S-1 1 ds1.htm FORM S-1 Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on August 1, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

M/A-COM TECHNOLOGY SOLUTIONS HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   3674   27-0306875
(State or other jurisdiction of incorporation or organization)  

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

100 Chelmsford Street

Lowell, MA 01851

(978) 656-2500

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Charles Bland

Chief Executive Officer

M/A-COM Technology Solutions Holdings, Inc.

100 Chelmsford Street

Lowell, MA 01851

(978) 656-2500

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Jason Day, Esq.

Perkins Coie LLP

1900 Sixteenth Street, Suite 1400

Denver, CO 80202-5255

(303) 291-2300

 

Keith Higgins, Esq.

Ropes & Gray LLP

Prudential Tower, 800 Boylston Street

Boston, MA 02199-3600

(617) 951-7000

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.   ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.   ¨

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

 

Large accelerated filer  ¨

  Accelerated filer  ¨   Non-accelerated filer  x     Smaller reporting company  ¨
   

(Do not check if a smaller reporting company)

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to Be Registered   Proposed Maximum
Aggregate Offering
Price (1)(2)
  Amount of
Registration Fee

Common stock, $0.001 par value per share

  $230,000,000   $26,703

 

 

 

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

Subject to Completion, dated August 1, 2011

PRELIMINARY PROSPECTUS

 

 

             Shares

LOGO

M/A-COM Technology Solutions Holdings, Inc.

Common Stock

 

 

This is the initial public offering of the common stock of M/A-COM Technology Solutions Holdings, Inc. We are offering              shares of our common stock and the selling stockholders identified in this prospectus are offering              shares of our common stock. We will not receive any proceeds from the sale of shares offered by the selling stockholders. No public market currently exists for our common stock.

We intend to apply to list our common stock on the Nasdaq Global Select Market under the symbol “MTSI.”

We anticipate that the initial public offering price will be between $             and $             per share.

Investing in our common stock involves risks. See “Risk Factors” beginning on page 11 of this prospectus.

 

     Per Share      Total  

Price to the public

   $                    $                

Underwriting discounts and commissions

   $         $     

Proceeds to us (before expenses)

   $         $     

Proceeds to the selling stockholders (before expenses)

   $         $     

We have granted the underwriters the option to purchase up to an additional              shares of our common stock on the same terms and conditions set forth above if the underwriters sell more than              shares of our common stock in this offering.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed on the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                     , 2011.

 

 

 

Barclays Capital   J.P. Morgan   Jefferies

 

Morgan Keegan

Raymond James

 

Needham & Company, LLC

Stifel Nicolaus Weisel

Prospectus dated                     , 2011

 


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     11   

Special Note Regarding Forward-Looking Statements

     33   

Market, Industry and Other Data

     33   

Use of Proceeds

     34   

Dividend Policy

     34   

Capitalization

     35   

Dilution

     37   

Selected Financial Data

     39   

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

     42   

Business

     63   

Management

     79   

Executive Compensation

     85   

Certain Relationships and Related Person Transactions

     102   

Principal and Selling Stockholders

     105   

Description of Capital Stock

     107   

Shares Eligible for Future Sale

     110   

Material U.S. Federal Income and Estate Tax Consequences to Non-U.S. Holders

     112   

Underwriting

     116   

Legal Matters

     124   

Experts

     124   

Where You Can Find More Information

     124   

Index to Financial Statements

     F-1   

 

 

You should rely only on the information contained in this prospectus or in any free writing prospectus filed with the Securities and Exchange Commission. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information different from that contained in this prospectus. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date on the front cover of this prospectus, or other date stated in this prospectus, regardless of the time of delivery of this prospectus or of any sale of our shares of common stock.

Until                     , 2011, (25 days after commencement of this offering), all dealers that buy, sell, or trade our shares of common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

For investors outside the United States: Neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. The distribution of this prospectus and any free writing prospectus and the offering and sale of shares of common stock may be restricted by law in your jurisdiction. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

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PROSPECTUS SUMMARY

The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the heading “Risk Factors.” See “Corporate Information” below in this summary and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—History and Basis of Presentation” for important details regarding our corporate history and presentation of our financial statements.

Company Overview

We are a leading provider of high-performance analog semiconductor solutions for use in wireless and wireline applications across the radio frequency (RF), microwave and millimeterwave spectrum. We leverage our system-level expertise to design and manufacture differentiated, high-value products for customers who demand high performance, quality and reliability. The diversity and depth of our business across technologies, products, applications, end markets and geographies provide us with a stable foundation for growth and enable us to develop strong relationships with our customers. We offer over 3,000 standard and custom devices, integrated circuits (ICs), multi-chip modules and complete subsystems across 38 product lines serving over 6,000 end customers in three large and growing primary markets. Our primary markets are Networks, which includes cable television (CATV), cellular backhaul, cellular infrastructure and fiber optic applications; Aerospace and Defense (A&D); and Multi-market, which includes automotive, industrial, medical, mobile and scientific applications.

We build upon a strong 60-year heritage of delivering innovative solutions dating back to the founding of Microwave Associates, Inc. We utilize our system-level knowledge and our extensive capabilities in high-frequency modeling, IC design, integration, packaging and manufacturing of semiconductors to address our customers’ needs. Our specialized engineers and technologists located across six global design centers collaborate with our customers during the early stage of their system development process to incorporate our standard products and identify custom products we can develop to enhance their overall system performance. We believe the combination of our market-facing strategy and our engineering expertise enables us to identify profitable growth opportunities and rapidly develop and deliver new products and solutions. We have a comprehensive new product opportunity assessment process with 128 products in development as of July 1, 2011 that we believe will enhance our revenue growth and improve our gross margin through a richer product mix. Many of our products have long lifecycles ranging from 5 to 10 years, and some products have been shipping for over 20 years. We believe these factors create a competitive advantage that often leads to sole source design wins and strengthened customer relationships.

We believe our “fab-lite” manufacturing model provides us with a competitive advantage and an attractive financial model through a variable cost structure. We operate a single gallium arsenide (GaAs) and silicon semiconductor fabrication facility (fab) at our Lowell, Massachusetts headquarters. We also utilize external semiconductor foundries to supply us with additional capacity in periods of high demand and to provide us access to additional process technologies. The ability to utilize a broad array of internal proprietary process technologies as well as commercially available foundry technologies allows us to select the most appropriate technology to solve our customers’ needs. We believe our fab-lite strategy provides us with dependable domestic supply, control over quality, reduced capital investment requirements, faster time to market and additional outsourced capacity when needed. In the A&D market, an internal domestic fab is often a requirement to be a strategic supplier. In addition, the experience base cultivated through the continued operation of our internal fab provides us with the expertise to better manage our external foundry suppliers.

 

 

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We serve our broad and diverse customer base through a multi-channel sales strategy utilizing direct sales and a global network of independent sales representatives and distributors. Our direct sales force and application engineers are focused on securing design wins by supporting industry-leading original equipment manufacturer (OEM) customers. Our customers include Alcatel-Lucent, Cisco Systems, Inc., Ericsson AB, Ford Motor Company (Ford), Harris Corporation, Huawei Technologies Co., Ltd., ITT Corporation, Rockwell Collins, Inc., Samsung Electronics Co., Ltd. and Thales S.A. Our top 25 direct customers, most of whom have been purchasing our products for at least a decade, accounted for 50.9% of our revenue in fiscal year 2010 and 57.2% of our revenue in the nine months ended July 1, 2011. Sales to our distributors accounted for 30.0% of our revenue in fiscal year 2010 and 25.1% of our revenue in the nine months ended July 1, 2011.

We generated revenue of $260.3 million for fiscal year 2010 and $231.5 million and $186.1 million for the nine months ended July 1, 2011 and July 2, 2010, respectively. Our revenue grew 24.4% for the nine months ended July 1, 2011 over the nine months ended July 2, 2010. We had 712 employees as of July 1, 2011.

Industry

The growth of advanced electronic systems using RF, microwave and millimeterwave technologies has created strong demand for high-performance analog semiconductor components, modules and solutions. This market demand is driven by the growth of mobile internet devices, cloud computing and streaming video that strain existing network capacity, as well as the growth in advanced information-centric military applications. In addition, the increasing need for real-time information, sensing and imaging functions in automotive, industrial, medical, scientific and test and measurement applications is driving demand in these markets.

As the demand for advanced electronics systems relying on RF, microwave and millimeterwave technologies increases, OEMs are facing increasing challenges including:

 

   

higher performance requirements such as increased throughput, reduced power consumption and increased signal integrity;

 

   

greater systems complexity due to competitive pressures to enhance system features and improve overall performance;

 

   

reducing development time in order to bring systems to market faster for customers facing increasing competition;

 

   

pressure to deliver more advanced and complex systems in a cost-effective manner; and

 

   

higher quality and reliability requirements, as the consequences of a field failure can be particularly serious or expensive to service.

Our Competitive Strengths

We believe our key competitive strengths include the following:

Extensive design and integration capabilities. Our 60-year heritage of innovation and experience includes advanced modeling, IC design, wafer fabrication processes, packaging and associated assembly and testing of individual devices and complete subsystems. Our system-level approach to integration, innovative IC and package design capabilities and experienced engineering talent enable us to provide a comprehensive set of high-performance and high-value solutions to meet the increasingly complex needs of our customers.

 

 

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Fab-lite manufacturing with broad and differentiated process and packaging technologies. We believe our fab-lite model provides us with an operating advantage over fabless competitors and those that only use an internal fab by giving us the flexibility to use our internal fab for proprietary process technologies and external fabs for other technologies. Our fab-lite model also provides us with dependable domestic supply, control over quality, reduced capital investment requirements, faster time to market and additional outsourced capacity when needed. In the A&D market, an internal domestic fab is often a requirement to be a strategic supplier.

Breadth and depth of product portfolio and diverse end markets. We offer more than 3,000 standard and custom ICs, modules and complete subsystems across 38 product lines. Many of our products have long lifecycles ranging from 5 to 10 years. Our broad range of products are offered in numerous form factors to facilitate their use in a variety of applications within our diverse primary markets of Networks, A&D and Multi-market, which represented 31%, 30% and 39%, respectively, of our revenue in the nine months ended July 1, 2011.

Global sales and engineering footprint fostering strong customer relationships. We employ a global multi-channel sales strategy and support model intended to facilitate our customers’ evaluation and selection of our products. We have strategically positioned our direct sales and applications engineering staff in 25 locations worldwide, augmented by independent sales representatives and distributors in 135 locations worldwide, to offer responsive local support to our customers, build long-term relationships and reach new customers in new geographies more effectively.

Proven track record, extensive history and reputation for delivering high-quality and reliable solutions. Our management team has an average of 23 years of experience in our industry. In addition, M/A-COM as a global brand leverages a 60-year heritage of designing and manufacturing innovative and reliable solutions. We have long-standing relationships with many of our industry-leading OEM customers who depend on us for high-quality and reliable solutions for technically demanding RF, microwave and millimeterwave applications.

Strategy

Our objective is to be the leader in providing high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum. Key elements of our strategy to achieve this objective include:

Aggressively deliver new products and solutions. Our system-level expertise, engineering talent and broad technology portfolio provide us with a strong foundation for delivering new products and solutions. We use our new product opportunity assessment process to identify and develop more integrated, higher-margin and value-added solutions with long lifecycles that we believe can support our revenue growth and improve our gross margin through a richer product mix. As of July 1, 2011, we had 128 new products in development.

Leverage technology expertise and innovation. We believe our core competency is the ability to model, design, integrate, package and manufacture differentiated solutions that are known for high performance, quality and reliability. We intend to leverage this core competency to continue to solve increasingly difficult and complex challenges that our customers face and to enhance and defend our technology leadership and sole supplier status with many of our customers.

Increase sales to existing customers and pursue new markets and customers. We intend to continue to expand our revenue opportunities through our market-facing strategy of aligning our solutions with our customers’ needs and collaborating with them during the product definition stage of their system, which allows us to sell more complete and highly-integrated semiconductor solutions. We believe we will continue to grow our sales by utilizing our multi-channel sales strategy and leveraging our technology across each of our large and growing primary markets.

 

 

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Utilize our fab-lite manufacturing approach to optimize our solutions. We intend to continue capitalizing on our fab-lite strategy as an operating advantage, allowing us to leverage our internal proprietary process technologies as well as other technologies from external fabs. We believe the flexibility and breadth of our fab-lite model help us provide optimized solutions for our customers and will help us continue to gain market share over time.

Opportunistically pursue complementary acquisitions. We may pursue acquisitions of technologies, design teams, products and companies that complement our strengths and help us execute our strategies. Our acquisition strategy is designed to accelerate our revenue growth, expand our technology portfolio, grow our addressable market and create shareholder value.

Continue to improve operational efficiency. We believe we will expand our gross margin primarily through a higher margin product mix driven by our new product development strategy. We also intend to continue to increase our operational efficiency by leveraging our existing fixed-cost structure, achieving greater capacity utilization and continuing to optimize our supply chain.

Risks

Our business is subject to numerous risks and uncertainties, including those highlighted in the section titled “Risk Factors” immediately following this prospectus summary, which you should carefully consider before deciding to invest in our common stock. Some of these risks include:

 

   

revenue growth that is substantially dependent on our successful development and release of new products;

 

   

various factors that may reduce our gross margin, which could negatively affect our results of operations;

 

   

order and shipment uncertainties, which could negatively affect our profitability if we fail to accurately forecast customer demand when managing inventory;

 

   

having a limited history of operations as a standalone company, which could make it difficult to evaluate our current business and prospects;

 

   

our principal end markets declining or failing to grow, which could negatively affect our revenue and profitability;

 

   

the decrease of the average selling prices of our products over time, which could have a material adverse effect on our revenue and gross margin;

 

   

our inability to compete successfully in the face of intense competition in our industry, which could negatively affect our revenue and gross margin; and

 

   

our dependence on orders from a limited number of customers for a significant percentage of our revenue.

Corporate Information

M/A-COM Technology Solutions Holdings, Inc. was incorporated under the laws of the State of Delaware in March 2009. The address of our principal executive offices is 100 Chelmsford Street, Lowell, Massachusetts 01851, and our telephone number is (978) 656-2500. In this prospectus, the terms “we,” “us” and “M/A-COM Tech” mean M/A-COM Technology Solutions Holdings, Inc. and its consolidated subsidiaries. Our operations are conducted through our various subsidiaries, which are organized and operated according to the laws of their respective jurisdictions of incorporation, and consolidated by M/A-COM Tech.

On March 30, 2009, we acquired 100% of the outstanding stock of M/A-COM Technology Solutions Inc. and M/ACOM Technology Solutions (Cork) Limited and the related M/A-COM brand (collectively, the M/A-COM Tech Business). In this prospectus, we refer to the acquisition of the M/A-COM Tech Business as the M/A-COM Acquisition.

 

 

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We acquired Mimix Holdings, Inc. (Mimix), a supplier of high-performance GaAs semiconductors, on May 28, 2010 (Mimix Merger) for its complementary products and technologies in our primary markets. Although Mimix operated as an independent company before the acquisition, we and Mimix had the same majority owner, who controlled Mimix prior to our incorporation. We therefore present in this prospectus combined financial statements in a manner similar to a pooling-of-interests. We treat Mimix as our accounting acquirer for financial statement presentation purposes because our majority owner acquired control of Mimix before acquiring control of us. Accordingly, our financial statements are presented as if the Mimix Merger occurred on the date of our incorporation in March 2009, when we came under common control with Mimix. Our financial statements for periods prior to March 30, 2009 reflect only the operations of Mimix and do not reflect the operations of the M/A-COM Tech Business. More specifically, our financial statements for fiscal year 2008 reflect only the operations of Mimix. Our financial statements for fiscal year 2009 reflect only the operations of Mimix through March 30, 2009 and reflect the combined operations of Mimix and the M/A-COM Tech Business from March 30, 2009 through October 2, 2009.

On April 25, 2011, we acquired Optomai, Inc. (Optomai), a fabless semiconductor company that develops high-performance ICs and modules for next generation fiber optic networks.

Our website address is www.macomtech.com. The information on or accessible through our website is not part of this prospectus. Our trademarks include “M/A-COM” and “The First Name in Microwave.” This prospectus also refers to the products or services of other companies by the trademarks and trade names used and owned by those companies.

 

 

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THE OFFERING

 

Common stock offered by us

             shares

 

Common stock offered by selling stockholders

             shares

 

Common stock to be outstanding immediately after this offering

             shares

 

Underwriters’ option to purchase additional shares

The underwriters have an option to purchase up to an aggregate of              additional shares of common stock from us to cover over-allotments. The underwriters can exercise this option at any time within 30 days from the date of this prospectus.

 

Use of proceeds

We plan to use $             of the net proceeds from this offering to pay to the holders of our Class B convertible preferred stock a preference payment to which they are entitled under our current amended and restated certificate of incorporation in connection with the conversion of the Class B convertible preferred stock prior to completion of this offering. We plan to use any remaining net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of these proceeds to acquire or make investments in complementary technologies, design teams, products and companies. We will not receive any proceeds from the common stock sold by the selling stockholders in this offering. See “Use of Proceeds.”

 

Risk factors

See “Risk Factors” beginning on page 11 and the other information included in this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our common stock.

 

Proposed Nasdaq Global Select Market symbol

MTSI

The number of shares of common stock outstanding immediately after this offering as set forth above is based on 158,664,636 shares of common stock outstanding, which assumes the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into shares of common stock, as of July 15, 2011 and excludes:

 

   

            shares of our common stock reserved for future issuance under our 2011 Omnibus Incentive Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans;”

 

   

9,395,102 shares of our common stock issuable upon the exercise of options outstanding as of July 15, 2011, to purchase shares of our common stock at a weighted-average exercise price of $0.315 per share;

 

   

5,125,431 shares of our common stock issuable upon the exercise of warrants outstanding as of July 15, 2011, to purchase shares of our common stock at an exercise price of $3.511898 per share; and

 

 

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            shares of our common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

Except as otherwise indicated, all information in this prospectus assumes:

 

   

the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 150,991,337 shares of our common stock to be effected upon the closing of this offering;

 

   

the filing and effectiveness of our fourth amended and restated certificate of incorporation and the effectiveness of our second amended and restated bylaws, which will occur immediately following the completion of this offering; and

 

   

no exercise by the underwriters of their option to purchase an additional             shares of our common stock to cover over-allotments.

 

 

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SUMMARY FINANCIAL DATA

You should read the following summary financial data in conjunction with our combined consolidated financial statements and related notes, as well as the sections titled “Risk Factors,” “Capitalization,” “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus. We were incorporated in March 2009 and completed the M/A-COM Acquisition on March 30, 2009. We acquired Mimix on May 28, 2010. Because we and Mimix had the same majority owner since our incorporation, we present in this prospectus combined financial statements in a manner similar to a pooling-of-interests. Because our majority owner acquired control of Mimix before acquiring control of us, we treat Mimix as our accounting acquirer for financial statement presentation purposes. Accordingly, our financial statements are presented as if the Mimix Merger had occurred on the date of our incorporation in March 2009, the date in which we came under common control with Mimix, and the financial statements for periods prior to March 30, 2009 reflect only the operations of Mimix. We derived (i) the statements of operations data for the fiscal years ended September 30, 2008, October 2, 2009 and October 1, 2010, and for the nine months ended July 1, 2011, and (ii) the balance sheet data as of October 2, 2009, October 1, 2010 and July 1, 2011, from our audited combined consolidated financial statements, which appear elsewhere in this prospectus. We derived the statements of operations data for the nine months ended July 2, 2010 from our unaudited combined consolidated financial statements, which appear elsewhere in this prospectus. These unaudited interim combined consolidated financial statements have been prepared on a basis consistent with our audited combined consolidated financial statements, and in the opinion of our management, include all adjustments, consisting only of normal, recurring adjustments and accruals, necessary for a fair presentation of our financial position and results of operations for the periods presented. All information presented as pro forma below is unaudited. We believe the financial results prior to March 30, 2009 are not comparable to our financial results for subsequent periods because they reflect only the operations of Mimix. For additional information on our presentation of financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—History and Basis of Presentation” appearing elsewhere in this prospectus.

 

    Fiscal Years     Nine Months Ended  
    2008     2009     2010     July 2,
2010
    July 1,
2011
 
                      (Unaudited)        

Statements of Operations Data (in thousands):

         

Revenue

  $ 25,423      $ 102,718      $ 260,297      $ 186,124      $ 231,493   

Cost of revenue (1)

    17,228        77,171        166,554        120,264        134,516   
                                       

Gross profit

    8,195        25,547        93,743        65,860        96,977   

Operating expenses:

         

Research and development (1)

    6,728        13,553        25,795        18,672        25,533   

Selling, general and administrative (1)

    6,047        25,601        45,860        33,281        36,617   

Accretion of contingent consideration

    —          2,800        2,000        1,500        660   

Restructuring charges

    —          5,100        2,234        1,369        866   
                                       

Total operating expenses

    12,775        47,054        75,889        54,822        63,676   
                                       

Income (loss) from operations

    (4,580     (21,507     17,854        11,038        33,301   
                                       

Other (expense) income:

         

Gain on bargain purchase

    —          27,073        —          —          —     

Accretion of common stock warrant liability (2)

    —          —          —          —          (10,241

Accretion of Class B conversion liability (3)

    —          —          —          —          (57,051

Interest expense

    (1,009     (1,699     (2,323     (1,738     (750
                                       

Total other (expense) income, net

    (1,009     25,374        (2,323     (1,738     (68,042
                                       

Income (loss) before income taxes

    (5,589     3,867        15,531        9,300        (34,741

Income tax (provision) benefit

    —          124        (8,996     (5,167     (3,779
                                       

Net income (loss) from continuing operations

    (5,589     3,991        6,535        4,133        (38,520
                                       

Net income from discontinued operations

    —          198        494        1,160        754   
                                       

Net income (loss)

    (5,589     4,189        7,029        5,293        (37,766

Less net income attributable to noncontrolling interest in a subsidiary

    —          23        195        195        —     
                                       

Net income (loss) attributable to controlling interest

    (5,589     4,166        6,834        5,098        (37,766

Accretion to redemption value of redeemable preferred stock and preferred stock dividends (4)

    (1,780     (3,559     (6,298     (4,585     (79,062
                                       

Net income (loss) attributable to common stockholders

  $ (7,369   $ 607      $ 536      $ 513      $ (116,828
                                       

 

 

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    Fiscal Years     Nine Months Ended  
    2008     2009     2010     July 2,
2010
    July 1,
2011
 

Net Income (Loss) Per Share (in thousands, except per share data):

         
(Unaudited)
  
 

Basic and diluted income (loss) per common share:

         

Income (loss) from continuing operations

  $ (9.67   $ 0.01      $ 0.00      $ (0.01)      $ (20.53

Income from discontinued operations

    —          0.00        0.01        0.02        0.13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (9.67   $ 0.01      $ 0.01      $ 0.01      $ (20.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per common share:

         

Basic

    762        52,806        47,521        62,200        5,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    762        53,366        50,343        62,553        5,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per common share: (5)

         

Basic

      $                     $                
     

 

 

     

 

 

 

Diluted

      $                     $                
     

 

 

     

 

 

 

Shares used to compute pro forma net income (loss) per common share: (5)

         

Basic

         
     

 

 

     

 

 

 

Diluted

         
     

 

 

     

 

 

 

 

    As of     As of July 1, 2011
    October 2,
2009
    October 1,
2010
    Actual     Pro Forma As
Adjusted (6)
                      (Unaudited)

Consolidated Balance Sheet Data (in thousands):

       

Cash and cash equivalents

  $ 15,358      $ 23,946      $ 36,728     

Working capital

    46,313        56,955        70,480     

Total assets

    153,315        164,836        204,592     

Note payable (7)

    30,191        30,000        —       

Class B conversion liability

    —          —          98,692     

Convertible and redeemable preferred stock

    —          —          180,628     

Stockholders’ equity (deficit)

    37,215        44,655        (180,654  

 

(1) Amortization expense related to intangible assets arising from acquisitions and non-cash compensation expense included in our combined consolidated statements of operations is set forth below (in thousands):

 

     Fiscal Years      Nine Months Ended  
     2008      2009      2010      July 2,
2010
     July 1,
2011
 
                          (Unaudited)         

Amortization expense:

  

Cost of revenue

   $ 98       $ 862       $ 1,594       $ 1,194       $ 1,207   

Selling, general and administrative

     98         613         1,095         822         811   

Non-cash compensation expense:

              

Cost of revenue

     26         173         194         139         290   

Research and development

     36         159         208         183         155   

Selling, general and administrative

     113         536         1,143         949         690   

 

(2) Represents changes in the fair value of common stock warrants recorded as liabilities and adjusted each reporting period to fair value.

 

(3) Represents changes in the fair value of features of our Class B convertible preferred stock that are recorded as liabilities and adjusted each reporting period to fair value.

 

(4) For the nine months ended July 1, 2011, includes $76.2 million of dividends declared and paid in January 2011 to holders of our Series A-1 and A-2 convertible preferred stock.

 

(5) Assumes the conversion of all outstanding shares of our convertible preferred stock into 150,991,337 shares of common stock upon the completion of this offering and the issuance of              shares to fund, in a manner similar to a dividend, the settlement of the Class B preference payment.

 

(6) The pro forma as adjusted column reflects the conversion of all outstanding shares of our convertible preferred stock into 150,991,337 shares of our common stock and the sale of                  shares of our common stock offered by this prospectus at an assumed initial public offering price of          per share, which is the midpoint of the price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the application of the net proceeds to settle the Class B convertible preferred stock preference payment.

 

(7) Reflects seller financing in connection with the M/A-COM Acquisition, which was subsequently paid off in December 2010.

 

 

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Quarterly Results (Unaudited):

The following table presents unaudited quarterly statement of operations data for each of the quarters in fiscal year 2010 and in the nine months ended July 1, 2011. This unaudited quarterly statement of operations information has been prepared on a basis consistent with our audited combined consolidated financial statements, and in the opinion of our management, include all adjustments, consisting only of normal, recurring adjustments and accruals, necessary for a fair presentation of our financial position and results of operations for the periods presented.

 

    Three Months Ended  
    January 1,
2010
    April 2,
2010
    July 2,
2010
    October 1,
2010
    December 31,
2010
    April 1,
2011
    July 1,
2011
 
    (in thousands)  

Revenue

  $ 57,405      $ 61,014      $ 67,705      $ 74,173      $ 74,909      $ 77,884      $ 78,700   

Cost of revenue (1)

    37,986        39,699        42,579        46,290        44,295        45,639        44,582   
                                                       

Gross profit

    19,419        21,315        25,126        27,883        30,614        32,245        34,118   

Operating expenses:

             

Research and development (1)

    4,756        6,352        7,564        7,123        7,714        8,356        9,463   

Selling, general and administrative (1)

    10,795        10,580        11,906        12,579        12,237        12,556        11,824   

Accretion of contingent consideration

    600        500        400        500        97        198        365   

Restructuring charges

    523        527        319        865        382        357        127   
                                                       

Total operating expenses

    16,674        17,959        20,189        21,067        20,430        21,467        21,779   
                                                       

Income from operations

    2,745        3,356        4,937        6,816        10,184        10,778        12,339   
                                                       

Net income (loss) (2)

  $ 2,563      $ 1,103      $ 1,627      $ 1,736      $ 8,606      $ (9,757   $ (36,615
                                                       

 

(1) Amortization expense related to intangible assets arising from acquisitions and non-cash compensation expense included in our quarterly financial data is set forth below:

 

    Three Months Ended  
    January 1,
2010
    April 2,
2010
    July 2,
2010
    October 1,
2010
    December 31,
2010
    April 1,
2011
    July 1,
2011
 
    (in thousands)  

Amortization expense:

             

Cost of revenue

  $ 399      $ 397      $ 398      $ 400      $ 382      $ 382      $ 443   

Selling, general and administrative

    274        274        274        273        258        257        296   

Non-cash compensation expense:

             

Cost of revenue

    (16     54        101        55        46        102        142   

Research and development

    6        39        138        25        34        40        81   

Selling, general and administrative

    266        208        475        194        85        386        219   

 

(2) Net loss for the three months ended April 1, 2011 and July 1, 2011 includes an aggregate of $20.4 million and $46.9 million of expense, respectively, relating to changes in the fair value of common stock warrants and features of our Class B convertible preferred stock that are recorded as liabilities and adjusted each reporting period to fair value.

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, together with the other information and financial statements appearing elsewhere in this prospectus, before you decide to invest in our common stock. If any of the following risks actually occur, our business, financial condition, results of operations and prospects could suffer, the market price of our common stock could decline and you might lose all or part of your investment in our common stock. See “Special Note Regarding Forward-Looking Statements” appearing elsewhere in this prospectus.

Risks Relating to Our Business

Our revenue growth is substantially dependent on our successful development and release of new products.

Our revenue growth will depend on our ability to timely develop new products for existing and new markets that meet customers’ performance, reliability and price requirements. The development of new products is a highly complex process, and we have in the past and may in the future experience delays and failures in completing the development and introduction of new products. Our successful product development depends on a number of factors, including the following:

 

   

accurate prediction of market requirements, changes in technology and evolving standards;

 

   

the availability of qualified product designers and process technologies needed to solve difficult design challenges in a cost-effective, reliable manner;

 

   

our ability to design products that meet customers’ cost, size and performance requirements;

 

   

our ability to manufacture new products according to customer needs with acceptable manufacturing yields;

 

   

our ability to offer new products at competitive prices;

 

   

acceptance by customers of our new product designs;

 

   

identification of and entry into new markets for our products;

 

   

acceptance of our customers’ products by the market and the lifecycle of such products;

 

   

our ability to deliver products in a timely manner within our customers’ product planning and deployment cycle; and

 

   

our ability to increase our product content in our customers’ systems.

A new product design effort may last 12 to 18 months or longer, and requires material investments in engineering hours and materials, as well as sales and marketing expenses, which will not be recouped if the product launch is unsuccessful. We may not be able to design and introduce new products in a timely or cost-efficient manner, and our new products may fail to meet the requirements of the market or our customers. In that case, we may not reach our expected level of production orders and lose market share, which could adversely affect our ability to sustain our revenue growth or maintain our current revenue levels.

Various factors may reduce our gross margin, which could negatively affect our business, financial condition and results of operations.

If we are unable to utilize our design, fabrication, assembly and test facilities at a high level, the significant fixed costs associated with these facilities may not be fully absorbed, resulting in higher average unit costs and lower gross margin. Our various products have different gross margin and increased sales of lower-margin products in a given period relative to other products may cause us to report lower overall gross margin. In the past, we have experienced periods where our gross margin declined due to, among other things, reduced factory utilization resulting from reduced customer demand, reduced selling prices and a change in product mix towards lower-margin products. Future market conditions may adversely affect our revenue and utilization rates and

 

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consequently our future gross margin, and this, in turn, could have an adverse impact on our business, financial condition and results of operations. In addition, increased raw material costs, manufacturing yields, more complex engineering requirements and other factors may lead to lower margins for us in the future. As a result of these or other factors, we may be unable to maintain or increase our gross margin in future periods and our gross margin may fluctuate from period to period.

We are subject to order and shipment uncertainties. Our profitability will decline if we fail to accurately forecast customer demand when managing inventory.

We generally sell our products on the basis of purchase orders rather than long-term purchase commitments from our customers. Our customers can typically cancel purchase orders or defer product shipments for some period without incurring liability to us. We typically plan production and inventory levels based on internal forecasts of customer demand, which can be highly unpredictable and can fluctuate substantially, leading to excess inventory write-downs and resulting negative impacts on gross margin and net income. We have limited visibility into our customers’ inventories, future customer demand and the product mix that our customers will require, which could adversely affect our production forecasts and operating margins. In addition, the rapid pace of innovation in our industry could render significant portions of our inventory obsolete. If we overestimate our customers’ requirements, we may have excess inventory, which could lead to obsolete inventory and unexpected costs. Conversely, if we underestimate our customers’ requirements, we may have inadequate inventory, which could lead to foregone revenue opportunities, loss of potential market share and damage to customer relationships as product deliveries may not be made on a timely basis, disrupting our customers’ production schedules. Some of our larger customers also require us to build and maintain minimum inventories and keep them available for purchase at specified locations based on non-binding demand estimates that are subject to change, which exposes us to increased inventory risk and makes it more difficult to manage our working capital. If demand from such customers decreases, we may be left with excess or obsolete inventory we are unable to sell. In response to anticipated long lead times to obtain inventory and materials from outside suppliers and foundries, we periodically order materials in advance of customer demand. This advance ordering has in the past and may in the future result in excess inventory levels or unanticipated inventory write-downs if expected orders fail to materialize, or other factors make our products less saleable. In addition, any significant future cancellation or deferral of product orders could adversely affect our revenue and margins, increase inventory write-downs due to obsolete inventory, and adversely affect our operating results and stock price.

Because we have a limited history of operations as a standalone company, it may be difficult to evaluate our current business and prospects.

While many of the products and technologies now comprising our business had a long history of operations as part of the larger organizations of prior owners, our standalone business began in March 2009. This short operating history as a standalone company, rather than as a small subset of a much larger corporate parent, combined with the rapidly evolving nature of our industry and fluctuations in the overall worldwide economy since March 2009, may make it difficult to evaluate our current business and future prospects. In addition, the financial statements included in this prospectus treat Mimix as our accounting acquirer. Therefore, our financial results prior to March 30, 2009 do not contain results from the M/A-COM Tech Business and are not comparable with the results after such date.

If our primary markets decline or fail to grow, our revenue and profitability may suffer.

Our future growth depends to a significant extent on the continued growth in usage of advanced electronic systems in Networks, A&D or Multi-market. The rate or extent to which these markets grow, if at all, is uncertain. These markets may fail to grow or decline for many reasons, including insufficient consumer demand, lack of access to capital, changes in the U.S. defense budget and procurement processes, changes in regulatory environments, and changes in network specifications. If demand for electronic systems in which our products are incorporated declines, fails to grow, or grows more slowly than we anticipate, purchases of our products may be reduced, which may adversely affect our business, financial condition and results of operations. In particular, our sales to Ford, which accounted for more than 10% of our revenue for the nine months ended July 1, 2011, are dependent upon the health of the automotive market and Ford’s ability to maintain or grow its market share.

 

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The average selling prices of our products may decrease over time, which could have a material adverse effect on our revenue and gross margin.

It is common in our industry for the average selling price of a given product to decrease over time as production volumes increase, competing products are developed or new technologies featuring higher performance or lower cost emerge. To combat the negative effects that erosion of average selling prices have had in the past and may in the future have on our revenue and gross margin, we attempt to actively manage the prices of our existing products and regularly introduce new process technologies and products in the market that exhibit higher performance, new features that are in demand, or lower manufacturing cost. Failure to maintain our current prices or to successfully execute on our new product development strategy will cause our revenue and gross margin to decline, which could decrease the value of your investment in our common stock.

We face intense competition in our industry, and our inability to compete successfully could negatively affect our operating results.

The semiconductor industry is highly competitive. While we compete with a wide variety of companies, we compete with Hittite Microwave Corporation (Hittite) across all three of our primary markets. Our other significant competitors include, among others, Aeroflex, Inc. (Aeroflex), Avago, Inc. (Avago), Microsemi Corporation (Microsemi), RF Micro Devices, Inc. (RFMD), Skyworks Solutions, Inc. (Skyworks) and TriQuint Semiconductor, Inc. (TriQuint).

We believe future competition could also come from companies developing new alternative technologies, component suppliers based in countries with lower production costs and IC manufacturers achieving higher levels of integration that exceed the functionality offered by our products. Our customers and suppliers could also develop products that compete with or replace our products. A decision by any of our large customers to design and manufacture ICs internally could have an adverse effect on our operating results. Increased competition could mean lower prices for our products, reduced demand for our products and a corresponding reduction in our ability to recover development, engineering and manufacturing costs.

Many of our existing and potential competitors have entrenched market positions, historical affiliations with OEMs, considerable internal manufacturing capacity, established intellectual property rights and substantial technological capabilities. Many of them may also have greater financial, technical, manufacturing or marketing resources than we do. Prospective customers may decide not to buy from us due to concerns about our relative size, financial stability or other factors. Our failure to successfully compete could result in lower revenue, decreased profitability and a lower stock price.

We typically depend on orders from a limited number of customers for a significant percentage of our revenue.

In fiscal year 2010, sales to our distributor Richardson Electronics, an Arrow Electronics Company (Richardson), and to Ford each accounted for more than 10% of our revenue, and sales to our top 10 direct and distribution customers accounted for 58% of our revenue. In the nine months ended July 1, 2011, sales to Richardson and Ford each accounted for more than 10% of our revenue, and sales to our top 10 direct and distribution customers accounted for an aggregate of 59% of our revenue. While the composition of our top 10 customers varies from year to year, we expect that sales to a limited number of customers will continue to account for a significant percentage of our revenue for the foreseeable future. The purchasing arrangements with our customers are typically conducted on a purchase order basis that does not require our customers to purchase any minimum amount of our products over a period of time. As a result, it is possible that any of our major customers could terminate their purchasing arrangements with us or significantly reduce or delay the amount of our products that they order, purchase products from our competitors or develop their own products internally. The loss of, or a reduction in, orders from any major customer could cause a decline in revenue and adversely affect our results of operations.

 

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We operate in the semiconductor industry, which is cyclical and subject to significant downturns.

The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, price erosion, product obsolescence, evolving standards, short product lifecycles and significant fluctuations in supply and demand. The industry has historically experienced significant fluctuations in demand and product obsolescence, resulting in product overcapacity, high inventory levels and accelerated erosion of average selling prices. Downturns in many sectors of the electronic systems industry have in the past contributed to extended periods of weak demand for semiconductor products. We have experienced adverse effects on our profitability and cash flows during such downturns in the past, and our business may be similarly harmed by any downturns in the future, particularly if we are unable to effectively respond to reduced demand in a particular market.

Our operating results may fluctuate significantly from period to period. We may not meet investors’ quarterly or annual financial expectations and, as a result, our stock price may decline.

Our quarterly and annual operating results may vary significantly in the future based upon a number of factors, many of which are beyond our control. Factors that could cause operating results to fluctuate include:

 

   

general economic growth or decline in the U.S. or foreign markets;

 

   

the timing, reduction or cancellation of orders by customers, whether as a result of a loss of market share by us or our customers, changes in the design of customers’ products, or slowing demand for our products or customers’ products;

 

   

the gain or loss of a key customer or significant changes in the financial condition of one or more key customers;

 

   

fluctuations in manufacturing output, yields, capacity levels, quality control or other potential problems or delays we or our subcontractors may experience in the fabrication, assembly, testing or delivery of our products;

 

   

changing conditions for products containing RF, microwave or millimeterwave applications, specifically in our Networks, A&D or Multi-market primary markets;

 

   

fluctuations in demand relating to the A&D market due to changes in government programs;

 

   

the market acceptance of our products and particularly the timing and success of new product and technology introductions by us, customers or competitors;

 

   

the amount, timing and relative success of our investments in research and development, which impacts our ability to develop, introduce and market new products and solutions on a timely basis;

 

   

period-to-period changes in the mix of products we sell, which can result in lower gross margin;

 

   

availability, quality and cost of semiconductor wafers and other raw materials, equipment, components and internal or outsourced manufacturing, packaging and test capacity, particularly where we have only one qualified source of supply;

 

   

seasonal and other changes in customer purchasing cycles and component inventory levels;

 

   

the effects of competitive pricing pressures, including decreases in average selling prices of our products;

 

   

impairment charges associated with intangible assets, including goodwill and acquisition-related intangible assets;

 

   

loss of key personnel or the shortage of available skilled workers;

 

   

factors that could cause our reported domestic and foreign income taxes and income tax rate to increase in future periods, such as limits on our ability to utilize net operating losses or tax credits and the geographic distribution of our income, which may change from period to period; and

 

   

the effects of war, natural disasters, acts of terrorism or geopolitical unrest.

 

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The foregoing factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly and annual operating results. In addition, if our operating results in any period do not meet our publicly stated guidance, if any, or the expectations of investors or securities analysts, our stock price may decline.

Our investment in research and development may not be successful, which may impact our profitability.

The semiconductor industry requires substantial investment in research and development in order to develop and bring to market new and enhanced technologies and products. Research and development expenses were $25.5 million for the nine months ended July 1, 2011 and $25.8 million for our fiscal year 2010. In fiscal year 2010 and the nine months ended July 1, 2011, we increased our research and development expenditures as part of our strategy toward the development of innovative and sustainable products and solutions to fuel our growth and profitability. We cannot assure you if or when the products and solutions where we have focused our research and development expenditures will become commercially successful. In addition, we may not have sufficient resources to maintain the level of investment in research and development required to remain competitive or succeed in our strategy. For example, development of certain process technologies requires significant expenditures that may not generate a sufficient return.

We may incur significant risk and expense in attempting to win new business, and such efforts may never generate revenue.

To obtain new business, we often need to win a competitive selection process to develop semiconductors for use in our customers’ systems, known in the industry as a “design win.” These competitive selection processes can be lengthy and can require us to incur significant design and development expenditures and dedicate scarce engineering resources in pursuit of an opportunity for a single customer opportunity. We may not win the competitive selection process and may never generate any revenue despite incurring significant design and development expenditures and selling, general and administrative expenses. Failure to obtain a design win sometimes prevents us from offering an entire generation of a product. This can result in lost revenue and could weaken our position in future competitive selection processes.

Even when we achieve a design win, success is not assured. Customer qualification and design cycles can be lengthy, and it may take a year or more following a successful design win and product qualification for one of our products to be purchased in volume by the customer. We may experience difficulties manufacturing the part in volume, such as low yields, supply chain delays or shortages, or quality issues. Further, while the customer has successfully qualified our part for use in its system when it awards a design win to us, it may not have qualified all of the other components being sourced for its system, or qualified its system as a whole with its end customers. Any difficulties our customer may experience in completing those qualifications may delay or prevent us from translating the design win into revenue. Any of these events, or any cancellation of a customer’s program or failure of our customer to successfully market its own product after our design win could materially and adversely affect our business, financial condition and results of operations, as we may have incurred significant expense and generated no revenue.

We expect to make future acquisitions, dispositions and investments, which involve numerous risks.

We have an active corporate development program and routinely evaluate potential acquisitions of, and investments with or other strategic alliances involving, complementary technologies, design teams, products and companies. We also may evaluate the merits of a potential divestment of one or more of our existing business lines. We expect to pursue such transactions if appropriate opportunities arise. However, we may not be able to identify suitable transactions in the future, or if we do identify such transactions, we may not be able to complete them on commercially acceptable terms, or at all. We also face intense competition for acquisitions from other acquirers in our industry. These competing acquirers may have significantly greater financial and other resources than us, which may prevent us from successfully pursuing a transaction. In the event we pursue acquisitions, we will face numerous risks including:

 

   

difficulties in integrating the personnel, culture, operations, technology or products and service offerings of the acquired company;

 

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diversion of management’s attention from normal daily operations of our business;

 

   

difficulties in entering markets where competitors have stronger market positions;

 

   

difficulties in managing and integrating operations in geographically dispersed locations;

 

   

difficulties in improving and integrating the financial reporting capabilities and operating systems of any acquired operations, particularly foreign and formerly private operations, as needed to maintain effective internal control over financial reporting and disclosure controls and procedures;

 

   

the loss of any key personnel of the acquired company as well as their know-how, relationships and expertise, which is common following an acquisition;

 

   

maintaining customer, supplier or other favorable business relationships of acquired operations;

 

   

generating insufficient revenue from completed acquisitions to offset increased expenses associated with any abandoned or completed acquisitions;

 

   

acquiring unknown liabilities associated with any acquired operations; and

 

   

additional expense associated with amortization or depreciation of acquired tangible and intangible assets.

Our past acquisitions of Mimix and Optomai required significant management time and attention relating to the transaction and subsequent integration. If we fail to properly integrate these acquired companies with ours, we may not receive the expected benefits of the acquisitions. Even if a proposed acquisition is successfully realized and integrated, we may not receive the expected benefits of the transaction.

Past transactions have resulted, and future transactions may result, in significant costs, expenses, liabilities and charges to earnings. The accounting treatment for any acquisition may result in significant amortizable intangible assets which, when amortized, will negatively affect our consolidated results of operations. The accounting treatment for any acquisition may result in significant goodwill, which, if impaired, will negatively affect our consolidated results of operations. Furthermore, we may incur indebtedness or issue equity securities to pay for acquisitions. The incurrence of indebtedness could limit our operating flexibility and be detrimental to our profitability, and the issuance of equity securities would be dilutive to our existing stockholders. Any or all of the above factors may differ from the investment community’s expectations in a given quarter, which could negatively affect our stock price. In addition, as a result of the foregoing, we may not be able to successfully execute acquisitions in the future to the same extent as we have the in the past, if at all.

In the event we make future investments, the investments may decline in value or fail to deliver any strategic benefits we anticipate from them, and we may lose all or part of our investment. In the event we undertake divestments, we may suffer from associated management distraction, damaged customer relationships, failure to realize the perceived strategic or financial merits of the divestment or suffer indemnity liabilities to the purchaser.

We depend on third parties for products and services required for our business, which may limit our ability to meet customer demand, assure product quality and control costs.

We purchase numerous raw materials, such as ceramic packages, precious metals, semiconductor wafers and dies, from a limited number of external suppliers. We also currently use several external manufacturing suppliers for assembly and testing of our products, and in some cases for fully-outsourced turnkey manufacturing of our products. We currently expect to increase our use of outsourced manufacturing in the future as a strategy for lowering our fixed operating costs. The ability and willingness of our external suppliers to perform is largely outside of our control. The use of external suppliers involves a number of risks, including the possibility of material disruptions in the supply of key components, the lack of control over delivery schedules, capacity constraints, manufacturing yields, quality and fabrication costs, and misappropriation of our intellectual property.

 

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For example, a defective batch of a chemical etchant received from a supplier caused higher than normal scrap loss in our internal manufacturing facility in March 2011, which reduced manufacturing yields and margins. If these vendors’ processes vary in reliability or quality, they could negatively affect our products and, therefore, our customer relations and results of operations.

We generally purchase raw materials on a purchase order basis and we do not have significant long-term supply commitments from our vendors. In terms of relative bargaining power, many of our suppliers are larger than we are, with greater resources, and many of their other customers are larger and have greater resources than we do. If these vendors experience shortages or fail to accurately predict customer demand, they may have insufficient capacity to meet our demand, creating a capacity constraint on our business. They may also choose to supply others in preference to us in times of capacity constraint or otherwise, particularly where the other customers purchase in higher volume. Third-party supplier capacity constraints have in the past and may in the future prevent us from supplying customer demand that we otherwise could have fulfilled at attractive prices.

Based on superior performance features, cost parameters or other factors, we utilize sole source suppliers for certain semiconductor packages and other materials, and it is not uncommon for one of our outside semiconductor foundries to be our sole supplier for the particular semiconductor fabrication process technologies manufactured at that supplier’s facility. Such supplier concentrations involve the risk of a potential future business interruption if the supplier becomes unable or unwilling to supply us at any point. While in some cases alternate suppliers may exist, because there are limited numbers of third-party wafer fabs that use the process technologies we select for our products and that have sufficient capacity to meet our needs, it may not be possible or may be expensive to find an alternative source of supply. Even if we are able to find an alternative source, moving production to an alternative external fab requires an extensive qualification or re-qualification process that could prevent or delay product shipments or disrupt customer’s production schedules, which could harm our business. In addition, some of our external foundry suppliers compete against us in the market in addition to being our supplier. The loss of a supplier can also significantly harm our business and operating results. A supplier may discontinue supplying us if its business is not sufficiently profitable, for competitive reasons or otherwise. We have in the past and may in the future have our supply relationship discontinued by an external foundry, causing us to experience supply chain disruption, customer dissatisfaction, loss of business and increased cost.

If we lose key personnel or fail to attract and retain key personnel, we may be unable to pursue business opportunities or develop our products.

We believe our continued ability to recruit, hire, retain and motivate highly-skilled engineering, operations, sales, administrative and managerial personnel is key to our future success. Competition for these employees is intense, particularly with respect to qualified engineers. Our failure to retain our present employees and hire additional qualified personnel in a timely manner and on reasonable terms could harm our competitiveness and results of operations. In addition, from time to time we may recruit and hire employees from our customers, suppliers and distributors, which could result in liability to us and has in the past and could in the future damage our business relationship with these parties. None of our senior management team is contractually bound to remain with us for a specified period, and we generally do not maintain key person life insurance covering our senior management. The loss of any member of our senior management team could strengthen a competitor or harm our ability to implement our business strategy.

Sources for certain components and materials are limited, which could result in interruptions, delays or reductions in product shipments.

Our industry may be affected from time to time by limited supplies of certain key components and materials. We have in the past and may in the future experience delays or reductions in supply shipments, which could reduce our revenue and profitability. If key components or materials are unavailable, our costs could increase and our revenue could decline.

 

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In particular, our manufacturing headquarters, design facilities, assembly and test facilities and supply chain, and those of our contract manufacturers, are subject to risk of catastrophic loss due to fire, flood, or other natural or man-made disasters, such as the earthquake and tsunami that devastated parts of Japan in 2011. Most of our semiconductor products are fabricated in our Lowell, Massachusetts headquarters, where our only internal wafer fab is located. In the nine months ended July 1, 2011, a substantial majority of the semiconductors used in our manufacturing were sourced internally. The majority of the internal and outsourced assembly and test facilities we utilize are located in the Pacific Rim, and some of our internal design, assembly and test facilities are located in California, regions with above average seismic and severe weather activity. In addition, our research and development personnel are concentrated in a few locations, primarily our headquarters and our Santa Clara, California, Sydney, Australia, Belfast, Northern Ireland and Cork, Ireland locations, with the expertise of the personnel at each such location generally focused on one or two specific areas. Any catastrophic loss or significant damage to any of these facilities would likely disrupt our operations, delay production, shipments and revenue and result in significant expenses to repair or replace the facility, and in some instances, could significantly curtail our research and development efforts in a particular product area or primary market, which could have a material adverse effect on our operations. In particular, any catastrophic loss at our headquarters facility would materially and adversely affect our business and financial results, revenue and profitability.

Our failure to continue to keep pace with new or improved semiconductor process technologies could impair our competitive position.

Semiconductor manufacturers constantly seek to develop new and improved semiconductor process technologies. Our future success depends in part upon our ability to continue to gain access to these semiconductor process technologies, internally or externally, in order to adapt to emerging customer requirements and competitive market conditions. If we fail for any reason to remain abreast of new and improved semiconductor process technologies as they emerge, we may lose market share, which could adversely affect our operating results.

Minor deviations in the manufacturing process can cause substantial manufacturing yield loss or even cause halts in production, which could have a material adverse effect on our revenue and gross margin.

Our products involve complexities in both the design and the semiconductor process technology employed in the fabrication of our products. In many cases, the products are also assembled in customized packages or feature high levels of integration. Our products must meet exacting customer specifications for quality, performance and reliability. Our manufacturing yield, or the percentage of units of a given product in a given period that is usable relative to all such units produced, is a combination of yields including wafer fabrication, assembly, and test yields. Due to the complexity of our products, we periodically experience difficulties in achieving acceptable yields as even minor deviations in the manufacturing process can cause substantial manufacturing yield loss or even cause halts in production. Our customers may also test our components once they have been assembled into their products. The number of usable products that result from our production process can fluctuate as a result of many factors, including the following:

 

   

design errors;

 

   

defects in photomasks, which are used to print circuits on wafers;

 

   

minute impurities in materials used;

 

   

contamination of the manufacturing environment;

 

   

equipment failure or variations in the manufacturing processes;

 

   

losses from broken wafers or other human error;

 

   

defects in packaging; and

 

   

issues and errors in testing.

 

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Typically, for a given level of sales, when our yields improve, our gross margin improves, and when our yields decrease, our unit costs are higher, our gross margin is lower and our profitability is adversely affected.

We depend on third-party sales representatives and distributors for a material portion of our revenues.

We sell many of our products to customers through independent sales representatives and distributors, as well as through our direct sales force. We are unable to predict the extent to which our independent sales representatives and distributors will be successful in marketing and selling our products. Moreover, many of our independent sales representatives and distributors also market and sell competing products. Our relationships with our representatives and distributors may be terminated by either party at any time, and do not require them to buy any of our products. Sales to distributors accounted for 30.0% of our revenue in fiscal year 2010, and sales to our largest distributor, Richardson, represented 23.4% of our revenue in the same period. If our distributors cease doing business with us or fail to successfully market and sell our products, our ability to sustain and grow our revenue could be materially adversely affected.

Our internal and external manufacturing, assembly and test model subjects us to various manufacturing and supply risks.

We operate a semiconductor wafer processing and manufacturing facility at our headquarters in Lowell, Massachusetts. This facility is also our primary internal design, assembly and test facility. We maintain other internal assembly and test operation facilities as well, including leased sites in Torrance, California and Hsinchu, Taiwan. We also use multiple external foundries for outsourced semiconductor wafer supply, as well as multiple domestic and Asian assembly and test suppliers to assemble and test our products. A number of factors will affect the future success of these internal manufacturing facilities and outsourced supply and service arrangements, including the following:

 

   

the level of demand for our products;

 

   

our ability to expand and contract our facilities and purchase commitments in a timely and cost-effective manner in response to changes in demand for our products;

 

   

our ability to generate revenue in amounts that cover the significant fixed costs of operating our facilities;

 

   

our ability to qualify our facilities for new products in a timely manner;

 

   

the availability of raw materials, including GaAs substrates and high purity source materials such as gallium, aluminum, arsenic, indium and silicon;

 

   

our manufacturing cycle times and yields;

 

   

the political and economic risks associated with our reliance on outsourced Asian assembly and test suppliers;

 

   

the location of our facilities and those of our outsourced suppliers;

 

   

natural disasters impacting our facilities and those of our outsourced suppliers;

 

   

our ability to hire, train, manage and retain qualified production personnel;

 

   

our compliance with applicable environmental and other laws and regulations; and

 

   

our ability to avoid prolonged periods of downtime or high levels of scrap in our facilities for any reason.

We may experience difficulties in managing any future growth.

To successfully conduct business in a rapidly evolving market, we must effectively plan and manage any current and future growth. Our ability to do so will be dependent on a number of factors, including:

 

   

maintaining access to sufficient manufacturing capacity to meet customer demands;

 

   

arranging for sufficient supply of key raw materials and services to avoid shortages or supply bottlenecks;

 

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building out our administrative infrastructure at the proper pace to support any current and future sales growth while maintaining operating efficiencies;

 

   

adhering to our high quality and process execution standards, particularly as we hire and train new employees and during periods of high volume;

 

   

managing the various components of our working capital effectively;

 

   

upgrading our operational and financial systems, procedures and controls, including improvement of our accounting and internal management systems; and

 

   

maintaining high levels of customer satisfaction.

If we do not effectively manage any future growth, we may not be able to take advantage of attractive market opportunities, our operations may be impacted and we may experience delays in delivering products to our customers or damaged customer relationships, and achieve lower than anticipated revenue and decreased profitability.

We may not realize the expected benefits of our recent restructuring activities and other initiatives designed to reduce costs and increase revenue across our operations.

We have pursued a number of restructuring initiatives designed to reduce costs and increase revenue across our operations. These initiatives included reductions in our number of manufacturing facilities and significant workforce reductions in certain areas as we realigned our business. Additional initiatives included establishing certain operations closer in location to our global customers and evaluating functions that may be more efficiently performed through outsourcing arrangements. These initiatives have been substantial in scope and disruptive to some of our historical operations. We may not realize the expected benefits of these new initiatives. As a result of these initiatives, we have incurred restructuring or other charges and we may in the future experience disruptions in our operations, loss of personnel and difficulties in delivering products timely. In the nine months ended July 1, 2011 and our fiscal year 2010, we incurred restructuring charges of $0.9 million and $2.2 million, respectively, consisting primarily of employee severance and related costs resulting from reductions in our workforce.

Our business could be harmed if systems manufacturers choose not to use components made of compound semiconductor materials we utilize.

Silicon semiconductor technologies are the dominant process technologies for the manufacture of ICs in high-volume, commercial markets and the performance of silicon ICs continues to improve. While we use silicon for some applications, we also often use compound semiconductor technologies such as GaAs, indium phosphide (InP) or gallium nitride (GaN) to deliver reliable operation at higher power, higher frequency or smaller form factor than a silicon solution would allow. While these compound semiconductor materials offer high-performance features, it is generally more difficult to design and manufacture products with reliability and in volume. GaN and InP, in particular, are newer process technologies that do not have as extensive a track record of reliable performance in the field as many of the competing process technologies. Compound semiconductor technology tends to be more expensive than silicon technology due to its above-described challenges and the generally lower volumes at which parts in those processes tend to be manufactured relative to silicon parts for high-volume consumer applications.

System designers in some markets may be reluctant to adopt our non-silicon products or may be likely to adopt silicon products in lieu of our products if silicon products meeting their demanding performance requirements are available, because of:

 

   

their unfamiliarity with designing systems using our products;

 

   

their concerns related to manufacturing costs and yields;

 

   

their unfamiliarity with our design and manufacturing processes; or

 

   

uncertainties about the relative cost effectiveness of our products compared to high-performance silicon components.

 

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We cannot be certain that additional systems manufacturers will design our compound semiconductor products into their systems or that the companies that have utilized our products will continue to do so in the future. If our products fail to achieve market acceptance, our results of operations will suffer.

Earn-out arrangements from our acquisitions may negatively affect our future cash flows.

In connection with the M/A-COM Acquisition, we agreed to pay Cobham Electronic Systems Corporation (Cobham) up to $30.0 million in the aggregate in the form of an earn-out based on our achievement of revenue targets in the 12-month periods ending September 30, 2010, 2011 and 2012, payable within 60 days of the end of the respective periods. The 2010 earn-out payment made to Cobham based on our performance was $8.8 million. Cobham may earn up to $15.0 million in each of the remaining two annual earn-out periods (subject in each case to the aggregate $30.0 million cap on all payments under the earn-out as a whole). Although neither period has been completed, our current expectation is that we will likely pay Cobham the maximum possible earn-out payment of $15.0 million for the period ending September 30, 2011, and that we will likely pay Cobham the remaining maximum possible earn-out payment of $6.2 million for the period ending September 30, 2012. The earn-out arrangement also provides the potential for accelerated earn-out payments and revision of the revenue targets in the event of a sale of our company or significant divestments by us of assets or businesses that would otherwise contribute revenue toward the earn-out. For example, if our current majority stockholder’s beneficial ownership of our outstanding equity securities drops below 50.1%, including in connection with this offering, the earn-out payments will accelerate.

We also entered into an earn-out arrangement in connection with our purchase of Optomai in April 2011. We agreed to pay the stockholders and option holders of Optomai up to $16.0 million in the aggregate in the form of an earn-out based on our achievement of certain revenue, product release and contribution margin targets based on sales of products utilizing Optomai intellectual property in the 12-month periods ending March 30, 2012 and March 29, 2013. The maximum aggregate earn-out payable by us pursuant to this earn-out arrangement is $1.0 million in the first annual earn-out period, and $16.0 million (less any earn-out paid in the first annual earn-out period) in the second annual earn-out period.

If an earn-out is achieved under either of these arrangements in any applicable period, payment of the earn-out will reduce the cash we otherwise would have available for general corporate purposes. If an earn-out payment is required in connection with our sale to an acquirer, it will reduce the proceeds otherwise available for distribution to stockholders in connection with the closing of such sale. As of July 1, 2011, we have recorded a liability of $26.0 million relating to these earn-out arrangements.

We may incur material costs and our business may be interrupted in connection with consolidation and outsourcing initiatives.

We have a number of ongoing strategic initiatives aimed at reducing our long-term operating cost model, including the outsourcing of various manufacturing functions to third party suppliers and consolidation of our operations within existing facilities. While the goal of these actions is to reduce recurring fixed cost, there are associated restructuring charges and execution risks associated with these initiatives. Exiting a leased site may involve negotiated exit payments with the landlord, temporary holding over at an increased lease rate, costs to perform restoration work required by the lease, or associated environmental liability, any of which may be material in amount. For example, we paid $2.5 million in exit costs in connection with our exit from a former leased site in Santa Clara, California in September 2010. Consolidation of operations and outsourcing may involve substantial capital expenses and the transfer of manufacturing processes and personnel from one site to another, with resultant startup issues at the receiving site and need for re-qualification of the transitioned operations with major customers and for ISO or other certifications. We may experience shortages of affected products, delays and higher than expected expenses. Affected employees may be distracted by the transition or may seek other employment, which could cause our overall operational efficiency to suffer.

 

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We are subject to risks from our international sales and operations.

We have operations in Europe, Asia and Australia, and customers around the world. As a result, we are subject to regulatory, geopolitical and other risks associated with doing business outside the U.S. Global operations involve inherent risks, including currency controls, currency exchange rate fluctuations, tariffs, required import and export licenses, associated delays and other related international trade restrictions and regulations.

The legal system in many of the regions where we conduct business can lack transparency in certain respects relative to that of the U.S. and can accord local government authorities a higher degree of control and discretion over business than is customary in the U.S. This makes the process of obtaining necessary regulatory approvals and maintaining compliance inherently more difficult and unpredictable. In addition, the protection accorded to proprietary technology and know-how under these legal systems may not be as strong as in the U.S., and, as a result, we may lose valuable trade secrets and competitive advantage. The cost of doing business in European jurisdictions can also be higher than in the U.S. due to exchange rates, local collective bargaining regimes and local legal requirements and norms regarding employee benefits and employer-employee relations, in particular.

Sales to customers located outside the U.S. accounted for 39.7% of our revenue in fiscal year 2010 and 47.6% of our revenue in the nine months ended July 1, 2011. We expect that revenue from international sales will continue to be a significant part of our total revenue. Because the majority of our foreign sales are denominated in U.S. dollars, our products become less price-competitive in countries with currencies that are low or are declining in value against the U.S. dollar. Also, we cannot be sure that our international customers will continue to accept orders denominated in U.S. dollars. If they do not, our reported revenue and earnings will become more directly subject to foreign exchange fluctuations. Some of our customer purchase orders and agreements are governed by foreign laws, which may differ significantly from U.S. laws. We may be limited in our ability to enforce our rights under such agreements and to collect amounts owed to us.

The majority of our assembly, packaging and test vendors are located in Asia. We generally do business with our foreign assemblers in U.S. dollars. Our manufacturing costs could increase in countries with currencies that are increasing in value against the U.S. dollar. Also, our international manufacturing suppliers may not continue to accept orders denominated in U.S. dollars. If they do not, our costs will become more directly subject to foreign exchange fluctuations. From time to time we may attempt to hedge our exposure to foreign currency risk by buying currency contracts or otherwise, and any such efforts involve expense and associated risk that the currencies involved may not behave as we expect, and we may lose money on such hedging strategies or not properly hedge our risk.

In addition, if terrorist activity, armed conflict, civil, economic or military unrest, or political instability occurs in the U.S. or other locations, such events may disrupt our manufacturing, assembly, logistics, security and communications, and could also result in reduced demand for our products. We have in the past and may again in the future experience difficulties relating to employees traveling in and out of countries facing civil unrest or political instability and with obtaining travel visas for our employees. Major health pandemics could also adversely affect our business and our customer order patterns. We could also be affected if labor issues disrupt our transportation arrangements or those of our customers or suppliers. There can be no assurance that we can mitigate all identified risks with reasonable effort. The occurrence of any of these events could have a material adverse effect on our operating results.

Our business could be adversely affected if we experience product returns, product liability and defects claims.

Our products are complex and frequently operate in high-performance, challenging environments. We may not be able to anticipate all of the possible performance or reliability problems that could arise with our products after they are released to the market. If such problems occur or become significant, we may experience reduced revenue and increased costs related to product recalls, inventory write-offs, warranty or damage claims, delays in, cancellations of, or returns of product orders, and other expenses. The many materials and vendors used in the

 

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manufacture of our products increase the risk that some defects may escape detection in our manufacturing process and subsequently affect our customers, even in the case of long-standing product designs. Our use of newly-developed or less mature semiconductor process technologies, such as GaN and InP, which have a less extensive track record of reliability in the field than other more mature process technologies, also increases the risk of performance and reliability problems. These matters have arisen in our operations from time to time in the past, have resulted in significant net costs to us per occurrence, and will likely occur again in the future. The occurrence of defects could result in product returns and liability claims, reduced product shipments, the loss of customers, the loss of or delay in market acceptance of our products, harm to our reputation, diversion of management’s time and resources, lower revenue, higher expenses and reduced profitability.

Any warranty or other rights we may have against our suppliers for quality issues caused by them may be more limited than those our customers have against us, based on our relative size, bargaining power, or otherwise. In addition, even if we ultimately prevail, such claims could result in costly litigation, divert management’s time and resources, and damage our customer relationships.

We also face exposure to potential liability resulting from the fact that some of our customers integrate our products into consumer products such as automobiles or mobile devices, which are then sold to consumers in the marketplace. We may be named in product liability claims even if there is not evidence that our products caused a loss. Product liability claims could result in significant expenses in connection with the defense of such claims and possible damages. In addition, we may be required to participate in a recall if our products prove to be defective. Any product recall or product liability claim brought against us could have a material negative impact on our reputation, business, financial condition or results of operations.

The outcome of litigation in which we have been named as a defendant is unpredictable and an adverse decision in any such matter could subject us to damage awards and lower the market price of our stock.

We are a defendant in a litigation matter described under the heading “Business—Legal Proceedings” appearing elsewhere in this prospectus. This and any other future litigation may divert financial and management resources that would otherwise be used to benefit our operations. Although we intend to contest the lawsuit vigorously, we cannot assure you that the results of the litigation will be favorable to us. An adverse resolution of the lawsuit or others in the future, including the results of any amicable settlement, could subject us to material damage awards or settlement payments or otherwise harm our business.

Our financial results may be adversely affected by increased tax rates and exposure to additional tax liabilities.

Our effective tax rate is highly dependent upon the geographic composition of our worldwide earnings and tax regulations governing each region, each of which can change from period to period. We are subject to income taxes in both the U.S. and various foreign jurisdictions, and significant judgment is required to determine our worldwide tax liabilities. Our effective tax rate as well as the actual tax ultimately payable could be adversely affected by changes in the amount of our earnings attributable to countries with differing statutory tax rates, changes in the valuation of our deferred tax assets, changes in tax laws or tax rates (particularly in the U.S. or Ireland), increases in non-deductible expenses, the availability of tax credits, material audit assessments or repatriation of non-U.S. earnings, each of which could materially affect our profitability. Any significant increase in our effective tax rates could materially reduce our net income in future periods and decrease the value of your investment in our common stock.

Changes in tax laws are introduced from time to time to reform U.S. taxation of international business activities. Depending on the final form of legislation enacted, if any, these consequences may be significant for us due to the large scale of our international business activities. If any of these proposals are enacted into legislation, they could have material adverse consequences on the amount of tax we pay and thereby on our financial position and results of operations.

 

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We may incur liability for claims of intellectual property infringement relating to our products.

The semiconductor industry is generally subject to frequent litigation regarding patents and other intellectual property rights. Other companies in the industry have numerous patents that protect their intellectual property rights in these areas, and have made in the past and may make in the future claims that we have infringed or misappropriated their intellectual property rights. One currently pending suit of this type is discussed elsewhere in this prospectus under “Business—Legal Proceedings.” Our customers may assert claims against us for indemnification if they receive claims alleging that their or our products infringe others’ intellectual property rights, and have in the past and may in the future choose not to purchase our products based on their concerns over such a pending claim. In the event of an adverse result of any intellectual property rights litigation, we could be required to pay substantial damages for infringement, expend significant resources to develop non-infringing technology, incur material liability for royalty payments or fees to obtain licenses to the technology covered by the litigation, or be subjected to an injunction, which could prevent us from selling our products and materially and adversely affect our revenue and results of operations. We cannot be sure that we will be successful in any such non-infringing development or that any such license would be available on commercially reasonable terms, if at all. Any claims relating to the infringement of third-party proprietary rights, even if not meritorious, could result in costly litigation, lost sales or damaged customer relationships, and diversion of management’s attention and resources.

Our limited ability to protect our proprietary information and technology may adversely affect our ability to compete.

Our future success and ability to compete is dependent in part upon our protection of our proprietary information and technology through patent filings and otherwise. We cannot be certain that any patents we apply for will be issued or that any claims allowed from pending applications will be of sufficient scope or strength to provide meaningful protection or commercial advantage. Our competitors may also be able to design around our patents. The laws of some countries in which our products are or may be developed, manufactured or sold, may not protect our products or intellectual property rights to the same extent as U.S. laws, increasing the possibility of piracy of our technology and products. Although we intend to vigorously defend our intellectual property rights, we may not be able to prevent misappropriation of our technology.

In addition, we rely on trade secrets, technical know-how and other unpatented proprietary information relating to our product development and manufacturing activities. We try to protect this information by entering into confidentiality agreements with employees and other parties. We cannot be sure that these agreements will be adequate and will not be breached, that we would have adequate remedies for any breach or that our trade secrets and proprietary know-how will not otherwise become known or independently discovered by others.

Additionally, our competitors may independently develop technologies that are substantially equivalent or superior to our technology. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain or use our products or technology. Our ability to enforce our patents and other intellectual property is limited by our financial resources and is subject to general litigation risks. If we seek to enforce our rights, we may be subject to claims that the intellectual property rights are invalid, are otherwise not enforceable or are licensed to the party against whom we assert a claim. In addition, our assertion of intellectual property rights could result in the other party seeking to assert alleged intellectual property rights of its own against us, which is a frequent occurrence in such litigations.

If we fail to comply with export control regulations we could be subject to substantial fines or other sanctions, including loss of export privileges.

Certain of our products are subject to the Export Administration Regulations, administered by the Department of Commerce, Bureau of Industry Security, which require that we obtain an export license before we can export products or technology to specified countries. Other products are subject to the International Traffic in Arms Regulations, which restrict the export of information and material that may be used for military or intelligence applications by a foreign person. We are also subject to U.S. import regulations and the import and export regimes of other countries in which we operate. Failure to comply with these laws could result in

 

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sanctions by the government, including substantial monetary penalties, denial of export privileges and debarment from government contracts. Export and import regulations may create delays in the introduction of our products in international markets or prevent the export or import of our products to certain countries or customers altogether. Any change in export or import regulations or related legislation, shift in approach by regulators to the enforcement or scope of existing regulations, changes in the interpretation of existing regulations by regulators or change in the countries, persons or technologies targeted by such regulations, could harm our business by resulting in decreased use of our products by, or our decreased ability to export or sell our products to, existing or potential customers with international operations.

We face risks associated with government contracting.

Some of our revenue is derived from contracts with agencies of the U.S. government or subcontracts with its prime contractors. Under some of our government subcontracts, we are required to maintain secure facilities and to obtain security clearances for personnel involved in performance of the contract, in compliance with applicable federal standards. If we were unable to comply with these requirements, or if personnel critical to our performance of these contracts were to lose their security clearances, we might be unable to perform these contracts or compete for other projects of this nature, which could adversely affect our revenue.

We may need to modify our activities or incur substantial costs to comply with environmental laws, and if we fail to comply with environmental laws we could be subject to substantial fines or be required to change our operations.

We are subject to a variety of international, federal, state and local governmental regulations directed at preventing or mitigating climate change and other environmental harms, as well as to the storage, discharge, handling, generation, disposal and labeling of toxic or other hazardous substances used to manufacture our products. If we fail to comply with these regulations, substantial fines could be imposed on us, and we could be required to suspend production, alter manufacturing processes, cease operations, or remediate polluted land, air or groundwater, any of which could have a negative effect on our sales, income and business operations. Failure to comply with environmental regulations could subject us to civil or criminal sanctions and property damage or personal injury claims. Compliance with current or future environmental laws and regulations could restrict our ability to expand our facilities or build new facilities, or require us to acquire additional expensive equipment, modify our manufacturing processes, or incur other substantial expenses which could harm our business, financial condition and results of operations. In addition, under some of these laws and regulations, we could be held financially responsible for remedial measures if our properties or those nearby are contaminated, even if we did not cause the contamination. We have incurred in the past and may in the future incur environmental liability based on the actions of prior owners, lessees or neighbors of sites we have leased or may lease in the future, or sites we become associated with due to acquisitions. We cannot predict:

 

   

changes in environmental or health and safety laws or regulations;

 

   

the manner in which environmental or health and safety laws or regulations will be enforced, administered or interpreted;

 

   

our ability to enforce and collect under indemnity agreements and insurance policies relating to environmental liabilities; or

 

   

the cost of compliance with future environmental or health and safety laws or regulations or the costs associated with any future environmental claims, including the cost of clean-up of currently unknown environmental conditions.

In addition to the costs of complying with environmental, health and safety requirements, we may in the future incur costs defending against environmental litigation brought by government agencies and private parties. We may be defendants in lawsuits brought by parties in the future alleging environmental damage, personal injury or property damage. A significant judgment against us could harm our business, financial condition and results of operations.

 

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Environmental regulations such as the WEEE and RoHS directives limit our flexibility and may require us to incur material expense.

Various countries require companies selling a broad range of electrical equipment to conform to regulations such as the Waste Electrical and Electronic Equipment (WEEE) and the European Directive 2002/95/Ec on restriction of hazardous substances (RoHS). New environmental standards such as these could require us to redesign our products in order to comply with the standards, require the development of compliance administration systems or otherwise limit our flexibility in running our business or require us to incur substantial compliance costs. For example, RoHS requires that certain substances be removed from all electronic components. The WEEE directive makes producers of electrical and electronic equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. We have already invested significant resources into complying with these regimes, and further investments may be required. Alternative designs implemented in response to regulation may be more costly to produce, resulting in an adverse effect on our gross profit margin. If we cannot develop compliant products in a timely fashion or properly administer our compliance programs, our revenue may also decline due to lower sales, which would adversely affect our operating results. Further, if we were found to be non-compliant with any rule or regulation, we could be subject to fines, penalties and/or restrictions imposed by government agencies that could adversely affect our operating results.

Our revolving credit facility could result in outstanding debt with a claim to our assets that is senior to that of our stockholders, and may have other adverse effects on our results of operations.

We have a revolving credit facility with RBS Business Capital with a potential future borrowing availability of up to $50.0 million, subject to compliance with financial and other covenants. As of July 1, 2011, our borrowing capacity under the revolving credit facility was $36.6 million. The facility is secured by a first priority lien on substantially all of our assets. The amount of our indebtedness could have important consequences, including the following:

 

   

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

 

   

no proceeds will be available for distribution to our stockholders in a sale or liquidation until any balance on the line is repaid in full;

 

   

we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions;

 

   

cash flow from operations will be allocated to the payment of the principal of, and interest on, any outstanding indebtedness; and

 

   

we cannot assure you that our business will generate sufficient cash flow from operations or other sources to enable us to meet our payment obligations under the facility and to fund other liquidity needs.

Our revolving loan facility also contains certain restrictive covenants that may limit or eliminate our ability to, among other things, incur additional debt, sell, lease or transfer our assets, pay dividends, make capital expenditures, investments and loans, make acquisitions, guarantee debt or obligations, create liens, enter into transactions with our affiliates, enter into new lines of business and enter into certain merger, consolidation or other reorganizations transactions. These restrictions could limit our ability to withstand downturns in our business or the economy in general or to take advantage of business opportunities that may arise, any of which could place us at a competitive disadvantage relative to our competitors that are not subject to such restrictions. If we breach a loan covenant, the lenders could either refuse to lend funds to us or accelerate the repayment of any outstanding borrowings under the revolving credit facility. We might not have sufficient assets to repay such indebtedness upon a default. If we are unable to repay the indebtedness, the lenders could initiate a bankruptcy proceeding against us or collection proceedings with respect to our assets securing the facility, which could materially decrease the value of our common stock.

 

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We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.

We have no direct operations and derive all of our cash flow from our subsidiaries. Because we conduct our operations through our subsidiaries, we depend on those entities for dividends and other payments or distributions to meet our operating needs. Legal and contractual restrictions in any existing and future outstanding indebtedness we or our subsidiaries incur may limit our ability to obtain cash from our subsidiaries. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could limit or impair their ability to pay dividends or other distributions to us.

Variability in self-insurance liability estimates could impact our results of operations.

We self-insure for employee health insurance and workers’ compensation insurance coverage up to a predetermined level, beyond which we maintain stop-loss insurance from a third-party insurer. Our aggregate exposure varies from year to year based upon the number of participants in our insurance plans. We estimate our self-insurance liabilities using an analysis provided by our claims administrator and our historical claims experience. Our accruals for insurance reserves reflect these estimates and other management judgments, which are subject to a high degree of variability. If the number or severity of claims for which we self-insure increases, it could cause a material change to our reserves for self-insurance liabilities, as well as to our earnings.

We may be subject to liabilities based on alleged links between the semiconductor manufacturing process and certain illnesses and birth defects.

In recent years, there has been increased media scrutiny and associated reports regarding a potential link between working in semiconductor manufacturing clean room environments and birth defects and certain illnesses, primarily cancer. Regulatory agencies and industry associations have begun to study the issue to determine if any actual correlation exists. Because we utilize clean rooms, we may become subject to liability claims alleging personal injury. In addition, these reports may also affect our ability to recruit and retain employees. A significant judgment against us or material defense costs could harm our reputation, business, financial condition and results of operations.

We rely on third parties to provide corporate infrastructure services necessary for the operation of our business. Any failure of one or more of our vendors to provide these services could have a material adverse effect on our business.

We rely on third-party vendors to provide critical corporate infrastructure services, including, among other things, certain services related to information technology, network development and monitoring, and human resources. We depend on these vendors to ensure that our corporate infrastructure will consistently meet our business requirements. The ability of these third-party vendors to successfully provide reliable, high quality services is subject to technical and operational uncertainties that are beyond our control. While we may be entitled to damages if our vendors fail to perform under their agreements with us, our agreements with these vendors limit the amount of damages we may receive. In addition, we do not know whether we will be able to collect on any award of damages or that any such damages would be sufficient to cover the actual costs we would incur as a result of any vendor’s failure to perform under its agreement with us. Any failure of our corporate infrastructure could have a material adverse effect on our business, financial condition and results of operations. Upon expiration or termination of any of our agreements with third-party vendors, we may not be able to replace the services provided to us in a timely manner or on terms and conditions, including service levels and cost, that are favorable to us and a transition from one vendor to another vendor could subject us to operational delays and inefficiencies until the transition is complete.

 

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Risks Relating to This Offering, Our Stock and Our Capitalization

An active trading market for our common stock may not develop and you may not be able to sell your common stock at or above the initial public offering price.

Prior to this offering, there has been no public market for our common stock. An active trading market for our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your common stock at an attractive price, or at all. The initial public offering price for our common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. An inactive market may also impair our future ability to raise capital by selling our common stock and may impair our ability to acquire other complementary technologies, design teams, products and companies by using our common stock as consideration.

The market price of our common stock may be volatile, which could result in substantial losses for investors purchasing shares in this offering.

You should consider an investment in our common stock risky and invest only if you can withstand a significant loss and wide fluctuations in the market value of your investment. In addition to the risks described in this prospectus, factors that may cause the market price of our common stock to fluctuate include:

 

   

changes in general economic, industry and market conditions;

 

   

domestic and international economic factors unrelated to our performance;

 

   

actual or anticipated fluctuations in our quarterly operating results;

 

   

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

   

changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

   

changes in market valuations or earnings of similar companies;

 

   

addition or loss of significant customers;

 

   

announcements by us or our competitors, customers or suppliers of significant products, contracts, acquisitions, strategic partnerships or other events;

 

   

developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual property lawsuits we may initiate, or in which we may be named as defendants;

 

   

failure to complete significant sales;

 

   

developments concerning current or future strategic alliances or acquisitions;

 

   

any future sales of our common stock or other securities; and

 

   

additions or departures of directors, executives or key personnel.

Furthermore, the stock markets recently have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions, interest rate changes or international currency fluctuations, may negatively impact the market price of our common stock. If the market price of our common stock after this offering does not exceed the initial public offering price, you may not realize any return on your investment in us and may lose some or all of your investment. In the past, companies that have experienced volatility in the market price of their stock have been subject to securities class

 

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action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If securities or industry analysts do not publish research or reports about our business, or publish negative reports about our business, our stock price and trading volume could decline.

The trading market for our common stock will depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our common stock or change their opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease their coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our stock price or trading volume to decline.

Upon expiration of lock-up agreements between the underwriters and our officers, directors and certain holders of our common stock, a substantial number of shares of our common stock could be sold into the public market shortly after this offering, which could depress our stock price.

Our officers, directors and certain holders of our common stock, options and warrants, holding substantially all of our outstanding shares of common stock prior to completion of this offering, have entered into lock-up agreements with our underwriters which prohibit, subject to certain limited exceptions, the disposal or pledge of, or the hedging against, any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, subject to extension in certain circumstances. The market price of our common stock could decline as a result of sales by our existing stockholders in the market after this offering and after the expiration of these lock-up periods, or the perception that these sales could occur. Once a trading market develops for our common stock, and after these lock-up periods expire, many of our stockholders will have an opportunity to sell their stock for the first time. These factors could also make it difficult for us to raise additional capital by selling equity or equity-related securities in the future at a time and price we deem appropriate. See “Shares Eligible for Future Sale” appearing elsewhere in this prospectus.

Our common stock price may decline if a substantial number of shares are sold in the market by our stockholders.

Future sales of substantial amounts of shares of our common stock by our existing stockholders in the public market, or the perception that these sales could occur, may cause the market price of our common stock to decline. Increased sales of our common stock in the market for any reason could exert significant downward pressure on our stock price. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate.

Some of our stockholders can exert control over us, and they may not make decisions that reflect our interests or those of other stockholders.

Our largest stockholders control a significant amount of our outstanding common stock. As of July 15, 2011, John and Susan Ocampo beneficially owned 66.3% of our common stock and certain investment funds affiliated with Summit Partners, L.P. owned 23.8% of our common stock, each on an as-converted basis. After this offering, John and Susan Ocampo will beneficially own approximately     % and certain investment funds affiliated with Summit Partners, L.P. will own approximately     % of our common stock, assuming no exercise by the underwriters of their over-allotment option. As a result, these stockholders will be able to exert a significant degree of influence over our management and affairs and control over matters requiring stockholder approval, including the election of our directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our securities. In addition, the interests of these stockholders may not always coincide with your interests or the interests of other stockholders.

 

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We may engage in future capital-raising transactions that dilute our stockholders or cause us to incur debt.

We may issue additional equity, debt or convertible securities to raise capital in the future. If we do, existing stockholders may experience significant further dilution. In addition, new investors may demand rights, preferences or privileges that differ from, or are senior to, those of our existing stockholders. Our incurrence of indebtedness could limit our operating flexibility and be detrimental to our results of operations.

We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.

As a public company we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act, as well as related rules and regulations implemented by the SEC and Nasdaq. In addition, our management team will have to adapt to the requirements of being a public company. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are unable to currently estimate these costs with any degree of certainty. We also expect these rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage than used to be available. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.

We are required to evaluate our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, and any adverse results from such evaluation could result in a loss of investor confidence in our financial reports and have an adverse effect on our stock price.

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning as early as the time of filing of our Annual Report on Form 10-K for the fiscal year ending September 28, 2012 and no later than the fiscal year ending September 27, 2013, we will be required to furnish a report by our management on our internal control over financial reporting. Such a report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. We have not completed the system and process documentation and evaluation needed to comply with these requirements. If our management identifies one or more material weaknesses in our internal control over financial reporting during this process, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective, or if our independent registered public accounting firm is unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price. We cannot assure you that we will not have deficiencies or weaknesses in our internal controls over financial reporting in the future.

In addition, as a new public company, we are implementing additional financial and management controls, reporting systems and procedures and are hiring additional accounting and finance staff in order to ensure the accuracy and completeness of our financial reports even before we are subject to the management report requirements under Section 404 of the Sarbanes-Oxley Act. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired, which could lead to inaccurate financial reports, which in turn could adversely affect our stock price.

We may also rely on external consultants to supplement our internal controls. For example, prior to completion of this offering, we have relied on external consultants to supplement our internal controls over

 

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financial reporting in connection with our accounting for income taxes and other complex accounting and financial matters, some of which require significant technical accounting expertise or require significant judgment. Use of external consultants involves additional risk that our external consultants may not perform as expected, or that coordination between our internal and external resources may not be adequate, resulting in one or more procedures not being performed or reviewed as planned, or one or more errors not being identified and corrected. If we do not effectively manage our outside consultants or if they fail to perform as expected or fail to provide an adequate level of expertise in certain areas, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired and the accuracy and completeness of our financial reports could be compromised, which could adversely affect our stock price.

We are obligated to use a substantial portion of the net proceeds from this offering to make a preference payment to the holders of our Class B convertible preferred stock, and management may apply the remainder of the net proceeds from this offering to uses that do not increase our market value or improve our operating results.

We plan to use $             of the net proceeds from this offering to pay to the holders of our Class B convertible preferred stock a preference payment to which they are entitled under our current amended and restated certificate of incorporation in connection with the conversion of the Class B convertible preferred stock prior to completion of this offering. We plan to use any remaining net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of the net proceeds to acquire or make investments in complementary technologies, design teams, products and companies. We cannot state with certainty how our management will use these net proceeds. Accordingly, our management will have considerable discretion in applying our net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether we are using our net proceeds appropriately. We may use our net proceeds for purposes that do not result in any increase in our results of operations or market value. Until the net proceeds we receive are used, they may be placed in investments that do not produce income or that lose value.

Anti-takeover provisions in our charter documents and Delaware law could prevent or delay a change in control of our company that stockholders may consider beneficial and may adversely affect the price of our stock.

Provisions of our fourth amended and restated certificate of incorporation and second amended and restated bylaws, each of which will be effective immediately following the completion of this offering, may discourage, delay or prevent a merger, acquisition or change of control that a stockholder may consider favorable. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. The existence of these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. These provisions include authorizing the issuance of “blank check” preferred stock, staggered elections of directors, and establishing advance notice requirements for nominations for election to the board of directors and for proposing matters to be submitted to a stockholder vote. Provisions of Delaware law may also discourage, delay or prevent someone from acquiring or merging with our company or obtaining control of our company. Specifically, Section 203 of the Delaware General Corporate Law may prohibit business combinations with stockholders owning 15% or more of our outstanding voting stock and could reduce our value.

We do not intend to pay dividends for the foreseeable future.

We do not intend to pay any cash dividends on our common stock in the foreseeable future. The payment of cash dividends is restricted under the terms of the agreements governing our indebtedness. In addition, because we are a holding company, our ability to pay cash dividends may be limited by restrictions on our ability to obtain sufficient funds through dividends from subsidiaries, including restrictions under the terms of the agreements governing our indebtedness. We anticipate that we will retain all of our future earnings for use in the development of our business and for general corporate purposes. Any determination to pay dividends in the future will be at the discretion of our board of directors. Accordingly, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investments.

 

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You will incur immediate and substantial dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your stock than the amounts paid by existing stockholders for their stock. As a result, you will incur immediate and substantial dilution of $             per share, representing the difference between the initial public offering price of $             per share (the mid-point of the estimated price range set forth on the cover page of this prospectus) and our as adjusted net tangible book value per share after giving effect to this offering. See “Dilution” appearing elsewhere in this prospectus.

We expect to be a “controlled company” within the meaning of the rules of the Nasdaq Stock Market, and, as a result, will qualify for, and may rely on, exemptions from certain corporate governance requirements. You will not have the same protections afforded to stockholders of companies that are subject to such requirements.

After completion of this offering, we expect John and Susan Ocampo to continue to control a majority of the voting power of our outstanding common stock. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the Nasdaq Stock Market. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group or another company is a “controlled company” and may elect not to comply with certain corporate governance requirements, including:

 

   

the requirement that a majority of the board of directors consist of independent directors;

 

   

the requirement that the listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;

 

   

the requirement that the listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and

 

   

the requirement for an annual performance evaluation of the nominating and governance and compensation committees.

Following this offering, we may utilize each of these exemptions. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the Nasdaq Stock Market.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements based on our management’s beliefs and assumptions and on information currently available to our management. The forward-looking statements are contained principally in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Compensation Discussion and Analysis.” Forward-looking statements include, among others, information concerning our possible or assumed future results of operations, business strategies, competitive position, industry, and potential growth and market opportunities. Forward-looking statements include all statements that are not historical facts and generally may be identified by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “would” or similar expressions and the negatives of those terms.

Forward-looking statements contained in this prospectus reflect our views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause events or our actual activities or results to differ significantly from those expressed in any forward-looking statement. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future events, results, actions, levels of activity, performance or achievements. Readers are cautioned not to place undue reliance on these forward-looking statements. A number of important factors could cause actual results to differ materially from those indicated by the forward-looking statements, including, among others, those factors described in “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

All forward-looking statements included in this prospectus are based on information available to us on the date of this prospectus. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. You should read this prospectus and the documents that we reference in this prospectus and have filed with the Securities and Exchange Commission (SEC) as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

MARKET, INDUSTRY AND OTHER DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including market opportunity and market size, is based on information from various publicly available sources, on assumptions that we have made that are based on that data and other similar sources and on our knowledge of the markets for our products and services. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified any third-party information and cannot assure you of its accuracy or completeness. While we believe the information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our sale of common stock in this offering will be approximately $             million, assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the common stock sold by the selling stockholders in this offering. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds from this offering by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting estimated underwriting discounts and commissions and estimated offering expenses.

We plan to use $             of the net proceeds from this offering to pay to the holders of our Class B convertible preferred stock a preference payment to which they are entitled under our current amended and restated certificate of incorporation in connection with the conversion of the Class B convertible preferred stock prior to completion of this offering. See “Certain Relationships and Related Person Transactions—Sale of Class B Convertible Preferred Stock and Warrants” appearing elsewhere in this prospectus for a description of this payment. We plan to use any remaining net proceeds from this offering for general corporate purposes, including working capital. We may also use a portion of these proceeds for the acquisition of, or investment in, complementary technologies, design teams, products and companies that complement our business, although we have no present commitments or agreements to enter into any acquisitions or investments.

DIVIDEND POLICY

We declared a one-time special dividend in the aggregate amount of $80.0 million on our Series A-1 convertible preferred stock, Series A-2 convertible preferred stock and common stock in January 2011. We do not intend to pay any additional cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and growth of our business. We are also restricted from paying dividends under certain requirements of law and the terms of the agreements governing our indebtedness. Any future determination to pay dividends will be subject to the discretion of our board of directors and will depend on various factors, including applicable laws, our results of operations, financial condition and liquidity requirements, restrictions that may be imposed by agreements governing our indebtedness and any other factors that our board of directors may consider relevant.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of July 1, 2011:

 

   

on an actual basis; and

 

   

on a pro forma basis, as adjusted to give effect to (i) the conversion of all of our convertible preferred stock into an aggregate of 150,991,337 shares of our common stock to be effected upon the completion of this offering, including settlement of the Class B conversion liability, and (ii) the issuance and sale by us of              shares of common stock in this offering, and the application of the net proceeds from the sale of such shares as described in “Use of Proceeds” at an assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, after deducting any estimated underwriting discounts and commissions and estimated offering expenses payable by us.

Our capitalization following this offering will depend upon the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with the sections entitled “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

     As of July 1, 2011
     Actual     Pro Forma,
as Adjusted
(unaudited)
     (in thousands except
share data)

Cash and cash equivalents

   $ 36,728     
          

Class B conversion liability

   $ 98,692     
          

Convertible preferred stock, $0.001 par value:

    

Series A-1 convertible preferred stock: 100,000,000 shares authorized, 100,000,000 shares issued and outstanding, actual; no shares issued and outstanding, pro forma as adjusted

   $ 64,000     

Series A-2 convertible preferred stock: 17,626,500 shares authorized, 16,821,780 shares issued and outstanding, actual; no shares issued and outstanding, pro forma as adjusted

     42,400     
          

Convertible preferred stock

     106,400     
          

Redeemable convertible preferred stock, $0.001 par value:

    

Class B convertible preferred stock: 34,169,560 shares authorized, 34,169,559.75 shares issued and outstanding, actual; no shares issued and outstanding, pro forma as adjusted

     74,228     
          

Stockholders’ equity (deficit)

    

Common stock, $0.001 par value: 208,921,494 shares authorized, 7,653,799 shares issued and outstanding, actual;             shares authorized,              shares authorized,             shares issued and outstanding, pro forma as adjusted

     7     

Accumulated other comprehensive loss

     (154  

Additional paid-in capital

     —       

Accumulated deficit

     (180,507  
          

Total stockholders’ equity (deficit)

     (180,654  
          

Total capitalization

   $ (26  
          

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, would increase (decrease) the amount of cash and cash equivalents, working capital, total assets and total stockholders’ equity and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each increase (decrease) of one million shares in the number of shares of our common stock offered by us would increase (decrease) the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $             million, assuming the assumed initial public offering price remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will be adjusted based on the actual public offering price and other terms of this offering determined at pricing.

The number of shares in the table above excludes, as of July 1, 2011:

 

   

            shares of our common stock reserved for future issuance under our 2011 Omnibus Incentive Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans;”

 

   

9,414,602 shares of our common stock issuable upon the exercise of options outstanding as of July 1, 2011, to purchase shares of our common stock at a weighted-average exercise price of $0.315 per share;

 

   

5,125,431 shares of our common stock issuable upon the exercise of warrants outstanding as of July 1, 2011, to purchase shares of our common stock at an exercise price of $3.511898 per share; and

 

   

            shares of our common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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DILUTION

If you invest in our common stock, your investment will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock in this offering and the pro forma net tangible book value per share of our common stock immediately after completion of this offering.

The historical net tangible book value of our common stock as of July 1, 2011 was $(26.7) million, or $(3.95) per share. Historical net tangible book value per share represents our total tangible assets (total assets less intangible assets) less total liabilities divided by the number of shares of outstanding common stock. After giving effect to (i) the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 150,991,337 shares of our common stock, the pro forma net tangible book value before this offering would be $         million, or $         per share, and (ii) the issuance and sale by us of              shares of our common stock in this offering at the assumed initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, and after deducting the underwriting discounts and commissions and our estimated offering expenses payable by us, our pro forma, as adjusted net tangible book value as of July 1, 2011 would have been $             million, or $             per share. This represents an immediate increase in net tangible book value of $             per share to our existing stockholders and an immediate dilution of $             per share to our new investors purchasing shares of common stock in this offering.

The following table illustrates this dilution on a per share basis:

 

Assumed initial public offering price per share of common stock

      $                

Pro forma net tangible book value per share as of July 1, 2011

     

Increase in pro forma net tangible book value per share attributable to the sale of shares of our common stock in this offering

     

Pro forma, as adjusted net tangible book value per share immediately after this offering

     
     

 

 

 

Pro forma dilution per share to new investors

      $     
     

 

 

 

The following table sets forth as of July 1, 2011, on a pro forma basis, as adjusted as described above, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares in this offering, based on an assumed initial public offering price of $             per share (the midpoint of the estimated price range set forth on the cover page of this prospectus), and before deducting any estimated underwriting discounts and commissions and estimated offering expenses:

 

     Total Shares   Total Consideration   Average Price
Per Share
     Number    Percent   Amount    Percent  

Existing stockholders

            %   $                      %   $            

New investors

            %   $          %   $

Total

      100%   $    100%   $
     

 

    

 

 

The sale of              shares of our common stock to be sold by the selling stockholders in this offering, which assumes no exercise of the underwriters’ over-allotment option, will reduce the number of shares of our common stock held by existing stockholders to             , or     % of the total shares outstanding, and will increase the number of shares of our common stock held by new investors to             , or     % of the total shares of our common stock outstanding in each case assuming no exercise of the underwriters’ over-allotment option.

If the underwriters exercise their over-allotment option in full, the number of shares of common stock held by the new investors will be increased to             , or approximately     % of the total number of shares of our common stock outstanding after this offering. A $1.00 increase (decrease) in the assumed initial public offering

 

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price of $             per share would increase (decrease) total consideration paid by new stockholders by $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their over-allotment option in full, our existing stockholders would own between     % and     %, in the aggregate, and new investors purchasing shares in this offering would own between     % and     %, in the aggregate, of the total number of shares of our common stock outstanding after this offering.

The tables and calculations above exclude:

 

   

            shares of our common stock reserved for future issuance under our 2011 Omnibus Incentive Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans;”

 

   

9,414,602 shares of our common stock issuable upon the exercise of options outstanding as of July 1, 2011, to purchase shares of our common stock at a weighted-average exercise price of $0.315 per share;

 

   

5,125,431 shares of our common stock issuable upon the exercise of warrants outstanding as of July 1, 2011, to purchase shares of our common stock at an exercise price of $3.511898 per share; and

 

   

            shares of our common stock reserved for future issuance under our 2011 Employee Stock Purchase Plan, which will become effective in connection with this offering, as more fully described in “Executive Compensation—Employee Benefit and Stock Plans.”

 

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SELECTED FINANCIAL DATA

You should read the following selected financial data in conjunction with our combined consolidated financial statements and related notes, as well as the sections titled “Risk Factors,” “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.

We were incorporated in March 2009 and completed the M/A-COM Acquisition on March 30, 2009. We acquired Mimix on May 28, 2010. Because we and Mimix had the same majority owner since our incorporation, we present in this prospectus combined financial statements in a manner similar to a pooling-of-interests. Because our majority owner acquired control of Mimix before acquiring control of M/A-COM, we treat Mimix as our accounting acquirer for financial statement presentation purposes. Accordingly, our financial statements are presented as if the Mimix Merger occurred on the date of our incorporation in March 2009, the date in which we came under common control with Mimix, and the financial statements for periods prior to March 30, 2009 reflect only the operations of Mimix. We derived (i) the statements of operations data for the fiscal years ended September 30, 2008, October 2, 2009 and October 1, 2010, and for the nine months ended July 1, 2011, and (ii) the balance sheet data as of October 2, 2009, October 1, 2010 and July 1, 2011, from our audited combined consolidated financial statements, which appear elsewhere in this prospectus. We derived the statements of operations data for the nine months ended July 2, 2010 from our unaudited combined consolidated financial statements, which appear elsewhere in this prospectus. We derived the consolidated balance sheet data as of September 30, 2006, 2007 and 2008 and the statements of operations data for the fiscal years ended September 30, 2006 and 2007 from our financial systems. These unaudited combined consolidated financial statements have been prepared on a basis consistent with our audited combined consolidated financial statements, and in the opinion of our management, include all adjustments, consisting only of normal, recurring adjustments and accruals, necessary for a fair presentation of our financial position and results of operations for the periods presented. All information presented as pro forma below is unaudited. We believe the financial results prior to March 30, 2009 are not comparable to our financial results for subsequent periods because they reflect only the operations of Mimix. Beginning with our fiscal year 2009, we adopted a 52-or 53-week fiscal year ending on the Friday closest to September 30.

For additional information on our presentation of financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—History and Basis of Presentation” appearing elsewhere in this prospectus.

 

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    Fiscal Years     Nine Months Ended  
    2006     2007     2008     2009     2010     July 2,
2010
    July 1,
2011
 

Statements of Operations Data (in thousands, except per share data):

  

        (Unaudited)     

Revenue

  $ 20,189      $ 21,959      $ 25,423      $ 102,718      $ 260,297      $ 186,124      $ 231,493   

Cost of revenue

    16,039        12,718        17,228        77,171        166,554        120,264        134,516   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    4,150        9,241        8,195        25,547        93,743        65,860        96,977   

Operating expenses:

             

Research and development

    5,876        6,643        6,728        13,553        25,795        18,672        25,533   

Selling, general and administrative

    5,815        6,762        6,047        25,601        45,860        33,281        36,617   

Accretion of contingent consideration

    —          —          —          2,800        2,000        1,500        660   

Restructuring charges

    —          —          —          5,100        2,234        1,369        866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    11,691        13,405        12,775        47,054        75,889        54,822        63,676   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (7,541     (4,164     (4,580     (21,507     17,854        11,038        33,301   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

             

Gain on bargain purchase

    —          —          —          27,073        —          —          —     

Accretion of common stock warrant liability (1)

    —          —          —          —          —          —          (10,241

Accretion of Class B conversion liability (2)

    —          —          —          —          —          —          (57,051

Interest expense

    (87     (109     (1,009     (1,699     (2,323     (1,738     (750
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

    (87     (109     (1,009     25,374        (2,323     (1,738     (68,042
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (7,628     (4,273     (5,589     3,867        15,531        9,300        (34,741

Income tax (provision) benefit

    —          —          —          124        (8,996     (5,167     (3,779
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (7,628     (4,273     (5,589     3,991        6,535        4,133        (38,520
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

    —          —          —          198        494        1,160        754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (7,628     (4,273     (5,589     4,189        7,029        5,293        (37,766

Less: net income attributable to noncontrolling interest in a subsidiary

    —          —          —          23        195        195        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to controlling interest

    (7,628     (4,273     (5,589     4,166        6,834        5,098        (37,766

Accretion to redemption value of redeemable preferred stock and preferred stock dividends (3)

    (1,435     (1,776     (1,780     (3,559     (6,298     (4,585     (79,062
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to common stockholders

  $ (9,063   $ (6,049   $ (7,369   $ 607      $ 536      $ 513      $ (116,828
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted income (loss) per common share:

             

Income (loss) from continuing operations

  $ (11.98   $ (7.94   $ (9.67   $ 0.01      $ 0.00      $ (0.01   $ (20.53

Income from discontinued operations

    —          —          —          0.00        0.01        0.02        0.13   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (11.98   $ (7.94   $ (9.67   $ 0.01      $ 0.01      $ 0.01      $ (20.40
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used to compute net income (loss) per common share:

             

Basic

    757        762        762        52,806        47,521        62,200        5,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    757        762        762        53,366        50,343        62,553        5,727   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income (loss) per common share: (4)

             

Basic

            $                       $                
         

 

 

     

 

 

 

Diluted

            $                       $                
         

 

 

     

 

 

 

Shares used to compute pro forma net income (loss) per common share: (4)

             

Basic

             
         

 

 

     

 

 

 

Diluted

             
         

 

 

     

 

 

 

 

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     As of  
     September 30,      October  2,
2009
     October  1,
2010
     July  1,
2011
 
     2006      2007     2008           

Consolidated Balance Sheet Data (in thousands):

                

Cash and cash equivalents

   $ 273       $ 160      $ 3,718       $ 15,358       $ 23,946       $ 36,728   

Working capital (deficit)

     131         (3,997     6,184         46,313         56,955         70,480   

Total assets

     9,755         14,449        15,025         153,315         164,836         204,592   

Note payable (5)

     —           —          —           30,191         30,000         —     

Class B conversion liability

     —           —          —           —           —           98,692   

Convertible and redeemable preferred stock

     26,441         28,217        —           —           —           180,628   

Stockholders’ equity (deficit)

     2,006         (1,799     7,122         37,215         44,655         (180,654

Dividends of $0.63 per share, $0.81 per share and $0.61 per share were paid to the record holders as of January 4, 2011 of our Series A-1 convertible preferred stock, Series A-2 convertible preferred stock and common stock, respectively, aggregating $80.0 million.

 

 

(1) Represents changes in the fair value of common stock warrants recorded as liabilities and adjusted each reporting period to fair value.

 

(2) Represents changes in the fair value of certain features of our Class B convertible preferred stock that are recorded as liabilities and adjusted each reporting period to fair value.

 

(3) For the nine months ended July 1, 2011, includes $76.2 million of dividends declared and paid in January 2011 to holders of our Series A-1 and A-2 convertible preferred stock.

 

(4) Assumes the conversion of all outstanding shares of our convertible preferred stock into 150,991,337 shares of common stock upon completion of this offering and the issuance of             shares to fund, in a manner similar to a dividend, the settlement of the Class B preference payment.

 

(5) Reflects seller financing in connection with the M/A-COM Acquisition, which was subsequently paid off in December 2010.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our combined consolidated financial statements and related notes, as well as the sections titled “Risk Factors,” “Capitalization” and “Selected Financial Data” appearing elsewhere in this prospectus. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this prospectus, particularly in “Risk Factors.”

Overview

We are a leading provider of high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum. We leverage our system-level expertise to design and manufacture differentiated, high-value products for customers who demand high performance, quality and reliability. The diversity and depth of our business across technologies, products, applications, end markets and geographies provide us with a stable foundation for growth and enable us to develop strong relationships with our customers. We offer over 3,000 standard and custom devices, ICs, multi-chip modules and complete subsystems across 38 product lines serving over 6,000 end customers in three large and growing primary markets. Our primary markets are Networks, which includes CATV, cellular backhaul, cellular infrastructure and fiber optic applications; A&D; and Multi-market, which includes automotive, industrial, medical, mobile and scientific applications. We have one reportable operating segment, semiconductors and modules.

History and Basis of Presentation

M/A-COM Technology Solutions Holdings, Inc. was incorporated in the State of Delaware on March 25, 2009 and on March 30, 2009, acquired 100% of the outstanding stock of M/A-COM Technology Solutions Inc. and M/ACOM Technology Solutions (Cork) Limited and the related M/A-COM brand, which we refer to as the M/A-COM Acquisition.

Throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations, references to “Mimix” refer to Mimix Holdings, Inc. as a standalone entity prior to its acquisition; references to “M/A-COM” refer to M/A-COM Technology Solutions Holdings, Inc. and its consolidated subsidiaries prior to its acquisition of Mimix; and references to “we,” “us” and “our” refer to the combined M/A-COM and Mimix businesses and operations or to M/A-COM Technology Solutions Holdings, Inc. and its consolidated subsidiaries as the context requires.

We acquired Mimix, a supplier of high-performance GaAs semiconductors, on May 28, 2010 (Mimix Merger) for its complementary products and technologies in our primary markets. Although Mimix operated as an independent company before the acquisition, M/A-COM and Mimix had the same majority owner, who had controlled Mimix prior to our incorporation. We therefore present in this prospectus combined financial statements in a manner similar to a pooling-of-interests. We treat Mimix as our accounting acquirer for financial statement presentation purposes because our majority owner acquired control of Mimix before acquiring control of M/A-COM. Accordingly, our financial statements are presented as if the Mimix Merger occurred on the date of our incorporation in March 2009, when we came under common control with Mimix. Our financial statements for periods prior to March 30, 2009 reflect only the operations of Mimix and do not reflect the operations of M/A-COM. More specifically, our financial statements for fiscal year 2008 reflect only the operations of Mimix. Our financial statements for fiscal year 2009 reflect only the operations of Mimix through March 30, 2009 and reflect the combined operations of Mimix and M/A-COM from March 30, 2009 through October 2, 2009.

 

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We believe that our financial results for periods prior to March 30, 2009 are not representative of our current business and are not comparable to our financial results for subsequent periods because those results reflect only the operations of Mimix. Accordingly, in discussing and analyzing our financial statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, we focus primarily on our more recent results in fiscal year 2010 and the nine month periods ended July 2, 2010 and July 1, 2011.

Beginning with our fiscal year 2009, we adopted a 52-or 53-week fiscal year ending on the Friday closest to September 30.

Discontinued Operations

During the nine months ended July 1, 2011, in keeping with our focus on high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum, we divested non-core laser diode and ferrite business lines that have been reported as discontinued operations. Unless otherwise noted, we exclude the discontinued operations from our discussion of revenue, cost of revenue and expenses.

Description of Our Revenue, Cost of Revenue and Expenses

Revenue. Substantially all of our revenue is derived from sales of high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum. We design, integrate, manufacture and package differentiated product solutions that we sell to customers through our direct sales organization, our network of independent sales representatives and our distributors.

We believe the primary drivers of our future revenue growth will include:

 

   

increasing design wins with new and existing customers, with a focus on early customer engagement;

 

   

increasing content of our semiconductor solutions in our customers’ systems through cross-selling of our 38 product lines;

 

   

introduction of, and the market’s reception to, new products that command higher prices because of added features, higher levels of integration and improved performance; and

 

   

growth in the market for high-performance analog semiconductors generally, and in our three primary markets in particular.

Cost of revenue. Cost of revenue consists primarily of the cost of semiconductor wafers and other materials used in the manufacture of our products, and the cost of assembly and testing of our products, whether performed by our internal manufacturing personnel or outsourced vendors. Cost of revenue also includes costs associated with personnel engaged in our manufacturing operations, such as wages and share-based compensation expense, as well as costs and overhead related to our manufacturing operations, including lease occupancy and utility expense related to our manufacturing operations, depreciation, production computer services and equipment costs, and the cost of our manufacturing quality assurance and supply chain activities. Further, cost of revenue includes the impact of warranty and inventory adjustments, including write-downs for excess and obsolete inventory as well as amortization of intangible assets related to acquired technology.

One of our objectives is to increase our gross margin, which is our gross profit expressed as a percentage of our revenue. We seek to introduce high-performance products that are valued by our customers for their ability to address technically challenging applications, rather than commoditized products used in high-volume applications where cost, rather than performance, is the highest priority. We also strive to continuously reduce our costs and to improve the efficiency of our manufacturing operations.

 

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Our gross margin in any period is significantly affected by industry demand and competitive factors in the markets into which we sell our products. Gross margin is also significantly affected by our product mix, that is, the percentage of our revenue in that period that is attributable to relatively higher or lower-margin products. Additional factors affecting our gross margin include fluctuations in the cost of wafers and materials, including precious metals, utilization of our fab, level of usage of outsourced manufacturing, assembly and test services, changes in our manufacturing yields, changes in foreign currencies and numerous other factors, some of which are not under our control. As a result of these or other factors, we may be unable to maintain or increase our gross margin in future periods and our gross margin may fluctuate from period to period.

Our gross margin was 36.0% in fiscal year 2010 and 41.9% and 35.4%, respectively, for the nine months ended July 1, 2011 and July 2, 2010.

Research and development. Research and development (R&D) expense consists primarily of costs relating to our employees engaged in the design and development of our products and technologies, including wages and share-based compensation. R&D expense also includes costs for consultants, facilities, services related to supporting computer design tools used in the engineering and design process, prototype development and project materials. We expense all research and development costs as incurred.

Selling, general and administrative. Selling, general and administrative (SG&A) expense consists primarily of costs of our executives, sales and marketing, finance, human resources and administrative organizations, including wages and share-based compensation. SG&A expense also includes professional fees, sales commissions paid to independent sales representatives, costs of advertising, trade shows, marketing, promotion, travel, occupancy and equipment costs, computer services costs, costs of providing customer samples and amortization of certain intangible assets relating to customer relationships.

Accretion of contingent consideration. We have partially funded the acquisition of businesses through contingent earn-out consideration, in which we have agreed to pay contingent amounts to the previous owners of acquired businesses based upon those businesses achieving contractual milestones. We record these obligations as liabilities at fair value and any changes in fair value are reflected in our earnings.

Restructuring charges. Following the M/A-COM Acquisition in March 2009, we began implementing our strategy to align our operations with the economic environment and our long-term fab-lite strategy, beginning with an initial staff reduction in April 2009. Restructuring expense consists of severance and related costs incurred in connection with reductions in staff. In fiscal years 2009 and 2010 and for the nine months ended July 1, 2011, we incurred $8.2 million of restructuring costs. We expect to incur an additional $0.7 million as we complete our planned restructuring in the fourth quarter of fiscal year 2011 or early in fiscal year 2012.

Other (expense) income. Other (expense) income consists of a gain on bargain purchase in 2009 in connection with the M/A-COM Acquisition, accretion of our common stock warrant liability, accretion of our Class B conversion liability and interest expense.

In December 2010, we issued shares of Class B convertible preferred stock and common stock warrants for gross proceeds of $120.0 million. The Class B convertible preferred stock has redemption rights that allow the holders to elect to receive an amount in excess of the fair value of our common stock commencing in December 2017. In addition, the holders of our Class B convertible preferred stock have the right to payments for up to $60.0 million upon a public offering of our common stock. Upon issuance of the Class B convertible preferred stock, the estimated fair values of these preferential features and the common stock warrants were bifurcated from the Class B convertible preferred stock proceeds and recorded as long-term liabilities. The carrying values of these liabilities are adjusted to estimate fair value at the end of each reporting period and the change in the estimated fair values are recognized in our earnings.

 

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Results of Operations

The following table sets forth, for the periods indicated, our statement of operations data (in thousands):

 

     Fiscal Years     Nine Months Ended  
     2008     2009     2010     July 2, 2010     July 1,
2011
 
                       (Unaudited)        

Revenue

   $ 25,423      $ 102,718      $ 260,297      $ 186,124      $ 231,493   

Cost of revenue (1)

     17,228        77,171        166,554        120,264        134,516   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     8,195        25,547        93,743        65,860        96,977   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development (1)

     6,728        13,553        25,795        18,672        25,533   

Selling, general and administrative (1)

     6,047        25,601        45,860        33,281        36,617   

Accretion of contingent consideration

     —          2,800        2,000        1,500        660   

Restructuring charges

     —          5,100        2,234        1,369        866   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     12,775        47,054        75,889        54,822        63,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (4,580     (21,507     17,854        11,038        33,301   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

          

Gain on bargain purchase

     —          27,073        —          —          —     

Accretion of common stock warrant liability (2)

     —          —          —          —          (10,241

Accretion of Class B conversion liability (3)

     —          —          —          —          (57,051

Interest expense

     (1,009     (1,699     (2,323     (1,738     (750
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income, net

     (1,009     25,374        (2,323     (1,738     (68,042
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (5,589     3,867        15,531        9,300        (34,741

Income tax (provision) benefit

     —          124        (8,996     (5,167     (3,779
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (5,589     3,991        6,535        4,133        (38,520
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

     —          198        494        1,160        754   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (5,589   $ 4,189      $ 7,029      $ 5,293      $ (37,766
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Amortization expense related to intangible assets arising from acquisitions and non-cash compensation expense included in our combined consolidated statements of operations is set forth below (in thousands):

 

     Fiscal Years      Nine Months Ended  
     2008      2009      2010      July 2, 2010      July 1,
2011
 
                          (Unaudited)         

Amortization expense:

              

Cost of revenue

   $ 98       $ 862       $ 1,594       $ 1,194       $ 1,207   

Selling, general and administrative

     98         613         1,095         822         811   

Non-cash compensation expense: (a)

              

Cost of revenue

     26         173         194         139         290   

Research and development

     36         159         208         183         155   

Selling, general and administrative

     113         536         1,143         949         690   

 

  (a) Includes (i) share-based compensation expense and (ii) incentive compensation amounts payable by the previous owner of the M/A-COM Tech Business to certain of our employees in connection with the sale of such business to us and recorded in our financial statements in a manner similar to share-based compensation.

 

(2) Represents changes in the fair value of common stock warrants recorded as liabilities and adjusted each reporting period to fair value.

 

(3) Represents changes in the fair value of certain features of our Class B convertible preferred stock that are recorded as liabilities and adjusted each reporting period to fair value.

 

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The following table sets forth, for the periods indicated, our statement of operations data expressed as a percentage of our revenue:

 

    Fiscal Years     Nine Months Ended  
    2008     2009     2010     July 2, 2010     July 1,
2011
 
                      (Unaudited)        

Revenue

    100.0     100.0     100.0     100.0     100.0

Cost of revenue

    67.8        75.1        64.0        64.6        58.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    32.2        24.9        36.0        35.4        41.9   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development

    26.5        13.2        9.9        10.0        11.0   

Selling, general and administrative

    23.8        24.9        17.6        17.9        15.8   

Accretion of contingent consideration

    —          2.7        0.8        0.8        0.3   

Restructuring charges

    —          5.0        0.9        0.7        0.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    50.2        45.8        29.2        29.5        27.5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (18.0     (20.9     6.9        5.9        14.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other (expense) income:

         

Gain on bargain purchase

    —          26.4        —          —          —     

Accretion of common stock warrant liability

    —          —          —          —          (4.4

Accretion of Class B conversion liability

    —          —          —          —          (24.6

Interest expense

    (4.0     (1.7     (0.9     (0.9     (0.3
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other (expense) income—net

    (4.0     24.7        (0.9     (0.9     (29.4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

    (22.0     3.8        6.0        5.0        (15.0

Income tax (provision) benefit

    —          0.1        (3.5     (2.8     (1.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (22.0     3.9        2.5        2.2        (16.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from discontinued operations

    —          0.2        0.2        0.6        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (22.0 )%      4.1     2.7     2.8     (16.3 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended July 1, 2011 to the Nine Months Ended July 2, 2010

Revenue. Our revenue increased $45.4 million or 24.4% to $231.5 million for the nine months ended July 1, 2011, from $186.1 million for the nine months ended July 2, 2010. Our sales growth in the 2011 period was primarily due to increased sales to existing and new customers of our existing products, market reception of new products developed within the last three years and general economic improvement across our primary markets. Revenue increased in the 2011 period in each of our primary markets compared to the corresponding period in 2010. Revenue from our primary markets, the percentage of change between the periods, and revenue by primary market expressed as a percentage of total revenue were (in thousands, except percentages):

 

     Nine Months Ended         
     July 2, 2010      July 1,
2011
     %
Change
 
     (Unaudited)                

Networks

   $ 49,093       $ 71,730         46.1%   

A&D

     60,987         69,155         13.4%   

Multi-market

     76,044         90,608         19.2%   
  

 

 

    

 

 

    

Total

   $ 186,124       $ 231,493      

Networks

     26.4%         31.0%      

A&D

     32.8%         29.9%      

Multi-market

     40.9%         39.1%      
  

 

 

    

 

 

    

Total

     100%         100%      

 

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The increase of revenue in Networks was primarily due to increased sales in cellular backhaul, cellular infrastructure and CATV applications such as Multi-media over Coax Alliance (MoCA) and set-top boxes, driven by increased mobile and video data traffic. The increase of revenue in A&D was primarily due to increased sales for radar and avionics applications, partially offset by lower sales in military communications and public safety radios. The increase of revenue in Multi-market was primarily due to increased sales in mobile device applications, as well as increased sales in automotive applications due to improved conditions in the automobile industry, particularly in North America.

Gross margin. Gross margin was 41.9% for the nine months ended July 1, 2011, compared with 35.4% for the nine months ended July 2, 2010. The increase in gross margin was primarily attributable to a favorable change in product mix towards higher margin products and lower costs as a percentage of revenue in the 2011 period, driven by manufacturing consolidation, outsourcing initiatives, staff reductions and improved factory utilization. The increase in gross margin was partially offset by higher costs to qualify outsource suppliers and the incurrence of additional costs to exit manufacturing facilities. Amortization and non-cash compensation expenses in cost of revenue represented 0.5% and 0.1%, respectively, of revenue in the 2011 period compared to 0.6% and 0.1%, respectively, in the 2010 period.

Research and development. R&D expense increased $6.9 million, or 36.7%, to $25.5 million, and represented 11.0% of our revenue, for the 2011 period, compared with $18.7 million for the 2010 period. The increase was primarily driven by increased new product development activities and related increases in staff, facility costs, computer design tools and engineering materials. Non-cash compensation expense in R&D expense was $0.2 million in both the 2010 period and the 2011 period.

Selling, general and administrative. SG&A expense increased $3.3 million, or 10.0%, to $36.6 million and represented 15.8% of our revenue for the 2011 period compared with $33.3 million for the 2010 period. The increase was primarily related to an increase in sales and marketing staff to support our revenue growth, professional fees in connection with preparation and audits of historical financial statements, travel expenses incurred in support of our efforts to expand sales at top domestic and foreign customer accounts, and costs to upgrade the software tools used by our worldwide sales and marketing organization. These increases were partially offset by reductions in fees paid under outsourced service arrangements as we built out our internal capabilities to provide for those functions. Amortization and non-cash compensation expenses in SG&A expense were $0.8 million and $0.7 million, respectively, in the 2011 period compared to $0.8 million and $0.9 million, respectively, in the 2010 period.

Accretion of contingent consideration. Accretion of contingent consideration expense decreased $0.8 million to $0.7 million for the nine months ended July 1, 2011 compared with $1.5 million for the nine months ended July 2, 2010. Our accretion of contingent consideration in the 2011 period was lower as a result of changes in the estimated fair value of the obligation arising in the M/A-COM Acquisition, offset partially by the addition of contingent consideration related to the acquisition of Optomai in April 2011. The estimates of fair value were primarily impacted by changes in interest rates underlying our estimates due to improvement in the credit environment, and a shortening of the discount period as we near the expected payment dates.

Restructuring charges. Restructuring charges decreased $0.5 million to $0.9 million for the nine months ended July 1, 2011 compared with $1.4 million for the nine months ended July 2, 2010. The decrease in our restructuring charges was primarily attributable to having completed a majority of our planned restructuring activities.

Accretion of common stock warrant liability. Common stock warrant liability expense of $10.2 million relates to the change in the estimated fair value of common stock warrants we issued in fiscal year 2011, which we carried as liabilities at fair value.

 

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Accretion of Class B conversion liability. Class B convertible preferred stock conversion liability expense of $57.1 million relates to the change in the estimated fair value of certain features of our Class B convertible preferred stock issued in fiscal year 2011, which we carry as a liability at fair value.

Interest expense. Interest expense decreased $1.0 million or 56.8% to $0.8 million or 0.3% of our revenue for the nine months ended July 1, 2011, compared with $1.7 million or 0.9% of our revenue for the nine months ended July 2, 2010, as a result of repayment of our debt in fiscal year 2011. Interest expense includes the amortization of deferred financing costs classified as interest expense in the amount of $0.1 million in the 2011 period.

Provision for income taxes. Provision for income taxes decreased $1.4 million to $3.8 million for the nine months ended July 1, 2011, compared with $5.2 million for the nine months ended July 2, 2010, representing an effective tax rate of (10.9%) and 55.6% for the nine months ended July 1, 2011 and July 2, 2010, respectively. As of October 1, 2010, we evaluated available positive and negative evidence and determined that it was not more likely than not that our deferred tax assets would be realized, and we recorded a full valuation allowance. In arriving at this conclusion, we determined that the cumulative losses incurred by Mimix and us for the years prior to fiscal year 2010 outweighed our short earnings history. The increase in our valuation allowance during fiscal year 2010 was the principal factor resulting in our 57.9% effective tax rate for the fiscal year 2010.

During the nine months ended July 1, 2011, we continued to evaluate available positive and negative evidence and concluded it was appropriate to recognize our deferred tax assets in full. The primary factor we considered was our continued profitability during the period. We concluded that it was probable we would generate taxable income for our fiscal year 2011, and that two consecutive years of profitability and forecasted income in future years constituted sufficient positive evidence to support a more likely than not assessment of recoverability of the assets. Accordingly, we reversed $17.6 million of our income tax valuation allowance during the nine months ended July 1, 2011. The remaining valuation allowance of $2.7 million as of July 1, 2011 will be released during our last fiscal quarter of 2011 when the assets to which the valuation allowance relates are expected to be consumed.

In addition to the reversal of the valuation allowance, our effective tax rate for the nine months ended July 1, 2011 has been significantly impacted by the charges related to changes in fair value of our Class B conversion liability and common stock warrant liability which totaled $67.3 million and are not tax deductible. The difference between the statutory tax rate, which would have resulted in a 35% income tax benefit, and our effective tax rate for the nine months ended July 1, 2011, which resulted in a 10.9% income tax provision, is driven by the non-deductible charge for the Class B conversion and common stock warrant liabilities, partially offset by the reversal of the valuation allowance.

Comparison of Fiscal Years Ended October 1, 2010, October 2, 2009 and September 30, 2008

As discussed above, although the Mimix Merger occurred on May 28, 2010, our financial statements are presented as if the Mimix Merger occurred in March 2009 when we came under common control with Mimix. Therefore, our financial statements for periods prior to March 30, 2009 reflect only the operations of Mimix and do not reflect the operations of M/A-COM. More specifically, the financial statements for fiscal year 2008 reflect only the operations of Mimix. Our financial statements for fiscal year 2009 reflect only the operations of Mimix through March 30, 2009 and reflect the combined operations of Mimix and M/A-COM from March 30, 2009 through October 2, 2009. The financial statements for fiscal year 2010 reflect the combined operations of Mimix and M/A-COM for the entire fiscal year.

 

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Unless otherwise noted below, the year-over-year changes in our financial results in the fiscal years ended October 1, 2010, October 2, 2009 and September 30, 2008 were primarily attributable to fiscal year 2010 including a full year of combined financial results of M/A-COM and Mimix, fiscal year 2009 including M/A-COM’s financial results for only approximately six months from March 30, 2009 combined with a full year of Mimix’s financial results and fiscal year 2008 including only Mimix’s financial results. See “Quarterly Results of Operations Data” below for revenue, gross margin and income trend discussion of comparable quarterly periods. We believe the financial results prior to March 30, 2009 are not comparable to our financial results for subsequent periods because they reflect only the operations of Mimix.

 

     Fiscal Years Ended  
     September 30,
2008
     October 2,
2009
     October 1,
2010
 
     (in thousands, except percentages)  

Revenue

   $ 25,423       $ 102,718       $ 260,297   

Gross margin

     32.2%         24.9%         36.0%   

Research and development

     6,728         13,553         25,795   

Selling, general and administrative

     6,047         25,601         45,860   

Revenue. In addition to the factors noted above, other factors that increased revenue include improved economic conditions, increased sales and support efforts for products acquired in the Mimix Merger, revenue from new products and our strategy to align our sales and marketing focus with our primary markets, contributed to the revenue increases in fiscal year 2010 as compared to fiscal year 2009.

Gross margin. Fiscal year 2010 gross margin improved primarily as a result of staffing reductions and manufacturing consolidation. Mimix historically had higher margins than M/A-COM, which contributed to an overall decrease in our gross margin in fiscal year 2009 as compared to fiscal year 2008.

Research and development. In addition to the factors noted above, R&D expense increased since March 2009 and through fiscal year 2010 due to increases in staff engaged in research and development and expansion of design centers to support our new product development.

Selling, general and administrative. In addition to the factors noted above, SG&A expense increased since March 2009 and through fiscal year 2010 due to additional sales and marketing staff to support our revenue growth and due to additional sales and administrative staff to support our in-sourcing of back office functions. These increases were partially offset by reductions in fees paid under outsourced service arrangements.

Gain on bargain purchase. Our gain on bargain purchase of $27.1 million in fiscal year 2009 relates to the M/A-COM Acquisition in March 2009, which occurred in the midst of the global economic downturn and related credit crises.

Accretion of contingent consideration. Our accretion of contingent consideration expense was $2.0 million in fiscal year 2010 compared to $2.8 million in fiscal year 2009. There was no accretion of contingent consideration expense in fiscal year 2008. The decrease in our accretion of contingent consideration from fiscal year 2009 to fiscal year 2010 was attributable to the changes in estimated fair value of the contingent obligations. The estimates of fair value were primarily impacted by changes in interest rates underlying our estimate based on improvement in the prevailing credit environment and a shortening of the discount period related to when we expect to pay the contingent consideration.

Restructuring charges. Our restructuring charges were $2.2 million in fiscal year 2010 compared to $5.1 million in fiscal year 2009. The decrease in restructuring charges was attributable to lower severance costs in fiscal year 2010 compared to fiscal year 2009. We commenced the restructuring activities following the M/A-COM Acquisition in March 2009. There were no restructuring charges in fiscal year 2008.

Interest expense. Our interest expense was $2.3 million in fiscal year 2010 compared to $1.7 million in fiscal year 2009 and $1.0 million in fiscal year 2008. The increase in interest expense from fiscal year 2009 to

 

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fiscal year 2010 was primarily due to incurring a full year of interest expense from borrowings under seller-financed debt related to the M/A-COM Acquisition in March 2009. Interest expense for fiscal year 2008 relates to interest incurred on short-term notes payable and a bank line of credit, all of which were either repaid or, in the case of a majority of the short-term notes, were converted into shares of convertible preferred stock, all in fiscal year 2008.

Provision for income taxes. Our provision for income taxes was $9.0 million in fiscal year 2010 compared to a $0.1 million income tax benefit in fiscal year 2009. There was no provision for income taxes in fiscal year 2008. The increase in the provision for income taxes from fiscal year 2009 to fiscal year 2010 is attributable to the discontinuance of our Subchapter S status, which allowed for prior income tax consequences to flow through to our stockholders through December 31, 2009. Effective January 1, 2010, we elected to discontinue our Subchapter S status.

 

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Quarterly Results (Unaudited)

The following tables set forth our unaudited quarterly combined consolidated statements of operations data for each of the quarters in fiscal year 2010 and each of the quarters in the nine months ended July 1, 2011, in dollar amount and expressed as a percentage of our revenue. We prepared the quarterly data on a consistent basis with the combined consolidated financial statements included in this prospectus. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information should be read in conjunction with our combined consolidated financial statements and related notes appearing elsewhere in this prospectus. We believe that our quarterly revenue, particularly the mix of revenue components, and our quarterly operating results are likely to vary in the future. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 

    Three Months Ended  
    January 1,
2010
    April, 2,
2010
    July 2,
2010
    October 1,
2010
    December 31,
2010
    April 1,
2011
    July 1,
2011
 
    (in thousands)  

Revenue

  $ 57,405      $ 61,014      $ 67,705      $ 74,173      $ 74,909      $ 77,884      $ 78,700   

Cost of revenue (1)

    37,986        39,699        42,579        46,290        44,295        45,639        44,582   
                                                       

Gross profit

    19,419        21,315        25,126        27,883        30,614        32,245        34,118   

Operating expenses:

             

Research and development (1)

    4,756        6,352        7,564        7,123        7,714        8,356        9,463   

Selling, general and administrative (1)

    10,795        10,580        11,906        12,579        12,237        12,556        11,824   

Accretion of contingent consideration

    600        500        400        500        97        198        365   

Restructuring charges

    523        527        319        865        382        357        127   
                                                       

Total operating expenses

    16,674        17,959        20,189        21,067        20,430        21,467        21,779   
                                                       

Income from operations

    2,745        3,356        4,937        6,816        10,184        10,778        12,339   
                                                       

Net income (loss) (2)

  $ 2,563      $ 1,103      $ 1,627      $ 1,736      $ 8,606      $ (9,757   $ (36,615
                                                       
    Three Months Ended  
(As a percentage of revenue)   January 1,
2010
    April, 2,
2010
    July 2,
2010
    October 1,
2010
    December 31,
2010
    April 1,
2011
    July 1,
2011
 

Revenue

    100.0     100.0     100.0     100.0     100.0     100.0     100.0

Cost of revenue

    66.2        65.1        62.9        62.4        59.1        58.6        56.6   
                                                       

Gross profit

    33.8        34.9        37.1        37.6        40.9        41.4        43.4   

Operating expenses:

             

Research and development

    8.3        10.4        11.2        9.6        10.3        10.7        12.0   

Selling, general and administrative

    18.8        17.3        17.6        17.0        16.3        16.1        15.0   

Accretion of contingent consideration

    1.0        0.8        0.6        0.7        0.1        0.3        0.5   

Restructuring charges

    0.9        0.9        0.5        1.2        0.5        0.5        0.2   
                                                       

Total operating expenses

    29.0        29.4        29.8        28.4        27.3        27.6        27.7   
                                                       

Income from operations

    4.8        5.5        7.3        9.2        13.6        13.8        15.7   
                                                       

Net income (loss)

    4.5     1.8     2.4     2.3     11.5     (12.5 )%      (46.5 )% 
                                                       

 

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(1) Amortization expense related to intangible assets arising from acquisitions and other non-cash compensation expense included in our combined consolidated statements of operations is set forth below:

 

    Three Months Ended  
    January 1,
    2010    
    April, 2,
    2010    
    July 2,
    2010    
    October 1,
    2010    
    December 31,
2010
    April 1,
    2011    
    July 1,
    2011    
 
    (in thousands)  

Amortization expense:

             

Cost of revenue

  $ 399      $ 397      $ 398      $ 400      $ 382      $ 382      $ 443   

Selling, general and administrative

    274        274        274        273        258        257        296   

Non-cash compensation expense: (a)

             

Cost of revenue

    (16     54        101        55        46        102        142   

Research and development

    6        39        138        25        34        40        81   

Selling, general and administrative

    266        208        475        194        85        386        219   

 

  (a) Includes (i) share-based compensation expense and (ii) incentive compensation amounts payable by the previous owner of the M/A-COM Tech Business to certain of our employees in connection with the sale of such business to us and recorded in our financial statements in a manner similar to share-based compensation.

 

(2) Net loss for the three months ended April 1, 2011 and July 1, 2011 includes an aggregate of $20.4 million and $46.9 million of expense, respectively, relating to changes in the fair value of common stock warrants and features of our Class B convertible preferred stock that are recorded as liabilities and adjusted each reporting period to fair value.

 

Revenue. Revenue improved consecutively over the seven quarters ended July 1, 2011 due to improved economic conditions, increased sales and support efforts for products acquired in the Mimix Merger, revenue from new products and our strategy to align our sales and marketing focus with our primary markets, which collectively led to increased sales to our existing and new customers.

Gross margin. Gross margin improved consecutively over the seven quarters ended July 1, 2011. The improvements were primarily driven by reduced costs from staff reductions, manufacturing consolidation and outsourcing initiatives, improved fab utilization primarily driven by higher sales and our strategy to focus on the development and sale of higher margin products.

Income from operations. Income from operations improved in each of the seven quarters ended July 1, 2011. We increased revenue and gross margin as noted above, and we also leveraged our infrastructure improvements and improved our management of expenses, which resulted in SG&A expense growing at a slower rate than revenue in each of the quarters, partially offset by an increase in R&D expense to support our new product activities.

Net income (loss). The net loss in the quarters ended April 1, 2011 and July 1, 2011 was primarily due to our accretion of the Class B convertible preferred stock conversion liability expenses of $17.4 million in the quarter ended April 1, 2011 and $39.6 million in the quarter ended July 1, 2011. In addition, the accretion of our common stock warrant liability also contributed $2.9 million and $7.3 million to our net loss in the quarters ended April 1, 2011 and July 1, 2011, respectively.

Liquidity and Capital Resources

As of July 1, 2011, we held $36.7 million of cash and cash equivalents. Cash and cash equivalents consisted of $25.7 million deposited with financial institutions and $11.0 million of short term investments. Cash provided by operations was $18.4 million for the nine months ended July 1, 2011, of which the principal components were net loss of $37.8 million and non-cash charges of $61.8 million, partially offset by unfavorable changes in operating assets and liabilities of $5.6 million. The change in net operating assets and liabilities includes an increase in accounts receivable of $3.5 million related to increased sales partially offset by improved collections during the period, an increase in inventory of $6.8 million related to our increased sales, a decrease of accrued and other liabilities of $6.7 million primarily related to lower accrued compensation resulting from time of disbursements and incentive program periods, and an increase in income taxes payable of $11.6 million due to the timing of tax payments.

 

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Cash used in investing activities was $5.5 million for the nine months ended July 1, 2011. We invested $6.7 million in the purchase of property and capital equipment in the nine months ended July 1, 2011, including renovation of a leased facility as well as the purchase of production test equipment, production tooling and engineering equipment and software tools. In addition, we paid $1.8 million of closing consideration in connection with the acquisition of Optomai on April 25, 2011. These uses of cash were partially offset by cash proceeds related to the sale of non-core laser diode and ferrite product line operations totaling $3.0 million.

Cash used in financing activities was $0.2 million for the nine months ended July 1, 2011. During this period, we raised $118.7 million in net proceeds from the issuance of Class B convertible preferred stock and warrants and paid approximately $80 million in cash dividends to holders of record of Series A-1 and Series A-2 convertible preferred stock and common stock on January 4, 2011. We paid $30.0 million of seller-financed debt arising from the M/A-COM Acquisition as well as $1.4 million of capital lease debt. In addition, we paid the first earn-out payment to Cobham during the period totaling $8.8 million relating to the M/A-COM Acquisition. These amounts were partially offset by our receipt of $0.5 million from the exercise of stock options during the nine months ended July 1, 2011.

In December 2010, we entered into a loan agreement with a commercial lender, which provides for an asset-based revolving credit facility of up to $50.0 million that matures in December 2014. Total borrowings available under the revolving credit facility at any given time are subject to customary reserves and reductions to the extent our asset borrowing base changes. Our borrowing capacity under the revolving credit facility at July 1, 2011 was $36.6 million. Borrowings under the revolving credit facility bear either a variable interest rate equal to the lender’s prime rate (which is a function of the federal funds effective rate) plus 0.5%, or the London InterBank Offered Rate (LIBOR) for a one-month period plus either 1.75% or 2.25%, subject to certain conditions. The revolving credit facility is secured by substantially all our assets and provides that we must comply with certain financial and non-financial covenants. We were in compliance with these financial and non-financial covenants as of July 1, 2011. As of July 1, 2011, we had no outstanding borrowings under the revolving credit facility.

In connection with the M/A-COM Acquisition, we agreed to pay Cobham up to $30.0 million in the aggregate in the form of an earn-out based on our achievement of revenue targets in the 12-month periods ended September 30, 2010, 2011 and 2012. Any such earned amounts are payable within 60 days following the applicable period end. In November 2010, we paid the first earn-out payment of $8.8 million to Cobham related to the initial period ended September 30, 2010. Cobham may earn up to $15.0 million in each of the remaining two annual earn-out periods, subject in each case to a $30.0 million limitation on all payments under the earn-out in the aggregate. Although neither period has been completed, our current expectation is that we will likely pay Cobham the maximum possible earn-out payment of $15.0 million for the earn-out period ending September 30, 2011 and that we will likely pay Cobham the remaining maximum possible earn-out payment of $6.2 million for the earn-out period ending September 30, 2012. The earn-out arrangement also provides the potential for accelerated earn-out payments and revision of the revenue targets in the event of a sale of our company, significant divestments by us of assets or businesses that would otherwise contribute revenue toward the earn-out or our current majority stockholders’ beneficial ownership of our outstanding equity securities dropping below 50.1%.

We also entered into an earn-out arrangement in connection with our purchase of Optomai in April 2011. We agreed to pay the stockholders and option holders of Optomai up to $16.0 million in the aggregate in the form of an earn-out based on our achievement of certain revenue, product release and contribution margin targets based on sales of products utilizing Optomai intellectual property in the 12-month periods ending March 30, 2012 and March 29, 2013. The maximum aggregate earn-out payable by us to the former stockholders and option holders of Optomai is $1.0 million in the first annual earn-out period and $16.0 million (less any earn-out paid in the first period) in the second annual earn-out period.

Upon completion of this offering, we will be obligated to pay a preference payment relating to this offering to the former holders of our Class B convertible preferred stock in an amount between $20.0 million and $60.0

 

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million. Assuming an initial public offering price of $             per share, which is the midpoint of the range set forth on the cover page of this prospectus, we will be obligated to pay a preference payment relating to this offering to the former holders of our Class B convertible preferred stock in the aggregate amount of $            . Such preference payment will be paid out of the proceeds of this offering. See “Certain Relationships and Related Person Transactions—Sale of Class B Convertible Preferred Stock and Warrants” appearing elsewhere in this prospectus.

The undistributed earnings of our foreign subsidiaries, with the exception of our Taiwan subsidiary, are permanently reinvested since we do not intend to repatriate such earnings. We believe the decision to permanently reinvest these earnings will not have a significant impact on our liquidity.

We believe that our cash, cash equivalents, cash generated from operations, available borrowings and proceeds from this offering will be sufficient to meet our cash needs for at least the next 12 months.

Contractual Obligations

The following is a summary of our contractual payment obligations for consolidated debt, purchase agreements, operating leases, other commitments and long-term liabilities as of October 1, 2010 (in thousands):

 

     Payments Due By Period  

Obligation (1)

   Total        Less Than 1  
Year
       1-3 Years          3-5 Years            Thereafter      

Long-Term Debt Obligations (2)

   $ 30,000       $ —         $ 30,000       $ —         $   —     

Operating Lease Obligations (3)

     7,897         2,831         4,435         484         147   

Capital Lease Obligations (4)

     1,426         768         658         —           —     

Purchase Commitments (5)

     1,595         1,595         —           —           —     
                                            
   $ 40,918       $ 5,194       $ 35,093       $ 484       $ 147   
                                            

 

(1) Excludes contingent obligations. Material contingent obligations include $30.0 million in contingent consideration related to acquisitions, $8.8 million of which we subsequently paid in November 2010. We currently expect to pay $15.0 million of this obligation in fiscal year 2012, with the balance expected to be paid in fiscal year 2013. Also excluded is a preference payment to the holders of our Class B convertible preferred stock of up to $60.0 million in connection with this offering. In fiscal year 2011, we entered into an arrangement to pay up to $16.0 million of additional contingent consideration, payable in fiscal years 2012 and 2013, in connection with our acquisition of Optomai.

 

(2) Reflects seller financing in connection with the M/A-COM Acquisition, which was subsequently paid off in December 2010 in connection with securing a new $50.0 million revolving credit facility with a commercial lender. Subsequent to the issuance of Class B convertible preferred stock in December 2010, we paid all outstanding amounts under the revolving credit facility and have not borrowed additional amounts under the revolving credit facility.

 

(3) We have non-cancelable operating lease agreements for office, research, development, and manufacturing space in the U.S. and foreign locations. We also have operating leases for certain equipment, automobiles and services. These lease agreements expire at various dates through 2017 and certain agreements contain provisions for extension at substantially the same terms as currently in effect.

 

(4) We entered into two non-cancelable capital lease agreements for equipment in fiscal year 2010 with terms of up to two years. The leases were terminated in May 2011 when we purchase the related assets.

 

(5) In the normal course of business, we enter into supply arrangements with certain of our suppliers to purchase minimum quantities of raw materials.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based on our combined consolidated financial statements. The preparation of financial statements, in conformity with generally accepted accounting principles in the U.S. (GAAP), requires management to make estimates and assumptions that affect

 

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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. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we re-evaluate our judgments and estimates. We base our estimates and judgments on our historical experience and on other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making the judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates, and material effects on our operating results and financial position may result. The accounting policies described below are those which our management believes involve the most significant application of judgment, or involve complex estimation.

Revenue recognition. We recognize revenue when: (i) there is persuasive evidence that an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. We defer the recognition of revenue, and the related costs, from sales to distributors under agreements providing for rights of return and price protection until such time as our products are sold by the distributors to their customers. We do not provide customers other than distributors the right to return product, with the exception of warranty related matters, which are discussed below. Accordingly, we do not generally maintain a reserve for sales returns.

Inventory. Inventory is stated at the lower of cost or market. We use a combination of standard cost and moving weighted-average cost methodologies to determine the cost basis for inventories, approximating a first-in, first-out basis. The standard cost of finished goods and work-in-process inventory is composed of material, labor and manufacturing overhead, which approximates actual cost. In addition to stating inventory at the lower of cost or market, we also evaluate inventory each quarter for excess quantities and obsolescence, establishing reserves when necessary based upon historical experience, assessment of economic conditions and expected demand. Estimating demand is inherently difficult, particularly given the cyclical nature of the semiconductor industry, and can result in excess or obsolete inventory. Once we write down inventory to its estimated net realizable value, we establish a new cost basis for that inventory and do not increase its carrying value due to subsequent changes in demand forecasts. Accordingly, if inventory previously written down is subsequently sold, we may realize higher than normal gross margin on these transactions. Neither inventory write-downs nor sales of previously written down inventory had a material impact on our operating results for any period presented in this prospectus.

Warranty obligations. We establish a product warranty liability at the time we recognize revenue. Our warranty terms are generally 12 months from the point of sale, and cover nonconformance with specifications and defects in material or workmanship. In certain circumstances longer or more stringent product warranties may apply. For sales to distributors, our warranty generally begins when the product is resold by the distributor. The liability we record is based on our estimated costs to fulfill customer product warranty obligations, and utilizes historical product failure rates. Should actual warranty obligations differ from estimates, revisions to the warranty liability may be required. If we experience an increase in warranty claims above historical experience or our costs to provide warranty services increase, we may increase our warranty accrual, which would adversely impact our gross margin.

Share-based compensation. We provide share-based compensation awards to our directors, officers and employees as incentives in the form of stock options for the purchase of our common stock, and shares of our common stock that are subject to vesting, which we refer to as restricted stock. We measure compensation cost for such awards based upon fair value on the date of grant, and recognize this cost as expense over the service period the awards are expected to vest, net of estimated forfeitures. The fair value of restricted stock is determined based on the excess of the estimated fair value of our common stock on the date of grant over the price paid for the shares. The fair value of stock options is determined using the Black-Scholes option-pricing model. We recognize the compensation expense associated with share-based awards on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The determination of fair value of share-based awards utilizing the Black-Scholes model is affected by the fair value of our common stock as of the

 

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time of grant and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends.

Prior to this offering, the fair value for our common stock, for the purpose of determining the exercise prices of our stock options and the fair value of restricted stock, was estimated by our board of directors, with input from management. Our board of directors exercised judgment in determining the estimated fair value of our common stock on the date of grant based on various factors, including:

 

   

consultation with independent third-party valuation professionals;

 

   

the prices paid in merger and acquisition transactions involving us, such as the M/A-COM Acquisition and the Mimix Merger;

 

   

the prices for our convertible preferred stock sold to outside investors in arm’s-length transactions;

 

   

the rights, preferences and privileges of that convertible preferred stock relative to those of our common stock;

 

   

our operating and financial performance;

 

   

the introduction of new products;

 

   

our stage of development and revenue growth;

 

   

the lack of an active public market for our common and preferred stock;

 

   

industry information such as market growth and volume;

 

   

the performance of similarly-situated companies in our industry;

 

   

the execution of strategic and development agreements;

 

   

the risks inherent in the development and expansion of our products and services; and

 

   

the likelihood of achieving a liquidity event, such as an initial public offering or a sale of our company given prevailing market conditions and the nature and history of our business.

We do not have a history of active published market prices for our common stock, and as such, we estimate volatility in share price using historical volatilities of similar companies. For purposes of using the Black-Scholes model, we based our analysis of expected volatility on reported data for a peer group of companies that issued options with substantially similar terms using an average of the historical volatility measures of this peer group of companies. The expected life of options has been determined utilizing the “simplified” method, which uses the midpoint between the vesting date and the end of the contractual term. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected life of the stock options. We paid a dividend, aggregating $80.0 million to stockholders of record of our Series A-1 convertible preferred stock, Series A-2 convertible preferred stock and common stock on January 4, 2011 following the issuance of our Class B convertible preferred stock. This dividend was not expected at the time we granted stock options in periods prior to the dividend payment. We believe the circumstances leading up to the dividend payment were unique and we do not anticipate paying future cash dividends on our shares of common stock; therefore, the expected dividend yield was assumed to be zero in estimating the fair value of stock options in all periods presented. We utilize an estimated forfeiture rate at the grant date of an award when calculating the expense to be recorded in our statements of operations, utilizing a combination of our historical and expected forfeitures. If this estimated rate changes due to different actual forfeitures, our stock compensation expense may increase or decrease significantly. If there are any modifications or cancellations of the underlying unvested securities or the terms of the stock option, we may be required to accelerate, increase or cancel any remaining unamortized share-based compensation expense.

 

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We believe that the exercise price for stock options granted was determined by our board of directors in a manner consistent with guidance set forth in the American Institute of Certified Public Accountants (AICPA), Technical Practice Aid, “Valuation of Privately-Held-Company Equity Securities Issued as Compensation,” referred to herein as the AICPA Practice Aid. We believe that consideration by our board of directors of the factors described above reflects a reasonable approach to estimating the fair value of our common stock for those periods. Determining the fair value of our stock requires complex and subjective judgments, however, and there is inherent uncertainty in our estimate of fair value.

For awards granted through the date of the May 2010 Mimix Merger, we used a number of methods to estimate the fair value of our common stock. In each case we developed both an income approach and market approach to estimate our total enterprise value. We allocated the enterprise value to the outstanding classes of equity based on methods described in the AICPA Practice Aid. Specifically, we employed the “Option Pricing Methodology” for valuations performed through October 2010 and the “Probability Weighted Expected Return Methodology” for valuations performed since October 2010. The change to the Probability Weighted Expected Return Methodology was precipitated by changes in our business that allowed us to forecast the occurrence of possible near-term liquidity events. For each of these valuations, consideration was given to any outside investments in our equity.

The Probability Weighted Expected Return Methodology took into consideration the following scenarios:

 

   

two different valuation scenarios for the completion of an initial public offering;

 

   

three different valuation scenarios for sales to a strategic acquirer at a price above the preferred stock aggregate liquidation preferences; and

 

   

a sale to an acquirer at a price at or below the liquidation preference.

The valuation information we considered to determine the fair value of our common stock was based on the Probability-Weighted Expected Return Methodology, liquidation preferences, progress towards a liquidity event and historical market data of recent liquidity transactions for similar companies. We allocated the enterprise value to preferred and common shares based on a scenario analysis described above that incorporated our capital structure and the specific rights and preferences associated with our securities under these various liquidity scenarios. The plans of our board of directors and management, together with achieved operating results, informed the timing and probability of the liquidity events used in the scenario analysis.

In connection with share-based awards in fiscal year 2010 and during the nine months ended July 1, 2011, based upon the above and other considerations, the board of directors estimated the fair value of our common stock to be:

 

   

either $0.16 or $0.50 per share in fiscal year 2010; and

 

   

either $2.02 or $2.77 per share in the nine months ended July 1, 2011.

 

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Since the M/A-COM Acquisition in March 2009, our board of directors granted the following stock options and restricted shares, through July 1, 2011:

 

Date

  

Type of Award

   Number of Common
Stock Shares

(in thousands)
     Exercise/Purchase
Price Per  Share
     Estimated Fair Value
of Common Stock
Per Share on Grant
Date
 

September 29, 2009

   Stock Options      7,500       $ 0.16       $ 0.16   

October 23, 2009

   Stock Options      3,245         0.16         0.16   

November 10, 2009

   Stock Options      860         0.16         0.16   

January 4, 2010

   Stock Options      750         0.16         0.16   

February 5, 2010

   Stock Options      250         0.16         0.16   

July 22, 2010

   Stock Options      2,530         0.50         0.50   

August 14, 2010

   Stock Options      1,680         0.50         0.50   

August 30, 2010

   Stock Options      100         0.50         0.50   

August 30, 2010

   Restricted Stock      30         0.00         0.50   

February 8, 2011

   Restricted Stock      440         0.00         2.02   

March 25, 2011

   Restricted Stock      40         0.00         2.02   

April 20, 2011

   Restricted Stock      163         0.00         2.77   

June 2, 2011

   Restricted Stock      215         0.00         2.77   

June 2, 2011

   Stock Options      65         2.77         2.77   

Estimated grant date fair value per share for stock options and restricted stock awards ranged from $0.08 to $2.77. We generally issue shares of restricted common stock at no cost to our employees and record share-based compensation expense based upon the grant-date fair value of the common stock over the period of services, which is generally the vesting period.

Significant factors considered by our board of directors in determining the fair value of our common stock at these grant dates include:

September 2009 to February 2010

The M/A-COM Acquisition was completed in March 2009, in the midst of the global economic downturn and related credit crisis, and began a prolonged phase of transitioning the business from a legacy group of product lines within a larger multinational organization to a standalone enterprise. We initially defined a restructuring plan to reduce staffing, consolidate facilities and reduce our manufacturing footprint. As part of the acquisition, we had incurred an aggregate of $43.0 million in seller-financed indebtedness bearing interest at rates between 7.5% and 13.0% per annum, both to pay for the acquisition and to provide initial working capital due to losses from operations at the time of the transaction. Approximately $5.0 million of such indebtedness was to mature six months following the acquisition, and our initial focus was on cost cutting, re-engaging with customers after a long period of uncertainty during which it was well-known that the business had been up for sale, reducing losses from operations and improving cash flows sufficiently to repay this amount, while investing in research and development toward eventual new products. Through the above efforts, we were able to repay the first $5.0 million of indebtedness to the seller in September 2009.

Throughout September 2009 to February 2010, our operating results continued to improve although at a slower pace than we expected, as the benefits of our planned reductions in staffing and outsourcing efforts took longer to realize than we had anticipated.

Our board of directors granted our first stock options to our executives in September 2009 and followed with grants of stock options to a broader group of our personnel beginning in October 2009 through February 2010. In connection with these awards, our board of directors estimated the fair value of our common stock on a non-controlling basis to be $0.16 per share, which included, among other things, consideration of a valuation of

 

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our common stock on a non-controlling basis we obtained as of March 30, 2009. That valuation was driven primarily by the price we paid in the M/A-COM Acquisition. The U.S. economy continued to be weak through much of this period. Although we saw signs that our business and the financial markets were improving by December 31, 2009 and were able to pay off an additional $8.0 million of our indebtedness by such date, given the overall economic environment, our continued debt burden of $30.0 million, and the risk that the long-term success or failure of the bulk of our restructuring and investment in the business to date remained uncertain, the board of directors concluded, on the basis of these and other factors, that the valuation of our common stock through February 2010 remained unchanged at $0.16 per share.

March 2010 to August 2010

Between March 2010 and August 2010, the U.S. economy and the financial and stock markets continued to recover. In March 2010, we issued 100,000,000 shares of Series A-1 convertible preferred stock in exchange for 98,000,000 outstanding shares of our common stock. This exchange did not change the ownership positions of our stockholders. The Series A-1 convertible preferred stock includes a liquidation preference of $0.795 per share and other rights, privileges and designations senior to the holders of our common stock.

In May 2010, in connection with the Mimix Merger, we issued 16,821,780 shares of Series A-2 convertible preferred stock. The Series A-2 convertible preferred stock includes a liquidation preference of $2.50 per share and other rights, privileges and designations senior to the holders of our common stock.

We obtained a valuation of our common stock as of May 28, 2010, the date of the Mimix Merger, and our board of directors determined the fair value of our common stock as a combined company and on a non-controlling basis to be $0.50 per share. This valuation included consideration of potential liquidity opportunities facing us on a probability weighted basis. Upon completion of the Mimix Merger, we began significant integration efforts to combine the two businesses, much of which was substantially completed by the end of the fourth quarter of fiscal year 2010. We generated revenue of $67.7 million in the third quarter of fiscal year 2010 as compared to revenue of $61.0 million in the second quarter of fiscal year 2010. Based on the valuation received and the factors discussed above, our board of directors granted stock options with an exercise price of $0.50 per share during July and August 2010 and recorded share-based compensation related to restricted stock grants using the same valuation.

September 2010 to March 2011

Between September 2010 and March 2011, the U.S. economy and the financial and stock markets continued to recover. We completed the sale of our Class B convertible preferred stock in December 2010 and a paid a related special dividend, aggregating $80.0 million to our stockholders, exclusive of the new Class B convertible preferred stockholders, on January 4, 2011. We experienced sequential revenue growth, generating revenue of $77.9 million for the three months ended March 2011 compared to $74.9 million for the quarter ended December 2010. We continued our cost savings initiatives while also heavily investing in product development. In light of our improved financial performance and the issuance of our Class B convertible preferred stock and payment of the special dividend, we obtained a valuation of our common stock as of January 4, 2011, on a post-dividend, non-controlling basis, which determined the fair value of our common stock to be $2.02 per share. This valuation included consideration of potential liquidity opportunities available to us on a probability weighted basis. Based on this valuation and the factors discussed above, our board of directors granted restricted stock in February 2011 and March 2011 using the $2.02 per share valuation.

 

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April 2011 to June 2011

Between April 2011 and July 1, 2011, the U.S. economy and the financial and stock markets continued their recovery. We continued to experience revenue growth, generating $78.7 million for the quarter ended July 1, 2011 compared to $77.9 million for the quarter ended March 2011. We continued our cost savings initiatives while also heavily investing in product development. In light of our improved financial performance, as of April 1, 2011, we obtained a valuation of our common stock consistent with the January 4, 2011 method which determined the fair value of our common stock to be $2.77 per share, on a non-controlling basis. Based on this valuation and the factors discussed above, on June 2, 2011 our board of directors granted stock options with an exercise price of $2.77 per share and recorded share-based compensation related to restricted stock grants in April and June 2011 using the same valuation. We also began interviewing potential underwriters for an initial public offering of our common stock on June 2, 2011.

Determining the appropriate fair value model and calculating the fair value of share-based awards requires significant judgment and the use of assumptions which may differ materially from actual results. Actual results, and future changes in estimates, may differ substantially from our current estimates.

Fair value measurements. We measure financial assets and liabilities at fair value. Fair value is an exit price, representing the amount that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, we group financial assets and liabilities in a three-tier fair value hierarchy. This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. On a recurring basis, we measure certain financial assets and liabilities at fair value.

The fair values of the contingent consideration liabilities were estimated based upon a risk-adjusted present value of the probability-weighted expected payments by us. Specifically, we considered base, upside and downside scenarios for the operating metrics upon which the contingent payments are to be based. Probabilities were assigned to each scenario and the probability-weighted payments were discounted to present value using risk-adjusted discount rates.

The fair value of the common stock warrants was estimated based upon a present value of the probability-weighted expected investment returns to the holders. We weighted various scenarios of possible investment returns to the holders over the terms of the contracts, such as upon a sale of us and upon an initial public offering of our common stock, using a range of potential outcomes. Using the scenarios developed, management considered the likely timing and method of exercise of the warrants and investment returns to the holders. Where a settlement was considered likely in the near term, the probable settlement amounts were weighted. Where the time to exercise was expected to be longer, a Black-Scholes option pricing model was used to estimate the fair value of the warrants, giving consideration to remaining contractual life, expected volatility and risk free rates. The probability-weighted expected settlement of the warrant was discounted to the present using a risk adjusted discount rate.

The fair values of the Class B conversion liabilities were estimated based upon a consideration of the estimated fair value of the underlying common stock into which the Class B convertible preferred stock is convertible, and the expected preferential payments pursuant to the terms of the securities. We estimated the fair value of the common stock by using the same probability-weighted scenarios in estimating the fair value of the warrants. For each potential scenario, the value to the Class B convertible stock was estimated relative to the existing preferences. The amount in excess of the liquidation preferences, if any, was then probability-weighted and discounted to the present using a risk adjusted discount rate.

These estimates include significant judgments about potential future liquidity events and actual results could materially differ and have a material impact upon the values of the recorded liabilities. Any changes in the

 

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estimated fair values of the liabilities in the future will be reflected in our earnings and such changes could be material. The fair values of common stock warrant liability and Class B conversion liabilities are heavily dependent on assumptions made by management relating to our valuation and the probability of completing an initial public offering of our common stock. An initial public offering completed during the next 12 months at a price per share reflective of our current estimated valuation, would result in an additional charge to our statement of operations of an estimated $20 million related to the common stock warrant liability and Class B conversion liabilities.

Income taxes. We periodically assess the likelihood that our deferred tax assets will be recovered from our future taxable income, and, to the extent we believe that it is more likely than not our deferred tax assets will not be recovered, we must establish a valuation allowance against our deferred tax assets. In making this assessment, we consider available positive and negative evidence. Conclusions reached are subject to significant judgments that are dependent upon changes in facts and circumstance. As of October 1, 2010, we evaluated available positive and negative evidence and determined that it was not more likely than not that our deferred tax assets would be realized, and we recorded a full valuation allowance. In arriving at this conclusion, we determined that the cumulative losses incurred by Mimix and us for the years prior to fiscal 2010 outweighed our short earnings history.

During the nine months ended July 1, 2011, we continued to evaluate available positive and negative evidence and concluded it was appropriate to recognize our deferred tax assets in full. The primary factor we considered was our continued profitability during the period. We concluded that it was probable that we would generate taxable income for our fiscal year ending September 30, 2011 and that two consecutive years of profitability and forecasted income in future years constituted sufficient positive evidence to support a more likely than not assessment of recoverability of the assets. Accordingly, we reversed $17.6 million of our income tax valuation allowance during the nine months ended July 1, 2011. The remaining valuation allowance of $2.7 million as of July 1, 2011 will be released during our last fiscal quarter of 2011 when the assets to which the valuation allowance relates are expected to be consumed.

For interim periods, we record a tax provision or benefit based upon the estimated effective tax rate expected for the full fiscal year.

Recent Accounting Pronouncements

In April 2010, the Financial Accounting Standards Board, (FASB) issued Account Standards Update (ASU) 2010-17, “Milestone Method of Revenue Recognition,” which amends Accounting Standards Codification (ASC) 605. ASU 2010-17 provides guidance for determining when the milestone method of revenue recognition is appropriate and how this method should be applied, and specifies related disclosure requirements. ASU 2010-17 will be effective for us on October 2, 2011. We believe that the adoption of ASU 2010-17 will not have a material effect on our financial position or results of operations.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB’s Emerging Issues Task Force).” ASU 2010-29 clarifies that when presenting comparative financial statements, an entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only, and expands the related disclosure requirements. ASU 2010-29 will be effective for us on October 2, 2011, and will be applied to business combinations for which the acquisition date is subsequent to that date. We believe that the adoption of ASU 2010-29 will not have a material effect on our financial disclosures.

 

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Off-Balance Sheet Arrangements

We had no off-balance sheet arrangements at July 1, 2011 or October 1, 2010.

Taxes

As of October 1, 2010, the total amount of our net unrecognized tax benefits for uncertain tax positions was $0.4 million. Although it is reasonably possible that our unrecognized tax benefits for tax positions taken on previously filed tax returns could materially change in the next 12 months, we are unable to make a reasonably reliable estimate as to when cash settlement of these unrecognized tax benefits, if any, will occur with a tax authority, as the timing of examinations and ultimate resolution of those examinations is uncertain.

Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk in the ordinary course of business, which consists primarily of interest rate risk associated with our cash and cash equivalents, as well as foreign exchange rate risk.

Interest rate risk. The primary objectives of our investment activity are to preserve principal, provide liquidity and earn a market rate of return. To minimize market risk, we maintain our portfolio in cash and diversified short-term investments, which may consist of bank deposits, money market funds and highly rated, short-term US government securities and short-term commercial paper through domestic banks who are insured by the Federal Deposit Insurance Corporation. The interest rates are variable and fluctuate with current market conditions. The risk associated with fluctuating interest rates is limited to this investment portfolio. We believe that a 10% change in interest rates would not have a material impact on our financial position or results of operations.

Our exposure to market risk also relates to the increase or decrease in the amount of interest expense we must pay on our revolving credit facility. The interest rate on our revolving credit facility is a variable interest rate based on our lender’s prime rate (a function of the federal funds effective rate) plus the applicable lender’s margin or the LIBOR plus the applicable lender’s margin, which exposes us to market interest rate risk when we have outstanding borrowings under the revolving credit facility. At July 1, 2011, we had no outstanding borrowings under the revolving credit facility. We believe that a 10% change in interest rates would not have a material impact on our financial position or results of operations.

Foreign currency risk. To date, our international customer agreements have been denominated primarily in U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates. The functional currency of a majority of our foreign operations is U.S. dollars with the remaining operations being local currency. The effects of exchange rate fluctuations on the net assets of the majority of our operations are accounted for as transaction gains or losses. We believe that a change of 10% in such foreign currency exchange rates would not have a material impact on our financial position or results of operations. In the future, we may enter into foreign currency exchange hedging contracts to reduce our exposure to changes in exchange rates.

 

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BUSINESS

Company Overview

We are a leading provider of high-performance analog semiconductor solutions for use in wireless and wireline applications across the RF, microwave and millimeterwave spectrum. We leverage our system-level expertise to design and manufacture differentiated, high-value products for customers who demand high performance, quality, and reliability. The diversity and depth of our business across technologies, products, applications, end markets and geographies provide us with a stable foundation for growth and enable us to develop strong relationships with our customers. We offer over 3,000 standard and custom devices, ICs, multi-chip modules and complete subsystems across 38 product lines serving over 6,000 end customers in three large and growing primary markets. Our primary markets are Networks, which includes CATV, cellular backhaul, cellular infrastructure and fiber optic applications; A&D; and Multi-market, which includes automotive, industrial, medical, mobile and scientific applications.

We build upon a strong 60-year heritage of delivering innovative solutions dating back to the founding of Microwave Associates, Inc. We utilize our system-level knowledge and our extensive capabilities in high-frequency modeling, IC design, integration, packaging and manufacturing of semiconductors to address our customers’ needs. Our specialized engineers and technologists located across six global design centers collaborate with our customers during the early stage of their system development process to incorporate our standard products and identify custom products we can develop to enhance their overall system performance. We believe the combination of our market-facing strategy and our engineering expertise enables us to identify profitable growth opportunities and rapidly develop and deliver new products and solutions. We have a comprehensive new product opportunity assessment process with 128 products in development as of July 1, 2011 that we believe will enhance our revenue growth and improve our gross margin through a richer product mix. Many of our products have long lifecycles ranging from 5 to 10 years, and some of our products have been shipping for over 20 years. We believe these factors create a competitive advantage that often leads to sole source design wins and strengthened customer relationships.

We believe our “fab-lite” manufacturing model provides us with a competitive advantage and an attractive financial model through a variable cost structure. We operate a single GaAs and silicon semiconductor fab at our Lowell, Massachusetts headquarters. We also utilize external semiconductor foundries to supply us with additional capacity in periods of high demand and to provide us access to additional process technologies. The ability to utilize a broad array of internal proprietary process technologies as well as commercially available foundry technologies allows us to select the most appropriate technology to solve our customers’ needs. We believe our fab-lite strategy also provides us with dependable domestic supply, control over quality, reduced capital investment requirements, faster time to market, and additional outsourced capacity when needed. In the A&D market, an internal domestic fab is often a requirement to be a strategic supplier. In addition, the experience base cultivated through the continued operation of our internal fab provides us with the expertise to better manage our external foundry suppliers.

We serve our broad and diverse customer base through a multi-channel sales strategy utilizing direct sales and a global network of independent sales representatives and distributors. Our direct sales force and application engineers are focused on securing design wins by supporting industry-leading OEM customers. Our customers include Alcatel-Lucent, Cisco Systems, Inc., Ericsson AB, Ford, Harris Corporation, Huawei Technologies Co., Ltd., ITT Corporation, Rockwell Collins, Inc., Samsung Electronics Co., Ltd. and Thales S.A. Our top 25 direct customers, most of whom have been purchasing our products for at least a decade, accounted for 50.9% of our revenue in fiscal year 2010 and 57.2% of our revenue in the nine months ended July 1, 2011. Sales to our distributors accounted for 30.0% of our revenue in fiscal year 2010 and 25.1% of our revenue in the nine months ended July 1, 2011.

 

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We generated revenue of $260.3 million for fiscal year 2010 and $231.5 million and $186.1 million for the nine months ended July 1, 2011 and July 2, 2010, respectively. Our revenue grew 24.4% for the nine months ended July 1, 2011 over the nine months ended July 2, 2010.

Industry

The growth of advanced electronic systems using RF, microwave and millimeterwave technologies has created strong demand for high-performance analog semiconductor components, modules and solutions. This market demand is driven by the growth of mobile internet devices, cloud computing and streaming video that strain existing network capacity, as well as the growth in advanced information-centric military applications. In addition, the increasing need for real-time information, sensing and imaging functions in automotive, industrial, medical, scientific and test and measurement applications is driving demand in these markets.

The terms RF, microwave and millimeterwave are used to refer to electromagnetic waves in a particular frequency range produced by applying an alternating current to an antenna or conductor. A wide variety of advanced electronic systems rely on electromagnetic waves for high-speed data transmission or reception.

LOGO

The Networks market is experiencing growth with the proliferation of wireless and wired devices from smartphones and tablets to set top boxes, as well as the data rich applications and services they enable such as mobile internet, cloud computing, video-on-demand, social media, global positioning functionality and location based services. According to the 2010 Cisco Visual Networking index, Global Internet Protocol traffic will quadruple from 2009 to 2014, growing at a approximately 34% compound annual growth rate (CAGR). The growth in Global Internet Protocol traffic is driving demand for communications infrastructure equipment consisting of amplifiers, filters, receivers, switches, synthesizers, transformers, upconverters, and other components to expand and upgrade cellular backhaul, cellular infrastructure, CATV, broadband, and fiber optic networks. In addition, semiconductor products and solutions must continually deliver higher throughput performance and functionality to meet the increasing demands of end users.

In the A&D market, electronic content continues to grow as military applications, such as radar warning receivers, communications data links and tactical radios, unmanned aerial vehicles (UAV), RF jammers, electronic countermeasures, and smart munitions, require more advanced electronic systems. Military applications are becoming more sophisticated, favoring higher performance semiconductor ICs based on GaAs and GaN technology due to their high power density, improved power efficiency and broadband capability. Radar systems for mapping and targeting missions are undergoing a major transition from existing mechanically scanned radar products to a new generation of active electronically scanned array (AESA) based products. Consisting of hundreds or thousands of transmit/receive modules commonly based on GaAs and increasingly on GaN technology, AESAs deliver greater speed, range, resolution and reliability over mechanically scanned radar

 

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products that utilize a single transmitter and receiver with mechanical steering. Military communications employing wireless infrastructure and tactical radios in the field remain critical for allowing geographically dispersed users to exchange information quickly and efficiently. The tactical radio market is transitioning from single-band, single-mode radios to multi-band, multi-mode radios and the annual multi-band military radio market is estimated to grow from $1.3 billion in 2009 to $4.4 billion in 2020, representing an approximately 12% CAGR, according to Strategy Analytics. UAVs and their underlying semiconductor content require innovative designs to meet the rigorous specifications for high performance, small size, and low power consumption. The Teal Group forecasts that the worldwide UAV market will double over the next decade due to heightened interest in information warfare and peace keeping missions.

The Multi-market category encompasses various applications including automotive, industrial, medical, mobile, test and measurement and scientific applications, where RF, microwave and millimeterwave semiconductor solutions are gaining prevalence. Semiconductor content in automobiles is projected to grow in order to offer connectivity, safety, performance and telematics features. For example, market research provider IC Insights forecasts that average semiconductor content per automobile will rise to $350 in 2011, a 15% increase from the $305 average in 2010, and to $425 in 2014. In addition, evolving medical technology has increased the need for high-performance semiconductor solutions in medical imaging and patient monitoring to provide enhanced analysis and functionality.

Industry Challenges

As the demand for advanced electronics systems relying on RF, microwave and millimeterwave technologies increases, OEMs are facing increasing challenges to provide high-performance, high quality and reliable products and systems including:

Higher performance requirements. End users of communication devices and advanced electronic systems are increasingly demanding higher performance, longer usage time, improved reception, faster data upload and download speeds, and longer service life. In order to meet these demands, OEMs seek innovative semiconductor solutions that offer greater performance attributes that result in increased throughput, reduced power consumption and increased signal integrity.

Increasing systems complexity. Growing competitive pressures to enhance system features and improve overall performance is creating greater system complexity. A common technology trend in many wireless markets is the proliferation of multi-band, multi-mode applications that operate at higher frequencies. This increasing complexity coupled with the pressure to reduce costs and simplify assembly operations, is forcing OEMs to seek highly integrated solutions that combine multiple functions, thereby reducing component count and system size without compromising performance.

Faster time to market. OEMs must reduce their development time in order to bring their systems to market faster and respond to growing competition. Due to long OEM program lifecycles and their customer planning processes, we believe the OEM’s ability to secure initial design wins is especially critical to drive future revenue. As a result, OEMs seek integrated solutions and technical support that shorten their time to design, develop, test, qualify and launch their systems.

Greater cost pressure. The global competitive landscape demands that OEMs deliver more advanced and complex systems in a cost-effective manner. Many OEMs have reduced or eliminated their internal semiconductor design and manufacturing capabilities and instead rely on specialized, best-in-class suppliers for these solutions. This trend has yielded additional opportunities for qualified semiconductor suppliers to provide cost-effective, high-performance products and solutions.

Higher quality and reliability requirements. Our primary markets are dominated by applications requiring high quality and reliable products. Components and systems in these markets may be subject to extreme environmental conditions for extended periods of time, in some cases over 10 years. For example, in automotive, battlefield and communications infrastructure applications, quality and reliability requirements are more stringent

 

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as the consequences of a field failure can be particularly serious or expensive to service. As a result, OEMs may require their suppliers to implement specialized design, manufacturing, quality assurance and testing processes.

Our Competitive Strengths

We believe our key competitive strengths include the following:

Extensive design and integration capabilities. Our 60-year heritage of innovation has allowed us to develop a comprehensive understanding of high-performance analog semiconductor solutions for wireless and wireline RF, microwave and millimeterwave applications. Our expertise includes advanced modeling, IC design wafer fabrication