Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31,June 30, 2011

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to

 

Commission file number 0-19654

 


 

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0138960

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
Identification No.)

 

741 Calle Plano

Camarillo, California 93012

(Address of principal executive offices)(zip code)

 

Registrant’s telephone number, including area code: (805) 388-3700

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ox  No o

 

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

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

As of May 1,August 4, 2011, there were 24,437,69624,454,924 shares of the registrant’s $0.01 par value common stock outstanding.

 

 

 



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

(UNAUDITED) QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND SIXNINE MONTHS ENDED MARCH 31,JUNE 30, 2011

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

 

 

Unaudited Consolidated Balance Sheets as of March 31,June 30, 2011 and September 30, 2010

 

 

Unaudited Consolidated Statements of Operations for the Three and SixNine Months Ended March 31,June 30, 2011 and 2010

 

 

Unaudited Consolidated Statements of Stockholders’ Deficit for the SixNine Months Ended March 31,June 30, 2011

 

 

Unaudited Consolidated Statements of Cash Flows for the SixNine Months Ended March 31,June 30, 2011 and 2010

 

Notes to Unaudited Consolidated Financial Statements

Item 2.

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

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

Legal Proceedings

Item 1A.

Risk Factors

Item 6.

Exhibits

 

2



Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1:  FINANCIAL STATEMENTS

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

March 31,

 

September 30,

 

 

June 30,

 

September 30,

 

 

2011

 

2010

 

 

2011

 

2010

 

 

(in thousands, except share data)

 

 

(in thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

18,233

 

$

38,127

 

 

$

18,156

 

$

38,127

 

Accounts receivable

 

15,372

 

15,765

 

Accounts receivable, net

 

12,478

 

15,765

 

Inventory

 

25,907

 

27,273

 

 

24,948

 

27,273

 

Restricted cash

 

1,901

 

394

 

Prepaid expenses and other current assets

 

2,075

 

3,307

 

 

1,774

 

2,913

 

Total current assets

 

61,587

 

84,472

 

 

59,257

 

84,472

 

Property, plant and equipment, net

 

8,329

 

8,196

 

 

7,742

 

8,196

 

Other intangible assets, net

 

1,454

 

864

 

 

1,842

 

864

 

Other assets

 

3,351

 

3,997

 

 

3,186

 

3,997

 

 

$

74,721

 

$

97,529

 

Total Assets

 

$

72,027

 

$

97,529

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,092

 

$

13,216

 

 

$

9,657

 

$

13,216

 

Accrued expenses and other current liabilities

 

12,981

 

16,293

 

 

13,015

 

16,293

 

Deferred revenue

 

3,367

 

6,926

 

 

2,119

 

6,926

 

Current portion of debt and capital leases

 

1,510

 

 

Total current liabilities

 

27,440

 

36,435

 

 

26,301

 

36,435

 

 

 

 

 

 

 

 

 

 

 

Other long-term liabilities

 

1,580

 

1,729

 

 

1,501

 

1,729

 

Long-term debt, net

 

16,841

 

26,070

 

 

15,411

 

26,070

 

Derivative liability

 

20,936

 

15,476

 

 

12,985

 

15,476

 

Convertible subordinated debt, net of discount

 

39,869

 

39,025

 

 

40,298

 

39,025

 

Total liabilities

 

106,666

 

118,735

 

 

96,496

 

118,735

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value. 10,000,000 shares authorized; 134,720 and 185,709 shares outstanding at March 31, 2011 and September 30, 2010, respectively

 

1

 

2

 

Common stock, $0.01 par value. 250,000,000 shares authorized; 24,437,696 and 23,986,531 shares outstanding at March 31, 2011 and September 30, 2010, respectively

 

245

 

240

 

Preferred stock, $0.01 par value. 10,000,000 shares authorized; 134,720 and 185,709 shares outstanding at June 30, 2011 and September 30, 2010, respectively

 

1

 

2

 

Common stock, $0.01 par value. 250,000,000 shares authorized; 24,454,924 and 23,986,531 shares outstanding at June 30, 2011 and September 30, 2010, respectively

 

245

 

240

 

Additional paid-in-capital

 

1,822,908

 

1,816,796

 

 

1,823,834

 

1,816,796

 

Accumulated deficit

 

(1,855,099

)

(1,838,326

)

 

(1,848,549

)

(1,838,326

)

Total Vitesse Semiconductor Corporation stockholders’ deficit

 

(31,945

)

(21,288

)

 

(24,469

)

(21,288

)

Noncontrolling interest

 

 

82

 

 

 

82

 

Total stockholders’ deficit

 

(31,945

)

(21,206

)

 

(24,469

)

(21,206

)

 

$

74,721

 

$

97,529

 

 

$

72,027

 

$

97,529

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months ended
March 31,

 

Six Months ended
March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

34,403

 

$

43,661

 

$

71,999

 

$

85,272

 

Intellectual property revenues

 

2,489

 

250

 

2,640

 

290

 

Net revenues

 

36,892

 

43,911

 

74,639

 

85,562

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

12,995

 

19,362

 

27,343

 

38,465

 

Engineering, research and development

 

14,976

 

12,276

 

29,422

 

24,235

 

Selling, general and administrative

 

9,978

 

9,083

 

20,436

 

19,612

 

Accounting remediation & reconstruction expense & litigation costs

 

 

 

 

73

 

Amortization of intangible assets

 

61

 

182

 

226

 

431

 

Costs and expenses

 

38,010

 

40,903

 

77,427

 

82,816

 

 

 

 

 

 

 

 

 

 

 

(Loss) income from operations

 

(1,118

)

3,008

 

(2,788

)

2,746

 

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense, net

 

2,039

 

2,544

 

4,558

 

5,637

 

Loss on embedded derivative

 

1,976

 

30,407

 

5,460

 

37,534

 

Loss on extinguishment of debt

 

3,874

 

 

3,874

 

21,576

 

Other income, net

 

(41

)

(30

)

(56

)

(106

)

Other expense, net

 

7,848

 

32,921

 

13,836

 

64,641

 

Loss before income tax expense

 

(8,966

)

(29,913

)

(16,624

)

(61,895

)

Income tax expense

 

75

 

4,147

 

149

 

6,025

 

Net loss

 

(9,041

)

(34,060

)

(16,773

)

(67,920

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net loss available to common stockholders

 

$

(9,041

)

$

(34,060

)

$

(16,773

)

$

(68,046

)

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.37

)

$

(1.69

)

$

(0.69

)

$

(3.62

)

Fair value adjustment of Preferred Stock - Series B, per common share

 

 

 

 

0.01

 

Net loss per share available to common stockholders

 

$

(0.37

)

$

(1.69

)

$

(0.69

)

$

(3.63

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding - basic and diluted

 

24,303

 

20,195

 

24,175

 

18,768

 

 

 

Three Months ended 
June 30,

 

Nine Months ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

31,856

 

$

37,533

 

$

103,855

 

$

122,805

 

Intellectual property revenues

 

4,132

 

 

6,772

 

290

 

Net revenues

 

35,988

 

37,533

 

110,627

 

123,095

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

13,488

 

15,702

 

40,831

 

54,167

 

Engineering, research and development

 

12,551

 

13,674

 

41,974

 

37,909

 

Selling, general and administrative

 

9,561

 

8,669

 

29,997

 

28,354

 

Amortization of intangible assets

 

62

 

182

 

288

 

613

 

Costs and expenses

 

35,662

 

38,227

 

113,090

 

121,043

 

Income (loss) from operations

 

326

 

(694

)

(2,463

)

2,052

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

1,929

 

2,496

 

6,487

 

7,036

 

(Gain) loss on embedded derivative

 

(7,951

)

(32,771

)

(2,491

)

5,860

 

(Gain) loss on extinguishment of debt

 

 

(265

)

3,874

 

21,311

 

Other expense (income), net

 

25

 

61

 

(32

)

(45

)

Other (income) expense, net

 

(5,997

)

(30,479

)

7,838

 

34,162

 

Income (loss) before income tax expense (benefit)

 

6,323

 

29,785

 

(10,301

)

(32,110

)

Income tax (benefit) expense

 

(227

)

(3,244

)

(78

)

2,781

 

Net income (loss)

 

6,550

 

33,029

 

(10,223

)

(34,891

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net income (loss) available to common stockholders

 

$

6,550

 

$

33,029

 

$

(10,223

)

$

(35,017

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share - basic

 

$

0.26

 

$

1.38

 

$

(0.42

)

$

(1.74

)

Net income (loss) per common share - diluted

 

$

0.21

 

$

0.99

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

24,447

 

22,780

 

24,266

 

20,105

 

Diluted

 

37,543

 

34,544

 

24,266

 

20,105

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total Vitesse
Semiconductor
Corporation

 

Non

 

Total 

 

 

Preferred Stock

 

Common Stock

 

Additional Paid-

 

Accumulated

 

Total Vitesse
Semiconductor
Corporation
Stockholders’

 

Non
Controlling

 

Total
Stockholders’

 

 

Preferred Stock

 

Common Stock

 

Paid-in-

 

Accumulated

 

Stockholders’

 

Controlling

 

Stockholders’

 

(In thousands, except share data)

 

Shares

 

Amount

 

Shares

 

Amount

 

in-Capital

 

Deficit

 

Deficit

 

Interest

 

Deficit

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Deficit

 

Interest

 

Deficit

 

Balance at September 30, 2010

 

185,709

 

$

2

 

23,986,531

 

$

240

 

$

1,816,796

 

$

(1,838,326

)

$

(21,288

)

$

82

 

$

(21,206

)

 

185,709

 

$

2

 

23,986,531

 

$

240

 

$

1,816,796

 

$

(1,838,326

)

$

(21,288

)

$

82

 

$

(21,206

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

(16,773

)

(16,773

)

 

(16,773

)

 

 

 

 

 

 

 

 

 

 

 

(10,223

)

(10,223

)

 

(10,223

)

Compensation expense related to stock options and awards

 

 

 

 

 

1,608

 

 

1,608

 

 

1,608

 

 

 

 

 

 

2,534

 

 

2,534

 

 

2,534

 

Residual value allocated to the equity conversion feature of Term B Loan

 

 

 

 

 

2,490

 

 

2,490

 

 

2,490

 

Premium related to Term B Loan issued in debt exchange

 

 

 

 

 

2,572

 

 

 

2,572

 

 

 

2,572

 

Residual value allocated to the equity conversion feature

 

 

 

 

 

2,490

 

 

2,490

 

 

2,490

 

Premium related to term B Loan issued in debt exchange

 

 

 

 

 

2,572

 

 

2,572

 

 

2,572

 

Conversion of Series B Preferred Shares

 

(50,989

)

(1

)

254,943

 

3

 

(2

)

 

 

 

 

 

(50,989

)

(1

)

254,943

 

3

 

(2

)

 

 

 

 

Release of restricted stock units

 

 

 

297,201

 

3

 

(3

)

 

 

 

 

 

 

 

314,429

 

3

 

(3

)

 

 

 

 

Repurchase and retirement of restricted stock units for payroll taxes

 

 

 

(100,979

)

(1

)

(553

)

 

(554

)

 

(554

)

 

 

 

(100,979

)

(1

)

(553

)

 

(554

)

 

(554

)

Distribution to minority interest holders

 

 

 

 

 

 

 

 

(82

)

(82

)

 

 

 

 

 

 

 

 

(82

)

(82

)

Balance at March 31, 2011

 

134,720

 

$

1

 

24,437,696

 

$

245

 

$

1,822,908

 

$

(1,855,099

)

$

(31,945

)

$

 

$

(31,945

)

Balance at June 30, 2011

 

134,720

 

$

1

 

24,454,924

 

$

245

 

$

1,823,834

 

$

(1,848,549

)

$

(24,469

)

$

 

$

(24,469

)

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Six Months Ended March 31,

 

 

Nine Months ended June 30,

 

 

2011

 

2010

 

 

2011

 

2010

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(16,773

)

$

(67,920

)

 

$

(10,223

)

$

(34,891

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Adjustments to reconcile net loss to net cash (used in) provided by operating

 

 

 

 

 

Depreciation and amortization

 

1,856

 

1,730

 

 

2,765

 

2,615

 

Share-based compensation

 

1,608

 

1,127

 

 

2,534

 

1,724

 

Change in market value of embedded derivative liability

 

5,460

 

38,631

 

 

(2,491

)

5,860

 

Gain on conversion of debt

 

 

(265

)

Gain on disposal of fixed assets

 

(42

)

 

 

(45

)

 

Loss on extinguishment of debt

 

3,874

 

20,765

 

 

3,794

 

20,765

 

Capitalization of interest to principal

 

415

 

614

 

 

415

 

937

 

Amortization of debt issuance costs

 

210

 

398

 

 

276

 

605

 

Amortization of debt discounts

 

917

 

831

 

 

1,468

 

1,311

 

Amortization of debt premium

 

(30

)

 

Amortization of debt premiums

 

(80

)

 

Other

 

(131

)

510

 

 

(24

)

510

 

 

 

 

 

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Accounts receivable

 

393

 

(3,069

)

 

3,287

 

1,809

 

Inventory

 

1,366

 

(1,047

)

 

2,325

 

(5,432

)

Prepaids and other assets

 

1,194

 

309

 

 

1,132

 

266

 

Accounts payable

 

(2,124

)

141

 

 

(3,559

)

3,725

 

Accrued expenses and other liabilities

 

(3,342

)

6,928

 

 

(3,438

)

1,346

 

Deferred revenue

 

(3,559

)

(1,451

)

 

(4,807

)

154

 

 

 

 

 

 

Net cash used in operating activities

 

(8,708

)

(1,503

)

Net cash (used in) provided by operating activities

 

(6,671

)

1,039

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

Capital expenditures

 

(2,488

)

(1,228

)

 

(3,178

)

(2,261

)

Other

 

 

(3

)

 

 

(3

)

 

 

 

 

 

Net cash used in investing activities

 

(2,488

)

(1,231

)

 

(3,178

)

(2,264

)

 

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

Payment of convertible debentures

 

 

(10,000

)

 

 

(10,000

)

Payment of senior debt

 

(8,000

)

(5,000

)

 

(8,000

)

(5,000

)

Cash restricted for payment of senior debt

 

(1,500

)

 

Equity issuance costs

 

 

(1,050

)

 

 

(1,050

)

Debt issuance costs

 

(60

)

(1,365

)

 

(60

)

(1,365

)

Prepayment fee on senior debt

 

(80

)

(50

)

 

 

(50

)

Repurchase and retirement of restricted stock units for payroll taxes

 

(554

)

 

 

(554

)

 

Capital lease obligations

 

(4

)

(155

)

 

(8

)

(233

)

Net cash used in financing activities

 

(8,698

)

(17,620

)

 

(10,122

)

(17,698

)

 

 

 

 

 

 

 

 

 

 

Net decrease in cash

 

(19,894

)

(20,354

)

 

(19,971

)

(18,923

)

Cash and cash equivalents at beginning of period

 

38,127

 

57,544

 

 

38,127

 

57,544

 

Cash and cash equivalents at end of period

 

$

18,233

 

$

37,190

 

 

$

18,156

 

$

38,621

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non cash transactions:

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

 

 

Interest

 

$

3,056

 

$

705

 

 

$

5,249

 

$

4,155

 

Income taxes

 

$

336

 

$

855

 

 

$

511

 

$

643

 

Non cash investing and financing activites:

 

 

 

 

 

 

 

 

 

 

Common stock issued in exchange for Series B Preferred Stock

 

$

3

 

$

 

 

$

3

 

$

27,584

 

Common stock issued for restricted stock units

 

$

3

 

$

 

 

$

3

 

$

 

Residual value allocated to the equity conversion feature of Term B Loan

 

$

2,490

 

$

 

Premium related to Term B Loan issued in debt exchange

 

$

2,572

 

 

 

Residual value allocated to the equity conversion feature

 

$

2,490

 

$

 

Premium related to term B Loan issued in Debt exchange

 

$

2,572

 

$

 

Issuance of 2014 convertible debentures

 

$

 

$

40,343

 

 

$

 

$

40,343

 

Common stock issued in exchange for 2024 debentures

 

$

 

$

36,317

 

 

$

 

$

36,317

 

Preferred stock - Series B issued in exchange for 2024 debentures

 

$

 

$

16,187

 

 

$

 

$

16,187

 

Compound embedded derivative issued in exchange for 2024 debentures

 

$

 

$

27,925

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

March 31,June 30, 2011

 

Note 1. The Company and Its Significant Accounting Policies

 

Description of Business

 

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are utilized 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 more than 25 years, Vitesse has been a leader in the transition of new technologies in communications networks.

 

Vitesse was incorporated in the state of Delaware in 1987. The Company’s principal office is located at 741 Calle Plano, Camarillo, California, and its phone number is (805) 388-3700. The Company’s stock trades on the Nasdaq Global Market under the ticker symbol VTSS.

 

Fiscal Year

 

The Company’s fiscal year is October 1 through September 30.

 

Basis of Presentation

 

The interim unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by generally accepted accounting principles in the United States (“GAAP”) for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended September 30, 2010, included in our Annual Report on Form 10-K filed with the SEC on December 1, 2010.

 

The consolidated financial statements included herein are unaudited; however, they contain all normal recurring accruals and adjustments that, in the opinion of management, are necessary to present fairly our consolidated financial position at March 31,June 30, 2011 and September 30, 2010, the consolidated results of our operations for the three and sixnine months ended March 31,June 30, 2011 and 2010, , our consolidated cash flows for the sixnine months ended March 31,June 30, 2011 and 2010, and the changes in our stockholders’ deficit for the sixnine months ended March 31,June 30, 2011. The results of operations for the three and sixnine months ended March 31,June 30, 2011 are not necessarily indicative of the results to be expected for future quarters or the full year.

 

Reclassifications

 

Certain reclassifications have been made to prior year amounts and related footnotes to conform to current-year presentation.

 

Use of Estimates

 

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the unaudited consolidated financial statements. The Company regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory reserves, share-based compensation, derivative valuation, purchased intangible asset valuations and useful lives, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. The actual results the Company experiences may differ materially and adversely from its original estimates. To the extent there are material differences between the estimates and the actual results, the Company’s future results of operations will be affected.

 

7



Table of Contents

Financial Instruments

 

ASC Topic 825, “Financial Instruments,” defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company’s financial instruments include cash equivalents, restricted cash, accounts receivable, accounts payable, accrued expenses and various debt instruments. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement, except for the debt instruments disclosed below, or the comparability of their terms to the terms the Company could obtain, for similar instruments, in the current market.

 

Restricted cash consists of various commitments of $0.4$1.9 million recorded in other current assets, as well asassets; including cash designated for debt payment obligations of $1.5 million. In addition, there is an interest-bearing certificatescertificate of deposit (“CDs”) collateralizing letters of credit of $1.5 million, which are included in other assets in the Unaudited Consolidated Balance Sheets as of March 31,June 30, 2011.

 

Effective February 4, 2011, the Company exchanged the existing Senior Term Loan intoThe Company’s debt consists of two term loans (the Term Loans A and B), each in the principal amount of $9.34 million.

Pursuant to ASC 470, the Company recorded the new Term Loans A and B, (see discussion in Note 3 Debt in the accompanying  Notes to Unaudited Financial Statements.), 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 loss on  extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding  principal of $17.0 million, the Payment-in-Kind (“PIK”) balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011.

The Company estimates the fair values of the Term Loans A and B 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 the  Company’s common stock into which the Term B loan is convertible.

As of March 31,June 30, 2011, the fair value andof the Term A Loan was $10.2 million. The carrying value of the Term A Loan was $9.9$9.8 million, including an unamortizednet of a $0.5 million remaining premium, which is amortized as interest expense over the life of $0.5 million.the loan. The Term A Loan maturity date is February 4, 2014.

As of June 30, 2011, the fair value of the Term B Loan was $11.9$9.7 million. The carrying value of the Term B Loan was $7.0 million, net of a $2.3 million remaining discount, which was amortized as interest expense over the life of the loan. The Term B Loan maturity date is October 30, 2014.

 

The Company estimates the fair values of the 2014 Debentures (convertible subordinated debt) and embedded derivatives 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 the Company’s common stock into which the 2014 Debentures are convertible. As of March 31, 2011, the fair value of the 2014 Debentures is $44.5 million excluding the fair value of the compound embedded derivative of $20.9 million. The change in fair value from September 30, 2010 is reflected as a loss on embedded derivative in the Unaudited Consolidated Statement of Operations for the three and six months ended March 31, 2011. As of March 31, 2011, the outstanding 2014 Debentures were carried on the balance sheet at $39.9 million, net of a $6.6 million remaining discount, which is amortized as interest expense over the life of the debentures.

The Company marks the compound embedded derivative to market due to the conversion price is not being indexed to the Company’s own stock. Specifically,common stock, the debt feature requiringembedded derivative is bifurcated and presented on the Companybalance sheet at fair value and the embedded derivative will be marked to redeem foregone interest upon conversion by the holder causes the exercise price not to be indexed to the Company’s own stock.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. The change in value of the compound embedded derivative is a non-cash item. At the Company’s option, it can settle the embedded derivative in either cash or common shares. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470 Debt (“ASC 470”), the Company has classified the liability as a long-term liability on its Unaudited Consolidated Balance Sheet as of March 31,June 30, 2011.

As of June 30, 2011, the fair value of the 2014 Debentures was $45.1 million excluding the fair value of the embedded derivative of $13.0 million. The change in fair value of the embedded derivative from September 30, 2010 was reflected as a gain on embedded derivative in the Unaudited Consolidated Statement of Operations for the three and nine months ended June 30, 2011. As of June 30, 2011, the outstanding 2014 Debentures were carried on the balance sheet at $40.3 million, net of a $6.2 million remaining discount, which was amortized as interest expense over the life of the debentures.

 

8



Table of Contents

Recent Accounting Pronouncements

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (ASC Topic 605) — Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25, Revenue Recognition-Multiple Element Arrangements by allowing the use of the best estimate of selling price in addition to vendor-specific objective evidence and verifiable objective evidence (now referred to as third-party evidence) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor-specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. The Company has adopted the provisions of ASU 2009-13 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

In October 2009, the FASB issued ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements, 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. The Company has adopted the provisions of ASU 2009-14 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Note 2. Supplemental Financial Information

 

Inventory

 

The following table presents the principal components of the Company’s inventory:

 

 

March 31, 2011
(unaudited)

 

September 30,
2010

 

 

June 30, 2011
(unaudited)

 

September 30,
2010

 

 

(in thousands)

 

 

(in thousands)

 

Raw materials

 

$

1,290

 

$

2,815

 

 

$

1,281

 

$

2,815

 

Work-in-process

 

12,825

 

12,854

 

 

10,990

 

12,854

 

Finished goods

 

11,792

 

11,604

 

 

12,677

 

11,604

 

Total

 

$

25,907

 

$

27,273

 

 

$

24,948

 

$

27,273

 

 

Revenues by Product Markets

 

We classify our revenues based on the markets into which our products are sold: (i) Carrier Networking, (ii) Enterprise Networking and (iii) Non-Core. The following table presents net product revenues (excluding IP revenue) from the Company’s productthese markets:

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking Products

 

$

15,498

 

$

17,170

 

$

33,662

 

$

36,358

 

Enterprise Networking Products

 

16,545

 

19,813

 

33,891

 

37,930

 

Non-Core Products

 

2,360

 

6,678

 

4,446

 

10,984

 

Net Product Revenues

 

$

34,403

 

$

43,661

 

$

71,999

 

$

85,272

 

 

 

Three Months ended June 30,

 

Nine Months ended June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking

 

$

14,790

 

$

14,983

 

$

48,453

 

$

51,341

 

Enterprise Networking

 

16,091

 

18,725

 

49,982

 

56,655

 

Non-Core

 

975

 

3,825

 

5,420

 

14,809

 

Product Revenues

 

$

31,856

 

$

37,533

 

$

103,855

 

$

122,805

 

 

Revenues by Geographic Area

The following table presents net revenues (including IP revenue) by geographic area:

 

Three Months Ended

 

Six Months Ended

 

 

Three Months ended June 30,

 

Nine Months ended June 30,

 

 

March 31,

 

March 31,

 

 

2011

 

2010

 

2011

 

2010

 

 

2011

 

2010

 

2011

 

2010

 

 

(unaudited) (in thousands)

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

United States

 

$

16,151

 

$

15,117

 

$

35,609

 

$

28,827

 

 

$

16,044

 

$

12,264

 

$

51,653

 

$

41,091

 

Asia Pacific

 

14,753

 

18,577

 

28,129

 

36,962

 

 

14,555

 

18,053

 

42,683

 

55,014

 

Europe

 

3,656

 

8,030

 

8,595

 

13,547

 

 

3,489

 

5,572

 

12,084

 

19,120

 

Other

 

2,332

 

2,187

 

2,306

 

6,226

 

 

1,900

 

1,644

 

4,207

 

7,870

 

Total Net Revenues

 

$

36,892

 

$

43,911

 

$

74,639

 

$

85,562

 

 

$

35,988

 

$

37,533

 

$

110,627

 

$

123,095

 

 

9



Table of Contents

 

Computation of Net LossIncome (Loss) per Share

 

The following table presents the computation of lossincome (loss) per share:

 

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,041

)

$

(34,060

)

$

(16,773

)

$

(67,920

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net loss available to common stockholders

 

$

(9,041

)

$

(34,060

)

$

(16,773

)

$

(68,046

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - basic and diluted

 

24,303

 

20,195

 

24,175

 

18,768

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share - basic and diluted

 

$

(0.37

)

$

(1.69

)

$

(0.69

)

$

(3.62

)

Fair value adjustment of Preferred Stock - Series B, per common share

 

 

 

 

0.01

 

Net loss per share available to common stockholders

 

$

(0.37

)

$

(1.69

)

$

(0.69

)

$

(3.63

)

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

(in thousands, except per share data)

 

Net income (loss)

 

$

6,550

 

$

33,029

 

$

(10,223

)

$

(34,891

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net income (loss) available to common stockholders

 

6,550

 

33,029

 

(10,223

)

(35,017

)

 

 

 

 

 

 

 

 

 

 

Allocation of earnings to Preferred Stock - Series B

 

176

 

1,516

 

 

 

Net income (loss) available to common stockholders after allocation for participating securities

 

6,374

 

31,513

 

(10,223

)

(35,017

)

 

 

 

 

 

 

 

 

 

 

Impact of assumed conversions:

 

 

 

 

 

 

 

 

 

Interest on 2014 Debentures, net of tax

 

1,237

 

1,161

 

 

 

Interest on Term B loan, net of tax

 

284

 

 

 

 

Net income (loss) available to common stockholders plus assumed conversions

 

$

8,071

 

$

34,190

 

$

(10,223

)

$

(35,017

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - Basic

 

24,447

 

22,780

 

24,266

 

20,105

 

Effect of dilutive common stock equivalents from:

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

25

 

149

 

 

 

Outstanding restricted stock units

 

178

 

187

 

 

 

Convertible preferred stock

 

674

 

1,096

 

 

 

2014 Convertible debentures

 

10,332

 

10,332

 

 

 

Term B Loan

 

1,887

 

 

 

 

Weighted average number of shares - Diluted

 

37,543

 

34,544

 

24,266

 

20,105

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders after allocation for participating securities - Basic

 

$

0.26

 

$

1.38

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders - Diluted

 

$

0.17

 

$

0.96

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Impact of assumed conversions:

 

 

 

 

 

 

 

 

 

Interest on 2014 Debentures, net of tax

 

0.03

 

0.03

 

 

 

Interest on Term B loan, net of tax

 

0.01

 

 

 

 

Net income (loss) available to common stockholders plus assumed conversions

 

$

0.21

 

$

0.99

 

$

(0.42

)

$

(1.74

)

 

In accordance with ASC Topic 260 Earnings per Share (“ASC 260”), basic net income and loss per share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period.

 

For the three and six months ended March 31,June 30, 2011 and 2010, the Company recorded net income from operations and accordingly included common stock equivalents from convertible debentures, convertible loans, convertible preferred stock, stock options, and restricted stock units in the diluted earnings per share calculation.

For the nine months ended June 30, 2011 and 2010, the Company recorded a net loss and infrom operations. In accordance with ASC 260, all outstanding potential common shares were excluded from the diluted loss per share computation. For periods in which the Company reports a net loss, diluted loss per share is calculated using only the weighted average number of shares outstanding during each of the periods, as the inclusion of any common stock equivalents would be anti-dilutive.

 

Under the two-class method of determining earnings for each class of stock, the Company considers the dividend rights and participation rights in undistributed earnings for each class. For the three and six months ended March 31, 2011 and 2010 , the dividend rights on the outstanding preferred shares are not material to the calculation, and therefore, not considered in determining earnings and losses per preferred share. The allocation 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.

 

The potential common shares excluded from the diluted loss per share computation are as follows:

 

 

Three Months Ended
March 31,

 

Six Months Ended March
31,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

1,485

 

980

 

1,456

 

999

 

Outstanding restricted stock units

 

403

 

84

 

241

 

49

 

Outstanding warrants

 

8

 

8

 

8

 

8

 

Convertible preferred stock

 

674

 

3,804

 

674

 

3,804

 

2014 Convertible debentures

 

10,332

 

11,110

 

10,332

 

11,110

 

Term B loan convertible note

 

1,887

 

 

1,887

 

 

Total potential common stock excluded from calculation

 

14,789

 

15,986

 

14,598

 

15,970

 

10



Table of Contents

 

The potential common shares excluded from the diluted per share computation are as follows:

 

 

Three Months ended 
June 30,

 

Nine Months ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

1,350

 

951

 

1,429

 

1,015

 

Outstanding restricted stock units

 

343

 

28

 

287

 

96

 

Outstanding warrants

 

8

 

8

 

8

 

8

 

Convertible preferred stock

 

 

 

674

 

1,096

 

2014 Convertible debentures

 

 

 

10,332

 

10,332

 

Term B loan convertible note

 

 

 

1,887

 

 

Total potential common stock excluded from calculation

 

1,701

 

987

 

14,617

 

12,547

 

Note 3. Debt

 

As of March 31,June 30, 2011, the outstanding 2014 Debentures were carried on the balance sheet at $39.9$40.3 million, net of a $6.6$6.2 million remaining discount. Unamortized debt issuance costs, as of March 31,June 30, 2011, were $0.9$0.8 million. The 2014 Debentures mature in October 2014 and bear interest at a fixed rate of 8.0% per annum. Interest is payable semi-annually.

 

On January 18, 2011, the Company paid $8.0 million against the principal balance of the Senior Term Loan. Effective February 4, 2011, the Company exchanged the existing Senior Term Loan intofor two term loans (the Term Loans A and B), each in the principal amount of $9.34 million.

 

The Term A Loan bears interest at a fixed rate of 10.5% per annum beginning on February 4, 2011, payable quarterly in arrears, with a maturity date of February 4, 2014. Prepayment of the Term A Loan iswas permitted at 101% of the principal amount plus accrued interest until August 4, 2011, after which the prepayment option expires.expired.

 

The Term B Loan bears interest at a fixed rate of 8.0% per annum beginning on February 4, 2011, payable quarterly in arrears, with a maturity date of October 30, 2014, unless earlier converted. Prepayment of the Term B Loan is not permitted prior to October 30, 2011. On or after October 30, 2011, prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest, but only if the closing sale price of the common stock has been at least 130% of the conversion price in effect for at least 20 trading days during any 30 consecutive trading day period ending on the day prior to the date of notice of prepayment.

 

The Term B Loan is convertible into shares of common stock at a conversion price of $4.95 per share (equivalent to an initial conversion rate of approximately 202 shares per $1,000 principal amount of the Term B Loan). The terms of conversion for the Term B Loan are substantially similar to the conversion terms for the Company’s 2014 Debentures except that there is no make-whole interest amount payable upon conversion. Full conversion of the $9.34 million in aggregate principal amount of the Term B Loan would result in the issuance of 1,887,234 shares of common stock, as of February 4, 2011.

 

The Company evaluated the Term A and B Loans issued in exchange for the Senior Term Loan pursuant to the guidance in ASC 470. The Company determined that it has not received any concessions from the noteholders in connection with the Second Amendment to Loan Agreementexchange and accordingly, the transaction willwas not be accounted for as a troubled debt restructuring. However, due to the addition of a substantive conversion feature ofin the new instrument issued,Term B Loan, as compared to the terms of Senior Term Loan, the Company accounted for the exchange of instruments, in settlement for the Senior Term Loan, as a debt extinguishment, pursuant to the guidance in ASC 470.

 

Pursuant to ASC 470, the Company recorded the new Term Loans A and B, 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 loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the Payment-in-Kind (“PIK”) balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011.

 

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Table of Contents

On February 4, 2011, the Company recorded the Term A Loan at fair value, which was $9.9 million, including a premium of $0.6 million,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. The premium calculated for the Term A Loan decreased the Company’s effective interest rate of interest from the stated fixed rate of 10.5% per annum. At March 31,June 30, 2011, the effective interest rate on the Term A Loan was 8.5%. 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.

As of March 31,June 30, 2011, the fair value of the Term A Loan was $10.2 million, and was carried on the balance sheet at $9.9$9.8 million, including the unamortized premium of $0.5 million. For the three and sixnine months ended March 31,June 30, 2011, interest expensethe premium amortization related to the Term A Loan premium was $0.03 million. $0.05 million and $0.1 million, respectively.

 

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 the Company to potentially settle any conversion request in either shares of its common stock or cash, at the Company’s option, itthe equity conversion feature was allocated a value of $2.5$2.49 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 $2.5$2.49 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 the Company’s 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 as of March 31,June 30, 2011.

As of March 31,June 30, 2011, the fair value of the Term B Loan was $9.7 million, and was carried on the balance sheet at $6.9$7.0 million, net of the unamortized discount of $2.4$2.3 million. For the three and sixnine months ended March 31,June 30, 2011, net interest expensethe discount amortization related to the Term B Loan discount was $0.1 million.million and $0.2 million, respectively.

 

11During the quarter ended June 30, 2011, the Company completed two transactions, from which $1.5 million in proceeds was restricted for the use in the partial payment of the Term A Loan.  The 2nd amendment to the Term Loans A and B and the 2014 Debenture agreement each include requirements that the Company remit any cash proceeds generated from the sale of assets to pay principal on the outstanding debt, in a prescribed order of payment.    The Company obtained a waiver from the noteholder allowing the Company to remit $1.5 million of the proceeds and to retain the remainder which is included in cash as of June 30, 2011.  As such, the $1.5 million was classified as restricted cash and $1.5 million of the Term A loan was classified out of long-term liabilities and into current liabilities. On July 15, 2011, the Company used the $1.5 million set aside in restricted cash to pay a portion of the Term A Loan.

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Table of Contents

Note 4. Fair Value Measurements

 

Assets and liabilities measured at fair value on a recurring basis include the following at March 31,June 30, 2011 and September 30, 2010 (in thousands):

 

 

Fair Value

 

 

 

 

Fair Value

 

 

 

 

Measurements Using

 

 

 

 

Measurements Using

 

 

 

March 31, 2011 (unaudited)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

June 30, 2011 (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – compound embedded derivative - 2014 Debenture

 

$

 

$

 

$

20,936

 

$

20,936

 

 

$

 

$

 

$

12,985

 

$

12,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – compound embedded derivative - 2014 Debenture

 

$

 

$

 

$

15,476

 

$

15,476

 

 

$

 

$

 

$

15,476

 

$

15,476

 

 

The following table provides a reconciliation of the beginning and ending balances for the derivative liability-compound embeddedliability-embedded derivative measured at fair value using significant unobservable inputs (Level 3) (in thousands):

 

 

Compound Embedded
Derivative related to 2014
Debentures

 

 

Compound Embedded
Derivative related to 2014
Debentures

 

Balance at September 30, 2010

 

$

15,476

 

 

$

15,476

 

Transfers in and /or out of Level 3

 

 

 

 

Purchases, sales, issuances, and settlements

 

 

 

 

Total losses included in earnings

 

(5,460

)

Balance at March 31, 2011 (unaudited)

 

$

20,936

 

Total net gains included in earnings

 

(2,491

)

Balance at June 30, 2011 (unaudited)

 

$

12,985

 

 

The compound embedded derivative liability, which is included in long term liabilities, represents the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. The make-whole feature, requiring the Company to redeem foregone interest upon conversion by the holder, which for accounting purposes results in the exercise price not being indexed to the Company’s own stock, which in turn results in the presentation of the compound embedded derivative as a standalone liability at fair value.

 

There is no current observable market for this type of derivative and, as such, the Company determined the value of the embedded derivative using a lattice-based convertible bond valuation model that combined expected cash outflows with market-based assumptions. The fair value of the 2014 Debentures (convertible subordinated debt) without the embedded compound derivative feature was also estimated using a convertible bond valuation model within a lattice framework. The convertible bond valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility and recent price quotes and trading information regarding shares of the Company’s common stock into which the 2014 Debentures are convertible. The Company will mark the embedded derivative to market due toAs the conversion price is not being indexed to the Company’s own stock.stock, the embedded derivative is bifurcated and presented on the balance sheet at fair value and the embedded derivative will be marked to market.  The change in the fair value of the bifurcated compound embedded derivative is primarily related to the change in price of the underlying common stock.

 

The valuation methodologies used by the Company 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 management believes its 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.

 

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Note 5. Income Taxes

 

The provision for income taxes as a percentage of income from operations before income taxes was (0.75%)0.72% for the sixnine months ended March 31,June 30, 2011 compared to (9.73%)8.84% for the comparable period in the prior year. For the year ending September 30, 2011, the Company’s estimated effective tax rate is (1.51%(1.43%).  The Company’s effective tax rate is primarily impacted by operating losses.

 

Because the Company has historically experienced net tax losses, the Company has placed a valuation allowance against its otherwise recognizable deferred tax assets.

 

The total amount of gross unrecognized tax benefits was approximately $10.7 million as of March 31, 2011 and approximately $10.6 million as of SeptemberJune 30, 2010.2011. The total amount of gross unrecognized tax benefits increaseddecreased by $0.1$0.2 million related to potentiala change in its state tax liabilities.filing methodology.

 

As of March 31,June 30, 2011, approximately $0.8 million of the $10.7 million FIN 48 unrecognized tax benefits, related to the Company’s state tax liability, is recorded in accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet. The remaining $9.9 million, related to state research and development tax credits that have not been utilized, is reflected as a reduction to the deferred tax asset arising from the state research and development tax credits.

As of September 30, 2010, approximately $0.7$0.5 million of the $10.6 million FIN 48 unrecognized tax benefits related to the Company’s state tax liability is recorded in accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet. TheOf the remaining $9.9balance, $10.0 million relatedrelates to federal and state research and development tax credits that have not been utilized is reflected as a reduction to the deferred tax asset arising from the state research and development tax credits.are fully reserved.

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Table of Contents

Note 6. Stockholders’ Equity

 

Stock Option Plans

 

Under all stock option plans in effect, as of March 31,June 30, 2011, a total of 4,604,4724,478,405 shares of common stock have been reserved for issuance and 1,242,6121,262,862 shares remain available for future grant. The following table summarizes compensation costs related to the Company’s share based compensation plans.

 

 

Three Months ended
June 30,

 

Nine Months ended 
June 30,

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

2011

 

2010

 

2011

 

2010

 

 

2011

 

2010

 

2011

 

2010

 

 

(unaudited) (in thousands)

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

$

136

 

$

79

 

$

230

 

$

225

 

 

$

123

 

$

100

 

$

353

 

$

326

 

Engineering, research and development

 

251

 

158

 

470

 

405

 

 

288

 

183

 

757

 

587

 

Selling, general and administrative

 

537

 

206

 

908

 

497

 

 

515

 

314

 

1,424

 

811

 

Total share-based compensation expense

 

$

924

 

$

443

 

$

1,608

 

$

1,127

 

 

$

926

 

$

597

 

$

2,534

 

$

1,724

 

 

Stock Options

 

Activity under all stock option plans for the sixnine months ended March 31,June 30, 2011, was as follows:

 

 

 

Shares

 

Weighted

average
exercise

price

 

Weighted
average
remaining
contractual
life (in years)

 

Aggregate

intrinsic

value

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2010

 

1,490,364

 

$

52.40

 

6.16

 

$

 

Granted

 

507,614

 

$

4.40

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

Cancelled or expired

 

(92,315

)

$

39.18

 

 

 

 

 

Options outstanding, March 31, 2011 (unaudited)

 

1,905,663

 

$

40.25

 

6.65

 

 

 

Options exercisable, March 31, 2011 (unaudited)

 

979,375

 

$

73.63

 

4.19

 

$

5,612

 

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Table of Contents

 

 

Shares

 

Weighted
average
exercise
price

 

Weighted
average
remaining
contractual
life
(in years)

 

Aggregate
intrinsic
value

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2010

 

1,490,364

 

$

 52.40

 

6.16

 

 

Granted

 

520,114

 

$

4.41

 

 

 

Exercised

 

 

 

 

 

Cancelled or expired

 

(199,650

)

$

116.38

 

 

 

Options outstanding, June 30, 2011 (unaudited)

 

1,810,828

 

$

31.56

 

6.60

 

$

4,538

 

Options exercisable, June 30, 2011 (unaudited)

 

898,776

 

$

58.58

 

4.17

 

 

 

Restricted Stock Units

 

A summary of restricted stock unit activity for the sixnine months ended March 31,June 30, 2011, was as follows:

 

 

Shares

 

Weighted Average

Grant-Date Fair
Value per Share

 

 

Shares

 

Weighted Average
Grant-Date Fair
Value per Share

 

 

 

 

 

 

 

 

 

 

 

Restricted stock units outstanding, September 30, 2010

 

770,786

 

$

5.72

 

 

770,786

 

$

5.72

 

Awarded

 

1,021,074

 

4.39

 

 

1,071,995

 

4.39

 

Released

 

(297,201

)

5.99

 

 

(314,429

)

6.09

 

Forfeited

 

(38,462

)

5.10

 

 

(123,637

)

4.70

 

Restricted stock units outstanding, March 31, 2011

 

1,456,197

 

$

4.75

 

Restricted stock units outstanding, June 30, 2011 (unaudited)

 

1,404,715

 

$

4.71

 

15



Table of Contents

 

Note 7. Commitments and Contingencies

 

From time to timetime-to-time in our normal course of business, we are a party to various legal claims, actions and complaints.  Although the ultimate outcome of these matters cannot be determined, management believes that, as of March 31,June 30, 2011, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.

 

Note 8. Subsequent Events

The DOJ Subpoena and SEC InvestigationPayment on Term A Loan

 

On March 22,July 15, 2011, the United States District Court for the Southern District of New York approved the Company’s settlement with the SEC relatedCompany used $1.5 million from restricted cash to the SEC’s investigationpay a portion of the Company’s historical stock option practices and accounting irregularities that occurred between 1995 and 2006 (“Consent Judgment”)Term A Loan. (See Note 3 Debt in the accompanying Unaudited Consolidated Financial Statements). Under the Consent Judgment,In addition, the Company paid a $3.0 million civil penalty and consented1.0% prepayment penalty.  Subsequent to the entry of a final judgment permanently enjoiningpayment, the Company from violationsoutstanding principal balance of the antifraudTerm A Loan was $7.8 million and other provisionsinterest expense will be reduced by $0.3 million over the life of the federal securities laws. The $3.0 million payment was accrued in the Company’s financial statements in June 2009.loan.

 

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Table of Contents

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Cautionary Statement

 

You should read the following discussion and analysis in conjunction with our Unaudited Consolidated Financial Statements and the related Notes thereto contained in Part I, Item 1 of this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report, as well as in our Annual Report on Form 10-K for the year ended September 30, 2010 (“Annual Report”) and in our other filings with the SEC, which discuss our business in greater detail.

 

This Quarterly Report contains forward-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 historical or current fact. We use words such as “anticipates,” “believes,” “plans,” “expects,” “future,” “intends,” “may,” “should,” “estimates,” “predicts,” “potential,” “continue,” “becoming,” “transitioning,” and similar expressions to identify such forward-looking statements. Our forward-looking statements include statements as to our business outlook, revenues, margins, expenses, tax provision, capital resources sufficiency, capital expenditures, interest income, cash commitments, and expenses. Forward-looking statements are not guarantees of future performance and the Company’s actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those referenced in the subsection entitled “Risk Factors” in Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

 

Overview

 

Over the last 10 years, the worldwide proliferation of the Internet and the rapid growth in the volume of data being sent over LANs and WANs has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range of data 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.

 

The Company is a leading supplier of high-performance integrated circuits (“ICs”) principally targeted at systems manufacturers in the communications industry. Within the communications industry, the Company’s products address Carrier and Enterprise Networking, where they enable data to be transmitted at high-speeds and processed and switched under a variety of protocols.

 

In recent years, the Company has focused its product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise Networking onto Internet Protocol based networks. These “Next-Generation Networks” share the requirements of high reliability, scalability, interoperability and low cost. Increasingly, these networks will be delivered based on Ethernet technology. The Company believes that products in this emerging technology area represent the best opportunity for the Company to provide differentiation in the market.

 

Debt Restructuring

The Company exchanged the Senior Term Loan Agreement effective February 4, 2011, to convert the existing Senior Term Loan into two term loans, each in the principal amount of $9.34 million.

The Term A Loan bears interest at a fixed rate of 10.5% per annum beginning on February 4, 2011, payable quarterly in arrears, with a maturity date of February 4, 2014. Prepayment of the Term A Loan is permitted at 101% of the principal amount plus accrued interest until August 4, 2011 after which the prepayment option expires.

The Term B Loan bears interest at a fixed rate of 8.0% per annum beginning on February 4, 2011, payable quarterly in arrears, with a maturity date of October 30, 2014, unless earlier converted. Prepayment of the Term B Loan is not permitted prior to October 30, 2011. On or after October 30, 2011, prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest, but only if the closing sale price of the common stock has been at least 130% of the conversion price in effect for at least 20 trading days during any 30 consecutive trading day period ending on the day prior to the date of notice of prepayment.

The Term B Loan is convertible into shares of common stock at a conversion price of $4.95 per share (equivalent to an initial conversion rate of approximately 202 shares per $1,000 principal amount of the Term B Loan). The terms of conversion for the Term B Loan are substantially similar to the conversion terms for the Company’s 2014 Debentures except that there is no make-whole

15



Table of Contents

interest amount payable upon conversion. Full conversion of the $9.34 million in aggregate principal amount of the Term B Loan would result in the issuance of 1,887,234 shares of common stock as of February 4, 2011.

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 the Company to potentially settle any conversion request in either shares of its common stock or cash, at the Company’s option, it was allocated a value of $2.5 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 $2.5 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 the Company’s 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 as of March 31, 2011.  As of March 31, 2011, the Term B Loan was carried on the balance sheet at $6.9 million, net of the unamortized discount of $2.4 million. For the three and six months ended March 31, 2011, net interest expense related to the Term B Loan discount was $0.1 million.

Pursuant to ASC 470, the Company recorded the new Term Loans A and B, (see discussion in Note 3 Debt in the accompanying Notes to Unaudited Financial Statements.), 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 loss on extinguishment, the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, the Payment-in-Kind (“PIK”) balance of $1.7 million, and the balance of the unamortized costs of $0.6 million, as of February 4, 2011.

Critical Accounting Policies and Estimates

 

Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended September 30, 2010. There have been no significant changes to these policies during the sixnine months ended March 31,June 30, 2011. These policies and estimates continue to be those that we believe are most important to a reader’s ability to understand our financial results.

 

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Table of Contents

Results of Operations for the Threethree and Six Months Ended March 31,nine months ended June 30, 2011 compared to the Threethree and Six Months Ended March 31,nine months ended June 30, 2010

 

The following table sets forth certain Unaudited Consolidated Statements of Operations data expressed as a percentage of net revenue for the periods indicated:

 

 

Three Months Ended
March 31,

 

Six Months Ended
March 31,

 

 

2011

 

2010

 

2011

 

2010

 

 

Three Months ended
June 30,

 

Nine Months ended
June 30,

 

 

(unaudited)

 

 

2011

 

2010

 

2011

 

2010

 

 

(in thousands, except per share data)

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

35.2

%

44.1

%

36.6

%

45.0

%

 

37.5

%

41.8

%

36.9

%

44.0

%

Engineering, research and development

 

40.6

%

28.0

%

39.4

%

28.3

%

 

34.9

%

36.4

%

37.9

%

30.7

%

Selling, general and administrative

 

27.0

%

20.7

%

27.4

%

22.9

%

 

26.6

%

23.1

%

27.1

%

23.1

%

Accounting remediation & reconstruction expense & litigation costs

 

0.0

%

0.0

%

0.0

%

0.1

%

Amortization of intangible assets

 

0.2

%

0.4

%

0.3

%

0.5

%

 

0.2

%

0.5

%

0.3

%

0.5

%

Costs and expenses

 

103.0

%

93.2

%

103.7

%

96.8

%

 

99.2

%

101.8

%

102.2

%

98.3

%

(Loss) income from operations

 

(3.0

)%

6.8

%

(3.7

)%

3.2

%

Income (loss) from operations

 

0.8

%

(1.8

)%

(2.2

)%

1.7

%

Other expense (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

5.5

%

5.8

%

6.1

%

6.6

%

 

5.4

%

6.7

%

5.9

%

5.7

%

Loss on embedded derivative

 

5.4

%

69.2

%

7.3

%

43.9

%

Loss on extinguishment of debt

 

10.5

%

0.0

%

5.2

%

25.2

%

Other income, net

 

(0.1

)%

(0.1

)%

(0.1

)%

(0.1

)%

Other expense, net

 

21.3

%

74.9

%

18.5

%

75.6

%

Loss before income tax expense

 

(24.3

)%

(68.1

)%

(22.2

)%

(72.4

)%

Income tax expense

 

0.2

%

9.4

%

0.2

%

7.0

%

Net loss

 

(24.5

)%

(77.5

)%

(22.4

)%

(79.4

)%

(Gain) loss on embedded derivative

 

(22.1

)%

(87.3

)%

(2.3

)%

4.8

%

(Gain) loss on extinguishment of debt

 

0.0

%

(0.7

)%

3.5

%

17.3

%

Other expense (income), net

 

0.1

%

0.2

%

0.0

%

(0.0

)%

Other (income) expense, net

 

(16.6

)%

(81.1

)%

7.1

%

27.8

%

Income (loss) before income tax expense (benefit)

 

17.4

%

79.3

%

(9.3

)%

(26.1

)%

Income tax expense (benefit)

 

(0.6

)%

(8.6

)%

(0.1

)%

2.3

%

Net income (loss)

 

18.0

%

87.9

%

(9.2

)%

(28.4

)%

Fair value adjustment of Preferred Stock - Series B

 

0.0

%

0.0

%

0.0

%

0.1

%

 

0.0

%

0.0

%

0.0

%

0.1

%

Net loss available to common stockholders

 

(24.5

)%

(77.5

)%

(22.4

)%

(79.5

)%

Net income (loss) available to common stockholders

 

18.0

%

87.9

%

(9.2

)%

(28.5

)%

 

1618



Table of Contents

 

Product Revenues

 

The Company classifies its ICWe classify our product revenues based on the markets into which our products into three categories:are sold: (i) Carrier Networking, Products; (ii) Enterprise Networking Products; and (iii) Non-Core Products.Non-Core. The Carrier Networking Products servicemarket includes core, metro, access, mobile and accessbackhaul networks. The Enterprise Networking Products service the market forcovers Ethernet switching and transmission within local area networks in small-medium enterprise (“SME”) and small-medium business (“SMB”) markets. The Non-Core Productsmarket is comprised of legacy products that have not received additional investment over the last five years and, as a result, havehas generally been in decline.

 

The following tables summarize the Company’s product revenues by product line:market:

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking Products

 

$

15,498

 

45.0

%

$

17,170

 

39.3

%

$

(1,672

)

(9.7

)%

Enterprise Networking Products

 

16,545

 

48.1

%

19,813

 

45.4

%

(3,268

)

(16.5

)%

Non-Core Products

 

2,360

 

6.9

%

6,678

 

15.3

%

(4,318

)

(64.7

)%

Net Product Revenues

 

$

34,403

 

100.0

%

$

43,661

 

100.0

%

$

(9,258

)

(21.2

)%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Product
Revenues

 

Amount

 

% of Product
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking

 

$

14,790

 

46.4

%

$

14,983

 

39.9

%

$

(193

)

(1.3

)%

Enterprise Networking

 

16,091

 

50.5

%

18,725

 

49.9

%

(2,634

)

(14.1

)%

Non-Core

 

975

 

3.1

%

3,825

 

10.2

%

(2,850

)

(74.5

)%

Product Revenues

 

$

31,856

 

100.0

%

$

37,533

 

100.0

%

$

(5,677

)

(15.1

)%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking Products

 

$

33,662

 

46.8

%

$

36,358

 

42.6

%

$

(2,696

)

(7.4

)%

Enterprise Networking Products

 

33,891

 

47.0

%

37,930

 

44.5

%

 

(4,039

)

(10.6

)%

Non-Core Products

 

4,446

 

6.2

%

10,984

 

12.9

%

 

(6,538

)

(59.5

)%

Net Product Revenues

 

$

71,999

 

100.0

%

$

85,272

 

100.0

%

$

(13,273

)

(15.6

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Product
Revenues

 

Amount

 

% of Product
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking

 

$

48,453

 

46.7

%

$

51,341

 

41.8

%

$

(2,888

)

(5.6

)%

Enterprise Networking

 

49,982

 

48.1

%

56,655

 

46.1

%

(6,673

)

(11.8

)%

Non-Core

 

5,420

 

5.2

%

14,809

 

12.1

%

(9,389

)

(63.4

)%

Product Revenues

 

$

103,855

 

100.0

%

$

122,805

 

100.0

%

$

(18,950

)

(15.4

)%

 

Net productProduct revenues for the three and sixnine months ended March 31,June 30, 2011 were $34.4$31.9 million and $72.0$103.9 million, respectively, compared to $43.7$37.5 million and $85.3$122.8 million for the same periods in 2010.

 

Net productProduct revenues from Carrier Networking for the three and sixnine months ended March 31,June 30, 2011 decreased by $1.7$0.2 million and $2.7$2.9 million, respectively, compared to the same periods in 2010,2010. These decreases were primarily due to continued weakness in the Asia Pacific region, which declined by $1.5$1.3 million from the same three-month period in 2010 and $4.3$5.6 million compared to the first sixnine months in 2010. The weakness was seen across a wide range of customers and products, primarily in China. This decrease was partially offset by increased sales in the United States. Compared with the secondthird quarter of fiscal year 2010, we saw growth in some of our connectivity products, including our crosspoint switch and 1Gigabit1 Gigabit Ethernet PHY products offset by declines in our legacy processing products for SONET applications and Physical Media Device (“PMD”) devices for optical module applications.

 

Net productProduct revenues from Enterprise Networking for the three and sixnine months ended March 31,June 30, 2011 decreased by $3.3$2.6 million and $4.0$6.7 million, respectively, compared to the same periods in 2010. The decrease is primarily due to weakness in the Company’s switch and 1Gigabit1 Gigabit Ethernet PHY products selling into low-end SME applications.

 

Net productProduct revenues from Non-Core for the three and sixnine months ended March 31,June 30, 2011 decreased by $4.3$2.9 million and $6.5$9.4 million, respectively, compared to the same periods in 2010. The decrease is primarily due to a decline of the Company’s Network Processing Productnetwork processing product line and legacy Fibre Channelfibre channel PHY products.

 

1719



Table of Contents

Intellectual Property (IP) Revenues

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IP Revenues

 

$

2,489

 

6.7

%

$

250

 

0.6

%

$

2,239

 

895.6

%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

IP Revenues

 

$

4,132

 

11.5

%

$

 

0.0

%

$

4,132

 

100.0

%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

IP Revenues

 

$

2,640

 

3.5

%

$

290

 

0.3

%

$

2,350

 

810.3

%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

IP Revenues

 

$

6,772

 

6.1

%

$

290

 

0.2

%

$

6,482

 

2235.3

%

 

IP revenues for the three and sixnine months ended March 31,June 30, 2011 increased by $2.2$4.1 million and $2.4$6.5 million, respectively, compared with the same periods in 2010. The increase in2010 as the Company completed two IP revenues is from two agreements completed during the quarter.  The CompanyWe recognized royalty revenues of $0.1$0.2 million and $0.3$0.5 million for the three and sixnine months ended March 31,June 30, 2011, respectively. No material royalties were received or recognized for the same periods in 2010. Costs associated with the sale of IP are included in Selling, general and administrative expenses.

 

Cost of Revenues

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Cost of Revenues

 

$

12,995

 

35.2

%

$

19,362

 

44.1

%

$

(6,367

)

(32.9

)%

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Cost of Revenues

 

$

27,343

 

36.6

%

$

38,465

 

45.0

%

$

(11,122

)

(28.9

)%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

Cost of Revenues

 

$

13,488

 

37.5

%

$

15,702

 

41.8

%

$

(2,214

)

(14.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Cost of Revenues

 

$

40,831

 

36.9

%

$

54,167

 

44.0

%

$

(13,336

)

(24.6

)%

 

As a fabless semiconductor Company, weWe 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. There was no cost of revenues associated with IP revenues for any periods presented in this report.presented.

 

Cost of net revenues for the three and sixnine months ended March 31,June 30, 2011 decreased by $6.4$2.2 million and $11.1$13.3 million, respectively, compared to the same periods in 2010. As a percentageThe cost of net revenues the costas a percentage of net revenues for the three and sixnine months ended March 31,June 30, 2011 were 35.2%37.5% and 36.6%36.9%, respectively, compared 44.1%to 41.8% and 45.0%44.0% for the same periods in 2010.   The decrease in the cost of net revenues is primarily attributable to lower product revenues.

 

Excluding IP revenue, the cost of net revenues as a percent of product revenues for the three and sixnine months ended March 31,June 30, 2011 was 37.8%42.3% and 38.0%39.3%, respectively, compared to 44.3%41.8% and 45.1%44.1% for the same periods in 2010.

The decrease in the cost of net revenues as a percent of product revenues for the nine month period ended June 30, 2011, compared with the same period in 2010, is primarily attributabledue to improved material costs, improved product yields and lower test costs resulting from the transition of the Company’sour test manufacturing activities from its California facility to an outsource model using an offshore facility. This transition resulted in reduced costs

20



Table of tests. In addition to these material cost savings, the Company has increased the percentage of its switching products sold into the Carrier market segment relative to the Enterprise market segment. These products tend to carry higher overall average selling prices in the Carrier market segment.Contents

 

For the three and sixnine months ended March 31,June 30, 2011, the Companywe decreased production volumes in response to market declines and substantial  improvements in availability of capacity at foundries and assembly sub-contractors which obviateseliminating the need forto maintain  higher inventory balances.  The lowerAs a result, production volumes

18



Table of Contents

experienced in the three and six months ended March 31, 2011, as the Company took actionscosts per unit have increased.   We expected to reduce inventory levels, increased current inventory unit costs.  As we reducecontinue to adjust our inventory levels consistent with our long term goal of five inventory turns, weand anticipate that the sale of these higher cost inventories will temporarily increase our cost of net product revenues in future periods and simultaneously reduce our reported product margins.

The Company continued to focus its efforts on improving operating efficiencies, including improving product yields, reducing scrap, and improving cycle times.periods.

 

Engineering, Research and Development

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

14,976

 

40.6

%

$

12,276

 

28.0

%

$

2,700

 

22.0

%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

12,551

 

34.9

%

$

13,674

 

36.4

%

$

(1,123

)

(8.2

)%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

29,422

 

39.4

%

$

24,235

 

28.3

%

$

5,187

 

21.4

%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

41,974

 

37.9

%

$

37,909

 

30.7

%

$

4,065

 

10.7

%

 

Engineering, research and development expenses consist primarily of salaries and related costs, including share-based compensation expense of employees engaged in research, design and development activities. Engineering, research and development 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 CompanyWe will continue to concentrate itsour spending in this area to meet its customer requirements and to respond to market conditions.

 

Engineering, research and development expense decreased $1.1 million, or 8.2% and increased $2.7$4.1 million, and $5.2 millionor 10.7% for the three and sixnine months ended March 31,June 30, 2011, respectively, compared to the same periods in 2010. As a percentage of net revenues,The lower engineering, research and development expenses for the three and six months ended March 31,June 30, 2011 increasedis primarily attributable to 40.6%lower labor expenses of $0.5 million and 39.4%, respectively, compared to 28.0% and 28.3% forlower tooling costs of $0.4 million resulting from fewer mask sets used during the same periods in 2010.quarter.

 

The increase in engineering, research and development expenses for the three and sixnine months ended March 31,June 30, 2011 is mainly attributable to increased engineering tool costs of $1.9$3.1 million, and $3.7 million, respectively. The engineering tool costs are comprised ofattributable to an increase in mask sets used and expenses related to electronic design automation tools and new product evaluation boards, associated with a higher level of new product introductions inintroductions. The remainder of the periods.

The Company had a $0.1 million increase in non-cash stock compensation expense for the threeresults from increased facility and six months ended March 31, 2011, respectively, as well as a $0.1 million and $0.3 million increase in severance costs for the three and six months ended March 31, 2011, respectively. The Company anticipates a total of $0.5 million in severance costs to be recognized over the first three quarters of 2011, of which $0.3 million occurred in the first six months of 2011, related to headcount reduction taken over the period. The reduction in headcount will decrease spending on research and development by approximately $2 million annually by the end of 2011 and will not impact product development in 2011.

The Company continues to concentrate its investments in areas that match its customers’ requirements and market conditions.labor costs.

 

1921



Table of Contents

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

9,978

 

27.0

%

$

9,083

 

20.7

%

$

895

 

9.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

20,436

 

27.4

%

$

19,612

 

22.9

%

$

824

 

4.2

%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

9,561

 

26.6

%

$

8,669

 

23.1

%

$

892

 

10.3

%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

29,997

 

27.1

%

$

28,354

 

23.0

%

$

1,643

 

5.8

%

 

Selling, general and administrative ("(“SG&A"&A”) expense consists primarily of personnel-related expenses, including share based compensation expense as well as, legal and other professional fees, facilities expenses, and outside labor, as well as personnel-related expenses, including share based compensation expense.labor.

 

SG&A expenses increased $0.9 million and $0.8$1.6 million for the three and sixnine months ended March 31,June 30, 2011, respectively, compared to the same periods of 2010.

 

The increase in SG&A expense for the three and six months ended March 31,June 30, 2011 is due in part to an increase inhigher compensation and benefits costsrelated expenses of approximately $0.6 million, and $1.6including a $0.2 million respectively, of which approximately $0.3 million and $0.4 million, respectively, are attributable to increasesincrease in non-cash stock compensation. In addition,related compensation, higher selling expenses of approximately $0.5 million and higher facility and related expenses of $0.6 million. These increases were partially offset by lower professional fees of $0.7 million.

The increase in SG&A expense for the nine months ended June 30, 2011 is due in part to higher compensation related expenses of approximately $2.0 million, including a $0.6 million increase in non-cash stock related compensation, higher selling expenses of approximately $0.5 million and higher facility and administrative costs increased $0.6related expenses of $1.8 million. These increases were partially offset by lower professional fees of $1.9 million and $1.1a non-recurring debt restructuring charge of $1.0 million respectively,that occurred in the first quarter of 2010.

The higher facility and related expenses are primarily due to re-allocation of our facility in Camarillo, California from cost of revenues toof SG&A due to closure of our test floor and the move to an outsource model. The increase in SG&A expenses for the three and six months ended March 31, 2011 was partially offset by a decrease in legal and accounting fees of $0.4 million and $1.1 million, respectively and a $1.0 million non-recurring debt restructuring charge related to the debt restructuring in October 2009.

 

Interest Expense, net

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

2,039

 

5.5

%

$

2,544

 

5.8

%

$

(505

)

(19.9

)%

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

4,558

 

6.1

%

$

5,637

 

6.6

%

$

(1,079

)

(19.1

)%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

1,929

 

5.4

%

$

2,496

 

6.7

%

$

(567

)

(22.7

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

6,487

 

5.9

%

$

7,036

 

5.7

%

$

(549

)

(7.8

)%

 

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.

 

For the three and sixnine months ended March 31,June 30, 2011, interest expense decreased by $0.5$0.6 million, and $1.1 million, respectively, compared to the same periods in 2010. The decrease is primarily due to the pay-down of $8.0 million on the Senior Term Loan in January 2011 and restructuring of the Senior Term Loan on February 4, 2011.  (See Note 3 Debt in the accompanying Notesnotes to Unaudited Consolidated Financial Statements.)

 

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Table of Contents

 

For the three months ended March 31,June 30, 2011, interest expense and amortization of the debt discount and of debt issuance costs related to the 2014 Debentures was $0.9 million and $0.5 million, respectively, compared to $1.0$0.9 million and $0.5 million, for the same period in 2010. ForDue to the restructuring of the Senior Term Loan on February 4, 2011, there was no interest expense or amortization of debt issue costs for the Senior Term Loan for the three months ended March 31, 2011June 30, 2011. For the same period in 2010, the interest expense and amortization of debt issue costs for the Senior Term Loan was $0.3 million and $0.1 million, respectively, compared towere $0.9 million and $0.2 million, for the same period in 2010.respectively. For the three months ended March 31,June 30, 2011, the interest expense and amortized debt issuance costs for termTerm Loans A and B were $0.3$0.4 million, in total. The premium amortization for the Term A Loan was $0.03$0.05 million and the discount amortization of the Term B Loans was $0.1 million, compared to $0 for the same period in 2010.  There2010, since there were no Term A and B Loans in Fiscalfiscal year 2010.

 

For the sixnine months ended March 31,June 30, 2011, interest expense and amortization of the debt discount and of debt issuance costs related to the 2014 Debentures was $1.9$2.8 million and $1.0$1.5 million, respectively, compared to $1.7$2.6 million and $0.8$1.4 million for the same period in 2010. For the sixnine months ended March 31,June 30, 2011, the interest expense and amortization of debt issue costs for the Senior Term Loan was $1.2 million and $0.3 million, respectively, compared to $1.4$2.4 million and $0.5$0.6 million for the same period in 2010. For the sixnine months ended March 31,June 30, 2011, the interest expense and amortized debt issuance costs for termTerm Loans A and B were $0.3$0.7 million, in total.  The premium amortization for the Term A Loan was $0.03$0.08 million and the discount amortization of the Term B Loans was $0.1$0.2 million, compared to $0 for the same period in 2010.  There2010, since there were no Term A and B Loans in Fiscalfiscal year 2010.

 

(Gain) Loss on Embedded Derivative

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Loss on embedded derivative

 

$

1,976

 

5.4

%

$

30,407

 

69.2

%

$

(28,431

)

(93.5

)%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Gain on embedded derivative

 

$

(7,951

)

(22.1

)%

$

(32,771

)

(87.3

)%

$

(24,820

)

(75.7

)%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Loss on embedded derivative

 

$

5,460

 

7.3

%

$

37,534

 

43.9

%

$

(32,074

)

(85.5

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

(Gain) loss on embedded derivative

 

$

(2,491

)

(2.3

)%

$

5,860

 

4.8

%

$

8,351

 

142.5

%

 

The gain on the embedded derivative associated with the 2014 Debentures was $8.0 million and $2.5 million for the three and nine months ended June 30, 2011, respectively, compared to a gain of $32.8 million and a loss of $5.9 million for the same periods in 2010.  For the three and sixnine months ended March 31,June 30, 2011, the lossgain on embedded derivative decreased by $28.4$24.8 million and $32.1increased by $8.4 million, respectively compared to the same periods in 2010. The change in the fair value of the embedded derivativesderivative is primarily related to the change in price of the underlying common stock. The loss on the embedded derivative associated with the 2014 Debentures was $2.0 million and $5.5 million for the three and six months ended March 31, 2011, respectively, compared to $30.4 million and $36.4 million for the same periods in 2010.  The Company also recorded a loss of $1.1 million, for the sixnine months ended March 31,June 30, 2010, to reflect the fair value of the derivative liability—premium put associated with the Company’s then outstanding 2024 Debentures at the date the put option was exercised.

 

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Table of Contents

 

(Gain) Loss on Extinguishment of Debt

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Loss on extinguishment of debt

 

$

3,874

 

10.5

%

$

 

0.0

%

$

3,874

 

100

%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

(Gain) loss on extinguishment of debt

 

$

 

0.0

%

$

(265

)

(0.7

)%

$

265

 

100

%

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Loss on extinguishment of debt

 

$

3,874

 

5.2

%

$

21,576

 

25.2

%

$

(17,702

)

(82

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

(Gain) loss on extinguishment of debt

 

$

3,874

 

3.5

%

$

21,311

 

17.3

%

$

(17,437

)

(82

)%

 

In fiscal year 2011, the loss on extinguishment of debt wasof $3.9 million.   The loss on extinguishment of debt in fiscal year 2011million is associated with the restructuring of the Senior Term Loan on February 4, 2011 (See Note 3 Debt in the accompanying Notesnotes to Unaudited Consolidated Financial Statements.)

 

In fiscal year 2010, the Companywe finalized negotiations with the noteholders of the 2024 Debentures to settle the obligation,obligations, including all amounts owed under the derivative liability for the premium put option, with a combination of cash; shares of the Company’sour common stock, shares of the Company’sour Series B Preferred stock, and $50.0 million face value of 2014 Debentures. The CompanyWe 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, and includesincluding 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 as required by ASC 470.

 

22



Table of Contents

Income Tax (Benefit) Expense

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Income tax expense

 

$

75

 

0.2

%

$

4,147

 

9.4

%

$

(4,072

)

(98.2

)%

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Income tax benefit

 

$

(227

)

(0.6

)%

$

(3,244

)

(8.6

)%

$

3,017

 

93

%

 

 

Six Months Ended

 

Six Months Ended

 

 

 

 

 

 

 

March 31, 2011

 

March 31, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Income tax expense

 

$

149

 

0.2

%

$

6,025

 

7.0

%

$

(5,876

)

(97.5

)%

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Income tax (benefit) expense

 

$

(78

)

(0.1

)%

$

2,781

 

2.3

%

$

(2,859

)

(102.8

)%

 

Income tax expensebenefit was $0.1$0.2 million and $0.1 million for the three and sixnine months ended March 31,June 30, 2011, respectively, compared to $4.1income tax benefit of $3.2 million and $6.0income tax expense of $2.8 million for the same periods in 2010. The decrease in income tax expense is primarily due to a projected federal tax loss for fiscal year 2011. Net income tax expense for the three and six months ended March 31, 2011 represents minimum state and foreign income tax on income not eligible for offset by loss carryforwards.

 

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Table of Contents

 

Liquidity and Capital Resources

 

Cash Flow Analysis

Cash and cash equivalents decreased to $18.2 million at March 31,June 30, 2011, from $37.2$38.6 million at March 31,June 30, 2010. Cash was used in operations, for capital expenditures and payment of debt. Cash expenses for the six months ended March 31,Nine Months Ended June 30, 2011 included $3.1$5.2 million for interest related to the 2014 Debentures, the Senior Term Loan, and Term A and B Loans, as well as $0.3$0.5 million for income taxes, compared to $0.7$4.2 million for interest related to the 2014 Debentures and the Senior Term Loan and $0.9$0.6 million for income taxes for the same period in 2010.

 

 

Six Months Ended March 31,

 

 

Nine Months Ended June 30,

 

 

2011

 

2010

 

 

2011

 

2010

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

Net cash used in operating activities

 

$

(8,708

)

$

(1,503

)

Net cash (used in) provided by operating activities

 

$

(6,671

)

$

1,039

 

Net cash used in investing activities

 

(2,488

)

(1,231

)

 

(3,178

)

(2,264

)

Net cash used in financing activities

 

(8,698

)

(17,620

)

 

(10,122

)

(17,698

)

Net decrease in cash and cash equivalents

 

(19,894

)

(20,354

)

 

(19,971

)

(18,923

)

Cash and cash equivalents at beginning of period

 

38,127

 

57,544

 

 

38,127

 

57,544

 

Cash and cash equivalents at end of period

 

$

18,233

 

$

37,190

 

 

$

18,156

 

$

38,621

 

 

Net Cash Used in Operating Activities

 

During the sixnine months ended March 31,June 30, 2011, cash used in operations totaled $6.7 million. Of the Company’s operating activities$6.7 million of cash used $8.7in operations, we used $1.6 million in cash.  The Company’sto fund the cash requirements of our net loss of $16.8 million includedwhich excludes non-cash charges of $5.5 million on the change in fair value of the embedded derivative liability for the 2014 Debentures, $3.9 million on theitems including depreciation and amortization, loss on extinguishment of debt $1.9and share based compensation. We used $7.0 million of depreciationpay down our current liabilities and amortization expense, $1.6$4.8 million of share-based compensation expense, $0.4 million in capitalized interest related to long-term debt, and $0.9 milliona decrease in deferred revenue. These uses were partially offset by the generation of amortizationcash from the collection of debt discounts.accounts receivable.

 

Accounts receivable decreased by $0.4 million to $15.4 million at March 31, 2011 from $15.8 million at September 30, 2010. The decrease in accounts receivable is primarily due to the timing of sales and a decrease in revenues compared to the same period last year. Inventory decreased by $1.4 million to $25.9 million at March 31, 2011 from $27.3 million at September 30, 2010. The Company decreased purchasing in the first and second quarters of fiscal year 2011 as compared to the same periods in 2010.

Accounts payable decreased by $2.1 million to $11.1 million at March 31, 2011 from $13.2 million at September 30, 2010. Accounts payable decreased primarilylower inventory is due to areduced purchases and production resulting from lower sales and an effort to reduce inventory levels.   Lower accounts payable is due to the reduction in purchases from our suppliers once industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers. Accrued expenses and other liabilities decreased by $3.3 million to $13.0 million at March 31, 2011 from $16.3 million at September 30, 2010. Accrued expenses and other liabilities decreased primarily due to the payment of the $3.0 million SEC settlement, which was accrued for in prior years.

During the nine months ended June 30, 2010, cash provided by operations totaled $1.0 million. We used $0.8 million to fund the cash portion of our net loss which excludes non-cash items including depreciation and amortization, loss on extinguishment of debt and share based compensation. We also used $5.4 million of cash to build up our inventory levels. These uses were partially offset by the generation of cash from the collection of accounts receivable and increase in current liabilities. For the nine months ended June 30, 2010, cash generated by operating activities totaled $6.4 million. The decrease in accounts receivable is primarily due to the timing of sales and a decrease in revenues compared to the same period last year. The higher inventory was due to increased purchases and production resulting from higher anticipated demand.   Higher accounts payable is due to the increased in purchases from our suppliers as well as the timing of payments to our vendors and other service providers.

 

Net Cash Used in Investing Activities

 

InvestingNet cash used in investing activities used $2.5totaled $3.2 million and $2.3 million in cash in the sixnine months ended March 31,June 30, 2011 primarily for capital expenditures. Investing activitiesand 2010, respectively and used $1.2 million in cash in the six months ended March 31, 2010, primarily for capital expenditures.

 

Net Cash Used in Financing Activities

 

Financing activities used $8.7$10.1 million in cash in the sixnine months ended March 31,June 30, 2011, primarily for a principal payment of $8.0 million on the Senior Term loan, $1.5 million increased in restricted cash for payment of our Term A Loan (See Note 3 Debt and Note 8 Subsequent Events in the accompanying notes to Unaudited Consolidated Financial Statements), and $0.6 million for the repurchase and retirement of restricted stock units for payroll taxes. In the sixnine months ended March 31,June 30, 2010, financing activities used $17.6$17.7 million, primarily due to a cash payment of $10.0 million to the holders of 2024 Debentures, $5.0 million to pay down the principal amount of the Senior Term Loan, equity issuance costs of $1.1 million, and debt issuance costs of $1.4 million.

 

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Table of Contents

 

Liquidity and Capital Resources, Contingent Liabilities and Operating Leases

 

ProspectiveLiquidity and Capital NeedsResources

 

Our principal sources of liquidity are our existing cash and cash equivalent balances, cash generated from product sales, and the sales or licensing of our intellectual property, including the sale of patents. As of June 30, 2011, our cash and cash equivalents totaled $18.2 million. Our working capital at June 30, 2011 was $33.0 million. As of September 30, 2010, our cash and cash equivalents totaled $38.1 million and working capital was $48.0 million.

In order to achieve sustained profitability and positive cash flows from operations, we may need to further reduce operating expenses and/or increase revenue. We have completed a series of cost reduction actions, which have improved our operating expense structure and 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. The Company believes that its existing sources of liquidity,cash and cash equivalent balances, along with cash expected to be generated from product sales and the sale andor licensing of IP,our intellectual property, including the sale of patents, will be sufficient to fund its operations and research and development efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months.

 

On July 15, 2011, we prepaid $1.5 million of our Term A loan, and we have no other principal payments on currently outstanding debt due in 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.

Contractual Obligations

 

Payment Obligations by Year

 

 

 

 

Payment Obligations for fiscal years ending September 30:

 

 

<1 Year

 

1 - 3 Years

 

3 - 5 Years

 

>5 Years

 

Total

 

 

Remaining in
2011

 

2012 - 2013

 

2014-2015

 

2016 and
thereafter

 

Total

 

Convertible subordinated debt

 

$

 

$

 

$

46,500

 

$

 

$

46,500

 

 

$

 

$

 

$

46,500

 

$

 

$

46,500

 

Term A Loan

 

 

9,341

 

 

 

9,341

 

 

1,500

 

 

7,841

 

 

9,341

 

Term B Loan

 

 

 

9,341

 

 

9,341

 

 

 

 

9,341

 

 

9,341

 

Operating leases

 

3,063

 

5,889

 

199

 

 

9,151

 

 

995

 

6,081

 

3,060

 

199

 

10,335

 

Software licenses

 

8,075

 

11,142

 

 

 

19,217

 

 

2,513

 

1,467

 

140

 

 

4,120

 

Inventory and related purchase obligations

 

297

 

420

 

 

 

717

 

 

3,334

 

12,658

 

6,833

 

 

22,825

 

Total

 

$

11,435

 

$

26,792

 

$

56,040

 

$

 

$

94,267

 

 

$

8,342

 

$

20,206

 

$

73,715

 

$

199

 

$

102,462

 

As of March 31,June 30, 2011, the 2014 Debentures, with a face value of $46.5 million, were outstanding, with a maturity date of October 30, 2014. The Company also has outstanding Term A and B Loans with a face value of $18.6$18.7 million. Payments with respect to the Term A Loan are interest only until the maturity date of February 4, 2014. Payments with respect to the Term B Loan are interest only until the maturity date of October 30, 2014. (See discussion in Note 3 Debt in the accompanying Notesnotes to Unaudited Consolidated Financial Statements.)

 

The Company leases facilities under non-cancellable operating leases that expire through 2015. Approximate minimum rental commitments under all non-cancellable operating leases as of March 31,June 30, 2011 are included in the table above.

 

Software license commitments represent non-cancellable licenses of IP from third-parties used in the development of the Company’s products. 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. The Company’s purchase orders are based on its current manufacturing needs and are typically fulfilled by its vendors within a relatively short time.

 

Off-Balance Sheet Arrangements

 

At March 31,June 30, 2011, other than operating leases, the Company had no material off-balance sheet arrangements.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Our quantitative and qualitative disclosures about market risk are described in our Annual Report on Form 10-K for the year ended September 30, 2010. There have been no material changes to these risks during the sixnine months ended March 31,June 30, 2011.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures, as(as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act.Act) as of June 30, 2011. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods, and is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31,June 30, 2011, these disclosure controls and procedures were effective.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the three months ended March 31,June 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Inherent Limitation on the Effectiveness of Internal Controls

 

The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating, and evaluating the controls and procedures, and the inability to eliminate misconduct completely. Accordingly, any system of internal control over financial reporting can only provide reasonable, not absolute, assurances. In addition, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company intends to continue to monitor and upgrade its internal controls as necessary or appropriate for the business, but cannot assure you that such improvements will be sufficient to provide effective internal control over financial reporting.

 

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Table of Contents

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On March 22,From time-to-time in our normal course of business, we are a party to various legal claims, actions and complaints. Although the ultimate outcome of these matters cannot be determined, management believes that, as of June 30, 2011, the United States District Court forfinal disposition of these proceedings will not have a material adverse effect on the Southern Districtfinancial position, results of New York approved the Company’s settlement with the SEC related to the SEC’s investigationoperations, or liquidity of the Company’s historical stock option practices and accounting irregularities that occurred between 1995 and 2006 (“Consent Judgment”). Under the Consent Judgment, the Company paid a $3.0 million civil penalty and consented to the entry of a final judgment permanently enjoining the Company from violations of the antifraud and other provisions of the federal securities laws. The $3.0 million payment was accrued in the Company’s financial statements in June 2009.Company.

 

ITEM 1A. RISK FACTORS

 

There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2010.

 

ITEM 6. EXHIBITS

10.1

Second Amendment to Loan Agreement dated as of February 4, 2011, by and among Vitesse Semiconductor Corporation, Vitesse Manufacturing & Development Corporation, Vitesse Semiconductor Sales Corporation and Whitebox VSC Ltd. (Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on February 8, 2011 (File No. 001-19654)).

31.1

Rule13a-14(a)/302 SOX Certification of Chief Executive Officer.

 

 

31.2

Rule13a-14(a)/302 SOX Certification of Chief Financial Officer.

 

 

32.1

Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer.

101.INS

XBRL Instance Document**

101.SCH

XBRL Taxonomy Extension Schema Document**

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document**

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document**

101.LAB

XBRL Taxonomy Extension Label Linkbase Document**

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document**

 

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Table of Contents

 

SIGNATURES

 

Pursuant to the requirements 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.

 

May 5,August 9, 2011

VITESSE SEMICONDUCTOR CORPORATION

 

 

 

 

 

By:

/s/ CHRISTOPHER R. GARDNER

 

 

Christopher R. Gardner

 

 

Chief Executive Officer

 

 

 

May 5,August 9, 2011

VITESSE SEMICONDUCTOR CORPORATION

 

 

 

 

 

By:

/s/ RICHARD C. YONKERMARTIN S. MCDERMUT

 

 

Richard C. YonkerMartin S. McDermut

 

 

Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

28