10-Q
1
a10-17289_110q.htm
10-Q
Table of
Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark
One)
x QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended September 30, 2010
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 000-29661
UTSTARCOM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
52-1782500
(State of Incorporation)
(I.R.S. Employer Identification No.)
20F, TOWER E1, THE TOWERS, ORIENTAL PLAZA
No. 1 EAST CHANG AN AVENUE
DONG CHENG DISTRICT BEIJING, P.R. CHINA
100738
(Address of principal executive offices)
(zip code)
Registrants telephone
number, including area code: + 86(10)8520-5588
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 during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
(Do not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No x
As
of November 1, 2010 there were 150,686,033 shares of the registrants
common stock outstanding, par value $0.00125.
Table of Contents
TABLE OF
CONTENTS
PART I FINANCIAL INFORMATION
3
ITEM
1 CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3
ITEM 2 MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
25
ITEM 3 QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
42
ITEM 4 CONTROLS AND
PROCEDURES
44
PART II OTHER INFORMATION
46
ITEM 1 LEGAL PROCEEDINGS
46
ITEM 1A RISK FACTORS
46
ITEM 2 UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
46
ITEM 3 DEFAULTS
UPON SENIOR SECURITIES
47
ITEM 4 REMOVED AND RESERVED
47
ITEM 5 OTHER INFORMATION
47
ITEM
6 EXHIBITS
47
SIGNATURES
49
2
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of Contents
PART IFINANCIAL
INFORMATION
ITEM 1CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UTSTARCOM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30,
December 31,
2010
2009
(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents
$
337,026
$
265,843
Short-term investments
972
1,038
Accounts receivable, net of allowances for
doubtful accounts of $32,409 and $26,065, respectively
41,632
42,346
Notes receivable
461
1,427
Inventories
51,857
72,300
Deferred costs
122,540
130,453
Prepaids and other current assets
47,286
47,906
Short-term restricted cash
22,444
26,448
Total current assets
624,218
587,761
Property, plant and equipment, net
4,810
130,612
Long-term investments
9,129
8,402
Long-term deferred costs
152,562
184,978
Long-term deferred tax assets
5,601
4,822
Other long-term assets
14,664
12,536
Total assets
$
810,984
$
929,111
LIABILITIES
AND EQUITY
Current
liabilities:
Accounts payable
$
29,724
$
54,115
Income taxes payable
1,130
Customer advances
86,450
120,364
Deferred revenue
181,785
170,777
Deferred tax liabilities
3,890
3,890
Other current liabilities
83,360
142,894
Total current liabilities
385,209
493,170
Long-term deferred revenue
144,877
160,932
Other long-term liabilities
27,590
18,858
Total liabilities
557,676
672,960
Commitments and contingencies (Note 10)
UTStarcom, Inc. stockholders equity:
Common stock: $0.00125 par value; 750,000
authorized shares; 150,686 and 130,095 shares issued and outstanding at
September 30, 2010 and December 31, 2009, respectively
176
153
Additional paid-in capital
1,292,176
1,251,532
Accumulated deficit
(1,109,274
)
(1,067,174
)
Accumulated other comprehensive income
69,444
70,848
Total UTStarcom, Inc. stockholders equity
252,522
255,359
Noncontrolling interests
786
792
Total equity
253,308
256,151
Total liabilities and equity
$
810,984
$
929,111
See accompanying notes to the condensed consolidated financial
statements.
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UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30,
Nine months ended September 30,
2010
2009
2010
2009
(in thousands, except per share data)
Net sales
Products
$
52,041
$
53,920
$
183,836
$
225,167
Services
9,353
16,584
31,570
44,840
61,394
70,504
215,406
270,007
Cost of net sales
Products
43,065
36,994
132,854
211,296
Services
6,236
9,321
20,378
28,708
Gross profit
12,093
24,189
62,174
30,003
See Note 17 for net sales to
related party and associated cost of net sales
Operating expenses:
Selling, general and administrative
24,530
33,139
75,882
114,290
Research and development
9,922
14,246
29,023
51,983
Restructuring
2,336
8,909
9,627
41,485
Net (gain) loss on divestitures
(1,436
)
1,689
(5,244
)
332
Total net operating expenses
35,352
57,983
109,288
208,090
Operating loss
(23,259
)
(33,794
)
(47,114
)
(178,087
)
Interest income
594
462
1,392
1,810
Interest expense
(70
)
(24
)
(208
)
(544
)
Other income (expense), net
6,967
(1,556
)
7,067
(3,341
)
Loss before income taxes
(15,768
)
(34,912
)
(38,863
)
(180,162
)
Income tax benefit (expense)
(1,400
)
317
(3,243
)
(6,166
)
Net loss
(17,168
)
(34,595
)
(42,106
)
(186,328
)
Net (gain) loss attributable to noncontolling
interests
(4
)
15
6
32
Net loss attributable to UTStarcom, Inc.
$
(17,172
)
$
(34,580
)
$
(42,100
)
$
(186,296
)
Net loss per share attributable to
UTStarcom, Inc.- Basic and Diluted
$
(0.13
)
$
(0.27
)
$
(0.32
)
$
(1.47
)
Weighted average shares used in per-share
calculation - Basic and Diluted
135,550
127,875
131,781
126,930
See
accompanying notes to the condensed consolidated financial statements.
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UTSTARCOM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
2010
2009
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$
(42,106
)
$
(186,328
)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization
4,166
10,177
Amortization of deferred gain on sale-leaseback
(429
)
Provision for (recovery of) doubtful accounts
6,012
(3,659
)
Other-than-temporary impairment of equity
investment
5,517
Stock-based compensation expense
6,131
9,434
Net (gain) loss on divestitures
(5,244
)
332
Gain on settlement of an investment interest
(481
)
Deferred income taxes
(567
)
2,341
Other
366
(634
)
Changes in operating assets and liabilities:
Accounts receivable
(8,685
)
108,947
Inventories and deferred costs
67,046
40,512
Other assets
3,318
62,380
Accounts payable
(32,445
)
(132,005
)
Income taxes payable
192
2,200
Customer advances
(35,866
)
41,116
Deferred revenue
(4,400
)
(33,775
)
Other liabilities
(54,413
)
(15,757
)
Net cash used in operating activities
(97,405
)
(89,202
)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment
(2,616
)
(1,651
)
Net proceeds from divestitures
2,848
11,508
Proceeds from sale of building, net of tax
payments
123,955
Change in restricted cash
7,379
1,895
Proceeds from settlement of an investment interest
481
1,600
Purchase of an investment interest
(550
)
Purchase of short-term investments
(12,002
)
(6,514
)
Proceeds from sale of short-term investments
7,825
7,625
Other
332
437
Net cash provided by investing activities
127,652
14,900
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock and option per stock
purchase agreement , net of expense
34,587
Issuance of common stock upon exercise of options
and ESPP
7
367
Repurchase of common stock
(58
)
Other
(755
)
Net cash provided by (used in) financing
activities
34,536
(388
)
Effect of exchange rate changes on cash and cash
equivalents
6,400
2,199
Net increase (decrease) in cash and cash
equivalents
71,183
(72,491
)
Cash and cash equivalents at beginning of period
265,843
309,603
Cash and cash equivalents at end of period
$
337,026
$
237,112
See accompanying notes to the condensed consolidated financial
statements.
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UTSTARCOM, INC.
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION AND LIQUIDITY
The
accompanying unaudited condensed consolidated financial statements include the
accounts of UTStarcom, Inc. (Company) and its wholly and majority owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in the preparation of the condensed consolidated financial
statements. The noncontrolling interests in consolidated subsidiaries are shown
separately in the condensed consolidated financial statements.
The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles in the United States (GAAP)
have been condensed or omitted pursuant to such rules and regulations. The
December 31, 2009 condensed consolidated balance sheet was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. However, the
Company believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the Companys December 31, 2009
financial statements, including the notes thereto, and the other information
set forth in the Companys Annual Report on Form 10-K for the year ended
December 31, 2009. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Actual results may be different. See the Companys 2009 Annual Report
for discussion of the Companys critical accounting policies and estimates.
In
the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) considered necessary for a fair statement of the Companys
financial condition, the results of its operations and its cash flows for the
periods indicated. The results of operations for the three and nine months
ended September 30, 2010 are not necessarily indicative of the operating
results for the full year.
In
December 2009, the Company entered into a Sales Leaseback Agreement for
the sale of its manufacturing, research and development, and administrative
offices facility in Hangzhou, China to a third party for approximately $138.8 million
with leaseback of approximately one-third of the facility. On May 31,
2010, the Company and the buyer agreed that all conditions precedent to the
closing had been met, the sale was consummated and the leaseback commenced on
June 1, 2010. As of May 31, 2010, the Company had received all of the
sales proceeds. See Note 7 for additional information on sale-leaseback
transaction.
On
February 1, 2010, the Company entered into agreements for a strategic
relationship with Beijing E-town International Investment and
Development Co., Ltd (BEIID) which included a proposed investment
of $48.5 million in the Companys common stock by BEIID, and two unrelated
investment funds, Elite Noble Limited and Shah Capital Opportunity
Fund LP. These investment transactions closed in September 2010.
Under the revised terms, UTStarcom received cash of $34.6 million, net of
issuance costs, and issued approximately 18.1 million shares of common stock
and an option to purchase up to an additional 4.0 million shares of common
stock for approximately $8.1 million through November 8, 2010. See Note 11
for additional information.
Management
believes that both the Companys China and non-China operations have sufficient
liquidity to finance working capital and capital expenditure needs during the
next 12 months. There can be no assurance that additional financing, if
required, will be available on terms satisfactory to the Company or at all, and
if funds are raised in the future through issuance of preferred stock or debt,
these securities could have rights, privileges or preference senior to those of
the Companys common stock and newly issued debt could contain debt covenants
that impose restrictions on the Companys operations. Further, any sale of
newly issued debt or equity securities could result in additional dilution to
the Companys current shareholders.
NOTE 2 - ACCOUNTING POLICIES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Earnings Per Share
Basic earnings per share (EPS)
is computed by dividing net income (loss) available to common stockholders by
the weighted average number of shares of the Companys common stock outstanding
during the period, which excludes nonvested restricted stock. Diluted EPS
presents the amount of net income (loss) available to each share of common
stock outstanding during the period plus each share of common stock that would
have been outstanding assuming the Company had issued shares of common stock
for all dilutive potential common shares outstanding during the period. The
Companys potentially dilutive common shares include outstanding stock options,
nonvested restricted stock, restricted stock units and Employee Stock Purchase
Plan (ESPP) shares prior
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to termination of the ESPP
effective May 15, 2009, which are reflected in diluted net income per
share by application of the treasury stock method. Under the treasury stock
method, the amount that the employee must pay for exercising stock options, the
amount of stock-based compensation cost for future services that the Company
has not yet recognized, and the amount of tax benefit that would be recorded in
additional paid-in capital upon exercise are assumed to be used to repurchase
shares. For the three and nine months ended September 30, 2010 and 2009,
no potential common shares were dilutive because of the net loss in the
periods. Potential shares of common stock of approximately 7.6 million and 11.4
million were excluded from the diluted per share calculation for the three
months ended September 30, 2010 and 2009, respectively, while 8.4 million
and 13.3 million were excluded from the diluted per share calculation for the
nine months ended September 30, 2010 and 2009, respectively, because to
include them would have been anti-dilutive for the periods. In addition,
potentially dilutive common shares from the investor option to purchase up to
an additional 4.0 million shares through November 8, 2010 (see Note 11)
were also excluded from the diluted per share calculation for the three and
nine months ended September 30, 2010 because to include them would have
been anti-dilutive for the periods.
Fair Value
Pursuant
to the accounting guidance for fair value measurements and its subsequent
updates, fair value is defined as the price that would be received from selling
an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. As such, fair value is a
market-based measurement that should be determined based on assumptions that
market participants would use in pricing an asset or liability. The
accounting guidance also establishes a three-tier fair value hierarchy which
requires the Company to use observable market data, when available, and to
minimize the use of unobservable inputs when determining fair value. The fair
value hierarchy prioritizes the inputs into three levels that may be used in
measuring fair value as follows:
Level
1 - observable inputs such as quoted prices in active markets for identical
assets or liabilities.
Level
2 - inputs other than the quoted prices in active markets for identical assets
or liabilities that are observable either directly or indirectly.
Level
3 - unobservable inputs based on the Companys assumptions.
In
January 2010, the Financial Accounting Standards Board (FASB) issued
amended standards that require additional fair value disclosures. These
disclosure requirements are effective in two phases. In the first quarter of
2010, the Company adopted the requirements for disclosures about inputs and
valuation techniques used to measure fair value as well as disclosures about
significant transfers between hierarchy levels. Beginning in the first quarter
of 2011, these amended standards will require presentation of disaggregated
activity within the reconciliation for fair value measurements using
significant unobservable inputs (Level 3). These amended standards do not
significantly impact the Companys consolidated financial statements.
At
September 30, 2010, the Company had no assets and liabilities measured at
fair value on a recurring basis. The Companys money market funds, which are
included in cash and cash equivalents, are recorded at cost which approximates
fair value, classified within Level 1 of the fair value hierarchy. The
fair value of certain of the Companys financial instruments that are not
measured at fair value, including accounts receivable, accounts payable, and
other current liabilities, approximates the carrying amount because of their
short maturities.
During
the nine months ended September 30, 2010, the Company had no assets and
liabilities measured at fair value on a non-recurring basis. At
December 31, 2009, the Company determined as a result of the sale
leaseback transaction entered into in December 2009 (see Note 7) that the
net book value of its Hangzhou facility was in excess of its fair value. Due to
the apparent decline in value, the Company conducted a recoverability test for
this entity-wide asset and determined the carrying value of the net assets of
the Company exceeded the undiscounted cash flows expected to result from the
use and eventual disposition of the asset group. In the Companys assessment of
fair value, management placed primary reliance on the market approach (the
third party offer). The result of this analysis reduced the Companys overall
assessment of fair value of the property by $33.3 million. Accordingly,
the Company recorded a non-cash impairment charge of $33.3 million during
the fourth quarter of 2009. The Companys overall assessment of fair value of
the property at December 31, 2009 was based on Level 2 inputs.
Variable Interest Entities
In
June 2009, the FASB issued authoritative guidance requiring an enterprise
to perform an analysis to determine whether the enterprises variable interest
or interests give it a controlling financial interest in a variable interest
entity. This analysis identifies the primary beneficiary of a variable interest
entity as one with the power to direct the activities of a variable interest
entity that most significantly impact the entitys economic performance and the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest. The Company adopted this new standard in the first
quarter of fiscal year 2010. See Note 18 for the impact of the adoption of the
guidance on the Companys consolidated financial statements.
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Recent Accounting Pronouncements Not Yet
Adopted
In
September 2009, the FASB issued new standards for revenue recognition with
multiple deliverables. These new standards impact the determination of when the
individual deliverables included in a multiple-element arrangement may be
treated as separate units of accounting. Additionally, these new standards
modify the manner in which the transaction consideration is allocated across the
separately identified deliverables by no longer permitting the residual method
of allocating arrangement consideration. These new standards are effective for
the Company beginning in the first quarter of fiscal year 2011, however early
adoption is permitted. The Company will adopt these standards in the first
quarter of fiscal year 2011 and is currently assessing the potential impact, if
any, of the guidance on its consolidated financial statements.
In
September 2009, the FASB issued new standards for the accounting for
certain revenue arrangements that include software elements. These new
standards amend the scope of pre-existing software revenue guidance by removing
from the guidance non-software components of tangible products and certain
software components of tangible products. These new standards are effective for
the Company beginning in the first quarter of fiscal year 2011, however early
adoption is permitted. The Company will adopt these standards in the first
quarter of fiscal year 2011 and is currently assessing the potential impact, if
any, of the guidance on its consolidated financial statements.
NOTE 3DIVESTITURES
China
Packet Data Services Node (PDSN) Assets
In
the third quarter of 2010, the Company completed a sale of its China PDSN assets.
The divested assets were part of the Multimedia Communications segment. After
the close of the transactions, the Company remained the primary obligor for
certain sales contracts that were in place prior to the close of the
transaction. The Company allocated proceeds to each component of the sales
agreement based on relative fair values and recorded a gain of $1.6 million
upon closing of the transaction in September 2010. The Company will record sales and related
cost of net sales in future periods related to the completion of existing
contracts. The Company determined that the sale of this product line did not
meet the criteria for presentation as a discontinued operation because of the
Companys continuing involvement.
EMEA
Operations
In September 2010, the Company entered into an agreement to
transfer its EMEA (Europe, Middle East and Africa) operations for no
consideration. However as of September 30, 2010, the transaction was not
completed because the Company did not transfer its obligations under the
existing sales contracts to the buyer. In the third quarter of 2010, the
Company recognized expenses of approximately $0.9 million as an operating
expense for its obligations primarily arising out of local statutory
requirements such as severance fund for transferred employees and other
miscellaneous costs. In the third quarter of 2010, the Company paid
approximately $0.3 million to the buyer with the remaining accrued balance of
$0.6 million expected to be paid in the fourth quarter of 2010 because the
buyer has agreed to take over these obligations. The Company determined that
the sale of its EMEA operations did not meet the criteria for presentation as a
discontinued operation because EMEA did not meet the definition of a component
of an entity and, the Company continues to have involvement with EMEA
operations as of September 30, 2010.
IP Messaging
and US PDSN Assets
In June 2010, the Company completed a sale of its IP Messaging and
US PDSN Assets as part of its strategy to focus on core IP-based product
offerings. The divested assets were located in North America, Caribbean, and Latin
America regions and were part of the Multimedia Communications segment.
Consideration for the approximately $1.7 million of net liabilities transferred
included approximately $0.4 million cash proceeds plus potential additional
contingent consideration of up to $1.6 million based on future cash collection
of transferred receivables. A gain of $2.1 million, net of taxes, was
recognized in June 2010 as a reduction to operating expenses. In the third
quarter of 2010, the Company received $0.7 million of contingent consideration
and recognized an additional gain on divestiture. The Company determined that
the sale of these product lines did not meet the criteria for presentation as a
discontinued operation as these product lines did not meet the definition of a
component of an entity.
Sale of Remote Access Server product line
In
January 2010, the Company completed a sale of certain assets and
liabilities related to its Remote Access Server (RAS) product line and
received total consideration of approximately $1.5 million. The primary
RAS product was the Total Control 1000 Transaction Gateway, which offers the
market a proven processing platform for carrier-class transaction network
service providers and enterprises for dial-up connectivity. In the first
quarter of 2010, the Company transferred net liabilities of approximately $0.3
million in connection with this transaction and recorded a net gain of
$1.8 million as a reduction of operating expenses. The Company determined
that the divestiture of the RAS product line did not meet the criteria for
presentation as a discontinued operation as the RAS product line did not meet
the definition of component of an entity.
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UTStarcom Personal Communications LLC (PCD)
On July 1, 2008, the Company completed the sale of UTStarcom
Personal Communications LLC, a wholly-owned subsidiary of the Company (PCD),
to Personal Communications Devices, LLC (PCD LLC). Concurrent with
the closing of the divestiture transaction, the Company entered into a
three-year supply agreement with PCD LLC whereby the Company indicated its
intent to supply handset products to PCD LLC. In connection with the wind
down of our Korea operations, in December 2008, we furnished PCD LLC with
180-days notice of termination of the supply agreement.
On June 30, 2009, the Company entered into a Settlement Agreement
and Release (the Settlement Agreement) with PCD LLC. Under the Settlement
Agreement, the Company waived its right to any earnout payments and granted a
call option to PCD LLC for the Companys $1.6 million investment in the equity
securities of PCD LLC. The Company also
agreed to pay PCD LLC a total of $11.1 million which included warranty costs of
approximately $8.4 million (see Note 8) and a reduction of revenue of
approximately $2.7 million. In addition to the $11.1 million claim settlement,
the Company recorded an additional $17.6 million of costs for inventory
write-downs to net realizable value, write-downs of excess inventory and
warranty reserves related to transactions with PCD LLC. The Company recorded
these transactions in the second quarter of 2009, resulting in a decrease in
revenue of approximately $2.7 million and an increase in cost of net sales of
$26.0 million. The sale of the PCD assets did not meet the criteria for
presentation as a discontinued operation because of the Companys significant
continuing involvement.
Korea operations
On
July 31, 2009, the Company completed a sale of its Korea operations to an
entity founded by a former employee and received total consideration of
approximately $2.0 million. In connection with this transaction, the
Company recorded a net loss of $1.3 million during 2009. Included in this
amount was $2.2 million of foreign currency losses previously carried in
accumulated other comprehensive income that were realized upon completion of
sale and liquidation of the subsidiary. The Company determined that the
divestiture of Korea operations did not meet the criteria for presentation as a
discontinued operation as the Korea operations did not meet the definition of
component of an entity.
Sale of Assets to Marvell Technology Group Ltd
In
February 2006, the Company sold substantially all of the assets and
selected liabilities of its semiconductor design business division to Marvell
Technology Group Ltd. (Marvell). In connection with the sale of assets,
the Company entered into a supply agreement with Marvell to purchase chipsets
for the Companys handset products over the next five years. The value
allocated to the supply agreement of $20.2 million has been amortized in
proportion to the quantities of chipsets purchased under the supply agreement.
During the first quarter of 2009, the Company revised its estimates of customer
demand for certain handset products and determined that future chipset
purchases from Marvell would be negligible. As a result, the Company fully
amortized against cost of net sales the remaining value of the supply agreement
of $8.5 million in the three months ended March 31, 2009.
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NOTE 4 - COMPREHENSIVE LOSS
Total
comprehensive loss for the three and nine months ended September 30, 2010
and 2009 consisted of the following:
Three months ended
September 30,
Nine months ended
September 30,
2010
2009
2010
2009
(in thousands)
Net loss
$
(17,168
)
$
(34,595
)
$
(42,106
)
$
(186,328
)
Other Comprehensive income
Unrealized gain on investments, net of tax
714
714
Reclassification for realization of previously
unrealized losses, net of tax
3,313
Reclassification for realization of previously
unrealized foreign currency translation losses, net of tax
2,360
2,164
Foreign currency translation
(2,712
)
1,641
(1,404
)
(247
)
Comprehensive loss
(19,880
)
(29,880
)
(43,510
)
(180,384
)
Comprehensive loss attributable to noncontrolling
interests
4
(15
)
(6
)
(32
)
Comprehensive loss attributable to
UTStarcom, Inc.
$
(19,884
)
$
(29,865
)
$
(43,504
)
$
(180,352
)
The
changes in noncontrolling interests during the nine months ended
September 30, 2010 and 2009 were as follows:
Nine months ended September 30,
2010
2009
(in thousands)
Balance at beginning of period
$
792
$
808
Comprehensive loss attributable to noncontrolling
interests
(6
)
(32
)
Balance at end of period
$
786
$
776
NOTE 5 BALANCE SHEET DETAILS
The following tables provide details of selected
balance sheet items:
September 30,
December 31,
2010
2009
(in thousands)
Inventories:
Raw materials
$
4,733
$
18,863
Work in process
14,967
12,881
Finished goods (1)
32,157
40,556
Total
$
51,857
$
72,300
(1) Includes finished goods at
customer sites of approximately $21.4 million and $33.8 million at
September 30, 2010 and December 31, 2009, respectively, for which the
customer has taken possession, but based on specific contractual terms, title
has not yet passed to the customer.
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Inventories
of approximately $0.8 million held by the Companys manufacturing outsource
partner are recorded in prepaids and other current assets in the condensed
consolidated balance sheet at September 30, 2010. No inventories were held
by our manufacturing outsource partner at December 31, 2009. The Company
recorded an $8.5 million inventory reserves in the third quarter of 2010 for
MSAN and MSTP for two international customer contracts due to the reduction in
product demands.
September 30,
December 31,
2010
2009
(in thousands)
Property, plant and equipment,
net:
Buildings
$
238
$
184,436
Leasehold improvements
11,290
15,422
Automobiles
4,186
4,243
Software
33,301
37,240
Equipment and Furniture
121,489
172,214
Others
811
1,690
Total
171,315
415,245
Less: accumulated depreciation and impairment
(166,505
)
(284,633
)
Total (see Note 7)
$
4,810
$
130,612
September 30,
December 31,
2010
2009
(in thousands)
Other current liabilities:
Accrued contract costs
$
13,429
$
27,657
Accrued payroll and compensation
22,421
35,871
Warranty costs
8,287
16,150
Accrued other taxes
16,281
15,863
Restructuring costs
5,403
21,707
Deposit received for sale of building
7,323
Other
17,539
18,323
Total
$
83,360
$
142,894
NOTE 6 - CASH, CASH EQUIVALENTS, INVESTMENTS AND FAIR
VALUE MEASUREMENTS
Cash
and cash equivalents, consisting primarily of bank deposits and money market
funds, are recorded at cost which approximates fair value because of the
short-term nature of these instruments. At September 30, 2010 and
December 31, 2009, there were no available-for-sale securities investments
subject to fair value accounting included in cash and cash equivalents or
long-term investments.
Short-term
investments, consisting of bank notes, were $1.0 million and $1.0 million
at September 30, 2010 and December 31, 2009, respectively. The
Company accepts bank notes receivable with maturity dates of between three and
six months from its customers in China in the normal course of business. The
Company may discount these bank notes with banking institutions in China.
During the nine months ended September 30, 2010, no bank notes were sold.
During the three months ended September 30, 2009, there were no bank notes
sold. During the nine months ended September 30, 2009, the Company sold
$9.9 million of bank notes and recorded immaterial costs as a result of
discounting the notes. All long-term investments are in privately-held
companies and are accounted for under the cost method. The Company recognizes
an impairment charge when a decline in the fair value of its investments below
the cost basis is judged to be other-than-temporary. In making this
determination, the Company reviews several factors to determine whether the
losses are other-than-temporary, including but not limited to: (i) the
length of time the investment was in an unrealized loss position, (ii) the
extent to which fair value was less than cost, (iii) the financial
condition and near term prospects of the issuer and (iv) the Companys
intent and ability to hold the investment for a period of time sufficient to
allow for any anticipated recovery in fair value.
11
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The
following table shows the break-down of the Companys equity securities
classified as long-term investments at September 30, 2010 and
December 31, 2009:
September 30,
December 31,
2010
2009
(in thousands)
Cortina
$
3,348
$
3,348
GCT SemiConductor, Inc
3,000
3,000
Xalted Networks
1,583
1,583
SBI
1,198
471
Total equity securities
$
9,129
$
8,402
SBI NEO
Technology A Investment LPS (SBI)
In
2008, the Company invested $0.5 million into SBI in exchange for
approximately 2% of the Partnership interest. The Partnerships investment
objective is to invest in unlisted or listed companies in Japan and overseas
that are engaged in high growth businesses, including businesses focused on
information technology and the environment. In the first quarter of 2010, the
Company contributed an additional $0.6 million into SBI, and at
September 30, 2010 maintains an approximately 2% Partnership interest. The
Company has concluded that it does not have a controlling interest in SBI as it
does not have the power to direct the activities of SBI that most significantly
impact the entitys economic performance. Affiliates of a related party have a
controlling interest in SBI, see Note 17. The Company accounts for the
investment in SBI using the cost method.
NOTE 7 SALE-LEASEBACK TRANSACTION
In
December 2009, the Company entered into a Property Transfer and Leaseback
Agreement (the Sale Leaseback Agreement) for the sale of its manufacturing,
research and development and administrative office facility in Hangzhou, China
(the Hangzhou facility) to a third party for proceeds of approximately
$138.8 million and the leaseback of approximately one-third of the
property through 2016. As of May 31, 2010, the Company had received all of
the sales proceeds and met all criteria for consummation of sale of the Hangzhou
facility. On May 31, 2010, the Company and the buyer agreed that all
conditions precedent to the closing had been met and the leaseback commenced on
June 1, 2010.
Management
concluded that the transaction qualified for sale-leaseback accounting as all
of the risks and rewards of ownership were transferred to the buyer upon
closing of the transaction and the leaseback arrangement did not include any
form of continuing involvement, other than a normal leaseback. In the second
quarter of 2010, the Company recorded the sale of the Hangzhou facility and
recorded a deferred gain of $7.7 million at the time of sale. The deferred gain
was represented by the gross sales proceeds of $138.8 million, less $7.5
million of transaction related taxes and other fees, and less the net book
value of the Hangzhou facility of $123.6 million. The gain on sale was deferred
in accordance with the accounting guidance for sale-leaseback transactions, as
the Company has retained more than a minor portion of the use of the property
through the six-year leaseback. The deferred gain on the sale-leaseback is
being amortized in proportion to the related gross rental charged to expense
over the leaseback term. During the three and nine months ended September 30,
2010, amortization of the deferred gain of $0.3 million and $0.4 million,
respectively, was recorded as a reduction of operating expenses. At
September 30, 2010, $1.2 million of deferred gain is included in other
current liabilities and $6.1 million of deferred gain is included in other
long-term liabilities in the condensed consolidated balance sheet.
In
connection with the Sale Leaseback Agreement, on February 1, 2010, the
Company entered into a Lease Contract (the Lease) with respect to the
leaseback of a portion of the Hangzhou facility. Under the terms of the Lease,
the Company will lease back 71,027 sqm gross floor area (GFA) aboveground and
12,000 sqm GFA underground of the building for a period of 6 years at a
rate of approximately $0.37, $0.44 and $0.47, respectively, per sqm per day for
years 1-2, 3-4 and 5-6, respectively, of the lease period for the aboveground
space; and approximately $3.66 per sqm per month for the underground space for
the full lease period. The Company was also required to pay a security deposit
in the amount of approximately $1.8 million and prepay part of the rent
and fees for the last six months of the lease term in the amount of
approximately $3.4 million upon lease inception on June 1, 2010. The
Company may terminate all or part of the Lease by giving six months advance
notice; however, the Company would be required to pay penalties and additional
compensation in the event of early termination. The Company has concluded that
the Lease qualifies as an operating lease. See Note 10 for future minimum lease payments under all
noncancelable operating leases.
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NOTE 8 - WARRANTY OBLIGATIONS AND OTHER GUARANTEES
The Company provides a standard warranty on its equipment and handset
sales for a period generally ranging from one to two years from the time of
final acceptance. At times, the Company has entered into arrangements to
provide limited warranty services for periods longer than two years. The
Company provides for the expected cost of product warranties at the time that
revenue is recognized based on an assessment of past warranty experience and
when specific circumstances dictate. The Company assesses the adequacy of its
recorded warranty liability every quarter and makes adjustments to the
liabilities if necessary. Specific warranty accruals are reversed upon the
expiration of the warranty period and are recorded as a reduction of cost of
net sales. From time to time, the Company may be subject to additional costs
related to non-standard warranty claims from its customers. If and when this
occurs, the Company estimates additional accruals based on historical
experience, communication with its customers and various assumptions that the
Company believes to be reasonable under the circumstances. Such additional
warranty accruals are recorded in the period in which the additional costs are
identified.
Expirations
recorded as a reduction of cost of net sales approximated $0.4 million and $0.6
million for the three months ended September 30, 2010 and 2009,
respectively, and $3.0 million and $2.9 million for the nine months ended
September 30, 2010 and 2009, respectively and are included in the table
below as benefit from expirations. The following table summarizes the activity
related to warranty obligations during the three and nine months ended
September 30, 2010 and 2009:
Three months ended
September 30,
Nine months ended
September 30,
2010
2009
2010
2009
(in thousands)
Balance at beginning of period
$
9,592
$
33,824
$
16,150
$
29,840
Accruals for warranties issued during the period
(benefit from expirations), net
(339
)
(1,124
)
(3,423
)
9,709
Settlements made during the period
(966
)
(10,057
)
(4,440
)
(16,906
)
Balance at end of period
$
8,287
$
22,643
$
8,287
$
22,643
During the second quarter of 2009, the Company recorded a special
warranty charge related to certain handsets sold to PCD LLC. Under the Settlement Agreement with PCD LLC (see
Note 3), the Company agreed to pay PCD LLC $8.4 million to settle certain PCD
LLC customers warranty claims arising from the handsets sold to PCD LLC. The $8.4 million claim settlement is included
in the accruals for warranties issued during the three and nine months ended
September 30, 2009 in the table above.
Certain
of the Companys sales contracts include provisions under which customers would
be indemnified by the Company in the event of, among other things, a
third-party claim against the customer for intellectual property rights
infringement related to the Companys products.
There are no limitations on the maximum potential future payments under
these guarantees. Historically, the
Company has not incurred material costs as a result of obligations under these
agreements. It is not possible to
determine the aggregate maximum potential loss under these indemnification
agreements due to the limited history of prior indemnification claims and the
unique facts and circumstances involved in each particular agreement.
NOTE 9 - RESTRUCTURING COSTS
Restructuring Costs
During the three months and nine months ended
September 30, 2010, the Company recorded approximately $2.3 million and
$9.6 million respectively in restructuring charges. For the three and nine
months ended September 30, 2009, the Company recorded restructuring charges of $8.9 million and
$41.5 million, respectively. The
following describes the Companys restructuring initiatives.
2009 Restructuring Plan
On
June 9, 2009, the Board of Directors of the Company approved a
restructuring plan (the 2009 Restructuring Plan) designed to reduce the
Companys operating costs. The 2009 Restructuring Plan includes a worldwide
reduction in force of approximately 50% of the Companys headcount, or
approximately 2,300 employees located primarily in China and the United States
and, to a lesser degree, other international locations. During the three months
ended September 30, 2010, the Company recorded restructuring costs of
approximately $2.2 million related to the 2009 Restructuring Plan, net of
approximately $0.2 million of reversal of charges recorded in fiscal year 2009.
During the nine months ended September 30, 2010, the Company recorded
restructuring costs of approximately $9.1 million related to the 2009
Restructuring Plan, net of approximately $1.9 million of reversal of charges
13
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recorded
in prior periods. The restructuring costs for the nine months ended
September 30, 2010 consist primarily of severance and benefits related to
additional employees included in the 2009 Restructuring Plan, adjusted for
change in estimate, and approximately $1.1 million of lease costs primarily
related to a lease expiring in 2013. During the three and nine months ended
September 30, 2009, the Company recorded restructuring costs of
approximately $9.2 million and $35.1 million, respectively, related
to the 2009 Restructuring Plan.
Restructuring costs for the nine months ended September 30, 2009
included $33.6 million for
severance and benefits related to approximately 2,070 employees and $1.5 million related primarily to the
estimated loss on a lease obligation which expires in 2013.Total restructuring
costs recorded through September 30, 2010 related to the 2009 Restructuring Plan approximated $49.1 million.
2008 Restructuring Plan
During fiscal 2008, the Company implemented a restructuring plan (the 2008
Restructuring Plan) primarily related to a global reduction in force across
all functions and employee terminations at certain non-core operations which
the Company was in the process of winding down. The total number of employees
affected totaled approximately 750, including 350 in China, 200 in Korea and
200 in other locations including the United States. During the three and nine
months ended September 30, 2010, the Company recorded additional
restructuring costs related to the 2008 Restructuring Plan of approximately
$0.1 million and $0.5 million, respectively, for severance and benefit
costs being recognized over the remaining service period for employees included
in the 2008 Restructuring Plan. During the three and nine months ended
September 30, 2009, the Company recorded a reversal of $0.3 million and a
charge of $6.1 million, respectively, in restructuring charges related to the
2008 Restructuring Plan. Total restructuring costs recorded through
September 30, 2010 related to the 2008
Restructuring Plan
approximated $19.9 million.
2007 Restructuring Plan
At June 30, 2010, the 2007 Restructuring Plan was complete.
The activity in the accrued restructuring balances related to the plans
described above was as follows for the nine months ended September 30,
2010 and 2009:
Balance at
December 31,
2009
Restructuring
Charges
Cash Payments
Non-cash
Settlement
Balance at
September 30,
2010
(in thousands)
2009 Restructuring Plan
Workforce Reduction
$
16,939
$
8,066
$
(19,907
)
$
(2,052
)
$
3,046
Lease Costs
1,516
1,052
(456
)
2,112
Other Costs
6
45
(45
)
6
Total 2009 Restructuring Plan
18,461
9,163
(20,363
)
(2,097
)
5,164
2008 Restructuring Plan
Workforce Reduction
2,526
494
(2,781
)
239
Lease Costs
385
(385
)
Other Costs
30
(30
)
Total 2008 Restructuring Plan
2,941
464
(3,166
)
239
2007 Restructuring Plan - Lease Costs
305
(305
)
Total
$
21,707
$
9,627
$
(23,834
)
$
(2,097
)
$
5,403
Balance at
December 31,
2008
Restructuring
Charges
Cash Payments
Non-cash
Settlement
Balance at
September 30,
2009
(in thousands)
2009
Restructuring Plan
Workforce
Reduction
$
$
33,620
$
(13,542
)
$
(1,569
)
$
18,509
Lease
Costs
1,516
(215
)
1,301
Other
Costs
7
(7
)
Total
2009 Restructuring Plan
35,143
(13,764
)
(1,569
)
19,810
2008
Restructuring Plan
Workforce
Reduction
7,976
5,189
(9,278
)
(880
)
3,007
Lease
Costs
249
1,075
(703
)
621
Other
Costs
498
(126
)
(314
)
58
Total
2008 Restructuring Plan
8,723
6,138
(10,295
)
(880
)
3,686
2007
Restructuring Plan - Lease Costs
788
204
(504
)
488
Total
$
9,511
$
41,485
$
(24,563
)
$
(2,449
)
$
23,984
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The
majority of the remaining cash expenditures related to the 2009 and 2008
Restructuring Plans are expected to be paid in 2010. The remaining liabilities
related to lease obligations are expected to be settled over the remaining
lease term. The Company expects to incur additional restructuring charges in the
fourth quarter of 2010 as it continues to execute the 2009 and 2008
Restructuring Plans.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain facilities under
noncancelable operating leases that expire at various dates through 2016. In connection with the Sale Leaseback
Agreement, the Company entered into a lease with respect to the leaseback of a
portion of the Hangzhou facility, see Note 7.
The leaseback commenced on June 1, 2010 and the contractual
obligations related to the Hangzhou facility lease are included in the table
below. Future minimum lease payments under all noncancelable operating leases
with an initial term in excess of one year as of September 30, 2010 are as
follows:
Twelve months ending September 30:
Amount
(in thousands)
2011
$
16,105
2012
14,459
2013
14,671
2014
14,127
2015
14,500
Thereafter
3,752
Total
$
77,614
Third Party Commissions
The Company records accruals for commissions payable
to third parties in the normal course of business. Such commissions are
recorded based on the terms of the contracts between the Company and the third
parties and paid pursuant to such contracts. Consistent with the Companys
accounting policies, these commissions are recorded as cost of net sales in the
period in which the liability is incurred. As of September 30, 2010, the
Company had approximately $0.5 million of such accrued commissions. Management
has performed, and continues to perform, follow-up procedures with respect to
these accrued commissions. Upon completion of such follow-up procedures, if the
accrued commissions have not been claimed and the statute of limitations, if
any, has expired, the Company reverses such accruals. Such reversals are
recorded in the Statement of Operations during the period management
determines that such accruals are no longer necessary. With the assistance of
its China counsel, the Company concluded that for certain of these accrued
commissions the statute of limitations had expired in August 2010, two years
after formal communication was sent to these agents. During the three and nine
months ended September 30, 2010 approximately $5.8 and $6.0 million,
respectively, were released to cost of net sales as a result of expiration of
statute of limitations. During the three and nine months ended September 30,
2009, approximately $0.7 million and $0.8 million, respectively, were released
to cost of net sales as a result of expiration of statute of limitations.
15
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India Department of Telecommunication Security and Supply Chain
Standards
Recent
changes in India require equipment manufacturers to satisfy certain security
and supply chain standards to the satisfaction of Indian authorities. The
Company entered into such agreements with several customers in India which
establish detailed security and supply chain standards covering products
supplied to telecommunication customers.
These agreements contain significant penalty clauses in the event a
security breach is detected related to product supplied by the Company. Management is unable to estimate the
likelihood or the financial impact of any such potential security breach on
the Companys financial position, results of operations, or cash flows. The
Company is currently assessing the potential impact these agreements may have
on the timing of revenue recognition.
Litigation
Securities Class Action Litigation
Beginning
in October 2004, several shareholder class action lawsuits alleging
federal securities violations were filed against the Company and various
officers and directors of the Company. The actions have been consolidated in
United States District Court for the Northern District of California under the
caption In re UTStarcom, Inc.
Securities Litigation , Master File No. C-04-4908-JW (PVT). The
lead plaintiffs in the case filed a First Amended Consolidated Complaint on
July 26, 2005. The First Amended Complaint alleged violations of the
Securities Exchange Act of 1934, and was brought on behalf of a putative class
of shareholders who purchased the Companys stock after April 16, 2003 and
before September 20, 2004. On April 13, 2006, the lead plaintiffs
filed a Second Amended Complaint adding new allegations and extending the end
of the class period to October 6, 2005. In addition to the Company
defendants, the plaintiffs are also suing Softbank. Plaintiffs complaint seeks
recovery of damages in an unspecified amount.
On
June 2, 2006, the Company and the individual defendants filed a motion to
dismiss the Second Amended Complaint. On March 21, 2007, the Court granted
defendants motion and dismissed plaintiffs Second Amended Complaint. The
Court granted plaintiffs leave to file a Third Amended Complaint, which
plaintiffs filed on May 25, 2007. On July 13, 2007, the Company and
the individual defendants filed a motion to dismiss and a motion to strike the
Third Amended Complaint. On March 14, 2008, the Court granted defendants
motion and dismissed plaintiffs Third Amended Complaint. The Court granted
plaintiffs leave to file a Fourth Amended Complaint, which plaintiffs
filed on May 14, 2008. On June 13, 2008, consistent with the Courts
March 14, 2008 dismissal order, the Company and the individual defendants
filed objections to the form and content of the Fourth Amended Complaint. On
July 24, 2008, the Court overruled the objections. On September 8,
2008, the Company and the individual defendants filed a motion to dismiss and a
motion to strike certain allegations from the Fourth Amended Complaint. On
March 27, 2009, the Court denied defendants motion to dismiss and granted
defendants motion to strike.
Plaintiffs,
the Company and the individual defendants have signed and filed a stipulation
of settlement providing for the settlement of the case. Defendant Softbank is
not a party to the settlement. Under the terms of the settlement, the Companys
and individual defendants insurers would pay the full amount of the
settlement. On May 13, 2010, the Court granted preliminary approval of the
settlement, and on August 31, 2010, the Court granted final approval of
the settlement. On October 8, 2010, plaintiffs and Defendant Softbank
filed a motion for preliminary approval of a separate settlement between
plaintiffs and Defendant Softbank. There
is no assurance that this settlement will receive court approval. If it does not, we continue to incur costs
with regard to discovery in connection with the litigation between plaintiffs
and Defendant Softbank. Accordingly, the
Company is unable at this time to estimate the effects of this lawsuit on the
Companys financial position, results of operations, or cash flows.
16
Table
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Shareholder Derivative Litigation
On
November 17, 2006, a shareholder derivative complaint captioned Ernesto Espinoza v. Ying Wu et al. , Case
No. RG06298775, was filed against certain of the Companys former officers
and current officers and directors in the Superior Court of the County of
Alameda, California. The complaint alleges that the individual defendants,
among other things, breached their duties, were unjustly enriched, and violated
the California Corporations Code in connection with the timing of stock option
grants. The complaint names the Company as a nominal defendant and seeks
unspecified monetary damages against the individual defendants and various
forms of injunctive relief. On February 2, 2007, the Company and the
individual defendants filed demurrers against the complaint. On April 11,
2007, the Court sustained the individual defendants demurrer, overruled the
Companys demurrer, ordered the plaintiff to file an amended complaint, and
ordered the Company to answer the original complaint. The plaintiff filed an
amended complaint and the Company has filed an answer to the amended complaint.
On August 21, 2007, the individual defendants filed demurrers against the
amended complaint. The Court sustained the individual defendants demurrers and
ordered the plaintiff to file a second amended complaint. On
September 26, 2008, plaintiff filed his second amended complaint. On
November 21, 2008, the Company and the individual defendants filed
demurrers against the second amended complaint. On February 27, 2009, the
Court sustained the Companys demurrer and ordered the plaintiff to file a
third amended complaint. On March 20, 2009, plaintiff filed his third amended
complaint. On May 5, 2009, the Company and the individual defendants filed
demurrers against the third amended complaint. On August 11, 2009, the
Court sustained the Companys demurrer without leave to amend. On
October 13, 2009, plaintiffs filed a notice of appeal.
The
parties have signed a binding Memorandum of Understanding providing for the
settlement of the case. The settlement requires completion of final settlement
documentation. The settlement is contingent on approval by the court. Under the
terms of the settlement, the individual defendants insurer would pay the full
amount of the monetary portion of the settlement. On April 15, 2010,
plaintiff filed a Request for Dismissal without prejudice with the Court of
Appeals. Pursuant to the Request, the appeal may be reinstated if the Superior
Court does not grant preliminary or final approval of the settlement. There is
no assurance that the settlement will receive court approval. Accordingly, the
Company is unable at this time to estimate the effects of this lawsuit on the
Companys financial position, results of operations, or cash flows.
IPO Allocation
On October 31, 2001, a
complaint was filed in United States District Court for the Southern District
of New York against the Company, some of the Companys directors and officers
and various underwriters for the Companys initial public offering.
Substantially similar actions were filed concerning the initial public
offerings for more than 300 different issuers, and the cases were coordinated as
In re Initial Public Offerings Securities
Litigation , Civil Action No. 01-CV-9604. Plaintiffs allege
violations of the Securities Act of 1933 and the Securities Exchange Act of
1934 through undisclosed improper underwriting practices concerning the allocation
of IPO shares in exchange for excessive brokerage commissions, agreements to
purchase shares at higher prices in the aftermarket and misleading analyst
reports. Plaintiffs seek unspecified damages on behalf of a purported class of
purchasers of the Companys common stock between March 2, 2000 and
December 6, 2000. On February 19, 2003, the Court granted in part and
denied in part a motion to dismiss the claims brought by defendants,
including the Company. The order dismissed all claims against the Company
except for a claim brought under Section 11 of the Securities Act of 1933,
which alleges that the registration statement filed in accordance with the IPO
was misleading.
The parties have reached a
global settlement of the litigation. Under the settlement the insurers will pay
the full amount of the settlement share allocated to the Company, and the
Company will bear no financial liability. The Company and other defendants,
will receive complete dismissals from the case. On October 5, 2009, the Court
entered an Opinion and Order granting final approval of the settlement. Certain
objectors have filed appeals. If for any reason the settlement does not become
effective, the Company believes it has meritorious defenses to the claims and
intends to defend the action vigorously.
Other Litigation
The
Company is a party to other litigation matters and claims that are normal in
the course of operations, and while the results of such litigation matters and
claims cannot be predicted with certainty, management of the Company believes
that the final outcome of such matters will not have a material adverse impact
on the Companys financial position, results of operations or cash flows.
Letters of credit
The
Company issues standby letters of credit primarily to support international
sales activities outside of China and in support of purchase commitments. When
the Company submits a bid for a sale, often the potential customer will require
that the Company issue a bid bond or a standby letter of credit to demonstrate
its commitment through the bid process. In addition, the Company may be
required to issue standby letters of credit as guarantees for advance customer
payments upon contract signing or performance guarantees. The standby letters
of credit usually expire without being drawn by the beneficiary thereof.
Finally, the Company may issue commercial letters of credit in support of
purchase commitments. At September 30, 2010, the Company had short-term
restricted cash of $22.4 million, and long-term restricted cash of $7.6 million
included in other long-term assets. The restricted cash amounts primarily
collateralize the Companys outstanding letters of credit approximating $23.3
million at September 30, 2010.
17
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NOTE 11 COMMON STOCK PURCHASE AND OPTION TO PURCHASE
ADDITIONAL SHARES
On
February 1, 2010, the Company entered into Stock Purchase Agreements with
Beijing E-town International Investment and Development Co., Ltd. (BEIID),
and two unrelated investment funds, Elite Noble Limited and Shah Capital
Opportunity Fund LP, which included a proposed investment of $48.5 million in
the Companys common stock. The Stock Purchase Agreements were subsequently
amended on May 4, 2010, June 4, 2010 and July 7, 2010,
respectively.
On
September 7, 2010, the Company and the investors entered into a fourth
amendment to each of the Stock Purchase Agreements (Fourth Amendments) to reduce
the per share purchase price and to make certain adjustment to the number of
shares sold under the agreements. Under the terms of the Fourth
Amendments, the Company and the investors agreed to reduce the purchase price
from $2.20 per share to $2.027 per share and adjust the number of shares sold
to each of the investors. The Fourth Amendments also provided an option
to Elite Noble Limited to purchase up to an additional 3,972,251 shares through
November 8, 2010 for approximately
$8.1 million based on a stated exercise price of $2.027
per share if the purchase takes place on or prior to October 7, 2010 and
$2.047 per share if the purchase takes place between October 8, 2010 and
November 8, 2010. On September 7, 2010, the Company completed the
transaction and issued an aggregate 18,073,202 shares of its common stock and
the option to purchase an additional 3,972,251 shares for cash proceeds, net of
issuance costs, of $34.6 million. Net cash proceeds were allocated to the
common stock issued and the option to purchase additional shares based on their
relative fair value at the date of issuance, resulting in $34.1 million of net
cash proceeds allocated to the common stock issued and $0.5 million of net cash
proceeds allocated to the option to purchase additional shares.
The
fair value of the option to purchase the additional 3,972,251 shares was
estimated to be $0.5 million at the date of issuance based on the Black-Scholes
option pricing model using a risk-free interest rate of 0.16%, volatility of
approximately 55%, the contractual life of 0.2 years and zero dividend rate.
The net cash proceeds allocated to the option to purchase additional shares
were recorded as additional paid in capital. The option was outstanding at September 30,
2010.
NOTE 12 STOCK INCENTIVE PLAN
During
the nine months ended September 30, 2010, the Company granted equity
awards primarily consisting of restricted stock and restricted stock units (RSUs),
and to a much lesser extent, option awards. Such awards generally vest over a
period of one to four years from the date of grant. Restricted stock has the
voting rights of common stock and the shares underlying restricted stock are
issued and outstanding. There were 555,391 option awards during the three
months ended September 30, 2010.
In
February 2008, the Compensation Committee granted 1,073,333
performance-based awards to certain senior executive officers. During the third
quarter of 2008, 233,333 of these contingently issuable shares were forfeited
as a result of employee terminations. On October 6, 2008, the performance
requirements with respect to 60,000 of these contingently issuable shares were
eliminated, these restricted stock units have a fair value of $2.69 per share,
which equals the closing price of the Companys common stock on the NASDAQ
Stock Market on the measurement date of October 6, 2008. On
February 18, 2009, the Committee determined, based on the Companys and
each executive officers level of performance during the Companys 2008 fiscal
year, that an additional 367,500 shares underlying the previously granted
performance-based restricted stock units had been earned, each of these
performance-based restricted stock units has a fair value of $1.27 per share, which
equals the closing price of the Companys common stock on the NASDAQ Stock
Market on the measurement date of February 18, 2009. These restricted
stock units vested 50% on February 27, 2009 and 50% vested on
February 26, 2010.
In
February 2009, the Compensation Committee also granted to senior executive
officers 313,293 restricted stock units with a four-year vesting and an
additional 626,586 performance-based awards, subject to the attainment of goals
determined by the Compensation Committee. The Company may be subject to
variable levels of expense related primarily to the varying levels of
performance, as well as for fluctuations in the Companys stock price as these
awards are marked to market periodically until the earlier of i) the date of
the Compensation Committees determination on performance or ii) the date they
were deemed fully vested as a result of involuntary termination. Of the 626,586
performance-based awards granted in February 2009, 401,859 awards were
deemed fully vested during fiscal 2009 as a result of involuntary terminations,
prior to the annual Compensation Committees evaluation of performance. At its
meeting on February 18, 2010, the Compensation Committee evaluated the
performance against established objectives of the remaining 224,727
performance-based awards and determined 148,769 RSUs were earned.
18
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In
February 2010, the Compensation Committee decided no annual grants of
stock-based awards would be made to existing senior executives for the 2010
year in light of the Companys previously announced planned changes in
management.
To
reduce the Companys long term cost structure and manage shareholder dilution,
the Company has elected to terminate the ESPP program effective May 15,
2009. The cancellation has been accounted for as a settlement of shares for no
consideration. This resulted in an immediate expense recognition in the first quarter
of 2009 of $1.2 million associated with the unrecognized compensation for
canceled purchase periods of the 24-month offering.
During
the second quarter of 2009, an adjustment was made to increase the estimated
forfeiture rate for equity awards of employees that are being included in the
2009 Restructuring Plan as the awards are not expected to ultimately vest. The resulting net effect of the forfeiture
rate adjustment was a decrease to the Companys stock-based compensation
expense for the nine months ended September 30, 2009 by approximately $0.4
million.
The
total stock-based compensation expense, including the ESPP expense described
above, recognized in the condensed consolidated statement of operations for the
three months and nine months ended September 30, 2010 and 2009 was as
follows:
Three months ended September 30,
Nine months ended September 30,
2010
2009
2010
2009
(in thousands)
Cost of net sales
$
42
$
101
$
135
$
592
Selling, general and administrative
901
1,516
3,381
5,572
Research and development
202
237
563
1,321
Restructuring
439
1,153
2,052
1,949
Total
$
1,584
$
3,007
$
6,131
$
9,434
Option
activity as of September 30, 2010 and changes during the nine months ended
September 30, 2010 were as follows:
Number of shares
outstanding
Weighted
average exercise
price
(in thousands)
Options outstanding, December 31, 2009
5,750
$
8.98
Options granted
655
2.17
Options exercised
(2
)
2.82
Options forfeited or expired
(1,945
)
15.77
Options outstanding, September 30, 2010
4,458
$
5.02
Nonvested
restricted stock and restricted stock units as of September 30, 2010, and
changes during the nine months ended September 30, 2010, were as follows:
Shares
Weighted average
grant date fair value
(in thousands)
Nonvested at December 31, 2009
4,030
$
2.38
Granted
1,479
$
2.25
Vested
(2,634
)
$
2.75
Forfeited
(564
)
$
2.14
Total nonvested at September 30, 2010
2,311
$
1.94
19
Table of Contents
At
September 30, 2010, there was approximately $4.0 million of total
unrecognized compensation cost, related to non-vested stock options, restricted
stock and restricted stock units, as measured, which the Company expects to
recognize over a weighted-average period of 2.3 years. For additional
information regarding the Companys stock-based compensation plans, see the
Companys Annual Report on Form 10-K for the year ended December 31,
2009.
NOTE 13 - INCOME TAXES
As
of December 31, 2009, the Company had gross unrecognized tax benefits of
approximately $90.6 million and had certain deferred tax assets and the
federal tax benefit of state income tax items totaling $77.8 million. If
recognized, the portion of gross unrecognized tax benefits that would decrease
the provision for income taxes and decrease the Companys net loss is
approximately $12.8 million.
As
of September 30, 2010, the Company had gross unrecognized tax benefits of
approximately $92.9 million and had certain deferred tax assets and the
federal tax benefit of state income tax items totaling $78.5 million. If
recognized, the portion of gross unrecognized tax benefits that would decrease
the provision for income taxes and decrease the Companys net loss is
approximately $14.4 million.
The
Company recognizes interest expense and penalties related to the above
unrecognized tax benefits within income tax expense. The Company had accrued
interest and penalties of approximately $3.1 million as of December 31,
2009 and approximately $3.4 million as of September 30, 2010.
The
Company is subject to taxation in the U.S. federal jurisdiction and
various U.S. state and foreign jurisdictions. The Company is under audit
by the taxing authorities in China on a recurring basis. The material
jurisdictions that the Company is subject to examination are in the
United States and China. The Companys tax years for 1999 through 2009 are
still open for examination in China. The Companys tax years for 2006 through
2009 are still open for examination in the United States. The Company
believes that it is reasonably possible that the amount of gross unrecognized
tax benefits related to the resolution of income tax matters could be reduced
by approximately $1.0 million during the next 12 months as income tax audits
are settled and statute of limitations expire. The portion of the $1.0 million
of gross unrecognized tax benefits that would decrease the provision for income
taxes and increase the Companys net income is approximately $0.7 million.
FASB
ASC 740-10 establishes criteria for recognizing or continuing to recognize only
more-likely-than-not tax positions, which may result in income tax expense
volatility in future periods. While the Company believes that it has adequately
provided for all tax positions, amounts asserted by taxing authorities could be
greater than the Companys accrued position. Accordingly, additional provisions
on income tax related matters could be recorded in the future as revised
estimates are made or the underlying matters are settled or otherwise resolved.
In
establishing its deferred income tax assets and liabilities, the Company makes
judgments and interpretations based on the enacted tax laws and published tax
guidance applicable to its operations. The Company records deferred tax assets
and liabilities and evaluates the need for valuation allowances to reduce the
deferred tax assets to realizable amounts. The likelihood of a material change
in the Companys expected realization of these assets is dependent on future
taxable income and its ability to use foreign tax credit carryforwards
and carrybacks.
Income
tax expense was $1.4 million for the three months ended September 30, 2010
compared to income tax benefit of $0.3 million for the three months ended
September 30, 2009. Income tax
benefit of $0.3 million for the three months ended September 30, 2009 was
mainly due to a one-time tax benefit related to the change in India withholding
taxes. Income tax expense was $3.2 million for the nine months ended September 30,
2010 compared to $6.2 million for the nine months ended September 30,
2009. The decrease in income tax expense in the nine months ended
September 30, 2010 compared with nine months ended September 30, 2009
was primarily due to the decreased ordinary income in jurisdictions where the
Company has been profitable and a one-time tax expense of $1.4 million in the
second quarter of 2009 related to establishing of valuation allowance on net
deferred tax assets in Korea.
For
2010 and 2009, the Company has not provided any tax benefit on any forecasted
losses incurred and tax credits generated in the United States and other
countries, because management believes that it is more likely than not that the
tax benefit associated with these losses will not be realized. Also, for 2010
and 2009, the Company continues to accrue tax expense in jurisdictions where
the Company has been historically profitable. Estimates of the annual effective
tax rate at the end of the interim periods are based on evaluations of possible
future events and transactions and may be subject to subsequent refinement or
revision.
20
Table of Contents
NOTE 14 - OTHER INCOME (EXPENSE), NET
Other
income (expense), net for the three and nine months ended September 30,
2010 and 2009, respectively were comprised of the following:
Three months ended September 30,
Nine months ended September 30,
2010
2009
2010
2009
(in thousands)
Other-than-temporary impairment of equity
investment
$
$
(1,719
)
$
$
(5,517
)
Foreign exchange gains (losses)
6,908
(11
)
6,057
1,734
Settlement with MRV Communications (1)
481
Other
59
174
529
442
Total
$
6,967
$
(1,556
)
$
7,067
$
(3,341
)
(1) Previously, the Company held an 8% ownership
interest in Fiberxon, which was acquired by MRV Communications (MRV) in 2007.
In connection with the acquisition, Fiberxon shareholders received cash and
stock as well as the right to potential deferred consideration. In
December 2009, MRV entered into a settlement agreement for dismissal of
legal proceedings between MRV and the former shareholders of Fiberxon regarding
the amount of contingent consideration owed related to its acquisition.
Proceeds received in the first quarter of 2010 represented the Companys
proportionate share of the settlement amounts.
NOTE 15 - SEGMENT REPORTING
In
the fourth quarter of 2009, the Company substantially completed the wind-down
of its handset business. Except for sales relating to inventory clearing, the
Company does not expect any significant handset revenue in 2010. Beginning on
January 1, 2010, the Company integrated its Services Segment into its
Multimedia Communications and Broadband Infrastructure segments based on
products for which services are performed. Effective January 1, 2010, the
new reporting segments are as follows:
· Multimedia
CommunicationsFocused on development and market opportunities in IPTV
solutions and Wireless infrastructure technologies, including related services
revenue.
· Broadband
InfrastructureFocused on our world class portfolio of broadband products,
including related services revenue.
· HandsetsFocused
on mobile phone business including PAS and CDMA handset market, as well as data
cards markets. Handset sales to PCD LLC, which commenced after the
July 1, 2008 sale of PCD, are included in this segment.
The
Companys chief operating decision makers make financial decisions based on
information it receives from its internal management system and currently
evaluates the operating performance of and allocates resources to the reporting
segments based on segment revenue and gross profit. Cost of sales and direct
expenses in relation to production are assigned to the reporting segments. The
accounting policies used in measuring segment assets and operating performance
are the same as those used at the consolidated level.
21
Table of Contents
Summarized
below are the Companys segment net sales, gross (loss) profit and segment
margin for the three and nine months ended September 30, 2010 and 2009
based on the current reporting segment structure. The Company has reclassified
its previously reported segment information for the three and nine months ended
September 30, 2009 to conform to the current segment presentation.
Three months ended September 30,
Nine months ended September 30,
2010
% of net
sales
2009
% of net
sales
2010
% of net
sales
2009
% of net
sales
(in thousands, except percentages)
Net Sales by
Segment
Multimedia Communications
$
39,500
64
%
$
30,044
43
%
$
128,811
60
%
$
120,520
45
%
Broadband Infrastructure
21,068
35
%
24,847
35
%
80,303
37
%
64,629
24
%
Handsets
826
1
%
15,613
22
%
6,292
3
%
84,858
31
%
$
61,394
100
%
$
70,504
100
%
$
215,406
100
%
$
270,007
100
%
Three months ended September 30,
Nine months ended September 30,
2010
Gross
profit %
2009
Gross
profit %
2010
Gross
profit %
2009
Gross
profit %
(in thousands, except percentages)
Gross profit by
Segment
Multimedia Communications
$
14,055
36
%
$
12,884
43
%
$
42,626
33
%
$
41,587
35
%
Broadband Infrastructure
(1,581
)
(8
)%
7,983
32
%
16,264
20
%
13,013
20
%
Handsets
(381
)
(46
)%
3,322
21
%
3,284
52
%
(24,597
)
(29
)%
$
12,093
20
%
$
24,189
34
%
$
62,174
29
%
$
30,003
11
%
Three months ended September 30,
Nine months ended September 30,
2010
2009
2010
2009
(in thousands)
Segment Margin
and Operating Loss
Multimedia Communications
$
5,958
$
3,218
$
20,211
$
9,152
Broadband Infrastructure
(5,127
)
4,094
6,381
Handsets
(731
)
470
2,268
(37,996
)
Total segment margin
100
7,782
28,860
(28,844
)
General and Corporate
(23,359
)
(41,576
)
(75,974
)
(149,243
)
Operating Loss
$
(23,259
)
$
(33,794
)
$
(47,114
)
$
(178,087
)
Sales
are attributed to a geographical area based upon the location of the customer.
Sales data by geographical area are as follows:
Three months ended September 30,
Nine months ended September 30,
% of net
% of net
% of net
% of net
2010
sales
2009
sales
2010
sales
2009
sales
(in thousands, except percentages)
Net Sales by
region
United States
$
%
$
10,664
15
%
$
5,903
3
%
$
53,654
20
%
China
37,162
61
%
30,959
44
%
120,348
55
%
134,708
50
%
Japan
11,718
19
%
5,051
7
%
33,951
16
%
18,093
7
%
India
8,093
13
%
14,399
20
%
20,446
9
%
33,519
12
%
Philippines
642
1
%
4,631
7
%
16,316
8
%
7,528
3
%
Other
3,779
6
%
4,800
7
%
18,442
9
%
22,505
8
%
Net sales
$
61,394
100
%
$
70,504
100
%
$
215,406
100
%
$
270,007
100
%
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Table of Contents
Long-lived
assets, consisting of property, plant and equipment, by geographical area are
as follows:
September 30,
December 31,
2010
2009
(in thousands)
United States
$
85
$
170
China
4,111
129,746
Other
614
696
Total long-lived assets
$
4,810
$
130,612
NOTE 16 - CREDIT RISK AND CONCENTRATION
At
September 30, 2010, the Companys accounts receivable balance included
amounts due from Philippine Long Distance Telephone Company and NEC Networks &
System Integration Corp, representing approximately 19% and 15%, respectively,
of the Companys total accounts receivable, net of allowances for doubtful
accounts. At December 31, 2009, the Companys accounts receivable balance
included amounts due from China Telecom, JiangSu Branch representing
approximately 11% of the Companys total accounts receivable, net of allowances
for doubtful accounts.
The
following customers accounted for 10% or more of the Companys net sales:
For the three
For the nine
months ended
months ended
September 30,
September 30,
(% of net sales)
2010
Softbank and affiliates
18
%
14
%
2009
PCD LLC
11
%
16
%
Approximately
56% and 33% of the Companys net sales during the three months ended
September 30, 2010 and 2009, respectively, and approximately 51% and 31%
of the Companys net sales during the nine months ended September 30, 2010
and 2009, respectively, were to entities affiliated with the government of
China. Accounts receivable balances from these China government affiliated
entities or state owned enterprises were $39.5 million and $45.7 million as of
September 30, 2010 and December 31, 2009, respectively. The Company
extends credit to its customers in China generally without requiring
collateral. With respect to global sales outside of China, the Company may
require letters of credit from its customers. The Company monitors its exposure
for credit losses and maintains allowances for doubtful accounts.
Approximately
61% and 44% of the Companys sales for the three months ended
September 30, 2010 and 2009, respectively, and approximately 55% and 50%
of the Companys net sales during the nine months ended September 30, 2010
and 2009, respectively, were made in China. Accordingly, the political,
economic and legal environment, as well as the general state of Chinas economy
may influence the Companys business, financial condition and results of
operations. The Companys operations in China are subject to special
considerations and significant risks not typically associated with companies in
the United States. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Companys results may be adversely affected by, among other things, changes in
the political, economic and social conditions in China, and by changes in
governmental policies with respect to laws and regulations, changes in Chinas
telecommunications industry and regulatory rules and policies,
anti-inflationary measures, currency conversion and remittance abroad, and
rates and methods of taxation.
23
Table of Contents
NOTE 17 - RELATED PARTY TRANSACTIONS
Softbank and affiliates
The
Company recognizes revenue with respect to sales of telecommunications
equipment to affiliates of Softbank, a significant stockholder of the Company.
Softbank offers ADSL coverage throughout Japan, which is marketed under the
name YAHOO! BB. The Company supports Softbanks fiber-to-the-home service
through sales of its carrier class GEPON product as well as its NetRing Ô product. In
addition, the Company supports Softbanks new internet protocol television (IPTV),
through sales of its RollingStream Ô product. During the three
and nine months ended September 30, 2010 and 2009, the Company recognized
revenue and related cost of net sales for sales of telecommunications equipment
and services to affiliates of Softbank as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
(in thousands)
Net sales
$
11,356
$
4,832
$
32,868
$
16,030
Cost of net sales
3,771
2,552
12,739
9,310
Gross profit
$
7,585
$
2,280
$
20,129
$
6,720
Gross
profit as a percentage of net sales fluctuations are expected and generally
result from changes in product mix. In the nine months ended September 30,
2010, gross profit as a percentage of net sales also benefited approximately
$2.4 million from the release of previously deferred revenue carve-out for
potential penalty and cancellation penalties as a result of completing these
obligations. Included in accounts receivable at September 30, 2010 and
December 31, 2009 were $13.0 million and $5.5 million, respectively,
related to these transactions.
Sales
to Softbank include a three year service period and a penalty clause if product
failure rates exceed a certain level over a seven year period. As of
September 30, 2010 and December 31, 2009, the Companys customer
advance balance related to Softbank agreements was $0.2 million and $0.2
million, respectively. The current deferred revenue balance related to Softbank
was $1.2 million and $1.4 million as of September 30, 2010 and
December 31, 2009, respectively. As of September 30, 2010, the
Companys noncurrent deferred revenue balance related to Softbank was $7.3
million compared to $8.8 million as of December 31, 2009.
As
discussed in Note 6, the Company has a $1.1 million investment in SBI.
Affiliates of Softbank have a controlling interest in SBI.
As
of September 30, 2010, Softbank beneficially owned approximately 10% of
the Companys outstanding stock.
NOTE 18VARIABLE INTEREST ENTITIES
In
October 2008, the Company made an investment in Turnstone Environment
Technologies LLC (TET), a Delaware limited liability company formed for
the purpose of licensing and developing energy efficient renewable cooling
solutions for cell towers in the telecommunications industry. In exchange for
5,180,788 Series A Preferred units representing approximately 22% of voting
interest in TET and 500,000 Series A Preferred warrants at an
exercise price of $0.9265 per unit and with an expiration term of 5 years,
the Company contributed $4.8 million in cash. The Company currently does
not have any representation on TETs board of directors nor the ability to
control the management and operation decisions of TET. The operations of TET
are in the development stage and the entity is actively seeking additional
investors. The Company does not intend to and has no obligation to fund future
losses or make additional contributions other than its initial investment. As
of December 31, 2009 and 2008, TET was in effect entirely funded by the
Companys initial investment as the capital contributions of the other current
investors were not substantive. The Company determined that the venture was a
variable interest entity and the Company was the primary beneficiary because it
was exposed to the majority of the variable interest entitys expected losses.
Therefore, the Company was required to consolidate TETs financial statements
under ASC 810-10-15, Variable Interest Entities Subsections.
Beginning January 1, 2009, the assets, liabilities and operating results
of TET were consolidated into the Companys balance sheet and statement of operations.
TET had no revenues and $3.9 million in expenses for the year ended
December 31, 2009, of which $3.1 million relates to amortization of an
acquired exclusive license to utilize solar cooling technology. The Company
initially determined the appropriate amortization period for the exclusive
license was to match the estimated revenue generation period from sale of
products utilizing the licensed technology. In the third quarter of 2009, as a
result of the delay in revenue generation, the Company changed its estimate to
a systematic and rational allocation of straight-line amortization expense
based on the term of the technology license. TETs operations are not
considered to be integral to the Companys major operating activities. As such,
all income and expenses from TETs operations, which are includable in the
Companys income statement as a result of the application of ASC 810-10-15,
Variable Interest Entities Subsections,
have been classified within operating expense.
24
Table of Contents
In the fourth quarter of
2009, the Company evaluated several fourth quarter events, including the
continued unsuccessful efforts of TET to secure additional funding; the
continued unsuccessful efforts of TET to locate a suitable local manufacturing
partner, TETs continued need to amend and extend payment due dates of the
acquired exclusive license to utilize solar cooling technology and the departure
of a key employee of TET. The Company determined that the combined effect of
these events, as well as others, was a triggering event for an impairment
analysis of TETs long-lived assets. The Company furthered determined that the
estimated cash flows from TET were not sufficient to recover the carrying value
of TETs net assets. As a result, the Company recorded a $0.9 million
impairment charge, included within operating expense, equal to its initial cost
of investment of $4.8 million less the cumulative absorbed losses to date. As
of December 31, 2009, the effect of consolidating TET resulted in an
immaterial impact on the consolidated balance sheet.
In June 2009, the FASB
issued authoritative guidance which revised the approach to identifying primary
beneficiaries from a quantitative-based risks-and rewards calculation to a
qualitative approach when assessing whether an entity has a controlling
financial interest in a variable interest entity. This analysis identifies the
primary beneficiary of a variable interest entity as one with the power to
direct the activities of a variable interest entity that most significantly
impact the entitys economic performance and the obligation to absorb losses of
the entity that could potentially be significant to the variable interest. The
Company adopted this new guidance in the first quarter of fiscal year 2010.
Under the new guidance, the Company concluded that it does not have the power
to direct the activities of TET that most significantly impact the entitys
economic performance, and therefore, is not TETs primary beneficiary which
would require consolidation. The Company further concluded that under the new
guidance it would have accounted for its initial investment under the cost
method. The new guidance also requires an enterprise upon initial adoption to
determine the carrying amount of an investment in an entity that is no longer
consolidated, as if it always had applied the provisions of the new guidance.
Because under either the consolidation model or the cost method, the
balance(s) of the assets/liabilities (investment) would be zero in the
financial statements of the Company at December 31, 2009 or
January 1, 2010, respectively, the adoption of the new guidance in the
first quarter of 2010 has no financial statement impact to the Company.
NOTE 19SUBSEQUENT EVENTS
On
October 16, 2010, the Company entered into an Ordinary Shares Purchase
with Stage Smart Limited (Stage Smart) and Smart Frontier Holdings Limited (Smart
Frontier), the sole shareholder of Stage Smart. Pursuant to the Ordinary
Shares Purchase Agreement, the Company agreed to purchase from Smart Frontier
5,100,000 ordinary shares of Stage Smart held by Smart Frontier (the Purchase Shares)
for an aggregate purchase price of $10.0 million. The Purchased Shares
constitute 51% of the total shares of Stage Smart currently held by Smart
Frontier. The purchase price for the Purchased Shares will be paid in the form
of the number of shares of the Companys common stock calculated by dividing
$10.0 million by the average closing price per share of the Companys common
stock quoted on the NASDAQ stock market for the thirty day period immediately
preceding the date of closing of the transaction subject to customary closing
conditions. Concurrent with entering into the Ordinary Shares Purchase
Agreement, the Company also entered into a Series A Preference Shares
Purchase Agreement with Stage Smart and its affiliated entity, its wholly owned
subsidiaries, and Smart Frontier. Pursuant to the Series A
Preference Shares Purchase Agreement, the Company agreed to purchase from Stage
Smart 9,600,000 Series A Preference Shares of Stage Smart at a price of
$2.08333 per share, for an aggregate consideration of $20.0 million. Under
certain conditions, shares of Series A Preference Shares are convertible
into ordinary shares on a 1:1 basis.
ITEM 2MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q contains forward-looking statements
regarding future events and our future results that are subject to the safe
harbors created under the Securities Act of 1933 and the Securities Exchange
Act of 1934. Forward-looking statements are based on current expectations,
estimates, forecasts and projections about us, our future performance and the
industries in which we operate as well as on our managements assumptions and
beliefs. Statements that contain words like expects, anticipates, may, will,
targets, projects, intends, plans, believes, seeks, estimates, or
variations of such words and similar expressions are forward-looking
statements. In addition, any statements that refer to trends in our businesses,
future financial results, and our liquidity and business plans are
forward-looking statements. Readers are cautioned that these forward-looking
statements are only predictions and are subject to risks and uncertainties,
including those discussed in Part II, Item 1A-Risk Factors of this
Form 10-Q. Therefore, actual
results may differ materially and adversely from those expressed in any
forward-looking statements. We do not guarantee future results, and actual
results, developments and business decisions may differ from those contemplated
by those forward-looking statements. We
undertake no obligation to update these forward-looking statements to reflect
events or circumstances occurring after the date of this Form 10-Q.
25
Table of Contents
EXECUTIVE SUMMARY
We
are one of the leading global providers of Internet Protocol (IP)-based
network solutions including the integration and support services sold to
telecommunications operators in both emerging and established markets around
the world. Our focus is to design and sell IP-based telecommunications
infrastructure products including our primary product suite of Internet
Protocol TV (IPTV), and broadband solutions along with the ongoing services
relating to the installation, operation and maintenance of these products.
Collectively our range of solutions is designed to expand and modernize
telecommunications networks through smooth network system integration, lower
operating costs and increased broadband access. We also provide the carriers
with increased revenue opportunities by enhancing their subscribers user
experience. The majority of our business is based in China, India and
other Asia markets. We also continue to maintain a presence in selective
markets in Latin America and Europe.
We
differentiate ourselves with products designed to reduce network complexity,
integrate high performance capabilities and allow a simple transition to next
generation networks. We design our products to facilitate cost-effective and
efficient deployment, maintenance and upgrades.
Because
our products are IP-based, our customers can more easily integrate our products
with other industry standard hardware and software. Additionally, we believe we
can introduce new features and enhancements that can be cost-effectively added
to our customers existing networks. IP-based devices can be changed or
upgraded in modules, saving our customers the expense of replacing their entire
system installation.
In
October 2010, we announced several critical shifts in our business
strategy, including an increased focus on the Chinese and Asian markets, the
pursuit of telecom and cable network customers in parallel and using our expertise
in building and operating technology and service platforms for IPTV and
Internet TV to sell more end-to-end solutions to service providers.
Overview of Our Third Quarter 2010
· On
February 1, 2010, we entered into agreements for a strategic relationship
with Beijing E-town International Investment and Development Co., Ltd
(BEIID) which included a proposed investment
in the Companys common stock by BEIID, and two unrelated investment
funds, Elite Noble Limited and Shah Capital Opportunity Fund LP. These
investment transactions closed in September 2010. Under the revised terms,
we received cash of $34.6 million and issued approximately 18.1 million shares
of common stock and an option to purchase up to an additional 4.0 million
shares of common stock for approximately $8.1 million through November 8,
2010.
· In the third
quarter of 2010, we continued to execute on our strategy to focus on our
IP-based product and services offerings by divesting our China PDSN Assets and
transferring our EMEA operations. We
also received $0.7 million of contingent consideration related to our second
quarter 2010 divestiture of IP Messaging and US PDSN Assets. We recognized a
$1.4 million gain on divestiture in the third quarter of 2010 as a result of
these transactions.
· Net sales decreased by $ 9.1 million to $61.4 million during the three months ended
September 30, 2010 compared to the same period in 2009. The decrease was
primarily due to the wind-down of our handset business which resulted in a
decrease of $14.8 million in revenue. This decrease was partially offset by the
$9.5 million increase in sales of Multimedia Communications segment. The increase is due to accelerated
amortization of $23.2 million of PAS deferred product revenue offsetting the
decrease in revenue of all other major product lines of the Multimedia Communications
segment.
· Gross profit was $12.1 million, or 20% of net
sales in the third quarter of 2010 compared to $24.2 million, or 34% of net
sales in the corresponding period of 2009.
The gross margin from Broadband segment was reduced $9.6 million
primarily due to an $8.5 million inventory reserve for MSAN and MSTP for two
international customer contracts. The
gross margin from Handset sales was reduced $3.7 million as a result of the
wind-down of our handset business. The gross margin from Multimedia
Communications increased $1.2 million, benefiting $5.8 million from the impact
of the release of accrued third party commissions as a result of expiration of statute of limitations and benefiting
from the acceleration of PAS deferred product revenue amortization, partially
offset by reserve for unrecoverable output VAT and decreased gross margin in
other major product lines.
· Selling, general and
administrative and research and development operating expenses decreased $12.9
million during the three months ended September 30, 2010 compared to the
same period in 2009. The decrease was primarily as a result of lower costs as a
result of restructuring and other cost reduction initiatives, partially offset
by a $2.5 million reserve for prepaid expatriate income tax on foreign tax
credit which we deem not recoverable and a $1.9 million provision for doubtful
accounts during the three months ended September 30, 2010 relating to
aging receivables compared to $1.6 million recovery of doubtful accounts in the
same period of 2009.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Managements
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our Consolidated Condensed Financial Statements, which we have
prepared in accordance with U.S. generally accepted accounting principles. The
preparation of these financial statements requires management to make estimates
and assumptions that affect the amounts reported in our consolidated financial
statements and accompanying notes. Estimates are based on historical
experience, knowledge of economic and market factors and various other
assumptions that management believes to be reasonable under the circumstances.
Actual results may differ from those estimates.
On
a regular basis we evaluate our estimates, assumptions and judgments and make
changes accordingly. An accounting policy is deemed to be critical if it
requires an accounting estimate to be made based on assumptions about matters
that are highly uncertain at the time the estimate is made, if different
estimates reasonably could have been used, or if changes in the estimate that
are reasonably likely to occur could materially impact the financial
statements. We believe that the estimates, assumptions and judgments involved
in revenue recognition, receivables and allowances for doubtful accounts,
accruals including third party commissions payable, restructuring liabilities,
litigation and other contingencies, stock-based compensation, product warranty,
variable interest entities, inventories, deferred costs, research and
development and capitalized software development costs, income taxes, impairment
of intangible assets and long-lived assets, and valuation and impairment of
investments have the greatest potential impact on our condensed consolidated
financial statements, so we consider these to be our critical accounting
policies. Management believes that there have been no significant changes
during the nine months ended September 30, 2010 to the items that we
disclosed as our critical accounting policies and estimates in Managements
Discussion and Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for the year ended December 31, 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
For
a description of the new accounting standards that affect us, see Note 2
of Notes to our Condensed Consolidated Financial Statements included under
Part I, Item 1 of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
In
the fourth quarter of 2009, we substantially completed the wind-down of our
handset business. Except for sales relating to inventory clearing, we do not
expect any significant revenue from our handset segment in the remainder of
2010. In addition, in order to optimize our resources and improve efficiency,
beginning on January 1, 2010 we integrated our Services Segment into our
Multimedia Communications and Broadband Infrastructure segments based on
products for which services are performed. Effective January 1, 2010, the
new reporting segments are as follows:
· Multimedia
CommunicationsFocused on development and market opportunities in IPTV
solutions and Wireless infrastructure technologies, including related services
revenue.
· Broadband
InfrastructureFocused on our world class portfolio of broadband products,
including related services revenue.
· HandsetsFocused
on mobile phone business including PAS and CDMA handset market, as well as data
cards markets. Handset sales to PCD LLC, which commenced after the
July 1, 2008 sale of PCD, are included in this segment.
We
have reclassified our previously reported segment information for the three and
nine months ended September 30, 2009 to conform to the current segment
presentation.
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NET
SALES
Three months ended September 30,
Nine months ended September 30,
% of net
% of net
% of net
% of net
2010
sales
2009
sales
2010
sales
2009
sales
(in thousands, except percentages)
Net Sales by
Segment
Multimedia Communications
$
39,500
64
%
$
30,044
43
%
$
128,811
60
%
$
120,520
45
%
Broadband Infrastructure
21,068
35
%
24,847
35
%
80,303
37
%
64,629
24
%
Handsets
826
1
%
15,613
22
%
6,292
3
%
84,858
31
%
$
61,394
100
%
$
70,504
100
%
$
215,406
100
%
$
270,007
100
%
Three months ended September 30,
Nine months ended September 30,
% of net
% of net
% of net
% of net
2010
sales
2009
sales
2010
sales
2009
sales
(in thousands, except percentages)
Net Sales by
region
United States
$
%
$
10,664
15
%
$
5,903
3
%
$
53,654
20
%
China
37,162
61
%
30,959
44
%
120,348
55
%
134,708
50
%
Japan
11,718
19
%
5,051
7
%
33,951
16
%
18,093
7
%
India
8,093
13
%
14,399
20
%
20,446
9
%
33,519
12
%
Philippines
642
1
%
4,631
7
%
16,316
8
%
7,528
3
%
Other
3,779
6
%
4,800
7
%
18,442
9
%
22,505
8
%
Net sales
$
61,394
100
%
$
70,504
100
%
$
215,406
100
%
$
270,007
100
%
Three months ended September 30, 2010 and 2009
Net
sales decreased by 13% to $61.4 million during the three months ended
September 30, 2010 compared to the same period in 2009. The decrease was primarily due to the
wind-down of our handset business which resulted in a decrease of $14.8 million
in revenue. Broadband Infrastructure segment net sales decreased $3.8 million,
mainly driven by the decreased sales in MSAN product and service sales, which
was partially offset by increased sales in TN product. Multimedia Communications segment net sales
were $39.5 million for the three months ended September 30, 2010 as
compared to $30.0 million for the same period of 2009. The increase was mainly
due to the accelerated amortization of PAS deferred product revenue partially
offset by the decrease in revenue of all other major product lines of the
segment.
28
Table of Contents
Nine months ended September 30, 2010 and 2009
Net
sales decreased by 20% to $215.4 million during the nine months ended
September 30, 2010 compared to the same period in 2009. The decrease was primarily due to the
wind-down of our handset business which resulted in a decrease of $78.6 million
in revenue. This decrease was partially offset by the $15.7 million increase in
sales of Broadband Infrastructure segment mainly due to $11.9 million MSAN
product revenue recognized from an international customer. Multimedia
Communications net sales were $128.8 million for the nine months ended
September 30, 2010 as compared to $120.5 million for the same period of
2009, mainly due to the accelerated amortization of PAS deferred product
revenue partially offset by the decrease in revenue of all other major product
lines of the segment.
For
additional discussion, see the Segment Reporting section of this Item 2.
In
2010 and beyond, we do not expect significant new contracts for our PAS
handsets and infrastructure equipment. As of September 30, 2010, we have
approximately $120.1 million of deferred revenue associated with PAS
infrastructure sales to be recognized ratably over the expected period of
support through December 2011. We review assumptions regarding the
estimated post contract support periods on a regular basis. Due to the China
telecommunication industry restructuring and launching of 3G services in China,
the Ministry of Industry and Information Technology of China announced that PAS
services in China will be phased out by January 1, 2012. In the fourth
quarter of 2009, we determined the remaining expected period of support as 2
years and hence deferred revenue associated with PAS infrastructure is being
recognized ratably beginning in the fourth quarter of 2009 through the fourth
quarter of 2011. As a result of this change, net sales and gross profit in the
nine months ended September 30, 2010 were increased by approximately $38.0
million and $13.4 million, respectively compared to the same periods in 2009.
In both fiscal 2010 and 2011, total net sales and gross profit associated with
the amortization of all PAS-related deferred revenue will approximate $93
million and $33 million, respectively.
The
economic uncertainty that we are operating in today could adversely impact our
business. However, the majority of our business is based in China and Indiatwo
countries that are still projected to have economic growth in 2010. We
currently offer and have initial market acceptance of our IPTV products in
China, India, Taiwan and other geographic regions. We believe that the
IPTV market presents a meaningful growth opportunity in these regions as well
as other regions where we have targeted to expand our IPTV offerings. Our
growth in India, however, may be adversely impacted by recent changes in India
requiring all manufacturers to satisfy certain security and supply chain
standards to the satisfaction of Indian authorities. We are pursuing
alternative long-term solutions and working with the carriers who use our
products to make sure we can satisfy these new requirements.
GROSS (LOSS) PROFIT
Three months ended September 30,
Nine months ended September 30,
2010
Gross
profit %
2009
Gross
profit %
2010
Gross
profit %
2009
Gross
profit %
(in thousands, except percentages)
Gross profit by Segment
Multimedia Communications
$
14,055
36
%
$
12,884
43
%
$
42,626
33
%
$
41,587
35
%
Broadband Infrastructure
(1,581
)
(8
)%
7,983
32
%
16,264
20
%
13,013
20
%
Handsets
(381
)
(46
)%
3,322
21
%
3,284
52
%
(24,597
)
(29
)%
$
12,093
20
%
$
24,189
34
%
$
62,174
29
%
$
30,003
11
%
Cost
of sales consists primarily of material and labor costs, including stock-based
compensation, associated with manufacturing, assembly and testing of products,
costs associated with installation and customer training, warranty costs, third
party commissions/fees to agents, inventory write-downs and overhead. Cost of
sales also includes import taxes and tariffs on components and assemblies. Some
components and materials used in our products are purchased from a single
supplier or a limited group of suppliers and, in some cases, are subject to
obtaining Chinese import permits and approvals. Our global program to outsource
our manufacturing operations is still in progress.
Our
gross profit has been affected by average selling prices, material costs,
product mix, the impact of warranty charges and contract loss provisions as
well as inventory reserves and release of deferred revenues and related cost
pertaining to prior years. Our gross profit, as a percentage of net sales,
varies among our product families. We expect that our overall gross profit, as
a percentage of net sales, will fluctuate in the future as a result of shifts
in product mix, stage of product life cycle, anticipated decreases in average
selling prices and our ability to reduce cost of sales.
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Three months ended September 30, 2010 and 2009
Gross
profit was $12.1 million, or 20% of net sales, in the three months ended
September 30, 2010 compared to $24.2 million, or 34% of net sales, in
the corresponding period of 2009. The gross margin from Broadband segment was
reduced $9.6 million primarily as a result of an $8.5 million inventory reserve
for MSAN and MSTP for two international customer contracts due to reduction in
product demands. The gross margin from
Handset sales was reduced $3.7 million as a result of the wind-down of our
handset business. The gross margin from Multimedia Communications increased
$1.2 million, benefiting $5.8 million for the three months ended September 30,
2010 from the impact of the release of accrued third party commissions as a result of expiration of statute of
limitations, compared with $0.7 million during the three months ended September 30, 2009, and benefiting from the acceleration of PAS
deferred product revenue amortization, partially offset by reserve for
unrecoverable output VAT and decreased gross margins in all other major product
lines of the segment .
Nine months ended September 30, 2010 and 2009
Gross
profit was $62.2 million, or 29% of net sales, in the nine months ended
September 30, 2010 compared to $30.0 million, or 11% of net sales, in
the corresponding period of 2009. There was $27.9 million gross profit increase
in Handset segment for the nine months ended September 30, 2010 compared
to the same period in 2009 primarily resulting from the wind-down of our
Handsets segment during 2009. Gross profit in Handset segment of $3.3 million
for the nine months ended September 30, 2010 related primarily to
inventory clearing sales compared with negative gross profit of $24.6 million
for the nine months ended September 30, 2009 which was impacted by
additional inventory reserves and claim settlements with PCD LLC, partially
offset by an $8.5 million decrease to cost of sales in the Handsets segment
resulting from the amortization of the Marvell supply agreement during the
first quarter of 2009. Compared to the nine months ended September 30,
2009, Broadband Infrastructure segment contributed $3.3 million increase in
gross profit in the same period of 2010, primarily due to increased sales of
higher margin TN products, including approximately $2.4 million from the release
of previously deferred revenue carve-out for potential penalty and cancellation
penalties in 2010 compared to 2009, partially offset by an
$8.5 million inventory reserve in the third quarter of 2010 for MSAN and MSTP
products for two international customer contracts due to reduction in demand . The gross
margin from Multimedia Communications increased $1.0 million, benefiting $6.0
million for the nine months ended September 30, 2010 from the impact of
the release of accrued third party commissions as a result of expiration of statute of limitations, compared with
$0.8 million for the and nine months ended September 30, 2009, and benefiting from the acceleration of PAS deferred product revenue amortization of Multimedia
Communications segment, partially offset by the decrease in sales of other
Multimedia Communications.
For
additional discussion, see the Segment Reporting section of this Item 2.
OPERATING EXPENSES
The
following table summarizes our operating expenses:
Three months ended September 30,
Nine months ended September 30,
% of
% of
% of
% of
net
net
net
net
2010
sales
2009
sales
2010
sales
2009
sales
(in thousands, except percentages)
Selling, general and administrative
$
24,530
40
%
$
33,139
47
%
$
75,882
35
%
$
114,290
42
%
Research and development
9,922
16
%
14,246
20
%
29,023
13
%
51,983
19
%
Restructuring
2,336
4
%
8,909
13
%
9,627
4
%
41,485
16
%
Loss (gain) on divestitures
(1,436
)
(2
)%
1,689
2
%
(5,244
)
(2
)%
332
0
%
Total net operating expenses
$
35,352
58
%
$
57,983
82
%
$
109,288
50
%
$
208,090
77
%
Selling,
general and administrative expenses (SG&A) include compensation and
benefits, professional fees, internal sales commissions, provision for doubtful
accounts receivable and travel and entertainment costs. Research and
development (R&D) expenses consist primarily of compensation and benefits
of employees engaged in research, design and development activities, costs of
parts for prototypes, equipment depreciation and third party development
expenses. We believe that continued and prudent investment in research and
development is critical to our long-term success, and we will aggressively
evaluate appropriate investment levels.
A portion of our costs are fixed and are difficult to quickly reduce in
periods of lower sales.
30
Table of Contents
SELLING, GENERAL AND ADMINISTRATIVE
Three
months ended September 30, 2010 and 2009
SG&A
expenses were $ 24.5 million for
the three months ended September 30, 2010, a decrease of $ 8.6 million as compared to $ 33.1 million for
the same period in 2009. The decrease in SG&A expense was primarily due to
a $5.9 million decrease in personnel related expenses as a result of our
restructuring actions and recent cost reduction measures, a $1.1 million
reduction in legal and accounting fees as a result of reduced activity in
investigations and litigation, a $0.6 million reduction in advertising and
marketing, sales promotions, as well as shows and exhibits expenses due to reduced
sales activities, a $1.3 million decrease in facility related expenses, a $0.6
million reduction in other taxes, fees, licenses, a $2.5 million reduction in
other operating cost, and a $0.2 million reduction in insurance as a result of
the reduced cost structure. These cost savings were partially offset by a $0.3
million increase in travel related expense as well as a $1.9 million provision
for doubtful accounts during the three months ended September 30, 2010
related to aging receivables compared to $1.6 million recovery of doubtful
accounts in the same period of 2009.
Nine
months ended September 30, 2010 and 2009
SG&A
expenses were $ 75.9 million for the
nine months ended June 30, 2010, a decrease of $ 38.4 million as compared to $ 114.3
million for the same period in 2009. The decrease in SG&A expense
was primarily due to a $26.9 million decrease in personnel related expenses as
a result of our restructuring actions and recent cost reduction measures, a
$6.6 million reduction in legal and accounting fees as a result of reduced
activity in investigations and litigation, a $2.7 million reduction in
advertising and marketing, sales promotions, as well as shows and exhibits
expenses due to reduced sales activities, a $0.8 million savings from reduction
in the use of outside services, a $0.9 million decrease in travel related
expenses due to reduced travel activity and cost containment efforts , a $4.0 million decrease in facility related
expenses, a $1.4 million reduction in other taxes, fees, licenses, a $2.7
million reduction in other operating cost and a $0.8 million reduction in
insurance as a result of the reduced cost structure. These cost savings were
partially offset by a $6.1 million provision for doubtful accounts related to
aging receivables compared to $3.7 million recovery of doubtful accounts in the
same period of 2009 resulting primarily from collection of long-aged
receivables.
RESEARCH AND DEVELOPMENT
Three months ended September 30, 2010 and 2009
R&D expenses decreased by $ 4.3
million during the three months ended September 30, 2010 compared
to the same period in 2009. The decrease
was mainly due to a $ 2.7 million
decrease in personnel related expense as a result of our restructuring actions,
$ 0.3 million savings from
reduction in use of outside services, and a total of $ 1.2 million decrease in depreciation, software license, parts and
facilities related expenses as we continued to streamline our operations and
wind down our handset business unit.
Nine months ended September 30, 2010 and 2009
R&D expenses decreased by $ 23.0 million
during the nine months ended September 30, 2010 compared to the same
period in 2009. The decrease was mainly
due to a $ 16.1 million decrease in
personnel related expense as a result of our restructuring actions, $ 2.0 million savings from reduction in use of outside services, and a total
of $ 4.5 million decrease in
depreciation, software license, parts and facilities related expenses as we
continued to streamline our operations and wind down our handset business unit.
RESTRUCTURING
Three and nine months ended September 30, 2010
During the three months and nine months ended
September 30, 2010, we recorded approximately $2.3 million and $9.6
million in restructuring charges.
On
June 9, 2009, our Board of Directors approved a restructuring plan (the 2009
Restructuring Plan) designed to reduce our operating costs. The 2009
Restructuring Plan includes a worldwide reduction in force of approximately 50%
of our headcount, or approximately 2,300 employees located primarily in China
and the United States and, to a lesser degree, other international locations.
During the three months ended September 30, 2010, we recorded
restructuring costs of approximately $2.2 million related to the 2009
Restructuring Plan, net of approximately $0.2 million of reversal of charges
recorded in fiscal year 2009. During the nine months ended September 30,
2010, we recorded restructuring costs of approximately $9.1 million related to
the 2009 Restructuring Plan, net of approximately $1.9 million of reversal of
charges recorded in prior periods. The restructuring costs for the nine months
ended September 30, 2010 consist primarily of severance and benefits
related to additional employees included in the Restructuring Plan, adjusted for change in estimate, and approximately $1.1 million of lease costs
primarily related to a lease expiring in 2013. Total restructuring costs
recorded through September 30, 2010 related to the 2009 Restructuring Plan
approximated $49.1 million.
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During
fiscal 2008, we implemented a restructuring plan (the 2008 Restructuring Plan)
primarily related to a global reduction in force across all functions and
employee terminations at certain non-core operations which we were in the
process of winding down. The number of employees affected totaled approximately
750, including 350 in China, 200 in Korea and 200 in other locations including
the United States. During the three and nine months ended September 30,
2010, we recorded additional restructuring costs related to the 2008
Restructuring Plan of approximately $0.1 million and $0.5 million,
respectively, for severance and benefit costs being recognized over the
remaining service period for employees included in the 2008 Restructuring Plan.
Total restructuring costs recorded through September 30, 2010 related to
the 2008 Restructuring Plan approximated $19.9 million.
Three and nine months ended September 30, 2009
During
the three and nine months ended September 30, 2009, the Company recorded
restructuring costs of approximately $9.2
million and $35.1 million,
respectively, related to the 2009 Restructuring Plan. Restructuring costs for the nine months ended
September 30, 2009 included $33.6 million
for severance and benefits related to approximately 2,070 employees and $1.5 million related primarily to the
estimated loss on a lease obligation which expires in 2013.
The
majority of the remaining cash expenditures related to the 2009 and 2008
Restructuring Plans are expected to be paid in 2010. The remaining liabilities
related to lease obligations are expected to be settled over the remaining
lease term. We expect to incur additional restructuring charges in 2010 as we
continue to execute the 2009 and 2008 Restructuring Plans.
GAIN ON
DIVESTITURES
Three
and nine months ended September 30, 2010
Gain
on divestitures for the three months ended September 30, 2010 of $1.4
million included a $1.6 million gain on sales of China PDSN Assets in the third
quarter of 2010, a $0.7 million additional gain on divestiture resulting from
$0.7 million contingent consideration received related to our second quarter
2010 divestiture of IP Messaging and US PDSN Assets, offset partially by a $0.9
million loss on transfer of EMEA operations in the third quarter of 2010. See
Note 3 to our Condensed Consolidated Financial Statements included under
Part 1, Item 1 of this Quarterly Report on Form 10-Q for
additional information regarding gain on divestitures.
Gain
on divestitures for the nine months ended September 30, 2010 of $5.2
million was comprised of the $1.6 million gain on sale of China PDSN Assets,
the $0.9 million loss on transfer of EMEA operations, $2.8 million gain on sale
of IP Messaging and US PDSN Assets and $1.8 million gain on sale of the RAS
product line in the first quarter of 2010.
Three
and nine months ended September 30, 2009
Loss
on divestiture for the three months ended September 30, 2009 was comprised
of a $1.7 million loss from the divestiture of our Korea operations. The loss
on divestiture of $0.3 million for the nine months ended September 30,
2009 was comprised of the $1.7 million loss from the divestiture of our Korea operations,
offset partially by a $1.4 million gain on sale of PCD assets resulting from an
adjustment to reflect actual transaction-related costs.
STOCK-BASED COMPENSATION EXPENSE
At
September 30, 2010, there was approximately $4.0 million of total
unrecognized compensation cost not including forfeitures, as measured, related
to non-vested stock options and restricted stock and restricted stock units,
which is expected to be recognized over a weighted-average period of 2.3 years.
The following table summarizes the stock-based compensation expense in our
consolidated statement of operations:
Three months ended September 30,
Nine months ended September 30,
2010
2009
2010
2009
(in thousands)
Cost of net sales
$
42
$
101
$
135
$
592
Selling, general and administrative
901
1,516
3,381
5,572
Research and development
202
237
563
1,321
Restructuring
439
1,153
2,052
1,949
Total
$
1,584
$
3,007
$
6,131
$
9,434
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Table of Contents
OTHER
INCOME (EXPENSE)
INTEREST INCOME
Three and nine months ended September 30, 2010 and 2009
Interest
income was $0.6 million and $0.5 million for the three months ended
September 30, 2010 and 2009, respectively. Interest income was
$1.4 million and $1.8 million for the nine months ended September 30,
2010 and 2009, respectively. Interest income decreased for the nine months
ended September 30, 2010 compared to the same period in 2009, primarily
due to a decline in the average interest rate.
INTEREST EXPENSE
Three and nine months ended September 30, 2010 and 2009
Interest
expense was $0.1 million and $0.1 million for the three months ended
September 30, 2010 and 2009, respectively. Interest expense was
$0.2 million and $0.5 million for the nine months ended September 30,
2010 and 2009, respectively. The decrease in interest expense for the nine
months ended September 30, 2010 compared to the same period in 2009 was primarily
attributable to the decreased use of credit facilities in 2010.
OTHER INCOME (EXPENSE), NET
Three months ended September 30, 2010 and 2009
Other
income, net was $7.0 million for the three months ended September 30, 2010
as compared to other expense, net of $1.6 million for the three months ended
September 30, 2009. Other income, net of $7.0 million for the three months
ended September 30, 2010 consisted primarily of $6.9 million of foreign
currency gains primarily resulting from intercompany receivables in Indian
Rupee and Chinese Renminbi. Other
expense, net of $1.6 million for the three months ended September 30, 2009
consisted primarily of a $1.7 million other-than-temporary impairment of an
equity investment.
Nine
months ended September 30, 2010 and 2009
Other
income, net for the nine months ended September 30, 2010 was $7.1 million
as compared to expense of $3.3 million for the nine months ended
September 30, 2009. Other income, net for the nine months ended
September 30, 2010 consisted primarily of $6.1 million of foreign currency
gains primarily resulting from intercompany receivables in Indian Rupee and Chinese
Renminbi, $0.5 million settlement proceeds with MRV Communications (MRV)
related to our investment in MRV which was sold in 2009, and $0.5 million of
other individually insignificant items. Other expense, net for the nine months
ended September 30, 2009 consisted primarily of a $5.5 million
other-than-temporary impairment of two equity investments, offset partially by
foreign currency gains of $1.7 million and $0.5 million of other
individually insignificant items.
INCOME TAX EXPENSE
Income
tax expense is based upon a blended effective tax rate based upon our
expectation of the amount of income to be earned in each tax jurisdiction and
is accounted under the liability method. Deferred income taxes are recognized
for the differences between the tax bases of assets and liabilities and their
financial statement amounts based on enacted tax rates. Valuation allowances
are established when necessary to reduce deferred tax assets to the amount
expected to be realized. We expect to maintain a full valuation allowance on
our remaining net deferred tax assets until an appropriate level of
profitability that generates taxable income is sustained or until we are able
to develop tax strategies that would enable us to conclude that it is more
likely than not that a portion of our deferred tax assets will be realizable.
Any reversal of valuation allowances will favorably impact our results of
operations in the period of the reversal.
FASB ASC 740-10 establishes criteria for recognizing
or continuing to recognize only more-likely-than-not tax positions, which may
result in income tax expense volatility in future periods. While we believe that
we have adequately provided for all tax positions, amounts asserted by taxing
authorities could be greater than our accrued position. Accordingly, additional
provisions on income tax related matters could be recorded in the future as
revised estimates are made or the underlying matters are settled or otherwise
resolved.
33
Table of Contents
Three months ended September 30, 2010 and 2009
Income
tax expense was $1.4 million for the three months ended September 30, 2010
compared to income tax benefit of $0.3 million for the three months ended
September 30, 2009. Income tax benefit of $0.3 million for the three
months ended September 30, 2009 was mainly due to one-time tax benefit
related to the change in India withholding taxes.
Nine
months ended September 30, 2010 and 2009
Income
tax expense was $3.2 million for the nine months ended September 30,
2010 compared to $6.2 million for the nine months ended September 30,
2009. The decrease in income tax expense
in the nine months ended September 30, 2010 compared with nine month ended
September 30, 2009 was primarily due to the decreased ordinary income in
jurisdictions where the Company has been profitable and a one-time tax expense
of $1.4 million in the three months ended June 30, 2009 related to
establishing of valuation allowance on net deferred tax assets in Korea.
34
Table of Contents
SEGMENT REPORTING
Summarized
below are our segment net sales and gross profit for the three and nine months
ended September 30, 2010 and 2009, respectively.
Multimedia Communications
Multimedia Communications
Three months ended
September 30,
Nine months ended
September 30,
2010
2009
2010
2009
(in thousands, except percentages)
Net sales
$
39,500
$
30,044
$
128,811
$
120,520
Gross profit
$
14,055
$
12,884
$
42,626
$
41,587
Gross profit as a percentage of net sales
36
%
43
%
33
%
35
%
During
the three months ended September 30, 2010, Multimedia Communications
segments sales were $39.5 million as compared to $30.0 million for the same
period in 2009 as the accelerated PAS deferred product revenue amortization and
the increase in sales of Set Top Box (STB) product offset the decrease in
revenue of all other major product lines. Amortization of PAS deferred product
revenue accounted for $23.2 million or 59% of Multimedia Communication sales
for the three months ended September 30, 2010, compared to $10.5 million
or 35% for the same period in 2009. Revenue from STB product accounted for 13%
and 8% of Multimedia Communications segments in the third quarter of 2010 and
2009, respectively.
During
the nine months ended September 30, 2010, sales of Multimedia
Communications segment were $128.8 million as compared to $120.5 million for
the same period in 2009 as accelerated PAS deferred product revenue
amortization and the increase in sales of STB product offset the decrease in
revenue of all other major product. Amortization of PAS deferred product
revenue accounted for $69.5 million or 54% of Multimedia Communications sales
for the nine months ended September 30, 2010, compared to $31.5 million or
26% for the same period in 2009.
The
gross profit as a percentage of net sales decreased to 36% for the three months
ended September 30, 2010 from 43% for the corresponding period in 2009.
The decrease in gross profit percentage was mainly due to increase in loss
order provision and inventory provision for IPTV products, and more revenue
from STB product with low gross margin, partially offset by an increase in
third party commission reversal for PAS product and acceleration of PAS
deferred product revenue amortization in the third quarter of 2010. During the three and nine months ended September 30,
2010, gross profit benefited $5.8 and $6.0 million, respectively, from the
impact of the release of accrued third party commissions as a result of expiration of statute of
limitations, compared with $0.7 million and $0.8 million, respectively,
during the three and nine months ended September 30, 2009. The gross profit
as a percentage of net sales decreased to 33% for the nine months ended September 30,
2010 from 35% for the corresponding period in 2009. The decrease was primarily
due to an approximately $1.0 million benefit to gross profit in the nine months
ended September 30, 2010 from sales of product inventory which was previously fully
reserved, compared to $5.1 million for the same period of 2009.
In
2010 and beyond, we do not expect significant new contracts for our PAS
handsets and infrastructure equipment. We plan to aggressively pursue opportunities
for our IPTV product portfolios in multiple markets. We believe that the IPTV
market presents a meaningful growth opportunity. We currently offer and have
initial market acceptance of our IPTV products in China, India, Taiwan and
other geographic regions.
Broadband
Infrastructure
Broadband Infrastructure
Three months ended
September 30,
Nine months ended
September 30,
2010
2009
2010
2009
(in thousands, except percentages)
Net sales
$
21,068
$
24,847
$
80,303
$
64,629
Gross profit
$
(1,581
)
$
7,983
$
16,264
$
13,013
Gross profit as a percentage of net sales
(8
)%
32
%
20
%
20
%
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Table of Contents
Broadband
Infrastructure sales decreased by 15% and increased by 24%, respectively,
during the three and nine months ended September 30, 2010 as compared to
the same periods in 2009. The decrease
in sales for the three months ended September 30, 2010 was due to the
decrease in sales of several product lines except for TN, CPE and MSTP
products. The increase in sales for the nine months ended September 30,
2010 was mainly due to the increase in sales of MSAN products, including $11.9
million revenue from an international customer in the first quarter of 2010.
Also contributing to the increase in sales for the nine months ended
September 30, 2010 was the increase in sales of most major product lines,
offset partially by a decrease in sales of MSTP and service. TN product revenue comprised approximately 29% and
0% of Broadband Infrastructure sales for the three months ended
September 30, 2010 and 2009, respectively. TN product revenue comprised approximately 14% and
0% of Broadband Infrastructure sales for the nine months ended
September 30, 2010 and 2009, respectively. Softbank in Japan, one of
our largest infrastructure customers, represented approximately 54% and 19% of
total Broadband sales during the three months ended September 30, 2010 and
2009, respectively, and 41% and 25% during the nine months ended
September 30, 2010 and 2009, respectively.
During
the fourth quarter of 2009, we began recognizing revenue ratably on a
significant customer contract over the seven year post contract support period
and in the third quarter of 2010 we began recognizing revenue ratably on the
second phase of this contract, also over the seven year post contract support
period. For the three and nine months ended September 30, 2010, we
recognized revenue of $5.2 million and $11.9 million, respectively, and
immaterial gross profit on both phases of the contracts.
Gross
profit percentage decreased to negative 8% for the three months ended
September 30, 2010 from 32% for the corresponding period of 2009. The
decrease in gross profit percentage was primarily due to an $8.5 million inventory
reserve for MSAN and MSTP for two contracts due to reduction in product demand,
and decreased sales of service which was partially offset by TN product sales
with high margin. Gross profit percentage remained stable at 20% for the nine months ended
September 30, 2010 and the corresponding period of 2009. The gross profit
percentage was impacted by the increase in TN product sales with high margin product sales , including
approximately $2.4 million from the release of previously deferred revenue
carve-out for potential penalty and cancellation penalties, partially offset by the impact of higher inventory
reserve for MSAN and MSTP products.
We
may incur additional warranty expense and inventory reserves as we introduce
new products and may be required to accrue additional contract losses for
certain fixed price contracts as these contracts progress. These factors will
result in negative impacts on our future gross margins, results of operations
and financial position.
Handsets
Three months ended
September 30,
Nine months ended
September 30,
2010
2009
2010
2009
(in thousands, except percentages)
Net sales
$
826
$
15,613
$
6,292
$
84,858
Gross profit
$
(381
)
$
3,322
$
3,284
$
(24,597
)
Gross profit as a percentage of net sales
(46
)%
21
%
52
%
(29
)%
Net
sales de creased by 95 % and 93% for the three and nine months ended September 30, 2010,
respectively, compared to the same period in 2009. The de crease was
primarily due to the substantial wind-down of our worldwide handset business.
Except for sales related to inventory clearing, we do not expect any
significant handset revenue in 2010.
Gross
profit as a percentage of net sales decreased from 21% for the three months
ended September 30, 2009 to negative 46% for the corresponding period in
2010. The decrease was mainly due to additional royalty accrual of $0.6 million
in the three months ended September 30, 2010.
Gross
profit as a percentage of net sales increased from negative 29% for the nine
months ended September 30, 2009 to 52% for the corresponding period in
2010. The increase was mainly due to inventory clearing sales of PAS and CDMA
handsets which were previously fully reserved. We incurred additional warranty
reserve recorded during the first quarter of 2009 due to additional repairs for
one of our handset products, and additional inventory reserve for our PAS
handsets as we anticipated decrease in demand after China launched its 3G
networks. In addition, gross profit was also reduced by approximately $ 26.2
million as a result of transactions with PCD LLC consisting of a claim
settlement of $11.1 million for product-related liability disputes and
product returns and $ 15.1 million of costs for inventory write-downs to net
realizable value, write-downs of excess inventory and warranty reserves.
36
Table of Contents
RELATED
PARTY TRANSACTIONS
Softbank
and affiliates
We
recognize revenue with respect to sales of telecommunications equipment to
affiliates of Softbank, a significant stockholder of the Company. Softbank
offers ADSL coverage throughout Japan, which is marketed under the name YAHOO!
BB. We support Softbanks fiber-to-the-home service through sales of our
carrier class GEPON product as well as our NetRing Ô product. In addition, we
support Softbanks new internet protocol television (IPTV), through sales of
our RollingStream Ô product.
During the three and nine months ended September 30, 2010 and 2009, we
recognized revenue and related cost of net sales for sales of
telecommunications equipment and services to affiliates of Softbank as follows.
Three Months Ended September 30,
Nine Months Ended September 30,
2010
2009
2010
2009
(in thousands)
Net sales
$
11,356
$
4,832
$
32,868
$
16,030
Cost of net sales
3,771
2,552
12,739
9,310
Gross profit
$
7,585
$
2,280
$
20,129
$
6,720
Gross
profit as a percentage of net sales fluctuations are expected and generally
result from changes in product mix. In the nine months ended September 30,
2010, gross profit as a percentage of net sales also benefited approximately
$2.4 million from the release of previously deferred revenue carve-out for
potential penalty and cancellation penalties as a result of completing these
obligations. Included in accounts receivable at September 30, 2010 and
December 31, 2009 were $13.0 million and $5.5 million, respectively,
related to these transactions.
Sales
to Softbank include a three year service period and a penalty clause if product
failure rates exceed a certain level over a seven year period. As of
September 30, 2010 and December 31, 2009, our customer advance
balance related to Softbank agreements was $0.2 million and $0.2 million,
respectively. The current deferred revenue balance related to Softbank was $1.2
million and $1.4 million as of September 30, 2010 and December 31,
2009, respectively. As of September 30, 2010, our noncurrent deferred
revenue balance related to Softbank was $7.3 million compared to $8.8 million
as of December 31, 2009.
As
discussed in Note 6 to our condensed consolidated financial statements included
under Part 1, Item 1 of this Quarterly Report on Form 10-Q, we
have a $1.1 million investment in SBI. Affiliates of Softbank have a controlling
interest in SBI.
As
of September 30, 2010, Softbank beneficially owned approximately 10% of
our outstanding stock.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and Capital Resources
The following sections discuss the effects of
changes in our balance sheet and cash flows, contractual obligations and other
commitments on our liquidity and capital resources.
Balance Sheet and Cash Flows
Cash and Cash Equivalents and Short-term
Investments
September 30,
December 31,
2010
2009
Change
(in thousands)
Cash and cash equivalents
$
337,026
$
265,843
$
71,183
Short-term investments - Bank notes
972
1,038
(66
)
Total
$
337,998
$
266,881
$
71,117
Nine months ended September 30,
2010
2009
Change
(in thousands)
Cash used in operating activities
$
(97,405
)
$
(89,202
)
$
(8,203
)
Cash provided by investing activities
127,652
14,900
112,752
Cash provided by (used in) financing activities
34,536
(388
)
34,924
Effect of exchange rate changes on cash and cash
equivalents
6,400
2,199
4,201
Net increase (decrease) in cash and cash
equivalents
$
71,183
$
(72,491
)
$
143,674
37
Table of Contents
Cash and cash equivalents, consisting
primarily of bank deposits and money market funds, are recorded at cost which
approximates fair value because of the short-term nature of these
instruments. At September 30,
2010, cash and cash equivalents approximating $202.9 million was held by our
subsidiaries in China.
Cash used in operating activities during the nine
months ended September 30, 2010 of $97.4 million resulted primarily from
the net loss of $42.1 million, adjusted for $5.2 million gains from investing
activities, and by changes in net operating assets and liabilities using net
cash of $65.3 million, partially offset by non-cash charges including $4.2
million of depreciation and amortization, $6.1 million stock-based compensation
and $6.0 million provision for doubtful accounts. Changes in net operating
assets and liabilities using net cash during the nine months ended
September 30, 2010 included $32.4 million for settlement of accounts
payable and $54.4 million for settlement of other liabilities as the Company
continues to streamline operations. Cash used in operating
activities during the nine months ended September 30, 2009 of $89.2
million resulted primarily from the net loss of $186.3 million offset by
non-cash charges including $10.2 million of depreciation and amortization, $9.4
million stock-based compensation, $5.5 million other-than-temporary impairment
of two equity investments and also offset by changes in operating assets and
liabilities providing net cash of $73.6 million. The decrease in sales activity in the first
nine months of 2009 was the primary driver of the changes in operating assets
and liabilities.
Cash provided by investing activities during the
nine months ended September 30, 2010 of $127.7 million included net
proceeds from divestiture of $2.8 million, proceeds from sale of building of
$124.0 million, and changes in restricted cash of $7.4 million, offset
partially by cash outflows including $4.2 million for net purchases of
short-term investments, $2.6 million for purchases of property, plant and
equipment and $0.5 million for purchase of an investment interest. Cash
outflows of approximately $4.2 million for net purchases of short-term
investments related primarily to a non-qualified deferred compensation plan
established in fiscal 2010 which allows a six-month deferral of compensation
for certain employees. Cash
provided by investing activities during the nine months ended September 30,
2009 was $14.9 million. Cash
provided from investing activities in the nine months ended September 30,
2009 included $10.0 million of cash proceeds released from escrow in
July 2009 related to sale of PCD, $1.6 million of cash proceeds from the
sale of our investment in PCD LLC and $1.5 million cash proceeds from the
divestiture of our Korea operations.
Cash
provided by financing activities during the nine months ended
September 30, 2010 consist primarily of net cash proceeds of $34.6 million
from issuance of 18.1 million shares of common stock and an option to purchase
an additional 4.0 million of common stock through November 8, 2010. See
Note 11 to our Condensed Consolidated Financial Statements included under
Part 1, Item 1 of this Quarterly Report on Form 10-Q for
additional discussion .Cash used in financing was immaterial during the nine
months ended September 30, 2009.
Accounts Receivable, Net
Accounts
receivable decreased $0.7 million from $42.3 million at December 31, 2009
to $41.6 million at September 30, 2010. At September 30, 2010, our
allowance for doubtful accounts was $32.4 million on gross receivables of $74.0
million. We recorded provision for doubtful accounts of $1.9 million and $6.1
million for the three and nine months ended September 30, 2010,
respectively, related to aging receivables resulting from a slowdown in
customer payments. We recorded net recoveries of doubtful accounts of
approximately $1.6 million and $3.6 million for the three and nine months ended
September 30, 2009, respectively, primarily due to significant collection
of long-aged receivables during the second quarter of 2009, partially offset by
provision for doubtful accounts. We assess collectability of receivables based
on a number of factors including analysis of creditworthiness, our customers
historical payment history and current economic conditions, our ability to
collect payment and on the length of time an individual receivable balance is
outstanding. We have certain accounts receivable in China that have been
outstanding for a significant period of time. We provide allowances for these
receivables based on the criteria discussed above. While we believe we have
sufficient experience and knowledge of the China market and customer payment
patterns to reasonably estimate such allowances, actual payment patterns and
customer behavior could differ from our expectations.
38
Table of Contents
Inventories
and Deferred Costs
The
following table summarizes our inventories and deferred costs:
September 30,
December 31,
Increase
2010
2009
(Decrease)
(in thousands)
Inventories:
Raw materials
$
4,733
$
18,863
$
(14,130
)
Work in-process
14,967
12,881
2,086
Finished goods
32,157
40,556
(8,399
)
Total inventories
$
51,857
$
72,300
$
(20,443
)
Short-term deferred costs
$
122,540
$
130,453
$
(7,913
)
Long-term deferred costs
$
152,562
$
184,978
$
(32,416
)
Inventories
consist of product held at our manufacturing facility and warehouses, as well
as finished goods at customer sites for which the customer has taken
possession, but based on specific contractual terms, title has not yet passed
to the customer. Finished goods at customer sites were approximately $21.4
million and $33.8 million at September 30, 2010 and December 31,
2009, respectively.
Inventories
of approximately $0.8 million held by our manufacturing outsource partner are recorded
in Prepaids and other current assets in the condensed consolidated balance
sheet at September 30, 2010. No inventories were held by our manufacturing
outsource partner at December 31, 2009. The Company recorded an $8.5 million
inventory reserve in the third quarter of 2010 for MSAN and MSTP for two
international customer contracts due to the reduction in product demands.
Liquidity
We
have incurred net losses of $225.7 million, $150.3 million and $195.6 million
during the years ended December 31, 2009, 2008 and 2007, respectively.
During the nine months ended September 30, 2010, we incurred a net loss of
$42.1 million. We have recorded operating losses in 22 of the 23 consecutive
quarters in the period ended September 30, 2010. At September 30,
2010, we have an accumulated deficit of $1, 109.3million. we incurred net cash
outflows from operations of $67.4 million, $55.2 million and
$225.1 million in 2009, 2008 and 2007 respectively. Cash used in operations
was $97.4 million during the nine months ended September 30, 2010. While
operating results are expected to improve in 2010 compared with prior years, we
expect to continue to incur losses for the remainder of 2010.
39
Table
of Contents
At
September 30, 2010, we had cash and cash equivalents of
$337.0 million, of which $202.9 million was held by our subsidiaries in
China. The amount of cash available for transfer from the China subsidiaries
will be limited both by the liquidity needs of the subsidiaries in China and
the restriction on currency exchange by Chinese-government mandated
requirements including currency exchange controls on certain transfers of funds
outside of China.
At
September 30, 2010, we had approximately $28.7 million of available credit
facilities. In the second quarter of 2010, we entered
into two credit facilities totaling $29.4 million. Both credit facilities
can be used for the issuance of certain letters of credit and guarantees
and both facilities expire in the second quarter of 2011.
Global
economies have experienced a significant downturn driven by a financial and
credit crisis that will continue to challenge such economies for some period of
time. Under the current macroeconomic environment there are significant risks
and uncertainties inherent in managements ability to forecast future results.
The operating environment confronting us, both internally and externally,
raises significant uncertainties.
In
the past two years, we took a number of actions to improve our liquidity. In
March 2008, we paid $289.5 million to retire our convertible
subordinated notes and related accrued interest. On July 1, 2008, we
completed the sale of PCD. In addition, we divested our Mobile Solutions
Business Unit in July 2008. In the fourth quarter of 2008, management
initiated actions to disband our Custom Solutions Business Unit, to wind down
our Korea based handset operations, and announced initiatives including efforts
to eliminate functional duplications by consolidation of a number of functions
into our China operations. In June 2009, management expanded the
initiatives to include a worldwide reduction in workforce, outsourcing of
manufacturing operations and optimizing research and development spending with
a focus on selected products. Our year-to-year quarterly selling, general and
administrative and research and development operating expenses decreased significantly
in 2009 compared with 2008 and management believes the continuing efforts to
stream-line operations will enable our fixed cost base to be better aligned
with operations, market demand and projected sales levels. If projected sales
do not materialize, we will need to take further actions to reduce costs and
expenses or explore other cost reduction options.
In
December 2009, we entered into a Sales Leaseback Agreement for the sale of
our manufacturing, research and development, and administrative offices
facility in Hangzhou, China to another third party for approximately
$138.8 million with leaseback of a portion of the facility. On May 31,
2010, the buyer and we agreed that all conditions precedent to the closing had
been met and the leaseback commenced on June 1, 2010. As of May 31,
2010, we had received all of the sales proceeds and met all criteria for
consummation of sale of the Hangzhou facility.
On
February 1, 2010, we entered into agreements for a strategic relationship
with Beijing E-town International Investment and Development Co., Ltd
(BEIID) which included a proposed investment of $48.5 million in our
common stock by BEIID, and two unrelated investment funds, Elite Noble Limited
and Shah Capital Opportunity Fund LP. These investments closed in September 2010.
Under the revised terms, we received a cash of $34.6 million, net of issuance
costs, and issued approximately 18.1 million shares of common stock and an
option to purchase up to an additional 4.0 million shares of common stock for
approximately $8.1 million through November 8, 2010.
Management
believes that both our China and non-China operations have sufficient liquidity
to finance working capital and capital expenditure needs during the next
12 months. There can be no assurance that additional financing, if
required, will be available on terms satisfactory to us or at all, and if funds
are raised in the future through issuance of preferred stock or debt, these
securities could have rights, privileges or preference senior to those of our
common stock and newly issued debt could contain debt covenants that impose
restrictions on our operations. Further, any sale of newly issued debt or
equity securities could result in additional dilution to our current
shareholders.
Income taxes
The
China Corporate Income Tax Law (CIT Law) became effective on January 1,
2008. Under the CIT Law, Chinas dual tax system for domestic enterprises and
foreign investment enterprises (FIEs) was effectively replaced by a unified
system. The new law establishes a tax rate of 25% for most enterprises and a
reduced tax rate of 15% for certain qualified high technology enterprises.
Prior
to this change in tax law, certain subsidiaries and joint ventures located in
China enjoyed tax benefits in China which were generally available to FIEs. The
tax holidays/incentives for FIEs were applicable or potentially applicable to
UTStarcom Chongqing Telecom Co. Ltd. (CUTS), UTStarcom
Telecom Co., Ltd. (HUTS) and UTStarcom China Co., Ltd. (UTSC),
our active subsidiaries in China, as those entities may qualify as accredited
technologically advanced enterprises.
The
CIT Law targets certain industries for the reduced 15% tax rate for certain
qualified high technology enterprises. For FIEs established before the
promulgation of the new law who had previously enjoyed lower tax rates, any
increase in their tax rates would be gradually phased in over five years.
During the fourth quarter of 2008, two of our China subsidiaries, HUTS and
UTSC, were approved for the reduced 15% tax rate. The approval lasts for three
years and is retroactive to January 1, 2008.
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The
Chinese central government may review and audit tax benefits granted by local
or provincial authorities and could determine to disallow such benefits.
Certain of our subsidiaries and joint ventures located in China enjoy tax
benefits in China that are generally available to foreign investment
enterprises. If these tax benefits are reduced, disallowed or repealed due to
changes in tax laws or determination by the Chinese government, our business
could suffer.
Off-balance sheet arrangements
At
September 30, 2010, we do not have any off-balance sheet arrangements.
Contractual obligations and other commitments
Our
obligations under contractual obligations and commercial commitments at
September 30, 2010 were as follows:
Payments Due by Period
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
(in thousands)
Operating leases
$
77,614
$
16,105
$
29,130
$
28,627
$
3,752
Letters of credit
23,342
16,248
7,008
86
Purchase commitments
39,347
35,448
3,899
Total
$
140,303
$
67,801
$
40,037
$
28,713
$
3,752
Operating leases
We
lease certain facilities under non-cancelable operating leases that expire at
various dates through 2013 to 2016. In connection with the Sale Leaseback
Agreement, on February 1, 2010, we entered into a Lease Contract (the Lease)
with respect to the leaseback of a portion of the Hangzhou facility. The Lease
became effective on June 1, 2010 and the contractual obligations related
to the Hangzhou facility Lease are included in the table above.
Letters of credit
We
issue standby letters of credit primarily to support international sales
activities outside of China and in support of purchase commitments. When we
submit a bid for a sale, often the potential customer will require that we
issue a bid bond or a standby letter of credit to demonstrate our commitment
through the bid process. In addition, we may be required to issue standby
letters of credit as guarantees for advance customer payments upon contract
signing or performance guarantees. The standby letters of credit usually expire
six to twelve months from date of issuance without being drawn by the beneficiary
thereof.
Purchase commitments
We
are obligated to purchase raw materials and work-in-process inventory under
various orders from various suppliers, all of which should be fulfilled without
adverse consequences material to our operations or financial condition.
Purchase commitments in the table above include agreements that are cancelable
without penalty.
Intellectual property
Certain
sales contracts include provisions under which customers would be indemnified
by us in the event of, among other things, a third-party claim against the
customer for intellectual property rights infringement related to our products.
There are no limitations on the maximum potential future payments under these
guarantees. We have not accrued any amounts in relation to these provisions as
no such claims have been made and we believe we have valid enforceable rights
to the intellectual property embedded in our products.
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Uncertain
tax positions
As
of September 30, 2010, we had $92.9 million of gross unrecognized tax
benefits. If recognized, the portion of gross unrecognized tax benefits that
would decrease the provision for income taxes and decrease our net loss is
$78.5 million. The impact on net loss reflects the gross unrecognized tax
benefits net of certain deferred tax assets and the federal tax benefit of
state income tax items totaling $14.4 million. We have not included these
amounts in the table of contractual obligations and commercial commitments
because of the difficulty in making reasonably reliable estimates of the timing
of cash settlements with the respective taxing authorities.
Third Party Commissions
We
record accruals for commissions payable to third parties in the normal course
of business. Such commissions are recorded based on the terms of the contracts
between the Company and the third parties and paid pursuant to such contracts.
Consistent with our accounting policies, these commissions are recorded as cost
of net sales in the period in which the liability is incurred. As of September 30,
2010, we had approximately $0.5 million of such accrued commissions. Management
has performed, and continues to perform, follow-up procedures with respect to
these accrued commissions. Upon completion of such follow-up procedures, if the
accrued commissions have not been claimed and the statute of limitations, if
any, has expired, we will reverse such accruals. Such reversals are recorded in
the Statement of Operations during the period management determines that
such accruals are no longer necessary. With the assistance of our China
counsel, we concluded that for certain of these accrued commissions the statute
of limitations had expired in August 2010, two years after formal communication
was sent to these agents. During the three and nine months ended September 30,
2010 approximately $5.8 million and $6.0 million respectively were released to
cost of net sales as a result of expiration of statute of limitations. No
significant reversals of accruals for third party commissions are expected in
2011. During the three and nine months ended September 30, 2009, we
released approximately $0.7 million and $0.8 million of accruals related to
third party commissions respectively to cost of net sales as a result of
expiration of statute of limitations.
India Department of Telecommunication Security and
Supply Chain Standards
Recent
changes in India require equipment manufacturers to satisfy certain security
and supply chain standards to the satisfaction of Indian authorities.
Management entered into such agreements with several customers in India which
establish detailed security and supply chain standards covering products
supplied to telecommunication customers.
These agreements contain significant penalty clauses in the event a
security breach is detected related to product supplied by the Company. Management is unable to estimate the
likelihood or the financial impact of any such potential security
breach on our financial position, results of operations, or cash flows.
The Company is currently assessing the potential impact these agreements may
have on the timing of revenue recognition.
ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We
are exposed to the impact of interest rate changes, changes in foreign currency
exchange rates and changes in the stock market.
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. The fair value of our investment
portfolio would not be significantly affected by either a 10% increase or
decrease in interest rates due mainly to the short term nature of most of our
investment portfolio. However, our interest income can be sensitive to changes
in the general level of U.S and China interest rates since the majority of our
funds are invested in instruments with maturities of less than one year. In a
declining interest rate environment, as short term investments mature,
reinvestment occurs at less favorable market rates. Given the short term nature
of certain investments, anticipated declining interest rates will negatively
impact our investment income.
We maintain an investment portfolio of various holdings, types and
maturities. We do not use derivative financial instruments. We place our cash
investments in instruments that meet high credit quality standards, as specified
in our investment policy guidelines. Our policy is to limit the risk of
principal loss and to ensure the safety of invested funds by generally
attempting to limit market risk. Funds in excess of current operating
requirements are mostly invested in money market funds which are rated AAA. Our
cash and cash equivalents are not subject to significant interest rate risk due
to the short maturities of these instruments. As of September 30, 2010 the
carrying value of our cash and cash equivalents approximated fair value.
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The table below represents
carrying amounts and related weighted-average interest rates of our investment
portfolio at September 30, 2010:
(in thousands, except
interest rates)
Cash and cash equivalents
$
337,026
Average interest rate
0.80
%
Restricted cash - short-term
$
22,444
Average interest rate
0.01
%
Short-term investments
$
972
Average interest rate
0.00
%
Restricted cash - long-term
$
7,586
Average interest rate
0.01
%
Total investment securities
$
368,028
Average interest rate
0.73
%
Investment Risk
We
have invested in several privately held companies as well as investment funds
which invest primarily in privately held companies, many of which can still be
considered in the start-up or development stages. These investments are
inherently risky, as the market for the technologies or products they have
under development are typically in the early stages and may never materialize.
Foreign Exchange Rate Risk
As
a multinational company, we conduct our business in a wide variety of
currencies and are therefore subject to market risk for changes in foreign
exchange rates. We expect to continue to
expand our business globally and, as such, expect that an increasing proportion
of our business may be denominated in currencies other than U.S. Dollars. As a result, fluctuations in foreign
currencies may have a material impact on our business, results of operations
and financial condition.
Historically,
the majority of our foreign-currency denominated sales have been made in China,
denominated in Renminbi. Additionally, since 2006, we made significant sales in
Japanese Yen, Euros, Indian Rupees and Canadian Dollars. Due to Chinas
currency exchange control regulations, we are limited in our ability to convert
and repatriate Renminbi, as well as in our ability to engage in foreign
currency hedging activities in China. The balance of our cash held in China was
$202.9 million at September 30, 2010.
Since China un-pegged the Renminbi from the U.S. Dollar in July, 2005,
through September 30, 2010, the Renminbi has strengthened by more than 15%
versus the U.S. Dollar. However, it is
uncertain what further adjustments may be made in the future.
We
may manage foreign currency exposures using forward and option contracts to
hedge and thus minimize exposure to the risk of the eventual net cash inflows
and outflows resulting from foreign currency denominated transactions with
customers, suppliers, and non-U.S. subsidiaries, however, we are not currently
hedging any such transactions. As our
foreign currency balances are not currently hedged, any significant revaluation
of our foreign currency exposures may materially and adversely affect our
business, results of operation and financial condition. We do not enter into foreign exchange forward
or option contracts for trading purposes.
Given
our exposure to international markets, we regularly monitor all of our material
foreign currency exposures. We use
sensitivity analysis to measure our foreign currency risk by computing the
potential decrease in cash flows that may result from adverse or beneficial
changes in foreign exchange rates, relative to the functional currency with all
other variables held constant. The
analysis covers all of our underlying exposures for foreign currency
denominated financial instruments. The
foreign currency exchange rates used were based on market rates in effect at
September 30, 2010. The sensitivity
analysis indicated that a hypothetical 10% adverse or beneficial movement in
exchange rates would have resulted in a loss or gain in the fair values of our
foreign currency denominated financial instruments of $15.8 million at
September 30, 2010.
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ITEM 4CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The Company
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports the Company files or
submits pursuant to the Securities Exchange Act of 1934, as amended (Exchange
Act), is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commissions (SEC) rules and
forms, and that such information is accumulated and communicated to the Companys
management, including its chief executive officer (CEO) and chief financial
officer (CFO), as appropriate, to allow timely decisions regarding required
financial disclosure.
In connection with
the preparation of this Quarterly Report on Form 10-Q (Form 10-Q),
the Company carried out an evaluation as of September 30, 2010 under the
supervision and with the participation of the Companys management, including
the CEO and CFO, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures, as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon
this evaluation, management concluded that as of September 30, 2010 the
Companys disclosure controls and procedures were not effective because of the
material weaknesses described in Managements Annual Report on Internal
Control over Financial Reporting, included in Part II, Item 9A -
Controls and Procedures (Item 9A) in the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2009 (the 2009
Annual Report), which have not yet been remediated. Investors are directed to
Item 9A in the 2009 Annual Report for the description of these weaknesses.
A material
weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the Companys annual or interim financial
statements will not be prevented or detected on a timely basis. To address the
material weaknesses in internal control over financial reporting noted above,
the Company performed additional analyses and other procedures (as further
described below under Managements Planned Remediation Initiatives and Interim
Measures) to ensure that the Companys consolidated financial statements were
prepared in accordance with generally accepted accounting principles in the
United States (GAAP). Accordingly, the Companys management believes that the
consolidated financial statements included in this Form 10-Q fairly
present in all material respects the Companys financial condition, results of
operations and cash flows for the periods presented and that this
Form 10-Q does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the periods covered by this report.
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Table
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Managements
Planned Remediation Initiatives and Interim Measures
The Company plans
to make necessary changes and improvements to the overall design of its control
environment to address the material weaknesses in internal control over
financial reporting noted above. In particular, the Company implemented during
2009 and the first three quarters of 2010, and plans to continue to implement
during the remainder of 2010, the specific measures described below. In
addition, in connection with the September 30, 2010 quarter-end reporting
process, the Company has undertaken additional measures described under the
subheading Interim Measures below to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of the Companys
consolidated financial statements included in this Form 10-Q and to ensure
that material information relating to the Company and its consolidated
subsidiaries was made known to management in connection with the preparation of
this Form 10-Q.
Remediation Initiatives
1. To
remediate the material weakness described in Item 9A in the 2009 Annual Report
over The recording of reserves for losses
on customer contracts, the Company transitioned the responsibility
for calculating the loss contract reserves to its local project office in India
in the third and fourth quarters of 2008, which facilitated enhanced
coordination between the local business units, operations, sales and the
finance teams and resulted in more timely and complete information being
available for analysis by the finance department. During the third quarter of
2009, the Company finalized its assessment of additional implemented modules of
its ERP system in the operation in India, which enhanced the overall monitoring
and analysis of the various accounts and balances in India. Although we believe
that these enhanced procedures improved the accuracy of the loss reserve
calculation, they have not been operating for an adequate period of time to
ensure effective remediation as of September 30, 2010. In the remainder of
2010, the Company will continue performing the current procedures and make
further enhancements, if needed, to confirm full and effective remediation.
2. To remediate
the material weakness described in Item 9A in the 2009 Annual Report over Period-end financial reporting process
the Company added technical resources to the finance team in China in the third
and fourth quarters of 2009 as well as in the first three quarters of 2010. In
the remainder of 2010, the Company will continue its effort to consolidate and
streamline its global close process in China, the additional technical
resources will enable the Company to broaden the scope and quality of the independent
reviews of underlying information related to the Companys period-end financial
reporting process, to standardize the processes for such financial reviews and
to ensure the reviewers analyze and monitor financial information in a
consistent and thorough manner.
3. To
remediate the material weakness described in Item 9A in the 2009 Annual Report
over internal control over financial
reporting related to revenue recognition, the Company will continue
to enhance its contracts review process in order to ensure that appropriate
members of management have reviewed and confirmed critical information
necessary to assess the proper revenue recognition accounting. The Company will
continue to assess and enhance its technical resources to broaden the scope and
quality of the independent reviews of underlying information related to the
revenue contracts.
Interim
Measures
Management
has not yet implemented all of the measures described above under the heading Remediation Initiatives and/or tested
them. Nevertheless, management believes the measures identified above to the
extent they have been implemented, together with other measures undertaken by
the Company in connection with the preparation of the condensed consolidated
financial statements included in this Form 10-Q and described below,
address the material weaknesses in internal control over financial reporting
described above. These other measures include the following:
1.
Extensive reviews of the reserves for losses on customer contracts including,
in India, reviews of the inventory cost against the current cost backlog report
and reconciliation between the local cost records to the cost records at the
Companys headquarters.
2. A
variety of manual review procedures, such as an extensive review of journal
entry postings into the ERP system, a thorough review of account
reconciliations, including revenue and deferred revenue accounts, and a
detailed review at its headquarters of trial balances including those issued
from decentralized locations, to ensure the completeness and accuracy of the
underlying financial information used to generate the consolidated financial
statements.
3. Various
reviews of the revenue contracts and associated accounting memos as well as the
consolidated revenue schedules and fulfillment status reports to ensure that
revenue is accurately and completely recorded.
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Managements Conclusion
Management
believes the remediation measures described under Managements Planned
Remediation Initiatives and Interim Measures above will strengthen the Companys
internal control over financial reporting and remediate the material weaknesses
identified above. However, management has not yet implemented all of these
measures and/or tested them. Management believes that the interim measures
described under Managements Planned Remediation Initiatives and Interim
Measures above ensure the reliability of financial reporting and the
preparation of the Companys financial statements included in this
Form 10-Q and has discussed this with the Companys Audit Committee.
The Company is
committed to continue improving its internal control processes and will
continue to diligently and vigorously review its disclosure controls and
procedures and its internal control over financial reporting in order to ensure
compliance with the requirements of Section 404 of the Sarbanes-Oxley Act
of 2002. However, any control system, regardless of how well designed, operated
and evaluated, can provide only reasonable, not absolute, assurance that its
objectives will be met. As management continues to evaluate and work to improve
the Companys internal control over financial reporting, it may determine to
take additional or alternate measures to address control deficiencies, and it
may determine not to complete certain of the measures described under Managements
Planned Remediation Initiatives and Interim Measures above.
Changes
in Internal Control over Financial Reporting
No changes other
than those described above occurred during the three months ended September 30,
2010 in our internal control over financial reporting that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART IIOTHER
INFORMATION
ITEM 1LEGAL PROCEEDINGS
For
a description of litigation and governmental investigations, see Note 10 to our
Condensed Consolidated Financial Statements included under Part 1, Item
1 of this Quarterly Report on Form 10-Q.
ITEM 1ARISK FACTORS
For a description of risk factors that could
materially affect our business, financial condition and future operating
results, please consider the risk factors set forth in Part I, Item
1A Risk Factors of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2009. Additional risks and uncertainties
not currently known to us or that we currently deem to be immaterial also may
materially and adversely affect our business, financial condition or future
operating results.
ITEM 2UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
There
were no unregistered sales of equity securities during the period covered by
this report other than those discussed in our Form 8-K filed on September 13,
2010.
Issuer Purchases of Equity Securities
The following table summarizes the Companys stock repurchase activity
for the three months ended September 30, 2010:
Period
Total number of shares
Purchased (1)
Average price
paid per share
Total number of shares
purchased as
part of publicly announced
plans or programs
Approximate dollar value
of shares that
may yet be purchased under
the plans or programs
July 2010
$
$
August 2010
$
$
September 2010
10,860
$
2.00
$
Total
10,860
$
(1) During the third quarter of 2010, the Company
acquired 10,860 shares of common stock that employees presented to the Company
to satisfy withholding taxes in connection with the vesting of restricted stock
awards.
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ITEM 3DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 REMOVED AND RESERVED
ITEM 5OTHER INFORMATION
The 2010 annual meeting of the stockholders of the
Company has been scheduled to be held at 20F, Tower E1, The Towers, Oriental
Plaza, No. 1 East Chang An Ave., Dong Cheng District, Beijing, China, on
Monday, December 13, 2010 at 1:00 p.m., local time. For more information on our annual meeting of
the stockholders and proxy statement, see our Proxy Statement filed on October 27,
2010.
ITEM 6EXHIBITS
Exhibit
Number
Description
Form
Incorporated
by Reference
From Exhibit
Number
Date Filed
3.1
Thirteenth
Amended and Restated Certificate of Incorporation of UTStarcom, Inc., as
amended.
8-K
3.1
12/12/2003
3.2
Second
Amended and Restated Bylaws of UTStarcom, Inc., as effective
June 28, 2008.
8-K
3.1
4/14/2008
4.1
See
exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation
and Bylaws defining the rights of holders of Common Stock.
4.2
Specimen
Common Stock Certificate.
S-1/A
4.1
2/7/2000
4.3
Third
Amended and Restated Registration Rights Agreement dated December 14,
1999.
S-1
4.2
12/20/1999
4.4
Stockholder
Rights Agreement, made as of February 1, 2010, by and between
UTStarcom, Inc. and Beijing E-town International Investment and
Development Co., Ltd.
8-K
4.1
2/4/2010
4.5
Stockholder
Rights Agreement, made as of February 1, 2010, by and among
UTStarcom, Inc., Elite Noble Limited and Shah Capital Opportunity
Fund LP.
8-K
4.2
2/4/2010
47
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Exhibit
Number
Description
Form
Incorporated
by Reference
From Exhibit
Number
Date Filed
10.1
Third
Amendment to Common Stock Purchase Agreement dated February 1, 2010, as
amended on April 30, 2010 and June 4, 2010, by and between the
Company and Beijing E-town International Investment and Development Co., Ltd.
8-K
10.1
7/13/2010
10.2
Third
Amendment to Common Stock Purchase Agreement dated February 1, 2010, as
amended on April 30, 2010 and June 4, 2010, by and among the
Company, Elite Noble Limited and Shah Capital Opportunity Fund LP.
8-K
10.2
7/13/2010
10.3
Fourth
Amendment to Common Stock Purchase Agreement dated February 1, 2010, as
amended on April 30, 2010, June 4, 2010 and July 7, 2010, by
and between the Company and Beijing E-town International Investment and
Development Co., Ltd.
8-K
10.1
9/13/2010
10.4
Fourth
Amendment to Common Stock Purchase Agreement dated February 1, 2010, as
amended on April 30, 2010, June 4, 2010 and July 7, 2010, by
and between the Company and Elite Noble Limited and Shah Capital Opportunity
Fund LP.
8-K
10.2
9/13/2010
31.1
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Filed herewith
31.2
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
Filed herewith
32.1
Certifications
Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002.
Filed herewith
* Management contract, plan or
arrangement
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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.
UTSTARCOM, INC.
Date:
November 8, 2010
By:
/s/
EDMOND CHENG
Edmond
Cheng
Senior Vice President and Chief Financial Officer
(Principal
Financial Officer)
49
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.