<PAGE>
FILED PURSUANT TO RULE 424(B)(1)
REGISTRATION NO. 333-14695
PROSPECTUS
3,000,000 SHARES
[LOGO OF VITESSE SEMICONDUCTOR CORPORATION]
COMMON STOCK
-------------
All of the 3,000,000 shares of Common Stock, par value $.01 per share, being
offered hereby (the "Offering") are being sold by Vitesse Semiconductor
Corporation ("Vitesse" or the "Company").
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "VTSS." The last sale price for the Common Stock on November 13, 1996,
as reported on the Nasdaq National Market, was $37.00 per share. See "Price
Range of Common Stock."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.......................... $36.00 $1.62 $34.38
- --------------------------------------------------------------------------------
Total(3)........................... $108,000,000 $4,860,000 $103,140,000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of the Offering of $300,000 payable by
the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 450,000 shares of Common Stock solely to cover over-
allotments, if any. If such option is exercised in full, the total Price
to Public, Underwriting Discounts and Commissions and Proceeds to Company
will be $124,200,000, $5,589,000 and $118,611,000, respectively. See
"Underwriting."
-------------
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
Underwriters and to certain further conditions. It is expected that delivery
of the shares will be made at the offices of Lehman Brothers Inc., New York,
New York, on or about November 19, 1996.
-------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
OPPENHEIMER & CO., INC.
November 13, 1996
<PAGE>
[VITESSE LOGO]
Telecommunications
[BACKGROUND OF PAGE -
MANY OF THE COMPANY'S HIGH-PERFOR- AN INTEGRATED CIRCUIT]
MANCE H-GAAS ICS ARE USED IN THE
TELECOMMUNICATIONS MARKET. THE
COMPANY'S PRODUCTS ADDRESS FIBER
OPTIC APPLICATIONS USING THE [PICTURE OF VSC8101, VSC8102
SONET/SDH AND ATM STANDARDS THAT AND VSC8110 ICs.]
REQUIRE DATA TRANSMISSION RATES AS
HIGH AS 10 GIGABITS PER SECOND.
THE VSC8101 AND VSC8102 ICS, SHOWN
TO THE RIGHT, IMPLEMENT COMPLETE
CLOCK AND DATA RECOVERY FUNCTIONS
FOR SONET STS-3 SYSTEMS. THE
VSC8110, ALSO SHOWN TO THE RIGHT,
IS A SONET/SDH AND ATM-COMPATIBLE
TRANSCEIVER WHICH INTEGRATES HIGH-
SPEED CLOCK GENERATION WITH 8-BIT
SERIAL-TO-PARALLEL AND PARALLEL-
TO-SERIAL CONVERSION.
Data
Communications
IN THE DATA COMMUNICATIONS MARKET,
THE COMPANY TARGETS HIGH-PERFOR-
[PICTURE OF VSC7125 ICs] MANCE SYSTEMS WHICH ARE DESIGNED
WITH THE FIBRE CHANNEL STANDARD FOR
HIGH-SPEED COMPUTER TO PERIPHERAL
APPLICATIONS. VITESSE'S H-GAAS ICS
ENABLE TRANSMISSION OF DATA OVER
SERIAL CHANNELS WITH RATES IN EX-
CESS OF 1 GIGABIT PER SECOND. THE
VSC7125 TRANSCEIVER ICS, SHOWN TO
THE LEFT, SUPPORT THE FIBRE CHANNEL
STANDARD AT 1.0625 GIGABITS PER
SECOND.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission in accordance with the Exchange Act
may be inspected and copied at the public reference facilities of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: 7 World
Trade Center, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp
Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, such material concerning the Company can be inspected at the offices
of the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission also maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants that file electronically with the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed or to be filed with the Commission under the
Exchange Act, are hereby incorporated by reference into this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996;
(b) The Company's Current Report on Form 8-K dated October 30, 1996; and
(c) The description of the Company's Common Stock set forth in its
Registration Statement on Form 8-A dated November 8, 1991.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently-filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom a copy of this Prospectus is delivered, upon the
written or oral request of any such person, a copy of any or all of the
documents referred to above which have been incorporated by reference herein
(other than exhibits to such documents which are not specifically incorporated
by reference into such documents). Such requests should be directed to Eugene
F. Hovanec, Vice President, Finance, and Chief Financial Officer, Vitesse
Semiconductor Corporation, 741 Calle Plano, Camarillo, California 93012;
telephone: (805) 388-3700.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements and Notes thereto appearing elsewhere
in this Prospectus. See "Risk Factors" for information that should be
considered by prospective investors.
THE COMPANY
Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leader in
the design, development, manufacturing and marketing of digital gallium
arsenide ("GaAs") integrated circuits ("ICs"). The Company's products
incorporate its proprietary H-GaAs (high integration gallium arsenide)
technology to produce high-performance ICs primarily for telecommunications,
data communications and automated test equipment ("ATE") systems providers. The
Company believes H-GaAs technology provides significant advantages over
silicon-based IC technologies in addressing the combination of speed, power
dissipation and complexity requirements of these high-performance systems
providers. In fiscal 1996, sales of telecommunications, data communications and
ATE products represented 52%, 8% and 24%, respectively, of the Company's total
revenues. The Company's major customers include Lucent, Alcatel, Credence,
Ericsson, Schlumberger, Seagate, Tellabs and Teradyne.
The limitations of silicon-based CMOS (complementary metal oxide
semiconductor), BiCMOS (bipolar complementary metal oxide semiconductor) and
ECL (emitter coupled logic) ICs have become more pronounced as the requirements
of telecommunications, data communications and ATE systems providers have
increased. GaAs has inherent physical properties that allow electrons to move
several times faster than within silicon. This higher electron mobility enables
the Company's ICs to operate at significantly higher speeds than silicon
devices or to operate at the same speeds with reduced power dissipation.
Within the telecommunications market, the Company's products are used in
high-growth segments including SONET/SDH. In addition, the Company has
introduced products for the ATM market. Dataquest Incorporated ("Dataquest")
estimates that the worldwide SONET/SDH IC market targeted by the Company will
increase from approximately $125 million in 1996 to approximately $525 million
in 2000. SONET/SDH transmission systems installed by network providers
generally operate at 2.488 GHz and above, a level which the Company believes
can be practicably addressed by the Company's H-GaAs technology but not by
silicon-based ICs. To date, most of the Company's revenues in the
telecommunications market have been from sales of SONET/SDH products.
In the data communications market, the Company targets high-performance
systems that are based on the emerging Fibre Channel standard for high-speed
computer to peripheral applications. Currently, the most prominent use of Fibre
Channel technology is in high-density rigid disk drives of 1 gigabyte or
greater. The Company believes that its H-GaAs solutions for this market offer
greater performance with lower power dissipation than competing silicon ICs.
In the ATE market, the Company believes that CMOS and BiCMOS silicon ICs are
too slow and the high power dissipation in ECL silicon ICs limits their
integration capabilities. The Company believes that the low power dissipation
and high complexity of the Company's H-GaAs ICs, which permit systems to be
built with fewer ICs, are well suited for the increasingly demanding
requirements of present generation ATE equipment.
A key element of the Company's H-GaAs technology is its manufacturing process
for GaAs ICs used at its own fabrication facility. Vitesse developed the first
commercially available self-aligned gate ("SAG") technology for GaAs. SAG
technology is universally used in manufacturing high-complexity silicon ICs. By
utilizing a proprietary means of applying SAG technology to GaAs, Vitesse
enables its products to be manufactured using a variety of wafer fabrication
equipment and techniques commonly used in silicon IC technology. Similarly, the
Company endeavors to make the process of designing its GaAs products
transparent to the designer when compared to the design process for silicon
ICs, allowing designs to be conducted using methodologies and CAD tools
essentially identical to those used to design silicon products.
The Company was incorporated under the laws of Delaware on February 3, 1987
and purchased substantially all of the assets relating to the design and
manufacture of GaAs ICs from Vitesse Electronics Corporation, a corporation
originally incorporated under the laws of Delaware on July 19, 1984. The
Company's principal executive offices are located at 741 Calle Plano,
Camarillo, California 93012, and its telephone number is (805) 388-3700.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock to be Offered by the Company.. 3,000,000 shares
Common Stock to be Outstanding after the
Offering.................................. 22,406,527 shares(l)
Use of Proceeds............................ Fund the site purchase, construction and
equipping of a new wafer fabrication facility
and the expansion of production capacity of
the Company's existing facility, and for
general corporate purposes, including working
capital
Nasdaq National Market Symbol.............. VTSS
</TABLE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
-------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Total revenues..................... $37,310 $ 26,364 $35,581 $42,882 $ 66,046
Income (loss) from operations...... 998 (18,238) (3,233) 2,788 13,432
Net income (loss).................. 704 (19,069) (4,141) 1,507 12,645
Net income (loss) per share(2)..... $ 0.05 $ (1.32) $ (0.28) $ 0.09 $ 0.63
Weighted average common and common
equivalent shares outstanding used
in computing per share amounts(2). 14,128 14,405 14,773 17,307 20,144
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------
AS
ACTUAL ADJUSTED(3)
-------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................................ $ 70,215 $173,055
Total assets............................................... 100,416 203,256
Total current liabilities.................................. 11,640 11,640
Long-term obligations, less current installments(4)........ 406 406
Net shareholders' equity................................... 88,370 191,210
</TABLE>
- --------
(1) Based on shares outstanding as of September 30, 1996. Excludes shares of
Common Stock issuable upon exercise of outstanding options. See
"Capitalization."
(2) See Note 1 of Notes to Financial Statements.
(3) Adjusted to reflect the sale by the Company of the 3,000,000 shares of
Common Stock offered hereby after deducting underwriting discounts and
commissions and estimated offering expenses and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(4) See Notes 3 and 4 of Notes to Financial Statements.
----------------
Certain statements in this Prospectus, including certain statements contained
in "Risk Factors," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business," constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Exchange Act. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements.
Vitesse, the Vitesse logo and H-GaAs are trademarks of the Company. This
Prospectus also includes trademarks of companies other than the Company.
This Prospectus also includes information from Dataquest. This information
only represents Dataquest's estimates and is in no way intended to represent
facts.
----------------
Except as otherwise noted herein, information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option.
5
<PAGE>
RISK FACTORS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act that
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth below and elsewhere in
this Prospectus. The following risk factors should be carefully considered
before purchasing the Common Stock offered hereby.
ACCEPTANCE OF H-GAAS BY TARGET MARKETS
ECL and BiCMOS are currently the dominant process technologies for high-
performance ICs. Vitesse's prospective customers are principally systems
designers and manufacturers in the telecommunications, data communications and
ATE industries that may use ECL or BiCMOS ICs in their existing systems and
evaluate Vitesse H-GaAs ICs for use in their next-generation systems. These
customers may be reluctant to adopt Vitesse's products because of perceived
risks relating to GaAs technology generally and concerns about the relative
speed, complexity, power dissipation and cost-effectiveness of the Company's
H-GaAs products compared to ECL and BiCMOS ICs. In addition, these customers
may be reluctant to rely upon a relatively small company such as Vitesse for a
critical sole-sourced component. There can be no assurance that additional
companies in Vitesse's target markets will adopt its H-GaAs technology or that
the companies that currently use the Company's H-GaAs products will continue
to do so in the future. See "Business--Strategy" and "--Competition."
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 have 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. 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. 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 or
financial condition to be materially and adversely affected. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview" and "Business--Manufacturing."
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. In fiscal 1995 and 1996,
sales to Lucent accounted for 17% and 25%, respectively, of the Company's
total revenues and sales to H. Y. Associates Co., Ltd., the Company's Japanese
distributor, accounted for 19% and 11%, respectively, of the Company's total
revenues.
6
<PAGE>
The Company's ten largest customers accounted for approximately 70% of total
revenues in fiscal 1995 and 75% of total revenues in fiscal 1996.
Prior to fiscal 1995, the supercomputer industry represented a significant
portion of the Company's revenues. In particular, the Company's largest
supercomputer customer represented $17,500,000, or 47%, of total revenues in
fiscal 1992 but currently represents an insignificant portion of the Company's
total revenues. While the Company no longer focuses on the supercomputer
industry, there can be no assurance that the Company's customers in the
telecommunications, data communications and ATE industries, on which the
Company currently depends, will continue to place orders with the Company. If
the Company were to lose a major customer or if orders by a major customer
were to otherwise decrease or be delayed, including reductions due to market
or competitive conditions, the Company's business, operating results or
financial condition could be materially adversely affected. See "Business--
Products and Customers."
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. For example, the Company wrote off $1.4 million in the second
quarter of fiscal 1995 as the result of the bankruptcy of a major
supercomputer customer. 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview" and "--Quarterly Results of
Operations."
MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY
The Company currently manufactures all of its ICs at its four-inch wafer
fabrication facility located in Camarillo, California. The Company believes
that this facility should be able to satisfy its production needs through the
end of fiscal 1998, assuming that the Company successfully completes planned
substantial incremental increases in production capacity at the facility
through such date. The Company plans to use up to $10 million of the proceeds
of this Offering for the purchase of equipment related to the expansion. In
addition to the purchase of equipment, the Company will be required to
successfully hire, train and manage additional production personnel in order
to successfully increase its production capacity in accordance with its time
schedule. In the event the Company's expansion plans were not implemented on a
timely basis for any reason, the Company could become subject to production
capacity constraints. Such constraints could have a material adverse effect on
the Company's business, operating results or financial condition.
The Company is currently in the process of planning and beginning
construction of a new six-inch wafer fabrication facility in Colorado Springs,
Colorado, to supplement its existing facility in Camarillo. As planned, the
facility will initially include a 10,000 square foot Class 1 clean room with
the capability for future expansion to 15,000 square feet. The Company plans
to initiate construction of the new facility during the first quarter of
fiscal 1997 and to complete the physical plant during the fourth quarter of
fiscal 1997. Following the completion of the physical plant, the Company must
install equipment and perform necessary testing prior to commencing commercial
production at the facility, a process which the Company anticipates will take
at least nine months. Accordingly, the Company believes the new facility will
not begin commercial production prior to the fourth quarter of fiscal 1998.
The Company estimates that the cost of the new wafer fabrication facility will
be at least $70 million, of which approximately $25 million relates to the
purchase of land and construction of the building and approximately $45
million relates to capital equipment purchases. The Company intends to fund
the cost of the facility with a portion of the proceeds of this Offering. In
the event the Company were to decide to expand the Class 1 clean room in the
future, substantial additional expenditures would be required.
7
<PAGE>
The construction of the new wafer fabrication facility entails significant
risks, including shortages of materials and skilled labor, unavailability or
late delivery of process equipment, unforeseen environmental or engineering
problems, work stoppages, weather interferences and unanticipated cost
increases, any of which could have a material adverse effect on the building,
equipping and production start-up of the new facility. In addition, unexpected
changes or concessions required by local, state or federal regulatory agencies
with respect to necessary licenses, land use permits, site approvals and
building permits could involve significant additional costs and delay the
scheduled opening of the facility. As a result of the foregoing and other
factors, there can be no assurance that the project will be successfully
completed within its current budget or within the timeframe currently
scheduled by the Company. The inability of the Company to successfully
complete the new facility as currently budgeted and scheduled could have a
material adverse effect on its business, operating results or financial
condition.
The successful operation of the new wafer fabrication facility, if
completed, as well as the Company's overall production operations, will also
be subject to numerous risks. The Company has no prior experience with the
operation of equipment or the processes involved in producing finished six-
inch wafers, which differ significantly from those involved in the production
of four-inch wafers. The Company will be required to hire, train and manage
production personnel successfully in order to effectively operate the new
facility. The Company does not have excess production capacity at its
Camarillo facility to offset any failure of the new facility to meet planned
production goals. As a result of these and other factors, the failure of the
Company to successfully operate the new wafer fabrication facility would have
a material adverse effect on its business, operating results or financial
condition. The Company will also have to effectively coordinate and manage the
Colorado Springs and Camarillo facilities to successfully meet its overall
production goals. The Company has no experience in coordinating and managing
full scale production facilities which are located at different sites. The
failure to successfully coordinate and manage the two sites would adversely
affect the Company's overall production and would have a material adverse
effect on its business, operating results or financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
COMPETITION
The high-performance semiconductor market is highly competitive and subject
to rapid technological change, price erosion and heightened international
competition. The telecommunications, data communications and ATE industries,
which are the primary target markets for the Company, are also becoming
intensely competitive because of deregulation and heightened international
competition, among other factors. In the telecommunications market, the
Company competes primarily against other GaAs-based companies such as Triquint
Semiconductor and the GaAs fabrication operations of system companies such as
Rockwell. In the data communications and the ATE markets, the Company competes
primarily against silicon ECL and BiCMOS products offered principally by
semiconductor manufacturers such as Fujitsu, Hewlett-Packard, Motorola,
National Semiconductor and Texas Instruments, and bipolar silicon IC
manufacturers such as Applied Micro Circuits Corporation and Synergy
Semiconductor Corporation. Many of these companies have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
In addition, in lower-frequency applications, the Company faces increasing
competition from CMOS-based products, particularly as the performance of such
products continues to improve.
Competition in the Company's markets for high-performance ICs is primarily
based on price/performance, product quality and the ability to deliver
products in a timely fashion. Some prospective customers may be reluctant to
adopt Vitesse's products because of perceived risks relating to GaAs
technology. In addition, product qualification is typically a lengthy process
and certain prospective customers may be unwilling to invest the time or incur
the costs necessary to qualify suppliers such as the Company. Prospective
customers may also have concerns about the relative speed, complexity and
power advantages of the Company's products compared to more familiar ECL or
BiCMOS semiconductors or about the risks associated with relying on a
relatively small company for a critical sole-sourced component.
8
<PAGE>
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 or financial condition. See "Business--
Engineering, Research and Development."
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 that 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-source 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 or financial condition. See "Business--
Manufacturing."
REQUIRED INCREASE IN AUTHORIZED SHARES; POTENTIAL USE OF PROCEEDS AND CASH-OUT
OF OPTIONS
As of September 30, 1996, the Company had outstanding options to purchase
3,258,026 shares of Common Stock pursuant to its stock option plans, as
amended to date, of which options to purchase 1,805,193 shares have vested or
will vest on or prior to November 30, 1997. In addition, the Company has
granted and anticipates that it will continue to grant additional stock
options in the ordinary course after September 30, 1996, which options will be
subject to vesting. The Company presently has 25,000,000 shares of Common
Stock authorized. If all granted options outstanding as of September 30, 1996
were exercised and all of the Company's shares issuable pursuant to the
Company's Employee Stock Purchase Plan were issued, then upon the issuance of
the shares offered hereby and the exercise in full of the Underwriters' over-
allotment option, the Company's issued shares of Common Stock would exceed the
number of authorized shares of Common Stock by 1,458,003 shares. In order to
address this shortage, the Board of Directors has authorized an amendment to
the Company's Certificate of Incorporation to increase the number of shares of
authorized Common Stock to 60,000,000 shares, and intends to submit such
amendment for approval by the Company's shareholders at the next annual
meeting, presently scheduled to take place in the first quarter of 1997. In
the event such amendment is not approved by the Company's shareholders, the
Company may purchase shares of its Common Stock on the open market at
prevailing prices to cover the exercise of outstanding stock options which
vest and become exercisable after November 30, 1997. Alternatively, the
Company may reach agreement with option holders to make cash payments in
exchange for cancellation of outstanding options. In the event any such
purchases in the open market are effected or such cash payments are made upon
cancellation of options, the Company may use a portion of the proceeds of this
Offering for such purposes.
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned wafer fabrication facility in Colorado
Springs, Colorado, or could require the Company to acquire costly equipment or
incur other significant expenses to comply with environmental regulations or
clean up prior discharges.
9
<PAGE>
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California and Colorado have resulted in
restrictions being placed on water use by manufacturers and residents in the
states. In the event of future drought, reductions in water use may be
mandated generally, and it is unclear how such reductions will be allocated
among California's or Colorado's different users. No assurance can be given
that near term reductions in water allocations to manufacturers will not
occur, possibly requiring a reduction in the Company's level of production,
and materially and adversely affecting the Company's operations. See
"Business--Environmental Matters."
MANAGEMENT OF GROWTH
The management of the Company's growth requires qualified personnel and
systems. In particular, the construction and operation of the Company's
planned wafer fabrication facility in Colorado Springs and its integration
with the Company's current facility will require significant management,
technical and administrative resources. There can be no assurance that the
Company will be able to manage its growth or effectively integrate its planned
wafer fabrication facility, and failure to do so could have a material adverse
effect on the Company's business, operating results or financial condition.
DEPENDENCE UPON KEY PERSONNEL
The Company's success depends in part upon attracting and retaining the
services of its managerial and technical personnel. The competition for
qualified personnel is intense. There can be no assurance that the Company can
retain its key managerial and technical employees or that it can attract,
assimilate or retain other skilled technical personnel in the future, and
failure to do so could have a material adverse effect on the Company's
business, operating results or financial condition. See "Business--Employees"
and "Management."
RISKS ASSOCIATED WITH UNALLOCATED PROCEEDS OF OFFERING
The Company currently intends to use a portion of the net proceeds of the
Offering for the building and equipping of a new wafer fabrication facility in
Colorado Springs, Colorado, and for the expansion of the production capacity
at its wafer fabrication facility in Camarillo, California. The total cost of
the planned Colorado Springs facility is currently estimated to be $70
million, of which approximately $25 million relates to the purchase of land
and construction of the building and $45 million relates to capital equipment
purchases. The Company intends to expend up to $10 million for the expansion
of the production capacity of the Camarillo wafer fabrication facility.
Except for funding of the proposed new wafer fabrication facility in
Colorado Springs and the expansion of the production capacity of its Camarillo
facility, the Company has not designated any specific use for the remaining
net proceeds from the sale by the Company of the Common Stock offered hereby.
However, the Company may use a portion of the net proceeds for the potential
repurchase of its Common Stock in the open market for issuance of shares
relating to certain stock options or to make cash payments in exchange for
such options. See "--Required Increase in Authorized Shares; Potential Use of
Proceeds and Cash-Out of Options." The Company intends to use the remaining
net proceeds primarily for working capital and general corporate purposes,
including the potential investment in or acquisition of complementary
businesses, products or technologies. The Company does not currently have any
agreements regarding such potential investments or acquisitions, nor is it in
negotiations regarding any such potential investments or acquisitions.
Accordingly, management will have significant flexibility in applying the net
proceeds from the Offering. There can be no assurance that any unused net
proceeds can or will be invested to yield a significant return. See "--
Manufacturing Capacity Limitations; New Production Facility," "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
10
<PAGE>
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock has been, and is likely to
continue to be, subject to wide fluctuations in response to quarterly
variations in operating results of the Company or its competitors,
announcements of technological innovations or new products by the Company or
its competitors, changes in earnings estimates by analysts and other events or
factors. In addition, the stock market has experienced extreme price and
volume fluctuations which have particularly affected the stock price of many
high-technology companies including the Company. Such fluctuations may
adversely affect the market price of the Company's Common Stock. See "Price
Range of Common Stock."
EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 10,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any shares of
Preferred Stock that may be issued in the future. Although the Company
presently has no intention to issue shares of Preferred Stock, such issuance,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. In addition, such Preferred Stock may have other rights,
including economic rights, senior to the Common Stock, and, as a result, the
issuance thereof could have a material adverse effect on the market value of
the Common Stock. Furthermore, the Company is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law, which
prohibit the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person first becomes an "interested stockholder,"
unless the business combination is approved in a prescribed manner. The
application of Section 203 could also have the effect of delaying or
preventing a change of control of the Company. Certain other provisions of the
Company's Certificate of Incorporation and Bylaws, as amended to date, may
have the effect of delaying or preventing changes of control or management of
the Company, which could adversely affect the market price of the Common
Stock. These provisions include, among others, provisions: (i) requiring
advance notice for nominating directors or bringing other business before
shareholder meetings, (ii) permitting the Board of Directors to consider
matters other than the price to be paid to shareholders in evaluating proposed
acquisitions of the Company, (iii) requiring specific minimum shareholder
votes to remove directors, either with or without cause and (iv) limiting the
persons able to, and the procedures for, calling a special meeting of the
shareholders. In addition, under the proposed lease financing arrangement
relating to its proposed Colorado Springs, Colorado, wafer fabrication
facility which the Company is currently negotiating, the Company would be
restricted from entering into certain merger or change of control
transactions. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock being offered hereby, after deducting the underwriting discounts
and commissions and estimated offering expenses, are estimated to be
$102,840,000 ($118,311,000 if the Underwriters' over-allotment option is
exercised in full). The Company currently intends to use approximately $70
million of the net proceeds for the construction and equipping of a new wafer
fabrication facility in Colorado Springs, Colorado, and up to $10 million of
the net proceeds for the expansion of the production capacity of its
Camarillo, California, wafer fabrication facility. The Company may also use a
portion of the net proceeds for the potential purchase of shares of its Common
Stock in the open market for issuance relating to certain stock options or to
make cash payments in exchange for such options. In addition, the Company may
use a portion of the net proceeds from the Offering for the investment in or
acquisition of complementary businesses, products or technologies. The Company
does not currently have any agreements regarding such potential investments or
acquisitions, nor is it in negotiations regarding any such potential
investments or acquisitions. Any remaining net proceeds are expected to be
used to provide funds for working capital and general corporate purposes.
Pending such uses, the net proceeds of the Offering will be invested in short-
term, investment-grade, income-producing investments. See "Risk Factors--
Required Increase in Authorized Shares; Potential Use of Proceeds and Cash-Out
of Options" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK
The Common Stock has been trading publicly on the Nasdaq National Market
under the symbol "VTSS" since December 11, 1991, the first trading date of the
Common Stock in the Company's initial public offering. The following table
sets forth, for the periods indicated, the range of quarterly high and low
closing sales prices for the Common Stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- ---------
<S> <C> <C>
Fiscal 1995
First Quarter........................................ $ 5 5/8 $ 4 1/4
Second Quarter....................................... 5 7/8 4 3/8
Third Quarter........................................ 8 1/8 4 9/16
Fourth Quarter....................................... 14 1/4 7 11/16
Fiscal 1996
First Quarter........................................ 13 7/8 10 5/8
Second Quarter....................................... 23 3/4 10 3/8
Third Quarter........................................ 33 7/8 18
Fourth Quarter....................................... 43 1/8 21
Fiscal 1997
First Quarter (through November 13, 1996)............ 42 5/8 31 1/4
</TABLE>
As of September 30, 1996, there were approximately 532 holders of record of
the Common Stock. On November 13, 1996, the last reported sale price on the
Nasdaq National Market for the Common Stock was $37.00 per share.
DIVIDEND POLICY
The Company has not paid cash dividends on its capital stock. The Company's
bank line of credit agreement prohibits the payment of dividends without the
bank's consent. In addition, the Company is restricted from paying or
declaring cash dividends to its shareholders pursuant to the terms of a Master
Lease Agreement dated October 30, 1996 by and between the Company and
LeasePlan North America, Inc. The Company currently anticipates that it will
retain all available funds for use in the operation and expansion of its
business and does not anticipate paying any cash dividends in the foreseeable
future. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and Notes 5 and 13 of
Notes to Financial Statements.
12
<PAGE>
CAPITALIZATION
The following table sets forth the current installments of long-term
obligations and the capitalization of the Company as of September 30, 1996 and
as adjusted as of such date to reflect the sale of the Common Stock offered
hereby after deducting the estimated underwriting discounts and commissions
and offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current installments of long-term obligations ........... $ 931 $ 931
======== ========
Long-term obligations, less current installments(l)...... $ 406 $ 406
Shareholders' equity(2):
Preferred stock, $.01 par value; 10,000,000 shares
authorized, none issued and outstanding............... -- --
Common stock, $.0l par value; 25,000,000 shares
authorized; actual:
19,406,527 shares issued and outstanding; as adjusted:
22,406,527 shares issued and outstanding.............. 194 224
Additional paid-in capital............................. 133,490 236,300
Accumulated deficit.................................... (45,314) (45,314)
-------- --------
Net shareholders' equity............................. 88,370 191,210
-------- --------
Total capitalization................................. $ 88,776 $191,616
======== ========
</TABLE>
- --------
(1) See Notes 3 and 4 of Notes to Financial Statements.
(2) Assumes no exercise of outstanding stock options. As of September 30,
1996, there were options outstanding to purchase a total of 3,258,026
shares of Common Stock at a weighted average exercise price of $7.52 per
share and 959,665 shares available for grant of future options under the
Company's 1987 Incentive Stock Option Plan, 1989 Stock Option Plan, 1991
Stock Option Plan, 1991 Director's Stock Option Plan and 1991 Employee
Stock Purchase Plan.
13
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Financial Statements and the Notes thereto included elsewhere herein. The
statements of operations data set forth below with respect to the fiscal years
ended September 30, 1994, 1995, and 1996, and the balance sheet data at
September 30, 1995 and 1996, are derived from, and are qualified by reference
to, the audited Financial Statements included elsewhere in this Prospectus,
which audited Financial Statements have been audited by KPMG Peat Marwick LLP,
and should be read in conjunction with those Financial Statements and Notes
thereto. The statements of operations data with respect to the fiscal years
ended September 30, 1992 and 1993 and the balance sheet data at September 30,
1992, 1993 and 1994, are derived from audited Financial Statements not
included herein.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues, net:
Production..................... $28,612 $ 17,692 $26,238 $34,703 $ 59,491
Development.................... 8,698 8,672 9,343 8,179 6,555
------- -------- ------- ------- --------
Total revenues.............. 37,310 26,364 35,581 42,882 66,046
------- -------- ------- ------- --------
Costs and expenses:
Cost of revenues............... 19,738 27,153 22,226 22,505 31,792
Engineering, research and
development................... 9,301 9,632 8,794 8,689 11,045
Selling, general and
administrative................ 7,273 7,817 7,794 8,900 9,777
------- -------- ------- ------- --------
Total costs and expenses.... 36,312 44,602 38,814 40,094 52,614
------- -------- ------- ------- --------
Income (loss) from operations... 998 (18,238) (3,233) 2,788 13,432
Other income (expense):
Interest income................ 770 402 134 93 1,364
Interest expense............... (1,226) (1,218) (1,111) (1,304) (772)
Other.......................... 9 21 86 9 26
------- -------- ------- ------- --------
Total other income
(expense).................. (447) (795) (891) (1,202) 618
------- -------- ------- ------- --------
Income (loss) before income
taxes and
extraordinary item............. 551 (19,033) (4,124) 1,586 14,050
Income taxes.................... 49 36 17 79 1,405
------- -------- ------- ------- --------
Income (loss) before
extraordinary item.............. 502 (19,069) (4,141) 1,507 12,645
Extraordinary item.............. 202 -- -- -- --
------- -------- ------- ------- --------
Net income (loss)............... $ 704 $(19,069) $(4,141) $ 1,507 $ 12,645
======= ======== ======= ======= ========
Net income (loss) per share(1).. $ 0.05 $ (1.32) $ (0.28) $ 0.09 $ 0.63
======= ======== ======= ======= ========
Weighted average common and
common equivalent shares used
in computing per share
amounts(1)..................... 14,128 14,405 14,773 17,307 20,144
<CAPTION>
SEPTEMBER 30,
---------------------------------------------
1992 1993 1994 1995 1996
------- -------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $35,940 $ 16,562 $14,644 $17,889 $ 70,215
Total assets.................... 62,140 43,975 39,496 42,111 100,416
Total current liabilities....... 9,499 10,424 11,950 11,593 11,640
Long-term obligations, less
current installments(2)......... 9,918 8,953 6,029 5,518 406
Net shareholders' equity........ 42,723 24,598 21,517 25,000 88,370
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements.
(2) See Notes 3 and 4 of Notes to Financial Statements.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and Notes thereto included elsewhere in this Prospectus. 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 and
Section 21E of the Exchange Act that involve risks and uncertainties. Factors
that realistically could cause results to differ materially from those
projected in the forward-looking statements are set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations," in
"Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
The Company is a leader in design, development, manufacturing and marketing
of digital GaAs ICs. The Company initially targeted the supercomputer and
defense industries. In fiscal 1992, 58% of the Company's total revenues were
derived from sales to the supercomputer industry. However, the supercomputer
industry began a steep decline soon thereafter, and the Company's financial
performance suffered from the decline in this market. Financial results were
further adversely affected by a $1.4 million dollar write-off associated with
the bankruptcy of a supercomputer customer in the second quarter of fiscal
1995. In fiscal 1996, sales to the supercomputer industry represented less
than 5% of the Company's total revenues.
The Company's present target customers are systems manufacturers in the
telecommunications, data communications and ATE markets. As a result of the
deployment of new transmission standards such as SONET/SDH and ATM as well as
other advances, there has been growing demand for high-performance ICs to meet
the increasingly rigorous standards of the telecommunications and data
communications industries. The requirements for high-performance ICs in the
ATE industry have also become more stringent in order to meet testing
requirements of increasingly faster and more complex ICs. In fiscal 1996,
sales of telecommunications, data communications and ATE products represented
52%, 8% and 24%, respectively, of the Company's total revenues.
The Company has two principal components of revenues: production revenues
and development revenues. Production revenues are generally recognized upon
shipment of the product, and costs associated with production are included in
cost of revenues. Development revenues are generally recognized upon
attainment of milestones established under customer contracts, such as the
release or shipment of the Company's cell library or design tools, the release
by the customer of a design net list or design tape and the Company's shipment
of prototype ICs. The majority of costs associated with development revenues,
including prototype fabrication costs, are included in cost of revenues, and
the remaining portion is expensed as engineering, research and development
expenses. The Company believes such revenues will continue to decline as a
percentage of total revenues in the foreseeable future. Included in
development revenues are nonrecurring license revenues which the Company has
received from time to time, typically for the transfer of technology to the
licensee. See Note 9 of Notes to Financial Statements. The Company does not
anticipate entering into significant licensing arrangements in the foreseeable
future, and licensing revenues have been immaterial since fiscal 1993.
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 have 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
15
<PAGE>
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 lower 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 or financial condition to be materially and
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.
The Company has focused its sales efforts on a relatively small number of
systems manufacturers who require high-performance ICs. Sales to the Company's
ten largest customers represented approximately 62%, 70% and 75% of total
revenues in fiscal 1994, 1995 and 1996, respectively.
As of September 30, 1996, the Company had $57,782,000 and $18,389,000 of
federal and state net operating loss carryforwards, respectively, which will
be recoverable only if future taxable income is sufficient to utilize such tax
loss carryforwards. Based upon historical results of operations and other
factors, management believes that it is more likely than not that the tax
benefits associated with such loss carryforwards will be realized. The Company
has fully reserved deferred tax assets associated with its available loss
carryforwards for financial reporting purposes, which will be recoverable only
if future taxable income is sufficient to utilize such tax loss carryforwards.
In 1995 and 1996, the application of the Company's net operating loss
carryforwards resulted in relatively low effective income tax rates for the
Company. The decrease or elimination of these net operating loss carryforwards
in the future would result in the Company experiencing higher effective income
tax rates. See Note 8 of Notes to Financial Statements.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth statements of operations data of the Company
expressed as a percentage of total revenues for the fiscal years indicated:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDED
SEPTEMBER 30,
---------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Revenues, net:
Production................ 73.7 % 80.9 % 90.1 %
Development............... 26.3 19.1 9.9
----- ----- -----
Total revenues.......... 100.0 100.0 100.0
----- ----- -----
Costs and expenses:
Cost of revenues.......... 62.5 52.5 48.1
Engineering, research and
development............... 24.7 20.3 16.7
Selling, general and
administrative............ 21.9 20.7 14.9
----- ----- -----
Total costs and
expenses................ 109.1 93.5 79.7
----- ----- -----
Income (loss) from
operations.................. (9.1) 6.5 20.3
Other income (expense):
Interest income........... 0.4 0.2 2.1
Interest expense.......... (3.1) (3.0) (1.2)
Other..................... 0.2 -- --
----- ----- -----
Total other income
(expense)............... (2.5) (2.8) 0.9
----- ----- -----
Income (loss) before income
taxes....................... (11.6) 3.7 21.3
Income taxes ............... -- 0.2 2.1
----- ----- -----
Net income (loss)........... (11.6)% 3.5 % 19.1 %
===== ===== =====
</TABLE>
YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
Revenues. Total revenues in fiscal 1996 were $66,046,000, a 54% increase
over the $42,882,000 recorded in fiscal 1995. The increase in total revenues
was due to a 71% increase in production revenues as a result of the growth of
shipments to customers in the telecommunications and ATE markets. Development
revenues in fiscal 1996 were $6,555,000 compared to $8,179,000 in fiscal 1995.
Cost of Revenues. Cost of revenues as a percentage of total revenues in
fiscal 1996 was 48.1% compared to 52.5% in fiscal 1995. The decrease in cost
of revenues as a percentage of total revenues resulted from increased
manufacturing yields as well as a reduction in per unit costs associated with
increased production.
Engineering, Research and Development. Engineering, research and development
expenses were $11,045,000 in fiscal 1996 compared to $8,689,000 in fiscal
1995. The increase was principally due to increased headcount and higher costs
to support the Company's continuing efforts to develop new products. The
Company's engineering, research and development costs are expensed as
incurred. The Company intends to continue to increase engineering, research
and development activities in the future. As a percentage of total revenues,
engineering, research and development expenses declined to 16.7% in fiscal
1996 from 20.3% in fiscal 1995 due primarily to the Company's revenues growing
faster than these expenses.
Selling, General and Administrative. Selling, general and administrative
expenses were $9,777,000 in fiscal 1996 compared to $8,900,000 in fiscal 1995.
This increase was principally due to increased headcount, salary increases,
higher commissions resulting from increased sales and increased advertising
costs. Included in selling, general and administrative expenses for fiscal
1995 is a $1,405,000 charge for the write-off of receivables, work-in-process
inventories and certain test hardware related to one of the Company's
17
<PAGE>
supercomputer customers which filed for bankruptcy in February 1995. As a
percentage of total revenues, selling, general and administrative expenses
declined to 14.9% in fiscal 1996 from 20.7% in fiscal 1995 primarily as a
result of the Company's revenues growing faster than these expenses.
Interest Income. Interest income increased to $1,364,000 in fiscal 1996 from
$93,000 in fiscal 1995 due to a higher average cash balance in fiscal 1996 as
compared to fiscal 1995 resulting primarily from the Company's equity offering
in March 1996.
Interest Expense. Interest expense decreased to $772,000 in fiscal 1996 from
$1,304,000 in fiscal 1995, primarily due to a decrease in the Company's
average debt balance.
Income Taxes. The Company recorded a provision for income taxes in the
amount of $1,405,000 in fiscal 1996 and $79,000 in fiscal 1995 principally for
federal alternative minimum taxes, state income taxes and taxes due to foreign
jurisdictions, in light of the Company's existing net operating loss
carryforwards.
Net Operating Loss Carryforwards. As of September 30, 1996, the Company had
federal net operating loss carryforwards of approximately $57,782,000, state
net operating loss carryforwards of approximately $18,389,000 and federal and
state research and development tax credits of approximately $2,210,000 and
$1,029,000, respectively. In fiscal 1992, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
No. 109). The Company elected not to retroactively restate financial
statements for periods prior to 1992 as the impact upon the financial
statements was immaterial.
YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO YEAR ENDED SEPTEMBER 30, 1994
Revenues. Total revenues for fiscal 1995 were $42,882,000, a 21% increase
from $35,581,000 in fiscal 1994. The increase was primarily due to a 32%
increase in production revenues as a result of continued growth of shipments
to customers in the telecommunications and ATE markets. Development revenues
decreased by 12% to $8,179,000 in fiscal 1995 from $9,343,000 in fiscal 1994.
This was principally due to a few relatively large billings for development
programs in fiscal 1994.
Cost of Revenues. Cost of revenues as a percentage of total revenues was
52.5% in fiscal 1995, compared to 62.5% in fiscal 1994. This improvement was
primarily due to the continued increase in production revenues in fiscal 1995.
Substantially all of the Company's facilities, equipment and labor costs
remained relatively fixed even though production revenues increased, and
therefore cost of revenues remained relatively constant in fiscal 1995. The
increased production activity in fiscal 1995, accompanied by yield
improvements and cost reductions, resulted in favorable manufacturing
variances leading to a decrease in cost of revenues as a percentage of
revenues.
Engineering, Research and Development. Engineering, research and development
expenses remained relatively constant at $8,689,000 in fiscal 1995 compared to
$8,794,000 in fiscal 1994. This was due to reduced headcount in fiscal 1995
offset by increased costs to support development of new products.
Selling, General and Administrative. Selling, general and administrative
expenses were $8,900,000 in fiscal 1995, a 14% increase from $7,794,000 in
fiscal 1994. Included in selling, general and administrative expenses for
fiscal 1995 is a $1,405,000 charge for the write-off of receivables, work-in-
process inventories and certain test hardware related to one of the Company's
supercomputer customers which filed for bankruptcy in February 1995. Included
in selling, general and administrative expenses for fiscal 1994 is a $425,000
charge for the settlement of a class action securities lawsuit and a $200,000
charge for severance and related costs in connection with a reduction in
workforce. Excluding these charges, selling, general and administrative
expenses increased by $326,000 in fiscal 1995. This was primarily due to
salary increases, higher commissions resulting from increased sales and an
advertising campaign that was launched in fiscal 1995. As a percentage of
total revenues, selling, general and administrative expenses declined to 20.7%
in fiscal 1995 from 21.9% in fiscal 1994.
18
<PAGE>
Interest Income. Interest income for fiscal 1995 was $93,000 compared to
$134,000 in fiscal 1994. The decrease was due to a lower average cash balance
in fiscal 1995 compared to fiscal 1994.
Interest Expense. Interest expense was $1,304,000 in fiscal 1995 compared to
$1,111,000 in fiscal 1994. The increase was due to a slight increase in the
Company's average debt balance during fiscal 1995 as well as an increase in
interest rates.
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited quarterly statements of
operations data for the eight fiscal quarters ended September 30, 1996 and
such data expressed as a percentage of total revenues for such periods. This
information has been prepared on the same basis as the audited Financial
Statements appearing elsewhere in this Prospectus and, in the opinion of
management, contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the unaudited quarterly
results of operations set forth herein. Results of operations for any previous
fiscal quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF
OPERATIONS:
Revenues, net:
Production............. $7,367 $ 8,016 $ 9,035 $10,285 $12,067 $14,021 $15,599 $17,804
Development............ 2,395 2,008 1,998 1,778 1,955 1,607 1,675 1,318
------ -------- ------- ------- ------- ------- ------- -------
Total revenues......... 9,762 10,024 11,033 12,063 14,022 15,628 17,274 19,122
------ -------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues....... 5,165 5,412 5,763 6,165 6,984 7,616 8,260 8,932
Engineering, research
and development........ 1,995 2,183 2,228 2,283 2,498 2,658 2,824 3,065
Selling, general and
administrative......... 1,717 3,257 1,937 1,989 2,266 2,406 2,495 2,610
------ -------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 8,877 10,852 9,928 10,437 11,748 12,680 13,579 14,607
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. 885 (828) 1,105 1,626 2,274 2,948 3,695 4,515
Other income (expense):
Interest income........ 23 23 23 24 27 119 621 597
Interest expense....... (313) (286) (352) (353) (301) (250) (107) (114)
Other.................. (3) 13 -- (1) (25) 30 -- 21
------ -------- ------- ------- ------- ------- ------- -------
Total other income
(expense).............. (293) (250) (329) (330) (299) (101) 514 504
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 592 (1,078) 776 1,296 1,975 2,847 4,209 5,019
Income taxes............ 30 (30) 14 65 197 285 421 502
------ -------- ------- ------- ------- ------- ------- -------
Net income (loss)....... $ 562 $ (1,048) $ 762 $ 1,231 $ 1,778 $ 2,562 $ 3,788 $ 4,517
====== ======== ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF TOTAL
REVENUES:
Revenues, net:
Production............. 75.5 % 80.0 % 81.9 % 85.3 % 86.1 % 89.7 % 90.3 % 93.1 %
Development............ 24.5 20.0 18.1 14.7 13.9 10.3 9.7 6.9
------ -------- ------- ------- ------- ------- ------- -------
Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
------ -------- ------- ------- ------- ------- ------- -------
Costs and expenses:
Cost of revenues....... 52.9 54.0 52.2 51.1 49.8 48.7 47.8 46.7
Engineering, research
and development........ 20.4 21.8 20.2 18.9 17.8 17.0 16.3 16.0
Selling, general and
administrative......... 17.6 32.5 17.6 16.5 16.2 15.4 14.4 13.7
------ -------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 90.9 108.3 90.0 86.5 83.8 81.1 78.6 76.4
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.............. 9.1 (8.3) 10.0 13.5 16.2 18.9 21.4 23.6
Other income (expense):
Interest income........ 0.2 0.2 0.2 0.2 0.2 0.7 3.6 3.1
Interest expense....... (3.2) (2.8) (3.2) (3.0) (2.1) (1.6) (0.6) (0.6)
Other.................. -- 0.1 -- -- (0.2) 0.2 -- 0.1
------ -------- ------- ------- ------- ------- ------- -------
Total other income
(expense).............. (3.0) (2.5) (3.0) (2.8) (2.1) (0.7) 3.0 2.6
------ -------- ------- ------- ------- ------- ------- -------
Income (loss) before
income taxes............ 6.1 (10.8) 7.0 10.7 14.1 18.2 24.4 26.2
Income taxes............ 0.3 (0.3) 0.1 0.5 1.4 1.8 2.4 2.6
------ -------- ------- ------- ------- ------- ------- -------
Net income (loss)....... 5.8 % (10.5) % 6.9 % 10.2 % 12.7 % 16.4 % 21.9 % 23.6 %
====== ======== ======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
The Company's production revenues have increased in each of the eight
quarters ended September 30, 1996 primarily due to increased shipments of the
Company's products. While cost of revenues has fluctuated, cost of revenues as
a percentage of total revenues has generally declined over this period due to
yield improvements and decreased unit costs associated with increased
production. Selling, general and administrative expenses in the quarter ended
March 31, 1995 were adversely affected as a result of the write-off of
receivables and other assets related to the bankruptcy of a major
supercomputer customer.
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: 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 variation in the
utilization of this capacity; and customer design changes, delays or
cancellations. The Company has from time to time experienced significant
customer design changes or delays and, in the past, has incurred significant
new product and process development charges 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 experience such changes or delays or incur such charges in
the future.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The Company generated $16,736,000 and $5,288,000 from operating activities
in fiscal 1996 and fiscal 1995, respectively. The increase in cash flow from
operating activities was primarily due to an increase in profitability. In
fiscal 1994, the Company used $3,511,000 of cash in operating activities,
primarily due to the significant operating loss incurred during that year.
Investing Activities
Capital expenditures, primarily for manufacturing and test equipment, were
$11,003,000, $3,362,000 and $1,730,000 in fiscal 1996, 1995 and 1994,
respectively. Included in the amounts for fiscal 1996, 1995 and 1994 is
equipment costing $245,000, $400,000 and $1,335,000, respectively, that was
financed by term loans. See Note 3 of Notes to Financial Statements.
Additionally, during fiscal 1995, the Company entered into operating lease
arrangements to lease certain equipment with a value of $373,000. The Company
intends to continue investing in new manufacturing, test and engineering
equipment and currently expects to spend up to $10 million for capital
expenditures through fiscal 1998 at its Camarillo facility.
Financing Activities
In fiscal 1996, the Company generated $40,388,000 of cash from financing
activities consisting of $50,725,000 of proceeds from the issuance and sale of
Common Stock in the Company's public offering in March 1996 and proceeds from
the issuance of Common Stock pursuant to the Company's stock option and stock
purchase plans offset by $10,337,000 in repayments of debt obligations.
Following the Company's public offering in March 1996, the Company accelerated
the repayment of several of its debt obligations, including its short-term
borrowings and substantial portions of its term loans and capital lease
obligations. In fiscal 1995, the Company used $782,000 in financing activities
consisting of $3,858,000 of payments on debt obligations, offset by $1,100,000
of proceeds from short-term borrowings and terms loans and $1,976,000 of
proceeds from the issuance of Common Stock pursuant to the Company's stock
purchase and stock option plans. In fiscal 1994, cash provided from financing
activities was $156,000 which consisted of $2,250,000 of short-term
borrowings, $1,335,000 of proceeds from a term loan and $1,060,000 of proceeds
from the issuance of Common Stock pursuant to the Company's stock purchase and
stock option plans, offset by $4,489,000 of payments on debt obligations.
20
<PAGE>
Historically, the Company has financed a substantial portion of its asset
purchases through capital leases. Principal payments under capital lease
obligations were $4,854,000 in fiscal 1996 and $2,907,000 and $4,032,000 in
fiscal 1995 and 1994, respectively. The Company anticipates that capital lease
expenditures during fiscal 1997 and 1998 will be $823,000 and $111,000,
respectively, based on the current level of lease obligations. In the event
that the Company enters into additional capital lease arrangements in the
future, these amounts are expected to increase.
The Company has a revolving line of credit agreement with a bank, which
agreement expires on January 5, 1997. The maximum amount available under the
revolving line of credit is $12,500,000. The interest rate on borrowings under
this revolving line of credit is equal to the bank's prime rate plus 0.5%. See
Note 5 of Notes to Financial Statements.
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 fiscal 1998 at its Camarillo facility
assuming that the Company successfully completes planned substantial
incremental increases in production capacity at the facility. The Company is
currently in the process of planning and beginning construction of a new wafer
fabrication facility. The Company estimates that the cost of the new wafer
fabrication facility in Colorado Springs, Colorado, will be at least $70
million, of which approximately $25 million relates to the purchase of land
and the construction of the building and $45 million relates to capital
equipment purchases. The Company has recently entered into a synthetic lease
transaction (the "Transaction") pursuant to a Master Lease Agreement (the
"Lease") providing for the financing of $27.5 million for the acquisition and
construction of a new wafer fabrication facility to be located in Colorado
Springs, Colorado (the "Facility"), as well as the acquisition of certain
capital equipment. The Lease will be an operating lease for accounting
purposes, but a conditional sale for Federal tax purposes. The obligations of
the Company are secured by the Company's interest in the Facility. The
Company's obligations are also secured by cash collateral in an amount equal
to 84% of all amounts advanced by the lessor under the lease for the
acquisition and construction of the Facility (the "Lease Balance"). The Lease
requires that all interest earned by the Company on the cash collateral be
paid to the lessor to satisfy a portion of the Company's rental obligation.
The Lease also requires monthly payments calculated on a payment date by
multiplying 16% of the then amount advanced by the lessor times a rate equal
to the three-month Eurodollar Rate plus a spread of 1.75%. The Company is
responsible for all costs of ownership and operation of the Facility, and has
guaranteed certain obligations of the lessor until such time as all of the
Company's obligations under the Lease are performed. The Lease provides the
Company with the option at the end of the lease term of either acquiring the
Facility for a price equal to outstanding advances made by the lessor, or
arranging for the Facility to be acquired by a third party. The Company is
contingently liable at the end of the lease term to the extent the lessor is
not able to realize 84% of the Lease Balance upon sale or other disposition of
the Facility. Under the Lease, the Company will be required to meet certain
financial and other covenants, including a restriction on the payment of cash
dividends to its shareholders. If certain financial covenants are not
maintained, the Company must provide additional cash collateral equal to 16%
of the Lease Balance. The Company expects to fund the remainder of the costs
of the Facility with a portion of the net proceeds from the Offering.
21
<PAGE>
BUSINESS
Vitesse is a leader in the design, development, manufacturing and marketing
of digital GaAs ICs. The Company's products incorporate its proprietary H-GaAs
(high integration gallium arsenide) technology to produce high-performance ICs
primarily for telecommunications, data communications and ATE systems
providers. The Company believes H-GaAs technology provides significant
advantages over silicon-based IC technologies in addressing the combination of
speed, power dissipation and complexity requirements of these high-performance
systems providers. In fiscal 1996, sales of telecommunications, data
communications and ATE products represented 52%, 8% and 24%, respectively, of
the Company's total revenues. The Company's major customers include Lucent,
Alcatel, Credence, Ericsson, Schlumberger, Seagate, Tellabs and Teradyne.
BACKGROUND
Telecommunications Market
As a result of deregulation and heightened competition in the worldwide
telecommunications industry over the past decade, domestic and foreign public
network service providers have been forced to differentiate themselves by
being more responsive and offering new and better services at lower costs. The
volume of information required to be transmitted across public networks has
increased significantly in recent years as a result of a variety of factors,
including the increase in data transmission and facsimile use and the
development of new applications such as video conferencing and multimedia.
Public network service providers, including interexchange long distance
carriers ("IXCs") and local exchange carriers ("LECs"), have been required to
upgrade their infrastructure to provide high-speed data services to customers
to meet these needs in addition to providing their standard telephone
services. Infrastructure improvements to public networks have most prominently
included a dramatic increase in the deployment of fiber optic technology to
replace conventional copper wire. Since optical fiber offers substantially
greater capacity, is less error prone and is easier to administer than copper
wire, it has become the transmission medium of choice for IXCs and,
increasingly, LECs.
As fiber optic technology has spread, existing network standards for the
transmission of information, which had been developed primarily for copper
wire networks, have presented limitations to simultaneously transmitting voice
and data. As a result, the SONET (Synchronous Optical Network) standard in the
United States and the equivalent SDH (Synchronous Digital Hierarchy) standard
in the rest of the world emerged as the next generation standards for high-
speed optical fiber transmission. The SONET/SDH standard facilitates high data
integrity and improved performance in terms of network reliability and reduces
maintenance and other operations costs by standardizing interoperability among
different vendors' equipment. Dataquest estimates that the worldwide SONET/SDH
IC market targeted by the Company will increase from approximately
$125 million in 1996 to approximately $525 million in 2000.
Asynchronous transfer mode ("ATM") is a data transmission standard
complementary to SONET/SDH that is in an early stage of development. ATM takes
advantage of the additional capacity provided by fiber optic technology. The
SONET/SDH standard relates to the system through which data is transmitted,
while ATM is a protocol for the packaging of data for transmission over the
SONET/SDH system. ATM technology enables LAN, WAN and public network systems
designers to provide increasingly improved services to network users. LAN and
WAN equipment vendors must enable the integration of mixed high-speed, high-
volume data communications, voice, video and imaging applications, reduce
bandwidth limitations of current LANs and WANs, lower equipment costs and ease
administrative burdens imposed by current system architectures. Similarly,
equipment vendors must provide systems that can handle integrated switched
high-speed, high-volume data communications, voice, video and imaging
services. Public network equipment vendors must also seamlessly integrate
their products with both LAN and WAN equipment to reduce overall networking
costs.
Fiber optic applications designed to the SONET/SDH and ATM standards
typically use data transmission rates of 155 MHz, 622 MHz, 2.488 GHz or 10
GHz. The Company believes that SONET/SDH transmission systems installed by
network providers generally operate at 2.488 GHz and above. The Company also
believes that silicon-based approaches are not practicable solutions at such
frequencies and, as a result, telecommunications systems manufacturers
increasingly look to GaAs solutions because of their requirements for high
bandwidth.
22
<PAGE>
Data Communications Market
Performance improvements in processors and peripherals, along with the
transition to distributed architectures such as client/server, have spawned
increasingly data-intensive and high-speed networking applications. This has
led to a focus on the methods of connecting high-performance computers to
peripheral equipment in the data communications industry.
In 1988, the American National Standards Institute established a Fibre
Channel standard which is a practical, inexpensive, yet expandable method for
achieving high-speed data transfer among workstations, mainframes, data
storage devices and other peripherals. The Fibre Channel standard addresses
the need for very fast transfers of large volumes of information, while at the
same time relieving system manufacturers from the burden of supporting the
variety of networks and channels currently in place. Fibre Channel is
especially effective in situations where large blocks of data must be
transferred within and between buildings and over campus environments. Fibre
Channel is substantially faster than existing network data transmission
protocols. Fibre Channel is capable of transmitting at rates exceeding 1
gigabit per second in both directions simultaneously and is also able to
transport existing protocols over both optical fiber and copper wire.
Currently, the most prominent use of Fibre Channel technology is in high-
density rigid disk drives of 1 gigabyte or greater.
The Company believes that CMOS silicon approaches are not practicable
solutions at the 1 gigabit per second or higher clock rates used in the Fibre
Channel standard. The Company believes that its H-GaAs solutions for this
market operate at lower power and greater performance margins than competing
ECL and BiCMOS ICs.
Automated Test Equipment Market
Automated test equipment ("ATE") is used for the comprehensive testing of
ICs, printed circuit boards and electronic systems. The increasing worldwide
demand for ICs in recent years has led to an increase in the demand for IC
test equipment. The ATE industry has experienced changes arising from the
increasing complexity of ICs, as manifested by growing pin counts, higher
speeds and greater levels of integration. These changes have created
challenges for ATE systems designers, since the equipment used to test these
complex devices must be capable of performance exceeding that of the devices
themselves.
These changes have also led to major revisions in ATE architectures.
Historically, ATE systems were primarily based on a central resource
architecture where timing and pattern generation hardware and software were
centralized and allocated as needed to groups of pins on the "device under
test" ("DUT"). Central resource architecture works best with relatively simple
ICs, but with newer, higher complexity devices, the test environment can be
significantly different for each pin. This has led to a "tester-per-pin"
architecture in which tester resources are dedicated to each pin of the DUT.
This rapid increase in system complexity has resulted in a marked increase in
the number of electronic components needed in the pin channel. The Company
believes these factors have led ATE designers to seek to increase component
integration.
For high-performance ATE systems, the Company believes that CMOS and BiCMOS
silicon ICs are too slow and that the high power dissipation in ECL silicon
ICs limits their integration capabilities. The Company believes that the low
power dissipation and high complexity of the Company's H-GaAs ICs, which
permit systems to be built with fewer ICs, are well-suited for the
increasingly demanding requirements of present generation ATE equipment.
STRATEGY
The Company's strategy includes the following elements:
Target Growing Markets
Vitesse targets the growing telecommunications, data communications and ATE
markets. Within the telecommunications and data communications markets, the
Company's products are used in emerging high-
23
<PAGE>
growth markets such as SONET/SDH, ATM and Fibre Channel, which require ICs
that are capable of high-bandwidth data transmission.
Reduce Costs of High-Performance Products
The Company continually strives to reduce the cost of its high-performance
products. The Company endeavors to continue to increase manufacturing yields
and decrease die sizes, as well as to decrease power dissipation to enable the
use of lower-cost plastic packaging.
Perform Own Wafer Fabrication Using Proprietary Manufacturing Process
Technology
The Company operates its own advanced wafer fabrication facility in
Camarillo, California, and is in the process of planning and beginning
construction of an additional wafer fabrication facility in Colorado Springs,
Colorado, which is not expected to begin production prior to late fiscal 1998.
The Company believes that control of wafer fabrication assures a reliable
source of supply and provides greater opportunities to enhance product quality
and reliability. In addition, the Company believes such control facilitates
new process and product development and provides a more dependable wafer
supply to meet customer requirements.
The Company's proprietary manufacturing process utilizes industry standard
manufacturing equipment. This enables the Company to employ developments in
silicon manufacturing technology to continue to improve minimum feature size,
dimension control, deposition and etch capabilities. By eliminating the need
for "custom" wafer fabrication equipment, the Company can focus its resources
on developing leading process technology rather than on developing expensive
customized manufacturing equipment.
Develop "GaAs Transparent" Products
The Company endeavors to make the process of designing Vitesse GaAs products
"transparent" to the designer when compared to the design process for silicon
ICs. The design of its H-GaAs products is conducted using methodologies and
CAD tools essentially identical to those used to design silicon products.
Customers designing Vitesse ASIC products can use industry standard CAD tools
(including those offered by Cadence, Mentor Graphics, Synopsys and Viewlogic)
in such a manner that there are no "GaAs-unique" factors that require special
background or training beyond those for an ASIC designer generally. In
addition, the Company's products do not require electronic systems
manufacturers to change input/output interface levels or utilize power supply
voltages unique to Vitesse products.
Establish Close Relationships with Customers' Engineering Management
The Company establishes close relationships with its customers' engineering
management and believes these relationships enable it to better understand the
customers' needs and win designs for existing and new systems.
PRODUCTS AND CUSTOMERS
Telecommunications
Telecommunications products accounted for 50% and 52% of the Company's total
revenues for fiscal 1995 and fiscal 1996, respectively. In fiscal 1996,
substantially all of the Company's sales in the telecommunications market were
for SONET/SDH applications, and less than 1% of such revenues were for ATM
applications. In fiscal 1996, the Company's significant telecommunications
customers, each of which purchased at least $100,000 of the Company's
products, included Lucent, Alcatel, Ericsson and Tellabs.
The Company manufactures a variety of telecommunications IC products for the
transmission and reception of data over a fiber optic network. The Company
supplies these products as Company standard products or as customer-designed
ASIC products. With respect to the transmission of data, the Company's
products take
24
<PAGE>
parallel data, code it and serialize it (multiplexing or "mux") for
transmission. At the receiving end of the fiber optic system, the Company's
telecommunications products decode and de-serialize the data (demultiplexing
or "demux"). The following diagram depicts applications which the Company's
telecommunications products address:
[APPLICATIONS DIAGRAM]
In the case of telecommunications switching, the Company offers a line of
crosspoint switches for high-speed digital switching applications including
data distribution and video switching. The Company also offers a line of
photodetector/transimpedance amplifiers for both telecommunications and data
communications applications which offer a low noise and wide bandwidth
solution for converting light from a fiber optic communications channel into
an electrical signal. The following is a summary of applications and related
operating frequencies which the Company's telecommunications products address:
<TABLE>
<CAPTION>
TRANS-
SONET ASSOCIATED CROSSPOINT IMPEDANCE
HIERARCHY CLOCK RATE MUX/DMUX SWITCHES AMPLIFIERS
--------- ---------- -------- ---------- ----------
<S> <C> <C> <C> <C>
STS/OC-3 155 MHz X X X
STS/OC-12 622 MHz X X X
STS/OC-48 2.488 GHz X
STS/OC-192 10 GHz X
</TABLE>
Data Communications
Data communications products accounted for 6% and 8% of the Company's total
revenues for fiscal 1995 and for fiscal 1996, respectively. Vitesse has
developed a line of Fibre Channel products for this market, which consist
primarily of transmitters, receivers and transceivers. In fiscal 1996, the
Company's significant data communications customers, each of which purchased
at least $100,000 of the Company's products, included IBM, Newbridge Networks,
Seagate, Sequent and Stratacom.
Additionally, the Company has developed a physical layer interface product
for the recently emerging Gigabit Ethernet market. Gigabit Ethernet is a
higher speed extension of the 10 Base T and 100 Base T Ethernet standards. The
Company is also in the process of developing additional products for this
market. To date, the Company's revenues from sale of products in this market
have not been material. There can be no assurance that such products will ever
gain market acceptance.
25
<PAGE>
Automated Test Equipment
ATE products accounted for 21% and 24% of the Company's total revenues for
fiscal 1995 and for fiscal 1996, respectively. Vitesse provides gate arrays
and custom products that offer a combination of high complexity, low power
dissipation and high speed for ATE. In fiscal 1996, the Company's significant
ATE customers, each of which purchased at least $100,000 of the Company's
products, included Credence, Hewlett-Packard, Integrated Measurement Systems,
LTX, Schlumberger and Teradyne.
The Company's ten largest customers accounted for approximately 70% and 75%
of total revenues in fiscal 1995 and fiscal 1996, respectively. In fiscal 1995
and fiscal 1996, sales to Lucent accounted for 17% and 25%, respectively, of
the Company's total revenues, and sales to H. Y. Associates Co., Ltd., the
Company's Japanese distributor, accounted for 19% and 11%, respectively, of
the Company's total revenues.
TECHNOLOGY
The Company believes the limitations of silicon-based CMOS, BiCMOS and ECL
ICs have become more pronounced as the requirements of the telecommunications,
data communications and ATE systems providers have increased. While CMOS
offers certain complexity advantages over the alternative silicon processes,
the Company believes it lacks the speed required for many high-performance
systems. ECL technology offers higher speeds but at the cost of high power
dissipation, which limits its use for high-complexity applications. BiCMOS
offers higher performance than is obtainable from CMOS, but less than that
offered by ECL, at levels of complexity which are greater than that available
from ECL but lower than that provided by CMOS. BiCMOS is slower than ECL and,
the Company believes, does not achieve the speed necessary for the highest
performance telecommunications, data communications and ATE systems.
GaAs has inherent physical properties which allow electrons to move several
times faster than within silicon. This higher electron mobility provides the
Company with the flexibility to manufacture ICs that operate at much higher
speeds than silicon devices or to operate at the same speeds with reduced
power consumption. The following table compares the intrinsic transistor
performance and cost per function for H-GaAs with alternative process
technologies:
<TABLE>
<CAPTION>
H-GAAS ECL BICMOS CMOS
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Speed................................... Highest High Moderate Lowest
Power Dissipation....................... Low Highest Moderate Lowest
Complexity.............................. High Lowest Higher Highest
Cost per Function....................... Moderate Highest Moderate Lowest
</TABLE>
The Company employs proprietary H-GaAs process technology based on a
refractory metal SAG process. SAG technology is universally used in the
manufacture of complex silicon ICs. The process structure and logic
implementation of the Company's GaAs ICs are similar to a traditional silicon
MOS process with the exception that the gate metal is deposited directly on
the GaAs substrate creating a metal-semiconductor junction comparable to
depositing the metal on a thin silicon dioxide layer grown on the silicon
substrate in the case of metal gate n-channel MOS.
The implementation of a SAG process in GaAs or silicon requires a gate metal
structure that can withstand the high temperature of an ion implant activation
anneal. This is in contrast to conventional microwave GaAs ("RF-GaAs") process
technologies which utilize a low temperature, non-self-aligned technology
based on gold as the gate metal. The table below compares Vitesse's H-GaAs,
traditional silicon MOS and microwave RF-GaAs:
<TABLE>
<CAPTION>
SILLCON MICROWAVE
H-GAAS MOS RF-GAAS
-------- -------- ---------
<S> <C> <C> <C>
Self-Aligned.................................. Yes Yes No
Interconnect.................................. Aluminum Aluminum Gold
Complexity.................................... High Highest Medium
</TABLE>
26
<PAGE>
Another advantage of SAG technology in GaAs is the greater control over
electrical transistor parameters compared to conventional gold gate
technology. This control of the field effect transistor ("FET")
characteristics has enabled the Company to be one of the few companies that
have demonstrated the ability to manufacture products having lower power
dissipation using direct coupled FET logic ("DCFL"). DCFL has the highest
complexity, fewest elements per logic function and best available combination
of speed at low power of any n-channel FET technology demonstrated in silicon
or GaAs.
The use of a high-temperature process also allows Vitesse to use silicon
industry standard aluminum interconnect technology. This enables the Company
to utilize standard deposition and dry etch equipment for interconnects. The
interconnect portion of the circuit represents a majority of mask levels in
the manufacturing process.
The Company has significantly improved its process technology:
<TABLE>
<CAPTION>
H-GaAs H-GaAs H-GaAs H-GaAs
I II III IV
------ ------ ------ ------
<S> <C> <C> <C> <C>
Product Announcement Year....................... 1986 1988 1991 1995
Gate Length (in microns)........................ 1.2 0.8 0.6 0.4
Metal Layers.................................... 2 3 4 5
Maximum Relative Speed(1)....................... 1.0x 1.4x 2.0x 3.0x
Minimum Relative Power Dissipation(1)........... 1.0x 0.7x 0.5x 0.3x
</TABLE>
- --------
(1) Compared to H-GaAs I.
The Company is currently in the process of implementing H-GaAs IV, a 0.4
micron five-layer metal GaAs FET technology capable of achieving higher
complexity and lower power dissipation than previous Vitesse technologies. The
Company has announced the introduction of the GLX family of gate arrays based
on H-GaAs IV technology. The GLX family of gate arrays has been designed to
offer the same speed as the H-GaAs III family of gate arrays in order to
decrease power dissipation. This is intended to enable ICs to be packaged in a
lower cost plastic package in the 100 MHz to 800 MHz range, thereby offering
the customer a lower cost solution in this performance range. The Company has
entered into contracts with a number of customers for the development of ASICs
based on the GLX product family. A limited number of prototypes in the GLX
product family have been shipped to date. See "Risk Factors--Product and
Process Development and Technological Change."
MANUFACTURING
Wafer Fabrication
The Company fabricates four-inch wafers at its Camarillo plant in a 6,000
square foot clean room, which has a rating of Class 10 (meaning there are
fewer than ten particles larger than 0.5 micron per cubic foot of air). Wafer
fabrication equipment used by the Company is generally identical to that used
in a sub-micron silicon MOS fabrication facility. Process technology is
generally similar to that used in advanced sub-micron silicon process
technologies, with certain modifications necessary to accommodate GaAs
material properties.
As is typically the case with semiconductor manufacturing, the Company's
manufacturing yields vary significantly among products, depending on the
product's complexity and the Company's experience in manufacturing the
particular ICs. While the Company's process technology utilizes standard
silicon semiconductor manufacturing equipment, aggregate production quantities
have been relatively low and the process technology is significantly less
developed than silicon process technology used by competitors. This leads to
overall yields lower than levels typically achieved in the silicon process.
The Company expects that many of its current and future products may never be
produced in high volume.
Regardless of the process technology used, the fabrication of ICs is a
highly complex and precise process. Defects in masks, impurities in the
materials used, contamination of the manufacturing environment, equipment
27
<PAGE>
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 non-functional.
The Company utilizes manufacturing equipment commonly used in the silicon IC
industry. This enables the Company to employ developments in silicon
manufacturing technology to continue to improve minimum feature size,
dimension control, deposition and etch capabilities. By eliminating the need
for "custom" wafer fabrication equipment, the Company can focus its resources
on developing leading process technology rather than on developing expensive
customized manufacturing equipment.
The Company is currently in the process of planning and beginning
construction of a new six-inch wafer fabrication facility in Colorado Springs,
Colorado, to supplement its existing facility in Camarillo. As planned, the
facility will initially include a 10,000 square foot Class 1 clean room with
the capability for future expansion to 15,000 feet. The Company plans to
initiate construction of the new facility during the first quarter of fiscal
1997 and to complete the physical plant during the fourth quarter of fiscal
1997. Following the completion of the physical plant, the Company must install
equipment and perform necessary testing prior to commencing commercial
production at the facility, a process which the Company anticipates will take
at least nine months. Accordingly, the Company believes the new facility will
not begin commercial production prior to the fourth quarter of fiscal 1998.
See "Risk Factors--Manufacturing Capacity Limitations; New Production
Facility."
Assembly and Test
The Company conducts ceramic package assembly for a portion of its ICs in
its Camarillo plant. The Company employs industry standard assembly equipment
in an automated assembly line that is intended to reduce packaging time as
well as to improve quality. The balance of the Company's ICs are packaged in
plastic for the Company by third parties since the Company has no internal
capability to perform such plastic packaging. The Company utilizes advanced
automated VLSI testers and has constructed several custom testers. However, in
many cases, the Company cannot test its products at full speed and must rely
on numerous sub-circuit path measurements to determine the performance of the
IC.
Components and Raw Materials
The Company purchases substantially all of its ceramic packages from
Kyocera. Kyocera is the world's largest supplier of multilayer, high-
performance ceramic packages and, in many cases, is the only source of these
packages. Since most of the ceramic packages used in the Company's assembly
process are designed to the Company's specifications, there are typically no
second sources for these packages. To date, the Company has not experienced
any adverse effects due to the sole-source nature of its ceramic packages. The
Company believes it maintains an adequate inventory of sole-source ceramic
packages. The level of inventory of ceramic packages carried by the Company is
substantially higher than standard plastic packages for IC companies that
utilize standard packages available from a wide variety of sources. Since
1992, the Company has increased its use of plastic packages, and it uses
multiple contract manufacturers to perform plastic packaging.
GaAs substrates and other raw materials and equipment used in the production
of the Company's ICs are available from several suppliers. Although lead times
are occasionally extended in the industry, the Company has not experienced any
material difficulty in obtaining raw materials or equipment.
ENGINEERING, RESEARCH AND DEVELOPMENT
The market for the Company's products is characterized by rapid changes in
both GaAs and competing silicon process technologies. Because of continual
improvements in these technologies, the Company believes that its future
success will depend largely on its ability to continue to improve its product
and process technologies, to develop new technologies in order to maintain the
performance of its products relative to competitors, to adapt its products and
process technologies to technological changes and to adopt emerging industry
standards. See "Risk Factors--Product and Process Development and
Technological Change."
28
<PAGE>
Product Research and Development
The Company's present product research and development efforts are focused
on developing new products for its telecommunications, data communications and
ATE product lines. Considerable design effort is being expended to increase
the speed and complexity and reduce the power dissipation of the Company's
products.
Process Research and Development
The Company is implementing H-GaAs IV, a 0.4 micron GaAs FET technology
capable of achieving higher complexity and lower power dissipation than
previous Vitesse technologies. The Company is currently engaged in research
and development projects focused on other process-related improvements to
increase yields and improve the speed, complexity and power dissipation
characteristics of its devices.
The Company's engineering, research and development expenses in fiscal 1994,
1995 and 1996 were $8,794,000 and $8,689,000 and $11,045,000, respectively.
COMPETITION
The high-performance semiconductor market is highly competitive and subject
to rapid technological change, price erosion and heightened international
competition. The telecommunications, data communications and ATE industries,
which are the primary target areas for the Company, are also becoming
intensely competitive because of deregulation and heightened international
competition, among other factors. In the telecommunications market, the
Company competes primarily against other GaAs-based companies such as Triquint
Semiconductor and the GaAs fabrication operations of systems companies such as
Rockwell. In the data communications market and the ATE market, the Company
competes primarily against silicon ECL and BiCMOS products offered principally
by semiconductor manufacturers such as Fujitsu, Hewlett-Packard, Motorola,
National Semiconductor and Texas Instruments, and bipolar silicon IC
manufacturers such as Applied Micro Circuits Corporation and Synergy
Semiconductor Corporation. Many of these companies have significantly greater
financial, technical, manufacturing and marketing resources than the Company.
In addition, in lower-frequency applications, the Company faces increasing
competition from CMOS-based products, particularly as the performance of such
products continues to improve.
Competition in the Company's markets for high-performance ICs is primarily
based on price/performance, product quality and the ability to deliver
products in a timely fashion. The Company emphasizes its products' quality and
combination of speed, complexity and power dissipation. Some prospective
customers may be reluctant to adopt Vitesse's products because of perceived
risks relating to GaAs technology. In addition, product qualification is
typically a lengthy process and certain prospective customers may be unwilling
to invest the time or incur the costs necessary to qualify suppliers such as
the Company. Prospective customers may also have concerns about the relative
speed, complexity and power advantages of the Company's products compared to
more familiar ECL or BiCMOS semiconductors or about the risks associated with
relying on a relatively small company for a critical sole-sourced component.
SALES AND CUSTOMER SUPPORT
The Company's principal method of selling its products in the United States
and Western Europe is through direct sales to systems manufacturers by the
Vitesse sales force. Other international sales, principally in Japan, are
conducted through foreign distributors.
Direct Sales
Because of the large engineering support required in connection with the
sale of high-performance ICs, the Company provides its customers with field
engineering support as well as engineering support from the Company's
headquarters. Typically, a field engineer will accompany a sales person to the
initial customer visit to understand and evaluate the customer's requirements.
The salesperson and field engineer will determine
29
<PAGE>
whether additional engineering analysis will be required by engineers based at
the Company's headquarters. The Company's sales cycle is typically lengthy and
requires the continued participation of salespersons, field engineers,
engineers based at the Company's headquarters and senior management. Some
manufacturers' representatives are employed in selected markets to support the
Vitesse sales force.
The Company's sales headquarters is located in Camarillo, California. Three
area sales offices are maintained in Boston, Massachusetts; Dallas, Texas; and
St. Germain en Laye, France. Additional sales and field application support
offices are located in Sunnyvale, California; Chester, New Jersey; St. Paul,
Minnesota; and San Diego, California.
Foreign Distributors
Sales in Japan are made through an unaffiliated Japanese distributor, H.Y.
Associates Co., Ltd. Sales in other countries are made through local
representatives. Export sales, primarily in Japan, were $8,850,000,
$12,533,000 and $15,624,000, in fiscal 1994, 1995 and 1996, respectively,
representing 25%, 29% and 24% of total revenues, respectively.
The Company generally warrants its products against defects in materials and
workmanship for a period of one year.
PATENTS AND LICENSES
The Company has been awarded 13 U.S. patents for various aspects of design
and process innovations used in the design and manufacture of its products.
The Company has two patent applications pending in the United States and three
patent applications pending in Japan and is preparing to file several more
patent applications. The Company believes that patents are of less
significance in its industry than such factors as technical expertise,
innovative skills and the abilities of its personnel.
As is typical in the semiconductor industry, the Company has, from time to
time, received, and may receive in the future, letters from third parties
asserting patent rights, maskwork rights or copyrights on certain of the
Company's products and processes. None of the claims to date has resulted in
the commencement of any litigation against the Company, nor has the Company to
date believed it is necessary to license any of the patent rights referred to
in such letters.
BACKLOG
Vitesse's sales are made primarily pursuant to standard purchase orders for
delivery of products. Quantities of the Company's products to be delivered and
delivery schedules are frequently revised to reflect changes in customer
needs. For these reasons, the Company's backlog as of any particular date is
not representative of actual sales for any succeeding period, and the Company
therefore believes that backlog is not a good indicator of future revenue. The
Company's backlog scheduled to be shipped in the next six months was
$36,000,000 on September 30, 1996, compared to $23,500,000 on September 30,
1995.
FACILITIES
The Company's executive offices and principal research and development and
fabrication facility is located in Camarillo, California, and is being leased
under a noncancellable operating lease that expires in 1999. The total space
occupied in this building is approximately 68,500 square feet. The Company
leases an additional 10,000 square feet in Camarillo for product development
and 5,000 square feet in Sunnyvale, California for a product development and
sales office. Additional sales offices are leased in Boston, Massachusetts;
Dallas, Texas; St. Paul, Minnesota; Chester, New Jersey; San Diego,
California; and St. Germain en Laye, France.
30
<PAGE>
ENVIRONMENTAL MATTERS
The Company is subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing process.
Any failure to comply with present or future regulations could result in the
imposition of fines on the Company, the suspension of production or a
cessation of operations. In addition, such regulations could restrict the
Company's ability to expand its facilities at its present location or
construct or operate its planned manufacturing facility in Colorado Springs,
Colorado, or could require the Company to acquire costly equipment or incur
other significant expenses to comply with environmental regulations or clean
up prior discharges.
The Company uses significant amounts of water throughout its manufacturing
process. Previous droughts in California and Colorado have resulted in
restrictions being placed on water use by manufacturers and residents in the
states. In the event of future drought, reductions in water use may be
mandated generally, and it is unclear how such reductions will be allocated
among California's or Colorado's different users. No assurance can be given
that near term reductions in water allocations to manufacturers will not
occur, possibly requiring a reduction in the Company's level of production,
and materially adversely affecting the Company's operations.
EMPLOYEES
As of September 30, 1996, the Company had 293 employees, including 92 in
engineering, research and development, 30 in marketing and sales, 157 in
operations and 14 in finance and administration. The Company's ability to
attract and retain qualified personnel is essential to its continued success.
None of the Company's employees is represented by a collective bargaining
agreement, nor has the Company ever experienced any work stoppage. The Company
believes its employee relations are good.
31
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company as of October 31, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Louis R. Tomasetta 47 President and Chief Executive Officer, Director
Ian Burrows 42 Vice President, Wafer Fab
Ira Deyhimy 56 Vice President, Product Development
Christopher R. Gardner 36 Vice President & General Manager, ATE
Robert J. Cutter 36 Vice President & General Manager, Colorado Springs
Eugene F. Hovanec 44 Vice President, Finance & Chief Financial Officer
James Mikkelson 48 Vice President, Technology Development
Michael S. Millhollan 52 Vice President & General Manager, Data Communications
Robert R. Nunn 35 Vice President & General Manager, Telecommunications
Neil J. Rappaport 50 Vice President, Sales
Ram Venkataraman 56 Vice President, Quality and Reliability
James A. Cole 54 Director
Pierre R. Lamond 66 Chairman of the Board
John C. Lewis 61 Director
Thurman J. Rodgers 48 Director
</TABLE>
Louis R. Tomasetta, a co-founder of the Company, has been President, Chief
Executive Officer and a Director since the Company's inception in February
1987. From 1984 to 1987, he served as President of the integrated circuits
division of Vitesse Electronics Corporation. Prior to that, Dr. Tomasetta was
the director of the Advanced Technology Implementation department at Rockwell.
Dr. Tomasetta has over 20 years experience in the management and development
of GaAs-based businesses, product, and technology. He received B.S., M.S. and
Ph.D. degrees in electrical engineering from the Massachusetts Institute of
Technology.
Ian Burrows joined the Company in February 1987 as a Process Engineering
Manager, became Director of Wafer Fabrication in December 1990, and Vice
President, Wafer Fab in April 1995. Prior to that, he held the position of
process engineering development manager at Honeywell's GaAs product center and
development process engineer at Mostek. Dr. Burrows received a B.S. in
electrical engineering from Warwick University, England, and M.S. and Ph.D.
degrees in electrical engineering from Texas Tech University.
Ira Deyhimy, a co-founder of the Company, has been Vice President, Product
Development since the Company's inception in February 1987. From 1984 to 1987
he was Vice President, Engineering at Vitesse Electronics Corporation. Prior
to that, Mr. Deyhimy was manager of Integrated Circuit Engineering at
Rockwell. He has over 20 years of experience in GaAs electronics. Mr. Deyhimy
received a B.S. degree in physics from the University of California at Los
Angeles and an M.S. degree in physics from California State University at
Northridge.
Christopher R. Gardner joined the Company in February 1987 and held various
engineering and engineering management positions through September 1996 when
he became Vice President & General Manager, ATE. Prior to that, Mr. Gardner
was a member of technical staff at AT&T Bell Laboratories. Mr. Gardner holds a
B.S. degree in electrical engineering from Cornell University and an M.S.
degree in electrical engineering from the University of California at
Berkeley.
Robert J. Cutter joined the Company in October 1996 as Vice President &
General Manager of the Colorado Springs facility. Prior to that, Mr. Cutter
was Plant Manager, Colorado Springs, for Rockwell. From 1990 to 1995, he was
Director of Operations for United Technologies Microelectronics Center. From
1981 to 1988, he held a variety of management positions at Inmos Corporation.
Mr. Cutter graduated from University of Southampton, United Kingdom, with a
First Class Honors Degree in Aeronautics & Astronautics.
Eugene F. Hovanec joined the Company as Vice President, Finance and Chief
Financial Officer in December 1993. From 1989 to 1993, Mr. Hovanec served as
Vice President, Finance & Administration, and Chief Financial Officer at
Digital Sound Corporation. Prior to that, from 1984 to 1989, he served as Vice
President and Controller at Micropolis Corporation, a disk drive company. Mr.
Hovanec holds a Bachelor of Business Administration degree from Pace
University, New York. Mr. Hovanec also serves as director of Interlink
Electronics, Inc.
32
<PAGE>
James Mikkelson, a co-founder of the Company, has served as Vice President,
Technology Development since the Company's inception in February 1987. From
1984 to 1987, he served as Vice President, Operations at Vitesse Electronics
Corporation. Prior to that, he served as Project Manager at Hewlett-Packard
where he was responsible for the development and manufacturing of MOS VLSI
circuits. Mr. Mikkelson holds B.S., M.S. and Engineer degrees in electrical
engineering from the Massachusetts Institute of Technology.
Michael S. Millhollan joined the Company in July 1989 as Director of the
Sunnyvale Product Development Center and became Vice President, General
Manager of Standard Products in October 1992 and was appointed Vice President
& General Manager, Data Communications in September 1996. From 1976 to 1989,
he held various senior design engineering positions with National
Semiconductor. Prior to that, he was at Motorola for seven years in various
design engineering positions. Mr. Millhollan holds a B.S. degree in electrical
engineering from the Georgia Institute of Technology.
Robert R. Nunn joined the Company in July 1989, became Director of Marketing
in January 1991 and Vice President and General Manager, ASIC Products in July
1992 and was appointed Vice President & General Manager, Telecommunications in
September 1996. From August 1987 to July 1989 he served as product marketing
manager at Advanced Micro Devices, Inc. ("AMD"). Mr. Nunn holds a B.S. degree
in computer engineering from the University of California at Los Angeles and
an M.B.A. from Harvard Business School.
Neil J. Rappaport joined the Company as Vice President, Sales in August
1987. From September 1982 to 1987, Mr. Rappaport was national sales manager
with Applied Micro Circuits Corporation, a manufacturer of ECL integrated
circuits. Prior to that, he held various sales positions with Signetics
Corporation, a semiconductor manufacturer. Prior to that, he was a design
engineer at Hughes Aircraft Company. Mr. Rappaport has a B.S. degree from
Fairleigh Dickinson University and an A.S. degree in electronics technology
from the RCA Institute.
Ram Venkataraman joined the Company as Director of Quality in January 1990
and in August 1990 he became Vice President, Quality and Reliability. From
March 1985 to January 1990, he held various positions, including manager of
reliability and quality assurance and Director of Wafer Fabrication
Operations, at GigaBit Logic, Inc., a GaAs semiconductor manufacturer. Mr.
Venkataraman has over 20 years of experience in IC quality assurance and
reliability spanning both silicon and GaAs technologies. Mr. Venkataraman
holds B.S. degrees in physics and electrical engineering from Madras
University, India, and an M.S. degree in electrical engineering from the
Indian Institute of Technology, India.
James A. Cole has served as a Director of the Company since February 1987.
Since October 1986, he has served as a General Partner of Spectra Enterprise
Associates and as a Partner of New Enterprise Associates. He was a founder and
Executive Vice President of Amplica, Inc., a GaAs microwave IC and sub-system
Company. Mr. Cole also serves as a Director of Giga-Tronics, Inc. and
Spectrian Corporation.
Pierre R. Lamond has been the Chairman of the Board of Directors since the
Company's inception in February 1987. Since December 1981, he has been a
General Partner of Sequoia Capital, a venture capital firm. Sequoia has
financed companies such as Cypress Semiconductor, Cisco Systems and C-Cube
Microsystems. Mr. Lamond was founder and Vice President of National
Semiconductor. He is also a Director of Cypress Semiconductor, CKS Group and
VidaMed, Inc.
John C. Lewis became a Director of the Company in January 1990. He is
currently Chairman of the Board of Directors and Chief Executive Officer of
Amdahl Corporation, a manufacturer of large general purpose computer storage
systems and software products where he has been since 1977. Before joining
Amdahl in 1977, he was President of Xerox Business Systems. Mr. Lewis also
serves as a Director of Cypress Semiconductor and Pinnacle Systems.
Thurman J. Rodgers has served as a Director of the Company since September
1987. He is the co-founder and since 1982 has been President and Chief
Executive Officer of Cypress Semiconductor. Prior to forming Cypress
Semiconductor, Dr. Rodgers managed the design, technical development, and
engineering for the static RAM business of AMD. He also serves as a Director
of C-Cube Microsystems.
33
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, the Underwriters
named below for whom Lehman Brothers Inc., Robertson, Stephens & Company LLC
and Oppenheimer & Co., Inc. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company, and
the Company has agreed to sell to each Underwriter, the number of shares of
Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Lehman Brothers Inc. .............................................. 1,200,000
Robertson, Stephens & Company LLC.................................. 1,200,000
Oppenheimer & Co., Inc. ........................................... 600,000
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
to purchase shares of Common Stock are subject to certain conditions, and that
if any of the foregoing shares of Common Stock are purchased by the
Underwriters pursuant to the Underwriting Agreement, all the shares of Common
Stock agreed to be purchased by the Underwriters must be so purchased.
The Company has been advised that the Underwriters propose to offer the
shares of Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain selected dealers
(who may include the Underwriters) at such public offering price less a
selling concession not in excess of $.95 per share. The selected dealers may
reallow a concession not in excess of $.10 per share to certain brokers and
dealers. After the initial public offering, the public offering price, the
concession to selected dealers and the reallowance may be changed by the
Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments that the Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
aggregate of 450,000 shares of Common Stock, exercisable solely to cover over-
allotments, at the offering price to the public less the underwriting
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional shares of Common Stock proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
Certain holders of shares of Common Stock of the Company, owning an
aggregate of 413,348 shares, have agreed that they will not, subject to
certain limited exceptions, directly or indirectly, offer, sell or otherwise
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for any such shares for a period of 90 days after
the effective date of the Offering without either the prior written consent of
Lehman Brothers Inc. Lehman Brothers Inc. reserves the right to release any or
all of such shareholders from their obligations under such lock-up agreements
at any time without notice. Any such release would increase the number of
shares available for sale into the public market, which could have a material
adverse effect on the price of the Common Stock. In addition, the Company has
agreed that it will not, subject to certain limited exceptions, directly or
indirectly, offer, sell or otherwise dispose of any shares of Common Stock or
any securities convertible into or exchangeable for such shares without the
prior written consent of Lehman Brothers Inc. for 90 days after the effective
date of the Offering.
34
<PAGE>
The offering price for the Common Stock was determined by negotiations among
the Company and the Representatives of the Underwriters based largely upon the
market price for the Common Stock as reported on the Nasdaq National Market.
In general, the rules of the Commission will prohibit the Underwriters and
other members of the selling group from making a market in the Company's
Common Stock during the "cooling off" period immediately preceding the
commencement of sales in the Offering. The Commission has, however, adopted
exemptions from these rules that permit passive market making under certain
conditions. These rules permit an Underwriter or other member of the selling
group to continue to make a market in the Common Stock subject to the
conditions, among others, that its bid not exceed the highest bid by a market
maker not connected with the Offering and that its net purchases on any one
trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group intend to engage
in passive market making in the Company's Common Stock during such cooling off
period.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters in connection with the Offering will
be passed upon for the Underwriters by Latham & Watkins, San Francisco,
California.
EXPERTS
The financial statements of the Company as of September 30, 1995 and 1996,
and for each of the years in the three-year period ended September 30, 1996
included herein and elsewhere in the Registration Statement have been included
herein and in the Registration Statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon authority of said firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-3 under the Securities Act, with respect to
the Common Stock offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. For further information with respect to the Company and
such Common Stock, reference is made to the Registration Statement and the
exhibits and schedules thereto. Statements contained in this Prospectus as to
the contents of any contract or any other document referred to are not
necessarily complete. In each instance, reference is made to the copy of such
contract or document filed as an exhibit to the Registration Statement, and
each such statement is qualified by such reference. Copies of the Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Commission's principal office in Washington, D.C., or obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a
World Wide Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
35
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.............................................. F-2
Balance Sheets as of September 30, 1995 and 1996.......................... F-3
Statements of Operations for the years ended September 30, 1994, 1995 and
1996...................................................................... F-4
Statements of Shareholders' Equity for the years ended September 30, 1994,
1995 and 1996............................................................. F-5
Statements of Cash Flows for the years ended September 30, 1994, 1995 and
1996...................................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:
We have audited the accompanying balance sheets of Vitesse Semiconductor
Corporation as of September 30, 1996 and 1995 and the related statements of
operations, shareholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Vitesse Semiconductor
Corporation as of September 30, 1996 and 1995 and the results of its
operations and its cash flows for each of the years in the three-year period
ended September 30, 1996 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Los Angeles, California
October 18, 1996
F-2
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
BALANCE SHEETS
SEPTEMBER 30, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1995 1996
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents................................ $ 6,315 $ 52,436
Receivables:
Trade accounts receivable, net of allowance for
doubtful accounts of $700 in 1995 and $900 in 1996
(Note 5).............................................. 12,610 18,423
Other.................................................. 120 196
-------- --------
12,730 18,619
Inventories, net:
Raw material........................................... 1,392 1,678
Work in process........................................ 6,138 5,436
Finished goods......................................... 2,365 2,845
-------- --------
9,895 9,959
Prepaid expenses......................................... 542 841
-------- --------
Total current assets................................... 29,482 81,855
-------- --------
Property and equipment, net (Notes 2, 3, and 4)............ 11,862 17,892
Other assets............................................... 767 669
-------- --------
$ 42,111 $100,416
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short term borrowings (Note 5)........................... $ 2,950 $ --
Current installments of capital lease obligations (Notes
2 and 4)................................................ 2,085 767
Current installments of term loans (Note 3).............. 1,121 164
Accounts payable......................................... 3,553 6,731
Accrued expenses and other current liabilities (Note 6).. 1,664 3,728
Deferred revenue......................................... 220 250
-------- --------
Total current liabilities.............................. 11,593 11,640
-------- --------
Capital lease obligations, less current installments (Notes
2 and 4).................................................. 3,627 91
Term loans, less current installments (Note 3)............. 1,891 315
Commitments (Note 11)
Shareholders' equity (Note 7):
Preferred stock, $.01 par value. Authorized 10,000,000
shares; none issued or outstanding -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; issued and outstanding 15,509,758 and 19,406,527
shares at September 30, 1995 and 1996, respectively..... 155 194
Additional paid-in capital............................... 82,804 133,490
Accumulated deficit...................................... (57,959) (45,314)
-------- --------
Net shareholders' equity................................. $ 25,000 $ 88,370
-------- --------
$ 42,111 $100,416
======== ========
</TABLE>
Subsequent Event (Note 13)
See accompanying notes to financial statements.
F-3
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues, net: (Notes 9 and 10)
Production............................ $ 26,238 $ 34,703 $ 59,491
Development........................... 9,343 8,179 6,555
----------- ----------- -----------
Total revenues...................... 35,581 42,882 66,046
----------- ----------- -----------
Costs and expenses:
Cost of revenues...................... 22,226 22,505 31,792
Engineering, research and development. 8,794 8,689 11,045
Selling, general and administrative... 7,794 8,900 9,777
----------- ----------- -----------
Total costs and expenses............ 38,814 40,094 52,614
----------- ----------- -----------
Income (loss) from operations........... (3,233) 2,788 13,432
Other income (expense):
Interest income....................... 134 93 1,364
Interest expense...................... (1,111) (1,304) (772)
Other................................. 86 9 26
----------- ----------- -----------
Total other income (expense)........ (891) (1,202) 618
----------- ----------- -----------
Income (loss) before income taxes....... (4,124) 1,586 14,050
Income taxes (Note 8)................... 17 79 1,405
----------- ----------- -----------
Net income (loss)....................... $ (4,141) $ 1,507 $ 12,645
=========== =========== ===========
Net income (loss) per share............. $ (0.28) $ 0.09 $ 0.63
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding.......... 14,773,137 17,307,007 20,144,419
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL NET
----------------- PAID-IN ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance, October 1,
1993................... 14,628,323 $146 $ 79,777 $(55,325) $24,598
Exercise of stock op-
tions.................. 106,206 1 229 -- 230
Shares issued under
Employee Stock Purchase
Plan................... 245,728 3 827 -- 830
Net Loss................ -- -- -- (4,141) (4,141)
---------- ---- -------- -------- -------
Balance, September 30,
1994................... 14,980,257 150 80,833 (59,466) 21,517
Exercise of stock op-
tions.................. 311,676 3 1,107 -- 1,110
Exercise of warrants.... 4,606 -- 41 -- 41
Shares issued under
Employee Stock Purchase
Plan................... 213,219 2 823 -- 825
Net income.............. -- -- -- 1,507 1,507
---------- ---- -------- -------- -------
Balance, September 30,
1995................... 15,509,758 $155 $ 82,804 $(57,959) $25,000
Exercise of stock op-
tions.................. 972,416 10 3,401 -- 3,411
Exercise of warrants.... 56,943 -- 15 -- 15
Shares issued under
Employee Stock Purchase
Plan................... 107,410 1 974 -- 975
Issuance of Common
Stock, net of expenses. 2,760,000 28 46,296 -- 46,324
Net income.............. -- -- -- 12,645 12,645
---------- ---- -------- -------- -------
Balance, September 30,
1996................... 19,406,527 $194 $133,490 $(45,314) $88,370
========== ==== ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)................................ $(4,141) $ 1,507 $ 12,645
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 5,558 5,316 4,973
Changes in assets and liabilities:
(Increase) decrease in:
Receivables, net............................. (4,550) (756) (5,889)
Inventories.................................. (135) (937) (64)
Prepaid expenses............................. (8) (51) (299)
Other assets................................. (61) 195 98
Increase (decrease) in:
Accounts payable............................. 506 94 3,178
Accrued expenses and other current liabili-
ties........................................ (158) (250) 2,064
Deferred revenue............................. (522) 170 30
------- ------- --------
Net cash provided by (used in) operating (3,511) 5,288 16,736
activities................................ ------- ------- --------
Cash flows from investing activities:
Short-term investments........................... -- 1,000 --
Capital expenditures............................. (1,730) (3,362) (11,003)
------- ------- --------
Net cash provided by (used in) financing (1,730) (2,362) (11,003)
activities................................ ------- ------- --------
Cash flows from financing activities:
Principal payments under capital lease obliga-
tions........................................... (4,032) (2,907) (4,854)
Principal payments under term loan............... (457) (951) (2,778)
Short-term borrowings (payments)................. 2,250 700 (2,950)
Proceeds from term loan.......................... 1,335 400 245
Net proceeds from issuance of common stock....... 1,060 1,976 50,725
------- ------- --------
Net cash provided by (used in) financing 156 (782) 40,388
activities................................ ------- ------- --------
Net increase (decrease) in cash and cash equiva-
lents............................................. (5,085) 2,144 46,121
Cash and cash equivalents at beginning of year..... 9,256 4,171 6,315
------- ------- --------
Cash and cash equivalents at end of period......... $ 4,171 $ 6,315 $ 52,436
======= ======= ========
Supplemental disclosures of cash flow information--
cash paid during the period for:
Interest......................................... $ 1,138 $ 1,275 $ 656
======= ======= ========
Income taxes..................................... $ 18 $ 44 $ 347
======= ======= ========
Supplemental schedule of noncash investing and fi-
nancing activities:
Capital lease obligations incurred............... $ 287 $ -- $ --
======= ======= ========
</TABLE>
In 1994 and 1995, the Company renegotiated certain capital leases resulting
in an extension of the terms of these leases beyond their original maturities
and the conversion of certain capital leases to operating leases. The net
effects of these transactions were a $607,000 reduction in the property and
equipment and capital lease obligations accounts in 1994, and a $1,876,000
increase in the same accounts in 1995.
See accompanying notes to financial statements.
F-6
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Vitesse Semiconductor Corporation (the "Company") was incorporated under the
laws of Delaware on February 3, 1987. The Company is a leader in the design,
development, manufacturing and marketing of digital GaAs ICs.
Revenue Recognition
Production revenue is recognized when products are shipped to customers.
Revenue from development contracts is recognized upon attainment of specific
milestones established under customer contracts. Revenue from products
deliverable under development contracts, including design tools and prototype
products, are recognized upon delivery. Amounts billed in excess of revenue
recognized are included as deferred revenue in the accompanying balance
sheets. Costs related to development contracts are expensed as incurred.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. Cash equivalents
and short-term investments are principally composed of money market accounts,
U.S. Government obligations and short-term commercial paper, and are carried
at cost plus accrued interest, which approximates market value.
Inventories
Inventories are stated at the lower of cost (determined by the first-in,
first-out method) or market (net realizable value). Costs associated with the
manufacture of a new product are charged to engineering, research and
development expense as incurred until the product is proven through testing
and acceptance by the customer. Inventories are shown net of a valuation
reserve of $2,493,000 and $2,797,000 at September 30, 1995 and 1996,
respectively.
Depreciation and Amortization
Depreciation of property and equipment is provided on the straight-line
method over the estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Machinery and equipment.................. 5 years
Furniture and fixtures................... 5 years
Computer equipment....................... 3 years
Leasehold improvements................... Term of lease
</TABLE>
Organization and technology costs included in other assets are amortized
over a five-year period.
Income Taxes
The Company accounts for income taxes pursuant to the provisions of
Financial Accounting Standards Board Statement No. 109. Under the asset and
liability method of Statement No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit
carryforwards.
F-7
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Research and Development Costs
The Company charges all research and development costs to expense when
incurred. Manufacturing costs associated with the development of a new
fabrication process or a new product are expensed until such times as these
processes or products are proven through final testing and initial acceptance
by the customer.
Costs related to revenues on non-recurring engineering services billed to
customers are generally classified as cost of revenues; however, certain
related contract engineering and research costs are included in engineering,
research and development expense because these costs cannot be directly
related to individual contracts.
Computation of Net Income (Loss) Per Share
The net income (loss) per share of common stock is computed using the
weighted average number of common shares outstanding and common stock
equivalents using the application of the treasury stock method for all periods
presented. Common stock equivalents are excluded from the computation for loss
years since their inclusion would be antidilutive.
Financial Instruments
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
defines fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties. The Company's carrying value of cash equivalents, trade accounts
receivable, other receivable, accounts payable, accrued expenses, term loans
and borrowings approximates fair value because the instrument has a short-term
maturity or because the applicable interest rates are comparable to current
borrowing rates of those instruments.
Long-Lived Assets
In March 1995, Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of," was issued. This statement provides guidelines for
recognition of impairment of losses related to long-term assets and is
effective for fiscal years beginning after December 15, 1995. Company
management does not believe that the adoption of this new standard will have a
material effect on the Company's financial statements.
Accounting for Stock Options
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" was issued. This statement
encourages, but does not require, a fair value based method of accounting for
employee stock options and will be effective for fiscal years beginning after
December 31, 1995. While the Company is still evaluating Statement No. 123, it
currently expects to elect to continue to measure and to recognize
compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to
Employees" and to comply with the pro forma disclosure requirements of
Statement No. 123. If the Company makes this election, Statement No. 123 will
have no impact on the Company's financial statements.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles. Actual
results could differ from those estimates.
F-8
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reclassification
Certain reclassifications have been made to the prior year financial
statements to conform with the current year presentation.
NOTE 2--PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment.................................. $23,333 $30,739
Furniture and fixtures................................... 122 144
Computer equipment....................................... 6,179 6,542
Leasehold improvements................................... 3,916 3,966
------- -------
33,550 41,391
Less accumulated depreciation and amortization........... 21,688 23,499
------- -------
$11,862 $17,892
======= =======
</TABLE>
Included in machinery and equipment is equipment not yet placed in service
of $501,000 and $4,713,000 as of September 30, 1995 and 1996, respectively.
Balances applicable to assets acquired under capitalized leases, which are
included in property and equipment, are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------
1995 1996
------- ------
(IN THOUSANDS)
<S> <C> <C>
Machinery and equipment................................... $12,261 $2,308
Furniture and fixtures.................................... 51 14
Computer equipment........................................ 2,560 2,038
Leasehold improvements.................................... 1,635 --
------- ------
16,507 4,360
Less accumulated depreciation and amortization............ 10,579 3,629
------- ------
$ 5,928 $ 731
======= ======
</TABLE>
NOTE 3--TERM LOANS
The Company has various equipment term loans with a financial institution
totaling $479,000 bearing interest rates between 9% and 10.2% per annum
payable in monthly installments through fiscal 2000.
Future principal payments under the term loans are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending September 30:
1997.................................. $164
1998.................................. 168
1999.................................. 131
2000.................................. 16
----
$479
====
</TABLE>
F-9
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--CAPITAL LEASE OBLIGATIONS
Capital lease obligations are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER
30,
-----------
1995 1996
------ ----
(IN
THOUSANDS)
<S> <C> <C>
Capital lease obligations, secured by related assets,
payable in aggregate monthly installments of $89,000
including interest ranging from 4% to 15% through January
1998...................................................... $5,712 $858
Less current installments.................................. 2,085 767
------ ----
$3,627 $ 91
====== ====
</TABLE>
The present value of future minimum capital lease payments is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending September 30:
1997..................................................... $823
1998..................................................... 111
----
Total...................................................... 934
Less amounts representing interest......................... 76
----
$858
====
</TABLE>
NOTE 5--SHORT-TERM BORROWINGS
At September 30, 1996, the Company had a $12,500,000 revolving line of
credit agreement with a bank. This agreement expires in January 1997.
Borrowings under the revolving line of credit agreement are limited to 80% of
eligible trade accounts receivable, as defined by the agreement. The agreement
provides for interest to be paid monthly at prime plus 0.5% (8.75% on
September 30, 1996). The Company must adhere to certain requirements and
provisions to be in compliance with the terms of the agreement and is
prohibited from paying dividends without the consent of the bank. Borrowings
are collateralized by all Company assets. As of September 30, 1995, $2,950,000
was outstanding under the line of credit (none at September 30, 1996).
NOTE 6--ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1995 1996
------ ------
<S> <C> <C>
Accrued vacation........................................... $ 324 $ 489
Accrued salaries and wages................................. 498 725
Accrued taxes.............................................. -- 1,108
Other...................................................... 731 1,406
------ ------
$1,553 $3,728
====== ======
</TABLE>
NOTE 7--SHAREHOLDERS' EQUITY
Preferred Stock
In fiscal 1991, the Board of Directors authorized 10,000,000 shares of
undesignated preferred stock. The Company has no present plans to issue any of
this preferred stock.
F-10
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock Option Plans
1987 Incentive Stock Option Plan and 1989 Stock Option Plan
The Company's 1987 Incentive Stock Option Plan (the "1987 Plan") was adopted
by the Board of Directors in February 1987 and approved by the shareholders in
January 1988. Pursuant to the 1987 Plan, 350,000 shares of the Company's
common stock were reserved for issuance.
The 1989 Stock Option Plan (the "1989 Plan") was approved by the Board of
Directors in April 1989 and approved by the shareholders in April 1990.
Pursuant to the 1989 Plan, 1,166,666 shares of the Company's common stock were
reserved for issuance. The 1987 Plan and 1989 Plan are collectively referred
to as the "Plans."
The Plans provide for the granting to employees (including officers and
employee directors of "incentive stock options" and for the granting of
nonstatutory options to employees (including officers and directors) and
consultants (including directors). Subject to the discretion of the Board of
Directors, options granted under the Plans generally vest and become
exercisable at the rate of 24% at the end of the first year, and thereafter at
a rate of 2% of the shares subject to the options per month and have a ten-
year term. Options have also been granted under the Plans with vesting periods
of fewer than five years.
The exercise price of all incentive stock options granted under the Plans
must be at least equal to the fair market value of the shares on the date of
grant. With respect to any participant who owns stock representing more than
10% of the voting rights of the Company's outstanding capital stock, the
exercise price of any incentive stock options granted must equal at least 110%
of the fair market value on the grant date. The exercise price of all
nonstatutory stock options granted under the Plans must be at least 85% of the
fair market value of the common stock on the date of grant.
1991 Stock Option Plan
The 1991 Stock Option Plan (the "1991 Plan") was adopted by the Board of
Directors and approved by the shareholders in August 1991. A total of
2,000,000 shares of common stock were reserved for issuance under the 1991
Plan. In January 1995, the shareholders approved an amendment to the 1991 Plan
to increase the number of shares reserved thereunder by an aggregate of
500,000 shares and to automatically increase on an annual basis beginning in
1995, by a number of shares equal to 3.5% of the Company's common stock
outstanding at the end of the fiscal year.
The 1991 Plan provides for the granting of incentive stock options to
employees of the Company and for the granting of nonstatutory stock options to
employees and consultants of the Company. Options granted under the 1991 Plan
generally vest and become exercisable at the rate of 25% per year, however,
certain options granted prior to June 30, 1992, vest and become exercisable at
the rate of 24% at the end of the first year, and thereafter at a rate of 2%
of the shares subject to the options per month.
The exercise price of all incentive and nonstatutory stock options granted
under the 1991 Plan must be at least equal to the fair market value of the
shares of common stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
stock of the Company, the exercise price of any incentive stock option granted
must equal at least 110% of the fair market value on the grant date and the
maximum term of the options must not exceed five years. The term of all other
options under the 1991 Plan may not exceed ten years.
In June 1993, substantially all outstanding stock options granted under the
1987,1989 and 1991 Plans with an exercise price in excess of $3.625 per share
were canceled and replaced with new options for a like number
F-11
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of shares having an exercise price of $3.625 per share, the fair market value
on the grant date. The new options have certain restrictions relating to the
sale of the shares.
Under the 1987 Plan, the 1989 Plan and the 1991 Plan, as of September 30,
1996, options to purchase an aggregate of 1,911,207 shares had been exercised,
options to purchase an aggregate of 3,064,726 shares were outstanding at a
weighted average exercise price of $7.52 per share and 441,215 shares (which
increased to 1,120,443 effective October 1, 1996 pursuant to the terms of the
1991 Plan) remained available for future grant. Of the 3,064,726 options
outstanding, 640,245 options were vested and exercisable under the Plans
pursuant to incentive stock options and 188,131 options were vested and
exercisable pursuant to nonstatutory stock options.
1991 Directors' Stock Option Plan
The 1991 Directors' Stock Option Plan (the "Directors' Plan") was adopted by
the Board of Directors and approved by the shareholders in August 1991 and
200,000 shares of common stock had been reserved for issuance under the
Directors' Plan. In January 1996, the shareholders approved an amendment to
the Directors' Plan to increase the number of shares reserved thereunder by an
aggregate of 200,000 shares. As of September 30, 1996, 235,000 options had
been granted under the Directors' Plan; 31,700 of such grants had been
exercised and 10,000 had been canceled. At September 30, 1996, 110,500 options
were exercisable.
The Directors' Plan provides that each non-employee director automatically
will be granted a nonstatutory option to purchase 10,000 shares (except in the
case of the Chairman of the Board of the Company who shall receive an option
to purchase 15,000 shares) of common stock upon first becoming a director. In
addition, the Directors' Plan provides that each director serving on January 1
of each calendar year will automatically be granted a nonstatutory option to
purchase 10,000 shares (except in the case of the Chairman of the Board of the
Company who shall receive an option to purchase 15,000 shares) of common
stock. The options granted to the non-employee directors are for a ten year
term and vest at the rate of 2% of the shares subject to the option at the end
of each month following the date of grant. The exercise price of the options
may not be less than the fair market value of the common stock on the last
business day prior to the date of grant of the option.
F-12
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Activity under the 1987, 1989 and 1991 Plans and the 1991 Directors' Stock
Option Plan is as follows:
<TABLE>
<CAPTION>
OPTION PRICE
NUMBER OF ----------------------------
SHARES PER SHARE AGGREGATE
--------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Options outstanding at October 1, 1993. 2,027,727 $ 0.03-10.75 $ 7,441
Options:
Granted.............................. 1,025,727 3.75-5.625 4,280
Exercised............................ (106,206) .03-5.00 (229)
Cancelled or expired................. (190,089) 2.16-5.625 (748)
--------- ------------- -------
Options outstanding at September 30,
1994................................... 2,756,432 .03-10.75 10,744
Options:
Granted.............................. 1,033,600 4.375-11.625 5,362
Exercised............................ (311,676) .03-5.625 (1,110)
Cancelled or expired................. (295,999) 1.62-5.875 (1,375)
--------- ------------- -------
Options outstanding at September 30,
1995................................... 3,182,357 .03-11.625 13,621
Options:
Granted.............................. 1,190,600 11.00-35.75 15,346
Exercised............................ (972,416) 0.03-9.375 (3,410)
Cancelled or expired................. (142,515) 3.625-13.875 (1,058)
--------- ------------- -------
Options outstanding at September 30, 3,258,026 $ 0.03-35.75 $24,499
1996................................... ========= ============= =======
</TABLE>
Subsequent to September 30, 1996, the Board of Directors de-reserved
approximately 2,709,698 shares from those previously designated for option
grants and authorized an increase in the number of authorized shares of Common
Stock in the Company's Certificate of Incorporation to 60,000,000 shares. In
addition, the Company's Board of Directors has approved a plan which states
that if the increase in the authorized number of shares is not approved at the
Company's 1997 Annual Meeting of Shareholders, the Company will meet its
obligations under the Company's option plans through stock repurchases,
payments to holders of vested options to cancel such options or other means.
1991 Employee Stock Purchase Plan
The Company's 1991 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors and approved by the shareholders effective
December 11, 1991. The Purchase Plan is intended to qualify under Section 423
of the Internal Revenue Code of 1986, as amended. A total of 1,000,000 shares
of common stock has been reserved for issuance under the Purchase Plan. Under
the Purchase Plan, eligible employees may purchase shares of the Company's
common stock at six month intervals at 85% of the lower of the fair market
value on the first or the last day of each six-month period. Employees may
purchase shares having a value not exceeding 20% of their compensation,
including commissions and overtime, but excluding bonuses. Employees may end
their participation in the offering at any time during the offering period,
and participation ends automatically on termination of employment with the
Company. In fiscal 1995 and 1996, 213,219 and 107,410 shares, respectively,
were issued under the Purchase Plan at average prices of $3.874 and $9.073. At
September 30, 1996, 343,450 shares were reserved for future issuance. In
January 1996, the shareholders approved an amendment to the Purchase Plan to
increase the number of shares reserved thereunder by an aggregate of 250,000
shares.
F-13
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Stock Warrants
In September and October 1991, the Company entered into a note and warrant
financing pursuant to which 9% promissory notes in the aggregate amount of
$3,000,000 were issued. Warrants issued in connection with the financing were
exercisable at $9 per share. A total of 99,789 warrants were issued in
connection with the financing. No warrants were exercised in fiscal 1994. In
fiscal 1995, warrants to acquire 4,606 shares were exercised for total
proceeds of $41,000 and, in fiscal 1996, warrants to acquire 1,709 shares were
exercised for total proceeds of $15,000 and 89,714 warrants were exchanged for
55,234 common shares. As of September 30, 1996, no warrants were outstanding.
NOTE 8--INCOME TAXES
Income tax expense consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------
1994 1995 1996
---- ---- ------
(UNAUDITED)
<S> <C> <C> <C>
Current:
Federal................................................. $-- $60 $ 300
State................................................... 17 19 755
Foreign................................................. -- -- 350
---- --- ------
$ 17 $79 $1,405
==== === ======
</TABLE>
The actual income tax expense differs from the expected tax expense computed
by applying the federal corporate tax rate of 34% to income before income
taxes as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------
1994 1995 1996
---- ----- -------
(UNAUDITED)
<S> <C> <C> <C>
Federal income taxes at statutory rate............... $-- $ 539 $ 4,918
Alternative minimum taxes............................ -- -- 300
State income taxes................................... 17 19 755
Foreign income taxes................................. -- -- 350
Utilization of tax loss carryforward................. -- (479) (4,918)
---- ----- -------
$ 17 $ 79 $ 1,405
==== ===== =======
</TABLE>
The tax effects of temporary differences that give rise to a significant
portion of the deferred tax assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $19,216 $19,646
Research and development tax credit carryforwards....... 3,405 3,239
Allowances and reserves................................. 2,140 1,257
Accumulated depreciation and amortization............... 2,202 2,072
Other................................................... 1,079 938
------- -------
Total gross deferred tax assets........................ 28,042 27,152
Less valuation allowance................................. 28,042 27,152
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>
F-14
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In 1996, the Company utilized $15,316,000 to reduce taxable income,
associated with certain employee exercises of stock options. Tax effects of
such items, which approximate $5,207,000 at September 30, 1996, will be
recorded as additional paid in capital when management concludes that it is
more likely than not that the related tax benefits will be realized. For
financial reporting purposes, the Company utilized net operating loss
carryforwards of $14,051,000 in 1996. These loss carryforwards were not
utilized for tax purposes due to the availability of deductions, for tax
purposes only, associated with the employee exercise of stock options
described above.
The net change in the valuation allowance for the years ended September 30,
1994, 1995 and 1996 was an increase (decrease) of $2,778,000, $(102,000) and
$(890,000), respectively. In assessing the realizability of deferred tax
assets, management considered whether it is more likely than not that some
portions or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible. Management considers the projected future taxable income and tax
planning strategies in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income of
approximately $65,000,000 prior to the expiration of the net operating loss
carryforwards in 2009. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred
tax assets are deductible, the Company has established a valuation allowance
for all deductible differences.
As of September 30, 1996, the Company had net operating loss carryforwards
for federal and state income tax purposes of $57,782,000 and $18,389,000,
respectively, which are available to offset future taxable income, if any,
through 2009. Additionally, the Company had research and development tax
credit carryforwards for federal and state income tax purposes of $2,210,000
and $1,029,000 respectively, which are available to offset future income
taxes, if any, through 2010.
NOTE 9--LICENSING AGREEMENT
The Company has a licensing agreed with Fujitsu Limited ("Fujitsu") whereby
Fujitsu has the right to use certain circuit design technology previously
developed by the Company. Royalties are payable to the Company based on a
percentage of sales, as defined. In each of the years ended September 30,
1994, 1995 and 1996, a nominal amount of royalties was received under this
agreement.
NOTE 10--SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND SEGMENT
INFORMATION
In fiscal 1994, two customers accounted for 14% and 10% of total revenues,
respectively. In fiscal 1995, two customers accounted for 19% and 17% of total
revenues, respectively. In fiscal 1996, two customers accounted for 25% and
11% of total revenues, respectively.
The Company generally sells its products to customers engaged in the design
or manufacture of high technology products either recently introduced or not
yet introduced to the marketplace. Substantially all the Company's trade
accounts receivable are due from such sources. The Company's major customers
who account for more than 10% of total revenues aggregated 38% and 37% of
total trade accounts receivables at September 30, 1995 and 1996, respectively.
F-15
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Export revenues are summarized by geographic areas as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- -------
<S> <C> <C> <C>
Europe............................................. $4,767 $ 4,968 $ 6,505
Japan.............................................. 3,767 8,211 7,972
Other.............................................. 316 354 1,147
------ ------- -------
$8,850 $12,533 $15,624
====== ======= =======
</TABLE>
NOTE 11--COMMITMENTS
The Company leases facilities under noncancellable operating leases that
expire through 2001. The Company also leases certain machinery and equipment
under noncancellable operating leases that expire through 1999.
Approximate minimum rental commitments under these operating leases as of
September 30, 1996 were as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending September 30:
1997.................................. $1,539
1998.................................. 1,105
1999.................................. 278
2000.................................. 73
2001.................................. 43
------
$3,038
======
</TABLE>
Rent expense under operating leases was approximately $1,945,000, $2,147,000
and $2,507,000 for the years ended September 30, 1994, 1995 and 1996,
respectively.
NOTE 12--RETIREMENT SAVINGS PLAN
The Company has a qualified retirement plan under the provisions of Section
401(k) of the Internal Revenue Code covering substantially all employees.
Participants in this plan may defer up to the maximum annual amount allowable
under IRS regulations. The contributions are fully vested and nonforfeitable
at all times. The Company does not make matching contributions under the plan.
NOTE 13--SUBSEQUENT EVENT (UNAUDITED)
The Company is currently negotiating a lease financing arrangement in
connection with the new wafer fabrication facility. In the event the Company
successfully negotiates such lease financing arrangement, the Company
anticipates that the lessor would provide approximately $25 million for the
purchase of the land and the building of the wafer fabrication facility under
a lease, which is expected to be treated as an operating lease for accounting
purposes. The lease arrangement would be collateralized with approximately $22
million of cash provided by the Company, which would be deposited in a
restricted account and classified as a long-term restricted investment on the
Company's balance sheet. The lease would have a base period of five years.
Under the terms of the lease arrangement, the Company would be required to
meet certain financial covenants and would be restricted in declaring and
paying dividends and entering into certain merger and change of control
transactions. The negotiations concerning the proposed lease have not been
completed, and there can be no assurance that a final agreement relating to
the lease will be reached based on the above terms, or at all.
F-16
<PAGE>
[VITESSE LOGO]
[BACKGROUND OF PAGE - AN
INTEGRATED CIRCUIT]
AUTOMATED
TEST EQUIPMENT
MANY OF THE COMPANY'S H-
GAAS ICS ARE USED IN THE
AUTOMATED TEST EQUIPMENT
MARKET, WHICH IS CHARACTER-
IZED BY HIGH- PERFORMANCE
SYSTEMS. THESE SYSTEMS RE-
QUIRE ICS WITH HIGH SPEED,
LOW POWER DISSIPATION AND
HIGH COMPLEXITY. SCHLUM-
BERGER LTD. USES A VITESSE
H-GAAS IC AS A TIMING COM-
PONENT IN ITS ITS9000GX
200MHZ LOGIC TESTER, SHOWN
BELOW.
[PICTURE OF SCHLUMBERGER LOGIC TESTER]
THE COMPANY'S H-GAAS FX40K
GATE ARRAY, PICTURED TO THE
[PICTURE OF FX40K GATE ARRAY] LEFT, IS USED IN HIGH-PER-
FORMANCE ATE SYSTEMS UTIL-
IZING THE "TESTER-PER-PIN"
ARCHITECTURE.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFOR-
MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information..................................................... 3
Incorporation of Certain Documents by Reference........................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 12
Dividend Policy........................................................... 12
Capitalization............................................................ 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 15
Business.................................................................. 22
Management................................................................ 32
Underwriting.............................................................. 34
Legal Matters............................................................. 35
Experts................................................................... 35
Additional Information.................................................... 35
Index to Financial Statements............................................. F-1
</TABLE>
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3,000,000 SHARES
[LOGO OF VITESSE SEMICONDUCTOR CORPORATION]
COMMON STOCK
-----------------
PROSPECTUS
November 13, 1996
-----------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
OPPENHEIMER & CO., INC.
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