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 |
For the quarterly period ended June 30,December 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-196541-31614
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
| 77-0138960 |
(State or other jurisdiction of |
| (I.R.S. Employer |
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 x 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 |
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|
|
Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
|
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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 August 4, 2011,February 3, 2012, there were 24,454,92425,187,569 shares of the registrant’s $0.01 par value common stock outstanding.
VITESSE SEMICONDUCTOR CORPORATION
(UNAUDITED) QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED JUNE 30,DECEMBER 31, 2011
VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED BALANCE SHEETS
|
| June 30, |
| September 30, |
|
| December 31, |
| September 30, |
| ||||
|
| 2011 |
| 2010 |
|
| 2011 |
| 2011 |
| ||||
|
| (in thousands, except share data) |
|
| (in thousands) |
| ||||||||
|
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| ||||
ASSETS |
|
|
|
|
|
|
|
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| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 18,156 |
| $ | 38,127 |
| |||||||
Cash |
| $ | 17,049 |
| $ | 17,318 |
| |||||||
Accounts receivable, net |
| 12,478 |
| 15,765 |
|
| 10,399 |
| 9,591 |
| ||||
Inventory |
| 24,948 |
| 27,273 |
|
| 18,133 |
| 20,857 |
| ||||
Restricted cash |
| 1,901 |
| 394 |
|
| 405 |
| 404 |
| ||||
Prepaid expenses and other current assets |
| 1,774 |
| 2,913 |
|
| 2,285 |
| 2,039 |
| ||||
Total current assets |
| 59,257 |
| 84,472 |
|
| 48,271 |
| 50,209 |
| ||||
Property, plant and equipment, net |
| 7,742 |
| 8,196 |
|
| 5,388 |
| 5,934 |
| ||||
Other intangible assets, net |
| 1,842 |
| 864 |
|
| 2,230 |
| 1,781 |
| ||||
Other assets |
| 3,186 |
| 3,997 |
|
| 2,954 |
| 3,070 |
| ||||
Total Assets |
| $ | 72,027 |
| $ | 97,529 |
| |||||||
|
|
|
|
|
|
| $ | 58,843 |
| $ | 60,994 |
| ||
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
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LIABILITIES AND STOCKHOLDERS' DEFICIT |
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Current liabilities: |
|
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|
|
|
|
|
|
|
| ||||
Accounts payable |
| $ | 9,657 |
| $ | 13,216 |
|
| $ | 7,321 |
| $ | 5,198 |
|
Accrued expenses and other current liabilities |
| 13,015 |
| 16,293 |
|
| 13,590 |
| 14,463 |
| ||||
Deferred revenue |
| 2,119 |
| 6,926 |
|
| 3,362 |
| 3,878 |
| ||||
Current portion of debt and capital leases |
| 1,510 |
| — |
|
| 11 |
| 11 |
| ||||
Total current liabilities |
| 26,301 |
| 36,435 |
|
| 24,284 |
| 23,550 |
| ||||
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|
|
|
| ||||
Other long-term liabilities |
| 1,501 |
| 1,729 |
|
| 1,759 |
| 1,927 |
| ||||
Long-term debt, net |
| 15,411 |
| 26,070 |
|
| 15,538 |
| 15,444 |
| ||||
Derivative liability |
| 12,985 |
| 15,476 |
| |||||||||
Compound embedded derivative |
| 4,498 |
| 7,796 |
| |||||||||
Convertible subordinated debt, net of discount |
| 40,298 |
| 39,025 |
|
| 41,178 |
| 40,736 |
| ||||
Total liabilities |
| 96,496 |
| 118,735 |
|
| 87,257 |
| 89,453 |
| ||||
Commitments and contingencies |
|
|
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Stockholders’ deficit: |
|
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|
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| |||||||||
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 |
| |||||||||
Commitments and contingencies, See note 10 |
|
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|
| |||||||||
Stockholders' deficit: |
|
|
|
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| |||||||||
Preferred stock, $0.01 par value. 10,000,000 shares authorized; Series B Non Cumulative, Convertible, 134,720 shares outstanding at December 31, 2011 and September 30, 2011 |
| 1 |
| 1 |
| |||||||||
Common stock, $0.01 par value. 250,000,000 shares authorized; 24,621,616 and 24,470,280 shares outstanding at December 31, 2011 and September 30, 2011, respectively |
| 246 |
| 245 |
| |||||||||
Additional paid-in-capital |
| 1,823,834 |
| 1,816,796 |
|
| 1,825,321 |
| 1,824,433 |
| ||||
Accumulated deficit |
| (1,848,549 | ) | (1,838,326 | ) |
| (1,853,982 | ) | (1,853,138 | ) | ||||
Total Vitesse Semiconductor Corporation stockholders’ deficit |
| (24,469 | ) | (21,288 | ) | |||||||||
Noncontrolling interest |
| — |
| 82 |
| |||||||||
Total stockholders’ deficit |
| (24,469 | ) | (21,206 | ) | |||||||||
Total stockholders' deficit |
| (28,414 | ) | (28,459 | ) | |||||||||
|
| $ | 72,027 |
| $ | 97,529 |
|
| $ | 58,843 |
| $ | 60,994 |
|
See accompanying notes to unaudited consolidated financial statements.
VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
|
| Three Months ended |
| Nine Months ended |
|
| Three Months Ended December 31, |
| ||||||||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
| 2011 |
| 2010 |
| ||||||
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| (in thousands, except per share data) |
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| (in thousands, except per share data) |
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Net revenues: |
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Product revenues |
| $ | 31,856 |
| $ | 37,533 |
| $ | 103,855 |
| $ | 122,805 |
|
| $ | 28,942 |
| $ | 37,596 |
|
Intellectual property revenues |
| 4,132 |
| — |
| 6,772 |
| 290 |
|
| 1,049 |
| 151 |
| ||||||
Net revenues |
| 35,988 |
| 37,533 |
| 110,627 |
| 123,095 |
|
| 29,991 |
| 37,747 |
| ||||||
Costs and expenses: |
|
|
|
|
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|
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|
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| ||||||
Cost of revenues |
| 13,488 |
| 15,702 |
| 40,831 |
| 54,167 |
|
| 12,163 |
| 14,349 |
| ||||||
Engineering, research and development |
| 12,551 |
| 13,674 |
| 41,974 |
| 37,909 |
|
| 12,425 |
| 14,182 |
| ||||||
Selling, general and administrative |
| 9,561 |
| 8,669 |
| 29,997 |
| 28,354 |
|
| 7,424 |
| 10,459 |
| ||||||
Restructuring and impairment charges |
| 28 |
| 264 |
| |||||||||||||||
Amortization of intangible assets |
| 62 |
| 182 |
| 288 |
| 613 |
|
| 67 |
| 165 |
| ||||||
Costs and expenses |
| 35,662 |
| 38,227 |
| 113,090 |
| 121,043 |
|
| 32,107 |
| 39,419 |
| ||||||
Income (loss) from operations |
| 326 |
| (694 | ) | (2,463 | ) | 2,052 |
| |||||||||||
Loss from operations |
| (2,116 | ) | (1,672 | ) | |||||||||||||||
Other (income) expense: |
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|
|
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| ||||||
Interest expense, net |
| 1,929 |
| 2,496 |
| 6,487 |
| 7,036 |
|
| 1,948 |
| 2,518 |
| ||||||
(Gain) loss on embedded derivative |
| (7,951 | ) | (32,771 | ) | (2,491 | ) | 5,860 |
| |||||||||||
(Gain) loss on extinguishment of debt |
| — |
| (265 | ) | 3,874 |
| 21,311 |
| |||||||||||
(Gain) loss on compound embedded derivative |
| (3,298 | ) | 3,484 |
| |||||||||||||||
Other expense (income), net |
| 25 |
| 61 |
| (32 | ) | (45 | ) |
| 12 |
| (16 | ) | ||||||
Other (income) expense, net |
| (5,997 | ) | (30,479 | ) | 7,838 |
| 34,162 |
|
| (1,338 | ) | 5,986 |
| ||||||
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 | ) | |||||||
Loss before income tax expense |
| (778 | ) | (7,658 | ) | |||||||||||||||
Income tax expense |
| 66 |
| 74 |
| |||||||||||||||
Net loss |
| (844 | ) | (7,732 | ) | |||||||||||||||
|
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| ||||||
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 | ) | |||||||
Net loss per common share - basic and diluted |
| $ | (0.03 | ) | $ | (0.32 | ) | |||||||||||||
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| ||||||
Weighted average common shares outstanding |
|
|
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|
|
|
|
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| |||||||||||
Basic |
| 24,447 |
| 22,780 |
| 24,266 |
| 20,105 |
| |||||||||||
Diluted |
| 37,543 |
| 34,544 |
| 24,266 |
| 20,105 |
| |||||||||||
Weighted average common shares outstanding - basic and diluted |
| 24,512 |
| 24,050 |
|
See accompanying notes to unaudited consolidated financial statements.
VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
| Additional |
|
|
| Total Vitesse |
| Non |
| Total |
| |||||||
|
| Preferred Stock |
| Common Stock |
| Paid-in- |
| Accumulated |
| Stockholders’ |
| Controlling |
| Stockholders’ |
| |||||||||||
(In thousands, except share data) |
| 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 | ) |
Net loss |
|
|
|
|
|
|
|
|
|
|
| (10,223 | ) | (10,223 | ) | — |
| (10,223 | ) | |||||||
Compensation expense related to stock options and awards |
| — |
| — |
| — |
| — |
| 2,534 |
| — |
| 2,534 |
| — |
| 2,534 |
| |||||||
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 | ) | — |
| — |
| — |
| — |
| |||||||
Release of restricted stock units |
| — |
| — |
| 314,429 |
| 3 |
| (3 | ) | — |
| — |
| — |
| — |
| |||||||
Repurchase and retirement of restricted stock units for payroll taxes |
| — |
| — |
| (100,979 | ) | (1 | ) | (553 | ) | — |
| (554 | ) | — |
| (554 | ) | |||||||
Distribution to minority interest holders |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (82 | ) | (82 | ) | |||||||
Balance at June 30, 2011 |
| 134,720 |
| $ | 1 |
| 24,454,924 |
| $ | 245 |
| $ | 1,823,834 |
| $ | (1,848,549 | ) | $ | (24,469 | ) | $ | — |
| $ | (24,469 | ) |
|
| Preferred Stock |
| Common Stock |
| Additional |
| Accumulated |
| Total |
| |||||||||
(in thousands, except share data) |
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Deficit |
| Deficit |
| |||||
Balance at September 30, 2011 |
| 134,720 |
| $ | 1 |
| 24,470,280 |
| $ | 245 |
| $ | 1,824,433 |
| $ | (1,853,138 | ) | $ | (28,459 | ) |
|
|
|
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|
|
|
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|
|
|
|
|
| |||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (844 | ) | (844 | ) | |||||
Compensation expense related to stock options, awards and ESPP |
| — |
| — |
| — |
| — |
| 1,063 |
| — |
| 1,063 |
| |||||
Release of restricted stock units |
| — |
| — |
| 220,062 |
| 2 |
| (2 | ) | — |
| — |
| |||||
Repurchase and retirement of restricted stock units for payroll taxes |
| — |
| — |
| (68,726 | ) | (1 | ) | (173 | ) | — |
| (174 | ) | |||||
Balance at December 31, 2011 |
| 134,720 |
| $ | 1 |
| 24,621,616 |
| $ | 246 |
| $ | 1,825,321 |
| $ | (1,853,982 | ) | $ | (28,414 | ) |
See accompanying notes to unaudited consolidated financial statements.
VITESSE SEMICONDUCTOR CORPORATION
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| Nine Months ended June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
|
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (10,223 | ) | $ | (34,891 | ) |
Adjustments to reconcile net loss to net cash (used in) provided by operating |
|
|
|
|
| ||
Depreciation and amortization |
| 2,765 |
| 2,615 |
| ||
Share-based compensation |
| 2,534 |
| 1,724 |
| ||
Change in market value of embedded derivative liability |
| (2,491 | ) | 5,860 |
| ||
Gain on conversion of debt |
| — |
| (265 | ) | ||
Gain on disposal of fixed assets |
| (45 | ) | — |
| ||
Loss on extinguishment of debt |
| 3,794 |
| 20,765 |
| ||
Capitalization of interest to principal |
| 415 |
| 937 |
| ||
Amortization of debt issuance costs |
| 276 |
| 605 |
| ||
Amortization of debt discounts |
| 1,468 |
| 1,311 |
| ||
Amortization of debt premiums |
| (80 | ) | — |
| ||
Other |
| (24 | ) | 510 |
| ||
|
|
|
|
|
| ||
Change in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| 3,287 |
| 1,809 |
| ||
Inventory |
| 2,325 |
| (5,432 | ) | ||
Prepaids and other assets |
| 1,132 |
| 266 |
| ||
Accounts payable |
| (3,559 | ) | 3,725 |
| ||
Accrued expenses and other liabilities |
| (3,438 | ) | 1,346 |
| ||
Deferred revenue |
| (4,807 | ) | 154 |
| ||
Net cash (used in) provided by operating activities |
| (6,671 | ) | 1,039 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (3,178 | ) | (2,261 | ) | ||
Other |
| — |
| (3 | ) | ||
Net cash used in investing activities |
| (3,178 | ) | (2,264 | ) | ||
|
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Payment of convertible debentures |
| — |
| (10,000 | ) | ||
Payment of senior debt |
| (8,000 | ) | (5,000 | ) | ||
Cash restricted for payment of senior debt |
| (1,500 | ) | — |
| ||
Equity issuance costs |
| — |
| (1,050 | ) | ||
Debt issuance costs |
| (60 | ) | (1,365 | ) | ||
Prepayment fee on senior debt |
| — |
| (50 | ) | ||
Repurchase and retirement of restricted stock units for payroll taxes |
| (554 | ) | — |
| ||
Capital lease obligations |
| (8 | ) | (233 | ) | ||
Net cash used in financing activities |
| (10,122 | ) | (17,698 | ) | ||
|
|
|
|
|
| ||
Net decrease in cash |
| (19,971 | ) | (18,923 | ) | ||
Cash and cash equivalents at beginning of period |
| 38,127 |
| 57,544 |
| ||
Cash and cash equivalents at end of period |
| $ | 18,156 |
| $ | 38,621 |
|
|
|
|
|
|
| ||
Supplemental disclosure of non cash transactions: |
|
|
|
|
| ||
Cash paid during the period for: |
|
|
|
|
| ||
Interest |
| $ | 5,249 |
| $ | 4,155 |
|
Income taxes |
| $ | 511 |
| $ | 643 |
|
Non cash investing and financing activites: |
|
|
|
|
| ||
Common stock issued in exchange for Series B Preferred Stock |
| $ | 3 |
| $ | 27,584 |
|
Common stock issued for restricted stock units |
| $ | 3 |
| $ | — |
|
Residual value allocated to the equity conversion feature |
| $ | 2,490 |
| $ | — |
|
Premium related to term B Loan issued in Debt exchange |
| $ | 2,572 |
| $ | — |
|
Issuance of 2014 convertible debentures |
| $ | — |
| $ | 40,343 |
|
Common stock issued in exchange for 2024 debentures |
| $ | — |
| $ | 36,317 |
|
Preferred stock - Series B issued in exchange for 2024 debentures |
| $ | — |
| $ | 16,187 |
|
|
| Three Months Ended |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
|
|
|
|
|
| ||
Cash flows provided by (used in) operating activities: |
|
|
|
|
| ||
Net loss |
| $ | (844 | ) | $ | (7,732 | ) |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 751 |
| 969 |
| ||
Stock-based compensation |
| 1,063 |
| 684 |
| ||
Change in fair value of compound embedded derivative liability |
| (3,298 | ) | 3,484 |
| ||
Loss on asset impairment |
| 4 |
| — |
| ||
Gain on disposal of fixed assets |
| (9 | ) | — |
| ||
Interest paid in kind |
| — |
| 336 |
| ||
Amortization of debt issuance costs |
| 68 |
| 254 |
| ||
Amortization of debt discounts |
| 579 |
| 424 |
| ||
Accretion of debt premiums |
| (38 | ) | — |
| ||
Change in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| (808 | ) | 2,093 |
| ||
Inventory |
| 2,724 |
| 234 |
| ||
Restricted cash |
| (1 | ) | (3,007 | ) | ||
Prepaids and other assets |
| (200 | ) | 950 |
| ||
Accounts payable |
| 2,123 |
| (4,751 | ) | ||
Accrued expenses and other liabilities |
| (1,045 | ) | (1,806 | ) | ||
Deferred revenue |
| (516 | ) | (241 | ) | ||
Net cash provided by (used in) operating activities |
| 553 |
| (8,109 | ) | ||
|
|
|
|
|
| ||
Cash flows used in investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (645 | ) | (1,114 | ) | ||
|
|
|
|
|
| ||
Net cash used in investing activities |
| (645 | ) | (1,114 | ) | ||
|
|
|
|
|
| ||
Cash flows used in financing activities: |
|
|
|
|
| ||
Repurchase and retirement of restricted stock units for payroll taxes |
| (174 | ) | — |
| ||
Capital lease obligations |
| (3 | ) | (2 | ) | ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (177 | ) | (2 | ) | ||
|
|
|
|
|
| ||
Net decrease in cash |
| (269 | ) | (9,225 | ) | ||
Cash at beginning of period |
| 17,318 |
| 38,127 |
| ||
Cash at end of period |
| $ | 17,049 |
| $ | 28,902 |
|
|
|
|
|
|
| ||
Supplemental disclosure of non cash transactions: |
|
|
|
|
| ||
Cash paid during the year for: |
|
|
|
|
| ||
Interest |
| $ | 2,270 |
| $ | 2,422 |
|
Income taxes |
| 172 |
| 316 |
| ||
Non cash investing and financing activites: |
|
|
|
|
| ||
Common stock issued in exchange for Series B Preferred Stock |
| — |
| 3 |
| ||
Common stock issued for restricted stock units |
| 1 |
| — |
|
See accompanying notes to unaudited consolidated financial statements.
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
June 30,December 31, 2011
Note 1. The Company and Its Significant Accounting PoliciesNOTE 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 Networkingnetworking 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.products for these applications.
Vitesse was incorporated in the state of Delaware in 1987. The Company’s principal office isOur headquarters are located at 741 Calle Plano, Camarillo, California, and itsour phone number is (805) 388-3700. The Company’sOur stock trades on the NasdaqNASDAQ Global Market under the ticker symbol VTSS.
Fiscal Year
The Company’sOur 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 (“GAAP”) 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”)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, 2010,2011, included in our Annual Report on Form 10-K filed with the SEC on December 1, 2010.6, 2011.
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 June 30,December 31, 2011 and September 30, 2010,2011, the consolidated results of our operations for the three and nine months ended June 30, 2011 and 2010, our consolidated cash flows for the ninethree months ended June 30,December 31, 2011 and 2010, and the changes in our stockholders’ deficit for the ninethree months ended June 30,December 31, 2011. The results of operations for the three and nine months ended June 30,December 31, 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.presentation with no changes to stockholders’ deficit amounts or net loss for the three months ended December 31, 2011.
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 CompanyManagement regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory reserves, share-basedstock-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 believeswe believe 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 experienceswe experience may differ materially and adversely from itsour original estimates. To the extent there are material differences between the estimates and the actual results, the Company’sour future results of operations will be affected.
Revenue Recognition
Product revenues
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605, Revenue Recognition, we recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable, and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred in all instances where the earnings process is incomplete. We recognize revenue on goods shipped directly to customers, based on when shipping terms result in title transfer, as that is when title passes to the customer and all revenue recognition criteria specified above are met.
A portion of our product sales is made through distributors under agreements allowing for pricing credits and/or right of return. Our past history with these pricing credits and/or right of return provisions prevent us from being able to reasonably estimate the final price of our inventory to be sold and the amount of inventory that could be returned pursuant to these agreements. As a result, the fixed and determinable revenue recognition criterion has not been met at the time we deliver products allowing for pricing credits or right of returns. Accordingly, product revenue from sales made through these distributors is not recognized until the distributors ship the product to their customers. We also maintain inventory, or hub, arrangements with certain of our customers. Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize revenue unless and until the customer reports that it has removed our product from the warehouse and taken title and risk of loss.
From time to time, we may ship goods to our distributors with no pricing credits and/or no or limited right of return. Under these circumstances, at the time of shipment, product prices are fixed or determinable and the amount of future returns and pricing allowances to be granted in the future can be reasonably estimated and are accrued. Accordingly, revenues are recorded net of these estimated amounts.
Intellectual property revenues
We derive intellectual property (“IP”) revenues from the license of our IP, maintenance and support, and royalty revenue following the sale by our licensees of products incorporating the licensed technology. We enter into IP licensing agreements that generally provide licensees the right to incorporate our IP components in their products with terms and conditions that vary by licensee. Our IP licensing agreements may include multiple elements with an IP license bundled with support services. For such multiple element IP licensing arrangements, we follow the guidance in FASB Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition, to determine whether there is more than one unit of accounting.
We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. All of the requirements are generally fulfilled upon execution of the patent sale arrangement.
License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the IP. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.
Certain of our agreements may contain support obligations. Under such agreements we provide unspecified, when and if, bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. Support revenue is recognized ratably over the period during which the obligation exists, typically 12 months or less.
We recognize royalty revenue in the period in which the licensee reports shipment of products incorporating our IP components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee. We may, at our discretion and in accordance with our agreements, engage a third-party to perform royalty audits of our licensees. Any correction of royalties previously reported would occur when the results are resolved.
Multiple Element Transactions
For multiple-element arrangements, we allocate revenue to all deliverables based on their relative selling prices. In such circumstances, we use a hierarchy to determine the selling price to be used for allocating revenues to deliverables: (i) vendor-specific objective evidence of fair value (VSOE); (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP). VSOE generally exists only when we sell the deliverable separately and revenue is the price actually charged by us for that deliverable. Generally, we are not able to determine TPE because our licensing arrangements differ from that of our peers. We have concluded that no VSOE or TPE exists because it is rare that either we or our competitors sell the deliverables on a stand-alone basis. ESPs reflect our best estimate of what the selling prices of the elements would be if they were sold regularly on a stand-alone basis. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition, which could affect our results of operations.
In determining ESPs, we apply significant judgment as we weigh a variety of factors, based on the facts and circumstances of the arrangement. The facts and circumstances we may consider include but are not limited to prices charged for similar offerings, if any, our historical pricing practices as well as the nature and complexity of different technologies being licensed, geographies and the number of uses allowed for a given license.
Fair Value
ASC Topic 820, Fair Value Measurements, establishes a framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820 established the following fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs):
Level 1: Observable inputs such as quoted prices for identical assets or liabilities in active markets;
Level 2: Other inputs observable directly or indirectly, such as quoted prices for similar assets or liabilities or market-corroborate inputs; and
Level 3: Unobservable inputs for which there is little or no market data and which requires the owner of the assets or liabilities to develop its own assumptions about how market participants would price these assets or liabilities. We only have one Level 3 recurring fair value measurement, the compound embedded derivative.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
Financial Instruments
ASC Topic 825, “FinancialFinancial 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’sOur financial instruments include cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued expenses and various debt instruments.expenses. 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 Companywe could obtain, for similar instruments, in the current market.
Restricted cash consists of various commitments of $1.9 million recorded in other current assets; including cash designated for Our debt payment obligations of $1.5 million. In addition, there is an interest-bearing certificate of deposit (“CDs”) collateralizing letters of credit of $1.5 million, whichinstruments are included in other assetscurrent portion of debt, long-term debt, net, and convertible subordinated debt, net of discount on our unaudited consolidated balance sheets and are presented as described below:
Senior Term A Loan
At its inception, the fair value of Term A Loan was computed using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate. The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition, and observing the quoted bond yields in the Unaudited Consolidated Balance Sheetsfixed income market as of June 30, 2011.the valuation date.
Senior Term B Loan
At its inception, the fair value of Term B Loan was computed using a binomial lattice model. The Company’s debt consistsvaluation was determined using Level 3 inputs. The valuation model combined expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of two term loans (theour common stock into which the Term Loans A and B), each in the principal amountB loan is convertible.
Table of $9.34 million. The Company estimatesContents
Convertible Subordinated Debt
We estimate the fair values of the Term Loans Aconvertible subordinated debt and Bcompound embedded derivative (“2014 Debentures”) using a convertible bond valuation model within a lattice framework. These valuations areframework 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 June 30, 2011, the fair value of the Term A Loan was $10.2 million. The carrying value of the Term A Loan was $9.8 million, net of a $0.5 million remaining premium, which is amortized as interest expense over the life of 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 $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’sour common stock into which the 2014 Debentures are convertible. As the conversion price is not being indexed to the Company’sour common stock, the compound embedded derivative is bifurcated and presented on the balance sheet at fair value and the compound embedded derivative will beis marked to market. The change in the fair value of the compound embedded derivative is a non-cash item primarily related to the change in price of the underlying common stock. The changestock and is reflected in value of the embedded derivative is a non-cash item.earnings. At the Company’sour option, itwe can settle the compound embedded derivative in either cash or common shares.stock. As the Company intendswe intend to, and hashave the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt (“ASC 470”), the Company haswe have classified the liability as a long-term liability on its Unaudited Consolidated Balance Sheetour consolidated balance sheets as of 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.
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:
|
| June 30, 2011 |
| September 30, |
| ||
|
| (in thousands) |
| ||||
Raw materials |
| $ | 1,281 |
| $ | 2,815 |
|
Work-in-process |
| 10,990 |
| 12,854 |
| ||
Finished goods |
| 12,677 |
| 11,604 |
| ||
Total |
| $ | 24,948 |
| $ | 27,273 |
|
Revenues by 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 product revenues (excluding IP revenue) from these markets:
|
| 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
|
| Three Months ended June 30, |
| Nine Months ended June 30, |
| ||||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
|
| (unaudited) (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 16,044 |
| $ | 12,264 |
| $ | 51,653 |
| $ | 41,091 |
|
Asia Pacific |
| 14,555 |
| 18,053 |
| 42,683 |
| 55,014 |
| ||||
Europe |
| 3,489 |
| 5,572 |
| 12,084 |
| 19,120 |
| ||||
Other |
| 1,900 |
| 1,644 |
| 4,207 |
| 7,870 |
| ||||
Total Net Revenues |
| $ | 35,988 |
| $ | 37,533 |
| $ | 110,627 |
| $ | 123,095 |
|
Computation of Net Income (Loss) per Share
The following table presents the computation of income (loss) per share:
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||
|
| 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 months ended 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 from 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. 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 per share computation are as follows:
|
| Three Months ended |
| Nine Months ended |
| ||||
|
| 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 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. Unamortized debt issuance costs, as of June 30, 2011, were $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 for 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 was permitted at 101% of the principal amount plus accrued interest until August 4, 2011, after which the prepayment option 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 exchange and accordingly, the transaction was not accounted for as a troubled debt restructuring. However, due to the addition of a substantive conversion feature in the Term B Loan, as compared to the terms of 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 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.
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. 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 from the stated fixed rate of 10.5% per annum. At 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 June 30, 2011, the fair value of the Term A Loan was $10.2 million, and was carried on the balance sheet at $9.8 million, including the unamortized premium of $0.5 million. For the three and nine months ended June 30, 2011, the premium amortization related to the Term A Loan was $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, the equity conversion feature was allocated a value of $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 $2.49 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 June 30, 2011.
As of June 30, 2011, the fair value of the Term B Loan was $9.7 million, and was carried on the balance sheet at $7.0 million, net of the unamortized discount of $2.3 million. For the three and nine months ended June 30, 2011, the discount amortization related to the Term B Loan was $0.1 million and $0.2 million, respectively.
During 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.
Note 4. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis include the following at June 30,December 31, 2011 and September 30, 2010 (in thousands):
|
| Fair Value |
|
|
| ||||||||
|
| Measurements Using |
|
|
| ||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
June 30, 2011 (unaudited) |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Derivative liability – compound embedded derivative - 2014 Debenture |
| $ | — |
| $ | — |
| $ | 12,985 |
| $ | 12,985 |
|
|
|
|
|
|
|
|
|
|
| ||||
September 30, 2010 |
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Derivative liability – compound embedded derivative - 2014 Debenture |
| $ | — |
| $ | — |
| $ | 15,476 |
| $ | 15,476 |
|
The following table provides a reconciliation of the beginning and ending balances for the derivative liability-embedded derivative measured at fair value using significant unobservable inputs (Level 3) (in thousands):
|
| Compound Embedded |
| |
Balance at September 30, 2010 |
| $ | 15,476 |
|
Transfers in and /or out of Level 3 |
| — |
| |
Purchases, sales, issuances, and settlements |
| — |
| |
Total net gains included in earnings |
| (2,491 | ) | |
Balance at June 30, 2011 (unaudited) |
| $ | 12,985 |
|
The 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 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 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. As the conversion price is not being indexed to the Company’s own 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 embedded derivative is primarily related to the change in price of the underlying common stock.2011.
The valuation methodologies used by the Companywe use as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes itswe believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Intangible and Long-Lived Assets
Our intangible assets consist primarily of existing technologies, IP, and related costs for Enterprise Resource Planning (“ERP”) system. We account for intangible assets in accordance with ASC Topic 350, Goodwill and Others. We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an asset or asset group may not be recoverable. The carrying value of an asset or asset group is not recoverable if the amounts of undiscounted future cash flows the assets are expected to generate (including any net proceeds expected from the disposal of the asset) are less than its carrying value. When we identify that impairment has occurred, we reduce the carrying value of the asset to its comparable market value (if available and appropriate) or to its estimated fair value based on a discounted cash flow approach. Currently, we do not have goodwill or indefinite-lived intangible assets.
Allowance for Doubtful Accounts
We evaluate the collectability of accounts receivable at each balance sheet date using a combination of factors, such as historical experience, credit quality, age of the accounts receivable balances, and economic conditions that may affect a customer’s ability to pay. We include any accounts receivable balances that are determined to be uncollectible in the overall allowance for doubtful accounts using the specific identification method. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Our allowance for doubtful accounts is $2.2 million as of December 31, 2011 and September 30, 2011.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). This ASU supersedes certain pending paragraphs in ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. This ASU will temporarily allow the Board time to re-deliberate the presentation requirements for reclassifications out of accumulated other comprehensive income for annual and interim financial statements. We do not anticipate the adoption of ASU 2011-12 will have an impact on our consolidated financial statements.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants or the SEC did not, or are not believed by management to, have a material impact on our present or future consolidated financial statements.
NOTE 2—COMPUTATION OF NET LOSS PER SHARE
In accordance with ASC Topic 260, Earnings per Share, 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 periods in which we report net income, the weighted average number of shares used to calculate diluted income per share is inclusive of common stock equivalents from unexercised stock options, restricted stock units, and shares to be issued under our Employee Stock Purchase Plan (“ESPP”), warrants, convertible preferred stock and convertible debentures. Unexercised stock options, restricted stock units, ESPP shares, and warrants are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive. The dilutive effect of the convertible preferred stock and convertible notes is determined using the if-converted method, which assumes any proceeds that could be obtained upon the exercise of stock options, warrants and ESPP shares would be used to purchase common shares at the average market price for the period.
The potential common shares excluded from the diluted computation are as follows:
|
| Three Months Ended |
| ||
|
| 2011 |
| 2010 |
|
|
| (in thousands) |
| ||
|
|
|
|
|
|
Outstanding stock options |
| 1,885 |
| 1,951 |
|
Outstanding restricted stock units |
| 2,162 |
| 1,730 |
|
Outstanding warrants |
| — |
| 8 |
|
Convertible preferred stock |
| 674 |
| 674 |
|
2014 Convertible debentures |
| 10,332 |
| 10,332 |
|
Term B loan convertible note |
| 1,887 |
| — |
|
ESPP Shares |
| 297 |
| — |
|
Total potential common stock excluded from calculation |
| 17,237 |
| 14,695 |
|
NOTE 3—DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS
The following table provides details of inventory as of December 31, 2011 and September 31, 2010:
|
| December 31, |
| September 30, |
| ||
|
| 2011 |
| 2011 |
| ||
|
| (in thousands) |
| ||||
Inventory: |
|
|
|
|
| ||
Raw materials |
| $ | 2,009 |
| $ | 883 |
|
Work-in-process |
| 8,184 |
| 9,247 |
| ||
Finished goods |
| 7,940 |
| 10,727 |
| ||
Total |
| $ | 18,133 |
| $ | 20,857 |
|
NOTE 4—DEBT
|
| December 31, |
| September 30, |
| ||||
|
| 2011 |
| 2011 |
| ||||
|
| (in thousands) |
| ||||||
|
|
|
|
|
| ||||
Term A Loan, 10.50% fixed-rate notes, due February 2014 |
| $ |
| 8,208 |
| $ |
| 8,247 |
|
|
|
|
|
|
|
|
| ||
Term B Loan-convertible, 8.0% fixed-rate notes, due October 2014 |
| 7,313 |
| 7,177 |
| ||||
Capital leases, non-current portion |
| 17 |
| 20 |
| ||||
Total long-term debt, net |
| 15,538 |
| 15,444 |
| ||||
2014 Convertible subordinated debentures, 8.0% fixed-rate notes, due October 2014 |
| 41,178 |
| 40,736 |
| ||||
Total debt, net |
| $ |
| 56,716 |
| $ |
| 56,180 |
|
The Term A Loan has a remaining principal balance of $7.9 million and is carried on the balance sheet at $8.2 million, including remaining unamortized premium, and matures on February 4, 2014. The Term A Loan bears interest at a fixed rate of 10.5% per annum payable quarterly in arrears. Considering the debt premium, the effective interest rate on the Term A Loan is 8.2%.
The Term B Loan has a principal balance of $9.3 million, is carried on the balance sheet at $7.3 million, net of remaining unamortized discount, and matures on October 30, 2014 unless converted earlier. The Term B Loan bears interest at a fixed rate of 8% per annum payable quarterly in arrears. Prepayments on the Term B Loan are permitted at 100% of the principal amount plus accrued interest, but only if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The Term B Loan is convertible into our common stock at a conversion price of $4.95 per share (equivalent to approximately 202 shares per $1,000 principal amount). The conversion terms are substantially similar to the conversion terms of the 2014 Debentures, except that there is no provision for the potential payment of a make-whole interest amount upon conversion. At December 31, 2011, conversion of the outstanding principal amount of the Term B Loan would result in the issuance of 1,887,234 shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash. Considering the debt discount, the effective interest rate on the Term B Loan is 17.7%.
The Term A Loan and Term B Loan (collectively, the “Term A and B Loans”) are collateralized by substantially all of our assets.
The 2014 Debentures have a principal balance of $46.5 million and are carried on the balance sheet at $41.2 million net of the remaining unamortized discount, which is being amortized as interest expense over the remaining life of the debenture. The 2014 Debentures bear interest at 8% per annum payable semi-annually in arrears. On or after October 30, 2011, prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest, but only if the closing price of our common stock has been at least 130% of the conversion price in effect for at least 20 trading days during the 30 consecutive trading day period ending on the day prior to the date of notice of prepayment. The 2014 Debentures are convertible into our common stock at a conversion price of $4.50 per share (equivalent to approximately 222 shares per $1,000 principal amount). We can elect to settle any conversion in stock, cash or a combination of stock and cash. If a 2014 Debenture is converted into common stock on or prior to October 30, 2012, we must pay a “make-whole amount” equal to the 2014 Debenture’s scheduled remaining interest payments through October 30, 2012, which we may elect to pay in cash or in shares of common stock valued at 95% of the average daily volume weighted average price per share over a 10 trading day period. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.
At December 31, 2011, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10,331,778 shares of common stock and $3.1 million in make-whole amount that may be paid in cash or by delivery of 0.7 million shares of common stock. Considering the debt discount, the effective interest rate on the Debentures is 12.24%.
The credit agreements for the Term A and B Loans and 2014 Debenture agreements provide for customary restrictions and limitations on our ability to incur indebtedness and liens on property, make restricted payments or investments, enter into mergers or consolidations, conduct asset sales, pay dividends or distributions and enter into specified transactions and activities and also contain other customary default provisions. The agreements provide that we must repurchase, at the option of the holders, principal amounts plus accrued and unpaid interest upon the occurrence of a fundamental change involving us, as described in the agreements. Upon the occurrence of fundamental change involving us, the holders of the 2014 Debentures and the Term B Loan may be entitled to receive a “make-whole premium” if they convert their 2014 Debentures or Term B Loan into common stock, payable in additional shares of common stock, if the trading price of our common stock is between $3.20 and $16 per share. Upon the occurrence of certain change in control events, the holders of the Terms Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest.
Except for required repurchases upon a change in control or in the event of certain asset sales, as described in the applicable credit agreements, we are not required to make any sinking fund or redemption payments with respect to this debt.
Maturities of outstanding debt by fiscal year ending September 30 are $7.9 million and $55.8 million for 2014 and 2015, respectively.
NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY
Assets and liabilities measured at fair value on our balance sheet on a recurring basis include the following at December 31, 2011 and September 30, 2011:
|
| December 31, 2011 |
| September 30, 2011 |
| ||||||||||||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||
|
| (in thousands) |
| ||||||||||||||||||||||
Compound embedded derivative liability |
| — |
| — |
| 4,498 |
| 4,498 |
| — |
| — |
| 7,796 |
| 7,796 |
| ||||||||
|
| $ | — |
| $ | — |
| $ | 4,498 |
| $ | 4,498 |
| $ | — |
| $ | — |
| $ | 7,796 |
| $ | 7,796 |
|
There were no transfers in and out of Level 1 and Level 2 fair value measurements during three months ended December 31, 2011.
The following table provides a reconciliation of the beginning and ending balances for the compound embedded derivative measured at fair value using significant unobservable inputs (Level 3):
Compound Embedded Derivative Liability
|
| 2012 |
| 2011 |
| ||
|
| (in thousands) |
| ||||
Beginning balance at September 30, |
| $ | 7,796 |
| $ | 15,476 |
|
Transfers in and /or out of Level 3 |
| — |
| — |
| ||
Purchases, sales, issuances, and settlements |
| — |
| — |
| ||
Total net (gains) losses included in earnings |
| (3,298 | ) | 3,484 |
| ||
Ending balance at December 31, |
| $ | 4,498 |
| $ | 18,960 |
|
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.
As of December 31, 2011, the fair value of the Term A and B Loans is $8.4 million and $8.1 million, respectively.
As of December 31, 2011, the fair value of the 2014 Debentures is $45.5 million excluding the fair value of the compound embedded derivative of $4.5 million.
Note 5. Income TaxesNOTE 6—STOCK BASED COMPENSATION
Under all stock option plans, a total of 4.5 million shares of common stock have been reserved for issuance and 0.4 million shares are available for future grant as of December 31, 2011. The 2010 Incentive Plan permits the grant of stock options, stock appreciation rights, stock awards, performance awards, restricted stock and stock units and other stock and cash-based awards.
As of December 31, 2011, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost. Compensation costs related to our stock-based compensation plans are as follows:
|
| Three Months Ended December 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
Cost of revenues |
| $ | 122 |
| $ | 94 |
|
Engineering, research and development |
| 376 |
| 220 |
| ||
Selling, general and administrative |
| 565 |
| 370 |
| ||
Total stock-based compensation expense |
| $ | 1,063 |
| $ | 684 |
|
As of December 31, 2011, there was $8.4 million of unrecognized stock-based compensation expense related to non-vested stock options, restricted stock units, and our ESPP. The weighted average period over which the unearned stock-based compensation is expected to be recognized is approximately 2.7 years. An estimated forfeiture rate of 5.23% has been applied to all unvested options and restricted stock outstanding as of December 31, 2011. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards.
Stock Option Plans
Activity under all stock option plans for the three months ended December 31, 2011 was as follows:
|
| Shares |
| Weighted average |
| Weighted average |
| Aggregate |
| ||
Options outstanding, September 30, 2011 |
| 1,699,183 |
| $ | 29.77 |
| 6.37 |
| $ | — |
|
Granted |
| 376,182 |
| 2.54 |
| — |
| — |
| ||
Exercised |
| — |
| — |
| — |
| — |
| ||
Cancelled or expired |
| (190,212 | ) | 104.38 |
| — |
| — |
| ||
Options outstanding, December 31, 2011 |
| 1,885,153 |
| 16.81 |
| 7.33 |
| — |
| ||
Options exercisable, December 31, 2011 |
| 818,404 |
| $ | 33.59 |
| 5.05 |
| $ | — |
|
The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $2.49, as of December 31, 2011, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There are no in-the-money stock options that were exercisable as of December 31, 2011.
The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:
|
| December 31, |
| ||
|
| 2011 |
| 2010 |
|
Expected life (in years) |
| 5.62 |
| 6.25 |
|
Expected volatility: |
|
|
|
|
|
Weighted-average |
| 87.0% |
| 85.7% |
|
Range |
| 86.1% - 87.1% |
| 85.7% - 86.3% |
|
Expected dividend |
| — |
| — |
|
Risk-free interest rate |
| 1.08%-1.27% |
| 2.29% - 2.35% |
|
Our determination of the fair value of stock-based payment awards is affected by assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: our expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The fair value of employee stock options is determined in accordance with ASC 718 and SAB 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC, using an option-pricing model, however, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise.
A summary of restricted stock unit activity for the three months ended December 31, 2011 is as follows:
|
| Restricted |
| Weighted Average |
| |
Restricted stock units vested and expected to vest, September 30, 2011 |
| 1,295,979 |
| $ | 4.67 |
|
Awarded |
| 1,124,068 |
| 2.54 |
| |
Released |
| (220,062 | ) | 4.64 |
| |
Forfeited |
| (37,954 | ) | 4.54 |
| |
Restricted stock units vested and expected to vest, December 31, 2011 |
| 2,162,031 |
| $ | 3.60 |
|
From time-to-time, we retain shares of common stock from employees upon vesting of restricted shares and restricted stock units to cover income tax withholding. The impact of such withholding totaled $0.2 million for the three months ended December 31, 2011, and was recorded as settlement on restricted stock tax withholding in the accompanying unaudited consolidated statements of stockholders’ deficit.
Employee Stock Purchase Plan
In January 2011, our stockholders approved the 2011 ESPP under which 2.5 million shares of common stock are reserved for issuance. The first purchase period began on August 1, 2011 and ended January 31, 2012. The fair value of the ESPP awards are calculated in accordance with ASC 718-50 Employee Share Purchase Plans, under which the fair value of each share granted under the ESPP is equal to the sum of 15% of a share of stock, a call option for 85% of a share of stock, and a put option for 15% of a share of stock. The fair value of the call and put options are determined using the Black-Scholes pricing model. We used the following assumptions: expected useful life of 0.5 years, weighted average expected volatility of 40.4%, our expected dividend rate, and a risk-free interest rate of 0.2%. We recognized approximately $0.1 million in stock compensation for the three months ended December 31, 2011 related to the ESPP. At December 31, 2011, no shares had been issued under this plan and 2.5 million shares were available for future issuance. On January 31, 2012, 334,646 shares were issued at $2.59, a 15% discount against the share price on that date.
NOTE 7—INCOME TAXES
The provision for income taxes as a percentage of income from operations before income taxes was 0.72%(8.48%) for the ninethree months ended June 30,December 31, 2011 compared to 8.84%(0.97%) for the comparable period in the prior year. For the year ending September 30, 2011, the Company’s estimated effective tax rate is (1.43%). The Company’sOur effective tax rate is primarily impacted by operating losses.
Because the Company haswe have historically experienced net tax losses, the Company haswe have placed a valuation allowance against itsour otherwise recognizable deferred tax assets.
The total amount of gross unrecognized tax benefits was approximately $10.6$10.2 million as of JuneDecember 31, 2011, which did not change from September 30, 2011. The total amount of gross unrecognized tax benefits decreased by $0.2 million related to a change in its state tax filing methodology.
As of June 30,December 31, 2011, approximately $0.5$0.3 million of the $10.6$10.2 million FIN 48ASC 740-10 (FIN 48) unrecognized tax benefits related to the Company’sour state tax liability is recorded in accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet.unaudited consolidated balance sheet. Of the remaining balance, $10.0$9.9 million relates to federal and state research and development tax credits that have not been utilized and are fully reserved.
TableOur ability to utilize our deferred tax assets to offset future taxable income may be significantly limited if we experience an “ownership change,” as defined in Section 382 of Contentsthe Internal Revenue Code of 1986, as amended (the “Code”). In general, an ownership change will occur if there is a cumulative change in Vitesse’s ownership by “5% shareholders” (as defined in the Code) that exceeds 50 percentage points over a rolling three-year period. Should an “ownership change” occur, it could significantly diminish the value of our net operating loss carryforwards by limiting the rate at which they could be permitted to offset them against any future taxable income.
The debt modifications in October 30, 2009 resulted in an “ownership change” as defined for United States federal income tax purposes. Therefore, our ability to utilize $56.3 million net operating losses incurred prior to the change of ownership became subject to an annual limitation of $3.1 million.
Net operating losses incurred by Vitesse subsequent to the ownership change totaled $26.6 million and are not subject to this limitation, however, they may be subject to limitation should a subsequent change in ownership occur. We are in the process of assessing the likelihood of an ownership change occurring for Section 382 purposes.
Note 6. Stockholders’ EquityNOTE 8—RESTRUCTURING AND IMPAIRMENT CHARGES
Stock Option Plans
Under all stock option plans in effect, asThe combined summary of June 30, 2011, a total of 4,478,405 shares of common stock have been reserved for issuance and 1,262,862 shares remain available for future grant. The following table summarizes compensation coststhe recent activity related to the Company’s share based compensation plans.
|
| Three Months ended |
| Nine Months ended |
| ||||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
| ||||
|
| (unaudited) (in thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Cost of revenues |
| $ | 123 |
| $ | 100 |
| $ | 353 |
| $ | 326 |
|
Engineering, research and development |
| 288 |
| 183 |
| 757 |
| 587 |
| ||||
Selling, general and administrative |
| 515 |
| 314 |
| 1,424 |
| 811 |
| ||||
Total share-based compensation expense |
| $ | 926 |
| $ | 597 |
| $ | 2,534 |
| $ | 1,724 |
|
Stock Options
Activity under all stock optionour restructuring plans for the nine months ended June 30, 2011, wasare as follows:
|
| Shares |
| Weighted |
| Weighted |
| Aggregate |
| ||
|
|
|
|
|
|
|
|
|
| ||
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 |
| — |
| |
|
| Facility |
| Severance |
| Property and |
| Total |
| ||||
|
| (in thousands) |
| ||||||||||
Liability balance at September 30, 2010 |
| $ | 921 |
| $ | — |
| $ | — |
| $ | 921 |
|
Charged to operations |
| 1,389 |
| 1,126 |
| 1,141 |
| 3,656 |
| ||||
Non-cash charges |
| — |
| — |
| (1,141 | ) | (1,141 | ) | ||||
Cash payments |
| — |
| (828 | ) | — |
| (828 | ) | ||||
Liability balance at September 30, 2011 |
| $ | 2,310 |
| $ | 298 |
| $ | — |
| $ | 2,608 |
|
Charged to operations |
| 4 |
| 24 |
| — |
| 28 |
| ||||
Non-cash charges |
| (4 | ) | — |
| — |
| (4 | ) | ||||
Cash payments |
| (253 | ) | (305 | ) | — |
| (558 | ) | ||||
Liability balance at December 31, 2011 |
| $ | 2,057 |
| $ | 17 |
| $ | — |
| $ | 2,074 |
|
Restricted Stock Units
A summaryIn September 2011, we initiated a restructuring plan to further align our resources with our strategic business objectives. Employees impacted under this plan were notified prior to the end of restricted stock unit activityfiscal year 2011. In September 2011, we consolidated our Camarillo operations into a single facility and exited an adjacent leased facility. As a result of the lease exit, we incurred $1.4 million in lease exit costs and $1.1 million in asset impairment charges for asset write-down for tenant improvements at the nine months ended June 30, 2011, was as follows:
|
| Shares |
| Weighted Average |
| |
|
|
|
|
|
| |
Restricted stock units outstanding, September 30, 2010 |
| 770,786 |
| $ | 5.72 |
|
Awarded |
| 1,071,995 |
| 4.39 |
| |
Released |
| (314,429 | ) | 6.09 |
| |
Forfeited |
| (123,637 | ) | 4.70 |
| |
Restricted stock units outstanding, June 30, 2011 (unaudited) |
| 1,404,715 |
| $ | 4.71 |
|
Note 7. Commitments and Contingencies
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 final disposition of these proceedingsfacility which will not have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
Note 8. Subsequent Events
Payment on Term A Loan
On July 15, 2011, the Company used $1.5 millionbe recovered from restrictedfuture related cash to pay a portion of the Term A Loan. (See Note 3 Debt in the accompanying Unaudited Consolidated Financial Statements). In addition, the Company paid a 1.0% prepayment penalty. Subsequent to the payment, the outstanding principal balance of the Term A Loanflows. The related facility was $7.8 million and interest expense will be reduced by $0.3 million over the life of the loan.vacated before September 30, 2011.
The fair value of the lease termination liability was determined based upon the present value of the remaining lease payments reduced by the current market rate for sublease rentals of similar properties. Our ability to generate sublease income is highly dependent upon the commercial real estate conditions at the time we perform our evaluations or negotiate sublease arrangements with third parties. The amounts we have accrued represent our best estimate of the obligations we expect to incur and could be subject to adjustments as market conditions change. Changes to the estimates will be reflected as “adjustments” in the period the changes in estimates were determined. There were no changes to the estimates for the three months ended December 31, 2011. Our cash payments under the lease agreement may differ significantly from the exit accrual recorded due to the differences between actual experience and estimates made by management in establishing the lease termination accrual.
NOTE 9—SEGMENT AND GEOGRAPHIC INFORMATION
We manage and operate our business through one operating segment.
Based on direct shipments, net revenues to customers that were equal to or greater than 10% of total net revenues in the three months ended December 31, 2011 and 2010 were as follows:
|
| Three Months Ended December 31, |
| ||
|
| 2011 |
| 2010 |
|
Nu Horizons Electronics (distributor) |
| 21.9 | % | 19.8 | % |
WPI Int’l. (HK) Ltd. (distributor) |
| 10.2 | % |
| * |
Tellabs |
|
| * | 12.2 | % |
*Less that 10% of total net revenues for period indicated.
Net revenues are summarized by geographic area as follows:
|
| Three Months Ended December 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
United States |
| $ | 13,725 |
| 18,634 |
| |
Asia Pacific |
| 10,535 |
| 13,405 |
| ||
EMEA* |
| 4,605 |
| 4,929 |
| ||
Other |
| 1,126 |
| 779 |
| ||
Total net revenues |
| $ | 29,991 |
| $ | 37,747 |
|
*Europe, Middle East and Africa
Revenue by geographic area is based upon where the design win for the work originated. United States revenue includes $1.0 million and $0.2 million of intellectual property revenue for the three months ended December 31, 2011 and 2010, respectively. We believe a substantial portion of the products sold to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.
We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.
|
| Three Months Ended December 31, |
| ||||||
|
| 2011 |
| 2010 |
| ||||
|
| (in thousands) |
| ||||||
Connectivity |
| $ | 12,968 |
| $ | 17,867 |
| ||
Ethernet switching |
| 8,023 |
| 10,207 |
| ||||
Transport processing |
| 7,951 |
| 9,522 |
| ||||
Product revenues |
| $ | 28,942 |
| $ | 37,596 |
| ||
NOTE 10—COMMITMENTS AND CONTINGENCIES
We are involved in legal proceedings in the ordinary course of business, including actions against us which assert or may assert claims or seek to impose fines and penalties in substantial amounts.
During our normal course of business, we make certain contractual guarantees and indemnities pursuant to which we may be required to make future payments under specific circumstances. We review our exposure under these agreements no less than annually, or more frequently when events indicate. Except for our established warranty reserves, we do not expect that any potential payments in connection with any of these indemnity obligations would have a material adverse effect on out consolidated financial position. Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of December 31, 2011 and September 30, 2011.
Patents and Licenses
We have entered into various licensing agreements requiring primarily fixed fee royalty payments. Certain of these agreements contain provisions for the payment of guaranteed or minimum royalty amounts. In the event that we fail to pay any minimum annual royalties, these licenses may automatically be terminated.
Warranties
We establish reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with our customers. Our warranty reserves are established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods.
Intellectual Property Indemnities
We indemnify certain customers and our contract manufacturers against liability arising from third-party claims of intellectual property rights infringement related to our products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, we are unable to determine the maximum amount of losses that we could incur related to such indemnifications.
Director and Officer Indemnities and Contractual Guarantees
We have entered into indemnification agreements with our directors and executive officers, which require us to indemnify such individuals to the fullest extent permitted by Delaware law. Our indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities
We have also entered into severance and change in control agreements with certain of our executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with us.
General Contractual Indemnities/Products Liability
During the normal course of business, we enter into contracts with customers where we agreed to indemnify the other party for personal injury or property damage caused by our products. Our indemnification obligations under such agreements are not generally limited in amount or duration. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, we are unable to determine the maximum amount of losses that we could incur relating to such indemnities. Historically, any amounts payable pursuant to such indemnities have not had a material negative effect our business, financial condition or results of operations. We maintain general and product liability insurance as well as errors and omissions insurance, which may provide a source of recovery to us in the event of an indemnification claim.
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, 20102011 (“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’sour 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 this Report and Part I, Item 1A of our Annual Report, and similar discussions in our other SEC filings. The Company assumesWe assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
We are a leading supplier of high-performance ICs, principally targeted at systems manufacturers in the communications industry. Within the communications industry, our 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.
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 haswe focused itsour product development and marketing efforts on products that leverage the convergence of Carrier and Enterprise Networking ontonetworking to Internet Protocol basedProtocol-based networks. These “Next-Generation Networks”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 believesWe believe that products in this emerging technology area represent the best opportunity for the Companyus to provide differentiation in the market.
Realization of Our Strategy
Several years ago, we embarked on a process to substantially re-invent Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Towards that goal, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products, and penetrate new customers in an effort to diversify ourselves and provide new opportunities for growth.
As with any high-technology company, these growth opportunities begin with new products. We improved the efficiency of our R&D by focusing our resources on two large, but independent markets: Carrier networking and Enterprise networking, which both rely increasingly on Ethernet technology, allowing us to maximize the impact of our R&D budget.
After two years of development, Vitesse introduced over 30 new products in 2010, over 20 new products in 2011, and we continue to introduce new products in 2012. These introductions included many new “platform” products and technology that will serve as the basis for future product development. This rate was nearly double our historic rate of product introductions and allowed us to substantially increase our served markets in both Carrier and Enterprise networking, providing us better growth opportunities.
The next step to generating growth is creating market traction and design wins where we are selected by our customers over our competitors. As we took our new products to market in 2011 and 2012, we saw a dramatic increase in our customer engagements and the number of design opportunities that were being identified by our sales team. Early adoption of our products by our customers has exceeded our goals. In 2011, we recorded over 300 new design wins, a 250% increase from the prior year. Of these design wins, we expect 80% of the value to come from our Tier-1 and Tier-2 customers, and nearly 50% to come from our new products introduced in 2010 and 2011. Design wins remain strong as we enter 2012.
Together with our customers, we are now preparing to take these new products into production. In our industry it typically takes 12 to 18 months for our customers to go from first product sample received to first customer shipment as customers do the necessary development work to complete and qualify their systems in the network. In 2011 and the first quarter of 2012, we shipped samples and pre-production on the majority of these new products, and we expect our customers to phase into volume production over the course of 2012 and into 2013.
As these new products ramp, we will begin a migration of our revenues to our new products, providing a new growth cycle for Vitesse. In 2011, only 5% of our revenue was from products sampled in the last three years. Based on observable market traction and the design wins captured in 2011, we expect revenues from our new products to increase in 2012 and continue to grow strongly from there.
We have also made solid progress on our strategy to strengthen our operational performance and execution. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an increased emphasis on the importance of our customers. During the last three years, we accelerated our comprehensive efforts to increase our product gross margins and operating margins, which together have substantially increased our operating leverage. During the last three years we have:
·Expanded our business in Europe and Asia, as a result of improved penetration into Tier 1 networking OEMs.
·Transitioned to a fully outsourced manufacturing model by moving the majority of our California probe and test function to an outsourced, offshore Asian test contractor, which was completed in 2010. This production model substantially reduced our fixed costs, headcount, and cost of testing, and will allow us to reduce our manufacturing cycle times and better serve our growing customer base in Asia.
·Consolidated multiple locations in order to gain efficiencies and streamline costs.
Critical Accounting Policies and Estimates
Our discussion and analysis of our historical financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements in conformity with those principals require us to make certain estimates of certain items and judgments as to certain future events including for example those related to revenue recognition, inventory valuation, long-lived assets, valuation of compound embedded derivative and term loan, stock-based compensation, income taxes, and restructuring assets. These determinations, even though inherently subjective and subject to change, affect the reported amounts of our assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. While we believe that our estimates are based on reasonable assumptions and judgments at the time they are made, some of our assumptions, estimates and judgments will inevitably prove to be incorrect. As a result, actual outcomes will likely differ from our accruals, and those differences, positive or negative, could be material. Some of our accruals are subject to adjustment, as we believe appropriate, based on revised estimates and reconciliation to the actual results when available.
Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the year ended September 30, 2010.2011. There have been no significant changes to these policies during the ninethree months ended June 30,December 31, 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.
17Impact of Recent Accounting Pronouncements
For information with respect to recent accounting pronouncements and the impact of these pronouncements, see “The Company and Its Significant Accounting Policies” footnote in the accompanying notes to the unaudited consolidated financial statements.
Results of Operations for the three and nine months ended June 30,December 31, 2011 compared to the three and nine months ended June 30,December 31, 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 |
| Nine Months ended |
|
| Three Months Ended December 31, |
| |||||||||||||
|
| 2011 |
| 2010 |
| 2011 |
| 2010 |
|
| 2011 |
| 2010 |
| |||||||
|
| (unaudited) |
|
| $ |
| % |
| $ |
| % |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| (in thousands, except for percentages) |
| |||||||||
Net revenues: |
|
|
|
|
|
|
|
|
| ||||||||||||
Product revenues |
| $ | 28,942 |
| 96.5 | % | $ | 37,596 |
| 99.6 | % | ||||||||||
Intellectual property revenues |
| 1,049 |
| 3.5 | % | 151 |
| 0.4 | % | ||||||||||||
Net revenues |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
| 29,991 |
| 100.0 | % | 37,747 |
| 100.0 | % | |||
|
|
|
|
|
|
|
|
|
| ||||||||||||
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Cost of revenues |
| 37.5 | % | 41.8 | % | 36.9 | % | 44.0 | % |
| 12,163 |
| 40.6 | % | 14,349 |
| 38.0 | % | |||
Engineering, research and development |
| 34.9 | % | 36.4 | % | 37.9 | % | 30.7 | % |
| 12,425 |
| 41.4 | % | 14,182 |
| 37.6 | % | |||
Selling, general and administrative |
| 26.6 | % | 23.1 | % | 27.1 | % | 23.1 | % |
| 7,424 |
| 24.8 | % | 10,459 |
| 27.7 | % | |||
Restructuring and impairment charges |
| 28 |
| 0.1 | % | 264 |
| 0.7 | % | ||||||||||||
Amortization of intangible assets |
| 0.2 | % | 0.5 | % | 0.3 | % | 0.5 | % |
| 67 |
| 0.2 | % | 165 |
| 0.4 | % | |||
Costs and expenses |
| 99.2 | % | 101.8 | % | 102.2 | % | 98.3 | % |
| 32,107 |
| 107.0 | % | 39,419 |
| 104.4 | % | |||
Income (loss) from operations |
| 0.8 | % | (1.8 | )% | (2.2 | )% | 1.7 | % | ||||||||||||
Other expense (income): |
|
|
|
|
|
|
|
|
| ||||||||||||
Loss from operations |
| (2,116 | ) | (7.0 | )% | (1,672 | ) | (4.4 | )% | ||||||||||||
Other (income) expense: |
|
|
|
|
|
|
|
|
| ||||||||||||
Interest expense, net |
| 5.4 | % | 6.7 | % | 5.9 | % | 5.7 | % |
| 1,948 |
| 6.5 | % | 2,518 |
| 6.7 | % | |||
(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 | % | ||||||||||||
(Gain) loss on compound embedded derivative |
| (3,298 | ) | (11.0 | )% | 3,484 |
| 9.2 | % | ||||||||||||
Other expense (income), net |
| 0.1 | % | 0.2 | % | 0.0 | % | (0.0 | )% |
| 12 |
| 0.0 | % | (16 | ) | (0.0 | )% | |||
Other (income) expense, net |
| (16.6 | )% | (81.1 | )% | 7.1 | % | 27.8 | % |
| (1,338 | ) | (4.5 | )% | 5,986 |
| 15.9 | % | |||
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 | % | ||||||||||||
Net income (loss) available to common stockholders |
| 18.0 | % | 87.9 | % | (9.2 | )% | (28.5 | )% | ||||||||||||
Loss before income tax expense |
| (778 | ) | (2.6 | )% | (7,658 | ) | (20.3 | )% | ||||||||||||
Income tax expense |
| 66 |
| 0.2 | % | 74 |
| 0.2 | % | ||||||||||||
Net loss |
| $ | (844 | ) | (2.8 | )% | $ | (7,732 | ) | (20.5 | )% |
Product Revenues
We classify our product revenues based on the markets into whichsell our products are sold:into the following markets: (i) Carrier Networking,networking; (ii) Enterprise Networkingnetworking; and (iii) Non-Core.Non-core. The Carrier Networkingnetworking market includes core, metro, access, mobile, and backhaul networks. The Enterprise Networkingnetworking market covers Ethernet switching and transmission within local area networksLANs in small-medium enterprise (“SME”) and small-medium business (“SMB”) markets. The Non-CoreNon-core market is comprised of legacy products that have not received additional investment over the last five years and, as a result, hashave generally been in decline.
The following tables summarize the Company’stable summarizes our product revenues by market:
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Product |
| Amount |
| % of Product |
| 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 | )% |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Product |
| Amount |
| % of Product |
| 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 | )% |
|
| Three Months Ended December 31, |
|
|
|
|
| ||||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| ||||||||
|
| Amount |
| % of Product |
| Amount |
| % of Product |
| Change |
| % |
| ||||
|
| (in thousands, except percentages) |
|
| |||||||||||||
Carrier networking |
| $ | 11,992 |
| 41.4 | % | $ | 18,165 |
| 48.3 | % | $ | (6,173 | ) | (34.0 | )% | |
Enterprise networking |
| 14,427 |
| 49.8 | % | 17,346 |
| 46.1 | % | (2,919 | ) | (16.8 | )% | ||||
Non-core |
| 2,523 |
| 8.8 | % | 2,085 |
| 5.6 | % | 438 |
| 21.0 | % | ||||
Product revenues |
| $ | 28,942 |
| 100.0 | % | $ | 37,596 |
| 100.0 | % | $ | (8,654 | ) | (23.0 | )% | |
ProductThe decrease in Carrier networking revenues for the threeis primarily attributable to general market decline in mature SONET-based products and nine months ended June 30, 2011 were $31.9 million and $103.9 million, respectively, compared to $37.5 million and $122.8 million for the same periods in 2010.
Product revenues from Carrier Networking for the three and nine months ended June 30, 2011 decreasedresulting inventory corrections by $0.2 million and $2.9 million, respectively, compared to the same periods in 2010. These decreases were primarily due to continued weakness in the Asia Pacific region, which declined by $1.3 million from the same three-month period in 2010 and $5.6 million compared to the first nine months in 2010. The weakness was seen across a wide range of customers and products,customers. This impact has been primarily in China. This decrease was partially offsetAsia, particularly China and a single North American customer. The decline in Enterprise networking revenues is driven primarily by increased salesa strong decline in the United States. Compared with the third quarter of fiscal year 2010, we saw growthseveral optical module manufacturers due in some of our connectivity products, including our crosspoint switchpart to flooding in manufacturing facilities in Thailand and 1 Gigabit Ethernet PHY products offset by declinesresulting disruption in their supply chains as well as a small decline in our processing products for SONET applications and Physical Media Device (“PMD”) devices for optical module applications.
Product revenues from Enterprise Networking for the three and nine months ended June 30, 2011 decreased by $2.6 million and $6.7 million, respectively, compared to the same periods in 2010. The decrease is primarily due to weakness in the Company’s switch and 1 Gigabit Ethernet PHY products selling into low-end SMESME/SMB applications. The increase in Non-core revenues is largely attributable to increased purchases of legacy products in our Network Processing (“NPU”) product line as customers increase inventory after we announced our plans to phase-out production of these products (“end-of-life”.)
ProductWe also classify our product revenues from Non-Corebased on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Product |
| Amount |
| % of Product |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
| ||||||||||||
Connectivity |
| $ | 12,968 |
| 44.8 | % | $ | 17,867 |
| 47.5 | % | $ | (4,899 | ) | (27.4 | )% |
Ethernet switching |
| 8,023 |
| 27.7 | % | 10,207 |
| 27.1 | % | (2,184 | ) | (21.4 | )% | |||
Transport processing |
| 7,951 |
| 27.5 | % | 9,522 |
| 25.4 | % | (1,571 | ) | (16.5 | )% | |||
Product revenues |
| $ | 28,942 |
| 100.0 | % | $ | 37,596 |
| 100.0 | % | $ | (8,654 | ) | (23.0 | )% |
The decrease in Connectivity revenues is largely attributable to decreases in products for the three10G SONET PHYs and nine months ended June 30, 2011 decreased by $2.9 million and $9.4 million, respectively,10G Laser Drivers for long haul DWDM applications, primarily in Asia.
The decrease in Ethernet switching revenues is largely attributable to declines in our Ethernet Media Access Control (“MAC”) products selling primarily into Carrier markets, due to overall softness in these markets compared towith the same periodsperiod in 2010. The decrease is primarily due to a decline of the Company’s network processing product line and fibre channel PHY products.2011.
The decrease in Transport processing revenues is largely attributable to a decline in our legacy SONET framers in North America and Asia, partially offset by increases in our NPU and Switch Fabrics products as customers increase inventories on these products as they approach end-of-life.
Based on direct shipments, net revenues to customers that were equal to or greater than 10% of total net revenues in the three months ended December 31, 2011 and 2010 were as follows:
|
| Three Months Ended December 31, |
| ||
|
| 2011 |
| 2010 |
|
Nu Horizons Electronics (distributor) |
| 21.9 | % | 19.8 | % |
WPI Int'l. (HK) Ltd. (distributor) |
| 10.2 | % |
| * |
Tellabs |
|
| * | 12.2 | % |
*Less that 10% of total net revenues for period indicated.
Net revenues are summarized by geographic area as follows:
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Total Net |
| Amount |
| % of Total Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
| ||||||||||||
|
|
|
|
| ||||||||||||
United States |
| $ | 13,725 |
| 45.8 | % | $ | 18,634 |
| 49.4 | % | $ | (4,909 | ) | (26.3 | )% |
Asia Pacific |
| 10,535 |
| 35.1 | % | 13,405 |
| 35.5 | % | (2,870 | ) | (21.4 | )% | |||
EMEA* |
| 4,605 |
| 15.4 | % | 4,929 |
| 13.1 | % | (324 | ) | (6.6 | )% | |||
Other |
| 1,126 |
| 3.7 | % | 779 |
| 2.0 | % | 347 |
| 44.5 | % | |||
Total net revenues |
| $ | 29,991 |
| 100.0 | % | $ | 37,747 |
| 100.0 | % | $ | (7,756 | ) | (20.5 | )% |
(*) EMEA includes Europe, Middle East and Africa
Revenue by geographic area is based upon where the design win for the work originated. United States revenue includes $1.0 million and $0.2 million of intellectual property revenue for the three months ended December 31, 2011 and 2010, respectively. We believe a substantial portion of the products sold to OEMs and third-party manufacturing service providers in the Asia Pacific region are ultimately shipped to end-markets in the United States and Europe.
Various factors may impact our revenues including the timing of orders by significant customers, our ability to meet customer demand, as well as multiple other market factors. Therefore, our revenue for the three months ended December 31, 2011 and 2010 may not necessarily be indicative of future revenues.
Intellectual Property (IP) Revenues
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % Change |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
IP Revenues |
| $ | 4,132 |
| 11.5 | % | $ | — |
| 0.0 | % | $ | 4,132 |
| 100.0 | % |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % Change |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
IP Revenues |
| $ | 6,772 |
| 6.1 | % | $ | 290 |
| 0.2 | % | $ | 6,482 |
| 2235.3 | % |
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
IP revenues |
| $ | 1,049 |
| 3.5 | % | $ | 151 |
| 0.4 | % | $ | 898 |
| 594.7 | % |
The increase in IP revenues forrevenue is attributable to $0.9 million from the licensing of IP during the three and nine months ended June 30, 2011 increased by $4.1 million and $6.5 million, respectively, compared with the same periods in 2010 as the Company completed two IP agreements during the quarter. We recognized royalty revenues of $0.2 million and $0.5 million for the three and nine months ended June 30, 2011, respectively. No material royalties wereDecember 31, 2011. Royalties received or recognized for the same periods in 2010.three months ended December 31, 2011 and 2010 were not material. Costs associated with the sale of IP are included in Selling,selling, general and administrative expenses.
Cost of Revenues
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| 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 |
| Amount |
| % of Net |
| Change |
| % Change |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Cost of Revenues |
| $ | 40,831 |
| 36.9 | % | $ | 54,167 |
| 44.0 | % | $ | (13,336 | ) | (24.6 | )% |
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Cost of revenues |
| $ | 12,163 |
| 42.0 | % | $ | 14,349 |
| 38.2 | % | $ | (2,186 | ) | (15.2 | )% |
We use third-parties for wafer fabrication and assembly services. Cost of revenues consists predominantly of: (i) purchased finished wafers; (ii) assembly services; (iii) test services; and (iv) labor and overhead costs associated with product procurement, planning and quality assurance. There was no
The overall decrease in cost of revenues associated with IP revenues for any periods presented.
Cost of net revenues for the three and nine months ended June 30, 2011 decreased by $2.2 million and $13.3 million, respectively, compared to the same periods in 2010. The cost of net revenues as a percentage of net revenues for the three and nine months ended June 30, 2011 were 37.5% and 36.9%, respectively, compared to 41.8% and 44.0% for the same periods in 2010. The decrease in the cost of net revenues is primarilylargely attributable to lower product revenues.
Excluding IP revenue, the cost of net revenues as a percent of product revenues for the three and nine months ended June 30, 2011 was 42.3% and 39.3%, respectively, compared to 41.8% and 44.1% for the same periods in 2010. The decreaseincrease 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 due to improved material costs, improved product yields and lower test costs resulting from the transition of our test manufacturing activities from its California facility to an outsource model using an offshore facility.
For the three and nine months ended June 30, 2011, we decreased production volumes in response to market declines and improvements in availability of capacity at foundries and assembly sub-contractors eliminating the need to maintaincaused by higher inventory balances. As a result, production costs per unit have increased. due to fixed costs of manufacturing operations applied to reduced volume.
We expectedexpect to continue to adjust our inventory levels and anticipate that the salesales of these higher cost inventories will temporarily increase our cost of net product revenues in future periods.periods until our revenues return to prior levels.
As it is customary in the semiconductor industry for product prices of maturing products to decline over time, it is imperative that we continue to reduce our cost of revenues. We continue to focus our efforts on improving operating efficiencies, including improving product yields, reducing scrap and improving cycle times.
Engineering, Research and Development
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Engineering, research and development |
| $ | 12,551 |
| 34.9 | % | $ | 13,674 |
| 36.4 | % | $ | (1,123 | ) | (8.2 | )% |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Engineering, research and development |
| $ | 41,974 |
| 37.9 | % | $ | 37,909 |
| 30.7 | % | $ | 4,065 |
| 10.7 | % |
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Engineering, research and development |
| $ | 12,425 |
| 41.4 | % | $ | 14,182 |
| 37.6 | % | $ | (1,757 | ) | (12.4 | )% |
Engineering, research and development (“R&D”) expenses consist primarily of salaries and related costs, including share-basedstock-based compensation expense offor employees engaged in research, design and development activities. Engineering, research and developmentR&D also includes costs of mask sets and electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses.
The level of R&D expense as a percentage of net revenues will vary from period to period, depending, in part, on the level of net revenues. Our research and development efforts are critical to maintaining a high level of new product introductions and are critical to our plans for future growth.
The decrease in R&D expense in the first quarter of fiscal year 2012 as compared to the same period in the prior year is largely attributable to lower compensation expense of $1.7 million and lower facility expense of $0.1 million resulting from our consolidation of multiple locations, and lower external physical design and test services of $0.3 million. These reductions were partially offset by increased expense of $0.5 million for mask sets and wafers.
We will continue to concentrate our spending in this areaR&D to meet customer requirements and to respond to market conditions.
Engineering, researchconditions, and we do not anticipate that the reduction in R&D will impact product development expense decreased $1.1 million, or 8.2% and increased $4.1 million, or 10.7% for the three and nine months ended June 30, 2011, respectively, compared to the same periods in 2010. The lower engineering, research and development expenses for the three months ended June 30, 2011 is primarily attributable to lower labor expenses of $0.5 million and lower tooling costs of $0.4 million resulting from fewer mask sets used during the quarter.
The increase in engineering, research and development expenses for the nine months ended June 30, 2011 is mainly attributable to increased engineering tool costs of $3.1 million, attributable 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. The remainder of the increase results from increased facility and labor costs.fiscal year 2012.
Selling, General and Administrative
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| 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 |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Selling, general and administrative |
| $ | 29,997 |
| 27.1 | % | $ | 28,354 |
| 23.0 | % | $ | 1,643 |
| 5.8 | % |
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Selling, general and administrative |
| $ | 7,424 |
| 24.8 | % | $ | 10,459 |
| 27.7 | % | $ | (3,035 | ) | (29.0 | )% |
Selling, general and administrative (“SG&A”) expense consists primarily of personnel-related expenses, including share basedstock-based compensation expense, as well as legal and other professional fees, facilities expenses, outside labor and outside labor.communication expenses.
The decrease in SG&A expense in the first quarter of fiscal year 2012 as compared to the same period in the prior year is largely attributable to lower personnel related expenses increased $0.9of $1.5 million resulting from steps taken to reduce headcount during fiscal year 2011, $1.1 million in lower legal and $1.6accounting fees, and lower facility expenses of $0.3 million due to the closure of the Calle Carga facility.
Restructuring and Impairment Charges
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Restructuring and impairment charges |
| $ | 28 |
| 0.1 | % | $ | 264 |
| 0.7 | % | $ | (236 | ) | (89.4 | )% |
The restructuring costs in the first quarter of fiscal year 2012 reflect costs related to the reduction in force at our Portland location, which was completed in October 2011.
In October 2010, we commenced a reduction in workforce at our Westford location. The related severance costs were $0.3 million for the three and nine months ended December 31, 2010. The Westford reduction in workforce was completed by June 30, 2011, respectively, compared to the same periods of 2010.2011.
Amortization of Intangible Assets
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Amortization of intangible assets |
| $ | 67 |
| 0.2 | % | $ | 165 |
| 0.4 | % | $ | (98 | ) | (59.4 | )% |
The increasedecrease in SG&Aamortization expense for the three months ended June 30,December 31, 2011 compared to the same period last year is due in part to higher compensation related expensesthe amortization of approximately $0.6 million, including a $0.2 million increase in non-cash stock related compensation, higher selling expensesexisting intangible assets, some of approximately $0.5 million and higher facility which became fully amortized during fiscal year 2011.
and related expensesTable of $0.6 million. These increases were partially offset by lower professional fees of $0.7 million.Contents
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 related expenses of $1.8 million. These increases were partially offset by lower professional fees of $1.9 million and a non-recurring debt restructuring charge of $1.0 million 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 of SG&A due to closure of our test floor and the move to an outsource model.
Interest Expense, net
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| 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 |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Interest expense, net |
| $ | 6,487 |
| 5.9 | % | $ | 7,036 |
| 5.7 | % | $ | (549 | ) | (7.8 | )% |
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Interest expense, net |
| $ | 1,948 |
| 6.5 | % | $ | 2,518 |
| 6.7 | % | $ | (570 | ) | (22.6 | )% |
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.
ForThe decrease in net interest expense for the three and nine months ended June 30,December 31, 2011 interest expense decreased by $0.6 million, compared to the same periods in 2010. The decrease isperiod last year was 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 notes to Unaudited Consolidated Financial Statements.)
For the three months ended 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 $0.9 million and $0.5 million, for the same period in 2010. Due to the restructuring of the Senior Term Loan on February 4, 2011, there was no interest expense or amortization of debt issue costs forand the Senior$1.5 million principal payment on the Term A Loan in July 2011.
(Gain) loss on Compound Embedded Derivative
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
(Gain) loss on compound embedded derivative |
| $ | (3,298 | ) | (11.0 | )% | $ | 3,484 |
| 9.2 | % | $ | (6,782 | ) | (194.7 | )% |
The gain on our compound embedded derivative related to our 2014 Debentures for the three months ended June 30, 2011. ForDecember 31, 2011 is primarily generated by the same perioddecrease in 2010, the interest expense and amortizationprice of debt issue costsour underlying common stock during this period.
Income Tax Expense
|
| Three Months Ended December 31, |
|
|
|
|
| |||||||||
|
| 2011 |
| 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Income tax expense |
| $ | 66 |
| 0.2 | % | $ | 74 |
| 0.2 | % | $ | (8 | ) | (10.8 | )% |
Our effective tax rate for the Senior Term Loan were $0.9 million and $0.2 million, respectively. For the three months ended June 30,December 31, 2011 was (8.48%). The income tax provision in the interest expensecurrent year is primarily due to state minimum taxes and amortized debt issuance costs for Term Loans A and B were $0.4 million, in total. The premium amortization for the Term A Loan was $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, since there were no Term A and B Loans in fiscal year 2010.
For the nine months ended June 30, 2011, interest expense and amortization of the debt discount and of debt issuance costs related to the 2014 Debentures was $2.8 million and $1.5 million, respectively, compared to $2.6 million and $1.4 million for the same period in 2010. For the nine months ended June 30, 2011, interest expense and amortization of debt issue costs for the Senior Term Loan was $1.2 million and $0.3 million, respectively, compared to $2.4 million and $0.6 million for the same period in 2010. For the nine months ended June 30, 2011, the interest expense and amortized debt issuance costs for Term Loans A and B were $0.7 million, in total. The premium amortization for the Term A Loan was $0.08 million and the discount amortization of the Term B Loans was $0.2 million, compared to $0 for the same period in 2010, since there were no Term A and B Loans in fiscal year 2010.
(Gain) Loss on Embedded Derivative
|
| Three Months Ended |
| Three Months Ended |
|
|
|
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| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
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|
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| |||||||
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| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
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| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Gain on embedded derivative |
| $ | (7,951 | ) | (22.1 | )% | $ | (32,771 | ) | (87.3 | )% | $ | (24,820 | ) | (75.7 | )% |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
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| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
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| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
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| (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 millionforeign taxes. Our effective tax rate for the three and nine months ended June 30, 2011, respectively, comparedDecember 31, 2010 was (0.97%), which was lower than the federal and state statutory rate due to a gain of $32.8 millionthe projected federal and a loss of $5.9 millionstate losses for the same periods in 2010. For the three and nine months ended June 30, 2011, the gain on embedded derivative decreased by $24.8 million and increased by $8.4 million, respectively compared to the same periods in 2010. The change in the fair value of the embedded derivative is primarily related to the change in price of the underlying common stock. The Company also recorded a loss of $1.1 million, for the nine months ended 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.fiscal year.
(Gain) Loss on Extinguishment of Debt
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
(Gain) loss on extinguishment of debt |
| $ | — |
| 0.0 | % | $ | (265 | ) | (0.7 | )% | $ | 265 |
| 100 | % |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| 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 of $3.9 million is associated with the restructuring of the Senior Term Loan on February 4, 2011 (See Note 3 Debt in the accompanying notes to Unaudited Consolidated Financial Statements.)
In fiscal year 2010, the we finalized negotiations with the noteholders of the 2024 Debentures to settle the obligations, including all amounts owed under the derivative liability for the premium put option, with a combination of cash; shares of the our common stock, shares of the our Series B Preferred stock,Condition and $50.0 million face value of 2014 Debentures. We recorded the new instruments issued in extinguishment of the 2024 Debentures at fair value and recognized a $21.6 million loss for the difference between the fair values of the new instruments, including approximately $0.8 million for fees paid to the noteholders, compared to the net carrying value of the 2024 Debentures. For the purposes of calculating this loss on extinguishment, the net carrying amount of the 2024 Debentures includes the $96.7 million of the 2024 Debentures and $13.3 million of the premium put derivative, recorded at fair value as required by ASC 470.
Income Tax (Benefit) ExpenseLiquidity
|
| Three Months Ended |
| Three Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Income tax benefit |
| $ | (227 | ) | (0.6 | )% | $ | (3,244 | ) | (8.6 | )% | $ | 3,017 |
| 93 | % |
|
| Nine Months Ended |
| Nine Months Ended |
|
|
|
|
| |||||||
|
| June 30, 2011 |
| June 30, 2010 |
|
|
|
|
| |||||||
|
| Amount |
| % of Net |
| Amount |
| % of Net |
| Change |
| % |
| |||
|
| (in thousands, except percentages) |
|
|
|
|
| |||||||||
Income tax (benefit) expense |
| $ | (78 | ) | (0.1 | )% | $ | 2,781 |
| 2.3 | % | $ | (2,859 | ) | (102.8 | )% |
Income tax benefit was $0.2 million and $0.1 million for the three and nine months ended June 30, 2011, respectively, compared to income tax benefit of $3.2 million and income 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.
Liquidity and Capital Resources
Cash Flow Analysis
Cash and cash equivalents decreased to $18.2$17.0 million at June 30,December 31, 2011, from $38.6$17.3 million at JuneSeptember 30, 2010. Cash2011. During the three months ended December 31, 2011 we generated cash from operations, which was offset by cash used in operations, for capital expenditures and payment of debt. Cash expenses for the Nine Months Ended June 30, 2011 included $5.2 million for interest related to the 2014 Debentures, the Senior Term Loan,financing activities. Our cash flows from operating, investing and Term A and B Loans,financing are summarized as well as $0.5 million for income taxes, compared to $4.2 million for interest related to the 2014 Debentures and the Senior Term Loan and $0.6 million for income taxes for the same period in 2010.follows:
|
| Nine Months Ended June 30, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
Net cash (used in) provided by operating activities |
| $ | (6,671 | ) | $ | 1,039 |
|
Net cash used in investing activities |
| (3,178 | ) | (2,264 | ) | ||
Net cash used in financing activities |
| (10,122 | ) | (17,698 | ) | ||
Net decrease in cash and cash equivalents |
| (19,971 | ) | (18,923 | ) | ||
Cash and cash equivalents at beginning of period |
| 38,127 |
| 57,544 |
| ||
Cash and cash equivalents at end of period |
| $ | 18,156 |
| $ | 38,621 |
|
|
| Three Months Ended December 31, |
| ||||
|
| 2011 |
| 2010 |
| ||
|
| (in thousands) |
| ||||
Net cash provided by (used in) operating activities |
| $ | 553 |
| $ | (8,109 | ) |
Net cash used in investing activities |
| (645 | ) | (1,114 | ) | ||
Net cash used in financing activities |
| (177 | ) | (2 | ) | ||
Net decrease in cash |
| (269 | ) | (9,225 | ) | ||
Cash at beginning of period |
| 17,318 |
| 38,127 |
| ||
Cash at end of period |
| $ | 17,049 |
| $ | 28,902 |
|
Net Cash Used inProvided by (Used In) Operating Activities
During the ninethree months ended JuneDecember 31, 2011, cash provided by operating activities totaled $0.6 million. Excluding changes in working capital, cash used to fund our losses totaled $1.7 million. We also used $0.8 million cash to fund the increase in accounts receivable and $0.5 million cash related to the decrease in deferred revenue due to lower purchases from distributors. These uses were offset by the generation of $2.7 million cash from operating with lower inventory levels and $1.3 million cash from increased accounts payable and accrued expenses.
Accounts receivable increased $0.8 million from $9.6 million at September 30, 2011 to $10.4 million at December 31, 2011 and resulted from higher sales near the end of the quarter. Inventory decreased $2.7 million from $20.9 million at September 30, 2011 to $18.1 million at December 31, 2011. The lower inventory is due to a concerted effort to reduce purchases and production. Accounts payable and accrued liabilities increased by $1.3 million from $19.7 million at September 30, 2011 to $20.9 million at December 31, 2011 due to the timing of payments to our vendors and other service providers.
During the three months ended December 31, 2010, cash used in operationsoperating activities totaled $6.7$8.1 million. Of the $6.7 million ofExcluding changes in working capital, cash used to fund our losses totaled $1.6 million. We transferred $3.0 million into a restricted cash trust account in operations, weanticipation of payment of the proposed SEC settlement. We also used $1.6$6.6 million to fund the cash requirements of our net loss which excludes non-cash items including depreciation and amortization, loss on extinguishment of debt and share based compensation. We used $7.0 million pay down our currentaccounts payable and accrued liabilities and $4.8$0.2 million related to a decrease in deferred revenue.revenue due to lower purchases from distributors. These uses were partially offset by the generation of cash from the collection of accounts receivable.receivable of $2.1 million and operating with lower inventory levels of $0.2 million.
Accounts receivable decreased $2.1 million from $15.8 million at September 30, 2010 to $13.6 million at December 31, 2010. The decrease inincreased cash generated from the collection of accounts receivable is due to lower sales in the first quarter of fiscal year 2010 as compared to the fourth quarter of fiscal year 2010. Inventory decreased $0.2 million from $27.3 million at September 30, 2010 to $27.0 million at December 31, 2010. Due to positive changes in the availability of materials, we decreased purchasing in the first quarter as compared to the fourth quarter of fiscal year 2010. Accounts payable decreased by $4.8 million from $13.2 million at September 30, 2010 to $8.5 million at December 31, 2010. Accounts payable decreased primarily due to the timing of sales and a decrease in revenues compared to the same period last year. The lower inventory is due to reduced 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 onceas industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers. Accrued expenses and other liabilitiesdecreased by $1.7 million from $16.3 million at September 30, 2010 to $14.6 million at December 31, 2010. Accrued expenses 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 inIn Investing Activities
Net cash used in investing activities totaled $3.2 million and $2.3 million in the nine months ended June 30, 2011 and 2010, respectively and used for capital expenditures.
Net Cash Used in Financing Activities
FinancingInvesting activities used $10.1$0.6 million in cash in the ninethree months ended June 30,December 31, 2011 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 nine months ended June 30, 2010, financingcapital expenditures. Investing activities used $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 coststotal of $1.1 million in cash in the same period last year for capital expenditures of $0.4 million and debt issuance costsan initial investment in an ERP system of $1.4$0.7 million.
Net Cash Used In Financing Activities
Financing activities used $0.2 million in cash in the three months ended December 31, 2011 primarily relating to the repurchase and retirement of restricted stock units for payroll taxes.
Liquidity and Capital Resources, including Long-Term Debt, Contingent Liabilities and Operating Leases
Liquidity andProspective Capital ResourcesNeeds
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.property. As of June 30,December 31, 2011, our cash and cash equivalents totaled $18.2$17.0 million. Our working capital at June 30,December 31, 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$24.0 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 westructure. 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 believesWe believe that itsour existing cash and cash equivalent balances, along with cash expected to be generated from product sales and the sale or licensing of our intellectual property, includingand the sale of patents,reduction in working capital requirements from lower inventory levels, will be sufficient to fund itsour 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.
We do not have principal payments on currently outstanding debt due in the next 12 months.
Contractual Obligations
|
| Payment Obligations for fiscal years ending September 30: |
| |||||||||||||
|
| Remaining in |
| 2012 - 2013 |
| 2014-2015 |
| 2016 and |
| Total |
| |||||
Convertible subordinated debt |
| $ | — |
| $ | — |
| $ | 46,500 |
| $ | — |
| $ | 46,500 |
|
Term A Loan |
| 1,500 |
| — |
| 7,841 |
| — |
| 9,341 |
| |||||
Term B Loan |
| — |
| — |
| 9,341 |
| — |
| 9,341 |
| |||||
Operating leases |
| 995 |
| 6,081 |
| 3,060 |
| 199 |
| 10,335 |
| |||||
Software licenses |
| 2,513 |
| 1,467 |
| 140 |
| — |
| 4,120 |
| |||||
Inventory and related purchase obligations |
| 3,334 |
| 12,658 |
| 6,833 |
| — |
| 22,825 |
| |||||
Total |
| $ | 8,342 |
| $ | 20,206 |
| $ | 73,715 |
| $ | 199 |
| $ | 102,462 |
|
|
| Payment Obligations by Fiscal Year |
| |||||||||||||
|
| Remaining |
| 2013-2014 |
| 2015-2016 |
| 2017 and |
| Total |
| |||||
|
| (in thousands) |
| |||||||||||||
Convertible subordinated debt (1) |
| $ | — |
| $ | — |
| $ | 46,493 |
| $ | — |
| $ | 46,493 |
|
Term A Loan (2) |
| — |
| 7,857 |
| — |
| — |
| 7,857 |
| |||||
Term B Loan (3) |
| — |
| — |
| 9,341 |
| — |
| 9,341 |
| |||||
Operating leases (4) |
| 2,343 |
| 4,819 |
| 1,334 |
| — |
| 8,496 |
| |||||
Software licenses (5) |
| 6,744 |
| 6,933 |
| 5,600 |
| 5,600 |
| 24,877 |
| |||||
Inventory and related purchase obligations (6) |
| 2,572 |
| 434 |
|
|
|
|
| 3,006 |
| |||||
Total |
| $ | 11,659 |
| $ | 20,043 |
| $ | 62,768 |
| $ | 5,600 |
| $ | 100,070 |
|
As of June 30, 2011, the(1)Convertible subordinated debt represents amounts due for our 8% convertible 2014 Debentures with a face value of $46.5 million, were outstanding, with a maturity date ofdue October 30, 2014. The Company also has outstanding Term A and B Loans with a face value of $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 notes to Unaudited Consolidated Financial Statements.)
The Company leases(2)Term A loan represents amounts due for our 10.5% fixed rate senior notes due February 2014.
(3)Term B loan represents amounts due for our 8.0% fixed rate senior notes due October 2014.
(4)We lease facilities under non-cancellable operating leaseslease agreements that expire at various dates through 2015. Approximate minimum rental commitments2016. During 2011, we elected to exit our Calle Carga facility, but still have obligations under all non-cancellable operating leases as of June 30, 2011the lease. Gross lease amounts for the Calle Carga facility are included in the table above.these amounts. The Calle Carga lease amounts presented have not been adjusted for any potential sublease income as allowed under relevant accounting guidance.
(5)Software license commitments represent non-cancellable licenses of IP from third-parties used in the development of the Company’sour products.
(6)Inventory and related purchase obligations represent non-cancellable purchase commitments for wafers and substrate parts. For purposes of the table above, inventory and related purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms. The Company’sOur purchase orders are based on itsour current manufacturing needs and are typically fulfilled by itsour vendors within a relatively short time.
Off-Balance Sheet Arrangements
At June 30,December 31, 2011 other than operating leases, the Companywe had no material off-balance sheet arrangements.arrangements, other than operating leases.
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, 2010.2011. There have been no material changes to these risks during the ninethree months ended June 30,December 31, 2011.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’sour management, including itsour Chief Executive Officer and Chief Financial Officer, the Company haswe have evaluated as of December 31, 2011 the effectiveness of the design and operation of itsour disclosure controls and procedures, (as such term isas defined underin Rules 13a-15(e) and 15d-15(e) promulgated underof the Exchange 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 theSecurities 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.of 1934. Based upon that evaluation, the Company’sour Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30,December 31, 2011, theseour disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting, (asas defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of the Exchange Act)1934, during the three monthsquarter ended June 30,December 31, 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 theOur disclosure controls and procedures provide our Chief Executive Officer and the inability to eliminate misconduct completely. Accordingly, any system ofChief Financial Officer reasonable assurances that our disclosure controls and procedures will achieve their objectives. However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting can or will prevent all human error. A control system, no matter how well designed and implemented, can provide only provide reasonable, not absolute, assurances. In addition, projectionsassurance that the objectives of the control system are met. Furthermore, the design of a control system must reflect the fact that there are internal resource constraints, and the benefit of controls must be weighed relative to their corresponding costs. Because of the limitations in all control systems, no evaluation of controls can provide complete assurance that all control issues and instances of error, if any, within the Company are detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur due to human error or mistake. Additionally, controls, no matter how well designed, could be circumvented by the individual acts of specific persons within the organization. The design of any evaluationsystem of effectiveness tocontrols is also based in part upon certain assumptions about the likelihood of future periods are subject to the riskevents, and there can be no assurance that controls may become inadequate becauseany design will succeed in achieving its stated objectives under all potential future conditions.
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,December 31, 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.
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, 2010.2011.
Exhibit |
**XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. †Certain portions of this agreement have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for an order granting confidential treatment pursuant to Rule 24b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934.
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.
|