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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
March 31, 2001
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
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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)
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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 April 30, 2001, there were 183,346,511 shares of $0.01 par value
common stock outstanding.
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VITESSE SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
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Page Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2001 2
(unaudited) and September 30, 2000
Unaudited Condensed Consolidated Statements of Operations for 3
the three months ended March 31, 2001, March 31, 2000, and
December 31, 2000, and the six months ended March 31, 2001
and March 31, 2000
Unaudited Condensed Consolidated Statements of Cash Flows for 4
the six months ended March 31, 2001 and March 31, 2000
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of 8
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 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 19
PART I
FINANCIAL INFORMATION
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, 2001 Sept. 30, 2000
-------------- --------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 117,505 $ 257,081
Short-term investments 346,848 442,475
Accounts receivable, net 131,796 113,172
Inventories, net 64,422 43,715
Prepaid expenses and other current assets 23,967 6,969
Deferred tax assets, net 13,730 13,730
---------- ----------
Total current assets 698,268 877,142
---------- ----------
Long-term investments 459,121 278,758
Property and equipment, net 230,786 141,874
Restricted long-term deposits 80,746 75,804
Intangible assets, net 434,817 452,895
Deferred tax assets, net 55,342 43,506
Other assets 43,446 31,087
---------- ----------
$2,002,526 $1,901,066
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 331 $ 4,227
Current portion of convertible subordinated debt 26,000 --
Accounts payable 40,797 21,813
Accrued expenses and other current liabilities 24,526 36,224
Income taxes payable -- 8,307
---------- ----------
Total current liabilities 91,654 70,571
---------- ----------
Long-term debt -- 3,587
Convertible subordinated debt 694,000 720,000
Minority interest 5,696 1,506
Shareholders' equity:
Common stock, $.01 par value. Authorized 500,000,000
shares; issued and outstanding 183,150,924 and
180,049,153 shares on March 31, 2001 and Sept. 30, 2000,
respectively 1,832 1,801
Additional paid-in capital 1,103,142 998,537
Deferred compensation (34,698) (18,958)
Retained earnings 140,900 124,022
---------- ----------
Total shareholders' equity 1,211,176 1,105,402
---------- ----------
$2,002,526 $1,901,066
========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
2
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended Six Months Ended
---------------------------------------------- ------------------------------
Mar. 31, 2001 Mar. 31, 2000 Dec. 31, 2000 Mar. 31, 2001 Mar. 31, 2000
-------------- -------------- -------------- -------------- --------------
(Restated) (Restated)
Revenues $121,757 $100,310 $165,066 $286,823 $189,589
Costs and expenses:
Cost of revenues 46,004 35,111 52,347 98,351 66,950
Engineering, research and development 38,101 23,322 33,665 71,766 41,553
Selling, general and administrative 18,259 11,325 17,665 35,924 23,282
Purchased in-process research and
development - 45,614 - - 45,614
Amortization of goodwill 20,893 360 20,334 41,227 720
-------- -------- -------- -------- --------
Total costs and expenses 123,257 115,732 124,011 247,268 178,119
-------- -------- -------- -------- --------
Income (loss) from operations (1,500) (15,422) 41,055 39,555 11,470
Interest income 13,712 5,291 15,412 29,124 8,111
Interest expense (8,388) (1,608) (8,305) (16,693) (1,634)
Other expense (654) - - (654) -
-------- -------- -------- -------- --------
Income (loss) before income taxes 3,170 (11,739) 48,162 51,332 17,947
Income taxes 14,394 5,135 20,060 34,454 14,931
-------- -------- -------- -------- --------
Net income (loss) $(11,224) $(16,874) $ 28,102 $ 16,878 $ 3,016
======== ======== ======== ======== ========
Net income (loss) per share
Basic $(0.06) $(0.10) $0.16 $0.09 $0.02
======== ======== ======== ======== ========
Diluted $(0.06) $(0.10) $0.15 $0.09 $0.02
======== ======== ======== ======== ========
Shares used in per share computations:
Basic 182,150 174,512 180,434 181,383 172,677
======== ======== ======== ======== ========
Diluted 182,150 174,512 193,084 192,619 186,383
======== ======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
--------------------------------
March 31, 2001 March 31, 2000
--------------- ---------------
Cash flows from operating activities: (Restated)
Net income $ 16,878 $ 3,016
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 63,696 14,839
Amortization of debt issue costs and debt discount 1,919 336
Amortization of deferred compensation 5,748 1,150
Purchased in-process research and development -- 45,614
Increase in equity associated with tax benefit from
exercise of stock options 46,238 46,926
Change in assets and liabilities:
(Increase) decrease in, net of effects of acquisitions:
Accounts receivable, net (18,624) (19,356)
Inventories, net (20,707) (6,578)
Prepaid expenses and other current assets (16,998) (10,639)
Deferred tax assets, net (11,836) (26,873)
Other assets (14,255) 237
Increase (decrease) in, net of effects of acquisitions:
Accounts payable 18,984 (7,257)
Accrued expenses and other current liabilities (12,429) (3,883)
Income taxes payable (8,307) (5,517)
--------- ---------
Net cash provided by operating activities 50,307 32,015
--------- ---------
Cash flows from investing activities:
Investments, net (84,736) (763,320)
Capital expenditures (111,224) (33,628)
Restricted long-term deposits (4,942) (8,723)
Payment for purchase of companies, net of cash acquired (11,242) 991
--------- ---------
Net cash used in investing activities (212,144) (804,680)
--------- ---------
Cash flows from financing activities:
Principal payments under long-term debt and capital leases (7,506) (2,828)
Cash paid for debt issue costs -- (18,000)
Capital contributions by minority interest limited partners 4,190 697
Proceeds from issuance of convertible subordinated debt and
term debt -- 725,000
Elimination of duplicate period of pooled companies -- 1,464
Proceeds from issuance of common stock, net 25,577 19,260
--------- ---------
Net cash provided by financing activities 22,261 725,593
--------- ---------
Net decrease in cash and cash equivalents (139,576) (47,072)
Cash and cash equivalents at beginning of period 257,081 89,941
--------- ---------
Cash and cash equivalents at end of period $ 117,505 $ 42,869
========= =========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
VITESSE SEMICONDUCTOR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
---------------------------------
March 31, 2001 March 31, 2000
---------------- ---------------
(Restated)
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $14,640 $ 37
======= ========
Income taxes $ 8,368 $ 256
======= ========
Supplemental disclosures of non-cash transactions:
Issuance of stock options in purchase transaction $ 5,221 $ 50,531
======= ========
Issuance of common stock in purchase transaction $ 6,112 $422,542
======= ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
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"). The condensed consolidated financial statements
for all prior periods presented have been restated to reflect the Company's
acquisition of SiTera Incorporated ("SiTera") on May 31, 2000, which was
accounted for under the pooling-of-interests method. 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 2000 Annual
Report. Footnotes and other disclosures which would substantially duplicate the
disclosures in the Company's audited financial statements for fiscal year 2000
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 (Loss) per Share
The reconciliation of shares used to calculate basic and diluted income
(loss) per share consists of the following (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
Mar. 31, 2001 Mar. 31,2000 Dec.31,2000 Mar. 31, 2001 Mar. 31, 2000
---------------- ---------------- ----------- -------------- -------------
Shares used in basic per share computations -
weighted average shares outstanding 182,150 174,512 180,434 181,383 172,677
Net effect of dilutive common share equivalents
based on treasury stock method -- -- 12,650 11,236 13,706
------- ------- ------- ------- -------
Shares used in diluted per share computation 182,150 174,512 193,084 192,619 186,383
======= ======= ======= ======= =======
Stock options and other convertible securities exercisable for 16,584,160,
20,123,618, and 7,141,522 shares that were outstanding at March 31, 2001 and
2000, and December 31, 2000, respectively, were not included in the computation
of diluted net income per share, as the effect of their inclusion would be
antidilutive. These securities consist primarily of the convertible
subordinated debentures that are convertible into the Company's common stock at
a conversion price of $112.19.
6
Reclassifications
------------------
Where necessary, prior periods' information has been reclassified to conform
to the current period condensed consolidated financial statement presentation.
Note 2. Purchase Accounting Business Combinations
On October 3, 2000, the Company acquired all of the equity interests of
FirstPass, Inc. ("FirstPass") in exchange for 70,800 shares of common stock
valued at $6.1 million, the assumption of stock options to purchase 378,028
shares of common stock valued at $4.9 million, net of deferred compensation of
$16.6 million, and cash consideration of $0.8 million. On February 13, 2001, the
Company acquired all of the equity interests of ht-Mikroelektronik GmbH ("ht-
Mikro") in exchange for cash consideration of $10.0 million and the assumption
of stock options to purchase 56,981 shares of common stock valued at $0.3
million, net of deferred compensation of $2.4 million. The consideration for
both transactions was allocated based on the fair values of the tangible and
intangible assets and liabilities acquired, including identifiable intangible
assets of $5.9 million, with the excess consideration of $16.0 million recorded
as goodwill. These intangible assets will be amortized over their estimated
useful lives ranging from 5 to 7 years. The transactions are being accounted for
as a purchase, and accordingly, the operations of First Pass and ht-Mikro are
included from the date of acquisition. Pro forma data is not presented herein as
FirstPass and ht-Mikro operations are immaterial.
Note 3. Inventories, net
Inventories consist of the following (in thousands):
March 31, 2001 Sept. 30, 2000
-------------- --------------
Raw materials $ 6,803 $ 4,184
Work in process and finished goods 57,619 39,531
------- -------
$64,422 $43,715
======= =======
Note 4. Subsequent Events
In April 2001, the Company agreed to acquire all of the equity interests of
Exbit Technology A/S (Exbit) in exchange for up to 6.9 million shares of the
Company's common stock. Exbit develops high-speed chip-sets and Intellectual
Property ("IP") Cores for the communications and networking industry. The
transaction is expected to be complete in the quarter ending June 30, 2001. The
transaction will be accounted for using the purchase method of accounting.
In April 2001, the Company purchased $26.0 million principal amount of its
4% convertible subordinated debentures due March 2005 at prevailing market
prices, for aggregate of approximately $19.0 million. As a result, the Company
expects to record an extraordinary gain on early extinguishment of debt of
approximately $4.9 million, net of income taxes of $2.1 million, in the quarter
ending June 30, 2001.
7
In May 2001, the Company announced measures to reduce its workforce by
approximately 12%. As a result of this workforce reduction, the Company expects
to incur a one-time charge between $1.5 million and $2.0 million in the quarter
ending June 30, 2001.
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 -
"Revenues", "Cost of Revenues", "Engineering, Research and Development Costs",
"Selling, General, and Administrative Expense", "Amortization of Goodwill and
Intangible Assets" and "Interest Income and Interest Expense", 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 second quarter of fiscal 2001 were $121.8 million, an
increase of 21% over the $100.3 million recorded in the second quarter of fiscal
2000 and a decrease of 26% from the $165.1 million recorded in the prior
quarter. For the six months ended March 31, 2001, total revenues were $286.8
million, a 51% increase over the $189.6 million recorded in the six months ended
March 31, 2000. The decrease in revenue in the second quarter of fiscal 2001
from the prior quarter was due to adverse market conditions and the reduction in
demand from our communications and data storage customers. The increase in
total fiscal 2001 revenues over fiscal 2000 revenues was due to unit growth in
shipments of existing products, as well as the introduction of new products to
customers in the communications markets. Due to continuing adverse general
market conditions and weakening demand for our products, we currently expect
that our revenues in the quarter ending June 30, 2001 will be less than our
revenues in the quarter ended March 31, 2001.
Cost of Revenues
Cost of revenues as a percentage of total revenues in the second quarter of
fiscal 2001 was 37.8% compared to 35.0% in the second quarter of fiscal 2000 and
31.7% in the prior quarter. The increase in cost of revenues as a percentage of
total revenues resulted primarily from the lower quarterly revenues on a base of
relatively fixed manufacturing costs. The increase was slightly offset by
improved manufacturing yields during the second quarter of fiscal 2001. We
anticipate that the costs of revenues as a percentage of total revenues will
continue to be adversely affected in the near term as a result of estimated
lower quarterly revenues and the significantly higher energy costs resulting
from the energy shortage facing the state of California.
8
Engineering, Research and Development Costs
Engineering, research and development expenses were $38.1 million in the
second quarter of fiscal 2001 compared to $23.3 million in the second quarter of
fiscal 2000 and $33.7 million in the prior quarter. For the six months ended
March 31, 2001, engineering, research, and development costs were $71.8 million
compared to $41.6 million in the six month period ended March 31, 2000. The
increases were principally due to increased headcount from recent acquisitions,
new hires, amortization of deferred stock compensation and higher costs to
support our continuing efforts to develop new products. As a percentage of
total revenues, engineering, research and development costs were 31.3% in the
second quarter of fiscal 2001, 23.3% in the second quarter of fiscal 2000, and
20.4% in the prior quarter. For the six months ended March 31, 2001,
engineering, research and development costs as a percentage of total revenues
increased to 25.0% from 21.9%, in the comparable period a year ago. We expect
these costs to continue to increase in absolute dollars and as a percentage of
revenues, as a result of continued efforts to develop new products and increased
headcount related to recent acquisitions and due to the anticipated decline in
revenues as described earlier. Our engineering, research and development costs
are expensed as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $18.3 million in the
second quarter of 2001, compared to $11.3 million in the second quarter of 2000
and $17.7 million in the prior quarter. For the six months ended March 31, 2001,
SG&A expenses were $35.9 million compared to $23.3 million in the same period in
fiscal 2000. The increase in SG&A expenses in absolute dollars was due
principally to increased compensation resulting from recent acquisitions, and
expansion of our worldwide sales and marketing organizations. As a percentage
of total revenues, SG&A expenses were 15.0% in the second quarter of 2001,
compared to 11.3% in the second quarter of 2000 and 10.7% in the prior quarter.
For the six months ended March 31, 2001, SG&A expenses as a percentage of total
revenues increased to 12.5% from 12.3%, in the comparable period a year ago. We
expect these costs to continue to increase in absolute dollars and as a
percentage of revenues, as a result of expected future growth and due to the
anticipated decline in revenues as described earlier.
Amortization of Goodwill and Intangible Assets
Amortization of goodwill and identifiable intangible assets was $20.9 million
and $0.4 million for the three months ended March 31, 2001 and 2000,
respectively. For the six months ended March 31, 2001, amortization of goodwill
and identifiable intangible assets was $41.2 million compared to $0.7 million in
the same period in fiscal 2000. Amortization of goodwill and identifiable
intangible assets primarily relates to the purchase of Orologic, Inc.
("Orologic") and other acquisitions completed in fiscal 2000 and 2001. 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"). Amortization of goodwill and
identifiable intangible assets will continue to be at this level and will
increase to the extent that we acquire companies and technologies. However, if
current Financial Accounting Standards Board proposals become effective, certain
intangible assets, including goodwill, will
9
be maintained on the balance sheet rather than amortized, although they may
eventually be written down to extent they are deemed to be impaired.
Interest Income and Interest Expense
Interest income was $13.7 million in the second quarter of fiscal 2001
compared to $5.3 million in the second quarter of 2000 and $15.4 million in the
prior quarter. For the six months ended March 31, 2001, interest income was
$29.1 million compared to $8.1 million in the same period in fiscal 2000. The
increase in interest income is due to higher average cash, short-term
investments, long-term investments and long-term deposit balances resulting from
proceeds received from the convertible debenture offering in March 2000. The
decrease in interest income of $1.7 million from the prior quarter is the result
of slightly lower cash, short term and long term investments held throughout the
quarter combined with lower interest rates. Interest expense was $8.4 million
in the second quarter of fiscal 2001 compared to $1.6 million in the second
quarter of fiscal 2000 and $8.3 million in the prior quarter. For the six months
ended March 31, 2001, interest expense was $16.7 million compared to $1.6
million in the same period in fiscal 2000. Increased interest expense relates
to the debentures and amortization of debt issuance costs. As a result of the
convertible debenture offering, we expect to record additional interest expense
of approximately $7.8 million per quarter in future periods, which may be
reduced to the extent that we may repurchase any additional convertible
subordinated debentures.
Income Taxes
Our year to date effective income tax rate is 67.1% as of March 31, 2001
compared to 83.2% for the same period in the prior year. For the quarter ended
March 31, 2001, the effective income tax rate is 454% compared to (43.7%) for
the quarter ended March 31, 2000. Excluding the effects of nondeductible
goodwill amortization and other permanent book to tax differences, the effective
income tax rate is approximately 33.0% for all periods presented.
Liquidity and Capital Resources
Operating Activities
We generated $50.3 million and $32.0 million from operating activities in the
six months ended March 31, 2001 and 2000, respectively. The increase in cash
flow from operations was principally due to an improvement in profitability of
$13.9 million and adjustment to non-cash items for depreciation and amortization
of $63.7 million. For the remainder of fiscal 2001, we expect that our growth
in profitability, compared to fiscal 2000, will be reduced due to the continuing
adverse market conditions.
Investing Activities
We used $212.1 million and $804.7 million in investing activities during the
six months ended March 31, 2001 and 2000, respectively. The cash used in
investing activities in the first six months of fiscal 2001 was primarily due to
the purchase of investments in held to maturity debt and equity securities of
$84.7 million and capital expenditures of $111.2 million and investments in
restricted long term deposits of $4.9 million. We intend to continue investing
in manufacturing, test and engineering equipment. In addition, we paid cash
consideration of $10.8 million in connection with the purchase of First Pass and
ht-Mikro in the six months ended March 31, 2001.
10
In December 2000, we entered into an operating lease transaction providing
for the financing of $17.2 million for the acquisition of certain test
equipment. If at the end of the lease term we do not purchase the equipment, we
would guarantee the residual value to the lessor equal to a specified percentage
of the lessor's cost of the equipment. As of March 31, 2001, the lessor
advanced a total of $17.2 million under this lease and held approximately $5.0
million as cash collateral, which amount is included in restricted long-term
deposits.
Financing Activities
We generated $22.3 and $725.6 million from financing activities for the six
months ended March 31, 2001 and 2000, respectively. Financing activities for
the six months ended March 31, 2001, represent proceeds of $25.6 million
received from the issuance and sale of common stock pursuant to our stock option
and stock purchase plans and proceeds of $4.2 million received from the limited
partners of the Vitesse venture funds, partially offset by repayments of debt
obligations of $7.5 million. Financing activities for the six months ended March
31, 2000, represent proceeds, net of issuance costs, of $702.0 million received
from the convertible subordinated debenture offering, proceeds of $5.0 million
received from the issuance of term debt and proceeds of $19.3 million received
from the issuance and sale of common stock pursuant to our stock option and
stock purchase plans, slightly offset by $2.8 million in repayments of debt
obligations.
Management believes that our cash and cash equivalents, short-term
investments, and cash flow from operations are adequate to finance our planned
growth and operating needs for the next 12 months.
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
requires recognition of all derivatives as either assets or liabilities on the
balance sheet at fair value. The Company has adopted 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. The adoption of this standard did not have a material
effect 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." SAB 101, as amended, summarizes certain SEC's views of applying
generally accepted accounting principles to revenue recognition in financial
statements. We do not expect SAB 101 to have a material effect on our
operations or financial position. We are required to adopt SAB 101 in the
fourth quarter of fiscal 2001.
11
Factors That May Affect Future Operating Results
We Have Recently Experienced a Decline in Revenues, and We Expect That Our
Operating Results Will Fluctuate in The Future Due to Reduced Demand in Our
Markets
Our revenues and earnings per share (excluding acquisition related charges)
in the three months ended March 31, 2001 were approximately 26.3% and 23.1 %,
respectively, lower than our revenues and earnings per share in the prior
quarter. Due to general economic conditions and slowdowns in purchases of
optical networking equipment, it has become increasingly difficult for us to
predict the purchasing activities of our customers and we expect that our
operating results will fluctuate substantially in the future. In particular, we
expect that our revenues and earnings per share for the quarter ending June 30,
2001 will be lower than our revenues and earnings in the quarter ended March 31,
2001. Future fluctuations in operating results may also be caused by a number
of factors, many of which are outside our control. Additional factors that
could affect our future operating results include the following:
. 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 quarter ending June 30, 2001, we are implementing cost reductions,
including a reduction in work force of approximately 12%, to bring our expenses
into line with our reduced revenue expectations. However, we cannot be sure
that these measures will be sufficient to offset lower revenues, and if they are
not, our earnings will be adversely affected. 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 intangible assets resulting from recent acquisitions. 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.
The market price for our common stock has been volatile and future
volatility could cause the value of your investment in our company to decline.
Our stock price has experienced significant volatility recently. In
particular, our stock price declined significantly in the context of
announcements made by us and other semiconductor suppliers of reduced revenue
expectations and of a general slowdown in the technology sector, particularly
the optical networking equipment sector. Given these general economic
conditions
12
and the reduced demands for our products that we have experienced recently, we
expect that our stock price will continue to be volatile. In addition, the value
of your investment could decline due to the impact of any of the following
factors, among others, upon the market price of our common stock:
. Additional changes in financial analysts estimates of our revenues and
earnings;
. Our failure to meet financial analysts performance expectations; and
. Changes in market valuations of other companies in the semiconductor or
fiber optic equipment industries.
In addition, many of the risks described elsewhere in this section could
materially and adversely affect our stock price, as discussed in those risk
factors. The stock markets have recently experienced substantial price and
volume volatility. Fluctuations such as these have effected and are likely to
continue to affect the market price of our common stock.
In the past, securities class action litigation has often been instituted
against companies following periods of volatility in the market price of such
companies' securities. If instituted against us, regardless of the outcome,
such litigation could result in substantial costs and diversion of our
management's attention and resources and have a material adverse effect on our
business, financial condition and results of operations. We could be required
to pay substantial damages, including punitive damages, if we were to lose such
a lawsuit.
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 six months ended March 31, 2001, no single customer
accounted for greater than 10% of 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.
We Depend on the Successful Operation of our Production Facilities
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. Further, some of
our products have been qualified for manufacture at only one of the two
facilities. Consequently, our failure to successfully operate either facility
could severely damage our financial results.
The successful operation of our Camarillo, California production facility
is also jeopardized by the recent and continuing energy shortage facing the
state of California. We currently have available an uninterrupted power supply
that would allow us to successfully power down our production facility in the
event of a power black out. However, this power supply is insufficient to allow
us to complete production of wafers in process in the event of a prolonged
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black out, and as such, if we are affected by such a black out it could
substantially disrupt production. Any such disruptions could materially and
adversely affect our operating results.
There Are Risks Associated with Recent and Future Acquisitions
In fiscal 2000, we made two significant acquisitions. In March 2000, we
completed the acquisition of Orologic, in exchange for approximately 4.6 million
shares of our common stock. In May 2000, we completed the acquisition SiTera
for approximately 14.7 million shares of our common stock. Also since the
beginning of fiscal 2000, we completed four smaller acquisitions for an
aggregate of approximately $61.7 million in approximately 0.8 million of common
stock issued and stock options assumed and approximately $44.6 million in cash.
In April 2001 we announced our agreement to acquire Exbit Technology A/S for up
to approximately 6.9 million shares of our Common Stock. 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 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, we were required to record IPR&D charge of $45.6
million in the three months ended March 31, 2000. In addition, we expect to
record additional acquisition related expenses in the quarter ending June 30,
2001 in connection with our acquisition of Exbit. Further, under current
accounting rules, we expect to amortize an aggregate of approximately $517.0
million of goodwill and other identifiable intangible assets over the next 2 to
7 years. However, if current Financial Accounting Standards Board proposals
become effective, certain intangible assets, including goodwill, will be
maintained on the balance sheet rather than being amortized, although they may
eventually be written down to the extent they are deemed to be impaired. 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. We compete directly or indirectly with the following
categories of companies:
. High-performance integrated circuit suppliers such as Agere Systems,
Applied Micro Circuits Corporation, Broadcom, Conexant, Hewlett
Packard, IBM, Intel, Motorola, and PMC Sierra
. Internal integrated circuit development units of systems companies
such as Cisco Systems, Fujitsu and Nortel Networks
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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.
There is Risk Associated with Doing Business in Foreign Countries
In fiscal 2000 and the first six months of fiscal 2001, international sales
accounted for 24% and 27%, respectively, 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. All 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.
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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 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. If we
fail to comply with these regulations, this failure 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. We have recently established several product design centers
worldwide and have acquired Orologic in March 2000, SiTera in May 2000,
completed six other acquisitions since the fall of 1998, and announced our
agreement to acquire Exbit in April 2001. 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.
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Our Ability to Repurchase Our Debentures, If Required, With Cash, Upon a
Change of Control May be Limited
In certain circumstances involving a change of control or the termination of
public trading of our common stock, holders of the debentures may require us to
repurchase some or all of the debentures. We cannot assure that we will have
sufficient financial resources at such time or will be able to arrange financing
to pay the repurchase price of the debentures.
Our ability to repurchase the debentures in such event may be limited by law,
by the indenture, by the terms of other agreements relating to our senior debt
and by such indebtedness and agreements as may be entered into, replaced,
supplemented or amended from time to time. We may be required to refinance our
senior debt in order to make such payments. We may not have the financial
ability to repurchase the debentures if payment of our senior debt is
accelerated.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
At March 31, 2001, the Company's investment portfolio principally includes
marketable debt securities consisting of obligations of the U.S. government and
its agencies. These securities sometimes have remaining terms in excess of one
year. Consequently, such securities are subject to interest rate risk. The
Company classifies these securities as held-to-maturity securities, which are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums or discounts.
At March 31, 2001, the Company's long-term debt consists of convertible
subordinated debentures with interest at a fixed rate of 4.00% per year.
Consequently, the Company does not have significant interest rate 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.
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PART II
OTHER INFORMATION
Item 2. Changes in Securities
(c) Recent Sales of Unregistered Securities
Pursuant to the terms of the acquisition of ht-Mikro on February 13,
2001, Vitesse assumed stock options to purchase 56,981 shares of common
stock held by certain employees of ht-Mikro. The stock options are
exercisable for common stock of Vitesse at a weighted average exercise
price of $20.00 per share, and become exercisable over time based on
continued employment with the Company. The securities were issued in
reliance on the exemption from registration provided by Section 4(2) of
the Securities Act, based on the limited number of security holders of
ht-Mikro, the relationships of such holders to ht-Mikro and the lack of
any advertisement or general solicitation in connection with the
acquisition.
Item 4. Submission of Matters to a Vote of Security Holders
On January 23, 2001, the Company held its regular Annual Meeting of
Stockholders. The purpose of the meeting was to elect Directors to serve for
the ensuing year, to approve a proposal to adopt the Company's 2001 Stock
Incentive Plan and to ratify the appointment of KPMG LLP as independent auditors
for the Company for the 2001 fiscal year. The following individuals were
elected to serve as Directors for the ensuing year:
Name Votes for Withheld
---- --------- --------
Pierre R. Lamond 147,980,583 437,405
Vincent Chan 147,915,588 502,400
James A. Cole 147,964,227 453,761
Alex Daly 147,881,903 536,085
John C. Lewis 147,997,594 420,394
Louis R. Tomasetta 147,999,030 418,958
Additionally, the following items were voted upon and approved by the
shareholders:
Against or Votes Broker
Votes for Withheld Abstained No Vote
---------- ---------- --------- ----------
Approval of a proposal to adopt the
Company's 2001 Stock Incentive Plan 60,885,595 53,531,262 340,467 33,660,664
Ratification of appointment of KPMG LLP
as independent auditors for the fiscal year
ending September 30, 2001 148,141,053 113,264 163,671 ---
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Item 6. Exhibits & Reports on Form 8-K
(a) Exhibits
10.1 Vitesse Semiconductor 2001 Stock Incentive Plan is incorporated herein
by reference to Exhibit 4.4 to the Company's Registration Statement on
Form S-8 (File No. 333-55466) filed with the Securities and Exchange
Commission on February 13, 2001.
(b) Reports on Form 8-K
None.
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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
May 15, 2001 By: /s/Eugene F. Hovanec
---------------------------
Eugene F. Hovanec
Vice President, Finance and
Chief Financial Officer
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