UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

 

 

x

 

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

 

 

 

For the quarterly period ended April 28, 2007

 

 

 

or

 

 

 

o

 

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

 

For the transition period from              to              

Commission file number: 0-30877

Marvell Technology Group Ltd.
(Exact name of registrant as specified in its charter)

Bermuda

 

77-0481679

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

Canon’s Court, 22 Victoria Street, Hamilton HM 12, Bermuda
(441) 296-6395
(Address, including Zip Code, of Principal Executive Offices and
Registrant’s telephone number, including area code)

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

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

Large accelerated filer  x

Accelerated filer  o

Non-accelerated filer  o

 

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

The number of shares outstanding of the registrant’s common stock outstanding as of June 29, 2007 was 587,592,940 shares.

 




TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements:

 

 

 

 

Unaudited Condensed Consolidated Balance Sheets as of April 28, 2007 and January 27, 2007

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations for the three months ended April 28, 2007 and April 29, 2006

 

4

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended April 28, 2007 and April 29, 2006

 

5

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

6

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

36

Item 4.

 

Controls and Procedures

 

37

 

PART II. OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

 

38

Item 1A.

 

Risk Factors

 

41

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

58

Item 3.

 

Defaults Upon Senior Securities

 

58

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

58

Item 5.

 

Other Information

 

58

Item 6.

 

Exhibits

 

58

Signatures

 

59

Exhibit Index

 

60

 

2




PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

ASSETS

 

 

April 28,
2007

 

January 27,
2007

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

464,498

 

$

568,008

 

Short-term investments

 

128,445

 

28,372

 

Accounts receivable, net

 

282,865

 

328,283

 

Inventories

 

268,024

 

247,403

 

Prepaid expenses and other current assets

 

179,626

 

170,123

 

Deferred income taxes

 

5,846

 

5,846

 

Total current assets

 

1,329,304

 

1,348,035

 

Property and equipment, net

 

434,077

 

440,943

 

Goodwill

 

1,976,219

 

1,977,805

 

Acquired intangible assets

 

543,182

 

580,558

 

Other non-current assets

 

173,391

 

180,359

 

Total assets

 

$

4,456,173

 

$

4,527,700

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

255,524

 

$

244,959

 

Accrued liabilities

 

193,961

 

259,972

 

Accrued employee compensation

 

110,177

 

108,895

 

Income taxes payable

 

26,420

 

29,078

 

Deferred income

 

52,061

 

50,874

 

Current portion of capital lease obligations

 

4,545

 

17,408

 

Total current liabilities

 

642,688

 

711,186

 

Capital lease obligations, net of current portion

 

10,048

 

17,096

 

Non-current income taxes payable

 

122,043

 

116,777

 

Term loan obligations, long-term portion

 

393,750

 

394,750

 

Other long-term liabilities

 

66,325

 

60,707

 

Total liabilities

 

1,234,854

 

1,300,516

 

Commitments and contingencies (Note 6)

 

 

 

 

 

Shareholders’ equity:

 

 

 

 

 

Common stock

 

1,175

 

1,175

 

Additional paid-in capital

 

3,849,277

 

3,802,509

 

Accumulated other comprehensive income

 

223

 

28

 

Accumulated deficit

 

(629,356

)

(576,528

)

Total shareholders’ equity

 

3,221,319

 

3,227,184

 

Total liabilities and shareholders’ equity

 

$

4,456,173

 

$

4,527,700

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

3




MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

 

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Net revenue

 

$

635,050

 

$

521,196

 

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold

 

327,417

 

240,233

 

Research and development and other

 

234,133

 

129,228

 

Selling and marketing

 

50,392

 

38,862

 

General and administrative

 

23,988

 

18,558

 

Amortization of acquired intangible assets

 

37,320

 

17,351

 

Total operating costs and expenses

 

673,250

 

444,232

 

Operating (loss) income

 

(38,200

)

76,964

 

Interest and other income (expense)

 

1,319

 

8,215

 

Interest expense

 

(9,975

)

(599

)

(Loss) income before income taxes

 

(46,856

)

84,580

 

Provision for income taxes

 

5,972

 

15,863

 

(Loss) income before change in accounting principle

 

(52,828

)

68,717

 

Cumulative effect of change in accounting principle, net of tax effect (Note 7)

 

 

8,846

 

Net (loss) income

 

$

(52,828

)

$

77,563

 

 

 

 

 

 

 

Basic (loss) income per share:

 

 

 

 

 

(Loss) income before change in accounting principle, net of tax effect

 

$

(0.09

)

$

0.12

 

Cumulative effect of change in accounting principle, net of tax effect

 

 

0.01

 

Basic net (loss) income per share

 

$

(0.09

)

$

0.13

 

Shares used in basic per share computation

 

587,426

 

583,702

 

 

 

 

 

 

 

Diluted (loss) income per share:

 

 

 

 

 

(Loss) income before change in accounting principle, net of tax effect

 

$

(0.09

)

$

0.11

 

Cumulative effect of change in accounting principle, net of tax effect

 

 

0.01

 

Diluted net (loss) income per share

 

$

(0.09

)

$

0.12

 

Shares used in diluted per share computation

 

587,426

 

639,516

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

4




MARVELL TECHNOLOGY GROUP LTD.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(52,828

)

$

77,563

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Cumulative effect of change in accounting principle, net of tax effect

 

 

(8,846

)

Depreciation and amortization

 

26,530

 

15,615

 

Stock-based compensation

 

46,768

 

48,762

 

Amortization of acquired intangible assets

 

37,320

 

17,351

 

Excess tax benefits from stock-based compensation

 

 

(697

)

Changes in assets and liabilities, net of acquisition:

 

 

 

 

 

Accounts receivable

 

45,418

 

(48,372

)

Inventories

 

(20,621

)

8,729

 

Prepaid expenses and other assets

 

11,820

 

(25,799

)

Accounts payable

 

12,523

 

(45,868

)

Accrued liabilities and other

 

(57,833

)

2,500

 

Accrued employee compensation

 

1,282

 

(8,222

)

Income taxes payable

 

2,608

 

15,100

 

Deferred income

 

1,187

 

(1,133

)

Net cash provided by operating activities

 

54,174

 

46,683

 

Cash flows from investing activities:

 

 

 

 

 

Cash paid for acquisition

 

 

(24,008

)

Purchases of short-term investments

 

(107,953

)

(57,405

)

Sales and maturities of short-term investments

 

8,018

 

238,124

 

Acquisition costs

 

(974

)

(461

)

Purchases of technology licenses

 

(15,700

)

 

Purchases of property and equipment

 

(35,282

)

(28,948

)

Net cash (used in) provided by investing activities

 

(151,891

)

127,302

 

Cash flows from financing activities:

 

 

 

 

 

Proceeds from the issuance of common stock

 

 

10,904

 

Principal payments on capital lease and debt obligations

 

(5,793

)

(4,628

)

Excess tax benefits from stock-based compensation

 

 

697

 

Net cash (used in) provided by financing activities

 

(5,793

)

6,973

 

Net (decrease) increase in cash and cash equivalents

 

(103,510

)

180,958

 

Cash and cash equivalents at beginning of period

 

568,008

 

348,431

 

Cash and cash equivalents at end of period

 

$

464,498

 

$

529,389

 

Supplemental cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

7,542

 

$

599

 

Cash paid for income taxes,

 

$

2,971

 

$

271

 

Acquisition of property and equipment under capital lease obligations

 

$

 

$

3,212

 

Reversal of deferred stock-based compensation due to adoption of FAS 123R

 

$

 

$

61,987

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5




MARVELL TECHNOLOGY GROUP LTD.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. The Company and its Significant Accounting Policies

The Company

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

Basis of presentation

The Company’s fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year 2008 is comprised of a 53-week period and fiscal year 2007 is comprised of a 52-week period.

On February 21, 2006, the Board of Directors approved a 2 for 1 stock split of the Company’s common stock, to be effected pursuant to the issuance of additional shares as a stock dividend. The stock split was subject to shareholder approval of an increase in the Company’s authorized share capital at the Company’s 2006 Annual General Meeting.  On June 9, 2006, shareholders at the Company’s 2006 Annual General Meeting approved an increase in the authorized share capital by 500.0 million shares of common stock.  Stock certificates representing one additional share for each share held were delivered on July 24, 2006 (payment date) to all shareholders of record at the close of business on July 10, 2006 (record date).  All share and per share amounts in these consolidated financial statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.

The unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for annual financial statements. In the opinion of management, all adjustments consisting of normal and recurring entries considered necessary for a fair presentation of the results for the interim periods have been included in the Company’s financial position as of April 28, 2007, the results of its operations for the three months ended April 28, 2007 and April 29, 2006, and its cash flows for the three months ended April 28, 2007 and April 29, 2006. The January 27, 2007 condensed consolidated balance sheet data was derived from audited consolidated financial statements included in the Company’s 2007 Annual Report on Form 10-K but does not include all disclosures required by GAAP.

These condensed consolidated financial statements and related notes are unaudited and should be read in conjunction with the Company’s audited financial statements and related notes for the year ended January 27, 2007 included in the Company’s Annual Report on Form 10-K, as filed on July 2, 2007 with the Securities and Exchange Commission (“SEC”).  The results of operations for the three months ended April 28, 2007 are not necessarily indicative of the results that may be expected for any other interim period or for the full fiscal year.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including property and equipment, investment fair values, goodwill and other intangible assets, income taxes, and contingencies. In addition, the Company uses assumptions when employing the Black-Scholes option valuation model to calculate the fair value of stock-based awards granted. The Company bases its estimates of the carrying value of certain assets and liabilities on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, when these carrying values are not readily available from other sources. Actual results could differ from these estimates.

6




Principles of consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. The functional currency of the Company and its significant subsidiaries is the United States dollar.

Cash and cash equivalents

The Company considers all highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. Cash and cash equivalents also consist of cash on deposit with banks, money market funds and commercial deposits.

Investments

The Company’s marketable investments are classified as available-for-sale securities and are reported at fair value. Unrealized gains and losses are reported, net of tax, if any, in accumulated other comprehensive income, a component of shareholders’ equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest and other income, net.

The Company also has equity investments in privately-held companies. These investments are recorded at cost and are included in other non-current assets.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentration of credit risk consist principally of cash equivalents, short-term investments and accounts receivable. The Company places its cash primarily in checking and money market accounts. Cash equivalents and short-term investment balances are maintained with high quality financial institutions, the composition and maturities of which are regularly monitored by management. The Company believes that the concentration of credit risk in its trade receivables with respect to its served markets, as well as the limited customer base, located primarily in the Far East, are substantially mitigated by the Company’s credit evaluation process, relatively short collection terms and the high level of credit worthiness of its customers. The Company performs ongoing credit evaluation of its customers’ financial condition and limits the amount of credit extended when deemed necessary based upon payment history and the customer’s current credit worthiness, but generally require no collateral. The Company regularly reviews the allowance of bad debt and doubtful accounts by considering factors such as historical experience, credit quality, age of the account receivable balances and current economic conditions that may affect a customer’s ability to pay.

Inventories

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

Property and equipment, net

Property and equipment, including capital leases and leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which ranges from three to five years. Buildings are depreciated over an estimated useful life of thirty years and building improvements are depreciated over estimated useful lives of fifteen years. Land is not depreciated. Assets held under capital leases and leasehold improvements are amortized over the shorter of term of lease or their estimated useful lives.

Goodwill and acquired intangible assets

Goodwill is recorded when the consideration paid for an acquisition exceeds the fair value of net tangible and intangible assets acquired. Acquisition-related identified intangible assets are amortized on a straight-line basis over their estimated economic lives of one to seven years for purchased technology, one to eight years for core technology and four to seven years for customer contracts.

7




Goodwill is measured and tested for impairment on an annual basis or more frequently if the Company believes indicators of impairment exist. The performance of the test involves a two-step process. The first step requires comparing the fair value of the reporting unit to its net book value, including goodwill. The Company has one reporting unit. The fair value of the reporting unit is determined by taking the market capitalization of the reporting unit as determined through quoted market prices. A potential impairment exists if the fair value of the reporting unit is lower than its net book value. The second step of the process is only performed if a potential impairment exists, and it involves determining the difference between the fair value of the reporting unit’s net assets other than goodwill to the fair value of the reporting unit and if the difference is less than the net book value of goodwill, an impairment exists and is recorded. In the event that the Company determines that the value of goodwill has become impaired, the Company will record an accounting charge for the amount of impairment during the fiscal quarter in which the determination is made. The Company has not been required to perform this second step of the process since its implementation of SFAS 142 because the fair value of the reporting unit has exceeded its net book value at every measurement date.

Impairment of long-lived assets

Long-lived assets include equipment, furniture and fixtures, privately held equity investments and intangible assets. Whenever events or changes in circumstances indicate that the carrying amount of long-lived assets may not be recoverable, the Company estimate the future cash flows, undiscounted and without interest charges, expected to result from the use of those assets and their eventual cash position. If the sum of the expected future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Reclassifications

Certain reclassifications have been made to the Statement of Operations for the prior period balances in order to conform to the current period’s presentation. In the first quarter of fiscal 2008, the Company reclassified costs related to patent investigation and filing fees from research and development to general and administrative.

Revenue recognition

The Company accounts for its revenues under the provisions of Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition in Financial Statements”. Under this provision, the Company recognizes revenues when there is persuasive evidence of an arrangement, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured.

Product revenue is generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and allowances. However, some of the Company’s sales are made through distributors under agreements allowing for price protection and rights of return on product unsold by the distributors. Product revenue on sales made through distributors with rights of return and price protection is deferred until the distributors sell the product to end customers. The Company’s sales to direct customers are made primarily pursuant to standard purchase orders for delivery of products. The Company generally allows customers to cancel or change purchase orders with limited notice prior to the scheduled shipment dates and from time to time it also may request a customer to accept a shipment of product before its original requested delivery date, in which case, revenue is not recognized until there is written confirmation from the customer accepting early shipment, delivery has occurred, the fee is fixed or determinable, and collection is reasonably assured. Additionally, collection is not deemed to be “reasonably assured” if customers receive extended payment terms. As a result, revenue on sales to customers with payment terms substantially greater than the Company’s normal payment terms is deferred and is recognized as revenue as the payments become due. Deferred revenue less the related cost of the inventories is reported as deferred income.

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

The Company also enters into development agreements with some of its customers. Under these development agreements product revenue is recognized under the proportionate performance method.  Revenue is recognized as related costs to complete the contract are incurred. These costs are included in research and development expense.

The provisions of EITF Issue No. 00-21 apply to sales arrangements with multiple arrangements that include a combination of hardware, software and /or services. For multiple element arrangements, revenue is allocated to the separate elements based on fair value. If an arrangement includes undelivered elements that are not essential to the functionality of the delivered elements, the

8




Company defers the fair value of the undelivered elements and the residual revenue is allocated to the delivered elements. If the undelivered elements are essential to the functionality of the delivered elements, no revenue is recognized. Undelivered elements typically are software warranty and maintenance services.

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

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

Research and development and other

Research and development and other costs consist primarily of $231.0 million and $126.9 million of research and development costs for the three months ended April 28, 2007 and April 29, 2006, respectively, excluding costs related to patent investigation and filings for the three month periods ended April 28, 2007 and April 29, 2006 which were $3.1 million and $2.3 million, respectively. Research and development and other costs are expensed as incurred.

Stock-based compensation

The Company has share-based payment awards to its employees and directors that are fully described in Notes 7 and 8. The stock-based compensation expenses are recorded in accordance with FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (SFAS 123R”).

Accounting for income taxes

The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). Under this method, the Company determines deferred tax assets and liabilities based upon the difference between the income tax bases of assets and liabilities and their respective financial reporting amounts at enacted tax rates in effect for the periods in which the differences are expected to reverse. The tax consequences of most events recognized in the current year’s financial statements are included in determining income taxes currently payable. However, because tax laws and financial accounting standards differ in their recognition and measurement of assets, liabilities, equity, revenues, expenses, gains and losses, differences arise between the amount of taxable income and pretax financial income for a year and between the tax bases of assets or liabilities and their reported amounts in the financial statements. Because it is assumed that the reported amounts of assets and liabilities will be recovered and settled, respectively, a difference between the tax basis of an asset or a liability and its reported amount in the balance sheet will result in a taxable or a deductible amount in some future years when the related liabilities are settled or the reported amounts of assets are recovered, hence giving rise to a deferred tax liability or asset, respectively. The Company then assesses the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, the Company establish a valuation allowance. The Company accounts for uncertain tax positions in accordance with FASB Interpretation No. 48 “Accounting for Uncertainty in Tax Positions” (“FIN 48”). The Company classifies accrued interest and penalties as part of the accrued FIN No. 48 liability and records the expense within the provision for income taxes.

The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, the Company is required to make many subjective assumptions and judgments regarding its income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. As such, changes in its subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 9 - Income Taxes of the consolidated financial statements for additional detail on the Company’s uncertain tax positions.

Warranty

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

9




Note 2. Recent Accounting Pronouncements

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43” (EITF 06-2”). EITF 06-2 requires companies to accrue the cost of such compensated absences over the require service period. The Company currently accrues the cost of compensated absences for sabbatical programs when the eligible employee complete the requisite service period. The Company is required to apply the provision of EITF 06-2 at the beginning of fiscal 2008. EITF 06-02 allows for adoption through retrospective application to all prior periods or through a cumulative effect adjustment to retained earnings if it is impracticable to determine the period specific effects of the change on prior periods presented.  The Company adopted EITF 06-2 in the first quarter of fiscal 2008. The adoption did not have a material impact on the Company’s financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that the Company recognize in its financial statements the impact of a tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Company’s fiscal 2008, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to opening retained earnings. On May 2, 2007, the FASB issued FASB Staff Position No. FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48-1” (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Effective January 28, 2007, the Company adopted FIN 48.  See Note 9 – Income Taxes for further details.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements.  The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal periods beginning after November 15, 2007.  The Company is currently evaluating the impact of SFAS 157 on the Company’s consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The Company adopted SAB 108 at the end of fiscal 2007. The adoption did not have a material impact on the Company’s financial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement expands the standards under SFAS No. 157 which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. The Company is currently evaluating the potential impact of this statement.

10




Note 3. Supplemental Financial Information

Available-for-sale investments (in thousands)

 

April 28, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Corporate debt securities

 

$

3,576

 

$

 

$

(40

)

$

3,536

 

Auction rate securities

 

99,953

 

 

 

99,953

 

U.S. Federal, state, county and municipal debt securities

 

25,252

 

 

(296

)

24,956

 

Short-term investments

 

$

128,781

 

$

 

$

(336

)

$

128,445

 

 

 

January 27, 2007

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair Value

 

Corporate debt securities

 

$

3,547

 

$

 

$

(56

)

$

3,491

 

U.S. Federal, state, county and municipal debt securities

 

25,300

 

 

(419

)

24,881

 

Short-term investments

 

$

28,847

 

$

 

$

(475

)

$

28,372

 

 

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

The contractual maturities of available-for-sale debt securities classified as short-term investments at April 28, 2007 are presented in the following table (in thousands):

 

April 28, 2007

 

January 28, 2007

 

 

 

Amortized
Cost

 

Estimated
Fair Value

 

Amortized
Cost

 

Estimated
Fair Value

 

Due in one year or less

 

$

23,789

 

$

23,540

 

$

8,581

 

$

8,499

 

Due between one and five years

 

5,039

 

4,952

 

20,266

 

19,873

 

Due over five years

 

99,953

 

99,953

 

 

 

 

 

$

128,781

 

$

128,445

 

$

28,847

 

$

28,372

 

 

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

 

 

April 28, 2007

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Corporate debt securities

 

$

 

$

 

$

3,536

 

$

(40

)

$

3,536

 

$

(40

)

U.S. Federal, state, county and municipal debt securities

 

 

 

24,956

 

(296

)

24,956

 

(296

)

Total temporarily impaired securities

 

$

 

$

 

$

28,492

 

$

(336

)

$

28,492

 

$

(336

)

 

11




 

 

 

January 27, 2007

 

 

 

Less than 12 months

 

12 months or more

 

Total

 

 

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Fair
Value

 

Unrealized
Losses

 

Corporate debt securities

 

$

 

$

 

$

3,491

 

$

(56

)

$

3,491

 

$

(56

)

U.S. Federal, state, county and municipal debt securities

 

 

 

24,881

 

(419

)

24,881

 

(419

)

Total temporarily impaired securities

 

$

 

$

 

$

28,372

 

$

(475

)

$

28,372

 

$

(475

)

 

Inventories (in thousands)

 

April 28,
2007

 

January 27,
2007

 

Work-in-process

 

$

142,295

 

$

97,529

 

Finished goods

 

125,729

 

149,874

 

 

 

$

268,024

 

$

247,403

 

 

Prepaid expenses and other current assets (in thousands)

 

April 28,
2007

 

January 27,
2007

 

Prepayments for foundry capacity

 

$

32,660

 

$

40,340

 

Prepayments for wafers (see Note 6)

 

65,485

 

29,973

 

Receivable from foundry

 

19,334

 

19,336

 

Other

 

62,147

 

80,474

 

 

 

$

179,626

 

$

170,123

 

 

Property and equipment (in thousands)

 

April 28,

 

January 27,

 

 

 

2007

 

2007

 

Property and equipment:

 

 

 

 

 

Machinery and equipment

 

$

289,360

 

$

269,586

 

Computer software

 

98,594

 

131,869

 

Furniture and fixtures

 

20,646

 

20,551

 

Leasehold improvements

 

26,330

 

12,283

 

Buildings

 

81,272

 

81,274

 

Building improvements

 

24,481

 

36,098

 

Land

 

51,500

 

51,500

 

Construction in progress

 

86,141

 

78,579

 

 

 

678,324

 

681,740

 

Less: Accumulated depreciation and amortization

 

(244,247

)

(240,797

)

 

 

$

434,077

 

$

440,943

 

 

Other non-current assets (in thousands)

 

April 28,
2007

 

January 27,
2007

 

Long term prepayments for foundry capacity

 

$

40,000

 

$

46,000

 

Equity investments in private companies

 

6,734

 

11,679

 

Severance fund

 

34,938

 

32,161

 

Technology licenses

 

27,493

 

26,680

 

Deferred tax assets, non-current

 

18,332

 

18,332

 

Other

 

45,894

 

45,507

 

 

 

$

173,391

 

$

180,359

 

 

12




Accrued liabilities (in thousands)

 

April 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

Supply agreement liability (see Note 6)

 

$

134,462

 

$

174,724

 

Term loan obligations, current portion

 

4,000

 

4,000

 

Accrued royalties

 

7,753

 

7,791

 

Accrued legal and professional services

 

8,504

 

15,955

 

Other

 

39,242

 

57,502

 

 

 

$

193,961

 

$

259,972

 

 

Other long-term liabilities (in thousands)

 

April 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

Accrued severance

 

$

40,692

 

$

34,326

 

Long-term facilities consolidation charge

 

1,703

 

2,447

 

Other

 

23,930

 

23,934

 

 

 

$

66,325

 

$

60,707

 

 

Net (loss) income per share

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

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Numerator:

 

 

 

 

 

Income (loss) before change in accounting principle

 

$

(52,828

)

$

68,717

 

Net (loss) income

 

$

(52,828

)

$

77,563

 

Denominator:

 

 

 

 

 

Weighted average shares of common stock outstanding

 

587,426

 

583,702

 

Weighted average shares — basic

 

587,426

 

583,702

 

Effect of dilutive securities-

 

 

 

 

 

Warrants

 

 

1,788

 

Common stock options and other

 

 

54,026

 

Weighted average shares — diluted

 

587,426

 

639,516

 

Income (loss) before change in accounting principle

 

 

 

 

 

Basic

 

$

(0.09

)

$

0.12

 

Diluted

 

$

(0.09

)

$

0.11

 

Net (loss) income per share

 

 

 

 

 

Basic

 

$

(0.09

)

$

0.13

 

Diluted

 

$

(0.09

)

$

0.12

 

 

13




The anti-dilutive effects of warrants, common stock options, restricted stock and other securities totaling 43,930,082 shares were excluded from diluted net loss per share for the three months ended April 28, 2007.

Options to purchase 12,792,650 common shares at a weighted average exercise price of $27.30 have been excluded from the computation of diluted net income per share for the three months ended April 29, 2006 based on the treasury stock method calculation.

Comprehensive (loss) income (in thousands)

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Net (loss) income

 

$

(52,828

)

$

77,563

 

Other comprehensive income:

 

 

 

 

 

Unrealized gain on available-for-sale investments and other, net of tax

 

195

 

406

 

Total comprehensive (loss) income

 

$

(52,633

)

$

77,969

 

 

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

Note 4. Business Combinations

The Company acquired the semiconductor division of UTStarcom, Inc (“UTStarcom Business”), the printer semiconductor division of Avago Technologies Limited (“Avago Business”), Intel’s communications and applications business (“ICAP Business”) and assets of two other businesses from unrelated parties during fiscal 2007.

UTStarcom Business

The Company acquired the UTStarcom Business on February 16, 2006.  The UTStarcom Business focuses on the design and development of personal handyphone systems (PHS) and next generation cellular communications technology. The primary reasons for the acquisition of the semiconductor division of UTStarcom were to strengthen and augment the Company’s software engineering workforce and enhance its technological capabilities for emerging cellular strategies, obtain an established product being utilized in wireless communications technology, reduce the time required to develop new products and bring them to market for next generation cellular technology and to complement the Company’s existing wireless offerings.  These factors contributed to a purchase price that was in excess of the fair value of the UTStarcom Business net tangible and intangible assets acquired.  The Company recorded goodwill, which is not deductible for tax purposes, in connection with this transaction.

Under the terms of the agreement, the Company paid $24.0 million in cash and an additional $16.0 million based on the achievement of certain defined milestones.  The purchase price of the acquisition was $40.8 million, including the contingent consideration recognized of $16.0 million, and was determined as follows (in thousands):

Cash

 

$

40,008

 

Transaction costs

 

792

 

Total purchase price

 

$

40,800

 

 

In the third quarter of fiscal 2007, the Company recorded additional purchase consideration of $16.0 million upon the achievement of the contingent milestones as defined in the purchase agreement.  Approximately $8.7 million was preliminarily allocated as negative goodwill, calculated as the excess of the fair value of net tangible and intangible assets acquired over the purchase price.  As a result of the contingent consideration, additional goodwill of $7.3 million was recorded.

Under the purchase method of accounting, the total purchase price (including the contingent consideration recognized of $16.0 million) was allocated to net tangible and intangible assets based on their fair values as of the date of the completion of the acquisition as follows (in thousands):

Inventories

 

$

2,097

 

Fixed assets

 

611

 

 

 

2,708

 

Amortizable intangible assets:

 

 

 

Existing technology

 

11,900

 

Core technology

 

4,100

 

Supply contract

 

900

 

Customer relationships

 

13,900

 

Goodwill

 

7,292

 

Total purchase price allocation

 

$

40,800

 

 

14




 

The amortizable intangible assets of $30.8 million were determined based on valuation techniques such as discounted cash flows and weighted average cost of capital methods used in the high technology industry using assumptions and estimates from management.  The amortizable intangible assets will be amortized over useful lives ranging from three to four years. The existing technology represents personal handyphone systems technology and other technology that UTStarcom has developed.  Core technology represents the combination of processes, patents, and trade secrets that are the building blocks for current and planned new products.  Customer relationships represent future projected revenue that will be derived from sales of future versions of existing products that will be sold to existing customers.  The value determined for the supply contract with UTStarcom represents the fair value of estimated revenues and net operating cash flows to be derived from the supply contract for the duration of the four-year contract.

The weighted average useful lives of acquired intangibles from the UTStarcom Business are 3.0 years for existing technology, 4.0 years for core technology, 4.0 years for the supply contract, and 4.0 years for customer relationships.

Avago Business

The Company acquired the Avago Business on May 1, 2006.  The Avago Business focuses on the design and development of system-on-chip and system level solutions for both inkjet and laser jet printer systems. The primary purpose and benefits of the acquisition were to obtain, accelerate and strengthen the Company’s entry into the printer market, leverage its portfolio of complementary technology and obtain important printer systems level knowledge.  These factors contributed to a purchase price that was in excess of the fair value of the Avago Business net tangible and intangible assets acquired.  The Company recorded goodwill, which is not deductible for tax purposes, in connection with this transaction.

Under the terms of the agreement, the Company paid $249.6 million in cash and may pay up to an additional $35.0 million in cash if certain defined milestones are achieved.  The purchase price of the acquisition, including the contingent consideration recognized of $10.0 million, was $263.0 million and was determined as follows (in thousands):

Cash

 

$

259,591

 

Transaction costs

 

3,388

 

Total purchase price

 

$

262,979

 

 

In the third quarter of fiscal 2007, the Company recorded additional purchase consideration with a corresponding increase in goodwill of $10.0 million based on the achievement of certain levels of revenue of the past year.  The remaining contingent consideration of up to $25.0 million is still outstanding and may result in the recognition of additional purchase consideration in the future.  The remaining contingent consideration is based on the achievement of a certain level of revenue over a one year period ending October 2007.  Additionally, in the third quarter of fiscal 2007, the Company recorded an adjustment of $1.9 million relating to inventory acquired at the acquisition date, resulting in a corresponding reduction in goodwill.  In the first quarter of fiscal 2008, the Company recorded an adjustment of $1.3 million relating to a reduction of an accrued liability recorded in the original purchase accounting resulting in a corresponding decrease in goodwill.

Under the purchase method of accounting, the total purchase price (including the contingent consideration recognized of $10.0 million) was allocated to net tangible and intangible assets based on their fair values as of the date of completion of the acquisition, as adjusted, as follows (in thousands):

Accounts receivable

 

$

1,871

 

Current assets

 

3,704

 

Deferred tax asset

 

2,183

 

Inventories

 

23,896

 

Fixed assets

 

14,305

 

Other current assets

 

2,750

 

Accrued liabilities

 

(11,940

)

Accrued employee benefits

 

(3,998

)

 

 

32,771

 

Amortizable intangible assets:

 

 

 

Existing technology

 

55,800

 

Core technology

 

40,200

 

Customer relationships

 

53,400

 

Goodwill

 

80,808

 

Total purchase price allocation

 

$

262,979

 

 

15




 

The amortizable intangible assets of $149.4 million were determined based on valuation techniques such as discounted cash flows and weighted average cost of capital methods used in the high technology industry using assumptions and estimates from management.  The amortizable intangible assets will be amortized over useful lives ranging from three to six years. The existing technology represents personal laser jet, laser jet systems technology and other technology that the Avago Business has developed.  Core technology represents the combination of processes, patents, and trade secrets that are the building blocks for current and planned new products.  Customer relationships represent future projected revenue that will be derived from sales of future versions of existing products that will be sold to existing customers.

The weighted average useful lives of acquired intangibles from the Avago Business are 3.2 years for existing technology, 4.9 years for core technology and 5.0 years for customer relationships.

ICAP Business

The Company acquired the ICAP Business on November 8, 2006.  The ICAP Business designs, manufactures, and markets applications and communications processors for cellular phones, personal digital assistants, and other personal devices. The primary purpose and benefits of the acquisition were to obtain, accelerate and strengthen the Company’s entry into the wireless handheld device market, leverage its portfolio of complementary technology and obtain important wireless systems level knowledge.  These factors contributed to a purchase price that was in excess of the fair value of the ICAP Business net tangible and intangible assets acquired.  The Company recorded goodwill, which is not deductible for tax purposes, in connection with this transaction.

The purchase price of the acquisition was $605.9 million, determined as follows (in thousands):

Cash

 

$

600,000

 

Transaction costs

 

5,857

 

Total purchase price

 

$

605,857

 

 

Under the purchase method of accounting, the total purchase price was allocated to net tangible and intangible assets based on their fair values as of the date of completion of the acquisition as follows (in thousands):

Prepaid expenses

 

$

3,847

 

Fixed assets

 

45,076

 

Deferred tax asset

 

4,550

 

Other assets

 

4,864

 

Severance pay fund

 

13,301

 

Long-term deferred tax asset

 

813

 

Accrued liabilities

 

(6,577

)

Accrued compensation

 

(12,236

)

Accrued supply agreement

 

(219,000

)

Long-term liabilities

 

(14,831

)

 

 

(180,193

)

Amortizable intangible assets:

 

 

 

Existing technology

 

190,700

 

Core technology

 

136,300

 

Customer relationships

 

59,900

 

In-process research and development

 

77,800

 

Goodwill

 

321,350

 

Total purchase price allocation

 

$

605,857

 

 

16




 

The amortizable intangible assets of $386.9 million were determined based on valuation techniques such as discounted cash flows and weighted average cost of capital methods used in the high technology industry using assumptions and estimates from management.  The amortizable intangible assets will be amortized over useful lives ranging from one to seven years. The existing technology comprises of products which have reached technological feasibility and includes the chipsets which have been completed and shipping in volume to customers.  Core technology and patents represent a combination of processes, patents and trade secrets developed though years of experience in design and development of the products.  Customer relationships represent future projected revenue that will be derived from sales of future versions of existing products that will be sold to existing customers. The Company has not provided a deferred tax liability on $386.9 million of purchased intangibles during the year as the intangibles are recorded in jurisdictions with a zero tax rate.

Of the total purchase price, $77.8 million was allocated to in-process research and development (“IPRD”) based upon the fair values of assets acquired and was charged to expense in the fourth quarter of fiscal 2007.  The ICAP Business was developing new products that had not reached technological feasibility and which had no alternative use and therefore was immediately written-off.  The projects in process consisted of the development of new features and functionalities for sophisticated processors necessary to address customer needs, drive market acceptance and fuel the overall revenue growth profile of the acquired products.  The values assigned to IPRD were determined by considering the importance of products under development to the overall development plan, estimating costs to develop the purchased IPRD into commercially viable products, estimating the resulting net cash flows from the projects when completed and discounting the net cash flows to their present value. The fair values of IPRD were determined using the income approach, which discounts expected future cash flows to present value. The discount rates used in the present value calculations were derived from a weighted-average cost of capital analysis, adjusted to reflect additional risks related to the product’s development and success as well as the product’s stage of completion. Discount rates ranging from 24.0% to 27.0% were used for IPRD.  At the time of the acquisition, there were three significant projects in progress that were approximately 56.0% complete with aggregate costs to complete of $31.0 million. The projects are expected to be completed during fiscal 2008.

The estimates used in valuing in-process research and development were based upon assumptions believed to be reasonable but which are inherently uncertain and unpredictable.  Assumptions may be incomplete or inaccurate, and unanticipated events and circumstances may occur.  Accordingly, actual results may vary from the projected results.

The weighted average useful lives of acquired intangibles from the ICAP Business are 4.2 years for existing technology, 7.0 years for core technology and 7.0 years for customer relationships.

The results of operations of the Avago Business and the ICAP Business have been included in the Company’s consolidated statements of operations since their respective acquisition dates.  The following unaudited pro forma information presents a summary of the results of operations of the Company assuming the acquisition of these business occurred at the beginning of the period presented (in thousands, except for per share amounts):

 

Three Months
Ended

 

 

 

April 29, 2006

 

Net revenue

 

$

670,452

 

Net loss

 

$

(76,128

)

Basic net loss per share

 

$

(0.13

)

Diluted net loss per share

 

$

(0.13

)

 

Other acquisitions

During fiscal 2007, the Company completed the acquisition of the assets of two other businesses from unrelated parties with purchase prices totaling $16.7 million.  Under the purchase method of accounting, the total purchase price was allocated to net tangible and intangible assets based on their fair values as of the date of the completion of the respective acquisitions.  The Company

17




recorded acquired net tangible assets of $0.4 million, deferred tax liability of $3.0 million, amortizable intangible assets of $10.1 million and goodwill of $9.2 million.  The intangible assets are being amortized over their useful lives ranging from one to eight years.

Note 5. Goodwill and Acquired Intangible Assets

 

As of April 28, 2007

 

As of January 27, 2007

 

 

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Purchased technology

 

$

703,398

 

$

(480,948

)

$

222,450

 

$

703,398

 

$

(462,403

)

$

240,995

 

Core technology

 

209,700

 

(33,155

)

176,545

 

209,700

 

(23,508

)

186,192

 

Trade name

 

100

 

(100

)

 

100

 

(100

)

 

Customer contracts

 

183,000

 

(39,446

)

143,554

 

183,000

 

(30,318

)

152,682

 

Supply contract

 

900

 

(267

)

633

 

900

 

(211

)

689

 

Total intangible assets

 

$

1,097,098

 

$

(553,916

)

$

543,182

 

$

1,097,098

 

$

(516,540

)

$

580,558

 

 

The decrease in goodwill of $1.6 million during the three months ended April 28, 2007 was due primarily to an adjustment of $1.3 million from the acquisition of the Avago Business (see Note 4) and other adjustments.

Purchased technology is amortized on a straight-line basis over their estimated useful lives of one to six years.  Core technology is amortized on a straight-line basis over its estimated useful lives of one to eight years.  Customer contracts and related relationships are amortized on a straight-line basis over their estimated useful lives of four to seven years.  The supply contract is amortized on a straight-line basis over its estimated useful life of four years.  The aggregate amortization expense of identified intangible assets was $37.4 million in the first quarter of fiscal 2008 and $17.4 million in the first quarter of fiscal 2007. The estimated total amortization expenses of acquired intangible assets are $111.0 million for the remaining nine months of fiscal 2008, $142.1 million in fiscal 2009, $115.0 million in fiscal 2010, $82.9 million in fiscal 2011, $40.8 million in fiscal 2012, $29.8 million in fiscal 2013, $21.4 million in fiscal 2014 and $0.2 million for fiscal 2015.

Note 6. Commitments and Contingencies

Warranty Obligations

The following table presents changes in the warranty accrual included in accrued liabilities during the three months ended April 28, 2007 and April 29, 2006 (in thousands):

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Warranty accrual (included in accrued liabilities):

 

 

 

 

 

Beginning balance

 

$

2,567

 

$

3,914

 

Warranties issued

 

208

 

339

 

Settlements

 

(241

)

(30

)

Ending balance

 

$

2,534

 

$

4,223

 

 

Purchase Commitments

In connection with the acquisition of the ICAP Business, the Company entered into a product supply agreement with Intel.  Under the terms of the agreement the Company has committed to purchase a minimum number of wafers through June 2008.  If at the end of any fiscal quarter for Intel, there is a shortfall between the quantity of supply ordered by the Company and the quantities of supply required under the supply agreement commitment, Intel will invoice the Company for the shortfall and will deliver the corresponding quantity upon receipt of payment from the Company.  The agreement requires the Company to prepay for certain wafers six months in advance of delivery and issue non cancellable purchase orders at least six months in advance of requested delivery dates for all purchases under the supply agreement. As of April 28, 2007, the Company recorded $65.5 million in prepaid assets for prepayment of wafers and had non cancellable purchase orders outstanding of $319.7 million.

Under the Company’s manufacturing relationships with all other foundries, cancellation of all outstanding purchase orders are allowed but require repayment of all expenses incurred through the date of cancellation. As of April 28, 2007, these foundries had incurred approximately $118.9 million of manufacturing expenses on the Company’s outstanding purchase orders.

18




On February 28, 2005 and as amended on March 31, 2005, the Company entered into an agreement with a foundry to reserve and secure foundry fabrication capacity for a fixed number of wafers at agreed upon prices for a period of five and a half years beginning on October 1, 2005. In return, the Company agreed to pay the foundry $174.2 million over a period of eighteen months.  The amendment extends the term of the agreement and the agreed upon pricing terms until December 31, 2015.  As of April 28, 2007, payments totaling $174.2 million which is included in prepaid expenses and other current assets and other non-current assets have been made and approximately $101.5 million of the prepayment has been utilized as of April 28, 2007.  At April 28, 2007, there are no more outstanding commitments under the agreement.

As of April 28, 2007, the Company had approximately $85.2 million of other outstanding non-cancellable purchase orders for capital purchase obligations.

Contingencies

IPO Securities Litigation.  On July 31, 2001, a putative class action suit was filed against two investment banks that participated in the underwriting of the Company’s initial public offering, or IPO, on June 29, 2000. That lawsuit, which did not name Marvell or any of our officers or directors as defendants, was filed in the United States District Court for the Southern District of New York. Plaintiffs allege that the underwriters received “excessive” and undisclosed commissions and entered into unlawful “tie-in” agreements with certain of their clients in violation of Section 10(b) of the Securities Exchange Act of 1934. Thereafter, on September 5, 2001, a second putative class action was filed in the Southern District of New York relating to our IPO. In this second action, plaintiffs named three underwriters as defendants and also named as defendants Marvell and two of our officers, one of whom is also a director. Relying on many of the same allegations contained in the initial complaint in which we were not named as a defendant, plaintiffs allege that the defendants violated various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In both actions, plaintiffs seek, among other items, unspecified damages, pre-judgment interest and reimbursement of attorneys’ and experts’ fees. These two actions relating to our IPO have been consolidated with hundreds of other lawsuits filed by plaintiffs against approximately 40 underwriters and approximately 300 issuers across the United States. Defendants in the consolidated proceedings moved to dismiss the actions. In February 2003, the trial court granted the motions in part and denied them in part, thus allowing the case to proceed against the underwriters and us as to alleged violations of section 11 of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934. Claims against the individual officers have been voluntarily dismissed with prejudice by agreement with plaintiffs. On June 26, 2003, the plaintiffs announced that a settlement among plaintiffs, the issuer defendants and their directors and officers, and their insurers has been structured, a part of which provides that the insurers for all issuer defendants would guarantee up to $1 billion to investors who are class members, depending upon plaintiffs’ success against non-settling parties. Our board of directors has approved the proposed settlement, which if approved by the court would result in the plaintiffs’ dismissing the case against us and granting releases that extend to all of our officers and directors. Definitive settlement documentation was completed in early June 2004 and first presented to the court on June 14, 2004. On February 15, 2005, the court issued an opinion preliminarily approving the proposed settlement, contingent upon certain modifications being made to one aspect of the proposed settlement — the proposed “bar order.” The court ruled that it had no authority to deviate from the wording of the Private Securities Litigation Reform Act of 1995 and that any bar order that may issue should the proposed settlement be finally approved must be limited to the express wording of 15 U.S.C. section 78u-4(f)(7)(A).  On May 2, 2005 the issuer defendants and plaintiffs jointly submitted an amendment to the settlement agreement conforming the language of the settlement agreement with the court’s February 15, 2005 ruling regarding the bar order.  The court on August 31, 2005 issued an order preliminarily approving the settlement and setting a public hearing on its fairness for April 24, 2006 due to difficulties in mailing the required notice to class members.  A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006. The court took the matter under submission. Meanwhile the consolidated case against the underwriters has proceeded. On October 2004, the district court certified a class. On December 5, 2006, however, the United States Court of Appeals for the Second Circuit reversed, holding that a class could not be certified. The Second Circuit’s holding, while directly affecting only the underwriters, raises some doubt as to whether the settlement class contemplated by the proposed issuer settlement would be approved in its present form. On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearing of the Second Circuit’s decision. On April 6, 2007, the Second Circuit denied the petition.  At a status conference on April 23, 2007, the district court suggested that the issuers’ settlement could not be approved in its present form, given the Second Circuit’s ruling.  While not yet ruling on the matter, the district court has suggested that the parties will likely withdraw and seek to reformulate the current settlement in light of the Second Circuit ruling.

Jasmine Networks Litigation. On September 12, 2001, Jasmine Networks, Inc. (“Jasmine”) filed a lawsuit in the Santa Clara County Superior Court alleging claims against three officers and the Company for improperly obtaining and using information and technologies during the course of the negotiations with our personnel regarding the potential acquisition of certain Jasmine assets by the Company.  The lawsuit claims that the Company’s officers improperly obtained and used such information and technologies after

19




the Company signed a non-disclosure agreement with Jasmine.  The Company believes the claims asserted against its officers and the Company are without merit and the Company intends to defend all claims vigorously.

On June 21, 2005, the Company filed a cross complaint in the above disclosed action in the Santa Clara County Superior Court asserting claims against Jasmine and unnamed Jasmine officers and employees.  The cross complaint was later amended to name two individual officers of Jasmine.  On May 15, 2007, the Company filed a second amended cross complaint to add additional causes of action for declaratory relief against Jasmine.  Among other actions, the cross complaint alleges that Jasmine and its personnel engaged in fraud in connection with their effort to sell to us technology that Jasmine and its personnel wrongfully obtained from a third party in violation of such third party’s rights.  The cross complaint seeks declaratory judgment that the Company’s technology does not incorporate any of Jasmine’s alleged technology.  The cross complaint seeks further declaratory judgment that Jasmine and its personnel misappropriated certain aspects of Jasmine’s alleged technology.  The Company intends to prosecute the cross complaint against Jasmine and its personnel vigorously, including, but not limited to, filing certain dispositive motions regarding the ownership of the technology which is the subject of the cross complaint.

CSIRO Litigation. In 2004, Australia’s Commonwealth Scientific and Industrial Research Organisation (“CSIRO”) sent notice letters to a number of Wi-Fi System manufacturers regarding CSIRO’s patent, U.S. Patent No. 5,487,069 as it relates to IEEE 802.11a and 802.11g wireless standards.  In May 2005, a group of system manufacturers, including customers of our 802.11a or 802.11g wireless LAN products, filed an action in the United States District Court for the Northern District of California seeking a declaratory judgment against CSIRO that the plaintiff manufacturers’ products employing the IEEE 802.11a or 802.11g wireless standards do not infringe CSIRO’s patent, U.S. Patent No. 5,487,069.  In September 2006, CSIRO filed an answer and counterclaims alleging that plaintiffs’ products that employ those wireless standards infringe the CSIRO patent and seeking damages, including enhanced damages and attorneys’ fees and costs, and an injunction against sales of infringing products.  In December 2006, the district court granted CSIRO’s motion to transfer the case to the United States District Court for the Eastern District of Texas, where CSIRO had brought a similar lawsuit against another company.  As a result of CSIRO’s counterclaims for patent infringement, a customer of ours has sought indemnification from us.  Also in December 2006, CSIRO filed suit in the United States District Court for the Eastern District of Texas against several manufacturers and suppliers of wireless products, including customers of our 802.11a or 802.11g wireless LAN products.  The complaint alleges that the manufacture, use and sale of wireless products compliant with the IEEE 802.11a or 802.11g wireless standards infringes on the CSIRO patent.  As a result of CSIRO’s claim for patent infringement, another customer of ours has sought indemnification from us.  In response to these demands for indemnification, the Company has acknowledged the demands and incurred costs in response to them.

On May 4, 2007, the Company filed an action in the United States District Court for the Eastern District of Texas seeking a declaratory judgment against CSIRO that the CSIRO patent is invalid and unenforceable and that the Company and its customers do not infringe the CSIRO patent.  The complaint also seeks damages and a license for the Company and its customers on reasonable and non-discriminatory terms in the event the Company’s 802.11a/g wireless LAN products are found to infringe and the CSIRO patent is found to be valid and enforceable.  CSIRO has not yet responded to the complaint.

Shareholder Derivative Litigation.  Between July 7, 2006 and August 2, 2006, three purported shareholder derivative actions were filed in the United States District Court for the Northern District of California.  Each of these lawsuits names the Company as a nominal defendant and a number of the Company’s current and former directors and officers as defendants.  Each lawsuit seeks to recover damages purportedly sustained by the Company in connection with its option granting processes, and seeks certain corporate governance and internal control changes. Pursuant to orders of the court dated August 17 and October 17, 2006, the three actions were consolidated as a single action, entitled In re Marvell Technology Group Ltd. Derivative Litigation.  The plaintiffs filed an amended and consolidated complaint on November 1, 2006.  On January 16, 2007, the Company filed a motion to dismiss the consolidated complaint for lack of standing or, in the alternative, stay proceedings.  Pursuant to stipulations among the parties and orders of the court, our motion is currently scheduled to be heard on November 2, 2007.

On February 12, 2007, a new purported derivative action was filed in the United States District Court for the Northern District of California.  Like In re Marvell Technology Group Ltd. Derivative Litigation, this lawsuit names the Company as a nominal defendant and a number of our current and former directors and officers as defendants.  It seeks to recover damages purportedly sustained by the Company in connection with its option granting processes, and seeks certain corporate governance and internal control changes.  On May 1, 2007, the court entered an order consolidating this lawsuit with In re Marvell Technology Group Ltd. Derivative Litigation.

On May 29, 2007, the court entered an order staying discovery in this matter pending resolution of the Company’s motion to dismiss.

20




Securities Litigation.  Between October 5, 2006 and November 13, 2006, four putative class actions were filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors.  The complaints allege that the Company and certain of its officers and directors violated the federal securities laws by making false and misleading statements and omissions relating to the grants of stock options.  The complaints seek, on behalf of persons who purchased our common stock during the period from October 3, 2001 to October 3, 2006, unspecified damages, interest, and costs and expenses, including attorneys’ fees and disbursements.  Pursuant to an order of the court dated February 2, 2007, these four putative class actions were consolidated as a single action entitled In re Marvell Technology Group Ltd. Securities Litigation.  By an order of the court dated February 28, 2007, the plaintiffs must file a consolidated complaint no later than 45 days after the Company files restated financial statements with the SEC.

SEC and United States Attorney Inquiries.  In July 2006, the Company received a letter of informal inquiry from the Securities and Exchange Commission (“SEC”) requesting certain documents relating to the Company’s stock option grants and practices.  The Company also received a grand jury subpoena from the office of the United States Attorney for the Northern District of California requesting substantially similar documents.  On April 20, 2007, the Company was informed that the SEC is now conducting a formal investigation in this matter. On June 8, 2007, the Company received a document subpoena from the SEC.  The Company has cooperated with the SEC and the United States Attorney regarding these matters and intends to continue to do so.  The Company cannot predict the outcome of these investigations.

General.  The Company is also party to other legal proceedings and claims arising in the normal course of business.

The legal proceedings and claims described above could result in substantial costs and could divert the attention and resources of the Company’s management.  Although the legal responsibility and financial impact with respect to these proceedings and claims cannot currently be ascertained, the Company does not believe that these matters will result in the payment of monetary damages, net of any applicable insurance proceeds, that in the aggregate would be material in relation to the Company’s consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling in litigation could require the Company to pay damages or one-time license fees or royalty payments, which could adversely impact gross margins in future periods, or could prevent the Company from manufacturing or selling some of its products or limit or restrict the type of work that employees involved in such litigation may perform for the Company. There can be no assurance that these matters will be resolved in a manner that is not adverse to the Company’s business, financial condition, results of operations or cash flows.

Note 7. Stock-Based Compensation

Effective from January 29, 2006, the Company adopted FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payment” (“SFAS 123R”).  SFAS 123R requires the measurement and recognition of compensation expense for all share-based awards to employees and directors, including employee stock options, restricted stock units and employee stock purchase rights based on estimated fair values.  SFAS 123R supersedes previous accounting guidance under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations and amends SFAS No.95, “Statement of Cash Flows.”  Under SFAS 123R, the benefits of tax deductions in excess of recognized compensation cost has to be reported as a financing cash flow, rather than as an operating cash flow.  This may reduce future net cash flows from operations and increase future net financing cash flows.  In March 2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”), which provides guidance regarding the interaction of SFAS 123R and certain SEC rules and regulations.  The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

Prior to January 29, 2006, the Company accounted for its stock based compensation plans using the intrinsic value method under the provisions of APB 25 and related guidance, under the accelerated method of amortization.

The Company adopted SFAS 123R using the modified prospective method.  Under the modified prospective method, results of operations include compensation costs of unvested options granted prior to January 29, 2006, and options granted subsequent to that date.  For grants prior to January 29, 2006, the Company amortizes stock-based compensation expense under the accelerated method.  For grants from January 29, 2006, the Company amortizes stock-based compensation expense ratably over the vest term.

Cumulative Effect of Change in Accounting Principle

The adoption of SFAS 123R resulted in a cumulative benefit from change in accounting principle of $8.8 million net of tax as of the year ended January 27, 2007, reflecting the net cumulative impact of estimated forfeitures that were previously no included in the determination of historic stock-based compensation expense in periods prior to January 28, 2006.

21




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

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Cost of goods sold

 

$

3,018

 

$

2,434

 

Research and development

 

32,042

 

30,437

 

Selling and marketing

 

7,151

 

8,234

 

General and administrative

 

4,557

 

7,657

 

 

 

$

46,768

 

$

48,762

 

 

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

 

Stock Option Plans

 

ESPP

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

April 28, 2007

 

April 29, 2006

 

April 28, 2007

 

April 29, 2006

 

Volatility

 

45

%

59

%

 

59% - 73

%

Expected life (in years)

 

5.0

 

4.7

 

 

1.3

 

Risk-free interest rate

 

4.6

%

4.7

%

 

3.9

%

Dividend yield

 

 

 

 

 

 

In refining estimates used in the adoption of SFAS 123R, the Company established the expected term for employee options and awards, as well as expected forfeiture rates, based on the historical settlement experience and after giving consideration to vesting schedules.  Assumptions for option exercises and pre-vesting terminations of options were stratified by employee groups with sufficiently distinct behavior patterns.

Expected volatility under SFAS 123R was developed based on the average of the Company’s historical daily stock price volatility.

SFAS 123R also requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates.  From January 29, 2006, stock-based compensation expense was recorded net of estimated forfeitures such that expense was recorded only for those stock-based awards that are expected to vest.

The weighted average fair values per share of the of options granted in the three month period ended April 28, 2007 and April 29, 2006 was $7.71 and $15.42, respectively.

Note 8. Shareholders’ Equity

Stock Plans

In April 1995, the Company adopted the 1995 Stock Option Plan (the “Option Plan”). The Option Plan, as amended, had 324,289,786 shares of common stock reserved for issuance thereunder as of April 28, 2007.  Options granted under the Option Plan generally have a term of ten years and generally must be issued at prices not less than 100% and 85% for incentive and nonqualified stock options, respectively, of the fair market value of the stock on the date of grant. Incentive stock options granted to shareholders who own greater than 10% of the outstanding stock are for periods not to exceed five years and must be issued at prices not less than 110% of the fair market value of the stock on the date of grant. The options generally vest 20% one year after the vesting commencement date, and the remaining shares vest one-sixtieth per month over the remaining forty-eight months. Options granted under the Option Plan prior to March 1, 2000 may be exercised prior to vesting. The Company has the right to repurchase such shares at their original purchase price if the optionee is terminated from service prior to vesting. Such right expires as the options vest over a five-year period. Options granted under the Option Plan subsequent to March 1, 2000 may only be exercised upon or after vesting.

In August 1997, the Company adopted the 1997 Directors’ Stock Option Plan (the “Directors’ Plan”). The Directors’ Plan had 3,600,000 shares of common stock reserved thereunder as of April 28, 2007.  Under the Directors’ Plan, an outside director is granted 30,000 options upon appointment to the Board of Directors. These options vest 20% one year after the vesting commencement date and remaining shares vest one-sixtieth per month over the remaining forty-eight months. An outside director is also granted 6,000

22




options on the date of each annual meeting of the shareholders. These options vest one-twelfth per month over twelve months after the fourth anniversary of the vesting commencement date. Options granted under the Directors’ Plan may be exercised prior to vesting. The Company has the right to repurchase such shares at their original purchase price if the director is terminated or resigns from the Board of Directors prior to vesting. Such right expires as the options vest over a five-year period.

In addition, the Company can also grant restricted stock.  Restricted stock are share awards that entitle the holder to receive tradable shares of the Company’s common stock upon vesting.

Employee Stock Purchase Plan

In June 2000, the Company adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”). The Purchase Plan had 33,871,612 shares of common stock reserve for issuance thereunder as of April 28, 2007.  Under the Purchase Plan, employees are granted the right to purchase shares of common stock at a price per share that is 85% of the lesser of the fair market value of the shares at (i) the participant’s entry date into the two-year offering period, or (ii) the end of each six-month purchase period within the offering period. Participants purchase stock using payroll deductions, which may not exceed 20% of their total cash compensation. Offering and purchase periods begin on December 1 and June 1 of each year.  For the three months ended April 28, 2007, there was no stock-based compensation expense related to the activity under the Purchase Plan.  The Company did not issue any shares under the Purchase Plan in the three months ended April 28, 2007.  As of April 28, 2007, there was no unrecognized compensation cost related to the Purchase Plan.

Stock option activity under the Company’s stock option plans for the three months ended April 28, 2007 is summarized below (in thousands, except per share amounts):

 

Options
Outstanding

 

Weighted
Average
Exercise
Price

 

Restricted Stock
Outstanding

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Balance at January 27, 2007

 

118,627

 

$

13.72

 

2,568

 

Options granted

 

1,505

 

$

16.95

 

53

 

Options forfeited/canceled/expired

 

(1,592

)

$

16.66

 

(58

)

Options exercised

 

 

$

0.00

 

 

Balance at April 28, 2007

 

118,540

 

$

13.72

 

2,563

 

Vested or expected to vest at April 28, 2007

 

111,789

 

$

13.27

 

2,372

 

Exercisable at April 28, 2007

 

50,466

 

$

8.10

 

 

 

 

Included in the preceding table are 1,690,000 shares of options granted to certain officers at an exercise price of $24.80 that will become exercisable only upon the achievement of specified annual earnings per share targets through fiscal 2010.

The aggregate intrinsic value and weighted average remaining contractual term of options vested and expected to vest at April 28, 2007 was $625.7 million and 6.7 years, respectively.  The aggregate intrinsic value and weighted average remaining contractual term of options exercisable at April 28, 2007 was $453.4 million and 5.3 years, respectively.   The aggregate intrinsic value is calculated based on the Company’s closing stock price for all in-the-money options as of April 28, 2007.

The aggregate intrinsic value and weighted average remaining contractual term of restricted stock vested and expected to vest as of April 28, 2007 was $38.6 million and 1.2 years, respectively.

23




Included in the table below is activity related to the nonvested portion of the stock based arrangements as follows:

 

Nonvested
Options
Outstanding

 

Weighted
Average
Grant Date
Fair Value

 

Nonvested
Restricted
Stock
Outstanding

 

Weighted
Average
Grant Date
Fair Value

 

Balance at January 27, 2007

 

84,731

 

$

8.72

 

2,708

 

$

20.10

 

Granted

 

1,505

 

$

6.77

 

53

 

$

16.95

 

Vested

 

(9,136

)

$

4.69

 

(32

)

$

32.23

 

Canceled/Forfeited

 

(1,598

)

$

6.96

 

(58

)

$

19.30

 

Balance at April 28, 2007

 

75,502

 

$

8.13

 

2,671

 

$

19.91

 

 

The Company’s current practice is to issue new shares to satisfy share option exercises. As of April 28, 2007, compensation costs related to nonvested awards not yet recognized amounted to $506.7 million. The unamortized compensation expense for stock options and restricted stock will be amortized on a straight-line basis and is expected to be recognized over a weighted-average period of 2.3 years and 2.6 years, respectively.

There was no total tax benefit attributable to options exercised in the three months ended April 28, 2007.  There were no excess tax benefits from stock-based compensation as reported on the condensed consolidated statement of cash flows in financing activities represents the reduction, in income taxes otherwise payable during the period, attributable to the actual gross tax benefits in excess of the expected tax benefits for options exercised in current and prior periods.

Under applicable securities laws, the Company suspended all stock option exercise transactions under its Stock Option Plan effective on the close of business on September 7, 2006.  On September 8, 2006, management communicated the trading suspension, which was expected to last until the Company files its delinquent SEC reports, to all option holders.  As a result, the exercisability on all outstanding options, including vested awards held by certain separated employees, was modified.  Incremental compensation costs, representing the excess of the fair value of the modified award over the fair value of the original award immediately before the filing of the Company’s delinquent SEC reports, on affected awards will be recognized the second half of fiscal 2008.

Stock Award Activity

In the first quarter of fiscal 2007, the Company granted 140,000 restricted stock awards to its employees under the 1995 Stock Option Plan. Such awards generally vest over a period of five years from the date of grant. The restricted stock awards have the voting rights of common stock and the shares underlying the restricted are considered issued and outstanding.  The Company expenses the cost of the restricted stock awards, which is determined to be the fair market value of the shares at the date of grant, ratably over the period during which the restrictions lapse.  The grant of restricted stock awards is deducted from the shares available for grant under the Company’s stock option plan.  Restricted stock activity under the Company’s stock option plans for the three months ended April 28, 2007 is summarized below (in thousands, except per share amounts):

 

Restricted Stock
Outstanding

 

Weighted
Average
Grant Date
Fair Value

 

 

 

 

 

 

 

Balance at January 27, 2007

 

140

 

$

32.21

 

Restricted stock granted

 

 

 

Restricted stock forfeited

 

 

 

Restricted stock vested

 

 

 

Balance at April 28, 2007

 

140

 

$

32.21

 

 

No restricted stock awards vested during the three months ended April 28, 2007.  Based on the closing price of the Company’s stock of $16.28, on April 27, 2007, the total pretax intrinsic value of all outstanding restricted stock was $2.3 million.

24




Note 9. Income Taxes

Effective January 28, 2007, the Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”). The adoption of FIN 48 did not result in any reclassifications of uncertain tax liabilities and did not have a cumulative impact to retained earnings.  As of January 28, 2007, the Company’s liabilities for unrecognized tax benefits totaled $116.8 million which includes interest and penalties of $31.5 million.  The Company recorded an increase of its unrecognized tax benefits of approximately $3.9 million during the quarter ended April 28, 2007, which included penalties and interest of $2.4 million.  This amount is included in other long-term tax liabilities and includes penalties and interest.  The cumulative uncertain tax position balance as of April 28, 2007 is $120.7 million, if recognized, would favorably affect the Company’s effective tax rate.

In accordance with the Company’s accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48.

The Company conducts business globally and, as a result, one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  The Company is subject to examination by tax authorities throughout the world, including such major jurisdictions as Singapore, Japan, Taiwan, China, India, Israel, Netherlands, Switzerland, the United Kingdom, and the United States.  The Company is subject to non-U.S. income tax examinations for years beginning with fiscal year 2002 and for U.S. income tax examinations beginning with fiscal year 2004.  The U.S. subsidiaries are currently under audit by the U.S. tax authorities for the fiscal years 2004, 2005 and 2006.  The U.S. tax authorities are also reviewing employment taxes with regard to the re-measured stock options.  The Company has accrued for the employment taxes and believes that it has adequately provided for this liability.  The Company does not believe that the total amount of unrecognized benefits will significantly change within the next year.

Note 10. Related Party Transactions

During the first quarters of fiscal 2008 and 2007, the Company incurred approximately none and $0.4 million, respectively, of expenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”), for charter aircraft services provided to Marvell Semiconductor, Inc. (“MSI”) for Estopia Air LLC (“Estopia Air”). The aircraft provided by ACM to the Company for such services is owned by Estopia Air. The Company’s Chairman, President and Chief Executive Officer, Sehat Sutardja, Ph.D, and the Company’s Director of Strategic Marketing and Business Development, Weili Dai, through their control and ownership of Estopia Air, own the aircraft provided by ACM. Expenses were incurred for business travel use of the aircraft at a cost determined to be at fair market value.

On February 19, 2005, the Company, through its subsidiaries MSI and Marvell Asia Pte. Ltd. (“MAPL”), entered into a development agreement with MagnetoX Inc. (“MagnetoX”). The development agreement has substantially similar terms as other development agreements with other parties.  The Company did not recognize any revenue from the development agreement during the first quarter of fiscal 2008 and fiscal 2007. Total revenue expected to be recognized from the development agreement is $1.0 million. Herbert Chang, one of the Company’s directors, is Chairman of the Board, President and Chief Executive Officer of MagnetoX. Estopia LLC (“Estopia”) is also a shareholder of MagnetoX. Sehat Sutardja, Ph.D., and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of MagnetoX.

On August 19, 2005, the Company, through its subsidiaries MSI and Marvell International Ltd., entered into a License and Manufacturing Services Agreement (the “License Agreement”) with C2 Microsystems, Inc. (“C2Micro”).  The License Agreement has substantially similar terms as other license and manufacturing services agreements with other third parties.  The Company recognized $30,000 of revenue under the License Agreement with C2 Micro during the first quarter of fiscal 2008 and $0.2 million of revenue during the first quarter of fiscal 2007.  Sehat Sutardja, Ph.D., and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of C2Micro.  Herbert Chang, through his ownership and control of C-Squared venture entities, is also an indirect shareholder of C2Micro.  Pantas Sutardja, Ph.D., the Company’s Chief Technology Officer, is also a shareholder of C2Micro.

Note 11. Subsequent Events

On May 18, 2007, the Company completed the acquisition of a private company for a purchase price of $9.4 million in cash.  The private company designs and develops software for the optical storage applications.

25




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended,  and Section 21E of the Securities Act of 1934, as amended,  including statements regarding our expectations, beliefs, intentions or strategies regarding the future.  Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “can,” and similar expressions identify such forward-looking statements. These are statements that relate to future periods and include statements relating to our anticipation that the rate of new orders and shipments will vary significantly from quarter to quarter; industry trends; our anticipation that the total amount of sales through distributors will increase in future periods; our expectation that a significant percentage of our sales will continue to come from direct sales to key customers; our expectations regarding the number of days in inventory, inventory levels, and levels of accounts receivable; our expectation of additional growth in fiscal 2008 due to various reasons, including expected increases in shipments of cellular and handheld, printer ASIC and our WLAN products from new design wins, and our belief that our analog, mixed signal, digital signal processing and embedded microprocessor integrated circuit technology can be leveraged into other large volume and diverse markets; the potential opportunities for a new generation of integrated circuit solutions in response to growing demand for products enabling the storage, transmission and management of large volumes of data at high speeds; the anticipated benefits of consolidating our facilities and the sufficiency of our facilities; the anticipated features and benefits of our technology solutions; our strategy and components of our strategy, including our intention to expand our market position by developing new signal processing technologies, to leverage our technology for broadband communications applications, to continue to extend our leadership position for storage market applications, and to strengthen and expand our relationship with customers using a variety of techniques; the anticipated needs of our customers; our expectations to transition our semiconductor products to increasingly smaller line width geometries; our intention to continue to use widely available CMOS processes to manufacture our products; the benefits of our fabless manufacturing approach; our expectations regarding competition; our intention to reduce product costs to offset decreases in average selling prices; our continued efforts relating to the protection of our intellectual property; our expectations regarding the amount of customer concentration in the future; the amount of our future sales in Asia; our intention to continue to invest significant resources for research and development; our expected results, cash flows, and expenses, including those related to sales and marketing, research and development and general and administrative; our intention to complete acquired in-process research and development projects; our intention to make acquisitions, investments, strategic alliances and joint ventures; our expectations regarding revenue, sources of revenue and make-up of revenue; our expectations regarding the impact of legal proceedings and claims; our expectations regarding the adequacy of our capital resources to meet our capital needs; our expectations regarding the growth in business and operations; our expectations regarding our compliance with SEC periodic reporting requirements and NASDAQ listing requirements; our expectations regarding the impact of the restatement of our financial statements in connection with the internal review of our historical stock option granting; our plans regarding remediation of 2007 material weakness and expectations regarding the effectiveness of those remediation efforts; our plan regarding dividends; our plan regarding forward exchange contracts; and the effect of recent accounting pronouncements and changes in taxation rules. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those indicated in the forward-looking statements. Factors that could cause actual results to differ materially from those predicted, include but are not limited to, the impact of international conflict and continued economic volatility in either domestic or foreign markets; our dependence upon the hard disk drive industry which is highly cyclical; our ability to scale our operations in response to changes in demand for existing or new products and services; our maintenance of an effective system of internal controls; our dependence on a small number of customers; our ability to develop new and enhanced products; our success in integrating businesses we acquire and the impact such acquisitions may have on our operating results; our ability to estimate customer demand accurately; the success of our strategic relationships with customers; our reliance on independent foundries and subcontractors for the manufacture, assembly and testing of our products; our ability to manage future growth; the development and evolution of markets for our integrated circuits; our ability to protect our intellectual property; the impact of any change in our application of the United States federal income tax laws and the loss of any beneficial tax treatment that we currently enjoy; the impact of changes in international financial and regulatory conditions; the impact of changes in management; the risk that other remediation efforts will be insufficient to address our material weakness in internal controls and the outcome pending or future litigation and legal proceedings. Additional factors, which could cause actual results to differ materially, include those set forth in the following discussion, as well as the risks discussed in Item 1A, “Risk Factors.” These forward-looking statements speak only as of the date hereof. Unless required by law, we undertake no obligation to update publicly any forward-looking statements.

Overview

We are a leading global semiconductor provider of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. Our diverse product portfolio includes switching, transceiver, wireless, PC connectivity, gateways, communications controller and storage and power management solutions that serve diverse applications used in business enterprises, consumer electronics and emerging markets. We are a fabless integrated circuit company, which means that we rely on independent, third-party contractors to perform manufacturing, assembly and test functions. This approach allows us to focus on designing, developing and marketing our products and significantly reduces the amount of capital we need to invest in manufacturing products. In January 2001, we acquired Galileo Technology Ltd. (now Marvell Semiconductor Israel Ltd, or MSIL) in a stock-for-stock transaction for aggregate consideration of approximately $2.5 billion. MSIL develops high-performance internetworking and switching products for the broadband communications market. In June 2003, we acquired RADLAN Computer Communications Ltd. (RADLAN), a leading provider of embedded networking software, for aggregate consideration of approximately $134.7 million. In November 2005, we acquired the hard disk and tape drive controller business of QLogic Corporation for approximately $232.5 million.  The acquired business designs and supplies controller chips for data storage peripherals, such as hard disk and tape drives.  In February 2006, we acquired the semiconductor design business of UTStarcom, Inc. for $40.8 million.  The semiconductor design

26




business of UTStarcom designs and supplies chipsets for cellular phone applications. In May 2006, we acquired the printer semiconductor business of Avago Technologies Limited for $263.0 million, including earnout payments of $10.0 million subsequently recognized during fiscal 2007 when milestones were met and potential additional earnout payments of up to $25.0 million.  The printer semiconductor division of Avago designs and develops system-on-chip and system level solutions for both inkjet and laser jet printer systems.  In November 2006, we completed the acquisition of the communications and applications processor business of Intel Corporation for approximately $605.9 million.  The communications and applications processor business of Intel designs and develops cellular baseband processors for multi-mode, multi-band wireless handheld devices such as cellular handsets, PDAs and smartphones.

We offer our customers a wide range of high-performance analog, mixed-signal, digital signal processing and embedded microprocessor integrated circuits. Our products can be utilized in a wide array of enterprise applications including hard disk drives, high-speed networking equipment, PCs, wireless local area network solutions (WLAN) for small office/home office and residential gateway solutions, and consumer applications such as cell phones, printers, digital cameras, MP3 devices, speakers, game consoles and PDAs.

 Our sales have historically been made on the basis of purchase orders rather than long-term agreements. In addition, the sales cycle for our products is long, which may cause us to experience a delay between the time we incur expenses and the time revenue is generated from these expenditures. We expect to increase our research and development, selling and marketing, and general and administrative expenditures as we seek to expand our operations. 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.

Our fiscal year is the 52- or 53-week period ending on the Saturday closest to January 31. In a 52-week year, each fiscal quarter consists of 13 weeks. The additional week in a 53-week year is added to the fourth quarter, making such quarter consist of 14 weeks. Fiscal year 2008 is comprised of 53 weeks.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods. For a description of our critical accounting policies and estimates, please refer to the “Critical Accounting Policies and Estimates” section of our Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended January 27, 2007. There have been no material changes in any of our accounting policies during fiscal 2008.

On January 28, 2007, we adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”) to account for uncertain tax positions. Adoption of FIN 48 did not have any impact on our condensed consolidated statement of operations, and the impact on our condensed consolidated balance sheet is summarized in Note 9 – Income Taxes. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding income tax laws and regulations are subject to change over time. As such, changes in our subjective assumptions and judgments can materially affect our consolidated financial position, results of operations and cash flows.

27




Results of Operations

The following table sets forth information derived from our unaudited condensed consolidated statements of operations expressed as a percentage of net revenue:

 

Three Months Ended

 

 

 

April 28,
2007

 

April 29,
2006

 

Net revenue

 

100.0

%

100.0

%

Operating costs and expenses:

 

 

 

 

 

Cost of goods sold

 

51.6

 

46.1

 

Research and development

 

36.9

 

24.8

 

Selling and marketing

 

7.9

 

7.5

 

General and administrative

 

3.8

 

3.5

 

Amortization of acquired intangible assets

 

5.9

 

3.3

 

Total operating costs and expenses

 

106.0

 

85.2

 

Operating (loss) income

 

(6.0

)

14.8

 

Interest and other income

 

0.2

 

1.5

 

Interest expense

 

(1.6

)

(0.1

)

(Loss) income before income taxes

 

(7.4

)

16.2

 

Provision for income taxes

 

0.9

 

3.0

 

(Loss) income before change in accounting policy

 

(8.3

)

13.2

 

Cumulative effect of change in accounting principle, net of tax effect

 

 

1.7

 

Net income (loss)

 

(8.3

)%

14.9

%

 

Three Months Ended April 28, 2007 and April 29, 2006

Net Revenue

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 

% Change

 

Net revenue

 

$

635,050

 

$

521,196

 

21.8

%

 

Net revenue consists primarily of product revenue from sales of our semiconductor devices, and to a much lesser extent, development revenue derived from development contracts with our customers. Net revenue is gross revenue, net of accruals for estimated sales returns and allowances and rebates. The increase in net revenue in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 reflects an increase in volume shipments of our cellular and handset products, which increased $113.9 million.  The net revenue increase in cellular and handheld products was from our initial shipments commencing in November 2006 from the acquisition of the applications and communications processor business from Intel Corporation (Intel).  Net revenue derived from development contracts increased in absolute dollars during the first quarter of fiscal 2008 as compared to the first quarter of fiscal 2007, but represented less than 10% of net revenue for each period.

Historically, a relatively small number of customers have accounted for a significant portion of our revenue.  For the quarter ended April 28, 2007, two customers each represented more than 10% of our net revenue, for a combined total of 27% of our net revenue.  For the quarter ended April 29, 2006, four customers each represented more than 10% of our net revenue, for a combined total of 53% of our net revenue.  In addition, no distributor accounted for more than 10% of our net revenue in the quarters ended April 28, 2007 and April 29, 2006.

Because we sell our products to many OEM manufacturers who have manufacturing operations located in Asia, a significant percentage of our sales are made to customers located outside of the United States. Sales to customers located in Asia represented 84% and 94% of our net revenue for the three months ended April 28, 2007 and April 29, 2006, respectively.  The rest of our sales are to customers located in the United States and other geographic regions.  We expect that a significant portion of our revenue will continue to be represented by sales to our customers in Asia. Substantially all of our sales to date have been denominated in United States dollars.

28




Cost of Goods Sold

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 

% Change

 

Cost of goods sold

 

$

327,417

 

$

240,233

 

36.3

%

% of net revenue

 

51.6

%

46.1

%

 

 

Gross margin

 

48.4

%

53.9

%

 

 

 

Cost of goods sold consists primarily of the costs of manufacturing, assembly and test of integrated circuit devices and related overhead costs, product warranty costs, royalties and compensation and associated costs relating to manufacturing support, logistics and quality assurance personnel, including stock-based compensation costs. Gross margin is calculated as net revenue less cost of goods sold as a percentage of net revenue. The decrease in gross margin percentage for the three months ended April 28, 2007 compared to the three months ended April 29, 2006 was primarily due to lower gross margins for cellular and handset products which commenced shipping in November 2006 as a result of the acquisition of the communications and application processor business from Intel.  The cellular and handset inventory that were supplied under a supply agreement with Intel are recorded at estimated fair value as required under purchase accounting.  Our gross margins may fluctuate in future periods due to, among other things, changes in the mix of products sold, the timing of production ramps of new products, increased pricing pressures from our customers and competitors, particularly in the consumer product markets that we are targeting, charges for obsolete or potentially excess inventory, changes in the costs charged by our manufacturing and test subcontractors, the introduction of new products with lower margins, product warranty costs and changes in the amount of development revenue recognized.

Research and Development and other

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 

% Change

 

Research and development and other

 

$

234,133

 

$

129,228

 

81.2

%

% of net revenue

 

36.9

%

24.8

%

 

 

 

Research and development and other expense consists primarily of compensation and associated costs relating to development personnel, including stock-based compensation expenses, prototype costs, contracted development work costs, depreciation and amortization expense, patent investigation and filing fees and allocated occupancy costs for these operations. The increase in research and development expense in absolute dollars in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was primarily due to net hiring of additional development personnel including personnel related to our acquisitions of the printer ASIC division of Avago Technologies Limited (Avago) in May 2006 and the communications and applications processor business of Intel in November 2006 which together resulted in an increase in salary and related costs of $59.1 million.  Additionally, we incurred increased costs for depreciation and amortization expense of $14.0 million arising from purchases of property, equipment and technology licenses, increased costs of $9.0 million for prototype and related product tape-out costs for new product initiatives, increased costs of $3.4 million for tooling and engineering equipment expenses, increased stock compensation costs of $3.0 million and an increase in other allocated expenses of $8.9 million related to our expanding operations.

We expect that research and development expense will increase in absolute dollars in future periods as we continue to devote resources to develop new products, migrate to lower process geometries, meet the changing requirements of our customers, expand into new markets and technologies and hire additional personnel, including those from our acquisitions.

Selling and Marketing

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 

% Change

 

Selling and marketing

 

$

50,392

 

$

38,862

 

29.7

%

% of net revenue

 

7.9

%

7.5

%

 

 

 

Selling and marketing expense consists primarily of compensation and associated costs relating to sales and marketing personnel, including stock-based compensation expenses, sales commissions, promotional and other marketing expenses, and allocated occupancy costs for these operations. The increase in selling and marketing expense in absolute dollars in the first quarter of fiscal

29




2008 compared to the first quarter of fiscal 2007 was primarily due to net hiring of additional selling and marketing personnel including the incremental salary and related expenses resulting from our acquisition of the printer semiconductor business from Avago in May 2006 and our acquisition of the communications and applications processor business from Intel in November 2006 which together resulted in an increase in salary and related costs of $9.0 million.  Additionally, we incurred an increase in allocated overhead costs of $2.4 million related to our expanding operations.

General and Administrative

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

General and administrative

 

$

23,988

 

$

18,558

 

29.3

%

% of net revenue

 

3.8

%

3.5

%

 

 

 

General and administrative expense consists primarily of compensation and associated costs relating to general and administrative personnel, including stock-based compensation expenses, fees for professional services, and allocated occupancy costs for these operations. The increase in absolute dollars in general and administrative expense in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was primarily due to an increase in legal fees of $8.1 million due largely to costs associated with our internal review by a special committee of the Board of Directors related to our historical stock option practices and related accounting matters.  In addition, general and administrative expense increased due to the net hiring of additional administrative personnel, which resulted in an increase in salary and related costs of $2.5 million. Partially offsetting the decrease in general and administrative expense in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 was a $3.1 million decrease in stock compensation costs.

Amortization of Acquired Intangible Assets

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

Amortization of acquired intangible assets

 

$

37,320

 

$

17,351

 

115.1

%

% of net revenue

 

5.9

%

3.3

%

 

 

 

In fiscal 2007, we made five acquisitions in which we acquired intangible assets which are being amortized over their estimate economic lives of one to eight years.  The increase in amortization of acquired intangible assets in the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 is due to additional amortization of intangible assets from new acquisitions.

Interest and Other Income

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

Interest and other income

 

$

1,319

 

$

8,215

 

(83.9

)%

% of net revenue

 

0.2

%

1.5

%

 

 

 

Interest and other income consist primarily of interest earned on cash, cash equivalents and short-term investment balances. The decrease in interest and other income for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 is primarily due to a $4.9 million reserve recorded in the first quarter of fiscal 2008 for the impairment of an equity investment in a private company which we determined to be fully impaired based on the private company’s deteriorated financial projections as well as well other qualitative information provided by the private company.  Additionally, interest and other income decreased due to lower interest income as a result to lower average cash balances for comparable periods.

Interest Expense

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

Interest expense

 

$

(9,975

)

$

(599

)

1,565.3

%

% of net revenue

 

(1.6

)%

(0.1

)%

 

 

 

30




Interest expense consists primarily of interest paid on term loan and capital lease obligations. The increase in interest expense for the first quarter of fiscal 2008 compared to the first quarter of fiscal 2007 is primarily due to $7.9 million of interest expense on a term loan obligation.

Provision for Income Taxes

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

Provision for income taxes

 

$

5,972

 

$

15,863

 

(62.4

)%

% of net revenue

 

0.9

%

3.0

%

 

 

 

Our effective tax rate was approximately (12.7%) and 18.7% for the three months ended April 28, 2007 and April 29, 2006, respectively.  The effective tax rates were affected by non-tax-deductible expenses, such as nondeductible acquisition related expenses, FAS 123R stock based compensation expenses and the accrual of interest and penalties on unrecognized tax benefits.

Cumulative Effects of Change in Accounting Principle, net of Tax Effect

 

 

Three Months Ended

 

 

 

 

 

April 28,
2007

 

April 29,
2006

 


% Change

 

Cumulative effects of change in accounting principle, net of tax effect

 

$

 

$

8,846

 

(100

)%

% of net revenue

 

0.0

%

1.7

%

 

 

 

During the three months ended April 29, 2006, we recorded an adjustment for the cumulative effect of a change in accounting principle related to estimating forfeitures in our adoption of SFAS 123R.

Liquidity and Capital Resources

Our principal source of liquidity as of April 28, 2007 consisted of $592.9 million of cash, cash equivalents and short-term investments. Since our inception, we have financed our operations through a combination of sales of equity securities, cash generated by operations and cash assumed in acquisitions.

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $54.2 million for the three months ended April 28, 2007 compared to $46.7 million for the three months ended April 29, 2006. The cash inflow from operations in the first three months of fiscal 2008 was primarily due to changes in working capital. Non-cash charges in the first three months of fiscal 2008 included $37.3 million related to amortization of acquired intangible assets, $26.5 million of depreciation and amortization expense and $46.8 million of stock-based compensation.  A significant working capital change contributing to positive cash flow in the first three months of fiscal 2008 was the decrease in accounts receivable of $45.4 million primarily due to the timing of payments received from customers.  The days sales outstanding, or DSO, metric decreased to 40 days in the first three months of fiscal 2008 compared to 51 days for the first three months of fiscal 2007.  Many of our larger customers have regularly scheduled payment dates that fall immediately before or after our fiscal quarter-end. As a result, our accounts receivable balance and DSO may fluctuate depending on the timing of large payments made by our customers.  Also contributing to an increase in positive cash flow was an increase in accounts payable of $12.5 million, due to an overall increase in operating activities.

Significant working capital changes offsetting positive cash flows in the first three months of fiscal 2008 included a decrease in accrued liabilities and other of $57.8 million due primarily to application of a supply contract liability related to the acquisition of communications and applications processor business of Intel and an increase in inventories of $20.6 million due to the build up of inventory to support our increasing revenue as well as inventory purchase commitments from our acquisitions.  The number of days in inventory has decreased at the end of the first quarter of fiscal 2008 to 74 days compared to 77 days at the end of the first quarter of fiscal 2007.

Net cash provided by operating activities was $46.7 million for the three months ended April 29, 2006. The cash inflows from operations in the first three months of fiscal 2007 were primarily a result of our generation of income during the period and changes to working capital. Non-cash charges in the first three months of fiscal 2007 included $17.4 million related to amortization of acquired intangible assets, $15.6 million of depreciation and amortization expense and $48.8 million of stock-based compensation. Significant

31




working capital changes contributing to positive cash inflow in the first three months of fiscal 2007 included an increase of $15.1 million in income tax payable resulting from higher taxable income in the first three months of fiscal 2007 and a decrease in inventory of $8.7 million, primarily as a result of a reduction in wafer starts. The number of days in inventory has increased at the end of the first quarter of fiscal 2007 to 77 days compared to 58 days at the end of the first quarter of fiscal 2006 due primarily to a higher comparable inventory balance at the end of each respective quarter. We expect the number of days in inventory to fluctuate in the range of approximately 60 to 75 days depending on our wafer starts and the inventory purchase needs of our customers as well as lead times and competitive situations in the marketplace.

Significant working capital changes offsetting positive cash flows in the first three months of fiscal 2007 included an increase in accounts receivable of $48.4 million primarily due to higher total net revenue in the first three months of fiscal 2007 compared to the first three months of fiscal 2006. Although accounts receivable increased, the days sales outstanding, or DSO, metric has remained consistent in the first three months of both fiscal 2007 and 2006 at 51 days. Many of our larger customers have regularly scheduled payment dates with some of the dates falling immediately before or after our fiscal quarter-end. As a result, our accounts receivable balance and DSO may fluctuate depending on timing of large payments made by our customers. Also contributing to working capital changes offsetting positive cash flow in the first three months of fiscal 2007 was a decrease in accounts payable of $45.9 million due to payments on outstanding balances and an increase in prepaid expenses and other assets of $25.8 million due primarily to a $23.0 million payment in connection with a capacity reservation agreement with a foundry.

Net Cash (Used in) Provided by Investing Activities

Net cash used in investing activities was $151.9 million for the first three months of fiscal 2008 while net cash provided by investing activities was $127.3 million for the first three months of fiscal 2007. The net cash used in investing activities in the first three months of fiscal 2008 was due to purchases of short-term investments of $108.0 million, purchases of property and equipment of $35.3 million and purchases of technology licenses of $15.7 million, partially offset by sales and maturities of short-term investments of $8.0 million.  The net cash provided by investing activities in the first three months of fiscal 2007 was due to sales and maturities of short-term investments of $238.1 million, partially offset by purchases of short-term investments of $57.4 million, purchases of purchases of property and equipment of $28.9 million and cash paid for acquisitions of $24.0 million..

Net Cash (Used in) Provided by Financing Activities

Net cash used in financing activities was $5.8 million for the three months ended April 28, 2007 while net cash provided by financing activities was $7.0 million for the three months ended April 29, 2006.  In the first three months of fiscal 2008, net cash used in financing activities was attributable to principal payments on capital lease and debt obligations.  In the first three months of fiscal 2007, net cash provided by financing activities was attributable to proceeds from the issuance of common stock under our stock option plans, partially offset by principal payments on capital lease obligations.  The proceeds from the issuance of common stock are primarily due to the exercises of stock options.  The increase in capital lease obligations is due to additional computer-aided design software licenses, which we acquired for use in our research and development activities.

Contractual Obligations and Commitments

In connection with the acquisition of the Intel Business, we entered into a product supply agreement with Intel.  Under the terms of the agreement we have committed to purchase a minimum number of wafers through June 2008.  If at the end of any fiscal quarter for Intel, there is a shortfall between the quantity of supply ordered by the Company and the quantities of supply required under the supply agreement commitment, Intel will invoice the Company for the shortfall and will deliver the corresponding quantity upon receipt of payment from the Company.  The agreement requires us to prepay for certain wafers six months in advance of delivery and requires us to issue non cancellable purchase orders at least six months in advance of requested delivery dates for all purchases under the supply agreement. As of April 28, 2007, we recorded $65.5 million in prepaid assets for prepayment of wafers and had non cancellable purchase orders outstanding of $319.7 million.

Under our manufacturing relationships with all other foundries, cancellation of all outstanding purchase orders are allowed but require repayment of all expenses incurred through the date of cancellation. As of April 28, 2007, these foundries had incurred approximately $118.9 million of manufacturing expenses on our outstanding purchase orders.

On February 28, 2005 and as amended on March 31, 2005, we entered into an agreement with a foundry to reserve and secure foundry fabrication capacity for a fixed number of wafers at agreed upon prices for a period of five and a half years beginning on October 1, 2005. In return, we agreed to pay the foundry $174.2 million over a period of eighteen months.  The amendment extends the term of the agreement and the agreed upon pricing terms until December 31, 2015.  As of April 28, 2007, payments totaling

32




$174.2 million (included in prepaid expenses and other current assets and other noncurrent assets) had been made and approximately $101.5 million of the prepayment had been utilized as of April 28, 2007.  At April 28, 2007, there are no more outstanding commitments under the agreement.

As of April 28, 2007, the Company had approximately $85.2 million of other outstanding non-cancelable purchase orders for capital purchase obligations.

As a result of our facility move in February 2002, we obtained a sublease on one of our facilities that had a non cancellable lease.  Actual sublease income approximated the estimated sublease income, but is less than our actual lease commitment, resulting in future negative cash flow over the remaining term of the sublease of approximately $2.9 million as of January 27, 2007.  At April 28, 2007, cash payments of $10.9 million, net of sublease income had been made in connection with this charge. Approximately $2.6 million was accrued for this facilities consolidation charge as of April 28, 2007 of which $0.9 million is current and $1.7 million is long-term, payable through 2010.

In May 2006, we completed the acquisition of the printer semiconductor business of Avago. The acquisition was completed in accordance with the terms and conditions of an Asset Purchase Agreement dated February 21, 2006, as amended.  Under the terms of the Agreement, we paid $249.6 million for certain assets and intellectual property and were committed to two additional contingent cash payments of $10.0 million and $25.0 million upon the achievement of certain levels of revenue.  In the third quarter of fiscal 2007, the Company recorded contingent consideration and additional goodwill for the first contingent payment of $10 million.  The second contingent payment of $25.0 million is based on the achievement of certain levels of revenue during fiscal 2008.

We currently intend to fund our short and long-term capital requirements, as well as our liquidity needs, with existing cash, cash equivalents and short-term investment balances as well as cash generated by operations. We believe that our existing cash, cash equivalents and short-term investment balances will be sufficient to meet our working capital needs, capital requirements, investment requirements, including acquisitions and commitments for at least the next twelve months. However, our capital requirements will depend on many factors, including our rate of sales growth, market acceptance of our products, costs of securing access to adequate manufacturing capacity, the timing and extent of research and development projects, costs of making improvements to facilities and increases in operating expenses, which are all subject to uncertainty. To the extent that our existing cash, cash equivalents and investment balances and cash generated by operations are insufficient to fund our future activities, we may need to raise additional funds through public or private debt or equity financing. We may enter into acquisitions or strategic arrangements in the future, which could also require us to seek additional debt or equity financing, which in turn may be dilutive to our current shareholders. Additional funds may not be available on terms favorable to us or at all.

The following table summarizes our contractual obligations as of April 28, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (in thousands):

 

 

Payments Due by Period

 

 

 


2008

 


2009

 


2010

 


2011

 


2012

 

Thereafter

 


Total

 

 

 

(remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

nine months)

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

11,319

 

$

16,338

 

$

13,061

 

$

9,932

 

$

5,885

 

$

30,442

 

$

86,977

 

Capital lease obligations

 

41,698

 

45,600

 

21,714

 

12,464

 

3,854

 

 

125,330

 

Purchase commitments to foundries

 

438,595

 

 

 

 

 

 

438,595

 

Capital purchase obligations

 

85,163

 

 

 

 

 

 

85,163

 

Long-term debt obligations

 

5,432

 

4,000

 

386,750

 

 

 

 

396,182

 

Total contractual cash obligations

 

$

582,207

 

$

65,938

 

$

421,525

 

$

22,396

 

$

9,739

 

$

30,442

 

$

1,132,247

 

 

Included in operating lease commitments are anticipated lease payments for two airplanes that are currently under construction. Delivery of one airplane was made in fiscal 2007 and delivery of the second airplane is expected in fiscal 2008. The airplane will be used for business travel purposes and will be accounted for as operating leases once the airplanes are completed and delivered.

As discussed in Note 9 – Income Taxes, we adopted the provisions of FIN 48 on January 28, 2007.  At April 28, 2007, we had a total current and non-current liability of $148.4 million for unrecognized tax benefits, which included an accrual for the payment of related interest and penalties of $38.8 million.  Of the total amount, $122.0 million is classified as non-current, which includes $33.3 million of interest and penalties.  We do not expect to pay any of this amount during the next 12 months.  If circumstances change, we will reclassify any required amount to the current income tax payable.

33




Stock option review related impacts: The additional payable for payroll taxes associated with affected stock option grants of approximately $10.6 million, additional Section 409A expenses for the adverse tax consequences of the re-measure options exercised during calendar year 2006 of approximately $24.2 million, and Section 162(m) liabilities of $26.5 million for cumulative period from fiscal 2001 through 2007, represents potential cash outflow totaling $61.3 million.

The IRS has provided taxpayers with the following two ways of correcting unexercised discounted stock options: 1) setting a fixed exercise date; and 2) increasing the exercise price of the option up to the fair market price on the date of grant. We are actively evaluating these options. The discount associated with unexercised stock options outstanding as of January 27, 2007 amounted to approximately $51.7 million. We have not determined the tax consequences associated with these potential future remedies.

Prospective capital needs: We believe that our existing cash, cash equivalents and marketable securities, together with cash generated from operations and from exercise of employee stock options will be sufficient to cover our working capital needs, capital expenditures, investment requirements and commitments for at least the next 12 months. In the event that we may need or desire to raise additional funds to prepay our term loan obligation or consummate acquisitions of other businesses, assets, products or technologies, we could raise such funds by electing to sell equity or debt securities to the public or to selected investors, or by borrowing money from financial institutions. Our existing credit agreement however limits our ability to borrow additional funds. Certain covenants would have to be met. Additionally, we have not been in full compliance with NASDAQ Marketplace Rule 4310 (c)(14) which requires us to timely file with the SEC all filings required by the Securities Exchange Act of 1934.

However, if the SEC disagrees with the manner in which we have accounted for and reported, or not reported, the financial impact of past stock option grants, there could be further delays in filing subsequent SEC reports or other actions that might result in the delisting of our common stock from the NASDAQ Global Select Market. If we are unable to maintain compliance with the conditions for continued listing required by NASDAQ, then our shares of common stock may subject to delisting from the NASDAQ Global Select Market. If our shares are delisted from the NASDAQ Global Select Market, they may not be eligible to trade on any national securities exchange or the over-the-counter market. If our common stock is no longer traded through a market system, the liquidity of our common stock may be greatly reduced, which could negatively affect its price.

Even if we become compliant with the NASDAQ conditions for continued listing, because one of the eligibility requirements for use of a Form S-3 filing is that an issuer must have timely filed all reports required to be filed with the SEC during the preceding twelve calendar months, we will not be able to register securities on Form S-3 and would be required register these securities using a Form S-1 registration statement, which can be more complex, time consuming and expensive. If we elect to raise additional funds, we may not be able to obtain such funds on a timely basis or on acceptable terms, if at all. If we raise additional funds by issuing additional equity or convertible debt securities, the ownership percentages of existing shareholders would be reduced. In addition, the equity or debt securities that we issue may have rights, preferences or privileges senior to our common stock.

Off-Balance Sheet Arrangements

As of April 28, 2007, we did not have any material off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

In June 2006, the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43” (EITF 06-2”). EITF 06-2 requires companies to accrue the cost of such compensated absences over the require service period. We currently accrue the cost of compensated absences for sabbatical programs when the eligible employee complete the requisite service period. We are required to apply the provision of EITF 06-2 at the beginning of fiscal 2008. EITF 06-02 allows for adoption through retrospective application to all prior periods or through a cumulative effect adjustment to retained earnings if it is impracticable to determine the period specific effects of the change on prior periods presented. We adopted EITF 06-2 in the first quarter of fiscal 2008. The adoption did not have a material impact on our financial position and results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty in income tax positions. This Interpretation requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not of being

34




sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of fiscal 2008, with the cumulative effect, if any, of the change in accounting principle recorded as an adjustment to our opening retained earnings. On May 2, 2007, the FASB issued FASB Staff Position No. FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48-1” (“FSP FIN 48-1”). FSP FIN 48-1 provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. Effective January 28, 2007, we adopted FIN 48.  See Note 9 – Income Taxes for further details.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), Fair Value Measurements.  The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements.  SFAS 157 is effective for financial statements issued for fiscal periods beginning after November 15, 2007.  We are currently evaluating the impact of SFAS 157 on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 108 (“SAB 108”). SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. We adopted SAB 108 at the end of fiscal 2007. The adoption did not have a material impact on our financial position and results of operations.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” which is effective for fiscal years beginning after November 15, 2007. This statement expands the standards under SFAS No. 157 which permits an entity to choose to measure many financial instruments and certain other items at fair value at specified election dates. Subsequent unrealized gains and losses on items for which the fair value option has been elected will be reported in earnings. We are currently evaluating the potential impact of this statement.

Related Party Transactions

During first quarters of fiscal 2008 and 2007, we incurred approximately none and $0.4 million, respectively of expenses from an unrelated third-party entity, ACM Aviation, Inc. (“ACM”) for charter aircraft services provided to MSI for Estopia Air LLC (“Estopia Air”). The aircraft provided by ACM to us for such services is owned by Estopia Air. Our President and Chief Executive Officer, Sehat Sutardja, Ph.D, and Director of Strategic Marketing and Business Development, Weili Dai, through their control and ownership in Estopia Air, own the aircraft provided by ACM. Expenses were incurred for business travel use of the aircraft at a cost determined to be at fair market value.

On February 19, 2005, through our subsidiaries MSI and Marvell Asia Pte. Ltd. (“MAPL”), we entered into a development agreement with MagnetoX (“MagnetoX”). The development agreement has substantially similar terms as other development agreements with other third parties.  We did not recognize any revenue from the development agreement during the first quarters of both fiscal 2008 and 2007.  Herbert Chang, one of our directors, is a shareholder of MagnetoX. Estopia LLC (“Estopia”) is also a shareholder of MagnetoX. Sehat Sutardja, Ph.D. and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of MagnetoX.

On August 19, 2005, through our subsidiaries MSI and Marvell International Ltd., we entered into a License and Manufacturing Services Agreement (the “License Agreement”) with C2 Microsystems, Inc. (“C2Micro”).  The License Agreement has substantially similar terms as other license and manufacturing services agreements with other third parties.  We recognized $30,000 of revenue under the License Agreement with C2Micro during the first quarter of fiscal 2008 and $0.2 million of revenue during the first quarter of fiscal 2007.  Sehat Sutardja, Ph.D., and Weili Dai, through their ownership and control of Estopia, are indirect shareholders of C2Micro.  Herbert Chang, through his ownership and control of C-Squared venture entities, is also an indirect shareholder of C2Micro.  Pantas Sutardja, Ph.D., our Chief Technology Officer, is also a shareholder of C2Micro.

35




Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk.  The primary objective of our investment activities is to preserve principal while at the same time maximize the income we receive from our investments without significantly increasing risk. Some of the securities in which we have invested may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. Also, variable rate securities may produce less income than expected if interest rates fall. To minimize this risk, we maintain our portfolio of cash equivalents and short-term investments in a variety of fixed and variable rate securities including money market funds, corporate debt securities, Federal, State, county and municipal debt securities and auction rate securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate. The following table presents the amounts of our cash equivalents and short-term investments that are subject to market risk by range of expected maturity and weighted-average interest rates as of April 28, 2007 (in thousands). This table does not include money market funds because those funds are not subject to market risk. Although auction rate securities generally have legally stated maturities in excess of one year, auction rate securities are presented below with an expected fiscal year maturity date in 2008 because such securities are structured with short-term interest reset dates of generally less than 90 days at which time we can sell or continue to hold the securities at par.

 

Expected Fiscal Year Maturity Date

 

 

 

2008

 

2009

 

2010

 

2011

 

2012

 

Total

 

Fair Value

 

Variable Rate

 

$

99,953

 

$

 

$

 

$

 

$

 

$

99,953

 

$

99,953

 

Average Interest Rate

 

5.31

%

 

 

 

 

5.31

%

 

 

Fixed Rate

 

$

8,653

 

$

20,175

 

$

 

$

 

$

 

$

28,828

 

$

28,492

 

Average Interest Rate

 

3.38

%

3.57

%

 

 

 

3.51

%

 

 

 

At any time, fluctuations in interest rates could affect interest earnings on our cash, cash equivalents, and short-term investments, or the fair value of our investment portfolio. A 10% move in interest rates as of April 28, 2007 would have an immaterial effect on our financial position, results of operations and cash flows.

Our term debt bears interest at the higher of the lender’s prime rate or 0.5% per annum above the Federal Funds Effective Rate, as defined in the agreement, plus a 1% margin.  In the case of Eurodollar loans, amounts borrowed bear interest at a rate equal to the Adjusted London Interbank Offered Rate, or LIBOR, plus 2% margin.  Such margins are subject to reductions or increases depending on our future credit rating if obtained.  We pay interest and principal amounts equal to 0.25% of the aggregate principal amount of loans on a quarterly basis on the last business day of each March, June, September and December.  The interest rate as of April 28, 2007 was 7.35%.

Investment Risk.  We invest in equity instruments of privately-held companies for business and strategic purposes. These investments, which totaled $6.7 million at April 28, 2007, are included in other non-current assets in the accompanying balance sheets and are accounted for under the cost method because our ownership is less than 20% and we do not have the ability to exercise significant influence over the operations on these companies. We monitor these investments for impairment and make appropriate reductions in carrying value when an impairment is deemed to be other than temporary.  An impairment of $4.9 million was recorded in the three months ended April 28, 2007.

Foreign Currency Exchange Risk.  Substantially all of our sales and the majority of our expenses to date have been denominated in United States dollars, and, as a result, we have relatively little exposure to foreign currency exchange risk. Occasionally, we will enter into short-term forward exchange contracts to hedge exposures for purchases denominated in foreign currencies such as the Singapore Dollar and the New Israeli Shekel. We do not enter into any other derivative financial instruments for trading or speculative purposes.

36




Item 4. Controls and Procedures

Management’s Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our interim Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934) as of April 28, 2007. Disclosure controls and procedures are designed to ensure that information required to be disclosed is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that such information is accumulated and communicated to management, including the Chief Executive Officer and interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Based in this evaluation, our management, including our Chief Executive Officer and interim Chief Financial Officer, has concluded that our disclosure controls and procedures were not effective because of the material weaknesses described under “Management’s Report on Internal Control Over Financial Reporting” in Item 9A of the Company’s Annual Report on Form 10-K for the year ended January 27, 2007, which the Company is still in the process of remediating. These material weaknesses are described below:

Control environment. We did not maintain an effective control environment based on criteria established in the COSO framework and commensurate with our rapid growth and increasing complexity.  Our management, including those individuals responsible for our Finance and Legal Departments, did not exercise the necessary rigor and commitment to internal control over financial reporting.  Specifically, (1) internal control deficiencies were not remediated in a timely manner; (2) certain individuals involved in the stock option process said that they did not feel able to provide frank advice to senior management regarding controls over processing, recording and reporting of stock options transactions; and (3) we did not maintain a sufficient complement of personnel with a level of accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with our financial reporting requirements.  This lack of an effective control environment contributed to the restatement of the consolidated financial statements of annual periods through fiscal 2006, each of the quarters of fiscal year 2006, as well as the first quarter of fiscal year 2007.  Additionally, this lack of an effective control environment could result in misstatements of any of our financial statement accounts and disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevent or detected; this lack of effective control environment also contributed to the material weakness described below. Accordingly, our management has determined that this control deficiency constitutes a material weakness.

Controls over stock-based compensation expense under FASB Statement of Financial Accounting Standards No. 123 (revised 2004), “Share Based Payments” (“FAS 123(R)”). We did not maintain effective controls over the accounting for and disclosure of our stock-based compensation expense under FAS 123(R). Our controls, including monitoring controls, policies and procedures relating to the accounting for and disclosure of stock-based compensation were not effective. Specifically, effective controls were not maintained to ensure the existence, completeness, accuracy, valuation and presentation of our stock-based compensation expense. This control deficiency resulted in audit adjustments to stock-based compensation expense for the year ended January 27, 2007. This control deficiency could also result in a misstatement to compensation expense that would result in a material misstatement to our annual or interim financial statements that would not be prevented or detected. Accordingly, our management has determined that this control deficiency constitutes a material weakness.

Because of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of April 28, 2007, based on the criteria established in “Internal Control - Integrated Framework” issued by the COSO. We have taken the remediation steps described below and in connection with the preparation of this Quarterly Report, our management undertook and completed reconciliations, analyses, reviews and control procedures in addition to those historically completed to confirm that this Quarterly Report fairly presents in all material aspects our financial position, results of operations and cash flows as of, and for the period presented in accordance with U.S. generally accepted accounting principles.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Implemented or Planned Remedial Actions of Material Weaknesses

Subsequent to April 28, 2007, we implemented or plan to implement further remedial actions, specifically:

·      Implemented or planned remediation efforts regarding the material weakness in internal control over financial reporting related to an ineffective control environment include the following:

We accepted the resignation of our former Vice President of Finance and Chief Financial Officer, George A. Hervey, on May 2, 2007. We also accepted Weili Dai’s resignation from her positions as our Executive Vice President and Chief Operating Officer. The Implementation Committee of our Board of Directors determined, contrary to the recommendation of the Special Committee that Ms. Dai have no continuing role with the Company, that retaining the services of Ms. Dai in a substantially reduced capacity as Director of Strategic Marketing and Business Development, an individual contributor in a non-managerial

37




role, and under the auspices of the Implementation Committee better serves the interests of all shareholders. Ms. Dai will have no authority to undertake any decisions affecting internal controls or financial matters of the Company. The Implementation Committee will provide periodic compliance updates to the Board of Directors on Ms. Dai’s activities.

Dr. Sehat Sutardja will remain Chief Executive Officer and a member of the Board, but will step down as Chairman of the Board in favor of a non-executive Chairman. The Implementation Committee believes that the reconstitution of the Board of Directors, the separation of the role of Chairman of the Board from that of Chief Executive Officer and President and the hiring of key qualified senior executives in Finance, Operations and Compliance will help address the issues discussed in the material weakness relating to our control environment noted above.

Following the Special Committee’s recommendations, we are conducting a search for a new Chief Operating Officer, Chief Financial Officer, General Counsel and Vice President of Compliance. The Vice President of Compliance will report directly to the Audit Committee of the Board. Additionally, the Board’s Governance Committee is conducting a search for three new independent directors to fill existing vacancies. One of these independent directors will succeed Dr. Sutardja as Chairman of the Board.

We adopted enhancements to the process undertaken by our Audit Committee of the Board of Directors in connection with the finalization of our Quarterly Reports on Form 10-Q for filing with the SEC.

The Executive Compensation Committee adopted a stock option grant policy. Further enhancements have been made regarding the memorialization of board actions and documentation of equity awards.

We have initiated a multi-phased automation project of the stock option granting process to reduce manual validation work over multiple employee databases, including records maintained in locations with poorer administrative resources. We have completed the first phase of this automation initiative.

We plan to provide the Audit Committee with a status report of outstanding internal control deficiencies and internal audit findings, including our progress made towards resolving outstanding items.

We are actively conducting a search for a new Chief Financial Officer. We also plan to further strengthen our controls over the monthly closing and financial reporting processes by continuing to hire additional personnel with knowledge, experience and training in the application of U.S. generally accepted accounting principles commensurate with our financial reporting requirements. The hiring of additional, qualified personnel is critical to the building of a finance organization with the depth and breadth of knowledge to support our planned operations.

·      Implemented or planned remediation efforts regarding the material weakness over accounting for and disclosure of our stock-based compensation expense under FAS 123R include the changes in internal control over financial reporting, as stated above, along with the following:

We reviewed the accounting for and disclosure of our stock-based compensation expense process and have assessed the need for additional managerial and qualified staff resources. Once these qualified individuals are hired and training of appropriate personnel is completed, effective monitoring controls will be in place and maintained to ensure existence, completeness, accuracy, valuation and presentation of our stock-based compensation expense.

Internal Control Over Financial Reporting

As required by Rule 13a-15(d) of the Securities Exchange Act of 1934, our management, including our Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our "internal control over financial reporting" as defined in Exchange Act Rule 13a-15(f) to determine whether any changes in our internal control over financial reporting occurred during the fiscal third quarter of 2007 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, except as noted above, we noted no additional changes have occurred during the first quarter of fiscal 2008.

Limitation on Effectiveness of Controls

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. The design of any control system is based, in part, upon the benefits of the control system relative to its costs. Control systems can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. In addition, over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies and procedures may deteriorate. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

IPO Securities Litigation.  On July 31, 2001, a putative class action suit was filed against two investment banks that participated in the underwriting of our initial public offering, or IPO, on June 29, 2000. That lawsuit, which did not name Marvell or any of our officers or directors as defendants, was filed in the United States District Court for the Southern District of New York. Plaintiffs allege that the underwriters received “excessive” and undisclosed commissions and entered into unlawful “tie-in” agreements with certain of their clients in violation of Section 10(b) of the Securities Exchange Act of 1934. Thereafter, on September 5, 2001, a second putative class action was filed in the Southern District of New York relating to our IPO. In this second action, plaintiffs named three

38




underwriters as defendants and also named as defendants Marvell and two of our officers, one of whom is also a director. Relying on many of the same allegations contained in the initial complaint in which we were not named as a defendant, plaintiffs allege that the defendants violated various provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. In both actions, plaintiffs seek, among other items, unspecified damages, pre-judgment interest and reimbursement of attorneys’ and experts’ fees. These two actions relating to our IPO have been consolidated with hundreds of other lawsuits filed by plaintiffs against approximately 40 underwriters and approximately 300 issuers across the United States. Defendants in the consolidated proceedings moved to dismiss the actions. In February 2003, the trial court granted the motions in part and denied them in part, thus allowing the case to proceed against the underwriters and us as to alleged violations of section 11 of the Securities Act of 1933 and section 10(b) of the Securities Exchange Act of 1934. Claims against the individual officers have been voluntarily dismissed with prejudice by agreement with plaintiffs. On June 26, 2003, the plaintiffs announced that a settlement among plaintiffs, the issuer defendants and their directors and officers, and their insurers has been structured, a part of which provides that the insurers for all issuer defendants would guarantee up to $1 billion to investors who are class members, depending upon plaintiffs’ success against non-settling parties. Our board of directors has approved the proposed settlement, which if approved by the court would result in the plaintiffs’ dismissing the case against us and granting releases that extend to all of our officers and directors. Definitive settlement documentation was completed in early June 2004 and first presented to the court on June 14, 2004. On February 15, 2005, the court issued an opinion preliminarily approving the proposed settlement, contingent upon certain modifications being made to one aspect of the proposed settlement — the proposed “bar order.” The court ruled that it had no authority to deviate from the wording of the Private Securities Litigation Reform Act of 1995 and that any bar order that may issue should the proposed settlement be finally approved must be limited to the express wording of 15 U.S.C. section 78u-4(f)(7)(A).  On May 2, 2005 the issuer defendants and plaintiffs jointly submitted an amendment to the settlement agreement conforming the language of the settlement agreement with the court’s February 15, 2005 ruling regarding the bar order.  The court on August 31, 2005 issued an order preliminarily approving the settlement and setting a public hearing on its fairness for April 24, 2006 due to difficulties in mailing the required notice to class members.  A final settlement approval hearing on the proposed issuer settlement was held on April 24, 2006. The court took the matter under submission. Meanwhile the consolidated case against the underwriters has proceeded. On October 2004, the district court certified a class. On December 5, 2006, however, the United States Court of Appeals for the Second Circuit reversed, holding that a class could not be certified. The Second Circuit’s holding, while directly affecting only the underwriters, raises some doubt as to whether the settlement class contemplated by the proposed issuer settlement would be approved in its present form. On January 5, 2007, plaintiffs petitioned the Second Circuit for rehearing of the Second Circuit’s decision. On April 6, 2007, the Second Circuit denied the petition.  At a status conference on April 23, 2007, the district court suggested that the issuers’ settlement could not be approved in its present form, given the Second Circuit’s ruling.  While not yet ruling on the matter, the district court has suggested that the parties will likely withdraw and seek to reformulate the current settlement in light of the Second Circuit ruling.

Jasmine Networks Litigation. On September 12, 2001, Jasmine Networks, Inc. (“Jasmine”) filed a lawsuit in the Santa Clara County Superior Court alleging claims against three officers and us for improperly obtaining and using information and technologies during the course of the negotiations with our personnel regarding the potential acquisition of certain Jasmine assets by us.  The lawsuit claims that our officers improperly obtained and used such information and technologies after we signed a non-disclosure agreement with Jasmine.  We believe the claims asserted against our officers and us are without merit and we intend to defend all claims vigorously.

On June 21, 2005, we filed a cross complaint in the above disclosed action in the Santa Clara County Superior Court asserting claims against Jasmine and unnamed Jasmine officers and employees.  The cross complaint was later amended to name two individual officers of Jasmine.  On May 15, 2007, we filed a second amended cross complaint to add additional causes of action for declaratory relief against Jasmine.  Among other actions, the cross complaint alleges that Jasmine and its personnel engaged in fraud in connection with their effort to sell to us technology that Jasmine and its personnel wrongfully obtained from a third party in violation of such third party’s rights.  The cross complaint seeks declaratory judgment that our technology does not incorporate any of Jasmine’s alleged technology.  The cross complaint seeks further declaratory judgment that Jasmine and its personnel misappropriated certain aspects of Jasmine’s alleged technology.  We intend to prosecute the cross complaint against Jasmine and its personnel vigorously, including, but not limited to, filing certain dispositive motions regarding the ownership of the technology which is the subject of the cross complaint.

CSIRO Litigation. In 2004, Australia’s Commonwealth Scientific and Industrial Research Organisation (“CSIRO”) sent notice letters to a number of Wi-Fi System manufacturers regarding CSIRO’s patent, U.S. Patent No. 5,487,069 as it relates to IEEE 802.11a and 802.11g wireless standards.  In May 2005, a group of system manufacturers, including customers of our 802.11a or 802.11g wireless LAN products, filed an action in the United States District Court for the Northern District of California seeking a declaratory judgment against CSIRO that the plaintiff manufacturers’ products employing the IEEE 802.11a or 802.11g wireless standards do not infringe CSIRO’s  patent, U.S. Patent No. 5,487,069.  In September 2006, CSIRO filed an answer and counterclaims alleging that plaintiffs’ products that employ those wireless standards infringe the CSIRO patent and seeking damages, including enhanced

39




damages and attorneys’ fees and costs, and an injunction against sales of infringing products.  In December 2006, the district court granted CSIRO’s motion to transfer the case to the United States District Court for the Eastern District of Texas, where CSIRO had brought a similar lawsuit against another company.  As a result of CSIRO’s counterclaims for patent infringement, a customer of ours has sought indemnification from us.  Also in December 2006, CSIRO filed suit in the United States District Court for the Eastern District of Texas against several manufacturers and suppliers of wireless products, including customers of our 802.11a or 802.11g wireless LAN products.  The complaint alleges that the manufacture, use and sale of wireless products compliant with the IEEE 802.11a or 802.11g wireless standards infringes on the CSIRO patent.  As a result of CSIRO’s claim for patent infringement, another customer of ours has sought indemnification from us.  In response to these demands for indemnification, we have acknowledged the demands and incurred costs in response to them.

On May 4, 2007, we filed an action in the United States District Court for the Eastern District of Texas seeking a declaratory judgment against CSIRO that the CSIRO patent is invalid and unenforceable and that we and our customers do not infringe the CSIRO patent.  The complaint also seeks damages and a license for us and our customers on reasonable and non-discriminatory terms in the event our 802.11a/g wireless LAN products are found to infringe and the CSIRO patent is found to be valid and enforceable.  CSIRO has not yet responded to the complaint.

Shareholder Derivative Litigation.  Between July 7, 2006 and August 2, 2006, three purported shareholder derivative actions were filed in the United States District Court for the Northern District of California.  Each of these lawsuits names us as a nominal defendant and a number of our current and former directors and officers as defendants.  Each lawsuit seeks to recover damages purportedly sustained by us in connection with our option granting processes, and seeks certain corporate governance and internal control changes. Pursuant to orders of the court dated August 17 and October 17, 2006, the three actions were consolidated as a single action, entitled In re Marvell Technology Group Ltd. Derivative Litigation.  The plaintiffs filed an amended and consolidated complaint on November 1, 2006.  On January 16, 2007, we filed a motion to dismiss the consolidated complaint for lack of standing or, in the alternative, stay proceedings.  Pursuant to stipulations among the parties and orders of the court, our motion is currently scheduled to be heard on November 2, 2007.

On February 12, 2007, a new purported derivative action was filed in the United States District Court for the Northern District of California.  Like In re Marvell Technology Group Ltd. Derivative Litigation, this lawsuit names us as a nominal defendant and a number of our current and former directors and officers as defendants.  It seeks to recover damages purportedly sustained by us in connection with our option granting processes, and seeks certain corporate governance and internal control changes.  On May 1, 2007, the court entered an order consolidating this lawsuit with In re Marvell Technology Group Ltd. Derivative Litigation.

On May 29, 2007, the court entered an order staying discovery in this matter pending resolution of our motion to dismiss.

Securities Litigation.  Between October 5, 2006 and November 13, 2006, four putative class actions were filed in the United States District Court for the Northern District of California against us and certain of our officers and directors.  The complaints allege that we and certain of our officers and directors violated the federal securities laws by making false and misleading statements and omissions relating to the grants of stock options.  The complaints seek, on behalf of persons who purchased our common stock during the period from October 3, 2001 to October 3, 2006, unspecified damages, interest, and costs and expenses, including attorneys’ fees and disbursements.  Pursuant to an order of the court dated February 2, 2007, these four putative class actions were consolidated as a single action entitled In re Marvell Technology Group Ltd. Securities Litigation.  By an order of the court dated February 28, 2007, the plaintiffs must file a consolidated complaint no later than 45 days after we file restated financial statements with the SEC.

SEC and United States Attorney Inquiries.  In July 2006, we received a letter of informal inquiry from the Securities and Exchange Commission (“SEC”) requesting certain documents relating to our stock option grants and practices.  We also received a grand jury subpoena from the office of the United States Attorney for the Northern District of California requesting substantially similar documents.  On April 20, 2007, we were informed that the SEC is now conducting a formal investigation in this matter.  On June 8, 2007, we received a document subpoena from the SEC.  We have cooperated with the SEC and the United States Attorney regarding these matters and intend to continue to do so.  We cannot predict the outcome of these investigations.

General.  We are also party to other legal proceedings and claims arising in the normal course of business.

The legal proceedings and claims described above could result in substantial costs and could divert the attention and resources of our management.  Although the legal responsibility and financial impact with respect to these proceedings and claims cannot currently be ascertained, we do not believe that these matters will result in our payment of monetary damages, net of any applicable insurance proceeds, that in the aggregate would be material in relation to our consolidated financial position or results of operations. However,

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litigation is subject to inherent uncertainties and unfavorable rulings could occur. An unfavorable ruling in litigation could require us to pay damages or one-time license fees or royalty payments, which could adversely impact gross margins in future periods, or could prevent us from manufacturing or selling some of our products or limit or restrict the type of work that employees involved in such litigation may perform for us. There can be no assurance that these matters will be resolved in a manner that is not adverse to our business, financial condition, results of operations or cash flows.

Item 1A. Risk Factors

In addition to the factors discussed in the “Overview” and “Liquidity and Capital Resources” sections of Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the following additional factors may affect our future results. Many of these factors are beyond our control, including business cycles and seasonal trends of the computing, semiconductor and related industries.

Matters related to the internal review of our historical stock option granting practices and the restatement of our financial statements may result in additional litigation, regulatory proceedings and government enforcement actions.

Our historical stock option granting practices and the restatement of our financial statements have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. For more information regarding our current litigation and related inquiries, please see the discussion included in Part II, Item 1 — “Legal Proceedings,” of this Report as well as the other risk factors related to litigation set forth in this section. We have provided the results of our internal review to the Securities and Exchange Commission (“SEC”) and the United States Attorney’s Office for the Northern District of California, and in that regard we have responded to formal and informal requests for documents and additional information. No assurance can be given regarding the outcomes of litigation, regulatory proceedings or government enforcement actions relating to our past stock option practices. The resolution of these matters will be time consuming, expensive, and may distract management from the conduct of our business. Further, if we are subject to adverse findings in litigation, regulatory proceedings or government enforcement actions, we could be required to pay damages or penalties or have other remedies imposed against us, our directors, executive officers or other officers, or employees, which could harm our reputation, business, financial condition, results of operations and cash flows.

In addition, while we believe that we have, in completing the restatement of our financial statements, made appropriate judgments in determining the correct measurement dates and disclosures relating to our stock option investigation, the SEC may disagree with the manner in which we reported the results of the investigation or accounted for and reported, or did not report, the corresponding financial impact. Accordingly, it is possible that we will be required to restate further our prior financial statements, amend prior filings with the SEC, or take other actions not currently contemplated.

Recent changes in our management may cause uncertainty in, or be disruptive to, our business.

We have recently experienced significant changes in our management and our board of directors.  In May 2007, our former Chief Financial Officer resigned and our Executive Vice President and Chief Operating Officer, who is one of our co-founders, resigned from those positions and as a member of our board of directors and will continue in a non-management role.  Also, the general counsel of our U.S. operating subsidiary was terminated in March 2007.  We are conducting a search for a permanent Chief Operating Officer, Chief Financial Officer and General Counsel.  We cannot assure you that we will find qualified candidates in a timely manner.  We have also commenced a search for three new independent directors to fill existing vacancies on our board of directors, one of whom will succeed Dr. Sehat Sutardja as Chairman of the Board.  These changes in our management and board of directors may be disruptive to our business, and, during the transition period, there may be uncertainty among customers, investors, vendors, employees and others concerning our future direction and performance. Our future success will depend to a significant extent on the ability of our management team to work together effectively.  The loss of any of our management or other key personnel could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.  Moreover, our success will depend on our ability to attract, hire and retain management and other key personnel and on the abilities of the new management personnel to function effectively, both individually and as a group, going forward.  If we are unable to attract and retain effective permanent replacements for our key executives in a timely manner, our business, financial condition, results of operations and cash flows may be adversely affected and our ability to execute our business model could be impaired.  Competition for qualified senior employees can be intense. We expect to experience difficulty in hiring and retaining highly skilled individuals with appropriate qualifications to support our growth and expansion. For example, both our interim Chief Financial Officer and interim General Counsel may choose not to participate as candidates in our search to fill these positions.  If we fail to attract, hire and retain qualified management individuals, it could lead to dissatisfaction among our customers, which could slow our growth or result in a loss of business.

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We have been named as a party to several purported class action and derivative lawsuits relating to our past option granting practices, and we may be named in additional litigation, all of which could cause our business, financial condition, results of operations and cash flows to suffer.

We have been named as a nominal defendant in purported shareholder derivative actions that name a number of our current and former directors and officers as defendants and that seek to recover damages purportedly sustained by us in connection with our option granting practices.  Further, putative class actions have been filed against us and certain of our officers and directors that allege violations of the federal securities laws and seek to recover damages.  We may in the future be subject to additional litigation relating to our past option granting practices.  Regardless of the outcome, this litigation, and any other litigation that may be brought against us or our directors and officers, could be time consuming, result in significant expense, and divert the attention and resources of our management and other key employees.  An unfavorable outcome in such litigation could have a material adverse effect on our business, financial condition, results of operations and cash flows.

The matters relating to the internal review of our historical stock option granting practices and the restatement of our financial statements may otherwise adversely impact our business.

As a result of our delayed filing of our Quarterly Reports on Form 10-Q for the fiscal quarters ended July 29, 2006, October 28, 2006, and April 28, 2007 and our Annual Report on Form 10-K for the fiscal year ended January 27, 2007, we will be ineligible to register our securities on Form S-3 for sale by us or resale by others. We may use Form S-1 to raise capital or complete acquisitions, but doing so could increase transaction costs and adversely impact our ability to raise capital or complete acquisitions of other companies in a timely manner.

Employees who were awarded options that were granted at a discount from fair market value and were all or partially unvested as of December 31, 2004, which we refer to as discount options, may be subject to income tax liability on the vesting date of those discount options in addition to a 20% excise tax under Internal Revenue Code section 409A and parallel state taxes. In considering actions that we believe would be in t