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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 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. markets. In many cases, we have led the forefront of Ethernet technology development and its integration in Carrier, Enterprise and other networks transitioning to Ethernet, thereby participating in significant infrastructure investments. operational costs. collectively called the “IP Edge”, will drive transition to Carrier Ethernet, which is still in its infancy. business networks. growth opportunities. strategy: require solutions for high-speed signal integrity the remaining portion of the $2.0 billion addressable market for our IC solutions. TransitionDelaware 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)ýx2011,2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $117,782,593,$79,580,292, based on the closing price on that date. As of December 5, 2011,November 29, 2013, there were outstanding 24,487,97857,545,025 shares of our common stock,the registrant’s Common Stock, $0.01 par value $0.01 per share.issuer'sissuer’s Proxy Statement for its 20122014 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 ReservedAccountingAccountant Fees and ServicesiFORWARD-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,We design, develop and marketsmarket a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 2530 years, Vitesse haswe have 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 Alcatel-Lucent, Accton, Ciena, Cisco Systems, Dell, IBM, Ericsson, Fiberhome, Hewlett-Packard, Hitachi, Huawei Technologies, Juniper Networks, Nokia Siemens Networks, Samsung, Tellabs, ZTE, and ZTE.ZyXel. As of September 30, 2011,2013, 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 Thisexperienced dramaticis the exponential growth in traffic on public and private communications networks. These networks such asinclude those used by long-distance, and local exchange service providers and wireless service providers (“Carriers”), as well as specialized networks, such as those used by Internet service and over-the-top (“OTT”) content providers. ThisDriving the traffic growth is driven bythe rapid adoption of data-intensive applications and services such as web access, web-delivered content, Internet access; e-commerce; Voice-over-Internet Protocol ("VoIP"(“IP’); video conferencing and telepresence; Internet Protocol 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 of cloudtelepresence, IP television, Cloud storage, Cloud computing, and software-as-a-serviceSoftware-as-a-Service (“SaaS”) by Enterprises. We expectPowerful mobile devices like smartphones and tablets that rival and often exceed the pacecapabilities of desktop machines now also consume these types of services. In the not too distant future, the industry expects that a majority of devices, appliances, sensors, machines, terminals, vehicles, as well as public and private power distribution systems (“Smart-Grid”) will all be connected to these ever expanding worldwide communications networks, leading to what is commonly referred to as the Internet of Things (“IoT”). While all independent, this growth in bandwidthexpanding conglomerate of networks faces common challenges: how to provide service delivery, synchronization and the related deployment of new services to accelerate well into the future. As a result, telecommunications service providerstiming, and Enterprises need to evolve their networks to support these new services and increased bandwidth demands, while limiting capital expenditures and curtailing the tremendous increases to power requirements. security.thesethe challenges, communications service providers (i.e., Carriers) and Enterprises have begunpacket-based Ethernet networking technologies increasingly form the basis to deploy equipment that is capable of more efficiently handling and transporting the various types of data-based traffic required by these new services. Communication 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 servicesservices. Long present in Enterprise networks, Ethernet is now expanding rapidly in both Carrier and Industrial networks, replacing older technologies. In addition, so-called virtualization technologies that started in Ethernet-based Cloud data centers are createdmaking inroads into Enterprise and delivered using packet-basedCarrier Ethernet networks, promising even more efficient network resource utilization. Even in Industrial Process Control, Smart-Grid Energy Distribution, Transportation and Automotive networks, we see the nascent transition from proprietary legacy networks to ubiquitous Ethernet-based networks. Substantial portions of the Carrier, Enterprise and IoT networks will be re-built based on these new technologies over the next five to 10 years.technologies.has grown dramatically intois now a vastly complex combination of interconnected networks.1990's,1990s, Carrier networks globally relied upon the Synchronous Optical Network ("(“SONET/SDH"SDH”) has beenas the standard network transport protocol for Carrierprotocol. SONET/SDH was designed to carry only voice traffic over a fixed circuit network. Today, networks throughout the world. While SONET circuit-based networks will continueare replacing SONET/SDH with Ethernet specifically designed to exist for many years, new network deployments are rapidly evolving tocarry voice, data, and video over a virtual packet-basedwe expect it to continue forcapabilities, at least the next few years as Carriers gradually upgrade their installed base of SONET/SDH, particularly in Eastern Europe, India,lower capital and China.thepacket-based IP network deployment, of packet-based networks, the industry has developed standards that willto upgrade traditional Ethernet to "Carrier“Carrier Ethernet." It” Effectively, it is in effect, an adaptation of Ethernet to provide the same features and functions, such as reliability, manageability, network timingsimilar service, synchronization, and scalability, which havesecurity functions 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. In addition, the migration of Enterprise services into the Cloud will drive the need for Carrier Ethernet in Access networks aimed at delivering business services.transition, which isprompts Carrier and Enterprise network evolution in its infancy,two notable areas: (1) the migration from wireline to wireless communication, as mobile devices quickly surpass wired computers for consumer use, particularly networks for 4G/LTE deployments: and (2) the demand for high-bandwidth, reliable and secure access to SaaS will be driven bydrive the migration of traditional Enterprise information technology (“IT”) networks into the Cloud. Accordingly, Carrier networks that can provide Mobile Access and Cloud Access are key areas for increased future investment. These 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,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.undergoing an evolutionevolving to provide more bandwidth, reliability, interoperability, and scalability. The advent of cloud computing providesCloud services constitutes another important growth trend. Although in its infancy, cloud computingCloud services will increasingly move Enterprise IT applications and data into secure hosted applications "inin the cloud,"Cloud, where they can be securely accessed from multiple locations, multiple devices, and multiple technologies.technologies can securely access those applications. Cloud computingservices will increase the need for Enterprises and data centers to provide high-bandwidth, high-reliability networks to interconnect elements of the "cloud."Cloud, collectively called “Cloud Access.” We expectstrategically address Enterprise networking in two ways: (1) with our low-power Enterprise Ethernet switching solutions and Metro Ethernet Forum’s Carrier Ethernet 2.0 (“MEF CE 2.0”) Cloud Access solutions to provide managed and secure access to the Cloud, and (2) with our Connectivity product line to provide reliable, high-speed connectivity between computing and storage devices in large data center switches and servers.need to interconnectCarrier networks, this transition is just beginning, and will lead to a unificationoccur over many years.networking requirements, centered on the concept of Converged Ethernet,markets, IoT is an obvious adjacent market for us to address since it provides us significant market expansion and drive a new investment cycle in the industry.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 toand IoT. To attain this goal, our strategy encompasseswe are executing the following elements: for the major networking protocols that perform common networking functions required by the most widely deployed networking equipment. Our products are targeted at CarrierEnterprise networks, both markets growing at approximately 10% year-over-year. Within thesedevelopment (“R&D”) on three large networking markets, we focus on markets that are at the beginning of a major investment cycle. By indentifyingidentifying technology disruptions we can take advantage of market transitions where we can solveand solving specific customer problems, that willwe leverage market transitions to increase our market share. Overall,estimatetarget is 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")IP Edge segment of approximately 16% due to our focus on faster-moving market segments. Thethe global Carrier networking equipment marketmarket. This segment is expected to grow rapidly as a consequencedue to the deployment of the increased bandwidth being generated from new wired and wireless applications being deployed, the transformation of thein Mobile Access network to an all-IP/Ethernet network,and its associated bandwidth growth, as well as the emerging trend toward Enterprise cloud computing that will driveincreased adoption of Cloud-based IT services for Cloud Access. Industry analysts project both Mobile Access and Cloud Access to grow significantly more bandwidth intofaster than the overall Carrier networks. networking market, which is expected to grow annually by 7% to 9%.market growth estimates, we expect our new portfolio of low-power, Carrier Ethernet switch engine and physical layer (“PHY”) products, we have specifically introduced for this segment and the othersour other products currently in development, are expected to address an IC market within the IP Edge of $612 million by 2017 with a market that is increasing at an annual ratefive year CAGR of approximately 30%, approaching $700 million in 2015. Carrier networking20%.is addressed by our Transport processing product line, adding another $400 million toserve the potential market we can serve. The Enterprise networking marketmarket. It is driven by the rapid transition to Gigabit Ethernet and 10 Gigabit Ethernet, convergence of data center protocols to Ethernet, as well asand government initiatives worldwide to reduce power consumption in networking equipment. Based on industry market projectionsOur new managed Enterprise 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 inas of 2011, and 2010, as well as our devices currently in development, address substantially larger segments of the Enterprise networking market than our prior generation of products. Some Based on industry market projections and our internal market growth estimates, we expect the addressable market for our products in this segment will approach $450 million by 2017 with a CAGR of 8%.particularlyprovide ideal solutions within this market segment. We expect IoT to increase our Connectivity product line sells into bothaddressable IC market by nearly $100 million within three years, with a five year CAGR of 11%.Enterprise networking applications.Industrial applications, we have developed 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$292 million by 2017.2015, with a growth ratedevelopment for adjacent market segments are the majority of approximately 14%.Transformationnetworkingtechnology. Ethernet is the dominant networking protocol being deployedtechnology for today’s IP traffic in both Carrier and Enterprise networks, today. Our key focus:•Networks: "IP Edge" networks and NetworksAccess networks—withAccess: With the explosion of data and video traffic from smartphones and tablet appliancesdevices for both personal and business use, and the introduction of 4G/LTE networks worldwide, Mobile Access dominates the IP Edge. These networks are transitioning from legacy E1/T1 networks to all-IP/demand Ethernet networks. 4G/LTE networks, in particular,technologies that enable the delivery of differentiated services, rather than just connectivity. They also deploy a completely new Mobile Access architecture that requires very sophisticated packet-processing technology, Quality-of-Service (“QoS”), and veryhighly accurate synchronization technology. Networks will become more distributed, with small cell base stations and timing technology.backhaul being the primary growth drivers. Our new Ethernet "switch engines" have the sameswitch engines, based on our Vitesse Service Aware Architecture™ (“ViSAA™”), provide better packet processing capability asthan complex and expensive Network Processors ("NPUs")network processors, at half the solution cost and much lower power. We also have best-in-class solutions in the industry to address the Mobile Access network timing needs of our customers with our Synchronous Ethernet ("SyncE"VeriTime™ IEEE1588 (“1588”) packet-based timing technology integrated in our SynchroPHY™ 1 Gbps, 10 Gbps, and IEEE1588v2 PHY- and10 Gbps Optical Transport Network (“OTN” ) PHY products, as well as switch-based timing solutions. We also offerVeriTime is the lowest power solutionsonly solution in the industry, which is highly important for LTE deployments including all-outdoor units attached to buildingsmarket today that can meet the stringent requirements of next-generation TD-LTE and small structures that will replace traditional base station and backhaul deployment models.•Carrier Networks: Ethernet Business Services—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"), Ethernet-over-SONET/SDH ("EoS"), as well as Ethernet-over-Wavelength Division Multiplex/Optical Transport Network ("OTN"). Our customers provide equipment to enable the transition to high-bandwidth Ethernet-based business services required to deliver best-in-class audio video experience for telepresence and high-performance cloud-based services, better quality-of-service ("QoS") operations, administration and maintenance ("OAM"), and security. We specialize in delivering IC solutions with these capabilities to our customers. Therefore, we are well positioned to enable Carrier OEMs and their service provider customers to deliver Ethernet-based services globally over all theirLTE-Advanced mobile networks, as well as the new timing class requirements currently being standardized by the ITU-T. In 2013, to address the increasing need for security across all networks, we introduced products with Intellisec technology, a patent-pending, flow-based universal encryption solution based on the IEEE802.1AE MACsec standard. Our 1Gbps and 10GGbps PHY solutions, that combine both VeriTime™ and Intellisec, are the only merchant silicon products available today, that can encrypt without compromising timing accuracy.investmentability to interface to any standard service provider network, without the service provider network needing to know that the traffic is encrypted. We are the only provider of this type of solution. We anticipate that a Tier-1 OEM will deploy Intellisec within service provider networks in their installed bases.•Networks: Green Ethernet Solutions—networks are transitioning from fastFast 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" has led to“Green Networks” resulted in the Energy Efficient Ethernet ("EEE"(“EEE”) standard that significantly reduces power consumption in Ethernet networks. We are a leading provider of Green EEEEEE-compliant PHY and switching products for Enterprise and consumer networking.Consumer networks.also specializedeliver low-power, high-availability, secure switch and PHY solutions with deterministic features into this emerging market. We have already started to accumulate design wins in supporting the convergenceIoT network equipment.
Tier-2 customers. information on our website is not incorporated by reference into, and is not made a part of, this report. such as EADs used for delivering business services. Gigabit Ethernet Copper and Dual-media A PMD is a mixed signal device that connects an electrical signal to an optical component. We offer laser drivers, transimpedance amplifiers, and post-amplifiers operating at speeds ranging from 1.25 Gbps to 14 Gbps. These products are currently Transport Processing Product Line networks. We also report intellectual property revenues. ours. Many of these non-core products have approached end-of-life (“EOL”) 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. Geographic providers. development charges (“NREs”) and/or commitments. their needs and specifications. intellectual property. 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: We 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 2011 October 1 through December 31, 2010 January 1 through March 31, 2011 April 1 through June 30, 2011 July 1 through September 30, 2011 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 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 operations (Loss) income from continuing operations Income (loss) from discontinued operations, net of tax Net (loss) income Fair value adjustment of Preferred Stock—Series B 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 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 Other long term obligations, incuding debt Total stockholders' (deficit) equity Term A and B Loans will bear interest at 9.0% per annum. In addition, in November 2013, we repurchased and cancelled $13.7 million of our 2014 Debentures. Loan A and Term Loan B), each in the principal amount of $9.34 million. Term A Loan. Fiscal Year 2009 total revenues, or $28.6 million for fiscal 2013. Our new products product gross margins and operating margins, which together have substantially increased our operating leverage. Our an enhanced customer-centric focus. As a fabless semiconductor company, we outsource the majority of our manufacturing. A substantial portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past estimated amounts. 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 disclose loss contingencies as appropriate. Net revenues: Product revenues Intellectual property revenues Net revenues 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 Loss from continuing operations Income from discontinued operations, net of tax Net loss Fair value adjustment of Preferred Stock—Series B Net loss available to common stockholders 2012 Carrier networking Enterprise networking Non-core Product revenues transport products going through EOL and in our newer technologies and products, particularly in Ethernet Cu PHYs. Asia. The decrease was partially offset by an increase in Enterprise processing due to revenues from switch fabrics going through EOL and an increase in new products. products as some of these products moved into EOL. Connectivity Connectivity Ethernet switching Ethernet switching Transport processing Transport processing Product revenues IP revenues The Africa Cost of revenues competitive pricing programs. Engineering, research and development Selling, general and administrative Restructuring and impairment charges Amortization of intangible assets Interest expense, net The decrease in net interest expense for fiscal year Gain on Compound Embedded Derivative Gain on compound embedded derivative stock during those periods. Loss on extinguishment of debt Senior Term Loan. Income tax (benefit) expense Carrier networking Enterprise networking Non-core Product revenues Connectivity Ethernet switching Transport processing Product revenues IP revenues 2012 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 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 payments under licensing agreements. $55.6 million in cash in fiscal year 2013, primarily due to the sale of common stock. Proceeds from the sale of common stock totaled $54.5 million and were offset by $0.6 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees. Financing activities provided $1.1 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 employees. 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 risk. 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 2013 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 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: Product revenues Intellectual property revenues Net revenues 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 Loss from continuing operations Income from discontinued operations, net of tax Net loss Fair value adjustment of Preferred Stock—Series B 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 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. Revenues Property Revenues revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less. Research and Development Costs the intellectual property. ASC Topic 718, new guidance did not impact our 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: 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 2012 are amortized is 6.05 years and 6.85 years, respectively. 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 The credit The Company was in compliance with all covenants as of September 30, 2013. Derivative liability—compound embedded derivative—2014 Debenture The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative measured at fair value using significant unobservable inputs (Level 3) 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 our financial instruments are as follows: debt, The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares and 2.0 shares for every share subject to the full value award in fiscal years 2013 and 2014, respectively. Cost of revenues Engineering, research and development Selling, general and administrative Total share-based compensation expense approximately awards and our stock price increases. Options outstanding, September 30, 2008 Granted Exercised Cancelled or expired Options outstanding, September 30, 2009 Granted Exercised Cancelled or expired Options outstanding, September 30, 2010 Granted Exercised Cancelled or expired Options outstanding, September 30, 2011 Options exercisable, September 30, 2011 exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock 2013. 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. period. During fiscal years 2013, 2012 and 2011, a total of 952,516, 821,470 and nil shares, respectively, were purchased by and distributed to employees at a weighted average price of $1.75, $2.11 and nil per share, respectively. At fiscal 2013 year-end, we had 0.8 million shares of our common stock reserved for future issuance under the plan. The (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 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 Nu Horizons Electronics (distributor) Titan Supply Chain Services (distributor) Huawei United States Asia Pacific EMEA* Other Total net revenues We also classify our product revenues based on our three product lines: (i) Connectivity, (ii) Ethernet switching and (iii) Transport processing. Connectivity Connectivity Ethernet switching Ethernet switching Transport processing Transport processing Product revenues USA Denmark Germany Software Licenses We lease facilities under non-cancellable operating leases. The leases our products. Operating leases(1) Software licenses Software licenses Total Related legal defense costs are expensed as incurred. 2012 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 In the 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.SCH2530 years of design experienceexpertise and considerable systems and networking knowledge to introduce innovative products that solve both general industry needs, as well as our customers' business problems. customers’ design challenges.•"packet networking"IP “packet networking” from "circuit networking",“circuit networking” in Carrier networks, 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 has created unique packet-processing technologies that are critical as networks become dominated by Ethernet-based data and video traffic.in networks.•mobile accessMobile Access market is going throughundergoing a major technology disruption as existing networks are unable to accommodate the explosionrising growth in mobile traffic. Vitesse'sOur revolutionary new Carrier Ethernetlow-power switch engines and carrier-class Gigabit Ethernet and 10 Gigabit Ethernet PHYs and 10 Gigabit Ethernet OTN mappers simplify the implementation of the multi-platform 3G and 4G/LTE network equipment. Vitesse products address small platformspower-constrained deployments such as small cell and pico-cell implementations for Mobile Access networks, as well as traditional macro-cells supporting thousands of subscribers. VitesseEthernet Access Devices (“EADs”) for Cloud Access networks. Our switch engines are typically half the cost and half therequire much lower power compared to othercompetitive solutions such as NPUsbased on network processors or Field Programmable Gate Arrays ("FPGAs"(“FPGAs”).•Access.Access and IoT. Many networks, in particular Mobile networks, need to be synchronized to highly accurate timing, in order to operate. With theThe migration to packet-based networks prompted development of new techniques for timing synchronization had to be developed or improved upon significantlytechniques to satisfy the demands of Mobile Access, especially for 4G/LTE and LTE-Advanced deployments. Vitesse has been a leader in providingIndustrial Process Control, Smart-Grid Energy Distribution, Transportation, and Automotive networks also require highly accurate time synchronization, particularly for factory automation. Our patented VeriTime technology provides innovative and unique timing features in both our Carrier Ethernet switch engines and PHYs across multiple speed grades. Accurate packet network timing is also requiredSynchroPHY products.Industrialall types of networks. Securing information, computing infrastructure and the networks connecting them has come to the forefront of discussion with almost daily reports about malware, identity theft, intellectual property theft, and denial-of-service attacks on commercial and government cyber infrastructure. Our Intellisec flow-based solutions offer strong AES technology for network-wide security directly at the Ethernet applications as well aslayer.audio/video Ethernet applications.Cloud services, cell-site gateways and managed Enterprise switch solutions, our ICs and systems software integrate a majority of the system functions. We provide turnkey solutions for our customers to enable much faster time-to-market than through in-house developments. Our proven systems-level software plays a key role in creating this competitive advantage.•"Green Networking"“Green Networking” to reduce power dissipation in Carrier and Enterprise network elements. Vitesse has been ahead ofWe continue to lead the industry in deploying low-power switch engines, like those based on our ViSAA technology, power-saving techniques for networking, and keep 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%80% compared with traditional devices.•that will requirerequiring solutions for signal integrity challenges.We provide world-class connectivityConnectivity solutions for a broad variety of applications from 100 Mbps to 10 Gbps and above.100 Gbps. Our high-performance, mixed-signal, CMOS technology provides superior signaling capabilities at the lowest power and cost.•The transition of LAN's 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 towe leverage theseour 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.•Increasing complexity of ICs for communications applications and a related trend for OEMs to purchase rather than manufacture these ICs. We believe OEMs are increasingly focusing their efforts on providing superior software and services as a means of differentiating themselves from their competition. This increased focus, in conjunction with the rising costs of developing custom Application Specific Integrated Circuits ("ASIC") and maintaining the associated component design teams, has led OEMs to work with companies such as Vitesse to develop Application Specific Standard Products ("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.top 20 semiconductor companies. Licensingleveragemonetize our substantial IP portfolio to generate revenue by entering into licenses with third parties.intellectual property portfolio. 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 PHYPHYs and our Ethernet switch cores. In 2010, we also announced the availability of licenses for our patented enhanced forward error correction ("eFEC"Forward Error Correction (“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, byfuture revenue from 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'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.long-term. A key element of our strategy is to work closely with our customers'customers’ product managers and systems design teams, as well as business unitunits and corporate management teams. We believe that theseThese key relationships enable us to obtainacquire a betterdetailed understanding of our customers'customers’ business and technology needs,needs. We also discuss key trends with service providers and enables usIT organizations around the world to spot new networking trends in their infancy. Using this knowledge, we develop solutions to address our customers'customers’ design issueschallenges and provide them with differentiated feature sets for their systems. Vitesse sells directlywhile serving all other 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 20 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 prior three year period. The increase in new product releases is a result of our focus on deploying our IP into products based 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"(“Cu 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 2010With the addition of our CEServices™ applications software, our solutions meet MEF CE 2.0 requirements for both Mobile Access and 2011, we introduced two majorCloud Access equipment, and can dramatically cut our customers’ time-to-market. Our new products include third generation switch engine families, JaguarJaguar-2 and Caracal,Serval-2, created to address a broad range of applications in the accessAccess and edgeEdge of the networks. Typically, these applications include customer premise equipment ("CPE"), access network equipment, wireless base stations,networks, including Mobile Access equipment includingsuch as base stations, small cells, fiber and microwave wireless backhaul, and Cloud Access equipment and metro networking equipment. In Enterprise applications, ourare targeted attarget Cloud Access as well as desktop, workgroup and LAN infrastructure within small-medium enterprise ("SME") and small-medium business ("SMB")SME/SMB markets and enable cost-effective migration of these systems to migrate to Gigabit Ethernet speeds in a cost-effective manner. Wespeeds. To date, we have shipped over 175250 million Gigabit Ethernet ports to date into Enterprise applications. Our Ethernet switch products provide a high-levelthe advanced features required in Cloud Access with high-levels of integration, leading to a significant reduction in part count,significantly reducing the physical system size, power consumption, and power, and reduced material cost for our customers.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"): Ethernet MACs provide addressing and channel control mechanisms that make it possible for several 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 in EoS and OTN systems used in access, metro, and long-haul Carrier networking systems. Our Ethernet MACs provide single-chip solutions for both Gigabit Ethernet and 10 Gigabit Ethernet applications, reducing software development costs for these applications.Transceivers: CopperTransceivers (Cu PHYs):("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 offerdelivering a combination of low power, low cost and a high level of integration. Our SimpliPHY™ Ethernet transceivers ("Copper PHYs")Cu PHYs provide industry leadingindustry-leading low-power operation generally using power saving features such as ActiPHY™ and PerfectReach™ActiPHY, PerfectReach and EEE technology that provide energy savings of up to 80%.with 1588v2 Packet timing and synchronization: In 2011, we introduced two new products with IEEE 1588v2 packet timing and synchronization capabilities. (Cu PHYs):device. This device, offers enhanced packet timing and synchronizationoffering our patented Intellisec security encryption technology supporting IEEE standards 1588v2 and Y.1731. It iscombined with VeriTime. These devices are unique in the first and only device on the marketindustry in their ability to support bothencryption without compromising 1588 timing accuracy of these critical technologies. We have performed testing in a variety of third party and customer test labs that demonstrate that our 1588v2 timing technology is dramatically superior to our competition.the network.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 PHYs, crosspoint switches, signal integrity devices, and Physical Media Devices ("PMDs"(“PMDs”),.devices.PMD: Connectivity Product LineEquipment Deploying our SolutionsVitesse SolutionsMobile Base StationsCell Site Routers and GatewaysIP Edge RoutersEnterprise WAN RoutersCarrier Ethernet Switch/RoutersAggregation Switches and RoutersMulti-Service PlatformsWDM Optical Transport SystemsPacket Optical Transport SystemsPHYs:1/10 Gigabit Ethernet PHYs10G EDC PHY/CDRs10G SONET/SDH-class PHYsDatacenter SwitchesCore Routers and SwitchesBroadcast Video RoutersFibre Channel Switches & DirectorsBlade ServersWDM Optical Transport SystemsPacket Optical Transport SystemsPHYs:1/10 Gigabit Ethernet PHYs10G EDC PHY/CDRsSignal Integrity DevicesCrosspoint SwitchesSFP and SFP+ Optical ModulesXFP ModulesPON Optical ModulesFibre Channel Optical ModulesPMD:Laser DriversTransimpedance AmplifiersPost AmplifiersPMD:being used in a variety of applications from Carrier long-haul and metro networks to Enterprise Gigabit Ethernet and 10 Gigabit Ethernet networks including storage networks and systems. We also develop products for application in Passive Optical Networks ("PON") that enable Fiber-to-the-Home deployments. Typically, we sell these products to optical module manufacturers who service equipment manufacturers, or directly to OEMs, who build discrete board-based solutions.PHYs: A PHY converts high-speed analog signals to low-speed digital signals in fiber optic, copper cable, and backplane applications. We incorporated many industry-leading, proprietary features into our PHY products such as VScope™, an integrated equalization waveform viewing technology and FlexEQ™, an adaptive equalization and electronic dispersion compensation technology. These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above. We offer a broad line of PHY products for the Ethernet, SONET/SDH, and Fibre Channel markets at speeds ranging from 155 Mbps to 14 Gbps. In 2011, we introduced highly accurate IEEE 1588v2 packet timing and synchronization capabilities into our 1 and10 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 PHY 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. It 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 technology is dramatically superior to our competition.Crosspoint Switches: Our crosspoint switches provide asynchronous, unblocked switching matrices from 4x4 to 144x144 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.Signal Integrity Devices: We provide a broad portfolio of devices for generic signal integrity applications including sending very-high speed signals over backplanes and copper cables. These devices include repeater and re-timer ICs that support data rates from 155 Mbps to 14 Gbps for protocols, including, Gigabit Ethernet, Fibre Channel, and SAS/SATA. Our products are deployed in a wide variety of systems in Carrier, Enterprise, data center, and high-definition video applications, both within systems as well as 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. TransportLatest generation products, as well as our new products in development, target the OTN market, integrating increasing amounts of Ethernet packet processing technology. These products includeoperate 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.mappers, and switchesmappers for SONET/SDH, EoS,Ethernet-over-SONET (“EoS”), and OTN applications. LatestOur 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.networks.Transport ProcessingProduct LineEquipment Deploying our SolutionsVitesse SolutionsSONET/SDH Optical TransportSONET/SDH Grooming SwitchesSONET Add Drop MultiplexorsDWDM Optical Transport Systems10G SONET/SDH Framers/Mappers10G EoS Framers/MappersSONET TSI SwitchesCarrier Ethernet Switch/RoutersAggregation Switches and RoutersMulti-Service PlatformsDWDM Optical Transport SystemsPacket Optical Transport Systems10G EoS Framers/Mappers10G OTN Framer/Mappers10G OTNMapper/PHYs with integrated IEEE 1588v2 timing and synchronization technologyFramers/Mappers: Framers are devices that take incoming data traffic from the PHY and process the framing information used for transporting data. Mappers convert data from one protocol to another. We offer a complete line of Framers and Mappers for SONET/SDH, EoS, and OTN applications. Our latestgeneration 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. In 2011, weMapper/mapper/PHY with VeriTime in the market with integrated 1588v2 packet timing and Ethernet Y.1731 OAM capability. Thesemarket. 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.Switches: A switch receives data from a line card and routes the data to its proper destination. We supply a family of Time Slot Interchange ("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, we have an IP 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,production; and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as 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 mapadopting Ethernet data services,technology in their network, particularly on mobile devices, for their users. This growth has created a huge dilemma as these service providers must provide an expanding base of subscribersMobile and connectivity services while simultaneously reducing costs. To address these challenges, Carriers will evolve and over time replace their legacy SONET/SDH networks with new all IP/Ethernet-based networks. Cloud Access.being referred to as "Carrier“Carrier Ethernet." The upgrade is, in effect, an adaptation” We provide a variety of products for newly emerging Carrier Ethernet to provide the same features and functions that have traditionally been provided by "telecom" protocols suchapplications as well as for legacy SONET/SDH and Plesiochronous Digital Hierarchy ("PDH"). Because ofEoS applications. Due to the complexity of the Carrier networks,network , 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 provides a variety of products for Carrier networking applications, including productsfor legacy SONET/SDH, EoS, and newly emerging Carrier Ethernet 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 and Intellisec
Connectivity
10 Gigabit Ethernet PHYs10G EDC PHY/CDRs10G SONET/SDH-classSynchroPHY 10 Gigabit Ethernet PHYs
with VeriTime and IntellisecEQNOX Signal Integrity Devices Crosspoint SwitchesLaser DriversTransimpedance AmplifiersPost Amplifiers
Crosspoint SwitchesLaser Drivers, 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 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”). Increasingly, Enterprise networks will also typically include broadband connections to Carrier networks for the broader communication of voice and data outside of the Enterprise.Enterprise, particularly for access to Cloud services. Enterprise networks are oftenusually classified into groups depending on their size and complexity. Categories arecomplexity; large Enterprise switch and routers, data center switching, SME, SMB,Cloud managed switches and SOHO.Layer2 and Layer 3 managed Ethernet switches. 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 switchingLayer 2 and Layer 3 stackable switches 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) Ethernet SwitchesSME Ethernet Switches with integrated CopperCu PHYsStackable Enterprise Ethernet SwitchesEthernet Media Access Controllers 1 Gigabit Ethernet Copper and Dual-Media PHYs
Connectivity1/10 Gigabit Ethernet PHYs10G EDC PHY/CDRsEQNOX Signal Integrity Devices Crosspoint Switches Laser Drivers
Driver, Transimpedance Amplifiers,
Post AmplifiersNetwork Processornetwork processor product line, and some of 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%52.7%, 50.4%51.6% and 63.0%44.6%, of our netproduct revenues for fiscal years 2013, 2012 and 2011, 2010,respectively. For fiscal year 2013, distributor WPG Holdings accounted for 18.1% of our product revenues. For fiscal year 2012, distributors Nu Horizons Electronics and 2009, respectively.WPG Holdings accounted for 14.6% and 11.7%, respectively, of our product revenues. For fiscal year 2011, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 20.6%21.9% and 10.3%,10.9% respectively, of our product revenues.ForOur top five OEM customers for fiscal year 2010, distributor Nu Horizons Electronics and direct customer2012 were Alcatel-Lucent, Cisco, Ciena, Huawei Technologies, and ZTE. Our sales to these customers accounted for 23.9% and 13.3%, respectively,approximately 27.5% of our net revenues. For fiscal year 2009, Nu Horizons Electronics and Huawei Technologies accounted for 36.0% and 12.0%, respectively, of our2012 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. 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%72.6%, 66.7%,65.2% and 62.7%63.3% of our net revenuerevenues in fiscal years 2013, 2012 and 2011, 2010respectively. 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 fabrication for our products is outsourced to third-party silicon wafer foundries, such asprimarily Taiwan Semiconductor Manufacturing("TSMC"(“TSMC”), Global Foundries,and to a lesser extent, GlobalFoundries, IBM, and TowerJazz Semiconductor, and United Microelectronics Corporation. Outsourcing our wafer manufacturing requirements enables us to eliminateSemiconductor. This outsourcing eliminates 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.subcontractors. 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. In 2010, we transitioned the majority of our probe and final testing facility from our internal operations in California to an outsource model with an offshore manufacturer. Today, weyield.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. The market for our products is characterized by continuallyintegration.integration characterize the market for our products. We believe that our future success will depend largely on our ability to continue to improveimproving our products and our process technologies, to develop new technologies and to adopt emerging industry standards. Our product development efforts are focused on designing new products for the high-performance communications infrastructure markets, based on understanding the evolving needs of our customers. We haveof engineers who followintegrates 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 reducewhile reducing the power dissipation of our products, and to create new, value-added features and functionality. We have, and will continue to develop common IPintellectual property 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. 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. We have also recently closed high-cost design centers in the United States, including Westford and Portland (October 2011). Many of our design centers are located in areas of strong technical talent pools and/or in areas where there are strong concentrations of our customers. Our engineering, research 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.Competition The markets for our products are highly competitive and subject to rapid 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. We compete for market share based on our customers' selection of our components over our competitors during the design phase of our customers' systems. In addition, many of our large customers have their own internal design teams, which causes us to compete against these teams when our customers consider a "make vs. 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 one of our competitors. Once selected for a design win, we have a high probability of holding the majority market share for this product within the customers' system. The design win is a critical milestone in the path to generating revenue. After device selection, our customers invest substantial resources in hardware, software, and systems design that, in many cases, are dependent on the ICs that they have selected. In the great majority of cases we are single sourced, that is, we are the only supplier selected for the available opportunity. Once we win a single sourced design it is often difficult for our competitors to replace us until the next design stage due to the high level of resource investment that the customers made in hardware, software, systems, and qualification efforts. Competition is particularly strong in the market for communication ICs, in part due to the market's historical growth rate, which attracts larger competitors, and in part due to the number of smaller companies focused on this area. The trend in the industry has been, and continues to be, to outsource more designs to companies such as Vitesse. While we expect this trend to continue, we view these "internal" design efforts 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. 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 Gennum, Mindspeed Technologies, Maxim Integrated Products, 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. 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 service our Tier 3 customers and for order fulfillment for some Tier 1 and Tier 2 customers. Because of the significant engineering supporteffort 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. Ourdesign wins. Common for our industry, 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.theour typical product sales cycle of Vitesse's product are as follows:•Vitesse fieldin order to design Vitesseour products into their systems.are demonstrated to the customer via evaluation boards and/or evaluation systems.•Vitesse's productcustomer.the Vitesseour field applications engineers assist in bringing the product to a working levelworking-level in the customer'scustomer’s lab.•Extensive is performed in the customer's lab to determine the viability and performance of the Vitesseour product in addressing the customer's needs.•thea customer’s engineering and-orand/or purchasing organizations, pre-production orders, or other firm indicationindications that Vitesse has beenthe customer selected us over our competitors for use in the customer'stheir system application. In the great majority ofmost cases, Vitesse iswe are the sole-source supplier to our customers, and typically cannot be easily replaced once we have wonsecured a design win and it goes into production.• additional technical support as they go through system-level qualification and testing. This support typically includes hardware and software development support.• all their system development and qualification efforts, they may move their product into the production phase. TypicallyFor those design wins which move to production, it typically takes our customer from six to 24 months to go from the design win to production.•placed intoin production, the customer is provided a standard product warranty and minimal furtheradditional sales support service is provided. We willsupport. Our products are generally warrant our productswarranted against defects in materials and workmanship for a period of one year.headquarters are locatedis headquartered 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 8this 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 85September 30, 2013, we held 84 United States patents, 2219 foreign patents, and 19as well as 22 patent applications pending in the United States. We are in the process ofStates and 28 foreign applications pending. Our intellectual property strategy involves filing additional patent applications.applications in our strategic focus markets on a regular basis. 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 and 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"“Risk Factors” under Item 1A.1A of this Report for further discussion of the risks associated with patents and IP.channeldistribution partners, the gain or loss of significant customers, market acceptance of our products and our customers'customers’ products, our ability to develop, introduce, and market new products and technologies on a timely basis, the availability and cost of products from our suppliers, new product and technology introductions by competitors, IPintellectual property disputes and the timing and extent of product development costs.Quantities of our productsProduct quantities to be delivered and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog, as of any particular date, is not necessarily representative of actual sales for any succeeding period. We, therefore, do not believe that backlog alone is a reliable indicator of future revenue levels."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 useBy using the "sell-through"sell-through methodology, we may have variability in our revenue from quarter to quarterquarter-to-quarter as customers have substantial flexibility to reschedule backlog with most of our channeldistribution partners as part of the terms and conditions of sale.DueEnvironmental concerns bring increased attention to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the semiconductor industry and manyindustry. Many companies are moving toward becoming compliantcompliance 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/2006/1907.2011,2013, we had 362331 employees worldwide, including 177171 in R&D, with the&D. The balance of employees are listed in population size order, inorder: 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'sSEC’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'sSEC’s website at www.sec.gov, and through our website, free of charge, at www.vitesse.com. Copies of such documents maybe requested by contacting our investor relations department at 805-388-3700 or sending an e-mail through the Investor Relations page on our website. The information on Vitesse'sour website is not incorporated by reference into and is not made a part of this report.••2011,2013, we had a net loss of $14.8$22.1 million primarily due to losses from operations, interest expense, restructuring and impairment charges, and loss on extinguishment of debt, 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.naturesnature of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual sales. Our sales cycle is often lengthy, particularly for larger transactions. As a result, we devote substantial time and effort and incur significant upfront expense in our sales efforts without any assurance that our efforts will result in a customer purchase. Therefore, it is often difficult to predict when, or even if, we will make a sale with a potential customer. Additionally, we make investment decisions and budget our expense levels based primarily on sales Fluctuations in our quarterly operating results could result in decreases in our stock price. ••orders;•channeldistribution partners;••customers'customers products;••••time to time,time-to-time, the semiconductor industry has experienced significant and extended downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. These factors could cause substantial fluctuations in our revenues and in our results of operations. Any downturns in the semiconductor industry may be severe and prolonged and any failure of the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenues and harm our business, financial condition and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints which may affect our ability to manufacture and ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.ten10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly manufacturers. Accordingly, we are sometimes subjected to end-of-life notices on certain materials and/or products provided by these manufacturers. This longer life cycle may impact our ability to continue to support certain products, forcing us to cease offering these products if we cannot obtain a replacement source of material. This longer life cycle may impact revenues and/or require us to incur additional costs to obtain alternative sources for these materials."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 quarterquarter-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%72.6%, 66.7%,65.2% and 62.7%63.3% of our net revenue in fiscal years 2011, 2010,2013, 2012 and 2009,2011, 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;•••customers'customers’ products.customers'customers’ products.customers'customers’ products do not gain widespread acceptance in these markets, our revenues and operating results may be materially and adversely affected.and storage products decline more rapidly than we anticipate, or if the rate of decline continues to exceed the rate of growth of our new products, our revenues and operating results could be materially and adversely affected. and storage markets that require high-performance ICs. We intend to continue doing so in the future. Some of these customers are also our competitors. If any of our major customers were to delay orders of our products or stop buying our products, our business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial difficulty, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations, we could experience increased competition for our products and downward pressure on the pricing of our products.such asprimarily TSMC Global Foundries,and, to a lesser extent, GlobalFoundries, 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:•••such asincluding earthquakes, tsunamis and floods.floods such as the earthquake and tsunami that occurred in Japan and the floods that occurred in Thailand that disrupted the global supply chain for components manufactured in those countries. A significant natural disaster or other catastrophic event could significantly disrupt our foundries'foundries’ production capabilities and could result in our experiencing a significant delay in delivery or substantial shortage of wafers and possibly in higher wafer prices. Any supply disruption or business interruption could materially and adversely affect our business, financial condition and results of operations. Certain of our suppliers integrate components or use materials manufactured in Japan in the production of our products. The recent earthquake and tsunami 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. 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 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'customers’ products. Our customers may substitute use of our products in their next-generation equipment with those of current or future competitors.Mindspeed Technologies,Semtech, and PMC-Sierra.Texas Instruments. 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 might have otherwise won. In addition, we are aware of smaller privately privately-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'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.localcountry-specific environmental regulations relating to the use, storage, discharge, and disposal of toxic, volatile and other hazardous chemicals used in our design 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, these regulations may restrict our ability to expand operations at our present locations in the United States and worldwide or require us to incur significant compliance related expenses.("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.2011,2013, we held 8584 United States patents 22and 19 foreign patents, and 19as well as 22 patent applications pending in the United States and 28 foreign applications pending for various aspects of design and process innovations.•••••defendant'sdefendant’s intellectual property rights and/or antitrust claims. Certain parties, after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.time to time,time-to-time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology. Tonone of these claims has resulted in the commencement of any litigation against us, norwe have wenot believed that it is necessary to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of our merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We also may be required to defend and indemnify customers against claims of infringement of third-party intellectual property rights, which could result in significant expense. Our recent efforts to license our intellectual property to third partiesthird-parties may also••••andLoan, Term B LoansLoan and 2014 Debentures. We haveloanloans (the “Term A Loan” and “Term B Loan”) with certain lenders for which Whitebox VSC, Ltd. ("Whitebox"), outstanding ("Term Loan Aserves as agent, and B"$32.8 million of our 8.0% Convertible Second Lien Debentures Due 2014 (the “2014 Debentures”). TheOur Term A Loan bearsand Term B Loan bear interest at a fixed rate of 10.5%9.0% per annum, beginning on February 4, 2011, payable quarterly in arrears, withand have a maturity date of February 4, 2014. The Term B Loan bearsAugust 31, 2016, and our 2014 Debentures bear interest at a fixed rate of 8.0% per annum, beginning on February 4, 2011, payable quarterlysemi-annually in arrears, withand have a maturity date of October 30, 2014.have $46.5 million ofintend to use our 8.00% Convertible Second Lien Debentures Due 2014 (the "2014 Debentures") outstanding. On October 29, 2014, we are obligatedexisting cash to repay the principal amount of theour 2014 Debentures. Our debt could materially and adversely affect our ability to obtain financing for working capital, acquisitionsDebentures on 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,before their maturity in October 2014, which will be subject to financial, business and other factors affectingachieve our operations, manyobjective of which are beyondreducing our control. Weoutstanding indebtedness but will also reduce our cash balances. While 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 requirementsoperations for at least the next 12 months. However,months after repayment of the 2014 Debentures, this ultimately 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 of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity-based or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests.Series B Preferred Stock, 2014 Debentures and our Term B loan.September 30, 2011,November 7, 2013, we had outstanding 134,720 shares of our convertible Series B Preferred Stock (convertible on a one-to-five basis), $46.5$32.8 million of 2014 Debentures and $9.3 million of Term B Loan, which indebtedness is convertible debt.into shares of our common stock at a price of $4.50 per share and $4.95 per share, respectively. Full conversion of the currently outstanding Series B Preferred Stock, the 2014 Debentures and the Term B Loan would result in the issuance of 12,892,6129,185,606 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.September 30, 2011, the holdersNovember 7, 2013, we had outstanding $32.8 million of 2014 Debentures convertible at a price of $4.50 per share into an aggregate of 7,298,372 shares of our common stock. If all of the 2014 Debentures had exercised approximately 51.9% of their availableconverted into common stock, and converted 82.5%thosestock). These stockholdersstock. If the holders of our 2014 Debentures convert their debt into common stock, 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 are different from those 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 Series B Preferred 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 is limited and could be limited further by an ownership change and/or decisions by California and other states to suspend the use of NOLs.research and development ("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 may beare subject to significant limitations under Section 382 of the Internal Revenue Code (and applicable state law) resulting from ownership changes and may in the future be subject to additional limitations under Section 382 if we undergo anfurther ownership change. In the event of an ownership change,changes. 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 limitlimits 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 thean 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.highly qualifiedhighly-qualified technical sales and marketing personnel, design and application engineers, as well as senior management. We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the emerging broadband wireless and wire line communications markets develop, and we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining highly qualifiedhighly-qualified manufacturing personnel, technical sales and marketing personnel, design and application engineers, as well as senior management. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material effect on our ability to operate our business. We do not presently maintain key-man life insurance for any of our key executive officers.management'smanagement’s attention and could materially harm our business. Noneandwhich includes our principal R&D and sales facilities, is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease with a term that expires on January 31, 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 58,00064,000 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,Massachusetts, China, Denmark, Germany, India and Taiwan. As of September 30, 2011,2013, we lease total space of approximately 280,000276,000 square feet. Our current space is sufficient to accommodate current operations.2011,2013, the final disposition of these proceedings will not have a material adverse effect on ourthe financial position, results of operations, or liquidity.REGISTRANT'SREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.has beenis listed on the NASDAQ Global Market under the symbol "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.“VTSS.” The following table below sets forth, for the periods indicated, the high and low sales prices of our common stock on the NasdaqNASDAQ 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-dealer prices, without retail mark-up, markdown or commission, and may not necessarily represent actual transactions.Market. High Low $ 4.85 $ 3.56 6.00 4.10 5.25 3.85 4.20 2.86 High Low Fiscal Year Ended 2013 October 1 through December 31, 2012 $ 2.48 $ 1.75 January 1 through March 31, 2013 2.36 1.84 April 1 through June 30, 2013 2.98 1.96 July 1 through September 30, 2013 3.09 2.46 High Low $ 7.60 $ 3.60 8.60 4.80 9.20 5.20 6.30 2.85 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 December 1, 2011,November 29, 2013, there were approximately 1,2091,109 stockholders of record of our common stock, and the closing price of our common stock was $2.23$2.94 per share as reported by the NASDAQ Global Market. 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.20062008 through the last trading day in September 2011.2013. 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 2006.2008. 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.
20112013 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 2013 2012 2011 2010 2009 (in thousands, except per share data) (In thousands, except per share data) $ 132,742 $ 165,633 $ 154,927 $ 218,536 $ 221,948 $ 101,334 $ 109,920 $ 132,742 $ 165,633 $ 154,927 8,225 357 13,250 10,000 — 2,439 9,563 8,225 357 13,250 140,967 165,990 168,177 228,536 221,948 3,656 854 528 — — Net revenues 103,773 119,483 140,967 165,990 168,177 Restructuring and impairment — (1,424 ) 3,656 854 528 — 73 (9,922 ) 10,761 13,558 — — — 73 (9,922 ) — — 191,418 — — — — — — 191,418 (11,073 ) 3,991 (179,005 ) 8,378 (1,799 ) (15,474 ) 1,635 (10,934 ) 4,118 (179,005 ) (14,812 ) (20,176 ) (194,112 ) 7,510 (4,825 ) — 121 71 9,044 (16,822 ) (14,812 ) (20,055 ) (194,041 ) 16,554 (21,647 ) — 126 — — — $ (14,812 ) $ (20,181 ) $ (194,041 ) $ 16,554 $ (21,647 ) Loss from continuing operations (22,078 ) (1,112 ) (14,812 ) (20,176 ) (194,193 ) Income from discontinued operations, net of tax — — — 121 71 Net loss (22,078 ) (1,112 ) (14,812 ) (20,055 ) (194,122 ) Fair value adjustment of Preferred Stock - Series B — — — 126 — Net loss available to common stockholders $ (22,078 ) $ (1,112 ) $ (14,812 ) $ (20,181 ) $ (194,122 ) $ (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 ) — — — $ (0.61 ) $ (0.96 ) $ (16.91 ) $ 1.48 $ (1.94 ) 24,315 21,074 11,478 11,181 11,178 Continuing operations $ (0.55 ) $ (0.04 ) $ (0.61 ) $ (0.96 ) $ (16.92 ) Discontinued operations — — — 0.01 0.01 Net loss per share $ (0.55 ) $ (0.04 ) $ (0.61 ) $ (0.95 ) $ (16.91 ) Fair value adjustment of Preferred Stock-Series B — — — (0.01 ) — Net loss per common share available to common stockholders $ (0.55 ) $ (0.04 ) $ (0.61 ) $ (0.96 ) $ (16.91 ) Weighted average shares outstanding: basic 40,311 25,121 24,315 21,074 11,478 $ 17,318 $ 38,127 $ 57,544 $ 36,722 $ 33,576 $ 68,863 $ 23,891 $ 17,318 $ 38,127 $ 57,544 26,659 48,037 39,397 49,198 55,287 69,363 28,694 26,659 48,037 39,397 60,994 97,529 109,273 292,277 327,348 98,961 56,616 60,994 97,529 109,273 7,796 15,476 — — — 56,180 65,095 111,352 126,123 155,118 (28,459 ) (21,206 ) (61,273 ) 125,526 107,532 Long-term compound embedded derivative liability — 2,899 7,796 15,476 — Other long-term obligations, including debt 61,157 58,947 58,107 66,824 113,162 Total stockholders’ (deficit) equity $ 15,908 $ (24,015 ) $ (28,459 ) $ (21,206 ) $ (61,273 ) Our financial resultscertainTerm A and B Loans, which amendment extended the maturity dates of the years set forth above were impacted byTerm A Loan and Term B Loan from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that 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 downrepaid $1.5 million of 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.Fiscal Year 2008Sale of Storage Products Business On October 29, 2007, we completed our sale of a portion of its 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 30 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 placed a tremendous strain onEnterprise networking.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, have risen dramatically in Carrier and Enterprise networks . Media-rich devices, such as smartphones and game consoles, require increased bandwidth. New Enterprise deployment options, such as Cloud-based services and social media and telepresence, also spur demand. More recently, there is a trend for increased Ethernet deployment within networks used in Industrial and Military networking, automotive transport, and future Smart Grid applications, collectively referred to Internet Protocol-based networks.as IoT.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 is often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks.in this emerging technology area represent the best opportunity for usand penetrate new customers.provide differentiation in the market.Industry Trends and Characteristics that Affectgrow our Business In order to achieve sustained, increasing profitability,new product revenue, we must achieve a combination of revenuewin market share in high-growth communications market segments. As with any high technology company, growth increases in margins,opportunities begin with new products. Over the past four years, we introduced many new “platform” products and careful controltechnologies that will serve as the basis for future product development. From that effort, we began sampling the first of our operating expenses. We continue“new product” portfolio in 2010. Since then, revenue from these new products has grown to focus on improving eachover 27% of these components of our financial model.addresshave captured design wins at over 200 customers, including market leaders such as Alcatel-Lucent, Cisco, Ericsson, Hewlett Packard, Huawei, Juniper, Samsung, and ZTE. In 2013, we introduced the two largestthird-generation of both our switch engine and fastest growing segments of the communications industry—PHY products. These new products allowed us to significantly increase our served markets in both Carrier Ethernet and Enterprise networking. ManyWe have become the clear choice for meeting our customers’ needs for service delivery, synchronization, security, and signal integrity.also serveand technology within the biggest market within these segments, Carrier Mobile Infrastructure, whichIoT, where Ethernet-based networks are emerging. There is beginning to require Carrier Ethernet capabilities. Our future revenue opportunities will, in part, be determined by our 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. We compete for market share based on our customers' selection of our components over our competitors during the design phase of our customers' systems. Our ability to compete is dependent on the needs of our customers, how well our products address these needs, our corporate relationships, and a variety of other factors. Once selected for a design win, we have a high probability of holding the majority market share for this product. Many of our large customers have their own internal 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. Whileexpect this trendcall “same-store-sales,” many others are wins at new customers, and reflect our growing market share. Because our products our highly complex, it takes our customers 12 to continue, we view these "internal" design efforts36 months to go from sample availability to first customer shipment, as a significant competitive threat. The "design win" is a critical milestonecustomers do the necessary development work to complete and qualify their systems in the pathnetwork. Since it typically takes an additional 12 to generating24 months to ramp into full production, we believe design wins represent a good leading indicator of future revenues.asonly upon shipment of the merchandise from our products, anddistributor to the final customer. As such, we may have variability in 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 newquarter-to-quarter as customers have substantial flexibility to reschedule backlog with of our distribution partners as part of the terms and existing products atconditions of sale. Our distributor sales were 52.7% , 51.6% and 44.6% of product revenue in 2013, 2012 and 2011, respectively.beginmay determine to phase-out products, or EOL. When we EOL a product, we typically provide up to six months notice for our developmentcustomers to make a last-time-buy of product and six additional months to take receipt of that product. The EOL announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have adequate stock on hand to support their production forecast.or achieveto increase our "design wins."ability to improve margins depends upon several factors, including our ability to continue to reduce our costefforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of revenues, including our wafer, assembly,programs such as lean manufacturing, and test costs, our ability to improve manufacturing yields, our ability to continue to migrate our products to next-generation process nodes, and our ability to reduce average selling price ("ASP") erosion. We have active programs in place to address each of these factors.As such, we must manageOur successful management of our supply chain efficiently to ensurehas provided us with competitive materials pricing and effective lead-timeslead times for the materials that we purchase. The semiconductor industry in which we compete is highly cyclical. Typically, inWe have sizable advantages due to lower fixed costs, reduced cycle times, and lower inventory resulting from our outsourcing of almost all of our wafer fabrication and assembly. During periods of strong demand, in the semiconductor industry, we maycould experience longer lead times, difficulties in obtaining capacity, and/or difficulty in meeting commitments for our required deliveries. Today, 100%deliveries during periods 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. Improving product yields is critical to maintaining and improving our cost of revenues. We have a team of engineers focused on yield improvements. Yields are affected by a variety of factors including design quality, wafer fabrication, assembly and test processes and controls, product volumes, and life cycles. We work closely with all our manufacturing subcontractors to improve product manufacturability and yields. We manufacture a wide variety of products, some at low volumes, which likely limits our ability to improve yields on some products. Since 2009, our product gross margins have improved from 49.5% to 59.6% in 2011. Gross margin is also impacted by the ASP of our products, which is primarily determined by competitive factors within the specific markets we serve.strong demand. 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 substantialsignificant added value relative to our competition. To remain competitive, In addition, we must efficiently deployhave strengthened our engineering, research and development ("R&D") resources into markets that will providecash balances by reducing our future revenue growth. Our R&D costs increased to $53.1inventory every fiscal year since September 30, 2010, resulting in a reduction of $16.6 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 duringover the lastpast three years from 42.2% in 2009 to 46.8% in 2010 to 49.3% in 2011. A large part of this growth is in our Hyderabad, India design center where we can more efficiently execute product verification and validation. Our Hyderabad design center has been re-targeted from storage products to products for Carrier and Enterprise networking applications. In 2011, we had two reductions in force that affectedfiscal years.efforts. As a result, R&D expense will be lower in 2012. We continue to focus our R&D efforts and to seek opportunities to more efficiently deploy our R&D resources into larger, growing markets. As is common in the industry, we sell semiconductor products directly 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 plans 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 with $82.5 million or 49.8% of product revenue in fiscal year 2010, and $49.8 million or 32.1% in fiscal year2009. Our accounting policy uses the "sell-through" model for sales to our distributors. The "sell-through" model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the "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" policy requires that we include all distributor channel inventory on our balance sheet as part of our reported inventory. Our indirect gross channel sales were $59.2 million, $83.1 million, and $105.1 million in fiscal years 2011, 2010, and 2009, respectively. Our sales are distributed geographically around the world. In 2011, 46.0% of our sales were to the United States, 38.6% to Asia, and 11.2% to Europe, the Middle East and Africa ("EMEA"), with the remaining 4.2% going to other countries. In 2010, 33.3% of our sales were to the United States, 44.2% to Asia, 15.5% to EMEA, and the remaining 7.0% going to other countries. In 2009, 37.3% of our sales were to the United States, 47.4% to Asia, 11.1% 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.Realization of Our Strategy Several years ago, we embarked on a process to substantially re-invent Vitesse to take advantage of the dramatic ongoing transformation of our target networking 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. As with any high-technology company, these growth opportunities begin with new products. We improved 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 two years of development, Vitesse introduced over 30 new products in 2010 and over 20 new products in 2011. These included many new "platform" products and technology 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. The next step to generating growth is creating market traction and design wins where we are selected by our customers over our competitors. As we took our new products to market in 2011, we saw a dramatic 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, we recorded over 300 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. Together with our customers, we are now preparing to take these new products into production. In our industry it typically takes twelve to eighteen 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, we shipped samples and pre-production on the majority of these new products, and we expect our customers to phase into volume productionSG&A organizations reducing expenses almost 25.0% over the course of 2012. As these new products ramp,past three fiscal years. We leverage top-level consultants to help us achieve short-term design goals while ensuring we will begin a migration ofmaintain our revenuesin-house engineering talent to drive our new products, providing a new growth cycle for the company. In 2011, only five percent of our revenue was fromproducts sampled in the last three years. Based on our observed market traction and the design wins captured in 2011, we expect revenue from our new products to increase to 10-15% of revenues in 2012 and continue to grow strongly from there. We've also made 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. During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins which together have substantially increased the operating leverage of the company. During the last three years we have:•Expanded our business in Europe and Asia, primarily in China, as the result of improved penetration into Tier 1 networking OEMs.•Transitioned 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 in 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 disclosure of contingent assets and liabilities. Management bases itsaccompanying notes. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions or conditions. 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.Revenue recognitionProduct revenues In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 605,subjective and complex judgments. ("ASC 605"), wedeterminable,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 preventprevents 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, hub, arrangements with certainno or limited right of our customers. Pursuantreturn. Under these circumstances, at the time of shipment, product prices are fixed or determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and are accrued. Accordingly, revenues are recorded net of 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.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 IPrecognize revenue from the sale and licensing agreements that generally provide licensees the right to incorporateof 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 ASU No. 2009-13, Revenue Recognition (ASC Topic 605) Multiple Deliverable Revenue Arrangements, to determine whether there is more than one unit of accounting. License and contract revenues are recorded upon delivery of the technologyintellectual property when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. The timing of delivery is dependent on, and varies with, the terms of each contract.IP.intellectual property. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.Maintenance and supportSupport revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less. 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 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. 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),(“VSOE”); (ii) third-party evidence of selling price (TPE),(“TPE”); and (iii) best estimate of the selling price (ESP)(“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, as well as 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 flows for us. Such evaluationthe revision is based on various analyses, including cash flowmade.profitability projections.Term B Loans, 2014 Debentures and related compound embedded derivative. The analyses necessarily involve significant management judgment. In the event the projected undiscounted cash flows are less than net book valuevaluation methodologies we use and our assessment of the assets, the carrying valuesignificance of the assets will be written downa particular input to their estimated fair value. Our future cash flows may vary from estimates.Valuation of Compound Embedded Derivative related to Subordinated 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 a compound embedded derivative (the "compound embedded derivative" or "derivative liability") requiring bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative meet 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. We estimated the approximate fair value of the compound embedded derivative as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a lattice framework. These valuations were determined using Level 3 inputs. The valuation of the compound embedded derivative required considerable judgment. The valuation methodologies used by us as described abovemeasurement may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believesAlthough we 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.Restructuring Charges—Facility In calculatingcostapplication of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to abandon our unutilized facility,evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we had to estimatedetermine that a tax position will more likely than not be sustained on audit, 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 requiredsecond step requires us to estimate and measure the timing and costs oftax benefit as the leaselargest amount that is more than 50% likely to be terminated,realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the amountprobability of operating costs forvarious possible outcomes. We re-evaluate these uncertain taxaffected facility and the timing and rate at which we might be able to sublease or complete negotiationsrecognition of a lease termination agreement. To formtax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs.estimates for these costs we performed an assessment of the affected facilitylegal counsel to determine whether they may, when resolved have a material adverse affect on our financial position or results or operations and considered the current market conditions. We believe our estimates of the obligations for the closing of the site remain sufficient to cover anticipated settlement costs. However, our assumptions on the lease termination payments, operating costs until termination, accrue and/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, 2011 2010 2009 $ % $ % $ % (in thousands, except 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 % 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 )% (619 ) (0.4 )% 1,521 0.9 % (1,451 ) (0.9 )% (14,812 ) (10.5 )% (20,176 ) (12.1 )% (194,112 ) (115.3 )% — 0.0 % 121 0.1 % 71 0.0 % (14,812 ) (10.5 )% (20,055 ) (12.0 )% (194,041 ) (115.3 )% — 0.0 % 126 0.1 % — 0.0 % $ (14,812 ) (10.5 )% $ (20,181 ) (12.1 )% $ (194,041 ) (115.3 )% September 30, 2013 2012 2011 $ % $ % $ % (in thousands, except for percentages) Net revenues: Product revenues $ 101,334 97.6 % $ 109,920 92.0 % $ 132,742 94.2 % Intellectual property revenues 2,439 2.4 % 9,563 8.0 % 8,225 5.8 % Net revenues 103,773 100.0 % 119,483 100.0 % 140,967 100.0 % Costs and expenses: Cost of product revenues 46,763 45.1 % 46,407 38.8 % 53,674 38.1 % Engineering, research and development 41,927 40.4 % 42,713 35.7 % 52,990 37.6 % Selling, general and administrative 30,210 29.1 % 29,822 25.0 % 41,233 29.3 % Restructuring and impairment — — % (1,424 ) (1.2 )% 3,656 2.6 % Amortization of intangible assets 347 0.3 % 330 0.3 % 348 0.2 % Costs and expenses 119,247 114.9 % 117,848 98.6 % 151,901 107.8 % (Loss) income from operations (15,474 ) (14.9 )% 1,635 1.4 % (10,934 ) (7.8 )% Other expense (income): Interest expense, net 7,916 7.6 % 7,778 6.5 % 8,456 6.0 % Gain on compound embedded derivative (803 ) (0.8 )% (4,897 ) (4.1 )% (7,680 ) (5.4 )% Loss on extinguishment of debt — — % — — % 3,874 2.7 % Other expense (income), net 39 — % 40 — % (153 ) (0.1 )% Other expense, net 7,152 6.8 % 2,921 2.4 % 4,497 3.2 % Loss before income tax benefit (22,626 ) (21.8 )% (1,286 ) (1.1 )% (15,431 ) (10.9 )% Income tax benefit (548 ) (0.5 )% (174 ) (0.1 )% (619 ) (0.4 )% Net loss $ (22,078 ) (21.3 )% $ (1,112 ) (1.0 )% $ (14,812 ) (10.5 )% 20112013 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/SMB networks and small-medium business ("SMB") markets.Cloud Access services. The Non-CoreNon-core market is comprised of legacy products that have not received additional investment over the last five fiscal years and, as a result, have generally been in decline. September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Carrier networking $ 56,306 55.6 % $ 47,630 43.4 % $ 8,676 18.2 % Enterprise networking 43,419 42.8 % 53,899 49.0 % (10,480 ) (19.4 )% Non-core 1,609 1.6 % 8,391 7.6 % (6,782 ) (80.8 )% Product revenues $ 101,334 100.0 % $ 109,920 100.0 % $ (8,586 ) (7.8 )% September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Connectivity $ 42,885 42.3 % $ 52,933 48.1 % $ (10,048 ) (19.0 )% Ethernet switching 38,675 38.2 % 32,607 29.7 % 6,068 18.6 % Transport processing 19,774 19.5 % 24,380 22.2 % (4,606 ) (18.9 )% Product revenues $ 101,334 100.0 % $ 109,920 100.0 % $ (8,586 ) (7.8 )% following table summarizesincrease in Ethernet switching revenues is largely attributable to a doubling in our new switches selling into both the Carrier and Enterprise networking markets. The increase was partially offset by declines in sales of our mature products. September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Intellectual property revenues $ 2,439 2.4 % $ 9,563 8.0 % $ (7,124 ) (74.5 )% September 30, 2013 2012 Nu Horizons Electronics ** * 13.5 % WPG Holdings** 17.7 % 10.7 % * Less than 10% of total net revenues for period indicated. ** Distributors September 30, 2013 2012 Amount % of Net Revenues Amount Change (in thousands, except percentages) United States $ 28,454 27.4 % $ 41,559 34.8 % $ (13,105 ) (31.5 )% Asia Pacific 61,454 59.2 % 62,260 52.1 % (806 ) (1.3 )% EMEA* 13,865 13.4 % 15,664 13.1 % (1,799 ) (11.5 )% Total net revenues $ 103,773 100.0 % $ 119,483 100.0 % $ (15,710 ) (13.1 )% * Europe, Middle East and Africa September 30, 2013 2012 ti Amount % of Product Revenues Amount % of Product Revenues Change (in thousands, except percentages) Cost of product revenues $ 46,763 46.1 % $ 46,407 42.2 % $ 356 0.8 % market:various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles. Our cost of product revenues as a percent of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs. Although the overall cost of product revenues did not change, the cost as a percentage of revenues increased in fiscal year 2013 as compared to fiscal year 2012 due to a mix of products that had an overall higher cost. September 30, 2011 2010 Amount % of
Product
Revenues Amount % of
Product
Revenues Change %
Change (in thousands, except percentages) $ 61,685 46.5 % $ 72,380 43.7 % $ (10,695 ) (14.8 )% 64,754 48.8 % 75,975 45.9 % (11,221 ) (14.8 )% 6,303 4.7 % 17,278 10.4 % (10,975 ) (63.5 )% $ 132,742 100.0 % $ 165,633 100.0 % $ (32,891 ) (19.9 )% September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Engineering, research and development $ 41,927 40.4 % $ 42,713 35.7 % $ (786 ) (1.8 )% September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Selling, general and administrative $ 30,210 29.1 % $ 29,822 25.0 % $ 388 1.3 % September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Restructuring and impairment $ — — % $ (1,424 ) (1.2 )% $ 1,424 (100.0 )% September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Interest expense, net $ 7,916 7.6 % $ 7,778 6.5 % $ 138 1.8 % September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Gain on compound embedded derivative $ (803 ) (0.8 )% $ (4,897 ) (4.1 )% $ 4,094 (83.6 )% September 30, 2013 2012 Amount Amount Change (in thousands, except percentages) Income tax benefit $ (548 ) (0.5 )% $ (174 ) (0.1 )% $ (374 ) 214.9 % September 30, 2012 2011 Amount Amount Change (in thousands, except percentages) Carrier networking $ 47,630 43.4 % $ 61,685 46.5 % $ (14,055 ) (22.8 )% Enterprise networking 53,899 49.0 % 64,754 48.8 % (10,855 ) (16.8 )% Non-core 8,391 7.6 % 6,303 4.7 % 2,088 33.1 % 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 declineincreased sales of our legacymature 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 EthernetCu 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% increase insales of our legacy SONET framers.Intellectual 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 % increasedecrease in IP revenue is attributableTransport processing revenues for fiscal year 2012 compared to $7.6 million from the sale and licensing of IP during fiscal year 2011 is largely attributable to the broad-based market decline for our mature SONET/SDH framers and mappers, offset by increased sales of switch fabric products to customers increasing inventories of these products as well as royalty revenues of $0.6 million. Thethey approach EOL. 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 2010ended September 30, 2012 also included the settlement of all future royalties under an existing agreement.minimal. Costs associated with the saleequal to or greater than 10% of IP are included in selling, generaltotal net revenues is as follows: September 30, 2012 2011 Nu Horizons Electronics ** 13.5 % 20.6 % WPG Holdings** 10.7 % * Huawei * 10.3 % 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 )% administrative expenses. 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 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 )% We use third-parties for wafer fabrication and assembly services. Cost of revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; (iii) test services; and (iv) labor and overhead costs associated with product procurement, planning, and quality assurance.revenues. The decrease in therevenues, slightly offset by a mix of products that had an overall higher cost. Our cost of netproduct revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of ourdue to a reduction in fixed costs of operations of $4.6 million, enabledaffected by outsourcing waferthese factors, as well as customer mix, volume, pricing, and final testing from our headquarters to an outsourced model using an offshore facility. In fiscal year 2011, we decreased production volumes in response to lower demand and improvements in availability of capacity at foundries and assembly sub-contractors eliminating the need to maintain higher inventory balances. As a result, production costs per unit have increased due to certain fixed costs of manufacturing operations. We expect to continue to adjust our inventory levels and anticipate that the sales of these higher cost inventories will temporarily increase our cost of net product revenues in future periods until our revenues return to prior levels. As it is customary in the semiconductor industry for product prices of maturing products to decline over time, it is imperative that we continue to reduce our cost of revenues. We continue to focus our efforts on improving operating efficiencies, including improving product yields, reducing scrap, and improving cycle times. In September 2011, we completed a reduction in force that is expected to lower manufacturing expenses in the future by $0.7 million annually. 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, 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 )% Engineering, research and development ("R&D") expenses consist primarily of salaries and related costs, including stock-based compensation expense for employees engagedThe decrease 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. The higher R&D expense infor fiscal year 2012 compared to fiscal year 2011 is largely attributable to increased costslower compensation and facility expense of $3.2$4.9 million associated withresulting from our consolidation of multiple locations and shift in activities to lower-cost areas, lower mask sets and wafers purchased, electronic design automationtest wafer expense of $1.9 million, and lower EDA tools expense of $2.0 million.new product evaluation boards associated with our two years of significant new product introductions and bringing those new productsAdministrative 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 )% market. This increase in R&D expense was partially offset byfiscal year 2011 is largely attributable to lower compensation related expenses of $3.6 million, a $4.1 million change in bad debt expense due to successful collection of $1.9 million of the $2.2 million of bad debts reserved in the fourth quarter of fiscal year 2011, $1.4 million in lower legal and accounting fees, and lower facility and depreciation expenses of $1.2 million relateddue to our consolidation of facilities. Partially offsetting the reassignment of employees to sellingreductions was a $1.3 million intangible asset write-down expense in fiscal year 2012 .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 fromImpairment Charges 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 )% R&D spending levels.we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting an adjacent leased facility. In September 2011,connection with these activities 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 decreaseincurred approximately $3.7 million of approximately $1.7 million fromrestructuring charges.2011 R&D spending levels. We will continue2012, we determined that it was unlikely we would be able to concentrate our spending in R&D to meet customer requirements and to respond to market conditions, andsublease the exited property for the remaining lease term through December 2015. Therefore, we do not anticipatedecided that we would reoccupy the reduction in R&D headcount will negatively impact product development in fiscal year 2012.Selling, General and Administrative 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 % 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. The increase in SG&A is largely attributable to an increase of $2.2 million in our allowance for doubtful accounts related to specific, potentially uncollectable accounts receivable balances identified during our fourth quarter, $2.2 million related to increased compensation, and $1.0 million due to higherexited 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 outsourcingupon expiration of our wafer and final testing from our headquartersmain Camarillo facility lease in January 2014, instead of locating to an outsourced model. In September 2011,a new facility as originally planned. Accordingly, 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, 2012 2011 Amount Amount Change (in thousands, except percentages) Interest expense, net $ 7,778 6.5 % $ 8,456 6.0 % $ (678 ) (8.0 )% Restructuring and Impairment Charges 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 % In September 2011, as part of our ongoing cost reduction efforts, 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 $0.6 million of severance costs due to the reduction in force. 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 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 recorded restructuring charges of $0.9 million in fiscal year 2010.Amortization of Intangible Assets 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 )% The decrease in amortization expense for fiscal year 2011 compared to fiscal year 2010 is due to the amortization of existing intangible assets, some of which became fully amortized during fiscal year 2011.Interest Expense, net 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 )% 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.20112012 compared to fiscal year 20102011 was primarily due to 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, 2012 2011 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Gain on compound embedded derivative $ (4,897 ) (4.1 )% $ (7,680 ) (5.4 )% $ 2,783 (36.2 )% changedecrease in the price of our underlying common stock. In fiscal year 2010, the gain on the compound embedded derivative was partially offset by a loss of $1.1 million recorded upon the exercise of the premium put associated with our then outstanding 2024 Debentures, which did not recur in fiscal year 2011. 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, 2012 2011 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Loss on extinguishment of debt $ — — % $ 3,874 2.7 % $ (3,874 ) (100.0 )% In fiscal year 2011, the$3.9 million results from the restructuringextinguishment of the Senior Term Loan on February 4, 2011. In fiscal year 2010, the loss on extinguishment of debt occurred when we recorded the new instruments issued in extinguishment of the 2024 Debentures at fair value, andin which we recognized a $21.6$3.9 million loss for the difference between the aggregate fair values of the new instruments, including approximately $0.8 million forTerm A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the 2024 Debentures.(Benefit) ExpenseBenefit 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, 2012 2011 Amount % of Net
Revenues Amount % of Net
Revenues Change %
Change (in thousands, except percentages) Income tax benefit $ (174 ) (0.1 )% $ (619 ) (0.4 )% $ 445 (71.9 )% ratebenefit for fiscal year 2012 was 13.6% . 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 is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions' deferred tax assets as such balances were more4.03%4.0% . The income tax benefit in the current year is primarily due to the reversal of uncertain tax positions due to the statute of limitations expiration, refundable federal income tax, reversal of foreign deferred tax liabilities, minimum taxes,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.LiquidityFiscal Years Ended $68.9 million at September 30, 2010 and 20092013Product 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$23.9 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.Financial Condition and LiquidityCash Flow Analysis Cash decreased to $17.3 million at September 30, 2011, from $38.1 million at September 30, 2010. During fiscal year 2011 we used cash in operations, for capital expenditures and payment of debt.2011. 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, 2013 2012 2011 (in thousands) Net cash (used in) provided by operating activities $ (9,119 ) $ 7,072 $ (7,211 ) Net cash used in investing activities (1,492 ) (1,602 ) (3,457 ) Net cash provided by (used in) financing activities 55,583 1,103 (10,141 ) Net increase (decrease) in cash 44,972 6,573 (20,809 ) Cash at beginning of period 23,891 17,318 38,127 Cash at end of period $ 68,863 $ 23,891 $ 17,318 byBy Operating Activities$9.8$9.6 million to pay down our accounts payable and accrued liabilities and $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.iswas primarily due to lower revenuessales during the year ended September 30, 2011 compared to the same period last year. The lower inventory ofin the prior fiscal year, as well as a $2.2 million reserve for potential bad debt. Inventory decreased $6.4 million isfrom $27.3 million at September 30, 2010 to $20.9 million at September 30, 2011. Due to positive changes in the availability of materials, we decreased purchasing in fiscal year 2011.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. During fiscal year 2010, cash provided by operating2011.totaled $1.5 million. Cash generated by operations excluding changes in workingused $1.6 million for capital totaled $2.6 million. Accounts payableexpenditures and accrued liabilities generated cash of $4.0 million and related to higher inventory purchases near year end and increases in accruals for softwarepayments under 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 wereagreements, partially offset by an $8.5$0.2 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. During the fiscal year 2009, our operating activities provided $19.2 million in cash. Cash generated by operations excluding changes in working capital totaled $14.9 million. During the year we operated with lower inventory levels which generated $18.7 million cash. The decrease in inventory resulted from lower 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. 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 $1.6 million related to a decrease in deferred revenues due to lower purchases by distributors. Lower accounts 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 paid 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.Net Cash (Used In) Provided by Investing Activities Investing activities used $3.5 million in 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 year 2010 primarily 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 $6.0fixed assets in fiscal year 2013. In 2012 and 2011 investing activities used $1.7 million net of commissions and transaction costs, partially offset by$3.5 million, respectively, for capital expenditures of $2.3 million and the purchase of intangibles of $2.0 million.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 paymenttaxes paid on behalf 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 $68.9 million at September 30, 2011, our cash totaled $17.3 million.2013. Our working capital at September 30, 20112013 was $26.7 million.$69.4 million.whichthat have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products. We believe that our existing cash, and 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.do notwill continue to consider opportunistically repurchasing additional debentures ahead of their maturity.principal paymentsa Form S-3 universal shelf registration statement on currently outstandingfile with the SEC. The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt duesecurities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. As of September 30, 2013, we raised a total of $58.8 million in gross proceeds from the sale of 29,371,280 shares of our common stock, leaving approximately $16.2 million available pursuant to the Form S-3. The Form S-3 will expire in accordance with applicable SEC rules on December 27, 2014. However, we expect to file an amendment to the Form S-3 (or to file another Form S-3) in the next 12 months.first quarter of fiscal 2014 that will permit Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. The following table summarizes our2011:2013 are as follows: Payment Obligations by Fiscal Year 2014 2015 2016 2017 2018 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) 4,904 3,092 1,771 — — 9,767 Operating leases (5) 2,068 1,128 199 — — — 3,395 Software licenses (6) 8,147 6,689 2,800 2,800 2,800 — 23,236 Inventory and other purchase obligations (7) 10,652 798 60 60 — — 11,570 Total $ 25,771 $ 58,200 $ 22,029 $ 2,860 $ 2,800 $ — $ 111,660 (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 August 31, 2016, which bear interest at 9.0% effective November 6, 2013. (3) Term B Loan represents amounts due for our 8.0% fixed rate senior notes due August 31, 2016, which bear interest at 9.0% effective November 6, 2013. (4) Interest payable for 2014 Debentures through 2015 and Term A and Term B Loans through 2016. (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.20112013, 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.European UnionEU and Asia. Our primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the United States dollar,U.SUnited States dollar during 2011,2013, total engineering, researchR&D and development and selling, general and administrativeSG&A expenses would have been approximately $2.2$2.0 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, 20112013 and 20102012 and the related consolidated statements of operations, stockholders' deficit,equity (deficit), and cash flows for each of the three years in the period ended September 30, 2011.2013. 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.also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules.schedule. We believe that our audits provide a reasonable basis for our opinion.20112013 and 2010,2012, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2011,2013, in conformity with accounting principles generally accepted in the United States of America.20112013, based on criteria established inInternal Control—Control - Integrated Framework(1992)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 6, 20115, 2013 expressed an unqualified opinion thereon.6, 20115, 2013 September 30,
2011 September 30,
2010 September 30,
2013 September 30,
2012 (in thousands) (in thousands, except par value) Cash $ 68,863 $ 23,891 Accounts receivable, net 9,807 9,403 Inventory, net 10,692 12,060 Prepaid expenses and other current assets 1,897 2,125 Total current assets 91,259 47,479 Property, plant and equipment, net 3,107 3,832 Other intangible assets, net 1,170 1,175 Other assets 3,425 4,130 $ 17,318 $ 38,127 $ 98,961 $ 56,616 9,591 15,765 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 7,436 $ 5,726 Accrued expenses and other current liabilities 12,245 12,188 Deferred revenue 2,215 871 Total current liabilities 21,896 18,785 Other long-term liabilities 407 574 Long-term debt, net 16,366 15,852 Compound embedded derivative — 2,899 Convertible subordinated debt, net 44,384 42,521 Total liabilities 83,053 80,631 Commitments and contingencies, See notes 11 and 12 Stockholders' equity (deficit): Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, nil and 135 shares outstanding at September 30, 2013 and 2012, respectively — 1 Common stock, $0.01 par value: 250,000 shares authorized; 57,545 and 25,812 shares outstanding at September 30, 2013 and 2012, respectively 575 258 Additional paid-in-capital 1,891,661 1,829,976 Accumulated deficit (1,876,328 ) (1,854,250 ) Total stockholders' equity (deficit) 15,908 (24,015 ) 20,857 27,273 $ 98,961 $ 56,616 404 394 2,039 2,913 50,209 84,472 5,934 8,196 1,781 864 3,070 3,997 $ 60,994 $ 97,529 $ 5,198 $ 13,216 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, 2011 2010 2009 (in thousands, except per share data) $ 132,742 $ 165,633 $ 154,927 8,225 357 13,250 140,967 165,990 168,177 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 ) (619 ) 1,521 (1,451 ) (14,812 ) (20,176 ) (194,112 ) — 121 71 (14,812 ) (20,055 ) (194,041 ) — 126 — $ (14,812 ) $ (20,181 ) $ (194,041 ) $ (0.61 ) $ (0.96 ) $ (16.92 ) — 0.01 0.01 (0.61 ) (0.95 ) (16.91 ) — 0.01 — $ (0.61 ) $ (0.96 ) $ (16.91 ) 24,315 21,074 11,478 Years Ended September 30, 2013 2012 2011 (in thousands, except per share data) Net revenues: Product revenues $ 101,334 $ 109,920 $ 132,742 Intellectual property revenues 2,439 9,563 8,225 Net revenues 103,773 119,483 140,967 Costs and expenses: Cost of product revenues 46,763 46,407 53,674 Engineering, research and development 41,927 42,713 52,990 Selling, general and administrative 30,210 29,822 41,233 Restructuring and impairment — (1,424 ) 3,656 Amortization of intangible assets 347 330 348 Costs and expenses 119,247 117,848 151,901 (Loss) income from operations (15,474 ) 1,635 (10,934 ) Other expense (income): Interest expense, net 7,916 7,778 8,456 Gain on compound embedded derivative (803 ) (4,897 ) (7,680 ) Loss on extinguishment of debt — — 3,874 Other expense (income), net 39 40 (153 ) Other expense, net 7,152 2,921 4,497 Loss before income tax benefit (22,626 ) (1,286 ) (15,431 ) Income tax benefit (548 ) (174 ) (619 ) Net loss $ (22,078 ) $ (1,112 ) $ (14,812 ) Net loss per common share - basic and diluted $ (0.55 ) $ (0.04 ) $ (0.61 ) Weighted average common shares outstanding - basic and diluted 40,311 25,121 24,315 the consolidated financial statements.STOCKHOLDERS' DEFICIT
STOCKHOLDERS’ EQUITY (DEFICIT) Total Vitesse
Semiconductor
Corporation
Stockholders'
Deficit Preferred Stock Common Stock Additional
Paid-in-
Capital Accumulated
Deficit Non
Controlling
Interest Total
Stockholders'
Deficit Shares Amount Shares Amount — $ — 11,309,803 $ 113 $ 1,749,478 $ (1,624,230 ) $ 125,361 $ 165 $ 125,526 — — — — — (194,041 ) (194,041 ) (81 ) (194,122 ) — — — — 3,138 — 3,138 — 3,138 — — 235,000 2 4,181 — 4,183 — 4,183 — — — — — — — (2 ) (2 ) — — 11,544,803 115 1,756,797 (1,818,271 ) (61,359 ) 86 (61,273 ) — — — — — (20,055 ) (20,055 ) (1 ) (20,056 ) — — — — 2,236 — 2,236 — 2,236 770,786 8 8,646,811 87 52,409 — 52,504 — 52,504 — — — — (1,050 ) — (1,050 ) — (1,050 ) (585,077 ) (6 ) 2,925,386 29 (23 ) — — — — — — 869,531 9 6,004 — 6,013 — 6,013 — — — — 423 — 423 — 423 — — — — — — — (3 ) (3 ) 185,709 2 23,986,531 240 1,816,796 (1,838,326 ) (21,288 ) 82 (21,206 ) — — — — — (14,812 ) (14,812 ) — (14,812 ) — — — — 3,152 — 3,152 — 3,152 — — — — 2,490 — 2,490 — 2,490 — — — — 2,572 — 2,572 — 2,572 (50,989 ) (1 ) 254,943 3 (2 ) — — — — — — 335,243 3 (3 ) — — — — — — (106,437 ) (1 ) (572 ) — (573 ) — (573 ) — — — — — — — (82 ) (82 ) 134,720 $ 1 24,470,280 $ 245 $ 1,824,433 $ (1,853,138 ) $ (28,459 ) $ — $ (28,459 ) Preferred Stock Common Stock Accumulated Deficit Total Vitesse Semiconductor Corporation Stockholders' Equity (Deficit) (in thousands) Shares Amount Shares Amount Balance at September 30, 2010 186 $ 2 23,987 $ 240 $ 1,816,796 $ (1,838,326 ) $ (21,288 ) Net loss — — — — — (14,812 ) (14,812 ) Compensation expense related to stock options, awards and ESPP — — — — 3,152 — 3,152 Residual value allocated to the equity conversion feature — — — — 2,490 — 2,490 Premium related to Term B Loan issued in debt exchange — — — — 2,572 — 2,572 Conversion of Series B Preferred Shares (51 ) (1 ) 255 3 (2 ) — — Release of restricted stock units — — 335 3 (3 ) — — Repurchase and retirement of restricted stock units for payroll taxes — — (106 ) (1 ) (572 ) — (573 ) Balance at September 30, 2011 135 1 24,471 245 1,824,433 (1,853,138 ) (28,459 ) Net loss — — — — — (1,112 ) (1,112 ) Compensation expense related to stock options, awards and ESPP — — — — 4,442 — 4,442 Issuance of common stock upon exercise of stock options — — 6 — 16 — 16 Issuance of shares under ESPP — — 821 8 1,729 — 1,737 Release of restricted stock units — — 721 7 (7 ) — — Repurchase and retirement of restricted stock units for payroll taxes — — (207 ) (2 ) (637 ) — (639 ) Balance at September 30, 2012 135 1 25,812 258 1,829,976 (1,854,250 ) (24,015 ) Net loss — — — — — (22,078 ) (22,078 ) Compensation expense related to stock options, awards and ESPP — — — — 4,396 — 4,396 Issuance of common stock upon exercise of stock options — — 9 — 20 — 20 Issuance of shares under ESPP — — 953 9 1,657 — 1,666 Issuance of common stock, net of offering costs — — 29,371 294 54,147 — 54,441 Conversion of Series B Preferred Shares (135 ) (1 ) 674 7 (6 ) — — Release of restricted stock units — — 1,045 10 (10 ) — — Repurchase and retirement of restricted stock units for payroll taxes — — (319 ) (3 ) (615 ) — (618 ) Reclassification of compound embedded derivative liability to additional paid-in-capital — — — — 2,096 — 2,096 Balance at September 30, 2013 — $ — 57,545 $ 575 $ 1,891,661 $ (1,876,328 ) $ 15,908 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 — Years Ended September 30, 2013 2012 2011 (in thousands) Cash flows (used in) provided by operating activities: Net loss $ (22,078 ) $ (1,112 ) $ (14,812 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 2,375 2,963 3,628 Stock-based compensation 4,396 4,442 3,152 Change in fair value of compound embedded derivative liability (803 ) (4,897 ) (7,680 ) Deferred income taxes 156 (1,537 ) — Allowance for doubtful accounts — — 2,212 Restructuring charges — (1,424 ) — Loss on asset impairment — 1,324 1,187 Gain on disposal of assets (153 ) — — Loss on extinguishment of debt, net — — 3,794 Interest paid in kind — — 415 Amortization of debt issuance costs 272 272 279 Amortization of debt discounts 2,552 2,363 2,037 Accretion of debt premiums (171 ) (157 ) (188 ) Change in operating assets and liabilities: Accounts receivable (404 ) 188 3,962 Inventory 1,368 8,797 6,416 Prepaids and other assets 535 739 1,074 Accounts payable 1,710 528 (8,018 ) Accrued expenses and other current liabilities (218 ) (2,410 ) (1,621 ) Deferred revenue 1,344 (3,007 ) (3,048 ) Net cash (used in) provided by operating activities (9,119 ) 7,072 (7,211 ) Cash flows used in investing activities: Capital expenditures (1,306 ) (808 ) (3,337 ) Payments under licensing agreements (342 ) (867 ) (120 ) Proceeds from sale of fixed assets 156 73 — Net cash used in investing activities (1,492 ) (1,602 ) (3,457 ) Cash flows provided by (used in) financing activities: Proceeds from the exercise of stock options and issuances of shares under ESPP 1,686 1,753 — Net proceeds from the sale of common stock 54,520 — — Payment of senior debt — — (9,500 ) Debt issuance costs — — (60 ) Repurchase and retirement of restricted stock units for payroll taxes (618 ) (639 ) (573 ) Other (5 ) (11 ) (8 ) Net cash provided by (used in) financing activities 55,583 1,103 (10,141 ) Net increase (decrease) in cash 44,972 6,573 (20,809 ) Cash at beginning of year 23,891 17,318 38,127 Cash at end of year $ 68,863 $ 23,891 $ 17,318 Supplemental disclosure of non cash transactions: Cash paid (refunded) during the fiscal year for: Interest $ 5,323 $ 5,341 $ 5,695 Income taxes (1,245 ) 1,440 392 Non cash investing and financing activities: Common stock issued in exchange for Series B Preferred Stock 7 — 3 Residual value allocated to the equity conversion feature — — 2,490 Premium related to Term B Loan issued in debt exchange — — 2,572 Equity offering costs incurred but not paid 79 — — Reclassification of compound embedded derivative liability to additional paid-in-capital 2,096 — — 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"of America (“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.current-yearcurrent fiscal year presentation with no changes to the stockholdersstockholders’ deficit accountsamounts or net loss for fiscal years 2010year 2011 or 2009.2012.
Foreign Currency TranslationTableContentsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Foreign Currency Translation The functional currency of 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.Risks and Uncertainties Our future results of operations involve a number of risks and uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, dependence on the highly cyclical nature of the semiconductor industry, fluctuations in operating results, high fixed costs, declines in average selling prices, decisions by our integrated device manufacturer customers to curtail outsourcing, our substantial indebtedness, our ability to fund liquidity needs, failure to maintain an effective system of internal controls, product return and liability risks, the absence of significant backlog in our business, our dependence on international operations and sales, proposed changes to United States tax laws, our management information systems may prove inadequate, attracting and retaining qualified employees, difficulties consolidating and evolving our operational capabilities, our dependence on materials and equipment suppliers, loss of customers, adverse tax consequences, the development of new proprietary technology and the enforcement of intellectual property rights by or against us, complexity of packaging and test processes, competition, our need to comply with existing and future environmental regulations, fire, flood or other calamity and continued control by existing stockholders. Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consist of demand deposits maintained with several financial institutions. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. We have never experienced any losses related to these balances. All of our non-interest bearing cash balances were fully insured at September 30, 2011 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 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)may again exceed federally insured limits. We did not have any interest-bearing bank accounts at September 30, 2011. 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 evaluations of our customers before granting credit. Trade accounts receivable are recorded at the invoice amount and do not bear interest. We believe that the credit risk in our accounts receivable is mitigated by our credit evaluation process and maintaining an allowance for anticipated losses. For fiscal year 2011, one direct customer accounted 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. We currently purchase wafers from a limited number of vendors. Additionally, since we do not maintain manufacturing facilities, we depend upon close relationships with contract manufacturers to assemble our products. We believe there are other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future. We are also dependent upon third parties for our probe testing. Under our fabless business model, our long-term revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity. We believe that in addition to the vendors currently utilized by us, other vendors would be able to provide these services. 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 patterns and inventory 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)revenuesASCAccounting Standards Codification (“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.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 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") from the licensesale and licensing of our intellectual property, maintenance and support 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 Accounting Standards Update ("ASU") No. 2009-13, Revenue Recognition (ASCASC Topic 605) Multiple Deliverable Revenue605-25, Multiple-Element Arrangements, to determine whether there is more than one unit of accounting.IP.intellectual property. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition. 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)IPintellectual property 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 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(VSOE)(“VSOE”); (ii) third-party evidence of selling price (TPE),(“TPE”); and (iii) best estimate of the selling price (ESP)(“ESP”). VSOE generally exists only when we sell the deliverable separately and revenue is the price actuallyThe Company hasWe have 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.Allowance for Doubtful Accounts We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, and age of the accounts receivable balances, and economic conditions that may affect a customer'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, our allowance for doubtful accounts are $2.2 million and $0, respectively. We have assessed the collectability of accounts receivable at September 30, 2011 and 2010 and determined that the allowance is sufficient for fiscal years 2011 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 could be required.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Fair Value ASC Topic 820,Fair Value Measurements ("ASC 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 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): Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets; Level 2: Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborated inputs; and Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities. We only have one Level 3 recurring fair value measurement, the compound embedded derivative. Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.Financial Instruments ASC Topic 825 "Financial Instruments" ("ASC 825"), 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:Senior Term A Loan At its inception, the fair value of Term A Loan was computed using a cash flow analysis in which the periodic 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.Senior Term B Loan At its inception, the fair value of Term B Loan was computed using a binomial lattice model. The valuation was determined using Level 3 inputs. The valuation model combined expected cash outflowsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)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.Convertible Subordinated Debt We estimate the fair values of the (convertible subordinated debt) and compound embedded derivative ("2014 Debentures") using a convertible bond valuation model within a lattice framework 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 2014 Debentures are convertible. As the conversion price is not being indexed to our common stock, the compound embedded derivative is bifurcated and presented on the balance sheet at fair value and the compound embedded derivative is marked to market. The change in the fair value of the compound embedded derivative is 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. As we intend to, and have 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 sheet as of September 30, 2011 and 2010. The valuation methodologies we use as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we 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.Inventory Inventory 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.ManufacturingR&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D also includes 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 includedmask tooling, which we fully expense in the calculationperiod, electronic design automation (“EDA”) tools, software licensing contracts, subcontracting and fabrication, depreciation and amortization, and overhead including facilities expenses.diluted loss per share because their effect is anti-dilutive.advertisingmarketing takes place.
Stock‑Based CompensationTable of ContentsNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 1—THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (Continued)Stock-based CompensationCompensation—StockCompensation-Stock Compensation ("(“ASC 718"718”) requires that all stock-basedstock‑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 estimate the expected life of a stock award as 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, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC. We are further required to estimate the fair value of stock-basedstock‑based payment awards on the date of grant using an option-pricingoption‑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-ScholesBlack‑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-ScholesBlack‑Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black-ScholesBlack‑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.stock-basedstock‑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 of each reporting period is equal to the portion of the grant-date value of the awards that have vested, 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.Recent Accounting Pronouncements In June 2011, the FASB issued ASU 2011-05,Comprehensive(Topic 220)—PresentationNet Comprehensive Income ("ASU 2011-05"), to require an entity to present the total of comprehensiveinterest income, the components of net income,foreign exchange gains and the components oflosses and other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The ASU is effective for us in our first quarter of 2013non-operating gains and should be applied retrospectively. We do not anticipate the 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,We account for income taxes pursuant to 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 requirementsprovisions of ASC subtopic 605-25,Topic 740, Revenue Recognition—Multiple Element ArrangementsIncome Taxes by allowing(“ASC 740”). Under the useasset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the best estimatefuture tax consequences attributable to differences between the financial statement carrying amounts of selling priceexisting 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 addition to vendor-specific objective evidencea 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 verifiable objective evidence (now referred to as third-party evidence)measurement analysis for determining the selling pricefinancial statement recognition and measurement of a deliverable. A vendor is now requiredtax position taken or expected to use its best estimatebe taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements 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 did not have material impact our financial statement,operations as the new guidance did not change the units of accounting within sales arrangements,income tax expense.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 management to, have a material impact on our present or future Consolidated Financial Statements.NOTE 2—COMPUTATION OF NET LOSS PER SHARE In accordance with ASC Topic 260 Earnings per Share ("ASC 260"), basicdiluted 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.and shares to be issued under our Employee Stock Purchase Plan ("ESPP"(“ESPP”), warrants, convertible preferred stock, 2014 Debentures and convertible debentures.the Term B Loan. Unexercised stock options, restricted stock units, ESPPand unvested shares and warrantsto be issued under our ESPP, are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.dilutiveallocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an as-converted basis.convertible preferred stock and convertible notes is determined using the if-converted method, which assumes any proceeds thatactual loss from a loss contingency differs from management's estimates, results of operations could be obtained uponadjusted upward or downward.exerciseFASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), to establish an optional two-step analysis for impairment testing of stock options, warrants and ESPP shares would be used to purchase common shares atindefinite-lived intangibles other than goodwill. The standards update was effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the average market price for the period.2011, 2010,2013, 2012 and 2009,2011, we recorded a net loss and in accordance with ASC 260loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation. September 30, 2013 2012 2011 (in thousands) Outstanding stock options 2,089 1,813 1,699 Outstanding restricted stock units 2,021 1,686 1,296 Outstanding warrants — — 8 ESPP shares 368 506 293 Convertible preferred stock — 674 674 2014 Debentures 10,332 10,332 10,332 Term B Loan 1,887 1,887 1,887 Total potential common stock excluded from calculation 16,697 16,898 16,189 2—COMPUTATION OF NET LOSS PER SHARE (Continued) The potential common shares excluded from the diluted computation are as follows: September 30, 2011 2010 2009 (in thousands) 1,699 1,490 913 1,296 771 172 8 8 8 674 929 — 10,332 10,332 — — — 1,899 1,887 — — 293 — — 16,189 13,530 2,992 NOTE 3—DETAILS3-DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS September 30, 2011 2010 September 30, (in thousands) 2013 2012 (in thousands) Inventory, net: $ 883 $ 2,815 $ 1,220 $ 1,394 9,247 12,854 3,652 5,359 10,727 11,604 5,820 5,307 $ 20,857 $ 27,273 Total $ 10,692 $ 12,060 September 30, 2011 2010 September 30, (in thousands) 2013 2012 (in thousands) Property, Plant and Equipment, Net: $ 89,547 $ 91,548 $ 77,865 $ 80,805 810 813 704 801 9,397 11,124 8,736 9,025 3,257 5,709 3,163 3,166 289 433 305 66 90,773 93,863 103,300 109,627 (97,366 ) (101,431 ) (87,666 ) (90,031 ) $ 5,934 $ 8,196 Total $ 3,107 $ 3,832 September 30, 2013 2012 (in thousands) Other Intangible Assets, Net: Intellectual property and technology license agreements $ 4,824 $ 4,482 Less: Accumulated amortization (3,654 ) (3,307 ) Total $ 1,170 $ 1,175 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,$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 toacquired intellectual property. The weighted average period over which intangible assets during theacquired in fiscal years 2011 or 2010. Intangible assets consist primarily of existing technologies, intellectual property,2013 and related costs for Enterprise Resource Planning ("ERP") system.$242, $402, $312, $292, $270,$282, $261, $240, $157, $122, and $263$108 in 2012, 2013, 2014, 2015, 2016, 2017, 2018 and thereafter, respectively. September 30, September 30, 2011 2010 2013 2012 (in thousands) (in thousands) Deferred tax asset $ 1,273 $ 1,420 $ 1,821 $ 1,877 1,605 1,861 831 1,651 Debt issue costs, net 287 559 418 469 260 290 $ 3,070 $ 3,997 Total $ 3,425 $ 4,130 September 30, September 30, 2011 2010 2013 2012 (in thousands) (in thousands) $ 4,384 $ 6,423 $ 3,526 $ 3,819 3,033 2,768 2,442 2,627 2,571 3,377 1,729 2,432 2,196 2,332 2,196 2,196 48 361 332 160 164 385 60 305 2,067 637 1,960 649 $ 14,463 $ 16,283 Total $ 12,245 $ 12,188 September 30, 2013 2012 (in thousands) Term A Loan, bearing interest at 10.5% as of September 30, 2013 and at 9.0% effective November 6, 2013, due August 2016 $ 7,919 $ 8,090 Term B Loan, convertible, bearing interest at 8.0% as of September 30, 2013 and at 9.0% effective November 6, 2013, due August 2016 8,444 7,755 Other 3 7 Total long-term debt, net 16,366 15,852 2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014 44,384 42,521 Total debt, net $ 60,750 $ 58,373 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) 62 (898 ) (2,109 ) Carrying value $ 7,919 $ 8,444 $ 44,384 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%. 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 on the Term B Loan are permitted at 100% of the principal amount plus accrued interest, 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.as described below. At September 30, 2011,2013, 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. TheAt September 30, 2013, conversion of the outstanding principal amount of the 2014 Debentures are convertible into ourwould result in the issuance of 10.3 million shares of common stock at a conversion price of $4.50 per share (equivalent to approximately 222 shares per $1,000 principal amount).stock. 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" equal to the 2014 Debenture'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 trading day period. The 2014 Debentures are collateralized by a second priority interest andin substantially all of our assets. As The compound embedded derivative, which expired October 30, 2012, was comprised of Septemberthe conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. Upon expiration of the make-whole payment for forgone interest, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock.2011,2012. We recorded a gain of $0.8 million into earnings due to the outstandingchange in value and reclassified the final liability value of $2.1 million, from other long-term liabilities, to equity. The 2014 Debentures were carried on the balance sheet at $40.7 million, netare collateralized by a second priority interest in substantially all of a $5.8 million remaining discount, which is amortized as interest expense over the life of the debentures.our assets.NOTES 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 10,331,778 shares of common stock and $4.0 million in make-whole amount that may be paid in cash or by delivery of 1.4 million shares of common stock. Considering the debt discount, the effective interest rate on the Debentures is 12.24%.agreementsagreement for the Term A and B Loans and the indenture for the 2014 Debenture agreements provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities, and also contain other customary default provisions. The agreements provide that we must repurchase, at the option of the holders, principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements. Upon the occurrence of fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a "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$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 $ — 2015 46,493 2016 17,199 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. Assets and liabilities measured at fair value on our balance sheet on a recurring basis include the following at September 30, 2011 and September 30, 2010: 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 There were no transfers in and out of Level 1 and Level 2 fair value measurements during fiscal year 2011.: Compound Embedded
Derivative related to
2014 Debentures (in thousands) $ 15,476 — — (7,680 ) $ 7,796 September 30, 2013 2012 (in thousands) Beginning balance $ 2,899 $ 7,796 Transfers to equity (2,096 ) — Total net gains included in earnings (803 ) (4,897 ) Ending balance $ — $ 2,899 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY (Continued)iswas included in long termlong-term liabilities, representsrepresented the value of the equity conversion feature and a "make-whole"“make-whole” feature of the 2014 Debentures. As 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 September 30, 2011,the derivative were indexed to our own stock.theour Term A and B Loans is $8.4 million and $8.6 million,2014 Debentures carried at amortized/accreted cost quarterly for disclosure purposes. As of September 30, 2011, the The estimated fair value2014 Debentures is $44.9 million excludingcomparability of its terms to the terms we could obtain, for similar instruments, in the current market.valuevalues of the compound embedded derivative of $7.8 million. September 30, 2013 2012 Carrying value Fair value Carrying value Fair value (in thousands) Term A Loan $ 7,919 $ 8,165 $ 8,090 $ 8,437 Term B Loan 8,444 9,781 7,755 9,776 2014 Debentures 44,384 49,282 42,521 46,725 6—STOCKHOLDERS'6-STOCKHOLDERS' EQUITY250,000,000250 million shares of common stock, par value $0.01, per share. We are authorized to issue up to 10,000,000 shares of preferred stock, par value of $0.01800,00019.5 million shares have been designated as Series B Preferred Stock. As of September 30, 2011, there were 134,720 shares of Series B Preferred Stock outstanding that were convertible into common stock on a five-to-one basis,are reserved 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 issuablefuture potential issuance upon conversion had such shares of Series B Preferred Stock been fully converted. During fiscal year 2011, 50,989 shares of Series B Preferred Stock were converted into 254,943 shares of common stock.NOTE 7—STOCK BASED COMPENSATION9.3 million Under all stock option plans, a total of 4,651,258 shares of common stock have been reserved for issuance under our stock compensation plans, and 1,656,0960.8 million remaining shares of common stock are reserved for issuance under our 2011 ESPP.2011.2013. 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.2011,2013, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.costscost related to our stock based compensation plans arePlan and ESPP is as follows: September 30, September 30, 2011 2010 2009 2013 2012 2011 (in thousands) (in thousands) $ 434 $ 387 $ 689 $ 617 $ 567 $ 434 984 766 940 1,616 1,530 984 1,734 1,083 1,504 2,163 2,345 1,734 $ 3,152 $ 2,236 $ 3,133 Total stock-based compensation expense $ 4,396 $ 4,442 $ 3,152 2011,2013, there was $8.2$5.6 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 for stock options and restricted stock units is expected to be recognized isNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 7—STOCK BASED COMPENSATION (Continued)2.7 years.1.7 years and 1.9 years, respectively. An estimated forfeiture rate of 5.23%2011.2013. 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 attrition. 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 2013, 2012, and 2011 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. Shares (in thousands) Weighted average
exercise price Weighted average
remaining
contractual life (in years) Aggregate
intrinsic value (in thousands)Options outstanding, September 30, 2010 1,490 $ 52.40 6.16 $ — Granted 579 4.30 Exercised — Cancelled or expired (370 ) 81.02 Options outstanding, September 30, 2011 1,699 29.77 6.37 — Granted 401 2.55 Exercised (6 ) 2.54 Cancelled or expired (281 ) 76.87 Options outstanding, September 30, 2012 1,813 16.57 6.61 2 Granted 464 2.12 Exercised (9 ) 2.24 Cancelled or expired (179 ) 16.52 Options outstanding, September 30, 2013 2,089 $ 13.43 6.67 $ 591 Options exercisable, September 30, 2013 1,273 $ 20.06 5.61 $ 178 Stock Option Plans The Compensation CommitteeThis intrinsic value represents the excess of the Board of Directors determines the totalfair market value of theour common 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 exercise over the grant using the Black-Scholes option-pricing model. Activity under all stock option plans for the three years ended September 30, 2011 was as follows: Shares Weighted average
exercise price Weighted average
remaining
contractual life (in
years) Aggregate
intrinsic value 913,141 $ 140.27 4.34 $ 209 235,724 7.42 — — — (87,049 ) 158.00 — 1,061,816 $ 109.32 4.61 $ 2,000 574,699 5.12 — (146,151 ) 280.06 1,490,364 $ 52.40 6.16 $ — 579,114 4.30 — — — — (370,295 ) 81.02 — 1,699,183 29.77 6.37 836,912 $ 55.46 3.88 $ — pricesprice of $2.95, $3.61, and $7.40,$3.04, as of September 30, 2011, 2010, and 2009, respectively,2013, 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 nowere 0.3 million 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 BulletinSAB 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, 2013 2012 2011 Expected life (in years) 5.66 6.61 6.17 Expected volatility: Weighted-average 82.0% 86.9% 85.9% Range 79.8% - 82.1% 82.2% - 87.1% 85.7% - 87.9% Expected dividend — — — Risk-free interest rate 0.9% - 1.7% 1.0% - 1.3% 1.1% - 2.8% 2010,was $1.44, $1.80 and 2009 was $3.16, $3.80, and $4.58, 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 $2.10 420 9.43 $ 2.10 101 $ 2.10 2.15 - 3.33 432 8.29 2.62 216 2.73 3.80 - 5.20 749 6.77 4.79 478 4.87 5.40 - 63.60 422 3.07 35.08 412 35.82 66.40 - 174.80 66 0.23 115.62 66 115.62 $2.10 - $174.80 2,089 6.67 $ 13.43 1,273 $ 20.06 directors and to certain employees.directors. Grants vest over varying terms, to a maximum of four years from the date of the grant. Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 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'srecipient’s employment or board term terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors. 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, 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 Awarded 1,527 2.12 Released (1,045 ) 3.19 Forfeited (147 ) 2.88 Restricted stock units, September 30, 2013 2,021 $ 2.65 1.13 $ 6,143 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 7—STOCK BASED COMPENSATION (Continued) A summaryWe issue restricted stock units as part of our 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 each of the years ended September 30, 2013, 2012, and 2011, and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders' equity. There was no such withholdingstockholders’ equity (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. In January 2011, our stockholders approved the 2011under which 2.5 million shares of common stock are reserved for issuance. Under the terms of this plan,whereby eligible employees may contributeauthorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares of our common stock. Purchases are made semiannually andat the purchase pricelower of the common stock is equal to 85% of the fair market value of the common stock on the firstdate of the commencement of the offering or on the last day of the 6-month offering period, whichever is lower.first purchase period began on August 1,Company recognized $0.6 million, $0.6 million and $0.1 million stock compensation expense under the ESPP during the years ended September 30, 2013, 2012 and 2011, and ends January 31, 2012. Therespectively. We determine the fair value of the ESPP awards are calculated in accordance with ASC 718-50 "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. WeUnderlying assumptions used the following assumptions: expected useful life of 0.5 years, weighted average expected volatility of 40.4%, our expected dividend rate, and a risk-free interest rate of 0.2%. We recognized approximately $0.1 million in stock compensation for the year ended September 30, 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. September 30, 2013 2012 2011 Expected life (in years) 0.5 0.5 0.5 Expected volatility (range) 47.6% - 49.8% 40.4% - 48.4% 40.4% Expected dividend — — — Risk-free interest rate 0.11% - .14% 0.09% - .20% .20% NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)(loss)loss before income from continuing operations before (benefit) provision for income taxestax benefit for the years ended September 30, 2011, 20102013, 2012 and 20092011 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, 2013 2012 2011 (in thousands) (Loss) income before income taxes: Domestic $ (23,646 ) $ (3,406 ) $ (17,451 ) Foreign 1,020 2,120 2,020 $ (22,626 ) $ (1,286 ) $ (15,431 ) (benefit) expensebenefit consists of the following for the years ended September 30, 2011, 20102013, 2012 and 2009:2011: September 30, 2011 2010 2009 (in thousands) $ (248 ) $ 843 $ (1,675 ) (367 ) 452 (103 ) (3 ) 226 327 $ (619 ) $ 1,521 $ (1,451 ) September 30, 2013 2012 2011 (in thousands) Income tax (benefit) expense: Current: Federal $ — $ (188 ) $ (248 ) State 54 41 (367 ) Foreign (758 ) 1,510 (4 ) Total current (704 ) 1,363 (619 ) Deferred: Federal — — — State — — — Foreign 156 (1,537 ) — Total deferred 156 (1,537 ) — Total income tax benefit: $ (548 ) $ (174 ) $ (619 ) There was no deferred tax expense for the periods presented.(benefit) provision for income tax expensebenefit by applying the statutory United States federal income tax rate to loss before income tax benefit is as follows: September 30, 2011 2010 2009 September 30, (in thousands, except for percentages) 2013 2012 2011 $ (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 $ (7,693 ) 34.0 % $ (437 ) 34.0 % $ (5,246 ) 34.0 % State tax benefit net of federal benefit (536 ) 2.4 % (13 ) 1.0 % (409 ) 2.7 % 5 (0.03 )% 226 (1.21 )% 327 (0.17 )% (1,156 ) 5.1 % 1,102 (85.7 )% 5 — % — — — — 65,792 (32.64 )% Tax credits (438 ) 1.9 % (1,230 ) 95.6 % — — % 1,108 (7.18 )% 194 (1.04 )% 714 (0.37 )% 771 (3.4 )% 1,015 (78.9 )% 1,108 (7.2 )% (636 ) 4.15 % 366 (1.96 )% — — 87 (0.4 )% (100 ) 7.9 % (636 ) 4.2 % (568 ) 3.68 % 328,862 (1757.14 )% (224 ) 0.10 % 7,164 (31.7 )% (1,147 ) 89.2 % (568 ) 3.7 % 5,127 (33.24 )% (321,308 ) 1716.67 % — — 1,253 (5.5 )% 636 (49.5 )% 5,127 (33.2 )% $ (619 ) 4.03 % $ 1,521 (8.13 )% $ (1,451 ) 0.74 % Income tax benefit $ (548 ) 2.4 % $ (174 ) 13.6 % $ (619 ) 4.0 % 2011 was 4.03%. ended September 30, 2013 compared to 13.6% and 4.0% for the comparable periods in the prior years. Our income tax benefit is primarily impacted by foreign taxes, a refund of withholding taxes on foreign income that would have been creditable against United States income taxes, 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 certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the reversalapplicable carryforward period based on our analysis of uncertain tax positions due to the statute of limitations expiration,available positive and negative evidence.refundable federal income tax, reversal of foreign deferred tax liabilities, minimum taxes, 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, 2013 2012 2011 (in thousands) Deferred Tax Assets: Net operating loss carryforward $ 27,110 $ 55,317 $ 53,938 Research and development tax credits 10,574 11,533 7,887 Deferred income 2,664 1,724 — Stock options 12,313 12,594 11,148 Fixed assets and intangible property 7,955 10,001 9,189 Inventory 2,256 2,940 3,168 Allowances and reserves 9,277 9,928 10,752 State taxes — — 1 Foreign tax credit/AMT credit 88 1,398 241 Other 11 — — Total deferred tax assets 72,248 105,435 96,324 Deferred Tax Liabilities: Debt amortization (2,065 ) (1,485 ) (655 ) Other — (5 ) (2,998 ) Total deferred tax liabilities $ (2,065 ) $ (1,490 ) $ (3,653 ) Net deferred income taxes 70,183 103,945 92,671 Valuation allowance (68,802 ) (102,408 ) (92,671 ) Total deferred tax asset $ 1,381 $ 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. Becausehave historically experienced net tax losses, we have placed a valuation allowance against our otherwise recognizable deferred tax assets. We have NOL carryforwards ofhad approximately $82.9$37.6 million, $41.7$32.6 million, and $234.6$133.7 million forof federal, state, and foreign income tax purposes at September 30, 2011, whichNet Operating Losses (“NOLs”), respectively, that can be carried forward to offsetused in future taxable income.tax years. We also have available federal and state research and development tax credit carryforwards of approximately $1.2$0.4 million and $10.1$10.2 million, respectively. In addition, we also have approximately $0.2 million in foreign tax credits to offset future taxable income. The federal NOLs and tax credits may be carried forward through 2031;2033; state NOLs may be carried forward through 2031;2033; state tax credits may be carried forward indefinitely; and foreign NOLs have various carryforward provisions in several jurisdictions. The Federal Tax Reform Act1986, and similar state laws, contains provisions that may limit the NOL and tax credits carryforwardscommon stock in a public offering which is believed to be usedhave resulted in any given year upon the occurrence of certain events, including a significant change in ownership interests. Under IRC Section 382 and 383 rules,ownership change. In general, a Section 382 ownership change in ownership can occur wheneveroccurs if there is a shiftcumulative change in our ownership by more than fifty“5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points by oneNOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 8—INCOME TAXES (Continued)or more five-percent stockholders withinover a rolling three-year period. When aAn ownership change of ownership occurs,generally affects the rate at which NOLs and credits may be impaired. We performed a studypotentially other deferred tax assets are permitted to evaluate the status ofoffset future taxable income. 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 purposesNOL amount 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 Federal NOLs that can be used in future tax years. Of this amount, $56.32013, $28.1 million is subject to an annual Section 382 limitation of $3.1$1.4 million due to the December 2012 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in utilizingan impact to our NOLs. Theprovision for income taxes for the year ended September 30, 2013, or on our net deferred tax asset as of September 30, 2013.expire in fiscal year 2031.$10.2$10.6 million as of September 30, 20112013 and approximately $10.6$10.8 million as of September 30, 2010.2012. The total amount of gross unrecognized tax benefits decreased by ($0.4)$0.2 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.2011,2013, approximately $0.3$0.2 million of the $10.2$10.6 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$10.4 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, 2010,2012, approximately $0.7$0.2 million of the $10.6$10.8 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$10.6 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 ) 2013 2012 2011 (in thousands) Beginning balance as of September 30: $ (10,822 ) $ (10,215 ) $ (10,615 ) Gross decreases - tax positions in prior period 354 — 200 Gross increases - current-period tax positions (147 ) (47 ) — Gross increases - tax positions in prior period — (560 ) — Reductions as a result of a lapse of statute of limitations — — 200 Ending balance as of September 30: $ (10,615 ) $ (10,822 ) $ (10,215 ) inwithin the consolidated statements of operations as income tax expense. As of September 30, 2011,2013, there waswere no material interest or penalties were accrued due to significant net operating loss.USUnited States and various state and foreign jurisdictions. The 20072009 through 20102013 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 twelve12 months.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)RESTRUCTURING AND IMPAIRMENT CHARGES The activity related to the excess facility and severance accruals under our restructuring plans during the three years Ended September 30, 2011, by year of plan, were 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 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 for fiscal year 2009. 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 termination 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 and exited an adjacent leased facility. As a result of the lease exit, we incurred $1.4 million in 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.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 9—RESTRUCTURING AND IMPAIRMENT CHARGES (Continued) The fair value of the lease termination liability was determined based upon 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 represent our best estimate of the obligations we expect to incur and could be subject to adjustments as market conditions change. Changes to 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 the lease termination accrual.NOTE 10—SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION 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, 2013 2012 2011 Nu Horizons Electronics ** * 13.5 % 20.6 % WPG Holdings** 17.7 % 10.7 % * Huawei * * 10.3 % We manage and operate our business through one operating segment. Revenues are summarized September 30, 2013 2012 2011 (in thousands) United States $ 28,454 $ 41,559 $ 51,698 Asia Pacific 61,454 62,260 63,923 EMEA* 13,865 15,664 25,346 Total net revenues $ 103,773 $ 119,483 $ 140,967 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) September 30, September 30, 2011 2010 2009 2013 2012 2011 (in thousands) (in thousands) $ 67,734 $ 82,522 $ 72,573 $ 42,885 $ 52,933 $ 67,734 37,940 46,714 42,002 38,675 32,607 37,940 27,068 36,397 40,352 19,774 24,380 27,068 $ 132,742 $ 165,633 $ 154,927 Product revenues $ 101,334 $ 109,920 $ 132,742 Substantially all long-lived assets are located in the United States. by countryare summarized as follows: September 30, 2011 2010 (in thousands) $ 8,295 $ 11,377 255 263 454 553 $ 9,004 $ 12,193 September 30, 2013 2012 (in thousands) Located within the United States $ 5,040 $ 6,034 Located outside the United States 1,492 1,928 $ 6,532 $ 7,962 11—10—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 $0.8 million for fiscal year 2013, $0.7 million for fiscal year 20112012, and $0.3$0.7 million for eachfiscal year 2011.2009.NOTE 12—COMMITMENTS AND CONTINGENCIESexpiringexpire 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 million, $3.8 million, and $3.9$3.5 million for fiscal year 2013, $3.0 million for fiscal year 2012, and $3.8 million for fiscal year 2011.fiscal years 2011, 2010, and 2009, respectively.NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 12—COMMITMENTS AND CONTINGENCIES (Continued) 2012 2013 2014 2015 2016 Thereafter Total (in thousands) 2014 2015 2016 2017 2018 Thereafter Total $ 3,104 $ 2,956 $ 1,908 $ 1,150 $ 199 $ — $ 9,317 (in thousands) Operating leases $ 2,068 $ 1,128 $ 199 $ — $ — $ — $ 3,395 8,483 3,700 3,233 2,800 2,800 5,600 26,616 8,147 6,689 2,800 2,800 2,800 — 23,236 $ 11,587 $ 6,656 $ 5,141 $ 3,950 $ 2,999 $ 5,600 $ 35,933 Total $ 10,215 $ 7,817 $ 2,999 $ 2,800 $ 2,800 $ — $ 26,631
NOTE 12—CONTINGENCIES(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. Software license commitments represent non-cancellable licenses of intellectual property from third-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, 20112013 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 indemnitiesagainst 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.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 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 First Quarter Second Quarter Third Quarter Fourth Quarter Total Year (in thousands) Fiscal Year 2013: Net revenues: Product revenues $ 23,905 $ 24,689 $ 26,285 $ 26,455 $ 101,334 Intellectual property revenues 1,822 64 133 420 2,439 Net revenues 25,727 24,753 26,418 26,875 103,773 Cost of product revenues 10,975 11,369 11,666 12,753 46,763 Loss from operations (3,819 ) (3,872 ) (4,291 ) (3,492 ) (15,474 ) Net loss (5,032 ) (4,847 ) (6,434 ) (5,765 ) (22,078 ) Net loss per share: Basic and diluted $ (0.18 ) $ (0.13 ) $ (0.17 ) $ (0.10 ) $ (0.55 ) Weighted average shares outstanding: Basic and diluted 28,059 37,215 38,630 57,254 40,311 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 and diluted $ (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 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)NOTE 13—QUARTERLY FINANCIAL DATA (UNAUDITED) (Continued)firstsecond quarter of fiscal year 2011,2012, we commenced a reductionsuccessfully collected on workforcethe fourth quarter of fiscal year 2011. In the third quarter of fiscal year 2012, we successfully collected on $1.2 million of bad debts that were reserved for in Westford, resulting in severance coststhe fourth quarter of $0.6 million.fiscal year 2011. In the fourth quarter of fiscal year 2011,2012, we commenced a second reduction in workforce primarily in the United States, resulting in additional severance costssuccessfully collected on $0.5 million 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 chargesbad debts that were reserved for in the fourth quarter of fiscal year 2011. In the second quarter of fiscal year 2011, we recognized a $3.9 million loss on the debt exchange with our senior debt holder. In Also in the fourth quarter of fiscal year 2011,2012, we recognized an impairment lossdetermined 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 $2.2 million related to specific, potentially uncollectible accounts receivable balances. None20112013 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, 2011,2013, our disclosure controls and procedures were effective.Management's20112013 based on the framework inInternal Control—IntegratedControl-Integrated Framework (1992) 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, 2011.2013.LLP'sLLP’s attestation report appears in this Form 10-K.20112013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. of 2011,2013, based on criteria established inInternal Control—Control - Integrated Framework (1992) 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.20112013, based on the COSO criteria.20112013 and 2010,2012, and the related consolidated statements of operations, stockholders' deficit,equity (deficit), and cash flows for each of the three years in the period ended September 30, 20112013 and our report dated December 6, 20115, 2013 expressed an unqualified opinion thereon.6, 20115, 2013a definitive proxy statement pursuant to Regulation 14A in connection with the solicitation of proxies for our Annual Meeting of Stockholders expected to be held in January 2012 (the "Proxy Statement") notno later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) in connection with the solicitation of proxies for our 2014 Annual Meeting of Stockholders and certain information to be 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."”ACCOUNTINGACCOUNTANT 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)
See Schedule II "Valuation“Valuation and Qualifying Accounts."”
(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, 2013 Deducted from accounts receivable: Allowance for doubtful accounts $ 258 $ (142 ) $ — $ (116 ) $ — Deducted from deferred tax asset Valuation allowance 102,408 (487 ) — (33,119 ) 68,802 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 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 5, 2013 VITESSE SEMICONDUCTOR CORPORATION (Registrant)Dated: December 6, 2011
By: /s/CHRISTOPHER R. GARDNER CHRISTOPHERChristopher R. GARDNER
GardnerChief Executive Officer December 5, 2013 VITESSE SEMICONDUCTOR CORPORATION By: /s/ MARTIN S. MCDERMUT Martin S. McDermut Chief Financial Officer (Principal Financial and Accounting Officer) Dated: December 6, 20115, 2013S/ CHRISTOPHERs/ Christopher R. GARDNERGardnerCHRISTOPHERGARDNER
GardnerDated: December 6, 20115, 2013S/ MARTIN S. MCDERMUT
s/ Martin S. McDermutDated: December 6, 20115, 2013/S/ STEVEN P. HANSONSTEVEN P. HANSONDated: December 6, 20115, 2013December 5, 2013 December 5, 2013 S/ JAMES HUGARs/ Scot B. JarvisJAMES HUGARDecember 5, 2013 December 5, 2013 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••••Vitesse'sVitesse’s other public filings, which are available without charge through the SEC'sSEC’s website at www.sec.gov. Incorporated by Reference Exhibit
Number Filed
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 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 January 30, 2013. 10-Q 001-31614 10.1 August 6, 2013 10.2* Employment Agreement, dated effective November 30, 2011, between the Registrant and Martin Nuss. 10-Q 001-31614 10.1 February 7, 2012 10.3* Employment Agreement between the Registrant and Martin S. McDermut dated July 27, 2011. 10-K 001-31614 10.2 December 6, 2011 10.4* Separation and General Release Agreement, dated May 17, 2012, between Registrant and Steve M. Perna. 10-Q 001-31614 10.1 August 7, 2012 10.5* Form of Indemnity Agreement between each of the directors and the Registrant. 8-K 001-31614 10.1 August 22, 2007 10.6*† Vitesse Semiconductor Corporation Fiscal Year 2013 Executive Bonus Plan, dated as of November 28, 2012. 10-Q 001-31614 10.1 February 5, 2013 10.7* 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 10.8* 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 10.9* 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 10.10* Vitesse Semiconductor Corporation 2010 Incentive Plan. 14A 001-31614 App. A March 31, 2010 10.11* 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 10.12* 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 10.13* Vitesse Semiconductor Corporation 2013 Incentive Plan. 8-K 001-31614 10.1 March 8, 2013 10.14* Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2013 Incentive Plan. X 10.15* Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2013 Stock Incentive Plan. X 10.16* Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2013 Stock Incentive Plan. X 10.17* Vitesse Semiconductor Corporation 2011 Employee Stock Purchase Plan. 14A 000-19654 App. A December 1, 2010 10.18 Loan Agreement, dated August 23, 2007 between the Registrant and Whitebox VSC, Ltd. 8-K 001-31614 10.3 August 29, 2007 10.19 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 10.20 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 10.21 Third Amendment to Loan Agreement, dated as of November 5, 2013, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent. 8-K 001-31614 10.1 November 7, 2013 10.22 Form of Letter Agreement, dated as of November 5, 2013, between Registrant and certain holders of the Registrant’s 8.0% convertible second lien debentures due October 2014. 8-K 001-31614 10.2 November 7, 2013 10.23 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 21.0 List of Subsidiaries. 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 Incorporated by Reference Exhibit
Number Filed
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
Number Filed
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
Number Filed
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 * Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K. Incorporated† Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by ReferenceExhibitNumberFiledHerewithExhibit DescriptionFormFile NumberExhibitFiling Date101.CAL** XBRL 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**Xinformation 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.*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.
