FORM
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value. PART I Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Legal Proceedings Item 4. PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules Signatures Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700. Our common stock trades on the NASDAQ Global Market under the ticker symbol VTSS. Networks using packet-based technology are often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks. acquisition and operation costs. We are focused on developing IC solutions for these high-growth networks, collectively called the “IP Edge.” business networks. require solutions for high-speed signal integrity the $2.1 billion addressable market for our IC solutions. transmission by allowing signals to travel farther, faster and error-free over copper and fiber. Tier 2 customers. information on our website is not incorporated by reference into, and is not made a part of, this report. Ethernet MACs provide addressing and channel control mechanisms that by providing single-chip solutions. Transceivers (PHYs): Connectivity Product Line generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps, and are targeted principally for next-generation systems in the core and metro segments of the Carrier networks. ours. for Many of these non-core products have approached end-of-life status. We have made no material R&D investments in these products in the last five years. We market and sell our semiconductor products directly to leading OEMs and Our top five OEM customers for fiscal year 2011 were Alcatel-Lucent, Cisco, Huawei Technologies, Tellabs, and ZTE. Our sales to these customers accounted for approximately 28.6% of our fiscal year 2011 net revenues. Our top five OEM customers for fiscal year 2010 were Alcatel-Lucent, Cisco, Huawei Technologies, Nokia Siemens, and ZTE. Our sales to these customers accounted for approximately 32.4% of our fiscal year 2010 net revenues. Geographic providers. yield. development charges (“NREs”) and/or commitments. intellectual property. In the communications networking market, which includes our Carrier and Enterprise networking markets, our competitors include Applied Micro Circuit, Broadcom, EZChip Semiconductor, Marvell Technology Group, Mindspeed Technologies, and PMC-Sierra. In the signal integrity market, our competitors include In order to achieve and sustain profitability, we must achieve a combination of substantial revenue growth and/or a reduction in operating expenses. forecasts. Because a substantial portion of our expenses are fixed in the short term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales. Our operating results will be adversely affected if revenues fall below our expectations in a particular quarter, which could cause the price of our common stock to decline significantly. The lengthy life cycle of our products as well as the short life cycles of some of the end products for which our products are designed may leave us with obsolete or excess inventories, which could have an adverse impact on our operating profit and net income results. Our We depend on third-party wafer foundries and other suppliers and subcontract manufacturers to manufacture and test substantially all of our current products and any delays in materials or packaging, availability of manufacturing capacity, or failure to meet quality control requirements could have material adverse effects on our customer relationships, revenues and cash flows. foundries need to have new manufacturing processes qualified if there is a disruption in an existing process. We typically require several months to qualify a new foundry or process before we can begin shipping products from the new foundry. If we cannot accomplish this qualification in a timely manner, we may experience a significant interruption in supply of the affected products. Defects, errors, or failures in our products could result in higher costs than we expect and could harm our reputation and adversely affect our revenues and level of customer satisfaction. Our customers may choose to internally design and develop products for themselves. Our operating results may be adversely impacted by worldwide political and economic conditions and uncertainties. As a result, the market price of our common stock may decline. If we are not successful in protecting our intellectual property rights, our ability to compete or maintain market share may be harmed. increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. The resolution or compromise of any litigation or other legal process to enforce such alleged third party rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. If such litigation were to result in an adverse ruling we could be required to: Loan. companies. These broad market fluctuations may adversely affect the market price of our common stock. Our success depends on our ability to attract and retain qualified personnel. Fiscal Year Ended 2010 October 1 through December 31, 2009 January 1 through March 31, 2010 April 1 through June 30, 2010 July 1 through September 30, 2010 Holders of Record The stock price performance graph depicted below shall not be deemed to be Results of Consolidated Statements of Operations Data: Consolidated Statements of Operations Data: Product revenues Product revenues Intellectual property revenues Intellectual property revenues Net revenues Restructuring and impairment charges Accounting remediation & reconstruction (revenue) expense & litigation costs Accounting remediation & reconstruction (revenue) expense & litigation costs Goodwill impairment Goodwill impairment (Loss) income from operations (Loss) income from continuing operations (Loss) income from continuing operations Income (loss) from discontinued operations, net of tax Net (loss) income Net (loss) income Fair value adjustment of Preferred Stock—Series B Net (loss) income available to common stockholders Net (loss) income available to common stockholders Net (loss) income per share: Net (loss) income per share: Basic and diluted: Basic and diluted: Continuing operations Discontinued operations Net (loss) income per share Fair value adjustment of Preferred Stock-Series B Net loss (income) per common share available to common stockholders Net loss (income) per common share available to common stockholders Weighted average shares outstanding: basic and diluted Balance Sheet Data: Balance Sheet Data: Cash and short-term investments Cash and short-term investments Working capital Working capital Total assets Total assets Long term compound embedded derivative liability Long term compound embedded derivative liability Other long term obligations, incuding debt Total stockholders' (deficit) equity lease termination reserve of Loan A and Term Loan B), each in the principal amount of $9.34 million. Fiscal Year 2009 Enterprise networks. We also increase margins with sales from our intellectual property portfolio in the form of licensing, royalties and patent sales. EMEA. networking. wins. subjective and complex judgments. Recognition Revenues A substantial portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past Property Revenues we or our competitors sell the deliverables on a stand-alone basis. ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations. We account for stock based compensation under ASC Topic 718, liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. in Charges-Facility were recognized initially. Net revenues: Net revenues: Product revenues Intellectual property revenues Net revenues Costs and expenses: Costs and expenses: Cost of revenues Engineering, research and development Selling, general and administrative Restructuring and impairment charges Accounting remediation & reconstruction expense & litigation costs Goodwill impairment Amortization of intangible assets Costs and expenses (Loss) income from operations Other expense (income) : Interest expense, net (Gain) loss on compound embedded derivative Loss on extinguishment of debt Other (income), net Other expense , net Loss before income tax (benefit) expense Income tax (benefit) expense Income tax (benefit) expense Loss from continuing operations Loss from continuing operations Income from discontinued operations, net of tax Income from discontinued operations, net of tax Net loss Net loss Fair value adjustment of Preferred Stock—Series B Net loss available to common stockholders Net loss available to common stockholders 2011 Carrier networking Carrier networking Enterprise networking Enterprise networking Non-core Non-core Product revenues transport products going through end-of-life and in our newer technologies and products, particularly in Ethernet Copper PHYs for Carrier applications. Asia. The decrease was partially offset by an increase in Enterprise processing due to revenues from switch fabrics going through end-of-life and an increase in new products. PHYs as some of these products moved into end-of-life. Connectivity Connectivity Ethernet switching Ethernet switching Transport processing Transport processing Product revenues Transport processing revenues for IP revenues Cost of revenues Engineering, research and development The higher R&D expense in fiscal year 2011 is largely attributable to increased costs of $3.2 million associated with the purchase of mask sets and wafers, Selling, general and administrative Restructuring and Impairment Charges Restructuring and impairment charges restructuring charges. million. Amortization of intangible assets 2011 Interest expense, net Gain on Compound Embedded Derivative Gain on compound embedded derivative Loss on extinguishment of debt Income tax (benefit) expense Carrier networking Enterprise networking Non-core Product revenues Connectivity Ethernet switching Transport processing Product revenues IP revenues Cost of revenues Engineering, research and development Selling, general and administrative Restructuring and impairment charges Accounting remediation & reconstruction expense & litigation costs Goodwill impairment Amortization of intangible assets Interest expense, net (Gain) loss on compound embedded derivative Loss on extinguishment of debt Other (income), net Income tax expense (benefit) Income from discontinued operations, net of tax Financial Condition and Liquidity Net cash (used in) provided by operating activities Net cash (used in) provided by investing activities Net cash used in financing activities Net (decrease) increase in cash Cash at beginning of year Cash at end of year $8.8 million. Excluding changes in working capital, cash generated by operations totaled $4.0 million. Cash increased $8.8 million from operating with lower inventory levels and $0.9 million from operating with lower accounts receivable, prepaid and other assets. These increases were partially offset by $1.9 million cash used to pay down accounts payable, accrued expenses and other liabilities, and $3.0 million related to a decrease in deferred revenue due to lower purchases from distributors. fiscal year 2011. same period in fiscal year 2009. $0.1 million of proceeds from the sale of fixed assets in fiscal year 2012. Investing activities used $3.5 million payments under licensing agreements. $75.0 million. The Form S-3 will expire in accordance with applicable SEC rules on December 27, 2014. To date no securities have been issued pursuant to the registration statement. Convertible subordinated debt(1) Term A Loan(2) Term B Loan(3) Operating leases(4) Software licenses(5) Inventory and related purchase obligations(6) Total Off-Balance Sheet Arrangements Term A and B Loans and 2014 result in increased or decreased costs for commercial operations in Europe and Asia. Had exchange rates of these foreign currencies been 10% higher or lower relative to the 2012 results of operations. ASSETS ASSETS Current assets: Current assets: Cash Accounts receivable, net Inventory Restricted cash Prepaid expenses and other current assets Total current assets Property, plant and equipment, net Other intangible assets, net Other assets LIABILITIES AND STOCKHOLDERS' DEFICIT LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current liabilities: Accounts payable Accrued expenses and other current liabilities Deferred revenue Current portion of debt and capital leases Total current liabilities Other long-term liabilities Long-term debt, net Compound embedded derivative Convertible subordinated debt, net of discount Total liabilities Commitments and contingencies, See note 12 Stockholders' deficit: Preferred stock, $0.01 par value. 10,000,000 shares authorized; Series B Non Cumulative, Convertible, 134,720 and 185,709 shares outstanding at September 30, 2011 and 2010, respectively Common stock, $0.01 par value. 250,000,000 shares authorized; 24,470,280 and 23,986,531 shares outstanding at September 30, 2011 and 2010, respectively Additional paid-in-capital Accumulated deficit Total Vitesse Semiconductor Corporation stockholders' deficit Noncontrolling interest Total stockholders' deficit Net revenues: Net revenues: Product revenues Intellectual property revenues Net revenues Costs and expenses: Costs and expenses: Cost of revenues Engineering, research and development Selling, general and administrative Restructuring and impairment charges Accounting remediation & reconstruction expense & litigation costs Goodwill impairment Amortization of intangible assets Costs and expenses (Loss) income from operations Other expense (income) : Interest expense, net (Gain) loss on compound embedded derivative Loss on extinguishment of debt Other (income), net Other expense (income), net Loss before income tax (benefit) expense Income tax (benefit) expense Income tax (benefit) expense Loss from continuing operations Loss from continuing operations Income from discontinued operations, net of tax Income from discontinued operations, net of tax Net loss Net loss Fair value adjustment of Preferred Stock—Series B Net loss available to common stockholders Net loss available to common stockholders Net loss per common share—basic and diluted Continuing operations Discontinued operations Net loss per common share—basic and diluted Fair value adjustment of Preferred Stock-Series B Net loss per common share available to common stockholders Net loss per common share available to common stockholders Weighted average common shares outstanding: Basic and Diluted Balance at September 30, 2008 Net loss Compensation expense related to stock options Stock issued pursuant to securities class-action settlement Distribution to minority interest holders Balance at September 30, 2009 Net loss Compensation expense related to stock options and awards Stock issued pursuant to debt restructuring Debt restructuring costs Conversion of Series B Preferred Shares Conversion of 8% Debentures Tax expense on debt transaction Distribution to minority interest holders Balance at September 30, 2010 Net loss Compensation expense related to stock options, awards and ESPP Residual value allocated to the equity conversion feature Premium related to Term B Loan issued in debt exchange Conversion of Series B Preferred Shares Release of restricted stock units Repurchase and retirement of restricted stock units for payroll taxes Distribution to minority interest holders Balance at September 30, 2011 Cash flows used in operating activities: Net loss Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization Share-based compensation Change in fair value of compound embedded derivative liability Impairment of goodwill Allowance for doubtful accounts Loss on asset impairment Gain on conversion of debt Gain on disposal of fixed assets Loss on extinguishment of debt, net Capitalization of interest paid in kind Realized loss on investments Amortization of debt issuance costs Amortization of debt discounts Accretion of debt premiums Other Change in operating assets and liabilities: Accounts receivable Inventory Prepaids and other assets Accounts payable Accrued expenses and other liabilities Deferred revenue Net cash (used in) provided by operating activities Cash flows from investing activities: Sale of Colorado building Transaction cost on sale of building Capital expenditures Other Net cash (used in) provided by investing activities Cash flows from financing activities: Payment of convertible debentures Payment of senior debt Equity issuance costs Debt issuance costs Prepayment fee on senior debt Repurchase and retirement of restricted stock units for payroll taxes Capital lease obligations Net cash used in financing activities Net (decrease) increase in cash Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of non cash transactions: Cash paid during the year for: Interest Income taxes Non cash investing and financing activites: Shares issued pursuant to class-action settlement Purchase of assets in exchange for future obligations Common stock issued in exchange for Series B Preferred Stock Common stock issued for restricted stock units Residual value allocated to the equity conversion feature Premium related to Term B Loan issued in debt exchange Issuance of 2014 convertible debentures Common stock issued in exchange for 2024 debentures Preferred stock—Series B issued in exchange for 2024 debentures Compound embedded derivative issued in exchange for 2024 debentures Common stock issued in exchange for 2014 debentures our foreign subsidiaries is the United States dollar; however, our foreign subsidiaries transact in local currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Foreign currency transaction and translation gains and losses are included in results of operations. diluted loss per share because their effect is anti-dilutive. may again exceed federally insured limits. Allowance for Doubtful Accounts ("ASC 360"). We perform periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives are compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values. All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs. included in long-term debt, net, and convertible subordinated debt, net on our consolidated balance sheets. The valuation was determined using Level 3 inputs. with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of our common stock into which the Term B downward. consolidated financial statements. Outstanding stock options Outstanding restricted stock units Outstanding warrants Convertible preferred stock 2014 Convertible debentures 2024 Convertible debentures Term B loan convertible note ESPP Shares Total potential common stock excluded from calculation Inventory: Inventory: Raw materials Raw materials Work-in-process Work-in-process Finished goods Finished goods Total Property, Plant and Equipment: Machinery and equipment Machinery and equipment Furniture and fixtures Furniture and fixtures Computer equipment Computer equipment Leasehold improvements Leasehold improvements Construction in progress Construction in progress Less: Accumulated depreciation Less: Accumulated depreciation Total Intangible Assets: Intellectual property Less: Accumulated amortization Total Intangible assets In fiscal year 2012 approximately $1.1 million of our ERP software was completely written off as it was not deemed useful any longer. Other Assets: Other Assets: Restricted cash Restricted cash Debt issue costs Other Other Total Accrued Expenses and Other Current Liabilities: Accrued Expenses and Other Current Liabilities: Accrued software license agreements Accrued software license agreements Accrued vacation Accrued vacation Accrued wages and benefits Accrued wages and benefits Interest payable Interest payable Accrued income taxes Accrued income taxes Accrued warranty liability Accrued warranty liability Accrued other Accrued other Total Term A Loan, 10.50% fixed-rate notes, due February 2014 Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014 Senior Term Loan, 15.50% fixed-rate note Capital leases, non-current portion Total long-term debt, net 2014 Convertible subordinated debentures, 8.0% fixed-rate notes, due October 2014 Total debt, net 2012 derivative were indexed to our own stock. A final valuation will be completed with any change in value recorded into earnings and the final value reclassified from other long-term liabilities to equity. Derivative liability—compound embedded derivative—2014 Debenture 2012 Balance at September 30, 2010 Transfers in and /or out of Level 3 Purchases, sales, issuances, and settlements Total net gains included in earnings Balance at September 30, 2011 The compound embedded derivative liability our financial instruments are as follows: share, of which preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to Cost of revenues Engineering, research and development Selling, general and administrative Total share-based compensation expense approximately The Compensation Committee of the Board of Directors determines the total value of the stock based compensation grants. The exercise price of options is the closing price on the date the options are granted. The options generally vest over four years and expire between five or ten years from the date of grant. The fair value of each option grant is estimated on the date of the grant using the Options outstanding, September 30, 2008 Granted Granted Exercised Exercised Cancelled or expired Cancelled or expired Options outstanding, September 30, 2009 Granted Granted Exercised Exercised Cancelled or expired Cancelled or expired Options outstanding, September 30, 2010 Granted Granted Exercised Exercised Cancelled or expired Cancelled or expired Options outstanding, September 30, 2011 Options exercisable, September 30, 2011 Expected life (in years) Expected volatility: Weighted-average Range Expected dividend Risk-free interest rate $3.33 - $4.36 4.60 - 5.20 5.40 - 54.80 55.40 - 249.20 $3.33 - $249.20 Restricted stock units vested and expected to vest, September 30, 2010 Awarded Released Forfeited Restricted stock units vested and expected to vest, September 30, 2011 number of shares that would have been issued upon vesting. September 30, 2012. The first purchase period began on August 1, 2011 and ended January 31, 2012. On January 31, 2012, 0.3 million shares were issued at a price per share of $2.59, a 15.0% discount against the share price on that date. The second purchase period began on February 1, 2012 and ended July 31, 2012. On July 31, 2012, 0.5 million shares were issued at a price per share of $1.79, a 15% discount to the share price on that date. The third purchase period began on August 1, 2012 and ends January 31, (Loss) income before income taxes: Domestic Foreign Income tax (benefit) expense: Current: Federal State Foreign Total current Federal income tax (benefit) provision at statutory rate State tax (benefit) provision, net of federal provision Foreign taxes Foreign taxes Goodwill impairment Nondeductible expenses Nondeductible expenses Other Other Change in valuation allowance Change in valuation allowance Rate change/other adjustments on deferred taxes Rate change/other adjustments on deferred taxes Income tax (benefit) expense negative evidence. Deferred taxes: Net operating loss carryforward Research and development tax credits Alternative Minimum Tax credit Research and development IRC 59(e) capitalization Debt Amortization Stock options Fixed assets and intangible property Inventory Allowances and reserves State taxes Foreign Tax Credit Other Total deferred tax assets Valuation allowance Total deferred taxes not be realized. development tax credits that have not been utilized. Beginning balance as of September 30: Gross decreases—tax positions in prior period Gross increases—current-period tax positions Reductions as a result of a lapse of statue of limitations Ending balance as of September 30: losses. Balance at September 30, 2008 Reversals and adjustments New charges Cash payments Balance at September 30, 2009 Reversals and adjustments New charges Cash payments Balance at September 30, 2010 Reversals and adjustments New charges Cash payments Balance at September 30, 2011 The fair value of the lease termination liability was determined based reserve of Nu Horizons Electronics (distributor) Titan Supply Chain Services (distributor) Huawei United States Asia Pacific EMEA* Other Total net revenues Connectivity Ethernet switching Transport processing Product revenues Substantially all long-lived assets are located in the United States. Long-lived assets (excluding intangible assets) by country are as follows: USA Denmark Germany year 2010. Future minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year and software licenses are as follows: Operating leases(1) Software licenses Software licenses Total Software license commitments represent non-cancellable licenses of intellectual property from sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods. indemnities. information for the periods presented. The operating results for any quarter are not indicative of results for any future period. Fiscal Year 2011: Net revenues: Product revenues Intellectual property revenues Net revenues Cost of revenues (Loss) income from operations Net (loss) income Basic net (loss) income per share: Diluted net (loss) income per share: Weighted average shares outstanding: Basic Diluted Fiscal Year 2010: Net revenues: Product revenues Intellectual property revenues Net revenues Cost of revenues (Loss) income from operations (Loss) income from continued operations Income from discontinued operations, net of tax Net (loss) income Fair value adjustment of Preferred Stock-Series B Net (loss) income available to common stockholders Basic net (loss) income per share: Continuing operations Discontinued operations Net (loss) income per share Diluted (loss) income per share: Continuing operations Discontinued operations Net (loss) income per share Weighted average shares outstanding: Basic Diluted $1.2 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011. In the fourth quarter of fiscal year 2012, we successfully collected on $0.5 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011. Also in the fourth quarter of 2012, we determined that it was unlikely that we would be able to sublease the exited property for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating a new facility as originally planned. Accordingly, we reversed the remaining lease termination reserve of $1.4 million. associated with these activities. In the second quarter of fiscal year 2011, we recognized a In the fourth quarter of fiscal year 2011, we recognized an impairment loss of in the United States of America. can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions. criteria Year ended September 30, 2011 Deducted from accounts receivable: Allowance for doubtful accounts Deducted from deferred tax asset Valuation allowance Year ended September 30, 2010 Deducted from deferred tax asset Valuation allowance Year ended September 30, 2009 Deducted from deferred tax asset Valuation allowance 3.1 3.2 4.1 4.2 4.3 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 †10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 21 23.1 24.1 31.1 31.2 32.1 101.INS 101.SCH
Delaware 77-0138960 77-0138960741 Calle PlanoCamarillo, California(Address of Principal Executive Offices)93012(Zip Code)Registrant'sRegistrant’s telephone number, including area code:(805) 388-3700Title of each class Name of each exchange on which registered Common Stock, $0.01 par value $.01 per shareNASDAQ Global Market ýxýxýx No oý xNo ooxýx
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smaller reporting company)ýx2011,2012, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $117,782,593,$71,163,660, based on the closing price on that date. As of December 5, 2011,November 30, 2012, there were outstanding 24,487,97825,815,016 shares of our common stock,the registrant’s Common Stock, $0.01 par value $0.01 per share.20122013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.Vitesse Semiconductor Corporation2011 Annual Report on FORM 10-KTable of ContentsPageBusiness Business2Properties Properties33Mine Safety Disclosures Removed and ReservediFORWARD-LOOKINGFORWARD‑LOOKING STATEMENTS("(“Annual Report"Report”), in particular the discussion in "Business"“Business” and "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operation"Operations” contains forward-lookingforward‑looking statements that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statements that do not directly relate to any historical or current fact. Forward-looking statements can be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," "potential,"“anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “potential,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-lookingforward‑looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors"“Risk Factors” under Part I, Item 1A. of this Annual Report. We assume no obligation to revise or update any forward-lookingforward‑looking statements for any reason, except as required by law.("(“we," "us," "Vitesse," "our"” “us,” “Vitesse,” “our” or the "Company"“Company”) is a leading supplier of high-performance integrated circuits ("ICs"(“ICs”) that are utilizedused primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 25 years, Vitesse has been a leader in the adoption of new technologies in Carrier and Enterprise networking. Carrier and Enterprise networks have seen a dramatic increase in both bandwidth demands and complexity through the introduction of new content-rich services, convergence of voice, video and data, enhanced 4G/Long Term Evolution ("LTE") mobile networks, media-rich devices such as smartphones like Apple's iPhone and game consoles, as well as new Enterprise deployment options such as cloud based servers and services like Amazon's Fire, social media, and tele-presence. These trends have forced a significant transition and consolidation of both Carrier and Enterprise networks to all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth, and capability while lowering power consumption, and acquisition and operations costs of these networks. These networks are based on network technology that is significantly more sophisticated, service-aware, secure, and reliable than traditional Enterprise-grade Ethernet Local Area Network ("LAN") technology. Such networks are built on new technology that is often referred to as "Carrier Ethernet" in Carrier networks and "Converged Enhanced Ethernet" in Enterprise networks. Because of the growing demand to deploy these new packet-based network technologies, these markets are forecasted to see significant growth and investment in the near future. Vitesse develops IC solutions and targets customers and platforms that sell into these high-growth networking markets. In many cases, Vitesse has led the adoption of Ethernet technology in Carrier and Enterprise networks to satisfy these requirements, often being the first IC vendor to innovate in these markets ahead of the standards.("OEMs"(“OEMs”) and original design manufacturers ("ODM's"(“ODMs”) worldwide such as Accton, Alcatel-Lucent, Accton, Ciena, Cisco Systems, Dell, IBM, Ericsson, Fiberhome, Hewlett-Packard, Hitachi, Huawei Technologies, Juniper Networks, Meraki, Nokia Siemens Networks, Tellabs, ZTE, and ZTE.ZyXel. As of September 30, 2011,2012, we operated three domestic design centers in the United States, at our headquarters and in Austin, and Portland,Texas and four international design centers in Denmark, Germany, India, and Taiwan. We subsequently closed the Portland design center in October 2011.Communications Industry Thissuch asincluding those used by long-distance and local exchange service providers, as well as specialized networks, such as those used by Internet service providers. ThisThe growth isin traffic has been driven by rapid adoption of data-intensive applications such as Internet access; e-commerce; Voice-over-Internetaccess, Internet Protocol ("VoIP"(“IP”); video conferencing and telepresence; Internet Protocoltelepresence, IP Television, ("IPTV"); expansion and upgrades in wireless networks driven by the bandwidth needs of smartphones, such as Apple's iPhone and Google's Android; and the rapid adoption ofcloud storage, cloud computing, and software-as-a-service by Enterprises.this growth in bandwidth demand and the related deployment of newrelated support services to continue to accelerate well into the future. As a result, telecommunications service providers (“Carriers”) and Enterprises need to evolveaccelerate the evolution of their networks to support thesesuch new services and increased bandwidth demands, while concurrently limiting capital expenditures and curtailing the tremendousminimizing increases to power requirements.communications service providers (i.e., Carriers)Carriers and Enterprises have begun to deployinitiated deployment of equipment that is capable of more efficiently handling and transporting the various types of data-based traffic required by these new services. Communicationmore efficiently. Communications providers are also upgrading their infrastructure to serve the variety of unique communications standards and protocols that deliver and process data. Increasingly, these new applications and services are created and delivered using packet-based Ethernet networking technologies.1990's,1990s, the Synchronous Optical Network ("(“SONET/SDH"SDH”) hashad been the standard network transport protocol for Carrier networks throughout the world. While SONET circuit-basedBut, SONET/SDH was designed to carry voice and fixed circuit traffic. New networks will continuecommunicate using the packet-based IP implemented with Ethernet technology, which allows them to exist for many years, new network deployments are rapidly evolving to packet-based technology,more readily scale in terms of services, bandwidth and we expect it to continue for at least the next few years as Carriers gradually upgrade their installed base of SONET/SDH, particularly in Eastern Europe, India,capability, while offering lower power consumption and China."Carrier“Carrier Ethernet."” It is, in effect, an adaptation of Ethernet to provide the samesimilar operational features and functions, such as reliability, manageability, network timing synchronization and scalability, which have traditionally been provided by telecom protocols such as SONET/SDH. As these Carrier Ethernet standards evolve, networks based on Ethernet technology will gradually replace legacy telecommunications networks. ThisThe transition to Carrier Ethernet, which is in its infancy, will be driven by access and edge networks, particularly Mobile Access networks for 3G and 4G/LTE deployments. that is deployed in businesses, offices and homes for voice, data and video communications. TheseEnterprise networks range from large, complex networks for financial institutions, retailers and other large businesses, to LANs for the home and small office. Typical categories are large enterprise, data center switching, small-medium enterprise ("SME"(“SME”), small-medium("SMB"(“SMB”), and small office office/home office ("SOHO"(“SOHO”). The networksNetworks generally include equipment such as routers, switches and wired and wireless gateways. These networksgateways and connect computers to servers, servers to storage systems and LANs to public Carrier Networks.Although in its infancy, cloudCloud computing will increasingly move Enterprise applications and data into secure hosted applications "inin the cloud," where they can be securely accessed from multiple locations, multiple devices and multiple technologies. Cloud computing will increase the need for Enterprises and data centers to provide high-bandwidth, high-reliability networks to interconnect elements of the "cloud."cloud. We expect thatare strategically addressing Enterprise networking with our low-power SME Ethernet switching solutions and our IP Edge solutions to provide managed and secure access to the needcloud, as well as leveraging our high-speed connectivity product line to interconnect will lead to a unificationprovide reliable high-speed connectivity between computing and storage devices in large data center switches and servers.objectivegoal is to be a leading supplier of high-performance ICs for the global communications infrastructure markets, primarily for IP Edge Carrier networking and Enterprise networking markets. In order to attain this goal, our strategy encompassesis composed of the following elements: Our products are targeted at CarrierEnterprise networks, both markets growing at approximately 10% year-over-year. Within thesedevelopment (“R&D”) on networking markets, we focus on markets that are at the beginning of a major investment cycle. By indentifyingidentifying technology disruptions and solving specific customer problems, we can take advantage of market transitions where we can solve specific customer problems that willand increase our market share. Overall, we estimate the total addressable market for our IC and Intellectual Property ("IP") solutions to exceed $2.2 billion by 2015, with a Compound Annual Growth Rate ("CAGR") of approximately 16% due to our focus on faster-moving market segments.consequenceresult of the increased bandwidth being generated from the deployment of new wired and wireless applications being deployed,applications. Deployment of new 4G/LTE networks, including macro and small cell base stations and backhaul equipment will be the transformation of the Mobile Access network to an all-IP/Ethernet network, as well asdrivers for growth in mobile access. In addition, the emerging trend toward Enterprise cloud computing that will drive demand for significantly more bandwidth and complexity into Carrier networks. we have specifically introduced for this segment and the othersour other products currently in development are expected to address aan IC market that is increasinggrowing at an estimated annual rate of approximately 30%28%, approaching $700 million in 2015.by 2016. In addition, we address Carrier networking also is addressed bywith our Transport processing product line adding another $400consisting of both mature products and our new Ethernet-optimized Optical Transport Network (“OTN”) PHYs, which add $200 million to the potential market we can serve.as well asand government initiatives worldwide to reduce power consumption in networking equipment. Based on industry market projectionsOur new SME switch and our internal market growth estimates, we expect the market that can be addressed with ourPHY products in this segment will approach $500 million in 2015. The products we introduced in 20112012 and 2010,2011, as well as our devices currently in development, address substantially larger segments of the Enterprise networking market than our prior generation of products. Some of Based on industry market projections and our internal market growth estimates, we expect the market that can be addressed by our products particularlyin this segment will approach $510 million by 2016.Connectivity product line sells into bothswitching and PHY products developed specifically for Carrier and Enterprise networking applications.applications, we develop a number of products that address high-speed signaling and connectivity issues in a broad variety of systems. As bandwidth requirements continue to accelerate, more systemsproblems.problems within and between high-capacity computing and communications systems. Our products address an increasinga need to transport signals at ever increasing speeds across fiber, cable and copper backplane applications. We estimate the addressable market for our devices to be on the order of $600$300 million by 2016.2015, with a growth ratedevelopment in adjacent market segments make up the remaining portion of approximately 14%.protocol beingtechnology for today's IP traffic, deployed in both Carrier and Enterprise networks. Our focus within Carrier networks today.is the rapidly growing IP Edge. Major components of the IP Edge are Mobile Access and Ethernet Business Services. For Enterprise networks, our focus is on SME-managed solutions, primarily with low power consumption and security. Our key focus:•Networks: "IP Edge"and Enterprise networks, and cross over into multiple adjacent markets such as video and storage.Access networks—withAccess: With the explosion of data and video traffic from smartphones and tablet appliancesdevices for both personal and business use, andconcurrent with the introduction of 4G/LTE networks worldwide, the IP Edge is dominated by Mobile Access. Mobile Access networks, 4G/LTE networks in particular, are fast transitioning from legacyobsolete E1/T1 networks to all-IP/Ethernet networks. 4G/LTE networks in particular,that enable the delivery of services rather than just connectivity. These networks deploy a completely new Mobile Access architecture that requires very sophisticated packet-processing technology and very accurate synchronization and timing technology. Networks will become more distributed, with small cell base stations and backhaul being the primary growth drivers. Our new Ethernet "switch engines"switch engines have the samebeen developed to provide better packet processing capability asthan complex and expensive Network Processors ("NPUs")network processors, at half the cost and half the power. We also have best-in-class solutions in the industry to address the Mobile Access network timing needs of our customers with our VeriTime™ Synchronous Ethernet ("SyncE"(“SyncE”) and IEEE1588v2 PHY-SynchroPHY™ and VeriTime switch-based timing solutions. We alsoOur VeriTime™ technology with 1588v2 packet-based timing meets the needs of current and future 4G/LTE deployments. Our switch engine and SynchroPHY solutions offer the lowestlow power, solutions in the industry, which is highly importantcritical for LTE deployments including all-outdoor unitssmall cells attached to buildings and small structures, that will replace traditional base stationsuch as light posts and backhaul deployment models.•Carrier Networks: traffic signals.Services—weServices: We specialize in transitioning access, metro, and core Carrier networks to deliver new Ethernet-based services over a variety of network transport technologies such as native Carrier Ethernet, Packet Transport Networks ("PTN"(“PTN”), Ethernet-over-SONET/SDH ("EoS"(“EoS”), as well as Ethernet-over-Wavelength Division Multiplex/Optical Transport Network ("OTN").and OTN. Our customers provide equipment to enable the transition to high-bandwidth Ethernet-based business services required to deliver best-in-class audio audio/video experience for telepresence and high-performance cloud-based services, better quality-of-service ("QoS"(“QoS”) operations, administration and maintenance ("OAM"(“OAM”), and security. We specialize in delivering IC solutions with these capabilitiesIn 2012, we introduced our Serval™ Switch Engine, which we believe is ideally suited to our customers. Therefore, we are well positioned to enableprovide complete Metro Ethernet Forums Carrier OEMsEthernet 2.0 (“MEF CE 2.0”) features required for Ethernet Business Service deployment within a very low-cost and their service provider customers to deliver Ethernet-based services globally over all their networks, as well as preserving their investment in their installed bases.•Networks: NetworksSolutions—networksSolutions: Networks are transitioning from fast Ethernet desktops and network attachments to Gigabit Ethernet and 10 Gigabit Ethernet (and higher speeds in data centers) with highly integrated, low-power designs. The need to deploy "Green Networks"“Green Networks” has led to the Energy Efficient Ethernet ("EEE"(“EEE”) standard that significantly reduces power consumption in Ethernet networks. We are a leading provider of Green EEE compliant PHY and switching products for Enterprise and consumer networking. We also specialize in supporting the convergence of multiple Enterprise networks for data, storage, audio, and video onto a common Ethernet-based networking infrastructure supported by our superior network timing solutions.•networks: NetworksSolutions—inSolutions: In both the Carrier and Enterprise markets, and in some closely adjacent markets, we develop products to solve high-speed signaling issues arising from ever-increasing signal speeds over copper traces on boards, across connectors, backplanes, and copper cables, as well as optical fiber, particularly at speeds of 10 Gigabit and above.Table Our FlexEQ™ adaptive equalization technology reduces the cost of Contentsexperienceexpertise to introduce innovative products that solve our customers' business problems.design challenges. Our advanced technology and IPintellectual property developments will seek to exploit major technology trends and disruptions within networking equipment including:•"packet networking"IP “packet networking” from "circuit networking",“circuit networking” requiring deployment of new systems based on Ethernet technologies, rather than the older SONET/SDH technologies.This demandshift will provide high-growth opportunities for silicon solutions that address these new systems developed with Carrier Ethernet and Converged Ethernet technologies. Vitesse hasWe have created unique packet-processing technologies that arewe view as critical as networks become dominated by Ethernet-based data and video traffic. Our solutions target the segments of the network that we believe will transition most quickly, including the IP Edge and Mobile Access.•explosionrising growth in mobile traffic. Vitesse'sOur new Carrier Ethernet switch engines and carrier-class Gigabit Ethernet SynchroPHY and 10 Gigabit Ethernet PHYs and 10 Gigabit Ethernet SynchroPHY OTN mappersPHY simplify the implementation of the multi-platform 3G and 4G/LTE network equipment. Vitesse products address small platformsOur revolutionary new low-power Serval switch engine addresses power-constrained deployments such as small cell and pico-cell implementations as well as traditional macro-cells supporting thousands of subscribers. VitesseNetwork Interface Devices (NID) for enterprise access to cloud services. Our switch engines are typically half the cost and half the power compared to other solutions such as NPUsnetwork processors or Field Programmable Gate Arrays ("FPGAs"(“FPGAs”).•had to behave been developed or improved upon significantly to satisfy the demands of Mobile Access,mobile access, especially for 4G/LTE and LTE-Advanced deployments. Vitesse has been a leader in providingOur patented VeriTime technology provides innovative and unique timing features in both our switch engines and PHYs across multiple speed grades.SynchroPHY products. Accurate packet network timing is also required in Industrial Ethernet applications as well asand for audio/video Ethernet applications.
A move to systems solutions from IC solutions.•"Green Networking"“Green Networking” to reduce power dissipation in Carrier and Enterprise network elements. Vitesse has beenWe continue to be ahead of the industry in deploying power-saving techniques for networking, and at the forefront of the EEE standardization effort. We were the first to introduce low-power EcoEthernet™ Copper PHY technology, also known as ActiPHY™ and PerfectReach™, thatwhich reduces power dissipation by more than 50% compared with traditional devices.•that will requirerequiring solutions for signal integrity challenges.We provide world-class connectivity solutions for a broad variety of applications from 100 Mbps to 10 Gbps and above. Our high-performance, mixed-signal, CMOS technology provides superior signaling capabilities at the lowest power and cost.•LAN'sLANs from Fast Ethernet to Gigabit Ethernet.LANs now use the Ethernet transmission protocol operating at speeds of 10 Mbps or 100 Mbps (Fast Ethernet). Only recently has Gigabit Ethernet started to appear on the desktop. In order to support the migration of desktop computers to these higher data rates, LAN backbones and servers are increasingly deploying the Gigabit Ethernet and 10 Gigabit Ethernet standards.•IPintellectual property rather than developdeveloping it on their own.internally. In several markets, Vitesse is beginning to leverage thesewe are leveraging our key technology advantages and technology cores into licensing opportunities with third parties for use in adjacent or similar markets to Carrier and Enterprise networking equipment that do not directly compete with our customer base.Tablebase, allowing us to serve a much larger market. Over the past four years, we have had licensing arrangements with four of Contentsthe top 20 semiconductor companies.•("ASIC"(“ASICs”) and maintaining the associated component design teams, has led OEMs to work with companies such as Vitesseours to develop Application Specific Standard Products ("ASSPs"(“ASSPs”) that can be flexibly used within their systems. As a result of this trend away from customer-specific ASIC developments, we believe the market for our products will increase in the future. LicensingIPintellectual property portfolio to generate revenue by entering into licenses with third parties.revenue. We offer a variety of technology "cores"“cores” for license and design services in deep submicron, 130-nanometer ("nm"), 65-nm and 40-nm process technologies. To date, our primary focus has been our Gigabit Ethernet Copper PHY and switch cores. In 2010, we also announced the availability of licenses for our enhanced forward error correction ("eFEC"(“eFEC”) technology for implementation in ASICs, Systems-On-a-Chip ("SOCs"(“SOCs”) and FPGAs.being able to exploit our many years of technology development, as well as our track record of high-quality products, bycontinued success licensing our technology to systems suppliers and other non-competing semiconductor suppliers. We believe we are in a uniqueour position to supply such technology to other IC vendors as we are an innovationinnovator and low-power leader for this technology. Such technology is only available from IC vendors that are competing in the same markets as the companies looking for the technology.makes us a compelling supplier. In many cases, we can also leverage these IPintellectual property licensing partnerships towards acceleratingto accelerate our partners' product developments and extend our process nodetechnology roadmaps.Building major customers are savvy buyers who have carefully investigatedanalyze and evaluate our ability to serve them reliably with products and technology, reliably, on a continuous basis, over the long term. We must also assure customers we are making progress on our stated initiatives. A key element of our strategy is to work closely with our customers' product managers and systems design teams, as well as business unit and corporate management teams. We believe that theseThese key relationships enable us to obtainacquire a betterdetailed understanding of our customers' business and technology needs, and enables us toneeds. Using this knowledge, we develop solutions to address our customers' design issueschallenges and provide them with differentiated feature sets for their systems. Vitesse sells directlyTier-1keep an open and Tier-2ongoing dialog with our customers while serving all otherto highlight milestones and progress on our stated initiatives. Our Sales team is responsible for servicing our Tier 1 and Tier 2 customer requirements. We rely on distributors for our Tier 3 customers via a channel distribution model. We classify customers into these tiers based on current revenue, strategic and program fit,for order fulfillment for some Tier 1 and growth potential for Vitesse.In fiscal year 2011, we exceeded our goal of introducing 20We introduced over 60 new products to the market after we achieved our ambitious goal of introducing 30 new products to market in fiscal year 2010. This increase in product releases represents an increase of 260% from the average number of new products we introduced over the priorlast three year period. The increase in new product releases is a result of our focus on deploying our IP into products basedyears, focused on Ethernet technology that can be leveraged across large markets in Carrier and Enterprise networking. A listrecent history of new product introductions in fiscal year 2011 and 2010 can be found on our website at www.vitesse.com. The("MACs"(“MACs”), and Ethernet transceivers ("(“Copper PHYs"PHYs”).Ethernet Switching Product Line Equipment Deploying our Solutions Vitesse Solutions Carrier Networking Carrier Ethernet Products Mobile Base Stations and Small Cells VeriTime Carrier Ethernet Switch Engines Cell Site Routers and Gateways Ethernet MACs IP Edge Routers Gigabit Ethernet Copper and Dual-Media PHYs Microwave Mobile Backhaul Systems SynchroPHY Gigabit Ethernet Copper and Dual-Media PHYs with VeriTime Carrier Ethernet Switch/Routers Aggregation Switches and Routers Packet Optical Transport Systems Enterprise Networking Enterprise Products Managed Enterprise Switches SME Ethernet Switches Stackable Enterprise Switches SME Ethernet Switches with integrated Copper PHYs Security Appliances Stackable Enterprise Ethernet Switches Gaming Consoles Ethernet MACs Industrial Ethernet Switches Gigabit Ethernet Copper and Dual-Media PHYs NPUsnetwork processors, together with Layer 2 and Layer 3 Ethernet switch functions, our VeriTime timing and synchronization technology, and an on-board CPU. Our switch engines integrate this increased level of functionalityCPU into a single chip at substantially lower cost and lower power than competing discrete and integrated solutions. In 2010Additionally, they meet MEF CE 2.0 requirements for mobile backhaul and 2011, we introducedmobile access equipment, providing forward compatibility for future value-add services. Our new products include two major switch engine families, Jaguar and Caracal, created to address a broad range of applications in the access and edge of the networks. Typically, theseIn 2012, Serval, our third family of switch engine products was added to the products portfolio. Serval is aimed specifically at applications includeincluding customer premise equipment ("CPE"(“CPE”), access network equipment, wireless base stations including small cells, and Mobile Access equipment including fiber and microwave wireless backhaul equipment, and metro networking equipment.small-medium enterprise ("SME")SME and small-medium business ("SMB")SMB markets and enable these systems to migrate to Gigabit Ethernet speeds in a cost-effective manner. WeTo date, we have shipped over 175230 million Gigabit Ethernet ports to date into Enterprise applications. Our Ethernet switch products provide a high-level of integration, leading to a significant reduction in part count, and power consumption, and reduced material cost for our customers.
Ethernet MACs:Ethernet Switching Product LineEquipment Deploying our SolutionsVitesse SolutionsMobile Base StationsCell Site Routers and GatewaysIP Edge RoutersMicrowave Mobile Backhaul SystemsCarrier Ethernet Switch/RoutersAggregation Switches and RoutersPacket Optical Transport SystemsCarrier Ethernet Switch EnginesEthernet MACsGigabit Ethernet Copper and Dual-Media PHYsGigabit Ethernet Copper and Dual-MediaPHYs with integrated IEEE 1588v2 timing and synchronization technologyManaged Enterprise SwitchesStackable Enterprise SwitchesSecurity AppliancesGaming ConsolesIndustrial Ethernet SwitchesSmall Medium Enterprise (SME) Ethernet SwitchesSME Ethernet Switches with integrated Copper PHYsStackable Enterprise Ethernet SwitchesEthernet MACsGigabit Ethernet Copper and Dual-Media PHYsEthernet Media Access Controllers ("MACs"):make it possible for severalenable multiple network nodes to communicate within a multipoint network. Our MAC products are designed for use in Enterprise class modular Ethernet switch platforms as well as inand EoS and OTN systems used in access, metro and long-haul Carrier networking systems. Our Ethernet MACs provide single-chip solutionsreduce software development costs for both Gigabit Ethernet and 10 Gigabit Ethernet applications reducing software development costs for these applications.Transceivers:("Cat5"(“Cat5”) copper cable and fiber optic cabling. This technology is widely deployed in personal computing, home electronics and LAN applications to Enterprise and data center applications, and more recently in Carrier networking applications. We offer a broad range of products in this category, including single, quad and octal devices that offer a combination of low power, low cost and a high level of integration. Our SimpliPHY™ Ethernet transceivers ("Copper PHYs")PHYs provide industry leadingindustry-leading low-power operation generally using power saving features such as ActiPHY™ActiPHY and PerfectReach™PerfectReach and EEE technology that provide energy savings of up to 80%. In 2011, we introduced two new products with IEEE 1588v2 packet timing and synchronization capabilities. device. This device, offersoffering our VeriTime enhanced packet timing and synchronization technology,technology. It is the first device on the market supporting both IEEE standards 1588v2 and Y.1731. It is the first and only device on the market to support both of theseY.1731, two critical technologies. We have performed testingIn 2012, we reported network performance results to the Telecommunication Standardization Sector, documenting VeriTime's < 10ns per hop accuracy over a nine-hop IEEE1588v2 Transparent Clock (TC) network, fulfilling TD-LTE and LTE-Advanced requirements in a variety of third party and customer test labs that demonstrate that our 1588v2 timing technology is dramatically superior to our competition.real-world tests today.connectivityConnectivity product line includes mixed-signal physical layer devices for connection of systems via optical fiber, copper cable or backplanes. These devices are deployed across a very wide range of applications and markets. Connectivity product lines include Physical Media Devices ("PMDs"(“PMDs”), PHYs, crosspoint switches, and signal integrity devices.Connectivity Product Line Connectivity Product LineEquipment Deploying our Solutions Vitesse Solutions Carrier Networking Carrier Ethernet Products Mobile Base Stations PHYs: Cell Site Routers and Gateways IP Edge Routers 10G EDC PHY/CDRs Enterprise WAN Routers 10G SONET/SDH-class PHYs Carrier Ethernet Switch/Routers Signal Integrity Re-timers Aggregation Switches and Routers Crosspoint Switches Multi-Service Platforms Laser Drivers WDM Optical Transport Systems Transimpedance Amplifiers Packet Optical Transport Systems Post Amplifiers Enterprise Networking Enterprise Products Data Center Switches PHYs: Core Routers and Switches 1/10 Gigabit Ethernet PHYs Broadcast Video Routers 10G EDC PHY/CDRs 10G SONET/SDH-class PHYsDatacenter SwitchesCore Routers and SwitchesBroadcast Video Routers
Fibre Channel Switches & Directors
RoutersSignal Integrity Devices Blade Servers Crosspoint Switches WDM Optical Transport Systems Laser Drivers Packet Optical Transport Systems PHYs:1/10 Gigabit Ethernet PHYs10G EDC PHY/CDRsSignal Integrity DevicesCrosspoint SwitchesTransimpedance Amplifiers
SFP and SFP+ Optical ModulesPost Amplifiers XFP Modules PON Optical Modules Fibre Channel Optical Modules PMD:Laser DriversTransimpedance AmplifiersPost Amplifiers("PON"(“PON”) that enable Fiber-to-the-Home (“FTTH”) deployments. Typically, we sell these products are sold to optical module manufacturers who service equipment manufacturers, or directly to OEMs, who build discrete board-based solutions.1415 Gbps. In 2011, weWe introduced highly accurate IEEE 1588v2 packet timing and synchronization capabilitiestechnology, called VeriTime™ into our 1 and10 SynchroPHY Gigabit Ethernet SFP+ transceivers allowing OEMs to upgrade their equipment with fully functional packet timing capabilities at low incremental cost and development effort. Our 10 Gigabit Ethernet PHYSynchroPHY is a pin-compatible enhancement to our prior generation device. This device offers enhanced packet timing and synchronization technology supporting IEEE standards 1588v2 and Y.1731. ItY.1731 and is the first and only device on the market to support both of these critical technologies. We performed interoperability testing in a variety of forums that demonstrate that our 1588v2 timing technologyVeriTime is dramatically superior to our competition. matrices with industry-leading performance up to 11 Gbps. This range of speeds and package form factors enable a wide variety of solutions for SONET/SDH, switching, blade servers and data center switches, high-density routers and HDTV video equipment.sending very-high speedthe high-speed transmission of signals over backplanes and copper cables. These devices include repeater and re-timer ICs that support data rates from 155 Mbps to 1415 Gbps for protocols, including, Gigabit Ethernet, Fibre Channel, Serial Attached SCSI and SAS/SATA.Serial Advanced Technology Attachment. Our products are deployed in a wide variety of systems in Carrier, Enterprise, data center, and high-definitionHD video applications, both within systems as well asand connecting between systems.goal is to addressTransport Processing product line addresses the needs of Carrier and Enterprise network providers as they undergo a migration to new Ethernet packet-based networks that provide increased bandwidth and lower cost. Transport processing products include a complete line of framers, mappers and switches for SONET/SDH, EoS, and OTN applications. Latest generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps and are targeted principally for next-generation systems in the core and metro segments of the Carrier network. Our latest generation of products includes our patented VeriTime timing and synchronization technology.Transport Processing Product Line Transport ProcessingProduct LineEquipment Deploying our Solutions Vitesse Solutions SONET/SDH Optical Transport 10G SONET/SDH Framers/Mappers SONET/SDH Grooming Switches SONET10G EoS Framers/Mappers SONET/SDH Add Drop Multiplexors SONET/SDH TSI Switches DWDM Optical Transport Systems 10G OTN Framer/Mappers Carrier Ethernet Switches and Routers 10G OTN Aggregation Switches and Routers SynchroPHY 10G OTN PHYs with VeriTime Multi-Service Platforms DWDM Optical Transport Systems 10G SONET/SDH Framers/Mappers10G EoS Framers/MappersSONET TSI SwitchesCarrier Ethernet Switch/RoutersAggregation Switches and RoutersMulti-Service PlatformsDWDM Optical Transport Systems
Packet Optical Transport Systems10G EoS Framers/Mappers10G OTN Framer/Mappers10G OTNMapper/PHYs with integrated IEEE 1588v2 timing and synchronization technology In 2011, weMapper/mapper/PHY in the market with integrated 1588v2 packet timing and Ethernet Y.1731 OAM capability. TheseVeriTime. We believe these capabilities will become important as Switchesswitches and Routersrouters add OTN mapping capability to their interfaces to directly interwork with WDM Transport systems, yet also need the precise packet timing capabilities required for advanced Mobile Networks.("TSI"(“TSI”) switches for use in SONET/SDH equipment. We have various TSI switches in our product portfolio that provide aggregate bandwidth up to 1.5 Tbps. Our switches provide higher bandwidth and lower power than competitive solutions. We also provide switch fabric chip sets for a variety of packet backplane applications. These switch fabric solutions allow total system interface bandwidths from 20 Gbps to 160 Gbps and higher. Vitesse classifiesnetworking,Networking; (2) Enterprise networkingNetworking; and (3) Non-Core. These classifications reflect the major trends in our product lines and how they map into our customer base. In addition,Additionally, we have an IPintellectual property revenue stream that was introduced in the last quarter of 2008.will dependdepends on several factors including, increasing demand from our end markets,markets; our ability to capture and maintain market share in growing markets,markets; the rate at which these new markets ramp into production,Vitesse.tointo a complex combination of networks. To address the technical and operational challenges created by the explosive technical growth of video and operational challenges,bandwidth demand requirements, Carriers are increasingly trying to map Ethernet data services, particularly on mobile devices, for their users. This growth has createdcaused a huge dilemma as thesefor service providers who must providedeliver services to an expanding base of subscribers and connectivity services while simultaneously reducing costs.will evolve and over timeneed to replace their legacy SONET/SDH networks with new all IP/Ethernet-based networks. Broadly, Ethernet technology upgraded to meet these requirements is being referred to as "Carrier“Carrier Ethernet."” Carrier Ethernet networks for mobile networks increasingly also require accurate synchronization using packet-based timing based on the IEEE1588v2 protocol. The upgrade is in effect,essentially an adaptation of Ethernet to provide the same features and functions that have traditionally been provided by "telecom"telecom protocols such as SONET/SDH and Plesiochronous Digital Hierarchy ("PDH"(“PDH”). Because of the complexity of the Carrier networks, products sold into these applications have long design cycles typically ranging from two to four years from design start to production, and have long life cycles, typically five to 10 years or more. Vitesse provideslegacy SONET/SDH, EoS, andthe newly emerging Carrier Ethernet applications as well as for legacy SONET/SDH and EoS applications. These products generally include:Carrier Networking Products Product Line Vitesse Solutions Ethernet Switching Carrier Ethernet Switch Engines Ethernet MACs Gigabit Ethernet Copper and Dual-Media PHYs SynchroPHY Gigabit Ethernet Copper and Dual-Media PHYs with integrated 1588v2VeriTIme
Connectivity
10 Gigabit Ethernet PHYsSynchroPHY 10 Gigabit Ethernet PHYs with VeriTime 10G EDC PHY/CDRs 10G SONET/SDH-class PHYsSignal Integrity Devices Crosspoint SwitchesLaser DriversTransimpedance AmplifiersPost Amplifiers
Crosspoint SwitchesLaser Driver, Transimpedance Amplifiers, Post Amplifiers Transport Processing 10G SONET/SDH Framers/Mappers10G EoS Framers/MappersSONET TSI Switches10G OTN Framer/Mappers
SynchroPHY 10G OTN Mapper/PHYs with integrated 1588v2VeriTime10G SONET/SDH Framers/Mappers 10G EoS Framers/Mappers SONET TSI Switches 10G OTN Framer/Mappers SynchroPHY 10G OTN Mapper/PHYs with VeriTime willis typically be comprisedcomposed of one or more LANs interconnecting computer systems, including workstations and servers, as well as one or more Service Access Network ("SAN"(“SAN”). Enterprise networks willtypically also typically include broadband connections to Carrier networks for the broader communication of voice and data outside of the Enterprise. Enterprise networks are oftenusually classified into groups depending on their size and complexity. Categories are large Enterprise, data center switching, SME, SMB and SOHO. The complexity of products within the Enterprise networks varies dramatically based on the product application.market segment. Products at the "low-end"“low-end” of the network, in SOHO, SME and low-end SME applications, typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of three to five years. Products sold into applications at the "high-end"“high-end” of Enterprise, such as data center switching have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to seven years or more. Vitesse providesEnterprise Networking Products Product Line Vitesse Solutions Switching Small Medium Enterprise (SME)SME Ethernet SwitchesSME Ethernet Switches with integrated Copper PHYs Stackable Enterprise Ethernet Switches Ethernet Media Access Controllers Gigabit Ethernet Copper and Dual-Media PHYs
Connectivity1/10 Gigabit Ethernet PHYs10G EDC PHY/CDRs Signal Integrity Devices Crosspoint Switches Laser Drivers
Driver, Transimpedance Amplifiers,
Post AmplifiersNetwork Processornetwork processor product line, and our packet-based Switch Fabricswitch fabric product line.Customersoriginal design manufacturers, as well asODMs, and through third-party electronic component distributors and manufacturing service providers. Sales to distributors accounted for approximately 42.0%47.5%, 50.4%42.0% and 63.0%50.4%, of our net revenues for fiscal years 2012, 2011 and 2010, respectively. For fiscal year 2012, distributors Nu Horizons Electronics and 2009, respectively.WPG Holdings accounted for 13.5% and 10.7%, respectively, of our net revenues. For fiscal year 2011, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 20.6% and 10.3%, respectively, of our net revenues. For fiscal year 2010, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 23.9% and 13.3%, respectively, of our net revenues. For2009, Nu Horizons Electronics and2012 were Alcatel-Lucent, Cisco, Ciena, Huawei Technologies, and ZTE. Our sales to these customers accounted for 36.0% and 12.0%, respectively,approximately 27.5% of our fiscal year 2012 net revenues. Our top five OEM customers for fiscal year 2009 were Alcatel-Lucent, Cisco, Huawei Technologies, IBM, and ZTE. Our sales to these customers accounted for approximately 37.5% of our fiscal year 2009 net revenues.revenue. We anticipate that such sales will continuerevenue, a trend we expect to becontinue. On a significant percentage of our revenue. Internationalbill-to basis, international sales constituted 54.0%65.2%, 66.7%,63.3% and 62.7%67.3% of our net revenuerevenues in fiscal years 2012, 2011 and 2010, respectively. We believe a substantial portion of the products billed to OEMs and 2009, respectively.third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe. The "Significant“Significant Customers, Concentration of Credit Risk Segment Reporting, andInformation"Information” footnote in the accompanying consolidated financial statements provides more specific data on revenue by geographic area.line,line; the acceptance of our products,products; our customer service levels,levels; expansion into additional domestic and international markets,markets; and our ability to maintain a competitive position against other technology providers who are producing similar products.("CMOS"(“CMOS”) technology with feature sizes down to 40 nm as well asand other semiconductor technologies, such as silicon-germanium ("SiGe"(“SiGe”). As a fabless semiconductor company, wafer("TSMC"(“TSMC”), Global Foundries,GlobalFoundries, IBM, and TowerJazz Semiconductor, and United Microelectronics Corporation.Semiconductor. Outsourcing our wafer manufacturing requirements enables us to eliminate the high costs of owning, operating and upgrading fabrication facilities and focuses our resources on design and test applications, where we believe we have greater competitive advantages. Once manufactured by ourfoundries, completed wafers are probedsort to determine which of the die on the wafer meet functional and performance specifications. This step in the manufacturing process determines the yield of good die per wafer versus the scrap of non-functioning die. Goodpackages. We outsourcepackages by our outsourced IC packaging to multiple assembly subcontractors in Asia and the United States. Following assembly, packaged products go through final testing where they are tested in packaged form to ensure that they meet all functional, performance and quality requirements. This step in the process determines the final yield and will include any yield loss in the assembly process.facilityactivities from our internal operations in California to an outsource model with an offshore manufacturer. Today, we outsource the majority of our probe and test functions. We outsource our test operationsfunctions in order to reduce our manufacturing cycle times, to better address customer requirements, to increase inventory turns and to reduce our overall fixed cost of probe and testing. InFor most cases,products we maintain the capability to probe and test products in small volumes at our own facilities. Along withLike our subcontractors, we utilizeuse advanced automated testers as well asand high-performance bench test equipment.productbelief that Ethernet will be the dominant networking technology for both Carrier and Enterprise networks has allowed us to focus our internal development efforts are focused on designingresources to launch over 60 new products forin the high-performance communications infrastructure markets, based on understanding the evolving needs of our customers. We havepast three years.followintegrate industry standards development, technology changes, and the product directions of our customers, in an effort to provide forward-looking guidance to the development teams in the form of a "productproduct roadmap." We work closely with our customers to co-specify and/or co-develop products. We refer to these early adoption customers as alpha-site customers. Occasionally, our relationshipsagreements with our alpha-site customers will involveinclude non-recurringcommitments toproduct purchase products. Our customers had no long-term purchase agreements with us as of September 30, 2011, 2010, and 2009, respectively.effortseffort to increase the speed and complexity and to reduce the power dissipation of our products, and to create new, value-added features and functionality. We have, and will continue to develop common IP cores and standard blocks that can be reused in multiple products, thereby reducing design cycle time and increasing first-time design correctness.threetwo design centers in the United States, combined with four international design centers in Asia and Europe. Our engineering, research and development expenses in fiscal years 2012, 2011 and 2010 were $42.7 million, $53.0 million and $51.0 million, respectively. To capitalize on software capability, co-locate development with customers, and continue to improve the cost efficiency offocus on our development organization, while improving profitability, we have expanded our capabilities in low-cost regions such as Taiwan and India.also recently closed high-cost design centersadditional sales and field application support offices in the United States, including WestfordCanada, China, Europe, India, and Portland (October 2011). ManyTaiwan.centers are locatedaround our patents. As such, any rights granted under our patents may not provide us with meaningful protection. In addition, we may not be able to successfully enforce our patents against infringing products in areasevery jurisdiction. See “Risk Factors” under Item 1A of strong technical talent pools and/or in areas where there are strong concentrationsthis Report for further discussion of our customers. Our engineering, researchthe risks associated with patents and development expenses in fiscal years 2011, 2010, and 2009 were $53.1 million, $51.1 million, and $45.7 million, respectively. We continue to invest a substantial portion of our revenue in research and development. We increased the percentage of our staff involved in R&D to 49.3% in 2011 from 46.8% in 2010 and 42.2% in 2009. technological advancement in design technology, wafer manufacturing techniques and alternative networking technologies. We must identify and capture future market opportunities by developing and deploying value-added products to offset the rapid price erosion that characterizes our industry.causes us to competeresults in our competition against these teams when our customers consider a "make“make vs. buy"buy” decision. Our ability to compete is dependent on the needs of our customers, how well our products address those needs, our corporate relationships, and a variety of other factors We use the term design win to classify a design where we have strong indication from the customer that they have selected our device in preference to onefactors.Vitesse.ours. While we expect this trend to continue, we view these "internal"internal design efforts by our customers as a significant competitive threat. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new business that we may have otherwise won.Gennum,Maxim Integrated Products, Mindspeed Technologies, Maxim Integrated Products,Semtech, and Texas Instruments. Over the next few years, we expect additional competitors, some of whom may have greater financial and other resources than we have, to enter the market with new products. In addition, we are aware of smaller, privately held companies that focus on specific subsets within our range of products. These companies, individually and collectively, represent future competition for design wins and subsequent product sales.Sales and Customer Support We have worldwide sales, marketing, and application support organizations. Our direct sales force is responsible for servicing our Tier 1 and Tier 2 customer requirements. We rely on distributors to service our Tier 3 customers and for order fulfillment for some Tier 1 and Tier 2 customers. Because of the significant engineering support required in connection with the sale of high-performance ICs, we provide our customers with both field engineering and application engineering support prior to the sale. These sales support services, which are provided by our field engineering and application engineering personnel, are utilized in the sales process in order to educate customers, and develop and close sales. Our sales cycle is typically lengthy, often six to 12 months or more, and requires the continued participation of salespeople, field engineers, application engineers, and senior management. The steps in the typical sales cycle of Vitesse's product are as follows:Design Opportunity Phase•Vitesse field applications engineers work with the customer in order to design Vitesse products into their systems.•Vitesse product capabilities and performance are demonstrated to the customer via evaluation boards and/or evaluation systems.•Vitesse's product samples are provided to the customer and the Vitesse field applications engineers assist in bringing the product to a working level in the customer's lab.•Extensive testing is performed in the customer's lab to determine the viability and performance of the Vitesse product in addressing the customer's needs.Design Win Phase•We use multiple elements to determine a design win. These include firm commitment from the engineering and-or purchasing organizations, pre-production orders or other firm indication that Vitesse has been selected over competitors for use in the customer's system application. In the great majority of cases, Vitesse is sole-source supplier to our customers, and typically cannot be easily replaced once we have won a design and it goes into production.•We support the customer with additional technical support as they go through system-level qualification and testing. This typically includes hardware and software development support.Production Phase•Once the customer has completed all their system development and qualification efforts they may move their product into the production phase. Typically it takes our customer from six to 24 months to go from the design win to production.•Once the product is placed into production, the customer is provided a standard product warranty, and minimal further sales support service is provided. We will generally warrant our products against defects in materials and workmanship for a period of one year. Our sales headquarters are located in Camarillo, California. We have additional sales and field application support offices in the United States, Canada, China, Europe, India, and Taiwan. Information regarding financial data by geographic areas is set forth in Part II, Item 8 of this Form 10-K and in "Significant Customers, Concentration of Credit Risk, Segment Reporting, and Geographic Information" Footnote in the accompanying consolidated financial statements.Intellectual Property We currently hold 85 United States patents, 22 foreign patents, and 19 patent applications pending in the United States. We are in the process of filing additional patent applications. We also generally enter into confidentiality agreements with our employees, consultants, and business partners, and typically control access to and distribution of our proprietary information. Despite these precautions, it is possible that competitors or other unauthorized third-parties may obtain, copy, use or disclose our technologies and processes, develop similar technology independently, or design around our patents. As such, any rights granted under our patents may not provide us with meaningful protection. In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction. See "Risk Factors" under Item 1A. of this Report for further discussion of the risks associated with patents and IP.IPintellectual property disputes and the timing and extent of product development costs."sell-through"“sell-through” model of accounting when using our distribution network. The "sell-through"“sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the "sell-through"“sell-through” methodology we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our channel partners as part of the terms and conditions of sale.industry and manyindustry. Many companies are moving toward becoming compliant with the Restriction of Hazardous Substances Directive ("RoHS"(“RoHS”), the European legislation that restricts the use of a number of substances, including lead, effective July 2006. We believe that our products are compliant with the RoHS directive. Additionally, some of our subcontractors may be required to register processing materials as required by Registration, Evaluation, Authorization and Restriction of Chemicals ("REACH"(“REACH”) European Union Regulation, EC/2006/1907.2011,2012, we had 362336 employees worldwide, including 177174 in R&D, with the balance of employees, listed in population size order, in operations, marketing and sales, and finance and administration. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees are represented by a collective bargaining agreement, nor have we ever experienced a work stoppage. We believe our employee relations are good.("SEC"(“SEC”). Any document that we file with the SEC may be read or copied at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. Our SEC filings are also available at the SEC's website at www.sec.gov, and through our website, free of charge, at www.vitesse.com. The information on Vitesse'sour website is not incorporated by reference into and is not made a part of this report.••2011,2012, we had a net loss of $14.8$1.1 million, primarily due to losses from operations, interest expense restructuring and impairment charges, and loss on extinguishment of debt,that was partially offset by a gain from the change in the fair value of the compound embedded derivative. Due to general economic conditions and slowdowns in purchases of networking equipment, it continues to be difficult for us to predict the purchasing activities of our customers. We expect that our operating results will fluctuate substantially in the future and we may experience future losses from operations. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control, including, but not limited to, the following:•The loss of major customers;•Timing, scheduling or cancellation of significant customer orders and shipments;•Increased competition from current and future competitors;•Reductions in the selling prices of our products;•Significant changes in the type and mix of products being sold;•Delays in introducing new products;•Design changes made by our customers;•Failure by third-party foundries and other subcontractors to manufacture and ship products on time;•Changes in third-party foundries' and other subcontractors' manufacturing capacity, utilization of their capacity and manufacturing yields;•Variations in product development costs;•Changes in our customers' inventory levels; and•Sales or closures of discontinued operations.••orders;•••customers'customers products;••••"sell-through"“sell-through” accounting policy model which recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the "sell-through"“sell-through” methodology, we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our distribution partners as part of their terms and conditions of sale.Internationalinternational sales and operations subject us to risks that could adversely affect our revenues and operating results.•54.0%65.2%, 66.7%,63.3% and 62.7%67.3% of our net revenue in fiscal years 2012, 2011 2010, and 2009,2010, respectively. Development and customer support operations located outside the United States have historically accounted for a significant percentage of our operating expenses, and we anticipate that such operations will continue to account for a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:•••••••••••••• to achieve market acceptance of our new products, our revenues and operating results will be adversely affected.••••customers'customers products into which our products will be incorporated;incorporated, including the related software content included in our products or with which our products integrate;•••such asprimarily TSMC and, to a lesser extent, Global Foundries, IBM, and United Microelectronics.TowerJazz Semiconductor. We depend on these third-party wafer foundries to allocate a portion of their manufacturing capacity sufficient to meet our needs and to produce wafers of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party foundries, including:•••recent earthquake and tsunami that occurred in March 2011 in Japan have disrupted the global supply chain for components manufactured in Japan that are incorporated in our products or included in the end user products of our customers. Due to cross dependencies, supply chain disruptions stemming from the occurrences in Japan could negatively impact the demand for our products, including, for example, if our customers are unable to obtain sufficient supply of other components required for their end products. We continue to monitor the effect of the events in Japan on end demand patterns and inventory levels throughout the supply chain. We must compete to capture future market opportunities to offset the rapid price erosion that characterizes our industry. We typically face competition at the design stage, where customers evaluate alternative design approaches that require ICs. Our competitors have increasingly frequent opportunities to supplant our products in next-generation systems because of shortened product life and design cycles in many of our customers' products. Our customers may substitute use of our products in their next-generation equipment with those of current or future competitors.both product andtechnologies, process technologies and software, including evolving industry standards, frequent new product introductions, short product life cycles, and increasing demand for higher levels of integration, and smaller process geometries.geometries, and increasing levels of software content. We believe that our success, to a large extent, depends on our ability to adapt to these changes, to continue to improve our product technologies, and to develop new products and technologies to maintain our competitive position. Our failure to accomplish any of these objectives could have a negative impact on our business and financial results. If new industry standards emerge, our products or our customers' products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards.our products and services,such as ours, which delays and lengthens sales cycles. We cannot predict the timing, strength or duration of any slowdown or subsequent recovery in the worldwide economy, the semiconductor industry or the wired and wireless communications markets. If the economy or markets in which we operate do not return to historical levels, our business, financial condition and results of operations will likely be materially and adversely affected.and manufacturing processes.process. In some circumstances, these regulations may require us to fund remedial action regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including the potential liabilities associated with chemicals used in our design and manufacturing processes.process. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition,("EU"(“EU”), member countries. For example, the RoHS directive, an EU regulation, restricts the use of certain hazardous substances, including lead, used in the construction of component parts of electrical and electronic equipment. We believe that our products comply with the RoHS directive; however, if we fail to comply with these regulations in the future we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties. We may incur increased manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements this directive, but we cannot currently estimate the extent of such increased costs or production delays, if any. To the extent that any such cost increases or delays are substantial, our operating results could be materially adversely affected. Also, we are aware that lead times for new, compliant components are longer and that older, non-compliant components are being discontinued at a fast pace. We or our customers may be impacted by shortages if parts that comply with the RoHS directive are not available.2011,2012, we held 8582 United States patents 22and 20 foreign patents and 19had 24 patent applications pending in the United States for various aspects of design and process innovations.•••••••••andLoan, Term B LoansLoan and 2014 Debentures. We haveloanloans with Whitebox VSC, Ltd. ("Whitebox"), outstanding ("Term Loanof which $7.9 million (the “Term A and B"Loan”). The Term A Loan bears interest at a fixed rate of 10.5% per annum, beginning on February 4, 2011, payable quarterly in arrears, withand has a maturity date of February 4, 2014. The Term2014, and $9.3 million (the “Term B LoanLoan”) bears interest at a fixed rate of 8.0% per annum, beginning on February 4, 2011, payable quarterly in arrears, withand has a maturity date of October 30, 2014. We have"2014 Debentures"“2014 Debentures”) outstanding. Onthat mature on October 29, 2014, we are obligated to repay the principal amount of the 2014 Debentures.30, 2014. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitions or other purposes and could make us vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will be dependent upon our future performance, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. We believe that our existing sources of liquidity, along with cash expected to be generated from product sales, will be sufficient to fund our financing requirements for at least the next 12 months. However, this may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources ofTableOur operating and financial flexibility is limited by the terms of Contentsthe agreements governing our Term A and Term B Loans and the indenture governing our 2014 Debentures.loan.2011,2012, we had outstanding 134,720 shares of our convertible Series B Preferred Stock (convertible on a one-to-five basis), $46.5 million of 2014 Debentures and $9.3 million of Term B Loan convertible debt. Full conversion of the currently outstanding Series B Preferred Stock, the 2014 Debentures and the Term B Loan would result in the issuance of 12,892,612 shares of common stock. The conversion of our shares of Series B Preferred Stock, 2014 Debentures and the Term B Loan could have a significant dilutive impact on the ownership rights of our stockholders.theour 2014 Debentures havecan convert their debt into common stock and own a significant percentage of our voting securities, which would give these holders significant influence over us and couldenable them to act in a manner with which other stockholders may disagree or that is not necessarily in the interests of other stockholders.2011, the holders2012, we had outstanding $46.5 million of 2014 Debentures convertible at a price of $4.50 per share into an aggregate of 10,331,778 shares of our common stock. If all of the 2014 Debentures had exercised approximately 51.9%converted into common stock, those shares would represent 28.6% of their availableour outstanding common stock as of September 30, 2012. Some of the holders of our 2014 Debentures also may hold shares of our common stock and converted 82.5% of their Series B Preferred Stock (convertible into 2.8%shares of our series B preferred stock. If the holders of our 2014 Debentures convert their debt into common stock). These stockholdersstock, they would own a significant percentage of our voting securities and would have significant influence over all matters submitted to the stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. For as long as theseThese security holders own the 2014 Debentures, they may have interests that arethose ofour other stockholders who do not also own 2014 Debentures.stockholders. For example, the holders of the 2014 Debentures may support proposals and actions with which other stockholders may disagree or which are not in their interests. In addition, their combined ownership of common stock, Seriesseries B Preferred Stockpreferred stock and 2014 Debentures could motivate them to support a sale of Vitesse at a price that is not attractive to many other stockholders. Furthermore, the concentration of ownership could delay or prevent a change in control of Vitesse or otherwise discourage a potential acquirer from attempting to obtain control of Vitesse, which in turn could reduce the price of our common stock.••••coverage ofon our common stock;•••••••("NOLs"(“NOLs”) and other tax attributes to offset future taxable income could be limited by an ownership change and/or decisions by California and other states to suspend the use of NOLs.("(“R&D"&D”) tax credits available to offset our future United States federal and state taxable income. Our NOLs are subject to limitations imposed by Section 382 of the Internal Revenue Code (and applicable state law). In addition, our ability to utilize any of our NOLs and other tax attributes have been and may in the future be subject to significant limitations under Section 382 of the Internal Revenue Code (and applicable state law) if we undergo an ownership change. In the event of an ownership change, Section 382 imposes an annual limitation (based upon our value at the time of the ownership change, as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income a corporation may offset with NOLs. If we undergo an ownership change, Section 382 would also limit our ability to use R&D tax credits. In addition, if the tax basis of our assets exceeded the fair market value of our assets at the time of the ownership change, Section 382 could also limit our ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first five years following an ownership change. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs. As a result, our inability to utilize these NOLs, credits or amortization as a result of any ownership changes could adversely impact our operating results and financial condition.2014 and an annual base rent of $1.2 million.2014. The total space occupied in this building is approximately 111,000 square feet. We also lease an additional 58,000 square foot facility in Camarillo ("(“Calle Carga"Carga”), which is leased through December 2015. As of September 28, 2011,We will reoccupy and build out the Calle Carga facility is vacant, and weTableupon the expiration of Contentsare looking at sub-leasing options. See "Restructuring and Impairment Charges" footnoteour main Camarillo facility lease in the accompanying notes to the consolidated financial statements.January 2014. We also lease space in additional locations that include domestic and international offices in Austin, Milpitas, New Jersey, Portland, Westford, China, Denmark, Germany, India and Taiwan. As of September 30, 2011,2012, we lease total space of approximately 280,000 square feet. Our current space is sufficient to accommodate current operations.2011,2012, the final disposition of these proceedings will not have a material adverse effect on ourthe financial position, results of operations, or liquidity.liquidity of the Company.theThe NASDAQ Global Market under the symbol "VTSS"“VTSS” since March 2, 2011. Prior to March 2, 2011, our common stock was traded on the OTCQB Marketplace of the OTC Markets Group Inc. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the NasdaqThe NASDAQ Global Market from and after March 2, 2011, and the high and low bid quotations of our common stock as reported on the OTCQB Marketplace prior to March 2, 2011. All prices have been adjusted for the one-for-20 reverse split of our common stock that occurred on June 30, 2010. Quotations reported on the OTCQB Marketplace reflect inter-dealerinter‑dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions. High Low Fiscal Year Ended 2012 October 1 through December 31, 2011 $ 2.95 $ 2.08 January 1 through March 31, 2012 4.13 2.44 April 1 through June 30, 2012 3.71 2.13 July 1 through September 30, 2012 2.75 1.91 High Low Fiscal Year Ended 2011 October 1 through December 31, 2010 $ 4.85 $ 3.56 January 1 through March 31, 2011 6.00 4.10 April 1 through June 30, 2011 5.25 3.85 July 1 through September 30, 2011 4.20 2.86 High Low $ 7.60 $ 3.60 8.60 4.80 9.20 5.20 6.30 2.85 December 1, 2011,November 30, 2012, there were approximately 1,2091,183 stockholders of record of our common stock, and the closing price of our common stock was $2.23 per share as reported by the NASDAQ Global Market.stock. The number of holders of record of our common stock does not include the number of stockholders whose shares are held in nominee or "street name"“street name” accounts through brokers and other institutions.agreementsagreement and the indenture governing our 2014 Debentures limit the payment of dividends without the consent of the lenders.20062007 through the last trading day in September 2011.2012. The graph is based on the assumption that $100 was invested in each of our common stock, the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index on the last trading day in September 2006.2007. The stock price performance on this graph is not necessarily an indicator of future price performance."filed"“filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"“Exchange Act”), or otherwise subject to the liabilities of such section, nor shall such graph be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.
20112012 that has been derived from our Consolidated Financial Statements.audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, "Management's“Management's Discussion and Analysis of Financial Condition andOperations"Operations” and the Consolidated Financial Statementsaudited consolidated financial statements and notes thereto included in Item 8, "Financial“Financial Statements and Supplementary Data"Data” of this Annual Report on Form 10-K. As of and for the years ended September 30, As of and for the years ended September 30, 2011 2010 2009 2008 2007 2012 2011 2010 2009 2008 (in thousands, except per share data) (In thousands, except per share data) $ 132,742 $ 165,633 $ 154,927 $ 218,536 $ 221,948 $ 109,920 $ 132,742 $ 165,633 $ 154,927 $ 218,536 8,225 357 13,250 10,000 — 9,563 8,225 357 13,250 10,000 140,967 165,990 168,177 228,536 221,948 3,656 854 528 — — Net revenues 119,483 140,967 165,990 168,177 228,536 Restructuring and impairment (1,424 ) 3,656 854 528 — — 73 (9,922 ) 10,761 13,558 — — 73 (9,922 ) 10,761 — — 191,418 — — — — — 191,418 — (11,073 ) 3,991 (179,005 ) 8,378 (1,799 ) Income (loss) from operations 1,635 (11,073 ) 3,991 (179,005 ) 8,378 (14,812 ) (20,176 ) (194,112 ) 7,510 (4,825 ) (1,112 ) (14,812 ) (20,176 ) (194,112 ) 7,510 — 121 71 9,044 (16,822 ) Income from discontinued operations, net of tax — — 121 71 9,044 (14,812 ) (20,055 ) (194,041 ) 16,554 (21,647 ) (1,112 ) (14,812 ) (20,055 ) (194,041 ) 16,554 — 126 — — — Fair value adjustment of Preferred Stock - Series B — — 126 — — $ (14,812 ) $ (20,181 ) $ (194,041 ) $ 16,554 $ (21,647 ) $ (1,112 ) $ (14,812 ) $ (20,181 ) $ (194,041 ) $ 16,554 $ (0.61 ) $ (0.96 ) $ (16.92 ) $ 0.67 $ (0.43 ) — 0.01 0.01 0.81 (1.50 ) $ (0.61 ) $ (0.95 ) $ (16.91 ) $ 1.48 $ (1.94 ) — (0.01 ) — — — Continuing operations $ (0.04 ) $ (0.61 ) $ (0.96 ) $ (16.92 ) $ 0.67 Discontinued operations — — 0.01 0.01 0.81 Net (loss) income per share $ (0.04 ) $ (0.61 ) $ (0.95 ) $ (16.91 ) $ 1.48 Fair value adjustment of Preferred Stock-Series B — — (0.01 ) — — $ (0.61 ) $ (0.96 ) $ (16.91 ) $ 1.48 $ (1.94 ) $ (0.04 ) $ (0.61 ) $ (0.96 ) $ (16.91 ) $ 1.48 24,315 21,074 11,478 11,181 11,178 Weighted average shares outstanding: basic 25,121 24,315 21,074 11,478 11,181 $ 17,318 $ 38,127 $ 57,544 $ 36,722 $ 33,576 $ 23,891 $ 17,318 $ 38,127 $ 57,544 $ 36,722 26,659 48,037 39,397 49,198 55,287 28,694 26,659 48,037 39,397 49,198 60,994 97,529 109,273 292,277 327,348 56,616 60,994 97,529 109,273 292,277 7,796 15,476 — — — 2,899 7,796 15,476 — — 56,180 65,095 111,352 126,123 155,118 (28,459 ) (21,206 ) (61,273 ) 125,526 107,532 Other long term obligations, including debt 58,373 56,180 65,095 111,352 126,123 Total stockholders’ (deficit) equity $ (24,015 ) $ (28,459 ) $ (21,206 ) $ (61,273 ) $ 125,526 Our financial resultscertainthe remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating to a new facility as originally planned. Accordingly, we reversed the years set forth above were impacted by the following events:EffectiveOn February 4, 2011, we exchanged our existing Senior Term Loan for two new term loans (Term We recognized a $3.9 million loss on the debt exchange. As of February 4, 2011 the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, and a payment-in-kind balance of $1.7 million. We recognized a $3.9 million andloss on the debt exchange. Included in the loss calculation was the remaining balance of the unamortized costs of $0.6 million.million on the original Senior Term Loan. In July 2011, we paid down the loan by $1.5 million.October 2010,fiscal 2011, in order to reduce costs and streamline the product design process, we commenced theimplemented a planned reduction in workforce atin one of our Westford, MassachusettsUS design center ("Westford"). The reduction in workforce was completed by June 2011. The related severance costs totaled $0.6 million. This activity is presented as restructuring and impairment charges on the consolidated statements of operations. On September 28, 2011, wecenters. We also consolidated our operations in Camarillo, California into a single facility at our headquarters and vacated our secondaryin Camarillo, leased office and warehouse space ("Calle Carga"),California and implemented a reduction in personnel across multiple departments primarily at facilities located within the United States. During the quarter ended September 30,departments. In fiscal 2011, we incurred approximately $3.1$3.7 million of costs and charges associated with these activities. These activities are presented as restructuring and impairment charges on the consolidated statements of operations.•paid•paid•issued•"Make-Whole Amount"“Make-Whole Amount” (as defined in the Indenture for the 2014 Debentures) in shares of common stock, and on June 7, 2010 we issued 91,753 shares of common stock valued at $6.20 per share, the fair value per share on the date of settlement, in settlement of the Make-Whole Amount.ourthe sale of a portion of itsour Storage Products business. For fiscal year 2008, we reported the results of operations of the Storage Products business, along with the gain recognized on the sale, in income (loss) from discontinued operations within our statement of operations. For fiscal year 2010, we reported revenue of $0.1 million, net of taxes of $0.2 million related to the final earn-out payments resulting from the sale of the Storage Products business.MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS"Risk Factors"“Risk Factors” included in Part I, Item 1A. of this Annual Report on Form 10-K.integrated circuits ("IC's"), principally targeted atICs that are used primarily by manufacturers of networking systems manufacturers in the communications industry. Within the communications industry, our products addressfor Carrier and Enterprise networking where they enable data to be transmitted at high-speedsapplications. We design, develop and processedmarket a diverse portfolio of high-performance, low-power and switched undercost-competitive networking and connectivity IC solutions. For more than 25 years, we have been a variety of protocols. Over the last 10 years, the worldwide proliferation of the Internet and the rapid growthleader in the volumeadoption of data being sent over LANsnew technologies in Carrier and WANs has placedEnterprise networking.tremendous strain ondramatic increase in both bandwidth demands and complexity driven by the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing rangeintroduction of datanew content-rich services, to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for faster, larger and more complex networks. In recent years, we focused our product development and marketing efforts on products that leverage the convergence of voice, video and data and enhanced 4G/LTE mobile networks. Media-rich devices such as smartphones and game consoles require increased bandwidth. New Enterprise deployment options such as cloud based servers and social media and tele-presence have also increased demand.networkingnetworks to Internet Protocol-based networks.all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth and capability while lowering power consumption and acquisition and operations costs. These next-generation networks share the requirements of high reliability, scalability, interoperability and low cost. Increasingly, these networks will be deliveredare based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet LAN technology. We believeSuch networks are built on new technology that productsis often referred to as “Carrier Ethernet” in this emerging technology area represent the best opportunity for us to provide differentiationCarrier networks and “Converged Enhanced Ethernet” in the market.increases inconsistent or improving margins and careful control of our operating expenses. We continue to focus on improving each of these components of our financial model.industry—Carrierindustry-Carrier Ethernet and Enterprise networking. Many of our products also serve the biggest market within these segments, Carrier Mobile Infrastructure, which is beginning to require Carrier Ethernet capabilities.will,are, in part, be determined by our continuing ability to participate and capture new design wins within our major customer base. This opportunity depends in large part on our ability to develop, deploy and sell products in a timely manner with features that compete effectively against the competitors in our markets.product. Manyproduct, typically for the lifetime of our large customers have their own internalthe customer's system. The design teams, which cause us to compete against these teams when our customers consider a "make vs. buy" decision. The trend in the industry has been, and continues to be, to outsource more designs to companies such as Vitesse. Whilewe expect this trend to continue, we view these "internal" design efforts as a significant competitive threat. The "design win"win is a critical milestone in the path to generating revenue, as our products, and our customers' products, are highly complex and typically require many years of development, testing and qualification before they reach full production. As a result, it may be difficult to forecast the potential revenue from new and existing products at the time we begin our development efforts or achieve our "designdesign wins."revenues, including our wafer,materials, assembly and test, costs, our ability to improve manufacturing yields, our ability to continue to migrate our products to next-generation process nodes,technology, and our ability to reduce average sellinglimit price ("ASP") erosion. We have active programs in place to address each of these factors.As such, weWe must manage our supply chain efficiently to ensure competitive materials pricing and effective lead-times for the materials that we purchase. The semiconductor industry in which we compete is highly cyclical. Typically, inIn periods of strong demand, in the semiconductor industry, we may experience longer lead times, and difficulties in obtaining capacity and/or meeting commitments for our required deliveries. Today, 100%almost all of our wafer fabrication and assembly is outsourced. During 2010, we successfully moved wafer probe and final testing from our in-house test facility at our headquarters to an outsourced operation at Asian subcontractors. This production model provides us substantial advantages in terms of lower fixed costs, reduced cycle times and lower inventory levels. Since 2009, our product gross margins have improved from 49.5% to 59.6% in 2011. ASPselling prices of our products, which is primarily determined by competitive factors within the specific markets we serve. Average margins vary widely within the markets we serve, with the Carrier networking market having the highest average margins and the Enterprise networking market having the lowest average margins. We endeavor to increase margins by providing products that have substantial added value relative to our competition.("(“R&D"&D”) resources into markets that will provide our future revenue growth. Our R&D costs increased to $53.1 million in 2011 from $45.7 million in 2009 as a result of our developing and releasing 50 new products. The percentage of our total headcount that is attributed to R&D has steadily increased during the last three years from 42.2% in 2009 to 46.8% in 2010 to 49.3% in 2011.2011 and to 49.4% in 2012. A large part of this growth is in our Hyderabad, India design center where we can more efficiently design software and execute product verification and validation.Hyderabad design center has been re-targetedR&D costs increased from storage products$45.7 million in 2009 to products for Carrier$51.0 million in 2010 to $53.0 million in 2011, as a result of our developing and Enterprise networking applications. In 2011,releasing over 60 new products. Our R&D costs decreased to $42.7 million in 2012 as we had two reductions in force that affectedconsolidated our R&D locations to better focus our R&D efforts. As a result,Although we decreased our R&D expense will be lowercosts, we have increased our headcount levels by expanding our teams in 2012.lower-cost regions that have technical talent pools and proximity to our customers. We intend to continue to focus our R&D efforts and to seek opportunities to more efficiently deploy our R&D resources into larger, growing markets.directlydirect to OEMs and also use a number of distributors and logistics providers to sell products indirectly to our customer base. In 2011, we continued our plansProduct revenues from direct customer sales were $53.2 million or 48.4% of product revenue in fiscal year 2012, compared to move more of our business to a direct model. Direct gross shipments to customers were $73.6 million or 55.4% of product revenue in fiscal year 2011, compared withand $82.5 million or 49.8% of product revenue in fiscal year 2010,2010. Revenues from direct customer sales, as a percentage of total sales, declined in 2012 due to declining sales to our largest direct customers.$49.8 million or 32.1%six additional months to take receipt of that product. As a result, the end-of-life announcement can result in fiscal year2009. several legacy products, allowing us to focus our manufacturing and distribution on our new products."sell-through"“sell-through” model for sales to our distributors. The "sell-through"“sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the "sell-through"“sell-through” methodology we may have variability in our revenue from quarter to quarter as customers have substantial flexibility to reschedule backlog with most of our channel partners as part of the terms and conditions of sale. In addition, the "sell-through"“sell-through” policy requires that we include all distributor channel inventory on our balance sheet as part of our reported inventory. Our indirect grossproduct revenues from channel sales were $56.7 million, $59.2 million $83.1 million, and $105.1$83.1 million, in fiscal years 2012, 2011 and 2010, and 2009, respectively.2011, 46.0%2012, 34.8% of our sales were to the United States, 38.6%52.1% to Asia and 11.2%13.1% to Europe, the Middle East and Africa ("EMEA", with the remaining 4.2% going to other countries.. In 2010, 33.3%2011, 36.7% of our sales were to the United States, 44.2%45.3% to Asia 15.5%and 18.0% to EMEA, and the remaining 7.0% going to other countries.EMEA. In 2009, 37.3%2010, 32.7% of our sales were to the United States, 47.4%50.6% to Asia, 11.1%and 16.7% to EMEA, and the remaining 4.2% going to other countries It is critical that we efficiently deploy our capital. Inventory levels decreased to $20.9 million as of September 30, 2011, from $27.3 million as of September 30, 2010. Inventory decreased as our channel partners and distributors took action to decrease their inventory in response to weaker demand. We were able to respond quickly to the change in demand by decreasing orders from our suppliers.a process to substantially re-inventthe strategic mission of re-inventing Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Our objective is to be the leading supplier of high-performance ICs for the global communications infrastructure markets. Towards that goal, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products and penetrate new customers in an effort to diversify ourselves and provide new opportunities for growth.high-technologyhigh technology company, these growth opportunities begin with new products. We improvedOver the efficiency of our R&D by focusing our resources on two large, but independent markets: Carrier networking and Enterprise networking, which both rely increasingly on Ethernet technology, allowing us to maximize the impact of our R&D budget. After twopast three years, of development, Vitessewe introduced over 3060 new products in 2010 and over 20 new products in 2011.products. These included many new "platform"“platform” products and technologytechnologies that will serve as the basis for future product development. This was nearly double our historic rate of product introductions. These new products allowed us to substantially increase our served markets in both Carrier and Enterprise networking, providing us better growth opportunities.tookhave taken our new products to market, in 2011, we saw a dramatichave seen an increase in our customer engagements and the number of design opportunities that were being identified by our sales team. Early adoption of our products by our customers has exceeded our goals. In 2011,the past two years, we recorded over 300600 new design wins, a 250% increase from the prior year. Of these design wins, we expect 80% of the value to come from our Tier-1 and Tier-2 customers, and nearly 50% to come from our new products introduced in 2010 and 2011.takeramp these new products into production.products. In our industry it typically takes twelvesix to eighteentwenty four months for our customers to go from first product sample received to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. In 2011,2012, we shipped samples and pre-production on the majority of these new products, and we expect our customers to phase into volume production over the course of 2012. As these new products ramp,2013.will beginbegan a migration of our revenues to our new products, providing a new growth cycle for the company.product portfolio. In 2011, only five percent6% of our product revenue was fromTable our new product portfolio. In 2012, this grew to 14% of Contentsproducts sampled in the last three years. Based on our observed market traction and the design wins captured in 2011, weproduct revenues. We expect revenue from our new products to increasedouble in 2013 compared to 10-15% of revenues in 2012 and continuedouble again in 2014.grow strongly from there. We'vegenerate revenues. Our primary focus for intellectual property licensing has been our Gigabit Ethernet Copper PHY and switch cores and eFEC technology. We license to non-competing third parties in adjacent or similar markets. solid progress on our strategy to strengthen our operational performance and execution. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an increased emphasis on the importance of our customers.enhanced customer-centric focus. During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased theour operating leverage of the company. During the last three yearsleverage. In addition, we have:•Expandedstrengthened our business in Europe and Asia, primarily in China, as the result of improved penetration into Tier 1 networking OEMs.•Transitionedcash balance by reducing inventory at September 30, 2012, by $15.2 million compared to a fully outsourced manufacturing model by moving the majority of our California probe and test function to an outsourced, offshore Asian test contractor, which was completed inSeptember 30, 2010. This production model substantially reduced our fixed costs, headcount, and reduced cost of testing, and will allow us to reduce our manufacturing cycle times and better serve our growing customer base in Asia.•Closed the Calle Carga facility and the Westford design center in fiscal year 2011 and the Portland facility closure is planned for the first quarter of 2012, in order to gain efficiencies by consolidating locations and streamlining costs. We also closed sales offices in Japan and Canada. Management's Discussion and AnalysisFinancial Condition and Results of Operations is based upon ourthe consolidated financial statements. The preparation of financial statements which have been prepared in accordanceconformity with accounting principles generally accepted in the United States ("GAAP"). The preparation of these financial statementsAmerica (“GAAP”) requires usmanagement to make estimates and assumptions about future events that affect the amounts we report as assets, liabilities, revenuereported in the financial statements and expenses, and the related disclosureaccompanying notes. Actual results could differ significantly from those estimates. We base our estimates on Our significant accounting policies are outlined in We believe that the notes to the consolidated financial statements. In management's opinion the following discussion addresses our most critical accounting policies, require the most significant judgment and involve complex estimation. We also have other policies that we consider to be key accounting policies; however these policies do not meet the definition of critical accounting estimates as they do not generally require us to make estimates or judgmentswhich are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, or subjective.recognitionrevenuesFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"(“ASC”) Topic 605,Revenue Recognition ("ASC 605"), we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable,determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We recognize revenue on goods shipped directly to customers at the time of shipping, as that is when title passes to the customer and all revenue recognition criteria specified above are met.experiencehistory with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products to our distributors.allowing for pricing credits or right of returns. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their end customers. We also maintain inventory, or hub, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third partythird-party warehouse based upon the customers'customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.property revenues("IP") revenues from the licensesale and licensing of our intellectual property, maintenance and support the sale of patents,fees and royalties'royalty revenue following the sale by our licensees of products incorporating the licensed technology. We enter into IPintellectual property licensing agreements that generally provide licensees the right to incorporate our IPintellectual property components in their products with terms and conditions that vary by licensee. Our IPintellectual property licensing agreements may include multiple elements with an IPintellectual property license bundled with support services. For such multiple element IPintellectual property licensing arrangements, we follow the guidance in FASB ASU No. 2009-13, Revenue Recognition (ASCASC Topic 605) Multiple Deliverable Revenue605-025, Multiple-Element Arrangements, to determine whether there is more than one unit of accounting. License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition. Certain of our agreements may contain maintenance and support obligations. Under such agreements we provide unspecified bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Maintenance and support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.for revenue recognition are generally fulfilled upon execution of the patent sale arrangement.IPintellectual property components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee. We may, atthird partythird-party to perform royalty audits of our licensees. Any correction of royalties previously reported would occur when the results are resolved.Multiple Element Transactions,; (ii) third-party evidence of selling price (TPE),; and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and revenue is the price actually charged by us for that deliverable. Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers. We have concluded that no VSOE or TPE exists because it is rare that either we employ a pricing model in which we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include, but are not limited to, prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license. We value inventories the lower of cost or market value on aand consist of materials, labor and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out basis. Provisionmethod. Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly and test, and internal overhead. We evaluate inventories for potentially obsoleteexcess quantities and obsolescence. Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. In order to state the inventory at lower of cost or slow-moving inventory is made based on management's analysismarket, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory levelsmay be required, and future sales forecasts. Our estimateswould be reflected in cost of future product demand may prove to be inaccurate, and we may understate or overstate the provision required for excess and obsolete inventory.Long Lived Assets We periodically evaluate the realizability of long-lived assets as events or circumstances indicate a possible inability to recover the carrying amount. Long-lived assets that will no longer be used in our business are written offgoods sold in the period identified since they will no longer generate any positive cash flowsthe revision is made.us. Such evaluation ismeasuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on various analyses, includingthe assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):flowaccounts receivable, accounts payable, and profitability projections. The analyses necessarily involve significant management judgment. Inaccrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the eventcomparability of their terms to the projected undiscounted cash flowsterms weless thanincluded in long-term debt, net, bookand convertible subordinated debt, net, on our consolidated balance sheets.assets,Term A Loan was computed using a cash flow analysis in which the carryingperiodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate. The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition and observing the quoted bond yields in the fixed income market as of the valuation date. The valuation was determined using Level 3 inputs.assets will be written down to their estimated fair value. Our futureTerm B Loan was computed using a binomial lattice model. The valuation was determined using Level 3 inputs. The valuation model combined expected cash flows may vary from estimates.Valuationoutflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of Compound Embedded Derivative related toour common stock into which the Term B Loan is convertible.Debentures In accordance with ASC Topic 815,Derivatives and Hedging ("ASC 815"), management evaluated the terms and features of the 2014 Debentures ("2014" Debentures") and identified aDebt(the "compound embedded derivative" or "derivative liability"included in our convertible subordinated debentures due October 2014 (“2014 Debentures”) requiringrequired bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative meetmet the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. Any gain or loss on the fair value of the compound embedded derivative is reflected in current earnings. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature are now indexed to our own stock. A final valuation was completed on October 30, 2012. We estimatedrecorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million from other long-term liabilities into equity.required considerable judgment. is a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. The compound embedded derivative expired on October 30, 2012. As we intended to, and had the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt, we classified the liability as a long-term liability on our consolidated balance sheets as of September 30, 2012 and September 30, 2011.used by uswe use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believeswe believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Stock Based CompensationTable of ContentsValuation of Term A and B Loans We estimated the fair value of our Term A and B Loan for purposes of accounting for a debt exchange transaction during fiscal year 2011 and for year-end disclosure of the fair value of the two loans. We estimated the fair value of the Term A Loan at its inception using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity are discounted to the valuation date using an appropriate market discount rate. The discount rate is determined by analyzing the seniority and securitization of the instrument, our financial condition, and observing the quoted bond yields in the fixed income market as of the valuation date. We estimated the fair value of the Term B Loan at its inception using a convertible bond valuation model within a lattice framework. These valuations are determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of our common stock into which the Term B loan is convertible. The valuation methodologies used by us in determining the fair value of the Term A and B loans requires considerable judgment. The fair value calculation may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the debt exchange date and the period-end reporting date.Accounting for Stock-Based CompensationCompensation—StockCompensation-Stock Compensation, which requires us to record such related compensation costs. Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on weighted historical implied volatility. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually.deferred tax liabilitieswe must make estimates and assets are determined based onjudgments in determining the differences between theprovision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax basiscredits, benefits, and deductions, and in the calculation of certain tax assets and liabilities using enactedthat arise from differences in the timing of recognition of revenue and expense for tax ratesand financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period. The effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense represents the tax payable for the period and the change during the period inon deferred tax assets and liabilities.periods.periods on a “more likely than not” basis. If and when we generate future taxable incomethe United Statesour tax jurisdictions against which these tax assets may be applied, some portion or all of the valuation allowance would be reversed and an increase in net income would consequently be reported in future years.Charges—Facilityunutilizedunder-utilized facility, we had to estimate the amount to be paid in lease termination payments, the future lease and operating costs to be paid until the lease is terminated, and the amount, if any, of sublease revenues. This calculation required us to estimate the timing and costs of the lease to be terminated, the amount of operating costs for the affected facility and the timing and rate at which we might be able to sublease or complete negotiations of a lease termination agreement. To form our estimates for these costs we performed an assessment of the affected facility and considered the current market conditions. We believe our estimates of In determining if an event or circumstance occurs that discharges or removes an entity's responsibility to settle a liability for a cost associated with an exit or disposal activity recognized in a prior period, we followed the obligations forguidance in ASC 420-10-40-1, that required that the closing ofrelated costs shall be reversed through the site remain sufficient to cover anticipated settlement costs. However, our assumptions onsame line item(s) in the lease termination payments, operatingincome statement used when those costs until termination, or the amounts and timing of offsetting sublease revenues may turn out to be incorrect and our actual cost may be materially different from our estimates. If our actual costs exceed our estimates, we would incur additional expenses in future periods."The“The Company and Its Significant Accounting Policies"Policies” footnote onin the accompanying notes to the audited consolidated financial statements.fiscal years indicated:periods indicated. The percentages in the table are based on net revenues. September 30, September 30, 2011 2010 2009 2012 2011 2010 $ % $ % $ % $ % $ % $ % (in thousands, except percentages) (in thousands, except for percentages) $ 132,742 94.2 % $ 165,633 99.8 % $ 154,927 92.1 % 8,225 5.8 % 357 0.2 % 13,250 7.9 % 140,967 100.0 % $ 165,990 100.0 % $ 168,177 100.0 % Product revenues $ 109,920 92.0 % $ 132,742 94.2 % $ 165,633 99.8 % Intellectual property revenues 9,563 8.0 % 8,225 5.8 % 357 0.2 % Net revenues 119,483 100.0 % 140,967 100.0 % 165,990 100.0 % — % — % 53,674 38.1 % 71,557 43.1 % 78,212 46.5 % 53,129 37.7 % 51,100 30.8 % 45,650 27.1 % 41,233 29.2 % 37,618 22.7 % 39,936 23.7 % 3,656 2.6 % 854 0.5 % 528 0.3 % — 0.0 % 73 0.0 % (9,922 ) (5.9 )% — 0.0 % — 0.0 % 191,418 113.8 % 348 0.2 % 797 0.5 % 1,360 0.8 % 152,040 107.8 % 161,999 97.6 % 347,182 206.3 % (11,073 ) (7.8 )% 3,991 2.4 % (179,005 ) (106.3 )% 8,456 6.0 % 9,495 5.7 % 4,653 2.8 % (7,680 ) (5.4 )% (7,869 ) (4.7 )% 12,209 7.3 % 3,874 2.7 % 21,311 12.8 % — 0.0 % (292 ) (0.2 )% (291 ) (0.2 )% (304 ) (0.2 )% 4,358 3.1 % 22,646 13.6 % 16,558 9.9 % (15,431 ) (10.9 )% (18,655 ) (11.2 )% (195,563 ) (116.2 )% Cost of product revenues 46,407 38.8 % 53,674 38.1 % 71,557 43.1 % Engineering, research and development 42,713 35.7 % 52,990 37.6 % 50,973 30.7 % Selling, general and administrative 29,822 25.0 % 41,233 29.3 % 37,618 22.7 % Restructuring and impairment (1,424 ) (1.2 )% 3,656 2.6 % 854 0.5 % Accounting remediation, reconstruction expense and litigation cost — — % — — % 73 — % Amortization of intangible assets 330 0.3 % 348 0.2 % 797 0.5 % Costs and expenses 117,848 98.6 % 151,901 107.8 % 161,872 97.5 % Income (loss) from operations 1,635 1.4 % (10,934 ) (7.8 )% 4,118 2.5 % Other expense (income): Interest expense, net 7,778 6.5 % 8,456 6.0 % 9,495 5.7 % Gain on compound embedded derivative (4,897 ) (4.1 )% (7,680 ) (5.4 )% (7,869 ) (4.7 )% Loss on extinguishment of debt — — % 3,874 2.7 % 21,311 12.8 % Other expense (income), net 40 — % (153 ) (0.1 )% (164 ) (0.1 )% Other expense, net 2,921 2.4 % 4,497 3.2 % 22,773 13.7 % Loss before income tax expense (1,286 ) (1.1 )% (15,431 ) (10.9 )% (18,655 ) (11.2 )% (619 ) (0.4 )% 1,521 0.9 % (1,451 ) (0.9 )% (174 ) (0.1 )% (619 ) (0.4 )% 1,521 0.9 % (14,812 ) (10.5 )% (20,176 ) (12.1 )% (194,112 ) (115.3 )% (1,112 ) (0.9 )% (14,812 ) (10.5 )% (20,176 ) (12.1 )% — 0.0 % 121 0.1 % 71 0.0 % — — % — — % 121 0.1 % (14,812 ) (10.5 )% (20,055 ) (12.0 )% (194,041 ) (115.3 )% (1,112 ) (0.9 )% (14,812 ) (10.5 )% (20,055 ) (12.0 )% — 0.0 % 126 0.1 % — 0.0 % Fair value adjustment of Preferred Stock - Series B — — % — — % 126 0.1 % $ (14,812 ) (10.5 )% $ (20,181 ) (12.1 )% $ (194,041 ) (115.3 )% $ (1,112 ) (0.9 )% $ (14,812 ) (10.5 )% $ (20,181 ) (12.1 )% 20112012 and 2010networking,networking; (ii) Enterprise networkingnetworking; and (iii) Non-Core.Non-core. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and transmissionrouting equipment used within LANs in small-medium enterprise ("SME")SME and small-medium business ("SMB") markets.SMB networks and cloud access services. The Non-CoreNon-core market is comprised of legacy products that have not received additional investment over the last five years and, as a result, have generally been in decline. The following table summarizesnew products, availability and pricing of competing products, capacity constraints at our suppliers, end-of-life product decisions, and general economic conditions. Therefore, our revenues for the fiscal years ended 2012 and 2011 may not necessarily be indicative of future revenues.market:market is as follows: September 30, September 30, 2011 2010 2012 2011 Amount % of
Product
Revenues Amount % of
Product
Revenues Change %
Change Amount Amount Change (in thousands, except percentages) (in thousands, except percentages) $ 61,685 46.5 % $ 72,380 43.7 % $ (10,695 ) (14.8 )% $ 47,630 43.4 % $ 61,685 46.5 % $ (14,055 ) (22.8 )% 64,754 48.8 % 75,975 45.9 % (11,221 ) (14.8 )% 53,899 49.0 % 64,754 48.8 % (10,855 ) (16.8 )% 6,303 4.7 % 17,278 10.4 % (10,975 ) (63.5 )% 8,391 7.6 % 6,303 4.7 % 2,088 33.1 % $ 132,742 100.0 % $ 165,633 100.0 % $ (32,891 ) (19.9 )% Product revenues $ 109,920 100.0 % $ 132,742 100.0 % $ (22,822 ) (17.2 )% the continueda broad-based weakness in the Asia Pacific region, which declined 26.9% to $28.6 millionour end customer markets for Carrier networking, particularly a decline in fiscal year 2011.our SONET/SDH products, including framers, EoS mappers, and FTTH products. The weakness was seen across a wide range of customers and products, primarily in China. This decrease wasdeclines were partially offset by 12.0% increased salesincreases in North America to $23.6 million.Asia. Enterprise switch revenue decreased 30.6% to $9.9 million,the United States and 1 Gigabit Ethernet PHY revenue decreased 16.7% to $16.3 million.a declinean increase of our legacy network processor product lineprocessors and legacy Fibre Channel PHY products.Connectivity,Connectivity; (ii) Ethernet switchingswitching; and (iii) Transport processing. September 30, September 30, 2011 2010 2012 2011 Amount % of
Product
Revenues Amount % of
Product
Revenues Change %
Change Amount Amount Change (in thousands, except percentages) (in thousands, except percentages) $ 67,734 51.0 % $ 82,522 49.8 % $ (14,788 ) (17.9 )% $ 52,933 48.1 % $ 67,734 51.0 % $ (14,801 ) (21.9 )% 37,940 28.6 % 46,714 28.2 % (8,774 ) (18.8 )% 32,607 29.7 % 37,940 28.6 % (5,333 ) (14.1 )% 27,068 20.4 % 36,397 22.0 % (9,329 ) (25.6 )% 24,380 22.2 % 27,068 20.4 % (2,688 ) (9.9 )% $ 132,742 100.0 % $ 165,633 100.0 % $ (32,891 ) (19.9 )% Product revenues $ 109,920 100.0 % $ 132,742 100.0 % $ (22,822 ) (17.2 )% reductiondecrease in Connectivity revenues is largely attributable to athe broad-based decline in the networking equipment market, which negatively impacted the demand for our more mature products, particularly SONET/SDH-based products. of 60.5% in products for legacy Fibre Channel applications and a decrease of 36.5% in10G Laser Drivers for long haul DWDM applications. The declines were partially offset by gains of 18.1% in PMD components for Fiber to the Home and 10GbE. The reduction in Ethernet switching revenuerevenues is largely attributable to overall market softnessdeclines in our Gigabit Ethernet switches and Gigabit EthernetCopper PHYs selling primarily into SMEthe Enterprise market, and SMBEthernet MAC products selling into both the Carrier and Enterprise markets. Gigabit Ethernet Switch revenue decreased 31.3%, and Gigabit Ethernet PHY revenue decreased 13.9%. The lower Transport processing revenue is largely attributable to an 79.5% decline in Network Processor (NPU) products and a 46.7% decline in Switch Fabric products. The decrease was partially offset by a 53.9% increasesales of our new Copper PHY products to the Carrier market.our legacy SONET framers.Table of Contentsfiscal year 2012Intellectual Property (IP) Revenues September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 8,225 5.8 % $ 357 0.2 % $ 7,868 2203.9 % The increase in IP revenue is attributable compared to $7.6 million from the sale and licensing of IP during well as royalty revenues of $0.6 million. Thethey approach end-of-life. September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Intellectual property revenues $ 9,563 8.0 % $ 8,225 5.8 % $ 1,338 16.3 % received or recognizedand patents, and for the same periods in fiscal year 2010 were minimal.ended September 30, 2012 also included the settlement of all future royalties under an existing agreement. Costs associated with the sale of IPintellectual property revenue are included in selling, general and administrative expenses. September 30, 2012 2011 Nu Horizons Electronics ** 13.5 % 20.6 % WPG Holdings** 10.7 % * Huawei * 10.3 % * Less than 10% of total net revenues for period indicated. ** Distributors September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) United States $ 41,559 34.8 % $ 51,698 36.7 % $ (10,139 ) (19.6 )% Asia Pacific 62,260 52.1 % 63,923 45.3 % (1,663 ) (2.6 )% EMEA* 15,664 13.1 % 25,346 18.0 % (9,682 ) (38.2 )% Total net revenues $ 119,483 100.0 % $ 140,967 100.0 % $ (21,484 ) (15.2 )% * Europe, Middle East and Africa RevenuesProduct Revenue September 30, 2011 2010 Amount % of Net
Product
Revenues Amount % of Net
Product
Revenues Change %
Change (in thousands, except percentages) $ 53,674 40.4 % $ 71,557 43.2 % $ (17,883 ) (25.0 )% September 30, 2012 2011 ti Amount % of Product Revenues Amount % of Product Revenues Change (in thousands, except percentages) Cost of product revenues $ 46,407 42.2 % $ 53,674 40.4 % $ (7,267 ) (13.5 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Engineering, research and development $ 42,713 35.7 % $ 52,990 37.6 % $ (10,277 ) (19.4 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Selling, general and administrative $ 29,822 25.0 % $ 41,233 29.3 % $ (11,411 ) (27.7 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Restructuring and impairment $ (1,424 ) (1.2 )% $ 3,656 2.6 % $ (5,080 ) (138.9 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Amortization of intangible assets $ 330 0.3 % $ 348 0.2 % $ (18 ) (5.2 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Interest expense, net $ 7,778 6.5 % $ 8,456 6.0 % $ (678 ) (8.0 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Gain on compound embedded derivative $ (4,897 ) (4.1 )% $ (7,680 ) (5.4 )% $ 2,783 (36.2 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Loss on extinguishment of debt $ — — % $ 3,874 2.7 % $ (3,874 ) (100.0 )% September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Income tax benefit $ (174 ) (0.1 )% $ (619 ) (0.4 )% $ 445 (71.9 )% September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Carrier networking $ 61,685 46.5 % $ 72,380 43.7 % $ (10,695 ) (14.8 )% Enterprise networking 64,754 48.8 % 75,975 45.9 % (11,221 ) (14.8 )% Non-core 6,303 4.7 % 17,278 10.4 % (10,975 ) (63.5 )% Product revenues $ 132,742 100.0 % $ 165,633 100.0 % $ (32,891 ) (19.9 )% September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Connectivity $ 67,734 51.0 % $ 82,522 49.8 % $ (14,788 ) (17.9 )% Ethernet switching 37,940 28.6 % 46,714 28.2 % (8,774 ) (18.8 )% Transport processing 27,068 20.4 % 36,397 22.0 % (9,329 ) (25.6 )% Product revenues $ 132,742 100.0 % $ 165,633 100.0 % $ (32,891 ) (19.9 )% September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Intellectual property revenues $ 8,225 5.8 % $ 357 0.2 % $ 7,868 2,203.9 % September 30, 2011 2010 Nu Horizons Electronics ** 20.6 % 23.9 % Huawei 10.3 % 13.3 % September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) United States $ 51,698 36.7 % $ 54,190 32.7 % $ (2,492 ) (4.6 )% Asia Pacific 63,923 45.3 % 84,045 50.6 % (20,122 ) (23.9 )% EMEA* 25,346 18.0 % 27,755 16.7 % (2,409 ) (8.7 )% Total net revenues $ 140,967 100.0 % $ 165,990 100.0 % $ (25,023 ) (15.1 )% September 30, 2011 2010 Amount % of Product Revenues Amount % of Product Revenues Change (in thousands, except percentages) Cost of product revenues $ 53,674 40.4 % $ 71,557 43.2 % $ (17,883 ) (25.0 )% We expect to continue to adjust our inventory levels and anticipate that the sales September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 53,129 37.7 % $ 51,100 30.8 % $ 2,029 4.0 % September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Engineering, research and development $ 52,990 37.6 % $ 50,973 30.7 % $ 2,017 4.0 % Engineering, research and development ("R&D") expenses consist primarily of salaries and related costs, including stock-based compensation expense for employees engaged in research, design and development activities. R&D also includes costs of mask sets and electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses. The level of R&D expenditures as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues. We view research and development expenditures as critical to maintaining a high level of new product introductions, which in turn are critical to our plans for future growth.purchased, electronic design automationEDA tools and new product evaluation boards associated with our two years of significant new product introductions and bringing those new products to market. This increase in R&D expense was partially offset by lower compensation expenses of $1.2 million related to the reassignment of employees to selling and marketing activities and headcount reductions. In October 2010, we commenced a reduction in force at our Westford design center, which we completed in June 2011. The Westford reduction in force will result in a decrease of approximately $1.7 million from fiscal year 2011 R&D spending levels. In September 2011, we commenced a reduction in force at our Portland design center, which was completed in October 2011. The Portland reduction in force will result in a decrease of approximately $1.7 million from fiscal year 2011 R&D spending levels. We will continue to concentrate our spending in R&D to meet customer requirements and to respond to market conditions, and we do not anticipate that the reduction in R&D headcount will negatively impact product development in fiscal year 2012. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 41,233 29.2 % $ 37,618 22.7 % $ 3,615 9.6 % September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Selling, general and administrative $ 41,233 29.3 % $ 37,618 22.7 % $ 3,615 9.6 % Selling, general and administrative ("SG&A") expense consists primarily of personnel-related expenses, including stock based compensation expense as well as legal and other professional fees, facilities expenses, outside labor and communication expenses.uncollectableuncollectible accounts receivable balances identified during ourfiscal year 2011 fourth quarter, $2.2 million related to increased compensation and $1.0 million due to higher facility costs partially offset by a $1.9 million decrease in professional fees. The increased compensation expense results from the reassignment of employees from R&D, additional marketing personnel and increased non-cash stock compensation. The increase in facility costs is primarily due to the re-allocation of expenses from cost of revenues due to the outsourcing of our wafer and final testing from our headquarters to an outsourced model. In September 2011, we completed a reduction in force in our SG&A organization that will result in approximately $1.5 million lower SG&A expenses on an annualized basis going forward. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 3,656 2.6 % $ 854 0.5 % $ 2,802 328 % September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Restructuring and impairment $ 3,656 2.6 % $ 854 0.5 % $ 2,802 328.1 % September 2011, as part of our ongoing cost reduction efforts,connection with these activities we exited our small Calle Carga office and warehouse facility and moved the 42 employees occupying this facility into our adjacent headquarters. Concurrently, we implemented the closure of the Portland design center and additional workforce reductions impacting a total of 41 employees, primarily in the United States. Restructuring and impairment charges consist of $2.5 million related to the Calle Carga facility. We also incurred $0.6approximately $3.7 million of severance costs due to the reduction in force.Octoberfiscal year 2010, in order to reduce costs and streamline the product design process, we commenced the planned reduction in workforce at our Westford design center. The Westford reduction in workforce was completed by June 2011 and affected 27 employees with the related severance costs of $0.6 million paid as of June 2011. In October 2009, in an effort to reduce costs and shorten manufacturing time, we eliminated test activities at our headquarters and outsourced testing to a third-party, offshore facility. This restructuring plan included the termination of approximately 50 employees. We recordedfacility, resulting in restructuring charges of $0.9 million in fiscal year 2010. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 348 0.2 % $ 797 0.5 % $ (449 ) (56.3 )% September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Amortization of intangible assets $ 348 0.2 % $ 797 0.5 % $ (449 ) (56.3 )% intangible assets,technology licensing agreements with third-parties, some of which became fully amortized during fiscal year 2011. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 8,456 6.0 % $ 9,495 5.7 % $ (1,039 ) (10.9 )% September 30, 2011 2010 Amount Amount Change (in thousands, except percentages) Interest expense, net $ 8,456 6.0 % $ 9,495 5.7 % $ (1,039 ) (10.9 )% Net interest expense is comprised of interest expense, net of interest income, and amortization of debt discount and premium, and amortization of debt issuance costs.the pay-down ofan $8.0 million pay-down on the Senior Term Loan in January 2011, the restructuring of the Senior Term Loan on February 4, 2011, and the $1.5 million principal payment on the Term A Loan in July 2011. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ (7,680 ) (5.4 )% $ (7,869 ) (4.7 )% $ 189 (2.4 )% September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Gain on compound embedded derivative $ (7,680 ) (5.4 )% $ (7,869 ) (4.7 )% $ 189 (2.4 )% changedecrease in the price of our underlying common stock. stock during those periods. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 3,874 2.7 % $ 21,311 12.8 % $ (17,437 ) (81.8 )% September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Loss on extinguishment of debt $ 3,874 2.7 % $ 21,311 12.8 % $ (17,437 ) (81.8 )% In fiscal year 2011, the$3.9 million results from the restructuringextinguishment of the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan. For the purposes of calculating this loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the payment-in-kind balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011. September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ (619 ) (0.4 )% $ 1,521 0.9 % $ (2,140 ) (140.7 )% September 30, 2011 2010 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Income tax (benefit) expense $ (619 ) (0.4 )% $ 1,521 0.9 % $ (2,140 ) (140.7 )% ratebenefit for fiscal year 2011 was 4.03%4.0%. The income tax benefit in the currentfiscal year 2011 is primarily due to the reversal of uncertain tax positions due to the statute of limitations expiration, refundable federal income tax, and reversal of foreign deferred tax liabilities, minimum taxes, and foreign taxes. Our effective tax rate for fiscal year 2010 was (8.13%(8.1%), which was lower than the federal and state statutory rate due to the utilization of NOL carryforwards and tax credits to offset taxes, other than federal and state minimum taxes and foreign taxes.Fiscal Years Ended September 30, 2010 and 2009Product Revenues The following tables summarize our product revenues by market: September 30, 2010 2009 Amount % of
Product
Revenues Amount % of
Product
Revenues Change %
Change (in thousands, except percentages) $ 72,380 43.7 % $ 69,020 44.5 % $ 3,360 4.9 % 75,975 45.9 % 60,356 39.0 % 15,619 25.9 % 17,278 10.4 % 25,551 16.5 % (8,273 ) (32.4 )% $ 165,633 100.0 % $ 154,927 100.0 % $ 10,706 6.9 % The increase in Carrier networking revenues for fiscal year 2010 as compared to fiscal year 2009 was largely attributable to improved market conditions within United States and EMEA markets, partially offset by some weakness in Asia, particularly China. Ethernet switch and PHY products grew by 47.6% to $8.8 million from fiscal year 2009 to fiscal year 2010. This increase was partially offset by a decrease in legacy SONET mapper products of 20% to $6.8 million in fiscal year 2010. In the Connectivity product line, Crosspoint switch revenues grew nearly 170% to $6.9 million and 10 Gigabit Ethernet grew 178.7% to $2.1 million. Again, this revenue growth was partially offset by declines in of some of our older SONET products. Revenues from older generation low-speed SONET PHYs decreased 53% to $6.0 million from fiscal year 2009 to fiscal year 2010. The increase in Enterprise networking revenues for fiscal year 2010 compared to fiscal year 2009 was primarily due to increased strength in connectivity products, including our crosspoint switch and 10 Gigabit Ethernet products selling into large Enterprise and datacenter applications. Crosspoint switch products grew 24.3% from fiscal year 2009 to fiscal year 2010 to $12.3 million. Revenues from our 10 Gigabit Ethernet PHY's and PMD products grew 105% from fiscal year 2009 to fiscal year 2010 to $10.7 million. The decrease in Non-core revenues for fiscal year 2010 compared to fiscal year 2009 was primarily due to a decline of our legacy Raid-on-Chip and legacy Fibre Channel PHY products, partially offset by growth in our Network Processing Unit ("NPU") product line. NPU products increased 13.1% from fiscal year 2009 to fiscal year 2010 to just over $5.6 million. We also classify our product revenues based on our three product lines: (i) Connectivity, (ii) Ethernet switching and (iii) Transport processing. September 30, 2010 2009 Amount % of
Product
Revenues Amount % of
Product
Revenues Change %
Change (in thousands, except percentages) $ 82,522 49.8 % $ 72,573 46.8 % $ 9,949 13.7 % 46,714 28.2 % 42,002 27.1 % 4,712 11.2 % 36,397 22.0 % 40,352 26.1 % (3,955 ) (9.8 )% $ 165,633 100.0 % $ 154,927 100.0 % $ 10,706 6.9 % The higher Connectivity product line revenue was driven by a 53.8% increase in Crosspoint switches, a 36.4% increase in 10G SONET PHYs, a 255.6% increase in PMD, and a 90.4% increase in10GEthernet PHYs. This growth was partially offset by a 53.6% decrease in 10G PMD and PHYs for long haul DWDM applications and a 52.2% decrease in low-speed SONET PHYs. The higher Ethernet switching product revenue was driven by a 16.3% increase in CuPHY revenues. The lower Transport processing product revenue was driven by an 82.1% decrease in legacy Raid-on-Chip products, partially offset by a 25.9% increase in EOS Mappers, Switch Fabrics and NPUs.Intellectual Property (IP) Revenues September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 357 0.2 % $ 13,250 7.9 % $ (12,893 ) (97.3 )% IP revenue in fiscal year 2010 was primarily related to engineering design fees. In fiscal year 2009, IP revenue of $13.3 million included licensing revenue of $8.3 million from the sale of patents from our IP portfolio and $5.0 million from an arrangement, entered into in the first quarter of fiscal year 2008, to license IP to a third-party. No material royalties were received or recognized for the fiscal years ended September 30, 2010 or 2009.Cost of Revenues September 30, 2010 2009 Amount % of Net
Product
Revenues Amount % of Net
Product
Revenues Change %
Change (in thousands, except percentages) $ 71,557 43.2 % $ 78,212 50.5 % $ (6,655 ) (8.5 )% The decrease in the cost of net revenues for fiscal year 2010 compared to fiscal year 2009 was largely attributable to improved product yields and lower test costs due to the transition of the test manufacturing activities from our headquarters to an outsource model using an offshore facility.Engineering, Research and Development September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 51,100 30.8 % $ 45,650 27.1 % $ 5,450 11.9 % The increase in R&D expenses for fiscal year 2010 compared to fiscal year 2009 was mainly attributable to increased engineering tool costs of $2.9 million, primarily for mask sets, and electronic design automation tools required in the support of new product development. In addition, labor costs increased approximately $2.3 million due to the reinstatement of salaries that had been temporarily reduced in fiscal year 2009, as well as increased medical and dental insurance premiums.Selling, General and Administrative September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 37,618 22.7 % $ 39,936 23.7 % $ (2,318 ) (5.8 )% The decrease in SG&A expense for fiscal year 2010 as compared to fiscal year 2009 was attributable to extensive cost-reduction efforts, including a legal fee reduction of $2.3 million, an accounting fee reduction of $2.1 million, as well as other cost reductions including travel, supplies and facilities costs of approximately $1.3 million. We also reduced compensation costs by $1.6 million as a result of headcount reductions. During fiscal year 2009, we recognized a gain on the sale of our Colorado building, which offset selling, general and administrative expense in that year by $2.9 million. We also recovered a net $1.9 million in sales tax, returned by a foreign authority.Restructuring and Impairment Charges September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 854 0.5 % $ 528 0.3 % $ 327 62 % In October 2009, in an effort to reduce costs and shorten manufacturing time, we eliminated test activities at our headquarters and outsourced testing to a third-party facility. This restructuring plan was approved during October 2009 with implementation efforts starting immediately and full transition of testing to the third-party completed by the third quarter of fiscal year 2010. This restructuring plan included the termination of approximately 50 employees. In connection with this restructuring, we recorded restructuring charges of $0.7 million in the first quarter and $0.2 million in the second quarter, totaling $0.9 million for severance costs for fiscal year 2010. As of March 31, 2009, we eliminated 64 positions; approximately 12% of our total workforce. Of the positions eliminated, 53 positions, or approximately 10% of the reductions in workforce, related to full-time employees; the remaining reductions related to temporary staffing. We did not incur any facilities costs related to workforce reductionsAccounting Remediation and Reconstruction Expense and Litigation Costs September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 73 0.0 % $ (9,922 ) (5.9 )% $ 9,995 (100.7 )% During fiscal year 2009, we recorded a settlement with our former independent registered public accountant, which resulted in a net credit of $16.0 million. We recorded costs of $4.1 million for work performed on stock option accounting and inventory valuation, revision of our revenue recognition policies, and other legal and financial issues. We recorded a $3.0 million accrual due to the proposed settlement with the SEC's Division of Enforcement related to the investigation of our historical stock option practices and certain other accounting irregularities. Lastly, we reached a settlement with the IRS related to the exercise of backdated options, resulting in a credit of $1.0 million as the settlement was less than we had previously estimated and accrued.Goodwill Impairment September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ — 0.0 % $ 191,418 114 % $ (191,418 ) 100 % During the first quarter of the fiscal year ended September 30, 2009, we performed an analysis of our goodwill and determined that the carrying amount of goodwill exceeded the implied fair value of that goodwill. As a result of the analysis, we recorded an impairment charge to fully write off our goodwill balance of $191.4 million.Amortization of Intangible Assets September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 797 0.5 % $ 1,360 0.8 % $ (563 ) (41.4 )% The decrease in amortization expense for fiscal year 2010 compared to fiscal year 2009 is primarily due to intangible assets related to the acquisition of Adaptec becoming fully amortized during fiscal year 2009.Interest Expense, net September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 9,495 5.7 % $ 4,653 2.8 % $ 4,842 104.1 % The increase in interest expense is the result of the higher combined effective interest rate on indebtedness as a result of the debt exchange and an increase in the interest rate on our Senior Term Loan.(Gain) Loss on Compound Embedded Derivative September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ (7,869 ) (4.7 )% $ 12,209 7.3 % $ (20,078 ) (164.5 )% We recognized a gain on our compound embedded derivative, of $9.0 million in fiscal year 2010, related to our 2014 Debentures. The gain on our 2014 Debentures was partially offset by a $1.1 million loss on the compound embedded derivative related to our 2024 Debentures in fiscal year 2010. We recognized a $12.2 million gain on the compound embedded derivative related to our 2024 Debentures, in fiscal year 2009.Loss on Extinguishment of Debt September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 21,311 12.8 % $ — 0.0 % $ 21,311 100 % In fiscal year 2010, we finalized negotiations with the noteholders of the 2024 Debentures to settle our obligations, including all amounts owed under the derivative liability for the premium put option, with a combination of cash; shares of our common stock, shares of our Series B Preferred stock, and $50.0 million face value of 2014 Debentures. We recorded the new instruments issued in extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the fair values of the new instruments, including approximately $0.8 million for fees paid to the noteholders, compared to the net carrying value of the 2024 Debentures. For the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures includes the $96.7 million of the 2024 Debentures and $13.3 million of the premium put derivative, recorded at fair value.Other Income, net September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ (291 ) (0.2 )% $ (304 ) (0.2 )% $ 13 4 % The change in other income primarily relates to changes in foreign exchange rates.Income Tax Expense (Benefit) September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 1,521 0.9 % $ (1,451 ) (0.9 )% $ 2,972 204.8 % Our effective tax rate for 2010 was (8.13%), which was lower than the federal and state statutory rate due to the utilization of NOL carryforwards. Our effective tax rate for 2009 was 0.74%, which was lower than the federal and state statutory rate due to the utilization of NOL carryforwards. Income tax expense was $1.5 million for fiscal year 2010 compared to income tax benefit of $1.5 million for fiscal year 2009, an increase in expense of $3.0 million. The increase is primarily due to limitations on the Company's NOL carryforwards as a result of an "ownership change" experienced for tax purposes on October 30, 2009. Net income tax expense for the year ended September 30, 2010 represents minimum federal, state and foreign income tax on income eligible for offset by loss carryforwards.Income from Discontinued Operations September 30, 2010 2009 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) $ 121 0.1 % $ 71 0.0 % $ 50 70.4 % Income from discontinued operations, consisted solely of income from the earn-out, in connection with our sale of a portion of our Storage Products business to Maxim Integrated Products, Inc. ("Maxim") in October 2007. The income, net of tax, totaled $0.1 million for each of the years ended September 30, 2010 and 2009, respectively. The contract with Maxim is complete and we do not anticipate any additional gains or losses to be incurred from this transaction.decreasedincreased to $17.3$23.9 million at September 30, 2012, from $17.3 million at September 30, 2011 and decreased from $38.1 million at September 30, 2010. During the fiscal year 2011 ended September 30, 2012, we usedgenerated cash infrom operations, which was partially offset by cash used for capital expenditures and payment of debt.financing activities. Our cash flows from operating, investing and financing activities are summarized as follows: September 30, 2011 2010 2009 (in thousands) $ (7,211 ) $ 1,472 $ 19,197 (3,457 ) (3,188 ) 1,649 (10,141 ) (17,701 ) (24 ) (20,809 ) (19,417 ) 20,822 38,127 57,544 36,722 $ 17,318 $ 38,127 $ 57,544 September 30, 2012 2011 2010 (in thousands) Net cash provided by (used in) operating activities $ 8,809 $ (7,211 ) $ 1,472 Net cash used in investing activities (1,602 ) (3,457 ) (3,188 ) Net cash used in financing activities (634 ) (10,141 ) (17,701 ) Net increase (decrease) in cash 6,573 (20,809 ) (19,417 ) Cash at beginning of period 17,318 38,127 57,544 Cash at end of period $ 23,891 $ 17,318 $ 38,127 ProvidedOperating ActivitiesOperating Activitiesoperating activities totaled $7.2 million.$7.2 million. Excluding changes in working capital, cash used to fund our losses totaled $6.0 million.$6.0 million. We also used $9.8 million to pay down our accounts payable and accrued liabilities and $3.0$3.0 million related to a decrease in deferred revenue due to lower purchases from distributors. These uses were partially offset by the generation of cash from the collection of accounts receivable of $4.0 million and operating with lower inventory levels of $6.4 million.$6.4 million.iswas primarily due to lower revenuessales during the year ended September 30, 2011 compared to the same period last year. The lower inventoryin the prior year, as well as a $2.2 million reserve for potential bad debt. Inventory decreased $6.4 million from $27.3 million at September 30, 2010 to $20.9 million at September 30, 2011. Due to positive changes in the availability of $6.4materials, we decreased purchasing in fiscal year 2011.isfrom $29.5 million at September 30, 2010 to $19.7 million at September 30, 2011 due to reduced purchases and production in response to lower sales, lower demand, and lower inventory held by distributors and easing of prior years' material shortages. Lower accounts payable of $8.0 million is due to thea reduction in inventory purchases from our suppliers as industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers, and due to thea payment of the $3.0 million in settlement of litigation with the SEC settlement. Accrued expenses and other liabilities decreased $1.8 million primarily due toin the timingsecond quarter of payments to our vendors and other service providers.$2.6$2.2 million. Accounts payable and accrued liabilities generated cash of $4.0 million and related to higher inventory purchases near year end and increases in accruals for software licensing, interest payable and payroll. Deferred revenue increased $2.4 million resulting from an increase in distributor purchases near end of the year. These sources were partially offset by an $8.5 million use of cash to build up our inventory levels in anticipation of higher sales demand and anticipated material shortages and increased accounts receivable of $0.7 million resulting from higher sales near year end. Duringour operating activities provided $19.2to $27.3 million in cash. Cash generated by operations excluding changes in working capital totaled $14.9 million. Duringat September 30, 2010, due to the year we operated with lowerbuild up our inventory levels which generated $18.7 million cash. The decrease in inventory resulted from loweranticipation of higher sales demand and consequently our inventory purchases and production, and its channel partners and distributors taking action to reduce their inventory in response to the economic slowdown.anticipated material shortages. Accounts receivable increased $5.0 million and resulted from higher sales near the end of the fiscal year. We used $6.6 million to pay down our accounts payable and accrued expenses and $1.6increased by $4.1 million relatedfrom $25.4 million at September 30, 2009 to a decrease in deferred revenues$29.5 million at September 30, 2010, due to loweran increase in purchases by distributors. Lower accountsat year end, increased accruals for software licensing, interest payable of $1.9 million is primarily due to lower inventory purchases. Accrued expenses and otherliabilities decreased $4.7 million during the year due to lower accrued wages of $1 million resulting from lower headcount and salary reductions, $0.9 million paidpayroll compared to the IRS upon the settlement of taxes related to backdated stock options and lower accrued income taxes due to tax payments made during the year.(Used In) ProvidedUsed In Investing ActivitiesInvesting Activitiesin cash in fiscal year 2011 for capital expenditures of $2.2 million and an initial investment in an ERP system of $1.3 million. Investing activities used $3.2 million in cash in fiscal yearyears 2011 and 2010, primarilyrespectively for capital expenditures. In fiscal year 2009, our investing activities provided $1.6 million in cash from proceeds from the sale of the Colorado building of $6.0 million, net of commissionsexpenditures and transaction costs, partially offset by capital expenditures of $2.3 million and the purchase of intangibles of $2.0 million.$10.1$0.6 million in cash in fiscal year 2012, primarily for the repurchase and retirement of restricted stock units for payroll taxes. Financing activities used $10.1 million in cash in fiscal year 2011, primarily relating tofor a principal payment of $8.0 million on the Senior Term loan, $1.5 million payment of our Term A Loan, and $0.6 million for the repurchase and retirement of restricted stock units for payroll taxes. In 2010, our financing activities used $17.7 million in cash, which was primarily due to a cash payment of $10.0 million to the holders of the 2024 Debentures, $5.0 million to pay down the principal amount of the Senior Term Loan and equity and debt issuance costs of $2.5 million.and cash equivalent balances, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property, including the sale of patents. As of property. Our cash totaled $23.9 million at September 30, 2011, our cash totaled $17.3 million.2012. Our working capital at September 30, 20112012 was $26.7 million.$28.7 million.whichthat have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, currentand cash equivalent balances, along with cash expected to be generated from product sales and the sale or licensing of our intellectual property, including the sale of patents, and the reduction incareful management of working capital requirements, from lower inventory levels, will be sufficient to fund our operations and research and developmentR&D efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months. In order to increase our working capital, we may seek to obtain additional debt or equity financing. However, we cannot assure you that such financing will be available to us on favorable terms, or at all, particularly in light of recent economic conditions in the capital markets. We do not have principal payments on currently outstandingnext 12 months.Tableamount due in February 2014 and a portion of Contentsthe amount due in October 2014. In order to meet the remaining debt obligation we may seek to modify the terms of the existing debt and/or obtain additional debt or equity financing. However, we cannot assure you that we will be able to modify the terms of the existing debt or that additional debt or equity financing will be available to us on favorable terms or at all. The following table summarizes our2011:2012 are as follows: Payment Obligations by Fiscal Year 2013 2014 2015 2016 2017 Thereafter Total (in thousands) Convertible subordinated debt (1) $ — $ — $ 46,493 $ — $ — $ — $ 46,493 Term A Loan (2) — 7,857 — — — — 7,857 Term B Loan (3) — — 9,342 — — — 9,342 Loan interest (4) 5,314 5,138 — — — 10,452 Operating leases (5) 3,089 2,002 1,131 199 — — 6,421 Software licenses (6) 7,676 7,073 6,503 2,800 2,800 2,800 29,652 Inventory and related purchase obligations (7) 5,033 280 280 — — — 5,593 Total $ 21,112 $ 22,350 $ 63,749 $ 2,999 $ 2,800 $ 2,800 $ 115,810 (1) 2014 Debentures represents amounts due for our 8.0% convertible debentures due October 2014. (2) Term A Loan represents amounts due for our 10.5% fixed rate senior notes due February 2014. (3) Term B Loan represents amounts due for our 8.0% fixed rate senior notes due October 2014. (4) Interest payable for Term A Loans, Term B Loans and 2014 Debentures through 2015. (5) We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016. (6) Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products. (7) Payment Obligations by Fiscal Year 2012 2013 - 2014 2014 - 2016 2017 and
thereafter Total (in thousands) $ — $ — $ 46,493 $ — $ 46,493 — 7,857 — — 7,857 — — 9,341 — 9,341 3,104 4,864 1,349 — 9,317 8,483 6,933 5,600 5,600 26,616 3,642 434 — — 4,076 $ 15,229 $ 20,088 $ 62,783 $ 5,600 $ 103,700 (1)Convertible subordinated debt represents amounts due for our 8% convertible 2014 Debentures due October 2014.(2)Term A loan represents amounts due for our 10.5% fixed rate senior notes due February 2014.(3)Term B loan represents amounts due for our 8.0% fixed rate senior notes due October 2014.(4)We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016. During 2011, we elected to exit our Calle Carga facility, but still have obligations under the lease. Gross lease amounts for the Calle Carga facility are included in these amounts. The Calle Carga lease amounts presented have not been adjusted for any potential sublease income as allowed under relevant accounting guidance.(5)Software license commitments represent non-cancellable licenses of IP from third-parties used in the development of our products.(6)Inventory and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts. For purposes of the table above, inventory and related purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time.20112012, we had no material off-balance sheet arrangements, other than operating leases.primarilysolely a result of fluctuations in foreign currency exchange rates, interest rates and the price of our common stock.rates. We do not hold or issue financial instruments for trading purposes.Cash and Cash Equivalents:cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of September 30, 2011, the carrying value of our cash and cash equivalents approximated fair value because of the ready market for the cash instruments.Debentures: At September 30, 2011, our debt consisted of long-term senior term loans, which were issued in two series referred to as "Term A Loans" and "Term B Loans", and our 2014 Debentures. Our Term A Loans and Term B Loans bear interest at a fixed rate of 10.5% and 8.0%, respectively, and the 2014 Debentures bear fixed interest at a fixed rate of 8.0%. Because we pay interest on our debt at fixed rates, market interest fluctuations doand therefore, would not impact our debt payments. Consequently, our results of operations and cash flows are notbe subject to any significant interest rate risk relating to our Term A Loans, Term B Loans or 2014 Debentures.Equity Price Risk We have outstanding $46.5 million in principal amount of our 2014 Debentures, which indebtedness is convertible by the holders into shares of our common stock. The 2014 Debentures provide that if a holder exercises its conversion rights prior to October 30, 2012, we must, upon such conversion, pay to the holder an amount equal to the interest that would have been payable from the conversion date through October 30, 2012 had the holder not exercised its conversion rights. We refer to this amount as the "Make-Whole Amount". We have the option of paying the Make-Whole Amount in cash or in shares of our common stock valued at 95% of the average daily volume weighted average price per share for the 10 trading days beginning on the first trading day after receipt by the holder of notice of our payment election. The 2014 Debentures contain a compound embedded derivative ("compound embedded derivative") which requires bifurcation and accounting at fair value in our balance sheet. The change in fair value of the compound embedded derivative is primarily related to the change in price of our underlying common stock. Any gain or loss on the fair value of the compound embedded derivative is reflected in current earnings. An increase or decrease of $0.50 in the market price of our common stock would result in approximately a $2.0 million decrease or increase, respectively in our earnings.U.SUnited States dollar during 2011,2012, total engineering, researchR&D and development and selling, general and administrativeSG&A expenses would have been approximately $2.2$1.7 million higher or lower.USUnited States dollar would not have had a material impact on our 2011 net loss. of (a Delaware corporation)(Company) as of September 30, 20112012 and 20102011 and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended September 30, 2011.2012. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.schedules.schedule. We believe that our audits provide a reasonable basis for our opinion.20112012 and 2010,2011, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2011,2012, in conformity with accounting principles generally accepted in the United States of America.20112012, based on criteria established inInternal Control—Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 6, 20114, 2012 expressed an unqualified opinion thereon.6, 20114, 2012 September 30,
2011 September 30,
2010 September 30,
2012 September 30,
2011 (in thousands) (in thousands, except par value) $ 17,318 $ 38,127 9,591 15,765 20,857 27,273 404 394 2,039 2,913 50,209 84,472 5,934 8,196 1,781 864 3,070 3,997 Cash $ 23,891 $ 17,318 Accounts receivable, net 9,403 9,591 Inventory, net 12,060 20,857 Prepaid expenses and other current assets 2,125 2,443 Total current assets 47,479 50,209 Property, plant and equipment, net 3,832 5,934 Other intangible assets, net 1,175 1,781 Other assets 4,130 3,070 $ 60,994 $ 97,529 $ 56,616 $ 60,994 Accounts payable $ 5,726 $ 5,198 Accrued expenses and other current liabilities 12,188 14,474 Deferred revenue 871 3,878 Total current liabilities 18,785 23,550 Other long-term liabilities 574 1,927 Long-term debt, net 15,852 15,444 Compound embedded derivative 2,899 7,796 Convertible subordinated debt, net 42,521 40,736 Total liabilities 80,631 89,453 Commitments and contingencies, See note 12 Stockholders' deficit: Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, 135 shares outstanding at September 30, 2012 and 2011, respectively 1 1 Common stock, $0.01 par value: 250,000 shares authorized; 25,812 and 24,471 shares outstanding at September 30, 2012 and 2011, respectively 258 245 Additional paid-in-capital 1,829,976 1,824,433 Accumulated deficit (1,854,250 ) (1,853,138 ) Total stockholders' deficit (24,015 ) (28,459 ) $ 5,198 $ 13,216 $ 56,616 $ 60,994 14,463 16,283 3,878 6,926 11 10 23,550 36,435
1,927
1,729 15,444 26,070 7,796 15,476 40,736 39,025 89,453 118,735 1 2 245 240 1,824,433 1,816,796 (1,853,138 ) (1,838,326 ) (28,459 ) (21,288 ) — 82 (28,459 ) (21,206 ) $ 60,994 $ 97,529 the consolidated financial statements. September 30, September 30, 2011 2010 2009 2012 2011 2010 (in thousands, except per share data) (in thousands, except per share data) $ 132,742 $ 165,633 $ 154,927 8,225 357 13,250 140,967 165,990 168,177 Product revenues $ 109,920 $ 132,742 $ 165,633 Intellectual property revenues 9,563 8,225 357 Net revenues 119,483 140,967 165,990 53,674 71,557 78,212 53,129 51,100 45,650 41,233 37,618 39,936 3,656 854 528 — 73 (9,922 ) — — 191,418 348 797 1,360 152,040 161,999 347,182 (11,073 ) 3,991 (179,005 ) 8,456 9,495 4,653 (7,680 ) (7,869 ) 12,209 3,874 21,311 — (292 ) (291 ) (304 ) 4,358 22,646 16,558 (15,431 ) (18,655 ) (195,563 ) Cost of product revenues 46,407 53,674 71,557 Engineering, research and development 42,713 52,990 50,973 Selling, general and administrative 29,822 41,233 37,618 Restructuring and impairment (1,424 ) 3,656 854 Accounting remediation, reconstruction expense and litigation cost — — 73 Amortization of intangible assets 330 348 797 Costs and expenses 117,848 151,901 161,872 Income (loss) from operations 1,635 (10,934 ) 4,118 Other expense (income): Interest expense, net 7,778 8,456 9,495 Gain on compound embedded derivative (4,897 ) (7,680 ) (7,869 ) Loss on extinguishment of debt — 3,874 21,311 Other expense (income), net 40 (153 ) (164 ) Other expense, net 2,921 4,497 22,773 Loss before income tax expense (1,286 ) (15,431 ) (18,655 ) (619 ) 1,521 (1,451 ) (174 ) (619 ) 1,521 (14,812 ) (20,176 ) (194,112 ) (1,112 ) (14,812 ) (20,176 ) — 121 71 — — 121 (14,812 ) (20,055 ) (194,041 ) (1,112 ) (14,812 ) (20,055 ) — 126 — Fair value adjustment of Preferred Stock - Series B — — 126 $ (14,812 ) $ (20,181 ) $ (194,041 ) $ (1,112 ) $ (14,812 ) $ (20,181 ) $ (0.61 ) $ (0.96 ) $ (16.92 ) — 0.01 0.01 (0.61 ) (0.95 ) (16.91 ) — 0.01 — Net loss per common share - basic and diluted: Continuing operations $ (0.04 ) $ (0.61 ) $ (0.96 ) Discontinued operations — — 0.01 Net loss per common share - basic and diluted: (0.04 ) (0.61 ) (0.95 ) Fair value adjustment of Preferred Stock - Series B — — (0.01 ) $ (0.61 ) $ (0.96 ) $ (16.91 ) $ (0.04 ) $ (0.61 ) $ (0.96 ) 24,315 21,074 11,478 Weighted average common shares outstanding - basic and diluted 25,121 24,315 21,074 the consolidated financial statements.STOCKHOLDERS'STOCKHOLDERS’ DEFICIT Total Vitesse
Semiconductor
Corporation
Stockholders'
Deficit Preferred Stock Common Stock Preferred Stock Common Stock Accumulated Deficit Total Vitesse Semiconductor Corporation Stockholders' Deficit Non Controlling Interest Additional
Paid-in-
Capital Accumulated
Deficit Total
Stockholders'
Deficit Total Vitesse
Semiconductor
Corporation
Stockholders'
Deficit Shares Amount Shares Amount — $ — 11,309,803 $ 113 $ 1,749,478 $ (1,624,230 ) $ 125,361 $ 165 — — — — — (194,041 ) (194,041 ) (81 ) (194,122 ) — — — — 3,138 — 3,138 — 3,138 — — 235,000 2 4,181 — 4,183 — 4,183 — — — — — — — (2 ) (2 ) (in thousands) Shares Amount Shares Amount Accumulated Deficit Total Vitesse Semiconductor Corporation Stockholders' Deficit Non Controlling Interest — — 11,544,803 115 1,756,797 (1,818,271 ) (61,359 ) 86 (61,273 ) — $ — 11,545 $ 115 — — — — — (20,055 ) (20,055 ) (1 ) (20,056 ) — — — — — (20,055 ) (20,055 ) (1 ) (20,056 ) — — — — 2,236 — 2,236 — 2,236 — — — — 2,236 — 2,236 — 2,236 770,786 8 8,646,811 87 52,409 — 52,504 — 52,504 771 8 8,647 87 52,409 — 52,504 — 52,504 — — — — (1,050 ) — (1,050 ) — (1,050 ) — — — — (1,050 ) — (1,050 ) — (1,050 ) (585,077 ) (6 ) 2,925,386 29 (23 ) — — — — (585 ) (6 ) 2,925 29 (23 ) — — — — — — 869,531 9 6,004 — 6,013 — 6,013 — — 870 9 6,004 — 6,013 — 6,013 — — — — 423 — 423 — 423 — — — — 423 — 423 — 423 — — — — — — — (3 ) (3 ) — — — — — — — (3 ) (3 ) 185,709 2 23,986,531 240 1,816,796 (1,838,326 ) (21,288 ) 82 (21,206 ) 186 2 23,987 240 1,816,796 (1,838,326 ) (21,288 ) 82 (21,206 ) — — — — — (14,812 ) (14,812 ) — (14,812 ) — — — — — (14,812 ) (14,812 ) — (14,812 ) — — — — 3,152 — 3,152 — 3,152 — — — — 3,152 — 3,152 — 3,152 — — — — 2,490 — 2,490 — 2,490 — — — — 2,490 — 2,490 — 2,490 — — — — 2,572 — 2,572 — 2,572 — — — — 2,572 — 2,572 — 2,572 (50,989 ) (1 ) 254,943 3 (2 ) — — — — (51 ) (1 ) 255 3 (2 ) — — — — — — 335,243 3 (3 ) — — — — — — 335 3 (3 ) — — — — — — (106,437 ) (1 ) (572 ) — (573 ) — (573 ) — — (106 ) (1 ) (572 ) — (573 ) — (573 ) — — — — — — — (82 ) (82 ) — — — — — — — (82 ) (82 ) 134,720 $ 1 24,470,280 $ 245 $ 1,824,433 $ (1,853,138 ) $ (28,459 ) $ — $ (28,459 ) 135 1 24,471 245 1,824,433 (1,853,138 ) (28,459 ) — (28,459 ) Net loss — — — — — (1,112 ) (1,112 ) — (1,112 ) Compensation expense related to stock options, awards and ESPP — — — — 4,442 — 4,442 — 4,442 Issuance of common stock upon exercise of stock options — — 6 — 16 — 16 — 16 Issuance of shares under ESPP — — 822 8 1,729 — 1,737 — 1,737 Release of restricted stock units — — 721 7 (7 ) — — — — Repurchase and retirement of restricted stock units for payroll taxes — — (208 ) (2 ) (637 ) — (639 ) — (639 ) Balance at September 30, 2012 135 $ 1 25,812 $ 258 $ 1,829,976 $ (1,854,250 ) $ (24,015 ) $ — $ (24,015 ) the consolidated financial statements. September 30, 2011 2010 2009 (in thousands) $ (14,812 ) $ (20,055 ) $ (194,041 ) 3,628 3,540 4,158 3,152 2,236 3,133 (7,680 ) (7,869 ) 12,209 — — 191,418 2,212 — — 1,241 — — — (265 ) — (54 ) — (2,924 ) 3,794 20,765 — 415 1,268 — — — 248 279 813 758 2,037 1,784 — (188 ) — — — 411 (109 ) 3,962 (691 ) (5,027 ) 6,416 (8,464 ) 18,657 1,074 1,594 (1,062 ) (8,018 ) 2,025 (1,910 ) (1,621 ) 2,020 (4,745 ) (3,048 ) 2,360 (1,566 ) (7,211 ) 1,472 19,197 — — 6,500 — — (547 ) (3,457 ) (3,185 ) (4,321 ) — (3 ) 17 (3,457 ) (3,188 ) 1,649 — (10,000 ) — (9,500 ) (5,000 ) — — (1,050 ) — (60 ) (1,365 ) — — (50 ) — (573 ) — — (8 ) (236 ) (24 ) (10,141 ) (17,701 ) (24 ) (20,809 ) (19,417 ) 20,822 38,127 57,544 36,722 $ 17,318 $ 38,127 $ 57,544 $ 5,695 $ 4,568 $ 4,054 392 565 3,072 — — 4,183 — — 260 3 29,254 — 3 — — 2,490 — — 2,572 — — — 40,343 — — 36,317 — — 16,187 — — 27,925 — — 6,013 — September 30, 2012 2011 2010 (in thousands) Cash flows provided by (used in) operating activities: Net loss $ (1,112 ) $ (14,812 ) $ (20,055 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 2,963 3,628 3,540 Stock-based compensation 4,442 3,152 2,236 Change in fair value of compound embedded derivative liability (4,897 ) (7,680 ) (7,869 ) Deferred income taxes (1,537 ) — — Common stock issued for employee stock plans 1,737 — — Allowance for doubtful accounts — 2,212 — Restructuring charges (1,424 ) — — Loss on asset impairment 1,324 1,187 — Gain on conversion of debt — — (265 ) Loss on extinguishment of debt, net — 3,794 20,765 Interest paid in kind — 415 1,268 Amortization of debt issuance costs 272 279 813 Amortization of debt discounts 2,363 2,037 1,784 Accretion of debt premiums (157 ) (188 ) — Change in operating assets and liabilities: Accounts receivable 188 3,962 (691 ) Inventory 8,797 6,416 (8,464 ) Prepaids and other assets 739 1,074 2,005 Accounts payable 528 (8,018 ) 2,025 Accrued expenses and other liabilities (2,410 ) (1,621 ) 2,020 Deferred revenue (3,007 ) (3,048 ) 2,360 Net cash provided by (used in) operating activities 8,809 (7,211 ) 1,472 Cash flows used in investing activities: Capital expenditures (808 ) (3,337 ) (3,078 ) Payments under licensing agreements (867 ) (120 ) (110 ) Proceeds from sale of fixed assets 73 — — Net cash used in investing activities (1,602 ) (3,457 ) (3,188 ) Cash flows used in financing activities: Proceeds from the exercise of stock options 16 — — Payment of convertible debentures — — (10,000 ) Payment of senior debt — (9,500 ) (5,000 ) Equity issuance costs — — (1,050 ) Debt issuance costs — (60 ) (1,365 ) Prepayment fee on senior debt — — (50 ) Repurchase and retirement of restricted stock units for payroll taxes (639 ) (573 ) — Other (11 ) (8 ) (236 ) Net cash used in financing activities (634 ) (10,141 ) (17,701 ) Net increase (decrease) in cash 6,573 (20,809 ) (19,417 ) Cash at beginning of period 17,318 38,127 57,544 Cash at end of period $ 23,891 $ 17,318 $ 38,127 Supplemental disclosure of non cash transactions: Cash paid during the year for: Interest $ 5,341 $ 5,695 $ 4,568 Income taxes 1,440 392 565 Non cash investing and financing activities: Common stock issued in exchange for Series B Preferred Stock — 3 29,254 Residual value allocated to the equity conversion feature — 2,490 — Premium related to Term B Loan issued in debt exchange — 2,572 — Issuance of 2014 convertible debentures — — 40,343 Common stock issued in exchange for 2024 debentures — — 36,317 Preferred stock - Series B issued in exchange for 2024 debentures — — 16,187 Compound embedded derivative issued in exchange for 2024 debentures — — 27,925 Common stock issued in exchange for 2014 debentures — — 6,013 the consolidated financial statements. THE CONSOLIDATED FINANCIAL STATEMENTS("(“Vitesse,"” the "Company," "us"“Company,” “us” or "we"“we”) is a leading supplier of high-performance integrated circuits ("ICs"(“ICs”) that are utilizedused primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products for these applications.Consolidated Financial Statementsconsolidated financial statements are prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"(“SEC”) and accounting principles generally accepted in the United States ("GAAP"(“GAAP”). Our reporting currency is the United States dollar. Our Consolidated Financial Statementsconsolidated financial statements include the accounts of Vitesse and our subsidiaries. All intercompanyinter-company accounts and transactions were eliminated in consolidation. For the fiscal year 2011, we incurred a net loss of $14.8 million and net cash used by operations totaled $7.2 million. In response, we have taken several steps to adjust our business model to adapt to our current level of operations. These steps include lowering expenses and reducing working capital needs in order to adjust our operating breakeven to support our expected revenue levels in the near future. Over the past two years, we have exited activities and facilities that did not fit into our revised operating model. In October 2010, we closed our Westford design center and terminated 27 employees. In September 2011 we also consolidated our headquarters into a single facility and exited our Calle Carga facility. In October 2011, we closed our Portland design center and reduced other direct and indirect labor costs by terminating 41 employees. We also took other steps to lower operating expenses, including reducing professional and outside consulting fees. As a result of these actions, we anticipate operating expenses in 2012 to be more than $10.0 million lower than in fiscal year 2011. Additionally, we took action to reduce our working capital needs. During 2011 we reduced our inventory levels resulting in a $6.4 million lower balance at September 30, 2011 as compared to 2010. We expect to be able to operate at lower inventory levels in fiscal year 2012. Although no assurance can be provided, we believe the expected future benefit of reduced cash requirements from these actions, when combined with our cash balance of $17.3 million at September 30, 2011, and the cash expected to be generated from product sales and the sale or licensing of our IP, will be sufficient to fund our operations and research and development efforts for at least the next twelve months.the stockholdersstockholders’ deficit accountsamounts or net loss for fiscal yearsyear 2010 or 2009.2011.
Foreign Currency TranslationTableContentsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Foreign Currency TranslationIn accordance with Accounting Standards Codification (“ASC”) Topic 605, The functional currencyRevenue Recognition, we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.foreign subsidiariesproduct sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products allowing for pricing credits or right of returns. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hub, arrangements with certain customers. Pursuant to these arrangements, we deliver products to a customer or a designated third-party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.United States dollar; however,price actuallysubsidiaries transact in local currencies. Consequently,exchange gains and losses and other non-operating gains and losses.translated into United States dollars atrecognized for the exchange ratefuture tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not “more likely than not,” we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. ASC Topic 740-10 prescribes a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.the balance sheet date. Revenuescumulative preferred stock and expensesfair value adjustments related to preferred stock. Potential common shares are translated at the average exchange rate prevailing during the period. Foreign currency transaction and translation gains and losses arenot included in resultsthe calculation of operations.20112012 due to a temporary federal program in effect from December 31, 2010 through December 31, 2012. Under the program, there is no limit to the amount of insurance for eligible accounts. Beginning 2013, insurance coverage will revert to $250,000$250,000 per depositor at each financial institution, and our non-interest bearing cash balancesNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued) We did not have any interest-bearing bank accounts at2011. We sell to domestic and foreign entities in the Carrier and Enterprise electronics industry. We grant uncollateralized credit to customers. We perform usual and customary credit evaluations2012, there was our customers before granting credit. Trade accounts receivable are recorded at the invoice amount and do not bear interest.receivables. At September 30, 2011, there was one direct customer that accounted for 14% of accounts receivables. We believe that this concentration and the concentration of credit risk in our accounts receivableresulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. For fiscal year 2011, one direct customer accountedWe generally do not require collateral security for more than 10% of our net revenues. Total sales to this customer were 10.3%, 13.3%, and 12.0% of net revenues for fiscal years 2011, 2010, and 2009, respectively. No other direct customer accounted for more than 10% of our net revenues. The percentage of our receivables from this customer at September 30, 2011 and 2010 was 14% and 18%, respectively. outstanding amounts. Certain of our suppliers integrate components or use materials manufactured in Thailand in the production of our products. The recent flooding in Thailand has disrupted the global supply chain for components manufactured in Thailand that are incorporated in our products or included in the end user products of our customers. Due to cross dependencies, supply chain disruptions stemming from the occurrences in Thailand could negatively impact the demand for our products, including, for example, if our customers are unable to obtain sufficient supply of other components required for their end products. We continue to monitor the effect of the events in Thailand on end demand patternsinventory levels throughout the supply chain.Contingencies We assess our exposure to loss contingencies, including environmental, legal, and income tax matters, and provide an accrual for exposure if it is judged to be probable and reasonably estimable. If the actual loss from a loss contingency differs from management's estimates, results of operations could be adjusted upward or downward.Warranty We generally warrant our products against defects for one year from date of shipment. A warranty reserve is recorded against revenue when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Revenue RecognitionProduct revenues In accordance with ASC Topic 605,Revenue Recognition ("ASC 605"), we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable, and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We recognize revenue on goods shipped directly to customers at the time of shipping, as that is when title passes to the customer and all revenue recognition criteria specified above are met. A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products to our distributors. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hub, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customers' projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.Intellectual property revenues We derive intellectual property revenues ("IP") from the license of our intellectual property, maintenance and support, and royalties' revenue following the sale by our licensees of products incorporating the licensed technology. We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Our IP licensing agreements may include multiple elements with an IP license bundled with support services. For such multiple element IP licensing arrangements, we follow the guidance in FASB Accounting Standards Update ("ASU") No. 2009-13, Revenue Recognition (ASC Topic 605) Multiple Deliverable Revenue Arrangements, to determine whether there is more than one unit of accounting. We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. All of the requirements are generally fulfilled upon execution of the patent sale arrangement. License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition. Certain of our agreements may contain support obligations. Under such agreements we provide unspecified, when and if, bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. SupportNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less. We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our IP components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee. We may, at our discretion and in accordance with our agreements, engage a third party to perform royalty audits of our licensees. Any correction of royalties previously reported would occur when the results are resolved.Multiple Element Transactions For multiple-element arrangements we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenues to deliverables: (i) vendor-specific objective evidence of fair value (VSOE); (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and is the price actually charged by us for that deliverable. Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers. The Company has concluded that no VSOE or TPE exists because it is rare that either we or our competitors sell the deliverables on a stand-alone basis. ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations. In determining ESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include but are not limited to prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license.and age of the accounts receivable balances, and economic conditions that may affect a customer'scustomer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. As of September 30, 2011 and 2010, ourOur allowance for doubtful accounts are $2.2is $0.3 million and $0, respectively. We have assessed the collectabilityaccounts receivable at September 30, 2012 and September 30, 2011, respectively.2010consist of materials, labor and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly, testing and internal overhead. We evaluate inventories for excess quantities and obsolescence. Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. In order to state the allowance is sufficient for fiscal years 2011inventory at lower of cost or market, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and 2010. However, if the financial condition of any customer were to deteriorate, resulting in an impairment of their ability to make payments, changes to the allowance couldwould be required.Shipping and Handling Fees and Costs Amounts billed to customers for shipping and handling is presented in product revenues. Costs incurred for shipping and handling are includedreflected in cost of revenues.
Property, Plant and EquipmentTablethree to five years for machinery and equipment, including product tooling; and the shorter of Contentslease terms or estimated useful lives for leasehold improvements.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Accounting for the Property, Plant, and Equipment ("(“ASC 820"820”), establishes a framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering marketentity'sentity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):market-corroboratedmarket-corroborate inputs; and"Financial Instruments" ("ASC 825")Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for similar instruments, in the current market. Our debt instruments are presented as described below:NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)loanLoan is convertible. We estimate the fair values of the (convertible subordinated debt) and("included in our convertible subordinated debentures due October 2014 Debentures"(“2014 Debentures”) required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expires October 30, 2012, and upon its expiration, the compound embedded derivative will no longer meet the criteria for bifurcation as all components of the conversion feature will then be indexed to our own stock. A final valuation was completed on October 30, 2012. We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million from other long-term liabilities to equity.frameworkframework. These valuations were determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes, and tradingAs the conversion price is not being indexed to our common stock, theSignificant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. bifurcated and presented on the balance sheet at fair value and the compound embedded derivative is marked to market.marked-to-market. The change in the fair value of the compound embedded derivative is a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. The change in value of the compound embedded derivative is a non-cash item. At our option, we can settle the compound embedded derivative in either cash or common shares.expired on October 30, 2012. As we intendintended to, and havehad the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt ("ASC 470"), we have classified the liability as a long-term liability on our consolidated balance sheetsheets as of September 30, 2012 and September 30, 2011 and 2010..InventoryWe generally warrant our products against defects for Inventoryone year from date of shipment. A warranty reserve is stated at the lower of cost or market (net realizable value). Costs associated with the development of a new product are charged to engineering, research and development ("R&D") expense as incurred, until the product is proven through testing and acceptance by the customer. At each balance sheet date, we evaluate our ending inventory for excess quantities and obsolescence. This evaluation includes analyses of sales levels by product and projections of future demand.Property, Plant and Equipment Property, plant and equipment are carried at cost less depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets' remaining estimated useful lives, ranging from three to five years, except for leasehold improvements, which are amortized over the shorter of the term of the related lease or their estimated useful lives.Intangible and Long-Lived Assets We account for goodwill and intangible assets in accordance with ASC Topic 350,Goodwill and Others ("ASC 350"). The provisions of ASC 350 require that a two-step impairment test be performed on goodwill at least annually, and an updating of accounting records accordingly. We evaluate these assets, including purchased intangible assets deemed to have indefinite lives, on an annual basis in the fourth quarter, or more frequently if we believe indicators of impairment exist. Factors we consider important that could result in an impairment review include significant underperformance to historicalNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)or projected operating results, substantial changes in our business strategy and significant negative industry or economic trends. If such indicators are present, we compare the fair value of the goodwill to our carrying value. Fair value of intangible assets is determined by discounted future cash flows, appraisals or other methods. Intangible assets, other than goodwill, are amortized over their useful lives unless these lives are determined to be indefinite. Intangible assets are carried at cost less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to ten years. We evaluate our long-lived assets except for goodwill and other indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. The carrying value of an asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value. When we identify that impairment has occurred, we reduce the carrying value of the assets to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach.Income Taxes We account for income taxes pursuant to the provisions of ASC Topic 740,Income Taxes ("ASC 740"). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the statement of operations. ASC Topic 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.Research and Development Costs Research and development costs are expensedrecorded against revenue when incurred. Manufacturing costs associated with the development of a new fabrication process or a new product are expensed until such time as these processes or products are proven through final testing and initial acceptance by the customer.Net Loss per Share Basic and diluted net loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding in each year. Net loss available to common stockholders is computed after deducting accumulated dividends on cumulative preferred stock and fair value adjustments related to preferred stock. Potential common shares are not included in the calculation of diluted loss per share because their effect is anti-dilutive.Marketing Costs All costs related to marketing and advertising our products are expensed as incurred or at the time the advertising takes place.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock-based Compensation ASC Topic 718,Compensation—Stock Compensation ("ASC 718") requires that all stock-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are required to be reported as a financing cash flow, rather than operating cash flow, as required under previous literature. It is also required to calculate the compensation cost of full-value awards such as restricted stock based on the market value of the underlying stock at the date of the grant. We are further required to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We estimate the fair value of each award as of the date of grant using the Black-Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black-Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-Scholes model meets the accounting guidance requirements, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability. We have elected to recognize compensation expense for all stock-based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end ofshipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.equaljudged to be probable and reasonably estimable. If the portionactual loss from a loss contingency differs from management's estimates, results of the grant-date value of the awards that have vested,operations could be adjusted upward or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.June 2011,July 2012, the FASB issued ASU 2011-05,2012-02, Comprehensive IncomeIntangibles-Goodwill and Other (Topic 220)—Presentation of Comprehensive Income350)-Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2011-05"2012-02"), to requireestablish an entity to present the totaloptional two-step analysis for impairment testing of comprehensive income, the components of net income, and the components ofindefinite-lived intangibles other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.than goodwill. The ASU isstandards update will be effective for us in our first quarterfinancial statements of 2013 and should be applied retrospectively. We do not anticipate theperiods beginning after September 15, 2012, with early adoption of ASU 2011-05 will have an impact on our consolidated financial statements. In May 2011, the FASB issued ASU No. 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820)—Fair Value Measurement ("ASU 2011-04"), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between United States GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. ASU 2011-04 should be applied prospectively and is effective for fiscal years and quarters that start after December 15, 2011. ASU 2011-04 is effective for us in our second quarter of fiscal year 2012. We are currently evaluating the impact of our pending adoption of ASU 2011-04 on our consolidated financial statements.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued) In October 2009, the FASB issued ASU No. 2009-13,Revenue Recognition (ASC Topic 605)—Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25,Revenue Recognition—Multiple Element Arrangements by allowing the use of the best estimate of selling price in addition to vendor-specific objective evidence and verifiable objective evidence (now referred to as third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor-specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. We have implemented the guidance of ASU 2009-13 prospectively, beginning in the first quarter of fiscal year 2011. The implementation of the new guidance didis not have material impact our financial statement, as the new guidance did not change the units of accounting within sales arrangements, and we did not utilize the residual method for the allocation of arrangement consideration. In October 2009, the FASB issued ASU No. 2009-14,Software (ASC Topic 985)—Certain Revenue Arrangements That Include Software Elements ("ASU 2009-14"), a consensus of the FASB Emerging Issues Task Force. This guidance modifies the scope of ASC subtopic 985-605,Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product's essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. We have implemented the guidance of ASU 2009-14 prospectively, beginning in the first quarter of fiscal year 2011. The implementation of the new guidance did not have a material impact on our financial statements Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC did not, or are not believed by managementexpected to have a material impact on our present or future Consolidated Financial Statements. ("ASC 260"), basic net income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.("ESPP"(“ESPP”), warrants, convertible preferred stock, 2014 Debentures and convertible debentures.Term B Loan. Unexercised stock options, restricted stock units, unvested shares to be issued under our ESPP, shares, and warrants are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive. The dilutive effectthe convertible preferred stock and convertible notes is determined using the if-converted method, which assumes any proceeds that could be obtained upon the exercisedetermining earnings for each class of stock, options, warrantswe consider the dividend rights and ESPPparticipating rights in undistributed earnings for each class of stock. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be used to purchasedistributed on an as-converted basis.at the average market price for the period. For fiscal years 2011, 2010, and 2009, we recorded a net loss and in accordance with ASC 260 all outstanding potential common shares wereare excluded from the diluted earningscomputation of net loss per share computation.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 2—COMPUTATION OF NET LOSS PER SHARE (Continued) The potential common shares excluded from the diluted computation are as follows: September 30, September 30, 2011 2010 2009 2012 2011 2010 (in thousands) (in thousands) 1,699 1,490 913 1,813 1,699 1,490 1,296 771 172 1,686 1,296 771 8 8 8 — 8 8 ESPP shares 506 293 — 674 929 — 674 674 929 10,332 10,332 — — — 1,899 1,887 — — 293 — — 2014 Debentures 10,332 10,332 10,332 Term B Loan 1,887 1,887 — 16,189 13,530 2,992 16,898 16,189 13,530 3—DETAILS3-DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS September 30, September 30, 2011 2010 2012 2011 (in thousands) (in thousands) $ 883 $ 2,815 $ 1,394 $ 883 9,247 12,854 5,359 9,247 10,727 11,604 5,307 10,727 $ 20,857 $ 27,273 Total $ 12,060 $ 20,857 September 30, 2011 2010 September 30, (in thousands) 2012 2011 (in thousands) Property, Plant and Equipment, net: $ 89,547 $ 91,548 $ 80,805 $ 89,547 810 813 801 810 9,397 11,124 9,025 9,397 3,257 5,709 3,166 3,257 289 433 66 289 93,863 103,300 103,300 109,627 (97,366 ) (101,431 ) (90,031 ) (97,366 ) $ 5,934 $ 8,196 Total $ 3,832 $ 5,934 September 30, 2012 2011 (in thousands) Other Intangible Assets, net: Intellectual property and technology license agreements $ 4,482 $ 4,757 Less: Accumulated amortization (3,307 ) (2,976 ) Total $ 1,175 $ 1,781 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 3—DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS (Continued) Depreciation expense was $3.3 million, $2.7 million, and $2.8 million for fiscal 2011, 2010, and 2009, respectively. September 30, 2011 2010 (in thousands) $ 4,757 $ 3,595 (2,976 ) (2,731 ) $ 1,781 $ 864 In the quarter ended December 31, 2008, we recorded an impairment charge to fully write off our goodwill. There has been no other impairment activity or adjustments to intangible assets during the fiscal years 2011 or 2010.consistconsisted primarily of existing technologies,technology licensing agreements with third-parties, intellectual property and related costs for our Enterprise Resource Planning ("ERP"(“ERP”) system.$242, $402, $312, $292, $270,$321, $231, $211, $190, $108, and $263$114 in 2012, 2013, 2014, 2015, 2016, 2017, and thereafter, respectively. September 30, September 30, 2011 2010 2012 2011 (in thousands) (in thousands) Deferred tax asset $ 1,420 $ — $ 1,821 $ 1,877 1,861 1,821 831 1,651 Debt issue costs, net 559 831 418 469 290 418 $ 3,070 $ 3,997 Total $ 4,130 $ 3,070 September 30, September 30, 2011 2010 2012 2011 (in thousands) (in thousands) $ 4,384 $ 6,423 $ 4,003 $ 4,384 3,033 2,768 2,627 3,033 2,571 3,377 2,432 2,571 2,196 2,332 2,196 2,196 48 361 160 48 164 385 305 164 2,067 637 465 2,078 $ 14,463 $ 16,283 Total $ 12,188 $ 14,474 September 30, 2012 2011 (in thousands) Term A Loan, 10.5% fixed-rate notes, due February 2014 $ 8,090 $ 8,247 Term B Loan, convertible, 8.0% fixed-rate notes, due October 2014 7,755 7,177 Other 7 20 Total long-term debt, net 15,852 15,444 2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014 42,521 40,736 Total debt, net $ 58,373 $ 56,180 September 30, 2011 2010 (in thousands) $ 8,247 $ — 7,177 — — 26,070 20 — 15,444 26,070 40,736 39,025 $ 56,180 $ 65,095 Term A Loan Term B Loan 2014 Debentures (in thousands) Principal $ 7,857 $ 9,342 $ 46,493 Unaccreted debt premium/(unamortized debt discount) 233 (1,587 ) (3,972 ) Carrying value $ 8,090 $ 7,755 $ 42,521 Interest payable terms Quarterly, in arrears Quarterly, in arrears Semi-annually, in arrears Annual effective interest rate 8.2 % 17.7 % 12.2 % Conversion price per common share n/a $ 4.95 $ 4.50 The Term A Loan has a remaining principal balance of $7.9 million and is carried on the balance sheet at $8.2 million, including remaining unamortized premium and matures on February 4, 2014. The Term A Loan bears interest at a fixed rate of 10.5% per annum payable quarterly in arrears. Considering the debt premium, the effective interest rate on the Term A Loan is 8.2%. The Term B Loan has a principal balance of $9.3 million, is carried on the balance sheet at $7.2 million, net of remaining unamortized discount and matures on October 30, 2014 unless converted earlier. The Term B Loan bears interest at a fixed rate of 8% per annum payable quarterly in arrears. On or after October 31, 2011, prepayments but only if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The Term B Loan is convertible into our common stock at a conversion price of $4.95 per share (equivalent to approximately 202 shares per $1,000 principal amount). The conversion terms are substantially similar to the conversion terms of the 2014 Debentures, except that there is no provision for the potential payment of a make-whole interest amount upon conversion. At September 30, 2011,2012, conversion of the outstanding principal amount of the Term B Loan would result in the issuance of 1,887,2341.9 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash. Considering the debt discount, the effective interest rate on the Term B Loan is 17.7%. On January 18, 2011, we paid $8.0 million against the principal balance of the Senior Term Loan. Effective February 4, 2011, we exchanged the existing Senior Term Loan for thethe Term B Loan (together, the "Term(collectively, “Term A and B Loans"Loans”), each in the principal amount of $9.3 million. We evaluated the Term A and B Loans issued in exchange for the Senior Term Loan pursuant to the guidance in ASC 470. We determined that we had not received any concessions from the noteholders in connection with the exchange and accordingly, the transaction was not accounted for as a troubled debt restructuring. However, due to the addition of a substantive conversion feature in the Term B Loan, as compared to the terms of the Senior Term Loan, we accounted for the exchange of instruments, in settlement for the Senior Term Loan, as a debt extinguishment. Pursuant to ASC 470, we recorded the Term A and B Loans issued in extinguishment of the Senior Term Loan at fair value and recognized a $3.9 million loss for the difference between the aggregate fair values of the new instruments plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan. For the purposes of calculating this lossNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 4—DEBT (Continued)on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, and the payment-in-kind ("PIK") balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011. On February 4, 2011, we recorded the Term A Loan at fair value, which was $9.9 million, including a premium of $0.6 million. The difference between the fair value and the face value (principal) of the Term A Loan represents a premium that will be amortized as a reduction of interest expense over the life of the loan. Accordingly, the Term A loan debt premium decreased our effective rate of interest from the stated or nominal fixed rate of 10.5% per annum to an effective interest rate of 8.2% per annum The carrying value will decrease over the life of the Term A Loan as the excess of the fair value over the face value of the note is amortized. On February 4, 2011, the Term B Loan fair value was determined to be $11.9 million, which included a premium of $2.6 million representing the difference between the fair value of the loan, including all terms and features of the note, and the face value of the note of $9.3 million. Since the note included an equity conversion feature, the $2.6 million premium was credited to additional paid in capital in accordance with ASC 470-20-25. Additionally, as the equity conversion feature allows for us to potentially settle any conversion request in either shares of its common stock or cash, at our option, the equity conversion feature was allocated a value of $2.4 million calculated as the difference between the $9.3 million face value of the note and the $6.9 million estimated fair value of the note, as determined based upon the note as an assumed standalone instrument including all terms and features except the equity conversion feature. The allocated equity conversion feature value of $2.4 million was recorded as a debt discount and a credit to additional paid in capital in accordance with ASC 470-20-15. The debt discount will be amortized as additional interest expense over the life of the debt using the effective interest method. Accordingly, the Term B loan debt discount increased our effective rate of interest from the stated or nominal fixed rate of 8.0% per annum to an effective interest rate of 17.7% per annum. The Term A and B Loans are collateralized by substantially all of our assets. The 2014 Convertible Subordinated Debentures (the "2014 Debentures") have a principal balance of $46.5 million and are carried on the balance sheet at $40.7 million net of the remaining unamortized discount. The 2014 Debentures bear interest at 8% per annum payable semi-annually in arrears. On or after October 30, 2011, prepayment but only if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The 2014 Debentures are convertible into our common stock at a conversion price of $4.50 per share (equivalent to approximately 222 shares per $1,000 principal amount). We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a "make-whole amount"“make-whole amount” equal to the 2014 Debenture'sDebenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at 95% of the average daily volume weighted average price per share over a 10 day trading day period. The 2014 Debentures are collateralized by a second priority interest andin substantially all of our assets. As of At 2011, the outstanding 2014 Debentures were carried on the balance sheet at $40.7 million, net of a $5.8 million remaining discount, which is amortized as interest expense over the life of the debentures.Table of ContentsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 4—DEBT (Continued) At September 30, 2011,, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10,331,77810.3 million shares of common stock and $4.0$0.3 million in make-whole amount that may be paid in cash or by delivery of 1.40.1 million shares of common stock. ConsideringThe make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the debt discount,compound embedded derivative no longer met the effective interest rate oncriteria for bifurcation as all components of the Debentures is 12.24%."make-whole premium"“make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between $3.20$3.20 and $16$16 per share. Upon the occurrence of certain change in control events, the holders of the TermsTerm A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest.Fiscal year (in thousands) 2014 $ 7,857 2015 55,835 Total $ 63,692 2011,the fiscal year ended September 30, 2012, a mandatory paymentrepayment of principal of $1.7 million following the sale of certain assets totaled $1.5 million. On May 14, 2010, we received a conversion notice from one ofwas waived by the noteholders of the 2014 Debentures, notifying us of the note holder's intent to convert $3.5 million in face amount of its holdings. We converted the principal amount of the submitted 2014 Debentures into shares of common stockTerm A and elected to pay the "make-whole amount" in shares of common stock. We issued 777,778 shares of our common stock on May 20, 2010 in settlement of the $3.5 million in face amount of the 2014 Debentures based on a conversion price of $4.50 per share, and we issued 91,753 shares of our common stock on June 7, 2010 in settlement of the "make-whole amount" obligation. In accordance with ASC 470, this conversion was accounted for as a debt extinguishment. We recognized a gain of $0.3 million in the accompanying financial statements. The gain on the extinguishment of debt was calculated as the difference between the fair value of the shares of common stock issued and the recorded value of the debt extinguished, which included a pro rata share of 1) debt issuance costs, 2) debt discount, and 3) fair value of the compound embedded derivative on the date of the conversion. As of September 30, 2009, we had outstanding $96.7 million in aggregate principal amount 2024 Convertible Subordinated Debentures (the "2024 Debentures"). We entered into a debt conversion agreement (the "Conversion Agreement") with the beneficial owners of more than 96.7% of the 2024 Debentures, pursuant to which these noteholders exchanges their 2024 Debentures for a combination of $6.4 million in cash, 8,646,811 shares of our common stock, and $50.0 million in newly issued 2014 Debentures convertible into 11,109,556 shares of our common stock. In addition, we issued 771,000 shares of our Series B Participating Non-Cumulative Convertible Preferred Stock, par value of $0.01 per share ("Series B Preferred Stock") to certain of the noteholders. The Conversion Agreement was consummated on October 30, 2009. We also paid $3.6 million in cash to the holders of 3.3% of the 2024 Debentures who declined to participate in the Conversion Agreement.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 4—DEBT (Continued) In accordance with ASC 470, this transaction was accounted for as a debt extinguishment, pursuant to which we recognized a $21.6 million loss. The loss on the extinguishment of debt was calculated as the difference between the aggregate fair values of the new instruments, including the compound embedded derivative associated with the 2014 Debentures, totaling $130.8 million, plus $0.8 million in additional amounts and fees paid to the creditors, compared to the net carrying values of the 2024 Debentures and related premium put derivative of $96.7 million and $13.3 million, respectively. In connection with the debt exchange and the debt modification, we incurred third-party costs of $2.9 million that were allocated to the underlying financial instruments issued based on the relative fair value of each instrument. Of the total fees incurred, $0.5 million was allocated to the modification of the Senior Term Loan and expensed as incurred, $1.0 million was allocated to the issuance of the common and preferred shares and charged against additional paid-in capital, and $1.4 million was allocated to the issuance of the 2014 Debentures and was capitalized in other assets as debt issuance costs, to be amortized as interest expense over the term of the loan. Unamortized debt issuance costs as of September 30, 2010 were $1.8 million. Maturities of outstanding debt by fiscal year ending September 30, 2011 are $7.9 million and $55.8 million for 2014 and 2015, respectively.include the following at September 30, 2011 and September 30, 2010:are as follows: September 30, 2011 September 30, 2010 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in thousands) — — 7,796 7,796 — — 15,476 15,476 $ — $ — $ 7,796 $ 7,796 $ — $ — $ 15,476 $ 15,476 September 30, 2012 September 30, 2011 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total (in thousands) Compound embedded derivative liability $ — $ — $ 2,899 $ 2,899 $ — $ — $ 7,796 $ 7,796 Total $ — $ — $ 2,899 $ 2,899 $ — $ — $ 7,796 $ 7,796 2011.:. Compound Embedded
Derivative related to
2014 Debentures (in thousands) $ 15,476 — — (7,680 ) $ 7,796 September 30, 2012 2011 (in thousands) Beginning balance $ 7,796 $ 15,476 Transfers in and /or out of Level 3 — — Purchases, sales, issuances, and settlements — — Total net gains included in earnings (4,897 ) (7,680 ) Ending balance $ 2,899 $ 7,796 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY (Continued) which is included in long term liabilities, represents the value of the equity conversion feature and a "make-whole"“make-whole” feature of the 2014 Debentures. As of September 30, 2011,theour Term A and B Loans is $8.4 million and $8.6 million, respectively. As of September 30, 2011, the2014 Debentures (“long-term debt”) carried at amortized/accreted cost quarterly for disclosure purposes. The estimated fair value of long-term debt is determined using Level 3 inputs based primarily on their comparability of their terms to the 2014 Debentures is $44.9 million excludingterms we could obtain, for similar instruments, in the current market.valuevalues of the compound embedded derivative of $7.8 million. September 30, 2012 2011 Carrying value Fair value Carrying value Fair value (in thousands) Term A Loan $ 8,090 $ 8,437 $ 8,247 $ 9,990 Term B Loan 7,755 9,776 7,177 8,661 2014 Debentures 42,521 46,725 40,736 45,228 6—STOCKHOLDERS'6-STOCKHOLDERS' EQUITY250,000,000250 million shares of common stock, par value $0.01,$0.01, per share.10,000,00010 million shares of preferred stock, par value of $0.01$0.01 per share, of which 800,0000.8 million shares have been designated as Series B Preferred Stock. As of September 30, 2011,2012, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-to-one5-to-one basis, for an aggregate of 673,600 shares of common stock. The holders of Series B Preferred Stock are entitled to receive, when, as and if declared by our board of directors out of funds legally available for the payment of dividends in respect of our common stock, dividends in an amount equal to ten percent of par value per share plus the amount of dividends that would have been payable with respect to the shares of common stock issuable upon conversion had such shares of Series B Preferred Stock been fully converted. During fiscal year 2011, 50,989Series B Preferred Stock were converted into 254,943our common stock, shares of common stock. Under alloption plans, a total of 4,651,258 shares of commonoptions and restricted stock units have been reserved for issuancegranted to employees and 1,656,096outside directors. Options generally vest over four years and have contractual lives of 10 years. are available for future grant as of September 30, 2011.2012. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units, and other stock and cash-based awards.2011,2012, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.costscost related to our stock basedstock-based compensation plans areplan is as follows: September 30, September 30, 2011 2010 2009 2012 2011 2010 (in thousands) (in thousands) $ 434 $ 387 $ 689 $ 567 $ 434 $ 387 984 766 940 1,530 984 766 1,734 1,083 1,504 2,345 1,734 1,083 $ 3,152 $ 2,236 $ 3,133 Total stock-based compensation expense $ 4,442 $ 3,152 $ 2,236 2011,2012, there was $8.2$5.8 million of unrecognized share-basedstock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned share-basedstock-based compensation is expected to be recognized isNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 7—STOCK BASED COMPENSATION (Continued)2.7 years.5.23%5.2% has been applied to all unvested options and restricted stock outstanding as of September 30, 2011.2012. On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee turnover. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture adjustments in 2012, 2011, and 2010 was not significant. Future share-basedstock-based compensation expense and unearned share-basedstock-based compensation will increase to the extent that we grant additional equity awards.Stock Option PlansBlack-Scholes option-pricingBlack‑Scholes option‑pricing model.under allin stock option plans for the three years ended September 30, 2011 wasawards is as follows: Shares Weighted average
exercise price Weighted average
remaining
contractual life (in
years) Aggregate
intrinsic value 913,141 $ 140.27 4.34 $ 209 Shares (in thousands) Weighted average
exercise price Weighted average
remaining
contractual life (in years) Aggregate
intrinsic value (in thousands)Options outstanding, September 30, 2009 1,061 $ 109.32 4.61 $ 2 235,724 7.42 — 575 5.12 — — — (87,049 ) 158.00 — (146 ) 280.06 1,061,816 $ 109.32 4.61 $ 2,000 Options outstanding, September 30, 2010 1,490 $ 52.40 6.16 $ — 574,699 5.12 579 4.30 — — — (146,151 ) 280.06 (370 ) 81.02 1,490,364 $ 52.40 6.16 $ — Options outstanding, September 30, 2011 1,699 $ 29.77 6.37 $ — 579,114 4.30 — 401 2.55 — — — (6 ) 2.54 (370,295 ) 81.02 — (281 ) 76.87 1,699,183 29.77 6.37 836,912 $ 55.46 3.88 $ — Options outstanding, September 30, 2012 1,813 16.57 6.61 2 Options exercisable, September 30, 2012 998 $ 26.93 5.16 $ — pricesprice of $2.95, $3.61, and $7.40,$2.44, as of September 30, 2011, 2010, and 2009, respectively,2012, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There are no in-the-money stock options that were exercisable as of September 30, 2011.stock-basedstock‑based awards is estimated at the date of grant using the Black-ScholesBlack‑Scholes option valuation model.model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107 ("SAB 107"). We have never paid cash dividends and intend to retain any future earnings for business development. The per share fair values of stock options granted inNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 7—STOCK BASED COMPENSATION (Continued)connection with stock incentive plans have been estimated using the following weighted average assumptions: 2011 2010 2009 6.17 6.22 5.86 85.9 % 86.4 % 66.7 % 85.70% - 87.9 % 86.2% - 89.1 % 65.0% - 85.1 % — — — 1.1% - 2.8 % 1.8% - 2.8 % 1.8% - 3.2 % Our determination of the fair value of stock-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The fair value of employee stock options is determined in accordance with ASC 718 and SAB 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC,SEC.an option-pricing model, however, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. The following table provides additional information in regards to options outstanding as of September 30, 2011: Options Outstanding Weighted
Average
Remaining
Contractual
Life (Years) Options Exercisable Number
Outstanding Weighted
Average
Exercise Price Number
Exercisable Weighted
Average
Exercise Price 492,463 9.18 $ 4.20 17,253 $ 3.89 439,609 8.32 5.18 114,962 5.18 450,304 4.70 24.52 388,105 27.27 316,807 1.66 111.10 316,592 111.08 1,699,183 6.37 $ 29.77 836,912 $ 55.46 September 30, 2012 2011 2010 Expected life (in years) 6.61 6.17 6.22 Expected volatility: Weighted-average 86.9% 85.9% 86.4% Range 82.2% - 87.1% 85.7% - 87.9% 86.2% - 89.1% Expected dividend — — — Risk-free interest rate 1.0% - 1.3% 1.1% - 2.8% 1.8% - 2.8% 2009 was $3.16, $3.80, and $4.58,$3.80, respectively. Options Outstanding Options Exercisable Range of Exercise Price Number Outstanding (in thousands) Weighted Average Remaining Contractual Life (Years) Weighted Average Exercise Price Number Exercisable (in thousands) Weighted Average Exercise Price $2.26 - $2.85 370 9.22 $ 2.54 81 $ 2.54 3.33 - 4.10 68 8.61 3.46 38 3.51 4.36 - 4.36 365 8.19 4.36 92 4.36 4.60 - 5.14 22 8.07 4.83 13 4.90 5.20 - 174.80 988 4.88 27.51 774 33.66 $2.26 - $174.80 1,813 6.61 $ 16.57 998 $ 26.93 33%33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date. Unvested restricted shares are forfeited if the recipient's employment terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.
Activity for our restricted stock award units is as follows: Restricted
Stock Units (in thousands) Weighted Average
Grant-Date Fair
Value per Share Weighted average
remaining
contractual life (in years) Aggregate
intrinsic value (in thousands)Restricted stock units, September 30, 2009 172 $ 7.05 0.66 $ 1,272 Awarded 618 5.37 Released — — Forfeited (19 ) 6.24 Restricted stock units, September 30, 2010 771 $ 5.72 1.35 $ 2,408 Awarded 1,122 4.34 Released (335 ) 5.97 Forfeited (262 ) 4.68 Restricted stock units, September 30, 2011 1,296 $ 4.66 1.38 $ 3,823 Awarded 1,258 2.57 Released (721 ) 3.99 Forfeited (147 ) 3.48 Restricted stock units, September 30, 2012 1,686 $ 3.49 1.09 $ 4,113 TableWe issue restricted stock units as part of ContentsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 7—STOCK BASED COMPENSATION (Continued) A summaryour equity incentive plans. For the majority of restricted stock unit activity forunits granted, the year ended September 30, 2011 is as follows: Restricted Stock Units Weighted Average Grant-Date Fair Value per Share 770,786 $ 5.72 1,121,995 4.34 (335,243 ) 5.97 (261,559 ) 4.68 1,295,979 $ 4.67 From time to time, we retainnumber of shares of common stock from employees upon vesting of restricted shares andissued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to cover income tax withholding.the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $0.6$0.6 million for the years ended as of September 30, 2012 and 2011, respectively and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders' equity. There was no such withholdingstockholders’ deficit. Although shares withheld are not issued, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the years ended September 30, 2010 and 2009.arewere reserved for issuance. UnderAs of September 30, 2012, the terms of this plan, employees may contribute up to 15% of their base salary, subject to certain limits to purchase2011 ESPP had 1.7 million shares available for issuance. Approximately 34% of our common stock. Purchases are made semiannually and theemployees were participating in our stock purchase priceplan as of the common stock is equal to 85% of the fair market value of the common stock on the first or last day of the offering period, whichever is lower.2012. 2013."Employee Share Purchase Plans", under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following assumptions:range of assumptions for both purchase periods: expected useful life of 0.5 years, weighted average expected volatility of 40.4% to 48.4%, our expecteda zero dividend rate, and a risk-free interest rate of 0.09% to 0.2%. We recognized approximately $0.1$0.6 million and $0.1 million in ESPP stock compensation for the yearyears ended September 30, 2012 and 2011, related to the ESPP. At September 30, 2011, no shares had been issued under this plan and 2.5 million shares were available for future issuance.respectively.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)(loss) incomeloss from continuing operations before (benefit) provision for income taxes for the years ended September 30, 2012, 2011 2010 and 20092010 were as follows: September 30, 2011 2010 2009 (in thousands) $ (17,451 ) $ (15,141 ) $ (183,642 ) 2,020 (3,514 ) (11,921 ) $ (15,431 ) $ (18,655 ) $ (195,563 ) September 30, 2012 2011 2010 (in thousands) Loss before income taxes: Domestic $ (3,406 ) $ (17,451 ) $ (15,141 ) Foreign 2,120 2,020 (3,514 ) $ (1,286 ) $ (15,431 ) $ (18,655 ) 2010 and 2009:2010: September 30, 2011 2010 2009 (in thousands) $ (248 ) $ 843 $ (1,675 ) (367 ) 452 (103 ) (3 ) 226 327 $ (619 ) $ 1,521 $ (1,451 ) September 30, 2012 2011 2010 (in thousands) Income tax (benefit) expense: Current: Federal $ (188 ) $ (248 ) $ 843 State 41 (367 ) 452 Foreign 1,510 (4 ) 226 Total current 1,363 (619 ) 1,521 Deferred: Federal — — — State — — — Foreign (1,537 ) — — Total deferred (1,537 ) — — Total income tax (benefit) expense: $ (174 ) $ (619 ) $ 1,521 There was no deferred tax expense for the periods presented. September 30, 2011 2010 2009 September 30, (in thousands, except for percentages) 2012 2011 2010 $ (5,246 ) 34.00 % $ (6,343 ) 34.00 % $ (68,422 ) 34.00 % (409 ) 2.65 % (476 ) 2.55 % 362 (0.18 )% $ % $ % $ % (in thousands, except for percentages) Federal income tax benefit at statutory rate $ (437 ) 34.0 % $ (5,246 ) 34.0 % $ (6,343 ) 34.0 % State tax benefit net of federal benefit (13 ) 1.0 % (409 ) 2.7 % (476 ) 2.6 % 5 (0.03 )% 226 (1.21 )% 327 (0.17 )% 1,102 (85.7 )% 5 — % 226 (1.2 )% — — — — 65,792 (32.64 )% Tax credits (1,230 ) 95.6 % — — % — — % 1,108 (7.18 )% 194 (1.04 )% 714 (0.37 )% 1,015 (78.9 )% 1,108 (7.2 )% 194 (1.0 )% (636 ) 4.15 % 366 (1.96 )% — — (100 ) 7.9 % (636 ) 4.2 % 366 (2.0 )% (568 ) 3.68 % 328,862 (1757.14 )% (224 ) 0.10 % (1,147 ) 89.2 % (568 ) 3.7 % 328,862 (1,757.1 )% 5,127 (33.24 )% (321,308 ) 1716.67 % — — 636 (49.5 )% 5,127 (33.2 )% (321,308 ) 1,716.7 % $ (619 ) 4.03 % $ 1,521 (8.13 )% $ (1,451 ) 0.74 % Income tax (benefit) expense $ (174 ) 13.6 % $ (619 ) 4.0 % $ 1,521 (8.1 )% 2011 was 4.03%. ended September 30, 2012 compared to 4.0% for the comparable period in the prior year. Our income tax benefit is primarily impacted by foreign taxes, withholding taxes on foreign income that are creditable against United States income taxes, the removal of unrecognized tax benefits, and certain nondeductible interest and share based expenses. The income tax benefit inis also impacted by the current year is primarily duerelease of a portion of the valuation allowances related to the reversal of uncertain tax positions due to the statute of limitations expiration,NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 8—INCOME TAXES (Continued)refundable federal income tax, reversal ofcertain foreign jurisdictions' deferred tax liabilities, minimum taxes,assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and foreign taxes. Our effective tax rate for fiscal year 2010 was (8.13%), which was lower than the federal and state statutory rate due to the utilization of NOL carryforwards and tax credits to offset taxes, other than federal and state minimum taxes, and foreign taxes. September 30, 2011 2010 2009 (in thousands) $ 53,938 $ 47,854 $ 301,106 7,887 6,564 23,066 88 — 179 — — 11,640 (655 ) — — 11,148 12,602 26,959 9,189 7,400 34,295 3,168 6,738 4,979 10,752 9,974 10,172 1 (104 ) 959 153 — — (2,998 ) 2,211 8,746 92,671 93,239 422,101 (92,671 ) (93,239 ) (422,101 ) $ — $ — $ — September 30, 2012 2011 2010 (in thousands) Deferred Tax Assets: Net operating loss carryforward $ 55,317 $ 53,938 $ 47,854 Research and development tax credits 11,533 7,887 6,564 Deferred income 1,724 — — Stock options 12,594 11,148 12,602 Fixed assets and intangible property 10,001 9,189 7,400 Inventory 2,940 3,168 6,738 Allowances and reserves 9,928 10,752 9,974 State taxes — 1 — Foreign tax credit/AMT credit 1,398 241 — Other — — 2,211 Total deferred tax assets 105,435 96,324 93,343 Deferred Tax Liabilities: Debt amortization (1,485 ) (655 ) — Other (5 ) (2,998 ) — State taxes — — (104 ) Total deferred tax liabilities $ (1,490 ) $ (3,653 ) $ (104 ) Net deferred income taxes 103,945 92,671 93,239 Valuation allowance (102,408 ) (92,671 ) (93,239 ) Total deferred tax asset $ 1,537 $ — $ — Deferred tax assets are primarily composed of federal and state tax NOL carryforwards; timing differences relating to stock options; tangible and intangible assets recovery; and research and development credits. Because we have historically experienced net tax losses, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. We have NOL carryforwards of approximately $82.9 million, $41.7 million, and $234.6 million for federal, state, and foreign income tax purposes at September 30, 2011, which can be carried forward to offset future taxable income. $1.2$1.3 million and $10.1$10.2 million, respectively. In addition, we also have approximately $0.2$1.4 million in foreign tax and AMT credits to offset future taxable income. The federal NOLsnet operating losses (“NOLs”) and tax credits may be carried forward through 2031;2032; state NOLs may be carried forward through 2031;2032; state tax credits may be carried forward indefinitely; and foreign NOLs have various carryforward provisions in several jurisdictions. The Federal Tax Reform Act of 1986, and similar state laws, contains provisions that may limit the NOL and tax credits carryforwards to be used in any given year upon the occurrence of certain events, including a significant change in ownership interests. Under IRC Section 382 and 383 rules, a change in ownership can occur whenever there is a shift in ownership by more than fifty percentage points by oneNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)$217.1 millionNOTE 8—INCOME TAXES (Continued)or more five-percent stockholders within a three-year period. When a change of ownership occurs, the NOLsfederal, state and credits may be impaired. We performed a study to evaluate the status of our NOLs. Based on that study, we believe that, as a result of the debt modifications in fiscal year 2010, we experienced an "ownership change" as defined for United States federal income tax purposes as of October 30, 2009 that resulted in an impairment of the use of the NOLs and credits as of the fiscal year ended September 30, 2010. We have approximately $82.9 million of Federalforeign NOLs that can be used in future tax years. Of thisthe federal NOL amount, $56.3$59.3 million is subject to an annual limitation of $3.1$3.1 million caused by a prior year “ownership change,” as defined in utilizingSection 382 of the Internal Revenue Code of 1986, as amended (the “Code”). In general, a Section 382 ownership change occurs if there is a cumulative change in Vitesse's ownership by “5%” shareholders (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. If an additional ownership change occurred during the current year or should one occur in the future, our NOLs. Theability to utilize ourNOL carryforwards and other deferred tax assets to offset future taxable income may be significantly limited. Therefore, the value and recoverability of our NOLs and deferred tax assets could be further diminished as a result of an additional ownership change.expire in fiscal year 2031.$10.2$10.8 million as of September 30, 20112012 and approximately $10.6$10.2 million as of September 30, 2010.2011. The total amount of gross unrecognized tax benefits decreasedincreased by ($0.4)$0.6 million, the majority of which ($0.2) million relates the a lapse in statuterelated to state research and the remaining ($0.2) million decrease relates to a change in state filing requirements.2011,2012, approximately $0.3$0.2 million of the $10.2$10.8 million unrecognized tax benefits related to our state tax liability is recorded in accrued expenses and other current liabilities on the Consolidated Balance Sheet.consolidated balance sheets. The remaining $9.9$10.6 million, which relates to research and development tax credits that have not been utilized, is reflected as a reduction to the deferred tax asset arising from the research and development tax credits. As of September 30, 2010,2011, approximately $0.7$0.3 million of the $10.6$10.2 million unrecognized tax benefits, related to our state tax liability, iswas recorded in accrued expenses and other current liabilities on the Consolidated Balance Sheet, theconsolidated balance sheets. The remaining $9.9$9.9 million, related to research and development tax credits that have not been utilized, iswas reflected as a reduction to the deferred tax asset arising from the research and development tax credits. 2011 2010 2009 (in thousands) $ (10,615 ) $ (26,288 ) $ (29,297 ) 200 16,013 — — (340 ) 3,009 200 — — $ (10,215 ) $ (10,615 ) $ (26,288 ) 2012 2011 2010 (in thousands) Beginning balance as of September 30: $ (10,215 ) $ (10,615 ) $ (26,288 ) Gross decreases - tax positions in prior period — 200 16,013 Gross increases - current-period tax positions (47 ) — (340 ) Gross increases - tax positions in prior period (560 ) — — Decrease relating to settlements — — — Reductions as a result of a lapse of statute of limitations — 200 — Ending balance as of September 30: $ (10,822 ) $ (10,215 ) $ (10,615 ) inwithin the consolidated statements of income as income tax expense. As of September 30, 2011,2012, there waswere no material interest or penalties were accrued due to significant net operating loss.USUnited States and various state and foreign jurisdictions. The 20072008 through 20102012 tax years generally remain subject to examination by their respective tax authorities. We previously completed an examination by the Internal Revenue Service for the tax years ended September 30, 2004 through September 30, 2006. The audit resulted in an adjustment that reduced our federal NOL carryforwards. Effectively, all our tax years in which a tax NOL is carried forward to the present are subject to examination by federal, state and foreign tax authorities. Therefore, we cannot estimate the range of unrecognized tax benefits that may significantly change within the next twelve months. AND IMPAIRMENT CHARGES The activitythe excess facility and severance accruals under our restructuring plans during the three years Ended September 30, 2011, by year of plan, wereaccrual is as follows: Excess Facility
Cost Severance
Costs Total (in thousands) $ — $ — $ — — — — — 528 528 — (528 ) (528 ) $ — $ — $ — — — — — 854 854 — (854 ) (854 ) $ — $ — $ — — — — 2,530 1,126 3,656 — (828 ) (828 ) $ 2,530 $ 298 $ 2,828 Total (in thousands) Liability balance at September 30, 2010 $ — $ — $ — $ — Reclass from other liability account 921 — — 921 Cash payments — (828 ) — (828 ) Charged to operations 1,389 1,126 1,141 3,656 Non-cash charges — — (1,141 ) (1,141 ) Liability balance at September 30, 2011 2,310 298 — 2,608 (Credited) charged to operations (1,460 ) 36 — (1,424 ) Cash payments (850 ) (334 ) — (1,184 ) Liability balance at September 30, 2012 $ — $ — $ — $ — As of March 31, 2009, we eliminated 64 positions, or approximately 12% of our total workforce. Of these, 53 positions, or approximately 10% of the reductions in our total workforce, related to full-time employees, and the remaining reductions related to temporary staffing. A severance expense of $0.5 million is included in our operating results for2009. In October 2009, in an effort to reduce costs and shorten manufacturing time, we eliminated test activities at the Camarillo, California location and outsourced testing to a third-party facility. This restructuring plan was approved during October 2009 with implementation efforts starting immediately and full transition of testing to the third-party by the third quarter of fiscal year 2010. This restructuring plan included the termination of approximately 50 employees. In connection with this restructuring, we recorded restructuring charges totaling $0.9 million for severance costs for fiscal year 2010. In October 2010, in order to reduce costs and streamline the product design process, we commenced the planned reduction in workforce at our Westford design center. The reduction in workforce was completed by June 2011. The reduction in workforce affected 27 employees. The related severance costs totaled $0.6 million. In September 2011, we initiated a restructuring plan to further align our resources with our strategic business objectives. We notified 41employees of their terminationconsolidated design activities and recognized total related severance costs of $0.6 million. All employees terminated under this plan were notified before the end of year. Additionally, we consolidated our Camarillo operations into a single facility, exiting and exited an adjacent leased facility. As a result of the lease exit,In connection with these actions we incurred $1.4approximately in for severance and asset write down expenses and lease exit costs and $1.1 million in asset impairment charges for asset write-downs for tenant improvements at the facility which will not be recovered from future related cash flows. The related facility was vacated before the end of year.termination costs.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 9—RESTRUCTURING AND IMPAIRMENT CHARGES (Continued)uponon the present value of the remaining lease payments reduced by the current market rate for sublease rentals of similar properties. Our ability to generate sublease income is highly dependent upon the commercial real estate conditions at the time we perform our evaluations or negotiate sublease arrangements with third parties. The amounts we have accrued representrepresented our best estimate of the obligations expected to be incurred.expectdetermined that it was unlikely that we would be able to incur and could be subjectsublease the exited property for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating to adjustmentsa new facility as market conditions change. Changes tooriginally planned. Accordingly, we reversed the estimates will be reflected as "adjustments" in the period the changes in estimated were determined. Our cash payments under the lease agreement may differ significantly from the exit accrual recorded due to the differences between actual experience and estimates made by management in establishing theremaining lease termination accrual. Our endone operating segment.generally are engaged in the design and/equal to or manufacturing of technology products either recently introduced or not yet introduced to the marketplace. We ship certain products to contract manufacturers of our end customers and through distributors. Based on direct shipments, net revenues to customers that exceededgreater than 10% of total net revenues in any of the three years ended September 30, 2011 wereis as follows: 2011 2010 2009 20.6 % 23.9 % 22.6 % * * 13.4 % 10.3 % 13.3 % 12.0 % September 30, 2012 2011 2010 Nu Horizons Electronics ** 13.5 % 20.6 % 23.9 % WPG Holdings** 10.7 % * * Huawei * 10.3 % 13.3 % We manage and operate our business through one operating segment. Revenues are summarized September 30, 2012 2011 2010 (in thousands) United States $ 41,559 $ 51,698 $ 54,190 Asia Pacific 62,260 63,923 84,045 EMEA* 15,664 25,346 27,755 Total net revenues $ 119,483 $ 140,967 $ 165,990 September 30, 2011 2010 2009 (in thousands) $ 64,877 $ 55,269 $ 62,653 54,417 73,390 79,720 15,746 25,665 18,740 5,927 11,666 7,064 $ 140,967 $ 165,990 $ 168,177 where the design win forcountry of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the work originated. United States revenue includes $8.2 million, $0.4 million and $13.3 milliongeographic location of intellectual property revenue for fiscal years 2011, 2010 and 2009, respectively. the ultimate end users.soldbilled to OEMsOEM and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 10—SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION (Continued) We also classify our product revenues based on our three product lines: (i) Connectivity, (ii) Ethernet switching and (iii) Transport processing. September 30, 2011 2010 2009 (in thousands) $ 67,734 $ 82,522 $ 72,573 37,940 46,714 42,002 27,068 36,397 40,352 $ 132,742 $ 165,633 $ 154,927 September 30, September 30, 2011 2010 2012 2011 (in thousands) (in thousands) $ 8,295 $ 11,377 $ 7,889 $ 8,295 255 263 127 255 454 553 414 454 $ 8,430 $ 9,004 $ 9,004 $ 12,193 11—RETIREMENT11-RETIREMENT SAVINGS PLANnonforfeitablenon-forfeitable at all times. No amounts contributed by participants to the plan were matched by us for the periods presented. In compliance with governing regulations, we made contributions to the retirement savings plans of employees of our foreign subsidiaries in the amount of $0.7$0.6 million for fiscal year 2012, $0.7 million for fiscal year 2011 and $0.3$0.3 million for each of the fiscal years 2010 and 2009.expiringexpire at various dates through fiscal 2015.year 2016 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance, maintenance costs or provisions for minimum rent increases. Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight line basis over the applicable lease term. Lease incentives received are recognized as a reduction of rental expense on a straight-line basis over the term of the lease. Rent expense, including common area maintenance expense, under operating leases totaled $3.8$3.0 million $3.8for fiscal year 2012, and $3.8 million and $3.9 million for each of the fiscal years 2011 2010, and 2009, respectively.2010.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 12—COMMITMENTS AND CONTINGENCIES (Continued) 2012 2013 2014 2015 2016 Thereafter Total (in thousands) 2013 2014 2015 2016 2017 Thereafter Total $ 3,104 $ 2,956 $ 1,908 $ 1,150 $ 199 $ — $ 9,317 (in thousands) Operating leases $ 3,089 $ 2,002 $ 1,131 $ 199 $ — $ — $ 6,421 8,483 3,700 3,233 2,800 2,800 5,600 26,616 7,676 7,073 6,503 2,800 2,800 2,800 29,652 $ 11,587 $ 6,656 $ 5,141 $ 3,950 $ 2,999 $ 5,600 $ 35,933 Total $ 10,765 $ 9,075 $ 7,634 $ 2,999 $ 2,800 $ 2,800 $ 36,073 (1)We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016. During 2011, we elected to exit our Calle Carga facility, but still have obligations under the lease. Gross lease amounts for the Calle Carga facility are included in these amounts. The Calle Carga lease amounts presented have not been adjusted for any potential sublease income as allowed under relevant accounting guidance.third-partiesthird‑parties used in the development of our products. On March 22, 2011, the United States District Court for the Southern District of New York approved our settlement with the SEC related to the SEC's investigation of our historical stock option practices and accounting irregularities that occurred between 1995 and 2006 (the "Consent Judgment"). Under the Consent Judgment, we paid a $3.0 million civil penalty and consented to the entry of a final judgment permanently enjoining us from violations of the antifraud and other provisions of the federal securities laws. The $3.0 million payment was accrued in the financial statements in June 2009.outour consolidated financial position. Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of September 30, 2012 and September 30, 2011 and September 30, 2010.. Royalty expenses totaled $0.2 million in 2011, $0.3 million in 2010, and $0.2 million in 2009. Royalty payments made may be subject to audit. We do not expect any possible future audit adjustments to be significant.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 12—COMMITMENTS AND CONTINGENCIES (Continued)filed against a director or executive officer, wefiled. We are unable to determine the maximum amount of losses that we could incur relating to such indemnities against a director or executive officer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance as well as errors and omissions insurance, which may provide a source of recovery to us in the event of an indemnification claim.13—QUARTERLY13-QUARTERLY FINANCIAL DATA (UNAUDITED)NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 13—QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued) First
Quarter Second
Quarter Third
Quarter Fourth
Quarter Total
Year (in thousands) $ 37,596 $ 34,403 $ 31,856 $ 28,887 $ 132,742 151 2,489 4,132 1,453 8,225 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year (in thousands) 37,747 36,892 35,988 30,340 140,967 14,349 12,995 13,432 12,898 53,674 (1,672 ) (1,118 ) 326 (8,609 ) (11,073 ) (7,732 ) (9,041 ) 6,550 (4,589 ) (14,812 ) $ (0.32 ) $ (0.37 ) $ 0.26 $ (0.19 ) $ (0.61 ) (0.32 ) (0.37 ) 0.21 (0.19 ) (0.61 ) 24,050 24,303 24,447 24,463 24,315 24,050 24,303 37,543 24,463 24,315 $ 41,611 $ 43,661 $ 37,533 $ 42,828 $ 165,633 40 250 — 67 357 41,651 43,911 37,533 42,895 165,990 18,409 19,373 15,744 18,031 71,557 (262 ) 3,008 (694 ) 1,939 3,991 (33,860 ) (34,060 ) 33,029 14,715 (20,176 ) — — — 121 121 (33,860 ) (34,060 ) 33,029 14,836 (20,055 ) 126 — — — 126 (33,986 ) (34,060 ) 33,029 14,836 (20,181 ) $ (1.95 ) $ (1.69 ) $ 1.38 $ 0.61 $ (0.96 ) — — — 0.01 0.01 (1.95 ) (1.69 ) 1.38 0.62 (0.95 ) (1.95 ) (1.69 ) 0.99 0.42 (0.96 ) — — — — 0.01 $ (1.95 ) $ (1.69 ) $ 0.99 $ 0.42 $ (0.95 ) 17,373 20,195 22,780 23,948 21,074 17,373 20,195 34,544 35,213 21,074 Fiscal Year 2012: Net revenues: Product revenues $ 28,942 $ 27,195 $ 25,730 $ 28,053 $ 109,920 Intellectual property revenues 1,049 2,542 4,557 1,415 9,563 Net revenues 29,991 29,737 30,287 29,468 119,483 Cost of product revenues 12,163 10,595 11,270 12,379 46,407 (Loss) income from operations (2,116 ) 1,100 2,120 531 1,635 Net (loss) income (844 ) (6,196 ) 4,711 1,217 (1,112 ) Net (loss) income per share: Basic $ (0.03 ) $ (0.25 ) $ 0.18 $ 0.05 $ (0.04 ) Diluted $ (0.03 ) $ (0.25 ) $ 0.16 $ 0.05 $ (0.04 ) Weighted average shares outstanding: Basic 24,512 25,043 25,302 25,628 25,121 Diluted 24,512 25,043 38,413 26,513 25,121 Fiscal Year 2011: Net revenues: Product revenues $ 37,596 $ 34,403 $ 31,856 $ 28,887 $ 132,742 Intellectual property revenues 151 2,489 4,132 1,453 8,225 Net revenues 37,747 36,892 35,988 30,340 140,967 Cost of product revenues 14,349 12,995 13,432 12,898 53,674 (Loss) income from operations (1,672 ) (1,118 ) 326 (8,470 ) (10,934 ) Net (loss) income (7,732 ) (9,041 ) 6,550 (4,589 ) (14,812 ) Net (loss) income per share: Basic $ (0.32 ) $ (0.37 ) $ 0.26 $ (0.19 ) $ (0.61 ) Diluted $ (0.32 ) $ (0.37 ) $ 0.21 $ (0.19 ) $ (0.61 ) Weighted average shares outstanding: Basic 24,050 24,303 24,447 24,463 24,315 Diluted 24,050 24,303 37,543 24,463 24,315 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)$0.2 millionNOTE 13—QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued) of bad debts that were reserved for in the fourth quarter of fiscal year 2011. In the third quarter of fiscal year 2012, we successfully collected on commenced a reduction in workforce in Westford,consolidated design activities, resulting in severance costs of $0.6 million.$0.6 million. In the fourth quarter of fiscal year 2011, we commencedfurther consolidated design activities and consolidated our Camarillo operations into a second reduction in workforce primarily in the United States,single facility,, exiting an adjacent leased facility, resulting in additional severance costs$3.1 of $0.6 million. We also exited our Calle Carga facility. Due to the resulting lease exit, we incurred $1.4 million in lease exit costs and $1.1 million in asset impairment charges in the fourth quarter of fiscal year 2011.$3.9$2.220112012 the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2011,2012, our disclosure controls and procedures were effective.accounting principles.20112012 based on the framework inInternal Control—IntegratedControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2011.2012.20112012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.decision-makingdecision‑making can be faulty, and that breakdowns of 2011,2012, based on criteria established inInternal Control—Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vitesse Semiconductor Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures-Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company'scompany's internal control over financial reporting based on our audit.20112012, based on the COSO criteria.20112012 and 2010,2011, and the related consolidated statements of operations, stockholders' deficit, and cash flows for each of the three years in the period ended September 30, 201120, 2012 and our report dated December 6, 20114, 2012 expressed an unqualified opinion thereon.6, 20114, 201220122013 (the "Proxy Statement"“Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference."Election“Election of Directors," "Executive” “Executive Officers," "Board” “Board Meetings and Committees,"” and "Section“Section 16(a) Beneficial Ownership Reporting Compliance."”"Executive“Executive Compensation," "Director” “Director Compensation," "Compensation” “Compensation Committee Interlocks and Insider Participation,"” and "Compensation“Compensation Committee Report."”"Security“Security Ownership of Certain Beneficial Owners and Management"Management” and "Equity“Equity Compensation Plan Information."”"Director Independence"“Director Independence” and "Certain“Certain Relationships and Related Person Transactions."”ACCOUNTINGACOUNTING FEES AND SERVICES"Principal“Principal Accountant Fees and Services"Services” and "Pre-Approval“Pre-Approval Policies and Procedures."”(a)(1) See the financial statements and financial statement schedules listed in Item 8. Financial Statements and Supplementary Data.
(a)(2)"Valuation“Valuation and Qualifying Accounts."” All other schedules have been omitted because they are not applicable or not required, or the information is included in the consolidated financial statements or notes thereto.
(a)(3)
See Exhibit Index following the signature page to this Annual Report on Form 10-K.VITESSE SEMICONDUCTOR CORPORATIONSCHEDULE II—Valuation and Qualifying Accounts Balance at
Beginning
of Year Charged to
Other
Accounts Deductions/
Write-offs Balance at
End of Year (in thousands) $ — $ 2,212 $ — $ 2,212 93,239 (568 ) — 92,671 422,101 (328,862 ) — 93,239 441,534 (224 ) (19,209 ) 422,101 Balance at Beginning of Year Charged to Costs and Expenses Charged to Other Accounts Deductions/Write-offs Balance at End of Year (in thousands) Year ended September 30, 2012 Deducted from accounts receivable: Allowance for doubtful accounts $ 2,212 $ (1,954 ) $ — $ — $ 258 Deducted from deferred tax asset Valuation allowance 92,671 (1,147 ) — 10,884 102,408 Year ended September 30, 2011 Deducted from accounts receivable: Allowance for doubtful accounts — 2,212 — — 2,212 Deducted from deferred tax asset Valuation allowance 93,239 (568 ) — — 92,671 Year ended September 30, 2010 Deducted from accounts receivable: Allowance for doubtful accounts — — — — — Deducted from deferred tax asset Valuation allowance $ 422,101 $ (328,862 ) $ — $ — $ 93,239 Incorporated by Reference Exhibit Number Exhibit Description Form File Number Exhibit Filing Date Filed or Furnished Herewith 3.1 Restated Certificate of Incorporation. 10-Q 001-31614 3.1 August 9, 2010 3.2 Amended and Restated Bylaws. 8-K 001-31614 3.2 December 2, 2004 4.1 Indenture between the Registrant and U.S. Bank National Association, as Trustee, dated as of October 30, 2009. 8-K 001-31614 4.1 October 30, 2009 4.2 Form of 8.0% Convertible Second Lien Debentures Due 2014 (included in Exhibit 4.1). 8-K 001-31614 4.1 October 30, 2009 4.3 Guaranty, dated October 30, 2009, executed by Vitesse Manufacturing & Development Corporation and Vitesse Semiconductor Sales Corporation in favor of U.S. Bank National Association, as Trustee, under the Indenture dated October 30, 2009. 10-K/A 001-31614 4.6 January 28, 2010 10.1* Employment Agreement between the Registrant and Christopher Gardner dated February 12, 2010. 10-Q 001-31614 10.2 May 17, 2010 10.2* Amendment to Employment Agreement, dated February 12, 2012, between Registrant and Christopher R. Gardner. 8-K 001-31614 10.1 February 16, 2012 10.3* Employment Agreement, dated effective November 30, 2011, between the Registrant and Martin Nuss. 10-Q 001-31614 10.1 February 7, 2012 10.4 Form of Indemnity Agreement between each of the directors and the Registrant. 8-K 001-31614 10.1 August 22, 2007 10.5 Loan Agreement, dated August 23, 2007 between the Registrant and Whitebox VSC, Ltd. 8-K 001-31614 10.3 August 29, 2007 10.6 First Amendment to Loan Agreement, dated as of October 16, 2009, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent. 8-K 001-31614 10.4 October 20, 2009 10.7 Second Amendment to Loan Agreement, dated as of February 4, 2011, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent. 10-Q 000-19654 10.1 February 8, 2011 10.8 Term Note, dated October 29, 2007 between the Registrant and Whitebox VSC, Ltd. for $30 million. 8-K 001-31614 4.1 October 31, 2007 10.9 Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Registrant and Maxim Integrated Products, Inc. 8-K 001-31614 10.1 October 31, 2007 10.10* Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 4, 2009. 10-K/A 001-31614 10.1 January 28, 2010 10.11* Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan. 10-K/A 001-31614 10.1 January 28, 2010 10.12* Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan. 10-K/A 001-31614 10.2 January 28, 2010 10.13*† Vitesse Semiconductor Corporation Fiscal Year 2012 Executive Bonus Plan, dated as of December 1, 2011. 10-Q 001-31614 10.2 February 7, 2012 10.14* Vitesse Semiconductor Corporation 2010 Incentive Plan. 14A 001-31614 App. A March 31, 2010 10.15* Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan. 10-K 001-31614 10.2 December 6, 2011 10.16* Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan. 10-K 001-31614 10.2 December 6, 2011 10.17* Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2010 Incentive Plan. 10-K 001-31614 X 10.18* Separation and General Release Agreement, dated May 17, 2012, between Registrant and Steve M. Perna. 10-Q 001-31614 10.1 August 7, 2012 10.19* Vitesse Semiconductor Corporation 2011 Employee Stock Purchase Plan. 14A 000-19654 App. A December 1, 2010 10.20* Employment Agreement between the Registrant and Martin S. McDermut dated July 27, 2011. 10-K 001-31614 10.2 December 6, 2011 21.0 List of Subsidiaries. 10-K 001-31614 X 23.1 Consent of BDO USA, LLP. X 24.1 Power of Attorney (included on signature page) X 31.1 Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. X 31.2 Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002. X 32.1 Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002. X 101.INS XBRL Instance Document** X 101.SCH XBRL Taxonomy Extension Schema Document** X 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document** X 101.DEF XBRL Taxonomy Extension Definition Linkbase Document** X 101.LAB XBRL Taxonomy Extension Label Linkbase Document** X 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document** X * Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K. † Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission on October 23, 2009, under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission. ** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. SIGNATURES of Section 13 or 15(d) of the Securities Exchange Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.December 4, 2012 VITESSE SEMICONDUCTOR CORPORATION (Registrant)Dated: December 6, 2011
By: /s/CHRISTOPHER R. GARDNER CHRISTOPHERChristopher R. GARDNER
GardnerChief Executive Officer December 4, 2012 VITESSE SEMICONDUCTOR CORPORATION By: /s/ MARTIN S. MCDERMUT Martin S. McDermut Chief Financial Officer (Principal Financial and Accounting Officer) Dated: December 6, 20114, 2012S/ CHRISTOPHERs/ Christopher R. GARDNERGardnerCHRISTOPHERGARDNER
GardnerDated: December 6, 20114, 2012S/ MARTIN S. MCDERMUT
s/ Martin S. McDermutDated: December 6, 20114, 2012S/ STEVENs/ Steven P. HANSONHansonSTEVENHANSON
HansonDated: December 6, 20114, 2012December 4, 2012 December 4, 2012 S/ JAMES HUGARs/ G. William LaRosaJAMES HUGARDecember 4, 2012 December 4, 2012 Dated: December 6, 2011/S/ G. WILLIAM LAROSAG. WILLIAM LAROSADirectorDated: December 6, 2011/S/ G. GRANT LYONG. GRANT LYONDirectorDated: December 6, 2011/S/ EDWARD ROGAS, JR.EDWARD ROGAS, JR.Director In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please note that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Vitesse or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:•should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;•may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;•may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and•were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments. Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Vitesse may be found elsewhere in this Annual Report on Form 10-K and Vitesse's other public filings, which are available without charge through the SEC's website at www.sec.gov. Incorporated by Reference Exhibit
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Herewith Exhibit Description Form File Number Exhibit Filing Date Restated Certificate of Incorporation. 10-Q 001-31614 3.1 August 9, 2010 Amended and Restated Bylaws. 8-K 001-31614 3.2 December 2, 2004 Indenture between the Registrant and U.S. Bank National Association, as Trustee, dated as of October 30, 2009. 8-K 001-31614 4.1 October 30, 2009 Form of 8.0% Convertible Second Lien Debentures Due 2014 (included in Exhibit 4.1). 8-K 001-31614 4.1 October 30, 2009 Guaranty, dated October 30, 2009, executed by Vitesse Manufacturing & Development Corporation and Vitesse Semiconductor Sales Corporation in favor of U.S. Bank National Association, as Trustee, under the Indenture dated October 30, 2009. 10-K/A 001-31614 4.6 January 28, 2010 Incorporated by Reference Exhibit
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Herewith Exhibit Description Form File Number Exhibit Filing Date * Resignation and Separation Agreement and General Release of Claims between the Registrant and Michael Green dated February 5, 2010. 10-Q 001-31614 10.1 May 17, 2010 * Employment Agreement between the Registrant and Christopher Gardner dated February 12, 2010. 10-Q 001-31614 10.2 May 17, 2010 * Letter Agreement, dated October 26, 2007 between the Registrant and Dr. Martin C. Nuss. 8-K 001-31614 10.1 November 20, 2007 Form of Indemnity Agreement between each of the directors and the Registrant. 8-K 001-31614 10.1 August 22, 2007 Loan Agreement, dated August 23, 2007 between the Registrant and Whitebox VSC, Ltd. 8-K 001-31614 10.3 August 29, 2007 First Amendment to Loan Agreement, dated as of October 16, 2009, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent. 8-K 001-31614 10.4 October 20, 2009 Second Amendment to Loan Agreement, dated as of February 4, 2011, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent. 10-Q 000-19654 10.1 February 8, 2011 Term Note, dated October 29, 2007 between the Registrant and Whitebox VSC, Ltd. for $30 million. 8-K 001-31614 4.1 October 31, 2007 Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Registrant and Maxim Integrated Products, Inc. 8-K 001-31614 10.1 October 31, 2007 Incorporated by Reference Exhibit
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Herewith Exhibit Description Form File Number Exhibit Filing Date Sale and Purchase Agreement for Vitesse Patents, dated June 30, 2009, between the Registrant and a third-party purchaser. 10-Q 001-31614 10.11 August 10, 2009 * Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 4, 2009. 10-K/A 001-31614 10.13 January 28, 2010 * Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan. 10-K/A 001-31614 10.14 January 28, 2010 * Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan. 10-K/A 001-31614 10.15 January 28, 2010 * Vitesse Semiconductor Corporation Fiscal Year 2010 Executive Bonus Plan, dated as of January 7, 2010. 10-Q 001-31614 10.16 February 9, 2010 * Vitesse Semiconductor Corporation 2010 Incentive Plan. 14A 001-31614 App. A March 31, 2010 * Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan. X * Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan. X * Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2010 Incentive Plan. 10-Q 001-31614 10.2 August 9, 2010 Incorporated by Reference Exhibit
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Herewith Exhibit Description Form File Number Exhibit Filing Date * Employment Agreement between the Registrant and Steve M. Perna dated August 2, 2010. 10-K 000-19654 10.22 December 1, 2010 * Vitesse Semiconductor Corporation 2011 Employee Stock Purchase Plan. 14A 000-19654 App. A December 1, 2010 * Employment Agreement between the Registrant and Martin S. McDermut dated July 27, 2011. X List of Subsidiaries. 10-K 000-19654 21.1 December 1, 2010 Consent of BDO USA, LLP. X Power of Attorney (included on signature page) X Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. X Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X XBRL Instance Document** X XBRL Taxonomy Extension Schema Document** X Incorporated by ReferenceExhibitNumberFiledHerewithExhibit DescriptionFormFile NumberExhibitFiling Date101.CALXBRL Taxonomy Extension Calculation Linkbase Document**X101.DEFXBRL Taxonomy Extension Definition Linkbase Document**X101.LABXBRL Taxonomy Extension Label Linkbase Document**X101.PREXBRL Taxonomy Extension Presentation Linkbase Document**X*Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K.†Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission on October 23, 2009, under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
