<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ...... TO ......
COMMISSION FILE NUMBER 0-19654
- --------------------------------------------------------------------------------
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 77-0138960
(State or other jurisdiction of (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 JUNE 30, 1996, THERE WERE 18,931,099 SHARES OF $0.01 PAR VALUE COMMON
STOCK OUTSTANDING.
================================================================================
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Balance Sheets as of June 30, 1996 and 2
September 30, 1995
Statements of Operations for the Three Months 3
ended June 30, 1996, June 30, 1995 and
March 31, 1996, and the Nine Months
ended June 30, 1996 and June 30, 1995
Statements of Cash Flows for the Nine Months 4
ended June 30, 1996 and June 30, 1995
Notes to Financial Statements 5
Item 2 Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Risk Factors 10
PART II OTHER INFORMATION
Item 6 Exhibits & Reports on Form 8-K 12
</TABLE>
1
<PAGE>
PART I
FINANCIAL INFORMATION
VITESSE SEMICONDUCTOR CORPORATION
BALANCE SHEET
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, 1996 Sept. 30,1995
------------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 50,193 $ 6,315
Trade accounts receivable, net 15,236 12,610
Other receivables 199 120
Inventories, net:
Raw material 1,358 1,392
Work in process 6,203 6,138
Finished goods 2,300 2,365
-------- --------
9,861 9,895
Prepaid expenses 775 542
-------- --------
Total current assets 76,264 29,482
-------- --------
Property and equipment, net 13,420 11,862
Other assets 648 767
-------- --------
$ 90,332 $ 42,111
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ --- $ 2,950
Current installments of capital lease obligations 948 2,085
Current installments of term loans 160 1,121
Accounts payable 3,883 3,553
Accrued expenses and other current liabilities 2,843 1,553
Deferred revenue 200 220
-------- --------
Total current liabilities 8,034 11,482
-------- --------
Capital lease obligations, less current installments 323 3,627
Term loans, less current installments 358 1,891
Other 111 111
Shareholders' equity:
Common stock, $.01 par value, authorized 25,000,000
shares; issued and outstanding 18,931,099 shares on
June 30, 1996, and 15,509,758 shares on Sept. 30, 1995 189 155
Additional paid-in capital 131,148 82,804
Accumulated deficit (49,831) (57,959)
-------- --------
Net shareholders' equity 81,506 25,000
-------- --------
$ 90,332 $ 42,111
======== ========
</TABLE>
2
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------------------------ -------------------------------
June 30, 1996 June 30, 1995 Mar. 31, 1996 June 30, 1996 June 30, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues, net:
Production $ 15,599 $ 9,035 $ 14,021 $ 41,687 $ 24,418
Development 1,675 1,998 1,607 5,237 6,401
----------- ----------- ----------- ----------- -----------
Total revenues 17,274 11,033 15,628 46,924 30,819
----------- ----------- ----------- ----------- -----------
Costs and expenses:
Cost of revenues 8,260 5,763 7,616 22,860 16,340
Engineering, research and devel. 2,824 2,228 2,658 7,980 6,406
Selling, general and admin./(1)/ 2,495 1,937 2,406 7,167 6,911
----------- ----------- ----------- ----------- -----------
Total costs and expenses 13,579 9,928 12,680 38,007 29,657
----------- ----------- ----------- ----------- -----------
Income from operations 3,695 1,105 2,948 8,917 1,162
Other income (expense):
Interest income 621 23 119 767 69
Interest expense (107) (352) (250) (658) (951)
Other --- --- 30 5 10
----------- ----------- ----------- ----------- -----------
514 (329) (101) 114 (872)
----------- ----------- ----------- ----------- -----------
Income before income taxes 4,209 776 2,847 9,031 290
Income taxes 421 14 285 903 14
----------- ----------- ----------- ----------- -----------
Net income $ 3,788 $ 762 $ 2,562 $ 8,128 $ 276
=========== =========== =========== =========== ===========
Net income per share $ 0.18 $ 0.05 $ 0.14 $ 0.42 $ 0.02
=========== =========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding 21,404,777 16,775,226 18,768,793 19,325,054 16,525,130
=========== =========== =========== =========== ===========
</TABLE>
/(1)/ Selling, general and administrative expenses include a charge of
$1,405,000 for the write-off of certain assets related to a customer for
the nine month period ended June 30, 1995. See management's discussion
and analysis of financial condition and results of operations.
3
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------
June 30, 1996 June 30, 1995
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,128 $ 276
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,695 3,924
Change in assets and liabilities:
(Increase) decrease in:
Receivables, net (2,705) (609)
Inventories 34 (663)
Prepaid expenses (233) (306)
Other assets 119 192
Increase (decrease) in:
Accounts payable 330 14
Accrued expenses and other current liabilities 1,290 (442)
Deferred revenue (20) 50
------- -------
Net cash provided by operating activities 10,638 2,436
------- -------
Cash flows from investing activities:
Short-term investments --- 1,000
Capital expenditures (5,253) (1,393)
------- -------
Net cash used in investing activities: (5,253) (393)
------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations (4,441) (2,326)
Principal payments under term loan (2,494) (680)
Short-term borrowings (payments) (2,950) 700
Proceeds from issuance of common stock, net 48,378 1,271
------- -------
Net cash provided by (used in) financing activities 38,493 (1,035)
------- -------
Net increase in cash and cash equivalents 43,878 1,008
Cash and cash equivalents at beginning of period 6,315 4,171
------- -------
Cash and cash equivalents at end of period $50,193 $ 5,179
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 520 $ 951
======= =======
Income Taxes $ 198 $ ---
======= =======
</TABLE>
4
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL
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. All amounts are unaudited except the September 30, 1995
balance sheet. This report should be read in conjunction with the audited
financial statements presented in the 1995 Annual Report and the Prospectus
dated March 14, 1996. Footnotes and other disclosures which would substantially
duplicate the disclosures in the Company's audited financial statements for
fiscal year 1995 contained in the Annual Report and the Prospectus have been
omitted. The interim financial information herein is not necessarily
representative of the results to be expected for any subsequent period.
NOTE 2. COMPLETION OF PUBLIC OFFERING
During the quarter ended March 31, 1996, the Company completed a public
offering of 2,4000,000 shares of Common Stock at a price to the public of $18
per share which resulted in net proceeds before expenses of $40,608,000. The
Company granted the underwriters a 30-day option to purchase up to an additional
360,000 shares of Common Stock to cover overallotments. In April 1996, the
underwriters exercised this option in full which resulted in additional proceeds
to the Company of $6,091,200. For complete information regarding this offering,
please see the Company's Prospectus dated March 14, 1996.
5
<PAGE>
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, and Section 21E of the Securities Exchange Act of 1934, as amended, and
is subject to the safe harbor created by that section. Factors that
realistically 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 "Risk
Factors."
RESULTS OF OPERATIONS
Revenues
Total revenues in the third quarter of fiscal 1996 were $17,274,000, a 57%
increase over the $11,033,000 recorded in the third quarter of fiscal 1995 and a
11% increase over the $15,628,000 recorded in the prior quarter. For the nine
months ended June 30, 1996, total revenues were $46,924,000, a 52% increase over
the $30,819,000 recorded in the nine months ended June 30, 1995. The increase
in total revenues in the third quarter of 1996 and in the nine months ended June
30, 1996 was due to an increase in production revenues as a result of increased
shipments to customers in the telecommunications and automatic test equipment
markets. Production revenues for the third quarter of 1996 were $15,599,000, a
73% increase over the $9,035,000 recorded in the third quarter of fiscal 1995
and a 11% increase over the $14,021,000 recorded in the prior quarter. For the
nine months ended June 30, 1996, production revenues were $41,687,000, a 71%
increase over the $24,418,000 recorded in the nine months ended June 30, 1995.
Development revenues in the third quarter of fiscal 1996 were $1,675,000
compared to $1,998,000 in the third quarter of fiscal 1995 and $1,607,000 in the
prior quarter. For the nine months ended June 30, 1996, development revenues
were $5,237,000 compared to $6,401,000 in the comparable period a year ago.
Fluctuations in development revenues from quarter to quarter are typically due
to the variability in the timing of design wins and achievement of development
milestones.
Cost of Revenues
Cost of revenues as a percentage of total revenues in the third quarter of
fiscal 1996 was 47.8% compared to 52.2% in the third quarter of fiscal 1995 and
48.7% in the prior quarter. For the nine months ended June 30, 1996 and 1995,
cost of revenues as a percentage of total revenues was 48.7% and 53.0%,
respectively. The decrease in cost of revenues as a percentage of total
revenues was due to a reduction in per unit costs associated with increased
production, as well as an improvement in manufacturing yields.
6
<PAGE>
Engineering, Research and Development Costs
Engineering, research and development costs were $2,824,000 in the third
quarter of fiscal 1996 compared to $2,228,000 in the third quarter of fiscal
1995 and $2,658,000 in the prior quarter. For the nine months ended June 30,
1996, engineering, research and development costs were $7,980,000 compared to
$6,406,000 recorded in the nine months ended June 30, 1995. These 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 decreased to 16% in the third
quarter of 1996 from 20% in the third quarter of 1995 and 17% in the prior
quarter. For the nine months ended June 30, 1996, engineering, research and
development costs as a percentage of total revenues decreased to 17% from 21% in
the comparable period a year ago. These decreases were the result of the
Company's revenues growing faster than engineering, research and development
costs. The Company's engineering, research and development costs are expensed
as incurred. The Company intends to continue to increase the dollar amount of
engineering, research and development activities in the future.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $2,495,000 in the
third quarter of 1996, compared to $1,937,000 in the third quarter of 1995 and
$2,406,000 in the prior quarter. For the nine months ended June 30, 1996, SG&A
expenses were $7,167,000, compared to $6,911,000 in the same period in 1995.
Included in SG&A expenses for nine months ended June 30, 1995 is a charge in the
amount of $1,405,000 for the write-off of receivables, work-in-process
inventories and certain test hardware related to one of the Company's customers
which filed for bankruptcy in February 1995.
SG&A expenses for the third quarter of 1996 increased by 29% and 4% over
the third quarter of 1995, and the prior quarter respectively. For the nine
months ended June 30, 1996, SG&A expenses increased by 30% from the comparable
period in 1995 after taking into account the $1,405,000 charge recorded in 1995.
These increases were due to increased headcount, salary increases, higher
commissions resulting from increased sales, and increased advertising. As a
percentage of total revenues, SG&A expenses decreased to 14% in the third
quarter of 1996 from 18% in the third quarter of 1995 and 14% in the prior
quarter. For the nine months ended June 30, 1996, SG&A expenses, as a percentage
of total revenues, decreased to 15% from 18% in the comparable period a year ago
after taking into account the charge noted above. These decreases were the
result of the Company's revenues growing faster than SG&A expenses.
Interest Income
Interest income increased to $621,000 in the third quarter of fiscal 1996
from $23,000 in the third quarter of 1995 and $119,000 in the prior quarter.
For the nine months ended June 30, 1996, interest income increased to $767,000
from $69,000 in the comparable period a year ago. These increases were the
result of a higher average cash balance in the second and third quarters of
fiscal 1996 as compared to the prior periods, primarily due to the proceeds from
the Company's public offering.
7
<PAGE>
Interest Expense
Interest expense decreased to $107,000 in the third quarter of fiscal 1996
from $352,000 in the third quarter of fiscal 1995 and $250,000 in the prior
quarter. For the nine months ended June 30, 1996, interest expense decreased to
$658,000 from $951,000 in the comparable period a year ago. These decreases
were caused by a decline in the Company's average debt balance, primarily due to
an accelerated repayment of certain debt following the Company's public
offering.
Income Taxes
The Company recorded a provision for income taxes in the amount of $421,000
in the third quarter of fiscal 1996 principally for the federal and state
alternative minimum taxes, in light of the Company's existing net operating loss
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities:
The Company generated $10,638,000 and $2,436,000 from operating activities
in the nine month periods ended June 30, 1996 and 1995, respectively. The
increase in operating cash flow was principally due to an improvement in
profitability.
Investing Activities:
Capital expenditures, principally for manufacturing, test and engineering
equipment, were $5,253,000 in the nine month period ended June 30, 1996 compared
to $1,393,000 in the nine month period ended June 30, 1995. The Company intends
to continue investing in manufacturing, test and engineering equipment and
currently expects to spend approximately an additional $1 million for capital
expenditures in fiscal 1996, which the Company intends to finance with working
capital.
Financing Activities:
In April 1996, the Company completed a public offering of 2.76 million
shares of its common stock for net proceeds before expenses of $46,699,200.
Net cash generated by financing activities during the nine month period
ended June 30, 1996 was $38,493,000. Proceeds from the issuance of Common Stock
pursuant to the public offering and the Company's stock option plans and stock
purchase plan were $48,378,000. This was offset by $9,885,000 in payment of debt
obligations.
The Company has a revolving line of credit agreement with a bank, which
expires on January 5, 1997. The maximum amount available under the revolving
line of credit is the lower of (i) $12,500,000 less the amounts outstanding
under the Company's term loans with the bank or (ii) 80% of the outstanding
eligible accounts receivable less the amounts outstanding on the
8
<PAGE>
Company's term loans. The interest rate on borrowings under this revolving line
of credit is equal to the bank's prime rate plus 0.5%. As of June 30, 1996 there
were no amounts outstanding under this agreement.
Management believes that the Company's cash flow from operations and
revolving line of credit agreement are adequate to finance its planned growth
and operating needs for the next 12 months. The Company believes it can meet its
wafer fabrication needs through 1997 at its Camarillo plant by adding
manufacturing personnel and acquiring additional manufacturing equipment. The
Company has announced that it will begin construction of a new fabrication
facility in 1997 and have it operational in fiscal 1998. The Company estimates
that the cost of the new facility will be at least $75 million which it
currently intends to fund out of cash and operating cash flow. However, in the
event that the funding needs of the new facility exceed the Company's cash
availability, the Company may be required to secure additional financing for the
construction of the facility. There can be no assurance that such financing will
be available on a timely basis or on acceptable terms and, as a result, that the
facility will be built on a timely basis or at all. Failure to receive adequate
funding or to complete the facility on a timely basis could have a material
adverse effect on the Company's business, operating results and financial
condition.
9
<PAGE>
RISK FACTORS
CUSTOMER AND INDUSTRY CONCENTRATION
The Company is, and intends to continue, focusing its sales efforts on a
relatively small number of companies in the telecommunications, data
communications and ATE markets that require high performance ICs. Certain of
these companies are also competitors of Vitesse.
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly results of operations have varied significantly in
the past and may continue to do so in the future. These variations have been due
to a number of factors, including: the loss of major customers; variations in
manufacturing yields; the timing and level of new product and process
development costs; changes in inventory levels; changes in the type and mix of
products being sold; changes in manufacturing capacity and variations in the
utilization of this capacity; and customer design changes, delays or
cancellations. The Company has also from time to time incurred significant new
product and process development costs due to the Company's policy of expensing
costs as incurred relating to the manufacture of new products and the
development of new process technology. There can be no assurance that the
Company will not incur such charges or experience revenue declines in the
future.
PRODUCT AND PROCESS DEVELOPMENT AND TECHNOLOGICAL CHANGE
The market for the Company's products is characterized by rapid changes in
both product and process technologies. The Company believes that its future
success will depend, in part, upon its ability to continue to improve its
product and process technologies and develop new technologies in order to
maintain its competitive position, to adapt its products and processes to
technological changes and to adopt emerging industry standards. There can be no
assurance that the Company will be able to improve its product and process
technologies and develop new technologies in a timely manner or that such
improvements or developments will result in products that achieve market
acceptance. The failure to successfully improve its existing technologies or
develop new technologies in a timely manner could adversely affect the Company's
business, operating results and financial condition.
DEPENDENCE ON THIRD PARTIES
The Company depends upon third parties for performing certain processes and
providing a variety of components and materials necessary for the production of
its H-GaAs ICs. The Company packages certain of its ICs in its Camarillo
facility using customized ceramic packaging which is presently available from
only one source. The balance of the Company's ICs are packaged in plastic by
third parties since the Company has no internal capability to perform such
plastic packaging. Other components and materials for H-GaAs ICs are available
from only a limited number of sources. The inability to obtain sufficient sole-
or limited-source services or components as required could result in delays or
reductions in product shipments which could adversely affect the Company's
business, operating results and financial condition.
10
<PAGE>
VARIABILITY OF MANUFACTURING YIELDS
The Company's manufacturing yields vary significantly among products,
depending on a particular IC's complexity and the Company's experience in
manufacturing it. Historically, the Company has experienced difficulties
achieving acceptable yields on some ICs, which has resulted in shipment delays.
The Company's overall yields are lower than yields experienced in a silicon
process because of the large number of different products manufactured in
limited volume and because the Company's H-GaAs process technology is
significantly less developed. The Company expects that many of its current and
future products may never be produced in volume.
Regardless of the process technology used, the fabrication of
semiconductors is a highly complex and precise process. Defects in masks,
impurities in the materials used, contamination of the manufacturing
environment, equipment failure and other difficulties in the fabrication process
can cause a substantial percentage of wafers to be rejected or numerous die on
each wafer to be nonfunctional.
Because the majority of the Company's costs of manufacturing are relatively
fixed, maintenance of the number of shippable die per wafer is critical to the
Company's results of operations. Yield decreases can result in substantially
higher unit costs and may result in reduced gross profit and net income. There
can be no assurance that the Company will not suffer periodic yield problems in
connection with new or existing products which could cause the Company's
business, operating results and financial condition to be materially adversely
affected.
Inventory is valued at the lower of cost or market. Because allocable
manufacturing costs can be high, new product inventory is often valued at
market. In addition, a portion of work-in-process inventory consists of wafers
in various stages of fabrication. Consequently, the Company estimates yields
per wafer in order to estimate the value of inventory. If yields are materially
different than projected, work-in-process inventory may need to be revalued. In
addition, the ability of customers to change designs and to cancel or reschedule
orders can also result in adverse adjustments to inventory. There can be no
assurance that such adjustments will not occur in the future and have a material
adverse effect on the Company's results of operations.
11
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) EXHIBITS
The following Exhibit is filed in connection with the Registrant's
electronic filing:
27. Financial Statement Schedules.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the 3 month period ended June
30, 1996.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITESSE SEMICONDUCTOR CORPORATION
By: /s/ Eugene F. Hovanec
-----------------------------------
Eugene F. Hovanec
Vice President, Finance and
Chief Financial Officer
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1996 SEP-30-1996
<PERIOD-START> APR-01-1996 OCT-01-1996
<PERIOD-END> JUN-30-1996 JUN-30-1996
<CASH> 50,193 50,193
<SECURITIES> 0 0
<RECEIVABLES> 15,936 15,936
<ALLOWANCES> 700 700
<INVENTORY> 9,861 9,861
<CURRENT-ASSETS> 76,264 76,264
<PP&E> 36,419 36,419
<DEPRECIATION> 22,999 22,999
<TOTAL-ASSETS> 90,332 90,332
<CURRENT-LIABILITIES> 8,034 8,034
<BONDS> 792 792
0 0
0 0
<COMMON> 131,337 131,337
<OTHER-SE> (49,831) (49,831)
<TOTAL-LIABILITY-AND-EQUITY> 90,332 90,332
<SALES> 17,274 46,924
<TOTAL-REVENUES> 17,274 46,924
<CGS> 8,260 22,860
<TOTAL-COSTS> 13,579 38,007
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 107 658
<INCOME-PRETAX> 4,209 9,031
<INCOME-TAX> 421 903
<INCOME-CONTINUING> 3,788 8,128
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,788 8,128
<EPS-PRIMARY> 0.18 0.42
<EPS-DILUTED> 0.18 0.42
</TABLE>
