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APPLIED MICRO CIRCUITS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
This management's discussion and analysis of financial condition and results of
operations ("MD&A") is provided as a supplement to the accompanying consolidated
financial statements and footnotes to help provide an understanding of our
financial condition, changes in our financial condition and results of our
operations. The MD&A is organized as follows:
• Caution concerning forward-looking statements. This section discusses how
forward-looking statements made by us in the MD&A and elsewhere in this
quarterly report are based on management's present expectations about future events and are inherently susceptible to uncertainty and changes in
circumstances.
• Overview. This section provides an introductory overview and context for
the discussion and analysis that follows in the MD&A.
• Critical accounting policies. This section discusses those accounting
policies that are both considered important to our financial condition and
operating results and require significant judgment and estimates on the
part of management in their application.
• Results of operations. This section provides an analysis of our results of
operations for the three and six months ended September 30, 2012 and 2011.
A brief description is provided of transactions and events that impact the
comparability of the results being analyzed.
• Financial condition and liquidity. This section provides an analysis of
our cash position and cash flows, as well as a discussion of our financing
arrangements and financial commitments.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
The MD&A should be read in conjunction with the consolidated financial
statements and notes thereto included in this report. This discussion contains
forward-looking statements. These forward-looking statements are made as of the
date of this report. Any statement that refers to an expectation, projection or
other characterization of future events or circumstances, including the
underlying assumptions, is a forward-looking statement. We use certain words and
their derivatives such as "anticipate", "believe", "plan", "expect", "estimate",
"predict", "intend", "may", "will", "should", "could", "future", "potential",
and similar expressions in many of the forward-looking statements. The
forward-looking statements are based on our current expectations, estimates and
projections about our industry, management's beliefs, and other assumptions made
by us. These statements and the expectations, estimates, projections, beliefs
and other assumptions on which they are based are subject to many risks and
uncertainties and are inherently subject to change. We describe many of the
risks and uncertainties that we face in Part II, Item 1A, "Risk Factors" and
elsewhere in this report. Our actual results and actual events could differ
materially from those anticipated in any forward-looking statement. Readers
should not place undue reliance on any forward-looking statement.
OVERVIEW
The Company
Applied Micro Circuits Corporation ("AppliedMicro", "APM", "AMCC", the
"Company", "we" or "our") is a leader in semiconductor solutions for the data
center, enterprise, telecom and consumer/small medium business ("SMB") markets.
We design, develop, market, sell and support high-performance low power ICs,
which are essential for the processing, transporting and storing of information
worldwide. In the telecom and enterprise markets, we utilize a combination of
design expertise coupled with system-level knowledge and multiple technologies
to offer IC products for wireline and wireless communications equipment such as
wireless access points, wireless base stations, multi-function printers,
enterprise and edge switches, blade servers, storage systems, gateways, core
switches, routers, metro, long-haul, and ultra-long-haul transport platforms. In
the consumer/SMB markets, we combine optimized software and system-level
expertise with highly integrated semiconductors to deliver comprehensive
reference designs and stand-alone semiconductor solutions for wireline and
wireless communications equipment such as wireless access points, network
attached storage, and residential and smart energy gateways. We are committed to
our strategy to focus on the transition to converge computing and connectivity
into the Data Center which will create optimized total-cost-of-ownership
solutions for cloud server workloads and position us towards the large growth
datacenter market. Our corporate headquarters are located in Sunnyvale,
California. Sales and engineering offices are located throughout the world.
We are a semiconductor company that possesses fundamental and differentiated
intellectual property for high speed signal processing, packet based
communications processors and telecommunications transport protocols. This
intellectual property enables us to be a key player in the data center,
enterprise and telecommunications applications. Our customer focus is on the
OEMs and telecommunications companies that build and connect to data centers. As
of September 30, 2012, our business had two reporting units, Computing and
Connectivity.
Since the start of fiscal 2011, we have invested a total of $353.5 million in
the R&D of new products, including higher-speed, lower-power and lower-cost
products, products that combine the functions of multiple existing products into
single highly-integrated solutions, and other products to expand and complete
our portfolio of communications solutions. These products, and our customers'
products for which they are intended, are highly complex. Due to this
complexity, it often takes several years to complete the
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development and qualification of a product before it enters into volume
production. Accordingly, we have not yet generated significant revenues from
some of the products developed during this time period. In addition, downturns
in the telecommunications market can severely impact our customers' business and
often result in significantly less demand for our products than was expected
when the development work commenced.
Acquisition of Veloce
On June 20, 2012 (the "Closing Date"), the Company completed its acquisition of
Veloce pursuant to the terms of the Agreement and Plan of Merger, entered into
as of May 17, 2009 (the "Initial Agreement"), as amended by Amendment No. 1 to
Agreement and Plan of Merger, entered into as of November 8, 2010 (the "First
Amendment"), and Amendment No. 2 to Agreement and Plan of Merger, entered into
as of April 5, 2012 (the "Second Amendment" and, collectively with the Initial
Agreement and the First Amendment, the "Merger Agreement"). The First Amendment
was amended, restated and replaced in its entirety by the Second Amendment.
The terms of the Merger Agreement include the payment of initial consideration
of $60.4 million, payable in shares of Company common stock and/or cash (at the
Company's election) to holders of Veloce common stock options that were vested
on the Closing Date, to Veloce stockholders and holders of Veloce stock
equivalents. Following the closing, the Company paid part of the consideration
by issuing approximately 2.4 million shares of its common stock and paying
approximately $12.7 million in cash, with the balance of the $60.4 million to be
paid, using a similar ratio of Company shares and cash, over the next two to
three years upon the satisfaction of additional vesting requirements. During the
three and six months ended September 30, 2012, as part of the above arrangement,
the company issued 0.2 million shares and 2.6 million shares respectively, and
paid approximately $2.1 million and $14.8 million in cash, respectively.
For accounting purposes, the consideration payable for the acquisition of Veloce
is considered compensatory and will be recognized as research and development
expense. Recognition of these costs will occur when certain development and
performance milestones become probable of achievement and earned. As of
March 31, 2012, one significant performance and development milestone set forth
under the Merger Agreement was considered probable of achievement and the
Company therefore recorded the initial consideration of $60.4 million, which was
recognized as research and development expense. During the three and six months
ended September 30, 2012, the Company recognized an additional $2.3 million and
$4.7 million, respectively, of research and development expense in connection
with progress achieved against certain product development milestones included
in the Second Amendment. No other product development milestones included in the
Merger Agreement were considered probable of achievement as of September 30,
2012.
The Second Amendment further provides for potential payments of additional
merger consideration contingent upon the achievement of certain post-closing
product development milestones relating to Company products on which Veloce has
worked. The additional payments would be payable in partial amounts upon the
achievement of each such milestone. The Company currently expects aggregate
additional payments to range from a minimum of $4.7 million to a maximum of $75
million, based on the Company's current expectations relating to the achievement
of such product development milestones. Any such additional payments may be
payable in shares of Company common stock and/or cash (at the Company's
election).
In connection with the Acquisition, substantially all of the former Veloce
employees are expected to continue working for the Company and will primarily
focus on achieving the post-closing Company product development milestones upon
which the additional payments to Veloce shareholders, Optionholders and
Unitholders are contingent.
Summary Financials
The following tables present a summary of our results of operations for the
three and six months ended September 30, 2012 and 2011 (dollars in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 46,324 100.0 % $ 64,929 100.0 % $ (18,605 ) (28.7 )%
Cost of revenues 20,561 44.4 27,704 42.7 7,143 25.8
Gross profit 25,763 55.6 37,225 57.3 (11,462 ) (30.8 )
Total operating expenses 48,515 104.7 39,313 60.5 9,202 23.4
Operating loss (22,752 ) (49.1 ) (2,088 ) (3.2 ) 20,664 989.7
Interest and other income, net 835 1.8 1,517 2.3 (682 ) (44.9 )
Loss before income taxes (21,917 ) (47.3 ) (571 ) (0.9 ) 21,346 3,738.4
Income tax (benefit) expense (360 ) 0.8 581 0.9 (941 ) (161.9 )
Net loss $ (21,557 ) (46.5 )% $ (1,152 ) (1.8 )% $ 20,405 1,771.3
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Six Months Ended September 30,
2012 2011
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 87,618 100.0 % $ 125,773 100.0 % $ (38,155 ) (30.3 )%
Cost of revenues 38,916 44.4 54,035 43.0 15,119 28.0
Gross profit 48,702 55.6 71,738 57.0 (23,036 ) (32.1 )
Total operating expenses 96,406 110.0 82,249 65.4 14,157 17.2
Operating loss (47,704 ) (54.4 ) (10,511 ) (8.4 ) 37,193 353.9
Interest and other income, net 2,597 3.0 2,873 2.3 (276 ) (9.6 )
Loss before income taxes (45,107 ) (51.5 ) (7,638 ) (6.1 ) 37,469 490.6
Income tax (benefit) expense (160 ) 0.2 391 0.3 (551 ) (140.9 )
Net loss $ (44,947 ) (51.3 )% $ (8,029 ) (6.4 )% $ 36,918 (459.8 )%
Net Revenues. We generate revenues primarily through sales of our IC products,
embedded processors and printed circuit board assemblies to OEMs, such as
Alcatel-Lucent, Ciena, Cisco, Brocade, Fujitsu, Hitachi, Huawei, Juniper,
Ericsson, NEC, Nokia Siemens Networks, and Tellabs, who in turn supply their
equipment principally to communications service providers.
On a sell-through basis, we had approximately 51 days of inventory in the
distributor channel at September 30, 2012 as compared to 70 days at
September 30, 2011. The decrease in inventory days was due to smaller amounts
being sold into the distributor channel as well as more inventory in the
distribution channel being sold through during the quarter ended September 30,
2012 as compared to the quarter ended September 30, 2011.
The gross margins for our solutions have historically declined over time. Some
factors that we expect to cause downward pressure on the gross margins for our
products include competitive pricing pressures, unfavorable product mix, the
cost sensitivity of our customers particularly in the higher-volume markets, new
product introductions by us or our competitors, and capacity constraints in our
supply chain. From time to time, for strategic reasons, we may accept orders at
less than optimal gross margins in order to facilitate the introduction of, or,
market penetration of our new or existing products. To maintain acceptable
operating results, we will need to offset any reduction in gross margins of our
products by reducing costs, increasing sales volume, developing and introducing
new products and developing new generations and versions of existing products on
a timely basis.
We classify our revenues into two categories based on the markets that the
underlying products serve. The categories are Computing and Connectivity. We use
this information to analyze our performance and success in these markets
including our strategy to focus on the transition to the large growth datacenter
market.
We are continuing to focus our current connectivity investments on high growth
10G and faster Ethernet solutions, data center, Optical Transport Network
("OTN") and enterprise market opportunities while continuing to service the
Telecom (SONET/SDH) market. Over time, we believe customers will transition from
the SONET/SDH standard to higher speed, lower power products that utilize the
OTN standard in order to support the increasing demand for transmission of data
over networks. However, the timing and extent of this transition is uncertain
due to the significant investment that is needed to convert networks to the OTN
standard. As such, the rate of conversion to the OTN standard is, in part,
greatly influenced by global economic market conditions. Recessionary type
market conditions will result in a slower transition of networks to the OTN
standard. Additionally, there can be no assurance that our revenues will
increase as the OTN standard is adopted.
The demand for our products has been affected in the past, and may continue to
be affected in the future, by various factors, including, but not limited to,
the following:
• the timing, rescheduling or cancellation of significant customer orders
and our ability, as well as the ability of our customers, to manage
inventory corrections;
• the qualification, availability and pricing of competing products and
technologies and the resulting effects on the sales, pricing and gross
margins of our products;
• our ability to specify, develop or acquire, complete, introduce, and
market new products and technologies in a cost effective and timely
manner;
• the rate at which our present and future customers and end-users adopt our products and technologies in our target markets;
• general economic and market conditions in the semiconductor industry and
communications markets;
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• combinations of companies in our customer base, resulting in the
combined company choosing our competitor's IC standardization rather
than our supported product platforms;
• the gain or loss of one or more key customers, or their key customers,
or significant changes in the financial condition of one or more of
our key customers or their key customers;
• our expectation of a market ramp for our products could be incorrect
and such ramp could get pushed out or not happen at all;
• our ability to meet customer demand due to capacity constraints at our
suppliers; and
• natural disasters that could affect our supply chain or our customer's
supply chain which would affect their requirements of our products.
For these and other reasons, our net revenue and results of operations for the
three and six months ended September 30, 2012 may not necessarily be indicative
of future net revenue and results of operations.
Based on direct shipments, net revenues to customers that were equal to or
greater than 10% of total net revenues were as follows (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
2012 2011 2012 2011
Wintec (global logistics provider) 20 % 21 % 19 % 21 %
Avnet (distributor) 28 % 20 % 28 % 18 %
Ericsson * 14 % * 10 %
Flextronics (sub-contract manufacturer) 12 % * 11 % 13 %
* Less than 10% of total net revenues.
We expect that our largest customers will continue to account for a substantial
portion of our net revenue for the foreseeable future.
Net revenues by geographic region were as follows (in thousands):
Three Months Ended September 30, Six Months Ended September 30,
2012 2011 2012 2011
% of Net % of Net % of Net % of Net
Amount Revenue Amount Revenue Amount Revenue Amount Revenue
United States of America* $ 17,283 37.3 % $ 32,377 49.9 % $ 33,428 38.1 % $ 58,441 46.5 %
Taiwan 4,965 10.7 4,871 7.5 10,066 11.5 9,466 7.5
Hong Kong 6,189 13.4 8,333 12.8 11,918 13.6 12,507 9.9
China 1,056 2.3 1,730 2.7 1,589 1.8 3,090 2.5
Europe* 9,832 21.2 8,700 13.4 16,790 19.2 22,694 18.0
Japan 1,829 3.9 1,940 3.0 4,038 4.6 3,841 3.0
Malaysia 1,401 3.0 1,791 2.8 2,345 2.7 4,845 3.8
Singapore 2,659 5.7 3,082 4.7 5,062 5.8 6,875 5.5
Other Asia 1,024 2.2 1,705 2.6 1,928 2.2 3,568 2.8
Other 86 0.3 400 0.6 454 0.5 446 0.5
$ 46,324 100.0 % $ 64,929 100.0 % $ 87,618 100.0 % $ 125,773 100.0 %
* Change in revenues was primarily due to shift in customer demand and continuing
geographic changes to macro economic-conditions
All of our revenues are primarily denominated in U.S. dollars, other than
revenues that account for less than 10% of our total revenues, which are
denominated primarily in Danish Kroner.
Key non-GAAP measurements. We use certain non-GAAP metrics such as Adjusted
Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted
EBITDA") to measure our performance. We define Adjusted EBITDA as net (loss)
income, less interest income, income taxes, depreciation and amortization,
stock-based compensation, amortization of intangibles and other one-time and/or
non-cash items.
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The following table reconciles Adjusted EBITDA to the accompanying financial
statements (in thousands):
Three Months Ended Six Months Ended
September 30, September 30,
2012 2011 2012 2011
Net loss $ (21,557 ) $ (1,152 ) $ (44,947 ) $ (8,029 )
Adjustment to net loss:
Interest and other income, net (661 ) (924 ) (1,334 ) (2,268 )
Stock-based compensation expense 7,634 3,124 15,323 7,302
Warrant expense - - 1,289 -
Amortization of purchased intangibles 1,280 1,482 2,609 4,096
Restructuring (recoveries) charges
- (40 ) - 873
Veloce accrued liability 2,325 - 4,650 -
Impairment of marketable securities* (174 ) (593 ) (1,263 ) (605 )
Acquisition related recoveries
- (2,267 ) - (2,267 )
Depreciation and amortization 3,550 2,423 6,355 4,654
Other and income tax adjustment (360 ) 581 (293 ) 391
Adjusted EBITDA $ (7,963 ) $ 2,634 $ (17,611 ) $ 4,147
* For non-GAAP purposes, any gain or loss relating to marketable securities is
not recognized until the underlying securities are sold and the actual gain or
loss is realized.
We believe that Adjusted EBITDA is a useful supplemental measure of our
operation's performance because it helps investors evaluate and compare the
results of operations from period to period by removing the accounting impact of
the company's financing strategies, tax provisions, depreciation and
amortization, restructuring charges, stock based compensation expense,
discontinued operations and certain other operating items. We adjust for these
excluded items because we believe that, in general, these items possess one or
more of the following characteristics: their magnitude and timing is largely
outside of the company's control; they are unrelated to the ongoing operations
of the business in the ordinary course; they are unusual or infrequent and the
company does not expect them to occur in the ordinary course of business; or
they are non-cash expenses.
Adjusted EBITDA is not a measure determined in accordance with generally
accepted accounting principles in the United States, or GAAP, and should not be
considered a substitute for operating income, net income or any other measure
determined in accordance with GAAP. Adjusted EBITDA should not be considered in
isolation or as a substitute for measures of performance prepared in accordance
with GAAP. Adjusted EBITDA is used by our management as a measure of operating
efficiency and overall financial performance for benchmarking against our peers
and competitors and is used as a metric to determine the performance vesting of
our three-year RSU grants issued in May 2009 (the "EBITDA Grants") and May 2011
(the "EBITDA2 Grants"). Management believes Adjusted EBITDA provides meaningful
supplemental information regarding the underlying operating performance of our
business. Management also believes that Adjusted EBITDA is useful to investors
because it is frequently used by securities analysts, investors and other
interested parties to evaluate the company.
The book-to-bill ratio is another metric commonly used by investors to compare
and evaluate technology and semiconductor companies. The book-to-bill ratio is a
demand-to-supply ratio that compares the total amount of orders received to the
total amount of orders filled. This ratio tells whether the company has more
orders than it delivered (if greater than 1), has the same amount of orders that
it delivered (equals 1), or has less orders than it delivered (under 1). Though
the ratio provides an indicator of whether orders are rising or falling, it does
not consider the timing of or if the order will result in future revenues and
the effect of changing lead times on bookings. Our book-to-bill ratio at
September 30, 2012 and 2011 was 1.0 and 0.9, respectively.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of net revenue and
expenses in the reporting period. We regularly evaluate our estimates and
assumptions related to: inventory valuation and capitalized mask set costs,
which affect our cost of sales and gross profit; the valuation of goodwill and
purchased intangibles, which has in the past affected, and could in the future
affect, our impairment charges to write down the carrying value of purchased
intangibles and the amount of related periodic amortization expense recorded for
definite-lived intangibles; the valuation of the Veloce consideration which
affects operating expenses; and an evaluation of other-than-temporary impairment
of our investments, which affects the amount and timing of write-down charges.
We also have other key accounting policies, such as our policies for stock-based
compensation and revenue recognition. The methods, estimates and judgments we
use in
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applying these critical accounting policies have a significant impact on the
results we report in our financial statements. We base our estimates and
assumptions on historical experience and on 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 experienced
by us may differ materially and adversely from management's estimates. To the
extent there are material differences between our estimates and the actual
results, our future results of operations will be affected.
We believe the following critical accounting policies require us to make
significant judgments and estimates in the preparation of our consolidated
financial statements.
Investments
We hold a variety of securities that have varied underlying investments. We
review our investment portfolio periodically to assess for other-than-temporary
impairment. We assess the existence of impairment of our investments in order to
determine the classification of the impairment as "temporary" or
"other-than-temporary". The factors used to determine whether an impairment is
temporary or other-than-temporary involves considerable judgment. The factors we
consider in determining whether any individual impairment is temporary or
other-than-temporary are primarily the length of the time and the extent to
which the market value has been less than amortized cost, the nature of
underlying assets (including the degree of collateralization), the financial
condition, credit rating, market liquidity conditions and near-term prospects of
the issuer. If the fair value of a debt security is less than its amortized cost
basis at the balance sheet date, an assessment would have to be made as to
whether the impairment is other-than-temporary. If we decided to sell the
security, an other-than-temporary impairment shall be considered to have
occurred. However, if we do not intend to sell the debt security, we shall
consider available evidence to assess whether it is more likely than not we will
be required to sell the security before the recovery of its amortized cost basis
due to cash, working capital requirements, contractual or regulatory obligations
indicate that the security will be required to be sold before a forecasted
recovery occurs. If it is more likely than not that we are required to sell the
security before recovery of its amortized cost basis, an other-than-temporary
impairment is considered to have occurred. If we do not expect to recover the
entire amortized cost basis of the security, we would not be able to assert that
we will recover its amortized cost basis even if we do not intend to sell the
security. Therefore, in those situations, an other-than-temporary impairment
shall be considered to have occurred. We use present value cash flow models to
determine whether the entire amortized cost basis of the security will be
recovered. We will compare the present value of cash flows expected to be
collected from the security with the amortized cost basis of the security. An
other-than-temporary impairment is said to have occurred if the present value of
cash flows expected to be collected is less than the amortized cost basis of the
security. During the three and six months ended September 30, 2012 and fiscal
year ended March 31, 2012, we did not record any other-than-temporary impairment
charges. As of September 30, 2012, we did not record an impairment charge in
connection with securities in a loss position (fair value less than carrying
value) with unrealized losses of $1.1 million as we believe that such unrealized
losses are temporary. In addition, we also had $8.3 million in unrealized gains.
Veloce Consideration
We periodically evaluate the progress of the development work that is performed
by our wholly owned subsidiary, Veloce, in connection with our contractual
arrangement with Veloce. Based on such an evaluation as well as considering
various other qualitative factors, we assess the estimated timing and
probability of attaining certain performance milestones. Upon assessing a
milestone as probable of achievement, the expense that is recognized considers
the stage of product development and estimating the performance metrics that
will be achieved. The consideration that we will pay for each performance
milestone is based upon the timing and the performance metrics that will
ultimately be achieved. Significant judgment is required to assess estimated
timing and the probability of achieving the performance milestones and
determining the amount of expense to be recognized.
During the three and six months ended September 30, 2012, the Company recognized
an additional $2.3 million and $4.7 million, respectively, of research and
development expense in connection with progress achieved against certain product
development milestones included in the Second Amendment. No other product
development milestones included in the Merger Agreement were considered probable
of achievement as of September 30, 2012.
Inventory Valuation
Our policy is to value inventories at the lower of cost or market on a
part-by-part basis. This policy requires us to make estimates regarding the
market value of our inventories, including an assessment of excess or obsolete
inventories. We determine excess and obsolete inventories based on an estimate
of the future demand for our products within a specified time horizon, generally
12 months. The estimates we use for future demand are also used for near-term
capacity planning and inventory purchasing and are consistent with our revenue
forecasts. If our demand forecast is greater than our actual demand we may be
required to take additional excess inventory charges, which would decrease gross
margin and net operating results. Any impairment charges taken establishes a new
cost basis for the underlying inventory and the cost basis for such inventory is
not marked-up on changes in circumstances until a gain is realized upon its
eventual sale. This accounting is consistent with the guidance provided by SAB
Topic 5-BB. To illustrate the
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sensitivity of inventory valuations to future estimates, as of September 30,
2012, reducing our future demand estimate to six months would decrease our
current inventory valuation by approximately $0.7 million and increasing our
future demand forecast to 18 months would not have any significant effect on our
current inventory valuation.
Purchased Definite-Lived Intangible Assets and Other Long-Lived Assets
We evaluate our long-lived assets such as property, plant and equipment and
purchased intangible assets with finite lives, for impairment whenever events or
changes in circumstances indicate the carrying value of an asset or asset group
may not be recoverable. The carrying value of an asset or asset group is not
recoverable if the amount 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 an impairment has
occurred, we reduce the carrying value of the assets to its comparable market
value (if available and appropriate) or to its estimated fair value based on a
discounted cash flow approach.
Revenue Recognition
We recognize revenue based on four basic criteria: 1) there is evidence that an
arrangement exists; 2) delivery has occurred; 3) the fee is fixed or
determinable; and 4) collectability is reasonably assured. We recognize revenue
upon determination that all criteria for revenue recognition have been met. In
addition, we do not recognize revenue until the applicable customer's acceptance
criteria have been met. The criteria are usually met at the time of product
shipment. Our standard terms and conditions of sale do not allow for product
returns and we generally do not allow product returns other than under warranty
or stock rotation agreements. Revenue from shipments to distributors is
recognized upon shipment. In addition, we record reductions to revenue for
estimated allowances such as returns not pursuant to contractual rights,
competitive pricing programs and rebates. These estimates are based on our
experience with stock rotations and the contractual terms of the competitive
pricing and rebate programs. Royalty revenues are recognized when cash is
received, only when royalty amounts cannot be reasonably estimated. Royalty
revenues are based upon sales of our customer's products that include our
technology.
Shipping terms are generally FCA (Free Carrier) shipping point. If actual
returns or pricing adjustments exceed our estimates, we would record additional
reductions to revenue.
From time to time we generate revenue from the sale of our internally developed
IP. We generally recognize revenue from the sale of IP when all basic criteria
outlined above are met, which is generally when the payments are received.
Mask Costs
We incur significant costs for the fabrication of masks used by our contract
manufacturers to manufacture our products. If we determine, at the time the cost
for the fabrication of masks are incurred, that technological feasibility of the
product has been achieved, we consider the nature of these costs to be
pre-production costs. Accordingly, such costs are capitalized as property and
equipment under machinery and equipment and are amortized as cost of sales over
approximately three years, representing the estimated production period of the
product. We periodically reassess the estimated product production period for
specific mask sets capitalized. If we determine, at the time fabrication mask
costs are incurred, that either technological feasibility of the product has not
occurred or that the mask is not reasonably expected to be used in production
manufacturing or that the commercial feasibility of the product is uncertain,
the related mask costs are expensed to R&D in the period in which the costs are
incurred. We will also periodically assess capitalized mask costs for
impairment. During the three and six months ended September 30, 2012, total mask
costs capitalized was $1.2 million and $3.1 million, respectively. During the
three and six months ended September 30, 2011, total mask costs capitalized was
$1.1 million each.
Stock-Based Compensation Expense
All share-based payments, including grants of stock options, restricted stock
units and employee stock purchase rights, are required to be recognized in our
financial statements based on their respective grant date fair values. The fair
value of each employee stock option and employee stock purchase right is
estimated on the date of grant using an option pricing model that meets certain
requirements. We currently use the Black-Scholes option pricing model to
estimate the fair value of our share-based payments, excluding RSUs, which we
use the fair market value of our common stock. The fair values generated by the
Black-Scholes model may not be indicative of the actual fair values of our
stock-based awards as it does not consider certain factors important to
stock-based awards, such as continued employment, periodic vesting requirements
and limited transferability. The determination of the fair value of share-based
payment awards utilizing the Black-Scholes model is affected by our stock price
and a number of assumptions, including expected volatility, expected life,
risk-free interest rate and expected dividends. We estimate the expected
volatility of our stock options at grant date by equally weighting the
historical volatility and the implied volatility of our stock over specific
periods of time as the expected volatility assumption required in the
Black-Scholes model. The expected life of the stock options is based on
historical and other data including life of the option and vesting period. The
risk-free interest rate assumption is the implied yield currently available on
zero-coupon government issues with a remaining term equal to the expected
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term. The dividend yield assumption is based on our history and expectation of
dividend payouts. The fair value of our restricted stock units is based on the
fair market value of our common stock on the date of grant. Forfeitures are
required to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ significantly from those
estimated. We evaluate the assumptions used to value stock-based awards on a
quarterly basis. If factors change and we employ different assumptions,
stock-based compensation expense may differ significantly from what we have
recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, we may be required to accelerate, increase or
cancel any remaining unearned stock-based compensation expense. We currently
estimate when and if performance-based grants will be earned. If the awards are
not considered probable of achievement, no amount of stock-based compensation is
recognized. If we consider the award to be probable, expense is recorded over
the estimated service period. To the extent that our assumptions are incorrect,
the amount of stock-based compensation recorded will be increased or decreased.
To the extent that we grant additional equity securities to employees or we
assume unvested securities in connection with any acquisitions, our stock-based
compensation expense will be increased by the additional unearned compensation
resulting from those additional grants or acquisitions.
RESULTS OF OPERATIONS
Comparison of the Three and Six Months Ended September 30, 2012 to the Three and
Six Months Ended September 30, 2011
Net Revenues. Net revenues for the three and six months ended September 30, 2012
were $46.3 million and $87.6 million, representing a decrease of 28.7% and 30.3%
from net revenues of $64.9 million and $125.8 million for the three and six
months ended September 30, 2011, respectively. We classify our revenues into two
categories based on the markets that the underlying products serve. The
categories are Computing and Connectivity. We use this information to analyze
our performance and success in these markets. See the following tables (dollars
in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue (Decrease) Change
Computing $ 23,776 51.3 % $ 32,565 50.2 % $ (8,789 ) (27.0 )%
Connectivity 22,548 48.7 32,364 49.8 (9,816 ) (30.3 )
$ 46,324 100.0 % $ 64,929 100.0 % $ (18,605 ) (28.7 )%
Six Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue (Decrease) Change
Computing $ 46,214 52.7 % $ 64,159 51.0 % $ (17,945 ) (28.0 )%
Connectivity 41,404 47.3 61,614 49.0 (20,210 ) (32.8 )
$ 87,618 100.0 % $ 125,773 100.0 % $ (38,155 ) (30.3 )%
During the three and six months ended September 30, 2012, our Computing revenues
declined by 27.0% and 28.0%, respectively, and our Connectivity revenues
declined by 30.3% and 32.8%, respectively compared to the same period last year.
The overall revenue decline was spread across both the Computing and
Connectivity product families and was as a result of lower demand for our
products due to overall softness in the macro conditions. In addition, the
revenues for our Connectivity products were lower due to the delay in the
overall OTN infrastructure build-out.
Gross Profit. The following table presents net revenues, cost of revenues and
gross profit for the three and six months ended September 30, 2012 and 2011
(dollars in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 46,324 100.0 % $ 64,929 100.0 % $ (18,605 ) (28.7 )%
Cost of revenues 20,561 44.4 27,704 42.7 7,143 25.8
$ 25,763 55.6 % $ 37,225 57.3 % $ (11,462 ) (30.8 )%
Six Months Ended September 30,
2012 2011
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Net revenues $ 87,618 100.0 % $ 125,773 100.0 % $ (38,155 ) (30.3 )%
Cost of revenues 38,916 44.4 54,035 43.0 15,119 28.0
$ 48,702 55.6 % $ 71,738 57.0 % $ (23,036 ) (32.1 )%
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The gross profit percentage for the three and six months ended September 30,
2012 was 55.6% compared to 57.3% and 57.0% for the three and six months ended
September 30, 2011, respectively. The decrease in our gross profit percentage,
excluding the impact of amortization of purchased intangibles, was 58.5% and
57.8%, and 59.7% and 58.8%, respectively, for the three and six months ended
September 30, 2012 and 2011, respectively. The decrease in our gross profit
percentage was primarily due to lower licensing revenues, unfavorable product
mix, lower overall revenues that have an impact on the absorption of fixed
costs, and declining average selling prices.
The amortization of purchased intangible assets included in cost of revenues
during the three and six months ended September 30, 2012 and 2011 $1.4 million
and $1.9 million, and $1.5 million and $2.2 million, respectively. The decrease
was primarily due to certain purchased intangible assets being fully amortized
during the fiscal year ended March 31, 2012 resulting in a lower amortization
charge in the three and six months ended September 30, 2012.
Research and Development and Selling, General and Administrative Expenses. The
following table presents research and development and selling, general and
administrative expenses for the three and six months ended September 30, 2012
and 2011 (dollars in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue Increase Change
Research and development $ 34,383 74.2 % $ 29,609 45.6 % $ 4,774 16.1 %
Selling, general and administrative $ 13,531 29.2 % $ 8,941 13.8 % $ 4,590 51.3 %
Six Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue Increase Change
Research and development $ 69,154 78.9 % $ 57,977 46.1 % $ 11,177 19.3 %
Selling, general and administrative $ 26,001 29.7 % $ 21,497 17.1 % $ 4,504 21.0 %
Research and Development. Increases in research and development ("R&D") expenses
are primarily driven by the effect of a ramp-up in the costs relating to Veloce,
our wholly-owned subsidiary, our internal costs related to the ARM 64-bit
silicon server development effort, and costs incurred on our developmental
effort relating to other new products. Total consolidated R&D expenses consist
primarily of salaries and related costs (including stock-based compensation) of
employees engaged in research, design and development activities, costs related
to engineering design tools, subcontracting costs and facilities expenses.
We recorded an initial consideration of $60.4 million as of March 31, 2012
(fiscal 2012) relating to the Veloce merger as the consummation of this merger
was considered probable as of this date. On June 20, 2012, we completed the
merger of Veloce and as of September 30, 2012, we recognized an additional $4.7
million of R&D expense in connection with progress achieved against certain
product development milestones included in the second amendment. For accounting
purposes, the Veloce consideration is considered a compensatory R&D expenditure
(as the merger consideration is primarily to acquire the R&D employees of
Veloce) which will be paid out in cash or equity, or a combination thereof, at
the discretion of the Company. Additional purchase consideration will be
recorded and amortized in future periods, if and when the additional development
milestones are achieved. See note 4 of Notes to Condensed Consolidated Financial
Statements for further details relating to Veloce.
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The increase in R&D expenses of 16.1% for the three months ended September 30,
2012 compared to the three months ended September 30, 2011 was primarily due to
$2.3 million for Veloce merger consideration costs, $2.0 million in stock-based
compensation charges, $0.8 million in consumable equipment and software cost,
$0.6 million in third party foundry cost $0.5 million in personnel cost, $0.3
million in packaging and other engineering costs offset by a decrease of $0.6 in
technology access fees, $0.5 million in printed circuit board cost, and $0.3
each million in new product development cost and engineering tools and supplies.
The increase in R&D expenses of 19.3% for the six months ended September 30,
2012 compared to the six months ended September 30, 2011 was primarily due $6.0
million for Veloce merger consideration costs (which includes approximately $1.3
million of expense related to the acceleration of Veloce warrants), $3.8 million
in stock-based compensation charges, $1.4 million in consumable equipment and
software cost, $0.9 million in personnel cost, $0.7 million each in customer
funded non-recurring engineering payments, corporate allocation expense and
packaging and other engineering costs offset by a decrease of $1.4 million in
technology access fees, $0.5 million in third party foundry cost, $0.4 million
in contractor cost and $0.2 million in printed circuit board cost.
We believe that a continued commitment to R&D is vital to our goal of
maintaining a leadership position with innovative products. In addition to our
internal R&D programs, our business strategy includes acquiring products,
technologies or businesses from third parties. Future acquisitions of products,
technologies or businesses may result in substantial additional on-going R&D
costs.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses consist primarily of personnel related expenses (including
stock-based compensation), professional and legal fees, corporate branding and
facilities expenses. The increase in SG&A expenses of 51.3% for the three months
ended September 30, 2012 compared to the three months ended September 30, 2011,
was primarily due to $2.4 million in stock-based compensation charges, $2.3
million relating to the reversal of a previously accrued liability associated
with an acquisition in the quarter ended September 30, 2011 (none in the quarter
ended September 30, 2012), $0.7 million in professional service fees offset by a
decrease of $0.5 million in general administration costs, $0.2 million in
marketing and travel costs and $0.1 million in sales commission expenses. The
increase in SG&A expenses of 21.0% for the six months ended September 30, 2012
compared to the six months ended September 30, 2011, was primarily due to $4.0
million in stock-based compensation charges, $2.1 million relating to the
reversal of previously accrued liabilities associated with an acquisition in the
six months ended September 30, 2011 (none in the six months ended September 30,
2012) and $0.8 million in professional service fees offset by a decrease of $0.6
million in general administration costs, $0.4 million each in personnel cost,
$0.5 each in marketing and travel costs and corporate allocation expenses, $0.3
million in sales commission cost and $0.1 million in professional service fees.
Future acquisitions of products, technologies or businesses may result in
substantial additional on-going SG&A costs.
Stock-Based Compensation. The following table presents stock-based compensation
expense for the three and six months ended September 30, 2012 and 2011, which
was included in the tables above (dollars in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue Increase Change
Costs of revenues $ 177 0.4 % $ 98 0.1 % $ 79 80.6 %
Research and development 3,714 8.0 1,726 2.7 1,988 115.2
Selling, general and administrative 3,743 8.1 1,300 2.0 2,443 187.9
$ 7,634 16.5 % $ 3,124 4.8 % $ 4,510 144.4 %
Six Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue Increase Change
Costs of revenues $ 438 0.5 % $ 209 0.1 % $ 229 109.6 %
Research and development 7,919 9.0 4,114 3.3 3,805 92.5
Selling, general and administrative 6,966 8.0 2,979 2.4 3,987 133.8
$ 15,323 17.5 % $ 7,302 5.8 % $ 8,021 109.8 %
The increase in stock-based compensation of 144.4% and 109.8% during the three
and six months ended September 30, 2012 compared to the three and six months
ended September 30, 2011, respectively, was primarily due to the expense
associated with the granting of new performance retention grants and other
performance based awards. The above stock based compensation expense of
approximately $7.6 million and $15.3 million for the three and six months ended
September 30, 2012 does not include approximately $1.3 million of expense
related to the acceleration of Veloce warrants. See note 5 of Notes to Condensed
Consolidated Financial Statements for further details relating to the Veloce
warrants.
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Restructuring Charges. There were no restructuring charges for the three and six
months ended September 30, 2012. The restructuring charges recorded during the
three and six months ended September 30, 2011 was primarily for employee
severances. As part of our ongoing cost reduction efforts, we could implement
additional restructuring programs and may incur significant additional
restructuring charges.
Interest and Other Income, net. The following table presents interest and other
income (expense), net for the three and six months ended September 30, 2012 and
2011 (dollars in thousands):
Three Months Ended September 30,
2012 2011
% of Net % of Net Increase %
Amount Revenue Amount Revenue (Decrease) Change
Interest income (expense), net $ 745 1.6 % $ 1,469 2.3 % $ (724 ) (49.3 )%
Other income (expense), net $ 90 0.2 % $ 48 (0.1 )% $ 42 (87.5 )%
Six Months Ended September 30,
2012 2011
% of Net % of Net %
Amount Revenue Amount Revenue (Decrease) Change
Interest income (expense), net $ 2,424 2.2 % $ 2,750 2.2 % $ (326 ) (11.9 )%
Other income (expense), net $ 173 0.1 % $ 123 0.1 % $ 50 40.7 %
Interest Income (expense), net. Interest income, net of management fees,
reflects interest earned on cash and cash equivalents, short-term investments
and marketable securities. The decrease in interest income, net for the three
and six months ended September 30, 2012, compared to the three and six months
ended September 30, 2011 was primarily due to our lower cash, cash equivalents
and short-term investments available-for-sale balances.
Income Taxes. The federal statutory income tax rate was 35% for the fiscal three
and six months ended September 30, 2012 and 2011. The decrease in the income tax
expense recorded for the three months ended September 30, 2012 compared to
September 30, 2011, was primarily related to other comprehensive income. The
allocation of the prior year tax provision included recognizing $0.4 million tax
benefit arising from the loss from continuing operations and the offsetting tax
expense was allocated to other comprehensive income.
FINANCIAL CONDITION AND LIQUIDITY
As of September 30, 2012, our principal source of liquidity consisted of $89.7
million in cash, cash equivalents and short-term investments which is
approximately $1.37 per share of outstanding common stock as compared to $1.84
per share at March 31, 2012. Working capital as of September 30, 2012 was $100.8
million. Total cash, cash equivalents, and short-term investments decreased by
$24.2 million during the six months ended September 30, 2012, primarily due to
cash used for operations of $28.3 million, purchase of property and equipment of
$7.6 million, the repurchases of our common stock for $0.7 million, a strategic
investment of $0.5 million, payment of contingent consideration of $0.5 million
and the funding of restricted stock units withheld for taxes of $0.3 million
offset by proceeds from stock issuance of $5.4 million, proceeds from sale of a
strategic equity investment of $7.1 million and a $1.4 million unrealized gain
on our short-term investments. At September 30, 2012, we had contractual
obligations not included on our balance sheet totaling $89.6 million, primarily
related to facility leases, IP licenses, engineering design software tool
licenses, non-cancelable inventory purchase commitments and liability for
uncertain tax positions.
For the six months ended September 30, 2012, we used $28.3 million of cash in
our operations compared to $8.9 million used for our operations for the six
months ended September 30, 2011. Our net loss of $44.9 million for the six
months ended September 30, 2012 included $28.1 million of non-cash charges
consisting of $4.9 million of depreciation, $2.6 million of amortization of
purchased intangibles, $16.6 million of stock-based compensation and $4.7
million of additional Veloce compensation cost offset by $0.6 million relating
to the tax effect on other comprehensive income and $0.1 million in acquisition
related adjustment (relating to our TPack acquisition in fiscal 2011). Our net
loss of $8.0 million for the six months ended September 30, 2011 included $12.9
million of non-cash charges consisting of $3.8 million of depreciation, $4.1
million of amortization of purchased intangibles and $7.3 million of stock-based
compensation, offset by a $2.3 million reduction to the estimated fair value of
our contingent consideration. The remaining change in operating cash flows for
the six months ended September 30, 2012 primarily reflected decreases in
accounts receivable, inventories, other assets, accounts payable, Veloce accrued
liability, deferred revenue and other accrued liabilities and increases in
accrued payroll and related expenses. Our overall quarterly days sales
outstanding was 28 days and 40 days for the three months ended September 30,
2012 and 2011, respectively. Decrease in the revenues generated during the last
month of the quarter ended September 30, 2012 as compared to the same period for
the quarter ended March 31, 2012 was the primary reason for the decrease in our
day's sales outstanding.
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We provided $8.5 million in cash from our investing activities during the six
months ended September 30, 2012, compared to generating $6.8 million during the
six months ended September 30, 2011. During the six months ended September 30,
2012, we used $7.6 million for the purchase of property and equipment and $0.5
million for purchase of strategic investment offset by proceeds of $9.5 million
from short-term investment activities and $7.1 million from sales of strategic
equity investment. During the six months ended September 30, 2011, we generated
$20.0 million for net short-term investment activities offset by $9.8 million
for the purchase of property and equipment, $2.5 million for purchase of
strategic investment and $1.0 million in funding of a note receivable.
We provided $3.6 million in cash for our financing activities during the six
months ended September 30, 2012, compared to using $30.5 million during the six
months ended September 30, 2011. The major financing use of cash for the six
months ended September 30, 2012 was the $0.7 million for the repurchase of
common stock, $0.5 million for the payment of a contingent consideration and
restricted stock units withheld for taxes of $0.3 million, offset by proceeds
from the issuance of common stock of $5.3 million. The major financing use of
cash for the six months ended September 30, 2011 was $20.9 million for the
repurchase of common stock, $10.0 million for the funding of our structured
stock repurchase agreements and $2.4 million for restricted stock units withheld
for taxes, offset by $3.0 million in proceeds from the issuance of common stock.
Veloce Merger
On June 20, 2012 (the "Closing Date"), the Company completed its acquisition of
Veloce pursuant to the terms of the Agreement and Plan of Merger, entered into
as of May 17, 2009 (the "Initial Agreement"), as amended by Amendment No. 1 to
Agreement and Plan of Merger, entered into as of November 8, 2010 (the "First
Amendment"), and Amendment No. 2 to Agreement and Plan of Merger, entered into
as of April 5, 2012 (the "Second Amendment" and, collectively with the Initial
Agreement and the First Amendment, the "Merger Agreement"). The First Amendment
was amended, restated and replaced in its entirety by the Second Amendment.
The terms of the Merger Agreement include the payment of initial consideration
of up to $60.4 million, payable in shares of Company common stock and/or cash
(at the Company's election) to holders of Veloce common stock options that were
vested on the Closing Date, to Veloce stockholders and holders of Veloce stock
equivalents. Following the closing, the Company paid part of the consideration
by issuing approximately 2.4 million shares of its common stock and paying
approximately $12.7 million in cash, with the balance of the $60.4 million to be
paid, using a similar ratio of Company shares and cash, over the next two to
three years upon the satisfaction of additional vesting requirements. During the
three and six months ended September 30, 2012, as part of the above arrangement,
the company issued 0.2 million shares and 2.6 million shares respectively, and
paid approximately $2.1 million and $14.8 million in cash, respectively.
The Second Amendment further provides for potential payments of additional
merger consideration contingent upon the achievement of certain post-closing
product development milestones relating to Company products on which Veloce has
worked. The additional payments would be payable in partial amounts upon the
achievement of each such milestone. The Company currently expects aggregate
additional payments to range from a minimum of $4.7 million to a maximum of $75
million, based on the Company's current expectations relating to the achievement
of such product development milestones. Any such additional payments may be
payable in shares of Company common stock and/or cash (at the Company's
election).
Although we currently believe we have adequate liquidity to operate normally,
our cash balances could decrement significantly if we decide to pay for the
remainder of the Veloce acquisition consideration using a greater proportion of
cash or if our normal operations require us to expend more cash. If our stock
price declines further, it could result in a much higher dilution to our
stockholders. As a result of any of the above, we may be faced with liquidity
issues and may be forced to raise capital from other sources, which may or may
not be possible to do so on reasonable terms.
Stock Repurchase Program
In August 2004, our Board of Directors authorized a stock repurchase program for
the repurchase of up to $200.0 million of our common stock. Under the program,
we are authorized to make purchases in the open market or enter into structured
agreements. In October 2008, our Board of Directors increased the stock
repurchase program by $100.0 million. During the six months ended September 30,
2012, approximately 0.1 million shares were repurchased on the open market at a
weighted average price of $5.18 per share. During the six months ended
September 30, 2011, approximately 3.5 million shares were repurchased on the
open market at a weighted average price of $5.98 per share. All repurchased
shares were retired upon delivery to us. As of September 30, 2012, we had $15.8
million available in our stock repurchase program.
We also utilize structured stock repurchase agreements to buy back shares which
are prepaid written put options on our common stock. We pay a fixed sum of cash
upon execution of each agreement in exchange for the right to receive either a
pre-determined amount of cash or stock depending on the closing market price of
our common stock on the expiration date of the agreement. Upon expiration of
each agreement, if the closing market price of our common stock is above the
pre-determined price, we will have our cash investment returned with a premium.
If the closing market price is at or below the pre-determined price, we will
receive the number of shares specified at the agreement inception. Any cash
received, including the premium, is treated as additional paid in capital on the
balance sheet.
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We did not enter into any structured stock repurchase agreements during the six
months ended September 30, 2012. During the six months ended September 30, 2011,
we entered into structured stock repurchase agreements totaling $10.0 million.
For those agreements that settled during the six months ended September 30,
2011, we received 1.0 million in shares of our common stock at an effective
purchase price of $9.74 per share from the settled structured stock repurchase
agreements. At September 30, 2011, we had no outstanding structured stock
repurchase agreements.
Other
Our aggregate fixed commitments payable over the next five years for licensing
fees relating to our R&D efforts, including our licensed IP, technology, product
design, test and verification tools, are approximately $23.5 million. These
amounts are also included in the table below.
The following table summarizes our contractual operating leases and other
purchase commitments as of September 30, 2012 (in thousands):
Other
Operating Purchase
Leases Commitments Total Fiscal Years Ending March 31, 2013 $ 1,252 $ 56,877 *
$ 58,129
2014 1,692 13,795 15,487
2015 870 11,996 12,866
2016 147 2,999 3,146
Total minimum payments $ 3,961 $ 85,667 $ 89,628
* Includes liability for uncertain tax positions of $43.4 million including
interest and penalties. Due to the high degree of uncertainty regarding the
timing of potential future cash flows associated with these liabilities, we are
unable to make a reasonably reliable estimate of the amount and period in which
these liabilities might be paid.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements as at September 30, 2012.
We believe that our available cash, cash equivalents and short-term investments
will be sufficient to meet our capital requirements and fund our operations for
at least the next 12 months, although we could elect or could be required to
raise additional capital during such period. There can be no assurance that such
additional debt or equity financing will be available on commercially reasonable
terms or at all. We expect to end our fiscal year with approximately $70 million
in cash which we believe is the adequate level of cash to run our business
operations. However, although we currently believe we have adequate liquidity to
operate normally, our cash balances could decrement significantly if we decide
to pay for the remainder of the Veloce acquisition consideration using a greater
proportion of cash or if our normal operations require us to expend more cash.
If our stock price declines further, it could result in a much higher dilution
to our stockholders. As a result of any of the above, we may be faced with
liquidity issues and may be forced to raise capital from other sources, which
may or may not be possible to do so on reasonable terms.
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