Vitesse Semiconductor (VTSS) 10-Q/A 2002 Q2 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

           For the quarterly period ended March 31, 2002

or

¨ 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 0-19654

VITESSE SEMICONDUCTOR CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	77-0138960
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

741 Calle Plano

Camarillo, CA 93012

(Address of principal executive offices)

(805) 388-3700

(Registrant’s telephone number, including area code)

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 and (2) has been subject to such filing requirements for the past 90 days: Yes  þ  No  ¨.

As of April 30, 2002, there were 200,816,561 shares of $0.01 par value common stock outstanding.

Item 1 of the March 31, 2002 10-Q has been amended to correct the Unaudited Condensed Consolidated Statement of Cash Flow for the six months ended March 31, 2001.

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PART I

FINANCIAL INFORMATION

VITESSE SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	March 31, 2002			Sept. 30, 2001
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	100,121		$	92,847
Short-term investments (principally marketable securities)		138,784			126,938
Accounts receivable, net		49,542			53,730
Inventories, net		42,538			44,833
Prepaid expenses and other current assets		15,917			12,447
Deferred tax assets, net		22,910			22,910
Total current assets		369,812			353,705
Long-term investments (principally marketable securities)		270,446			454,849
Property and equipment, net		202,131			248,332
Restricted long-term deposits		92,600			87,987
Goodwill, net		551,949			553,066
Other intangible assets, net		35,764			42,057
Deferred tax assets, net		122,902			122,902
Other assets		65,720			69,884
	$	1,711,324		$	1,932,782
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	1,359		$	897
Current portion of convertible subordinated debt		—			69,765
Accounts payable		19,714			21,463
Accrued expenses and other current liabilities		15,742			23,198
Accrued interest expense		434			955
Income taxes payable		14,582			12,172
Total current liabilities		51,831			128,450
Long-term debt		1,247			1,703
Derivative liability		15,247			—
Convertible subordinated debt, net of $15,248 discount		438,580			467,328
Minority interest		6,377			6,296
Shareholders’ equity:
Common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 198,347,998 and 197,440,321 shares on March 31, 2002 and Sept. 30, 2001, respectively		1,983			1,974
Additional paid-in capital		1,398,885			1,396,466
Deferred compensation		(63,690	)		(81,582	)
Retained earnings(deficit)		(139,136	)		12,147
Total shareholders’ equity		1,198,042			1,329,005
	$	1,711,324		$	1,932,782

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in thousands, except per share data)

	Three Months Ended									Six Months Ended
	Mar. 31, 2002			Mar. 31, 2001			Dec. 31, 2001			Mar. 31, 2002			Mar. 31, 2001
Revenues	$	42,089		$	121,757		$	39,149		$	81,238		$	286,823
Costs and expenses:
Cost of revenues		22,640			46,004			33,916			56,556			98,351
Engineering, research and development		44,335			38,101			45,031			89,366			71,766
Selling, general and administrative		17,035			18,259			17,471			34,506			35,924
Restructuring charge		276			—			64,299			64,575			—
Amortization of intangible assets		3,147			20,893			3,146			6,293			41,227
Total costs and expenses		87,433			123,257			163,863			251,296			247,268
Income (loss) from operations		(45,344	)		(1500	)		(124,714	)		(170,058	)		39,555
Interest income		4,843			13,712			5,159			10,002			29,124
Interest expense		(3,900	)		(8,388	)		(4,324	)		(8,224	)		(16,693	)
Other expense		—			(654	)		—			—			(654	)
Other income, net		943			4,670			835			1,778			11,777
Income (loss) before income taxes and extraordinary item		(44,401	)		3,170			(123,879	)		(168,280	)		51,332
Income tax expense (benefit)		—			14,394			(6,495	)		(6,495	)		34,454
Income (loss) before extraordinary item		(44,401	)		(11,224	)		(117,384	)		(161,785	)		16,878
Extraordinary gain on early extinguishment of debt, net of $6,596 of tax expense		—			—			10,502			10,502			—
Net income (loss)	$	(44,401	)	$	(11,224	)	$	(106,882	)	$	(151,283	)	$	16,878
Basic and diluted extraordinary gain per share:	$	—		$	—		$	0.05		$	0.05		$	—
Net income (loss) per share:
Basic	$	(0.22	)	$	(0.06	)	$	(0.54	)	$	(0.76	)	$	0.09
Diluted	$	(0.22	)	$	(0.06	)	$	(0.54	)	$	(0.76	)	$	0.09
Shares used in per share computations:
Basic		198,043			182,150			197,543			197,811			181,383
Diluted		198,043			182,150			197,543			197,811			192,619

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended
	March 31, 2002			March 31, 2001
Cash flows from operating activities:
Net income (loss)	$	(151,283	)	$	16,878
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		42,493			63,696
Property and equipment write off		46,958			—
Inventory write off		12,033			—
Prepaid maintenance write off		16,201			—
Amortization of debt issue costs and debt discount		651			1,919
Amortization of deferred compensation		16,185			5,748
Extraordinary gain on extinguishment of debt, net		(10,502	)		—
Gain on derivative instrument		(1	)		—
Increase in equity associated with tax benefit fromexercise of stock options		—			46,238
Deferred tax assets, net		—			(11,836	)
Change in assets and liabilities:
(Increase) decrease in, net of effects of acquisitions:
Accounts receivable, net		4,188			(18,624	)
Inventories, net		(9,738	)		(20,707	)
Prepaid expenses and other current assets		(19,671	)		(16,998	)
Other assets		2,396			(14,255	)
Increase (decrease) in, net of effects of acquisitions:
Accounts payable		(1,749	)		18,984
Accrued expenses and other current liabilities		(6,860	)		(12,429	)
Income taxes payable		(4,186	)		(8,307	)
Net cash provided by (used in) operating activities		(62,885	)		50,307
Cash flows from investing activities:
Investments, net		172,557			(84,736	)
Capital expenditures		(36,482	)		(111,224	)
Restricted long-term deposits		(4,613	)		(4,942	)
Payment for purchase of companies, net of cash acquired		—			(11,242	)
Net cash provided by (used in) investing activities		131,462			(212,144	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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VITESSE SEMICONDUCTOR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

	Six Months Ended
	March 31, 2002			March 31, 2001
Cash flows from financing activities:
Principal payments under long-term debt and capital leases		(469	)		(7,506	)
Repurchase of convertible subordinated debt		(65,050	)		—
Capital contributions by minority interest limited partners		81			4,190
Proceeds from issuance of common stock, net		4,135			25,577
Net cash provided by (used in) financing activities		(61,303	)		22,261
Net increase (decrease) in cash and cash equivalents		7,274			(139,576	)
Cash and cash equivalents at beginning of period		92,847			257,081
Cash and cash equivalents at end of period	$	100,121		$	117,505
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	6,741		$	14,640
Income taxes	$	314		$	8,368
Supplemental disclosures of non-cash transactions:
Property and equipment financing	$	475		$	—
Reversal of accrued acquisition costs	$	1,117		$	—
Cancellation of stock options	$	1,439		$	—
Issuance of stock options in purchase transaction	$	—		$	5,221
Issuance of common stock in purchase transaction	$	—		$	6,112

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Basis of Presentation and Significant Accounting Policies

The accompanying condensed consolidated financial statements are unaudited and include the accounts of Vitesse Semiconductor Corporation and its subsidiaries (the “Company”). All intercompany accounts and transactions have been eliminated. In management’s opinion, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of financial condition and results of operations are reflected in the attached interim financial statements. This report should be read in conjunction with the audited financial statements presented in the 2001 Annual Report. Footnotes and other disclosures which would substantially duplicate the disclosures in the Company’s audited financial statements for fiscal year 2001 contained in the Annual Report have been omitted. The interim financial information herein is not necessarily representative of the results to be expected for any subsequent period.

Cash Equivalents and Investments

The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Investments with maturities over three months and up to one year are considered short-term investments. Investments with maturities over one year are considered long-term investments. Cash equivalents and investments are principally composed of money market accounts, commercial paper rated A-1, P-1 and obligations of the U.S. government and its agencies. Pursuant to Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, the Company classifies its debt securities as held-to-maturity securities, which are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. As of March 31, 2002 and September 30, 2001, the carrying value was substantially the same as market value.

Derivative Instruments and Hedging Activities

The Company utilizes interest rate swap agreements to manage interest rate exposures in accordance with SFAS No. 133,Accounting for Derivative Instruments and Hedging Activities, andSFAS No. 138,Accounting for Certain Derivative Instruments and Certain Hedging Activities—an Amendment of SFAS No. 133.The Company records all derivatives on the balance sheet at fair value.

Computation of Net Income (Loss) per Share

The reconciliation of shares used to calculate basic and diluted income (loss) per share consists of the following (in thousands):

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Three Months Ended			Six Months Ended
	Mar. 31, 2002	Mar. 31, 2001	Dec.31, 2001	Mar. 31, 2002	Mar. 31, 2001
Shares used in basic per share computations—weighted average shares outstanding	198,043	182,150	197,543	197,811	181,383
Net effect of dilutive common share equivalents based on treasury stock method	—	—	—	—	11,236
Shares used in diluted per share computation	198,043	182,150	197,543	197,811	192,619

Stock options and other convertible securities exercisable for 43,303,153, 16,584,160 and 44,585,205 shares that were outstanding at March 31, 2002 and 2001, and December 31, 2001, respectively, were not included in the computation of diluted net income (loss) per share, as the effect of their inclusion would be antidilutive. The antidilutive common stock equivalents consist of employee stock options and the convertible subordinated debentures that are convertible into the Company’s common stock at a conversion price of $112.19.

Reclassifications

Where necessary, prior periods’ information has been reclassified to conform to the current period condensed consolidated financial statement presentation.

Note 2.    Restructuring Costs and Other Special Charges

Restructuring costs—In the first quarter of fiscal 2002, the Company announced a restructuring plan as a result of the continued decrease in demand for its products, a shift in the industry’s technology and efforts to align its cost structure with the current business environment. This restructuring plan included a workforce reduction, consolidation of excess facilities and write-down of fixed assets deemed impaired. Restructuring costs of $0.3 million and $64.6 million were recognized in the three and six months ended March 31, 2002, respectively. The summary of restructuring costs and activity related to the restructuring liabilities, including a rollforward of restructuring charges recognized in the prior year are outlined as follows (in thousands):

	Workforce Reduction			Excess Facilities		Impairment Of Assets		Total
Balance at September 30, 2001	$	1,229		1,706		—		2,935
Total charge		1,012		404		63,159		64,575
Noncash charges		—		(662	)	(63,159	)	(63,821	)
Cash payments		(1,139	)	(572	)	—		(1,711	)
Balance at March 31, 2002	$	1,102		876		—		1,978

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In November 2001, the Company reduced its workforce by 130 employees, primarily within the Company’s manufacturing and research and development operations, and recorded a charge of approximately $0.3 million and $1.0 million, in the three and six months ended March 31, 2002, respectively, primarily related to severance and fringe benefits. The termination of these employees was completed in the current quarter. The consolidation of excess facilities resulted in a charge of $0.4 million which represents lease terminations, non-cancelable lease costs and write off of leasehold improvements and office equipment related to the leases and will be paid over the respective lease terms through May 2003.

From fiscal 1999 through early fiscal 2001, the Company aggressively expanded its manufacturing capacity in order to meet expected demand. As a result of the significant decrease in demand during the last six months of fiscal 2001, continuing into fiscal 2002, and the rapid changes in the technology processes within the industry, the Company recorded a charge of approximately $63.2 million in the first quarter of fiscal 2002 for the elimination of certain excess manufacturing equipment equaling $47.0 million, including fabrication and test equipment, and prepaid maintenance contracts associated with that equipment equaling $16.2 million. This charge also included the write off of certain software licenses under non-cancelable agreements associated with research and development employment positions which were eliminated as a result of the cancellation of projects deemed non-strategic and projects the Company determined would not yield an acceptable return on investment.

In the quarter ended June 30, 2001, the Company implemented a similar restructuring plan due to the sharp decline in demand for its products resulting in a charge of $26.6 million, with a remaining accrued restructuring balance of $2.9 million as of September 30, 2001. In the six months ended March 31, 2002, the Company’s activities related to the 2001 restructuring accrual resulted in cash payments of approximately $0.7 million and non-cash charges of approximately $0.5 million.

Note 3.    Goodwill and Other Intangible Assets

In July 2001, the FASB issued Statement No. 141, “Business Combinations”, and Statement No. 142, “Goodwill and Other Intangible Assets.” Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001, and that certain intangible assets acquired in a business combination be recognized as assets apart from goodwill. Statement 142 requires goodwill to be tested for impairment under certain circumstances, and written down when impaired, rather than being amortized as previous standards required. Furthermore, Statement 142 requires intangible assets, other than goodwill, to be amortized over their useful lives unless these lives are determined to be indefinite. Other intangible assets are carried at cost less accumulated amortization. Amortization is computed over the useful lives of the respective assets, generally two to ten years.

Statement 142 is effective for fiscal years beginning after December 15, 2001; however, the Company has elected to adopt the statement effective as of October 1, 2001. In accordance with Statement 142, the Company has ceased amortizing goodwill totaling $552.0 million, including $6.4 million of acquired workforce previously classified as other intangible assets.

The following table presents details of the Company’s total other intangible assets (in thousands):

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Gross Carrying Amount		Accumulated Amortization		Net Balance
March 31, 2002
Customer relationships	$	813	(813	)	—
Technology		43,765	(10,698	)	33,067
Covenants not to compete		4,000	(1,303	)	2,697
Total	$	48,578	(12,814	)	35,764
September 30, 2001
Customer relationships	$	813	(610	)	203
Technology		43,765	(5,496	)	38,269
Covenants not to compete		4,000	(415	)	3,585
Workforce		11,110	(4,709	)	6,401
Total	$	59,688	(11,230	)	48,458

The following table presents the amortization expense of other intangible assets as reported in the Consolidated Statements of Operations (in thousands):

	Three Months Ended						Six Months Ended
	Mar. 31, 2002		Mar. 31, 2001		Dec. 31, 2001		Mar. 31, 2002		Mar. 31, 2001
Amortization expense	$	3,147	$	530	$	3,146	$	6,293	$	1,060

The estimated future amortization expense of other intangible assets is as follows (in thousands):

Fiscal year	Amount
2002 (remaining six months)	$	4,758
2003		9,516
2004		8,879
2005		8,048
2006		4,146
2007		190
Thereafter		227
Total		35,764

The following presents the impact of Statement 142 on net income (loss) and net income (loss) per share had the statement been in effect for the second quarter of fiscal 2001 and the six month period ended March 31, 2001 (in thousands, except per share amounts):

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Three Months Ended									Six Months Ended
	Mar. 31, 2002			Mar. 31, 2001			Dec. 31, 2001			Mar. 31, 2002			Mar. 31, 2001
Reported net income (loss)	$	(44,401	)	$	(11,224	)	$	(106,882	)	$	(151,283	)	$	16,878
Adjustments:
Amortization of goodwill		—			19,844			—			—		$	39,226
Amortization of workforce		—			519			—			—			941
Adjusted net income (loss)	$	(44,401	)	$	9,139		$	(106,882	)	$	(151,283	)	$	57,045
Basic net income (loss) per share—as reported	$	(0.22	)	$	(0.06	)	$	(0.54	)	$	(0.76	)	$	0.09
Basic net income (loss) per share—adjusted	$	(0.22	)	$	0.05		$	(0.54	)	$	(0.76	)	$	0.31
Diluted net income (loss) per share—as reported	$	(0.22	)	$	(0.06	)	$	(0.54	)	$	(0.76	)	$	0.09
Diluted net income (loss) per share—adjusted	$	(0.22	)	$	0.05		$	(0.54	)	$	(0.76	)	$	0.30

The Company only operates within one reporting unit. Therefore, any allocation of goodwill is not required. Upon the adoption of SFAS No. 142 and in accordance with its provisions, the Company did not record any transitional impairment charges.

The Company is required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. As of March 31, 2002, no impairment of goodwill has been recognized. Future goodwill impairment tests may result in charges to earnings if the Company determines that goodwill has become impaired.

Note 4.    Inventories, net

Inventories consist of the following (in thousands):

	March 31, 2002		Sept. 30, 2001
Raw materials	$	5,678	$	3,978
Work in process and finished goods		36,860		40,855
	$	42,538	$	44,833

During the first quarter of fiscal 2002, the Company wrote off $12.0 million of excess and obsolete inventories. The continued industry-wide reduction in capital spending and the resulting decrease in demand for the Company’s products, resulted in significant adjustments to reduce sales forecasts established at the end of fiscal year 2001. As a result, the Company recorded a charge, in accordance with the Company’s inventory reserve methodology, which was included in the costs of revenues in the quarter ended December 31, 2001.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 5.    Debt

In October and November 2001, the Company purchased $83.3 million principal amount of its 4% convertible subordinated debentures due March 2005 at prevailing market prices, for an aggregate amount of approximately $65.1 million. As a result, the Company recorded an extraordinary gain on early extinguishment of debt of approximately $10.5 million, net of income taxes of $6.6 million and a proportion of deferred debt issuance costs of $1.1 million, in the quarter ended December 31, 2001.

Note 6.    Derivative Instruments and Hedging Activities

In the quarter ended December 31, 2001, the Company entered into an interest-rate related derivative instrument to manage its exposure on its debt instruments that is recorded as a derivative liability. The Company does not enter into derivative instruments for trading or speculative purposes.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the risk of the counter-party failing to perform under the terms of the derivative contract when the contract’s value is in the Company’s favor. The Company minimizes the credit risk in derivative instruments by entering into transactions with high-quality counterparties.

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with the interest-rate contract is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding or forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s debt.

The Company uses fixed debt to finance its operations. The debt obligation exposes the Company to variability in the fair value of debt due to changes in interest rates. Management believes it is prudent to limit the variability. To meet this objective, management entered into an interest rate swap agreement to manage fluctuations in debt resulting from interest rate risk and designated this agreement as the hedging instrument in a fair value hedging relationship under SFAS 133. This swap changes the fixed-rate exposure on the debt to variable. Under the terms of the interest rate swap, the Company receives fixed interest rate payments and makes variable interest rate payments, thereby managing the value of debt.

Changes in the fair value of the interest rate swap designated as hedging instruments that effectively offset the fair value variability associated with fixed-rate, long-term debt are reported in interest expense as a yield adjustment of the hedged debt.

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VITESSE SEMICONDUCTOR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Interest expense for the six months ended March 31, 2002 includes a deminimus amount of net gains representing fair value hedge ineffectiveness arising from slight differences between the fair value change in the interest rate swap and the change in fair value of the hedged debt obligation. The maximum term over which the Company is hedging exposures to the variability of debt for interest risk is 39 months. There were no hedges discontinued during the current quarter.

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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.

VITESSE SEMICONDUCTOR CORPORATION
By:	/s/    EUGENE F. HOVANEC
	Eugene F. Hovanec Vice President, Finance and Chief Financial Officer

June 13, 2002

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