commissions of $7.3 million and
other offering costs of $2.8 million. Upon the closing of
the IPO, all shares of mandatorily redeemable convertible
preferred stock outstanding automatically converted into
22,364,378 shares of common stock.
|
|
|
|
|
Common stock outstanding at December 31, 2006
|
|
|
9,365,600
|
|
Common stock issued in IPO
|
|
|
7,762,500
|
|
Conversion of mandatorily redeemable convertible preferred stock
to common stock
|
|
|
22,364,378
|
|
Common stock issued in connection with exercises of stock options
|
|
|
742,712
|
|
Common stock issued in connection with the common stock warrant
exercises
|
|
|
86,756
|
|
Repurchases of shares of unvested common stock
|
|
|
(14,585
|
)
|
|
|
|
|
|
Common stock outstanding at December 31, 2007
|
|
|
40,307,361
|
|
|
|
|
|
|
Stock
Options and Unvested Common Stock
Upon completion of its IPO in May 2007, the Company adopted the
2007 Stock Incentive Plan, the 2007 Plan, which reserved
5,000,000 shares of the Companys common stock. The
number of shares of the common stock reserved for issuance will
automatically increase on January 1st, from January 1,
2008 through January 1, 2017, by the lesser of (i) 5%
of the total number of shares of the common stock outstanding on
the applicable January 1st date or
(ii) 5,000,000 shares. The board of directors may also
act, prior to the first day of any fiscal year, to increase the
number of shares as the board of directors shall determine,
which number shall be less than each of (i) and (ii). The
maximum number of shares that may be issued pursuant to the
exercise of incentive stock options under the 2007 Plan is equal
to 10,000,000 shares. The 2007 Plan provides for the grant
of incentive stock options, non-statutory stock options,
restricted stock awards, restricted stock unit awards, stock
appreciation rights, performance stock awards, and other forms
of equity compensation (collectively, stock awards),
and performance cash awards, all of which may be granted to
employees (including officers), directors, and consultants or
affiliates. Awards granted under the 2007 Plan vest at the rate
specified by the plan administrator, typically with 1/8th of the
shares vesting six months after the date of grant and 1/48th of
the shares vesting monthly thereafter over the next three and
one half years. The term of awards expires ten years from the
date of grant. As of December 31, 2007, 197,700 shares
have been granted under the 2007 Plan.
As of December 31, 2006, the Companys 2001 Stock
Incentive Plan, the 2001 Plan, reserved 590,220 shares of
the Companys common stock for issuance to employees,
officers, consultants and advisors of the Company. Options
granted under the 2001 Plan were either incentive stock options
or non-statutory stock options as determined by the
Companys board of directors. Options granted under the
2001 Plan vest at the rate specified by the plan administrator,
typically with 1/8th of the shares vesting six months after the
date of grant and 1/48th of the shares vesting monthly
thereafter over the next three and one half years to four and
one half years. The term of
62
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
option expires ten years from the date of grant. In 2007 prior
to the Companys IPO, 361,375 shares had been granted
under the 2001 Plan.
Under the Companys 2001 Plan, certain employees have the
right to early-exercise unvested stock options, subject to
rights held by the Company to repurchase unvested shares in the
event of voluntary or involuntary termination. For options
granted prior to March 2005, the Company has the right to
repurchase any such shares at the shares original purchase
price. For options granted after March 2005, the Company has the
right to repurchase such shares at the lower of market value or
the original purchase price.
For those options granted prior to March 2005, in accordance
with
EITF 00-23,
Working Group Work Plan Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and FASB Interpretation No. 44
Accounting for Certain Transactions involving Stock
Compensation, the Company accounts for cash received in
consideration for the early-exercise of unvested stock options
as a current liability, included as a component of accrued
liabilities in the Companys consolidated balance sheets.
For those shares issued in connection with options granted prior
to March 2005, there were 123,895 and 377,030 unvested shares
outstanding as of December 31, 2007 and 2006, respectively,
and $70,000 and $173,000 related liabilities, respectively.
Detail related to activity of unvested shares of common stock is
as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Weighted-Average
|
|
|
|
Unvested Shares
|
|
|
Exercise/Purchase
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance as of December 31, 2004
|
|
|
1,335,113
|
|
|
$
|
0.34
|
|
Issued
|
|
|
454,791
|
|
|
|
0.86
|
|
Vested
|
|
|
(708,289
|
)
|
|
|
0.35
|
|
Repurchased
|
|
|
(18,645
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
1,062,970
|
|
|
|
0.56
|
|
Issued
|
|
|
400,023
|
|
|
|
2.95
|
|
Vested
|
|
|
(558,184
|
)
|
|
|
0.60
|
|
Repurchased
|
|
|
(32,599
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
872,210
|
|
|
|
1.63
|
|
Issued
|
|
|
80,397
|
|
|
|
5.64
|
|
Vested
|
|
|
(501,360
|
)
|
|
|
1.59
|
|
Repurchased
|
|
|
(14,585
|
)
|
|
|
0.71
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
436,662
|
|
|
|
2.45
|
|
|
|
|
|
|
|
|
|
|
63
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Detail related to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted-Average
|
|
|
|
of Shares
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Balance at December 31, 2004
|
|
|
1,326,061
|
|
|
$
|
0.30
|
|
Options granted
|
|
|
1,754,366
|
|
|
|
1.05
|
|
Options exercised
|
|
|
(524,021
|
)
|
|
|
0.80
|
|
Options cancelled and forfeited
|
|
|
(86,236
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
|
2,470,170
|
|
|
|
0.72
|
|
Options granted
|
|
|
2,434,750
|
|
|
|
3.42
|
|
Options exercised
|
|
|
(602,634
|
)
|
|
|
2.26
|
|
Options cancelled and forfeited
|
|
|
(80,882
|
)
|
|
|
1.57
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
|
4,221,404
|
|
|
|
2.05
|
|
Options granted
|
|
|
546,575
|
|
|
|
15.31
|
|
Options exercised
|
|
|
(742,212
|
)
|
|
|
1.97
|
|
Options cancelled and forfeited
|
|
|
(105,766
|
)
|
|
|
3.93
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
3,920,001
|
|
|
|
3.86
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value for options exercised during the year
ended December 31, 2007 was $15.2 million,
representing the difference between the estimated fair value of
the Companys common stock at the date of exercise and the
exercise price paid.
The following table summarizes information about all stock
options outstanding as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Options
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Exercise Prices
|
|
Shares
|
|
|
Term
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
$ 0.19- 0.80
|
|
|
544,722
|
|
|
|
6.15
|
|
|
$
|
0.29
|
|
|
|
436,729
|
|
|
$
|
0.28
|
|
|
|
|
|
1.02- 1.50
|
|
|
1,080,161
|
|
|
|
7.52
|
|
|
|
1.04
|
|
|
|
614,487
|
|
|
$
|
1.03
|
|
|
|
|
|
3.04- 3.74
|
|
|
1,624,072
|
|
|
|
8.14
|
|
|
|
3.07
|
|
|
|
536,441
|
|
|
$
|
3.07
|
|
|
|
|
|
5.42- 8.52
|
|
|
486,346
|
|
|
|
9.08
|
|
|
|
7.36
|
|
|
|
95,599
|
|
|
$
|
6.97
|
|
|
|
|
|
27.00-31.54
|
|
|
184,700
|
|
|
|
9.66
|
|
|
|
28.57
|
|
|
|
13,173
|
|
|
$
|
27.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 0.19-31.54
|
|
|
3,920,001
|
|
|
|
7.93
|
|
|
|
3.86
|
|
|
|
1,696,429
|
|
|
$
|
2.02
|
|
|
$
|
76,133,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
1,696,429
|
|
|
|
7.46
|
|
|
|
2.02
|
|
|
|
|
|
|
|
|
|
|
|
35,685,604
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
3,621,177
|
|
|
|
7.90
|
|
|
|
3.79
|
|
|
|
|
|
|
|
|
|
|
|
70,557,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of each employee option grant for the year ended
December 31, 2007 and 2006 under SFAS 123(R) was
estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions.
64
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
For the Year
|
|
|
Ended December 31,
|
|
|
2007
|
|
2006
|
|
Risk-free interest rate
|
|
3.29%-4.72%
|
|
4.36%-5.23%
|
Expected life
|
|
4-6 years
|
|
4-5 years
|
Dividend yield
|
|
None
|
|
None
|
Volatility
|
|
55%-56%
|
|
50%-60%
|
The Company determined that it was not practical to calculate
the historical volatility of its share price since the
Companys securities were not publicly traded prior to May
2007 and therefore, there is no readily determinable market
value for its stock; it has limited information on its own past
volatility; and the Company is a high-growth technology company
whose future operating results are not comparable to its prior
operating results. Therefore, the Company estimated its expected
volatility based on reported market value data for a group of
publicly traded companies, which it selected from certain market
indices, that the Company believed was relatively comparable
after consideration of their size, stage of life cycle,
profitability, growth, and risk and return on investment. The
expected term represents the period that stock-based awards are
expected to be outstanding, giving consideration to the
contractual terms of the stock-based awards, vesting schedules
and expectations of future employee behavior as influenced by
changes to the terms of our stock-based awards. For the year
ended December 31, 2007, we used the simplified method of
determining the expected term as permitted by the provisions of
Staff Accounting Bulletin No. 107, Share-Based
Payment and Staff Accounting Bulletin No. 110,
Year-End Help for Expensing Employee Stock Options.
The estimated weighted-average grant date fair value of options
granted during the twelve months ended December 31, 2007
and 2006 were $9.62 and $2.12, respectively.
As of December 30, 2007, there was $6.0 million of
unrecognized compensation costs related to stock options granted
under the companys 2001 and 2007 Plans. The unrecognized
compensation cost is expected to be recognized over a weighted
average period of 2.47 years.
Restricted
Stock Unit Awards
The company began issuing restricted stock units, or RSUs, in
the fourth quarter of 2007. Shares are issued on the date the
restricted stock units vest, and the fair value of the
underlying stock on the dates of grant is recognized as
stock-based compensation over a three-year vesting period. Below
is the information as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
Unvested
|
|
|
Grant Date
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Fair Market
|
|
|
Contractual
|
|
|
Fair
|
|
|
|
Outstanding
|
|
|
Value
|
|
|
Term (years)
|
|
|
Value(1)
|
|
|
Non-vested at December 31, 2006
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,500
|
|
|
|
31.54
|
|
|
|
|
|
|
|
|
|
Issued and released
|
|
|
(500
|
)
|
|
|
|
|
|
|
|
|
|
$
|
27.20
|
|
Cancelled/Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2007
|
|
|
12,000
|
|
|
|
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the value of Cavium stock on the date that the
restricted stock units vest. |
The total intrinsic value of the RSUs issued as of
December 31, 2007 was $276,000, representing the closing
price of the Companys stock on December 31, 2007,
multiplied by the number of non-vested RSUs expected to vest as
of December 31, 2007.
Share-based compensation related to the RSUs is calculated based
on the market price of the Companys common stock on the
date of grant. The weighted average estimated values of
restricted stock unit grants, as well as
65
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the weighted average assumptions that were used in calculating
the fair value during 2007, were based on estimates at the date
of grant, as follows:
|
|
|
|
|
|
|
2007
|
|
|
Estimated values
|
|
$
|
31.54
|
|
Risk-free interest rate
|
|
|
3.29
|
%
|
Dividend yield
|
|
|
0
|
%
|
As of December 31, 2007, there was $336,000 of unrecognized
compensation costs related to restricted stock units granted
under the Companys 2007 Equity Incentive Plan. The
unrecognized compensation cost is expected to be recognized over
a weighted average period of 2.83 years.
Prior to December 31, 2007 the Company had incurred
operating losses and, accordingly, had not recorded a provision
for income taxes. For the years ended December 31, 2007 and
2006, the Company reported $142,000 and $560,000, respectively,
of income tax expense. The provision at December 31, 2006
was primarily related to alternative minimum tax on profit in
connection with establishing the international business
structure. The provision at December 31, 2007 was primarily
due to the federal alternative minimum tax on profits in the
Companys United States profits adjusted by certain
non-deductible items, international taxes and state income taxes.
The domestic and foreign components of loss before income tax
expense and cumulative effect of change in accounting principle
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
11,037
|
|
|
$
|
17,877
|
|
|
$
|
(11,572
|
)
|
Foreign
|
|
|
(8,705
|
)
|
|
|
(26,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,332
|
|
|
$
|
(8,425
|
)
|
|
$
|
(11,572
|
)
|
The difference between the provision for income that would be
derived by applying the statutory rate to income before tax for
the year ended December 31, 2007 and the provision actually
recorded was due to the benefit from net operating loss
carryforwards.
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Domestic
|
|
$
|
97
|
|
|
$
|
560
|
|
|
$
|
|
|
Foreign
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
142
|
|
|
$
|
560
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys effective tax rate differs from the United
States federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax
|
|
|
2.5
|
|
|
|
6.6
|
|
|
|
|
|
Change in valuation allowance
|
|
|
(31.4
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
Other
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6.1
|
%
|
|
|
6.6
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of the temporary differences that give rise to
deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets, non-current:
|
|
|
|
|
|
|
|
|
Tax credits
|
|
$
|
5,987
|
|
|
$
|
4,155
|
|
Net operating loss carryforwards
|
|
|
3,092
|
|
|
|
12,736
|
|
Capitalized research and development
|
|
|
115
|
|
|
|
170
|
|
Depreciation and amortization
|
|
|
2,834
|
|
|
|
1,087
|
|
Other
|
|
|
1,108
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
13,136
|
|
|
|
19,078
|
|
Less: valuation allowance
|
|
|
(13,136
|
)
|
|
|
(19,078
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
As of December 31, 2007, the Company had total net
operating loss carryforwards for federal and state income tax
purposes of $26.3 million and $44.6 million,
respectively. If not utilized, these net federal and state
operating loss carryforwards will expire beginning in 2022 and
2012, respectively. The Company is tracking the portion of its
deferred tax assets attributable to stock option benefits in a
separate memo account pursuant to SFAS No. 123R.
Therefore, these amounts are no longer included in the
Companys gross or net deferred tax assets. Pursuant to
SFAS No. 123R, footnote, 82, the stock option benefits
of approximately $5.3 million will only be recorded to
equity when they reduce cash taxes payable. The Company also had
federal and other state research and development tax credit
carryforwards of approximately $3.8 million and
$3.5 million, respectively. The federal and other state tax
credit carryforwards will expire commencing 2021 and 2018,
respectively, except for the California research tax credits
which carry forward indefinitely. The Company also has federal
alternative minimum tax credits of approximately
$0.6 million, which have no expiration date. Realization of
deferred tax assets is dependent upon future earnings, if any,
the timing and amount of which are uncertain. Accordingly, the
Companys net deferred tax assets have been fully offset by
a valuation allowance. The valuation allowance decreased by
$5.9 million and $4.4 million for the periods ended
December 31, 2007 and 2006, respectively. The provision for
income taxes could be favorably impacted during 2008, or future
years, if the Companys results of operations and forecasts
of future profitability improve significantly to indicate that
the deferred tax assets will be realized. Such a change in
expectations could result in a material change to its valuation
allowance assessment and the resulting income tax provision.
The Company has reviewed whether the utilization of its net
operating losses and research credits were subject to a
substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar
state provisions. The Company does not expect the disclosed net
operating losses and research credits carryovers to expire
before the statute lapses.
67
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Undistributed earnings of our foreign subsidiary of
approximately $0.2 million and $0.1 million at
December 31, 2007 and 2006, respectively, are considered to
be indefinitely reinvested and, accordingly, no provisions for
federal and state income taxes have been provided thereon. Upon
distribution of those earnings in the form of dividends or
otherwise, we would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and
withholding taxes payable to various foreign countries.
The Company adopted FASB Interpretation 48, Accounting for
Uncertainty in Income Taxes, or FIN 48, on
January 1, 2007. As a result of the implementation of
FIN 48, the Company did not recognize any adjustment to the
liability for uncertain tax positions and therefore did not
record any adjustment to the beginning balance of retained
earnings on the consolidated balance sheet. As of the date of
adoption, the Company recorded a $3.3 million reduction to
deferred tax assets for unrecognized tax benefits, all of which
is currently offset by a full valuation allowance and therefore
did not record any adjustment to the beginning balance of
retained earnings on the balance sheet.
The Companys practice is to recognize interest
and/or
penalties related to income tax matters in income tax expense.
As of December 31 2007, the Company had $9,600 in accrued
interest
and/or
penalties.
The following table summarizes the activity related to the
unrecognized tax benefits:
|
|
|
|
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2006
|
|
$
|
3,264
|
|
Gross increases related to prior years tax positions
|
|
|
40
|
|
Gross increases related to current year tax positions
|
|
|
270
|
|
Settlements
|
|
|
|
|
Expiration of the statute of limitations for the assessment of
taxes
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
3,574
|
|
|
|
|
|
|
Included in the unrecognized tax benefits of $3.6 million
at December 31, 2007 was $0.2 million of tax benefits
that, if recognized, would reduce the Companys annual
effective tax rate. The Company does not expect its unrecognized
tax benefits to change significantly over the next
12 months.
The Company is in the process of expanding its international
operations and staff to better support its expansion into
international markets. This expansion includes the
implementation of an international structure that includes,
among other things, a research and development cost-sharing
arrangement, certain licenses and other contractual arrangements
between the Company and its wholly-owned domestic and foreign
subsidiaries. The Companys foreign subsidiaries have
acquired certain rights to sell the existing intellectual
property and intellectual property that will be developed or
licensed in the future. The existing rights were transferred for
an initial payment. As a result of these changes and an
expanding customer base in Asia, the Company expects that an
increasing percentage of its consolidated pre-tax income will be
derived from, and reinvested in, its Asian operations. The
Company anticipates that this pre-tax income will be subject to
foreign tax at relatively lower tax rates when compared to the
United States federal statutory tax rate and as a consequence,
the Companys effective income tax rate is expected to be
lower than the United States federal statutory rate.
The Companys major tax jurisdictions are the United States
federal government and the state of California. The Company
files income tax returns in the United States federal
jurisdiction, the state of California and various state and
foreign tax jurisdictions in which it has a subsidiary or branch
operation. The United States federal corporation income tax
returns beginning with the 2000 tax year remain subject to
examination by the Internal Revenue Service, or IRS. The
California corporation income tax returns beginning with the
2000 tax year remain subject to examination by the California
Franchise Tax Board. There are no on-going tax audits in the
major tax jurisdictions.
68
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Company has established a defined contribution savings plan
under Section 401(k) of the Internal Revenue Code. This
plan covers substantially all employees who meet minimum age and
service requirements and allows participants to defer a portion
of their annual compensation on a pre-tax basis. Company
contributions to the plan may be made at the discretion of the
board of directors. Through December 31, 2007, the Company
has not made any contributions to the plan.
11. Segment
Information
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, establishes standards
for reporting information about operating segments. Operating
segments are defined as components of an enterprise for which
separate financial information is available and evaluated
regularly by the chief operating decision-maker, or
decision-making group, in deciding how to allocate resources and
in assessing performance. The Company is organized as, and
operates in, one reportable segment: the development and sale of
semiconductor processor solutions for next-generation
intelligent networking equipment. The chief operating
decision-maker is the Chief Executive Officer. The
Companys Chief Executive Officer reviews financial
information presented on a consolidated basis, accompanied by
information about revenue by customer and geographic region, for
purposes of evaluating financial performance and allocating
resources. The Company and its Chief Executive Officer evaluate
performance based primarily on revenue to the customers and in
the geographic locations in which the Company operates. Revenue
is attributed by geographic location based on the bill-to
location of customer. The Companys long-lived assets are
primarily located in the United States of America and not
allocated to any specific region. Therefore, geographic
information is presented only for total revenue.
The following table is based on the geographic location of the
original equipment manufacturers or the distributors who
purchased the Companys products. For sales to the
distributors, their geographic location may be different from
the geographic locations of the ultimate end users. Sales by
geography for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
United States
|
|
$
|
32,748
|
|
|
$
|
19,483
|
|
|
$
|
10,292
|
|
Taiwan
|
|
|
10,500
|
|
|
|
7,403
|
|
|
|
3,085
|
|
China
|
|
|
3,367
|
|
|
|
2,290
|
|
|
|
1,865
|
|
Japan
|
|
|
2,732
|
|
|
|
2,612
|
|
|
|
3,517
|
|
Other countries
|
|
|
4,856
|
|
|
|
2,417
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
54,203
|
|
|
$
|
34,205
|
|
|
$
|
19,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.
|
Commitments
and Contingencies
|
The Company leases its facilities under non-cancelable operating
leases, which contain renewal options and escalation clauses,
and expire through May 2012. The Company also acquires certain
assets under capital leases.
69
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Minimum commitments under non-cancelable capital and operating
lease agreements as of December 31, 2007 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Lease and
|
|
|
|
|
|
|
|
|
|
Technology License
|
|
|
Operating
|
|
|
|
|
|
|
Obligations
|
|
|
Leases
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
2008
|
|
$
|
4,969
|
|
|
$
|
1,266
|
|
|
$
|
10,932
|
|
2009
|
|
|
2,596
|
|
|
|
1,065
|
|
|
|
3,661
|
|
2010
|
|
|
1,774
|
|
|
|
1,110
|
|
|
|
2,884
|
|
2011
|
|
|
|
|
|
|
843
|
|
|
|
843
|
|
2012
|
|
|
|
|
|
|
199
|
|
|
|
199
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,339
|
|
|
$
|
4,483
|
|
|
$
|
18,519
|
|
Less: Interest component
|
|
|
(809
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payment
|
|
|
8,530
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(4,471
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations
|
|
$
|
4,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred under operating leases was $997,000,
$797,000 and $589,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
The Company is not currently a party to any legal proceedings
that management believes would have a material adverse effect on
the consolidated financial position, results of operations or
cash flows of the Company.
The technology license obligations include future cash payments
payable primarily for license agreements with outside vendors.
One of the license agreements is with Cadence Design Systems for
its electronic design automation software which is used in the
design of the Companys products. The term of the license
is two years which will expire in June 2009. The second license
agreement is with MIPS Technologies, Inc. which includes a
non-exclusive, non-transferable right to develop multiple
licensed MIPS cores that implement the MIPS architecture. This
second license agreement required the Company to pay
$1.9 million after the completion of its IPO for an
automatic two-year extension of the license. The term of the
license after the two-year extension is seven years and will
expire in December 2010. As of December 31, 2007, $475,000
was paid, and the balance is accrued within capital lease and
technology license obligations on consolidated balance sheets.
The Company also has a purchase agreement with Synopsys Inc. to
purchase certain intellectual property which is to be used for
the Companys future products. The Company has an agreement
to pay $1.15 million over the two-year period for various
intellectual properties. The agreement will expire in October
2008. $815,000 has been paid to purchase certain intellectual
property as of December 31, 2007.
In October 2007, the Company signed a license agreement with
Synopsys for certain design tools totaling $7.0 million,
with 12 installment payments. The term of the license is three
years which will expire in October 2010. The present value of
the installment payments has been capitalized and is amortized
over three years, and included within capital lease and
technology license obligations on consolidated balance sheets.
As of December 31, 2007, $541,000 was paid.
70
CAVIUM
NETWORKS, INC.
Schedule II
Valuation and Qualifying Accounts and Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charges to
|
|
|
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
68
|
|
|
$
|
|
|
|
$
|
(30
|
)
|
|
$
|
38
|
|
Allowance for customer returns
|
|
|
34
|
|
|
|
434
|
|
|
|
(329
|
)
|
|
|
139
|
|
Income tax valuation allowance
|
|
|
19,078
|
|
|
|
|
|
|
|
(5,942
|
)
|
|
|
13,136
|
|
Year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
73
|
|
|
$
|
55
|
|
|
$
|
(60
|
)
|
|
$
|
68
|
|
Allowance for customer returns
|
|
|
37
|
|
|
|
123
|
|
|
|
(126
|
)
|
|
|
34
|
|
Income tax valuation allowance
|
|
|
23,474
|
|
|
|
|
|
|
|
(4,396
|
)
|
|
|
19,078
|
|
Year ended December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
59
|
|
|
$
|
14
|
|
|
$
|
|
|
|
$
|
73
|
|
Allowance for customer returns
|
|
|
58
|
|
|
|
183
|
|
|
|
(204
|
)
|
|
|
37
|
|
Income tax valuation allowance
|
|
|
18,228
|
|
|
|
5,246
|
|
|
|
|
|
|
|
23,474
|
|
All other schedules are omitted because they are inapplicable or
the requested information is shown in the consolidated financial
statements of the registrant or related notes thereto.
71
|
|
Item 9.
|
Changes
In and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
Our management evaluated, with the participation of our Chief
Executive Officer and our Chief Financial Officer, the
effectiveness of our disclosure controls and procedures (as
defined in
Rule 13a-15(e)
of the Exchange Act of 1934, as amended) as of the end of the
period covered by this Annual Report on
Form 10-K.
Based on this evaluation, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information
we are required to disclose in reports that we file or submit
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms,
and that such information is accumulated and communicated to
management as appropriate to allow for timely decisions
regarding required disclosure.
As a newly public company and under the applicable rules of the
Securities and Exchange Commission we are not required to
include Managements Annual Report on Internal Control Over
Financial Reporting or an attestation report of an Independent
Registered Public Accounting Firm in our Annual Report on
Form 10-K.
Changes
in Internal Control Over Financial Reporting
There was no change in our internal control over financial
reporting during the fourth quarter of 2007 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
PART III
Certain information required by Part III is omitted from
this Annual Report on
Form 10-K
since we intend to file our definitive proxy statement for our
2008 annual meeting of stockholders, pursuant to
Regulation 14A of the Securities Exchange Act, not later
than 120 days after the end of the fiscal year covered by
this Annual Report on
Form 10-K,
and certain information to be included in the proxy statement is
incorporated herein by reference.
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this item with respect to directors
and executive officers may be found under the caption
Executive Officers of the Registrant in Part I,
Item 1 of this Annual Report on
Form 10-K,
and in the section entitled Proposal 1
Election of Directors appearing in the Proxy Statement.
Such information is incorporated herein by reference.
The information required by this Item with respect to our audit
committee and audit committee financial expert may be found in
the section entitled Proposal 1 Election
of Directors Audit Committee appearing in the
Proxy Statement. Such information is incorporated herein by
reference.
The information required by this Item with respect to compliance
with Section 16(a) of the Securities Exchange Act of 1934
and our code of ethics may be found in the sections entitled
Section 16(a) Beneficial Ownership Reporting
Compliance and Proposal 1 Election
of Directors Code of Business Conduct and
Ethics, respectively, appearing in the Proxy Statement.
Such information is incorporated herein by reference.
|
|
Item 11.
|
Executive
Compensation.
|
The information required by this item is included in our proxy
statement for our 2008 annual meeting of stockholders under the
sections entitled Executive Compensation,
Compensation Committee Interlocks and Insider
Participation and Compensation Committee
Report and is incorporated herein by reference.
72
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
|
The information required by this item relating to security
ownership of certain beneficial owners and management is
included in our proxy statement for our 2008 annual meeting of
stockholders under the section entitled Security Ownership
of Certain Beneficial Owners and Management and is
incorporated herein by reference.
The information required by this item with respect to securities
authorized for issuance under our equity compensation plans is
incorporated herein by reference to the information from the
proxy statement for our 2008 annual meeting of stockholders
under the section entitled Equity Compensation Plan
Information and is incorporated herein by reference.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence.
|
The information required by this item is included in our proxy
statement for our 2008 annual meeting of stockholders under the
sections entitled Certain Relationships and Related
Transactions and Proposal 1
Election of Directors and is incorporated herein by
reference.
|
|
Item 14.
|
Principal
Accounting Fees and Services.
|
The information required by this item is incorporated herein by
reference to the information included in our proxy statement for
our 2008 annual meeting of stockholders under the section
entitled Proposal 2 Ratification of
Selection of Independent Registered Public Accounting Firm.
PART
IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
Index to Consolidated Financial Statements
a. The following documents are filed as part of this report:
|
|
|
|
|
1.
|
|
Financial Statements:
|
|
45
|
|
|
See Index to Financial Statements in Item 8 of this Annual
Report on
Form 10-K,
which is incorporated herein by reference.
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2.
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Financial Statement Schedule:
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71
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Schedule II Valuation and Qualifying Accounts
and Reserve
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3.
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Exhibits:
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74
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The exhibits listed in the accompanying index to exhibits are
filed or incorporated by reference as a part of this Annual
Report on
Form 10-K.
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73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 10, 2008.
Cavium Networks, Inc.
Syed Ali
President and Chief Executive Officer
Arthur Chadwick
Chief Financial Officer and Vice President
of Finance and Administration
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.
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Signature
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Title
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Date
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President, Chief Executive Officer and
Director (Principal Executive Officer)
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March 10, 2008
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/s/ Arthur
Chadwick Arthur
Chadwick
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Chief Financial Officer and Vice President
of Finance and Administration (Principal
Financial and Accounting Officer)
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March 10, 2008
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/s/ Kris
Chellam Kris
Chellam
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Director
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March 10, 2008
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Director
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March 10, 2008
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/s/ Anthony
Pantuso Anthony
Pantuso
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Director
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March 10, 2008
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Director
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March 10, 2008
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/s/ Anthony
Thornley Anthony
Thornley
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Director
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March 10, 2008
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74
EXHIBIT INDEX
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Incorporated by Reference
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Exhibit
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Schedule/
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File
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Filing
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Number
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Description
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Form
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Number
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Exhibit
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Date
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3
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.1
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Amended and Restated Certificate of Incorporation of the
Registrant
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S-1/A
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333-140660
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3
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.3
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4/13/2007
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3
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.2
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Amended and Restated Bylaws of the Registrant
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S-1/A
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333-140660
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3
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.5
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4/13/2007
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4
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.1
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Reference is made to exhibits 3.1 and 3.2
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4
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.2
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Form of the Registrants Common Stock Certificate
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S-1/A
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333-140660
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4
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.2
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4/24/2007
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4
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.3
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Third Amended and Restated Investors Rights Agreement,
dated December 8, 2004, as amended on October 25, 2005
and August 9, 2006, by and among the Registrant and certain
of its security holders
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S-1
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333-140660
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4
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.3
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2/13/2007
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10
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.1
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Form of Indemnity Agreement to be entered into between the
Registrant and its directors and officers
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S-1
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333-140660
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10
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.1
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2/13/2007
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10
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.2
|
|
2001 Stock Incentive Plan and forms of agreements thereunder
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S-1
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333-140660
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10
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.2
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2/13/2007
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10
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.3
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2007 Equity Incentive Plan
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S-1
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333-140660
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10
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.3
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2/13/2007
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10
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.4
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Form of Option Agreement, Form of Option Grant Notice and Form
of Exercise Notice under 2007 Equity Incentive Plan
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S-1
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333-140660
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10
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.4
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2/13/2007
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10
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.5
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Executive Employment Agreement, dated January 2, 2001,
between the Registrant and Syed Ali
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S-1
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333-140660
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10
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.5
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2/13/2007
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10
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.6
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Employment Offer Letter, dated December 27, 2004, between
the Registrant and Arthur Chadwick
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S-1
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333-140660
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10
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.6
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2/13/2007
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10
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.7
|
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Employment Offer Letter, dated January 22, 2001, between
the Registrant and Anil K. Jain
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S-1
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333-140660
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|
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10
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.7
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2/13/2007
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|
10
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.8
|
|
Employment Offer Letter, dated May 6, 2003, between the
Registrant and Rajiv Khemani
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S-1
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333-140660
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|
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10
|
.8
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2/13/2007
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|
10
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.9
|
|
Letter Agreement, dated November 4, 2005, between the
Registrant and Kris Chellam
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S-1
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333-140660
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10
|
.9
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2/13/2007
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|
10
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.10
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Letter Agreement, dated September 1, 2006, between the
Registrant and Anthony Thornley
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S-1
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333-140660
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10
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.10
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2/13/2007
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10
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.11
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Lease Agreement, dated April 15, 2005, between the
Registrant and MB Technology Park, LLC
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S-1
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333-140660
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10
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.11
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2/13/2007
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|
10
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.12*
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Lease Agreement Amendment, dated March 6 2008, between the
Registrant and MB Technology Park, LLC
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10
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.13
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Loan and Security Agreement, dated October 6, 2005, between
the Registrant and Silicon Valley Bank
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S-1
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333-140660
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10
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.12
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2/13/2007
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10
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.14
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Loan Modification Agreement, dated January 3, 2007, between
the Registrant and Silicon Valley Bank
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S-1
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333-140660
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10
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.13
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2/13/2007
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10
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.15
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Second Loan Modification Agreement, dated January 25, 2007,
between the Registrant and Silicon Valley Bank.
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S-1
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333-140660
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10
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.14
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2/13/2007
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10
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.16
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Term Loan and Security Agreement, dated October 6, 2005,
between the Registrant, Silicon Valley Bank and Gold Hill
Lending 03, L.P.
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S-1
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333-140660
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10
|
.15
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2/13/2007
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|
|
|
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|
|
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|
|
|
|
|
|
|
|
Incorporated by Reference
|
Exhibit
|
|
|
|
Schedule/
|
|
File
|
|
|
|
Filing
|
Number
|
|
Description
|
|
Form
|
|
Number
|
|
Exhibit
|
|
Date
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10
|
.17
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|
First Amendment to Loan and Security Agreement, dated
October 24, 2006, between the Registrant, Silicon Valley
Bank and Gold Hill Lending 03, L.P.
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|
S-1
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333-140660
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|
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10
|
.16
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|
2/13/2007
|
|
10
|
.18
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|
Form of Warrant to Purchase Shares of Series B preferred
stock
|
|
S-1
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333-140660
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10
|
.17
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2/13/2007
|
|
10
|
.19
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|
Form of Warrant to Purchase Shares of Series D preferred
stock
|
|
S-1
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|
333-140660
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|
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10
|
.18
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2/13/2007
|
|
10
|
.20
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|
Consent, Assignment, Assumption and Amendment Agreement, dated
February 5, 2007, between the Registrant, Silicon Valley
Bank and Gold Hill Lending 03, L.P.
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|
S-1/A
|
|
333-140660
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|
|
10
|
.19
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|
3/16/2007
|
|
10
|
.21
|
|
Letter Agreement, dated March 15, 2007, between the
Registrant and AVM Capital, L.P.
|
|
S-1/A
|
|
333-140660
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|
|
10
|
.20
|
|
3/16/2007
|
|
#10
|
.22
|
|
Master Technology License Agreement, dated December 30,
2003, between the Registrant and MIPS Technologies, Inc.
|
|
S-1/A
|
|
333-140660
|
|
|
10
|
.21
|
|
4/6/2007
|
|
21
|
.1*
|
|
Subsidiaries of the Registrant
|
|
|
|
|
|
|
|
|
|
|
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23
|
.1*
|
|
Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm
|
|
|
|
|
|
|
|
|
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|
31
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 of Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1*
|
|
Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 of Syed B. Ali, President and Chief Executive Officer
and Arthur D. Chadwick, Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Filed herewith |
|
# |
|
Confidential treatment has been requested with respect to
certain portions of this exhibit. Omitted portions have been
filed separately with the Securities and Exchange Commission. |
|
|
|
Management contract or compensatory plan or arrangement. |