As filed with the Securities and Exchange Commission on
April 13, 2007
Registration
No. 333-140660
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
AMENDMENT NO. 4
to
FORM S-1
REGISTRATION
STATEMENT
Under
The Securities Act of
1933
Cavium Networks, Inc.
(Exact name of Registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction of
incorporation or organization)
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3674
(Primary Standard
Industrial
Classification Code Number)
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77-0558625
(I.R.S. Employer
Identification Number)
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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)
Copies to:
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Vincent P.
Pangrazio, Esq.
Cooley Godward Kronish LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94304
(650) 843-5000
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Jeffrey D. Saper, Esq.
Allison B. Spinner, Esq.
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
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Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following
box.
o
CALCULATION OF REGISTRATION
FEE
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Proposed Maximum
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Proposed Maximum
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Title of Each Class of
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Amount to be
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Aggregate Offering
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Aggregate Offering
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Amount of
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Securities to be Registered
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Registered(1)
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Price Per Share(2)
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Price(2)
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Registration Fee(3)
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Common Stock, $0.001 par value per
share
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7,187,500
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$12.00
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$86,250,000
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$9,229
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(1)
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Includes 937,500 shares of
common stock issuable upon exercise of the underwriters
over-allotment option.
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(2)
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Estimated solely for the purpose of
calculating the amount of the registration fee in accordance
with Rule 457(a) of the Securities Act of 1933, as amended.
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(3)
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A registration fee of $9,229 was
previously paid in connection with the initial filing of this
registration statement on February 13, 2007.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities and we are not soliciting offers to buy these
securities in any jurisdiction where the offer or sale is not
permitted.
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PROSPECTUS
(Subject to Completion)
Issued April 13, 2007
6,250,000
Shares
COMMON
STOCK
Cavium Networks, Inc. is offering 6,250,000 shares of
its common stock. This is our initial public offering and no
public market currently exists for our shares. We anticipate
that the initial public offering price will be between $10.00
and $12.00 per share.
We have applied to have our common stock listed on The
NASDAQ Global Market under the symbol CAVM.
Investing in our common stock involves
risks. See Risk Factors beginning on
page 7.
PRICE
$
A SHARE
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Underwriting
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Price to
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Discounts and
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Proceeds to
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Public
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Commissions
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Cavium Networks
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Per Share
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$
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$
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$
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Total
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$
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$
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$
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We have granted the underwriters the right to purchase up to
an additional 937,500 shares of common stock to cover
over-allotments.
The Securities and Exchange Commission and state securities
regulators have not approved or disapproved of these securities
or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares to purchasers
on ,
2007.
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MORGAN
STANLEY
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LEHMAN
BROTHERS
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THOMAS WEISEL PARTNERS
LLC
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,
2007
TABLE OF
CONTENTS
You should rely only on the information contained in this
prospectus or in any free writing prospectus we may authorize to
be delivered or made available to you. We have not authorized
anyone to provide you with additional or different information.
We are offering to sell, and seeking offers to buy, shares of
our common stock only in jurisdictions where offers and sales
are permitted. The information in this prospectus is accurate
only as of the date of this prospectus, regardless of the time
of delivery of this prospectus or any sale of shares of our
common stock.
Until ,
2007 (25 days after commencement of this offering), all
dealers that buy, sell or trade shares of our common stock,
whether or not participating in this offering, may be required
to deliver a prospectus. This delivery requirement is in
addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold
allotments or subscriptions.
For investors outside the United States: Neither we nor any of
the underwriters have done anything that would permit this
offering or possession or distribution of this prospectus in any
jurisdiction where action for that purpose is required, other
than in the United States. Persons outside the United States who
come into possession of this prospectus must inform themselves
about, and observe any restrictions relating to, the offering of
the shares of common stock and the distribution of this
prospectus outside of the United States.
i
PROSPECTUS
SUMMARY
This summary highlights information contained elsewhere in
this prospectus and does not contain all of the information that
you should consider in making your investment decision. Before
investing in our common stock, you should carefully read this
entire prospectus, including our audited consolidated financial
statements and the related notes and the information set forth
under the headings Risk Factors and
Managements Discussion and Analysis of Financial
Condition and Results of Operations, in each case included
elsewhere in this prospectus.
CAVIUM
NETWORKS, INC.
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. 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. In 2006, we
generated revenue from over 100 customers, including Aruba
Networks, Inc., Cisco Systems, Inc., Citrix Systems, Inc., F5
Networks, Inc., Furukawa Electric Co., Ltd., Juniper Networks,
Inc., Nokia Corporation, SafeNet, Inc., SonicWALL, Inc. and
Yamaha Corporation. We received 56% of our revenue in 2006 from
our top five customers. Since our first commercial shipments in
2003, we have shipped more than 1.7 million processors.
Traffic on the Internet and enterprise networks is rapidly
increasing due to trends that include greater adoption of
Web 2.0 applications, voice over IP, or VoIP, video over
broadband, file sharing, greater use of web-based services, and
the proliferation of stored content that is 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
trends provide. To address these 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, as
well as security services. These attributes require advanced
semiconductor processing solutions.
To enable this processing capability, networking equipment
providers have historically used a variety of approaches,
including internally designed custom semiconductor products,
such as ASICs, FPGAs or other proprietary chips, multiple chip
offerings based on a single general purpose microprocessor unit,
or MPU, from merchant suppliers, software-based solutions or a
combination of these approaches. While these approaches have
been adequate for basic network processing, they are less
effective as the need for intelligent processing at high speeds
increases. As a result, providers of networking equipment are
increasingly turning to third-party vendors for high
performance, power-efficient and cost-effective intelligent
processing products.
According to estimates from a December 2006 market analysis
forecast by iSuppli Corporation, a market research firm, the
market for digital application specific semiconductor products,
or Logic ASSPs, and MPUs shipped into wired communications
devices was $5.8 billion in 2006. This market is estimated
to grow to $8.3 billion by 2010.
We offer intelligent processing products for enterprise network,
data center, broadband and consumer, and access and service
provider markets. Our products have the following key features:
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High Performance Multi-Core Architecture.
Our
products can utilize multiple microprocessor cores as well as
proprietary hardware accelerators on one chip, which can perform
application-aware and content-aware functions at high speeds.
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Highly Integrated SoC.
Our highly integrated
semiconductor processors can replace a number of single function
semiconductors with a multi function SoC, which significantly
improves performance and lowers power consumption and cost.
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Software-Enabled Development Tools.
Our
intelligent processing products feature internally developed,
embedded software tools and development kits based on industry
standard software tailored for use with our SoCs.
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Scalability and Product Breadth.
Each of our
processor families shares a common architecture across a range
of product offerings which allow our customers to provide
networking equipment for the most basic to the most advanced
network infrastructure. This allows our customers to leverage
software design efforts across multiple systems.
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Efficient Power Usage.
We have designed our
products to optimize power usage. Our products include multiple
power efficient processor cores and a proprietary advanced
multi-core power management architecture, which allow our
customers to optimize power usage across their products.
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Our objective is to be the leading provider of intelligent
processing products for next-generation networking,
communications and security applications. Key elements of our
strategy include:
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Extend Our Technology Leadership Positions.
We
intend to continue to invest in the development of successive
generations of our products to meet the increasingly higher
performance, lower cost and lower power requirements of our
customers.
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Expand Our Customer Relationships.
We intend
to continue to build and strengthen our relationships with our
customers to identify and secure new market opportunities.
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Target New Applications Requiring Intelligent
Processing.
We intend to leverage our core design
expertise to develop new processors for a broader range of
applications and end markets.
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Expand International Presence.
We intend to
continue to expand our sales, design and technical support
organization to broaden our customer reach in new markets,
primarily in Asia and Europe.
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Risks
Affecting Us
Our business is subject to numerous risks, which are highlighted
in the section entitled Risk Factors immediately
following this prospectus summary. These risks represent
challenges to the successful implementation of our strategy and
to the growth and future profitability of our business. Some of
these risks are:
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we were established in 2000 and have not been profitable in any
fiscal period since we were formed. We experienced net losses of
$11.7 million, $11.7 million, and $9.0 million in
2004, 2005 and 2006, respectively;
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the market for our products is highly competitive, and we face
competition from a number of established companies;
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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
received 56% of our revenues in 2006 from our top
five customers;
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we expect our revenues and expense levels to vary in the future,
making it difficult to predict our future operating results;
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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; and
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we rely on third parties for substantially all of our
manufacturing operations, including wafer fabrication, assembly,
test, warehousing and shipping.
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2
For further discussion of these and other risks you should
consider before making an investment in our common stock, see
the section entitled Risk Factors immediately
following this prospectus summary.
Corporate
Information
We were incorporated in California in November 2000 and
reincorporated in Delaware in February 2007. Our principal
executive 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. The information
on, or accessible through, our web site is not part of this
prospectus. Unless the context requires otherwise, references in
this prospectus to Cavium Networks,
company, we, us and
our refer to Cavium Networks, Inc. and its
wholly-owned subsidiaries on a consolidated basis.
Cavium Networks and the Cavium Networks logo are trademarks of
Cavium Networks, Inc. This prospectus also includes other
trademarks of Cavium Networks, Inc. and trademarks of other
persons.
3
THE
OFFERING
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Common stock offered
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6,250,000 shares
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Common stock to be outstanding after this offering
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37,979,797 shares
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Over-allotment option
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937,500 shares
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Use of proceeds
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We intend to use the net proceeds of this offering to repay
approximately $4.0 million of outstanding indebtedness
under one of our credit facilities, pay $1.9 million under
a license agreement and for working capital and other general
corporate purposes, which may also include acquisitions of or
investments in complementary businesses, technologies or other
assets. See Use of Proceeds.
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Proposed NASDAQ Global Market symbol
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CAVM
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The number of shares of common stock to be outstanding after
this offering is based on 31,729,797 shares outstanding as
of December 31, 2006, and excludes:
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4,221,404 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2006, at a weighted
average exercise price of $2.05 per share;
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102,976 shares of common stock issuable upon exercise of
warrants to purchase common stock and preferred stock
outstanding as of December 31, 2006, at a weighted average
exercise price of $4.49 per share; and
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5,000,000 shares of common stock reserved for issuance
under our 2007 Equity Incentive Plan, as well as any automatic
increases in the number of shares of our common stock reserved
for future issuance under this plan.
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Except as otherwise indicated, all information in this
prospectus assumes:
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the conversion of each outstanding share of our Series A,
Series B, Series C and Series D preferred stock
into one share of common stock, upon completion of this offering;
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conversion of all outstanding warrants to purchase shares of our
convertible preferred stock into warrants to purchase an
aggregate of 102,976 shares of common stock, effective upon
completion of this offering;
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a one-for-two reverse stock split of our common and preferred
stock effected on April 12, 2007;
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no exercise by the underwriters of their option to purchase up
to an additional 937,500 shares of common stock from us to
cover over-allotments; and
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the filing of our amended and restated certificate of
incorporation prior to completion of this offering.
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4
SUMMARY
CONSOLIDATED FINANCIAL DATA
We present below our summary consolidated financial data. The
summary consolidated statements of operations data for each of
the years ended December 31, 2004, 2005 and 2006, and the
summary consolidated balance sheet data as of December 31,
2006, have been derived from our audited consolidated financial
statements included elsewhere in this prospectus. You should
read this information together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited consolidated financial
statements and related notes, each included elsewhere in this
prospectus. Our historical results are not necessarily
indicative of the results to be expected in any future period.
The pro forma net loss per common share data is computed using
the weighted average number of shares of common stock
outstanding, after giving effect to the conversion (using the
if-converted method) of all shares of our convertible preferred
stock into common stock as though the conversion had occurred on
the original dates of issuance.
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Year Ended December 31,
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2004
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2005
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2006
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(in thousands, except share and per share data)
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Consolidated Statements of
Operations Data:
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Revenue
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$
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7,411
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$
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19,377
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$
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34,205
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Cost of
revenue
(1)(2)
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3,080
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7,865
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13,092
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Gross profit
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4,331
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11,512
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21,113
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Operating expenses:
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Research and
development
(2)
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12,010
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16,005
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18,651
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Sales, general and
administrative
(2)
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3,752
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6,840
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10,058
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Total operating expenses
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15,762
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22,845
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28,709
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Loss from operations
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(11,431
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(11,333
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(7,596
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Other income (expense), net:
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Interest expense
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(388
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(183
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(707
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Warrant revaluation expense
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(411
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(467
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Interest income
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86
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355
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345
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Total other income (expense), net
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(302
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(239
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(829
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Loss before income tax expense and
cumulative effect of change in accounting principle
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(11,733
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(11,572
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(8,425
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Income tax expense
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(560
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Loss before cumulative effect of
change in accounting principle
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(11,733
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(11,572
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(8,985
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)
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Cumulative effect of change in
accounting principle
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(100
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Net loss
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$
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(11,733
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)
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$
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(11,672
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$
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(8,985
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Net loss per common share, basic
and diluted
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$
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(1.82
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$
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(1.59
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$
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(1.11
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)
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Shares used in computing basic and
diluted net loss per common share
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6,459,050
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7,318,607
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8,065,995
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Pro forma net loss per common
share, basic and diluted (unaudited)
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$
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(0.29
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)
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Shares used in computing pro forma
basic and diluted net loss per common share (unaudited)
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29,631,993
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5
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(1)
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Includes acquired intangible asset
amortization of $254, $1,007 and $1,116 in the years ended
December 31, 2004, 2005 and 2006, respectively.
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(2)
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Includes stock-based compensation
expense as follows:
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Year Ended December 31,
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2004
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2005
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2006
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(in thousands)
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Cost of revenue
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$
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$
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$
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9
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Research and development
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10
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396
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Sales, general and administrative
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85
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75
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340
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|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma consolidated balance sheet data as of
December 31, 2006 in the table below gives effect to
(i) the conversion of all outstanding shares of our
convertible preferred stock into shares of our common stock and
(ii) the reclassification of the preferred stock warrant
liability to additional
paid-in
capital upon the conversion of these warrants to purchase shares
of our convertible preferred stock into warrants to purchase
shares of our common stock, as if each had occurred at
December 31, 2006. The pro forma as adjusted consolidated
balance sheet data as of December 31, 2006 also gives
effect to (i) our receipt of the estimated net proceeds
from this offering, based on an assumed initial public offering
price of $11.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us, and (ii) our use of proceeds from
this offering to repay approximately $4.0 million of
outstanding indebtedness under one of our credit facilities and
pay $1.9 million under a license agreement, as if each of
these events had occurred at December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,154
|
|
|
$
|
10,154
|
|
|
$
|
65,887
|
Working capital
|
|
|
11,689
|
|
|
|
11,689
|
|
|
|
69,597
|
Total assets
|
|
|
29,962
|
|
|
|
29,962
|
|
|
|
87,595
|
Preferred stock warrant liability
|
|
|
701
|
|
|
|
|
|
|
|
|
Capital lease and technology
license obligations
|
|
|
3,580
|
|
|
|
3,580
|
|
|
|
3,580
|
Note payable
|
|
|
4,000
|
|
|
|
4,000
|
|
|
|
|
Other non-current liabilities
|
|
|
39
|
|
|
|
39
|
|
|
|
39
|
Convertible preferred stock
|
|
|
72,437
|
|
|
|
|
|
|
|
|
Common stock and additional
paid-in capital
|
|
|
3,740
|
|
|
|
76,878
|
|
|
|
138,511
|
Total stockholders equity
(deficit)
|
|
|
(57,180
|
)
|
|
|
15,958
|
|
|
|
77,591
|
6
RISK
FACTORS
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors, as
well as the other information in this prospectus, before
deciding whether to invest in shares of our common stock. The
occurrence of any of the following risks, or other risks that
are currently unknown or unforeseen by us, could harm our
business, financial condition, results of operations or growth
prospects. In that case, the trading price of our common stock
could decline, and you may lose all or part of your
investment.
Risks
Related to Our Business
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 since we were formed. We experienced net losses of
$11.7 million, $11.7 million and $9.0 million in
2004, 2005 and 2006, respectively. As of December 31, 2006,
our accumulated deficit was $60.9 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., hi/fn, inc., Intel Corporation, Marvell
Technology Group Ltd., PMC-Sierra, Inc. and others. We also face
competition from a number of private companies, including Raza
Microelectronics, Inc. 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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7
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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.
|
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
49%, 52% and 56% of our revenues from our top five customers in
2004, 2005 and 2006, 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:
|
|
|
|
|
our agreements with our customers do not require them to
purchase a minimum quantity of our products;
|
|
|
|
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
|
|
|
|
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.
|
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
8
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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|
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|
|
fluctuations in demand, sales cycles, product mix and prices for
our products;
|
|
|
|
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;
|
|
|
|
the forecasting, scheduling, rescheduling or cancellation of
orders by our customers;
|
|
|
|
our ability to successfully define, design and release new
products in a timely manner that meet our customers needs;
|
|
|
|
changes in manufacturing costs, including wafer, test and
assembly costs, mask costs, manufacturing yields and product
quality and reliability;
|
|
|
|
the timing and availability of adequate manufacturing capacity
from our manufacturing suppliers;
|
|
|
|
the timing of announcements by our competitors or us;
|
|
|
|
future accounting pronouncements and changes in accounting
policies;
|
|
|
|
volatility in our stock price, which may lead to higher stock
compensation expenses;
|
|
|
|
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
|
|
|
|
productivity and growth of our sales and marketing force.
|
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
$7.4 million in 2004 to approximately $34.2 million in
2006. We may not achieve similar growth rates 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.
9
To manage our growth successfully and handle the
responsibilities of being a public company, we believe we must
effectively, among other things:
|
|
|
|
|
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;
|
|
|
|
add additional sales personnel and expand sales offices;
|
|
|
|
implement and improve our administrative, financial and
operational systems, procedures and controls; and
|
|
|
|
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.
|
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;
|
|
|
|
the quality, performance and reliability of the product; and
|
|
|
|
effective marketing, sales and service.
|
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. 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.
10
Our products must meet exacting 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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|
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|
|
our customers usually require a comprehensive technical
evaluation of our products before they incorporate them into
their designs;
|
|
|
|
it can take from 9 months to 3 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.
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.
11
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 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
12
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 yet become profitable
and therefore do not yet have a 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 U.S. 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. We do not seek to maintain
sufficient inventory to address a lengthy transition period
because we believe it is uneconomical to keep more than minimal
inventory on hand. 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.
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
14
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 the year after the one in which we become a public company.
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 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 non-disclosure
agreements and other methods, to protect our proprietary
technologies and know-how. We have been
15
issued six patents in the United States and two patents in
foreign countries and have an additional 27 patent applications
pending in the United States and 27 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 U.S. 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
U.S.-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
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 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;
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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 of
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, in March 2002 and June 2003, major
earthquakes occurred in Taiwan. 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 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 out 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
17
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 expense employee stock options, which will negatively
impact our net income in future periods.
In December 2004, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
(Revised 2004), Share-Based Payment, or SFAS 123(R), which
requires the measurement of all share-based payments to
employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in our
consolidated statements of operations. Effective January 1,
2006, we adopted the fair-value-based 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. The total expense reported in 2006 related to
employee stock options was $675,000. We expect this amount to
increase in future years as new grants are made to existing
employees and to new employees as they join the company. These
additional expenses will decrease operating income and
correspondingly reduce our net income in future periods.
Being a public company will increase our costs and affect
our ability to attract and retain qualified board
members.
As a public company, we will incur significant legal, accounting
and other expenses that we did not incur as a private company.
In addition, the Sarbanes-Oxley Act, as well as rules
subsequently implemented by the Securities and Exchange
Commission and The NASDAQ Global Market, have imposed various
new requirements on public companies, including requiring
changes in corporate governance practices. We expect these rules
and regulations to increase our legal and financial compliance
costs and to make some activities more time-consuming and costly.
Under the Sarbanes-Oxley Act and NASDAQ rules, we are required
to maintain an independent board. If we are unable to maintain
adequate directors and officers insurance, our
ability to recruit and retain qualified directors, especially
those directors who may be deemed independent for purposes of
The NASDAQ rules, and officers will be significantly curtailed.
18
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 U.S. federal statutory tax rate and,
as a consequence, our effective income tax rate is expected to
be lower than the U.S. 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 U.S. and international income changes for any
reason. Accordingly, there can be no assurance that our income
tax rate will be less than the U.S. federal statutory rate.
Risks
Related to this Offering and Ownership of our Common
Stock
There has been no prior trading market for our common
stock, and an active trading market may not develop or be
sustained following this offering.
Prior to this offering, there has been no public market for our
common stock, and we cannot assure you that an active trading
market will develop or be sustained after this offering. The
initial public offering price will be negotiated between us and
representatives of the underwriters and may not be indicative of
the market price of our common stock after this offering.
The market price of our common stock may be volatile,
which could cause the value of your investment to
decline.
Prior to this offering, our common stock has not been traded in
a public market. We cannot predict the extent to which a trading
market will develop or how liquid that market might become. The
initial public offering price may not be indicative of prices
that will prevail in the trading market. The trading price of
our common stock following this offering 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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In addition, the stock market in general, and the market for
semiconductor and other technology companies in particular, have
experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating
performance of those companies. Such fluctuations may be even
more pronounced in the trading market shortly following this
offering. These broad market and industry factors may seriously
harm the
19
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.
If securities analysts or industry analysts downgrade our
stock, publish negative research or reports, or do not publish
reports about our business, our stock price and trading volume
could decline.
The trading market for our common stock will be influenced by
the research and reports that industry or securities analysts
publish about us, our business and our market. If one or more
analysts adversely change their recommendation regarding our
stock or our competitors stock, our stock price would
likely decline. If one or more analysts cease coverage of us or
fail to regularly publish reports on us, we could lose
visibility in the financial markets, which in turn could cause
our stock price or trading volume to decline.
Purchasers in this offering will immediately experience
substantial dilution in net tangible book value.
The initial public offering price is substantially higher than
the prices paid for our common stock in the past and higher than
the book value of the shares we are offering. This is referred
to as dilution. Accordingly, if you purchase common stock in the
offering, you will incur immediate dilution of approximately
$9.01 per share in the net tangible book value per share from
the price you pay for our common stock based on the assumed
initial public offering price of $11.00. If the holders of
outstanding stock options and warrants exercise those
securities, you will incur additional dilution.
The price of our stock could decrease as a result of
shares being sold in the market after this offering.
Additional sales of our common stock in the public market after
this offering, or the perception that these sales could occur,
could cause the market price of our shares to decline. Upon the
completion of this offering, we will have approximately
37,979,797 shares of common stock outstanding. All of the
shares sold in this offering will be freely transferable without
restriction or additional registration under the Securities Act
of 1933, as amended. Our directors, officers and other existing
security holders will be subject to
lock-up
agreements described under the caption
Shares Eligible for Future Sale. Subject to the
volume and other restrictions under Rules 144 and 701 under
the Securities Act, these securities will be available for sale
following the expiration of these
lock-up
agreements. These
lock-up
agreements expire 180 days after the date of this
prospectus or in certain circumstances up to 214 days after
the date of this prospectus.
A limited number of stockholders will have the ability to
influence the outcome of director elections and other matters
requiring stockholder approval.
After this offering, our directors and executive officers and
their affiliates will beneficially own approximately 52.3% of
our outstanding common stock. 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, including those who
purchase shares in this offering.
Management will have broad discretion over the use of
proceeds from this offering.
The net proceeds from this offering will be used for general
corporate purposes, including working capital and capital
expenditures as well as the repayment of approximately
$4.0 million of outstanding indebtedness under one of our
credit facilities and the payment of $1.9 million under a
license agreement. We currently anticipate spending a portion of
the net proceeds on sales and marketing activities, research and
development activities, general and administrative matters and
on capital expenditures. In addition, we may use a portion of
the net proceeds to acquire or invest in complementary
businesses or products or to obtain the right to use
complementary technologies. We have not reserved or allocated
specific amounts for these purposes and we cannot specify with
certainty how we will
20
use the net proceeds. Accordingly, our management will have
considerable discretion in the application of the net proceeds
and you will not have the opportunity, as part of your
investment decision, to assess whether the proceeds are being
used appropriately. The net proceeds may be used for corporate
purposes that do not increase our operating results or market
value. Until the net proceeds are used, they may be placed in
investments that do not produce income or that lose value.
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, as they will be in effect upon the
closing of this offering, 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;
|
|
|
|
the ability of our board of directors to alter our bylaws
without obtaining stockholder approval;
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
the required approval of at least
66
2
/
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
|
|
|
|
the required approval of at least a majority of the shares
entitled to vote at an election of directors to remove directors
without cause.
|
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.
21
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY
DATA
This prospectus, particularly the sections entitled
Prospectus Summary, Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and
Business, contains forward-looking statements. All
statements other than historical facts contained in this
prospectus, including statements regarding our future results of
operations and financial positions, business strategy, plans and
our objectives for future operations, are forward looking
statements. When used in this prospectus the words
anticipate, objective, may,
might, should, could,
can, intend, expect,
believe, estimate, predict,
potential, plan, is designed
to or the negative of these and similar expressions
identify forward-looking statements. Forward-looking statements
include, but are not limited to, statements about:
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|
|
|
|
our expectations regarding our expenses, sales and operations;
|
|
|
|
our operating results;
|
|
|
|
our customer concentration;
|
|
|
|
our anticipated cash needs and our estimates regarding our
capital requirements and our need for additional financing;
|
|
|
|
our ability to anticipate the future needs of our customers;
|
|
|
|
our ability to achieve new design wins;
|
|
|
|
our plans for future products and enhancements of existing
products;
|
|
|
|
our growth strategy and our growth rate;
|
|
|
|
our intellectual property, third-party intellectual property and
claims related to infringement thereof; and
|
|
|
|
our anticipated trends and challenges in the markets in which we
operate, including average selling price reductions, cyclicality
in the networking industry and transitions to new process
technologies.
|
These statements reflect our current views with respect to
future events and are based on assumptions and subject to risk
and uncertainties. We operate in a very competitive and rapidly
changing environment. New risks emerge from time to time. Given
these risks and uncertainties, you should not place undue
reliance on these forward-looking statements. While we believe
our plans, intentions and expectations reflected in those
forward-looking statements are reasonable, we cannot assure you
that these plans, intentions or expectations will be achieved.
Our actual results, performance or achievements could differ
materially from those contemplated, expressed or implied by the
forward-looking statements contained in this prospectus,
including those under the heading Risk Factors.
All forward-looking statements attributable to us or persons
acting on our behalf are expressly qualified in their entirety
by the cautionary statements set forth in this prospectus. Other
than as required by applicable securities laws, we are under no
obligation to update any forward-looking statement, whether as
result of new information, future events or otherwise.
This prospectus also contains statistical data and estimates
that we obtained from industry publications and reports
generated by iSuppli. These industry publications and reports
generally indicate that the information contained therein was
obtained from sources believed to be reliable, but do not
guarantee the accuracy and completeness of such information.
Although we believe that the publications and reports are
reliable, we have not independently verified the data.
Anthony Pantuso, one of our directors, is a member of the board
of directors of iSuppli and a managing director of NeoCarta
Associates, LLC, an investor in iSuppli, see Principal
Stockholders. Mr. Pantuso was not involved with the
preparation of any data or estimates generated by iSuppli that
are referenced in this prospectus.
22
USE OF
PROCEEDS
We estimate that our net proceeds from the sale of the common
stock that we are offering will be approximately
$61.5 million, assuming an initial public offering price of
$11.00 per share (the midpoint of the range listed on the
cover page of this prospectus), after deducting estimated
underwriting discounts and commissions and estimated offering
expenses payable by us. If the underwriters over-allotment
option is exercised in full, we estimate that our net proceeds
would be approximately $71.1 million, after deducting
estimated underwriting discounts and commissions and estimated
offering expenses payable by us. A $1.00 increase (decrease) in
the assumed initial public offering price of $11.00 per
share would increase (decrease) the net proceeds to us from this
offering by $5.8 million, assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same.
We intend to use our net proceeds from this offering to pay in
full the principal amount outstanding under our term loan
agreement with Silicon Valley Bank and Gold Hill Ventures 03 LP.
As of December 31, 2006, the principal amount outstanding
was $4.0 million. Currently, the loan has an interest rate
equal to 10.5% per annum and has a maturity date of
June 1, 2009. We used the proceeds of this loan for working
capital and other general corporate purposes.
We also intend to use our net proceeds from this offering to pay
an obligation under a license agreement of $1.9 million.
We also intend to use our net proceeds from this offering for
working capital and other general corporate purposes.
We may also use a portion of the proceeds to expand our current
business through acquisitions of or investments in other
complementary businesses, products or technologies. However, we
have no negotiations, agreements or commitments with respect to
any acquisitions at this time.
Pending the uses described above, we intend to invest the net
proceeds in a variety of short-term, interest-bearing,
investment grade securities.
DIVIDEND
POLICY
We have never declared or paid cash dividends on our capital
stock. Our loan and security agreements with Silicon Valley Bank
and Gold Hill Ventures 03 LP limit our ability to pay dividends.
We currently intend to retain any future earnings and do not
expect to pay any dividends in the foreseeable future.
23
CAPITALIZATION
The following table sets forth our capitalization as of
December 31, 2006:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to reflect (i) the conversion of all
outstanding shares of our preferred stock into shares of common
stock and (ii) the reclassification of the preferred stock
warrant liability to additional
paid-in
capital upon the conversion of these warrants to purchase shares
of our convertible preferred stock into warrants to purchase
shares of our common stock; and
|
|
|
|
|
|
on a pro forma as adjusted basis to reflect our receipt of the
estimated net proceeds from our sale of 6,250,000 shares of
common stock at the assumed initial public offering price of
$11.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us and our use of proceeds from this
offering to repay approximately $4.0 million of outstanding
indebtedness under one of our credit facilities and to pay
$1.9 million under a license agreement.
|
You should read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited and unaudited consolidated
financial statements and the related notes, each appearing
elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(in thousands, except share data)
|
|
|
Note payable
|
|
$
|
4,000
|
|
|
$
|
4,000
|
|
|
$
|
|
|
Preferred stock warrant liability
|
|
|
701
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible
preferred stock, par value $0.001: 22,935,158 shares
authorized, actual, 22,364,197 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted
|
|
|
72,437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par
value; no shares
authorized, issued
or outstanding, actual; 10,000,000 shares authorized pro
forma and pro forma as adjusted, no shares issued or
outstanding, pro forma and pro forma as adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value;
40,965,057 shares authorized, 9,365,600 shares issued
and outstanding, actual; 200,000,000 shares authorized,
31,729,797 shares issued and outstanding, pro forma;
200,000,000 shares authorized, 37,979,797 shares
issued and outstanding, pro forma as adjusted
|
|
|
14
|
|
|
|
59
|
|
|
|
65
|
|
Additional paid-in capital
|
|
|
3,726
|
|
|
|
76,819
|
|
|
|
138,446
|
|
Accumulated deficit
|
|
|
(60,920
|
)
|
|
|
(60,920
|
)
|
|
|
(60,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(57,180
|
)
|
|
|
15,958
|
|
|
|
77,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
23,538
|
|
|
$
|
23,538
|
|
|
$
|
77,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table above excludes the following shares:
|
|
|
|
|
4,221,404 shares of common stock issuable upon exercise of
options outstanding as of December 31, 2006, at a weighted
average exercise price of $2.05 per share;
|
|
|
|
|
|
102,976 shares of common stock issuable upon exercise of
warrants to purchase common stock and preferred stock
outstanding as of December 31, 2006, at a weighted average
exercise price of $4.49 per share;
|
|
|
|
|
|
5,000,000 shares of common stock reserved for issuance
under our 2007 Equity Incentive Plan, as well as any automatic
increases in the number of shares of our common stock reserved
for future issuance under this plan.
|
24
DILUTION
If you invest in our common stock in this offering, your
interest will be diluted to the extent of the difference between
the public offering price per share of our common stock and the
pro forma net tangible book value per share of our common stock
after this offering. As of December 31, 2006, our pro forma
net tangible book value was $14.1 million, or
$0.44 per share of common stock. Our pro forma net tangible
book value per share represents the amount of our total tangible
assets reduced by the amount of our total liabilities and
divided by the total number of shares of our common stock
outstanding as of December 31, 2006, after giving effect to
the conversion of our preferred stock into common stock. After
giving effect to our sale in this offering of
6,250,000 shares of our common stock at the assumed initial
public offering price of $11.00 per share, after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma net
tangible book value as of December 31, 2006 would have been
approximately $75.7 million, or $1.99 per share of our
common stock. This represents an immediate increase of net
tangible book value of $2.04 per share to our existing
stockholders and an immediate dilution of $9.01 per share
to investors purchasing shares in this offering. The following
table illustrates this per share dilution:
|
|
|
|
|
|
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
11.00
|
|
Pro forma net tangible book value
per share as of December 31, 2006, before giving effect to
this offering
|
|
$
|
0.44
|
|
|
|
|
|
Increase in pro forma net tangible
book value per share attributable to investors purchasing shares
in this offering
|
|
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value
per share after giving effect to this offering
|
|
|
|
|
|
|
1.99
|
|
|
|
|
|
|
|
|
|
|
Dilution in pro forma net tangible
book value per share to investors in this offering
|
|
|
|
|
|
$
|
9.01
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, the pro forma net tangible book value per share after
giving effect to this offering would be $2.19 per share,
and the dilution in pro forma net tangible book value per share
to investors in this offering would be $8.81 per share.
The following table summarizes, as of December 31, 2006,
the differences between the number of shares of common stock
purchased from us, after giving effect to the conversion of our
preferred stock into common stock, the total cash consideration
paid and the average price per share paid by our existing
stockholders and by our new investors purchasing stock in this
offering at the assumed initial public offering price of
$11.00 per share, before deducting the underwriting
discounts and commissions and estimated offering expenses
payable by us:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
31,729,797
|
|
|
|
83.5
|
%
|
|
$
|
71,475,000
|
|
|
|
51.0
|
%
|
|
$
|
2.25
|
|
New investors
|
|
|
6,250,000
|
|
|
|
16.5
|
|
|
|
68,750,000
|
|
|
|
49.0
|
|
|
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
37,979,797
|
|
|
|
100
|
%
|
|
|
140,225,000
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
If the underwriters exercise their over-allotment option in
full, our existing stockholders would own 81.5% and our new
investors would own 18.5% of the total number of shares of our
common stock outstanding upon completion of this offering. The
total consideration paid by our existing stockholders would be
$71.5 million, or 47.5%, and the total consideration paid
by our new investors would be $79.1 million, or 52.5%.
The above discussion and tables also assume no exercise of any
outstanding stock options or warrants except as set forth above.
As of December 31, 2006, there were:
|
|
|
|
|
102,976 shares of common stock issuable upon exercise of
warrants to purchase common stock and preferred stock
outstanding as of December 31, 2006, at a weighted average
exercise price of $4.49 per share; and
|
25
|
|
|
|
|
4,221,404 shares of common stock issuable upon the exercise
of outstanding options, at a weighted average exercise price of
$2.05 per share; and
|
|
|
|
|
|
5,000,000 shares of common stock reserved for future
issuance under our 2007 Equity Incentive Plan, as well as any
automatic increases in the number of shares of our common stock
reserved for future issuance under this plan.
|
If all of these options and warrants were exercised, then our
existing stockholders, including the holders of these options
and warrants, would own 85.2% and our new investors would own
14.8% of the total number of shares of our common stock
outstanding upon completion of this offering. The total
consideration paid by our existing stockholders would be
$80,861,240, or 54.0%, and the total consideration paid by our
new investors would be $68,750,000, or 46.0%. The average price
per share paid by our existing stockholders would be $2.24 and
the average price per share paid by our new investors would be
$11.00.
26
SELECTED
CONSOLIDATED FINANCIAL DATA
We present below our selected consolidated financial data. The
selected consolidated statement of operations data for each of
the years ended December 31, 2004, 2005 and 2006, and the
selected consolidated balance sheet data as of December 31,
2005 and 2006, have been derived from our audited consolidated
financial statements included elsewhere in this prospectus. The
selected consolidated statement of operations data for each of
the two years ended December 31, 2002 and 2003, and the
selected consolidated balance sheet data as of December 31,
2002, 2003 and 2004 have been derived from our audited
consolidated financial statements that are not included in this
prospectus. You should read this information together with
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements and related notes, each
included elsewhere in this prospectus. Our historical results
are not necessarily indicative of the results to be expected in
any future period. The pro forma net loss per common share data
is computed using the weighted average number of shares of
common stock outstanding, after giving effect to the conversion
(using the if-converted method) of all shares of our convertible
preferred stock into common stock as though the conversion had
occurred on the original dates of issuance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands, except share and per share data)
|
|
Consolidated Statements of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
632
|
|
|
$
|
2,433
|
|
|
$
|
7,411
|
|
|
$
|
19,377
|
|
|
$
|
34,205
|
|
Cost of
revenue
(1)(2)
|
|
|
209
|
|
|
|
773
|
|
|
|
3,080
|
|
|
|
7,865
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
423
|
|
|
|
1,660
|
|
|
|
4,331
|
|
|
|
11,512
|
|
|
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
(2)
|
|
|
9,167
|
|
|
|
9,970
|
|
|
|
12,010
|
|
|
|
16,005
|
|
|
|
18,651
|
|
Sales, general and
administrative
(2)
|
|
|
2,118
|
|
|
|
2,745
|
|
|
|
3,752
|
|
|
|
6,840
|
|
|
|
10,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
11,285
|
|
|
|
12,715
|
|
|
|
15,762
|
|
|
|
22,845
|
|
|
|
28,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(10,862
|
)
|
|
|
(11,055
|
)
|
|
|
(11,431
|
)
|
|
|
(11,333
|
)
|
|
|
(7,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(263
|
)
|
|
|
(47
|
)
|
|
|
(388
|
)
|
|
|
(183
|
)
|
|
|
(707
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(411
|
)
|
|
|
(467
|
)
|
Interest income
|
|
|
105
|
|
|
|
97
|
|
|
|
86
|
|
|
|
355
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(158
|
)
|
|
|
50
|
|
|
|
(302
|
)
|
|
|
(239
|
)
|
|
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense and
cumulative effect of change in accounting principle
|
|
|
(11,020
|
)
|
|
|
(11,005
|
)
|
|
|
(11,733
|
)
|
|
|
(11,572
|
)
|
|
|
(8,425
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(11,020
|
)
|
|
|
(11,005
|
)
|
|
|
(11,733
|
)
|
|
|
(11,572
|
)
|
|
|
(8,985
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,020
|
)
|
|
$
|
(11,005
|
)
|
|
$
|
(11,733
|
)
|
|
$
|
(11,672
|
)
|
|
$
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(3.37
|
)
|
|
$
|
(2.14
|
)
|
|
$
|
(1.82
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.11
|
)
|
Shares used in computing basic and
diluted net loss per common share
|
|
|
3,274,130
|
|
|
|
5,130,794
|
|
|
|
6,459,050
|
|
|
|
7,318,607
|
|
|
|
8,065,995
|
|
Shares used in computing pro forma
basic and diluted net loss per
common share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,631,993
|
|
Pro forma net loss per common
share, basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(0.29
|
)
|
|
|
|
(1)
|
|
Includes acquired intangible asset
amortization of (in thousands) $254, $1,007 and $1,116 in the
years ended December 31, 2004, 2005 and 2006, respectively.
|
|
(2)
|
|
Includes stock-based compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands)
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9
|
|
Research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
396
|
|
Sales, general and administrative
|
|
|
|
|
|
|
|
|
|
|
85
|
|
|
|
75
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
|
|
|
$
|
|
|
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,003
|
|
|
$
|
11,384
|
|
|
$
|
18,381
|
|
|
$
|
7,879
|
|
|
$
|
10,154
|
|
Working capital
|
|
|
6,017
|
|
|
|
11,198
|
|
|
|
17,718
|
|
|
|
6,160
|
|
|
|
11,689
|
|
Total assets
|
|
|
7,881
|
|
|
|
17,991
|
|
|
|
28,731
|
|
|
|
20,219
|
|
|
|
29,962
|
|
Preferred Stock Warrant Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,184
|
|
|
|
701
|
|
Capital lease and technology
license obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,087
|
|
|
|
3,580
|
|
Note payable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Other non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
39
|
|
Convertible preferred stock
|
|
|
23,520
|
|
|
|
41,494
|
|
|
|
62,339
|
|
|
|
61,820
|
|
|
|
72,437
|
|
Common stock and additional paid-in
capital
|
|
|
433
|
|
|
|
477
|
|
|
|
641
|
|
|
|
1,261
|
|
|
|
3,740
|
|
Total stockholders equity
(deficit)
|
|
$
|
(17,179
|
)
|
|
$
|
(28,530
|
)
|
|
$
|
(39,776
|
)
|
|
$
|
(50,674
|
)
|
|
$
|
(57,180
|
)
|
28
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial
condition and results of operations should be read in
conjunction with Selected Consolidated Financial
Data and our consolidated financial statements and related
notes appearing elsewhere in this prospectus. In addition to
historical information, this discussion and analysis contains
forward-looking statements that involve risks, uncertainties and
assumptions. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, including but not limited to, those set forth
under Risk Factors and elsewhere in this
prospectus.
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.
In addition, we introduced a number of new products within all
three of these product families in 2006. Since inception, we
have invested heavily in new product development and have not
yet achieved profitability on a quarterly or annual basis. Our
revenue has grown from approximately $7.4 million in 2004
to approximately $34.2 million in 2006, 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.
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.
29
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 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.
Results
of Operations
Revenue.
Our revenue consists primarily of
sales of our semiconductor products to providers of networking
equipment and their contract manufacturers and through
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 U.S. dollars.
We also derive revenue in the form of license and maintenance
fees through licensing our software products which help our
customers build products around our SoCs in a more time and cost
efficient manner. Revenue from such arrangements totaled $0,
$181,000 and $740,000, in 2004, 2005 and 2006, respectively.
Our customers representing greater than 10% of revenue since
2004 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
F5 Networks
|
|
|
12
|
%
|
|
|
19
|
%
|
|
|
21
|
%
|
Cisco
|
|
|
*
|
|
|
|
*
|
|
|
|
18
|
|
SonicWALL
|
|
|
*
|
|
|
|
12
|
|
|
|
*
|
|
Yamaha
|
|
|
18
|
|
|
|
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
$2.5 million, $6.2 million and $10.5 million in
2004, 2005 and 2006, respectively, which accounted for 33.0%,
32.0% and 31.0% of revenue, 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
30
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
United States
|
|
$
|
3,857
|
|
|
$
|
10,292
|
|
|
$
|
19,483
|
|
Taiwan
|
|
|
1,275
|
|
|
|
3,085
|
|
|
|
7,403
|
|
Japan
|
|
|
1,662
|
|
|
|
3,517
|
|
|
|
2,612
|
|
Other countries
|
|
|
617
|
|
|
|
2,483
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,411
|
|
|
$
|
19,377
|
|
|
$
|
34,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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,
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 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 technology 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 estimated 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 $254,000,
$1.0 million, $1.1 million in 2004, 2005 and 2006,
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 are
expected to increase 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, 2006, we
capitalized $694,000 of mask costs. We depreciate the cost of
fabrication masks that we reasonably expect to use for
production manufacturing. We depreciate those costs over a
12-month
period and include them in cost of revenue. The balance of
capitalized mask costs at December 31, 2006 was $559,000.
As our products mature and there is increasing assurance that
any particular product design will likely go into production, we
anticipate that a larger percentage of our total mask costs will
be capitalized and amortized to cost of revenue.
31
Our revenue, cost of revenue, gross profit and gross margin for
2004, 2005 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Revenue
|
|
$
|
7,411
|
|
|
$
|
19,377
|
|
|
$
|
34,205
|
|
Cost of revenue
|
|
|
3,080
|
|
|
|
7,865
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$
|
4,331
|
|
|
$
|
11,512
|
|
|
$
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
58.4
|
%
|
|
|
59.4
|
%
|
|
|
61.7
|
%
|
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, 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 prototype products, MIPS
architecture license fees, engineering design 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 development purposes are charged to
research and development expenses. We incurred total development
fabrication mask costs of $0.6 million, $1.1 million
and $1.2 million in 2004, 2005 and 2006, 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 during the
last three years were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands)
|
|
Research and development expenses
|
|
$
|
12,010
|
|
|
$
|
16,005
|
|
|
$
|
18,651
|
|
Percent of revenue
|
|
|
162.1
|
%
|
|
|
82.6
|
%
|
|
|
54.5
|
%
|
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. We expect that after
this offering, we will 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 will
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 during the last three years
were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands)
|
|
Sales, general and administrative
expenses
|
|
$
|
3,752
|
|
|
$
|
6,840
|
|
|
$
|
10,058
|
|
Percent of revenue
|
|
|
50.6
|
%
|
|
|
35.3
|
%
|
|
|
29.4
|
%
|
32
Other Income (Expense), Net.
Other income
(expense), net primarily includes interest income on cash, cash
equivalents and marketable securities balances and interest
expense on our outstanding debt. 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
this offering, these warrants will convert into warrants to
purchase shares of our common stock and, as a result, are not
expected to result in future charges following the offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
(in thousands)
|
|
Interest expense
|
|
|
(388
|
)
|
|
|
(183
|
)
|
|
|
(707
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
(411
|
)
|
|
|
(467
|
)
|
Interest income
|
|
$
|
86
|
|
|
$
|
355
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
$
|
(302
|
)
|
|
$
|
(239
|
)
|
|
$
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for Income Taxes.
As of
December 31, 2006, we had federal and state net operating
loss carryforwards of approximately $29.6 million and
$45.3 million, respectively. These federal and state net
operating loss carryforwards will expire commencing in 2022 and
2008, respectively. We also have federal and state research and
development tax credit carryforwards of approximately
$2.3 million and $2.1 million, respectively. The
federal and state tax credit carryforwards will expire
commencing in 2021 and 2018, respectively, except for the
California research tax credits which carry forward
indefinitely. Utilization of these net operating loss and tax
credit carryforwards may be subject to an annual limitation due
to provisions of the Internal Revenue Code of 1986, as amended,
and analogous provisions of state tax laws, that are applicable
if we have experienced an ownership change in the
past, or if an ownership change occurs in the future, for
example, as a result of this offering aggregated with certain
other sales of our stock before or after this offering.
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 exploit our
existing intellectual property and intellectual property that we
develop or license 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
U.S. federal statutory tax rate and as a consequence, our
effective income tax rate is expected to be lower than the
U.S. federal statutory rate.
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 as 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 indirect channels
compared to 32.0% in 2005.
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 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.
33
Sales, General and Administrative
Expenses.
Sales, general and administrative
expenses increased $3.2 million, or 47.1%, to
$10.0 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 net expense of $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
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 line of credit in
June 2006.
Fiscal
2005 Compared to Fiscal 2004
Revenue.
Our revenue was $19.4 million in
2005 as compared to $7.4 million in 2004, an increase of
162.2%. This increase was primarily due to increased sales of
NITROX products to existing and new customers primarily for
their enterprise network and data center products. In 2005, we
derived 32.0% of our revenue from indirect channels compared to
33.3% in 2004.
Gross Margin.
Gross margin increased modestly
to 59.4% in 2005, from 58.1% in 2004, primarily due to a product
mix shift toward our more complex, higher performance products,
which tend to have higher margins.
Research and Development Expenses.
Research
and development expenses increased $4.0 million, or 33.3%,
to $16.0 million in 2005 from $12.0 million in 2004.
Product prototype, depreciation and other product development
costs accounted for $1.8 million, salaries and benefit
expenses accounted for $1.1 million, and facilities
expenses and consulting services fees accounted for
$0.9 million of the increase. Research and development
headcount increased to 86 at the end of 2005 from 72 at the end
of 2004.
Sales, General and Administrative
Expenses.
Sales, general and administrative
expenses increased $3.1 million, or 81.6%, to
$6.8 million in 2005 from $3.8 million in 2004.
Salaries, benefits and commissions accounted for
$1.7 million of the increase, while facilities expenses,
professional services fees and travel accounted for
$1.4 million of the increase. Sales, general and
administrative headcount increased to 36 at the end of 2005 from
25 at the end of 2004.
Other Income (Expense), Net.
Other income
(expense), net decreased to net expense of $0.2 million in
2005 from net expense of $0.3 million in 2004. The decrease
was primarily due to an increase in interest income, offset by
$0.4 million in warrant revaluation expense recognized in
accordance with FSP
150-5.
34
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, 2006. 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 prospectus. 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 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
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(in thousands, except per share data)
|
|
|
Revenue
|
|
$
|
3,538
|
|
|
$
|
4,284
|
|
|
$
|
5,428
|
|
|
$
|
6,127
|
|
|
$
|
7,049
|
|
|
$
|
8,099
|
|
|
$
|
9,187
|
|
|
$
|
9,870
|
|
Cost of
revenue
(1)(2)
|
|
|
1,479
|
|
|
|
1,839
|
|
|
|
2,220
|
|
|
|
2,327
|
|
|
|
2,622
|
|
|
|
3,135
|
|
|
|
3,878
|
|
|
|
3,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
2,059
|
|
|
|
2,445
|
|
|
|
3,208
|
|
|
|
3,800
|
|
|
|
4,427
|
|
|
|
4,964
|
|
|
|
5,309
|
|
|
|
6,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
(2)
|
|
|
3,325
|
|
|
|
3,906
|
|
|
|
3,941
|
|
|
|
4,833
|
|
|
|
5,120
|
|
|
|
4,939
|
|
|
|
4,224
|
|
|
|
4,368
|
|
Sales, general and
administrative
(2)
|
|
|
1,547
|
|
|
|
1,591
|
|
|
|
1,760
|
|
|
|
1,942
|
|
|
|
2,154
|
|
|
|
2,799
|
|
|
|
2,594
|
|
|
|
2,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
4,872
|
|
|
|
5,497
|
|
|
|
5,701
|
|
|
|
6,775
|
|
|
|
7,274
|
|
|
|
7,738
|
|
|
|
6,818
|
|
|
|
6,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(2,813
|
)
|
|
|
(3,052
|
)
|
|
|
(2,493
|
)
|
|
|
(2,975
|
)
|
|
|
(2,847
|
)
|
|
|
(2,774
|
)
|
|
|
(1,509
|
)
|
|
|
(466
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(72
|
)
|
|
|
(23
|
)
|
|
|
(37
|
)
|
|
|
(51
|
)
|
|
|
(85
|
)
|
|
|
(199
|
)
|
|
|
(271
|
)
|
|
|
(152
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
|
|
|
|
(42
|
)
|
|
|
(369
|
)
|
|
|
(151
|
)
|
|
|
(152
|
)
|
|
|
(13
|
)
|
|
|
(151
|
)
|
Interest income
|
|
|
125
|
|
|
|
92
|
|
|
|
89
|
|
|
|
49
|
|
|
|
81
|
|
|
|
36
|
|
|
|
117
|
|
|
|
111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
53
|
|
|
|
69
|
|
|
|
10
|
|
|
|
(371
|
)
|
|
|
(155
|
)
|
|
|
(315
|
)
|
|
|
(167
|
)
|
|
|
(192
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense and
cumulative effect of change in accounting principle
|
|
|
(2,760
|
)
|
|
|
(2,983
|
)
|
|
|
(2,483
|
)
|
|
|
(3,346
|
)
|
|
|
(3,002
|
)
|
|
|
(3,089
|
)
|
|
|
(1,676
|
)
|
|
|
(658
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(2,760
|
)
|
|
|
(2,983
|
)
|
|
|
(2,483
|
)
|
|
|
(3,346
|
)
|
|
|
(3,004
|
)
|
|
|
(3,089
|
)
|
|
|
(1,676
|
)
|
|
|
(1,216
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,760
|
)
|
|
$
|
(2,983
|
)
|
|
$
|
(2,583
|
)
|
|
$
|
(3,346
|
)
|
|
$
|
(3,004
|
)
|
|
$
|
(3,089
|
)
|
|
$
|
(1,676
|
)
|
|
$
|
(1,216
|
)
|
Net loss per common share, basic
and diluted
|
|
$
|
(0.40
|
)
|
|
$
|
(0.42
|
)
|
|
$
|
(0.34
|
)
|
|
$
|
(0.44
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.38
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes amortization of acquired technology as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
Amortization of acquired technology
|
|
$
|
191
|
|
$
|
258
|
|
$
|
279
|
|
$
|
279
|
|
$
|
279
|
|
$
|
279
|
|
$
|
279
|
|
$
|
279
|
35
|
|
(2)
|
Includes stock-based compensation expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
March 31,
|
|
June 30,
|
|
September 30,
|
|
December 31,
|
|
|
2005
|
|
2005
|
|
2005
|
|
2005
|
|
2006
|
|
2006
|
|
2006
|
|
2006
|
|
|
(in thousands)
|
|
Cost of revenue
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
3
|
|
$
|
3
|
|
$
|
3
|
Research and development
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
7
|
|
|
19
|
|
|
122
|
|
|
122
|
|
|
133
|
Sales, general and administrative
|
|
|
27
|
|
|
7
|
|
|
19
|
|
|
22
|
|
|
39
|
|
|
85
|
|
|
101
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
28
|
|
$
|
8
|
|
$
|
20
|
|
$
|
29
|
|
$
|
58
|
|
$
|
210
|
|
$
|
226
|
|
$
|
251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 indirect sales
channels, 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. 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 in the
second quarter of 2006 included higher accounting and legal
costs related to the development and implementation of our
international structure and efforts to prepare to become a
public company.
Liquidity
and Capital Resources
Since our inception, we have funded our operations using a
combination of 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, 2006, we had cash and cash
equivalents of $10.1 million, and a total of
$4.0 million outstanding under our term loan.
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 bear 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. The accounts
receivable line of credit was due to expire on January 5,
2007, but on January 25, 2007, we entered into a loan
modification agreement that extended the term of this credit
facility through July 4, 2008.
In October 2005, we also entered into a Term Loan and Security
Agreement with Silicon Valley Bank that provided a
$4.0 million term loan line of credit. The credit line was
secured by all of our other assets except intellectual property.
Upon entering into the Term Loan and Security Agreement, we
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, we borrowed $4.0 million against this term
loan line of credit. Concurrently, we issued additional warrants
to purchase 27,500 shares of Series D convertible
preferred stock at a price of $6.58 per share as discussed
in Note 9 of the consolidated financial statements. On
October 24, 2006, we entered into the First Amendment to
the Term Loan and Security Agreement. 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.
36
Following is a summary of our working capital, cash, and cash
equivalents at the end of each of the last three years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Working capital
|
|
$
|
18,322
|
|
|
$
|
6,160
|
|
|
$
|
11,689
|
|
Cash and cash equivalents
|
|
$
|
18,381
|
|
|
$
|
7,879
|
|
|
$
|
10,154
|
|
The following table shows our cash flows from operating
activities, investing activities and financing activities for
each of the last three years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Net cash used in operating
activities
|
|
$
|
(10,522
|
)
|
|
$
|
(7,955
|
)
|
|
$
|
(7,819
|
)
|
Net cash used in investing
activities
|
|
|
(2,283
|
)
|
|
|
(2,608
|
)
|
|
|
(2,075
|
)
|
Net cash provided by financing
activities
|
|
|
19,802
|
|
|
|
61
|
|
|
|
12,169
|
|
Cash
Flows from Operating Activities
Net cash used in operating activities was $10.5 million,
$8.0 million and $7.8 million in 2004, 2005 and 2006,
respectively. Net cash used in operating activities in 2006
primarily consisted of our net loss of $9.0 million and an
increase of $3.4 million in accounts receivable balance,
primarily driven by higher revenue and an increase of
$2.9 million in inventories as we continued to increase
production in order to meet increased customer demand, offset by
depreciation and amortization expense of $5.0 million and
an increase in accrued liabilities of $1.1 million.
Net cash used in operating activities in 2004 and 2005 primarily
consisted of our net losses of $11.7 million and
$11.7 million, respectively, and an increase of $795,000
and $2.1 million, respectively, in accounts receivable
balances, offset by depreciation and amortization of
$2.1 million and $3.3 million, respectively, and an
increase in accrued liabilities of $420,000 and
$1.3 million, respectively. For 2004, inventories increased
by $1.1 million as we continued to increase production in
order to meet the increased customer demand. There was no change
in inventories in 2005. The increase in accounts receivable
balances were generally due to higher revenue and the increase
in accrued liabilities were primarily due to growth in accrued
compensation and benefits associated with increases in our
headcount each year.
Cash
Flows from Investing Activities
Net cash used in investing activities was $2.3 million,
$2.6 million and $2.1 million in 2004, 2005 and 2006,
respectively. Net cash flows used in investing activities
primarily relate to acquisitions in 2004 and 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
$19.8 million, $0.1 million and $12.2 million in
2004, 2005 and 2006, respectively. Between December 2004 and
February 2005, we sold our Series D preferred stock for net
proceeds of $20.7 million. There was no additional
financing activity in 2005. In August and October 2006, we sold
additional shares of Series D preferred stock for net
proceeds of $9.0 million. In addition, shareholders
exercised Series B and Series D preferred stock
warrants during the year for net proceeds of $0.8 million.
We had no net borrowing in 2004 and 2005. In 2006, we made net
borrowings of $4.0 million under our term loan agreement.
We believe that our $10.1 million of cash and cash
equivalents at December 31, 2006, the extension of our
$6.0 million line of credit and expected cash flow from
operations will be sufficient to fund our projected operating
requirements for at least twelve months. However, we may need to
raise additional capital or incur additional indebtedness to
continue to fund our operations in the future. 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
37
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, 2006, we believe our exposure related to the
above indemnities at December 31, 2006 is not material. In
the ordinary course of business, 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, 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 table describes our commitments to settle
contractual obligations in cash as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
935
|
|
$
|
685
|
|
$
|
88
|
|
$
|
23
|
|
$
|
1,731
|
Capital lease and technology
license obligations
|
|
|
2,747
|
|
|
1,073
|
|
|
|
|
|
|
|
|
3,820
|
Purchase commitments
|
|
|
5,009
|
|
|
|
|
|
|
|
|
|
|
|
5,009
|
Notes payable
|
|
|
1,474
|
|
|
2,526
|
|
|
|
|
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,165
|
|
$
|
4,284
|
|
$
|
88
|
|
$
|
23
|
|
$
|
14,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Critical
Accounting Policies and Estimates
Our consolidated financial statements are 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.
Although we believe that our judgments and estimates are
reasonable under the circumstances, 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:
38
|
|
|
|
|
product warranty accrual;
|
|
|
|
stock-based compensation;
|
|
|
|
estimation of fair value of warrants to purchase convertible
preferred stock;
|
|
|
|
inventory valuation; and
|
|
|
|
accounting for income taxes.
|
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 fee is deemed fixed or determinable and free of
contingencies and significant uncertainties, and collection is
probable. Our 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. 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 customer. 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. No such revenue was
deferred in 2004, 2005 or 2006, respectively.
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.
We have entered into certain distributor agreements where we
grant to distributors limited rights of returns and price
protection. Revenue from sales to distributors is recognized
upon shipment if we conclude that we can reasonably estimate the
credits for returns and price adjustments issuable. Revenue from
sales to distributors is 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. Reserves are
provided for estimated returns relating to rights of return and
other credits for price protection, at the time of shipment,
based on our historical pattern of returns and pricing credits
of sales recognized upon shipment. If actual results differ from
our estimates, operating results could be adversely affected.
We also derive revenue in the form of license and maintenance
fees through licensing our software products. Revenue from such
arrangements totaled $0, $181,000 and $740,000, in fiscal 2004,
2005 and 2006, 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. Deferred revenue was $220,000 and $628,000 as of
December 31, 2005 and 2006, respectively.
Warranty
Accrual
Our products are subject to warranties of one year 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 and assumes
that we have to replace products subject to a claim.
39
Stock-Based
Compensation
In 2006, the fair value of our common stock was determined based
on quarterly valuations obtained by us on a contemporaneous
basis. Given the absence of an active market for our common
stock, our board of directors was required to estimate the fair
value of our common stock for purposes of determining
stock-based compensation expense. Our board of directors
considered objective and subjective factors in determining the
estimated value of our common stock on each option grant date,
including the timing of the grant in relation to previous
valuation dates, the prices for our convertible preferred stock
sold to outside investors in arms-length transactions, the
rights, preferences and privileges of that convertible preferred
stock relative to those of our common stock, our stage of
development and revenue growth, the hiring of key personnel, the
likelihood of achieving a liquidity event, such as our initial
public offering or sale, for the shares of common stock
underlying the options given prevailing market conditions, and
valuations conducted by independent valuation consultants.
During 2006, in estimating the fair value of our common stock
our board of directors relied heavily upon the valuations made
by Duff & Phelps, LLC, an independent valuation firm.
The Company engaged Duff & Phelps, LLC in September
2005 to perform valuations of its common stock and convertible
preferred stock at least quarterly. Duff & Phelps, LLC
used an income approach to estimate the aggregate enterprise
value of the Company at each valuation date. The income approach
involves applying appropriate risk-adjusted discount rates to
estimated debt-free cash flows, based on forecasted revenues and
costs. The projections used in connection with these valuations
were based on our expected operating performance over the
forecast period.
Duff & Phelps, LLC allocated the aggregate implied
enterprise value that it estimated to the shares of our
preferred and common stock using the option-pricing method at
each valuation date. The option-pricing method involves making
assumptions regarding the anticipated timing of a potential
liquidity event, such as an initial public offering, and
estimates of the volatility of our equity securities. The
anticipated timing was based on the plans of our board of
directors and management. Duff & Phelps, LLC estimated
the volatility of our stock based on available information on
the volatility of stocks of publicly traded companies in our
industry.
During 2006, we granted options to purchase our common stock at
dates that generally fell between the dates of the valuations
performed by Duff & Phelps, LLC. In those instances, we
granted awards with an exercise price equal to the per-share
fair value determined by the most recent valuation received from
Duff & Phelps, LLC. In conjunction with preparing our
financial statements we estimated the fair value of our common
stock underlying stock options on these dates of grant under
SFAS 123(R). We retrospectively calculated our revenue
growth between the dates of the third-party valuation received
immediately prior to and subsequent to the grant date and
utilized this information to interpolate an estimated per share
value of our common stock between those dates. In the first
quarter of 2006, our board granted stock options to purchase an
aggregate of 1,961,250 shares of common stock with an
exercise price of $3.04 per share. In the second quarter of
2006, our board granted stock options to purchase an aggregate
of 123,500 shares of common stock with an exercise price of
$3.74 per share. In the third quarter of 2006, our board granted
stock options to purchase an aggregate of 135,000 shares of
common stock with an exercise price of $5.52 per share. In the
fourth quarter of 2006, our board granted stock options to
purchase an aggregate of 215,000 shares of common stock
with an exercise price of $5.42 per share. The estimated fair
value of our common stock increased during the first and second
quarters of 2006 due to an overall improvement in certain
aspects of our business including increasing revenues, expanding
distribution channels and customer base and new product
introductions. During the third quarter of 2006, the estimated
fair value of our common stock decreased slightly. At the end of
the third quarter, business continued to improve, but
concurrently we revised downward the projections for expected
sales, income and cash flow in future years, which reduced the
projected cash flow. This downward revision offset any increase
due to improving business conditions. The estimated fair value
of our common stock increased at the end of the fourth quarter
of 2006 due to continued improvement in our business in the
fourth quarter, continued reduction in our quarterly net loss
and the increased likelihood of an initial public offering.
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
40
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, 2006 is based on the grant date
fair value of stock option awards we granted or modified after
January 1, 2006. 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.
We determined that it was not practical to calculate the
volatility of our share price since our securities are not
publicly traded 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 expected term that we estimated.
In 2006, we recorded employee non-cash stock-based compensation
expense of $675,000 in accordance with SFAS 123(R) based on
the related options having an expected term of between four and
five years, depending on the grant and related vesting term. In
future periods, stock-based compensation expense may increase as
we issue additional equity-based awards to continue to attract
and 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 in 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 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 $8,000,
$62,000 and $70,000 during 2004, 2005 and 2006, 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 $411,000 and $467,000 of expense in other
income (expense), net, for the remainder of 2005 and 2006,
respectively, to reflect increases in the estimated fair value
of the warrants.
Upon the closing of this offering, the remaining outstanding
warrants will convert to warrants to purchase shares of our
common stock and, as a result, will no longer be subject to FSP
150-5.
At
that time, the then-current aggregate fair value of these
warrants will be reclassified from current liabilities to
additional paid-in capital, and we will cease to record any
related periodic fair value adjustments.
41
Inventory
Valuation
We write down inventory based on historical usage 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 $64,000, $155,000 and $366,000 at the end of 2004,
2005 and 2006, 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. At December 31, 2006, we had approximately
$29.6 million and $45.3 million of net operating loss
carry forwards available to offset future taxable income for
U.S. federal and state purposes, respectively. These
federal and state net operating loss carry forwards will expire
commencing in 2022 and 2008, respectively. We also have federal
and state research and development tax credit carryforwards of
approximately $2.3 million and $2.1 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. 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-U.S. activities
are subject to local country taxes but are not subject to
U.S. tax until repatriated to the U.S. It is our
intention to permanently reinvest most of these earnings outside
the U.S.
As of December 31, 2006, we had gross deferred tax assets
of $19.1 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 believe recovery is not likely, we establish a
valuation allowance. Due to the uncertainty of our future
profitability, we have fully reserved our deferred tax assets at
December 31, 2005. For the year ended December 31,
2006, we reported a $560,000 provision related to the
implementation of an international structure. 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.
Recent
Accounting Pronouncements
In June 2006, the FASB Emerging Issues Task Force issued EITF
No. 06-03,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
, or EITF
06-03,
which
states that a company must disclose its accounting policy (i.e.,
gross or net presentation) regarding presentation of taxes
within the scope of EITF
06-03.
If
taxes included in gross revenue are significant, a company must
disclose the amount of these taxes for each period for which an
income statement is presented. The disclosures are required for
annual and interim financial statements for each period for
which an income statement is presented. EITF
06-03
will
be effective for us beginning January 1, 2007. Based on our
current evaluation of this issue, we do not expect the adoption
of EITF
06-03
to
have a significant impact on our consolidated results of
operations or financial position.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
, or
FIN No. 48, which prescribes a recognition threshold
and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken
in a tax return. Additionally, FIN No. 48 provides
42
guidance on the recognition, classification, accounting in
interim periods and disclosure requirements for uncertain tax
positions. The accounting provisions of FIN No. 48
became effective for us beginning January 1, 2007. We are
in the process of determining the effect, if any, that the
adoption of FIN No. 48 will have on our consolidated
results of operations or financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
The purpose of SFAS No. 157 is to define fair value,
establish a framework for measuring fair value and enhance
disclosures about fair value measurements. The measurement and
disclosure requirements are effective for us beginning in the
first quarter of fiscal 2008. We are currently evaluating what
impact, if any, SFAS No. 157 will have on our interim
financial reporting.
Quantitative
and Qualitative Disclosure About Market Risk
Foreign
Currency Risk
All of our sales are denominated in U.S 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 U.S. dollars.
Interest
Rate Risk
We had cash and cash equivalents of $10.1 million at
December 31, 2006, 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.
At December 31, 2006, we had $4.0 million of
borrowings outstanding under our term loan line of credit, which
bore interest at a fixed rate of 10.5%.
43
BUSINESS
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 allow UTM, secure connectivity and network
perimeter protection. Our products are SoCs, which incorporate
single or multiple processor cores, a highly integrated
architecture and customizable software that is based on a 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 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 conduct all of our semiconductor design and software
engineering activity in-house and outsource wafer fabrication
and assembly and test. In 2006, we generated revenue from over
100 customers, including Aruba Networks, Cisco, Citrix, F5
Networks, Furukawa Electric, Juniper Networks, Nokia, SafeNet,
SonicWALL and Yamaha. Since our first commercial shipments in
2003, we have shipped more than 1.7 million processors.
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.
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.
The market trends driving the need for advanced networking
systems and the processors that enable them include the
following:
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Increasing Traffic and Line Rates.
The
widespread adoption of broadband connectivity and the emergence
of real-time and multimedia applications, such as VoIP, music
and video downloads, file sharing and video
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over broadband, are driving significant increases in the amount
and complexity of traffic over networks. Additionally,
enterprises are storing and transmitting larger amounts of data
and utilizing web-based applications. As a result, providers of
networking equipment must incorporate products that can process
these substantially higher volumes of data at line rates of
100Mbps to 10Gbps and higher.
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Secure Connectivity and Enterprise Perimeter
Protection.
The growing demand for access to
enterprise and online resources, remote connectivity and storage
of confidential data makes secure connectivity and perimeter
protection critical for todays networks. Secure
connectivity is essential to ensure that only authorized users
can access confidential and proprietary information and is
established using encryption algorithms and protocols. Perimeter
protection is necessary to secure networks from external attacks
and malicious threats such as viruses, worms and intrusions, and
is accomplished using deep packet inspection to identify the
contents of the packet payload for the presence of a virus. The
increasing need for secure connectivity and enterprise perimeter
protection is driving demand for security products that provide
encryption algorithms, protocols and deep packet inspection.
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Requirements for Application Awareness.
The
growing trend of data, voice and video traffic converging into a
single network requires prioritizing network traffic based on
the type of application data. Traditional networks route and
switch information based on the simple use of packet source and
destination address, without regard to the packets
application. In order to achieve more efficient use of computing
resources and to control access to web-based applications,
networking systems need to manage data traffic at the
application level. For example, an
e-mail
packet and a multimedia packet may need to be processed
differently and directed to separate servers in a network.
Network infrastructure that incorporates application awareness
requires networking equipment with advanced processing
functions, general-purpose programmability and significant
processing power.
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Requirements for Content Awareness.
In
addition to recognizing the application, networks also have to
be content-aware. This requires the ability to inspect and
process the contents of a packet in order to enable a network to
apply policies, or prioritization rules, for routing,
transformation and security. For instance, a purchase order
entering an enterprises communications infrastructure can
be inspected in transit and portions of the payload relevant to
different enterprise functions can be routed to different
servers within the enterprise. Implementing content-aware
features in networking equipment requires significant computing
power, general purpose programmability and specialized functions
such as pattern matching.
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Networking equipment providers address these needs 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
equipment are increasingly turning to third-party vendors for
high performance, power-efficient and cost-effective intelligent
processing products.
According to estimates from a December 2006 market analysis
forecast by iSuppli, the market for digital application specific
semiconductor products, or Logic ASSPs, and MPUs shipped into
wired communications devices was $5.8 billion in 2006. This
market is estimated to grow to $8.3 billion by 2010.
Our
Solution
We offer highly integrated semiconductor products that enable
intelligent processing in the enterprise network, data center,
broadband and consumer, and access and service provider markets.
Our products have the following key features:
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High Performance Multi-Core Architecture.
Our
products can integrate single or multiple microprocessor cores
and proprietary hardware accelerators on one chip, which can
perform application-aware and content-aware functions at high
speeds. We design our own microprocessor cores using an enhanced
MIPS instruction set that allows our customers to take advantage
of industry standard software and tools. With up to 16
individual 64-bit enhanced MIPS microprocessor cores, our most
comprehensive products can
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handle up to 19 billion operations per second. As a result,
our products can process multiple packets simultaneously and can
scale and optimize performance to the requirements of the target
application.
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Highly Integrated SoCs.
Our highly integrated
products can replace a number of single function semiconductors
with a multi function SoC, which significantly improves
performance and lowers power consumption and cost. In addition,
advanced security processing algorithms and accelerators are
integrated into all of our products to provide both secure
connectivity and perimeter protection to enable secure
communications. Our SoCs offer complete Layer 4 through 7
intelligent processing with the use of specialized hardware for
compression and decompression, TCP/IP acceleration, advanced
encryption, intrusion protection and anti-virus scanning. For
example, our SoC product can replace a design that may include a
general purpose MPU, a bridge chipset, a security processor, a
compression chip, a chip used for pattern matching, and various
network processing units, ASICs
and/or
FPGAs.
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Software-Enabled Development Tools.
Our
intelligent processing products feature internally developed,
embedded software tools and development kits tailored for use
with our SoCs. Our operating system and toolkits incorporate
industry standard software, such as Linux, which enables our
customers to easily port their software to run on our
processors. Further, customers can write applications on a
core-by-core
basis, depending on functional requirements. 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 development tools in
conjunction with our SoCs enhances our customers ability
to get their products to market quickly.
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Scalability and Product Breadth.
In each of
our processor families, we have multiple product offerings that
range in complexity and performance while sharing a common
architecture. As a result, our customers can access a wide array
of products that can provide processing products from the most
basic to the most advanced network infrastructure. This provides
our customers with the ability to leverage software design
efforts across multiple systems, addressing a range of price and
performance points. For example, a customer could build an
entire product line based on a single SoC design and software
implementation, utilizing products with more cores and more
hardware accelerators in higher end applications.
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Efficient Power Usage.
Our products include
multiple power efficient processor cores and a proprietary
advanced multi-core power management architecture. This allows
our customers to optimize power usage across their products. In
addition, our customers can reduce power consumption in their
products by replacing multiple single purpose chips with a
single SoC.
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Our
Strategy
Our objective is to be the leading provider of intelligent
processing products for next-generation networking,
communications and security applications. Key elements of our
strategy include:
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Extend Our Technology Leadership Positions.
We
intend to continue to invest in the development of future
generations of our products to meet the increasingly higher
performance, lower cost and lower power requirements of our
customers. We intend to leverage our engineering capabilities
and continue to invest significant resources in recruiting and
developing additional expertise in the area of high performance
processor design, networking, security and application and
software development.
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Expand Our Customer Relationships.
We intend
to continue to build and strengthen our relationships with our
customers. The design and product life cycles of our
customers products can be lengthy, which requires us to
work with them throughout the entire design phase, to maintain a
long-term commitment, and to focus on their current and future
needs. We believe that we can leverage our existing position
with customers to identify and secure new market opportunities.
We intend to continue to work with our ecosystem partners to
develop complementary software, silicon and board subsystems,
which allows our customers to accelerate time to market with
optimized performance, enables us to win new designs and
enhances our competitive position.
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Target New Applications Requiring Intelligent
Processing.
We intend to leverage our core design
expertise to develop new processors for a broader range of
applications and end markets. Because we have a highly
integrated processor and a high performance multi-core
architecture, we believe that there are other applications for
our core intellectual property in other large and emerging
markets. These could include new opportunities in the
networking, wireless and storage markets that are increasingly
adopting application-aware, content-aware and secure processing.
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Expand International Presence.
We intend to
continue to expand our sales, design and technical support
organization to broaden our customer reach in new markets,
primarily in Asia and Europe. Given the continued globalization
of supply chains, particularly with respect to design and
manufacturing, we believe that a global presence will become
critical to securing design wins from both existing and new
customers.
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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.
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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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(Number 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 Multi-core MIPS64
Processors
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CN38XX (16)
CN36XX (4)
CN31XX (2)
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Network Services Processor
Secure Communications Processor
Communications 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
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i/s/w: IPsec, SSL or
WLAN Security
version
p: Multi-protocol version
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Standalone Security Processors, with wide range of interface connectivity
Performance: 100Mbps to 10+ Gbps
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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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CN31XX (2)
CN30XX (1)
CN2XX (1)
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Network Services Processor
Secure
Communications
Processor
Communications
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 Network
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Our OCTEON 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 10Gbps.
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 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 NITROX processor family offers standalone security
processors that provide the functionality required for secure
communication in a single chip. These 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
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applications requiring up to a 1Gbps line rate. The NITROX Soho
and OCTEON processors are primarily used for broadband routers,
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. In 2006, we generated revenue from
over 100 customers, including Aruba Networks, Cisco,
Citrix, F5 Networks, Furukawa Electric, Juniper Networks, Nokia,
SafeNet, SonicWALL and Yamaha.
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 18% of revenue in 2006. F5 Networks
accounted for 12%, 19%, and 21% of revenue in 2004, 2005 and
2006, respectively. SonicWALL accounted for 12% of revenue in
2005. Yamaha accounted for 18% and 11% of revenue in 2004 and
2005, respectively.
Sales and
Marketing
We 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 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 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
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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, 2006,
we had 104 employees in our research and development group.
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.
We have six issued and 27 pending patent applications
in the United States, and two issued and 27 pending foreign
patent applications. The six issued patents in the United States
expire in the years beginning in 2021 through 2023. 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.
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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 will, upon completion of our offering, be extended by
an additional two years and will consequently expire in December
2010 and we will be required to pay an additional
$1.9 million for the two year extension. 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
U.S. trademark application for the OCTEON mark. 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 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.
51
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
Freescale, Broadcom, Raza, Marvell, PMC-Sierra, Intel, and to a
lesser extent, Hifn. 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 March 31, 2007, we had 180 regular employees located
in the United States, India and Asia, which was comprised of:
10 employees in manufacturing operations, 113 in
engineering, research and development, 57 in sales, marketing
and administrative. None of our employees is represented by a
labor union and we consider current employee relations to be
good.
Facilities
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 May 2008. This facility 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.
Legal
Proceedings
From time to time, we may become involved in legal proceedings
arising in the ordinary course of our business. 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.
52
MANAGEMENT
Executive
Officers and Directors
The following table sets forth certain information about our
executive officers, key employees and directors as of
March 31, 2007:
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Name
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Age
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Position(s)
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Executive Officers:
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Syed B. Ali
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48
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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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50
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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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50
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Vice President of IC Engineering
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Rajiv Khemani
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39
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Vice President of Marketing and
Sales
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Key Employees:
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Muhammad R. Hussain
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35
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Vice President of Software
Engineering and CTO
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Andrew J. Rava
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49
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Vice President of Sales
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Syed A. Zaheer
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40
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Vice President of Operations
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Non-Employee
Directors:
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Kris
Chellam
(1)
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56
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Director
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John W.
Jarve
(2)(3)
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51
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Director
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Anthony J.
Pantuso
(1)(2)
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44
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Director
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C.N.
Reddy
(2)(3)
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51
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Director
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Anthony S. Thornley
(1)(3)
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60
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Director
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(1)
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Member of the Audit Committee
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(2)
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Member of the Compensation Committee
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(3)
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Member of the Nominating and
Governance Committee
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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
53
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.
Muhammad Raghib Hussain
is one of our founders and has
served as our Vice President of Software Engineering, and CTO
since 2003. Prior to 2003 he served as a Director of Software
and Systems Engineering. From 1999 to August 2000, he served as
a Hardware Engineer at Cisco Systems, a network equipment
company. From 1996 to 1999, he served as a Principal Design
Engineer at Cadence Design Systems, an EDA design services
company. Prior to that, Mr. Hussain served as Design
Engineer at VPNet, an enterprise security company, of which he
was a founding team member. He received a BS degree in Computer
Systems Engineering from NED University in Karachi, Pakistan,
and an MS degree in Computer Engineering from San Jose
State University.
Andrew J. Rava
has served as our Vice President of
Sales since July 2004. Prior to joining us, from 2003 to June
2004, Mr. Rava served as Vice President of Sales, Ethernet
Products at Vitesse Semiconductor, a semiconductor communication
company. In 2003, he served as Vice President of Sales at Cicada
Semiconductor, which was acquired by Vitesse in that year. From
2000 to 2003 he was a Senior Strategic Account Manager at
Broadcom, a communications semiconductor company. Mr. Rava
joined Broadcom when they acquired Altima Communications, an
Ethernet chip company, in 2000 where he was Vice President of
Sales. From 1997 to 1999 he was Vice president of North American
Sales for Disco Corporation, a publicly traded Japanese
semiconductor equipment manufacturer. Mr. Rava received an
MBA degree from LaSalle University.
Syed A. Zaheer
has served as our Vice President of
Operations since August 2001. Prior to joining us, from 2000 to
August 2001, Mr. Zaheer served as Director of Product and
Test Engineering for the Internetworking Products Division of
Integrated Device Technology, an integrated circuit supplier.
From 1997 to 2000, he served as Product Engineering manager for
Centuar Technology, a subsidiary of IDT. He received a BS degree
in Electrical Engineering from Osmania University, Hyderabad,
India and an MSEE degree from Arizona State University.
Kris Chellam
has served as a director since December
2005. Mr. Chellam served as Senior Vice President, Global
Enterprise Services of Xilinx Corporation, a programmable logic
IC company, from July 2005, until his retirement in
February 2007. Mr. Chellam joined Xilinx in July 1998
and served as Senior Vice President of Finance and Chief
Financial Officer until June 2005. Prior to joining Xilinx,
Mr. Chellam served as Senior Vice President, Finance and
Administration and Chief Financial Officer at Atmel Corp. for
seven years. Previously, Chellam worked for more than
12 years at Intel Corporation in a variety of financial
management positions in Europe and the United States.
Mr. Chellam is a member of the Institute of Chartered
Accountants in England and Wales. He completed his Cambridge
Certificate of Education of Malaysia in 1968 and obtained his
chartered accountancy degree in London in 1975. Mr. Chellam
serves as a member of the board of directors and chair of the
audit committee of @Road, a mobile resource management solutions
company.
John W. Jarve
has served as a director since 2002.
Since 1985, Mr. Jarve has been employed by Menlo Ventures,
a venture capital firm, where he currently serves as a Managing
Director. Prior to joining Menlo Ventures, he worked at Intel
Corporation. Mr. Jarve is a member of the Stanford Graduate
School of Business Management Board, a trustee of the Crystal
Springs Uplands School, and is a former trustee of the
Corporation of the Massachusetts Institute of Technology. He
currently serves on several private company boards.
Mr. Jarve received a BS and MS in electrical engineering
from the Massachusetts Institute of Technology and an MBA from
the Stanford University Graduate School of Business.
Anthony J. Pantuso
has served as a director since
2004. He has been a Managing Director at NeoCarta Ventures, a
venture capital firm, since November 1999. From November 1996 to
July 1999 he served as Senior Vice President for GE Equity, a
division of GE Capital, a private equity investment company.
Prior to working at GE Equity, Mr. Pantuso served in
various positions at US WEST, MediaOne and Ernst &
Young. He currently serves on several private company boards.
Mr. Pantuso received a BS in Business Administration from
Colorado State University.
54
C.N. Reddy
has served as a director since 2001. He is a
co-founder of Alliance Semiconductor, which until 2006, was a
provider of semiconductor products and solutions, and has held
various positions. Since October 2000 he has served as Executive
Vice President for Investments of Alliance, during which time he
has been responsible for Alliances investments in private
technology companies and identifying future possible technology
company acquisitions for Alliance. From December 1997 to October
2000 he served as Executive Vice President and Chief Operating
Officer of Alliance. From May 1993 to December 1997 he served as
Senior Vice-President of Engineering and Operations of Alliance.
From February 1985 to May 1993 he served as Vice President of
Engineering of Alliance. From February 1985 to October 2000 he
also served as Secretary of Alliance. Mr. Reddy has served
as a member of the board of directors since Alliances
inception in 1985. He was a member of the founding management
team at Cypress Semiconductor. Prior to that, he held positions
at Texas Instruments and National Semiconductor Corporation.
Mr. Reddy is currently the Executive Vice President of
Investments and serves on the board of directors at Alliance
Semiconductor. He currently serves on several private company
boards. Mr. Reddy holds an MSEE from Utah State University.
Anthony S. Thornley
has served as a director since
September 2006. Mr. Thornley currently serves as the Chief
Financial Officer of KMF Audio Inc., a microphone company. From
February 2002 to June 2005 he served as President and Chief
Operating Officer of Qualcomm Inc., a wireless communication
technology and integrated circuit company. From July 2001 to
February 2002 he served as Chief Financial and Operating Officer
of Qualcomm Inc and from March 1994 to February 2002 as Chief
Financial Officer of Qualcomm. Prior to joining Qualcomm, he was
with Nortel Networks, a telecommunications equipment
manufacturer, for sixteen years in various financial and
information systems management positions, including Vice
President Finance and IS, Public Networks, Vice President
Finance NT World Trade and Corporate Controller Nortel Limited.
He has also worked for Coopers and Lybrand in public accounting.
Mr. Thornley is a director of Callaway Golf, a golfing
equipment manufacturer. Mr. Thornley received his BS degree
in Chemistry from the University of Manchester, England.
Our executive officers are elected by, and serve at the
discretion of, our board of directors. There are no family
relationships among any of our directors or executive officers.
Board
Composition
Our board of directors is currently composed of six members,
including five non-employee members, and our current President
and Chief Executive Officer. Upon completion of this offering,
our amended and restated certificate of incorporation will
provide for a classified board of directors consisting of three
classes of directors, each serving staggered three-year terms.
As a result, a portion of our board of directors will be elected
each year. To implement the classified structure, prior to the
consummation of the offering, two of the nominees to the board
will be appointed to one-year terms, two will be appointed to
two-year terms and two will be appointed to three-year terms.
Thereafter, directors will be elected for three-year terms. Our
Class I directors, whose terms will expire at the 2008
annual meeting of stockholders, are Messrs. Pantuso and
Reddy. Our Class II directors, whose terms will expire at
the 2009 annual meeting of stockholders, are
Messrs. Chellam and Jarve. Our Class III directors,
whose terms will expire at the 2010 annual meeting of
stockholders, are Messrs. Ali and Thornley.
Under Delaware law, our directors may be removed for cause by
the affirmative vote of the holders of a majority of our voting
stock.
Pursuant to a voting agreement originally entered into in
December 2004 and most recently amended in September 2006 by and
among us and certain of our stockholders, Messrs. Ali,
Jarve, Pantuso and Reddy were each elected to serve as members
on our board of directors and, as of the date of this
prospectus, continue to so serve. The voting agreement and all
rights thereunder will automatically terminate upon completion
of this offering, and members previously elected to our board of
directors pursuant to the voting agreement will continue to
serve as directors until their successors are duly elected by
holders of our common stock. For a more complete description of
the voting agreement, see Certain Relationships and
Related Party Transactions Voting Agreement.
Director
Independence
In February 2007, our board of directors undertook a review of
the independence of the directors and considered whether any
director has a material relationship with us that could
compromise his ability to exercise
55
independent judgment in carrying out his responsibilities. As a
result of this review, our board of directors determined that
Messrs. Chellam, Jarve, Pantuso, Reddy and Thornley are
independent directors as defined under the rules of
The NASDAQ Stock Market.
Board
Committees
Our board of directors has established an audit committee, a
compensation committee and a corporate governance and nominating
committee. Our board of directors may establish other committees
to facilitate the management of our business.
Audit
Committee
Our audit committee currently consists of Messrs. Chellam,
Pantuso and Thornley, each of whom our board of directors has
determined meets the requirements for independence and for
financial literacy under the current standards of the SEC and
The NASDAQ Stock Market. Mr. Chellam serves as the chair of
our audit committee and is an audit committee financial
expert as defined in the SEC rules. This committees
main function is to oversee our accounting and financial
reporting processes, internal systems of control, independent
auditor relationships and the audits of our financial
statements. This committees responsibilities include:
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reviewing and pre-approving the engagement of our independent
auditors to perform audit services and any permissible non-audit
services;
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evaluating the performance of our independent auditors and
deciding whether to retain their services;
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reviewing our annual and quarterly financial statements and
reports and discussing the statements and reports with our
independent auditors and management;
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reviewing and approving all related-party transactions;
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reviewing with our independent auditors and management
significant issues that may arise regarding accounting
principles and financial statement presentation, as well as
matters concerning the scope, adequacy and effectiveness of our
financial controls; and
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establishing procedures for the receipt, retention and treatment
of complaints received by us regarding financial controls,
accounting or auditing matters.
|
Compensation
Committee
Our compensation committee consists of Messrs. Jarve,
Pantuso and Reddy, each of whom our board of directors has
determined is independent within the meaning of the independent
director standards of The NASDAQ Stock Market. Mr. Jarve
serves as the chair of our compensation committee. This
committees purpose is to assist our board of directors in
determining the compensation for our senior management and
directors and recommend these plans to our board. This
committees responsibilities include:
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reviewing and approving the compensation of our chief executive
officer;
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reviewing and approving the compensation policies, plans and
programs for our executive officers and other senior management,
as well as our overall compensation plans and structure;
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reviewing and discussing with management and recommending to our
board of directors the disclosures to be included under the
caption Compensation Discussion and Analysis for use
in any annual reports, registration statements, proxy statements
or information statements;
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recommending to our board of directors the compensation for our
independent directors; and
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administering our stock plans and employee benefit plans.
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56
Corporate
Governance and Nominating Committee
Our corporate governance and nominating committee will consist
of Messrs. Thornley, Jarve and Reddy, each of whom our
board of directors has determined is independent within the
meaning of the independent director standards of The NASDAQ
Stock Market. Mr. Thornley serves as the chair of our
corporate governance and nominating committee. This
committees purpose is to assist our board by identifying
individuals qualified to become members of our board of
directors, consistent with criteria set by our board, and to
develop our corporate governance principles. This
committees responsibilities include:
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establishing criteria for board membership and reviewing and
recommending nominees for election as directors;
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considering board nominations and proposals submitted by our
stockholders;
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assessing the performance of our board of directors and the
independence of directors; and
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developing our corporate governance principles.
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Pursuant to a letter agreement, our corporate governance and
nominating committee has agreed to consult with the manager of
certain Alliance Ventures entities until the 2008 annual
stockholders meeting in connection with the
committees identification, evaluation and review of an
additional independent director.
Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee is one of our
officers or employees. No member of our compensation committee
serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving as a member of our board of directors.
57
COMPENSATION
DISCUSSION AND ANALYSIS
The following discussion and analysis of compensation
arrangements of our named executive officers for 2006 should be
read together with the compensation tables and related
disclosures set forth below. This discussion contains
forward-looking statements that are based on our current plans,
considerations, expectations and determinations regarding future
compensation programs. Actual compensation programs that we
adopt may differ materially from currently planned programs as
summarized in this discussion.
The primary objectives of the compensation committee of our
board of directors with respect to executive compensation are to
attract and retain the best possible executive talent, to tie
annual and long-term cash and stock incentives to achievement of
measurable corporate, business unit and individual performance
objectives, and to align executives incentives with
stockholder value creation, to be affordable within the context
of our operating expense model, to be fairly and equitably
administered and to reflect our values. To achieve these
objectives, our compensation committee expects to implement and
maintain compensation plans that tie a substantial portion of
our executives overall compensation to our financial
performance and common stock price. Overall, the total
compensation opportunity is intended to create an executive
compensation program that is based on comparable public
companies.
As we administer our compensation programs, we plan to:
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evolve and modify our programs to reflect the competitive
environment and our changing business needs;
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focus on simplicity, flexibility and choice wherever possible;
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openly communicate the details of our programs with our
employees and managers to ensure that our programs and their
goals are understood;
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provide our managers and employees with the tools they need to
administer our compensation programs; and
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consistently apply our compensation philosophy to all our
locations, although our specific programs may vary from country
to country.
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Compensation
Components
Base Salary.
Base salaries for our executives
are established based on the scope of their responsibilities,
taking into account competitive market compensation paid by
other companies for similar positions. Generally, we believe
that executive base salaries should be in the range of salaries
for executives in similar positions and with similar
responsibilities at comparable companies in line with our
compensation philosophy. Base salaries are reviewed by our
compensation committee annually, and adjusted from time to time
to realign salaries with market levels after taking into account
individual responsibilities, performance, experience and cost of
living adjustments, as appropriate.
Annual Bonus.
In addition to base salaries, we
believe performance-based cash bonuses are important in
providing incentives to achieve corporate goals. Cash bonuses
are intended to reward individual performance during the year
and can therefore be highly variable from year to year. The
goals for our executive officers are communicated to them within
30 days following the determination of such goals by our
board of directors. In 2007, the goals will be established by
the compensation committee. Bonuses are determined and paid, if
approved by the compensation committee, every six months. Our
compensation committee has not yet determined the corporate
performance goals it will apply in determining our executive
officers bonuses for 2007.
Long-Term Incentive Program.
We believe that
long-term performance is achieved through an ownership culture
that encourages long-term performance by our executive officers
through our grants of stock-based awards. Our long-term equity
incentive compensation is currently exclusively in the form of
stock options to acquire our common stock. Our equity incentive
plans were established to provide our employees, including our
executive officers, with incentives to help align those
employees incentives with the interests of our
stockholders. Prior to this offering we have granted awards to
our employees primarily through our 2001 Stock Incentive Plan.
In 2006, certain of our named executive officers were granted
options pursuant to our 2001 Stock Incentive Plan in the amounts
indicated in the section below entitled Grants of Plan
Based Awards.
58
In the absence of a public trading market for our common stock,
our board of directors determined the fair market value of our
common stock in good faith based on consideration of a number of
relevant factors including the status of our development
efforts, results of operations, financial status, market and
industry conditions, the absence of a liquid market for our
common stock, the rights, preferences and privileges of our
common stock compared to our preferred stock and other factors.
In September 2005, in response to Section 409A of the
Internal Revenue Code of 1986, as amended, and the proposed
regulations issued by the U.S. Internal Revenue Services
thereunder, our board of directors retained Duff &
Phelps, LLC, an independent valuation firm, to determine the
fair market value of our common stock as of September 30,
2005. The board of directors has obtained periodic valuation
updates subsequent to the initial valuation. All equity awards
to our employees, including executive officers, and to our
directors in 2006 were granted at no less than the fair market
value of our common stock on the grant date in accordance with
the valuation determined by our independent valuation firm and
based on a review of material changes in our business and
results of operations. We do not have any program, plan or
obligation that requires us to grant equity compensation on
specified dates and, because we have not been a public company,
we have not made equity grants in connection with the release or
withholding of material non-public information. Authority to
make equity grants to executive officers rests with our
compensation committee, although, our compensation committee
does consider the recommendations of our Chairman and Chief
Executive Officer for officers other than himself. In the future
we expect the exercise price of options to be set at the closing
price of our common stock on the date of grant.
In connection with this offering, our board of directors has
adopted the Cavium Networks, Inc. 2007 Equity Incentive Plan,
which we refer to as the 2007 Plan, which will take effect upon
the consummation of this offering which permits the grant of
stock options, stock appreciation rights, restricted stock
grants or awards, performance shares, and other stock-based
awards. The 2007 Plan will replace our existing 2001 Stock
Incentive Plan immediately following this offering. For a
further description, please see the section below entitled
Equity Incentive Plans.
In the past, our practice has been to review annually equity
awards to existing employees, including our executive officers,
and make additional awards if appropriate. With respect to newly
hired employees, including executive officers, our practice has
been to make stock grants at the first meeting of the board of
directors following such employees hire date. Our
compensation committee has not yet established a policy for
granting equity awards to current and new employees, including
executive officers, following this offering, but expects to
adopt such a policy during 2007. Like our other pay components,
we intend that the annual aggregate value of these awards will
be set in line with that of comparable companies.
In 2006, we granted options to purchase a total of 2,434,750
shares to all employees, of which options to purchase 677,500
shares were granted to our executive officers, representing
27.8% of all grants in 2006. Our board of directors does not
apply a rigid formula in allocating stock options to executive
officers as a group or to any particular executive officer.
Instead, our board of directors exercises its judgment and
discretion and considers, among other things, the role and
responsibility of the executive officer, competitive factors,
the amount of stock-based equity compensation already held by
the executive officer, the non-equity compensation received by
the executive officer and the total number of options to be
granted to all participants during the year. The number of stock
options granted to each named executive officer is set forth in
the Grants of Plan-Based Awards Table. The value of
such grants, as determined in accordance with FAS 123(R)
for each individual named executive officer is set forth in the
column Option Awards in the Summary
Compensation Table.
We encourage our executive officers to hold a significant equity
interest in the company. However, we do not have specific share
retention and ownership guidelines for our executive officers.
We have a policy that, once we become a publicly traded company
following this offering, we will not permit our executive
officers, directors or other members of management to engage in
short sales, transactions in put or call options, hedging
transactions or other inherently speculative transactions with
respect to the companys stock, and will discourage the
purchase and sale of exchange-traded options on our stock by our
executive officers.
Stock Appreciation Rights.
Our 2007 Plan
authorizes us to grant stock appreciation rights, which are more
fully described below under Equity Incentive Plans.
To date no stock appreciation rights have been awarded to
59
any of our executive officers. However, our compensation
committee, in its discretion, may in the future elect to make
such grants to our executive officers if it deems it advisable.
Restricted Stock Grants or Awards.
Our
compensation committee did not grant restricted stock or
restricted stock awards pursuant to our 2001 Stock Incentive
Plan to any of our executive officers in the year ended
December 31, 2006. However, our 2007 Plan authorizes
restricted stock and restricted stock awards and our
compensation committee, in its discretion, may in the future
elect to make such grants to our executive officers if it deems
it advisable.
Employment Agreements and Offer Letters; Other
Compensation.
Our senior officers who were
parties to employment agreements and offer letters prior to this
offering will continue, following this offering, to be parties
to such agreements in their current form until such time, if
any, as the compensation committee determines in its discretion
that revisions to such agreements are advisable. We have no
current plans to make changes to any employment agreements or
offer letters, except as required by law or as required to
clarify the benefits to which our executive officers are
entitled as set forth herein.
All of our full-time employees in the U.S., including our
executive officers, may participate in our health programs, such
as medical, dental and vision care coverage, and our 401(k) and
life insurance programs.
The compensation committee, which is comprised solely of
outside directors as defined for purposes of
Section 162(m) of the Internal Revenue Code, may elect to
adopt plans or programs providing for additional benefits if the
compensation committee determines that doing so is in our best
interests.
Stock Ownership Guidelines.
We have not
currently adopted stock ownership guidelines. We may implement
guidelines regarding the issuance of new stock option awards in
the future in order to assure that our officers are
appropriately incentivized.
Summary
Compensation Table
The following table sets forth information regarding
compensation earned by our Chief Executive Officer, our Chief
Financial Officer and our two other executive officers during
the year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incentive
|
|
|
|
|
|
Name and
|
|
|
|
|
|
|
|
Option
|
|
|
Plan
|
|
All Other
|
|
|
|
Principal Position
|
|
Salary
|
|
|
Bonus
(1)
|
|
|
Awards
(2)
|
|
|
Compensation
|
|
Compensation
(3)
|
|
Total
|
|
|
Syed B. Ali
|
|
$
|
194,480
|
|
|
$
|
45,650
|
|
|
$
|
692,615
|
|
|
|
|
$
|
10,640
|
|
$
|
943,385
|
|
President and Chief Executive
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arthur D. Chadwick
|
|
|
188,625
|
|
|
|
18,260
|
|
|
|
197,890
|
|
|
|
|
|
10,780
|
|
|
415,555
|
|
Vice President of Finance and
Administration and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anil K. Jain
|
|
|
194,480
|
|
|
|
18,260
|
|
|
|
212,732
|
|
|
|
|
|
10,779
|
|
|
436,251
|
|
Vice President of
IC Engineering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rajiv Khemani
|
|
|
187,200
|
|
|
|
18,260
|
|
|
|
256,938
|
|
|
|
|
|
10,528
|
|
|
472,926
|
|
Vice President of Marketing and
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Bonuses listed on this table
reflects the performance of the Chief Executive Officer, Chief
Financial Officer and each of the named executive officers.
However, a portion of the bonuses are actually paid in the
following calendar year.
|
|
(2)
|
|
Amount reflects the expensed fair
value of stock options granted in 2006, calculated in accordance
with SFAS No. 123(R). See Note 1 of Notes
to Financial Statements Stock-Based Compensation
Associated with Awards to Employees for a discussion of
assumptions made in determining the grant date and fair market
value and compensation expense of our stock options.
|
60
|
|
|
(3)
|
|
Includes the following payments we
paid on behalf of the executives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
|
|
|
|
|
|
Health Care
|
|
Insurance
|
|
|
|
Name
|
|
Year
|
|
|
Contribution
|
|
Premiums
|
|
Total
|
|
|
Syed B. Ali
|
|
|
2006
|
|
|
$
|
10,380
|
|
$
|
260
|
|
|
10,640
|
|
Arthur D. Chadwick
|
|
|
2006
|
|
|
|
10,380
|
|
|
400
|
|
|
10,780
|
|
Anil K. Jain
|
|
|
2006
|
|
|
|
10,380
|
|
|
399
|
|
|
10,779
|
|
Rajiv Khemani
|
|
|
2006
|
|
|
|
10,380
|
|
|
148
|
|
|
10,528
|
|
Grants of
Plan Based Awards
All options granted to our named executive officers in 2006 are
nonqualified stock options. The exercise price per share of each
option granted to our named executive officers was equal to the
fair market value of our common stock as determined in good
faith by our board of directors on the date of the grant. All of
the stock options granted to our named executive officers in
2006 were granted under our 2001 Stock Incentive Plan.
The following table sets forth certain information regarding
grants of plan-based awards to our named executive officers for
the fiscal year ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
|
|
|
|
|
Estimated Future Payouts Under
|
|
|
Number of
|
|
Exercise or Base
|
|
Grant Date Fair
|
|
|
|
|
Non-Equity Incentive Plan
Awards
(1)
|
|
|
Securities
|
|
Price of Option
|
|
Value of Stock and
|
Name
|
|
Grant Date
|
|
Target
|
|
|
Maximum
|
|
|
Underlying Options
|
|
Awards
($/Sh)
(2)
|
|
Option
Awards
(3)
|
|
Syed B. Ali
|
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
$
|
3.04
|
|
$
|
331,380
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
175,000
|
|
|
3.04
|
|
|
361,235
|
Arthur D. Chadwick
|
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
3.04
|
|
|
94,680
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
3.04
|
|
|
103,210
|
Anil K. Jain
|
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
53,750
|
|
|
3.04
|
|
|
101,781
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
53,750
|
|
|
3.04
|
|
|
110,951
|
Rajiv Khemani
|
|
|
|
|
20,000
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
3.04
|
|
|
94,680
|
|
|
3/22/06
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
3.04
|
|
|
103,210
|
|
|
11/14/06
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
5.42
|
|
|
59,048
|
|
|
|
(1)
|
|
Actual amounts earned by our
executive officers for 2006 are shown in the column entitled
Bonus in our Summary Compensation Table.
|
|
(2)
|
|
Represents the per share fair
market value of our common stock, as determined by our board of
directors in good faith on the grant date.
|
|
(3)
|
|
Amount represents the total fair
value of stock options in 2006, calculated in accordance with
SFAS No. 123(R). See Note 1 of Notes to
Financial Statements Stock-Based Compensation
Associated with Awards to Employees.
|
61
Outstanding
Equity Awards At 2006 Fiscal Year-End
The following table sets forth certain information regarding
equity awards granted to our named executive officers
outstanding as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
|
|
|
|
Number of
|
|
|
Underlying
|
|
|
|
|
|
|
Securities Underlying
|
|
|
Unexercised
|
|
Option
|
|
|
|
|
Unexercised Options
|
|
|
Options
|
|
Exercise
|
|
Option
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
Price
(1)
|
|
Expiration Date
|
|
Syed B. Ali
|
|
|
350,000
|
(2)
|
|
|
|
|
$
|
1.02
|
|
|
8/2/2015
|
|
|
|
175,000
|
(2)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
|
|
|
175,000
|
(3)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
Arthur D. Chadwick
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anil K. Jain
|
|
|
25,000
|
(2)
|
|
|
|
|
|
0.30
|
|
|
7/30/2014
|
|
|
|
90,000
|
(2)
|
|
|
|
|
|
1.02
|
|
|
8/2/2015
|
|
|
|
53,750
|
(2)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
|
|
|
53,750
|
(3)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
Rajiv Khemani
|
|
|
50,000
|
(2)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
|
|
|
50,000
|
(3)
|
|
|
|
|
|
3.04
|
|
|
3/22/2016
|
|
|
|
20,000
|
(4)
|
|
|
|
|
|
5.42
|
|
|
11/14/2016
|
|
|
|
(1)
|
|
Represents the per share fair
market value of our common stock, as determined by our board of
directors in good faith on the grant date.
|
|
(2)
|
|
Each option vests as to 12.5% on
the date six months from the vesting commencement date and
1/48th of the shares subject to the stock option vest
monthly thereafter.
|
|
(3)
|
|
Each option vests as to 20% on the
one year anniversary of the vesting commencement date and
1/60th of the shares subject to the stock option vest
monthly thereafter.
|
|
(4)
|
|
30,000 shares vested on the
date of grant and 1/48th of the shares subject to the stock
option vest monthly over 12 months after the vesting
commencement date.
|
Option
Exercises and Stock Vested
The following table sets forth certain information regarding
option awards exercised by our named executive officers during
2006:
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
Number of
|
|
|
|
|
|
Shares Acquired
|
|
|
Value Realized
|
Name
|
|
on Exercise
|
|
|
on Exercise
|
|
Syed B. Ali
|
|
|
|
|
|
|
|
Arthur D. Chadwick
|
|
|
50,000
|
(1)
|
|
$
|
0
|
|
|
|
50,000
|
(2)
|
|
|
0
|
Anil K. Jain
|
|
|
5,000
|
(2)
|
|
|
10,100
|
Rajiv Khemani
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Shares remain subject to a
repurchase option in favor of the company which lapses at a rate
of 20% on the one year anniversary of the vesting commencement
date and 1/60th of the shares lapse on a monthly basis
thereafter.
|
|
(2)
|
|
Shares remain subject to a
repurchase option in favor of the company which lapses at a rate
of 12.5% on the date six months from the vesting commencement
date and 1/48th of the shares lapse on a monthly basis
thereafter.
|
Pension
Benefits
We do not currently maintain qualified or non-qualified defined
benefit plans.
62
Nonqualified
Deferred Compensation
We do not currently maintain non-qualified defined contribution
plans or other deferred compensation plans.
Employee
Agreements and Potential Payments Upon Termination or Change in
Control
The following summaries set forth the employment agreements and
potential payments payable to our executive officers upon
termination of employment or a change in control of us under
their current employment agreements and our other compensation
programs. The compensation committee may in its discretion
revise, amend or add to the benefits if it deems advisable. In
addition to the potential payments set forth below, each of the
executive officers, as employees, may be entitled to certain
benefits under the 2001 Stock Incentive Plan relating to the
accelerated vesting of equity awards if such executive
officers employment is terminated by us without cause or
by the executive officer for good reason following a change in
control of us (as such terms are defined in the 2001 Stock
Incentive Plan). Further information regarding the benefits
under the 2001 Stock Incentive Plan is set forth under
Equity Incentive Plans.
Syed B. Ali.
In January 2001, we entered
into an employment agreement with Mr. Ali, our President
and Chief Executive Officer. The base annual salary paid to
Mr. Ali in 2006 was $194,480. Mr. Alis agreement
provides that he is an at-will employee and his employment may
be terminated at any time by us or Mr. Ali. If we terminate
Mr. Alis employment without cause or Mr. Ali is
constructively terminated, and Mr. Ali executes a release
of claims against the company, Mr. Ali will be entitled to
receive $14,583 (less applicable withholding taxes) per month
for a period of twelve months and reimbursement for health care
continuation coverage for the same period. If, during the
twelve-month period, Mr. Ali obtains full time employment
(or its equivalent), then Mr. Alis severance payments
will be decreased by the salary or fees paid for such work (but
not decreased by more than $50,000) and his health care
continuation reimbursements will cease if he has been provided
with substantially similar coverage. For purposes of his
employment agreement, Mr. Ali will be deemed to be
terminated for cause if he is terminated because he performs an
act or fails to perform an act in bad faith and to the material
detriment of the company, refuses or fails to act in accordance
with any lawful, reasonable direction or order of our board of
directors and such refusal or failure has a materially adverse
effect on our business, willfully commits misconduct or
dishonesty in the management of our affairs, or is convicted of
a felony and such conviction has a materially adverse effect on
us or on Mr. Alis ability to serve as our employee.
For purposes of his employment agreement, Mr. Ali will be
deemed to be constructively terminated if he terminates his
employment because, without Mr. Alis consent, we
materially breach the employment agreement and it is not cured
within thirty days after written notice thereof to our board of
directors, materially reduce or change Mr. Alis job
title, duties, responsibilities or requirements that are
inconsistent with the position of President, materially reduce
Mr. Alis salary or benefits in effect, or relocate
our headquarters (or require Mr. Ali to relocate) more than
one hundred miles from our then-current location. For a period
of eighteen months after his termination of employment,
Mr. Ali will be subject to certain restrictions on
competition with the company and on the solicitation of
employees, customers and clients. Mr. Ali is also eligible
to participate in our general employee benefit plans in
accordance with the terms and conditions of such plans.
Arthur D. Chadwick.
In December 2004, we
entered into an employment offer letter with Mr. Chadwick,
our Vice President of Finance & Administration and
Chief Financial Officer. The base annual salary paid to
Mr. Chadwick in 2006 was $188,625. Mr. Chadwicks
offer letter provides that he is an at-will employee and his
employment may be terminated at any time by us or Mr. Chadwick.
Mr. Chadwicks offer letter also provides for the issuance
of a stock option to purchase 250,000 shares of our common
stock, vesting over four years, based on his continued
employment and subject to accelerated vesting as described
below. If we terminate Mr. Chadwicks employment
without cause or Mr. Chadwick resigns for good reason, one
half of his unvested company stock and stock options issued
pursuant to his offer letter will become vested.
Mr. Chadwicks unvested company stock and stock
options issued pursuant to his offer letter will vest if we
terminate Mr. Chadwicks employment or
Mr. Chadwick resigns for good reason within three months
prior to or 12 months following a change in control (as
defined in his offer letter) or Mr. Chadwick is not offered
the position of chief financial officer of the surviving or
continuing entity within three months following the change in
control. In addition, in the event of a change in control,
Mr. Chadwick has agreed to assist the company with the
transition following such a transaction for up to 6 months.
For purposes of his offer letter, Mr. Chadwick will be
deemed to be terminated for cause if he is terminated because he
fails to substantially perform his principal duties and
responsibilities (other than as a result of
63
death or disability) after thirty days written notice from us,
materially and continually breaches his obligations to us set
forth in the offer letter or any written policy of the company
that is applicable to all officers after thirty days written
notice from us, commits an act or acts of dishonesty undertaken
and intended to result in substantial gain or personal
enrichment at our expense, or is convicted of a felony or crime
involving moral turpitude. For purposes of his offer letter,
Mr. Chadwick will be deemed to have terminated for good
reason if he resigns because, without his written consent, we
reduce Mr. Chadwicks salary or target bonus or
materially reduce Mr. Chadwicks benefits, materially
reduce Mr. Chadwicks duties, authority or
responsibilities, relocate Mr. Chadwicks employment
to a location more than fifty miles from his then current
California office location or because a successor company fails
to assume and perform the obligation of the offer letter.
Mr. Chadwick is also eligible to participate in our general
employee benefit plans in accordance with the terms and
conditions of such plans.
Anil K. Jain.
In January 2001, we entered
into an employment offer letter with Mr. Jain, our Vice
President of IC Engineering. The base annual salary paid to
Mr. Jain in 2006 was $194,480. Mr. Jains offer letter
provides that Mr. Jain is an at-will employee and his
employment may be terminated at any time by us or Mr. Jain.
Mr. Jains offer letter provides for the issuance of a
stock option to purchase the equivalent of 375,000 shares
of our common stock, vesting over four years. If we terminate
Mr. Jains employment for any reason, Mr. Jain is
entitled to receive his base salary as well as benefits for
three months after termination. Mr. Jain is also eligible
to participate in our general employee benefit plans in
accordance with the terms and conditions of such plans.
Rajiv Khemani.
In May 2003, we entered into an
employment offer letter with Mr. Khemani, our Vice
President of Marketing and Sales. The base annual salary paid to
Mr. Khemani in 2006 was $187,200. Mr. Khemanis
offer letter provides that Mr. Khemani is an at-will
employee and his employment may be terminated at any time by us
or Mr. Khemani. Mr. Khemanis offer letter also
provides for the issuance of a stock option to purchase
237,500 shares of our common stock, vesting over four
years. The offer letter does not provide Mr. Khemani with
any severance or change in control benefits. Mr. Khemani is
eligible to participate in our general employee benefit plans in
accordance with the terms and conditions of such plans.
Non-Employee
Director Compensation
The following table sets forth a summary of the compensation we
paid to our non-employee directors in 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees
|
|
|
|
|
|
|
|
|
|
|
Earned or
|
|
|
|
Non-Stock
|
|
|
|
|
|
|
Paid in
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
Name
|
|
Cash
|
|
Awards
(1)
|
|
Compensation
|
|
Compensation
|
|
Total
|
|
Kris
Chellam
(2)
|
|
|
|
|
$
|
25,895
|
|
|
|
|
|
|
|
$
|
25,895
|
John W.
Jarve
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony J.
Pantuso
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
C.N.
Reddy
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anthony S.
Thornley
(6)
|
|
|
|
|
|
61,430
|
|
|
|
|
|
|
|
|
61,430
|
|
|
|
(1)
|
|
Amounts reflect the expensed fair
market value of stock options in 2006, calculated in accordance
with SFAS No. 123(R). See Note 1 of Notes
to Financial Statements Stock-Based Compensation
Associated with Awards to Employees.
|
|
|
|
(2)
|
|
Mr. Chellam owned options to
purchase up to 6,250 shares of our common stock as of
December 31, 2006, none of which are vested as of
December 31, 2006.
|
|
|
|
(3)
|
|
Mr. Jarve did not own any
outstanding options as of December 31, 2006.
|
|
(4)
|
|
Mr. Pantuso did not own any
outstanding options as of December 31, 2006.
|
|
(5)
|
|
Mr. Reddy did not own any
outstanding options as of December 31, 2006.
|
|
(6)
|
|
Mr. Thornley did not own any
outstanding options as of December 31, 2006.
|
Prior to this offering our directors have not received any cash
compensation for their services as members of our board of
directors or any committee of our board of directors. However,
we have a policy of reimbursing directors for travel, lodging
and other reasonable expenses incurred in connection with their
attendance at board or committee meetings.
64
Upon completion of this offering, non-employee directors will
receive cash compensation for their services as non-employee
members of the board of directors in the following amounts:
$12,000 per year for service on the board of directors,
plus $6,000 per year for service on the audit committee and
$6,000 per year for service on the compensation committee.
In addition, the chairperson of the audit committee will receive
an additional $6,000 per year. This cash compensation will
be paid annually, with the first payment to be made on the date
of our annual stockholders meeting in 2008. Payments will
be pro rated for any partial year of service.
Two of our non-employee directors have received options to
purchase shares of our common stock under our 2001 Stock
Incentive Plan. In December 2005, we granted an option to
purchase 25,000 shares of common stock at an exercise price
of $1.50 per share to Mr. Chellam; and in September
2006, we granted an option to purchase 25,000 shares of
common stock at an exercise price of $5.52 per share to
Mr. Thornley. Each of these options has a four-year monthly
vesting schedule. In addition, in December 2006, we granted an
option to purchase 6,250 shares of common stock at an
exercise price of $5.42 per share to Mr. Chellam. This
option has a one-year monthly vesting schedule. In February
2007, we granted an option to purchase 3,125 shares of
common stock at an exercise price of $8.52 per share to
Mr. Thornley. This option has a four-year vesting schedule.
In the event of certain change in control transactions,
including our merger with or into another corporation or the
sale of substantially all of our assets, the vesting of all
shares subject to each option granted to the non-employee
directors will accelerate fully.
Each individual who is elected or appointed as a non-employee
director of the board of directors after this offering will
automatically be granted an option to purchase
50,000 shares of our common stock. All of the shares
subject to each such grant vest in equal monthly installments
over four years. The vesting commencement date of these options
will occur when the director first takes office.
At the time of each of our annual stockholders meetings,
beginning in 2008, each non-employee director who has served for
at least the preceding six months and who will continue to be a
director after that meeting will automatically be granted a
nonstatutory option on such date to purchase 12,500 shares
of our common stock that will vest in equal monthly installments
over four years.
All these options will be granted with an exercise price equal
to the fair market value of our common stock on the date of the
grant. For further information regarding the equity compensation
of our non-employee directors, see the section titled
Equity Incentive Plans 2007 Equity Incentive
Plan.
Equity
Incentive Plans
2001
Stock Incentive Plan
Our board of directors adopted the Cavium Networks 2001 Stock
Incentive Plan, which we refer to as the 2001 Plan, on
February 8, 2001. The 2001 incentive plan will terminate in
2011, unless sooner terminated by our board of directors.
Awards.
The 2001 Plan provides for the grant
of incentive stock options, nonstatutory stock options,
restricted stock awards, and other forms of equity compensation
(collectively, stock awards), all of which may be
granted to employees (including officers), directors, and
consultants; provided, however, that incentive stock options may
only be granted to employees.
Share Reserve.
The aggregate number of shares
of our common stock that may be issued pursuant to stock awards
under the 2001 Plan (including incentive stock options) is
10,345,979 shares.
Following the date that Section 162(m) of the Internal
Revenue Code applies to stock awards under the 2001 Plan, no
person may be granted stock options covering more than
1,000,000 shares of our common stock during any fiscal
year. However, a participant may be granted options for up to an
additional 500,000 shares in connection with the
participants commencement of service.
The following types of shares will become available again for
subsequent issuance under the 2001 Plan: (i) any shares
covered by a stock award granted under the 2001 Plan that is
forfeited or canceled, expires or is settled in cash, and
(ii) any unvested shares that are forfeited or repurchased
by us at their original purchase price.
65
Administration.
Our board of directors has
delegated its authority to administer the 2001 Plan to our
compensation committee. Subject to the terms of the 2001 Plan,
our board of directors or an authorized committee, referred to
as the plan administrator, determines recipients, dates of
grant, the numbers and types of stock awards to be granted, and
the terms and conditions of the stock awards, including the
period of their exercisability and vesting. Subject to the
limitations set forth below, the plan administrator will also
determine the exercise price of stock options granted and the
consideration to be paid for restricted stock awards. The plan
administrator does not have the authority, without first
obtaining stockholder approval, to (i) reduce the exercise
price of any outstanding stock option, (ii) cancel any
outstanding stock option and grant in exchange another stock
award or other consideration or (iii) engage in any action
that is treated as a repricing under generally accepted
accounting principles.
Stock Options.
Incentive and nonstatutory
stock options are granted pursuant to incentive and nonstatutory
stock option agreements adopted by the plan administrator. The
plan administrator determines the exercise price for a stock
option, within the terms and conditions of the 2001 Plan,
provided that the exercise price of an incentive stock option
cannot be less than 100% of the fair market value of our common
stock on the date of grant and the exercise price of a
nonstatutory stock option cannot be less than 85% of the fair
market value of our common stock on the date of grant. In
addition, no incentive or nonstatutory stock option may be
granted to any person who, at the time of the grant, owns or is
deemed to own stock possessing more than 10% of our total
combined voting power or that of any of our affiliates unless
the exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant. Incentive
stock options are subject to additional tax limitations, as
described below with respect to the 2007 incentive plan. All
stock options granted under the 2001 Plan vest at the rate
specified by the plan administrator, typically with
1
/
8
th
of the shares vesting six months after the date of grant and
1
/
48
th
of the shares vesting monthly thereafter over the next three and
one half years.
The plan administrator determines the term of stock options
granted under the 2001 Plan, up to a maximum of ten years
(except in the case of incentive stock options granted to any
person who, at the time of grant, owns or is deemed to own stock
possessing more than 10% of our total combined voting power or
that of any of our affiliates, in which case the term of the
incentive stock option must not exceed five years). Unless the
terms of an optionees stock option agreement provide
otherwise, if an optionees relationship with us, or any of
our affiliates, ceases for any reason other than disability or
death or for cause, the optionee may exercise any vested stock
options for a period of three months following the cessation of
service. If an optionees service relationship with us, or
any of our affiliates, ceases due to disability or death (or if
an optionee dies within 12 months following cessation of
service due to disability), the optionee or a beneficiary may
exercise any vested options for a period of 12 months from
the date of death. In no event, however, may a stock option be
exercised beyond the expiration of its term.
Acceptable consideration for the purchase of common stock issued
upon the exercise of a stock option will be determined by the
plan administrator and may include (a) cash or check,
(b) a promissory note, (c) the tender of common stock
previously owned by the optionee, (d) a broker-assisted
cashless exercise, and (e) other legal consideration
approved by the plan administrator.
Unless the plan administrator provides otherwise, stock options
generally are not transferable except by will or the laws of
descent and distribution, and in the case of nonstatutory stock
options, pursuant to certain trusts or by gift to certain family
members.
Restricted Stock Awards.
Restricted stock
awards are granted pursuant to restricted stock award agreements
adopted by the plan administrator. The purchase price for
restricted stock awards is (i) 100% of the fair market
value of our common stock on the date of grant for any person
who, at the time of the grant, owns or is deemed to own stock
possessing more than 10% of our total combined voting power or
that of any of our affiliates, and (ii) at least 85% of the
fair market value of our common stock on the date of grant for
all other participants. The purchase price may be paid in any
form of consideration described above with respect to options,
except for broker-assisted exercises. Shares of common stock
acquired under a restricted stock award may, but need not, be
subject to a share repurchase option in our favor in accordance
with a vesting schedule to be determined by the plan
administrator. Rights to acquire shares under a restricted stock
award are not transferable except by will or the laws of descent
and distribution.
Changes to Capital Structure.
In the event
that there is a change in our capital structure, such as a stock
split, appropriate adjustments will be made to (i) the
number of shares reserved under the 2001 Plan, (ii) the
maximum
66
number of options that can be granted in a fiscal year, and
(iii) the number of shares and exercise price, if
applicable, of all outstanding stock awards.
Corporate Transactions.
In the event of
certain of our corporate transactions or related entity
dispositions, outstanding stock awards under the 2001 Plan may
be assumed (as described in the 2001 Plan) by any successor
entity (or its parent company). If an award is not assumed, it
will terminate upon a corporate transaction. Except as provided
otherwise in an individual agreement, in the event of certain
corporate transactions or related entity dispositions,
(i) each award that is assumed will become vested with
respect to one additional year of vesting credit upon a
participants termination of service if the
participants service is terminated without cause or if the
participant terminates service voluntarily for good reason (as
such terms are defined in the 2001 Plan) within 12 months
of the corporate transaction or related entity disposition and
(ii) each award that is not assumed will become fully
vested with respect to shares representing one additional year
of vesting credit immediately prior to the corporate transaction
or related entity disposition.
For purposes of the 2001 Plan, a corporate transaction will be
deemed to occur in the event of (i) a merger or
consolidation in which we are not the surviving entity (except
for a transaction the principal purpose of which is to change
the state in which we are incorporated), (ii) the sale,
transfer or other disposition of all or substantially all of our
assets (including the capital stock of our subsidiaries),
(iii) approval by our stockholders of any plan or proposal
for our complete liquidation or dissolution, (iv) a reverse
merger in which we are the surviving entity but more than 50% of
the total combined voting power of our securities is transferred
to a person or persons different from those who held such
securities immediately prior to such merger or (v) an
acquisition by another person or related group of persons of
beneficial ownership of securities possessing more than 50% of
the total combined voting power of our outstanding securities.
For purposes of the 2001 Plan, a related entity disposition is
the sale, distribution or other disposition by us or our
affiliates of all or substantially all of the interests of us or
our affiliates in any related entity (as defined in the 2001
Plan) effected by a sale, merger or consolidation or other
transaction involving the related entity or the sale of all our
substantially all of the assets of that related entity, other
than any related entity disposition to us or our affiliates.
Changes in Control.
Except as provided
otherwise in an individual agreement, following certain
specified change in control transactions, with respect to every
participant who is terminated without cause or for good reason
(as such terms are defined in the 2001 Plan) within
12 months of the change in control transaction, the
participants awards representing one additional year of
vesting credit will become fully vested and be released from any
repurchase or forfeiture rights upon the participants
termination of service.
2007
Equity Incentive Plan
Our board of directors has adopted the 2007 Plan, which will
become effective immediately upon the date of the underwriting
agreement for this offering. The 2007 Incentive Plan will
terminate on the day before the tenth anniversary of the date it
is adopted by our board of directors or approved by our
stockholders, whichever is earlier, unless sooner terminated by
our board of directors.
Awards.
The 2007 Plan provides for the grant
of incentive stock options, nonstatutory 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 our
employees (including officers), directors, and consultants and
employees (including officers) and consultants or our affiliates.
Share Reserve.
Following this offering, the
aggregate number of shares of our common stock that may be
issued initially pursuant to stock awards under the 2007 Plan is
5,000,000 shares. The number of shares of our 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 our common stock outstanding on the
applicable January 1st date or
(ii) 5,000,000 shares. Our 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
67
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.
No person may be granted stock options or stock appreciation
rights covering more than 10,000,000 shares of our common
stock under the 2007 Plan during any calendar year. Such
limitation is designed to help assure that any deductions to
which we would otherwise be entitled upon the exercise of a
stock option or stock appreciation right or upon the subsequent
sale of shares purchased under such a stock award, will not be
subject to the $1,000,000 limitation on the income tax
deductibility of compensation paid per covered executive officer
imposed by Section 162(m) of the Internal Revenue Code.
If a stock award granted under the 2007 Plan expires or
otherwise terminates without being exercised in full, or is
settled in cash, the shares of our common stock not acquired
pursuant to the stock award again become available for
subsequent issuance under the 2007 Plan. In addition, the
following types of shares under the 2007 Plan may become
available for the grant of new stock awards under the 2007 Plan:
(i) shares that are forfeited to us prior to becoming fully
vested; (ii) shares withheld to satisfy income or
employment withholding taxes; (iii) shares used to pay the
exercise price of a stock option in a net exercise arrangement;
and (iv) shares tendered to us to pay the exercise price of
a stock option. Shares issued under the 2007 Plan may be
previously unissued shares or reacquired shares bought on the
open market. As of the date hereof, no shares of our common
stock have been issued under the 2007 incentive plan.
Administration.
Our board of directors has
delegated its authority to administer the 2007 Plan (except with
respect to non-discretionary grants made to non-employee
directors, as discussed in Non-Discretionary Grants to
Non-Employee Directors below) to our compensation
committee. Subject to the terms of the 2007 Plan, our board of
directors or an authorized committee, referred to as the plan
administrator, determines recipients, dates of grant, the
numbers and types of stock awards to be granted, and the terms
and conditions of the stock awards, including the period of
their exercisability and vesting. Subject to the limitations set
forth below, the plan administrator will also determine the
exercise price of stock options granted, the consideration to be
paid for restricted stock awards, and the strike price of stock
appreciation rights.
The plan administrator has the authority to:
|
|
|
|
|
reduce the exercise price of any outstanding stock option;
|
|
|
|
cancel any outstanding stock option and grant in exchange one or
more of the following: (a) new stock options covering the
same or a different number of shares of common stock,
(b) new stock awards, (c) cash,
and/or
(d) other valuable consideration; or
|
|
|
|
engage in any action that is treated as a repricing under
generally accepted accounting principles.
|
The plan administrator also has the authority to amend the 2007
Plan in any respect it deems necessary or advisable; however,
except as provided by the 2007 Plan with regard to changes in
our capital structure, stockholder approval shall be required
for any amendment to the 2007 Plan that either
(i) materially increases the number of shares of common
stock available for issuance under the 2007 Plan,
(ii) materially expands the class of individuals eligible
to receive awards under the 2007 Plan, (iii) materially
increases the benefits accruing to participants under the 2007
Plan or materially reduces the price at which shares of common
stock may be issued or purchased under the 2007 Plan,
(iv) materially extends the term of the 2007 Plan, or
(v) expands the types of awards available for issuance
under the 2007 Plan, but only to the extent required by
applicable law or listing requirements.
Stock Options.
Incentive and nonstatutory
stock options are granted pursuant to stock option agreements
adopted by the plan administrator. The plan administrator
determines the exercise price for a stock option, within the
terms and conditions of the 2007 Plan, provided that the
exercise price of a stock option cannot be less than 100% of the
fair market value of our common stock on the date of grant
except in the case of certain incentive stock options, as
described in Tax Limitations on Incentive Stock
Options below. Stock options granted under the 2007 Plan
vest at the rate specified by the plan administrator, typically
with
1
/
8
th
of the shares vesting six months after the date of grant and
1
/
48
th
of the shares vesting monthly thereafter over the next three and
one half years. No stock option granted to an employee that is
classified as a non-exempt employee for purposes of
the Fair Labor Standards Act may be first exercisable until at
least six months following the date of grant of the stock option.
68
The plan administrator determines the term of stock options
granted under the 2007 Plan, up to a maximum of ten years
(except in the case of certain incentive stock options, as
described in Tax Limitations on Incentive Stock
Options below). Unless the terms of an optionees
stock option agreement provide otherwise, if an optionees
relationship with us, or any of our affiliates, ceases for any
reason other than disability or death, the optionee may exercise
any vested stock options for a period of three months following
the cessation of service. If an optionees service
relationship with us, or any of our affiliates, ceases due to
disability or death (or an optionee dies within a certain period
following cessation of service), the optionee or a beneficiary
may exercise any vested stock options for a period of
12 months following such cessation of service in the event
of disability and 18 months following the date of death.
The stock option term may be extended in the event that exercise
of the stock option following termination of service is
prohibited by applicable securities laws. In no event, however,
may a stock option be exercised beyond the expiration of its
term.
Acceptable consideration for the purchase of common stock issued
upon the exercise of a stock option will be determined by the
plan administrator and may include (a) cash, check, bank
draft or money order, (b) a broker- assisted cashless
exercise, (c) the tender of common stock owned by the
optionee, (d) a net exercise arrangement, and
(e) other legal consideration approved by the plan
administrator.
Unless the plan administrator provides otherwise, stock options
generally are not transferable except by will, the laws of
descent and distribution, or pursuant to a domestic relations
order. An optionee may designate a beneficiary, however, who may
exercise the stock option following the optionees death.
Tax Limitations on Incentive Stock
Options.
Incentive stock options may be granted
only to our employees and employees of our parent or subsidiary
corporations. A maximum of 10,000,000 shares may be issued
pursuant to incentive stock options under the 2007 Plan. The
aggregate fair market value, determined at the time of grant, of
shares of our common stock with respect to incentive stock
options that are exercisable for the first time by an optionee
during any calendar year under all of our incentive plans may
not exceed $100,000. No incentive stock option may be granted to
any person who, at the time of the grant, owns or is deemed to
own stock possessing more than 10% of our total combined voting
power or that of any of our affiliates unless (a) the stock
option exercise price is at least 110% of the fair market value
of the stock subject to the stock option on the date of grant,
and (b) the term of the incentive stock option does not
exceed five years from the date of grant.
Restricted Stock Awards.
Restricted stock
awards are granted pursuant to restricted stock award agreements
adopted by the plan administrator. Restricted stock awards may
be granted in consideration for (a) past or future services
rendered to us or our affiliates, or (b) any other form of
legal consideration. Shares of common stock acquired under a
restricted stock award may, but need not, be subject to
forfeiture in accordance with a vesting schedule as determined
by the plan administrator. Rights to acquire shares under a
restricted stock award may be transferred only upon such terms
and conditions as set by the plan administrator.
Restricted Stock Unit Awards.
Restricted stock
unit awards are granted pursuant to restricted stock unit award
agreements adopted by the plan administrator. Restricted stock
unit awards may be granted in consideration for any form of
legal consideration. A restricted stock unit award may be
settled by cash, delivery of stock, a combination of cash and
stock as deemed appropriate by the plan administrator, or in any
other form of consideration set forth in the restricted stock
unit award agreement. Additionally, dividend equivalents may be
credited in respect of shares of common stock covered by a
restricted stock unit award. Except as otherwise provided in the
applicable award agreement, restricted stock unit awards that
have not vested will be forfeited upon the participants
cessation of continuous service for any reason.
Stock Appreciation Rights.
Stock appreciation
rights are granted pursuant to stock appreciation right
agreements adopted by the plan administrator. The plan
administrator determines the strike price for a stock
appreciation right which cannot be less than 100% of the fair
market value of our common stock on the date of grant. Upon the
exercise of a stock appreciation right, we will pay the
participant an amount equal to the product of (a) the
excess of the per share fair market value of our common stock on
the date of exercise over the strike price, multiplied by
(b) the number of shares of common stock with respect to
which the stock appreciation right is exercised. A stock
appreciation right granted under the 2007 Plan vests at the rate
specified in the stock appreciation right agreement as
determined by the plan administrator.
69
The plan administrator determines the term of stock appreciation
rights granted under the 2007 Plan, up to a maximum of ten
years. If a participants service relationship with us, or
any of our affiliates, ceases for any reason, then the
participant, or the participants beneficiary, may exercise
any vested stock appreciation right for three months (or such
longer or shorter period specified in the stock appreciation
right agreement) after the date such service relationship ends.
In no event, however, may a stock appreciation right be
exercised beyond the expiration of its term.
Performance Awards.
The 2007 Plan permits the
grant of performance stock awards and performance cash awards
that may qualify as performance-based compensation that is not
subject to the $1,000,000 limitation on the income tax
deductibility of compensation paid per covered executive officer
imposed by Section 162(m) of the Internal Revenue Code. To
assure that the compensation attributable to performance stock
awards and performance cash awards will so qualify, the plan
administrator can structure such awards so that stock or cash
will be issued or paid pursuant to such award only upon the
achievement of certain pre-established performance goals during
a designated performance period. No individual may receive more
than 10,000,000 vested shares of our common stock during any
calendar year pursuant to performance-based stock awards. No
individual may be paid more than $10,000,000 during any calendar
year pursuant to performance cash awards.
Performance goals may be based on any one of, or combination of,
the following performance criteria: earnings per share; earnings
before interest, taxes and depreciation; earnings before
interest, taxes, depreciation and amortization; total
stockholder return; return on equity; return on assets,
investment, or capital employed; operating margin; gross margin;
operating income; net income (before or after taxes); net
operating income; net operating income after tax; pre-tax
profit; operating cash flow; sales or revenue targets; increases
in revenue or product revenue; expenses and cost reduction
goals; improvement in or attainment of working capital levels;
economic value added (or an equivalent metric); market share;
cash flow; cash flow per share; share price performance; debt
reduction; implementation or completion of projects or
processes; customer satisfaction; stockholders equity; and
to the extent that an award is not intended to comply with
Section 162(m) of the Internal Revenue Code, other measures
of performance selected by our board of directors. At the time
of granting any performance-based award, our board of directors
is authorized to determine whether, when calculating the
attainment of performance goals: (i) to exclude
restructuring
and/or
other
nonrecurring charges; (ii) to exclude exchange rate
effects, as applicable, for
non-U.S. dollar
denominated net sales and operating earnings; (iii) to
exclude the effects of changes to generally accepted accounting
standards required by the Financial Accounting Standards Board;
(iv) to exclude the effects of any statutory adjustments to
corporate tax rates; and (v) to exclude the effects of any
extraordinary items as determined under generally
accepted accounting principles.
Other Stock Awards.
The plan administrator may
grant other awards based in whole or in part by reference to our
common stock. The plan administrator will set the number of
shares under the award and all other terms and conditions of
such awards.
Non-Discretionary Grants to Non-Employee
Directors.
Under the 2007 Plan, our non-employee
directors will automatically receive a series of stock awards
over their period of service on our board of directors:
Form of Initial and Annual Grants.
On or
before the end of our fiscal year, our board will determine if
all initial and annual grants to be granted in the subsequent
year will be in the form of nonstatutory stock options or
another type of stock award. If our board of directors does not
make such a determination on or before the end of our fiscal
year, all initial and annual grants to be granted in the
subsequent fiscal year will be in the form of nonstatutory stock
options, as described below. If the initial and annual grants
are in the form of another type of stock award, the number of
shares of common stock subject to such grants will be determined
by our board of directors in its sole discretion.
Initial Grants.
If the initial grant is in the
form of a stock option, each individual who is elected or
appointed as a non-employee director after this offering will
automatically be granted a nonstatutory stock option to purchase
50,000 shares of our common stock. All of the shares
subject to each such initial grant shall vest in a series of 48
equal monthly installments measured from the date of grant.
Annual Grants.
If the annual grant is in the
form of a stock option, each individual who is serving as a
non-employee director on the date of an annual meeting of our
stockholders, commencing with the annual meeting in
70
2008, and has served at least six months preceding the annual
meeting will automatically be granted a nonstatutory stock
option to purchase 12,500 shares of our common stock on
such date. The shares subject to each such annual grant shall
vest in a series of 48 equal monthly installments measured from
the date of grant.
Changes to Capital Structure.
In the event
that there is a specified type of change in our capital
structure, such as a stock split, appropriate adjustments will
be made to (i) the class(es) and maximum number of shares
reserved under the 2007 Plan, (ii) the class(es) and
maximum number of shares by which the share reserve may increase
automatically each year, (iii) the class(es) and maximum
number of shares which may be issued as incentive stock options,
(iv) the class(es) and maximum number of options, stock
appreciation rights, and performance stock and performance cash
awards that can be granted in a calendar year, (v) the
class(es) and number of shares for which stock options are
subsequently to be made as initial and annual grants to new and
continuing non-employee directors, and (vi) the class(es)
and number of shares and exercise price or strike price, if
applicable, of all outstanding stock awards.
Corporate Transactions.
In the event of
certain significant corporate transactions, our board of
directors has the discretion to take one or more of the
following actions with respect to a stock award:
(i) arrange for the surviving or acquiring corporation (or
its parent) to assume or continue the stock award or to
substitute a similar stock award for the stock award;
(ii) arrange for the assignment of any reacquisition or
repurchase rights held by us for any shares issued pursuant to
the stock award to the surviving or acquiring corporation (or
its parent); (iii) accelerate the vesting and
exercisability of the stock award, if applicable, with such
stock award terminating if not exercised (if applicable) prior
to the corporate transaction; (iv) arrange for the lapse of
any reacquisition or repurchase rights held by us with respect
to the stock award; or (v) cancel the stock award, to the
extent not vested or not exercised prior to the corporate
transaction, in exchange for such cash consideration as our
board, in its discretion, may consider appropriate. Our board of
directors does not need to take the same action with respect to
all stock awards or with respect to all participants. Other
terms may be provided in individual stock award agreements.
For purposes of the 2007 Plan, a corporate transaction will be
deemed to occur in the event of (i) a sale of all or
substantially all of our consolidated assets and the
consolidated assets of our subsidiaries; (ii) a sale of at least
90% of our outstanding securities; (iii) the consummation of a
merger or consolidation in which we are not the surviving
corporation; or (iv) the consummation of a merger or
consolidation in which we are the surviving corporation but the
shares of our outstanding common stock are converted into other
property by virtue of the transaction.
Changes in Control.
Stock awards may be
subject to additional acceleration of vesting and exercisability
upon or after the occurrence of certain specified change in
control transactions, as may be provided in the agreement for
such stock award or other individual written agreement, but in
the absence of such provision, no such acceleration will occur.
Tax
Consequences
The following is a summary of the principal United States
federal income tax consequences with respect to participation in
the 2007 Plan. This summary is not intended to be exhaustive,
and does not discuss the income tax laws of any city, state or
foreign jurisdiction in which a participant may reside.
Stock Options.
There are no federal income tax
consequences to the optionee or us by reason of the grant of a
nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionee normally will recognize taxable ordinary
income equal to the excess of the fair market value of our
common stock on the date of exercise over the option exercise
price paid for those shares. With respect to employees, we are
generally required to withhold an amount based on the ordinary
income recognized. Generally, we will be entitled (subject to
the requirement of reasonableness, the provisions of
Section 162(m) of the Code, and the satisfaction of a tax
reporting obligation) to a business expense deduction equal to
the taxable ordinary income realized by the optionee. Upon
disposition of the stock, the optionee will recognize a capital
gain or loss equal to the difference between the selling price
and the sum of the amount paid for such stock plus any amount
recognized as ordinary income upon acquisition of the stock.
Such gain or loss will be long-term or short-term depending on
whether the stock was held for more than one year.
71
Incentive stock options granted are intended to qualify for
favorable tax treatment under Section 422 of the Code.
There generally are no federal income tax consequences to the
optionee or us by reason of the grant or exercise of an
incentive stock option. However, the exercise of an incentive
stock option may increase the optionees alternative
minimum tax liability, if any. If an optionee holds stock
acquired through exercise of an incentive stock option for more
than two years from the stock option grant date and more than
one year from the date on which the shares are transferred to
the optionee upon exercise of the stock option, any gain or loss
on a disposition of such stock will be a long-term capital gain
or loss. Generally, if the optionee disposes of the stock before
the expiration of either of these holding periods (a
disqualifying disposition), then at the time of
disposition the optionee will realize taxable ordinary income
equal to the lesser of (i) the excess of the stocks
fair market value on the exercise date over the exercise price,
or (ii) the optionees actual gain, if any, on the
purchase and sale. The optionees additional gain or any
loss upon the disqualifying disposition will be a capital gain
or loss, which will be long-term or short-term depending on
whether the stock was held for more than one year. To the extent
the optionee recognizes ordinary income by reason of a
disqualifying disposition, we generally (subject to the
requirement of reasonableness, the provisions of
Section 162(m) of the Code, and the satisfaction of a tax
reporting obligation) will be entitled to a corresponding
business expense deduction in the tax year in which the
disqualifying disposition occurs.
Restricted Stock Awards.
There are no tax
consequences to the recipient or us by reason of the grant of a
restricted stock award. Upon receipt of the stock pursuant to
such award, the recipient normally will recognize taxable
ordinary income equal to the excess of the stocks fair
market value over the purchase price, if any. However, to the
extent the stock is subject to certain types of vesting
restrictions, the taxable event will be delayed until the
restrictions lapse, unless the recipient elects under
Section 83(b) of the Code to be taxed on receipt of the
stock by filing a Section 83(b) election. With respect to
employees, we generally are required to withhold an amount based
on the ordinary income recognized. Subject to the requirement of
reasonableness, the provisions of Section 162(m) of the
Code and the satisfaction of a tax reporting obligation, we will
be entitled to a business expense deduction equal to the taxable
ordinary income realized by the recipient. Upon disposition of
the stock, the recipient will recognize a capital gain or loss
equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as
ordinary income upon acquisition (or vesting) of the stock. Such
gain or loss will be long-term or short-term depending on
whether the stock was held for more than one year.
Restricted Stock Unit Awards.
No taxable
income is recognized upon receipt of a restricted stock unit
award. The recipient generally will recognize ordinary income in
the year in which the shares subject to that unit are actually
vested and issued to the recipient in an amount equal to the
fair market value of the shares on the date of issuance. The
recipient and we will be required to satisfy certain tax
withholding requirements applicable to such income. Subject to
the requirement of reasonableness, the provisions of
Section 162(m) of the Code and the satisfaction of a tax
reporting obligation, we will be entitled to an income tax
deduction equal to the amount of ordinary income recognized by
the recipient at the time the shares are issued. In general, the
deduction will be allowed for the taxable year in which such
ordinary income is recognized by the recipient.
Stock Appreciation Rights.
No taxable income
is realized upon the receipt of a stock appreciation right. Upon
exercise of the stock appreciation right, the fair market value
of the shares (or cash in lieu of shares) received is recognized
as ordinary income to the recipient in the year of such
exercise. Under Section 83(b) of the Code , with respect to
employees, we are required to withhold from the payment made on
exercise of the stock appreciation right or from regular wages
or supplemental wage payments an amount based on the ordinary
income recognized. Generally, we will be entitled to an income
tax deduction in the year in which such ordinary income is
recognized by the recipient.
401(k)
Plan
We maintain a defined contribution employee retirement plan, or
401(k) plan, for our employees. Our executive officers are also
eligible to participate in the 401(k) plan on the same basis as
our other employees. The 401(k) plan is intended to qualify as a
tax-qualified plan under Section 401(k) of the Internal
Revenue Code. The 401(k) plan provides that each participant may
contribute up to 15% of his or her pre-tax compensation, up to
the statutory limit, which is $15,500 for calendar year 2007.
Participants that are 50 years or older can also make
catch-up
contributions, which in calendar year 2007 may be up to an
additional $5,000 above the statutory limit.
72
Under the 401(k) plan, each participant is fully vested in his
or her deferred salary contributions, when contributed. We do
not make matching contributions. Participant contributions are
held and invested by the plans trustee.
Limitations
on Directors Liability and Indemnification
Agreements
As permitted by Delaware law, we have adopted provisions in our
amended and restated certificate of incorporation that limit or
eliminate the personal liability of directors for a breach of
their fiduciary duty of care as a director. The duty of care
generally requires that, when acting on behalf of the
corporation, a director exercise an informed business judgment
based on all material information reasonably available to him or
her. Consequently, a director will not be personally liable to
us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for:
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any breach of the directors duty of loyalty to us or our
stockholders;
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any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
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any act related to unlawful stock repurchases or redemptions or
payments of dividends; or
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any transaction from which the director derived an improper
personal benefit.
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These limitations of liability do not limit or eliminate our
rights or any stockholders rights to seek non-monetary
relief, such as injunctive relief or rescission. These
provisions will not alter a directors liability under
federal securities laws.
As permitted by Delaware law, our bylaws also provide that:
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we will indemnify our directors and executive officers, subject
to certain exceptions, and may indemnify our other officers,
employees and agents, to the fullest extent permitted by law;
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subject to certain exceptions, we will advance expenses to our
directors and executive officers in connection with a legal
proceeding to the fullest extent permitted by law; and
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the rights provided in our bylaws are not exclusive.
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We believe that indemnification under our bylaws covers at least
negligence and gross negligence on the part of indemnified
parties. Our bylaws also permit us to secure insurance on behalf
of any officer, director, employee or other agent for any
liability arising out of the persons actions in connection
with his or her services to us, regardless of whether Delaware
law permits indemnification for such liability.
The limitation of liability and indemnification provisions in
our amended and restated certificate of incorporation and bylaws
may discourage stockholders from bringing a lawsuit against our
directors and officers for breach of their fiduciary duty. They
may also reduce the likelihood of derivative litigation against
our directors and officers, even though an action, if
successful, might benefit us and other stockholders. Further, a
stockholders investment may be adversely affected to the
extent that we pay the costs of settlement and damage awards
against directors and officers as required by these
indemnification provisions. Currently, there is no pending
litigation or proceeding involving any of our directors,
officers or employees for which indemnification is sought, and
we are not aware of any threatened litigation that may result in
claims for indemnification.
In addition to the indemnification provided for in our bylaws,
prior to the closing of this offering, we intend to enter, and
we intend to continue thereafter to enter, into separate
indemnification agreements with each of our directors and
executive officers that may be broader than the specific
indemnification provisions contained in the Delaware General
Corporation Law. These indemnification agreements may require
us, among other things, to indemnify our directors and executive
officers for some expenses, including attorneys fees,
judgments, fines and settlement amounts incurred by a director
or executive officer in any action or proceeding arising out of
his service as a director, officer, employee or other agent of
Cavium Networks or any of our subsidiaries or any other company
or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are
necessary to attract and retain qualified individuals to serve
as directors and executive officers. There is no pending
litigation or proceeding involving any of our directors or
executive officers for which indemnification is required or
permitted, and we are not aware of any threatened litigation or
proceeding that may result in a claim for indemnification.
73
CERTAIN
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following is a summary of transactions since January 1,
2004 to which we have been a party in which the amount involved
exceeded $120,000 and in which any of our executive officers,
directors or beneficial holders of more than 5% of our capital
stock had or will have a director or indirect material interest,
other than compensation arrangements which are described under
the section of this prospectus entitled Compensation
Discussion and Analysis.
Common
Stock Issuances
Since January 1, 2004, Anil K. Jain, one of our executive
officers, has purchased 117,500 shares of our common stock
at a per share exercise price of $0.20, 125,000 shares of
common stock at a per share exercise price of $0.30 and
15,000 shares of common stock at a per share exercise price
of $1.02, in each case by exercising stock options granted under
our 2001 Stock Incentive Plan, resulting in an aggregate
purchase price of $281,800.
Since January 1, 2004, Arthur D. Chadwick, one of our
executive officers, has purchased 250,000 shares of common
stock at a per share exercise price of $0.80 and
100,000 shares of common stock at a per share exercise
price of $3.04, in each case by exercising stock options granted
under our 2001 Stock Incentive Plan, resulting in an aggregate
purchase price of $504,000.
Since January 1, 2004, Rajiv Khemani, one of our executive
officers, has purchased 25,000 shares of our common stock
at a per share exercise price of $0.30 and 50,000 shares of
common stock at a per share exercise price of $1.02, in each
case by exercising stock options granted under our 2001 Stock
Incentive Plan, resulting in an aggregate purchase price of
$58,000.
In 2006, Kris Chellam, one of our directors, purchased
25,000 shares of common stock upon the exercise of an
option granted under our 2001 Stock Incentive Plan at a per
share exercise price of $1.50, resulting in an aggregate
purchase price of $37,500.
In 2006, Anthony S. Thornley, one of our directors,
purchased 25,000 shares of common stock upon the exercise
of an option granted under our 2001 Stock Incentive Plan at a
per share exercise price of $5.52, resulting in an aggregate
purchase price of $138,000.
Preferred
Stock Issuances
Series B
Preferred Stock
In September 2006, we sold an aggregate of 59,522 shares of
our Series B preferred stock at a price of $2.10 per
share pursuant to warrant exercises by affiliates of Diamondhead
Ventures, an existing stockholder who holds more than 5% of our
stock.
In September 2006, we sold an aggregate of 119,046 shares
of our Series B preferred stock at a price of
$2.10 per share pursuant to warrant exercises by Alliance
Ventures IV, L.P., an existing stockholder who, along with its
affiliates, holds more than 5% percent of our stock and was then
affiliated with C.N. Reddy, one of our directors, Solar Venture
Partners, L.P. an affiliate of Mr. Reddy, and Galaxy
Venture Partners II, L.L.C., also an affiliate of
Mr. Reddy.
Series D
Preferred Stock
In December 2004, we sold an aggregate of 3,049,454 shares
of our Series D preferred stock at a price of
$6.5776 per share in a private financing. In August and
October 2006, we sold an aggregate of 1,032,037 shares of
our Series D preferred stock at a price of $8.70 per
share in a private financing. In addition, certain existing
stockholders exercised warrants for Series D preferred
stock in 2006.
74
The following table summarizes the purchases of our preferred
stock since January 1, 2004 by our directors, executive
officers, 5% stockholders and persons affiliated with them in
amounts in excess of $120,000:
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Series B
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Series D
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Investor
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Preferred
Stock
(1)
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Preferred
Stock
(1)
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Directors
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Kris Chellam
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80,000
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(2)
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John W. Jarve
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1,152,938
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(3)
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Anthony J. Pantuso
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1,388,661
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(4)
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C.N. Reddy
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119,046
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(5)(9)
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111,413
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(6)
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5% Stockholders
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Entities affiliated with Menlo
Ventures
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1,152,938
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(3)
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Entities affiliated with NeoCarta
Ventures
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1,388,661
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(4)
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Entities affiliated with
Diamondhead Ventures
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59,522
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(7)
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315,435
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(8)
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Entities Affiliated with Alliance
Ventures
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90,714
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(9)
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61,000
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(10)
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(1)
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Each outstanding share of
Series B preferred stock and Series D preferred stock
will automatically convert into one share of our common stock
immediately upon the closing of this offering.
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(2)
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Consists of 80,000 shares
issued to The Chellam Family Trust dtd 1/28/88. Mr. Chellam
is co-trustee of The Chellam Family Trust dtd
1/28/88.
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(3)
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Consists of 1,091,807 shares
issued to Menlo Ventures IX, L.P., 20,519 shares issued to
MMEF IX, L.P., 36,029 shares issued to Menlo Entrepreneurs
Fund IX, L.P. and 4,583 shares issued to Menlo
Entrepreneurs Fund IX(A), L.P. These numbers include
30,919 shares issued as a result of the exercise of
warrants in 2006. John W. Jarve, one of our directors, is a
managing member of MV Management IX, L.L.C., the general partner
of Menlo Ventures, IX, L.P., Menlo Entrepreneurs Fund IX,
L.P., Menlo Entrepreneurs Fund IX(A), L.P. and MMEF IX,
L.P. and has shared voting and investment power over the shares
held by these entities. Mr. Jarve disclaims beneficial
ownership of these shares except to the extent of his
proportionate pecuniary interest in them.
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(4)
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Consists of 1,249,796 shares
issued to NeoCarta Ventures, L.P. and 138,865 shares issued
to NeoCarta Scout Fund, L.L.C. Anthony J. Pantuso, one of
our directors, is a managing director of NeoCarta Associates,
LLC, which is the general partner of NeoCarta Ventures, L.P. and
is a managing director of NeoCarta Associates, LLC, which is the
manager of NeoCarta Scout Fund, L.L.C. Mr. Pantuso may be
deemed to share dispositive and voting power over these shares,
which are, or may be, deemed to be beneficially owned by
NeoCarta Ventures, L.P. and NeoCarta Scout Fund.
Mr. Pantuso may be deemed to have an indirect pecuniary
interest in an indeterminate portion of the shares held by
NeoCarta Ventures, L.P. and NeoCarta Scout Fund, L.L.C.
Mr. Pantuso disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
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(5)
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Consists of 5,666 shares
issued to Solar Venture Partners, L.P. and 22,666 shares
issued to Galaxy Venture Partners III, L.L.C., all issued
as a result of the exercise of warrants in 2006. C.N. Reddy, one
of our directors, is one of the general partners of Solar
Venture Partners, L.P. and is the managing partner of Galaxy
Ventures. Mr. Reddy disclaims beneficial ownership of these
shares except to the extent of his proportionate pecuniary
interest in them.
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(6)
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Consists of 25,206 shares
issued to Solar Venture Partners, L.P. and 86,207 shares
issued to Scenic Capital. C.N. Reddy, one of our directors, is
one of the general partners of Solar Venture Partners, L.P. and
is the general partner of Scenic Capital. Mr. Reddy
disclaims beneficial ownership of these shares except to the
extent of his proportionate pecuniary interest in them.
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(7)
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Consists of 57,077 shares
issued to Diamondhead Ventures, LP, 1,627 shares issued to
Diamondhead Ventures Advisory Fund, LP and 818 shares
issued to Diamondhead Ventures Principals Fund, LP, all issued
as a result of the exercise of warrants in 2006.
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(8)
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Consists of 302,476 shares
issued to Diamondhead Ventures, LP, 8,624 shares issued to
Diamondhead Ventures Advisory Fund, LP and 4,335 shares
issued to Diamondhead Ventures Principals Fund, LP. These
numbers include 9,569 shares issued as a result of the
exercise of warrants in 2006. Raman Khanna is a managing member
of Diamondhead Management, L.L.C., which is the general partner
of Diamondhead Ventures, L.P., Diamondhead Ventures Advisory
Fund, L.P. and Diamondhead Principals Fund, L.P. Mr. Khanna
may be deemed to share dispositive and voting power over these
shares, which are, or may be, deemed to be beneficially owned by
Diamondhead Ventures, L.P., Diamondhead Ventures Advisory Fund,
L.P. and Diamondhead Ventures Principals Fund, L.P.
Mr. Khanna disclaims beneficial ownership of these shares,
except to the extent of his pecuniary interest therein.
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(9)
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Consists of 90,714 shares
issued to Alliance Ventures IV, LP as a result of the exercise
of warrants in 2006. At the time of the Alliance Ventures IV,
L.P. warrant exercise, C.N. Reddy, one of our directors, was a
manager of Alliance Venture Management, LLC, the general partner
of Alliance Ventures IV, L.P. Alliance Venture Management, LLC
is no longer the general partner of Alliance Ventures IV, L.P.
or its affiliated funds. Mr. Reddy disclaims beneficial
ownership of these shares. Randall Meals, Steven Schlossareck
and Maury Domengeaux are managing directors of AVM Capital
Partners LLC, which is the general partner of Alliance Ventures
IV, L.P. and Alliance Ventures III, L.P. Randall Meals, Steven
Schlossareck and Maury Domengeaux have shared voting and
investment power over the shares held by Alliance Ventures IV,
L.P. and Alliance Ventures III, L.P. Randall Meals, Steven
Schlossareck and Maury Domengeaux disclaim beneficial ownership
of these shares, except to the extent of their pecuniary
interest therein.
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(10)
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Consists of 61,000 shares
issued to Jason Investments, which was, at the time of the
issuance, affiliated with Alliance Ventures IV, L.P. At the time
of the issuance, C.N. Reddy, one of our directors, was a manager
of Alliance Venture Management, LLC, the general partner of
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Alliance Ventures IV, L.P. Alliance
Venture Management, LLC is no longer the general partner of
Alliance Ventures IV, L.P. or its affiliated funds. Jason
Investments is no longer affiliated with Alliance Ventures IV,
L.P. Mr. Reddy and Alliance Ventures IV, L.P. disclaim
beneficial ownership of these shares.
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Investors
Rights Agreement
We have entered into an amended and restated investors
rights agreement with the purchasers of our outstanding
preferred stock, including Syed B. Ali and Muhammad R.
Hussain, entities with which certain of our directors are
affiliated, and the holders of our outstanding convertible
preferred stock warrants. The holders of an aggregate of
26,114,378 shares of our common stock, assuming conversion
of our outstanding preferred stock, and the holders of warrants
to purchase an aggregate of 55,000 shares of our preferred
stock, or their permitted transferees, are entitled to
registration rights under the Securities Act with respect to
these shares following this offering. For a further description
of this agreement, see Description of Capital
Stock Registration Rights.
Election
of Directors
We have entered into an amended and restated voting agreement
with the purchasers of our outstanding preferred stock,
including entities with which certain of our directors are
affiliated, and certain other stockholders, including
Messrs. Ali and Hussain, obligating each party to vote or
consent at each stockholder meeting or with respect to each
written stockholder consent to maintain the size of our board of
directors and to elect the nominees of certain parties to the
board of directors. Upon the closing of this offering, the
voting agreement will terminate in its entirety and none of our
stockholders will have any special rights regarding the election
or designation of members of our board of directors.
We have entered into a letter agreement with respect to
identifying, evaluating and reviewing a candidate for our board
of directors. For a further description of this agreement, see
Management Board Committees
Corporate Governance and Nominating Committee.
Director
and Officer Indemnification
Our amended and restated certificate of incorporation and bylaws
contain provisions limiting the liability of directors. In
addition, prior to the closing of this offering, we intend to
enter, and we intend to continue thereafter to enter, into
separate indemnification agreements with each of our directors
and executive officers to the fullest extent permitted under
Delaware law. See Description of Capital Stock
Limitation of Liability and Indemnification Matters.
Director
Compensation
See Compensation Discussion and Analysis
Non-Employee Director Compensation.
Policies
and Procedures for Review and Approval of Conflicting
Activities
Pursuant to our written Code of Conduct, our executive officers
and directors are not permitted to enter into any transactions
with our company without the approval of either our audit
committee or our board of directors. In approving or rejecting
such proposed transactions, the audit committee or board of
directors, as applicable, shall consider the relevant facts and
circumstances available and deemed relevant to the audit
committee or board of directors, as applicable, including but
not limited to the risks, costs, benefits to the company, the
terms of the transactions, the availability of other sources for
comparable services or products and, if applicable, the impact
on a directors independence. Our audit committee
and/or
board
of directors shall approve only those transactions that, in
light of known circumstances, are in, or are not inconsistent
with, our best interests, as our audit committee or board of
directors determines in the good faith exercise of its
discretion. The company has designated a compliance officer to
generally oversee compliance with the Code of Conduct.
All of the transactions described above were entered into prior
to the adoption of our Code of Conduct. Instead, their approvals
are as described herein. The stock option exercises were the
result of options granted by the companys board of
directors. The issuances of Series D Preferred Stock and
the related Investors Rights Agreement and Voting
Agreement were unanimously approved by our board of directors.
The director and officer indemnification agreements were
unanimously approved by the board of directors.
76
PRINCIPAL
STOCKHOLDERS
The following table sets forth the beneficial ownership
information of our common stock at March 31, 2007, and as
adjusted to reflect the sale of the shares of common stock in
this offering, for:
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each person known to us to be the beneficial owner of more than
5% of our common stock;
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each of our named executive officers;
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each of our directors; and
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all of our executive officers and directors as a group.
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Unless otherwise noted below, the address of the persons and
entities listed on the table is c/o Cavium Networks, Inc.,
805 East Middlefield Road, Mountain View, California 94043. We
have determined beneficial ownership in accordance with the
rules of the SEC. Except as indicated by the footnotes below, we
believe, based on the information furnished to us, that the
persons and entities named in the table below have sole voting
and investment power with respect to all shares of common stock
reflected as beneficially owned, subject to applicable community
property laws. We have based our calculation of the percentage
of beneficial ownership on 31,807,971 shares of common
stock outstanding on March 31, 2007, and
38,057,971 shares of common stock outstanding upon
completion of this offering.
In computing the number of shares of common stock beneficially
owned by a person and the percentage ownership of that person,
we deemed outstanding shares of common stock subject to options
or warrants held by that person that are currently exercisable
or exercisable within 60 days of March 31, 2007. We
did not deem these shares outstanding, however, for the purpose
of computing the percentage ownership of any other person.
Beneficial ownership representing less than 1% is denoted with
an asterisk (*).
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|
|
|
Shares Beneficially Owned
|
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
Before
|
|
|
After
|
|
Name of Beneficial Owner
|
|
Number
|
|
|
Offering
|
|
|
Offering
|
|
|
5% Stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Entities affiliated with Menlo
Ventures
(1)
|
|
|
9,513,118
|
|
|
|
29.91
|
%
|
|
|
25.00
|
%
|
Entities affiliated with Alliance
Ventures
(2)
|
|
|
4,407,352
|
|
|
|
13.86
|
|
|
|
11.58
|
|
Entities affiliated with
Diamondhead
Ventures
(3)
|
|
|
2,915,880
|
|
|
|
9.17
|
|
|
|
7.66
|
|
Entities affiliated with
NeoCarta
(4)
|
|
|
1,733,488
|
|
|
|
5.45
|
|
|
|
4.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors and Named Executive
Officers:
|
|
|
|
|
|
|
|
|
|
|
|
|
Syed B.
Ali
(5)
|
|
|
2,781,250
|
|
|
|
8.56
|
|
|
|
7.18
|
|
Arthur D.
Chadwick
(6)
|
|
|
500,000
|
|
|
|
1.57
|
|
|
|
1.31
|
|
Anil K.
Jain
(7)
|
|
|
932,500
|
|
|
|
2.91
|
|
|
|
2.44
|
|
Rajiv
Khemani
(8)
|
|
|
432,500
|
|
|
|
1.35
|
|
|
|
1,13
|
|
C.N.
Reddy
(9)
|
|
|
1,219,363
|
|
|
|
3.83
|
|
|
|
3.20
|
|
John W.
Jarve
(1)
|
|
|
9,513,118
|
|
|
|
29.91
|
|
|
|
25.00
|
|
Anthony J.
Pantuso
(4)
|
|
|
1,733,488
|
|
|
|
5.45
|
|
|
|
4.55
|
|
Kris
Chellam
(10)
|
|
|
111,250
|
|
|
|
*
|
|
|
|
*
|
|
Anthony S.
Thornley
(11)
|
|
|
28,125
|
|
|
|
*
|
|
|
|
*
|
|
All executive officers and
directors as a group (9
persons)
(12)
|
|
|
17,251,594
|
|
|
|
52.30
|
%
|
|
|
43.97
|
%
|
|
|
|
(1)
|
|
Consists of
(a) 9,015,479 shares held by Menlo Ventures IX, L.P.,
(b) 297,505 shares held by Menlo Entrepreneurs
Fund IX, L.P., (c) 163,718 shares held by MMEF
IX, L.P. and (d) 36,416 shares held by Menlo
Entrepreneurs Fund IX(A), L.P. John W. Jarve, one of our
directors, is a managing member of MV Management IX, L.L.C., the
general partner of Menlo Ventures, IX, L.P., Menlo Entrepreneurs
Fund IX, L.P., Menlo Entrepreneurs Fund IX(A), L.P.
and MMEF IX, L.P. and has shared voting and investment power
over the shares held by these entities. Mr. Jarve disclaims
beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest in them. The address for the
Menlo Ventures affiliated entities is 3000 Sand Hill Road,
Bldg. 4, Suite 100, Menlo Park, CA 94025.
|
|
|
|
(2)
|
|
Consists of
(a) 4,129,575 shares held by Alliance Ventures, IV,
L.P. and (b) 277,777 shares held by Alliance
Ventures III, L.P. Randall Meals, Steven Schlossareck and
Maury Domengeaux are managing directors of AVM Capital Partners
LLC, which is the general partner of Alliance Ventures IV, L.P.
and Alliance Ventures III, L.P. Randall Meals, Steven
Schlossareck and Maury Domengeaux have shared voting
|
77
|
|
|
|
|
and investment power over the
shares held by Alliance Ventures IV, L.P. and Alliance Ventures
III, L.P. Randall Meals, Steven Schlossareck and Maury
Domengeaux disclaim beneficial ownership of these shares, except
to the extent of their pecuniary interest therein. The address
for Alliance Ventures affiliated entities is 12930 Saratoga
Avenue,
Suite D-8,
Saratoga, CA 95070.
|
|
|
|
(3)
|
|
Consists of
(a) 2,796,070 shares held by Diamondhead Ventures,
L.P., (b) 79,730 shares held by Diamondhead Ventures
Advisory Fund, L.P., and (c) 40,080 shares held by
Diamondhead Ventures Principals Fund, L.P. Raman Khanna is a
managing member of Diamondhead Management, L.L.C., which is the
general partner of Diamondhead Ventures, L.P., Diamondhead
Ventures Advisory Fund, L.P. and Diamondhead Principals Fund,
L.P. Mr. Khanna may be deemed to share dispositive and
voting power over these shares, which are, or may be, deemed to
be beneficially owned by Diamondhead Ventures, L.P., Diamondhead
Ventures Advisory Fund, L.P. and Diamondhead Ventures Principals
Fund, L.P. Mr. Khanna disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest
therein. The address for the Diamondhead Ventures affiliated
entities is 2200 Sand Hill Road, Suite 110, Menlo Park, CA
94025.
|
|
|
|
(4)
|
|
Consists of
(a) 1,560,141 shares held by NeoCarta Ventures, L.P.,
and (b) 173,347 shares held by NeoCarta Scout Fund,
L.L.C. Anthony J. Pantuso, one of our directors, is a
managing director of NeoCarta Associates, LLC, which is the
general partner of NeoCarta Ventures, L.P. and is a managing
director of NeoCarta Associates, LLC, which is the manager of
NeoCarta Scout Fund, L.L.C. Mr. Pantuso may be deemed to
share dispositive and voting power over these shares, which are,
or may be, deemed to be beneficially owned by NeoCarta Ventures,
L.P. and NeoCarta Scout Fund, L.L.C. Mr. Pantuso may be
deemed to have an indirect pecuniary interest in an
indeterminate portion of the shares held by NeoCarta Ventures,
L.P. and NeoCarta Scout Fund, L.L.C. Mr. Pantuso disclaims
beneficial ownership of these shares, except to the extent of
his pecuniary interest therein. The address for the entities
affiliated with NeoCarta Ventures affiliated entities is 343
Sansome Street, Suite 525, San Francisco, CA 94104.
|
|
|
|
(5)
|
|
Includes options for
700,000 shares of common stock exercisable within
60 days of March 31, 2007.
|
|
|
|
(6)
|
|
Includes
(a) 87,495 shares held by Arthur D. Chadwick Living
Trust, dated 5/24/2000 for which Mr. Chadwick is the sole
beneficiary and sole trustee; and (b) 62,505 shares
held by Farah J. Subedar Living Trust, dated 5/24/2000 for which
Mr. Chadwicks spouse is the sole beneficiary and sole
trustee.
|
|
|
|
(7)
|
|
Includes options for
197,500 shares of common stock exercisable within
60 days of March 31, 2007 and 117,000 shares held
by the Jain Family Trust dated 2/27/07.
|
|
|
|
(8)
|
|
Includes options for
120,000 shares of common stock exercisable within
60 days of March 31, 2007.
|
|
|
|
(9)
|
|
Consists of
(a) 316,840 shares held by Solar Venture Partners, LP;
(b) 816,316 shares held by Galaxy Venture
Partners III, LLC; and (c) 86,207 shares held by
Scenic Capital. C.N. Reddy, one of our directors, is one of the
general partners of Solar Venture Partners, LP, one of the
general partners of Galaxy Venture Partners III, LLC and
the general partner of Scenic Capital. Mr. Reddy may be
deemed to share voting and investment power over these shares.
Mr. Reddy disclaims beneficial ownership of these shares
except to the extent of his proportionate pecuniary interest in
them. The address for Scenic Capital is c/o C.N. Reddy,
Alliance Semiconductor Corp., 2900 Lakeside Drive,
Suite 229, Santa Clara, CA 95054. The address for
Solar Venture Partners, LP and Galaxy Venture Partners III,
LLC is 3561 Homestead Road, Suite 532, Santa Clara,
CA 95051.
|
|
|
|
(10)
|
|
Includes options for
6,250 shares of common stock exercisable within
60 days of March 31, 2007 and 80,000 shares held
by The Chellam Family Trust dtd 1/28/88 of which
Mr. Chellam is a co-Trustee.
|
|
|
|
(11)
|
|
Includes options for
3,125 shares of common stock exercisable within
60 days of March 31, 2007.
|
|
|
|
(12)
|
|
Includes options exercisable for an
aggregate of 1,026,875 shares of common stock within
60 days of March 31, 2007 held by our directors and
named executive officers as described in the notes above.
|
78
DESCRIPTION
OF CAPITAL STOCK
General
The following description summarizes some of the terms of our
capital stock. Because it is only a summary, it does not contain
all the information that may be important to you. For a complete
description you should refer to our amended and restated
certificate of incorporation and bylaws as they will be in
effect upon the completion of this offering, copies of which
have been filed as exhibits to the registration statement of
which the prospectus is a part.
Upon completion of this offering and the filing of our amended
and restated certificate of incorporation, our authorized
capital stock will consist of 200,000,000 shares of common
stock, $0.001 par value per share, and
10,000,000 shares of preferred stock, $0.001 par value
per share.
As of March 31, 2007, assuming the conversion of all
outstanding preferred stock into common stock upon the closing
of this offering, we had approximately 192 record holders of our
common stock. As of March 31, 2007, there were
4,416,697 shares of common stock subject to outstanding
options.
Common
Stock
Each holder of common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
the stockholders, including the election of directors. Our
amended and restated certificate of incorporation and amended
and restated bylaws do not provide for cumulative voting rights.
Because of this, the holders of a majority of the shares of
common stock entitled to vote in any election of directors can
elect all of the directors standing for election, if they should
so choose. Subject to preferences that may be applicable to any
then outstanding preferred stock, the holders of our outstanding
shares of common stock are entitled to receive dividends, if
any, as may be declared from time to time by our board of
directors out of legally available funds. In the event of our
liquidation, dissolution or winding up, holders of common stock
will be entitled to share ratably in the net assets legally
available for distribution to stockholders after the payment of
all of our debts and other liabilities, subject to the
satisfaction of any liquidation preference granted to the
holders of any outstanding shares of preferred stock.
Holders of our common stock have no preemptive, conversion or
subscription rights, and there are no redemption or sinking fund
provisions applicable to our common stock. The rights,
preferences and privileges of the holders of common stock are
subject to, and may be adversely affected by, the rights of the
holders of shares of any series of our preferred stock that we
may designate and issue in the future.
All of our outstanding shares of common stock are, and the
shares of common stock to be issued in this offering will be,
fully paid and nonassessable.
Preferred
Stock
Assuming the closing of this offering, all currently outstanding
shares of preferred stock will be converted into shares of
common stock. See Note 9 to our consolidated financial
statements for a description of the currently outstanding
preferred stock. Following this offering, our amended and
restated certificate of incorporation will be further amended
and restated to delete all references to such shares of
preferred stock. Under the amended and restated certificate of
incorporation to be effective upon completion of this offering,
our board of directors will have the authority, without further
action by the stockholders, to issue up to
10,000,000 shares of preferred stock in one or more series,
to establish from time to time the number of shares to be
included in each such series, to fix the rights, preferences and
privileges of the shares of each wholly unissued series and any
qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series,
but not below the number of shares of such series then
outstanding.
Our board of directors may authorize the issuance of preferred
stock with voting or conversion rights that could adversely
affect the voting power or other rights of the holders of the
common stock. The issuance of preferred stock, while providing
flexibility in connection with possible acquisitions and other
corporate purposes, could, among other things, have the effect
of delaying, deferring or preventing a change in our control and
may adversely affect the market price of the common stock and
the voting and other rights of the holders of common stock.
79
Immediately after the closing of this offering, no shares of our
preferred stock will be outstanding. We have no current plans to
issue any shares of preferred stock.
Warrants
As of March 31, 2007, warrants exercisable for up to
47,619 shares of our Series B preferred stock and
55,000 shares of our Series D preferred stock were
outstanding. The warrant to purchase 47,619 shares of our
Series B preferred stock is immediately exercisable at an
exercise price of $2.10 per share and will expire on
October 31, 2012. The warrants to purchase
55,000 shares of our Series D preferred stock are
immediately exercisable at an exercise price of $6.58 per
share and will expire on October 5, 2015. These warrants
have net exercise provisions under which the holders may, in
lieu of payment of the exercise price in cash, surrender the
warrants and receive a net amount of shares of Series B
preferred stock or Series D preferred stock based on the
fair market value of our Series B preferred stock or
Series D preferred stock at the time of exercise of the
warrant after deduction of the aggregate exercise price. These
warrants also contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon
the exercise of the warrant in the event of stock dividends,
stock splits or stock combinations, reclassifications,
combinations or exchanges. Upon the closing of this offering,
such warrants will be exercisable for a total of
102,619 shares of our common stock.
Registration
Rights
Upon completion of this offering, the holders of
26,169,378 shares of our common stock will be entitled to
rights with respect to the registration of these shares under
the Securities Act. These shares are referred to as registrable
securities. Under the terms of the agreement between us and the
holders of the registrable securities, if we propose to register
any of our securities under the Securities Act, these holders
are entitled to notice of such registration and may be entitled
to include their shares of registrable securities in the
proposed registration. At any time within the five year period
commencing six months following the completion of this offering,
holders of all of these registrable securities are entitled to
demand registration, pursuant to which they may require us to
use our commercially reasonable efforts to register their
registrable securities under the Securities Act at our expense,
up to a maximum of two registrations. Holders of a majority of
these registrable securities, acting together, may initiate this
type of registration and request that we register all or a
portion of their registrable securities. After we become
eligible under applicable securities laws to file a registration
statement on
Form S-3,
holders of registrable securities may also require us to file an
unlimited number of additional registration statements on
Form S-3
at our expense so long as the holders propose to sell
registrable securities of at least $1 million and we have
not already filed two registration statements on
Form S-3
in the previous twelve months. The foregoing registration rights
of the holders of registrable securities are subject to certain
conditions and limitations, among them the right of the
underwriters of an offering to limit the number of shares
included in such registration and our right not to effect a
requested registration 60 days prior to or 180 days
after an offering of our securities, including the offering made
here. These registration rights have been waived by all holders
of registrable securities with respect to this offering.
Anti-Takeover
Effects of Provisions of Our Amended and Restated Certificate of
Incorporation, Our Bylaws and Delaware Law
Some provisions of Delaware law and our amended and restated
certificate of incorporation and bylaws expected to be adopted
upon completion of this offering contain provisions that could
make the following transactions more difficult: acquisition of
us by means of a tender offer; acquisition of us by means of a
proxy contest or otherwise; or removal of our incumbent officers
and directors.
These provisions, summarized below, are expected to discourage
coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to
acquire control of us to first negotiate with our board of
directors. We believe that the benefits of increased protection
of our potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us
outweigh the disadvantages of discouraging these proposals
because negotiation of these proposals could result in an
improvement of their terms.
80
Undesignated
Preferred Stock
Our board of directors has the ability to issue preferred stock
with voting or other rights or preferences that could impede the
success of any attempt to change control of us. These and other
provisions may have the effect of deferring hostile takeovers or
delaying changes in control or management of our company.
Stockholder
Meetings
Our charter documents provide that a special meeting of
stockholders may be called only by our chairman of the board or
chief executive officer, or by a resolution adopted by a
majority of our board of directors.
Requirements
for Advance Notification of Stockholder Nominations and
Proposals
Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for
election as directors, other than nominations made by or at the
direction of the board of directors or a committee of the board
of directors.
Elimination
of Stockholder Action by Written Consent
Our amended and restated certificate of incorporation eliminates
the right of stockholders to act by written consent without a
meeting.
Election
and Removal of Directors
Our board of directors is divided into three classes. The
directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. For more
information on the classified board, see
Management Board of Directors. In
addition, directors may be removed from office by our
stockholders only for cause. This system of electing and
removing directors may tend to discourage a third party from
making a tender offer or otherwise attempting to obtain control
of us, because it generally makes it more difficult for
stockholders to replace a majority of the directors.
Amendment
of Charter Provisions
The amendment of any of the above provisions, except for the
provision making it possible for our board of directors to issue
preferred stock, would require approval by holders of at least
66
2
/
3
%
of our then outstanding common stock.
Delaware
Anti-Takeover Statute
We are subject to Section 203 of the Delaware General
Corporation Law, which prohibits persons deemed interested
stockholders from engaging in a business
combination with a Delaware corporation for three years
following the date these persons become interested stockholders
unless:
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|
|
prior to the date of the transaction, our board of directors
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
|
|
|
|
upon completion of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
calculated as provided under Section 203 of the Delaware
General Corporation Law; or
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|
|
|
at or subsequent to the date of the transaction, the business
combination is approved by our board of directors and authorized
at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least two-thirds
of the outstanding voting stock which is not owned by the
interested stockholder.
|
Generally, an interested stockholder is a person
who, together with affiliates and associates, owns, or within
three years prior to the determination of interested stockholder
status did own, 15% or more of a corporations voting
stock. Generally, a business combination includes a
merger, asset or stock sale, or other transaction
81
resulting in a financial benefit to the interested stockholder.
The existence of this provision may have an anti-takeover effect
with respect to transactions not approved in advance by the
board of directors.
The provisions of Delaware law, our amended and restated
certificate of incorporation and our bylaws could have the
effect of discouraging others from attempting hostile takeovers
and, as a consequence, they may also inhibit temporary
fluctuations in the market price of our common stock that often
result from actual or rumored hostile takeover attempts. These
provisions may also have the effect of preventing changes in our
management. It is possible that these provisions could make it
more difficult to accomplish transactions that stockholders may
otherwise deem to be in their best interests.
Limitations
of Liability and Indemnification Matters
We have adopted provisions in our amended and restated
certificate of incorporation that limit the liability of our
directors to the fullest extent authorized and permitted by the
Delaware General Corporation Law for monetary damages for breach
of their fiduciary duties. Delaware law provides that directors
of a corporation will not be personally liable for monetary
damages for breach of their fiduciary duties as directors,
except liability for any of the following:
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|
|
any breach of their duty of loyalty to the corporation or the
stockholders;
|
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|
|
acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
|
|
|
|
unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware
General Corporation Law; or
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
This limitation of liability does not apply to liabilities
arising under the federal securities laws and does not affect
the availability of equitable remedies such as injunctive relief
or rescission.
Our amended and restated certificate of incorporation and our
bylaws provide that we shall indemnify our directors and
executive officers and may indemnify our other officers and
employees and other agents to the fullest extent authorized and
permitted by the Delaware General Corporation Law. We believe
that indemnification under our amended and restated certificate
of incorporation and bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also
permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out
of his or her actions in this capacity, regardless of whether
our amended and restated certificate of incorporation and bylaws
would permit indemnification.
Prior to completion of this offering, we intend to enter into
separate indemnification agreements with our directors and
executive officers, in addition to indemnification provided for
in our charter documents. These agreements will provide for,
among other things, indemnification of our directors and
executive officers for expenses, judgments, fines and settlement
amounts incurred by this person in any action or proceeding
arising out of this persons services as a director or
executive officer or at our request. We believe that these
provisions and agreements are necessary to attract and retain
qualified persons as directors and executive officers.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC.
NASDAQ
Global Market Listing
We have applied to have our common stock listed on The NASDAQ
Global Market under the symbol CAVM.
82
SHARES ELIGIBLE
FOR FUTURE SALE
Prior to this offering, there has been no public market for our
common stock. Future sales of our common stock in the public
market, or the availability of such shares for sale in the
public market, could adversely affect market prices prevailing
from time to time. As described below, only a limited number of
shares will be available for sale shortly after this offering
due to contractual and legal restrictions on resale.
Nevertheless, sales of our common stock in the public market
after such restrictions lapse, or the perception that those
sales may occur, could adversely affect the prevailing market
price at such time and our ability to raise equity capital in
the future.
Sales of
Restricted Shares
Upon the closing of this offering, we will have outstanding an
aggregate of 38,057,971 shares of common stock, assuming
31,807,971 shares outstanding as of March 31, 2007 and
that there are no exercises of options or warrants after
March 31, 2007 and no exercise of the underwriters
over-allotment option. Of these shares, the
6,250,000 shares of common stock to be sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are
held by any of our affiliates as such term is
defined in Rule 144 of the Securities Act. All remaining
shares of common stock held by existing stockholders were issued
and sold by us in private transactions and are eligible for
public sale only if registered under the Securities Act or if
they qualify for an exemption from registration under
Rule 144 or Rule 701 under the Securities Act, which
rules are summarized below.
As a result of the
lock-up
agreements described below and the provisions of Rule 144,
Rule 144(k) and Rule 701 under the Securities Act, the
shares of our common stock (excluding the shares sold in this
offering) that will be available for sale in the public market
are as follows:
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|
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|
Date
|
|
Number of Shares
|
|
On the date of this prospectus
|
|
|
|
At various times beginning more
than 180 days after the date of this prospectus
|
|
|
31,807,971
|
In addition, of the 4,416,697 shares of our common stock
that were subject to stock options outstanding as of
March 31, 2007, options to purchase 1,548,000 shares
of common stock were vested as of March 31, 2007 and will
be eligible for sale 180 days following the effective date
of this offering, subject to extensions as described in the
section entitled Underwriters.
Lock-up
Agreements
We, all of our directors and executive officers, holders of
substantially all outstanding shares of our common stock and
securities exercisable for or convertible into our common stock
have agreed that, subject to certain exceptions, without the
prior written consent of Morgan Stanley & Co.
Incorporated and Lehman Brothers Inc. on behalf of the
underwriters, we and they will not, during the period beginning
on the date of this prospectus and ending 180 days
thereafter:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend or
otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or
exercisable or exchangeable for shares of our common stock;
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of our common stock;
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in our case only, file or cause to be filed a registration
statement, including any amendments, with respect to the
registration of any shares of our common stock or securities
convertible, exercisable or exchangeable into our common stock
or any other securities of the company (other than any
registration statement on
Form S-8); or
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publicly announce the intent to do any of the foregoing,
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83
whether any such transaction described in the first two bullet
points immediately above is to be settled by delivery of shares
of our common stock or such other securities, in cash or
otherwise.
Rule 144
In general, under Rule 144 as currently in effect, a person
who owns shares that were acquired from us or an affiliate of
ours at least one year prior to the proposed sale is entitled to
sell upon the expiration of the lock-up agreements described
above, within any three-month period, a number of shares that
does not exceed the greater of:
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1% of the number of shares of our common stock then outstanding,
which will equal approximately 380,580 shares immediately
after this offering; or
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the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of a notice on
Form 144 with respect to that sale.
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Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates for purposes of the Securities Act at any
time during the 90 days preceding a sale and who has
beneficially owned the shares proposed to be sold for at least
two years, including the holding period of any prior owner other
than our affiliates, is entitled to sell those shares without
complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, any of our directors, employees,
consultants or advisors who purchased shares from us in
connection with a compensatory stock or option plan or written
employment agreement in a transaction before the effective date
of this offering that was completed in reliance on Rule 701
and complied with the requirements of Rule 701 will be,
subject to the lock-up restrictions described above, eligible to
resell such shares 90 days after the effective date of the
offering in reliance on Rule 144 of the Securities Act, by
complying with the applicable requirements of Rule 144 of
the Securities Act other than certain restrictions, including
the holding period conditions.
Stock
Plans
We intend to file one or more registration statements of
Form S-8
under the Securities Act to register shares of our common stock
issued or reserved for issuance under our stock incentive plans.
The first such registration statement is expected to be filed
soon after the date of this prospectus and will automatically
become effective upon filing with the Securities and Exchange
Commission. Accordingly, shares registered under such
registration statement will be available for sale in the open
market, unless such shares are subject to vesting restrictions
with us or the
lock-up
restrictions described above.
Registration
Rights
Upon completion of this offering, the holders of
26,169,378 shares of common stock or their transferees will
be entitled to various rights with respect to the registration
of these shares under the Securities Act. Registration of these
shares under the Securities Act would result in these shares
becoming fully tradable without restriction under the Securities
Act immediately upon the effectiveness of the registration,
except for shares purchased by affiliates. See Description
of Capital Stock Registration Rights for
additional information. Shares covered by a registration
statement will be eligible for sale in the public market upon
the expiration or release from the terms of the
lock-up
agreement.
84
MATERIAL
UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR
NON-UNITED
STATES HOLDERS OF COMMON STOCK
This section summarizes certain material U.S. federal
income and estate tax considerations relating to the ownership
and disposition of common stock to
non-U.S. holders.
This summary does not provide a complete analysis of all
potential tax considerations. The information provided below is
based on existing authorities. These authorities may change with
retroactive effect or the IRS might interpret the existing
authorities differently. In either case, the tax considerations
of owning or disposing of common stock could differ from those
described below. For purposes of this summary, a
non-U.S. holder
is any holder other than a citizen or resident of the United
States, a corporation organized under the laws of the United
States or any state, a trust that is (i) subject to the
primary supervision of a U.S. court and the control of one
of more U.S. persons or (ii) has a valid election in
effect under applicable U.S. Treasury regulations to be
treated as a U.S. person or an estate whose income is
subject to U.S. income tax regardless of source. If a
partnership or other flow-through entity is a holder or
beneficial owner of common stock, the tax treatment of a partner
in the partnership or an owner of the entity will depend upon
the status of the partner or other owner and the activities of
the partnership or other entity. Accordingly, partnerships and
flow-through entities that hold our common stock and partners or
owners of such partnerships or entities, as applicable, should
consult their own tax advisors. The summary generally does not
address tax considerations that may be relevant to particular
investors because of their specific circumstances, or because
they are subject to special rules, including, without
limitation, banks, insurance companies, or other financial
institutions; persons subject to the alternative minimum tax;
tax-exempt organizations; dealers in securities or currencies;
traders in securities that elect to use a
mark-to-market
method of accounting for their securities holdings; persons that
own, or are deemed to own, more than five percent of our company
(except to the extent specifically set forth below); certain
former citizens or long-term residents of the United States;
hybrid entities (entities treated as flow-through
entities in one jurisdictions but as opaque in another) and
their owners; persons who hold our common stock as a position in
a hedging transaction, straddle, conversion
transaction or other risk reduction transaction; or
persons deemed to sell our common stock under the constructive
sale provisions of the Internal Revenue Code. Finally, the
summary does not describe the effects of any applicable foreign,
state or local laws.
INVESTORS CONSIDERING THE PURCHASE OF COMMON STOCK SHOULD
CONSULT THEIR OWN TAX ADVISORS REGARDING THE APPLICATION OF THE
U.S. FEDERAL INCOME AND ESTATE TAX LAWS TO THEIR PARTICULAR
SITUATIONS AND THE CONSEQUENCES OF FOREIGN, STATE, OR LOCAL TAX
LAWS, AND TAX TREATIES.
Dividends
We have not made any distributions on our common stock, and we
do not plan to make any distributions for the foreseeable
future. However, if we do make distributions on our common
stock, those payments will constitute dividends for
U.S. tax purposes to the extent paid from our current and
accumulated earnings and profits, as determined under
U.S. federal income tax principles. To the extent those
distributions exceed our current and accumulated earnings and
profits, they will constitute a return of capital and will first
reduce a
non-U.S. holders
basis in our common stock, but not below zero, and then will be
treated as gain from the sale of stock. Any dividend paid to a
non-U.S. holder
on our common stock will generally be subject to
U.S. withholding tax at a 30 percent rate. The
withholding tax might apply at a reduced rate under the terms of
an applicable income tax treaty between the United States and
the
non-U.S. holders
country of residence. A
non-U.S. holder
must demonstrate its entitlement to treaty benefits by
certifying eligibility. A
non-U.S. holder
can meet this certification requirement by providing a
Form W-8BEN
or appropriate substitute form to us or our paying agent. If the
holder holds the stock through a financial institution or other
agent acting on the holders behalf, the holder will be
required to provide appropriate documentation to the agent. The
holders agent will then be required to provide
certification to us or our paying agent, either directly or
through other intermediaries. For payments made to a foreign
partnership or other flow-through entity, the certification
requirements generally apply to the partners or other owners as
well as to the partnership or other entity, and the partnership
or other entity must provide the partners or other
owners documentation to us or our paying agent. Special
rules, described below, apply if a dividend is effectively
connected with a U.S. trade or business conducted by the
non-U.S. holder.
85
Sale of
Common Stock
Non-U.S. holders
generally will not be subject to U.S. federal income tax on
any gains realized on the sale, exchange, or other disposition
of common stock. This general rule, however, is subject to
several exceptions. For example, the gain would be subject to
U.S. federal income tax if:
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the gain is effectively connected with the conduct by the
non-U.S. holder
of a U.S. trade or business (in which case the special
rules described below apply);
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the
non-U.S. holder
is an individual who holds our common stock as a capital asset
(generally, an asset held for investment purposes) and who is
present in the U.S. for a period or periods aggregating
183 days or more during the calendar year in which the sale
or disposition occurs and certain other conditions are met;
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the
non-U.S. holder
was a citizen or resident of the United States and thus is
subject to special rules that apply to expatriates; or
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the rules of the Foreign Investment in Real Property Tax Act, or
FIRPTA (described below), treat the gain as effectively
connected with a U.S. trade or business.
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An individual
non-U.S. holder
described in the second bullet point immediately above will be
subject to a flat 30% tax on the gain derived from the sale,
which may be offset by U.S. source capital losses, even
though the individual is not considered a resident of the
U.S. If a
non-U.S. holder
is described in the third bullet point above, the
non-U.S. holder
should consult its own tax advisor to determine the
U.S. federal, state, local and other tax consequences that
may be relevant to such holder.
The FIRPTA rules may apply to a sale, exchange or other
disposition of common stock if we are, or were within five years
before the transaction, a U.S. real property holding
corporation, or a USRPHC. In general, we would be a USRPHC
if interests in U.S. real estate comprised most of our
assets. We do not believe that we are a USRPHC or that we will
become one in the future. If we are or become a USRPHC, so long
as our common stock is regularly traded on an established
securities market, only a
non-U.S. holder
who, actually or constructively, holds or held (at any time
during the shorter of the five year period preceding the date of
disposition or the holders holding period) more than 5% of
our common stock will be subject to U.S. federal income tax
on the disposition of our common stock.
Dividends
or Gain Effectively Connected With a U.S. Trade or
Business
If any dividend on common stock, or gain from the sale, exchange
or other disposition of common stock, is effectively connected
with a U.S. trade or business conducted by the
non-U.S. holder,
then the dividend or gain will be subject to U.S. federal
income tax at the regular graduated rates. If the
non-U.S. holder
is eligible for the benefits of a tax treaty between the United
States and the holders country of residence, any
effectively connected dividend or gain generally
would be subject to U.S. federal income tax only if it is
also attributable to a permanent establishment or fixed base
maintained by the holder in the United States. Payments of
dividends that are effectively connected with a U.S. trade
or business, and therefore included in the gross income of a
non-U.S. holder,
will not be subject to the 30% withholding tax. To claim
exemption from withholding, the holder must certify its
qualification, which can be done by providing a
Form W-8ECI.
If the
non-U.S. holder
is a corporation, that portion of its earnings and profits that
is effectively connected with its U.S. trade or business
would generally be subject to a branch profits tax.
The branch profits tax rate generally is 30%, although an
applicable income tax treaty might provide for a lower rate.
Backup
Withholding and Information Reporting
The Internal Revenue Code and the Treasury regulations require
those who make specified payments to report such payments to the
IRS. Among the specified payments are dividends and proceeds
paid by brokers to their customers. The required information
returns enable the IRS to determine whether the recipient
properly included the payments in income. This reporting regime
is reinforced by backup withholding rules. These
rules require the payors to withhold tax from payments subject
to information reporting if the recipient fails to cooperate
with the reporting regime by failing to provide his taxpayer
identification number to the payor, furnishing an incorrect
86
identification number, or repeatedly failing to report interest
or dividends on his returns. The withholding tax rate is
currently 28 percent. The backup withholding rules do not
apply to payments to corporations, whether domestic or foreign.
Payments to
non-U.S. holders
of dividends on common stock generally will not be subject to
backup withholding, and payments of proceeds made to
non-U.S. holders
by a broker upon a sale of common stock will not be subject to
information reporting or backup withholding, in each case so
long as the
non-U.S. holder
certifies its nonresident status. Some of the common means of
certifying nonresident status are described under
Dividends. We must report annually to
the IRS any dividends paid to each
non-U.S. holder
and the tax withheld, if any, with respect to such dividends.
Copies of these reports may be made available to tax authorities
in the country where the
non-U.S. holder
resides.
Any amounts withheld from a payment to a holder of common stock
under the backup withholding rules generally can be credited
against any U.S. federal income tax liability of the holder.
U.S. Federal
Estate Tax
The estates of nonresident alien individuals are generally
subject to U.S. federal estate tax on property with a
U.S. situs. Because we are a U.S. corporation, our
common stock will be U.S. situs property and therefore will
be included in the taxable estate of a nonresident alien
decedent. The U.S. federal estate tax liability of the
estate of a nonresident alien may be affected by a tax treaty
between the United States and the decedents country of
residence.
THE PRECEDING DISCUSSION OF U.S. FEDERAL INCOME AND
ESTATE TAX CONSIDERATIONS IS FOR GENERAL INFORMATION ONLY. IT IS
NOT TAX ADVICE. EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS OWN
TAX ADVISOR REGARDING THE PARTICULAR U.S. FEDERAL, STATE,
LOCAL, AND FOREIGN TAX CONSEQUENCES OF PURCHASING, HOLDING, AND
DISPOSING OF OUR COMMON STOCK, INCLUDING THE CONSEQUENCES OF ANY
PROPOSED CHANGE IN APPLICABLE LAWS.
87
UNDERWRITERS
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley & Co.
Incorporated and Lehman Brothers Inc. are acting as
representatives and joint book-running managers of this
offering, have severally agreed to purchase, and we have agreed
to sell to the underwriters, severally, the number of shares of
our common stock indicated in the table below:
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Number of
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Name
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Shares
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Morgan Stanley & Co.
Incorporated
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Lehman Brothers Inc.
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Thomas Weisel Partners LLC
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Needham & Company, LLC
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JMP Securities LLC
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Total
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The underwriters are offering the shares of our common stock
subject to their acceptance of the shares from us and subject to
prior sale. The underwriting agreement provides that the
obligations of the several underwriters to pay for and accept
delivery of the shares of common stock offered by us pursuant to
this prospectus are subject to the approval of certain legal
matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares
of our common stock offered by us pursuant to this prospectus if
any such shares are taken, except that the underwriters are not
required to take or pay for shares covered pursuant to the
exercise of the underwriters over-allotment option
described below.
The underwriters initially propose to offer a portion of the
shares of our common stock directly to the public at the initial
public offering price listed on the cover page of this
prospectus and a portion of such shares to certain dealers at a
price that represents a concession not in excess of
$ per share under the initial
public offering price. No underwriter may allow, and no dealer
may re-allow, any concession to other underwriters or to any
dealers. After the initial offering of the shares of our common
stock, the offering price and other selling terms may from time
to time be varied by the representatives.
Pursuant to the underwriting agreement, we have granted to the
underwriters an option, which we refer to as an over-allotment
option, exercisable for 30 days from the date of this
prospectus, to purchase from us up to an aggregate of 937,500
additional shares of our common stock at the initial public
offering price listed on the cover page of this prospectus, less
underwriting discounts and commissions. The underwriters may
exercise this option solely for the purpose of covering
over-allotments, if any, made in connection with the initial
offering of the shares of our common stock offered by this
prospectus. To the extent such over-allotment option is
exercised, each underwriter will be obligated, subject to
certain conditions, to purchase approximately the same
percentage of the additional shares of our common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of our
common stock listed next to the names of all underwriters in the
preceding table. If the over-allotment option is exercised in
full, the total price to the public would be
$ , the total amount of
underwriting discounts and commissions would be
$ and the total proceeds to us
would be $ .
The following table shows the per share and total underwriting
discounts and commissions to be paid by us to the underwriters
in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the
underwriters over-allotment option.
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Per Share
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Total
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No
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Full
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No
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Full
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Exercise
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Exercise
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Exercise
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Exercise
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Underwriting discounts and
commissions to be paid by us
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$
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$
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$
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$
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The expenses of this offering payable by us, not including
underwriting discounts and commissions, are estimated to be
approximately $2.5 million, which includes legal,
accounting and printing costs and various other fees associated
with the registration and listing of our common stock.
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The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares offered by them.
We, all of our directors and executive officers, and holders of
substantially all our outstanding common stock and securities
exercisable for or convertible into our common stock have agreed
that, subject to certain exceptions, without the prior written
consent of Morgan Stanley & Co. Incorporated and Lehman
Brothers Inc. on behalf of the underwriters, we and they will
not, during the period beginning on the date of this prospectus
and ending 180 days thereafter:
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offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any
shares of our common stock or any securities convertible into or
exercisable or exchangeable for our common stock;
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enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of our common stock;
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in our case only, file or cause to be filed a registration
statement, including any amendments, with respect to the
registration of any shares of our common stock or securities
convertible, exercisable or exchangeable into our common stock
or any other securities of the company (other than any
registration statement on
Form S-8); or
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publicly announce the intent to do any of the foregoing,
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whether any such transaction described in the first two bullet
points immediately above is to be settled by delivery of our
common stock or such other securities, in cash or otherwise. In
addition, all of our directors and executive officers and
holders of substantially all our outstanding common stock and
securities exercisable for or convertible into our common stock
have agreed that they will not, without the prior written
consent of Morgan Stanley & Co. Incorporated and Lehman
Brothers Inc. on behalf of the underwriters, during the period
ending 180 days after the date of this prospectus, make any
demand for, or exercise any right with respect to, the
registration of any shares of common stock or any security
convertible into or exercisable or exchangeable for our common
stock.
Subject to certain exceptions, the restrictions described in the
immediately preceding paragraph do not apply to:
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the issuance by us of shares of common stock upon the exercise
of an option or the conversion of any convertible security;
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transactions relating to shares of common stock or other
securities acquired in open market transactions after the
completion of the offering of the shares; provided that no
filing under Section 16(a) of the Securities Exchange Act
of 1934, as amended, is required or voluntarily made in
connection with subsequent sales of common stock or other
securities acquired in such open market transactions;
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transfers of shares of common stock or any security convertible
into common stock as a bona fide gift;
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distributions of shares of common stock or any security
convertible into common stock to limited partners or equity
holders of the person subject to the restrictions described in
the immediately preceding paragraph; or
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transfers of shares of common stock or any security convertible
into common stock by will or intestate succession to the
immediate family of, or a trust, the beneficiaries of which are
exclusively the, person or persons subject to the restrictions
described in the immediately preceding paragraph or members of
such persons immediate family,
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provided that in the case of each of the third, fourth and fifth
types of transactions described above, each donee or distributee
agrees to be subject to the restrictions described in the
preceding paragraph and no filing under Section 16(a) of
the Securities Exchange Act of 1934, as amended, is required or
voluntarily made in connection with these transactions during
the
180-day
restricted period.
89
The
180-day
restricted period described in the preceding paragraphs will be
extended if:
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during the last 17 days of the initial
180-day
restricted period, we issue an earnings release or material news
or a material event relating to our company occurs; or
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prior to the expiration of the initial
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period,
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in which case the restrictions described in the preceding
paragraphs will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement by us or, if there is no announcement by us, the
occurrence of the material news or material event.
The underwriters have informed us that in order to facilitate
this offering of our common stock they may engage in
transactions that stabilize, maintain or otherwise affect the
price of our common stock. Specifically, the underwriters may
sell more shares than they are obligated to purchase under the
underwriting agreement, creating a short position. A short sale
is covered if the short position is no greater than the number
of shares available for purchase by the underwriters under the
over-allotment option. The underwriters can close out a covered
short sale by exercising the over-allotment option or by
purchasing shares in the open market. In determining the source
of shares to close out a covered short sale, the underwriters
will consider, among other things, the open market price of
shares compared to the price available under the over-allotment
option. The underwriters may also sell shares in excess of the
over-allotment option, creating a naked short position. The
underwriters must close out any naked short position by
purchasing shares in the open market. The underwriters have
informed us that a naked short position is more likely to be
created if the underwriters are concerned that there may be
downward pressure on the price of our common stock in the open
market after pricing that could adversely affect investors who
purchase in this offering. In addition, to stabilize the price
of our common stock, the underwriters may bid for and purchase
shares of our common stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed
to an underwriter or a dealer for distributing our common stock
covered hereby, if the underwriting syndicate repurchases
previously distributed shares of our common stock to cover
underwriting syndicate short positions or to stabilize the price
of our common stock. These activities may raise or maintain the
market price of our common stock above independent market levels
or prevent or retard a decline in the market price of our common
stock. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in connection with such liabilities.
A prospectus in electronic format may be made available on the
web sites maintained by one or more underwriters. Other than the
prospectus in electronic format, the information on the
underwriters websites is not part of this prospectus. The
underwriters may agree to allocate a number of shares to
underwriters for sale to their online brokerage account holders.
Internet distributions will be allocated by Morgan
Stanley & Co. Incorporated and Lehman Brothers Inc. to
underwriters that may make Internet distributions on the same
basis as other allocations.
Each of the underwriters has represented and agreed that:
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it has not made or will not make an offer of shares to the
public in the United Kingdom within the meaning of
section 102B of the Financial Services and Markets Act 2000
(as amended), or the FSMA, except to legal entities which are
authorized or regulated to operate in the financial markets or,
if not so authorized or regulated, whose corporate purpose is
solely to invest in securities or otherwise in circumstances
which do not require the publication by us of a prospectus
pursuant to the Prospectus Rules of the Financial Services
Authority, or the FSA;
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it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or
inducement to engage in investment activity (within the meaning
of section 21 of FSMA) to persons who have professional
experience in matters relating to investments falling within
Article 19(5) of the Financial Services and Markets Act
2000 (Financial Promotion) Order 2005 or in circumstances in
which section 21 of FSMA does not apply to us; and
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it has complied with and will comply with all applicable
provisions of FSMA with respect to anything done by it in
relation to the shares in, from or otherwise involving the
United Kingdom.
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In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive, each
representative has represented and agreed that with effect from
and including the date on which the Prospectus Directive is
implemented in that Member State it has not made and will not
make an offer of our shares of common stock to the public in
that Member State prior to the publication of a prospectus in
relation to the shares which has been approved by the competent
authority in that Member State or, where appropriate, approved
in another Member State, all in accordance with the Prospectus
Directive, except that it may, with effect from and including
such date, make an offer of such shares to the public in that
Member State:
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at any time to legal entities which are authorized or regulated
to operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
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at any time to any legal entity which has two or more of:
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
43,000,000; and (3) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
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at any time in any other circumstances which do not require the
publication by us of a prospectus pursuant to Article 3 of
the Prospectus Directive.
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For the purposes of the above, the expression an offer of
our shares of common stock to the public in relation to
any such shares in any Member State means the communication in
any form and by any means of sufficient information on the terms
of the offer and such shares to be offered so as to enable an
investor to decide to purchase or subscribe such shares, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive 2003/71/EC
and includes any relevant implementing measure in that Member
State.
We have applied to have our common stock listed on The NASDAQ
Global Market under the symbol CAVM.
Pricing
of the Offering
Prior to this offering, there has been no public market for our
common stock. The initial public offering price will be
determined by negotiations among us and the underwriters. Among
the factors to be considered in determining the initial public
offering price are:
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|
|
|
|
our future prospects and those of our industry in general;
|
|
|
|
our sales, earnings and certain other financial and operating
information in recent periods; and
|
|
|
|
the price-earnings ratios, price-sales ratios and market prices
of securities and certain financial and operating information of
companies engaged in activities similar to ours.
|
The estimated initial public offering price range set forth on
the cover page of this prospectus is subject to change as a
result of market conditions and other factors. An active trading
market for the shares may not develop. It is also possible that
after the offering the shares will not trade in the public
market at or above the initial public offering price.
Other
Relationships
Certain of the underwriters and their respective affiliates may
in the future perform various financial advisory, investment
banking and other commercial services for us, for which they may
receive customary fees and expenses.
91
LEGAL
MATTERS
The validity of our common stock offered by this prospectus will
be passed upon for us by Cooley Godward Kronish LLP, Palo Alto,
California. Wilson Sonsini Goodrich &
Rosati, P.C., Palo Alto, California, will act as counsel to
the underwriters.
EXPERTS
The financial statements as of December 31, 2005 and 2006
and for each of the three years in the period ended
December 31, 2006 included in this Prospectus have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in auditing and accounting.
WHERE YOU
CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on
Form S-1
under the Securities Act of 1933, as amended, with respect to
the shares of our common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration
statement and the exhibits and schedules thereto. Some items are
omitted in accordance with the rules and regulations of the SEC.
For further information with respect to us and the common stock
offered hereby, we refer you to the registration statement and
the exhibits and schedules filed therewith. Statements contained
in this prospectus as to the contents of any contract, agreement
or any other document are summaries of the material terms of
this contract, agreement or other document. With respect to each
of these contracts, agreements or other documents filed as an
exhibit to the registration statement, reference is made to the
exhibits for a more complete description of the matter involved.
A copy of the registration statement, and the exhibits and
schedules thereto, may be inspected without charge at the public
reference facilities maintained by the SEC room 1580, 100 F
Street, N.E., Washington, D.C. 20549, and copies of these
materials may be obtained from those offices upon the payment of
the fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the public reference
facility. The SEC maintains a web site that contains reports,
proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address
of the SECs website is http://www.sec.gov.
Upon completion of this offering, we will be required and we
intend to file periodic reports, proxy statements, and other
information with the SEC pursuant to the Securities Exchange Act
of 1934.
92
CAVIUM
NETWORKS, INC. AND SUBSIDIARIES
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Cavium Networks, Inc.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, of changes in
mandatorily redeemable convertible preferred stock and
stockholders deficit and of cash flows present fairly, in
all material respects, the financial position of Cavium
Networks, Inc. and its subsidiaries at December 31, 2005
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, 2006 in conformity with accounting
principles generally accepted in the United States of America.
These financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements 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
February 13, 2007, except for Note 14, which is as of
April 12, 2007
F-2
CAVIUM
NETWORKS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
|
|
|
Equity as of
|
|
|
|
As of December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
2006
|
|
|
|
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,879
|
|
|
$
|
10,154
|
|
|
|
|
|
Accounts receivable, net of
allowances of $110 and $102, respectively
|
|
|
3,836
|
|
|
|
7,248
|
|
|
|
|
|
Inventories
|
|
|
2,087
|
|
|
|
5,006
|
|
|
|
|
|
Prepaid expenses and other current
assets
|
|
|
319
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
14,121
|
|
|
|
22,813
|
|
|
|
|
|
Property and equipment, net
|
|
|
1,773
|
|
|
|
5,040
|
|
|
|
|
|
Intangible assets, net
|
|
|
4,219
|
|
|
|
1,902
|
|
|
|
|
|
Other assets
|
|
|
106
|
|
|
|
207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
20,219
|
|
|
$
|
29,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, MANDATORY
REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS EQUITY (DEFICIT)
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,293
|
|
|
$
|
2,904
|
|
|
|
|
|
Accrued expenses and other current
liabilities
|
|
|
2,435
|
|
|
|
3,481
|
|
|
|
|
|
Capital lease and technology
license obligations, current portion
|
|
|
2,049
|
|
|
|
2,564
|
|
|
|
|
|
Preferred stock warrant liability
|
|
|
1,184
|
|
|
|
701
|
|
|
$
|
|
|
Current portion of notes payable
|
|
|
|
|
|
|
1,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
7,961
|
|
|
|
11,124
|
|
|
|
|
|
Notes payable, net of current
portion
|
|
|
|
|
|
|
2,526
|
|
|
|
|
|
Capital lease and technology
license obligations, net of current portion
|
|
|
1,038
|
|
|
|
1,016
|
|
|
|
|
|
Other non-current liabilities
|
|
|
74
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,073
|
|
|
|
14,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 13)
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily redeemable convertible
preferred stock, par value $0.001: 22,220,100, 22,935,158 and
none shares authorized; 21,091,375, 22,364,197, and none shares
issued and outstanding; $62,057, $69,623, and none aggregate
liquidation preference
|
|
|
61,820
|
|
|
|
72,437
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
(deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001:
37,750,000, 40,965,057 and 40,965,057 shares authorized;
8,729,320, 9,365,600, 31,729,797 shares issued and
outstanding
|
|
|
13
|
|
|
|
14
|
|
|
$
|
59
|
|
Additional paid-in capital
|
|
|
1,248
|
|
|
|
3,726
|
|
|
|
76,819
|
|
Accumulated deficit
|
|
|
(51,935
|
)
|
|
|
(60,920
|
)
|
|
|
(60,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
(deficit)
|
|
|
(50,674
|
)
|
|
|
(57,180
|
)
|
|
$
|
15,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities, mandatorily
redeemable convertible preferred stock and stockholders
equity (deficit)
|
|
$
|
20,219
|
|
|
$
|
29,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
CAVIUM
NETWORKS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands, except share and per share data)
|
|
|
Revenue
|
|
$
|
7,411
|
|
|
$
|
19,377
|
|
|
$
|
34,205
|
|
Cost of
revenue
(1)
|
|
|
3,080
|
|
|
|
7,865
|
|
|
|
13,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
4,331
|
|
|
|
11,512
|
|
|
|
21,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development
(1)
|
|
|
12,010
|
|
|
|
16,005
|
|
|
|
18,651
|
|
Sales, general and
administrative
(1)
|
|
|
3,752
|
|
|
|
6,840
|
|
|
|
10,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
15,762
|
|
|
|
22,845
|
|
|
|
28,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(11,431
|
)
|
|
|
(11,333
|
)
|
|
|
(7,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(388
|
)
|
|
|
(183
|
)
|
|
|
(707
|
)
|
Warrant revaluation expense
|
|
|
|
|
|
|
(411
|
)
|
|
|
(467
|
)
|
Interest income
|
|
|
86
|
|
|
|
355
|
|
|
|
345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense), net
|
|
|
(302
|
)
|
|
|
(239
|
)
|
|
|
(829
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax expense and
cumulative effect of change in accounting principle
|
|
|
(11,733
|
)
|
|
|
(11,572
|
)
|
|
|
(8,425
|
)
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
|
(11,733
|
)
|
|
|
(11,572
|
)
|
|
|
(8,985
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,733
|
)
|
|
$
|
(11,672
|
)
|
|
$
|
(8,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(1.82
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.11
|
)
|
Shares used in computing basic and
diluted net loss per common share
|
|
|
6,459,050
|
|
|
|
7,318,607
|
|
|
|
8,065,995
|
|
Shares used in computing pro forma
basic and diluted net loss per common share (unaudited)
|
|
|
|
|
|
|
|
|
|
|
29,631,993
|
|
Pro forma net loss per common
share, basic and diluted (unaudited)
|
|
|
|
|
|
|
|
|
|
$
|
(0.29
|
)
|
|
|
|
(1)
|
|
Includes stock-based compensation
expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9
|
|
Research and development
|
|
$
|
|
|
|
$
|
10
|
|
|
$
|
396
|
|
Sales, general and administrative
|
|
$
|
85
|
|
|
$
|
75
|
|
|
$
|
340
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mandatorily Redeemable
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Notes Receivable
|
|
|
|
|
|
Total
|
|
|
|
Convertible Preferred Stock
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
from
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Deficit
|
|
|
Deficit
|
|
|
|
|
|
Balance at December 31,
2003
|
|
|
17,941,355
|
|
|
$
|
41,494
|
|
|
|
|
7,237,362
|
|
|
$
|
12
|
|
|
$
|
465
|
|
|
$
|
(143
|
)
|
|
$
|
(28,530
|
)
|
|
$
|
(28,196
|
)
|
Issuance of Series D preferred
stock, net of issuance costs of $26
|
|
|
3,049,454
|
|
|
|
20,032
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection
with early-exercises of stock options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
953,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection
with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
128,027
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
Repurchase of shares of unvested
common stock
|
|
|
|
|
|
|
|
|
|
|
|
(84,766
|
)
|
|
|
|
|
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
(16
|
)
|
Interest on notes receivable from
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
(11
|
)
|
Vesting of early-exercised stock
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
Non-employee stock-based
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Stock-based compensation related to
variable awards granted to employee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
77
|
|
Issuance of Series D warrants
in connection with bridge loan financing
|
|
|
|
|
|
|
209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,733
|
)
|
|
|
(11,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31,
2004
|
|
|
20,990,809
|
|
|
|
61,735
|
|
|
|
|
8,233,943
|
|
|
|
12
|
|
|
|
629
|
|
|
|
(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
|
|
|
|
|
|
|
|
|
|
|
|
135,623
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
8,739,320
|
|
|
|
13
|
|
|
|
1,248
|
|
|
|
|
|
|
|
(51,935
|
)
|
|
|
(50,674
|
)
|
Common stock issued in connection
with early-exercises of stock options subject to repurchase
|
|
|
|
|
|
|
|
|
|
|
|
33,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in connection
with other exercises of options
|
|
|
|
|
|
|
|
|
|
|
|
568,766
|
|
|
|
1
|
|
|
|
1,348
|
|
|
|
|
|
|
|
|
|
|
|
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 at December 31,
2006
|
|
|
22,364,197
|
|
|
$
|
72,437
|
|
|
|
|
9,365,600
|
|
|
$
|
14
|
|
|
$
|
3,726
|
|
|
$
|
|
|
|
$
|
(60,920
|
)
|
|
$
|
(57,180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CAVIUM
NETWORKS, INC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,733
|
)
|
|
$
|
(11,672
|
)
|
|
$
|
(8,985
|
)
|
Adjustments to reconcile net loss
to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forgiveness of note receivable from
stockholder
|
|
|
|
|
|
|
104
|
|
|
|
|
|
Stock-based compensation expense
|
|
|
85
|
|
|
|
85
|
|
|
|
745
|
|
Amortization of warrant costs to
interest expense
|
|
|
209
|
|
|
|
52
|
|
|
|
143
|
|
Revaluation of warrants to fair
value
|
|
|
|
|
|
|
511
|
|
|
|
467
|
|
Depreciation and amortization
|
|
|
2,071
|
|
|
|
3,308
|
|
|
|
5,009
|
|
Others
|
|
|
17
|
|
|
|
81
|
|
|
|
10
|
|
Changes in assets and liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
(795
|
)
|
|
|
(2,084
|
)
|
|
|
(3,412
|
)
|
Inventories
|
|
|
(1,088
|
)
|
|
|
30
|
|
|
|
(2,919
|
)
|
Prepaid expenses and other current
assets
|
|
|
(268
|
)
|
|
|
124
|
|
|
|
(41
|
)
|
Other assets
|
|
|
32
|
|
|
|
(39
|
)
|
|
|
(101
|
)
|
Accounts payable
|
|
|
528
|
|
|
|
197
|
|
|
|
125
|
|
Accrued expenses and other current
and non-current liabilities
|
|
|
420
|
|
|
|
1,348
|
|
|
|
1,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating
activities
|
|
|
(10,522
|
)
|
|
|
(7,955
|
)
|
|
|
(7,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(472
|
)
|
|
|
(1,503
|
)
|
|
|
(2,075
|
)
|
Acquisition of business
|
|
|
(1,811
|
)
|
|
|
(1,105
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(2,283
|
)
|
|
|
(2,608
|
)
|
|
|
(2,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from bridge loan financing
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
Proceeds from term loan
|
|
|
|
|
|
|
|
|
|
|
4,000
|
|
Proceeds from issuance of
convertible preferred stock
|
|
|
16,004
|
|
|
|
604
|
|
|
|
8,965
|
|
Proceeds from issuance of common
stock
|
|
|
413
|
|
|
|
407
|
|
|
|
1,361
|
|
Principal payment of capital lease
and technology license obligations
|
|
|
(599
|
)
|
|
|
(998
|
)
|
|
|
(2,915
|
)
|
Repurchase of shares of unvested
common stock
|
|
|
(16
|
)
|
|
|
(4
|
)
|
|
|
(20
|
)
|
Repayment of receivable from
stockholder
|
|
|
|
|
|
|
52
|
|
|
|
|
|
Proceeds from issuance of
convertible preferred stock in connection with warrant exercises
|
|
|
|
|
|
|
|
|
|
|
778
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
19,802
|
|
|
|
61
|
|
|
|
12,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and
cash equivalents
|
|
|
6,997
|
|
|
|
(10,502
|
)
|
|
|
2,275
|
|
Cash and cash equivalents,
beginning of period
|
|
|
11,384
|
|
|
|
18,381
|
|
|
|
7,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of period
|
|
$
|
18,381
|
|
|
$
|
7,879
|
|
|
$
|
10,154
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash
flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
151
|
|
|
$
|
131
|
|
|
$
|
564
|
|
Supplemental disclosure of
non-cash activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease and technology
license obligations
|
|
$
|
|
|
|
$
|
1,414
|
|
|
$
|
3,408
|
|
Conversion of bridge loan into
Series D convertible preferred stock
|
|
|
4,028
|
|
|
|
|
|
|
|
|
|
Vesting of early exercised options
|
|
|
69
|
|
|
|
197
|
|
|
|
141
|
|
Additions to property and equipment
included in accounts payable and accrued expenses and other
current liabilities
|
|
|
714
|
|
|
|
|
|
|
|
486
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
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.
The Company continues to be subject to a number of risks similar
to other companies in a comparable stage, including reliance on
key personnel, the ability to access capital to support future
growth, successful development and marketing of its products in
an emerging market, and competition from other companies with
potentially greater technical, financial and marketing
resources. The Company has principally relied on equity
financing to fund its operating and investing activities to
date. The Company believes that cash and cash equivalents at
December 31, 2006, along with its current revolving
accounts receivable line of credit will be sufficient to fund
the Companys projected operating requirements for the next
twelve months. However, the Company may need to raise additional
capital or incur additional indebtedness to continue to fund the
Companys operations in the future.
As of December 31, 2006, the liquidation preferences of the
holders of the Companys redeemable convertible preferred
stock exceeds total assets of the Company. In the event of
liquidation, dissolution or winding up of the Company, common
stockholders may not receive any proceeds.
Summary
of Significant Accounting Policies
Accounting
Principles
The consolidated financial statements and accompanying notes are
prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP).
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.
Unaudited
Pro Forma Stockholders Equity
On February 1, 2007, the Companys board of directors
authorized the Company to file a Registration Statement with the
Securities and Exchange Commission to permit the Company to
proceed with an initial public offering of its common stock.
Upon consummation of this offering, all of the Companys
outstanding shares of convertible preferred stock will convert
to an equivalent number of shares of the Companys common
stock. Additionally, all warrants to purchase shares of the
Companys convertible preferred stock outstanding at the
consummation of the offering will be converted into warrants to
purchase an equivalent number of shares of common stock and will
therefore be reclassified from liabilities to stockholders
equity (deficit). Unaudited pro forma stockholders equity
as of December 31, 2006, as adjusted for the impact of
these conversions assuming the offering was consummated on
December 31, 2006, is disclosed on the accompanying
consolidated pro forma balance sheet.
Use of
Estimates
The preparation of financial statements in conformity with GAAP
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.
F-7
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
quarterly 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 $73,000 and $68,000 as of December 31, 2005
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 historical usage 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 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, generally three years, 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 none and $694,000 of mask costs in property and
equipment during 2005 and 2006, 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. An impairment loss would be
recognized when estimated undiscounted future cash flows
expected to result from the use of the asset and its eventual
disposition are less than its carrying amount.
F-8
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair
Value of Financial Instruments
The carrying amounts of certain of the Companys financial
instruments, including cash and cash equivalents, accounts
receivable, other receivables and assets, accounts payable,
accrued liabilities, other payables and liabilities, approximate
their fair values due to their short-term nature. Based on
borrowing rates available to the Company as of the balance sheet
date presented for loans with similar terms and similar
circumstances, the carrying amounts of the Companys debt
obligations at December 31, 2006 approximate their fair
value.
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 two 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.
The Companys accounts receivable are derived from revenue
earned from customers primarily 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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Percentage of total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
12
|
%
|
|
|
19
|
%
|
|
|
21
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
18
|
|
Customer C
|
|
|
*
|
|
|
|
12
|
|
|
|
*
|
|
Customer D
|
|
|
18
|
|
|
|
11
|
|
|
|
*
|
|
All other customers
|
|
|
58
|
|
|
|
51
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Percentage of gross accounts
receivable:
|
|
|
|
|
|
|
|
|
Customer E
|
|
|
17
|
%
|
|
|
23
|
%
|
Customer F
|
|
|
17
|
|
|
|
*
|
|
All other customers
|
|
|
66
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Less than 10% of the consolidated
revenue or accounts receivable for the respective period end.
|
F-9
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 customer. If the customer was 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. No such revenue was deferred
in 2004, 2005 or 2006, respectively.
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 (OEMs), their contract
manufacturers or to international 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 international distributors.
The Company grants its distributors limited rights of returns
and price protection. Revenue from sales to distributors is
recognized upon shipment if the Company concludes it can
reasonably estimate the credits for returns and price
adjustments issuable. Revenue from sales to distributors is
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. 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 2004, 2005 and 2006.
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 $0,
$181,000 and $740,000 for the years ended December 31,
2004, 2005 and 2006, 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. Deferred revenue was $220,000 and $628,000
as of December 31, 2005 and 2006, respectively.
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 and assumes that products have to
be replaced subject to a
F-10
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claim. 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,
|
|
|
|
2005
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Beginning balance
|
|
$
|
30
|
|
$
|
106
|
|
Accruals for warranties issued
during the year
|
|
|
76
|
|
|
140
|
|
Settlements made during the year
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
106
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
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 $112,000, $125,000 and $214,000 for the years ended
December 31, 2004, 2005 and 2006, 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 it is more likely
than not that the net deferred tax asset will not 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 APB 25,
and Financial Accounting Standards Board (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
F-11
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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, which requires, among other inputs, an estimate
of the Companys fair value of the underlying common stock
on the date of grant.
In 2006, the Company recorded employee stock-based compensation
expense of $675,000. 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 (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 $8,000, $62,000 and $70,000 for the
year ended December 31, 2004, 2005 and 2006, 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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cost of revenue
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9
|
|
Research and development
|
|
|
|
|
|
|
10
|
|
|
|
396
|
|
Sales, general and administrative
|
|
|
85
|
|
|
|
75
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
expense
|
|
$
|
85
|
|
|
$
|
85
|
|
|
$
|
745
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 2004, 2005 or 2006, there are no components of
comprehensive income (loss) 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 June 29, 2005, the FASB issued Staff Position
150-5
,
Issuers Accounting under FASB Statement No. 150 for
Freestanding Warrants and Other Similar Instruments on
Shares That Are Redeemable
(FSP
150-5).
F-12
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
FSP 150-5
affirms that warrants to purchase shares of the Companys
mandatorily redeemable convertible preferred stock are subject
to the requirements in FSP
150-5
and
requires the Company to classify these warrants as liabilities
and revalue them to fair value at the end of each reporting
period. The Company adopted FSP
150-5
and
accounted for the cumulative effect of the change in accounting
principle as of the beginning of the third quarter of 2005. For
the year ended December 31, 2005, the impact of the change
in accounting principle was to increase net loss by $511,000.
The impact consisted of a $100,000 cumulative charge as of
July 1, 2005, when the Company adopted FSP
150-5,
reflecting the fair value of the warrants as of the date of
adoption, and $411,000 of expense that was recorded in other
income (expense), net to reflect the increase in fair value
between July 1, 2005 and December 31, 2005.
These warrants will be subject to revaluation at each balance
sheet date and any change in fair value will be recognized as a
component of other income (expense), net. The Company will
continue to adjust the warrant liability for changes in fair
value until the earlier of the exercise of the warrants or the
completion of a liquidation event, including the consummation of
an initial public offering, at which time the warrant liability
will be reclassified to additional paid-in capital.
The impact of the cumulative effect of change in accounting
principle on net loss per common share was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Net loss per common share, basic
and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of
change in accounting principle
|
|
$
|
(1.82
|
)
|
|
$
|
(1.58
|
)
|
|
$
|
(1.11
|
)
|
Cumulative effect of change in
accounting principle
|
|
|
|
|
|
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per common share, basic
and diluted
|
|
$
|
(1.82
|
)
|
|
$
|
(1.59
|
)
|
|
$
|
(1.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic and diluted
loss per common share
|
|
|
6,459,050
|
|
|
|
7,318,607
|
|
|
|
8,065,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent
Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes
(FIN 48), which prescribes a recognition
threshold and measurement process for recording in the financial
statements uncertain tax positions taken or expected to be taken
in a tax return. Additionally, FIN 48 provides guidance on
the recognition, classification, accounting in interim periods
and disclosure requirements for uncertain tax positions. The
accounting provisions of FIN 48 will be effective for the
Company beginning January 1, 2007. The Company does not
anticipate that the adoption of FIN 48 will have any
material impact on its consolidated results of operations or
financial position.
In June 2006, the FASB Emerging Issues Task Force issued EITF
No. 06-03,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation)
(EITF
06-03),
which states that a company must disclose its accounting policy
(i.e., gross or net presentations) regarding presentations of
taxes within the scope of EITF
06-03.
If
taxes included in gross revenue are significant, a company must
disclose the amount of these taxes for each period for which an
income statement is presented. The disclosures are required for
annual and interim financial statements for each period for
which an income statement is presented. EITF
06-03
will
be effective for the Company beginning January 1, 2007. The
Company does not expect that the adoption of EITF
06-03
will
have a material effect on its consolidated results of operations
or financial position.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS No. 157).
The purpose of SFAS No. 157 is to define fair value,
establish a framework for measuring fair value and enhance
disclosures about fair value measurements. The measurement and
disclosure requirements are effective for the Company
F-13
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
beginning in the first quarter of 2008. The Company is currently
evaluating what impact, if any, SFAS No. 157 will have
on its interim financial reporting.
|
|
2.
|
Net Loss
Per Common Share and Pro Forma Net Loss Per Common
Share
|
Basic net loss per common share is calculated using the
weighted-average number of common shares outstanding during the
period that are not subject to vesting provisions. Net loss per
common share assuming dilution is calculated on the basis of the
weighted-average number of common shares outstanding and the
dilutive effect of all potentially dilutive securities,
including common stock options, unvested common stock and
convertible securities.
Basic and diluted net loss per common share were the same for
all periods presented as the impact of all potentially dilutive
securities outstanding was anti-dilutive. The following table
presents the potentially dilutive securities outstanding that
were excluded from the computation of diluted net loss per
common share for the periods presented because their inclusion
would have had an anti-dilutive effect:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
Options to purchase common stock
|
|
|
2,470,170
|
|
|
|
4,221,404
|
|
Common stock subject to vesting
provisions
|
|
|
1,062,954
|
|
|
|
872,210
|
|
Mandatorily redeemable convertible
preferred stock
|
|
|
21,091,375
|
|
|
|
22,364,197
|
|
Warrants to purchase mandatorily
redeemable convertible preferred stock
|
|
|
316,267
|
|
|
|
102,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,940,766
|
|
|
|
27,560,787
|
|
|
|
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per common share have been
computed to give effect to the conversion of the Companys
convertible preferred stock (using the if-converted method) into
common stock as though the conversion had occurred on the
original dates of issuance.
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,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Work in process
|
|
|
$ 583
|
|
|
$
|
2,069
|
|
Finished goods
|
|
|
1,504
|
|
|
|
2,937
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2,087
|
|
|
$
|
5,006
|
|
|
|
|
|
|
|
|
|
|
F-14
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property
and Equipment, Net
|
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Test equipment
|
|
$
|
186
|
|
|
$
|
1,418
|
|
Software and computer equipment
|
|
|
2,675
|
|
|
|
7,178
|
|
Furniture, office equipment and
leasehold improvements
|
|
|
31
|
|
|
|
40
|
|
Construction-in-progress
|
|
|
295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,187
|
|
|
|
8,636
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(1,414
|
)
|
|
|
(3,596
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,773
|
|
|
$
|
5,040
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was $369,000, $842,000 and
$2,192,000 for the years ended December 31, 2004, 2005 and
2006, respectively.
Assets recorded under capital leases included in property and
equipment were $714,000 and $3,623,000 at December 31, 2005
and 2006, respectively. Amortization expense related to assets
recorded under capital lease was $153,000 and $1,033,000 for the
years ended December 31, 2005 and 2006, respectively.
Menlo
Logic, LLC
On April 21, 2005, the Company acquired Menlo Logic, LLC.
The acquisition was accounted for using the purchase method of
accounting.
The aggregate purchase price consisted of cash consideration of
$1,105,000, including direct acquisition costs of approximately
$80,000. The acquisition included technology used for secure
communications.
The developed technology acquired from Menlo Logic, LLC included
primarily software technology used for secure communications.
Products developed with this technology are being sold by the
Company for use with secure communication processors.
The total purchase price was allocated to identifiable
intangible assets, including in-process research and development
(IPR&D) based on their estimated fair value, as
follow:
|
|
|
|
|
In-process research and development
|
|
$
|
51,000
|
|
Developed technology
|
|
|
1,054,000
|
|
|
|
|
|
|
|
|
$
|
1,105,000
|
|
|
|
|
|
|
The values assigned to IPR&D and developed technology was
based upon future discounted cash flows related to the
assets projected income streams (including costs to
complete for IPR&D) using a discount rate of 25% for
IPR&D and 18% for developed technology. Factors considered
in estimating the discounted cash flows from IPR&D and
developed technology include risk related to the characteristics
and applications of the technology, existing and future markets
and an assessment of the age of the technology within its life
span. IPR&D was expensed at the date of acquisition and is
included within research and development expenses. The Company
is amortizing the developed technology to cost of revenue on a
straight-line basis over its estimated useful life of
3 years.
F-15
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys consolidated financial statements include the
results of operations of Menlo Logic, LLC commencing as of the
acquisition date.
Summarized below are the unaudited pro forma results of the
Company as though the acquisition described above occurred at
the beginning of the period indicated. Adjustment have been made
for the estimated amortization of intangible assets and other
appropriate pro forma adjustments. The charges for purchased
in-process research and development are not included in the pro
forma results, because they are non-recurring. The information
presented does not purport to be indicative of the results that
would have been achieved had the acquisition been made as of
those dates nor of the results which may occur in the future.
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
(in thousands, except per share data)
|
|
|
|
(unaudited)
|
|
|
Revenue
|
|
$
|
19,443
|
|
Net loss
|
|
|
(11,786
|
)
|
Net loss per share
basic and diluted
|
|
|
(1.61
|
)
|
Brecis
Communications Corporation
On August 15, 2004, the Company acquired certain assets of
Brecis Communications Corporation (Brecis).
The aggregate purchase price consisted of cash consideration of
$1,811,000, including direct acquisition costs of approximately
$150,000. The acquisition included a product line of 32-bit
MIPS-based secure communication processors.
The developed technology acquired from Brecis related to 32-bit
MIPS-based secure communication processors. Products developed
with this technology are being sold under the NITROX Soho name
to address the broadband and consumer market.
The total purchase price was allocated to tangible and
identifiable intangible assets and liabilities based on their
estimated fair value, as follows:
|
|
|
|
|
Inventories
|
|
$
|
220,000
|
|
Developed technology
|
|
|
2,289,000
|
|
|
|
|
|
|
|
|
|
2,509,000
|
|
Less: liabilities assumed
|
|
|
(698,000
|
)
|
|
|
|
|
|
|
|
$
|
1,811,000
|
|
|
|
|
|
|
The value assigned to developed technology was based upon future
discounted cash flows related to the assets projected
income streams using a discount rate of 21%. Factors considered
in estimating the discounted cash flows to be derived from
developed technology include risk related to the characteristics
and applications of the technology, existing and future markets
and an assessment of the age of the technology within its life
span. The Company is amortizing the developed technology
intangible asset to cost of revenue on a straight-line basis
over its estimated useful life of 3 years.
The Companys consolidated financial statements include the
results of operations of Brecis commencing as of the acquisition
date.
F-16
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Intangible
Assets, net
|
Intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Developed technology
|
|
$
|
3,343
|
|
|
$
|
3,343
|
|
Technology license
|
|
|
5,044
|
|
|
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,387
|
|
|
|
8,887
|
|
Less: accumulated depreciation and
amortization
|
|
|
(4,168
|
)
|
|
|
(6,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,219
|
|
|
$
|
1,902
|
|
|
|
|
|
|
|
|
|
|
Amortization expenses were $1,702,000, $2,466,000 and $2,817,000
for the years ended December 31, 2004, 2005 and 2006,
respectively. Amortization expense increased in 2006 due to the
full year amortization of Menlo Logic acquired technology and
other technologies licensed in late 2005. Future amortization
expenses are estimated to be $1,260,000 for 2007, $496,000 for
2008 and $146,000 for 2009.
|
|
7.
|
Accrued
expenses and other current and other non-current
liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Accrued expenses and other current
liabilities:
|
|
|
|
|
|
|
|
|
Accrued compensation and related
benefit
|
|
$
|
605
|
|
|
$
|
851
|
|
Accrued warranty
|
|
|
106
|
|
|
|
161
|
|
Accrual for mask costs
|
|
|
235
|
|
|
|
|
|
Refundable deposits related to
unvested employee stock option exercises
|
|
|
301
|
|
|
|
173
|
|
Professional fees
|
|
|
291
|
|
|
|
583
|
|
Deferred revenue
|
|
|
220
|
|
|
|
628
|
|
Income tax payable
|
|
|
|
|
|
|
558
|
|
Other
|
|
|
677
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,435
|
|
|
$
|
3,481
|
|
|
|
|
|
|
|
|
|
|
For deferred revenue, see Note 1. Organization and
Significant Accounting Policies,
Revenue Recognition
,
which discusses our revenue recognition policy for license and
maintenance fees.
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 bear 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. The accounts receivable line of credit
was due to expire on January 5, 2007, but on
January 25, 2007, the Company entered into a loan
modification agreement that extended the term of the then
existing revolving line of credit through July 4, 2008.
In October 2005, the Company also entered into a term loan and
security agreement (the October 6, 2005 Term Loan and
Security Agreement) with Silicon Valley Bank that provided
a $4.0 million term loan line of credit. The credit line
was secured by all of the Companys other assets except
intellectual property. Upon entering into the
F-17
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
October 6, 2005 Term Loan and Security Agreement, 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
this term loan line of credit. 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 this term loan and security
agreement. The term loans carried a fixed interest rate of 10.5%
at December 31, 2006.
|
|
9.
|
Mandatorily
Redeemable Convertible Preferred Stock and Stockholders
Deficit
|
Mandatorily Redeemable Convertible Preferred Stock
The Companys mandatorily redeemable convertible preferred
stock consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands,
|
|
|
|
except share data)
|
|
|
Mandatorily redeemable convertible
preferred stock, par value
$0.001
|
|
|
|
|
|
|
|
|
Series A:
4,349,994 shares authorized; 4,349,990 shares issued
and outstanding; $7,830 liquidation preference at
December 31, 2006
|
|
$
|
7,773
|
|
|
$
|
7,773
|
|
Series B:
7,612,431 shares authorized; 7,384,472 shares issued
and outstanding at December 31, 2005 and
7,564,448 shares issued and outstanding at
December 31, 2006; $15,885 liquidation preference at
December 31, 2006
|
|
|
15,438
|
|
|
|
16,534
|
|
Series C:
6,206,896 shares authorized; 6,206,893 shares issued
and outstanding, $18,000 liquidation preference at
December 31, 2006
|
|
|
17,973
|
|
|
|
17,973
|
|
Series D:
4,050,778 shares authorized at December 31, 2005 and
4,765,835 shares authorized at December 31, 2006;
3,150,020 shares issued and outstanding at
December 31, 2005 and 4,242,866 issued and outstanding at
December 31, 2006; $27,908 liquidation preference at
December 31, 2006
|
|
|
20,636
|
|
|
|
30,157
|
|
|
|
|
|
|
|
|
|
|
Total mandatorily redeemable
convertible preferred stock
|
|
$
|
61,820
|
|
|
$
|
72,437
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, the Company was authorized to
issue 22,935,156 shares of convertible preferred stock, of
which 4,349,994 were designated as Series A convertible
preferred stock (Series A Preferred Stock),
7,612,431 were designated as Series B convertible preferred
stock (Series B Preferred Stock), 6,206,896
were designated as Series C convertible preferred stock
(Series C Preferred Stock) and 4,765,835 were
designated as Series D convertible preferred stock
(Series D Preferred Stock and collectively,
Series A, B, C and D Preferred Stock).
In August 2001 the Company issued a total of
4,349,994 shares of Series A Preferred Stock for
proceeds of $7,773,000, net of issuance costs of $57,000.
From April through May 2002 the Company issued a total of
7,384,472 shares of Series B Preferred Stock for
proceeds of $15,438,000, net of issuance costs of $70,000. In
September 2006, warrant holders exercised warrants to purchase
an additional 178,568 shares of Series B Preferred
Stock for proceeds of $375,000. In November 2006, warrant
holders exercised warrants to purchase an additional
1,408 shares of Series B Preferred Stock for proceeds
of $3,000.
From June through August 2003, the Company issued a total of
6,206,893 shares of Series C Preferred Stock for
proceeds of $17,973,000, net of issuance costs of $27,000.
In December 2004, the Company issued 3,049,454 shares of
Series D Preferred Stock for proceeds of
$20,032,000, net of issuance costs of $26,000. In February
2005, the Company issued 100,566 shares of Series D
F-18
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Preferred Stock for proceeds of $604,000, net of issuance costs
of $57,000. In May 2006, warrant holders exercised warrants to
purchase an additional 30,919 shares of Series D
Preferred Stock for proceeds of $203,000. In September 2006,
warrant holders exercised warrants to purchase
29,890 shares of Series D Preferred Stock for proceeds
of $197,000.
In August 2006, the Company issued 999,537 shares of
Series D Preferred Stock for proceeds of $8,681,000, net of
issuance costs of $15,000. In October 2006, the Company issued
an additional 32,500 shares of Series D Preferred
Stock for proceeds of $284,000.
Holders of Series A, B, C and D Preferred Stock have
certain registration rights. The Series A, B, C and D
Preferred Stock have the following characteristics:
Voting
Holders of Series A, B, C, and D Preferred Stock are
entitled to vote, together with the holders of common stock, on
all matters submitted to stockholders for a vote. Each preferred
stockholder is entitled to the number of votes equal to the
number of shares of common stock into which its shares of
preferred stock are convertible at the time of that vote.
Dividends
The holders of the Series A, B, C and D Preferred Stock are
entitled to receive, when and as declared by the board of
directors and out of funds legally available, noncumulative
dividends at the rate of $0.14, $0.17, $0.23 and $0.53 per share
per annum, in preference and priority to any payment of any
dividend on common stock. No dividends or other distributions
shall be made with respect to the common stock, until all
declared dividends on the Series A, B, C and D Preferred
Stock have been declared or paid by the Company. Through
December 31, 2006, no dividends have been declared or paid
by the Company.
Liquidation Preference
In the event of any liquidation, dissolution, winding up or
change of control of the Company, the holders of the then
outstanding Series A, B, C and D Preferred Stock shall
receive an amount equal to the sum of $1.80, $2.10, $2.90 and
$6.58, respectively, per share of Series A, B, C and D
Preferred Stock, plus all declared but unpaid dividends, payable
in preference and priority to any payments made to the holders
of the then outstanding common stock. Change of control includes
any sale, exclusive licensing or other disposition of all or
substantially all of the assets of the Company; any merger,
reorganization or consolidation of the Company with or into
another entity, any sale by the shareholders of the Company of
an aggregate of fifty percent or more of the capital stock.
These liquidity features cause the preferred stock to be
classified as mezzanine capital rather than as a component of
stockholders equity.
Conversion
Each share of preferred stock, at the option of the holder, is
convertible into a number of fully paid shares of common stock
as determined by dividing the respective preferred stock issue
price by the conversion price in effect at the time. The initial
conversion price of Series A, B, C and Series D
Preferred Stock is $1.80, $2.10, $2.90 and $6.58, respectively,
and is subject to adjustment in accordance with antidilution
provisions contained in the Companys Certificate of
Incorporation. Conversion is automatic immediately upon the
closing of a firm commitment underwritten public offering in
which the public offering price equals or exceeds $13.1552 per
share of common stock (adjusted to reflect subsequent stock
dividends, stock splits or recapitalizations) and the aggregate
proceeds raised is not less than $40,000,000.
Warrants
As of December 31, 2006, the following warrants to purchase
shares of the Companys convertible preferred stock were
outstanding.
F-19
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
of Shares
|
|
|
|
|
|
|
|
as of
|
|
|
|
Series of Convertible
|
|
Subject to
|
|
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Expiration
|
Preferred Stock
|
|
Warrants
|
|
|
Issue Date
|
|
Price
|
|
|
2006
|
|
|
Date
|
|
B
|
|
|
357
|
|
|
February 15, 2002
|
|
$
|
2.10
|
|
|
$
|
3,000
|
|
|
February 14, 2007
|
B
|
|
|
47,619
|
|
|
November 1, 2002
|
|
|
2.10
|
|
|
|
314,000
|
|
|
October 31, 2012
|
D
|
|
|
27,500
|
|
|
October 6, 2005
|
|
|
6.58
|
|
|
|
192,000
|
|
|
October 5, 2015
|
D
|
|
|
27,500
|
|
|
June 19, 2006
|
|
|
6.58
|
|
|
|
192,000
|
|
|
October 5, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,976
|
|
|
|
|
|
|
|
|
$
|
701,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In February 2002, the Company issued warrants to purchase
180,333 shares of Series B Preferred Stock in
connection with a bridge loan financing. The warrants have an
exercise price of $2.10 per share and expire in February
2007. The fair value ascribed to the warrants of $231,000 was
determined using the Black-Scholes option pricing model at the
date of issuance and represented deferred financing cost, which
has been amortized to interest expense during the year ended
December 31, 2002. In 2006, warrants to purchase
179,976 shares of Series B Preferred Stock were
exercised for total proceeds of $378,000.
In November 2002, the Company issued warrants to purchase
47,169 shares of Series B Preferred Stock in
connection with the revolving account receivable line of credit.
The warrants have an exercise price of $2.10 per share and
expire in November 2012. The fair value ascribed to the warrants
of $79,000 was determined using the Black-Scholes option pricing
model at the date of issuance and represented deferred financing
cost, which has been amortized to interest expense during the
years ended December 31, 2002 and 2003.
In August 2004, the Company issued warrants to purchase
60,809 shares of Series D Preferred Stock in
connection with a bridge loan financing. The warrants have an
exercise price of $6.58 per share and expire in August
2009. The fair value ascribed to the warrants of $209,000 was
determined using the Black-Scholes option pricing model at the
date of issuance and represented deferred financing cost, which
has been amortized to interest expense during the year ended
December 31, 2004. In 2006, warrants issued in connection
with bridge loan financing to purchase 60,809 shares of
Series D Preferred Stock were exercised for total proceeds
of $400,000.
In October 2005, the Company issued warrants to purchase
27,500 shares of Series D Preferred Stock in
connection with a line of credit as discussed in Note 7.
The warrants have an exercise price of $6.58 per share and
expire in October 2015. The fair value ascribed to the warrants
of $154,000 was determined using the Black-Scholes option
pricing model at the date of issuance and represented deferred
financing cost, which was being amortized over the term of the
agreement. In addition, the arrangement included the issuance of
warrants to purchase an additional 27,500 shares of
Series D Preferred Stock subject to a future drawing on the
line of credit. In June 2006, the Company drew on the line of
credit and issued warrants to purchase an additional
27,500 shares of Series D Preferred Stock. These
warrants also have an exercise price of $6.58 per share and
expire in October 2015. The fair value ascribed to the warrants
issued in June 2006, of $188,000, was determined using the
Black-Scholes option pricing model at the date of issuance and
represented deferred financing costs, which has been amortized
over the term of the agreement. The Company recognized $52,000
and $143,000 of interest expense for the years ended December
2005 and 2006, respectively, related to these warrants. As of
December 31, 2006, these warrants have not been exercised
and remain outstanding.
In January 2001, the Company issued fully and immediately
exercisable warrants to purchase 56,250 shares of common
stock for legal expenses incurred. The warrants have an exercise
price of $0.002 per share. The total expense recorded for
these warrants was $11,000, which is equivalent to the value of
the services rendered. These warrants were exercised in November
2006 for total proceeds of $75.
F-20
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Stock
Options and Unvested Common Stock
As of December 31, 2006, the Companys 2001 Stock
Incentive Plan (the 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 Plan may be either incentive
stock options or non-statutory stock options as determined by
the Companys board of directors. Generally, options
granted under the Plan vest four or five years from the date of
grant and expire ten years from the date of grant.
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 753,193 and 377,030 unvested shares
outstanding as of December 31, 2005 and 2006, respectively,
and $301,000 and $173,000 related liabilities, respectively.
Detail related to activity of unvested shares of common stock is
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Number of
|
|
|
Average
|
|
|
Unvested Shares
|
|
|
Exercise/
|
|
|
Outstanding
|
|
|
Purchase Price
|
|
Balance as of December 31,
2003
|
|
|
1,241,835
|
|
|
$
|
0.17
|
Issued
|
|
|
953,991
|
|
|
|
0.41
|
Vested
|
|
|
(775,947
|
)
|
|
|
0.17
|
Forfeited
|
|
|
(84,766
|
)
|
|
|
0.19
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2004
|
|
|
1,335,113
|
|
|
|
0.34
|
Issued
|
|
|
454,791
|
|
|
|
0.86
|
Vested
|
|
|
(708,289
|
)
|
|
|
0.35
|
Forfeited
|
|
|
(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
|
Forfeited
|
|
|
(32,599
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
Balance as of December 31,
2006
|
|
|
872,210
|
|
|
|
1.63
|
|
|
|
|
|
|
|
|
F-21
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Detail related to stock option activity is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Number of
|
|
|
Average
|
|
|
Shares
|
|
|
Exercise
|
|
|
Outstanding
|
|
|
Price
|
|
Balances as of December 31,
2003
|
|
|
859,105
|
|
|
$
|
0.20
|
Options granted
|
|
|
1,663,850
|
|
|
|
0.40
|
Options exercised
|
|
|
(1,081,345
|
)
|
|
|
0.38
|
Options forfeited
|
|
|
(115,549
|
)
|
|
|
0.22
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2004
|
|
|
1,326,061
|
|
|
|
0.30
|
Options granted
|
|
|
1,754,366
|
|
|
|
1.05
|
Options exercised
|
|
|
(524,021
|
)
|
|
|
0.80
|
Options forfeited
|
|
|
(86,236
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2005
|
|
|
2,470,170
|
|
|
|
0.72
|
Options granted
|
|
|
2,434,750
|
|
|
|
3.42
|
Options exercised
|
|
|
(602,634
|
)
|
|
|
2.26
|
Options forfeited
|
|
|
(80,882
|
)
|
|
|
1.57
|
|
|
|
|
|
|
|
|
Balances as of December 31,
2006
|
|
|
4,221,404
|
|
|
|
2.05
|
|
|
|
|
|
|
|
|
The total intrinsic value for options exercised during 2006 was
$973,000, 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 December 31, 2006
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Shares
|
|
|
Remaining
|
|
Weighted-
|
|
|
Subject
|
|
|
Contractual
|
|
Average
|
|
|
to Options
|
|
|
Life
|
|
Exercise
|
Exercise Prices
|
|
Outstanding
|
|
|
(in years)
|
|
Price
|
|
$0.19
|
|
|
37,500
|
|
|
|
4.26
|
|
$
|
0.19
|
0.20
|
|
|
198,122
|
|
|
|
6.24
|
|
|
0.20
|
0.30
|
|
|
633,982
|
|
|
|
7.57
|
|
|
0.30
|
0.80
|
|
|
11,000
|
|
|
|
7.96
|
|
|
0.80
|
1.02
|
|
|
1,177,304
|
|
|
|
8.59
|
|
|
1.02
|
1.50
|
|
|
65,750
|
|
|
|
8.96
|
|
|
1.50
|
3.04
|
|
|
1,727,746
|
|
|
|
9.22
|
|
|
3.04
|
3.74
|
|
|
103,500
|
|
|
|
9.45
|
|
|
3.74
|
5.42
|
|
|
200,000
|
|
|
|
9.92
|
|
|
5.42
|
5.52
|
|
|
66,500
|
|
|
|
9.66
|
|
|
5.52
|
|
|
|
|
|
|
|
|
|
|
|
$0.19-5.52
|
|
|
4,221,404
|
|
|
|
8.65
|
|
|
2.05
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
1,193,061
|
|
|
|
|
|
|
1.09
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest
|
|
|
3,996,115
|
|
|
|
|
|
|
2.01
|
|
|
|
|
|
|
|
|
|
|
|
The exercise price of stock options granted in 2006 was
determined based on quarterly valuations obtained by the Company
on a contemporaneous basis. The valuations were made by
Duff & Phelps, LLC, an independent valuation firm.
Duff & Phelps, LLC used an income approach to estimate
the aggregate enterprise value of the Company at each valuation
date. The income approach involves applying appropriate
risk-adjusted discount rates to estimated debt-free cash flows,
based on forecasted revenues and costs. The projections used in
connection with these valuations were based on the
Companys expected operating performance over the forecast
period.
F-22
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Duff & Phelps, LLC allocated the aggregate implied
enterprise value that it estimated to the shares of preferred
and common stock using the option-pricing method at each
valuation date. The option-pricing method involves making
assumptions regarding the anticipated timing of a potential
liquidity event, such as an initial public offering, and
estimates of the volatility of the Companys equity
securities. The anticipated timing was based on the plans of the
Companys board of directors and management.
Duff & Phelps, LLC estimated the volatility of the
Companys stock based on available information on the
volatility of stocks of publicly traded companies in the
Companys industry.
During 2006, the Company granted options to purchase the
Companys common stock at dates that generally fell between
the dates of the valuations performed by Duff & Phelps,
LLC. In those instances, the Company granted awards with an
exercise price equal to the per-share fair value determined by
the most recent valuation received from Duff & Phelps,
LLC. In conjunction with preparing the Companys financial
statements, the Company estimated the fair value of its common
stock underlying stock options on the dates of grant under
SFAS 123(R). The Company retrospectively calculated its
revenue growth between the dates of the third-party valuations
received immediately prior to and subsequent to the grant date
and utilized this information to interpolate an estimated per
share value of the Companys common stock between those
dates. During the year ended December 31, 2006, the Company
granted stock options with exercise prices as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
Fair Value of
|
|
Intrinsic
|
|
|
Options
|
|
|
Exercise
|
|
Common Stock
|
|
Value Per
|
Grant Dates
|
|
Granted
|
|
|
Price
|
|
Per Share
|
|
Share
|
|
March 22, 2006
|
|
|
1,961,220
|
|
|
$
|
3.04
|
|
$
|
3.52
|
|
$
|
0.48
|
June 12, 2006
|
|
|
123,500
|
|
|
|
3.74
|
|
|
4.62
|
|
|
0.88
|
August 30, 2006
|
|
|
110,000
|
|
|
|
5.52
|
|
|
5.52
|
|
|
|
September 20, 2006
|
|
|
25,000
|
|
|
|
5.52
|
|
|
5.52
|
|
|
|
November 14, 2006
|
|
|
91,250
|
|
|
|
5.42
|
|
|
5.94
|
|
|
0.52
|
December 15, 2006
|
|
|
123,750
|
|
|
|
5.42
|
|
|
7.40
|
|
|
1.98
|
The fair value of each employee option grant for 2006 under
SFAS 123(R) was estimated on the date of grant using the
Black-Scholes option-pricing model with the following
assumptions.
|
|
|
Risk-free interest rate
|
|
4.38%-5.23%
|
Expected life
|
|
4 to 5 years
|
Dividend yield
|
|
None
|
Volatility
|
|
50%-60%
|
The Company determined that it was not practical to calculate
the volatility of its share price since the Companys
securities are not publicly traded 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 Company used the average expected
volatility rates reported by the comparable group for an
expected term that approximated the expected term estimated by
the Company, or a less period equal to the full history of the
comparable company if less than the expected life.
The estimated weighted-average grant date fair value of options
granted during the twelve months ended December 31, 2006
was $2.12.
F-23
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Current
and Deferred Income Taxes
|
Since inception, the Company has incurred operating losses and,
accordingly, has not recorded a provision for income taxes for
the years ended December 31, 2004 or 2005. For the year
ended December 31, 2006, the Company reported a $560,000
provision related to the implementation of an international
structure. 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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Domestic
|
|
$
|
(11,733
|
)
|
|
$
|
(11,572
|
)
|
|
$
|
17,877
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
(26,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(11,733
|
)
|
|
$
|
(11,572
|
)
|
|
$
|
(8,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Domestic
|
|
$
|
|
|
|
$
|
|
|
|
$
|
560
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys effective tax rate differs from the
U.S. federal statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
Income tax at statutory rate
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
|
|
34.0
|
%
|
State taxes, net of federal benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
Alternative minimum tax
|
|
|
|
|
|
|
|
|
|
|
6.6
|
|
Change in valuation allowance
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
%
|
|
|
|
%
|
|
|
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,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets, non-current:
|
|
|
|
|
|
|
|
|
Tax credits
|
|
|
2,818
|
|
|
|
4,155
|
|
Net operating loss carryforwards
|
|
|
19,398
|
|
|
|
12,736
|
|
Capitalized research and
development
|
|
|
196
|
|
|
|
170
|
|
Depreciation and amortization
|
|
|
553
|
|
|
|
1,087
|
|
Other
|
|
|
509
|
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
23,474
|
|
|
|
19,078
|
|
Less: valuation allowance
|
|
|
(23,474
|
)
|
|
|
(19,078
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
F-24
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As of December 31, 2006, the Company had total net
operating loss carryforwards for federal and state income tax
purposes of $29.6 million and $45.3 million,
respectively. If not utilized, these net federal and state
operating loss carryforwards will expire beginning in 2022 and
2008, respectively. The Company also had federal and other
state research and development tax credit carryforwards of
approximately $2.3 million and $2.1 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. 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. Utilization of these net operating loss carryforwards
and credit carryforwards are subject to an annual limitation due
to provisions of the Internal Revenue Code of 1986, as amended.
Events which cause limitations in the amount of net operating
losses and credits that the Company may utilize in any one year
include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three-year period.
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, 2006, the Company
has not made any contributions to the plan.
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 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. Substantially all of the Companys
long-lived assets are located in the United States of America.
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
F-25
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
from the geographic locations of the ultimate end users. Sales
by geography for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
United States of America
|
|
$
|
3,857
|
|
|
$
|
10,292
|
|
|
$
|
19,483
|
|
Taiwan
|
|
|
1,275
|
|
|
|
3,085
|
|
|
|
7,403
|
|
Japan
|
|
|
1,662
|
|
|
|
3,517
|
|
|
|
2,612
|
|
Other countries
|
|
|
617
|
|
|
|
2,483
|
|
|
|
4,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,411
|
|
|
$
|
19,377
|
|
|
$
|
34,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13.
|
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.
Minimum commitments under non-cancelable capital and operating
lease agreements as of December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease
|
|
|
|
|
|
|
|
|
and Technology
|
|
|
Operating
|
|
|
|
|
|
License Obligations
|
|
|
Leases
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Years Ending
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
2,747
|
|
|
$
|
935
|
|
$
|
3,682
|
|
2008
|
|
|
1,073
|
|
|
|
613
|
|
|
1,686
|
|
2009
|
|
|
|
|
|
|
72
|
|
|
72
|
|
2010
|
|
|
|
|
|
|
44
|
|
|
44
|
|
2011
|
|
|
|
|
|
|
44
|
|
|
44
|
|
Thereafter
|
|
|
|
|
|
|
23
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,820
|
|
|
$
|
1,731
|
|
$
|
5,551
|
|
Less: interest (at 9%)
|
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease
payments
|
|
|
3,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(2,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term portion of obligations
|
|
$
|
1,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent expense incurred under operating leases was $345,000,
$589,000 and $797,000 for the years ended December 31,
2004, 2005 and 2006, 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 two license agreements with outside
vendors. One of the license agreements is for electronic design
automation software which is used in the design of the
Companys products. There are no additional payments called
for under this arrangement beyond the amount capitalized. The
second license agreement includes a non-exclusive,
non-transferable right to develop multiple licensed MIPS cores
that implement the MIPS architecture. This second license
agreement requires us to pay $1.9 million after completion
of our initial public offering for an automatic 2 year extension
of the license. As of December 31, 2006, this amount has
not been accrued.
F-26
CAVIUM
NETWORKS, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
On April 12, 2007, the Company filed an amendment to its
Amended and Restated Certificate of Incorporation to effect a
1-for-2 reverse stock split of the Companys common and
preferred stock. The consolidated financial statements and the
accompanying notes have been adjusted to reflect the reverse
stock split retroactively.
|
|
15.
|
Unaudited
Subsequent Event
|
On April 11, 2007, the 2007 Equity Incentive Plan was
approved by the stockholders.
F-27
PART II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, payable in connection
with the registration of the common stock hereunder. All amounts
are estimates except the SEC registration fee, the NASD filing
fee and The NASDAQ Global Market listing fee.
|
|
|
|
|
|
Amount to be Paid
|
|
SEC Registration Fee
|
|
$
|
9,229
|
NASD Filing Fee
|
|
|
14,125
|
NASDAQ Global Market Listing Fee
|
|
|
125,000
|
Legal Fees and Expenses
|
|
|
925,000
|
Accounting Fees and Expenses
|
|
|
750,000
|
Printing and Engraving Expenses
|
|
|
125,000
|
Blue Sky Fees and Expenses
|
|
|
15,000
|
Transfer Agent and Registrar Fees
|
|
|
10,000
|
Director and Officer Insurance
Expense
|
|
|
250,000
|
Road Show Fees and Expenses
|
|
|
150,000
|
Miscellaneous Expenses
|
|
|
76,646
|
|
|
|
|
Total
|
|
$
|
2,450,000
|
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
Section 145 of the Delaware General Corporation Law permits
a corporation to include in its charter documents and in
agreements between the corporation and its directors and
officers provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Our amended and restated certificate of incorporation to be
effective upon completion of this offering provides for the
indemnification of directors to the fullest extent permissible
under Delaware law.
Our bylaws to be effective upon completion of this offering
provide for the indemnification of officers, directors and third
parties acting on our behalf if this person acted in good faith
and in a manner reasonably believed to be in and not opposed to
our best interest, and, with respect to any criminal action or
proceeding, the indemnified party had no reason to believe his
or her conduct was unlawful.
Prior to completion of the offering, we intend to enter into
indemnification agreements with our directors and executive
officers, in addition to indemnification provided for in our
charter documents, and we intend to enter into indemnification
agreements with any new directors and executive officers in the
future.
The underwriting agreement (Exhibit 1.1 hereto) provides
for indemnification by the underwriters of us and our executive
officers and directors, and indemnification of the underwriters
by us for certain liabilities, including liabilities arising
under the Securities Act of 1933, as amended.
We intend to purchase and maintain insurance on behalf of any
person who is or was a director or officer against any loss
arising from any claim asserted against him or her and incurred
by him or her in that capacity, subject to certain exclusions
and limits of the amount of coverage.
II-1
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
The following sets forth information regarding all unregistered
securities sold between January 1, 2004 and March 31,
2007:
(1) Between January 1, 2004 and March 31, 2007,
the Company granted stock options to purchase
6,214,341 shares of common stock to employees, consultants
and directors pursuant to its 2001 Stock Incentive Plan. Of
these options, 242,568 shares have been cancelled without
being exercised and 1,667,743 have been exercised,
37,448 shares of which have been repurchased and 4,182,324
remain outstanding.
(2) In 2004, the Company received a bridge financing in
which it issued (a) convertible promissory notes in
aggregate principal amount of $4,000,000 and (b) warrants
that became exercisable for up to 100,567 shares of its
Series D Preferred Stock with an exercise price of
$6.58 per share to 8 accredited investors.
(3) In 2004, the Company issued an aggregate of
3,049,454 shares of its Series D Preferred Stock to 13
accredited investors, at $6.58 per share, for an aggregate
purchase price of $20,058,111.67.
(4) In 2005, the Company issued an aggregate of
100,566 shares of its Series D Preferred Stock to 4
accredited investors, at $6.58 per share, for an aggregate
purchase price of $661,489.50.
(5) In 2005, the Company issued warrants exercisable for up
to 55,000 shares of its Series D Preferred Stock to
two accredited investors with an exercise price of
$6.58 per share in conjunction with the establishment of
credit facilities.
(6) In 2006, as a result of warrant exercises, the Company
issued an aggregate of 60,809 shares of its Series D
Preferred Stock to 8 accredited investors, at $6.58 per
share, for an aggregate purchase price of $399,900.44.
(7) In 2006, the Company issued an aggregate of
1,032,037 shares of its Series D Preferred Stock to 15
accredited investors, at $8.70 per share, for an aggregate
purchase price of $8,978,748.00.
(8) In 2006, as a result of warrant exercises, the Company
issued an aggregate of 179,976 shares of its Series B
Preferred Stock to 8 accredited investors, at $2.10 per
share, for an aggregate purchase price of $377,956.95.
(9) In 2007, as a result of warrant exercises, the Company
issued an aggregate of 184 shares of its Series B
Preferred Stock to 2 accredited investors, at
$2.10 per share, for an aggregate purchase price of $387.45.
The offers, sales and issuances of the securities described in
Item 15(1) were deemed to be exempt from registration under
the Securities Act based on either (1) Rule 701
promulgated under the Securities Act as offers and sale of
securities pursuant to certain compensatory benefit plans and
contracts relating to compensation in compliance with
Rule 701 or (2) Rule 506 under Regulation D
of the Securities Act as transactions by an issuer not involving
any public offering to accredited investors. The recipients of
securities in each of these transactions represented their
intention to acquire the securities for investment only and not
with view to or for sale in connection with any distribution
thereof and appropriate legends were affixed to the share
certificates and instruments issued in such transactions. All
recipients had adequate access, through their relationships with
us, to information about us.
The offers, sales, and issuances of the securities described in
Items 15(2) through 15(9) were deemed to be exempt from
registration under the Securities Act in reliance on
Section 4(2) of the Securities Act and Regulation D
promulgated thereunder as transactions by an issuer not
involving a public offering. The recipients of securities in
each of these transactions represented their intention to
acquire the securities for investment only and not with a view
to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the securities issued in
these transactions. Each of the recipients of securities in
these transactions was an accredited person and had adequate
access, through employment, business or other relationships, to
information about us.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedules
|
(a) Exhibits
II-2
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
*1.1
|
|
Form of Underwriting Agreement
|
3.1
|
|
Amended and Restated Certificate
of Incorporation of the Registrant, as currently in effect
|
3.3
|
|
Form of Amended and Restated
Certificate of Incorporation of the Registrant, to be in effect
upon completion of this offering
|
3.4
|
|
Bylaws of the Registrant, as
currently in effect
|
3.5
|
|
Form of Amended and Restated
Bylaws of the Registrant, to be in effect upon completion of
this offering
|
4.1
|
|
Reference is made to
exhibits 3.1, 3.3 and 3.4
|
*4.2
|
|
Form of the Registrants
Common Stock Certificate
|
4.3
|
|
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
|
*5.1
|
|
Opinion of Cooley Godward Kronish
LLP
|
10.1
|
|
Form of Indemnity Agreement to be
entered into between the Registrant and its directors and
officers
|
10.2
|
|
2001 Stock Incentive Plan and
forms of agreements thereunder
|
10.3
|
|
2007 Equity Incentive Plan, to be
in effect upon completion of this offering
|
10.4
|
|
Form of Option Agreement, Form of
Option Grant Notice, and Form of Exercise Notice under 2007
Equity Incentive Plan
|
10.5
|
|
Executive Employment Agreement,
dated January 2, 2001, between the Registrant and Syed Ali
|
10.6
|
|
Employment Offer Letter, dated
December 27, 2004, between the Registrant and Arthur
Chadwick
|
10.7
|
|
Employment Offer Letter, dated
January 22, 2001, between the Registrant and Anil
K. Jain
|
10.8
|
|
Employment Offer Letter, dated
May 6, 2003, between the Registrant and Rajiv Khemani
|
10.9
|
|
Letter Agreement, dated
November 4, 2005, between the Registrant and Kris Chellam
|
10.10
|
|
Letter Agreement, dated
September 1, 2006, between the Registrant and Anthony
Thornley
|
10.11
|
|
Lease Agreement, dated
April 15, 2005, between the Registrant and MB Technology
Park, LLC
|
10.12
|
|
Loan and Security Agreement, dated
October 6, 2005, between the Registrant and Silicon Valley
Bank
|
10.13
|
|
Loan Modification Agreement, dated
January 3, 2007, between the Registrant and Silicon Valley
Bank
|
10.14
|
|
Second Loan Modification
Agreement, dated January 25, 2007, between the Registrant
and Silicon Valley Bank
|
10.15
|
|
Term Loan and Security Agreement,
dated October 6, 2005, between the Registrant, Silicon
Valley Bank and Gold Hill Lending 03, L.P.
|
10.16
|
|
First Amendment to Loan and
Security Agreement, dated October 24, 2006, between the
Registrant, Silicon Valley Bank and Gold Hill Lending 03, L.P.
|
10.17
|
|
Form of Warrant to Purchase Shares
of Series B preferred stock
|
10.18
|
|
Form of Warrant to Purchase Shares
of Series D preferred stock
|
10.19
|
|
Consent, Assignment, Assumption
and Amendment Agreement, dated February 5, 2007, between the
Registrant, Silicon Valley Bank and Gold Hill Lending 03, L.P.
|
10.20
|
|
Letter Agreement, dated March 15,
2007, between the Registrant and AVM Capital, L.P.
|
#10.21
|
|
Master Technology License
Agreement, dated December 30, 2003, between the Registrant
and MIPS Technologies, Inc.
|
21.1
|
|
Subsidiaries of the Registrant
|
23.1
|
|
Consent of PricewaterhouseCoopers
LLP, independent registered public accounting firm
|
*23.2
|
|
Consent of Cooley Godward Kronish
LLP (included in exhibit 5.1)
|
II-3
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
23.3
|
|
Consent of Duff & Phelps, LLC
|
24.1
|
|
Power of Attorney
|
99.1
|
|
Report of PricewaterhouseCoopers
LLP
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
Previously filed.
|
|
#
|
|
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.
|
(b) Financial Statement Schedules. The following financial
statement schedule is included herewith:
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, 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
|
Year ended December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2
|
|
$
|
57
|
|
$
|
|
|
|
$
|
59
|
Allowance for customer returns
|
|
|
16
|
|
|
370
|
|
|
(328
|
)
|
|
|
58
|
Income tax valuation allowance
|
|
|
12,323
|
|
|
5,905
|
|
|
|
|
|
|
18,228
|
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.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting
Agreement, certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
II-4
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this Registration Statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
That, for the purpose of determining liability under the
Securities Act of 1933 to any purchaser, if the Registrant is
subject to Rule 430C, each prospectus filed pursuant to
Rule 424(b) as part of a registration statement relating to
an offering, other than registration statements relying on
Rule 430B or other than prospectuses filed in reliance on
Rule 430A, shall be deemed to be part of and included in
the Registration Statement as of the date it is first used after
effectiveness.
Provided, however
, that no statement made
in a registration statement or prospectus that is part of the
Registration Statement or made in a document incorporated or
deemed incorporated by referenced into the Registration
Statement or prospectus that is part of the Registration
Statement will, as to a purchaser with a time of contract of
sale prior to such first use, supersede or modify any statement
that was made in the Registration Statement or prospectus that
was part of the Registration Statement or made in any such
document immediately prior to such date of first use.
That, for the purpose of determining liability of the Registrant
under the Securities Act of 1933 to any purchaser in the initial
distribution of the securities, the undersigned Registrant
undertakes that in a primary offering of securities of the
undersigned Registrant pursuant to this Registration Statement,
regardless of the underwriting method used to sell the
securities to the purchaser, if the securities are offered or
sold to such purchaser by means of any of the following
communications, the undersigned Registrant will be a seller to
the purchaser and will be considered to offer or sell such
securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the
undersigned Registrant relating to the offering required to be
filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering
prepared by or on behalf of the undersigned Registrant or used
or referred to by the undersigned Registrant;
(iii) The portion of any other free writing prospectus
relating to the offering containing material information about
the undersigned Registrant or its securities provided by or on
behalf of the undersigned Registrant; and
(iv) Any other communication that is an offer in the
offering made by the undersigned Registrant to the purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, Cavium Networks, Inc. has duly caused this Amendment
No. 4 to the Registration Statement on
Form S-1
to be signed on its behalf by the undersigned, thereunto duly
authorized, in Mountain View, California on the
12
th
day of April, 2007.
Cavium Networks, Inc.
Syed Ali
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment No. 4 to the Registration Statement
on
Form S-1
has been signed by the following persons in the capacities and
on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
/s/ Syed
Ali
Syed
Ali
|
|
President, Chief Executive
Officer and Director
(Principal Executive Officer)
|
|
April 12, 2007
|
|
|
|
|
|
/s/ Arthur
Chadwick
Arthur
Chadwick
|
|
Chief Financial Officer and Vice
President of Finance and Administration
(Principal Financial
and Accounting Officer)
|
|
April 12, 2007
|
|
|
|
|
|
*
Kris
Chellam
|
|
Director
|
|
April 12, 2007
|
|
|
|
|
|
*
John
Jarve
|
|
Director
|
|
April 12, 2007
|
|
|
|
|
|
*
Anthony
Pantuso
|
|
Director
|
|
April 12, 2007
|
|
|
|
|
|
*
C.N.
Reddy
|
|
Director
|
|
April 12, 2007
|
|
|
|
|
|
*
Anthony
Thornley
|
|
Director
|
|
April 12, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Syed
B. Ali
Syed
B. Ali
Attorney-in-Fact
|
|
|
|
|
II-6
EXHIBIT INDEX
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
*1.1
|
|
Form of Underwriting Agreement
|
3.1
|
|
Amended and Restated Certificate
of Incorporation of the Registrant, as currently in effect
|
3.3
|
|
Form of Amended and Restated
Certificate of Incorporation of the Registrant, to be in effect
upon completion of this offering
|
3.4
|
|
Bylaws of the Registrant, as
currently in effect
|
3.5
|
|
Form of Amended and Restated
Bylaws of the Registrant, to be in effect upon completion of
this offering
|
4.1
|
|
Reference is made to
exhibits 3.1, 3.3 and 3.4
|
*4.2
|
|
Form of the Registrants
Common Stock Certificate
|
4.3
|
|
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
|
*5.1
|
|
Opinion of Cooley Godward Kronish
LLP
|
10.1
|
|
Form of Indemnity Agreement to be
entered into between the Registrant and its directors and
officers
|
10.2
|
|
2001 Stock Incentive Plan and
forms of agreements thereunder
|
10.3
|
|
2007 Equity Incentive Plan, to be
in effect upon completion of this offering
|
10.4
|
|
Form of Option Agreement, Form of
Option Grant Notice and Form of Exercise Notice under 2007
Equity Incentive Plan
|
10.5
|
|
Executive Employment Agreement,
dated January 2, 2001, between the Registrant and Syed Ali
|
10.6
|
|
Employment Offer Letter, dated
December 27, 2004, between the Registrant and Arthur
Chadwick
|
10.7
|
|
Employment Offer Letter, dated
January 22, 2001, between the Registrant and Anil
K. Jain
|
10.8
|
|
Employment Offer Letter, dated
May 6, 2003, between the Registrant and Rajiv Khemani
|
10.9
|
|
Letter Agreement, dated
November 4, 2005, between the Registrant and Kris Chellam
|
10.10
|
|
Letter Agreement, dated
September 1, 2006, between the Registrant and Anthony
Thornley
|
10.11
|
|
Lease Agreement, dated
April 15, 2005, between the Registrant and MB Technology
Park, LLC
|
10.12
|
|
Loan and Security Agreement, dated
October 6, 2005, between the Registrant and Silicon Valley
Bank
|
10.13
|
|
Loan Modification Agreement, dated
January 3, 2007, between the Registrant and Silicon Valley
Bank
|
10.14
|
|
Second Loan Modification
Agreement, dated January 25, 2007, between the Registrant
and Silicon Valley Bank.
|
10.15
|
|
Term Loan and Security Agreement,
dated October 6, 2005, between the Registrant, Silicon
Valley Bank and Gold Hill Lending 03, L.P.
|
10.16
|
|
First Amendment to Loan and
Security Agreement, dated October 24, 2006, between the
Registrant, Silicon Valley Bank and Gold Hill Lending 03, L.P.
|
10.17
|
|
Form of Warrant to Purchase Shares
of Series B preferred stock
|
10.18
|
|
Form of Warrant to Purchase Shares
of Series D preferred stock
|
10.19
|
|
Consent, Assignment, Assumption
and Amendment Agreement, dated February 5, 2007, between the
Registrant, Silicon Valley Bank and Gold Hill Lending 03, L.P.
|
10.20
|
|
Letter Agreement, dated March 15,
2007, between the Registrant and AVM Capital, L.P.
|
#10.21
|
|
Master Technology License
Agreement, dated December 30, 2003, between the Registrant
and MIPS Technologies, Inc.
|
21.1
|
|
Subsidiaries of the Registrant
|
23.1
|
|
Consent of PricewaterhouseCoopers
LLP, independent registered public accounting firm
|
*23.2
|
|
Consent of Cooley Godward Kronish
LLP (included in exhibit 5.1)
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
23.3
|
|
Consent of Duff & Phelps LLC
|
24.1
|
|
Power of Attorney
|
99.1
|
|
Report of PricewaterhouseCoopers
LLP
|
|
|
|
*
|
|
To be filed by amendment.
|
|
|
|
Previously filed.
|
|
#
|
|
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.
|