10-K 1 a2013930-10k.htm 10-K 2013.9.30-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ______________________________________
 
Form 10-K
 
x
ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2013
 
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 1-31614
 ______________________________________

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
 ______________________________________ 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.01 par value
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o  No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if smaller reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x 
As of March 31, 2013, the aggregate market value of the voting and non-voting common equity held by non-affiliates was $79,580,292, based on the closing price on that date. As of November 29, 2013, there were outstanding 57,545,025 shares of the registrant’s Common Stock, $0.01 par value. 
Documents Incorporated By Reference
Portions of the issuer’s Proxy Statement for its 2014 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report.
 



VITESSE SEMICONDUCTOR CORPORATION
2013 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
 
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
31 
Item 6.
Selected Financial Data
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
35 
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Signatures


2

PART I

SPECIAL NOTE REGARDING FORWARD‑LOOKING STATEMENTS
This Annual Report on Form 10-K (“Annual Report”), in particular the discussion in “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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 any historical or current fact. Forward-looking statements can be identified by words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,” “potential,” and similar terms. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward‑looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled “Risk Factors” under Part I, Item 1A. of this Annual Report. We assume no obligation to revise or update any forward‑looking statements for any reason, except as required by law.

3

ITEM 1. BUSINESS

Overview
Vitesse Semiconductor Corporation (“we,” “us,” “Vitesse,” “our” or the “Company”) is a leading supplier of high-performance integrated circuits (“ICs”) that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 30 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.
Our customers include leading networking original equipment manufacturers (“OEMs”) and original design manufacturers (“ODMs”) worldwide such as Alcatel-Lucent, Ciena, Cisco Systems, Dell, IBM, Ericsson, Fiberhome, Hewlett-Packard, Huawei Technologies, Juniper Networks, Nokia Siemens Networks, Samsung, Tellabs, ZTE, and ZyXel. As of September 30, 2013, we operated domestic design centers at our headquarters and in Austin, Texas and four international design centers in Denmark, Germany, India, and Taiwan.
Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700. Our common stock trades on the NASDAQ Global Market under the ticker symbol VTSS.

Industry Background
The communications industry’s defining characteristic over the past decade is the exponential growth on public and private communications networks. These networks include those used by long-distance, local exchange service providers and wireless service providers (“Carriers”), as well as specialized networks, such as those used by Internet service and over-the-top (“OTT”) content providers. Driving the traffic growth is the rapid adoption of data-intensive applications and services such as web access, web-delivered content, Internet Protocol (“IP’) video conferencing and telepresence, IP television, Cloud storage, Cloud computing, and Software-as-a-Service (“SaaS”) by Enterprises. Powerful mobile devices like smartphones and tablets that rival and often exceed the capabilities of desktop machines now also consume these types of services. In the not too distant future, the industry expects that a majority of devices, appliances, sensors, machines, terminals, vehicles, as well as public and private power distribution systems (“Smart-Grid”) will all be connected to these ever expanding worldwide communications networks, leading to what is commonly referred to as the Internet of Things (“IoT”). While all independent, this expanding conglomerate of networks faces common challenges: how to provide service delivery, synchronization and timing, and security.
To address the challenges, packet-based Ethernet networking technologies increasingly form the basis to deliver these new applications and services. Long present in Enterprise networks, Ethernet is now expanding rapidly in both Carrier and Industrial networks, replacing older technologies. In addition, so-called virtualization technologies that started in Ethernet-based Cloud data centers are making inroads into Enterprise and Carrier Ethernet networks, promising even more efficient network resource utilization. Even in Industrial Process Control, Smart-Grid Energy Distribution, Transportation and Automotive networks, we see the nascent transition from proprietary legacy networks to ubiquitous Ethernet-based networks. Substantial portions of the Carrier, Enterprise and IoT networks will be re-built based on these new technologies over the next five to 10 years.
We develop applicable IC solutions and target customers and platforms that sell into these high-growth networking markets. In many cases, we have led the forefront of Ethernet technology development and its integration in Carrier, Enterprise and other networks transitioning to Ethernet, thereby participating in significant infrastructure investments.
Carrier Networking
The telecommunications service provider Carrier network, which includes networks delivering voice, data, and video communication services to business, residential, and mobile customers, is now a vastly complex combination of interconnected networks.
Since the 1990s, Carrier networks globally relied upon the Synchronous Optical Network (“SONET/SDH”) as the standard network transport protocol. SONET/SDH was designed to carry only voice traffic over a fixed circuit network. Today, networks are replacing SONET/SDH with Ethernet specifically designed to carry voice, data, and video over a virtual packet-based

4

network. This technology allows more efficient scaling in terms of services, bandwidth, and capabilities, at lower capital and operational costs.
To accelerate packet-based IP network deployment, the industry has developed standards to upgrade traditional Ethernet to “Carrier Ethernet.” Effectively, it is an adaptation of Ethernet to provide similar service, synchronization, and security functions traditionally provided by SONET/SDH. As Carrier Ethernet standards evolve, networks based on Ethernet technology will gradually replace legacy telecommunications networks. In addition, the migration of Enterprise services into the Cloud will drive the need for Carrier Ethernet in Access networks aimed at delivering business services.
We expect the pace of growth in bandwidth demand and the deployment of revenue-generating support services to accelerate well into the future. This prompts Carrier and Enterprise network evolution in two notable areas: (1) the migration from wireline to wireless communication, as mobile devices quickly surpass wired computers for consumer use, particularly networks for 4G/LTE deployments: and (2) the demand for high-bandwidth, reliable and secure access to SaaS will drive the migration of traditional Enterprise information technology (“IT”) networks into the Cloud. Accordingly, Carrier networks that can provide Mobile Access and Cloud Access are key areas for increased future investment. These access and edge networks, collectively called the “IP Edge”, will drive transition to Carrier Ethernet, which is still in its infancy.
Enterprise Networking
Enterprise networks include equipment deployed in businesses, offices, and homes for voice, data, and video communications. Enterprise networks range from large, complex networks for financial institutions, retailers, and other large businesses, to LANs for the home and small office. Typical categories are large Enterprise, data center switching, small-medium enterprise (“SME”), small-medium business (“SMB”) and small office/home office (“SOHO”). Networks generally include equipment such as routers, switches, wired and wireless gateways, and connect computers to servers, servers to storage systems, and LANs to public Carrier networks.
Similar to Carrier networks, Enterprise networks and data centers are evolving to provide more bandwidth, reliability, interoperability, and scalability. The advent of Cloud services constitutes another important growth trend. Cloud services will increasingly move Enterprise IT applications and data into secure hosted applications in the Cloud, where multiple locations, multiple devices, and multiple technologies can securely access those applications. Cloud services will increase the need for Enterprises and data centers to provide high-bandwidth, high-reliability networks to interconnect elements of the Cloud, collectively called “Cloud Access.” We strategically address Enterprise networking in two ways: (1) with our low-power Enterprise Ethernet switching solutions and Metro Ethernet Forum’s Carrier Ethernet 2.0 (“MEF CE 2.0”) Cloud Access solutions to provide managed and secure access to the Cloud, and (2) with our Connectivity product line to provide reliable, high-speed connectivity between computing and storage devices in large data center switches and servers.
Internet of Things
Proprietary communications and networking protocols have long dominated networking within IoT applications. With the higher bandwidth and increased networking demands in Industrial Process Control, Smart-Grid Energy Distribution, Transportation, and Automotive applications, the transition to Ethernet is manifesting here as well. Many of the capabilities that we developed for Carrier Ethernet, including resiliency, high availability, accurate time synchronization, low power, security, and eCloud connectivity, are key features for networks within these broad-based IoT applications. Now-standardized and common Carrier Ethernet protocols are replacing proprietary solutions. Similar to the Carrier networks, this transition is just beginning, and will occur over many years.
Because of the synergies with our traditional Enterprise and Carrier markets, IoT is an obvious adjacent market for us to address since it provides us significant market expansion and growth opportunities.

Strategy
Our goal is to be a leading supplier of high-performance ICs for the global communications infrastructure markets, primarily for IP Edge Carrier networking, Enterprise networking, and IoT. To attain this goal, we are executing the following strategy:

5

Target Large and Growing Markets
We target high-growth areas in the communications infrastructure market to provide solutions that perform common networking functions required by the most widely deployed networking equipment.
Overall, we estimate the served addressable market for our IC solutions to approach $2.0 billion by 2017 with a compound annual growth rate (“CAGR”) of approximately 14%.
We have focused our research and development (“R&D”) on three large networking markets that are at the beginning of a major investment cycle. By identifying technology disruptions and solving specific customer problems, we leverage market transitions to increase our market share.
One market that we target is the IP Edge segment of the global Carrier networking market. This segment is expected to grow rapidly due to the deployment of the new wired and wireless applications in Mobile Access and its associated bandwidth growth, as well as the increased adoption of Cloud-based IT services for Cloud Access. Industry analysts project both Mobile Access and Cloud Access to grow significantly faster than the overall Carrier networking market, which is expected to grow annually by 7% to 9%.
Based on industry market projections and internal estimates, we expect our new portfolio of low-power, Carrier Ethernet switch engine and physical layer (“PHY”) products, and our other products currently in development, to address an IC market within the IP Edge of $612 million by 2017 with a five year CAGR of 20%.
We also serve the Enterprise networking market. It is driven by the rapid transition to Gigabit Ethernet and 10 Gigabit Ethernet, convergence of data center protocols to Ethernet, and government initiatives worldwide to reduce power consumption in networking equipment. Our new managed Enterprise switch and PHY products introduced as of 2011, as well as our devices currently in development, address substantially larger segments of the Enterprise networking market than our prior generation of products. Based on industry market projections and our internal market growth estimates, we expect the addressable market for our products in this segment will approach $450 million by 2017 with a CAGR of 8%.
Finally, as it transitions to use Ethernet-based networking, IoT is an additional market opportunity for Vitesse. Many of our existing products provide ideal solutions within this market segment. We expect IoT to increase our addressable IC market by nearly $100 million within three years, with a five year CAGR of 11%.
In addition to our switching and PHY products developed specifically for Carrier, Enterprise, and Industrial applications, we have developed a number of products that address high-speed signaling and connectivity issues in a broad variety of systems. As bandwidth requirements continue to accelerate, more systems require solutions for high-speed signal integrity problems within and between high-capacity computing and communications systems. Our products address a need to transport signals at ever increasing speeds across fiber, cable, and copper backplane applications. We estimate the addressable market for our devices to be on the order of $292 million by 2017.
New products in development for adjacent market segments are the majority of the remaining portion of the $2.0 billion addressable market for our IC solutions.
Focus on Networks in Transition
Globally, networks are undergoing a massive transition. For most networks, this means a migration to packet-based Ethernet technology. Ethernet is the dominant networking technology for today’s IP traffic in both Carrier and Enterprise networks, and is now starting to proliferate to other networking applications.

6

Carrier Networks
Mobile Access: With the explosion of data and video traffic from smartphones and tablet devices for both personal and business use, and the introduction of 4G/LTE networks worldwide, Mobile Access dominates the IP Edge. These networks demand Ethernet technologies that enable the delivery of differentiated services, rather than just connectivity. They also deploy a completely new architecture that requires very sophisticated packet-processing technology, Quality-of-Service (“QoS”), and highly accurate synchronization technology. Networks will become more distributed, with small cell base stations and backhaul being the primary growth drivers. Our new Ethernet switch engines, based on our Vitesse Service Aware Architecture™ (“ViSAA™”), provide better packet processing capability than complex and expensive network processors, at half the solution cost and much lower power. We also have best-in-class solutions to address the Mobile Access network timing with our VeriTime™ IEEE1588 (“1588”) packet-based timing technology integrated in our SynchroPHY™ 1 Gbps, 10 Gbps, and 10 Gbps Optical Transport Network (“OTN” ) PHY products, as well as switch-based timing solutions. VeriTime is the only solution in the market today that can meet the stringent requirements of next-generation TD-LTE and LTE-Advanced mobile networks, as well as the new timing class requirements currently being standardized by the ITU-T. In 2013, to address the increasing need for security across all networks, we introduced products with Intellisec technology, a patent-pending, flow-based universal encryption solution based on the IEEE802.1AE MACsec standard. Our 1Gbps and 10GGbps PHY solutions, that combine both VeriTime™ and Intellisec, are the only merchant silicon products available today, that can encrypt without compromising timing accuracy.
Cloud Access: As businesses migrate to Cloud-based processing and storage capabilities to reduce operational expenses, they require high-bandwidth, reliable, and secure access to private and public Cloud networks. Carriers increasingly enable Cloud Access for businesses by selling Carrier Ethernet business services. Our Carrier Ethernet switch engines, based on ViSAA, enable the Carrier Access network to deliver new high-bandwidth, reliable and secure Ethernet-based services optimized for access to Cloud services. In 2012, we introduced our first Serval™ switch engine, which we believe is ideally suited to complete the MEF CE 2.0 features required for Ethernet Business Service deployment within a very low-cost and low power solution. Since the introduction of the Serval switch engine, we have achieved multiple design wins for Business Services and Cloud Access products, including design wins with a major Tier-1 OEM. We have since announced next-generation Serval-2™ and Jaguar-2™ switch engines that provide higher density and bandwidth, and have even more enhanced features for this market.
Enterprise Networks
Cloud-managed Enterprise networking, security, and storage solutions are a new and fast growing business segment as businesses migrate toward Enterprise Cloud services. We provide Gigabit Ethernet switches that are feature- and power-optimized specifically for Cloud-based management and services, with one of the leading Enterprise Cloud managed switch OEMs having adopted our solutions.
As Enterprise networks become distributed within the Cloud, security becomes an increasingly difficult challenge. In 2013, we introduced a complete portfolio of 1 Gbps and 10 Gbps PHY ICs with integrated 128-bit and 256-bit strong advanced encryption standard (“AES”) technology, together with our patent-pending Intellisec™ flow-based solutions. These new ICs can equip industry-standard Enterprise edge routers with strong AES technology, while preserving their ability to interface to any standard service provider network, without the service provider network needing to know that the traffic is encrypted. We are the only provider of this type of solution. We anticipate that a Tier-1 OEM will deploy Intellisec within service provider networks in 2014.
Enterprise networks are transitioning from Fast Ethernet desktops and network attachments to Gigabit Ethernet and 10 Gigabit Ethernet with highly integrated, low-power designs. The need to deploy “Green Networks” resulted in the Energy Efficient Ethernet (“EEE”) standard that significantly reduces power consumption in Ethernet networks. We are a leading provider of EEE-compliant PHY and switching products for Enterprise and Consumer networks.

Internet of Things
Networks for Industrial Process Control, Smart-Grid Energy Distribution, Transportation, and Automotive applications are all undergoing rapid and massive transformation. All machines are becoming intelligent, and require network connectivity. Increasingly, this is accomplished with Ethernet technology. We deliver low-power, high-availability, secure switch and PHY solutions with deterministic features into this emerging market. We have already started to accumulate design wins in IoT network equipment.

7

Carrier, Enterprise, and Data Center Networks
In both the Carrier and Enterprise markets, and in some closely adjacent markets, data bandwidth is increasing exponentially. We develop products to solve high-speed signaling issues arising from ever-increasing signal speeds over copper traces on boards, across connectors, backplanes, and copper cables, as well as optical fiber, particularly at speeds of 10 Gigabit and above. Our EQNOX™ family of signal conditioning products reduces the cost of transmission by allowing signals to travel farther, faster and error-free over copper and fiber.

Develop and Leverage Differentiating Technology in Market Leading Products
We use our 30 years of design expertise and considerable systems and networking knowledge to introduce innovative products that solve both general industry needs, as well as our customers’ design challenges.
Unique technologies embedded in Vitesse silicon, software, and IP solutions are targeted at our customers’ most difficult challenges: service delivery, synchronization, and security. They are known in the industry as:
•
ViSAA: As the industry’s only silicon-based implementation to provide Ethernet services sold by Carriers to their Enterprise customers, ViSAA enables equipment capabilities such as on-demand service creation, remote monitoring and trouble shooting, at lower power and cost and higher performance than competitive solutions.
•
VeriTime: The industry’s only all digital hardware-based implementation of 1588 time stamping in Ethernet switch and PHY silicon. 1588 is forecasted to be the industry’s most widely adopted standard for providing synchronization and timing for 4G/LTE networks.
•
Intellisec: A patent-pending, flow-based encryption solution for transporting confidential communications over Ethernet networks, Intellisec implements the IEEE 802.1AE MACsec standard in a simple, scalable, low power, and easy-to-upgrade implementation. Intellisec is unique in the industry in its ability to encrypt traffic without compromising timing accuracy.

Our advanced technology and IP developments will seek to exploit major technology trends and disruptions within networking equipment including:
•
A dramatic shift towards IP “packet networking” from “circuit networking” in Carrier networks, requiring deployment of new systems based on Ethernet technologies, rather than the older SONET/SDH technologies. This shift will provide high-growth opportunities for silicon solutions that address new systems developed with Carrier Ethernet technologies in networks.
•
Growing demand for higher bandwidth and higher capacity networks, particularly for mobile applications. The Mobile Access market is undergoing a major technology disruption as existing networks are unable to accommodate the rising growth in mobile traffic. Our revolutionary new low-power switch engines address power-constrained deployments such as small cell and pico-cell implementations for Mobile Access networks, as well as Ethernet Access Devices (“EADs”) for Cloud Access networks. Our switch engines are typically half the cost and require much lower power compared to competitive solutions based on network processors or Field Programmable Gate Arrays (“FPGAs”).
•
Increasing requirements for synchronization in all types of networks, particularly Mobile Access and IoT. The migration to packet-based networks prompted development of new timing synchronization techniques to satisfy the demands of Mobile Access, especially for 4G/LTE and LTE-Advanced deployments. Industrial Process Control, Smart-Grid Energy Distribution, Transportation, and Automotive networks also require highly accurate time synchronization, particularly for factory automation. Our patented VeriTime technology provides innovative and unique timing features in both our Carrier Ethernet switch engines and SynchroPHY products.
•
Increasing requirements for security in all types of networks. Securing information, computing infrastructure and the networks connecting them has come to the forefront of discussion with almost daily reports about malware, identity theft, intellectual property theft, and denial-of-service attacks on commercial and government cyber infrastructure. Our Intellisec flow-based solutions offer strong AES technology for network-wide security directly at the Ethernet layer.
•
A move to systems solutions from IC solutions. In some IP Edge systems including EADs for Cloud services, cell-site gateways and managed Enterprise switch solutions, our ICs and systems software integrate a majority of the system functions. We provide turnkey solutions for our customers to enable much faster time-to-market than through in-house developments. Our proven systems-level software plays a key role in creating this competitive advantage.

8

•
A move towards “Green Networking” to reduce power dissipation in Carrier and Enterprise network elements. We continue to lead the industry in deploying low-power switch engines, like those based on our ViSAA technology, power-saving techniques for networking, and keep at the forefront of the EEE standardization effort. We were the first to introduce low-power EcoEthernet™ Copper PHY technology, also known as ActiPHY™ and PerfectReach™, which reduces power dissipation by more than 80% compared with traditional devices.
•
A trend to higher speeds requiring solutions for signal integrity challenges. We provide world-class Connectivity solutions for a broad variety of applications from 100 Mbps to 100 Gbps. Our high-performance, mixed-signal, CMOS technology provides superior signaling capabilities at the lowest power and cost.
•
The need for companies to buy or license intellectual property rather than developing it internally. In several markets, we leverage our key technology advantages and technology cores into licensing opportunities with third parties for use in adjacent or similar markets to Carrier and Enterprise networking equipment that do not directly compete with our customer base, allowing us to serve a much larger market. Over the past four years, we completed licensing arrangements with four of the top 20 semiconductor companies.
Leverage Intellectual Property
In 2008, we began to monetize our substantial intellectual property portfolio. We offer a variety of technology cores for license and design services in process technologies. To date, our primary focus has been our Gigabit Ethernet Copper PHYs and our Ethernet switch cores. In 2010, we also announced the availability of licenses for our patented enhanced Forward Error Correction (“eFEC”) technology for implementation in ASICs, Systems-On-a-Chip (“SOCs”), and FPGAs.
We anticipate future revenue from licensing our technology to systems suppliers and non-competing semiconductor suppliers. We believe our position as an innovator and low-power leader makes us a compelling supplier. In many cases, we can also leverage intellectual property licensing partnerships to accelerate our partners’ product developments and extend our process technology roadmaps.
As a leading innovator in our target markets, we continue to file domestic and foreign patents that protect our innovations. In addition for defensive purposes, we sometimes sell certain patent assets to third parties that are in a better position to prosecute and monetize these patent assets against infringing companies. We always retain licenses to these patents.

Build Customer Relationships and Partnerships
As a transition specialist we often have to be significantly ahead of market trends, and able to innovate in areas that may not be obvious today. One of our key competitive assets is a deep systems and networking understanding in many parts of our organization. This allows us to predict market trends and then innovate and develop key technologies ahead of their market need.

Our customers are savvy buyers who carefully analyze and evaluate our ability to serve them reliably with products and technology, on a continuous basis, over the long-term. A key element of our strategy is to work closely with our customers’ product managers and systems design teams, as well as business units and corporate management teams. These key relationships enable us to acquire a detailed understanding of our customers’ business and technology needs. We also discuss key trends with service providers and IT organizations around the world to spot new networking trends in their infancy. Using this knowledge, we develop solutions to address our customers’ design challenges and provide them with differentiated feature sets for their systems.
Our worldwide sales, marketing, and application support organizations work together to keep an open and ongoing dialog with our customers to highlight milestones and progress on our stated initiatives. Our sales team is responsible for servicing our Tier-1 and Tier-2 customer requirements. We rely on distributors and independent representatives for our Tier-3 customers and for order fulfillment for some Tier-1 and Tier-2 customers.

9

Product Overview
We develop and manufacture a wide variety of innovative products that are marketed to Carrier and Enterprise networking, as well as data center infrastructure OEMs. While many of our products are targeted at specific markets, many of them find applications in multiple types of networking equipment across all of our focus markets. A recent history of new product introductions can be found on our website at www.vitesse.com. The information on our website is not incorporated by reference into, and is not made a part of, this report.
Our products fall into the following product lines:
Ethernet Switching Product Line
Our Ethernet Switching product line addresses Gigabit Ethernet and 10 Gigabit Ethernet applications in Carrier and Enterprise markets. This product line consists of Carrier Ethernet switch engines, Enterprise Ethernet switches, Ethernet Media Access Controllers (“MACs”), and Ethernet transceivers (“Cu PHYs”).
Carrier Ethernet Switch Engines:
Carrier networks are transitioning to packet-based IP/Ethernet technologies. Our latest generation switch engines target these applications with innovative features that enable true Carrier Ethernet networking. Our switch engines are based on ViSAA, the industry’s only silicon based implementation to provide Ethernet services sold by Carriers to their Enterprise customers. These products combine the packet processing features typically seen in network processors, together with Layer 2 and Layer 3 Ethernet switch functions, our VeriTime timing and synchronization technology, and an on-board CPU into a single chip at substantially lower cost and lower power than competing discrete and integrated solutions. With the addition of our CEServices™ applications software, our solutions meet MEF CE 2.0 requirements for both Mobile Access and Cloud Access equipment, and can dramatically cut our customers’ time-to-market. Our new products include third generation switch engine families, Jaguar-2 and Serval-2, created to address a broad range of applications in the Access and Edge of the networks, including Mobile Access equipment such as base stations, small cells, fiber and microwave wireless backhaul, and Cloud Access equipment such as EADs used for delivering business services.
Enterprise Ethernet Switches:
Our Ethernet switches target Cloud Access as well as desktop, workgroup and LAN infrastructure within SME/SMB markets and enable cost-effective migration of these systems to Gigabit Ethernet speeds. To date, we have shipped over 250 million Gigabit Ethernet ports into Enterprise applications. Our Ethernet switch products provide the advanced features required in Cloud Access with high-levels of integration, significantly reducing the physical system size, power consumption, and material cost for our customers.
Gigabit Ethernet Copper and Dual-media Transceivers (Cu PHYs):
Cu PHYs allow transmission of 10/100/1000 BASE-T data over Category 5 (“Cat5”) copper cable and fiber optic cabling. This technology is widely deployed in personal computing, home electronics, and LAN applications to Enterprise and data center applications, and more recently in Carrier networking applications. We offer a broad range of products in this category, including single, quad, and octal devices delivering a combination of low power, low cost and high integration. Our SimpliPHY™ Cu PHYs provide industry-leading low-power operation generally using power saving features such as ActiPHY, PerfectReach and EEE technology that provide energy savings of up to 80%.
SynchroPHY Gigabit Ethernet Copper and Dual-media Transceivers (Cu PHYs):
Our SynchroPHY Gigabit Ethernet PHY integrates our VeriTime technology in many different port counts and media types to fit into many different equipment types. Vitesse was first to the market with a Gigabit Ethernet PHY device that can support both IEEE standards: 1588 and Y.1731. These two standards are critical technologies for next-generation Mobile Access networks. In 2012, we reported network performance results to the Telecommunication Standardization Sector, documenting VeriTime’s < 10 ns per hop accuracy over a nine-hop 1588 Transparent Clock (TC) network, fulfilling TD-LTE and LTE-Advanced requirements in real-world tests today. Today, our latest generation PHY is a pin-compatible enhancement to our prior generation dual-media device, offering our patented Intellisec security encryption technology combined with VeriTime. These devices are unique in the industry in their ability to support encryption without compromising 1588 timing accuracy of the network.

10

Connectivity Product Line
Our Connectivity product line includes mixed-signal physical layer devices for connection of systems via optical fiber, copper cable, or backplanes. These devices are deployed across a very wide range of applications and markets. Connectivity product lines include PHYs, crosspoint switches, signal integrity devices, and Physical Media Devices (“PMDs”).
PHYs:
A PHY converts high-speed analog signals to low-speed digital signals in fiber optic, copper cable and backplane applications. We offer a broad line of PHY products for the Ethernet, SONET/SDH, and Fibre Channel markets at speeds ranging from 155 Mbps to 15 Gbps.
Our PHY portfolio includes the 10 Gigabit Ethernet SynchroPHY family that incorporates VeriTime technology, the industry’s most feature rich implementation of 1588 time stamping. In addition, our newest 10 Gigabit Ethernet PHY products also enable 128/256-bit encryption based on our Intellisec technology. By delivering both 1 and 10 Gigabit Ethernet PHYs incorporating both VeriTime and Intellisec, Vitesse customers can design Mobile Access and Cloud Access equipment with similar capabilities across multiple port speeds and interface types.

Crosspoint Switches:
Our crosspoint switches provide asynchronous, unblocked switching matrices from 4x4 to 144x144 with industry-leading performance up to 11 Gbps. This range of speeds and package form factors enable a wide variety of solutions for SONET/SDH, switching, blade servers and data center switches, high-density routers and HDTV video equipment.
Signal Integrity Devices:
We provide a broad portfolio of devices for generic signal integrity applications including the high-speed transmission of signals over backplanes and copper cables. These devices include repeater and re-timer ICs that support data rates from 155 Mbps to 16 Gbps for protocols, including, Gigabit Ethernet, Fibre Channel, Serial Attached SCSI, and Serial Advanced Technology Attachment. Our products are deployed in a wide variety of systems in Carrier, Enterprise, data center, and HD video applications, both within systems and connecting between systems. We incorporated many industry-leading proprietary features into our EQNOX signal integrity products such as VScope™, an integrated equalization waveform viewing technology and FlexEQ™, an adaptive equalization and electronic dispersion compensation technology (“EDC”). These technologies dramatically improve signal integrity transmission and reception for applications at 6 Gbps and above.
PMD:
A PMD is a mixed signal device that connects an electrical signal to an optical component. We offer laser drivers, transimpedance amplifiers, and post-amplifiers operating at speeds ranging from 1.25 Gbps to 14 Gbps. These products are currently used in a variety of applications from Carrier long-haul and metro networks to Enterprise Gigabit Ethernet and 10 Gigabit Ethernet networks including storage networks and systems.
Transport Processing Product Line
Our Transport Processing product line addresses the needs of Carrier network providers as they undergo a migration to new Ethernet packet-based networks that provide increased bandwidth and lower cost. Latest generation products, as well as our new products in development, target the OTN market, integrating increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps and are targeted principally for next-generation systems in the core and metro segments of the Carrier network. Our latest generation of products includes our patented VeriTime timing and synchronization technology.
Framers/Mappers:
We offer a complete line of framers and mappers for SONET/SDH, Ethernet-over-SONET (“EoS”), and OTN applications. Our latest generation products, as well as our new products in development, integrate increasing amounts of Ethernet packet processing technology. These products operate at speeds up to 10 Gbps, and are targeted principally for next-generation systems in the core and metro segments of the Carrier networks.

11

We also introduced the first SynchroPHY OTN mapper/PHY with VeriTime in the market. We believe these capabilities will become important as switches and routers add OTN mapping capability to their interfaces to directly interwork with WDM Transport systems, yet also need the precise packet timing capabilities required for advanced Mobile networks.

Market Overview
We classify product revenues into three markets: (1) Carrier Networking; (2) Enterprise Networking; and (3) Non-Core. These classifications reflect the major trends in our product lines and how they map into our customer base. We also report intellectual property revenues.
Our ability to achieve sustained revenue growth depends on several factors including, increasing demand from our end markets; our ability to capture and maintain market share in growing markets; the rate at which these new markets ramp into production; and the continuing trend by systems companies to outsource the designing and manufacturing of ICs to companies such as ours.
Carrier Networking
The global telecommunications Carrier network, which includes networks delivering voice and data services, has grown dramatically into a complex combination of networks. To address the technical and operational challenges created by the explosive growth of video bandwidth demand requirements, Carriers are increasingly adopting Ethernet technology in their network, particularly for Mobile and Cloud Access.
Broadly, Ethernet technology upgraded to meet these requirements is referred to as “Carrier Ethernet.” We provide a variety of products for newly emerging Carrier Ethernet applications as well as for legacy SONET/SDH and EoS applications. Due to the complexity of the Carrier network , products sold into these applications have long design cycles typically ranging from two to four years from design start to production, and have long life cycles, typically five to 10 years or more.
These products generally include:
Carrier Networking Products
Product Line
Vitesse Solutions
Ethernet Switching
Carrier Ethernet Switch Engines
Ethernet MACs
Gigabit Ethernet Copper and Dual-Media PHYs
SynchroPHY Gigabit Ethernet Copper and Dual-Media PHYs with VeriTIme and Intellisec
Connectivity
10 Gigabit Ethernet PHYs
SynchroPHY 10 Gigabit Ethernet PHYs with VeriTime and Intellisec
EQNOX Signal Integrity Devices
Crosspoint Switches
Laser Drivers, Transimpedance Amplifiers, Post Amplifiers
Transport Processing
SynchroPHY 10G OTN Mapper/PHYs with VeriTime
10G SONET/SDH Framers/Mappers
10G EoS Framers/Mappers
Enterprise Networking
Enterprise networks generally include equipment dedicated to the communication of voice and data services within large Enterprise organizations. An Enterprise network is typically composed of one or more LANs interconnecting computer systems, including workstations and servers, as well as one or more Service Access Network (“SAN”). Increasingly, Enterprise networks also include broadband connections to Carrier networks for the broader communication of voice and data outside of the Enterprise, particularly for access to Cloud services. Enterprise networks are usually classified into groups depending on their size and complexity; large Enterprise switch and routers, data center switching, Cloud managed switches and Layer2 and Layer 3 managed Ethernet switches. The complexity of products within the Enterprise networks varies dramatically based on the market segment. Products at the “low-end” of the network, in SOHO, SME and low-end SME applications, typically have fast design cycles on the order of six to 12 months and short life cycles, on the order of three to five years. Products sold into applications at the “high-end” of Enterprise, such as Layer 2 and Layer 3 stackable switches have longer design cycles, typically one to two years from design start to production and long life cycles, typically three to seven years or more.

12

We provide a variety of products into Enterprise networking applications. These products generally include:
Enterprise Networking Products
Product Line
Vitesse Solutions
Switching
Ethernet Switches with integrated Cu PHYs
Stackable Ethernet Switches
Ethernet Media Access Controllers
1 Gigabit Ethernet Copper and Dual-Media PHYs
Connectivity
10 Gigabit Ethernet PHYs
EQNOX Signal Integrity Devices
Crosspoint Switches
Laser Driver, Transimpedance Amplifiers, Post Amplifiers
Non-Core
Products that do not substantially sell into the Carrier or Enterprise networking markets, or have no current or future investment, have been classified as Non-Core products. Today, these products include legacy products from our Fibre Channel storage products line, our Raid-on-Chip processor line, our network processor product line, and some of our packet-based switch fabric product line. Many of these non-core products have approached end-of-life (“EOL”) status. We have made no material R&D investments in these products in the last five years.
Customers
We market and sell our semiconductor products directly to leading OEMs and ODMs, and through third-party electronic component distributors and manufacturing service providers. Sales to distributors accounted for approximately 52.7%, 51.6% and 44.6%, of our product revenues for fiscal years 2013, 2012 and 2011, respectively. For fiscal year 2013, distributor WPG Holdings accounted for 18.1% of our product revenues. For fiscal year 2012, distributors Nu Horizons Electronics and WPG Holdings accounted for 14.6% and 11.7%, respectively, of our product revenues. For fiscal year 2011, distributor Nu Horizons Electronics and direct customer Huawei Technologies accounted for 21.9% and 10.9% respectively, of our product revenues.
Product revenues from direct customer sales were $47.9 million or 47.3% of product revenues in 2013 compared to $53.2 million or 48.4% of product revenue in 2012 and $73.6 million or 55.4% of product revenue in fiscal year 2011. Our top five OEM customers for fiscal year 2013 were Alcatel-Lucent, Cisco, Hewlett Packard, Huawei, and Tellabs. Our sales to these customers accounted for approximately 31.3% of our fiscal year 2013 net revenues. Our top five OEM customers for fiscal year 2012 were Alcatel-Lucent, Cisco, Ciena, Huawei Technologies, and ZTE. Our sales to these customers accounted for approximately 27.5% of our fiscal year 2012 net revenues. Our top five OEM customers for fiscal year 2011 were Alcatel-Lucent, Cisco, Huawei Technologies, Tellabs, and ZTE. Our sales to these customers accounted for approximately 28.6% of our fiscal year 2011 net revenues.

Our customer base is widely dispersed geographically. Sales to customers located outside the United States have historically accounted for a significant percentage of our revenue, a trend we expect to continue. On a bill-to basis, international sales constituted 72.6%, 65.2% and 63.3% of our net revenues in fiscal years 2013, 2012 and 2011, respectively. We believe a substantial portion of the products billed 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. The “Significant Customers, Concentration of Credit Risk and Geographic Information” footnote in the accompanying consolidated financial statements provides more specific data on revenue by geographic area.
Future sales of our technology products will be based on, among other elements, continued expansion of our product line; the acceptance of our products; our customer service levels; expansion into additional domestic and international markets; and our ability to maintain a competitive position against other technology providers.
Manufacturing and Operations
Wafer Fabrication
Our products make use of the state-of-the-art complementary-symmetry metal-oxide-semiconductor (“CMOS”) technology and other semiconductor technologies, such as silicon-germanium (“SiGe”). As a fabless semiconductor company, wafer fabrication for our products is outsourced to third-party silicon wafer foundries, primarily Taiwan Semiconductor Manufacturing

13

Corporation (“TSMC”), and to a lesser extent, GlobalFoundries, IBM, and TowerJazz Semiconductor. This outsourcing eliminates the high costs of owning, operating and upgrading fabrication facilities, and focuses our resources on design and test applications, where we believe we have greater competitive advantages.
Probe, Assembly and Final Test
The highest complexity wafers pass through wafer sort to determine which of the die on the wafer meet functional and performance specifications. This step in the manufacturing process determines the yield of good die per wafer versus the scrap of non-functioning die.
Approved probed die are assembled into packages by our outsourced IC packaging subcontractors. Following assembly, packaged products go through final testing in packaged form to ensure that they meet all functional, performance and quality requirements. This step in the process determines the final yield.
We outsource the majority of our probe and test functions in order to reduce our manufacturing cycle times, better address customer requirements, increase inventory turns and reduce our overall fixed cost of probe and testing. For most products we maintain the capability to probe and test products in small volumes at our own facilities. Like our subcontractors, we use advanced automated testers and high-performance bench test equipment.

Engineering, Research and Development
Continually evolving industry standards, rapid advancements in process technologies, and increasing levels of functional integration characterize the market for our products. We believe that our future success will depend largely on our ability to continue improving our products and our process technologies, to develop new technologies and to adopt emerging industry standards.
Vitesse has a dedicated engineering team who integrates industry standards development, technology changes, and the product directions of our customers, in an effort to provide forward-looking guidance to the development teams in the form of a product roadmap. We work closely with our customers to co-specify and/or co-develop products. We refer to these early adoption customers as alpha-site customers. Occasionally, our agreements with alpha-site customers will include non-recurring development charges (“NREs”) and/or product purchase commitments.
We expend considerable design effort to increase speed and complexity while reducing the power dissipation of our products, and to create new, value-added features and functionality. We continue to develop common intellectual property cores and standard blocks that can be reused in multiple products, thereby reducing design cycle time and increasing first-time design correctness.
We have significant research, engineering, and product development resources located in two design centers in the United States, combined with four international design centers in Asia and Europe. To capitalize on software capability, co-locate development with customers, and continue to focus on our development organization, while improving profitability, we have expanded our capabilities in low-cost regions such as Taiwan and India.

Sales and Customer Support
Due to the significant engineering effort required in the sale of high-performance ICs, we provide our customers with both field engineering and application engineering support prior to the sale. These support services are utilized in the sales process to educate customers and close design wins. Common for our industry, our sales cycle is typically lengthy, often six to 12 months or more, and requires the continued participation of salespeople, field engineers, application engineers, and senior management.
The steps in our typical product sales cycle are as follows:
Design Opportunity Phase
•
Chief Technology Officer and technical marketing engagement with the respective peers at our customer.
•
Field applications engineers work with the customer to design our products into their systems.

14

•
Evaluation boards and/or evaluation systems are utilized to demonstrate product capabilities and performance to the customer.
•
Product samples are provided to the customer and our field applications engineers assist in bringing the product to a working-level in the customer’s lab.
•
The customer performs extensive lab testing to determine the viability and performance of our product in addressing their needs and specifications.

Design Win Phase
•
We use multiple elements to determine a design win. These might include firm commitment from a customer’s engineering and/or purchasing organizations, pre-production orders, or other indications that the customer selected us over our competitors for use in their system application. In most cases, we are the sole-source supplier to our customers, and typically cannot be easily replaced once we have secured a design win and it goes into production.
•
We support the customer with technical support as they go through system-level qualification and testing. This support typically includes hardware and software development support.

Production Phase
•
Once the customer has completed system development and qualification efforts, they may move their product into the production phase. For those design wins which move to production, it typically takes our customer from six to 24 months to go from design win to production.
•
Once the product is in production, the customer is provided a standard product warranty and minimal additional sales support. Our products are generally warranted against defects in materials and workmanship for a period of one year.
Our sales is headquartered in Camarillo, California. We have additional sales and field application support offices in the United States, Canada, China, Europe, India, and Taiwan.

Intellectual Property
As of September 30, 2013, we held 84 United States patents, 19 foreign patents, as well as 22 patent applications pending in the United States and 28 foreign applications pending. Our intellectual property strategy involves filing additional patent applications in our strategic focus markets on a regular basis. We also generally enter into confidentiality agreements with our employees, consultants and business partners, and typically control access to and distribution of our proprietary information. Despite these precautions, it is possible that competitors or other unauthorized third-parties may obtain and copy, use or disclose our technologies and processes, develop similar technology independently, or design around our patents. As such, any rights granted under our patents may not provide us with meaningful protection. In addition, we may not be able to successfully enforce our patents against infringing products in every jurisdiction. See “Risk Factors” under Item 1A of this Report for further discussion of the risks associated with patents and intellectual property.

Competition
The markets for our products are highly competitive and subject to rapid advancement in design technology, wafer manufacturing techniques and alternative networking technologies. We must identify and capture future market opportunities by developing and deploying value-added products to offset the fast price erosion that characterizes our industry.
We compete for market share based on our customers’ selection of our components over our competitors during the design phase of their systems. In addition, many of our large customers have their own internal design teams, which we also compete against when our customers consider a “make vs. buy” decision. Our ability to compete is dependent on the needs of our customers, how well our products address those needs, our corporate relationships, and a variety of other factors.

15

Competition is particularly strong in the market for communication ICs, partially due to the market’s historical growth rate, which attracts larger competitors, and also to the number of smaller companies focused on this area. The trend in the industry has been, and continues to be, to outsource more designs to companies such as ours. While we expect this trend to continue, we view internal design efforts by our customers as a significant competitive threat. Larger competitors in our market have acquired both mature and early-stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new design wins that we may have otherwise won.
In the communications networking market, which includes our Carrier and Enterprise networking markets, our competitors include Applied Micro Circuit, Broadcom, Cortina Systems, Marvell Technology Group, and PMC-Sierra. In the signal integrity market, our competitors include Maxim Integrated Products, Semtech, and Texas Instruments. Over the next few years, we expect additional competitors, some of whom may have greater financial and other resources than we have, to enter the market with new products. In addition, we are aware of smaller, privately-held companies that focus on specific subsets within our range of products. These companies, individually and collectively, represent future competition for design wins and subsequent product sales.

Cyclicality
The semiconductor industry is highly cyclical and is characterized by constant and rapid technological change, rapid product obsolescence, price erosion, evolving technical standards, short product life cycles, and wide fluctuations in product supply and demand. These factors and others, together with changes in general economic conditions, cause significant upturns and downturns in the industry and within our business. In addition, our operating results are subject to substantial quarterly and annual fluctuations due to a number of factors, such as demand for network infrastructure equipment, the timing of receipt, reduction or cancellation of significant orders, fluctuations in the levels of component inventories held by our customers and distribution partners, the gain or loss of significant customers, market acceptance of our products and our customers’ products, our ability to develop, introduce, and market new products and technologies on a timely basis, the availability and cost of products from our suppliers, new product and technology introductions by competitors, intellectual property disputes and the timing and extent of product development costs.

Backlog
Our sales are made primarily pursuant to standard purchase orders for delivery of products. Product quantities to be delivered and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, our backlog, as of any particular date, is not necessarily representative of actual sales for any succeeding period. We, therefore, do not believe that backlog alone is a reliable indicator of future revenue levels.
We generally use the “sell-through” model of accounting when using our distribution network. The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. By using the sell-through methodology, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with most of our distribution partners as part of the terms and conditions of sale.

Environmental Management
We monitor the environmental impact of our products. Environmental concerns bring increased attention to the need for lead-free solutions in electronic components and systems within the semiconductor industry. Many companies are moving toward compliance with the Restriction of Hazardous Substances Directive (“RoHS”), the European legislation that restricts the use of a number of substances, including lead, effective July 2006. We believe that our products are compliant with the RoHS directive. Additionally, some of our subcontractors may be required to register processing materials as required by Registration, Evaluation, Authorization and Restriction of Chemicals (“REACH”) European Union Regulation, EC/2006/1907.
There are other international environmental directives, regulations, and initiatives that are currently evolving in the electronics industry, such as the halogen-free initiative, which may also impact material suppliers and processing sub-contractors. We believe our parts will be compliant and that materials will be available to meet these emerging regulations. However, it is possible that unanticipated supply shortages or delays may occur as a result of these environmental factors.

16

Employees
As of October 31, 2013, we had 331 employees worldwide, including 171 in R&D. The balance of employees are listed in population size order: operations, marketing and sales, and finance and administration. Our ability to attract and retain qualified personnel is essential to our continued success. None of our employees are represented by a collective bargaining agreement, nor have we ever experienced a work stoppage. We believe our employee relations are good.

Available Information
We file annual, quarterly and special reports, as well as proxy statements and other information, with the Securities Exchange Commission (“SEC”). Any document that we file with the SEC may be read or copied at the SEC’s public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. Our SEC filings are also available at the SEC’s website at www.sec.gov, and through our website, free of charge, at www.vitesse.com. Copies of such documents maybe requested by contacting our investor relations department at 805-388-3700 or sending an e-mail through the Investor Relations page on our website. The information on our website is not incorporated by reference into and is not made a part of this report.

17

ITEM 1A. RISK FACTORS
You should carefully consider the risks described below before investing in our securities. We organize our risks into the following categories:
•
Risks Relating to Our Business; and
•
Risks Relating to an Investment in Our Common Stock or Debt.
Risks Relating to Our Business
We have experienced losses from operations and may experience future losses from operations.
For the year ended September 30, 2013, we had a net loss of $22.1 million. Due to general economic conditions and slowdowns in purchases of networking equipment, it continues to be difficult for us to predict the purchasing activities of our customers. We expect that our operating results will fluctuate substantially in the future and we may experience future losses from operations. In order to achieve and sustain profitability, we must achieve a combination of substantial revenue growth and/or a reduction in operating expenses.
If we are unable to accurately predict our future sales and to appropriately budget for our expenses, our operating results could be materially and adversely affected.
The rapidly changing nature of the markets in which we sell our products limit our ability to accurately forecast quarterly and annual sales. Our sales cycle is often lengthy, particularly for larger transactions. As a result, we devote substantial time and effort and incur significant upfront expense in our sales efforts without any assurance that our efforts will result in a customer purchase. Therefore, it is often difficult to predict when, or even if, we will make a sale with a potential customer. Additionally, we make investment decisions and budget our expense levels based primarily on sales forecasts. Because a substantial portion of our expenses are fixed in the short term or are incurred in advance of anticipated sales, we may not be able to decrease our expenses in a timely manner to offset any shortfall of sales. Our operating results will be adversely affected if revenues fall below our expectations in a particular quarter, which could cause the price of our common stock to decline significantly.
Our quarterly revenues and operating results have fluctuated in the past and may fluctuate and be difficult to predict in the future, and such fluctuations could adversely affect our stock price.
Our quarterly revenues and operating results have fluctuated significantly in the past and we believe they may continue to do so. As a result, you should not rely on the results of any one quarter or fiscal period as an indication of future performance and period-to-period comparisons of our revenues and operating results may not be meaningful.
Our quarterly operating results may fluctuate as a result of a variety of factors, including, among others, those described elsewhere in this section and those listed below, many of which are outside of our control.
•
Fluctuations in demand for network infrastructure equipment;
•
The timing of receipt, reduction or cancellation of significant orders and shipments;
•
Fluctuations in the levels of component inventories held by our customers and distribution partners;
•
The gain or loss of significant customers;
•
Significant changes in the type and mix of products being sold;
•
Increased competition from current and future competitors;
•
Market acceptance of our products and our customers products;
•
Our ability to develop, introduce and market new products and technologies on a timely basis;
•
The availability and cost of products from our suppliers;

18

•
Reductions in the selling prices of our products;
•
Design changes to our products made by our customers;
•
New product and technology introductions by competitors;
•
Failure by third-party foundries and other subcontractors to manufacture, assemble, test and ship products on time;
•
Changes in third-party foundries’ and other subcontractors’ manufacturing capacity, utilization of their capacity and manufacturing yields;

•
Intellectual property disputes; and
•
The timing and extent of product development costs.
Our operating results may be adversely impacted by economic conditions and uncertainties in the markets we address, including the cyclical nature of and volatility in the semiconductor industry. As a result, the market price of our common stock may decline.
We operate primarily in the semiconductor industry, which is cyclical and subject to rapid change and evolving industry standards. From time-to-time, the semiconductor industry has experienced significant and extended downturns. These downturns are characterized by decreases in product demand, excess customer inventories and accelerated erosion of prices. These factors could cause substantial fluctuations in our revenues and in our results of operations. Any downturns in the semiconductor industry may be severe and prolonged and any failure of the industry or wired and wireless communications markets to fully recover from downturns could seriously impact our revenues and harm our business, financial condition and results of operations. The semiconductor industry also periodically experiences increased demand and production capacity constraints which may affect our ability to manufacture and ship products. Accordingly, our operating results may vary significantly as a result of the general conditions in the semiconductor industry, which could cause large fluctuations in our stock price.
The lengthy life cycle of our products as well as the short life cycles of some of the end products for which our products are designed may leave us with obsolete or excess inventories, which could have an adverse impact on our operating profit and net income results.
Many of our products have very long life cycles, often exceeding 10 years or more. These life cycles may be longer than what is typically supported by wafer and/or assembly manufacturers. Accordingly, we are sometimes subjected to end-of-life notices on certain materials and/or products provided by these manufacturers. This longer life cycle may impact our ability to continue to support certain products, forcing us to cease offering these products if we cannot obtain a replacement source of material. This longer life cycle may impact revenues and/or require us to incur additional costs to obtain alternative sources for these materials.
Further, the life cycles of some of our products depend heavily upon the life cycles of the end products for which our products are designed. Products with short life cycles require us to manage production and inventory levels closely. Write-offs of obsolete or excess inventories resulting from unanticipated changes in the estimated total demand for our products and/or the estimated life cycles of the end products for which our products are designed may negatively affect our operating profit and net income results.
We have limited control over the indirect channels of distribution we utilize, which makes it difficult to accurately forecast orders and could result in the loss of certain sales opportunities.
A portion of our sales is realized through independent resellers and distributors that are not under our control. For the year ended September 30, 2013, 52.7% of our product revenues were through these entities. These independent sales organizations generally represent product lines offered by several companies and thus could reduce their sales efforts applied to our products or terminate their representation of us. Our revenues could be adversely affected if our relationships with resellers or distributors were to deteriorate or if the financial condition of one or more significant resellers or distributors were to decline.

19

In addition, as our business grows, there may be an increased reliance on indirect channels of distribution. There can be no assurance that we will be successful in maintaining or expanding these indirect channels of distribution. This uncertainty could result in the loss of certain sales opportunities. Furthermore, our reliance on indirect channels of distribution may reduce visibility with respect to future business opportunities, thereby making it more difficult to accurately forecast orders.
Further, we generally use the sell-through accounting policy model which recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. Because we use the sell-through methodology, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with most of our distribution partners as part of their terms and conditions of sale.
Order or shipment cancellations or deferrals could cause reductions in our revenues or unplanned inventory growth resulting in excess inventory, which may adversely affect our operating results.
We sell, and expect to continue selling, a significant number of products pursuant to purchase orders that customers may cancel or defer on short notice without incurring a significant penalty. If a customer cancels or defers product shipments or refuses to accept shipped products, we may incur unanticipated reductions or delays in recognizing revenues and be required to hold excess inventory. Holding excess inventory could reduce our profit margins by reducing sales prices or requiring inventory write-downs or write-offs for excess or obsolete inventory.
Our international sales and operations subject us to risks that could adversely affect our revenues and operating results.
Sales to customers located outside the United States account for a significant percentage of our revenues. International sales constituted 72.6%, 65.2% and 63.3% of our net revenue in fiscal years 2013, 2012 and 2011, respectively. Development and customer support operations located outside the United States have historically accounted for a significant percentage of our operating expenses, and we anticipate that such operations will continue to account for a significant percentage of our expenses. International sales and operations involve a variety of risks and uncertainties, including risks related to:
•
Reliance on strategic alliance partners;
•
Compliance with changing foreign regulatory requirements and tax laws;
•
Difficulties in staffing and managing foreign operations;
•
Reduced protection for intellectual property rights in some countries;
•
Longer payment cycles to collect accounts receivable in some countries;
•
Political and economic instability and potential hostilities and changes in diplomatic and trade relationships;
•
Economic downturns in international markets and disruptions in capital and trading markets;
•
Wage inflation;
•
Currency risks;
•
Existing or future environmental laws and regulations;
•
Cultural differences in the conduct of business;
•
Natural disasters, acts of terrorism and war;
•
Changing restrictions imposed by United States export laws, including increasing restrictions based on security concerns; and
•
Competition from companies based in North America that have established significant international operations.
Failure to successfully address these risks and uncertainties could adversely affect our international sales and operations, which could in turn have a material and adverse effect on our results of operations and financial condition.

20

If we are unable to develop and introduce new products successfully, keep abreast of the rapid technological changes in our market or achieve market acceptance of our new products, our revenues and operating results will be adversely affected.
Our future success will depend on our ability to develop and timely introduce new, high-performance ICs and IC systems for existing and new markets and our success in developing and delivering these new products will depend on various factors, including our ability to:
•
Accurately predict market requirements, changes in technology and evolving industry standards;
•
Accurately define new products;
•
Expand our software capabilities in order to provide customers with complete product solutions;
•
Complete and introduce new products in a cost-effective and timely manner;
•
Qualify and obtain industry interoperability certification of our products and our customers products into which our products will be incorporated, including the related software content included in our products or with which our products integrate;
•
Work with our wafer foundry, assembly, and probe and test subcontractors to achieve high manufacturing yields;
•
Convince leading communications equipment manufacturers to select these products; and
•
Gain market acceptance of our products and our customers’ products.
We may not have sufficient resources to make the substantial investment in R&D in order to develop and bring to market new and enhanced products or to improve and further develop the software content included in our products or their compatibility with systems in which our products integrate. Furthermore, we are required to continually evaluate expenditures for planned product development and to choose among alternative technologies based on our expectations of future market growth. We may be unable to timely develop and introduce new or enhanced products, our products may not satisfy customer requirements or achieve market acceptance, or we may be unable to anticipate new industry standards and technological changes. We also may not be able to respond successfully to new product announcements and introductions by competitors.
There can be no assurance that we will be successful in developing and marketing these new or other future products. Our inability to develop and introduce new products successfully and in a timely manner could negatively affect our business and results of operations.
Demand for our products is dependent on demand for our customers’ products.
Our success will also depend on the ability of our customers to successfully develop new products and enhance existing products for the Carrier and Enterprise networking markets. These markets may not develop in the manner or in the time periods that our customers anticipate. If they do not, or if our customers’ products do not gain widespread acceptance in these markets, our revenues and operating results may be materially and adversely affected.
Failure to accurately forecast market and customer demand for our products, or to quickly adjust to forecast changes, could adversely affect our business and financial results or operating efficiencies.
Product introductions as well as plans for future products are based on our expectations regarding market demand and direction. If our expectations regarding market demand and direction are incorrect, the rate of development or acceptance of our current and next-generation solutions do not meet market demand and customer expectation, the sales of our legacy or current Carrier and Enterprise networking products decline more rapidly than we anticipate, or if the rate of decline continues to exceed the rate of growth of our new products, our revenues and operating results could be materially and adversely affected.
Our ability to accurately forecast customer demand may also be impaired by the delays inherent in our lengthy sales cycle. After we have developed and delivered a product to a customer, our customers need time to test, evaluate and adopt our products and additional time to begin production of the equipment that incorporates our products. Due to this lengthy cycle, we may experience significant delays from the time we increase our operating expenses and make investments in inventory

21

until the time that we generate revenues from these products. It is possible that we may never generate any revenues from these products after incurring such expenditures. Even if a customer selects our product to incorporate into their equipment or devices, we have no assurance that the customer will ultimately bring our product to market or that such effort by our customer will be successful. If we incur significant research and development expenses, marketing expenses and investments in inventory in the future that we are not able to recover, and our operating results could be adversely affected.
We are dependent on a small number of customers in a few industries for a significant amount of revenues. A decrease in sales to or the loss of one or more significant customers could adversely impact our revenues and results of operations.
We focus our sales efforts on a small number of customers in the Carrier and Enterprise networking markets that require high-performance ICs. We intend to continue doing so in the future. Some of these customers are also our competitors. If any of our major customers were to delay orders of our products or stop buying our products, our business and financial condition would be severely affected. Additionally, if any of our customers are impacted by consolidation, experience financial difficulty, or are impacted by adverse economic conditions that would delay networking infrastructure upgrades, build-outs or new installations, we could experience increased competition for our products and downward pressure on the pricing of our products.
We depend on third-party wafer foundries and other suppliers and subcontract manufacturers to manufacture and test substantially all of our current products and any delays in materials or packaging, availability of manufacturing capacity, or failure to meet quality control requirements could have material adverse effects on our customer relationships, revenues and cash flows.
Wafer fabrication for our products is outsourced to third-party silicon wafer foundry subcontractors, primarily TSMC and, to a lesser extent, GlobalFoundries, IBM, and TowerJazz Semiconductor. We depend on these third-party wafer foundries to allocate a portion of their manufacturing capacity sufficient to meet our needs and to produce wafers of acceptable quality in a timely manner. There are significant risks associated with our reliance on third-party foundries, including:
•
Lack of assured wafer supply, the potential for wafer shortages and possible increases in wafer prices;
•
Limited control over delivery schedules, manufacturing yields, product costs, and product quality; and
•
Unavailability of, or delays in, obtaining access to key process technologies.
These risks and other risks associated with our reliance on third-party wafer foundries could materially and adversely affect our revenues, cash flows, operating results, and relationships with our customers.
Our third-party wafer foundries fabricate products for other companies and, in certain cases, manufacture products of their own design. Historically, there have been periods in which there has been a worldwide shortage of wafer foundry capacity for the production of high-performance ICs such as ours. Instead of having long-term agreements with any of our third-party foundries, we subcontract our manufacturing requirements on a purchase order basis. As a result, it is possible that the capacity we may need in the future may not be available to us on acceptable terms, if at all.
A significant portion of the manufacturing operations required for our products are located in Asia. These areas are subject to natural disasters including earthquakes, tsunamis and floods such as the earthquake and tsunami that occurred in Japan and the floods that occurred in Thailand that disrupted the global supply chain for components manufactured in those countries. A significant natural disaster or other catastrophic event could significantly disrupt our foundries’ production capabilities and could result in our experiencing a significant delay in delivery or substantial shortage of wafers and possibly in higher wafer prices. Any supply disruption or business interruption could materially and adversely affect our business, financial condition and results of operations.
If any of our foundries do not have adequate available capacity for us for any reason, we may encounter supply delays or disruptions, and we may need to qualify an alternative foundry. Our current foundries need to have new manufacturing processes qualified if there is a disruption in an existing process. We typically require several months to qualify a new foundry or process before we can begin shipping products from the new foundry. If we cannot accomplish this qualification in a timely manner, we may experience a significant interruption in supply of the affected products.
In addition to third-party wafer foundries, we also depend on third-party subcontractors in Asia and the United States for the assembly, wafer probe and package testing of our products. As with the wafer foundries, any difficulty in obtaining parts or

22

services from these subcontractors could affect our ability to meet scheduled product deliveries to customers, which could in turn have a material adverse effect on our customer relationships, revenues and operating results.
These third-party subcontractors purchase materials used in the assembly process based on our forecast. In the event we fail to meet our obligations by placing purchase orders that are inconsistent with our forecast, we may be required to pay for material forecasted, but not ordered. This obligation may have an adverse effect on operating results and cash flows.
As with wafer fabrication, worldwide assembly and testing capacity for our products is limited, and we are dependent on our suppliers to provide enough capacity in the correct mix to address all of our requirements. The master service agreements with our assembly subcontractors have provisions for the subcontractors to maintain inventory stocks based on forecasts, but these agreements do not include any guaranteed capacity provisions. As a result, it is possible that the capacity we will need in the future may not be available to us on acceptable terms, if at all, and we could experience shortages or assembly problems in the future. As part of our test outsourcing agreement, we consigned testing equipment to our test subcontractor. The availability of assembly and test services from these subcontractors could be materially and adversely affected in the event a subcontractor experiences financial difficulties or suffers any damage to their facilities.
If we do not achieve satisfactory manufacturing yields or quality, our business will be harmed because of increases in our business expenses.
The fabrication of ICs is a highly complex and technically demanding process. Defects in designs, problems associated with transitions to newer manufacturing processes, and the inadvertent use of defective or contaminated materials can result in unacceptable manufacturing yields and performance. These problems are frequently difficult to detect in the early stages of the production process and can be time-consuming and expensive to correct once detected. Even though we procure all of our wafers from third-party foundries, we may be responsible for low yields when these wafers are tested against our quality control standards. In addition, defects in our existing or new products may require us to incur significant warranty, support and repair costs, and could divert the attention of our engineering personnel away from the development of new products.
In the past, we have experienced difficulties in achieving acceptable probe and/or final test yields on some of our products, particularly with new products, which frequently involve new manufacturing processes and smaller geometry features than previous generations. Decreased yields can result in higher unit costs, shipment delays and increased expenses associated with resolving yield problems. Because we also estimate yields to value work-in-process inventory, yields below our estimates may require us to increase the value of inventory and related reserves reflected on our financial statements. Poor manufacturing yields, defects or other performance problems with our products could adversely affect our ability to provide competitively priced products and our operating results.
Defects, errors, or failures in our products could result in higher costs than we expect and could harm our reputation and adversely affect our revenues and level of customer satisfaction.
Due to the highly complex nature of our products, on occasion an undetected defect, error, or failure may occur when one of our products is deployed in the field. The occurrence of defects, errors, or failures in our products could result in cancellation of orders, product returns, increased warranty expense, and the loss of, or delay in, market acceptance of our IC solutions. Our customers could, in turn, bring legal actions against us, resulting in the diversion of our resources, legal expenses and judgments, fines or other penalties, or losses. Any of these occurrences could adversely affect our business, results of operations and financial condition.
We face significant emerging and existing competition and, therefore, may not be able to maintain our market share or may be negatively impacted by competitive pricing practices.
The markets for our products are intensely competitive and subject to rapid technological advancement in design technology, wafer manufacturing techniques and alternative networking technologies. Our competitors have increasingly frequent opportunities to supplant our products in next-generation systems because of shortened product life and design cycles in many of our customers’ products. Our customers may substitute use of our products in their next-generation equipment with those of current or future competitors. Our customers may choose to internally design and develop products for themselves.
In the communications market, which includes our Carrier and Enterprise network markets, competitors include Applied Micro Circuit, Broadcom, Cortina Systems, Marvell Technology Group, and PMC-Sierra. In the signal integrity market, our competitors include Maxim Integrated Products, Semtech, and Texas Instruments. Larger competitors in our market have acquired both mature and early stage companies with advanced technologies. These acquisitions could enhance the ability of larger competitors to obtain new business that we might have otherwise won. In addition, we are aware of smaller privately-

23

held companies that focus on specific portions of our range of products. Over the next few years, we expect additional competitors, some of which may have greater financial and other resources than we have, to enter the market with new products. These companies, individually and collectively, represent future competition during the design stage and in subsequent product sales.
We must keep pace with rapid technological change and evolving industry standards in order to grow our revenues and our business.
We sell products in markets that are characterized by rapid technological changes in product technologies, process technologies and software, including evolving industry standards, frequent new product introductions, short product life cycles, and increasing demand for higher levels of integration, smaller process geometries, and increasing levels of software content. We believe that our success, to a large extent, depends on our ability to adapt to these changes, to continue to improve our product technologies, and to develop new products and technologies to maintain our competitive position. Our failure to accomplish any of these objectives could have a negative impact on our business and financial results. If new industry standards emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantial unanticipated costs to comply with these new standards.
Development costs for new product technologies continue to increase. We may incur substantially higher research and development costs for next-generation products, as these products are typically more complex and must be implemented in more advanced wafer fabrication processes and assembly technologies.
Our operating results may be adversely impacted by worldwide political and economic conditions and uncertainties. As a result, the market price of our common stock may decline.
Recent general worldwide economic conditions have included slower economic activity, an increase in bankruptcy filings, concerns about inflation and deflation, increased energy costs, decreased consumer confidence, reduced corporate profits and capital spending, adverse business conditions, liquidity concerns in the wired and wireless communications markets, international conflicts, terrorist and military activity, and the impact of natural disasters and public health emergencies. These conditions make it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities, and these conditions have caused, and may continue to cause, United States and foreign businesses to slow spending on products such as ours, which delays and lengthens sales cycles. We cannot predict the timing, strength or duration of any slowdown or subsequent recovery in the worldwide economy, the semiconductor industry or the wired and wireless communications markets. If the economy or markets in which we operate do not return to historical levels, our business, financial condition and results of operations will likely be materially and adversely affected.
Our business is subject to environmental regulations that could increase our operating expenses.
We are subject to a variety of federal, state, local and country-specific environmental regulations relating to the use, storage, discharge, and disposal of toxic, volatile and other hazardous chemicals used in our design process. In some circumstances, these regulations may require us to fund remedial action regardless of fault. Consequently, it is often difficult to estimate the future impact of environmental matters, including the potential liabilities associated with chemicals used in our design process. If we fail to comply with these regulations, we could be subject to fines or be required to suspend or cease our operations. In addition, these regulations may restrict our ability to expand operations at our present locations in the United States and worldwide or require us to incur significant compliance related expenses.
Laws and regulations have been enacted in several jurisdictions in which we sell our products, including various European Union (“EU”), member countries. For example, the RoHS directive, an EU regulation, restricts the use of certain hazardous substances, including lead, used in the construction of component parts of electrical and electronic equipment. We believe that our products comply with the RoHS directive; however, if we fail to comply with these regulations in the future we may be forced to recall products and cease their manufacture and distribution, and we could be subject to civil or criminal penalties. We may incur increased manufacturing costs, and some products may be subject to production delays to comply with future legislation which implements this directive, but we cannot currently estimate the extent of such increased costs or production delays, if any. To the extent that any such cost increases or delays are substantial, our operating results could be materially adversely affected. Also, we are aware that lead times for new, compliant components are longer and that older, non-compliant components are being discontinued at a fast pace. We or our customers may be impacted by shortages if parts that comply with the RoHS directive are not available.
Similar legislation may be enacted in other countries or regions where we sell our products. We will need to ensure that we comply with these laws and regulations as they are enacted, and that our subcontractors also comply with these laws and

24

regulations. If we or our subcontractors fail to comply with the legislation, our customers may refuse or be unable to purchase our products, which could harm our business, operating results and financial condition. If we have to make significant capital expenditures to comply with environmental laws, or if we are subject to significant expenses in connection with a violation of these laws, our business, operating results and financial condition could be materially and adversely affected.
If we are not successful in protecting our intellectual property rights, our ability to compete or maintain market share may be harmed.
We rely on a combination of patent, copyright, trademark, and trade secret protections, as well as confidentiality agreements and other methods, to protect our proprietary technologies and processes. For example, we enter into confidentiality agreements with our employees, consultants and business partners, and control access to, and distribution of our proprietary information. As of September 30, 2013, we held 84 United States patents and 19 foreign patents, as well as 22 patent applications pending in the United States and 28 foreign applications pending for various aspects of design and process innovations.
However, despite our efforts to protect our intellectual property, we cannot assure you that:
•
Steps we take to prevent misappropriation or infringement of our intellectual property will be successful;
•
Any existing or future patents will not be challenged, invalidated or circumvented;
•
Any pending patent applications or future applications will be approved;
•
Others will not independently develop similar products or processes to our, or design around our, patents; or
•
Any of the measures described above will provide meaningful protection.
Further, we do not file patent applications on a worldwide basis, meaning we do not have patent protection in some jurisdictions. It may be possible for a third-party, including our licensees, to misappropriate our copyrighted material or trademarks. It is possible that existing or future patents may be challenged, invalidated or circumvented and effective patent, copyright, trademark, and trade secret protection may be unavailable or limited in foreign countries. It may be possible for a third-party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents in the United States and in other jurisdictions. It is also possible that some of our existing or new licensing relationships will enable other parties to use our intellectual property to compete against us. Legal actions to enforce intellectual property rights tend to be lengthy and expensive and the outcome often is not predictable. As a result, despite our efforts and expenses, we may be unable to prevent others from infringing upon or misappropriating our intellectual property, which could harm our business. In addition, practicality also limits our assertion of intellectual property rights. Patent litigation is expensive and its results are often unpredictable. Assertion of intellectual property rights often results in counterclaims for perceived violations of the defendant’s intellectual property rights and/or antitrust claims. Certain parties, after receipt of an assertion of infringement will cut off all commercial relationships with the party making the assertion, thus making assertions against suppliers, customers, and key business partners risky. If we forgo making such claims, we may run the risk of creating legal and equitable defenses for an infringer.
Certain of our software (as well as that of our customers) may be derived from so-called “open source” software that is generally made available to the public by its authors and/or other third parties. Open source software is made available under licenses that impose certain obligations on us in the event we were to distribute derivative works of the open source software. These obligations may require us to make source code for the derivative works available to the public, and/or license such derivative works under a particular type of license, rather than the forms of license customarily used to protect our intellectual property. While we believe we have complied with our obligations under the various applicable licenses for open source software, in the event that the copyright holder of any open source software were to successfully establish in court that we had not complied with the terms of a license for a particular work, we could be required to release the source code of that work to the public and/or stop distribution of that work if the license is terminated.
We may be subject to claims of infringement of third-party intellectual property rights or demands that we license third-party technology, which could result in significant expense and loss of our proprietary rights.
The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights. As is common in the industry, from time-to-time, third parties have asserted patent, copyright, trademark, and other intellectual property rights to technologies that are important to our business and have demanded that we license their patents and technology. To

25

date, we have not believed it necessary to license any of the rights referred to in such claims. We expect, however, that we will continue to receive such claims in the future, and any litigation to determine their validity, regardless of our merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. We also may be required to defend and indemnify customers against claims of infringement of third-party intellectual property rights, which could result in significant expense. Our recent efforts to license our intellectual property to third-parties may also increase the potential for others to initiate claims against us. We cannot assure that we would prevail in such disputes given the complex technical issues and inherent uncertainties in intellectual property litigation. The resolution or compromise of any litigation or other legal process to enforce such alleged third-party rights, including claims arising through our contractual indemnification of our customers, or claims challenging the validity of our patents, regardless of its merit or resolution, could be costly and divert the efforts and attention of our management and technical personnel. If such litigation were to result in an adverse ruling we could be required to:
•
Pay substantial damages;
•
Discontinue the use of infringing technology, including ceasing the manufacture, use or sale of infringing products;
•
Expend significant resources to develop non-infringing technology;
•
Pay substantial damages to our customers or end users to discontinue use or replace infringing technology with non-infringing technology; or
•
License technology from the party claiming infringement, which license may not be available on commercially reasonable terms.
Litigation resulting in any of the above could materially and adversely affect our business, financial condition and operating results.
We are subject to United States Customs and Export Regulations.
We are subject to United States Customs and Export Regulations, including United States International Traffic and Arms Regulations and similar laws, which collectively control import, export and sale of technologies by United States companies. Failure to comply with such regulations may result in civil and criminal enforcement, including monetary fines and possible injunctions against shipment of product, which could have a material adverse impact on our results of operations and financial condition.
Risks Relating to an Investment in Our Common Stock or Debt Instruments
We have significant debt in the form of our Term A Loan, Term B Loan and 2014 Debentures.
As of November 7, 2013, we had outstanding $17.2 million in original principal of our senior term loans (the “Term A Loan” and “Term B Loan”) with certain lenders for which Whitebox VSC, Ltd. serves as agent, and $32.8 million of our 8.0% Convertible Second Lien Debentures Due 2014 (the “2014 Debentures”). Our Term A Loan and Term B Loan bear interest at a fixed rate of 9.0% per annum, payable quarterly in arrears, and have a maturity date of August 31, 2016, and our 2014 Debentures bear interest at a fixed rate of 8.0% per annum, payable semi-annually in arrears, and have a maturity date of October 30, 2014. We intend to use our existing cash to repay our 2014 Debentures on or before their maturity in October 2014, which will achieve our objective of reducing our outstanding indebtedness but will also reduce our cash balances. While we believe that our existing sources of liquidity, along with cash expected to be generated from product sales, will be sufficient to fund our operations for at least the next 12 months after repayment of the 2014 Debentures, this ultimately may not be the case. If we incur operating losses and negative cash flows in the future, we may need to further reduce our operating costs or obtain alternate sources of financing, or both. We may need additional capital in the future and may not have access to additional sources of capital on favorable terms or at all. If we raise additional funds through the issuance of equity-based or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock and our stockholders may experience dilution of their ownership interests.
Early repayment of our 2014 Debentures may result in significant interest expense.
Our 2014 Debentures mature on October 30, 2014. Although we do not have a contractual right to retire our 2014 Debentures early, we will continue to consider opportunistically repurchasing all or a portion of our 2014 Debentures prior to their scheduled maturity by repurchasing the debentures at a premium to the outstanding principal amount of the debentures. Our

26

repurchase of 2014 Debentures at a premium will result in increased interest expense in the periods during which the repurchases occur. In November 2013, we repurchased $13.7 million of our 2014 Debentures at a premium of 7.0% resulting in increased interest expense of $1.6 million in the first quarter of fiscal 2014. If the remaining $32.8 million of 2014 Debentures outstanding after the November 2013 repurchase were to be repurchased at a premium of 5.0%, there would be interest expense of $3.3 million.
Our operating and financial flexibility is limited by the terms of the agreements governing our Term A and Term B Loans and the indenture governing our 2014 Debentures.
The loan agreement governing our Term A Loan and Term B Loan and the indenture governing our 2014 Debentures contain financial and other covenants that may limit our ability to, or prevent us from, taking certain actions that we believe are in the best interests of our business and our stockholders. For example, the loan agreement and the indenture contain covenants that limit our ability, among other things, to:
•
incur additional indebtedness;
•
pay dividends or make distributions to our stockholders;
•
repurchase or redeem our stock;
•
make investments;
•
grant liens;
•
make capital expenditures;
•
enter into transactions with our stockholder and affiliates;
•
enter into hedging agreements;
•
sell assets;
•
maintain less than $8.0 million of unrestricted cash;
•
allow consolidated revenue for any fiscal quarter to be less than $10.0 million; and
•
acquire the assets of, or merge or consolidate with, other companies.
A breach of any of these covenants could result in a default under the loan agreement or the indenture or both, in which event our lenders could elect to declare all amounts outstanding to be immediately due and payable. If the lenders require immediate repayment, and we do not have sufficient funds to repay them in full, substantially all of our assets secure our obligations under the Term A Loan, Term B Loan and 2014 Debentures, and assets may be sold to pay those obligations, which could severely harm our business.
Our stockholders will experience significant dilution in connection with the conversion of our 2014 Debentures and our Term B Loan.
As of November 7, 2013, we had outstanding $32.8 million of 2014 Debentures and $9.3 million of Term B Loan, which indebtedness is convertible into shares of our common stock at a price of $4.50 per share and $4.95 per share, respectively. Full conversion of the currently outstanding 2014 Debentures and Term B Loan would result in the issuance of 9,185,606 shares of common stock. The conversion of our 2014 Debentures and Term B Loan could have a significant dilutive impact on the ownership rights of our stockholders.
The holders of our 2014 Debentures can convert their debt into common stock and own a significant percentage of our voting securities, which would give these holders significant influence over us and enable them to act in a manner with which other stockholders may disagree or that is not necessarily in the interests of other stockholders.
As of November 7, 2013, we had outstanding $32.8 million of 2014 Debentures convertible at a price of $4.50 per share into an aggregate of 7,298,372 shares of our common stock. If all of the 2014 Debentures converted into common stock, those

27

shares would represent 12.7% of our outstanding common stock as of November 7, 2013. Some of the holders of our 2014 Debentures also may hold shares of our common stock. If the holders of our 2014 Debentures convert their debt into common stock, they would own a significant percentage of our voting securities and would have significant influence over all matters submitted to the stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. These security holders may have interests that are different from our other stockholders. For example, the holders of the 2014 Debentures may support proposals and actions with which other stockholders may disagree or which are not in their interests. In addition, their combined ownership of common stock and 2014 Debentures could motivate them to support a sale of Vitesse at a price that is not attractive to many other stockholders. Furthermore, the concentration of ownership could delay or prevent a change in control of Vitesse or otherwise discourage a potential acquirer from attempting to obtain control of Vitesse, which in turn could reduce the price of our common stock.
The price of our common stock may fluctuate significantly.
The price of our common stock is volatile and may fluctuate significantly. There can be no assurance as to the prices at which our common stock will trade or that an active trading market in our common stock will be sustained in the future. The market price at which our common stock trades may be influenced by many factors, including:
•
Our operating and financial performance and prospects, including our ability to achieve sustained profitability;
•
The depth and liquidity of the market for our common stock which can impact, among other things, the volatility of our stock price and the availability of market participants to borrow shares;
•
Investor perception of us and the industry in which we operate;
•
The level of research on our Company;
•
Changes in earnings estimates or buy/sell recommendations by analysts;
•
The issuance and sale of additional shares of common stock;
•
General financial and other market conditions; and
•
Domestic and international economic conditions.
In addition, public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock.
Provisions in our organizational documents and Delaware law will make it more difficult for someone to acquire control of us.
Our restated certificate of incorporation, our amended and restated bylaws and the Delaware General Corporation Law contain several provisions that would make more difficult an acquisition of control of us in a transaction not approved by our board of directors. Our restated certificate of incorporation and amended and restated bylaws include provisions such as:
•
The ability of our board of directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;
•
A prohibition on stockholder action by written consent; and
•
A requirement that stockholders provide advance notice of any stockholder nominations of directors or any proposal of new business to be considered at any meeting of stockholders.
In addition to the provisions in our restated certificate of incorporation and amended and restated bylaws, Section 203 of the Delaware General Corporation Law generally provides that a corporation shall not engage in any business combination with any interested stockholder during the three-year period following the time that such stockholder becomes an interested stockholder, unless a majority of the directors then in office approves either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.

28

Our ability to use our net operating losses (“NOLs”) and other tax attributes to offset future taxable income is limited and could be limited further by an ownership change and/or decisions by California and other states to suspend the use of NOLs.
We have significant NOLs and R&D tax credits available to offset our future United States federal and state taxable income. Our ability to utilize our NOLs and other tax attributes are subject to significant limitations under Section 382 of the Internal Revenue Code (and applicable state law) resulting from ownership changes and may in the future be subject to additional limitations under Section 382 if we undergo further ownership changes. Section 382 imposes an annual limitation (based upon our value at the time of the ownership change, as determined under Section 382 of the Internal Revenue Code) on the amount of taxable income a corporation may offset with NOLs. Section 382 also limits our ability to use R&D tax credits. In addition, if the tax basis of our assets exceeded the fair market value of our assets at the time of an ownership change, Section 382 could also limit our ability to use amortization of capitalized R&D and goodwill to offset taxable income for the first five years following an ownership change. Any unused annual limitation may be carried over to later years until the applicable expiration date for the respective NOLs. As a result, our inability to utilize these NOLs, credits or amortization as a result of any ownership changes could adversely impact our operating results and financial condition.
In addition, California and certain states have suspended use of NOLs for certain taxable years and other states are considering similar measures. As a result, we may incur higher state income tax expense in the future. Depending on our future tax position, continued suspension of our ability to use NOLs in states in which we are subject to income tax could have an adverse impact on our operating results and financial condition.
Our success depends on our ability to attract and retain qualified personnel.
A small number of key executive officers manage our business. Their departure could have a material adverse effect on our operations. We believe that our future success will also depend, in large part, on our continued ability to attract and retain highly-qualified technical sales and marketing personnel, design and application engineers, as well as senior management. We believe that there is, and will continue to be, intense competition for qualified personnel in the semiconductor industry as the emerging broadband wireless and wire line communications markets develop, and we cannot assure you that we will be successful in retaining our key personnel or in attracting and retaining highly-qualified manufacturing personnel, technical sales and marketing personnel, design and application engineers, as well as senior management. The loss of the services of one or more of our key employees or our inability to attract, retain and motivate qualified personnel could have a material effect on our ability to operate our business. We do not presently maintain key-man life insurance for any of our key executive officers.
The market price for our common stock has experienced significant price and volume volatility and is likely to continue to experience significant volatility in the future. This volatility may impair our ability to finance strategic transactions with our stock and otherwise harm our business.
Our stock price is likely to experience significant volatility in the future as a result of numerous factors outside our control. Significant declines in our stock price may interfere with our ability to raise additional funds through equity financing or to finance strategic transactions with our stock. We have historically used equity incentive compensation as part of our overall compensation arrangements. The effectiveness of equity incentive compensation in retaining key employees may be adversely impacted by volatility in our stock price. In addition, there may be increased risk of securities litigation following periods of fluctuations in our stock price. Securities class action lawsuits are often brought against companies after periods of volatility in the market price of their securities. These and other consequences of volatility in our stock price which could be exacerbated by the recent worldwide financial crisis could have the effect of diverting management’s attention and could materially harm our business.
The effectiveness of disclosure controls is inherently limited.
We do not expect that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system objectives will be met. The design of a control system must also reflect applicable resource constraints, and the benefits of controls must be considered relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business.

29

ITEM 1B. UNRESOLVED STAFF COMMENTS
None

ITEM 2. PROPERTIES
Our headquarters which includes our principal R&D and sales facilities, is located in Camarillo, California and is leased pursuant to a non-cancellable operating lease with a term that expires on January 31, 2014. The total space occupied in this building is approximately 111,000 square feet. We also lease an additional 64,000 square foot facility in Camarillo (“Calle Carga”), which is leased through December 2015. We will reoccupy and build out the Calle Carga facility upon the expiration of our main Camarillo facility lease in January 2014. We also lease space in additional locations that include domestic and international offices in Austin, Milpitas, New Jersey, Massachusetts, China, Denmark, Germany, India and Taiwan. As of September 30, 2013, we lease total space of approximately 276,000 square feet. Our current space is sufficient to accommodate current operations.

ITEM 3. LEGAL PROCEEDINGS
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 September 30, 2013, the final disposition of these proceedings will not have a material adverse effect on the financial position, results of operations, or liquidity.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

30

PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is listed on the NASDAQ Global Market under the symbol “VTSS.” The table below sets forth, for the periods indicated, the high and low sales prices of our common stock on the NASDAQ Global Market.
 
High
Low
Fiscal Year Ended 2013
 
 
October 1 through December 31, 2012
$
2.48

$
1.75

January 1 through March 31, 2013
2.36

1.84

April 1 through June 30, 2013
2.98

1.96

July 1 through September 30, 2013
3.09

2.46

 
High
Low
Fiscal Year Ended 2012
 
 
October 1 through December 31, 2011
$
2.95

$
2.08

January 1 through March 31, 2012
4.13

2.44

April 1 through June 30, 2012
3.71

2.13

July 1 through September 30, 2012
2.75

1.91

Holders of Record
As of November 29, 2013, there were approximately 1,109 stockholders of record of our common stock, and the closing price of our common stock was $2.94 per share as reported by the NASDAQ Global Market. The number of holders of record of our common stock does not include the number of stockholders whose shares are held in nominee or “street name” accounts through brokers and other institutions.

Dividends
We have never paid cash dividends and presently intend to retain any future earnings for business development. Further, our existing loan agreements limit the payment of dividends without the consent of the lenders.

31

Five-Year Stock Performance Graph
The following performance graph compares the cumulative total stockholder return for our common stock with the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index from market close on the last trading day in September 2008 through the last trading day in September 2013. The graph is based on the assumption that $100 was invested in each of our common stock, the NASDAQ Composite Index, the NASDAQ Stock Market-United States Index and the NASDAQ Electronics Components Index on the last trading day in September 2008. The stock price performance on this graph is not necessarily an indicator of future price performance.
The stock price performance graph depicted below shall not be deemed to be “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”), or otherwise subject to the liabilities of such section, nor shall such graph be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended or the Exchange Act, except as shall be expressly set forth by specific reference in such a filing.





32

ITEM 6. SELECTED FINANCIAL DATA
The table below sets forth selected consolidated financial data for the five years in the period ended September 30, 2013 that has been derived from our audited consolidated financial statements. The information set forth below is not necessarily indicative of results of future operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
 
As of and for the years ended September 30,
 
2013
 
2012
 
2011
 
2010
 
2009
 
(In thousands, except per share data)
Consolidated Statements of Operations Data:
 
 
 
 
 
 
 
 
 
Product revenues
$
101,334

 
$
109,920

 
$
132,742

 
$
165,633

 
$
154,927

Intellectual property revenues
2,439

 
9,563

 
8,225

 
357

 
13,250

Net revenues
103,773

 
119,483

 
140,967

 
165,990

 
168,177

Restructuring and impairment
—

 
(1,424
)
 
3,656

 
854

 
528

Accounting remediation & reconstruction (revenue) expense & litigation costs
—

 
—

 
—

 
73

 
(9,922
)
Goodwill impairment
—

 
—

 
—

 
—

 
191,418

(Loss) income from operations
(15,474
)
 
1,635

 
(10,934
)
 
4,118

 
(179,005
)
Loss from continuing operations
(22,078
)
 
(1,112
)
 
(14,812
)
 
(20,176
)
 
(194,193
)
Income from discontinued operations, net of tax
—

 
—

 
—

 
121

 
71

Net loss
(22,078
)
 
(1,112
)
 
(14,812
)
 
(20,055
)
 
(194,122
)
Fair value adjustment of Preferred Stock - Series B
—

 
—

 
—

 
126

 
—

Net loss available to common stockholders
$
(22,078
)
 
$
(1,112
)
 
$
(14,812
)
 
$
(20,181
)
 
$
(194,122
)
Net (loss) income per share:
 
 
 
 
 
 
 
 
 
Basic and diluted:
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.55
)
 
$
(0.04
)
 
$
(0.61
)
 
$
(0.96
)
 
$
(16.92
)
Discontinued operations
—

 
—

 
—

 
0.01

 
0.01

Net loss per share
$
(0.55
)
 
$
(0.04
)
 
$
(0.61
)
 
$
(0.95
)
 
$
(16.91
)
Fair value adjustment of Preferred Stock-Series B
—

 
—

 
—

 
(0.01
)
 
—

Net loss per common share available to common stockholders
$
(0.55
)
 
$
(0.04
)
 
$
(0.61
)
 
$
(0.96
)
 
$
(16.91
)
Weighted average shares outstanding: basic
40,311

 
25,121

 
24,315

 
21,074

 
11,478

Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and short-term investments
$
68,863

 
$
23,891

 
$
17,318

 
$
38,127

 
$
57,544

Working capital
69,363

 
28,694

 
26,659

 
48,037

 
39,397

Total assets
98,961

 
56,616

 
60,994

 
97,529

 
109,273

Long-term compound embedded derivative liability
—

 
2,899

 
7,796

 
15,476

 
—

Other long-term obligations, including debt
61,157

 
58,947

 
58,107

 
66,824

 
113,162

Total stockholders’ (deficit) equity
$
15,908

 
$
(24,015
)
 
$
(28,459
)
 
$
(21,206
)
 
$
(61,273
)
Fiscal Year 2013
In December 2012, we raised $17.1 million, net of offering costs of $1.6 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, which was a discount to the market price of our common stock.

In June 2013, we raised an additional $37.4 million, net of offering expenses of $2.8 million, from the registered public sale of 18,720,000 shares of common stock at $2.15 per share, which was a discount to the market price of our common stock.
In November 2013, we amended the credit agreement for Term A and B Loans, which amendment extended the maturity dates of the Term A Loan and Term B Loan from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that the Term A and B Loans will bear interest at 9.0% per annum. In addition, in November 2013, we repurchased and cancelled $13.7 million of our 2014 Debentures.

33

Fiscal Year 2012
In the fourth quarter of 2012, we determined that it was unlikely that we would be able to sublease Calle Carga, our secondary Camarillo leased office and warehouse space for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating to a new facility as originally planned. Accordingly, we reversed the lease termination reserve of $1.4 million.
Fiscal Year 2011
On January 18, 2011, we paid $8.0 million against the principal balance of our Senior Term Loan. On February 4, 2011, we exchanged our existing Senior Term Loan for two new term loans (Term Loan A and Term Loan B), each in the principal amount of $9.34 million. As of February 4, 2011 the net carrying amount of the Senior Term Loan was $18.7 million, which included the remaining outstanding principal of $17.0 million, and a payment-in-kind balance of $1.7 million. We recognized a $3.9 million loss on the debt exchange. Included in the loss calculation was the remaining balance of the unamortized costs of $0.6 million on the original Senior Term Loan. In July 2011, we repaid $1.5 million of the Term A Loan.
In fiscal 2011, in order to reduce costs and streamline the product design process, we implemented a planned reduction in workforce in one of our US design centers. We also consolidated our operations at our headquarters in Camarillo, California and implemented a reduction in personnel across multiple departments. In fiscal 2011, we incurred approximately $3.7 million of costs and charges associated with these activities. These activities are presented as restructuring and impairment charges on the consolidated statements of operations.
Fiscal Year 2010
In October 2009, we completed a debt restructuring transaction. The debt restructuring resulted in the conversion of 96.7% of our 2024 Debentures into a combination of cash, common stock, Series B Preferred Stock and 2014 Debentures. With respect to the remaining 3.3% of the 2024 Debentures, we settled our obligations in cash. Additionally, we repaid approximately $5.0 million of our $30.0 million Senior Term Loan, the terms of which were amended as part of the debt restructuring transactions. Under the terms of the debt restructuring transactions, we:
•
Paid $3.6 million in cash to satisfy our obligations to the holders of the 2024 Debentures who did not participate in the transaction;
•
Paid $6.4 million in cash consideration to the holders of the 2024 Debentures who participated in the transaction;
•
Issued $50.0 million in aggregate principal amount of 2014 Debentures to the holders of the 2024 Debentures who participated in the transaction; and
•
Issued to the holders of the 2024 Debentures who participated in the exchange 8,646,811 shares of common stock, and to some of those holders, an aggregate of 771,000 shares of a new Series B Preferred Stock, which are convertible into common stock on a five-to-one basis and have a dividend preference relative to the common stock.
In May 2010, $3.5 million of 2014 Debentures were converted into 777,778 shares of common stock, based on a conversion price of $4.50 per share. We elected to pay the “Make-Whole Amount” (as defined in the Indenture for the 2014 Debentures) in shares of common stock, and on June 7, 2010 we issued 91,753 shares of common stock valued at $6.20 per share, the fair value per share on the date of settlement, in settlement of the Make-Whole Amount.
In October 2009, in an effort to reduce costs and shorten manufacturing time, we eliminated test activities at our headquarters and outsourced testing to a third-party facility. This restructuring plan was approved during October 2009 with implementation efforts starting immediately and full transition of testing to the third-party by the third quarter of the fiscal year ending September 30, 2010. In connection with this restructuring, the Company recorded restructuring charges totaling $0.9 million for severance costs for the fiscal year ended September 30, 2010. This activity is presented as restructuring and impairment charges on the consolidated statements of operations.
Fiscal Year 2009
During the quarter ended December 31, 2008, we determined that our goodwill was fully impaired and recorded an impairment charge of $191.4 million.

34

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included in Part I, Item 1A. of this Annual Report on Form 10-K.

Overview
We are a leading supplier of high-performance ICs that are used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. We design, develop and market a diverse portfolio of high-performance, low-power and cost-competitive networking and connectivity IC solutions. For more than 30 years, we have been a leader in the adoption of new technologies in Carrier and Enterprise networking.
Both bandwidth demands and complexity, driven by the introduction of new content-rich services, the convergence of voice, video and data, and enhanced 4G/LTE mobile networks, have risen dramatically in Carrier and Enterprise networks . Media-rich devices, such as smartphones and game consoles, require increased bandwidth. New Enterprise deployment options, such as Cloud-based services and social media and telepresence, also spur demand. More recently, there is a trend for increased Ethernet deployment within networks used in Industrial and Military networking, automotive transport, and future Smart Grid applications, collectively referred to as IoT.
As a result, Carrier, Enterprise, and increasingly, IoT networks are transitioning to all-IP and packet-based Ethernet networks that can scale in terms of services, bandwidth and capability, while lowering power consumption and acquisition and operations costs. These networks are based on technology that is significantly more sophisticated, service-aware, secure and reliable than traditional Enterprise-grade Ethernet LAN technology. Such networks are built on new technology that is often referred to as “Carrier Ethernet” in Carrier networks and “Converged Enhanced Ethernet” in Enterprise networks.

Realization of Our Transition Strategy
Several years ago, we embarked on the strategic mission of re-inventing Vitesse to take advantage of the dramatic ongoing transformation of our target networking markets. Our objective is to be the leading supplier of high-performance ICs for the global communications infrastructure markets. In an effort to diversify ourselves and provide new opportunities for growth, we re-positioned our R&D teams and invested heavily to enter new markets, develop new products, and penetrate new customers.
To continue to grow our new product revenue, we must win market share in high-growth communications market segments. As with any high technology company, growth opportunities begin with new products. Over the past four years, we introduced many new “platform” products and technologies that will serve as the basis for future product development. From that effort, we began sampling the first of our “new product” portfolio in 2010. Since then, revenue from these new products has grown to over 27% of total revenues, or $28.6 million for fiscal 2013. Our new products have captured design wins at over 200 customers, including market leaders such as Alcatel-Lucent, Cisco, Ericsson, Hewlett Packard, Huawei, Juniper, Samsung, and ZTE. In 2013, we introduced the third-generation of both our switch engine and PHY products. These new products allowed us to significantly increase our served markets in both Carrier and Enterprise networking. We have become the clear choice for meeting our customers’ needs for service delivery, synchronization, security, and signal integrity.
We believe we have effectively and efficiently targeted these high-growth infrastructure markets with substantial R&D investments over the last five years. To optimize our R&D efficiency, we chose to serve large, growing, independent markets which rely increasingly on Ethernet technology: Carrier and Enterprise networks. As we are now three years into the deployment of these new products, we can see that our target markets and products were well chosen. Increasingly, we also now see opportunities for our products and technology within the IoT, where Ethernet-based networks are emerging. There is

35

tremendous synergy and cost savings in terms of R&D effort to provide Ethernet switch and PHY products into this emerging adjacent market.
In bringing our new products to market, our customer engagements and number of design opportunities identified by our sales team have consistently increased since 2010. Early customer adoption of our new products has exceeded our goals. In 2013, design wins for our new products increased by approximately 40% from 2012. While many of these wins represented additional business at our most important customers, what we call “same-store-sales,” many others are wins at new customers, and reflect our growing market share. Because our products our highly complex, it takes our customers 12 to 36 months to go from sample availability to first customer shipment, as customers do the necessary development work to complete and qualify their systems in the network. Since it typically takes an additional 12 to 24 months to ramp into full production, we believe design wins represent a good leading indicator of future revenues.
We augment our product revenues by leveraging our substantial intellectual property portfolio to generate revenues. Our primary focus for intellectual property licensing has been our Gigabit Ethernet CuPHY and switch cores and eFEC technology. We license to non-competing third parties in adjacent or similar markets.

Our accounting policy generally uses the “sell-through” model for sales to our distributors. The “sell-through” model recognizes revenue only upon shipment of the merchandise from our distributor to the final customer. As such, we may have variability in our revenue from quarter-to-quarter as customers have substantial flexibility to reschedule backlog with of our distribution partners as part of the terms and conditions of sale. Our distributor sales were 52.7% , 51.6% and 44.6% of product revenue in 2013, 2012 and 2011, respectively.

In the normal course of business, we regularly assess our product portfolio to ensure it aligns with our strategy. At such time, we may determine to phase-out products, or EOL. When we EOL a product, we typically provide up to six months notice for our customers to make a last-time-buy of product and six additional months to take receipt of that product. The EOL announcement can result in near-term increases in our revenues as customers typically respond to these announcements by making last-time-buys to ensure that they have adequate stock on hand to support their production forecast.
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. Our efforts in operations include reduction in materials costs and cycle times, improved product yields, implementation of programs such as lean manufacturing, and an enhanced customer-centric focus. As a fabless semiconductor company, we outsource the majority of our manufacturing. Our successful management of our supply chain has provided us with competitive materials pricing and effective lead times for the materials we purchase. We have sizable advantages due to lower fixed costs, reduced cycle times, and lower inventory resulting from our outsourcing of almost all of our wafer fabrication and assembly. During periods of strong demand, we could experience longer lead times, difficulties in obtaining capacity, and/or difficulty in meeting commitments for our required deliveries during periods of strong demand. Average margins vary widely within the markets we serve, with the Carrier networking market having the highest average margins and the Enterprise networking market having the lowest average margins. We endeavor to increase margins by providing products that have significant added value relative to our competition. In addition, we have strengthened our cash balances by reducing our inventory every fiscal year since September 30, 2010, resulting in a reduction of $16.6 million over the past three fiscal years.

We have also focused on streamlining our R&D and SG&A organizations reducing expenses almost 25.0% over the past three fiscal years. We leverage top-level consultants to help us achieve short-term design goals while ensuring we maintain our in-house engineering talent to drive our overall corporate objectives.

Critical Accounting Policies and Estimates
Our accounting policies are more fully described in Note 1 of the consolidated financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We base our estimates on historical experience and on various other assumptions that we believe are reasonable in the circumstances. We regularly discuss with our audit committee the basis of our estimates. These estimates could change under different assumptions or conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments.

36

Revenue Recognition
Product Revenues
We recognize product revenue when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is reasonably assured. Delivery occurs when goods are shipped and title and risk of loss transfer to the customer, in accordance with the terms specified in the arrangement with the customer. Revenue recognition is deferred where the earnings process is incomplete.
A substantial 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 prevents 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.
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 revenues from the sale and licensing of our intellectual property, maintenance and support fees and royalty revenue following the sale by our licensees of products incorporating the licensed technology. We recognize revenue from the sale and licensing of our intellectual property when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. The timing of delivery is dependent on, and varies with, the terms of each contract.
Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.
Certain of our agreements may contain maintenance and support obligations. Under such agreements we provide unspecified bug fixes and technical support. No other upgrades, products, or post-contract support are provided. These arrangements may be renewable annually by the customer. 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 intellectual property components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee.
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.

37

Inventory Valuation
Inventories are stated at lower of cost or market and consist of materials, labor, and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly and test, as well as internal overhead. We evaluate inventories for excess quantities and obsolescence. Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. In order to state the inventory at lower of cost or market, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of goods sold in the period the revision is made.
Fair Value
We use different valuation methodologies that use Level 3 inputs to value our Term A and Term B Loans, 2014 Debentures and related compound embedded derivative. The valuation methodologies we use and our assessment of the significance of a particular input to the fair value measurement may produce a fair value that may not be indicative of net realizable value or future fair values. Although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Stock Based Compensation
We account for stock based compensation under ASC Topic 718, Compensation-Stock Compensation, which requires us to record related compensation costs. Calculating the fair value of stock-based compensation awards requires the input of highly subjective assumptions, including the expected life of the awards and expected volatility of our stock price. Expected volatility is a statistical measure of the amount by which a stock price is expected to fluctuate during a period. Our estimates of expected volatilities are based on weighted historical implied volatility. The expected forfeiture rate applied in calculating stock-based compensation cost is estimated using historical data and is updated annually.
The assumptions used in calculating the fair value of stock-based awards involve estimates that require management judgment. If factors change and we use different assumptions, our stock-based compensation expense could change significantly in the future. In addition, if our actual forfeiture rate is different from our estimate, our stock-based compensation expense could change significantly in the future.
Income Taxes
We account for income taxes in accordance with ASC Topic 740, Income Taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, we must make estimates and judgments in determining the provision for taxes for financial statement purposes. These estimates and judgments occur in the calculation of tax credits, benefits, and deductions, and in the calculation of certain tax assets and liabilities that arise from differences in the timing of recognition of revenue and expense for tax and financial statement purposes, as well as the interest and penalties related to uncertain tax positions. Significant changes in these estimates may result in an increase or decrease to our tax provision in a subsequent period. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We must assess the likelihood that we will be able to recover our deferred tax assets. Our valuation allowance against the deferred tax assets is based on our assessments of historical losses and projected operating results in future periods on a “more likely than not” basis. If and when we generate future taxable income in our tax jurisdictions against which these tax assets may be applied, some portion or all of the valuation allowance would be reversed and an increase in net income would consequently be reported in future years.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. If we determine that a tax position will more likely than not be sustained on audit, the second step requires us to estimate and measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as we have to determine the probability of various possible outcomes. We re-evaluate these uncertain tax

38

positions on a quarterly basis. This evaluation is based on factors such as changes in facts or circumstances, changes in tax law, new audit activity, and effectively settled issues. Determining whether an uncertain tax position is effectively settled requires judgment. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision in the period in which a change in judgment occurs.
Litigation

We are party to various claims and lawsuits arising in the normal course of business. We closely monitor these claims and lawsuits and frequently consult with our legal counsel to determine whether they may, when resolved have a material adverse affect on our financial position or results or operations and accrue and/or disclose loss contingencies as appropriate.

Impact 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 audited consolidated financial statements.

39

Results of Operations
The following table sets forth certain consolidated statements of operations data for the periods indicated. The percentages in the table are based on net revenues.
 
September 30,
 
2013
 
2012
 
2011
 
$
 
%
 
$
 
%
 
$
 
%
 
(in thousands, except for percentages)
Net revenues:
 
 
 
 
 
 
 
 
 
 
 
Product revenues
$
101,334

 
97.6
 %
 
$
109,920

 
92.0
 %
 
$
132,742

 
94.2
 %
Intellectual property revenues
2,439

 
2.4
 %
 
9,563

 
8.0
 %
 
8,225

 
5.8
 %
Net revenues
103,773

 
100.0
 %
 
119,483

 
100.0
 %
 
140,967

 
100.0
 %
Costs and expenses:
 

 
 
 
 
 
 
 
 
 
 
Cost of product revenues
46,763

 
45.1
 %
 
46,407

 
38.8
 %
 
53,674

 
38.1
 %
Engineering, research and development
41,927

 
40.4
 %
 
42,713

 
35.7
 %
 
52,990

 
37.6
 %
Selling, general and administrative
30,210

 
29.1
 %
 
29,822

 
25.0
 %
 
41,233

 
29.3
 %
Restructuring and impairment
—

 
—
 %
 
(1,424
)
 
(1.2
)%
 
3,656

 
2.6
 %
Amortization of intangible assets
347

 
0.3
 %
 
330

 
0.3
 %
 
348

 
0.2
 %
Costs and expenses
119,247

 
114.9
 %
 
117,848

 
98.6
 %
 
151,901

 
107.8
 %
(Loss) income from operations
(15,474
)
 
(14.9
)%
 
1,635

 
1.4
 %
 
(10,934
)
 
(7.8
)%
Other expense (income):
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
7,916

 
7.6
 %
 
7,778

 
6.5
 %
 
8,456

 
6.0
 %
Gain on compound embedded derivative
(803
)
 
(0.8
)%
 
(4,897
)
 
(4.1
)%
 
(7,680
)
 
(5.4
)%
Loss on extinguishment of debt
—

 
—
 %
 
—

 
—
 %
 
3,874

 
2.7
 %
Other expense (income), net
39

 
—
 %
 
40

 
—
 %
 
(153
)
 
(0.1
)%
Other expense, net
7,152

 
6.8
 %
 
2,921

 
2.4
 %
 
4,497

 
3.2
 %
Loss before income tax benefit
(22,626
)
 
(21.8
)%
 
(1,286
)
 
(1.1
)%
 
(15,431
)
 
(10.9
)%
Income tax benefit
(548
)
 
(0.5
)%
 
(174
)
 
(0.1
)%
 
(619
)
 
(0.4
)%
Net loss
$
(22,078
)
 
(21.3
)%
 
$
(1,112
)
 
(1.0
)%
 
$
(14,812
)
 
(10.5
)%

40

Fiscal Years Ended September 30, 2013 and 2012
Product Revenues
We sell our products into the following markets: (i) Carrier networking; (ii) Enterprise networking; and (iii) Non-core. The Carrier networking market includes core, metro, edge, and access equipment used for transport, switching, routing, mobile access, and backhaul in service provider networks. The Enterprise networking market covers Ethernet switching and routing equipment used within LANs in SME/SMB networks and Cloud Access services. The Non-core market is comprised of products that have not received additional investment over the last five fiscal years and, as a result, have generally been in decline.
The demand for our products is affected by various factors, including our development and introduction of new products, availability and pricing of competing products, capacity constraints at our suppliers, EOL product decisions, and general economic conditions. Therefore, our revenues for the fiscal years ended 2013 and 2012 may not necessarily be indicative of future revenues.
Product revenue by market is as follows:
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Carrier networking
$
56,306

 
55.6
%
 
$
47,630

 
43.4
%
 
$
8,676

 
18.2
 %
Enterprise networking
43,419

 
42.8
%
 
53,899

 
49.0
%
 
(10,480
)
 
(19.4
)%
Non-core
1,609

 
1.6
%
 
8,391

 
7.6
%
 
(6,782
)
 
(80.8
)%
Product revenues
$
101,334

 
100.0
%
 
$
109,920

 
100.0
%
 
$
(8,586
)
 
(7.8
)%

The increase in Carrier networking revenues is attributable to an almost doubling in sales of our new Ethernet switch products, more than tripling in sales of our new Connectivity products, and increased sales for our SONET/SDH framer products going through EOL. The increases were partially offset by declines in sales from other SONET/SDH products.
The decrease in Enterprise networking revenues is driven by a decrease in sales of our switch fabrics products that had gone through EOL in the prior fiscal year and declines in our mature crosspoint products, partially offset by a more than doubling in sales of our new switch products.
The decrease in Non-core revenues is largely attributable to a decrease of our legacy Fiber Channel PHYs and network processors, some of which had gone through EOL in the prior fiscal year.
In fiscal year 2012, a number of older products went through EOL. Revenue from these EOL products was $15.9 million in fiscal year 2013 as compared to $24.9 million in fiscal year 2012, and we expect these EOL revenues will continue to decline.
We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.

41

Product revenue by product line is as follows:
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Connectivity
$
42,885

 
42.3
%
 
$
52,933

 
48.1
%
 
$
(10,048
)
 
(19.0
)%
Ethernet switching
38,675

 
38.2
%
 
32,607

 
29.7
%
 
6,068

 
18.6
 %
Transport processing
19,774

 
19.5
%
 
24,380

 
22.2
%
 
(4,606
)
 
(18.9
)%
Product revenues
$
101,334

 
100.0
%
 
$
109,920

 
100.0
%
 
$
(8,586
)
 
(7.8
)%

Although revenues for our new Connectivity products increased, Connectivity revenues overall decreased due to the broad-based decline in the networking equipment market, which negatively impacted the demand for our more mature SONET/SDH PHY-based products. In addition, there was a strong decline in our legacy non-core products, particularly Fibre Channel PHYs products.
The increase in Ethernet switching revenues is largely attributable to a doubling in our new switches selling into both the Carrier and Enterprise networking markets. The increase was partially offset by declines in sales of our mature products.
The decrease in Transport processing revenues for fiscal year 2013 compared to fiscal year 2012 is largely attributable to lower sales of switch fabrics, NPUs and optical transport network products that had gone through EOL in the prior fiscal year. These increases were offset by increased revenues for SONET framers, going through EOL in the current fiscal year.

Intellectual Property Revenue
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Intellectual property revenues
$
2,439

 
2.4
%
 
$
9,563

 
8.0
%
 
$
(7,124
)
 
(74.5
)%

Intellectual property revenue includes licenses, royalties, and the sale of patents. For the fiscal year ended September 30, 2012, intellectual property revenue also included the settlement of all future royalties under an existing agreement. Intellectual property revenues decreased in fiscal year 2013 as compared to the prior fiscal year due to a decrease in deliverables of intellectual property. The timing and amounts of intellectual property revenues fluctuate. Expenses associated with intellectual property revenue are included in selling, general and administrative (“SG&A”) expenses.
Net revenue from customers that were equal to or greater than 10% of total net revenues is as follows:
 
September 30,
 
2013
 
2012
Nu Horizons Electronics **
*

 
13.5
%
WPG Holdings**
17.7
%
 
10.7
%
____________________________________________
*
Less than 10% of total net revenues for period indicated.
**
Distributors

42

Net revenue by geographic area is as follows: 
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
United States
$
28,454

 
27.4
%
 
$
41,559

 
34.8
%
 
$
(13,105
)
 
(31.5
)%
Asia Pacific
61,454

 
59.2
%
 
62,260

 
52.1
%
 
(806
)
 
(1.3
)%
EMEA*
13,865

 
13.4
%
 
15,664

 
13.1
%
 
(1,799
)
 
(11.5
)%
Total net revenues
$
103,773

 
100.0
%
 
$
119,483

 
100.0
%
 
$
(15,710
)
 
(13.1
)%
_________________________________________________
*
Europe, Middle East and Africa
Revenue by geographic area is based upon the country of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users. We believe a substantial portion of the products billed 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.

Cost of Product Revenue
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
ti
Amount
 
% of Product Revenues
 
Amount
 
% of Product Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 

Cost of product revenues
$
46,763

 
46.1
%
 
$
46,407

 
42.2
%
 
$
356

 
0.8
%

We use third-parties for wafer fabrication and assembly services. Cost of product 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.
Our cost of product revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our products within their life-cycles. Our cost of product revenues as a percent of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs. Although the overall cost of product revenues did not change, the cost as a percentage of revenues increased in fiscal year 2013 as compared to fiscal year 2012 due to a mix of products that had an overall higher cost.
Engineering, Research and Development
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Engineering, research and development
$
41,927

 
40.4
%
 
$
42,713

 
35.7
%
 
$
(786
)
 
(1.8
)%

R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D also includes costs of mask tooling, which we fully expense in the period, and electronic design

43

automation (“EDA”) tools, software licensing contracts, subcontracting and fabrication costs, depreciation and amortization, and overhead including facilities expenses.
The level of R&D expense will vary from period-to-period, depending on timing of development projects and the purchase of masks aligned to those projects. The level of R&D expense as a percentage of net revenues will vary, depending, in part, on the level of net revenues. Our R&D 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 for fiscal year 2013 compared to fiscal year 2012 is largely attributable to lower overhead testing expenses of $1.5 million and other expenses of $0.7 million, partially offset by higher employee compensation and contractor expenses of $1.4 million for providing new product development and design services.

Selling, General and Administrative
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Selling, general and administrative
$
30,210

 
29.1
%
 
$
29,822

 
25.0
%
 
$
388

 
1.3
%

SG&A expense consists primarily of compensation expense, legal and other professional fees, facilities expenses, outside labor, and communication expense, and is comparable to the prior fiscal year.
In fiscal year 2013, our SG&A compensation expense decreased by $1.6 million. Due to the relocation of our main Camarillo facility to an adjacent facility, we incurred $0.9 million in asset retirement expenses as well as increased rent of $0.7 million. In fiscal year 2012, we collected $1.9 million of accounts receivable that was written off as uncollectible in fiscal year 2011. Fiscal year 2012 also included a $1.3 million write-down of an intangible asset.
Restructuring and Impairment Charges
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Restructuring and impairment
$
—

 
—
%
 
$
(1,424
)
 
(1.2
)%
 
$
1,424

 
(100.0
)%

During fiscal year 2011 we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting an adjacent leased facility. In the fourth quarter of fiscal year 2012, we determined that it was unlikely we would be able to sublease the exited property for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon expiration of our main Camarillo facility lease in January 2014, instead of locating to a new facility as originally planned. Accordingly, we reversed the remaining lease termination reserve of $1.4 million.
Interest Expense, Net
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Interest expense, net
$
7,916

 
7.6
%
 
$
7,778

 
6.5
%
 
$
138

 
1.8
%

44

Net interest expense is comprised of cash interest expense, amortization of debt discount, premium, and debt issuance costs, net of interest income.
Net interest expense for the fiscal year 2013 is comparable to the prior fiscal year.

Gain on Compound Embedded Derivative
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Gain on compound embedded derivative
$
(803
)
 
(0.8
)%
 
$
(4,897
)
 
(4.1
)%
 
$
4,094

 
(83.6
)%

The gain on our compound embedded derivative related to our 2014 Debentures is primarily generated by the decrease in the price of our underlying common stock during those periods.
The compound embedded derivative included in our 2014 Debentures required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative is comprised of the conversion option and a make-whole payment for foregone interest if the holder converts the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock. A final valuation was completed on October 30, 2012, resulting in gain of $0.8 million due to the change in fair value.

Income Tax Benefit
 
September 30,
 
 
 
 
 
2013
 
2012
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Income tax benefit
$
(548
)
 
(0.5
)%
 
$
(174
)
 
(0.1
)%
 
$
(374
)
 
214.9
%

Our effective tax rate was 2.4% for the fiscal year ended September 30, 2013 compared to 13.6% for the comparable period in the prior fiscal year. Our income tax benefit is primarily impacted by foreign taxes, a refund of withholding taxes on foreign income that would have been creditable against United States income taxes, and certain nondeductible interest and share based expenses. The income tax benefit is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions’ deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.

45

Fiscal Years Ended September 30, 2012 and 2011
Product Revenues
Product revenue by market is as follows:
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Carrier networking
$
47,630

 
43.4
%
 
$
61,685

 
46.5
%
 
$
(14,055
)
 
(22.8
)%
Enterprise networking
53,899

 
49.0
%
 
64,754

 
48.8
%
 
(10,855
)
 
(16.8
)%
Non-core
8,391

 
7.6
%
 
6,303

 
4.7
%
 
2,088

 
33.1
 %
Product revenues
$
109,920

 
100.0
%
 
$
132,742

 
100.0
%
 
$
(22,822
)
 
(17.2
)%
The decrease in Carrier networking revenues is largely attributable to a broad-based weakness in our end customer markets for Carrier networking, particularly a decline in our SONET/SDH products, including framers, EoS mappers, and FTTH products. The declines were partially offset by increases in transport products going through EOL and in our newer technologies and products, particularly in Ethernet Cu PHYs.
The decrease in Enterprise networking revenues is driven by declines in 1 Gigabit Ethernet switch and PHY products selling into low-end SME/SMB applications due to overall weak market conditions, primarily in the United States and Asia. The decrease was partially offset by an increase in Enterprise processing due to revenues from switch fabrics going through EOL and an increase in new products.
The increase in Non-core revenues is largely attributable to increased sales of our mature network processors and Fibre Channel products as some of these products moved into EOL.
Revenue from EOL products totaled $24.9 million and $6.3 million in the fiscal year ended September 30, 2012 and 2011, respectively. Product phase-outs are part of our normal course of business, and we will continue this practice in the future. We expect revenues from EOL products to decline in fiscal year 2013. However, we cannot predict the degree and/or timing of the impact of product phase-out on future revenues. From time-to-time, upon customer request or due to a change in our product strategy, we may decide to resume producing a part we previously phased-out.
We also classify our product revenues based on our three product lines: (i) Connectivity; (ii) Ethernet switching; and (iii) Transport processing.
Product revenue by product line is as follows:
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Product
Revenues
 
Amount
 
% of Product
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
Connectivity
$
52,933

 
48.1
%
 
$
67,734

 
51.0
%
 
$
(14,801
)
 
(21.9
)%
Ethernet switching
32,607

 
29.7
%
 
37,940

 
28.6
%
 
(5,333
)
 
(14.1
)%
Transport processing
24,380

 
22.2
%
 
27,068

 
20.4
%
 
(2,688
)
 
(9.9
)%
Product revenues
$
109,920

 
100.0
%
 
$
132,742

 
100.0
%
 
$
(22,822
)
 
(17.2
)%
The decrease in Connectivity revenues is largely attributable to the broad-based decline in the networking equipment market, which negatively impacted the demand for our more mature products, particularly SONET/SDH-based products.
The decrease in Ethernet switching revenues is largely attributable to declines in our Gigabit Ethernet Cu PHYs selling primarily into the Enterprise market, and Ethernet MAC products selling into both the Carrier and Enterprise markets. The decrease was partially offset by sales of our new Cu PHY products to the Carrier market.

46

The decrease in Transport processing revenues for fiscal year 2012 compared to fiscal year 2011 is largely attributable to the broad-based market decline for our mature SONET/SDH framers and mappers, offset by increased sales of switch fabric products to customers increasing inventories of these products as they approach EOL.

Intellectual Property Revenue
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Intellectual property revenues
$
9,563

 
8.0
%
 
$
8,225

 
5.8
%
 
$
1,338

 
16.3
%
Intellectual property includes licenses, royalties, and patents, and for the year ended September 30, 2012 also included the settlement of all future royalties under an existing agreement.
Net revenue from customers that were equal to or greater than 10% of total net revenues is as follows:
 
September 30,
 
2012
 
2011
Nu Horizons Electronics **
13.5
%
 
20.6
%
WPG Holdings**
10.7
%
 
*

Huawei
*

 
10.3
%
________________________________________________
* Less than 10% of total net revenues for period indicated.
** Distributor

Net revenue by geographic area is as follows: 
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
United States
$
41,559

 
34.8
%
 
$
51,698

 
36.7
%
 
$
(10,139
)
 
(19.6
)%
Asia Pacific
62,260

 
52.1
%
 
63,923

 
45.3
%
 
(1,663
)
 
(2.6
)%
EMEA*
15,664

 
13.1
%
 
25,346

 
18.0
%
 
(9,682
)
 
(38.2
)%
Total net revenues
$
119,483

 
100.0
%
 
$
140,967

 
100.0
%
 
$
(21,484
)
 
(15.2
)%
_________________________________________________
*Europe, Middle East and Africa

Cost of Product Revenues
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Product Revenues
 
Amount
 
% of Product Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 

Cost of product revenues
$
46,407

 
42.2
%
 
$
53,674

 
40.4
%
 
$
(7,267
)
 
(13.5
)%
The overall decrease in cost of product revenues is largely attributable to lower product revenues, slightly offset by a mix of products that had an overall higher cost. Our cost of product revenues is affected by various factors, including product mix, volume, and provisions for excess and obsolete inventories, material costs, manufacturing efficiencies, and the position of our

47

products within their life-cycles. Our cost of product revenues as a percent of net product revenues is affected by these factors, as well as customer mix, volume, pricing, and competitive pricing programs. 

Engineering, Research and Development
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Engineering, research and development
$
42,713

 
35.7
%
 
$
52,990

 
37.6
%
 
$
(10,277
)
 
(19.4
)%
The decrease in R&D expense for fiscal year 2012 compared to fiscal year 2011 is largely attributable to lower compensation and facility expense of $4.9 million resulting from our consolidation of multiple locations and shift in activities to lower-cost areas, lower mask and test wafer expense of $1.9 million, and lower EDA tools expense of $2.0 million.
Selling, General and Administrative
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Selling, general and administrative
$
29,822

 
25.0
%
 
$
41,233

 
29.3
%
 
$
(11,411
)
 
(27.7
)%
The decrease in SG&A expense for fiscal year 2012 compared to fiscal year 2011 is largely attributable to lower compensation related expenses of $3.6 million, a $4.1 million change in bad debt expense due to successful collection of $1.9 million of the $2.2 million of bad debts reserved in the fourth quarter of fiscal year 2011, $1.4 million in lower legal and accounting fees, and lower facility and depreciation expenses of $1.2 million due to our consolidation of facilities. Partially offsetting the reductions was a $1.3 million intangible asset write-down expense in fiscal year 2012 .
Restructuring and Impairment Charges
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Restructuring and impairment
$
(1,424
)
 
(1.2
)%
 
$
3,656

 
2.6
%
 
$
(5,080
)
 
(138.9
)%
During fiscal year 2011 we consolidated design activities and consolidated our Camarillo operations into a single facility, exiting an adjacent leased facility. In connection with these activities we incurred approximately $3.7 million of restructuring charges.
In the fourth quarter of fiscal year 2012, we determined that it was unlikely we would be able to sublease the exited property for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon expiration of our main Camarillo facility lease in January 2014, instead of locating to a new facility as originally planned. Accordingly, we reversed the remaining lease termination reserve of $1.4 million.
Interest Expense, Net
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 
 
 
Interest expense, net
$
7,778

 
6.5
%
 
$
8,456

 
6.0
%
 
$
(678
)
 
(8.0
)%
 

48

The decrease in net interest expense for fiscal year 2012 compared to fiscal year 2011 was primarily due to an $8.0 million pay-down on the Senior Term Loan in January 2011, the restructuring of the Senior Term Loan on February 4, 2011, and the $1.5 million principal payment on the Term A Loan in July 2011.
Gain on Compound Embedded Derivative
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Gain on compound embedded derivative
$
(4,897
)
 
(4.1
)%
 
$
(7,680
)
 
(5.4
)%
 
$
2,783

 
(36.2
)%
The gain on our compound embedded derivative related to our 2014 Debentures is primarily generated by the decrease in the price of our underlying common stock during those periods.

Loss on Extinguishment of Debt
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Loss on extinguishment of debt
$
—

 
—
%
 
$
3,874

 
2.7
%
 
$
(3,874
)
 
(100.0
)%

A loss on extinguishment of debt for fiscal year 2011 was a result of the extinguishment of the Senior Term Loan at fair value, in which we recognized a $3.9 million loss for the difference between the aggregate fair values of Term A and B Loans plus additional amounts and fees paid to the noteholders compared to the net carrying value of the Senior Term Loan.
Income Tax Benefit
 
September 30,
 
 
 
 
 
2012
 
2011
 
 
 
 
 
Amount
 
% of Net
 Revenues
 
Amount
 
% of Net
 Revenues
 
Change
 
%
Change
 
(in thousands, except percentages)
 
 

 
 

Income tax benefit
$
(174
)
 
(0.1
)%
 
$
(619
)
 
(0.4
)%
 
$
445

 
(71.9
)%
Our effective tax benefit for fiscal year 2012 was 13.6% . Our income tax benefit is primarily impacted by foreign taxes, withholding taxes on foreign income that are creditable against United States income taxes, the removal of unrecognized tax benefits, and certain nondeductible interest and share based expenses. The income tax benefit is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions' deferred tax assets as such balances were more
likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence. Our effective tax benefit for fiscal year 2011 was 4.0% .

Financial Condition and Liquidity
Cash Flow Analysis

49

Cash increased to $68.9 million at September 30, 2013, from $23.9 million at September 30, 2012 and from $17.3 million at September 30, 2011. Our cash flows from operating, investing and financing activities are summarized as follows: 
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Net cash (used in) provided by operating activities
$
(9,119
)
 
$
7,072

 
$
(7,211
)
Net cash used in investing activities
(1,492
)
 
(1,602
)
 
(3,457
)
Net cash provided by (used in) financing activities
55,583

 
1,103

 
(10,141
)
Net increase (decrease) in cash
44,972

 
6,573

 
(20,809
)
Cash at beginning of period
23,891

 
17,318

 
38,127

Cash at end of period
$
68,863

 
$
23,891

 
$
17,318


Net Cash (Used In) Provided By Operating Activities
During the fiscal year ended September 30, 2013, cash used in operating activities totaled $9.1 million. Cash increased $1.9 million from operating with lower inventory levels and prepaid and other assets, partially offset by $0.4 million from higher receivables. Cash also increased by $3.1 million due to increased accounts payable and deferred revenue due to higher purchases from distributors, which was offset by $0.2 million from lower accrued liabilities.
Inventory decreased $1.4 million from $12.1 million at September 30, 2012 to $10.7 million at September 30, 2013 due to ongoing efforts to ensure purchases align with production and efforts to manage excess inventory. Accounts payable, accrued liabilities and other liabilities increased by $1.6 million from $18.5 million at September 30, 2012 to $20.1 million at September 30, 2013 due to the timing of payments to our vendors and other service providers.
During the fiscal year ended September 30, 2012, cash provided by operating activities totaled $7.1 million. Excluding changes in working capital, cash generated by operations totaled $2.2 million. Cash increased $8.8 million from operating with lower inventory levels and $0.9 million from operating with lower accounts receivable, prepaid and other assets. These increases were partially offset by $1.9 million cash used to pay down accounts payable, accrued expenses and other liabilities, and $3.0 million related to a decrease in deferred revenue due to lower purchases from distributors.
Inventory decreased $8.8 million from $20.9 million at September 30, 2011 to $12.1 million at September 30, 2012 due to ongoing efforts to ensure purchases align with production and concerted efforts to manage excess inventory. Accounts payable, accrued liabilities and other liabilities decreased by $3.1 million from $21.6 million at September 30, 2011 to $18.5 million at September 30, 2012 due to the timing of payments to our vendors and other service providers and non-cash restructuring gain.
During the fiscal year ended September 30, 2011, cash used in operating activities totaled $7.2 million. Excluding changes in working capital, cash used to fund our losses totaled $6.0 million. We also used $9.6 million to pay down our accounts payable and accrued liabilities and $3.0 million related to a decrease in deferred revenue due to lower purchases from distributors. These uses were partially offset by the generation of cash from the collection of accounts receivable of $4.0 million and operating with lower inventory levels of $6.4 million.
Accounts receivable decreased $4.0 million from $15.8 million at September 30, 2010 to $9.6 million at September 30, 2011. The decrease in accounts receivable was primarily due to lower sales during the year ended September 30, 2011 compared to the same period in the prior fiscal year, as well as a $2.2 million reserve for potential bad debt. Inventory decreased $6.4 million from $27.3 million at September 30, 2010 to $20.9 million at September 30, 2011. Due to positive changes in the availability of materials, we decreased purchasing in fiscal year 2011.
Accounts payable and accrued expenses decreased by $9.8 million from $29.5 million at September 30, 2010 to $19.7 million at September 30, 2011 due to a reduction in purchases from our suppliers as industry-wide material shortages eased, as well as the timing of payments to our vendors and other service providers, and a payment of $3.0 million in settlement of litigation with the SEC in the second quarter of fiscal year 2011.
Net Cash Used In Investing Activities

50

Investing activities used $1.6 million for capital expenditures and payments under licensing agreements, partially offset by $0.2 million of proceeds from the sale of fixed assets in fiscal year 2013. In 2012 and 2011 investing activities used $1.7 million and $3.5 million, respectively, for capital expenditures and payments under licensing agreements.
Net Cash Used In Financing Activities
Financing activities provided $55.6 million in cash in fiscal year 2013, primarily due to the sale of common stock. Proceeds from the sale of common stock totaled $54.5 million and were offset by $0.6 million in cash used for the repurchase of restricted stock units for payroll taxes paid on behalf of employees. Financing activities provided $1.1 million in cash in fiscal year 2012, primarily for the repurchase and retirement of restricted stock units for payroll taxes. Financing activities used $10.1 million in cash in fiscal year 2011, primarily for a principal payment of $8.0 million on the Senior Term loan, $1.5 million payment of our Term A Loan, and $0.6 million for the repurchase of restricted stock units for payroll taxes paid on behalf of employees.

Capital Resources, including Long-Term Debt, Contingent Liabilities and Operating Leases
Prospective Capital Needs
Our principal sources of liquidity are our existing cash, cash generated from product sales, and cash generated from the sales or licensing of our intellectual property. Our cash totaled $68.9 million at September 30, 2013. Our working capital at September 30, 2013 was $69.4 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 that have improved our operating expense structure. We will continue to perform additional actions, as necessary. Our ability to maintain, or increase, current revenue levels to sustain profitability will depend, in part, on demand for our products. We believe that our existing cash, along with cash expected to be generated from product sales and the sale or licensing of our intellectual property, and the careful management of working capital requirements, will be sufficient to fund our operations and R&D efforts, anticipated capital expenditures, working capital, and other financing requirements for the next 12 months. In order to increase our working capital, we may seek to obtain additional debt or equity financing. However, we cannot assure you that such financing will be available to us on favorable terms, or at all, particularly in light of recent economic conditions in the capital markets.
Our long-term debt is comprised of our Term A and B Loans and 2014 Debentures. On November 5, 2013 we amended the credit agreement for the Term A and B Loans (the “Amendment”). The Amendment extends the maturity dates of each of outstanding Term A and Term B Loans from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016 and also provides that the Term A and B Loans will each bear interest in cash at 9.0% per annum payable quarterly in arrears. The Amendment also provides us with a right to optionally prepay the Term A and B Loans in whole or in part subject to a prepayment fee and the right, so long as no event of default exists under the credit agreement for the Term A and Term B Loans, to purchase, repay, redeem or defease any or all of the 2014 Debentures. On November 5, 2013, we repurchased $13.7 million principal amount of our 2014 Debentures, leaving $32.8 million principal amount of 2014 Debentures outstanding. We will continue to consider opportunistically repurchasing additional debentures ahead of their maturity.
We have a Form S-3 universal shelf registration statement on file with the SEC. The universal shelf registration statement on Form S-3 permits Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million. As of September 30, 2013, we raised a total of $58.8 million in gross proceeds from the sale of 29,371,280 shares of our common stock, leaving approximately $16.2 million available pursuant to the Form S-3. The Form S-3 will expire in accordance with applicable SEC rules on December 27, 2014. However, we expect to file an amendment to the Form S-3 (or to file another Form S-3) in the first quarter of fiscal 2014 that will permit Vitesse to sell, in one or more public offerings, shares of our common stock, shares of preferred stock or debt securities, or any combination of such securities, for proceeds in an aggregate amount of up to $75.0 million.

51

Contractual Obligations
Our significant contractual obligations as of September 30, 2013 are as follows:
 
Payment Obligations by Fiscal Year
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
(in thousands)
Convertible subordinated debt (1)
$
—

 
$
46,493

 
$
—

 
$
—

 
$
—

 
$
—

 
$
46,493

Term A Loan (2)
—

 
—

 
7,857

 
—

 
—

 
—

 
7,857

Term B Loan (3)
—

 
—

 
9,342

 
—

 
—

 
—

 
9,342

Loan interest (4)
4,904

 
3,092

 
1,771

 
—

 
—

 
 
 
9,767

Operating leases (5)
2,068

 
1,128

 
199

 
—

 
—

 
—

 
3,395

Software licenses (6)
8,147

 
6,689

 
2,800

 
2,800

 
2,800

 
—

 
23,236

Inventory and other purchase obligations (7)
10,652

 
798

 
60

 
60

 
—

 
—

 
11,570

Total
$
25,771

 
$
58,200

 
$
22,029

 
$
2,860

 
$
2,800

 
$
—

 
$
111,660

________________________________________________
(1)
2014 Debentures represents amounts due for our 8.0% convertible debentures due October 2014.
(2)
Term A Loan represents amounts due for our 10.5% fixed rate senior notes due August 31, 2016, which bear interest at 9.0% effective November 6, 2013.
(3)
Term B Loan represents amounts due for our 8.0% fixed rate senior notes due August 31, 2016, which bear interest at 9.0% effective November 6, 2013.
(4)
Interest payable for 2014 Debentures through 2015 and Term A and Term B Loans through 2016.
(5)
We lease facilities under non-cancellable operating lease agreements that expire at various dates through 2016.
(6)
Software license commitments represent non-cancellable licenses of technology from third-parties used in the development of our products. 
(7)
Inventory and other purchase obligations represent non-cancellable purchase commitments. For purposes of the table above, inventory and other purchase obligations are defined as agreements that are enforceable and legally binding and that specify all significant terms. Our purchase orders are based on our current manufacturing needs and are typically fulfilled by our vendors within a relatively short time. Other purchase commitments may be for longer periods and are dictated by contractual terms.
Off-Balance Sheet Arrangements
At September 30, 2013, we had no material off-balance sheet arrangements, other than operating leases.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices. Our market risk exposure is solely a result of fluctuations in foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.
Interest Rate Risk
Our Term A and B Loans and 2014 Debentures bear fixed interest rates, and therefore, would not be subject to interest rate risk.
Foreign Currency Exchange Risk
We conduct business in certain foreign markets, primarily in the EU and Asia. Our primary exposure to foreign currency risk relates to investments in foreign subsidiaries that transact business in a functional currency other than the United States dollar,

52

primarily the Euro, Danish Kroner, Taiwanese Dollar, Chinese Renminbi and Indian Rupee. We primarily incur research and development, sales and customer support and administrative expenses in these foreign currencies. All of our sales are denominated in United States dollars, and we are therefore subject to limited foreign currency exchange rate risks as a result of commercial operations in Europe and Asia. Fluctuations in the United States dollar exchange rate for Euro, Danish Kroner, Taiwanese Dollar, Chinese Renminbi, and Indian Rupee could result in increased or decreased costs for commercial operations in Europe and Asia. Had exchange rates of these foreign currencies been 10% higher or lower relative to the United States dollar during 2013, total R&D and SG&A expenses would have been approximately $2.0 million higher or lower.
A relatively small amount of our monetary assets and liabilities are denominated in foreign currencies. The impact on these assets and liabilities from fluctuations in related foreign currencies relative to the United States dollar would not have had a material impact on our 2013 results of operations.
We outsource our wafer manufacturing, assembly and testing, warehousing and shipping operations to third parties in foreign jurisdictions pursuant to short-term contracts that allow for changes in the fees we are charged for these services. While the expenses related to these services are denominated in United States dollars, if the value of the United States dollar decreases relative to the currencies of the countries in which such contractors operate, the prices we are charged for their services may increase. Fluctuations in currency exchange rates could affect our business in the future.
Currently, we have not implemented any hedging strategies to mitigate risks related to the impact of fluctuations in currency exchange rates.

53

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
 
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements:
 
Consolidated Balance Sheets at September 30, 2013 and 2012
Consolidated Statements of Operations for the Years Ended September 30, 2013, 2012 and 2011
Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended September 30, 2013, 2012 and 2011
Consolidated Statements of Cash Flows for the Years Ended September 30, 2013, 2012 and 2011
Notes to Consolidated Financial Statements
Schedule II Valuation and Qualifying Accounts
 

54

Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders
Vitesse Semiconductor Corporation
Camarillo, California
We have audited the accompanying consolidated balance sheets of Vitesse Semiconductor Corporation (Company) as of September 30, 2013 and 2012 and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 2013. In connection with our audits of the financial statements, we have also audited the financial statement schedule listed in the accompanying index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Vitesse Semiconductor Corporation at September 30, 2013 and 2012, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2013, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Vitesse Semiconductor Corporation's internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated December 5, 2013 expressed an unqualified opinion thereon.


/s/ BDO USA, LLP
Los Angeles, California
December 5, 2013

55

VITESSE SEMICONDUCTOR CORPORATION
CONSOLIDATED BALANCE SHEETS
 
September 30,
2013
 
September 30,
2012
 
(in thousands, except par value)
ASSETS
 

 
 

Current assets:
 

 
 

Cash
$
68,863

 
$
23,891

Accounts receivable, net
9,807

 
9,403

Inventory, net
10,692

 
12,060

Prepaid expenses and other current assets
1,897

 
2,125

Total current assets
91,259

 
47,479

Property, plant and equipment, net
3,107

 
3,832

Other intangible assets, net
1,170

 
1,175

Other assets
3,425

 
4,130

 
$
98,961

 
$
56,616

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
7,436

 
$
5,726

Accrued expenses and other current liabilities
12,245

 
12,188

Deferred revenue
2,215

 
871

Total current liabilities
21,896

 
18,785

Other long-term liabilities
407

 
574

Long-term debt, net
16,366

 
15,852

Compound embedded derivative
—

 
2,899

Convertible subordinated debt, net
44,384

 
42,521

Total liabilities
83,053

 
80,631

Commitments and contingencies, See notes 11 and 12


 


Stockholders' equity (deficit):
 

 
 

Preferred stock, $0.01 par value: 10,000 shares authorized; Series B Non Cumulative, Convertible, nil and 135 shares outstanding at September 30, 2013 and 2012, respectively
—

 
1

Common stock, $0.01 par value: 250,000 shares authorized; 57,545 and 25,812 shares outstanding at September 30, 2013 and 2012, respectively
575

 
258

Additional paid-in-capital
1,891,661

 
1,829,976

Accumulated deficit
(1,876,328
)
 
(1,854,250
)
Total stockholders' equity (deficit)
15,908

 
(24,015
)
 
$
98,961

 
$
56,616

 
See accompanying notes to consolidated financial statements.


56

VITESSE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands, except per share data)
Net revenues:
 

 
 

 
 
Product revenues
$
101,334

 
$
109,920

 
$
132,742

Intellectual property revenues
2,439

 
9,563

 
8,225

Net revenues
103,773

 
119,483

 
140,967

Costs and expenses:
 

 
 
 
 
Cost of product revenues
46,763

 
46,407

 
53,674

Engineering, research and development
41,927

 
42,713

 
52,990

Selling, general and administrative
30,210

 
29,822

 
41,233

Restructuring and impairment
—

 
(1,424
)
 
3,656

Amortization of intangible assets
347

 
330

 
348

Costs and expenses
119,247

 
117,848

 
151,901

(Loss) income from operations
(15,474
)
 
1,635

 
(10,934
)
Other expense (income):
 

 


 


Interest expense, net
7,916

 
7,778

 
8,456

Gain on compound embedded derivative
(803
)
 
(4,897
)
 
(7,680
)
Loss on extinguishment of debt
—

 
—

 
3,874

Other expense (income), net
39

 
40

 
(153
)
Other expense, net
7,152

 
2,921

 
4,497

Loss before income tax benefit
(22,626
)
 
(1,286
)
 
(15,431
)
Income tax benefit
(548
)
 
(174
)
 
(619
)
Net loss
$
(22,078
)
 
$
(1,112
)
 
$
(14,812
)
Net loss per common share - basic and diluted
$
(0.55
)
 
$
(0.04
)
 
$
(0.61
)
Weighted average common shares outstanding - basic and diluted
40,311

 
25,121

 
24,315

 
See accompanying notes to consolidated financial statements.


57

VITESSE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) 
 
 
Preferred Stock
 
Common Stock
 
Additional
Paid-in-Capital
 
Accumulated Deficit
 
Total Vitesse Semiconductor Corporation Stockholders' Equity (Deficit)
(in thousands)
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at September 30, 2010
 
186

 
$
2

 
23,987

 
$
240

 
$
1,816,796

 
$
(1,838,326
)
 
$
(21,288
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
(14,812
)
 
(14,812
)
Compensation expense related to stock options, awards and ESPP
 
—

 
—

 
—

 
—

 
3,152

 
—

 
3,152

Residual value allocated to the equity conversion feature
 
—

 
—

 
—

 
—

 
2,490

 
—

 
2,490

Premium related to Term B Loan issued in debt exchange
 
—

 
—

 
—

 
—

 
2,572

 
—

 
2,572

Conversion of Series B Preferred Shares
 
(51
)
 
(1
)
 
255

 
3

 
(2
)
 
—

 
—

Release of restricted stock units
 
—

 
—

 
335

 
3

 
(3
)
 
—

 
—

Repurchase and retirement of restricted stock units for payroll taxes
 
—

 
—

 
(106
)
 
(1
)
 
(572
)
 
—

 
(573
)
Balance at September 30, 2011
 
135

 
1

 
24,471

 
245

 
1,824,433

 
(1,853,138
)
 
(28,459
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
(1,112
)
 
(1,112
)
Compensation expense related to stock options, awards and ESPP
 
—

 
—

 
—

 
—

 
4,442

 
—

 
4,442

Issuance of common stock upon exercise of stock options
 
—

 
—

 
6

 
—

 
16

 
—

 
16

Issuance of shares under ESPP
 
—

 
—

 
821

 
8

 
1,729

 
—

 
1,737

Release of restricted stock units
 
—

 
—

 
721

 
7

 
(7
)
 
—

 
—

Repurchase and retirement of restricted stock units for payroll taxes
 
—

 
—

 
(207
)
 
(2
)
 
(637
)
 
—

 
(639
)
Balance at September 30, 2012
 
135

 
1

 
25,812

 
258

 
1,829,976

 
(1,854,250
)
 
(24,015
)
Net loss
 
—

 
—

 
—

 
—

 
—

 
(22,078
)
 
(22,078
)
Compensation expense related to stock options, awards and ESPP
 
—

 
—

 
—

 
—

 
4,396

 
—

 
4,396

Issuance of common stock upon exercise of stock options
 
—

 
—

 
9

 
—

 
20

 
—

 
20

Issuance of shares under ESPP
 
—

 
—

 
953

 
9

 
1,657

 
—

 
1,666

Issuance of common stock, net of offering costs
 
—

 
—

 
29,371

 
294

 
54,147

 
—

 
54,441

Conversion of Series B Preferred Shares
 
(135
)
 
(1
)
 
674

 
7

 
(6
)
 
—

 
—

Release of restricted stock units
 
—

 
—

 
1,045

 
10

 
(10
)
 
—

 
—

Repurchase and retirement of restricted stock units for payroll taxes
 
—

 
—

 
(319
)
 
(3
)
 
(615
)
 
—

 
(618
)
Reclassification of compound embedded derivative liability to additional paid-in-capital
 
—

 
—

 
—

 
—

 
2,096

 
—

 
2,096

Balance at September 30, 2013
 
—

 
$
—

 
57,545

 
$
575

 
$
1,891,661

 
$
(1,876,328
)
 
$
15,908

 
See accompanying notes to consolidated financial statements.


58

VITESSE SEMICONDUCTOR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Years Ended September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Cash flows (used in) provided by operating activities:
 

 
 

 
 
Net loss
$
(22,078
)
 
$
(1,112
)
 
$
(14,812
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 

 
 

 
 

Depreciation and amortization
2,375

 
2,963

 
3,628

Stock-based compensation
4,396

 
4,442

 
3,152

Change in fair value of compound embedded derivative liability
(803
)
 
(4,897
)
 
(7,680
)
Deferred income taxes
156

 
(1,537
)
 
—

Allowance for doubtful accounts
—

 
—

 
2,212

Restructuring charges
—

 
(1,424
)
 
—

Loss on asset impairment
—

 
1,324

 
1,187

Gain on disposal of assets
(153
)
 
—

 
—

Loss on extinguishment of debt, net
—

 
—

 
3,794

Interest paid in kind
—

 
—

 
415

Amortization of debt issuance costs
272

 
272

 
279

Amortization of debt discounts
2,552

 
2,363

 
2,037

Accretion of debt premiums
(171
)
 
(157
)
 
(188
)
Change in operating assets and liabilities:
 
 
 

 
 

Accounts receivable
(404
)
 
188

 
3,962

Inventory
1,368

 
8,797

 
6,416

Prepaids and other assets
535

 
739

 
1,074

Accounts payable
1,710

 
528

 
(8,018
)
Accrued expenses and other current liabilities
(218
)
 
(2,410
)
 
(1,621
)
Deferred revenue
1,344

 
(3,007
)
 
(3,048
)
Net cash (used in) provided by operating activities
(9,119
)
 
7,072

 
(7,211
)
Cash flows used in investing activities:
 

 
 

 
 
Capital expenditures
(1,306
)
 
(808
)
 
(3,337
)
Payments under licensing agreements
(342
)
 
(867
)
 
(120
)
Proceeds from sale of fixed assets
156

 
73

 
—

Net cash used in investing activities
(1,492
)
 
(1,602
)
 
(3,457
)
Cash flows provided by (used in) financing activities:
 

 
 

 
 

Proceeds from the exercise of stock options and issuances of shares under ESPP
1,686

 
1,753

 
—

Net proceeds from the sale of common stock
54,520

 
—

 
—

Payment of senior debt
—

 
—

 
(9,500
)
Debt issuance costs
—

 
—

 
(60
)
Repurchase and retirement of restricted stock units for payroll taxes
(618
)
 
(639
)
 
(573
)
Other
(5
)
 
(11
)
 
(8
)
Net cash provided by (used in) financing activities
55,583

 
1,103

 
(10,141
)
Net increase (decrease) in cash
44,972

 
6,573

 
(20,809
)
Cash at beginning of year
23,891

 
17,318

 
38,127

Cash at end of year
$
68,863

 
$
23,891

 
$
17,318

Supplemental disclosure of non cash transactions:
 
 
 
 
 
Cash paid (refunded) during the fiscal year for:
 

 
 

 


Interest
$
5,323

 
$
5,341

 
$
5,695

Income taxes
(1,245
)
 
1,440

 
392

Non cash investing and financing activities:
 

 
 

 
 

Common stock issued in exchange for Series B Preferred Stock
7

 
—

 
3

Residual value allocated to the equity conversion feature
—

 
—

 
2,490

Premium related to Term B Loan issued in debt exchange
—

 
—

 
2,572

Equity offering costs incurred but not paid
79

 
—

 
—

Reclassification of compound embedded derivative liability to additional paid-in-capital
2,096

 
—

 
—


See accompanying notes to consolidated financial statements.

59


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
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 used primarily by manufacturers of networking systems for Carrier and Enterprise networking applications. Vitesse designs, develops and markets a diverse portfolio of high-performance, low-power and cost-competitive semiconductor products for these applications.
Vitesse was incorporated in the state of Delaware in 1987. Our headquarters are located at 741 Calle Plano, Camarillo, California, and our phone number is (805) 388-3700. Our stock trades on the NASDAQ Global Market under the ticker symbol VTSS.
Fiscal Year
Our fiscal year is October 1 through September 30.
Basis of Presentation
The accompanying consolidated financial statements are prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“GAAP”). Our reporting currency is the United States dollar. Our consolidated financial statements include the accounts of Vitesse and our subsidiaries. All inter-company accounts and transactions were eliminated in consolidation.
Reclassifications 
Certain reclassifications have been made to prior fiscal year amounts and related footnotes to conform to current fiscal year presentation with no changes to stockholders’ deficit amounts or net loss for fiscal year 2011 or 2012.
Foreign Currency Translation
The functional currency of our foreign subsidiaries is the United States dollar; however, our foreign subsidiaries transact in local currencies. Consequently, assets and liabilities are translated into United States dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at the average exchange rate prevailing during the period. Foreign currency transaction and translation gains and losses are included in results of operations. 
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 consolidated financial statements. Management regularly evaluates estimates and assumptions related to revenue recognition, allowances for doubtful accounts, warranty reserves, inventory valuation reserves, stock-based compensation, compound embedded derivative valuation, purchased intangible asset valuations and useful lives, asset retirement obligations, and deferred income tax asset valuation allowances. These estimates and assumptions are based on current facts, historical experience and various other factors that we 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 we experience may differ materially and adversely from our original estimates. To the extent there are material differences between the estimates and the actual results, our future results of operations will be affected.

60

Revenue Recognition
Product Revenues
In accordance with 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 where the earnings process is incomplete.
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 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 revenues from the sale and licensing of our intellectual property, maintenance and support and royalty revenue following the sale by our licensees of products incorporating the licensed technology. We enter into intellectual property licensing agreements that generally provide licensees the right to incorporate our intellectual property components in their products with terms and conditions that vary by licensee. Our intellectual property licensing agreements may include multiple elements with an intellectual property license bundled with support services. For such multiple element intellectual property licensing arrangements, we follow the guidance in ASC Topic 605-25, Multiple-Element Arrangements, to determine whether there is more than one unit of accounting.
We recognize revenue from the sale of patents when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. All of the requirements are generally fulfilled upon execution of the patent sale arrangement.
License and contract revenues are recorded upon delivery of the technology when there is persuasive evidence of an arrangement, fees are fixed or determinable, delivery has occurred, and collectability is reasonably assured. The timing of delivery is dependent on, and varies with, the terms of each contract. Other than maintenance and support, there is no continuing obligation under these arrangements after delivery of the intellectual property. Deferred revenue is created when we bill a customer in accordance with a contract prior to having met the requirements for revenue recognition.
Certain of our agreements may contain support obligations. Under such agreements we provide unspecified 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 intellectual property components. Royalties are calculated on a per unit basis, as specified in our agreement with the licensee. We may, at our discretion and in accordance with our agreements, engage a third-party to perform royalty audits of our licensees. Any correction of royalties previously reported would occur when the results are resolved.
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

61

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.
Shipping and Handling Fees and Costs
Amounts billed to customers for shipping and handling is presented in product revenues. Costs incurred for shipping and handling are included in cost of revenues.
Research and Development Costs
Research and development (“R&D”) costs are expensed when incurred. R&D expenses consist primarily of compensation expenses for employees and contractors engaged in research, design and development activities. R&D also includes costs of mask tooling, which we fully expense in the period, electronic design automation (“EDA”) tools, software licensing contracts, subcontracting and fabrication, depreciation and amortization, and overhead including facilities expenses.
Intellectual property purchased from third parties is capitalized and amortized over the useful life of the intellectual property.
Marketing Costs
All of the costs related to marketing and advertising our products are expensed as incurred or at the time the marketing takes place.
Stock‑Based Compensation
ASC Topic 718, Compensation-Stock Compensation (“ASC 718”) requires that all stock‑based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values. The benefits of tax deductions in excess of recognized compensation cost are required to be reported as a financing cash flow, rather than operating cash flow, as required under previous literature. It is also required to calculate the compensation cost of full-value awards such as restricted stock based on the market value of the underlying stock at the date of the grant. We estimate the expected life of a stock award as the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SEC Staff Accounting Bulletin (“SAB”) No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC. We are further required to estimate the fair value of stock‑based payment awards on the date of grant using an option‑pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We estimate the fair value of each award as of the date of grant using the Black‑Scholes option pricing model, which was developed for use in estimating the value of traded options that have no vesting restrictions and that are freely transferable. The Black‑Scholes model considers, among other factors, the expected life of the award and the expected volatility of our stock price. Although the Black‑Scholes model meets the accounting guidance requirements, the fair values generated by the model may not be indicative of the actual fair values of our awards, as it does not consider other factors important to those stock-based payment awards, such as continued employment, periodic vesting requirements, and limited transferability.
We have elected to recognize compensation expense for all stock‑based awards granted after September 30, 2005 on a straight-line basis over the requisite service period for the entire award. The amount of compensation expense recognized through the end of each reporting period is equal to the portion of the grant-date value of the awards that have vested, or for partially vested awards, the value of the portion of the award that is ultimately expected to vest for which the requisite services have been provided.
Other Income, Net 
Other income, net, consists of interest income, foreign exchange gains and losses and other non-operating gains and losses.

62

Income Taxes
We account for income taxes pursuant to the provisions of ASC Topic 740, Income Taxes (“ASC 740”). Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. We assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not “more likely than not,” we establish a valuation allowance. To the extent we establish a valuation allowance or increase or decrease this allowance in a period, we include an expense or benefit within the tax provision in the statement of operations. ASC Topic 740-10 prescribes a “more likely than not” recognition threshold and measurement analysis for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. We recognize potential accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense.
Net Loss per Share
Basic and diluted 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, shares to be issued under our Employee Stock Purchase Plan (“ESPP”), convertible preferred stock, 2014 Debentures and the Term B Loan. Unexercised stock options, restricted stock units, and unvested shares to be issued under our ESPP, are considered to be common stock equivalents if, using the treasury stock method, they are determined to be dilutive.

Under the two-class method of determining earnings for each class of stock, we consider the dividend rights and participating rights in undistributed earnings for each class of stock. The allocation of undistributed earnings to preferred shares is equal to the amount of earnings per common share that would be distributed on an as-converted basis.

Risks and Uncertainties
Our future results of operations involve a number of risks and uncertainties. Factors that could affect our business or future results and cause actual results to vary materially from historical results include, but are not limited to, the highly cyclical nature of the semiconductor industry; our high fixed costs; declines in average selling prices; decisions by our IC manufacturer customers to curtail outsourcing; our substantial indebtedness; our ability to fund liquidity needs; our failure to maintain an effective system of internal controls; product return and liability risks; the absence of significant backlog in our business; our dependence on international operations and sales; proposed changes to United States tax laws; that our management information systems may prove inadequate; our ability to attract and retain qualified employees; difficulties consolidating and evolving our operational capabilities; our dependence on materials and equipment suppliers; our loss of customers; adverse tax consequences; the development of new proprietary technology and the enforcement of intellectual property rights by or against us; the complexity of packaging and test processes in our industry; competition; our need to comply with existing and future environmental regulations; and fire, flood or other calamity affecting us or others with whom we do business.

Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of cash and accounts receivable. Cash consists of demand deposits maintained with several financial institutions, which often exceed Federal Deposit Insurance Corporation (“FDIC”) limits of $250,000. We have never experienced any losses related to these balances; however, our balances are significantly in excess of insured limits.
At September 30, 2013, there was one direct customer and three distributors that accounted for 12.3% and 50.8% of net accounts receivable, respectively. At September 30, 2012, there was one distributor that accounted for 13.6% of net accounts receivable. We believe that this concentration and the concentration of credit risk resulting from trade receivables owing from high-technology industry customers is substantially mitigated by our credit evaluation process, relatively short collection periods and maintaining an allowance for anticipated losses. We generally do not require collateral security for outstanding amounts.
We currently purchase wafers from a limited number of vendors. Additionally, since we do not maintain manufacturing facilities, we depend upon close relationships with contract manufacturers to assemble our products. We believe there are other vendors who can provide the same quality wafers at competitive prices and other contract manufacturers that can provide comparable services at competitive prices. We anticipate the continued use of a limited number of vendors and contract manufacturers in the near future. We are also dependent upon third parties for our probe testing. Under our fabless business

63

model, our long-term revenue growth is dependent on our ability to obtain sufficient external manufacturing capacity, including wafer production capacity. We believe that in addition to the vendors currently utilized by us, other vendors would be able to provide these services.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at the invoice amount and presented net of the allowance for doubtful accounts; they do not bear interest. 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 was nil and $0.3 million as of September 30, 2013 and September 30, 2012, respectively.
Inventory
Inventories are stated at lower of cost or market and consist of materials, labor and overhead. Inventory costs are determined using standard costs which approximate actual costs under the first-in, first-out method. Costs include the costs of purchased finished products, sorted wafers, and outsourced assembly, testing and internal overhead. We evaluate inventories for excess quantities and obsolescence. Our evaluation considers market and economic conditions; technology changes, new product introductions, and changes in strategic business direction; and requires estimates that may include elements that are uncertain. In order to state the inventory at lower of cost or market, we maintain reserves against individual stocking units. Inventory write-downs, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is made.
Property, Plant and Equipment
Property, plant and equipment are carried at cost less depreciation and amortization. Depreciation and amortization are calculated using the straight-line method over the assets' remaining estimated useful lives, ranging from three to five years for machinery and equipment, including product tooling; and the shorter of lease terms or estimated useful lives for leasehold improvements. When property, plant and equipment is retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts. Gains and losses from retirements and asset disposals are recorded in SG&A.
We evaluate the recoverability of property, plant and equipment in accordance with ASC Topic 360, Property, Plant, and Equipment (“ASC 360”). We perform periodic reviews to determine whether facts and circumstances exist that would indicate that the carrying amounts of property, plant and equipment exceeds their fair values. If facts and circumstances indicate that the carrying amount of property, plant and equipment might not be fully recoverable, projected undiscounted net cash flows associated with the related asset or group of assets over their estimated remaining useful lives are compared against their respective carrying amounts. In the event that the projected undiscounted cash flows are not sufficient to recover the carrying value of the assets, the assets are written down to their estimated fair values. All long-lived assets to be disposed of are reported at the lower of carrying amount or fair market value, less expected selling costs.
Intangible Assets
Our intangible assets consist primarily of technology licensing agreements with third-parties. We account for intangible assets in accordance with ASC Topic 350, Intangibles - Goodwill and Other. We evaluate our finite-lived assets for impairment whenever events or changes in circumstances indicate the carrying value of an intangible asset or asset group may not be recoverable. The carrying value of an intangible 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.
Fair Value
ASC Topic 820, Fair Value Measurements (“ASC 820”), establishes a framework for measuring fair value and requires disclosures about fair value measurement. ASC 820 emphasizes that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant

64

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.
Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
Financial Instruments
ASC Topic 825, Financial Instruments, defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. Our financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. These financial instruments are stated at their carrying values, which are estimates of their fair values because of their nearness to cash settlement or the comparability of their terms to the terms we could obtain, for similar instruments, in the current market. Our debt instruments are included in long-term debt, net, and convertible subordinated debt, net on our consolidated balance sheets.
Senior Term A Loan
At its inception, the fair value of the Term A Loan was computed using a cash flow analysis in which the periodic cash coupon payments and the principal payment at maturity were discounted to the valuation date using an appropriate market discount rate. The discount rate was determined by analyzing the seniority and securitization of the instrument, our financial condition, and observing the quoted bond yields in the fixed income market as of the valuation date. The valuation was determined using Level 3 inputs.
Senior Term B Loan
At its inception, the fair value of the Term B Loan was computed using a binomial-lattice model. The valuation 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 our common stock into which the Term B Loan is convertible.
Convertible Subordinated Debt
The 2014 Debentures required bifurcation and accounting at fair value because the economic and contractual characteristics of the compound embedded derivative met the criteria for bifurcation and separate accounting due to the conversion price not being indexed to our own stock. The compound embedded derivative was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock.

At its inception, the approximate fair value of the compound embedded derivative included in our 2014 Debentures was computed as the difference between the estimated value of the 2014 Debentures with and without the compound embedded derivative features. The fair value of the 2014 Debentures was estimated using a convertible bond valuation model within a binomial-lattice framework. These valuations were determined using Level 3 inputs. The valuation model combines expected cash outflows with market-based assumptions regarding risk-adjusted yields, stock price volatility, recent price quotes, and trading information of our common stock into which the 2014 Debentures are convertible. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement.

65

The compound embedded derivative was presented on the balance sheet at fair value and was marked-to-market, until the make-whole payment for foregone interest expired on October 30, 2012. The change in the fair value of the compound embedded derivative was a non-cash item primarily related to the change in price of the underlying common stock and is reflected in earnings. As we intended to, and had the ability to, satisfy the obligations with equity securities, in accordance with ASC Topic 470, Debt, we classified the liability as a long-term liability on our consolidated balance sheet as of September 30, 2012.
The valuation methodologies we use as described above require considerable judgment and may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although we believe our valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Warranty
We generally warrant our products against defects for one year from date of shipment. A warranty reserve is recorded against revenue when products are shipped. At each reporting period, we adjust our reserve for warranty claims based on our actual warranty claims experience as a percentage of net revenue for the preceding 12 months and also consider the effect of known operational issues that may have an impact that differs from historical trends. Historically, our warranty returns have not been material.
Contingencies
We assess our exposure to loss contingencies, including environmental, legal and income tax matters, and provide an accrual for exposure if it is judged to be probable and reasonably estimable. If the actual loss from a loss contingency differs from management's estimates, results of operations could be adjusted upward or downward.
Recent Accounting Pronouncements
In July 2012, the FASB issued ASU 2012-02, Intangibles-Goodwill and Other (Topic 350)-Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), to establish an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The standards update was effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The implementation of the new guidance did not impact our consolidated financial statements.

NOTE 2—COMPUTATION OF NET LOSS PER SHARE
For fiscal years 2013, 2012 and 2011, we recorded a net loss. As such, all outstanding potential common shares were excluded from the diluted earnings per share computation. 
The following potentially dilutive common shares are excluded from the computation of net loss per share.
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Outstanding stock options
2,089

 
1,813

 
1,699

Outstanding restricted stock units
2,021

 
1,686

 
1,296

Outstanding warrants
—

 
—

 
8

ESPP shares
368

 
506

 
293

Convertible preferred stock
—

 
674

 
674

2014 Debentures
10,332

 
10,332

 
10,332

Term B Loan
1,887

 
1,887

 
1,887

Total potential common stock excluded from calculation
16,697

 
16,898

 
16,189



66

NOTE 3-DETAILS OF CERTAIN FINANCIAL STATEMENT COMPONENTS
The following tables provide details of selected balance sheet items:
 
September 30,
 
2013
 
2012
 
(in thousands)
Inventory, net:
 

 
 

Raw materials
$
1,220


$
1,394

Work-in-process
3,652

 
5,359

Finished goods
5,820

 
5,307

Total
$
10,692

 
$
12,060

 
September 30,
 
2013
 
2012
 
(in thousands)
Property, Plant and Equipment, Net:
 
 
 
Machinery and equipment
$
77,865

 
$
80,805

Furniture and fixtures
704

 
801

Computer equipment
8,736

 
9,025

Leasehold improvements
3,163

 
3,166

Construction in progress
305

 
66

 
90,773

 
93,863

Less: Accumulated depreciation
(87,666
)
 
(90,031
)
Total
$
3,107

 
$
3,832


Depreciation expense totaled $2.0 million, $2.6 million and $3.3 million for fiscal years 2013, 2012 and 2011, respectively. We retired or otherwise disposed of property, plant and equipment with cost and accumulated depreciation of $3.8 million and $3.7 million, respectively, for fiscal year 2013, and with cost and accumulated depreciation of $9.8 million for fiscal year 2012.
 
September 30,
 
2013
 
2012
 
(in thousands)
Other Intangible Assets, Net:
 
 
 
Intellectual property and technology license agreements
$
4,824

 
$
4,482

Less: Accumulated amortization
(3,654
)
 
(3,307
)
Total
$
1,170

 
$
1,175


67


Intangible assets consisted primarily of technology licensing agreements with third-parties and acquired intellectual property. The weighted average period over which intangible assets acquired in fiscal years 2013 and 2012 are amortized is 6.05 years and 6.85 years, respectively.
The future amortization expense of amortizable intangible assets for the next five fiscal years is (in thousands): $282, $261, $240, $157, $122, and $108 in 2014, 2015, 2016, 2017, 2018 and thereafter, respectively.
 
September 30,
 
2013
 
2012
 
(in thousands)
Other Assets:
 
 
 
Deferred tax asset
$
1,273

 
$
1,420

Restricted cash
1,605

 
1,861

Debt issue costs, net
287

 
559

Other
260

 
290

Total
$
3,425

 
$
4,130


Restricted cash consists of interest bearing certificates of deposit collateralizing letters of credit and other commitments.
 
September 30,
 
2013
 
2012
 
(in thousands)
Accrued Expenses and Other Current Liabilities:
 
 
 
Accrued software license agreements
$
3,526

 
$
3,819

Accrued vacation
2,442

 
2,627

Accrued wages and benefits
1,729

 
2,432

Interest payable
2,196

 
2,196

Accrued income taxes
332

 
160

Accrued warranty liability
60

 
305

Accrued other
1,960

 
649

Total
$
12,245

 
$
12,188


NOTE 4—DEBT 
 
September 30,
 
2013
 
2012
 
(in thousands)
Term A Loan, bearing interest at 10.5% as of September 30, 2013 and at 9.0% effective November 6, 2013, due August 2016
$
7,919

 
$
8,090

Term B Loan, convertible, bearing interest at 8.0% as of September 30, 2013 and at 9.0% effective November 6, 2013, due August 2016
8,444

 
7,755

Other
3

 
7

Total long-term debt, net
16,366

 
15,852

2014 Debentures, convertible, 8.0% fixed-rate notes, due October 2014
44,384

 
42,521

Total debt, net
$
60,750

 
$
58,373

 


68

Additional information about our debt is as follows:
 
Term A Loan
 
Term B Loan
 
2014 Debentures
 
(in thousands)
Principal
$
7,857

 
$
9,342

 
$
46,493

Unaccreted debt premium/(unamortized debt discount)
62

 
(898
)
 
(2,109
)
Carrying value
$
7,919

 
$
8,444

 
$
44,384

Interest payable terms
Quarterly, in arrears

 
Quarterly, in arrears

 
Semi-annually, in arrears
Annual effective interest rate
8.2
%
 
17.7
%
 
12.2
%
Conversion price per common share
n/a

 
$
4.95

 
$
4.50


The Term B Loan conversion terms are substantially similar to the conversion terms of the 2014 Debentures, as described below. At September 30, 2013, conversion of the outstanding principal amount of the Term B Loan would result in the issuance of 1.9 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash.
The Term A Loan and Term B Loan (collectively, “Term A and B Loans”) are collateralized by substantially all of our assets.
Prepayment of the 2014 Debentures is permitted at 100% of the principal amount plus accrued and unpaid interest 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. At September 30, 2013, conversion of the outstanding principal amount of the 2014 Debentures would result in the issuance of 10.3 million shares of common stock. We can elect to settle any conversion in stock, cash or a combination of stock and cash. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets. The compound embedded derivative, which expired October 30, 2012, was comprised of the conversion option and a make-whole payment for foregone interest if the holder converted the debenture early. Upon expiration of the make-whole payment for forgone interest, the compound embedded derivative no longer met the criteria for bifurcation as all components of the conversion feature were indexed to our own stock.
A final valuation was completed on October 30, 2012. We recorded a gain of $0.8 million into earnings due to the change in value and reclassified the final liability value of $2.1 million, from other long-term liabilities, to equity. The 2014 Debentures are collateralized by a second priority interest in substantially all of our assets.
The credit agreement for the Term A and B Loans and the indenture for the 2014 Debenture 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 Term A and B Loans may require us to redeem all or a portion of the loans at 100% of the principal amount plus accrued and unpaid interest. The Company was in compliance with all covenants as of September 30, 2013.
On November 5, 2013 we amended the credit agreement for the Term A and B Loans (the "Amendment"). The Amendment extends the maturity dates of each of our outstanding Term A and B Loans from February 4, 2014 and October 30, 2014, respectively, to August 31, 2016, and also provides that the Term A and B Loans will each bear interest in cash at 9.0% per annum payable quarterly in arrears. Accordingly, both the Term A and B Loans is included in long-term debt, net as of September 30, 2013 in the accompanying Consolidated Balance Sheets.
The Amendment provides us with a right to optionally prepay the Term A and B Loans in whole or in part, at any time and from time to time, subject to the payment of a prepayment fee. The prepayment fee is 5% of the aggregate principal amount repaid for prepayments made prior to October 30, 2014, 3% for prepayments made on or after October 30, 2014 but prior to October 30, 2015, and 2% for prepayment made on or after October 30, 2015. The credit agreement for the Term A and B Loans continue to require that we prepay the Term A and B Loans upon the occurrence of certain prepayment events, but provides us with greater flexibility to sell assets and use the resulting proceeds for purposes other than repaying the Term A and B Loans after repayment of our 2014 Debentures.

69

The Amendment provides us with the right, so long as no event of default exists under the credit agreement for the Term A and B Loans, to purchase, repay, redeem or defease any or all of the 2014 Debentures. In addition, the Amendment requires us to maintain an unrestricted cash balance of $8.0 million and achieve minimum quarterly revenues of $10.0 million.
The credit agreement for the Term A and B Loans continues to provide the lenders with the right to convert the Term B Loan into shares of our common stock at a conversion price of $4.95 per share through October 30, 2014. After that date, the lenders will not have the right to convert the Term B Loan into common stock.
In connection with Amendment, we paid the lenders a consent fee of $308,000 and we repurchased $13.7 million principal amount of our 2014 Debentures at 107% of the principal amount thereof plus accrued interest, which eliminated the potential issuance of approximately 3.0 million dilutive common shares. After this transaction, $32.8 million principal amount of 2014 Debentures remain outstanding.
Debt Maturities
Principal maturity of our total aggregated outstanding debt is as follows:
Fiscal year
(in thousands)
2014
$
—

2015
46,493

2016
17,199

Total
$
63,692


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. During the fiscal year ended September 30, 2012, a mandatory repayment of principal of $1.7 million following the sale of certain assets was waived by the Term A and B Loans noteholder.

NOTE 5—FAIR VALUE MEASUREMENTS AND DERIVATIVE LIABILITY
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).
 
September 30,
 
2013
 
2012
 
(in thousands)
Beginning balance
$
2,899

 
$
7,796

Transfers to equity
(2,096
)
 
—

Total net gains included in earnings
(803
)
 
(4,897
)
Ending balance
$
—

 
$
2,899


The compound embedded derivative liability, which was included in long-term liabilities, represented the value of the equity conversion feature and a “make-whole” feature of the 2014 Debentures. The make-whole payment for foregone interest expired October 30, 2012, and upon its expiration, the compound embedded derivative no longer met the criteria for bifurcation as all components of the derivative were indexed to our own stock.

We measure the fair value of our Term A and B Loans and 2014 Debentures carried at amortized/accreted cost quarterly for disclosure purposes.

We use a binomial-lattice model to estimate fair values of our Term B Loan and 2014 Debenture financial instruments. The key unobservable input utilized in the model includes a discount rate of 6.4% and 6.5%, respectively. The estimated fair value

70

of our Term A Loan is determined using Level 3 inputs based primarily on the comparability of its terms to the terms we could obtain, for similar instruments, in the current market.

The estimated fair values of our financial instruments are as follows:
 
September 30,
 
2013
 
2012
 
Carrying value
 
Fair value
 
Carrying value
 
Fair value
 
(in thousands)
Term A Loan
$
7,919

 
$
8,165

 
$
8,090

 
$
8,437

Term B Loan
8,444

 
9,781

 
7,755

 
9,776

2014 Debentures
44,384

 
49,282

 
42,521

 
46,725


NOTE 6-STOCKHOLDERS' EQUITY
Authorized Capital Stock
We are authorized to issue up to 250 million shares of common stock, par value $0.01, per share, of which 19.5 million shares are reserved for future potential issuance upon conversion of debt, 9.3 million shares of common stock have been reserved for issuance under our stock compensation plans, and 0.8 million remaining shares of common stock are reserved for issuance under our 2011 ESPP.
We are authorized to issue up to 10 million shares of preferred stock, par value of $0.01 per share.
In December 2012, we raised $17.1 million, net of offering costs of $1.6 million, from the registered public sale of 10,651,280 shares of common stock at $1.75 per share, which was a discount to the market price of our common stock.

In June 2013, we raised an additional $37.4 million, net of offering expenses of $2.8 million, from the registered public sale of 18,720,000 shares of common stock at $2.15 per share, which was a discount to the market price of our common stock.

NOTE 7—STOCK BASED COMPENSATION
Stock Options
We have in effect one stock incentive plan (the 2013 Incentive Plan, or “Plan”) under which non-qualified stock options and restricted stock units have been granted to employees and non-employee directors. Options generally vest over four years and expire 10 years from the date of grant.
The Compensation Committee of the Board of Directors determines the stock-based compensation grants. The exercise price of options is the closing price on the date the options are granted. The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.

Under the Plan, we have 4.5 million shares available for future grant as of September 30, 2013. The 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. The Plan uses a “fungible share” concept, pursuant to which shares that are subject to appreciation awards (such as stock options and stock appreciation rights) are counted against the Plan share limit on a 1-for-1 basis for every such share subject to appreciation awards, and shares that are subject to full value awards (such as awards of stock, restricted stock and restricted stock units) are counted against the Plan share limit at a ratio of 1.5 shares and 2.0 shares for every share subject to the full value award in fiscal years 2013 and 2014, respectively.
As of September 30, 2013, none of our stock-based awards are classified as liabilities. We did not capitalize any stock-based compensation cost.

71

Compensation cost related to our Plan and ESPP is as follows:
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Cost of revenues
$
617

 
$
567

 
$
434

Engineering, research and development
1,616

 
1,530

 
984

Selling, general and administrative
2,163

 
2,345

 
1,734

Total stock-based compensation expense
$
4,396

 
$
4,442

 
$
3,152


As of September 30, 2013, there was $5.6 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 for stock options and restricted stock units is expected to be recognized is approximately 1.7 years and 1.9 years, respectively. An estimated forfeiture rate of 5.2% has been applied to all unvested options and restricted stock outstanding as of September 30, 2013. On a quarterly basis, we assess changes to our estimate of expected equity award forfeitures based on our review of recent forfeiture activity and expected future employee attrition. We recognize the effect of adjustments made to the forfeiture rates, if any, in the period that we change the forfeiture estimate. The effect of forfeiture adjustments in 2013, 2012, and 2011 was not significant. Future stock-based compensation expense and unearned stock-based compensation will increase to the extent that we grant additional equity awards and our stock price increases.
Activity in stock option awards is as follows:
 
 
Shares (in thousands)
 
Weighted average
exercise price
 
Weighted average
remaining
contractual life  (in years)
 
Aggregate
intrinsic value (in thousands)
Options outstanding, September 30, 2010
 
1,490

 
$
52.40

 
6.16
 
$
—

Granted
 
579

 
4.30

 
 
 
 
Exercised
 
—

 
 
 
 
 
 
Cancelled or expired
 
(370
)
 
81.02

 
 
 
 
Options outstanding, September 30, 2011
 
1,699

 
29.77

 
6.37
 
—

Granted
 
401

 
2.55

 
 
 
 
Exercised
 
(6
)
 
2.54

 
 
 
 
Cancelled or expired
 
(281
)
 
76.87

 
 
 
 
Options outstanding, September 30, 2012
 
1,813

 
16.57

 
6.61
 
2

Granted
 
464

 
2.12

 
 
 
 
Exercised
 
(9
)
 
2.24

 
 
 
 
Cancelled or expired
 
(179
)
 
16.52

 
 
 
 
Options outstanding, September 30, 2013
 
2,089

 
$
13.43

 
6.67
 
$
591

Options exercisable, September 30, 2013
 
1,273

 
$
20.06

 
5.61
 
$
178


This intrinsic value represents the excess of the fair market value of our common stock on the date of exercise over the exercise price of such options. The aggregate intrinsic values in the preceding table for the options outstanding represent the total pretax intrinsic value, based on our closing stock price of $3.04, as of September 30, 2013, which would have been received by the option holders had those option holders exercised their in-the-money options as of those dates. There were 0.3 million in-the-money stock options that were exercisable as of September 30, 2013.
The fair value of stock‑based awards is estimated at the date of grant using the Black‑Scholes option valuation model; however, the value calculated using an option pricing model may not be indicative of the fair value observed in a willing buyer/willing seller market transaction, or actually realized by the employee upon exercise. Expected volatility is based on the historical volatility of our common stock. The risk-free interest rate is based on the United States Treasury constant maturity rate for the expected life of the stock option. The expected life of a stock award is the period of time that the award is expected to be outstanding. Expected lives are estimated in accordance with SAB No. 107, as amended by SAB No. 110, which provides supplemental application guidance based on the views of the SEC.

72

The per share fair values of stock options granted in connection with stock incentive plans have been estimated using the following weighted average assumptions:
 
September 30,
 
2013
 
2012
 
2011
Expected life (in years)
5.66
 
6.61
 
6.17
Expected volatility:
 
 
 
 
 
Weighted-average
82.0%
 
86.9%
 
85.9%
Range
79.8% - 82.1%
 
82.2% - 87.1%
 
85.7% - 87.9%
Expected dividend
—
 
—
 
—
Risk-free interest rate
0.9% - 1.7%
 
1.0% - 1.3%
 
1.1% - 2.8%
The weighted average fair value at the date of grant of options granted in fiscal years 2013, 2012 and 2011 was $1.44, $1.80 and $3.16, respectively.
The following table provides additional information in regards to options outstanding as of September 30, 2013:
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Price
 
Number Outstanding (in thousands)
 
Weighted Average Remaining Contractual Life (Years)
 
Weighted Average Exercise Price
 
Number Exercisable (in thousands)
 
Weighted Average Exercise Price
$2.10
 
420

 
9.43
 
$
2.10

 
101

 
$
2.10

2.15 - 3.33
 
432

 
8.29
 
2.62

 
216

 
2.73

3.80 - 5.20
 
749

 
6.77
 
4.79

 
478

 
4.87

5.40 - 63.60
 
422

 
3.07
 
35.08

 
412

 
35.82

66.40 - 174.80
 
66

 
0.23
 
115.62

 
66

 
115.62

$2.10 - $174.80
 
2,089

 
6.67
 
$
13.43

 
1,273

 
$
20.06

Restricted Stock Units
We grant restricted stock units to certain employees and to our non-employee directors. Grants vest over varying terms, to a maximum of four years from the date of the grant. Awards to non-employee directors upon their initial appointment or election to the board vest in installments of 33.3% each over the first three anniversaries of the grant date, and annual awards to non-employee directors vest 100% on the first anniversary of the grant date. Unvested restricted shares are forfeited if the recipient’s employment or board term terminates for any reason other than death, disability, or special circumstances as determined by the Compensation Committee of the Board of Directors.
Activity for our restricted stock award units is as follows:
 
Restricted
Stock Units (in thousands)
 
Weighted Average
Grant-Date Fair
Value per Share
 
Weighted average
remaining
contractual life  (in years)
 
Aggregate
intrinsic value (in thousands)
Restricted stock units, September 30, 2010
771

 
$
5.72

 
1.35
 
$
2,408

Awarded
1,122

 
4.34

 
 
 
 
Released
(335
)
 
5.97

 
 
 
 
Forfeited
(262
)
 
4.68

 
 
 
 
Restricted stock units, September 30, 2011
1,296

 
4.66

 
1.38
 
3,823

Awarded
1,258

 
2.57

 
 
 
 
Released
(721
)
 
3.99

 
 
 
 
Forfeited
(147
)
 
3.48

 
 
 
 
Restricted stock units, September 30, 2012
1,686

 
3.49

 
1.09
 
4,113

Awarded
1,527

 
2.12

 
 
 
 
Released
(1,045
)
 
3.19

 
 
 
 
Forfeited
(147
)
 
2.88

 
 
 
 
Restricted stock units, September 30, 2013
2,021

 
$
2.65

 
1.13
 
$
6,143


73


We issue restricted stock units as part of our equity incentive plans. For the majority of restricted stock units granted, the number of shares issued on the date the restricted stock units vest is net of the minimum statutory withholding requirements that we pay in cash to the appropriate taxing authorities on behalf of our employees. The impact of such withholding totaled $0.6 million for each of the years ended September 30, 2013, 2012, and 2011, and was recorded as settlement on restricted stock tax withholding in the accompanying consolidated statements of stockholders’ equity (deficit). Although shares withheld are not issued, they are treated as common stock repurchases in our consolidated financial statements, as they reduce the number of shares that would have been issued upon vesting.
Employee Stock Purchase Plan
We have an ESPP whereby eligible employees may authorize payroll deductions of up to 15% of their regular base salary subject to certain limits to purchase shares at the lower of 85% of the fair market value of the common stock on the date of the commencement of the offering or on the last day of the 6-month offering period. During fiscal years 2013, 2012 and 2011, a total of 952,516, 821,470 and nil shares, respectively, were purchased by and distributed to employees at a weighted average price of $1.75, $2.11 and nil per share, respectively. At fiscal 2013 year-end, we had 0.8 million shares of our common stock reserved for future issuance under the plan. The Company recognized $0.6 million, $0.6 million and $0.1 million stock compensation expense under the ESPP during the years ended September 30, 2013, 2012 and 2011, respectively. We determine the fair value of the ESPP awards using the Black-Scholes pricing model. Underlying assumptions used were as follows:
 
 
September 30,
 
 
2013
 
2012
 
2011
Expected life (in years)
 
0.5
 
0.5
 
0.5
Expected volatility (range)
 
47.6% - 49.8%
 
40.4% - 48.4%
 
40.4%
Expected dividend
 
—
 
—
 
—
Risk-free interest rate
 
0.11% - .14%
 
0.09% - .20%
 
.20%

NOTE 8—INCOME TAXES
The components of loss before income tax benefit for the years ended September 30, 2013, 2012 and 2011 were as follows:
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
(Loss) income before income taxes:
 
 
 
 
 
Domestic
$
(23,646
)
 
$
(3,406
)
 
$
(17,451
)
Foreign
1,020

 
2,120

 
2,020

 
$
(22,626
)
 
$
(1,286
)
 
$
(15,431
)

74

Income tax benefit consists of the following for the years ended September 30, 2013, 2012 and 2011:
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Income tax (benefit) expense:
 
 
 
 
 
Current:
 
 
 
 
 
Federal
$
—

 
$
(188
)
 
$
(248
)
State
54

 
41

 
(367
)
Foreign
(758
)
 
1,510

 
(4
)
Total current
(704
)
 
1,363

 
(619
)
Deferred:
 
 
 
 
 
Federal
—

 
—

 
—

State
—

 
—

 
—

Foreign
156

 
(1,537
)
 
—

Total deferred
156

 
(1,537
)
 
—

Total income tax benefit:
$
(548
)
 
$
(174
)
 
$
(619
)
A reconciliation of the income tax benefit by applying the statutory United States federal income tax rate to loss before income tax benefit is as follows:
 
September 30,
 
2013
 
2012
 
2011
 
$
 
%
 
$
 
%
 
$
 
%
 
(in thousands, except for percentages)
Federal income tax benefit at statutory rate
$
(7,693
)
 
34.0
 %
 
$
(437
)
 
34.0
 %
 
$
(5,246
)
 
34.0
 %
State tax benefit net of federal benefit
(536
)
 
2.4
 %
 
(13
)
 
1.0
 %
 
(409
)
 
2.7
 %
Foreign taxes
(1,156
)
 
5.1
 %
 
1,102

 
(85.7
)%
 
5

 
—
 %
Tax credits
(438
)
 
1.9
 %
 
(1,230
)
 
95.6
 %
 
—

 
—
 %
Nondeductible expenses
771

 
(3.4
)%
 
1,015

 
(78.9
)%
 
1,108

 
(7.2
)%
Other
87

 
(0.4
)%
 
(100
)
 
7.9
 %
 
(636
)
 
4.2
 %
Change in valuation allowance
7,164

 
(31.7
)%
 
(1,147
)
 
89.2
 %
 
(568
)
 
3.7
 %
Rate change/other adjustments on deferred taxes
1,253

 
(5.5
)%
 
636

 
(49.5
)%
 
5,127

 
(33.2
)%
Income tax benefit
$
(548
)
 
2.4
 %
 
$
(174
)
 
13.6
 %
 
$
(619
)
 
4.0
 %
Our effective tax rate was 2.4% for the fiscal year ended September 30, 2013 compared to 13.6% and 4.0% for the comparable periods in the prior years. Our income tax benefit is primarily impacted by foreign taxes, a refund of withholding taxes on foreign income that would have been creditable against United States income taxes, and certain nondeductible interest and share based expenses. The income tax benefit is also impacted by the release of a portion of the valuation allowances related to certain foreign jurisdictions' deferred tax assets as such balances were more likely than not realizable within the applicable carryforward period based on our analysis of the available positive and negative evidence.

75

Deferred tax assets and liabilities are recognized for future tax consequences between the carrying amounts of assets and liabilities and their respective tax basis using enacted tax rates in effect for the fiscal year in which the differences are expected to reverse. Significant deferred tax assets and liabilities, consist of the following:
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
Deferred Tax Assets:
 
 
 
 
 
Net operating loss carryforward
$
27,110

 
$
55,317

 
$
53,938

Research and development tax credits
10,574

 
11,533

 
7,887

Deferred income
2,664

 
1,724

 
—

Stock options
12,313

 
12,594

 
11,148

Fixed assets and intangible property
7,955

 
10,001

 
9,189

Inventory
2,256

 
2,940

 
3,168

Allowances and reserves
9,277

 
9,928

 
10,752

State taxes
—

 
—

 
1

Foreign tax credit/AMT credit
88

 
1,398

 
241

Other
11

 
—

 
—

Total deferred tax assets
72,248

 
105,435

 
96,324

Deferred Tax Liabilities:
 
 
 
 
 
Debt amortization
(2,065
)
 
(1,485
)
 
(655
)
Other
—

 
(5
)
 
(2,998
)
Total deferred tax liabilities
$
(2,065
)
 
$
(1,490
)
 
$
(3,653
)
Net deferred income taxes
70,183

 
103,945

 
92,671

Valuation allowance
(68,802
)
 
(102,408
)
 
(92,671
)
Total deferred tax asset
$
1,381

 
$
1,537

 
$
—


At September 30, 2013, we had approximately $37.6 million, $32.6 million, and $133.7 million of federal, state, and foreign Net Operating Losses (“NOLs”), respectively, that can be used in future tax years. We also have available federal and state research and development tax credit carryforwards of approximately $0.4 million and $10.2 million, respectively. The federal NOLs and tax credits may be carried forward through 2033; state NOLs may be carried forward through 2033; state tax credits may be carried forward indefinitely; and foreign NOLs have various carryforward provisions in several jurisdictions.

In December 2012 , we issued 10.7 million shares of common stock in a public offering which is believed to have resulted in a Section 382 ownership change. In general, a Section 382 ownership change occurs if there is a cumulative change in our ownership by “5%” shareholders (as defined in the Internal Revenue Code of 1986, as amended) that exceeds 50 percentage points over a rolling three-year period. An ownership change generally affects the rate at which NOLs and potentially other deferred tax assets are permitted to offset future taxable income. Of our federal NOL amount as of September 30, 2013, $28.1 million is subject to an annual Section 382 limitation of $1.4 million due to the December 2012 ownership change. Since we maintain a full valuation allowance on all of our U.S. and state deferred tax assets, the impact of the ownership change on the future realizability of our U.S. and state deferred tax assets did not result in an impact to our provision for income taxes for the year ended September 30, 2013, or on our net deferred tax asset as of September 30, 2013.

In June 2013, we issued an additional 18.7 million shares of common stock in a public offering. We are in the process of evaluating whether the offering caused a Section 382 ownership change. If an additional ownership change did occur or does occur in the future, our ability to utilize our NOL carryforwards and other deferred tax assets to offset future taxable income may be further limited and the value and recoverability of our NOLs and other deferred tax assets could be further diminished.

We analyzed our need to maintain the valuation allowance against our otherwise recognizable deferred tax assets in the federal, state, and foreign jurisdictions and have recorded a total valuation allowance of $68.8 million of as September 30, 2013, which represents a decrease of $33.6 million from the prior fiscal year. Because we have historically experienced net tax losses, the benefits of which resulted in recognized deferred tax assets, we have placed a $58.0 million valuation allowance against all of our otherwise recognizable deferred tax assets in the federal and state jurisdictions. Furthermore, we have also placed a $10.8 million valuation allowance against most of our deferred tax assets in our foreign jurisdictions as we have concluded that it is more likely than not that the majority of our foreign deferred tax assets will not be realized.

76

Accounting guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The total amount of gross unrecognized tax benefits was approximately $10.6 million as of September 30, 2013 and approximately $10.8 million as of September 30, 2012. The total amount of gross unrecognized tax benefits decreased by $0.2 million, the majority of which related to state research and development tax credits that have not been utilized.
As of September 30, 2013, approximately $0.2 million of the $10.6 million unrecognized tax benefits related to our state tax liability is recorded in accrued expenses and other current liabilities on the consolidated balance sheets. The remaining $10.4 million, which relates to research and development tax credits that have not been utilized, is reflected as a reduction to the deferred tax asset arising from the research and development tax credits. As of September 30, 2012, approximately $0.2 million of the $10.8 million unrecognized tax benefits, related to our state tax liability, was recorded in accrued expenses and other current liabilities on the consolidated balance sheets. The remaining $10.6 million, related to research and development tax credits that have not been utilized, was reflected as a reduction to the deferred tax asset arising from the research and development tax credits.
A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
 
2013
 
2012
 
2011
 
(in thousands)
Beginning balance as of September 30:
$
(10,822
)
 
$
(10,215
)
 
$
(10,615
)
Gross decreases - tax positions in prior period
354

 
—

 
200

Gross increases - current-period tax positions
(147
)
 
(47
)
 
—

Gross increases - tax positions in prior period
—

 
(560
)
 
—

Reductions as a result of a lapse of statute of limitations
—

 
—

 
200

Ending balance as of September 30:
$
(10,615
)
 
$
(10,822
)
 
$
(10,215
)
We recognize accrued interest and penalties related to unrecognized tax benefits within the consolidated statements of operations as income tax expense. As of September 30, 2013, there were no material interest or penalties accrued due to significant net operating losses.
We are subject to taxation in the United States and various state and foreign jurisdictions. The 2009 through 2013 tax years generally remain subject to examination by their respective tax authorities. Effectively, all our tax years in which a tax NOL is carried forward to the present are subject to examination by federal, state and foreign tax authorities. Therefore, we cannot estimate the range of unrecognized tax benefits that may significantly change within the next 12 months.

NOTE 9—SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK AND GEOGRAPHIC INFORMATION
 We manage and operate our business through one operating segment.
 Net revenue from customers equal to or greater than 10% of total net revenues is as follows:
 
September 30,
 
2013
 
2012
 
2011
Nu Horizons Electronics **
*

 
13.5
%
 
20.6
%
WPG Holdings**
17.7
%
 
10.7
%
 
*

Huawei
*

 
*

 
10.3
%
 __________________________________________________
*Less than 10% of total net revenues for period indicated.
**Distributors

77

Net revenue by geographic area is as follows:
 
September 30,
 
2013
 
2012
 
2011
 
(in thousands)
United States
$
28,454

 
$
41,559

 
$
51,698

Asia Pacific
61,454

 
62,260

 
63,923

EMEA*
13,865

 
15,664

 
25,346

Total net revenues
$
103,773

 
$
119,483

 
$
140,967

________________________________________________
*Europe, Middle East and Africa
Revenue by geographic area is based upon the country of billing. The geographic location of distributors and third-party manufacturing service providers may be different from the geographic location of the ultimate end users.
We believe a substantial portion of the products billed to OEM 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. Product revenues by product lines are as follows:
 
September 30,
 
2013

2012

2011
 
(in thousands)
Connectivity
$
42,885


$
52,933


$
67,734

Ethernet switching
38,675


32,607


37,940

Transport processing
19,774


24,380


27,068

Product revenues
$
101,334


$
109,920


$
132,742



Long-lived assets (excluding intangible assets) are summarized as follows:
 
September 30,
 
2013
 
2012
 
(in thousands)
Located within the United States
$
5,040

 
$
6,034

Located outside the United States
1,492

 
1,928

 
$
6,532

 
$
7,962


NOTE 10—RETIREMENT SAVINGS PLAN
We have a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code covering substantially all U.S. employees. Participants in this plan may defer up to the maximum annual amount allowable under IRS regulations. The contributions are fully vested and non-forfeitable at all times. No amounts contributed by participants to the plan were matched by us for the periods presented. In compliance with governing regulations, we made contributions to the retirement savings plans of employees of our foreign subsidiaries in the amount of $0.8 million for fiscal year 2013, $0.7 million for fiscal year 2012, and $0.7 million for fiscal year 2011.


78

NOTE 11—COMMITMENTS
Operating Leases and Software Licenses
We lease facilities under non-cancellable operating leases. The leases expire at various dates through fiscal year 2016 and frequently include renewal provisions for varying periods of time, provisions which require us to pay taxes, insurance, maintenance costs or provisions for minimum rent increases. Minimum leases payments, including scheduled rent increases are recognized as rent expenses on a straight line basis over the applicable lease term. Lease incentives received are recognized as a reduction of rental expense on a straight-line basis over the term of the lease. Rent expense, including common area maintenance expense, under operating leases totaled $3.5 million for fiscal year 2013, $3.0 million for fiscal year 2012, and $3.8 million for fiscal year 2011.
Software license commitments represent non-cancellable licenses of intellectual property from third‑parties used in the development of our products.
Future minimum lease payments under non-cancellable operating leases that have remaining non-cancellable lease terms in excess of one year and software licenses are as follows:
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
(in thousands)
 
 
Operating leases
$
2,068

 
$
1,128

 
$
199

 
$
—

 
$
—

 
$
—

 
$
3,395

Software licenses
8,147

 
6,689

 
2,800

 
2,800

 
2,800

 
—

 
23,236

Total
$
10,215

 
$
7,817

 
$
2,999

 
$
2,800

 
$
2,800

 
$
—

 
$
26,631


NOTE 12—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. Related legal defense costs are expensed as incurred.
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 our consolidated financial position. Accordingly, except for established warranty reserves, we have not recorded any liabilities for these agreements as of September 30, 2013 and September 30, 2012.
Patents and Technology 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

79

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. 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, 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 which may provide a source of recovery to us in the event of an indemnification claim.

NOTE 13—SUBSEQUENT EVENT
On November 5, 2013, we amended the credit agreement for our Term A and B Loans. In connection with the Amendment, we repurchased $13.7 million principal amount of our 2014 Debentures. The terms of the Amendment are discussed in Note 4.

80

NOTE 14—QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth the consolidated statements of operations for each of our last eight quarters. This quarterly information is derived from unaudited interim financial statements and has been prepared on the same basis as the annual consolidated financial statements. The per-share computation for the fiscal year is a separate, annual calculation. Accordingly, the sum of the quarterly per-share amounts does not necessarily equal the annual per-share amount. In management's opinion, this quarterly information reflects all adjustments necessary for fair presentation of the information for the periods presented. The operating results for any quarter are not indicative of results for any future period.
 
First Quarter
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
Total Year
 
(in thousands)
Fiscal Year 2013:
 
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Product revenues
$
23,905

 
$
24,689

 
$
26,285

 
$
26,455

 
$
101,334

Intellectual property revenues
1,822

 
64

 
133

 
420

 
2,439

Net revenues
25,727

 
24,753

 
26,418

 
26,875

 
103,773

Cost of product revenues
10,975

 
11,369

 
11,666

 
12,753

 
46,763

Loss from operations
(3,819
)
 
(3,872
)
 
(4,291
)
 
(3,492
)
 
(15,474
)
Net loss
(5,032
)
 
(4,847
)
 
(6,434
)
 
(5,765
)
 
(22,078
)
Net loss per share:
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.18
)
 
$
(0.13
)
 
$
(0.17
)
 
$
(0.10
)
 
$
(0.55
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic and diluted
28,059

 
37,215

 
38,630

 
57,254

 
40,311

Fiscal Year 2012:
 
 
 
 
 
 
 
 
 
Net revenues:
 
 
 
 
 
 
 
 
 
Product revenues
$
28,942

 
$
27,195

 
$
25,730

 
$
28,053

 
$
109,920

Intellectual property revenues
1,049

 
2,542

 
4,557

 
1,415

 
9,563

Net revenues
29,991

 
29,737

 
30,287

 
29,468

 
119,483

Cost of product revenues
12,163

 
10,595

 
11,270

 
12,379

 
46,407

(Loss) income from operations
(2,116
)
 
1,100

 
2,120

 
531

 
1,635

Net (loss) income
(844
)
 
(6,196
)
 
4,711

 
1,217

 
(1,112
)
Net (loss) income per share:
 
 
 
 
 
 
 
 
 
Basic and diluted
$
(0.03
)
 
$
(0.25
)
 
$
0.18

 
$
0.05

 
$
(0.04
)
Diluted
$
(0.03
)
 
$
(0.25
)
 
$
0.16

 
$
0.05

 
$
(0.04
)
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
24,512

 
25,043

 
25,302

 
25,628

 
25,121

Diluted
24,512

 
25,043

 
38,413

 
26,513

 
25,121

In the second quarter of fiscal year 2012, we successfully collected on $0.2 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011. In the third quarter of fiscal year 2012, we successfully collected on $1.2 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011. In the fourth quarter of fiscal year 2012, we successfully collected on $0.5 million of bad debts that were reserved for in the fourth quarter of fiscal year 2011. Also in the fourth quarter of 2012, we determined that it was unlikely that we would be able to sublease the exited property for the remaining lease term through December 2015. Therefore, we decided that we would reoccupy the exited facility upon the expiration of our main Camarillo facility lease in January 2014 instead of locating a new facility as originally planned. Accordingly, we reversed the remaining lease termination reserve of $1.4 million.

81

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None

ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated as of September 30, 2013 the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2013, our disclosure controls and procedures were effective.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange Act of 1934. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our internal control over financial reporting as of September 30, 2013 based on the framework in Internal Control-Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon that evaluation, our management concluded that our internal control over financial reporting was effective as of September 30, 2013.
Attestation Report of Registered Public Accounting Firm
BDO USA, LLP, our independent registered public accounting firm that audited our financial statements included in this report, has issued an attestation report on our internal control over financial reporting. BDO USA, LLP’s attestation report appears in this Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitation on the Effectiveness of Controls
Our disclosure controls and procedures provide our Chief Executive Officer and Chief 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 reasonable, not absolute, assurance 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 system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all potential future conditions.


82

Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Vitesse Semiconductor Corporation
Camarillo, California
We have audited Vitesse Semiconductor Corporation's internal control over financial reporting as of September 30, 2013, based on criteria established in Internal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Vitesse Semiconductor Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Item 9A, Controls and Procedures-Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Vitesse Semiconductor Corporation maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Vitesse Semiconductor Corporation as of September 30, 2013 and 2012, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the three years in the period ended September 30, 2013 and our report dated December 5, 2013 expressed an unqualified opinion thereon.

/s/ BDO USA, LLP
Los Angeles, California
December 5, 2013

83

ITEM 9B. OTHER INFORMATION
None.
PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we will file with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K a definitive proxy statement pursuant to Regulation 14A (the “Proxy Statement”) in connection with the solicitation of proxies for our 2014 Annual Meeting of Stockholders and certain information to be included therein is incorporated herein by reference.


ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated by reference from our Proxy Statement under the headings “Election of Directors,” “Executive Officers,” “Board Meetings and Committees,” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from our Proxy Statement under the headings “Executive Compensation,” “Director Compensation,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from our Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated by reference from our Proxy Statement under the heading “Director Independence” and “Certain Relationships and Related Person Transactions.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated by reference from our Proxy Statement under the heading “Principal Accountant Fees and Services” and “Pre-Approval Policies and Procedures.”

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
See the financial statements and financial statement schedules listed in Item 8. Financial Statements and Supplementary Data.
(a)(2)
See Schedule II “Valuation and Qualifying Accounts.”
(a)(3)
See Exhibit Index following the signature page to this Annual Report on Form 10-K.

84

SCHEDULE II-Valuation and Qualifying Accounts
 
Balance at Beginning of Year
 
Charged to Costs and Expenses
 
Charged to Other Accounts
 
Deductions/Write-offs
 
Balance at End of Year
 
(in thousands)
Year ended September 30, 2013
 
 
 
 
 
 
 
 
 
Deducted from accounts receivable:
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
$
258

 
$
(142
)
 
$
—

 
$
(116
)
 
$
—

Deducted from deferred tax asset
 
 
 
 
 
 
 
 
 
Valuation allowance
102,408

 
(487
)
 
—

 
(33,119
)
 
68,802

Year ended September 30, 2012
 
 
 
 
 
 
 
 
 
Deducted from accounts receivable:
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
2,212

 
(1,954
)
 
—

 
—

 
258

Deducted from deferred tax asset
 
 
 
 
 
 
 
 
 
Valuation allowance
92,671

 
(1,147
)
 
—

 
10,884

 
102,408

Year ended September 30, 2011
 
 
 
 
 
 
 
 
 
Deducted from accounts receivable:
 
 
 
 
 
 
 
 
 
Allowance for doubtful accounts
—

 
2,212

 
—

 
—

 
2,212

Deducted from deferred tax asset
 
 
 
 
 
 
 
 
 
Valuation allowance
$
93,239

 
$
(568
)
 
$
—

 
$
—

 
$
92,671


85

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. 
December 5, 2013
VITESSE SEMICONDUCTOR CORPORATION
 
 
 
 
 
 
 
By:
/s/ CHRISTOPHER R. GARDNER
 
 
Christopher R. Gardner
 
 
Chief Executive Officer
 
 
 
December 5, 2013
VITESSE SEMICONDUCTOR CORPORATION
 
 
 
 
 
 
 
By:
/s/ MARTIN S. MCDERMUT
 
 
Martin S. McDermut
 
 
Chief Financial Officer
 
 
(Principal Financial and Accounting Officer)

86

POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Christopher R. Gardner and Martin S. McDermut, and each of them, as his true and lawful attorneys-in-fact and agents, with full power of substitution for him, and in his name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
December 5, 2013
/s/ Christopher R. Gardner

Christopher R. Gardner
Director, President and Chief Executive Officer
(Principal Executive Officer)
December 5, 2013
/s/ Martin S. McDermut

Martin S. McDermut
Chief Financial Officer
(Principal Financial and Accounting Officer)
December 5, 2013
/s/ Mathew Frey

Mathew Frey
Director
December 5, 2013
/s/ Steven P. Hanson

Steven P. Hanson
Director
December 5, 2013
/s/ James Hugar

James Hugar
Director
December 5, 2013
/s/ Scot B. Jarvis

Scot B. Jarvis
Director
December 5, 2013
/s/ Edward Rogas, Jr.

Edward Rogas, Jr.
Director
December 5, 2013
/s/ Kenneth Traub

Kenneth Traub
Director


87

EXHIBIT INDEX
In reviewing the agreements included as exhibits to this Annual Report on Form 10-K, please note that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about Vitesse or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other party or parties to the applicable agreement and:
•
should not in all instances be treated as categorical statements of fact, but rather as a means of allocating the risk to one of the parties if those statements prove to be inaccurate;
•
may have been qualified by disclosures that were made to the other party or parties in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
•
may apply standards of materiality in a manner that is different from what may be viewed as material to you or other investors; and
•
were made only as of the date of the applicable agreement or other date or dates that may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about Vitesse may be found elsewhere in this Annual Report on Form 10-K and Vitesse’s other public filings, which are available without charge through the SEC’s website at www.sec.gov.
 
 
 
 
Incorporated by Reference
 
 
Exhibit Number
 
Exhibit Description
 
Form
 
File Number
 
Exhibit
 
Filing Date
 
Filed or Furnished Herewith
3.1
 
Restated Certificate of Incorporation.
 
10-Q
 
001-31614
 
3.1
 
August 9, 2010
 
 
3.2
 
Amended and Restated Bylaws.
 
8-K
 
001-31614
 
3.2
 
December 2, 2004
 
 
4.1
 
Indenture between the Registrant and U.S. Bank National Association, as Trustee, dated as of October 30, 2009.
 
8-K
 
001-31614
 
4.1
 
October 30, 2009
 
 
4.2
 
Form of 8.0% Convertible Second Lien Debentures Due 2014 (included in Exhibit 4.1).
 
8-K
 
001-31614
 
4.1
 
October 30, 2009
 
 
4.3
 
Guaranty, dated October 30, 2009, executed by Vitesse Manufacturing & Development Corporation and Vitesse Semiconductor Sales Corporation in favor of U.S. Bank National Association, as Trustee, under the Indenture dated October 30, 2009.
 
10-K/A
 
001-31614
 
4.6
 
January 28, 2010
 
 
10.1*
 
Employment Agreement between the Registrant and Christopher Gardner dated January 30, 2013.
 
10-Q
 
001-31614
 
10.1
 
August 6, 2013
 
 
10.2*
 
Employment Agreement, dated effective November 30, 2011, between the Registrant and Martin Nuss.
 
10-Q
 
001-31614
 
10.1
 
February 7, 2012
 
 
10.3*
 
Employment Agreement between the Registrant and Martin S. McDermut dated July 27, 2011.
 
10-K
 
001-31614
 
10.2
 
December 6, 2011
 
 
10.4*
 
Separation and General Release Agreement, dated May 17, 2012, between Registrant and Steve M. Perna.
 
10-Q
 
001-31614
 
10.1
 
August 7, 2012
 
 
10.5*
 
Form of Indemnity Agreement between each of the directors and the Registrant.
 
8-K
 
001-31614
 
10.1
 
August 22, 2007
 
 
10.6*†
 
Vitesse Semiconductor Corporation Fiscal Year 2013 Executive Bonus Plan, dated as of November 28, 2012.
 
10-Q
 
001-31614
 
10.1
 
February 5, 2013
 
 
10.7*
 
Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan as of September 4, 2009.
 
10-K/A
 
001-31614
 
10.1
 
January 28, 2010
 
 
10.8*
 
Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan.
 
10-K/A
 
001-31614
 
10.1
 
January 28, 2010
 
 
10.9*
 
Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation Amended and Restated 2001 Stock Incentive Plan.
 
10-K/A
 
001-31614
 
10.2
 
January 28, 2010
 
 
10.10*
 
Vitesse Semiconductor Corporation 2010 Incentive Plan.
 
14A
 
001-31614
 
App. A
 
March 31, 2010
 
 
10.11*
 
Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan.
 
10-K
 
001-31614
 
10.2
 
December 6, 2011
 
 
10.12*
 
Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2010 Incentive Plan.
 
10-K
 
001-31614
 
10.2
 
December 6, 2011
 
 
10.13*
 
Vitesse Semiconductor Corporation 2013 Incentive Plan.
 
8-K
 
001-31614
 
10.1
 
March 8, 2013
 
 
10.14*
 
Automatic Equity Grant Program for Eligible Directors under the Vitesse Semiconductor Corporation 2013 Incentive Plan.
 
 
 
 
 
 
 
 
 
X
10.15*
 
Form of Notice of Grant of Stock Options and Option Agreement under the Vitesse Semiconductor Corporation 2013 Stock Incentive Plan.
 
 
 
 
 
 
 
 
 
X
10.16*
 
Form of Notice of Grant of Restricted Stock Units and RSU Agreement under the Vitesse Semiconductor Corporation 2013 Stock Incentive Plan.
 
 
 
 
 
 
 
 
 
X
10.17*
 
Vitesse Semiconductor Corporation 2011 Employee Stock Purchase Plan.
 
14A
 
000-19654
 
App. A
 
December 1, 2010
 
 
10.18
 
Loan Agreement, dated August 23, 2007 between the Registrant and Whitebox VSC, Ltd.
 
8-K
 
001-31614
 
10.3
 
August 29, 2007
 
 
10.19
 
First Amendment to Loan Agreement, dated as of October 16, 2009, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent.
 
8-K
 
001-31614
 
10.4
 
October 20, 2009
 
 
10.20
 
Second Amendment to Loan Agreement, dated as of February 4, 2011, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent.
 
10-Q
 
000-19654
 
10.1
 
February 8, 2011
 
 
10.21
 
Third Amendment to Loan Agreement, dated as of November 5, 2013, among the Registrant, the Lenders named therein and Whitebox VSC Ltd., as agent.
 
8-K
 
001-31614
 
10.1
 
November 7, 2013
 
 
10.22
 
Form of Letter Agreement, dated as of November 5, 2013, between Registrant and certain holders of the Registrant’s 8.0% convertible second lien debentures due October 2014.
 
8-K
 
001-31614
 
10.2
 
November 7, 2013
 
 
10.23
 
Intellectual Property, Assignment and License Agreement, dated October 29, 2007 between the Registrant and Maxim Integrated Products, Inc.
 
8-K
 
001-31614
 
10.1
 
October 31, 2007
 
 
21.0
 
List of Subsidiaries.
 
 
 
 
 
 
 
 
 
X
23.1
 
Consent of BDO USA, LLP.
 
 
 
 
 
 
 
 
 
X
24.1
 
Power of Attorney (included on signature page)
 
 
 
 
 
 
 
 
 
X
31.1
 
Certification of Principal Executive officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
31.2
 
Certification of Principal Financial officer pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
32.1
 
Certifications of Principal Executive Officer and Principal Financial Officer pursuant to Securities Exchange Act Rules 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes‑Oxley Act of 2002.
 
 
 
 
 
 
 
 
 
X
101.INS
 
XBRL Instance Document**
 
 
 
 
 
 
 
 
 
X
101.SCH
 
XBRL Taxonomy Extension Schema Document**
 
 
 
 
 
 
 
 
 
X
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document**
 
 
 
 
 
 
 
 
 
X
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document**
 
 
 
 
 
 
 
 
 
X
_____________________________________________________
*
Each a management contract or compensatory plan or arrangement required to be filed as an exhibit to this annual report on Form 10-K.
†
Confidential treatment has been granted for certain portions omitted from this exhibit pursuant to an order granted by the Commission under Rule 24b-2 of the Securities Exchange Act of 1934, as amended. Confidential portions of this exhibit have been separately filed with the Securities and Exchange Commission.
**
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.


88