We have
revised the risk factors that relate to our business, as set forth below. These risks include any material changes to and supersede the risks previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended
September 28, 2012. We encourage investors to review these risk factors, as well as those contained under Forward-Looking Statements preceding Part I of this Quarterly Report on Form 10-Q.
Our business, financial condition and operating results can be affected by a number of factors, including those listed below, any one of
which could cause our actual results to vary materially from recent results or from our anticipated future results. Any of these risks could also materially and adversely affect our business, financial condition or the price of our common stock or
other securities.
Our operating results may be adversely impacted by worldwide political and economic uncertainties and specific
conditions in the markets we address, including the cyclical nature of and volatility in the semiconductor industry.
We operate in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time to
time, the semiconductor industry has experienced significant downturns characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. The semiconductor industry also periodically experiences increased
demand and production capacity constraints, which may affect our ability to ship products. Furthermore, during challenging economic times, our customers and vendors may face issues gaining timely access to sufficient credit, which could impact their
ability to make timely payments to us. As a result, we may experience growth patterns that are different than the end demand for products, particularly during periods of high volatility. Accordingly, our operating results may vary significantly as a
result of the general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.
We
cannot predict the timing, strength or duration of any economic slowdown or the impact it will have on our customers, our vendors or us. The combination of our lengthy sales cycle coupled with challenging macroeconomic conditions could have a
compound impact on our business. The impact of market volatility is not limited to revenue, but may also affect our product gross margins and other financial metrics. Any downturns in the semiconductor industry could be severe and prolonged, and any
failure of the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenue and harm our business, financial condition and results of operations.
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Our operating results are subject to substantial quarterly and annual fluctuations.
We have incurred significant losses in prior periods. Our net revenue and operating results have fluctuated in the
past and may fluctuate in the future and we may incur losses and negative cash flows in future periods. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others:
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changes in end-user demand for the products manufactured and sold by our customers;
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customers could accelerate their demand to earn financial incentives;
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the effects of competitive pricing pressures, including decreases in average selling prices of our products;
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the gain or loss of significant customers;
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market acceptance of our products and our customers products;
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our ability to timely develop, introduce, market and support new products and technologies;
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availability and cost of products from our suppliers;
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intellectual property disputes;
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the timing of receipt, reduction or cancellation of significant orders by customers;
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fluctuations in the levels of component inventories held by our customers and changes in our customers inventory management practices;
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shifts in our product mix and the effect of maturing products;
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the timing and extent of product development costs;
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new product and technology introductions by us or our competitors;
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fluctuations in manufacturing yields; and
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significant warranty claims, including those not covered by our suppliers.
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The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly
or annual operating results.
We have substantial cash requirements to fund our operations, research and development efforts and capital
expenditures. Our capital resources are limited and capital needed for our business may not be available when we need it.
We have used significant cash to fund our operating activities. Our principal sources of liquidity are our existing cash balances, cash generated from product sales and our revolving credit facility with
Silicon Valley Bank (SVB). We believe that our existing cash balances, along with cash expected to be generated from operations and our revolving credit facility, will be sufficient to fund our operations, research and development efforts,
anticipated capital expenditures, working capital and other financing requirements, including principal and interest payments on our debt obligations, for at least the next 12 months. We have completed transactions that involved the issuance of
equity and the issuance or incurrence of indebtedness, including credit facilities. Even after completing these transactions, we may need additional capital in the future and may not have access to additional sources of capital on favorable terms or
at all. If we raise additional funds through the issuance of equity, equity-based or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of
their ownership interests. In addition, there can be no assurance that we will continue to benefit from the sale or licensing of intellectual property as we have in previous periods.
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Our review, in consultation with Morgan Stanley, of strategic alternatives potentially available to us
may not result in an increase in our stock price or in improvements to our operating results, liquidity or financial condition. Moreover, the review could distract our management and employees and create substantial uncertainty among customers,
suppliers and other third parties with whom we conduct business, any of which could adversely affect our business, operating results, or financial condition.
On April 30, 2013, we issued a press release announcing that we have engaged Morgan Stanley & Co. LLC to assist us in evaluating various strategic alternatives available to our company. The
strategic review will require the expenditure of significant time and resources by our company and management team and may not result in an increase in stockholder value or in improvements to our operating results or financial condition. The
strategic review could also distract our executives, employees, and board of directors from other matters relating to the operation of our businesses and affect our ability to attract and retain new executives or key employees. In addition, our
announcement of the strategic review may have created and may continue to create uncertainty among current and potential employees, suppliers and customers. In particular, these suppliers and customers could question our commitment to continuing
particular product lines or markets or operating as an independent business. As a result of these factors, the announcement could potentially undermine our business and have a material adverse effect on our results of operations or financial
condition. In addition, the announcement and subsequent developments could cause increased volatility in our stock price.
Our success
depends on our ability to timely develop competitive new products in new markets and keep abreast of the rapid technological changes in our market.
Our operating results will depend largely on our ability to continue to timely introduce new and enhanced semiconductor products in new markets, as well as our ability to keep abreast of rapid
technological changes in our markets. Our products could become obsolete sooner than we expect because of faster than anticipated, or unanticipated, changes in one or more of the technologies related to our products. The introduction of new
technology representing a substantial advance over current technology could adversely affect demand for our existing products. Currently accepted industry standards are also subject to change, which may also contribute to the obsolescence of our
products. If we are unable to develop and introduce new or enhanced products in a timely manner, our business may be adversely affected.
Successful product development and introduction depends on numerous factors, including, among others:
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our ability to anticipate customer and market requirements and changes in technology and industry standards;
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our ability to accurately define new products;
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our ability to complete development of new products, and bring our products to market, on a timely basis;
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our ability to differentiate our products from offerings of our competitors; and
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overall market acceptance of our products.
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We may not have sufficient resources to make the substantial investment in research and development in order to develop and bring to market new and enhanced products, particularly if we are required to
take further cost reduction actions. Furthermore, we are required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We may be unable
to timely develop and introduce new or enhanced products, our products may not satisfy customer requirements or achieve market acceptance, or we may be unable to anticipate new industry standards and technological changes. We also may not be able to
respond successfully to new product announcements and introductions by competitors.
Research and development projects may
experience unanticipated delays related to our internal design efforts. New product development also requires the production of photomask sets and the production and testing of sample devices. In the event we experience delays in obtaining these
services from the wafer fabrication and assembly and test vendors on whom we rely, our product introductions may be delayed and our revenue and results of operations may be adversely affected.
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The price of our common stock may fluctuate significantly.
The price of our common stock is volatile and may fluctuate significantly. There can be no assurance as to the prices at which our common
stock will trade or that an active trading market in our common stock will be sustained in the future. The market price at which our common stock trades may be influenced by many factors, including:
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our operating and financial performance and prospects, including our ability to achieve sustained profitability;
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our limited capital resources and availability of capital needed for our business;
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the depth and liquidity of the market for our common stock which can impact, among other things, the volatility of our stock price and the
availability of market participants to borrow shares;
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investor perception of us and the industry in which we operate;
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the recently completed acquisition of picoChip may not be accretive and may cause dilution to our earnings per share;
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the level of research coverage of our common stock;
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changes in earnings estimates or buy/sell recommendations by analysts;
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the issuance and sale of additional shares of common stock;
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the recently completed sale and issuance of convertible senior notes;
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limitations placed on our investors by our stockholders rights agreement, which is designed to protect our net operating loss carryforwards;
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general financial and other market conditions; and
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domestic and international economic conditions.
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In addition, public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has
significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely
affect the market price of our common stock. If we do not meet the requirements for continued quotation on the Nasdaq Global Select Market (NASDAQ), our common stock could be delisted which would adversely affect the ability of investors to sell
shares of our common stock and could otherwise adversely affect our business.
Our debt obligations could adversely affect our financial
condition.
In recent periods, our debt obligations have increased. As of June 28, 2013, we had $47.0 million in
aggregate principal amount of convertible senior notes outstanding. In addition, our loan and security agreement with SVB that was entered into in connection with the picoChip acquisition includes: (i) a term loan facility of $15.0 million; and
(ii) a revolving credit facility of up to $20.0 million. As of June 28, 2013, the outstanding balance on the term loan was $14.6 million and the outstanding balance on the revolving credit facility was $13.5 million. Our debt obligations
may adversely impact our financial condition. For example, our debt obligations may:
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require us to use a large portion of our cash flow to repay our indebtedness thereunder if we fail to comply with the restrictive financial and
operating covenants in the loan and security agreement or if other events of default occur, which may have a material adverse effect on our liquidity and will reduce the availability of our cash flow to fund working capital, capital expenditures,
acquisitions or strategic business opportunities, research and development expenditures and other general business activities;
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limit our future ability to raise funds for working capital, capital expenditures, acquisitions or strategic business opportunities, research and
development expenditures and other general business activities; and
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contribute to a future downgrade of our credit rating, which could increase future borrowing costs.
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Our ability to meet our payment obligations under our debt obligations depends on our ability to generate significant cash flow in the
future. There can be no assurance that our business will generate cash flow from operations, or that additional capital will be available to us, in an amount sufficient to enable us to meet our payment obligations under our debt obligations and to
fund our other liquidity needs. If we are unable to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional
capital. If we were unable to implement one or more of these alternatives, we may be unable to meet our debt payment obligations.
In
the second quarter of fiscal 2013, we recorded an impairment charge on the goodwill we obtained through the acquisition of picoChip. Any further impairment in the carrying value of goodwill would negatively impact our consolidated results of
operations and/or financial position.
Goodwill is reviewed for impairment on an annual basis in the fourth fiscal
quarter or whenever events occur or circumstances change that would more likely than not reduce the fair value of our wireless infrastructure reporting unit below its carrying amount. Fair value is determined based on the discounted cash flows and
comparable market values of our reporting unit. If the fair value of the reporting unit is less than its carrying value, the fair value of the implied goodwill is calculated as the difference between the fair value of our reporting unit and the fair
value of the underlying assets and liabilities, excluding goodwill. In the event an impairment to goodwill is identified, an immediate charge to earnings in an amount equal to the excess of the carrying value over the implied fair value would be
recorded, which would adversely affect our operating results. Determining market values using a discounted cash flow method requires that we make significant estimates and assumptions, including long-term projections of cash flows, market conditions
and appropriate market rates. Our judgments are based on historical experience, current market trends and other information. In estimating future cash flows, we rely on internally generated forecasts for operating profits and cash flows, including
capital expenditures.
Changes in estimates of future cash flows caused by items such as unforeseen events or changes in
market conditions could negatively affect our reporting units fair value and result in an impairment charge. Factors that could cause us to change our estimates of future cash flows include a prolonged economic crisis, successful efforts by
our competitors to gain market share in our targeted markets, our inability to compete effectively with other semiconductor manufacturers or our inability to maintain price competitiveness. An impairment of a significant portion of our goodwill
could materially adversely affect our financial condition and results of operations.
During the second quarter of fiscal
2013, we performed an interim evaluation of goodwill, definite-lived intangibles and indefinite-lived intangibles as we believed there were impairment triggering circumstances which warranted an evaluation. These circumstances consisted of actual
and projected decreases in net revenue due to slower than expected deployments of 3G small cell base stations, as compared to prior projections at the time of our last goodwill impairment analysis in July 2012. We may be required to incur
significant expenditures to offset the delay in our anticipated increases to revenue.
Given the triggering circumstances, we
performed step one of the impairment test for goodwill and determined that the fair value of the wireless infrastructure reporting unit was lower than the carrying value. The failure of step one of the goodwill impairment test triggered a step two
impairment analysis, which resulted in an impairment charge of $30.5 million for goodwill related to our wireless infrastructure reporting unit.
The loss of one or more key customers or distributors, or the diminished demand for our products from a key customer could significantly reduce our net revenue, gross margin and results of
operations.
A relatively small number of end customers and distributors have accounted for a significant portion of
our net revenue in any particular period. There has been an increasing trend toward industry consolidation in our markets in recent years, particularly among major network equipment and telecommunications companies. Industry consolidation could
decrease the number of significant customers for our products thereby increasing our reliance on key customers. In addition, industry consolidation has generally led, and may continue to lead, to pricing pressures and loss of market
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share. We have no long-term volume purchase commitments from our key customers. One or more of our key customers or distributors may discontinue operations as a result of consolidation, financial
instability, liquidation or otherwise. Reductions, delays and cancellation of orders from our key customers or the loss of one or more key customers could significantly reduce our net revenue and results of operations. We cannot assure you that our
current customers will continue to place orders with us, that orders by existing customers will continue at current or historical levels or that we will be able to obtain orders from new customers.
We may not be able to attract and retain qualified personnel necessary for the design, development, sale and support of our products. Our success
could be negatively affected if key personnel leave.
Our future success depends on our ability to attract, retain and
motivate qualified personnel, including executive officers and other key management, technical and support personnel. As the source of our technological and product innovations, our key technical personnel represent a significant asset. The
competition for such personnel can be intense in the semiconductor industry. We may not be able to attract and retain qualified management and other personnel necessary for the design, development, sale and support of our products.
In periods of poor operating performance, we have experienced, and may experience in the future, particular difficulty attracting and
retaining key personnel. If we are not successful in assuring our employees of our financial stability and our prospects for success, our employees may seek other employment, which may materially and adversely affect our business. We intend to
continue to expand our international business activities including expansion of design and operations centers abroad and may have difficulty attracting and maintaining international employees. The loss of the services of one or more of our key
employees, including Raouf Y. Halim, our chief executive officer, or certain key design and technical personnel, or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our ability to operate our
business.
Some of our engineers are foreign nationals working in the U.S. under work visas. The visas permit qualified
foreign nationals working in specialty occupations, such as certain categories of engineers, to reside in the U.S. during their employment. The number of new visas approved each year may be limited and may restrict our ability to hire additional
qualified technical employees. In addition, immigration policies are subject to change, and these policies have generally become more stringent since the events of September 11, 2001. Any additional significant changes in immigration laws,
rules or regulations may further restrict our ability to retain or hire technical personnel.
We are entirely dependent upon third
parties for the manufacture of our products and are vulnerable to their capacity constraints during times of increasing demand for semiconductor products.
We are entirely dependent upon outside wafer fabrication facilities, known as foundries, for wafer fabrication services. Our principal suppliers of wafer fabrication services are TSMC, Samsung Electronics
Co., Ltd. and Jazz Semiconductor, Inc. We are also dependent upon third parties, including Amkor and ASE, for the assembly and testing of all of our products. Under our fabless business model, our long-term revenue growth is dependent on our ability
to obtain sufficient external manufacturing capacity, including wafer production capacity. Periods of upturns in the semiconductor industry may be characterized by rapid increases in demand and a shortage of capacity for wafer fabrication and
assembly and test services.
The risks associated with our reliance on third parties for manufacturing services include:
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the lack of assured supply, potential shortages and higher prices;
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the effects of disputes or litigation involving our third-party foundries;
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limited control over delivery schedules, manufacturing yields, production costs and product quality; and
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the unavailability of, or delays in obtaining, products or access to key process technologies.
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Our standard lead time, or the time required to manufacture our products (including wafer
fabrication, assembly and testing), is typically 12 to 16 weeks. During periods of manufacturing capacity shortages, the foundries and other suppliers on whom we rely may devote their limited capacity to fulfill the production requirements of
other customers that are larger or better financed than we are, or who have superior contractual rights to enforce the manufacture of their products, including to the exclusion of producing our products.
Additionally, if we are required to seek alternative foundries or assembly and test service providers, we would be subject to longer lead
times, indeterminate delivery schedules and increased manufacturing costs, including costs to find and qualify acceptable suppliers. For example, if we choose to use a new foundry, the qualification process may take as long as six months over the
standard lead time before we can begin shipping products from the new foundry. Such delays could negatively affect our relationships with our customers.
Wafer fabrication processes are subject to obsolescence, and foundries may discontinue a wafer fabrication process used for certain of our products. In such event, we generally offer our customers a
last-time buy program to satisfy their anticipated requirements for our products. Any unanticipated discontinuation of a wafer fabrication process on which we rely may adversely affect our revenue and our customer relationships.
The foundries and other suppliers on whom we rely may experience financial difficulties or suffer disruptions in their
operations due to causes beyond our control, including deteriorations in general economic conditions, labor strikes, work stoppages, electrical power outages, fire, earthquake, flooding or other natural disasters. Certain of our suppliers
manufacturing facilities are located near major earthquake fault lines in the Asia-Pacific region and in California. Due to cross dependencies, supply chain disruptions could negatively impact demand of our products, including, for example, if our
customers are unable to obtain sufficient supply of other components required for their end product. In the event of a disruption of the operations of one or more of our suppliers, we may not have an alternate source immediately available. Such an
event could cause significant delays in shipments until we are able to shift the products from an affected facility or supplier to another facility or supplier. The manufacturing processes we rely on are specialized and are available from a limited
number of suppliers. Alternate sources of manufacturing capacity, particularly wafer production capacity, may not be available to us on a timely basis. Even if alternate manufacturing capacity is available, we may not be able to obtain it on
favorable terms, or at all. Difficulties or delays in securing an adequate supply of our products on favorable terms, or at all, could impair our ability to meet our customers requirements and have a material adverse effect on our operating
results.
In addition, the highly complex and technologically demanding nature of semiconductor manufacturing has caused
foundries to experience, from time to time, lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new process technologies. Lower than anticipated
manufacturing yields may affect our ability to fulfill our customers demands for our products on a timely basis. Moreover, lower than anticipated manufacturing yields may adversely affect our gross margin and our results of operations.
We are subject to intense competition.
The communications semiconductor industry in general, and the markets in which we compete in particular, are intensely competitive. We compete worldwide with a number of U.S. and international
semiconductor manufacturers that are both larger and smaller than we are in terms of resources and market share. We currently face significant competition in our markets and expect that intense price and product competition will continue. This
competition has resulted, and is expected to continue to result, in declining average selling prices for our products.
Many
of our current and potential competitors have certain advantages over us, including:
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stronger financial position and liquidity;
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longer, or stronger, presence in key markets;
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greater name recognition;
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more secure supply chain;
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lower cost alternatives to our products;
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access to larger customer bases; and
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significantly greater sales and marketing, manufacturing, distribution, technical and other resources.
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As a result, these competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements or
may be able to devote greater resources to the development, promotion and sale of their products than we can. Moreover, we have incurred substantial operating losses and we may in the future incur losses in future periods. We believe that financial
stability of suppliers is an important consideration in our customers purchasing decisions. If our OEM customers perceive that we lack adequate financial stability, they may choose semiconductor suppliers that they believe have a stronger
financial position or liquidity.
Current and potential competitors also have established or may establish financial or
strategic relationships among themselves or with our existing or potential customers, resellers or other third parties. These relationships may affect customers purchasing decisions. Accordingly, it is possible that new competitors or
alliances among competitors could emerge and rapidly acquire significant market share. We may not be able to compete successfully against current and potential competitors.
We are subject to the risks of doing business internationally.
A
significant part of our strategy involves our continued pursuit of growth opportunities in a number of international markets. We market, sell, design and service our products internationally. Products shipped to international destinations, primarily
in the Asia-Pacific region and Europe, were approximately 80% of our net revenue for the first nine months of fiscal 2013. China is a particularly important international market for us, as approximately 30% of our net revenue for the first nine
months of fiscal 2013 came from customers in China. In addition, we have design centers, customer support centers and rely on suppliers, located outside the U.S., including foundries and assembly and test service providers located in the
Asia-Pacific region. We intend to continue to expand our international business activities and may open other design centers and customer support centers abroad. Our international sales and operations are subject to a number of risks inherent in
selling and operating abroad which could adversely impact our international sales and could make our international operations more expensive. These include, but are not limited to, risks regarding:
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currency exchange rate fluctuations;
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local economic and political conditions;
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difficulties in staffing and managing foreign operations;
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potential hostilities and changes in diplomatic and trade relationships;
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natural disasters, including earthquakes or flooding;
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restrictive governmental actions (such as restrictions on the transfer or repatriation of funds and trade protection measures, including export
duties and quotas and customs duties and tariffs);
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changes in legal or regulatory requirements;
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difficulty in obtaining distribution and support;
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disruptions of capital and trading markets;
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greater difficulty in accounts receivable collection and longer payment cycles;
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the laws and policies of the U.S. and other countries affecting trade, foreign investment and loans and import or export requirements, including
the Foreign Corrupt Practices Act and similar rules and regulations;
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government export regulations as they apply to the encryption or other features contained in some of our products, which could limit our ability
to manufacture the affected products at foreign foundries or ship these products to certain customers;
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tariffs, duties and other import or export restrictions imposed by foreign governments on components that we obtain from non-domestic supplier;
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existing or future environmental laws and regulations governing, among other things, air emissions, wastewater discharges, the contents of our
products, the use, handling and disposal of hazardous substances and wastes, soil and groundwater contamination and employee health and safety;
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limitations on our ability under local laws to protect our intellectual property; and
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cultural differences in the conduct of business.
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Because most of our international sales are currently denominated in U.S. dollars, our products could become less competitive in international markets if the value of the U.S. dollar increases relative to
foreign currencies. As we continue to shift a portion of our operations offshore, more of our expenses are incurred in currencies other than those in which we bill for the related services. An increase in the value of certain currencies, such as the
Euro, Japanese yen, Ukrainian hryvnia and Indian rupee, against the U.S. dollar could increase costs of our offshore operations by increasing labor and other costs that are denominated in local currencies.
We may in the future enter into foreign currency forward exchange contracts to mitigate the risk of loss from currency exchange rate
fluctuations for foreign currency commitments entered into in the ordinary course of business. We do not enter into foreign currency forward exchange contracts for other purposes. Our financial condition and results of operations could be adversely
affected by currency fluctuations.
Our business is subject to various governmental regulations, and compliance with these regulations
may cause us to incur significant expenses. If we fail to maintain compliance with applicable regulations, we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties.
Our business is subject to various international and U.S. laws and other legal requirements, including packaging,
product content, labor and import/export regulations. These regulations are complex, change frequently and have generally become more stringent over time. We may be required to incur significant costs to comply with these regulations or to remedy
violations. Any failure by us to comply with applicable government regulations could result in cessation of our operations or portions of our operations, product recalls or impositions of fines and restrictions on our ability to conduct our
operations. In addition, because many of our products are regulated or sold into regulated industries, we must comply with additional regulations in marketing our products.
Our products and operations are also subject to the rules of industrial standards bodies, like the International Standards Organization, as well as regulation by other agencies, such as the U.S. Federal
Communications Commission. If we fail to adequately address any of these rules or regulations, our business could be harmed.
For example, the SEC recently adopted a final rule to implement Section 1502 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, which requires new disclosures concerning the use of conflict minerals, generally tantalum, tin, gold, or tungsten, that originated in the Democratic Republic of the Congo or an adjoining country. These disclosures are required
whether or not these products containing conflict minerals are manufactured by us or third parties. Verifying the source of any conflict minerals in our products will create additional costs in order to comply with the new disclosure requirements
and we may not be able to certify that the metals in our products are conflict free, which may create issues with our customers. In addition, the new rule may affect the pricing, sourcing and availability of minerals used in the manufacture of our
products.
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We must conform the manufacture and distribution of our products to various laws and adapt
to regulatory requirements in all countries as these requirements change. If we fail to comply with these requirements in the manufacture or distribution of our products, we could be required to pay civil penalties, face criminal prosecution and, in
some cases, be prohibited from distributing our products in commerce until the products or component substances are brought into compliance.
We may be subject to claims, or we may be required to defend and indemnify customers against claims, of infringement of third-party intellectual
property rights or demands that we, or our customers, license third-party technology, which could result in significant expense.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. From time to time, third parties have asserted and may in the future assert patent,
copyright, trademark and other intellectual property rights against technologies that are important to our business. The resolution or compromise of any litigation or other legal process to enforce such alleged third party rights, including claims
arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical
personnel.
We may not prevail in any such litigation or other legal process or we may compromise or settle such claims
because of the complex technical issues and inherent uncertainties in intellectual property disputes and the significant expense in defending such claims. If litigation or other legal process results in adverse rulings, we may be required to:
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pay substantial damages for past, present and future use of the infringing technology;
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cease the manufacture, use or sale of infringing products;
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discontinue the use of infringing technology;
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expend significant resources to develop non-infringing technology;
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pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology;
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license technology from the third party claiming infringement, which license may not be available on commercially reasonable terms, or at all;
or
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relinquish intellectual property rights associated with one or more of our patent claims, if such claims are held invalid or otherwise
unenforceable.
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If we are not successful in protecting our intellectual property rights, it may harm our ability to
compete.
We rely primarily on patent, copyright, trademark and trade secret laws, as well as employee and third-party
nondisclosure and confidentiality agreements and other methods, to protect our proprietary technologies and processes. We may be required to engage in litigation to enforce or protect our intellectual property rights, which may require us to expend
significant resources and to divert the efforts and attention of our management from our business operations; in particular:
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the steps we take to prevent misappropriation or infringement of our intellectual property may not be successful;
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any existing or future patents may be challenged, invalidated or circumvented; or
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the measures described above may not provide meaningful protection.
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Despite the preventive measures and precautions that we take, a third party could copy or
otherwise obtain and use our technology without authorization, develop similar technology independently or design around our patents. We generally enter into confidentiality agreements with our employees, consultants and strategic partners. We also
try to control access to and distribution of our technologies, documentation and other proprietary information. Despite these efforts, internal or external parties may attempt to copy, disclose, obtain or use our products, services or technology
without our authorization. Also, former employees may seek employment with our business partners, customers or competitors, and the confidential nature of our proprietary information may not be maintained in the course of such future employment.
Further, in some countries outside the U.S., patent protection is not available or not reliably enforced. Some countries that do allow registration of patents do not provide meaningful redress for patent violations. As a result, protecting
intellectual property in those countries is difficult and competitors may sell products in those countries that have functions and features that infringe on our intellectual property.
Because of the lengthy sales cycles of many of our products, we may incur significant expenses before we generate any revenue related to those products.
Our customers generally need six months or longer to test and evaluate our products and an additional nine months or more to begin volume
production of equipment that incorporates our products. These lengthy periods also increase the possibility that a customer may decide to cancel or change product plans, which could reduce or eliminate sales to that customer. As a result of this
lengthy sales cycle, we may incur significant research and development and selling, general and administrative expenses before we generate any revenue from new products. We may never generate the anticipated revenue if our customers cancel or change
their product plans as customers may increasingly do if economic conditions continue to deteriorate.
Uncertainties involving the
ordering and shipment of our products could adversely affect our business.
Our sales are typically made pursuant to
individual purchase orders and we generally do not have long-term supply arrangements with our customers. Generally, our customers may cancel orders until 30 days prior to shipment. In addition, we sell a substantial portion of our products
through distributors, some of whom have a right to return unsold products to us. Sales to distributors accounted for approximately 69% of our revenue for the third quarter of fiscal 2013.
Because of the significant lead times for wafer fabrication and assembly and test services, we routinely purchase inventory based on
estimates of end-market demand for our customers products. End-market demand may be subject to dramatic changes and is difficult to predict. End-market demand is highly influenced by the timing and extent of carrier capital expenditures which
may decrease due to general economic conditions, and uncertainty, over which we have no control. The difficulty in predicting demand may be compounded when we sell to OEMs indirectly through distributors or contract manufacturers, or both, as our
forecasts of demand are then based on estimates provided by multiple parties. In addition, our customers may change their inventory practices on short notice for any reason. The cancellation or deferral of product orders, the return of previously
sold products or overproduction due to the failure of anticipated orders to materialize could result in our holding excess or obsolete inventory, which could result in write-downs of inventory. Conversely, if we fail to anticipate inventory needs we
may be unable to fulfill demand for our products, resulting in a loss of potential revenue.
If network infrastructure OEMs do not
design our products into their equipment, we will be unable to sell those products. Moreover, a design win from a customer does not guarantee future sales to that customer.
Our products are not sold directly to the end-user but are components of other products. As a result, we rely on network infrastructure
OEMs to select our products from among alternative offerings to be designed into their equipment. We may be unable to achieve these design wins. Without design wins from OEMs, we would be unable to sell our products. Once an OEM designs
another suppliers semiconductors into one of its product platforms, it is more difficult for us to achieve future design wins with that OEMs product platform because changing suppliers involves significant cost, time, effort and risk for
the OEM. Achieving a design win with a customer does not ensure that we will receive significant revenue from that customer, and we may be unable to convert design wins into actual sales. Even after a design win, the customer is not obligated to
purchase our products and can choose at any time to stop using our products if, for example, its own products are not commercially successful.
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The complexity of our products may lead to errors, defects and/or bugs, any of which could subject us
to significant costs or damages and adversely affect market acceptance of our products.
Although we, our customers and
our suppliers rigorously test our products, our products are complex and may contain errors, defects or bugs when first introduced or as new versions are released. We have in the past experienced, and may in the future experience, errors, defects
and bugs. If any of our products contain production defects or reliability, safety, quality or compatibility problems that are significant to our customers, our reputation may be damaged and customers may be reluctant to buy our products, which
could adversely affect our ability to retain existing customers and attract new customers. In addition, these defects or bugs could interrupt or delay sales of affected products to our customers, which could adversely affect our results of
operations.
If defects or bugs are discovered after commencement of commercial production of a new product, we may be
required to make significant expenditures of capital and other resources to resolve the problems. This could result in significant additional development costs and the diversion of technical and other resources from our other development efforts. We
could also incur significant costs to repair or replace defective products, and we could be subject to claims for damages by our customers or others against us. We could also be exposed to product liability claims or indemnification claims by our
customers. These costs or damages could have a material adverse effect on our financial condition and results of operations.
We may
make business acquisitions or investments, which involve significant risk.
In addition to the acquisition of picoChip,
we may, from time to time, make acquisitions, enter into alliances or make investments in other businesses to complement our existing product offerings, augment our market coverage or enhance our technological capabilities. However, any such
transactions could result in:
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issuances of equity securities dilutive to our existing stockholders;
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substantial cash payments;
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the incurrence of substantial debt and assumption of unknown liabilities;
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large one-time write-offs;
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amortization expenses related to intangible assets;
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a limitation on our ability to use our net operating loss carryforwards;
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the diversion of managements time and attention from operating our business to acquisition integration challenges;
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adverse tax consequences; and
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the potential loss of key employees, customers and suppliers of the acquired business.
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Additionally, in periods subsequent to an acquisition, we must evaluate goodwill and acquisition-related intangible assets for
impairment. If such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. As discussed above, a goodwill and asset impairment charge was recorded during the second quarter of fiscal 2013
related to our picoChip acquisition.
Integrating acquired organizations and their products and services may be expensive,
time-consuming and a strain on our resources and our relationships with employees, customers and suppliers, and ultimately may not be successful. The benefits or synergies we may expect from the acquisition of complementary or supplementary
businesses may not be realized to the extent or in the time frame we initially anticipate. Some of the risks that may affect our ability to successfully integrate acquired companies include those associated with:
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failure to successfully further develop the acquired products or technology;
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conforming the acquired companys standards, policies, processes, procedures and controls with our operations;
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coordinating new product and process development, especially with respect to highly complex technologies;
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loss of key employees or customers of the acquired company;
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hiring additional management and other critical personnel;
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in the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic,
currency, political and regulatory risks associated with specific countries;
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increasing the scope, geographic diversity and complexity of our operations;
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consolidation of facilities, integration of the acquired companys accounting, human resource and other administrative functions and coordination
of product, engineering and sales and marketing functions;
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the geographic distance between the companies;
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liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws,
commercial disputes, tax liabilities and other known and unknown liabilities; and
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litigation or other claims in connection with the acquired company, including claims for terminated employees, customers, former stockholders or other
third parties.
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Substantial sales of the shares of our common stock issuable upon conversion of our convertible senior
notes or substantial sales of the shares of our common stock issued in connection with the picoChip acquisition could adversely affect our stock price or our ability to raise additional financing in the public capital markets.
We have $32.0 million aggregate principal amount of convertible senior notes outstanding. These notes are convertible at any time, at the
option of the holder, into a total of approximately 8.2 million shares of our common stock. In connection with the acquisition of picoChip, we issued an aggregate of approximately 5.2 million shares of our common stock to the stockholders
of picoChip. The conversion of the notes and subsequent sale of a substantial number of shares of our common stock related to the notes or the sale of a substantial number of the picoChip acquisition shares could also adversely affect demand for,
and the market price of, our common stock. Each of these transactions could adversely affect our ability to raise additional financing by issuing equity or equity-based securities in the public capital markets.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes may be limited.
As of September 28, 2012, we had net operating loss carryforwards of approximately $649.5 million for federal income tax
purposes. Furthermore, we acquired additional net operating loss carryforwards upon the acquisition of picoChip. As of December 31, 2011, picoChip had net operating loss carryforwards for U.S. federal and California income tax purposes of $1.5
million each and for U.K. corporation tax purposes of $28.9 million. Under Section 382 of the Internal Revenue Code, if a corporation undergoes an ownership change, the corporations ability to use its pre-change net operating
loss carryforwards and other pre-change tax attributes to offset its post-change income may be significantly limited. An ownership change is generally defined as a greater than 50% change in equity ownership by value over a three-year period. In
August 2009, our board of directors adopted a stockholders rights agreement that is designed to help preserve our ability to utilize fully certain tax assets primarily associated with net operating loss carryforwards under Section 382 of
the Internal Revenue Code. Even with this rights agreement in place, we may experience an ownership change in the future as a result of shifts in our stock ownership, including upon the issuance of our common stock, the exercise of stock options or
warrants or as a result of any conversion of our convertible notes into shares of our common stock, among other things. If we were to trigger an ownership change in the future, our ability to use any net operating loss carryforwards existing at that
time could be significantly limited.
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Our results of operations could vary as a result of the methods, estimates and judgments we use in
applying our accounting policies.
The methods, estimates and judgments we use in applying our accounting policies have
a significant impact on our results of operations (see Critical Accounting Policies and Estimates in Part I, Item 2 of this Quarterly Report on Form 10-Q). Such methods, estimates and judgments are, by their nature, subject to
substantial risks, uncertainties and assumptions, and changes in rule making by various regulatory bodies. Factors may arise over time that lead us to change our methods, estimates and judgments. Changes in those methods, estimates and judgments
could significantly affect our results of operations.
Provisions in our organizational documents and stockholders rights agreements and
Delaware law will make it more difficult for someone to acquire control of us.
Our restated certificate of
incorporation, our amended and restated bylaws, our stockholders rights agreements and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by
our board of directors. Our restated certificate of incorporation and amended and restated bylaws include provisions such as:
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the division of our board of directors into three classes to be elected on a staggered basis, one class each year;
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the exclusive responsibility of the board of directors to fill vacancies on the board of directors;
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the ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;
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a prohibition on stockholder action by written consent;
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a requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at
any meeting of stockholders;
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a requirement that a supermajority vote be obtained to remove a director for cause or to amend or repeal certain provisions of our restated certificate
of incorporation or amended and restated bylaws;
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elimination of the right of stockholders to call a special meeting of stockholders; and
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a fair price provision.
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Our stockholders rights agreements give our stockholders certain rights that would substantially increase the cost of acquiring us in a transaction not approved by our board of directors.
In addition to the stockholders rights agreements and the provisions in our restated certificate of incorporation and amended and
restated bylaws, Section 203 of the Delaware General Corporation Law generally provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such
stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder
approval requirements are met.
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