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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-19654
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VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware 77-0138960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) 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 (X) No ( ).
As of July 31, 2000, there were 179,618,298 shares of $0.01 par value
common stock outstanding.
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VITESSE SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
-----------------
Page Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2000 2
(unaudited) and September 30, 1999
Unaudited Condensed Consolidated Statements of Operations 3
for the three months ended June 30, 2000, June 30, 1999
and March 31, 2000 and the nine months ended June 30, 2000
and June 30, 1999
Unaudited Condensed Consolidated Statements of Cash Flows for 4
the nine Months ended June 30, 2000 and June 30, 1999
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 10
Financial Condition and Results of Operations
Item 3 Quantitative and Qualitative Disclosure About Market Risk 17
PART II OTHER INFORMATION
Item 2 Changes in Securities 18
Item 6 Exhibits and Reports on Form 8-K 18
1
PART I
FINANCIAL INFORMATION
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2000 Sept. 30, 1999
------------- --------------
(Unaudited) (Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 322,409 $ 89,941
Short-term investments 134,240 110,245
Accounts receivable, net 100,535 69,080
Inventories, net 37,532 26,931
Prepaid expenses 7,798 5,641
Deferred tax assets, net 51,356 32,677
---------- ----------
Total current assets 653,870 334,515
---------- ----------
Long-term investments 510,748 38,063
Property and equipment, net 118,037 81,849
Restricted long-term deposits 75,908 67,334
Intangible assets, net 452,242 14,609
Deferred tax assets, net 6,237 6,237
Other assets 17,931 462
---------- ----------
$1,834,973 $543,069
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,287 $ 3,307
Accounts payable 10,689 16,387
Accrued expenses and other current liabilities 15,566 13,841
Accrued interest expense 8,467 --
Income taxes payable -- 5,517
---------- ----------
Total current liabilities 38,009 39,052
---------- ----------
Long-term debt 4,252 1,636
Convertible subordinated debt 720,000 -
Minority interest 1,506 -
Shareholders' equity:
Common stock, $.01 par value. Authorized
500,000,000 shares; issued and outstanding
179,476,994 and 170,937,687 shares on June 30,
2000 and Sept. 30, 1999, respectively
1,795 1,709
Additional paid-in capital 978,334 406,103
Deferred compensation (21,356) --
Treasury stock, 0 and 754,845 shares
outstanding, at cost, on June 30, 2000 and
Sept. 30, 1999, respectively -- (100)
Retained earnings 112,433 94,669
---------- ----------
Total shareholders' equity 1,071,206 502,381
---------- ----------
$1,834,973 $543,069
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
2
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Nine Months Ended
---------------------------------------------- -----------------------------
June 30, 2000 June 30, 1999 March 31, 2000 June 30, 2000 June 30, 1999
------------- ------------- -------------- ------------- -------------
(Restated) (Restated) (Restated)
Revenues $114,090 $ 73,277 $100,310 $303,679 $200,982
Costs and expenses:
Cost of revenues 38,747 27,343 35,111 105,697 75,908
Engineering, research & development 21,617 15,013 21,093 60,880 42,057
Selling, general & administrative 13,120 10,789 11,685 36,762 28,843
Acquisition related costs 21,413 360 47,843 69,677 850
-------- -------- -------- -------- --------
Total costs & expenses 94,897 53,505 115,732 273,016 147,658
-------- -------- -------- -------- --------
Income (loss) from operations 19,193 19,772 (15,422) 30,663 53,324
Other income, net 7,273 2,917 3,683 13,750 8,286
-------- -------- -------- -------- --------
Income (loss) before income taxes 26,466 22,689 (11,739) 44,413 61,610
Income taxes 13,182 7,654 5,135 28,113 19,830
-------- -------- -------- -------- --------
Net income (loss) $ 13,284 $ 15,035 $(16,874) $ 16,300 $ 41,780
======== ======== ======== ======== ========
Net income (loss) per share
Basic $ 0.07 $ 0.09 $ (0.10) $ 0.09 $ 0.26
======== ======== ======== ======== ========
Diluted $ 0.07 $ 0.08 $ (0.10) $ 0.09 $ 0.24
======== ======== ======== ======== ========
Shares used in per share computations:
Basic 179,107 166,445 174,512 174,657 162,904
======== ======== ======== ======== ========
Diluted 192,567 178,990 174,512 188,589 176,151
======== ======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
-------------------------------
June 30, 2000 June 30, 1999
-------------- --------------
(Restated)
Cash flows from operating activities:
Net income $ 16,300 $ 41,780
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 42,329 17,220
Amortization of debt issue costs and debt discount 1,263 --
Amortization of deferred compensation 2,406 --
Purchased in-process research & development 45,614 --
Deferred tax assets 1,041 --
Change in assets and liabilities:
(Increase) decrease in, net of effects of acquisitions:
Accounts receivable, net (31,287) (24,942)
Inventories (10,601) (5,727)
Prepaid expenses (2,053) (910)
Other assets (549) 98
Increase (decrease) in, net of effects of acquisitions:
Accounts payable (5,782) (3,542)
Accrued expenses and other current liabilities (17,811) 5,862
Accrued interest expense 8,467 --
Income taxes payable 26,638 20,775
--------- --------
Net cash provided by operating activities 75,975 50,614
--------- --------
Cash flows from investing activities:
Investments, net (496,680) (37,030)
Capital expenditures (57,092) (35,338)
Restricted long-term deposits (8,574) 1,697
Payment for purchase of companies, net of cash acquired (8,326) (13,040)
--------- --------
Net cash used in investing activities (570,672) (83,761)
--------- --------
Cash flows from financing activities:
Principal payments under long-term debt and capital leases (4,897) (209)
Proceeds from term loans 5,000 1,546
Proceeds from issuance of convertible subordinated debt 720,000 --
Cash paid for debt issue costs (18,000) --
Capital contributions by minority interest limited partners 1,506 --
Elimination of duplicate period of pooled companies 1,464 --
Proceeds from issuance of common stock, net 22,092 32,906
--------- --------
Net cash provided by financing activities 727,165 34,243
--------- --------
Net increase in cash and cash equivalents 232,468 1,096
Cash and cash equivalents at beginning of period 89,941 85,163
--------- --------
Cash and cash equivalents at end of period $ 322,409 $ 86,259
========= ========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
--------------------------------
June 30, 2000 June 30, 1999
------------- -------------
(Restated)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 224 $ 29
======== =======
Income taxes $ 367 $ 1,670
======== =======
Supplemental disclosures of non-cash transactions:
Issuance of stock options in purchase transaction $ 52,146 $ 300
======== =======
Issuance of common stock in purchase transaction $422,542 $ --
======== =======
Issuance of notes payable in purchase transaction $ -- $ 2,725
======== =======
Increase in equity associated with tax benefit from
exercise of stock options $ 51,875 $34,573
======== =======
See accompanying Notes to Condensed Consolidated Financial Statements.
5
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO 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"). As more fully described in Note 2 of the
condensed consolidated financial statements, the Company's acquisition of SiTera
Incorporated ("SiTera") on May 31, 2000, was accounted for under the pooling-of-
interests method, and accordingly, the condensed consolidated financial
statements for all prior periods presented have been restated to include the
accounts and results of operations of SiTera. Additionally, as more fully
described in Note 3, on March 31, 2000, the Company acquired all of the equity
interests of Orologic, Inc. ("Orologic") in exchange for 4,546,883 shares of
common stock and the assumption of stock options to purchase 543,815 shares of
common stock valued, in the aggregate, at approximately $490 million. This
transaction has been accounted for using the purchase method of accounting and
therefore, the operations of Orologic are included from the date of acquisition.
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 1999 Annual Report. Footnotes and other disclosures which would
substantially duplicate the disclosures in the Company's audited financial
statements for fiscal year 1999 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.
Computation of Net Income per Share
The reconciliation of shares used to calculate basic and diluted income per
share consists of the following (in thousands):
Three Months Ended Nine Months Ended
------------------------------------------- ----------------------------
June 30, 2000 June 30,1999 Mar. 31,2000 June 30 2000 June 30, 1999
------------- ------------ ------------ ------------ -------------
Shares used in basic per share computations -
weighted average shares outstanding 179,107 166,445 174,512 174,657 162,904
Net effect of dilutive common share equivalents
based on treasury stock method 13,460 12,545 -- 13,932 13,247
------- ------- ------- ------- -------
Shares used in diluted per share computations 192,567 178,990 174,512 188,589 176,151
======= ======= ======= ======= =======
Common stock equivalents to purchase 6,494,467 and 117,863 shares that were
outstanding at June 30, 2000 and 1999, respectively, were not included in the
computation of diluted net income per share, as their effect would have been
antidilutive. The common stock equivalents at June 30, 2000 consist primarily of
the convertible subordinated debentures that are convertible
6
into the Company's common stock at a conversion price of $112.19. Common stock
equivalents to purchase 20,832,269 shares that were outstanding at March 31,
2000, were not included in the computation of diluted net income
per share for the quarter ended March 31, 2000, because, due to the net loss
position, the effect would be antidilutive.
Comprehensive Income
On October 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." This statement establishes
standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company has no
components of other comprehensive income. Therefore comprehensive income is the
same as reported net income.
Segment Reporting
On October 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information"("SFAS No. 131"). This statement establishes standards for
reporting operating segment information in annual financial statements and
interim reports issued to shareholders. The Company operates in only one
segment, as defined by SFAS No. 131. Substantially all long-lived assets are
located in the United States.
Reclassifications and Restatements
Where necessary, prior periods' information has been reclassified to conform
to the current period condensed consolidated financial statement presentation.
On September 13, 1999, the Board of Directors approved a 2 for 1 stock split
of the Company's Common Stock that was effected on October 20, 1999. All
references to the number of common shares, weighted average number of common
shares and per share data for all periods presented have been adjusted to
reflect the stock split.
Note 2. Pooling of Interests Business Combinations
On May 31, 2000, the Company issued 14,698,288 shares of its common stock
in exchange for all of the outstanding shares of SiTera, a provider of
intelligent network processing for service provider, carrier edge and large
enterprise markets. This acquisition has been retroactively accounted for under
the pooling-of-interests method of accounting in the condensed consolidated
financial statements.
The results of operations previously reported by the separate entities,
and the combined amounts presented in the accompanying condensed consolidated
financial statements, are summarized below (in thousands):
7
Vitesse SiTera Combined
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Three months ended
March 31, 2000:
Revenues $ 100,167 $ 143 $ 100,310
Net loss (10,447) (6,427) (16,874)
Three months ended
June 30, 1999:
Revenues $ 73,262 $ 15 $ 73,277
Net income (loss) 18,112 (3,077) 15,035
Nine months ended
June 30, 1999
Revenues $ 200,907 $ 75 $ 200,982
Net income (loss) 48,347 (6,567) 41,780
Certain reclassifications have been made to the financial statements of
Sitera to conform to the Company's financial presentation.
Note 3. Purchase Accounting Business Combinations
On March 31, 2000, the Company acquired all of the equity interests of
Orologic in exchange for 4,546,883 shares of common stock and the assumption of
stock options to purchase 543,815 shares of common stock valued, in the
aggregate, at approximately $490 million, which includes estimated direct
acquisition costs of approximately $17 million. Orologic is a "fabless"
semiconductor company that develops high performance system on a chip solutions
that enable data packet processing at OC-48 and OC-192 rates. The acquisition
of Orologic was recorded using the purchase method of accounting. Therefore,
the consideration was allocated based upon the fair values of the
tangible and intangible assets and liabilities acquired. The allocation
includes purchased in-process research and development of $45.6 million, which
has been charged to expense in the three month period ended March 31, 2000,
identifiable intangibles of $813,000, and excess consideration of $446 million
recorded as goodwill. Goodwill and the other identifiable intangibles will be
amortized over their estimated useful lives ranging from 2 to 6 years. As of
June 30, 2000, accumulated amortization related to these intangible assets was
$18.7 million.
Pro forma consolidated results of operations for the nine month periods ended
June 30, 2000 and 1999 are summarized below to reflect the acquisition of
Orologic as if it had occurred on October 1, 1999 and 1998, respectively:
Nine months ended
(in thousands, except per share data) June 30, 2000 June 30, 1999
- -------------------------------------------------------------------------------------
Revenues $304,128 $201,082
Net loss (27,604) (14,866)
Net loss per share - basic and diluted (0.16) (0.09)
8
On June 5, 2000, the Company acquired certain assets and liabilities of
Kalman Saffran Associates, Inc. ("KSA") in exchange for cash consideration of
$8.6 million and stock options to purchase 147,500 shares of common stock valued
at $1.6 million, net of deferred compensation, using an option pricing model.
The consideration was allocated based on the relative fair values of the
tangible and intangible assets and liabilities acquired, including acquired
workforce of $2.1 million, with the excess consideration of $8.7 million
recorded as goodwill. These intangible assets will be amortized over their
estimated useful lives ranging from 5 to 7 years. The transaction is being
accounted for as a purchase, and accordingly, the operations of KSA are included
from the date of acquisition. Pro forma data is not presented herein as
difference is immaterial.
Note 4. Inventories, net
Inventories consist of the following (in thousands):
June 30, 2000 September 30, 1999
------------- ------------------
Raw materials $ 5,915 $ 5,168
Work in process and finished goods 31,617 21,763
------- -------
$37,532 $26,931
======= =======
Note 5. Long Term Debt
In December 1999, the Company entered into a $5 million loan agreement
with two lenders. The loan is available for drawdown in increments of $1
million through March 31, 2000. Interest is based on the three year U.S.
Treasury rate plus a spread of 7.49%, with a maximum rate of 15% per annum,
payable monthly. Principal payments are due monthly in payments equal to 3.33%
of the loan plus interest over a period of 30 months, commencing in June 2000.
As of June 30, 2000, the Company had drawndown the maximum funds under the loan
agreement, or $5 million.
During March 2000, the Company completed a private offering of $720 million
of 4% convertible subordinated debentures due 2005. Net proceeds received by
the Company, after costs of issuance, were approximately $702 million. Interest
is payable in arrears semiannually on March 15 and September 15 of each year,
beginning September 15, 2000. The debentures are convertible into the Company's
common stock at approximately $112.19 per share, subject to certain adjustments.
The notes may be redeemed, at the Company's option, on or after March 15, 2003
at specified redemption prices. For the quarter ended June 30, 2000, interest
expense relating to the convertible subordinated debentures aggregated $8.1
million.
The remaining balances of long term debt relates to various capital leases
and notes payable to third parties.
Note 6. Subsequent Events
On August 7, 2000, the Company acquired certain assets of the WAN product
line of Philips Semiconductors for approximately $23.3 million. The Philips
Semiconductors WAN product line designs, develops and markets products for WAN
access and aggregation. The transaction will be accounted for using the
purchase method of accounting.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), in particular, in "Results of Operations -
Engineering, Research and Development Costs - Selling, General, and
Administrative Expense - Orologic Acquisition and Income Taxes," and in
"Liquidity and Capital Resources--Investing and Financing Activities," and is
subject to the safe harbor created by that section. Factors that management
believes could cause results to differ materially from those projected in the
forward looking statements are set forth below in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Factors That May
Affect Future Operating Results."
Results of Operations
Revenues
Total revenues in the third quarter of fiscal 2000 were $114.1 million, a
55.7% increase over the $73.3 million recorded in the third quarter of fiscal
1999 and a 13.7% increase over the $100.3 million recorded in the prior quarter.
For the nine months ended June 30, 2000, total revenues were $303.7 million, a
51.1% over the $201.0 million recorded in the nine months ended June 30, 1999.
The increase in total revenues was due to unit growth in shipments of existing
products, as well as the introduction of new products to customers in the
communications market.
Cost of Revenues
Cost of revenues as a percentage of total revenues in the third quarter of
fiscal 2000 was 34.0% compared to 37.3% in the third quarter of fiscal 1999 and
35.0% in the prior quarter. The decrease in cost of revenues as a percentage of
total revenues resulted primarily from a reduction in per unit costs associated
with increased utilization of the Company's Colorado Springs wafer fabrication
facility, as well as improved manufacturing yields during the first, second and
third quarters of fiscal 2000.
Engineering, Research and Development Costs
Engineering, research and development expenses were $21.6 million in the
third quarter of fiscal 2000 compared to $15.0 million in the third quarter of
fiscal 1999 and $21.1 million in the prior quarter. For the nine months ended
June 30, 2000, engineering, research, and development costs were $60.9 million
compared to $42.1 million in the nine months ended June 30, 1999. The increases
were principally due to increased headcount and higher costs to support the
Company's continuing efforts to develop new products. As a percentage of total
revenues, engineering, research and development costs were 18.9% in the third
quarter of fiscal 2000, 20.5% in the third quarter of fiscal 1999, and 21.0% in
the prior quarter. For the nine months ended June 30, 2000, engineering,
research and development costs as a percentage of total revenues decreased to
20% from 20.9%, in the comparable period a year ago. The Company
10
expects these costs to continue to increase in absolute dollars as a result of
continued efforts to develop new products and increased headcount related to
recent acquisitions. The Company's engineering, research and development costs
are expensed as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $13.1 million in the
third quarter of 2000, compared to $10.8 million in the third quarter of 1999
and $11.7 million in the prior quarter. For the nine months ended June 30, 2000,
SG&A expenses were $36.8 million compared to $28.8 million in the same period in
fiscal 1999. The increase in SG&A expenses in absolute dollars was due
principally to increased comepnsation and travel costs resulting from recent
acquisitions, and increases in legal and accounting fees. As a percentage of
total revenues, SG&A expenses were 11.5% in the third quarter of 2000, compared
to 14.7% in the third quarter of 1999 and 11.6% in the prior quarter. For the
nine months ended June 30, 2000, SG&A expenses as a percentage of total revenues
decreased to 12.1% from 14.3%, in the comparable period a year ago. The Company
expects these costs to continue to increase in absolute dollars as a result of
expected future growth.
Orologic Acquisition
In connection with the acquisition of Orologic, the Company recorded a second
quarter fiscal 2000 charge of $45.6 million for the fair value of purchased in-
process research and development ("IPR&D"). In addition, $446 million was
allocated to identifiable intangible assets and goodwill. Such assets are being
amortized over their expected lives, ranging from 2 to 6 years, increasing
annual and quarterly amortization expense by approximately $74.5 million and
$18.6 million, respectively. The fair values allocated to the intangible assets
acquired, including the IPR&D, were based upon independent appraisals.
Other Income, Net
Other income consists of interest income, net of interest and other expenses.
Interest income increased to $15.5 million in the third quarter of fiscal 2000
from $3.0 million in the third quarter of 1999 and $5.3 million in the prior
quarter. Interest expense was $8.2 million in the third quarter of fiscal 2000
and $1.6 million in the prior quarter. The Company incurred only a minimal
amount of interest expense in the third quarter of fiscal 1999. For the nine
months ended June 30, 2000, interest income and interest expense increased to
$23.6 million and $9.8 million from $8.4 million and $0.1 million, respectively,
in the comparable period a year ago. The increase in interest income is due to
higher average cash, short-term investments, long-term investments and long-term
deposit balances resulting from increased profitability and proceeds received
from the convertible debenture offering. Increased interest expense relates to
the debentures and amortization of debt issuance costs. As a result of the
convertible debenture offering, the Company expects to record additional
interest expense of approximately $8.1 million per quarter in future periods.
Income Taxes (to come from John)
The Company's year to date effective income tax rate is 63.3 % as of June 30,
2000 compared to 32.2% for the same period in the prior year. For the quarter
ended June 30, 2000, the effective income tax rate is 49.8% compared to 33.7%
for the quarter ending June 30, 1999. Excluding the effects of the Orologic
transaction, the quarter and year to date effective income tax rates are
approximately 33% through June 30, 2000.
11
Liquidity and Capital Resources
Operating Activities
The Company generated $76.0 million and $50.6 million from operating
activities in the nine months ended June 30, 2000 and 1999, respectively. The
increase in cash flow from operations was principally due to an improvement in
profitability, excluding the one time non-cash charge of $45.6 million relating
to purchased in-process research and development.
Investing Activities
The Company used $570.7 million and $83.8 million in investing activities
during the nine months ended June 30, 2000 and 1999, respectively. The increase
in cash used in investing activities was primarily due to the net investment of
$496.7 million, in held to maturity debt and equity securities, from the
proceeds received from the convertible subordinated debentures offering.
Capital expenditures, principally for manufacturing and test equipment, were
$57.1 million in the nine months ended June 30, 2000 compared to $35.3 million
in the nine months ended June 30, 1999. The Company intends to continue
investing in manufacturing, test and engineering equipment.
The Company entered into an operating lease transaction providing for the
financing of $11.1 million for the acquisition of certain test equipment.
Payments under this lease commenced in November 1999. If at the end of the
lease term the Company does not purchase the property, the Company would
guarantee the residual value to the lessor equal to a specified percentage of
the lessor's cost of the equipment. As of June 30, 2000, the lessor advanced a
total of $11.1 million under this lease and had held $8.8 million as cash
collateral, which the amount is included in restricted long-term deposits.
Financing Activities
The Company's financing activities provided $727.2 million for the nine
months ended June 30, 2000, representing proceeds, net of issuance costs, of
$702 million received from the convertible subordinated debentures offering,
proceeds of $5 million received from the loan agreement and proceeds of $22.1
million received from the issuance and sale of common stock pursuant to the
Company's stock option and stock purchase plans. This was slightly offset by
$4.9 million in repayments of debt obligations.
Management believes that the Company's cash and cash equivalents, short-term
investments, and cash flow from operations are adequate to finance its planned
growth and operating needs for the next 12 months.
12
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will require recognition of all derivatives as either assets or liabilities on
the balance sheet at fair value. The Company will adopt SFAS No. 133, as amended
by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal year ending
September 30, 2001. Management has not completed an evaluation of the effects
this standard will have on the Company's consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on
revenue recognition issues in the absence of authoritative literature addressing
a specific arrangement or a specific industry. The Company is required to follow
the guidance in the SAB no later than the fourth quarter of its year 2001 with
restatement to the first quarter of fiscal 2001 required for any change to
comply with the SAB. The SEC has recently indicated it intends to issue further
guidance with respect to adoption of specific issues addressed by SAB No. 101.
Until such time as this additional guidance is issued, the Company is unable to
assess the impact, if any, it may have, however based on current guidance the
Company believes adoption of the SAB will not have a material impact on the
Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation" (FIN 44). FIN 44 provides guidance for issues arising in applying
APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies
specifically to new awards, exchanges of awards in a business combination,
modification to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
Application of FIN 44 did not have an affect on the Company's financial
reporting.
Factors That May Affect Future Operating Results
We are Dependent on a Small Number of Customers in a Few Industries
We intend to continue focusing our sales effort on a small number of
customers in the communications and test equipment markets that require high-
performance integrated circuits. Some of these customers are also our
competitors. For the nine months ended June 30, 2000, our three largest
customers accounted for 14%, 13% and 10% of our total revenues and no other
customer accounted for more than 10% of our total revenues. If any of our major
customers delays orders of our products or stops buying our products, our
business and financial condition would be severely affected.
Our Operating Results May Fluctuate
Our quarterly revenues and expenses may fluctuate in the future. These
variations may be due to a number of factors, many of which are outside our
control. Factors that could affect our future operating results include the
following:
13
. The loss of major customers
. Variations, delays or cancellations of orders and shipments of our
products
. Reduction in the selling prices of our products
. Significant changes in the type and mix of products being sold
. Delays in introducing new products
. Design changes made by our customers
. Our failure to manufacture and ship products on time
. Changes in manufacturing capacity, the utilization of this capacity and
manufacturing yields
. Variations in product and process development costs
. Changes in inventory levels; and
. Expenses or operational disruptions resulting from acquisitions
In the past, we have recorded significant new product and process development
costs because our policy is to expense these costs at the time that they are
incurred. We may incur these types of expenses in the future. In future periods,
we expect a substantial increase in amortization of intangibles assets resulting
from recent acquisitions and interest expense resulting from recent financing
activities. These additional expenses will have a material and adverse effect
on our earnings in future periods. The occurrence of any of the above mentioned
factors could have a material adverse effect on our business and on our
financial results.
We Have Limited Manufacturing Capacity and We Depend on a New Production
Facility
During 1998, we started producing high-performance integrated circuits at our
new six-inch wafer fabrication factory in Colorado Springs, Colorado. We are
faced with several risks in the successful operation of this facility as well as
in our overall production operations. We had only produced finished four-inch
wafers until 1998 and therefore we have limited experience with the equipment
and processes involved in producing finished six-inch wafers. We do not have
excess production capacity at our Camarillo plant to offset failure of the new
Colorado facility to meet production goals. Further, some of our products have
been qualified for manufacture at only one of the two facilities. Consequently,
our failure to successfully operate the new facility could severely damage
financial results.
We also must now effectively coordinate and manage two facilities. We have
limited experience in managing production facilities located at two different
sites, and our failure to successfully do so could have a material adverse
effect on our business and operating results.
There Are Risks Associated with Recent and Future Acquisitions
In fiscal 1999, we made three strategic acquisitions. In March 2000, we
completed the acquisition of Orologic, Inc., in exchange for approximately 4.6
million shares of our common stock. In May 2000, we completed the acquisition
SiTera, Inc., for approximately 14.7 million shares of our common stock. Also in
fiscal 2000, we have completed two smaller acquisitions for
14
an aggregate of approximately $45 million. These acquisitions may result in the
diversion of management's attention from the day-to-day operations of the
Company's business. Risks of making these acquisitions include difficulties in
the integration of acquired operations, products and personnel. If we fail in
our efforts to integrate recent and future acquisitions, our business and
operating results could be materially and adversely affected.
In addition, acquisitions we will make could result in dilutive issuances of
equity securities, substantial debt, and amortization expenses related to
goodwill and other intangible assets. In particular, in connection with our
acquisition of Orologic, Inc., we were required to record acquisition related
expenses of $45.6 million in the three months ended March 31, 2000. Further, we
expect to amortize an aggregate of approximately $446 million of goodwill and
other identifiable intangible assets over the next 2 to 6 years. In addition,
we have accounted for the acquisition of SiTera, Inc., as a pooling-of-
interests, resulting in the exchange of approximately 14.7 million shares of
common stock. Our management frequently evaluates strategic opportunities
available. In the future we may pursue additional acquisitions of complementary
products, technologies or businesses.
Our Industry Is Highly Competitive
The high-performance semiconductor market is extremely competitive and is
characterized by rapid technological change, price erosion and increased
international competition. The communications and test equipment industries,
which are our primary target markets, are also becoming intensely competitive
because of deregulation and international competition. We compete directly or
indirectly with the following categories of companies:
. Gallium Arsenide fabrication operations of systems companies such as
Conexant and Fujitsu
. High-performance silicon integrated circuit manufacturers who use Emitter
Coupled Logic ("ECL"), Bipolar Complementary Metal-Oxide-Semiconductor
("BiCMOS") or Complementary Metal-Oxide-Semiconductor ("CMOS")
technologies such as Hewlett Packard, Fujitsu, Motorola, Lucent
Technologies, Texas Instruments and Applied Micro Circuits Corporation
. Internal integrated circuit manufacturing units of systems companies such
as Lucent Technologies, Siemens and Fujitsu
Our current and prospective competitors include many large companies that
have substantially greater marketing, financial, technical and manufacturing
resources than we do.
Competition in the markets that we serve is primarily based on
price/performance, product quality and the ability to deliver products in a
timely fashion. Product qualification is typically a lengthy process and some
prospective customers may be unwilling to invest the time or expense necessary
to qualify suppliers such as Vitesse. Prospective customers may also have
concerns about the relative advantages of our products compared to more familiar
silicon-based semiconductors. Further, customers may also be concerned about
relying on a relatively small company for a critical sole-sourced component. To
the extent we fail to overcome these challenges, there could be material and
adverse effects on our business and financial results.
15
There is Risk Associated with Doing Business in Foreign Countries
In fiscal 1999, international sales accounted for 33% of our total revenues,
and we expect international sales to constitute a substantial portion of our
total revenues for the foreseeable future. International sales involve a
variety of risks and uncertainties, including risks related to:
. Reliance on strategic alliance partners
. Compliance with foreign regulatory requirements
. Variability of foreign economic conditions
. Changing restrictions imposed by U.S. export laws, and
. Competition from U.S. based companies that have firmly established
significant international operations
Failure to successfully address these risks and uncertainties could adversely
affect our international sales, which could in turn have a material and adverse
effect on our results of operations and financial condition.
We Must Keep Pace with Product and Process Development and Technological
Change
The market for our products is characterized by rapid changes in both product
and process technologies. We believe that our success to a large extent depends
on our ability to continue to improve our product and process technologies and
to develop new products and technologies in order to maintain our competitive
position. Further, we must adapt our products and processes to technological
changes and adopt emerging industry standards. Our failure to accomplish any of
the above could have a negative impact on our business and financial results.
We Are Dependent on Key Suppliers
We manufacture our products using a variety of components procured from
third-party suppliers. Most of our high-performance integrated circuits are
packaged by third parties. Other components and materials used in our
manufacturing process are available from only a limited number of sources.
Further, we are increasingly relying on third-party semiconductor foundries for
our supply of silicon based products. Any difficulty in obtaining sole- or
limited-sourced parts or services from third parties could affect our ability to
meet scheduled product deliveries to customers. This in turn could have a
material adverse effect on our customer relationships, business and financial
results.
Our Manufacturing Yields Are Subject to Fluctuation
Semiconductor fabrication is a highly complex and precise process. Defects
in masks, impurities in the materials used, contamination of the manufacturing
environment and equipment failures can cause a large percentage of wafers or die
to be rejected. Manufacturing yields vary among products, depending on a
particular high-performance integrated circuit's complexity and on our
experience in manufacturing it. In the past, we have experienced difficulties
in achieving acceptable yields on some high-performance integrated circuits,
which has led to shipment delays. Our overall yields are lower than yields
obtained in a mature silicon process because we
16
manufacture a large number of different products in limited volume and our
process technology is less developed. We anticipate that many of our current and
future products may never be produced in volume.
Since a majority of our manufacturing costs are relatively fixed, maintaining
a number of shippable die per wafer is critical to our operating results. Yield
decreases can result in higher unit costs and may lead to reduced gross profit
and net income. We use estimated yields for valuing work-in-process inventory.
If actual yields are material different than these estimates, we may need to
revalue work-in-process inventory. Consequently, if any of our current or
future products experience yield problems, our financial results may be
adversely affected.
Our Business Is Subject to Environmental Regulations
We are subject to various governmental regulations related to toxic, volatile
and other hazardous chemicals used in our manufacturing process. Our failure to
comply with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Additionally, we may be restricted in
our ability to expand operations at our present locations or we may be required
to incur significant expenses to comply with these regulations.
Our Failure to Manage Growth May Adversely Affect Us
The management of our growth requires qualified personnel, systems and other
resources. In particular, the continued operation of the new facility in
Colorado Springs and its integration with the Camarillo facility will require
significant management, technical and administrative resources. Additionally, we
have recently established several product design centers worldwide. Finally, we
acquired Vermont Scientific Technologies, Inc. ("VTEK") in November 1998, Serano
Systems Corporation ("Serano") in January 1999, XaQti Corporation ("XaQti") in
July 1999, Orologic, Inc. ("Orologic") in March 2000, SiTera, Inc. ("SiTera") in
May 2000, and certain assets and liabilities of Kalman Saffran Associates,
Inc. ("KSA") in June 2000, and certain assets and liabilities of Philips
Semiconductors, Inc. ("Philips") in August 2000, and we have only limited
experience in integrating the operations of acquired businesses. Failure to
manage our growth or to successfully integrate new and future facilities or
newly acquired businesses could have a material adverse effect on our business
and financial results.
We Are Dependent on Key Personnel
Due to the specialized nature of our business, our success depends in part
upon attracting and retaining the services of qualified managerial and technical
personnel. The competition for qualified personnel is intense. The loss of any
of our key employees or the failure to hire additional skilled technical
personnel could have a material adverse effect on our business and financial
results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
At June 30, 2000, the Company's long-term debt consists of convertible
subordinated debentures with interest at a fixed rate. Consequently, the
Company does not have significant cash flow exposure on its long-term debt.
However, the fair value of the convertible subordinated debentures is subject to
significant fluctuation due to their convertibility into shares of Vitesse
common stock.
17
PART II
OTHER INFORMATION
Item 2. Changes in Securities
In May 2000, we issued 14,698,288 shares of our common stock and assumed
stock options to purchase 1,146,584 of our common stock in connection with the
acquisition of all of the equity interests of SiTera, Inc. The issuance of
shares was made pursuant to the exemption from registration provided by Section
3(a)(10) of the Securities Act of 1933, as amended, after obtaining a permit to
complete the acquisition from the Office of the California Secretary of State.
Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization, entered into as of April 19,
2000, by and among Vitesse Semiconductor Corp., Southpaw Acquisition
Corp., and SiTera, Inc., and with respect to Article 8 only, Steven
P. Flannery as Stockholder Representative and U.S. Bank Trust
National Association as Escrow Agent, incorporated by reference to
Current Report on Form 8-K dated May 31, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Report on Form 8-K/A, dated March 31, 2000 (filed May 25, 2000),
amending Current Report on Form 8-K to include historical and pro
forma financial statements of the Company and Orologic, Inc.
Report on Form 8-K/A, dated March 31, 2000 (filed June 7, 2000),
amending Form 8-K/A filed May 25, 2000, to correct certain financial
information.
Report on Form 8-K, dated April 19, 2000, reporting the Company's
agreement to acquire all of the equity interest of SiTera, Inc.
Report on Form 8-K, dated May 31, 2000, reporting the completion of
the Company's acquisition of all the equity interests of SiTera,
Inc.
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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
August 11, 2000 By: /s/Eugene F. Hovanec
--------------------
Eugene F. Hovanec
Vice President, Finance and
Chief Financial Officer
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INDEX TO EXHIBITS
27 Financial Data Schedule
20