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Vitesse Execs Get the Axe

Vitesse Semiconductor Corp. (Nasdaq: VTSS) stock fell more than 20 percent this morning as the company fired its CEO and other executives and noted that its cash holdings are about half what was announced earlier this year.

Louis Tomasetta was fired, as were chief financial officer Yatin Mody and Eugene F. Hovanec, executive vice president and former CFO.

Acting CEO Chris Gardner -- previously Vitesse's chief operating officer -- was formally named the chief executive this morning. Likewise, acting CFO Shawn Hassel will move into that spot for good. Hasell comes from the financial consulting firm of Alvarez & Marsal LLC, which Vitesse has engaged for help.

Vitesse stock was down 40 cents (21.6%) at $1.45 in midday trading.

The executive overhaul comes as part of an ongoing -- and worsening -- set of scandals that began April 18, when Vitesse announced it was investigating stock-option grants for certain executives. (See Vitesse Brass Placed on Leave and Vitesse Woes Worsen.)

The executive overhaul was expected. What probably sank the stock today were new and not so cheery disclosures about Vitesse's finances.

The biggest problem is a new picture of Vitesse's cash situation. Today's release notes Vitesse's unrestricted cash and equivalents total $13.2 million. But its latest Securities and Exchange Commission (SEC) 10-Q filing, for the quarter ended Dec. 31, 2005, listed $27.4 million in cash and equivalents and another $1.7 million in short-term investments.

Separately, Vitesse said Silicon Valley Bank has declared the company in default on its credit facility, citing factors including Vitesse's tardiness with its March-quarter earnings report. Vitesse has drawn $10 million on that credit "plus approximately $4.2 million in issued but undrawn standby letter of credits," Vitesse's release notes.

Vitesse is scrambling to patch up the Silicon Valley Bank situation and says it's reached a "conceptual agreement" with the bank that could include an immediate $5 million payment plus some additional financing. Vitesse says it's also hired an investment bank to help seek financing.

Still, Vitesse's release includes a dire warning: "If additional financing is not obtained and/or the Bank takes further action under the credit facility, it would have a material adverse effect on the Company's operations, liquidity and financial condition."

Vitesse announced that its internal investigation -- which had already expanded to include customer credits -- now includes the company's revenue recognition practices in general as well as its methods for reporting cash in its quarterly earnings.

Before all these problems arose, Vitesse's stock had been on a rally, climbing as high as $3.79 in late March. The stock hadn't been at that level since late 2004.

Vitesse's initial investigation apparently was precipitated by a Wall Street Journal article about the suspicious timing of executive stock options.

— Craig Matsumoto, Senior Editor, Light Reading

Pete Baldwin 12/5/2012 | 3:53:48 AM
re: Vitesse Execs Get the Axe This just keeps getting worse. Next thing you know they'll announce their products cause hives and have to be recalled.

I shouldn't joke ... that cash situation is mighty strange, and seems to show that this isn't just a case of the board being overly cautious.

Any other interpretations?
OSXman 12/5/2012 | 3:53:47 AM
re: Vitesse Execs Get the Axe The decline in price in VTSS today was absolutely merited as the disclosures, limited as they were, were very disturbing.

1.) the company is in default of its line of credit, and can be forced into bankruptcy.

2.) the company has just $13mm in cash, of which they are contemplating giving $5mm back to the back, which would leave them with just $8mm. That's not much of a cushion to run a business.

3.) the implication that the company's historical stated cash position is unreliable.

With the spectre of possible bankruptcy, it is hard to make a case where the bottom might be.

I believe the board is handling this very poorly, and there is a total vacuum of information. It is easy to see how this could be an extraordinary buying opportunity, but some information would be helpful.
OSXman 12/5/2012 | 3:53:47 AM
re: Vitesse Execs Get the Axe The differential in cash is strange, but there is not really enough information to make an informed judgment. For example, perhaps some of the cash on the balance sheet at 12/31 was restricted but not identified as such.

It's also possible that the company used a lot of cash in recent months. Perhaps customers withheld payments, or suppliers wanted advance deposits owing to the uncertainty. With no CEO and no CFO, things can get pretty messed up.

Or, perhaps, there are far deeper issues regarding revenue and expense recognition.

While Tomasetta is/was a respected figure in the industry, it is pretty astonishing at how poorly this company was run over the past few years. The balance sheet is now in very precarious shape and most likely the company will be forced into a merger at a distressed price.

Mark Sebastyn 12/5/2012 | 3:53:47 AM
re: Vitesse Execs Get the Axe I am clearly in the minority (just look at what Mr. market did to VTSS today) but I am shocked that people were surprised by this announcement.

Vitesse didn't report financials. Everyone knew that. As a result the Nasdaq puts you on notice for delisting. They have bank covenants that require the same thing. These things are all negotiable provided the company is acting in good faith. It appears that Vitesse is acting in good faith.

I don't know why this is such a surprise to the market.

As for the firing, people didn't really think they were coming back?

It's entirely possible more bad news will emerge. But I don't know why this announcement was such a shock.
OSXman 12/5/2012 | 3:53:46 AM
re: Vitesse Execs Get the Axe Obviously, the most appealing near term solution would be to sell the company to AMCC or whoever, but it is hard to see how this happens with all the uncertainty. In the absence of a full investigation, the board could be excoriated for giving the company away.

So that leaves a bank that wants its money back, and a company that needs money. They have announced that they have hired an investment bank to seek financing. Well... investment banks don't lend you money, they raise it for you. In other words, expect a highly dilutive offering of some sort.

The company (apparently) has about $90mm or so in net debt. Straight debt is out of the question. Convertible debt, on extremely onerous terms might be available. And, there's always the outright sale of equity at distressed prices.

Any way you slice it, it seems there is probably more pressure coming on the stock, even though it is likely very cheap.
punci 12/5/2012 | 3:53:46 AM
re: Vitesse Execs Get the Axe The easiest thing to keep track of is cash in the bank, so it seems very odd that Vitesse has actually less cash than it stated. Can't the auditors just look at the bank balances for this?

In addition, Vitesse has $100M of long-term debt. Any ideas as to when this is due or if it is convertible?

OSXman 12/5/2012 | 3:53:46 AM
re: Vitesse Execs Get the Axe At December 31, the last date for which financials are available, the company showed cash and securities of $29mm. Today we are informed that available cash is $13.2mm AND there is $10mm drawn under the line of credit.

Therefore the apparent change in cash is not just $16mm, it is $26mm.
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