RESTATEMENT OF CONSOLIDATED FINANCIAL STATEMENTS

Background

In early 2013, during the course of the Company’s review of its financial results for the fourth quarter and full year of 2012, management identified a historical practice of the Company making available, at no charge to its customers, minor feature and/or compatibility enhancements, as well as bug fixes on a when-and-if-available basis (collectively, “Software Updates”) that management has concluded meets the definition of post-contract customer support (“PCS”) under U.S. GAAP. The business practice of providing Software Updates at no charge for many of the Company’s products creates an implicit obligation and an additional undelivered element for each impacted arrangement (referred to as “Implied Maintenance Release PCS”). The Company’s identification of this additional undelivered element in substantially all of its customer arrangements has a significant impact on the historical revenue recognition policies because this element had not been previously accounted for in any period.

As a result of the foregoing and as explained more fully below, the Company has restated its financial statements for the three and six months ended June 30, 2012.

Restatement Adjustments

Revenue Recognition

The failure to identify and account for the existence of Implied Maintenance Release PCS resulted in errors in the timing of revenue recognition reported in the Company’s previously issued consolidated financial statements. Historically, the Company generally recognized revenue upon product shipment or over the period services and post-contract customer support were provided (assuming other revenue recognition conditions were met). As described more fully in the Company’s policy for “Revenue Recognition” in Note A to the Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, the existence of Implied Maintenance Release PCS in a customer arrangement requires recognition of some or all arrangement consideration, depending on GAAP applicable to the deliverables, over the period of time that the Implied Maintenance Release PCS is delivered, which is after product delivery or services are rendered and is generally after several years. The errors in the timing of revenue recognition have been corrected in the restated condensed consolidated financial statements. The significant change in the pattern of revenue recognition also had indirect impacts on revenue related accounts, such as sales return allowances and, as discussed further below, non-revenue accounts such as stock-based compensation and income taxes, which have also been restated in the restated condensed consolidated financial statements.

Restructuring

The Company also identified an overstatement of a severance costs accrual of $1.4 million due to an incorrect estimate originally recorded in the three months ended June 30, 2012.

Stock-Based Compensation

As a result of the change in the timing of revenue recognition described above, the timing and amount of stock-based compensation expense attributable to performance-based awards, where expected vesting was based on profitability, also changed. Due to the restated historical financial statements, many of the performance-based awards have vested earlier than originally estimated.

Other Adjustments

In addition to correcting the restatement adjustments described above, the Company also recorded other adjustments for other errors identified during the restatement process, including reclassifications between cost of sales and operating expenses, as well as errors in inventories and accrued liabilities. The provision for income taxes has been adjusted to reflect the changes in quarterly income before taxes.

Discontinued Operations

On July 2, 2012, the Company exited its consumer business through the sale of the assets of that business in two separate transactions. As described further in Note 7, the disposition of the consumer business qualified for presentation as discontinued operations; therefore, these financial statements have been retrospectively adjusted for all periods presented to report the consumer business as a discontinued operation. In the previously issued financial statements, the sale of the consumer business was incorrectly included in continuing operations.

Adjustments to Condensed Consolidated Statement of Operations

The following tables present the impact of the financial statement adjustments on the Company’s previously reported condensed consolidated statements of operations for the three and six months ended June 30, 2012 (in thousands except per share data):



	Three Months Ended
	June 30, 2012
	As Previously Reported			Revenue Restatement Adjustments		Other Restatement Adjustments			Discontinued Operations			As Restated
Net revenues:
Products	$	123,026		$	25,270	$	—		$	(23,305	)	$	124,991
Services	34,405			6,080		—			—			40,485
Total net revenues	157,431			31,350		—			(23,305		)	165,476
Cost of revenues:
Products	69,275			—		(262		)	(18,030		)	50,983
Services	14,325			—		2,004			—			16,329
Amortization of intangible assets	644			—		—			—			644
Total cost of revenues	84,244			—		1,742			(18,030		)	67,956
Gross profit	73,187			31,350		(1,742		)	(5,275		)	97,520
Operating expenses:
Research and development	26,896			—		142			(777		)	26,261
Marketing and selling	43,454			—		(16		)	(1,156		)	42,282
General and administrative	13,905			—		15			(569		)	13,351
Amortization of intangible assets	1,105			—		1			—			1,106
Restructuring costs, net	15,841			—		(1,404		)	—			14,437
Gain on sale of assets	9,951			—		—			(9,951		)	—
Total operating expenses	111,152			—		(1,262		)	(12,453		)	97,437

Operating (loss) income	(37,965		)	31,350		(480		)	7,178			83

Interest income	14			—		2			—			16
Interest expense	(405		)	—		(2		)	—			(407		)
Other income	12			—		—			—			12
Loss from continuing operations before income taxes	(38,344		)	31,350		(480		)	7,178			(296		)
Provision for (benefit from) income taxes, net	903			—		(1,839		)	—			(936		)
(Loss) income from continuing operations, net of tax	(39,247		)	31,350		1,359			7,178			640
Discontinued operations:
Income from divested operations	—			—		—			2,773			2,773
Income from discontinued operations	$	—		$	—	$	—		$	2,773		$	2,773
Net (loss) income	$	(39,247	)	$	31,350	$	1,359		$	9,951		$	3,413

(Loss) income per common share – basic and diluted:
(Loss) income per share from continuing operations, net of tax – basic and diluted	$	(1.01	)									$	0.02
Income per share from discontinued operations – basic and diluted	—											0.07
Net (loss) income per common share – basic and diluted	$	(1.01	)									$	0.09

Weighted-average common shares outstanding – basic	38,778											38,778
Weighted-average common shares outstanding – diluted	38,778											38,778



	Six Months Ended
	June 30, 2012
	As Previously Reported			Revenue Restatement Adjustments		Other Restatement Adjustments			Discontinued Operations			As Restated
Net revenues:
Products	$	242,964		$	55,834	$	—		$	(46,101	)	$	252,697
Services	66,607			5,323		—			—			71,930
Total net revenues	309,571			61,157		—			(46,101		)	324,627
Cost of revenues:
Products	130,483			—		(753		)	(33,265		)	96,465
Services	27,042			—		3,698						30,740
Amortization of intangible assets	1,294			—		—			—			1,294
Total cost of revenues	158,819			—		2,945			(33,265		)	128,499
Gross profit	150,752			61,157		(2,945		)	(12,836		)	196,128
Operating expenses:
Research and development	54,377			—		(102		)	(1,554		)	52,721
Marketing and selling	89,380			—		(2,913		)	(2,312		)	84,155
General and administrative	28,544			—		293			(1,138		)	27,699
Amortization of intangible assets	2,717			—		—			—			2,717
Restructuring costs, net	16,009			—		(1,128		)	—			14,881
Gain on sale of assets	9,951			—		—			(9,951		)	—
Total operating expenses	200,978			—		(3,850		)	(14,955		)	182,173
Operating (loss) income	(50,226		)	61,157		905			2,119			13,955

Interest income	115			—		30			—			145
Interest expense	(720		)	—		(30		)	—			(750		)
Other income	32			—		—			—			32
(Loss) income from continuing operations before income taxes	(50,799		)	61,157		905			2,119			13,382
Provision for income taxes, net	1,426			—		310			—			1,736
(Loss) income from continuing operations, net of tax	(52,225		)	61,157		595			2,119			11,646
Discontinued operations:
Income from divested operations	—			—		—			7,832			7,832
Income from discontinued operations	—			—		—			7,832			7,832
Net (loss) income	$	(52,225	)	$	61,157	$	595		$	9,951		$	19,478

(Loss) income per common share – basic and diluted:
(Loss) income per share from continuing operations, net of tax – basic and diluted	$	(1.35	)									$	0.30
Income per share from discontinued operations – basic and diluted	—											0.20
Net (loss) income per common share – basic and diluted	$	(1.35	)									$	0.50

Weighted-average common shares outstanding – basic	38,720											38,720
Weighted-average common shares outstanding – diluted	38,720											38,759

Adjustments to Condensed Consolidated Statement of Cash Flows

The following table presents the impact of the financial statement adjustments on the Company’s previously reported condensed consolidated statement of cash flows for the six months ended June 30, 2012 (in thousands):



	Six Months Ended
	June 30, 2012
	As Previously Reported			Revenue Restatement Adjustments			Other Restatement Adjustments			Discontinued Operations			As Restated
Cash flows from operating activities:
Net (loss) income	$	(52,225	)	61,157			$	595		9,951			$	19,478
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	16,184			—			(1,668		)	—			14,516
Recovery of doubtful accounts	(62		)	—			(34		)	—			(96		)
Non-cash provision for restructuring	2,633			—			(2,633		)	—			—
Non-cash provision for allowances related to divestitures	2,848			—			(2,848		)	—			—
Gain on sale of assets	(256		)	—			4			—			(252		)
Loss on divestiture	9,951			—			—			(9,951		)	—
Stock-based compensation expense	5,374			—			2,031			—			7,405
Non-cash interest expense	73			—			74			—			147
Foreign currency transaction gains	(848		)	—			(971		)	—			(1,819		)
Provision for deferred taxes	823			—			—			—			823
Changes in operating assets and liabilities:
Accounts receivable	12,317			(3,230		)	3,175			—			12,262
Inventories	20,967			—			1,671			—			22,638
Prepaid expenses and other current assets	(2,317		)	—			1,075			—			(1,242		)
Accounts payable	(3,531		)	—			—			—			(3,531		)
Accrued expenses, compensation and benefits and other liabilities	5,060			—			(144		)	—			4,916
Income taxes payable	2,170			—			104			—			2,274
Deferred revenues	13,171			(57,927		)	—			—			(44,756		)
Net cash provided by operating activities	32,332			—			431			—			32,763

Cash flows from investing activities:
Purchases of property and equipment	(5,237		)	—			214			—			(5,023		)
Increase in other long-term assets	(161		)	—			131			—			(30		)
Net cash used in investing activities	(5,398		)	—			345			—			(5,053		)

Cash flows from financing activities:
Proceeds from issuance of common stock under employee stock plans	80			—			493			—			573
Common stock repurchases for tax withholdings for net settlement of equity awards	—			—			(493		)	—			(493		)
Proceeds from revolving credit facilities	1,000			—			—			—			1,000
Payments on revolving credit facilities	(1,000		)	—			—			—			(1,000		)
Net cash provided by financing activities	80			—			—			—			80

Effect of exchange rate changes on cash and cash equivalents	(486		)	—			(776		)	—			(1,262		)
Net increase in cash and cash equivalents	26,528			—			—			—			26,528
Cash and cash equivalents at beginning of period	32,855			—			—			—			32,855
Cash and cash equivalents at end of period	$	59,383		$	—		$	—		$	—		$	59,383