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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 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 0-19654

 


 

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

77-0138960

(State or other jurisdiction of
incorporation or organization)

 

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

 

741 Calle Plano

Camarillo, California 93012

(Address of principal executive offices)(zip code)

 

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

 


 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes 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

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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

 

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

 

 

 



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

(UNAUDITED) QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2011

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

Item 1.

 

Financial Statements

 

 

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

 

 

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

 

 

Unaudited Consolidated Statements of Stockholders’ Deficit for the Nine Months Ended June 30, 2011

 

 

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

 

 

Notes to Unaudited Consolidated Financial Statements

Item 2.

 

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

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

 

Controls and Procedures

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1.

 

Legal Proceedings

Item 1A.

 

Risk Factors

Item 6.

 

Exhibits

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1:  FINANCIAL STATEMENTS

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

June 30,

 

September 30,

 

 

 

2011

 

2010

 

 

 

(in thousands, except share data)

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

18,156

 

$

38,127

 

Accounts receivable, net

 

12,478

 

15,765

 

Inventory

 

24,948

 

27,273

 

Restricted cash

 

1,901

 

394

 

Prepaid expenses and other current assets

 

1,774

 

2,913

 

Total current assets

 

59,257

 

84,472

 

Property, plant and equipment, net

 

7,742

 

8,196

 

Other intangible assets, net

 

1,842

 

864

 

Other assets

 

3,186

 

3,997

 

Total Assets

 

$

72,027

 

$

97,529

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

9,657

 

$

13,216

 

Accrued expenses and other current liabilities

 

13,015

 

16,293

 

Deferred revenue

 

2,119

 

6,926

 

Current portion of debt and capital leases

 

1,510

 

 

Total current liabilities

 

26,301

 

36,435

 

 

 

 

 

 

 

Other long-term liabilities

 

1,501

 

1,729

 

Long-term debt, net

 

15,411

 

26,070

 

Derivative liability

 

12,985

 

15,476

 

Convertible subordinated debt, net of discount

 

40,298

 

39,025

 

Total liabilities

 

96,496

 

118,735

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

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

 

1

 

2

 

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

 

245

 

240

 

Additional paid-in-capital

 

1,823,834

 

1,816,796

 

Accumulated deficit

 

(1,848,549

)

(1,838,326

)

Total Vitesse Semiconductor Corporation stockholders’ deficit

 

(24,469

)

(21,288

)

Noncontrolling interest

 

 

82

 

Total stockholders’ deficit

 

(24,469

)

(21,206

)

 

 

$

72,027

 

$

97,529

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

Three Months ended 
June 30,

 

Nine Months ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

31,856

 

$

37,533

 

$

103,855

 

$

122,805

 

Intellectual property revenues

 

4,132

 

 

6,772

 

290

 

Net revenues

 

35,988

 

37,533

 

110,627

 

123,095

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

13,488

 

15,702

 

40,831

 

54,167

 

Engineering, research and development

 

12,551

 

13,674

 

41,974

 

37,909

 

Selling, general and administrative

 

9,561

 

8,669

 

29,997

 

28,354

 

Amortization of intangible assets

 

62

 

182

 

288

 

613

 

Costs and expenses

 

35,662

 

38,227

 

113,090

 

121,043

 

Income (loss) from operations

 

326

 

(694

)

(2,463

)

2,052

 

Other (income) expense:

 

 

 

 

 

 

 

 

 

Interest expense, net

 

1,929

 

2,496

 

6,487

 

7,036

 

(Gain) loss on embedded derivative

 

(7,951

)

(32,771

)

(2,491

)

5,860

 

(Gain) loss on extinguishment of debt

 

 

(265

)

3,874

 

21,311

 

Other expense (income), net

 

25

 

61

 

(32

)

(45

)

Other (income) expense, net

 

(5,997

)

(30,479

)

7,838

 

34,162

 

Income (loss) before income tax expense (benefit)

 

6,323

 

29,785

 

(10,301

)

(32,110

)

Income tax (benefit) expense

 

(227

)

(3,244

)

(78

)

2,781

 

Net income (loss)

 

6,550

 

33,029

 

(10,223

)

(34,891

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net income (loss) available to common stockholders

 

$

6,550

 

$

33,029

 

$

(10,223

)

$

(35,017

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share - basic

 

$

0.26

 

$

1.38

 

$

(0.42

)

$

(1.74

)

Net income (loss) per common share - diluted

 

$

0.21

 

$

0.99

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

24,447

 

22,780

 

24,266

 

20,105

 

Diluted

 

37,543

 

34,544

 

24,266

 

20,105

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Total Vitesse
Semiconductor
Corporation

 

Non

 

Total 

 

 

 

Preferred Stock

 

Common Stock

 

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

)

 

See accompanying notes to unaudited consolidated financial statements.

 

5



Table of Contents

 

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

 

 

See accompanying notes to unaudited consolidated financial statements.

 

6



Table of Contents

 

VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2011

 

Note 1. The Company and Its Significant Accounting Policies

 

Description of Business

 

Vitesse Semiconductor Corporation (“Vitesse,” the “Company,” “us” or “we”) is a leading supplier of high-performance integrated circuits (“ICs”) that are utilized primarily by manufacturers of networking systems for Carrier and Enterprise Networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products. For more than 25 years, Vitesse has been a leader in the transition of new technologies in communications networks.

 

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

 

Fiscal Year

 

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

 

Basis of Presentation

 

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

 

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

 

Reclassifications

 

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

 

Use of Estimates

 

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

 

7



Table of Contents

 

Financial Instruments

 

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

 

Restricted cash consists of various commitments of $1.9 million recorded in other current assets; including cash designated for 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, which are included in other assets in the Unaudited Consolidated Balance Sheets as of June 30, 2011.

 

The Company’s debt consists of two term loans (the Term Loans A and B), each in the principal amount of $9.34 million. The Company estimates the fair values of the Term Loans A and B using a convertible bond valuation model within a lattice framework. These valuations are determined using Level 3 inputs. The valuation model combines expected cash outflows with  market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes and trading information of the  Company’s common stock into which the Term B loan is convertible.

 

As of 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’s common stock into which the 2014 Debentures are convertible. As the conversion price is not being indexed to the Company’s common 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 embedded derivative is primarily related to the change in price of the underlying common stock. The change in value of the embedded derivative is a non-cash item. At the Company’s option, it can settle the embedded derivative in either cash or common shares. As the Company intends to, and has the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470 Debt (“ASC 470”), the Company has classified the liability as a long-term liability on its Unaudited Consolidated Balance Sheet as of June 30, 2011.

 

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

 

8



Table of Contents

 

Recent Accounting Pronouncements

 

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

 

In October 2009, the FASB issued ASU No. 2009-14, Software (ASC Topic 985) — Certain Revenue Arrangements That Include Software Elements, a consensus of the FASB Emerging Issues Task Force. This guidance modifies the scope of ASC subtopic 985-605, Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality. ASU 2009-14 is effective for fiscal years beginning on or after June 15, 2010. The Company has adopted the provisions of ASU 2009-14 and the adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

 

Note 2. Supplemental Financial Information

 

Inventory

 

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

 

 

 

June 30, 2011
(unaudited)

 

September 30,
2010

 

 

 

(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

 

 

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Table of Contents

 

Computation of Net Income (Loss) per Share

 

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

 

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

(in thousands, except per share data)

 

Net income (loss)

 

$

6,550

 

$

33,029

 

$

(10,223

)

$

(34,891

)

Fair value adjustment of Preferred Stock - Series B

 

 

 

 

126

 

Net income (loss) available to common stockholders

 

6,550

 

33,029

 

(10,223

)

(35,017

)

 

 

 

 

 

 

 

 

 

 

Allocation of earnings to Preferred Stock - Series B

 

176

 

1,516

 

 

 

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

 

6,374

 

31,513

 

(10,223

)

(35,017

)

 

 

 

 

 

 

 

 

 

 

Impact of assumed conversions:

 

 

 

 

 

 

 

 

 

Interest on 2014 Debentures, net of tax

 

1,237

 

1,161

 

 

 

Interest on Term B loan, net of tax

 

284

 

 

 

 

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

 

$

8,071

 

$

34,190

 

$

(10,223

)

$

(35,017

)

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares - Basic

 

24,447

 

22,780

 

24,266

 

20,105

 

Effect of dilutive common stock equivalents from:

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

25

 

149

 

 

 

Outstanding restricted stock units

 

178

 

187

 

 

 

Convertible preferred stock

 

674

 

1,096

 

 

 

2014 Convertible debentures

 

10,332

 

10,332

 

 

 

Term B Loan

 

1,887

 

 

 

 

Weighted average number of shares - Diluted

 

37,543

 

34,544

 

24,266

 

20,105

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.26

 

$

1.38

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common stockholders - Diluted

 

$

0.17

 

$

0.96

 

$

(0.42

)

$

(1.74

)

 

 

 

 

 

 

 

 

 

 

Impact of assumed conversions:

 

 

 

 

 

 

 

 

 

Interest on 2014 Debentures, net of tax

 

0.03

 

0.03

 

 

 

Interest on Term B loan, net of tax

 

0.01

 

 

 

 

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

 

$

0.21

 

$

0.99

 

$

(0.42

)

$

(1.74

)

 

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

 

For the three 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.

 

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Table of Contents

 

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

 

 

 

Three Months ended 
June 30,

 

Nine Months ended 
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited) (in thousands)

 

 

 

 

 

 

 

 

 

 

 

Outstanding stock options

 

1,350

 

951

 

1,429

 

1,015

 

Outstanding restricted stock units

 

343

 

28

 

287

 

96

 

Outstanding warrants

 

8

 

8

 

8

 

8

 

Convertible preferred stock

 

 

 

674

 

1,096

 

2014 Convertible debentures

 

 

 

10,332

 

10,332

 

Term B loan convertible note

 

 

 

1,887

 

 

Total potential common stock excluded from calculation

 

1,701

 

987

 

14,617

 

12,547

 

 

Note 3. Debt

 

As of 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.

 

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Table of Contents

 

On February 4, 2011, the Company recorded the Term A Loan at fair value, which was $9.9 million, including a premium of $0.6 million. 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.

 

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Table of Contents

 

Note 4. Fair Value Measurements

 

Assets and liabilities measured at fair value on a recurring basis include the following at June 30, 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
Derivative related to 2014
Debentures

 

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.

 

The valuation methodologies used by the Company as described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although management believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

 

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Table of Contents

 

Note 5. Income Taxes

 

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

 

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

 

The total amount of gross unrecognized tax benefits was approximately $10.6 million as of June 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, 2011, approximately $0.5 million of the $10.6 million FIN 48 unrecognized tax benefits related to the Company’s state tax liability is recorded in accrued expenses and other current liabilities on the Unaudited Consolidated Balance Sheet. Of the remaining balance, $10.0 million relates to federal and state research and development tax credits that have not been utilized and are fully reserved.

 

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Table of Contents

 

Note 6. Stockholders’ Equity

 

Stock Option Plans

 

Under all stock option plans in effect, as of 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 costs related to the Company’s share based compensation plans.

 

 

 

Three Months ended
June 30,

 

Nine Months ended 
June 30,

 

 

 

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 option plans for the nine months ended June 30, 2011, was as follows:

 

 

 

Shares

 

Weighted
average
exercise
price

 

Weighted
average
remaining
contractual
life
(in years)

 

Aggregate
intrinsic
value

 

 

 

 

 

 

 

 

 

 

 

Options outstanding, September 30, 2010

 

1,490,364

 

$

 52.40

 

6.16

 

 

Granted

 

520,114

 

$

4.41

 

 

 

Exercised

 

 

 

 

 

Cancelled or expired

 

(199,650

)

$

116.38

 

 

 

Options outstanding, June 30, 2011 (unaudited)

 

1,810,828

 

$

31.56

 

6.60

 

$

4,538

 

Options exercisable, June 30, 2011 (unaudited)

 

898,776

 

$

58.58

 

4.17

 

 

 

Restricted Stock Units

 

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

 

 

 

Shares

 

Weighted Average
Grant-Date Fair
Value per Share

 

 

 

 

 

 

 

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

 

 

15



Table of Contents

 

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 proceedings 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 million from restricted 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 Loan was $7.8 million and interest expense will be reduced by $0.3 million over the life of the loan.

 

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Table of Contents

 

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

 

Cautionary Statement

 

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

 

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

 

Overview

 

Over the last 10 years, the worldwide proliferation of the Internet and the rapid growth in the volume of data being sent over LANs and WANs has placed a tremendous strain on the existing communications infrastructure. Communication service providers have sought to increase their revenues by delivering a growing range of data services to their customers in a cost-effective manner. The resulting demand for increased bandwidth and services has created a need for faster, larger and more complex networks.

 

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

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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Table of Contents

 

Results of Operations for the three and nine months ended June 30, 2011 compared to the three and nine months ended June 30, 2010

 

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

 

 

 

Three Months ended
June 30,

 

Nine Months ended
June 30,

 

 

 

2011

 

2010

 

2011

 

2010

 

 

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

100.0

%

100.0

%

100.0

%

100.0

%

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues

 

37.5

%

41.8

%

36.9

%

44.0

%

Engineering, research and development

 

34.9

%

36.4

%

37.9

%

30.7

%

Selling, general and administrative

 

26.6

%

23.1

%

27.1

%

23.1

%

Amortization of intangible assets

 

0.2

%

0.5

%

0.3

%

0.5

%

Costs and expenses

 

99.2

%

101.8

%

102.2

%

98.3

%

Income (loss) from operations

 

0.8

%

(1.8

)%

(2.2

)%

1.7

%

Other expense (income):

 

 

 

 

 

 

 

 

 

Interest expense, net

 

5.4

%

6.7

%

5.9

%

5.7

%

(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

%

Other expense (income), net

 

0.1

%

0.2

%

0.0

%

(0.0

)%

Other (income) expense, net

 

(16.6

)%

(81.1

)%

7.1

%

27.8

%

Income (loss) before income tax expense (benefit)

 

17.4

%

79.3

%

(9.3

)%

(26.1

)%

Income tax expense (benefit)

 

(0.6

)%

(8.6

)%

(0.1

)%

2.3

%

Net income (loss)

 

18.0

%

87.9

%

(9.2

)%

(28.4

)%

Fair value adjustment of Preferred Stock - Series B

 

0.0

%

0.0

%

0.0

%

0.1

%

Net income (loss) available to common stockholders

 

18.0

%

87.9

%

(9.2

)%

(28.5

)%

 

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Table of Contents

 

Product Revenues

 

We classify our product revenues based on the markets into which our products are sold: (i) Carrier Networking, (ii) Enterprise Networking and (iii) Non-Core. The Carrier Networking market includes core, metro, access, mobile and backhaul networks. The Enterprise Networking market covers Ethernet switching and transmission within local area networks in small-medium enterprise (“SME”) and small-medium business (“SMB”) markets. The Non-Core market is comprised of legacy products that have not received additional investment over the last five years and, as a result, has generally been in decline.

 

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

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Product
Revenues

 

Amount

 

% of Product
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking

 

$

14,790

 

46.4

%

$

14,983

 

39.9

%

$

(193

)

(1.3

)%

Enterprise Networking

 

16,091

 

50.5

%

18,725

 

49.9

%

(2,634

)

(14.1

)%

Non-Core

 

975

 

3.1

%

3,825

 

10.2

%

(2,850

)

(74.5

)%

Product Revenues

 

$

31,856

 

100.0

%

$

37,533

 

100.0

%

$

(5,677

)

(15.1

)%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Product
Revenues

 

Amount

 

% of Product
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Carrier Networking

 

$

48,453

 

46.7

%

$

51,341

 

41.8

%

$

(2,888

)

(5.6

)%

Enterprise Networking

 

49,982

 

48.1

%

56,655

 

46.1

%

(6,673

)

(11.8

)%

Non-Core

 

5,420

 

5.2

%

14,809

 

12.1

%

(9,389

)

(63.4

)%

Product Revenues

 

$

103,855

 

100.0

%

$

122,805

 

100.0

%

$

(18,950

)

(15.4

)%

 

Product revenues for the three 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 decreased 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, primarily in China. This decrease was partially offset by increased sales in the United States. Compared with the third quarter of fiscal year 2010, we saw growth in some of our connectivity products, including our crosspoint switch and 1 Gigabit Ethernet PHY products offset by declines 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 SME applications.

 

Product revenues from Non-Core for the three and nine months ended June 30, 2011 decreased by $2.9 million and $9.4 million, respectively, compared to the same periods in 2010. The decrease is primarily due to a decline of the Company’s network processing product line and fibre channel PHY products.

 

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Table of Contents

 

Intellectual Property (IP) Revenues

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

IP Revenues

 

$

4,132

 

11.5

%

$

 

0.0

%

$

4,132

 

100.0

%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

IP Revenues

 

$

6,772

 

6.1

%

$

290

 

0.2

%

$

6,482

 

2235.3

%

 

IP revenues for the three and 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 were received or recognized for the same periods in 2010. Costs associated with the sale of IP are included in Selling, general and administrative expenses.

 

Cost of Revenues

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

 

Cost of Revenues

 

$

13,488

 

37.5

%

$

15,702

 

41.8

%

$

(2,214

)

(14.1

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

% Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Cost of Revenues

 

$

40,831

 

36.9

%

$

54,167

 

44.0

%

$

(13,336

)

(24.6

)%

 

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 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 primarily 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 decrease in the cost of net revenues as a percent of product revenues for the nine month period ended June 30, 2011, compared with the same period in 2010, is 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.

 

20



 

Table of Contents

 

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 maintain  higher inventory balances.  As a result, production costs per unit have increased.   We expected to continue to adjust our inventory levels and anticipate that the sale of these higher cost inventories will temporarily increase our cost of net product revenues in future periods.

 

Engineering, Research and Development

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

12,551

 

34.9

%

$

13,674

 

36.4

%

$

(1,123

)

(8.2

)%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Engineering, research and development

 

$

41,974

 

37.9

%

$

37,909

 

30.7

%

$

4,065

 

10.7

%

 

Engineering, research and development expenses consist primarily of salaries and related costs, including share-based compensation expense of employees engaged in research, design and development activities. Engineering, research and development also includes costs of mask sets and electronic design automation tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and facilities expenses. We will continue to concentrate our spending in this area to meet customer requirements and to respond to market conditions.

 

Engineering, research and 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.

 

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Table of Contents

 

Selling, General and Administrative

 

 

 

Three Months Ended

 

Three Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

9,561

 

26.6

%

$

8,669

 

23.1

%

$

892

 

10.3

%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Selling, general and administrative

 

$

29,997

 

27.1

%

$

28,354

 

23.0

%

$

1,643

 

5.8

%

 

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

 

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

 

The increase in SG&A expense for the three months ended June 30, 2011 is due in part to higher compensation related expenses of approximately $0.6 million, including a $0.2 million increase in non-cash stock related compensation, higher selling expenses of approximately $0.5 million and higher facility and related expenses of $0.6 million. These increases were partially offset by lower professional fees of $0.7 million.

 

The increase in SG&A expense for the nine months ended June 30, 2011 is due in part to higher compensation related expenses of approximately $2.0 million, including a $0.6 million increase in non-cash stock related compensation, higher selling expenses of approximately $0.5 million and higher facility and 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
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

1,929

 

5.4

%

$

2,496

 

6.7

%

$

(567

)

(22.7

)%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Interest expense, net

 

$

6,487

 

5.9

%

$

7,036

 

5.7

%

$

(549

)

(7.8

)%

 

Net interest expense is comprised of interest expense, net of interest income, and amortization of debt discount and premium, and amortization of debt issuance costs.

 

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

 

22



Table of Contents

 

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 for the Senior Term Loan for the three months ended June 30, 2011. For the same period in 2010, the interest expense and amortization of debt issue costs for the Senior Term Loan were $0.9 million and $0.2 million, respectively. For the three months ended June 30, 2011, the interest expense 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

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

Gain on embedded derivative

 

$

(7,951

)

(22.1

)%

$

(32,771

)

(87.3

)%

$

(24,820

)

(75.7

)%

 

 

 

Nine Months Ended

 

Nine Months Ended

 

 

 

 

 

 

 

June 30, 2011

 

June 30, 2010

 

 

 

 

 

 

 

Amount

 

% of Net
 Revenues

 

Amount

 

% of Net
 Revenues

 

Change

 

%
Change

 

 

 

(in thousands, except percentages)

 

 

 

 

 

(Gain) loss on embedded derivative

 

$

(2,491

)

(2.3

)%

$

5,860

 

4.8

%

$

8,351

 

142.5

%

 

The gain on the embedded derivative associated with the 2014 Debentures was $8.0 million and $2.