<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1996.
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
VITESSE SEMICONDUCTOR CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 77-0138960
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
----------------
741 CALLE PLANO
CAMARILLO, CALIFORNIA 93012
(805) 388-3700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
LOUIS R. TOMASETTA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VITESSE SEMICONDUCTOR CORPORATION
741 CALLE PLANO
CAMARILLO, CALIFORNIA 93012
(805) 388-3700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
FRANCIS S. CURRIE CHRISTOPHER L. KAUFMAN
JOHN T. SHERIDAN ORA T. FRUEHAUF
HAROLD R. DEGRAFF TAD J. FREESE
WILSON SONSINI GOODRICH & ROSATI LATHAM & WATKINS
PROFESSIONAL CORPORATION 505 MONTGOMERY STREET, SUITE 1900
650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94111
PALO ALTO, CALIFORNIA 94304 (415) 391-0600
(415) 493-9300
----------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ______
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 3,450,000 $38.125 $131,531,250 $39,858
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</TABLE>
(1) Includes 450,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c).
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES
AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
Subject to Completion, dated October 23, 1996
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
3,000,000 SHARES
[VITESSE SEMICONDUCTOR CORPORATION LOGO]
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 October 21, 1996, as
reported on the Nasdaq National Market, was $35.50 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>
<CAPTION>
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Underwriting
Price to Discounts Proceeds to
Public and Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share............................... $ $ $
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Total(3)................................ $ $ $
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</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 $ , $ and $ , 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 , 1996.
-------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
OPPENHEIMER & CO., INC.
, 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,
[PICTURE OF VSC7125 ICs] THE COMPANY TARGETS HIGH-PERFOR-
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, 1995;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
December 31, 1995, March 31, 1996 and June 30, 1996;
(c) The Company's Proxy Statement for its annual meeting of shareholders
held on January 23, 1996 (other than the portions thereof identified as not
deemed filed with the Commission);
(d) The Company's 1995 Annual Report to Shareholders; and
(e) 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 $171,623
Total assets............................................... 100,416 201,824
Total current liabilities.................................. 11,640 11,640
Long-term obligations, less current installments(4)........ 406 406
Net shareholders' equity................................... 88,370 189,778
</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 at an assumed offering price of $35.50 per
share and 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, based on an assumed public offering price
of $35.50 per share, after deducting the underwriting discounts and
commissions and estimated offering expenses, are estimated to be $101,408,000
($116,664,000 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 October 21, 1996)............. 42 5/8 35 1/2
</TABLE>
As of September 30, 1996, there were approximately 532 holders of record of
the Common Stock. On October 21, 1996, the last reported sale price on the
Nasdaq National Market for the Common Stock was $35.50 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, under the Company's proposed lease arrangement
related to the Company's proposed Colorado Springs, Colorado, wafer
fabrication facility, the Company would be restricted from declaring or paying
dividends. 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, at an assumed public offering price of $35.50 per share (and 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............................. 133,490 234,868
Accumulated deficit.................................... (45,314) (45,314)
-------- --------
Net shareholders' equity............................. 88,370 189,778
-------- --------
Total capitalization................................. $ 88,776 $190,184
======== ========
</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 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.
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............................ 1.2(micrometer) 0.8(micrometer) 0.6(micrometer) 0.4(micrometer)
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 September 30, 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
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.
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. ..............................................
Robertson, Stephens & Company LLC..................................
Oppenheimer & Co., Inc. ...........................................
---------
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 $ per share. The selected dealers may
reallow a concession not in excess of $ 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 will be 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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO OF VITESSE SEMICONDUCTOR CORPORATION]
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
OPPENHEIMER & CO., INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting commission, payable by the Registrant in connection with the sale
of Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee........................................... $ 39,858
NASD filing fee................................................ 13,654
Nasdaq additional listing fee.................................. 17,500
Blue Sky fees and expenses..................................... 5,000
Printing and engraving expenses................................ 75,000
Legal fees and expenses........................................ 100,000
Accounting fees and expenses................................... 40,000
Transfer agent and registrar fees.............................. 3,000
Miscellaneous expenses......................................... 5,988
--------
Total........................................................ $300,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Paragraph 9 of the Registrant's
Amended Certificate of Incorporation and Article 6 of the Registrant's Bylaws
provide for indemnification of the Registrant's directors and officers to the
maximum extent permitted by the Delaware General Corporation Law. The
Registrant also maintains, and intends to continue to maintain, insurance for
the benefit of its directors and officers to insure such persons against
certain liabilities, including liabilities under the Securities laws.
Reference is also made to Section 8 of the Underwriting Agreement (Exhibit 1.1
hereto) indemnifying officers and directors of the Registrant against certain
liabilities.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement.
3.1(1) Certificate of Incorporation of Registrant, as amended to date.
3.2(2) Bylaws of Registrant, as amended to date.
4.1(3) Amended Modification Agreement including Registration Rights and Right
of First Refusal dated June 12, 1991 between Registrant and certain
security holders of Registrant.
4.2 Specimen of Registrant's Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
</TABLE>
- --------
(1) Incorporated by reference from the Company's annual report on Form 10-K
for the period ended September 30, 1992.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File no. 33-43548), effective December 10, 1991.
(3) Confidential treatment previously granted as to certain portions of these
exhibits.
II-1
<PAGE>
(b) Financial Statement Schedules
Not Applicable
ITEM 17. UNDERTAKINGS.
(a) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
a registration statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of the
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the Registrant's Certificate of Incorporation,
Bylaws, indemnification agreements or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(d) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver,
or cause to be delivered to each person to whom the prospectus is sent or
given, the latest quarterly report that is specifically incorporated by
reference in the prospectus to provide such interim financial information.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant certifies
that it has reasonable grounds to believe that it meets all the requirements
for filing on Form S-3 and has duly caused this Registration Statement on Form
S-3 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of Camarillo, State of California, on this 23rd day of October,
1996.
VITESSE SEMICONDUCTOR CORPORATION
/s/ Eugene F. Hovanec
By: ______________________________________
Eugene F. Hovanec
Vice President, Finance and Chief
Financial Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Louis R. Tomasetta and Eugene F.
Hovanec, and each of them, their true and lawful attorneys and agents, with
full power of substitution, each with power to act alone, to sign and execute
on behalf of the undersigned any and all amendments (including without
limitation any post-effective amendments and amendments thereto) to this
Registration Statement on Form S-3, requests to accelerate the effectiveness
of this Registration Statement, and any registration statement for the same
offering that is to be effective under Rule 462(b) of the Securities Act, and
to perform any acts necessary in order to file the same, with all exhibits
thereto and other documents in connection therewith with the Securities and
Exchange Commission, and each of the undersigned does hereby ratify and
confirm all that said attorneys and agents, or their or his or her
substitutes, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on
the dates indicated:
SIGNATURES TITLE DATE
/s/ Louis R. Tomasetta President and Chief October 23,
- ----------------------------------- Executive Officer 1996
LOUIS R. TOMASETTA (Principal Executive
Officer)
/s/ Eugene F. Hovanec Vice President, October 23,
- ----------------------------------- Finance and Chief 1996
EUGENE F. HOVANEC Financial Officer
(Principal Financial
and Accounting
Officer)
/s/ Pierre R. Lamond Chairman of the Board October 23,
- ----------------------------------- of Directors 1996
PIERRE R. LAMOND
/s/ James A. Cole Director October 23,
- ----------------------------------- 1996
JAMES A. COLE
/s/ John C. Lewis Director October 23,
- ----------------------------------- 1996
JOHN C. LEWIS
/s/ Thurman J. Rogers Director October 23,
- ----------------------------------- 1996
THURMAN J. ROGERS
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1(1) Certificate of Incorporation of Registrant, as amended to date.
3.2(2) Bylaws of Registrant, as amended to date.
4.1(3) Amended Modification Agreement including Registration Rights and Right
of First Refusal dated June 12, 1991 between Registrant and certain
security holders of Registrant.
4.2 Specimen of Registrant's Common Stock Certificate.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C.
23.1 Consent of Independent Certified Public Accountants.
23.2 Consent of Counsel (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-3).
</TABLE>
- --------
(1) Incorporated by reference from the Company's annual report on Form 10-K
for the period ended September 30, 1992.
(2) Incorporated by reference from the Company's Registration Statement on
Form S-1 (File no. 33-43548), effective December 10, 1991.
(3) Confidential treatment previously granted as to certain portions of these
exhibits.
<PAGE>
EXHIBIT 1.1
3,000,000 SHARES
VITESSE SEMICONDUCTOR CORPORATION
COMMON STOCK ($.01 PAR VALUE)
UNDERWRITING AGREEMENT
----------------------
November __, 1996
LEHMAN BROTHERS INC.
ROBERTSON, STEPHENS & COMPANY LLC
OPPENHEIMER & CO., INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Vitesse Semiconductor Corporation, a Delaware corporation (the
"Company"), proposes to sell 3,000,000 shares (the "Firm Stock") of the
Company's Common Stock, par value $.01 per share (the "Common Stock"). In
addition, the Company proposes to grant to the Underwriters named in Schedule 1
hereto (the "Underwriters") an option to purchase up to an additional 450,000
shares of the Common Stock on the terms and for the purposes set forth in
Section 2 (the "Option Stock"). The Firm Stock and the Option Stock, if
purchased, are hereinafter collectively called the "Stock." This is to confirm
the agreement concerning the purchase of the Stock from the Company by the
Underwriters.
1. Representations, Warranties and Agreements of the Company.
The Company represents, warrants and agrees that:
(a) A registration statement on Form S-3 with respect to the Stock
has (i) been prepared by the Company in conformity with the
requirements of the United States Securities Act of 1933 (the
"Securities Act") and the rules and regulations (the "Rule and
Regulations") of the United States Securities and Exchange Commission
(the "Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement have been
delivered by the Company to you as the representatives (the
"Representatives") of the Underwriters. As used in this
<PAGE>
Agreement, "Effective Time" means the date and the time as of which
such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time; "Preliminary
Prospectus" means each prospectus included in such registration
statement, or amendments thereof, before it became effective under the
Securities Act and any prospectus filed with the Commission by the
Company with the consent of the Representatives pursuant to Rule
424(a) of the Rules and Regulations; "Registration Statement" means
such registration statement, as amended at the Effective Time,
including any documents incorporated by reference therein at such time
and all information contained in the final prospectus filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations in
accordance with Section 5 hereof and deemed to be a part of the
registration statement as of the Effective Time pursuant to paragraph
(b) of Rule 430A of the Rules and Regulations; and "Prospectus" means
such final prospectus, as first filed with the Commission pursuant to
paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations.
Reference made herein to any Preliminary Prospectus or to the
Prospectus shall be deemed to refer to and include any documents
incorporated by reference therein pursuant to Item 12 of Form S-3
under the Securities Act, as of the date of such Preliminary
Prospectus or the Prospectus, as the case may be, and any reference to
any amendment or supplement to any Preliminary Prospectus or the
Prospectus shall be deemed to refer to and include any document filed
under the United States Securities Exchange Act of 1934 (the "Exchange
Act") after the date of such Preliminary Prospectus or the Prospectus,
as the case may be, and incorporated by reference in such Preliminary
Prospectus or the Prospectus, as the case may be; and any reference to
any amendment to the Registration Statement shall be deemed to include
any annual report of the Company filed with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act after the Effective Time
that is incorporated by reference in the Registration Statement. The
Commission has not issued any order preventing or suspending the use
of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will, when they become effective or are filed with the
Commission, as the case may be, conform in all respects to the
requirements of the Securities Act and the Rules and Regulations and
do not and will not, as of the applicable effective date (as to the
Registration Statement and any amendment thereto) and as of the
applicable filing date (as to the Prospectus and any amendment or
supplement thereto) contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided that
no representation or warranty is made as to information contained in
or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company through the Representatives by or on behalf of any
Underwriter specifically for inclusion therein.
2
<PAGE>
(c) The documents incorporated by reference in the Prospectus, when
they became effective or were filed with the Commission, as the case
may be, conformed in all material respects to the requirements of the
Exchange Act and the rules and regulations of the Commission
thereunder, and none of such documents contained an untrue statement
of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; and any further documents so filed and incorporated by
reference in the Prospectus, when such documents are filed with
Commission will conform in all material respects to the requirements
of the Exchange Act and the rules and regulations of the Commission
thereunder and will not contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading.
(d) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of its jurisdiction of
incorporation, is duly qualified to do business and is in good
standing as a foreign corporation in each jurisdiction in which its
ownership or lease of property or the conduct of its business requires
such qualification, and has all power and authority necessary to own
or hold its properties and to conduct the business in which it is
engaged; and the Company has no subsidiaries. The Company does not own
or control, directly or indirectly, any corporation, association or
other entity.
(e) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus.
(f) The unissued shares of the Stock to be issued and sold by the
Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and non-
assessable; and the Stock will conform to the description thereof
contained in the Prospectus.
(g) This Agreement has been duly authorized, executed and delivered
by the Company.
(h) The execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby
will not conflict with or result in a breach or violation of any of
the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the property or assets of the Company is
subject, nor will such actions result in any violation of the
provisions of the charter or by-laws of the Company or any statute or
any order, rule or regulation of any court or governmental agency or
body having jurisdiction over
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the Company or any of its properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws
in connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby.
(i) There are no contracts, agreements or understandings between the
Company and any person granting such person the right (other than
rights which have been waived or satisfied) to require the Company to
file a registration statement under the Securities Act with respect to
any securities of the Company owned or to be owned by such person or
to require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
(j) Except as described in the Prospectus, the Company has not sold
or issued any shares of Common Stock during the six-month period
preceding the date of the Prospectus, including any sales pursuant to
Rule 144A under, or Regulations D or S of, the Securities Act, other
than shares issued pursuant to employee benefit plans, qualified stock
options plans or other employee compensation plans or pursuant to
outstanding options, rights or warrants.
(k) The Company has not sustained, since the date of the latest
audited financial statements included in the Prospectus, any material
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus; and, since such
date, there has not been any change in the capital stock or long-term
debt of the Company or any of its subsidiaries or any material adverse
change, or any development involving a prospective material adverse
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the
Company, otherwise than as set forth or contemplated in the
Prospectus.
(l) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby,
at the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
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(m) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 7(g)
hereof, are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(n) The Company has good and marketable title in fee simple to all
real property and good and marketable title to all personal property
owned by it, in each case free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such as
do not materially affect the value of such property and do not
materially interfere with the use made and proposed to be made of such
property by the Company; and all real property and buildings held
under lease by the Company are held by it under valid, subsisting and
enforceable leases, with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company.
(o) The Company carries, or is covered by, insurance in such amounts
and covering such risks as is adequate for the conduct of its business
and the value of its properties and as is customary for companies
engaged in similar businesses in similar industries.
(p) The Company owns or possesses adequate rights to use all material
patents, patent applications, trademarks, service marks, trade names,
trademark registrations, service mark registrations, copyrights and
licenses necessary for the conduct of its business and has no reason
to believe that the conduct of its business will conflict with, and
have not received any notice of any claim of conflict with, any such
rights of others.
(q) There are no legal or governmental proceedings pending to which
the Company is a party or of which any property or assets of the
Company or any of its subsidiaries is the subject which, if determined
adversely to the Company, might have a material adverse effect on the
consolidated financial position, stockholders' equity, results of
operations, business or prospects of the Company; and to the best of
the Company's knowledge, no such proceedings are threatened or
contemplated by governmental authorities or threatened by others.
(r) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
(s) There are no contracts or other documents which are required to
be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed
as exhibits to the Registration Statement or incorporated therein by
reference as permitted by the Rules and Regulations.
(t) No labor disturbance by the employees of the Company exists or,
to the knowledge of the Company, is imminent which might be expected
to have a
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material adverse effect on the financial position, stockholders'
equity, results of operations, business or prospects of the Company.
(u) The Company has filed all federal, state and local income and
franchise tax returns required to be filed through the date hereof and
has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company which has had (nor does the
Company have any knowledge of any tax deficiency which, if determined
adversely to the Company might have) a material adverse effect on the
financial position, stockholders' equity, results of operations,
business or prospects of the Company.
(v) The Company (i) makes and keeps accurate books and records and
(ii) maintains internal accounting controls which provide reasonable
assurance that (A) transactions are executed in accordance with
management's authorization, (B) transactions are recorded as necessary
to permit preparation of its financial statements and to maintain
accountability for its assets, (C) access to its assets is permitted
only in accordance with management's authorization and (D) the
reported accountability for its assets is compared with existing
assets at reasonable intervals.
(w) The Company (i) is not in violation of its charter or by-laws,
(ii) is in default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any material indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which it is
a party or by which it is bound or to which any of its properties or
assets is subject and (iii) is not in violation in any material
respect of any law, ordinance, governmental rule, regulation or court
decree to which it or its property or assets may be subject or has
failed to obtain any material license, permit, certificate, franchise
or other governmental authorization or permit necessary to the
ownership of its property or to the conduct of its business.
(x) There has been no storage, disposal, generation, manufacture,
refinement, transportation, handling or treatment of toxic wastes,
medical wastes, hazardous wastes or hazardous substances by the
Company (or, to the knowledge of the Company, any of its predecessors
in interest) at, upon or from any of the property now or previously
owned or leased by the Company in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or
which would require remedial action under any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit, except
for any violation or remedial action which would not have, or could
not be reasonably likely to have, singularly or in the aggregate with
all such violations and remedial actions, a material adverse effect on
the general affairs, management, financial position, stockholders'
equity or results of operations of the Company; there has been no
material spill, discharge, leak, emission, injection, escape, dumping
or release of any kind onto
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such property or into the environment surrounding such property of any
toxic wastes, medical wastes, solid wastes, hazardous wastes or
hazardous substances due to or caused by the Company or with respect
to which the Company has knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which
would not have or would not be reasonably likely to have, singularly
or in the aggregate with all such spills, discharges, leaks,
emissions, injections, escapes, dumpings and releases, a material
adverse effect on the general affairs, management, financial position,
stockholders' equity or results of operations of the Company; and the
terms "hazardous wastes", "toxic wastes", "hazardous substances" and
"medical wastes" shall have the meanings specified in any applicable
local, state, federal and foreign laws or regulations with respect to
environmental protection.
(y) Neither the Company nor any subsidiary is an "investment company"
within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
2. Purchase of the Stock by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms
and conditions of, this Agreement, the Company agrees to sell
3,000,000 shares of the Firm Stock to the several Underwriters and
each of the Underwriters, severally and not jointly, agrees to
purchase the number of shares of the Firm Stock set opposite that
Underwriter's name in Schedule 1 hereto. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall
be rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option to
purchase up to 450,000 shares of Option Stock. Such option is granted solely
for the purpose of covering over-allotments in the sale of Firm Stock and is
exercisable as provided in Section 4 hereof. Shares of Option Stock shall be
purchased severally for the account of the Underwriters in proportion to the
number of shares of Firm Stock set opposite the name of such Underwriters in
Schedule 1 hereto. The respective purchase obligations of each Underwriter with
respect to the Option Stock shall be adjusted by the Representatives so that no
Underwriter shall be obligated to purchase Option Stock other than in 100 share
amounts. The price of both the Firm Stock and any Option Stock shall be $_____
per share.
The Company shall not be obligated to deliver any of the Stock to be
delivered on the First Delivery Date or the Second Delivery Date (as hereinafter
defined), as the case may be, except upon payment for all the Stock to be
purchased on such Delivery Date as provided herein.
3. Offering of Stock by the Underwriters. Upon authorization by the
Representatives of the release of the Firm Stock, the several Underwriters
propose to offer the Firm Stock for sale upon the terms and conditions set forth
in the Prospectus.
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4. Delivery of and Payment for the Stock. Delivery of and payment
for the Firm Stock shall be made at the office of Wilson Sonsini Goodrich &
Rosati, P.C., 650 Page Mill Road, Palo Alto, California at 7:00 A.M., Pacific
time, on the fourth full business day following the date of this Agreement or at
such other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to as
the "First Delivery Date." On the First Delivery Date, the Company shall deliver
or cause to be delivered certificates representing the Firm Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in immediately available funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Firm Stock shall be registered in such names and in such
denominations as the Representatives shall request in writing not less than two
full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company shall make the certificates representing the Firm Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the First Delivery Date.
At any time on or before the thirtieth day after the date of this
Agreement the option granted in Section 2 may be exercised by written notice
being given to the Company by the Representatives. Such notice shall set forth
the aggregate number of shares of Option Stock as to which the option is being
exercised, the names in which the shares of Option Stock are to be registered,
the denominations in which the shares of Option stock are to be issued and the
date and time, as determined by the representatives, when the shares of Option
Stock are to be delivered; provided, however, that this date and time shall not
be earlier than the First Delivery Date nor earlier than the second business day
after the date on which the option shall have been exercised nor later than the
fifth business day after the date on which the option shall have been exercised.
The date and time the shares of Option Stock are delivered are sometimes
referred to as the "Second Delivery Date," and the First Delivery Date and the
Second Delivery Date are sometimes each referred to as a "Delivery Date".
Delivery of and payment for the Option Stock shall be made at the
place specified in the first sentence of the first paragraph of this Section 4
(or at such other place as shall be determined by agreement between the
Representatives and the Company) at 7:00 A.M., Pacific time, on the Second
Delivery Date. On the Second Delivery Date, the Company shall deliver or cause
to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price by certified or official bank
check or checks payable in immediately available funds. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Option Stock shall be registered in such names and in such
denominations as the Representatives shall request in the aforesaid written
notice. For the purpose of expediting the checking and packaging of the
certificates for the Option Stock, the Company shall make the certificates
representing the Option Stock available for inspection by the Representatives in
New
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York, New York, not later than 2:00 P.M., New York City time, on the business
day prior to the Second Delivery Date.
5. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Representatives and to file such Prospectus pursuant to Rule 424(b)
under the Securities Act not later than Commission's close of business
on the second business day following the execution and delivery of
this Agreement or, if applicable, such earlier time as may be required
by Rule 430A(a)(3) under the Securities Act; to make no further
amendment or any supplement to the Registration Statement or to the
Prospectus prior to the last Delivery Date except as permitted herein;
to advise the Representatives, promptly after it receives notice
thereof, of the time when any amendment to the Registration Statement
has been filed or becomes effective or any supplement to the
Prospectus or any amended Prospectus has been filed and to furnish the
Representatives with copies thereof; to file promptly all reports and
any definitive proxy or information statements required to be filed by
the Company with the Commission pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of the Prospectus
and for so long as the delivery of a prospectus is required in
connection with the offering or sale of the Stock; to advise the
Representatives, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order
preventing or suspending the use of any Preliminary Prospectus or the
Prospectus, of the suspension of the qualification of the Stock for
offering or sale in any jurisdiction, of the initiation or threatening
of any proceeding for any such purpose, or of any request by the
Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Representatives and to counsel
for the Underwriters a signed copy of the Registration Statement as
originally filed with the Commission, and each amendment thereto filed
with the Commission, including all consents and exhibits filed
therewith;
(c) To deliver promptly to the Representatives such number of the
following documents as the Representatives shall reasonably request:
(i) conformed copies of the Registration Statement as originally filed
with the Commission and each amendment thereto (in each case excluding
exhibits other than this Agreement and the computation of per share
earnings), (ii) each Preliminary Prospectus, the Prospectus and any
amended or supplemented Prospectus and (iii) any document incorporated
by reference in the Prospectus (excluding exhibits thereto); and, if
the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock
and if at such time any events
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<PAGE>
shall have occurred as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made when such Prospectus is delivered, not
misleading, or, if for any other reason it shall be necessary to amend
or supplement the Prospectus or to file under the Exchange Act any
document incorporated by reference in the Prospectus in order to
comply with the Securities Act or the Exchange Act, to notify the
Representatives and, upon their request, to file such document and to
prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Representatives may from
time to time reasonably request of an amended or supplemented
Prospectus which will correct such statement or omission or effect
such compliance.
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus or any supplement to the
Prospectus that may, in the judgment of the Company or the
Representatives, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus, any document
incorporated by reference in the Prospectus or any Prospectus pursuant
to Rule 424 of the Rules and Regulations, to furnish a copy thereof to
the Representatives and counsel for the Underwriters and obtain the
consent of the Representatives to the filing;
(f) As soon as practicable after the Effective Date (it being
understood that the Company shall have until at least 410 days after
the end of the Company's current fiscal quarter), to make generally
available to the Company's security holders and to deliver to the
Representatives an earnings statement of the Company and its
subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including, at the
option of the Company, Rule 158);
(g) For a period of five years following the Effective Date, to
furnish to the Representatives copies of all materials furnished by
the Company to its shareholders and all public reports and all reports
and financial statements furnished by the Company to the principal
national securities exchange upon which the Common Stock may be listed
pursuant to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as the
Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
10
<PAGE>
jurisdictions for as long as may be necessary to complete the
distribution of the Stock; provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or
to file a general consent to service of process in any jurisdiction;
(i) For a period of 90 days from the date of the Prospectus, not to,
directly or indirectly, offer for sale, sell or otherwise dispose of
(or enter into any transaction or device which is designed to, or
could be expected to, result in the disposition by any person at any
time in the future of) any shares of Common Stock (other than the
Stock and shares issued pursuant to employee benefit plans, qualified
stock option plans or other employee compensation plans existing on
the date hereof or pursuant to currently outstanding options, warrants
or rights), or sell or grant options, rights or warrants with respect
to any shares of Common Stock (other than the grant of options
pursuant to option plans existing on the date hereof), without the
prior written consent of Lehman Brothers Inc.; and to cause each
officer and director of the Company to furnish to the Representatives,
prior to the First Delivery Date, a letter or letters, in form and
substance satisfactory to counsel for the Underwriters, pursuant to
which each such person shall agree not to, directly or indirectly,
offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or could be expected to,
result in the disposition by any person at any time in the future of)
any shares of Common Stock for a period of 90 days from the date of
the Prospectus, without the prior written consent of Lehman Brothers
Inc.;
(j) Prior to the Effective Date, to apply for the inclusion of the
Stock on the National Market System and to use its best efforts to
complete that listing, subject only to official notice of issuance,
prior to the First Delivery Date;
(k) To apply the net proceeds from the sale of the Stock being sold
by the Company as set forth in the Prospectus; and
(l) To take such steps as shall be necessary to ensure that neither
the Company nor any subsidiary shall become an "investment company"
within the meaning of such term under the Investment Company Act of
1940 and the rules and regulations of the Commission thereunder.
6. Expenses. The Company agrees to pay (a) the costs incident to the
authorization, issuance, sale and delivery of the Stock and any taxes payable in
that connection; (b) the costs incident to the preparation, printing and filing
under the Securities Act of the Registration Statement and any amendments and
exhibits thereto; (c) the costs of distributing the Registration Statement as
originally filed and each amendment thereto and any post-effective amendments
thereof (including, in each case, exhibits), any Preliminary Prospectus, the
Prospectus and any amendment or supplement to the Prospectus or any document
incorporated by reference therein, all as provided in this Agreement; (d) the
costs of producing and distributing this Agreement and any other related
documents in connection with the offering,
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purchase, sale and delivery of the stock; (e) the filing fees incident to
securing any required review by the National Association of Securities Dealers,
Inc. of the terms of sale of the Stock; (f) any applicable listing or other
fees; (g) the fees and expenses of qualifying the Stock under the securities
laws of the several jurisdictions as provided in Section 5; (h) and of
preparing, printing and distributing a Blue Sky Memorandum (including related
fees and expenses of counsel to the Underwriters); and (i) all other costs and
expenses incident to the performance of the obligations of the Company; provided
that, except as provided in this Section 6 and in Section 11 the Underwriters
shall pay their own costs and expenses, including the costs and expenses of
their counsel, any transfer taxes on the Stock which they may sell and the
expenses of advertising any offering of the Stock made by the Underwriters.
7. Conditions of Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
contained herein, to the performance by the Company of its obligations
hereunder, and to each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the Commission
in accordance with Section 5(a); no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall
have been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied
with.
(b) No Underwriter shall have discovered and disclosed to the Company
on or prior to such Delivery Date that the Registration Statement or
the Prospectus or any amendment or supplement thereto contains an
untrue statement of a fact which, in the opinion of Latham & Watkins,
counsel for the Underwriters, is material or omits to state a fact
which, in the opinion of such counsel, is material and is required to
be stated therein or is necessary to make the statements therein not
misleading.
(c) All corporate proceedings and other legal matters incident to the
authorization, form and validity of this Agreement, the Stock, the
Registration Statement and the Prospectus, and all other legal matters
relating to this Agreement and the transactions contemplated hereby
shall be reasonably satisfactory in all material respects to counsel
for the Underwriters, and the Company shall have furnished to such
counsel all documents and information that they may reasonably request
to enable them to pass upon such matters.
(d) Wilson Sonsini Goodrich & Rosati, P.C. shall have furnished to
the Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form
and substance reasonably satisfactory to the Representatives, to the
effect that:
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(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware;
(ii) The Company has the corporate power and authority to own,
lease and operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in
which the ownership or leasing of its properties or the conduct of its
business requires such qualification, except where the failure to be
so qualified or be in good standing would not have a material adverse
effect on the condition (financial or otherwise), earnings, operations
or business of the Company. To such counsel's knowledge, the Company
does not own or control, directly or indirectly, any corporation,
association or other entity;
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the caption
"Capitalization" as of the dates stated therein, the issued and
outstanding shares of capital stock of the Company have been duly and
validly issued and are fully paid and nonassessable, and, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
(v) The shares of Firm Stock or Option Stock, as the case may
be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and will not
have been issued in violation of, to such counsel's knowledge, any
preemptive right, co-sale right, registration right, right of first
refusal or other similar right granted in any case by the Company;
(vi) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the Underwriters
the shares of Stock to be issued and sold by it hereunder;
(vii) This Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been duly executed
and delivered by the Company and, assuming due authorization,
execution and delivery by you, is a valid and binding agreement of the
Company, enforceable in accordance with its terms, except insofar as
indemnification provisions may be limited by applicable law and except
as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or
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similar laws relating to or affecting creditors' rights generally or
by general equitable principles;
(viii) The Registration Statement has become effective under the
Securities Act and, to such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
pending or threatened under the Securities Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom
as to which such counsel need express no opinion), as of the effective
date of the Registration Statement, complied as to form in all
material respects with the requirements of the Securities Act and the
applicable Rules and Regulations, and the documents incorporated by
reference in the Prospectus and any further amendment or supplement to
any such incorporated document made by the Company prior to such
Delivery Date (other than the financial statements (including
supporting schedules) and financial data derived therefrom as to which
such counsel need express no opinion) when they became effective or
were filed with the Commission, as the case may be, complied as to
form in all material respects with the requirements of the Exchange
Act and the rules and regulations of the Commission thereunder;
(x) The description of capital stock contained in or
incorporated by reference in the Prospectus, to the extent that it
constitutes matters of law or legal conclusions, has been reviewed by
such counsel and is a fair summary of such matters and conclusions;
and the forms of certificates evidencing the Common Stock and filed as
exhibits to the Registration Statement comply with Delaware law;
(xi) The description contained in or incorporated by reference
in the Registration Statement and the Prospectus of the charter and
bylaws of the Company and of statutes are accurate and fairly present
the information required to be presented by the Securities Act and the
applicable Rules and Regulations;
(xii) To such counsel's knowledge, there are no agreements,
contracts, leases or documents to which the Company is a party of a
character required to be described or referred to in the Registration
Statement or Prospectus or to be filed as an exhibit to the
Registration Statement (or to any documents incorporated therein by
reference) which are not described or referred to therein or filed as
required;
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(xiii) The performance of this Agreement and the consummation of
the transactions herein contemplated (other than performance of the
Company's indemnification obligations hereunder, concerning which no
opinion need be expressed) will not (a) result in any violation of the
Company's charter or bylaws or (b) to such counsel's knowledge, result
in a material breach or violation of any of the terms and provisions
of, or constitute a default under, any material bond, debenture, note
or other evidence of indebtedness, or any material lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which the
Company is a party or by which its properties are bound, or any
applicable statute, rule or regulation known to such counsel or, to
such counsel's knowledge, any order, writ or decree of any court,
government or governmental agency or body having jurisdiction over the
Company, or over any of its properties or operations;
(xiv) No consent, approval, authorization or order of or
qualification with any court, government or governmental agency or
body having jurisdiction over the Company, or over any of its
properties or operations is necessary in connection with the
consummation by the Company of the transactions herein contemplated,
except such as have been obtained under the Securities Act or such as
may be required under state or other securities or Blue Sky laws in
connection with the purchase and the distribution of the Shares by the
Underwriters;
(xv) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened against the Company of
a character required to be disclosed in the Registration Statement or
the Prospectus by the Securities Act or the Rules and Regulations,
other than those described therein;
(xvi) To such counsel's knowledge, the Company is not presently
(a) in material violation of its charter or bylaws, or (b) in material
breach of any applicable statute, rule or regulation known to such
counsel or, to such counsel's knowledge, any order, writ or decree of
any court or governmental agency or body having jurisdiction over the
Company, or over any of its properties or operations; and
(xvii) To such counsel's knowledge, all holders of securities of
the Company having rights known to such counsel to registration of
such shares of Common Stock or other securities, because of the filing
of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement.
15
<PAGE>
In addition, such counsel shall state that such counsel has
participated in conferences with officials and other representatives
of the Company, the Representatives, counsel for the Underwriters and
the independent certified public accountants of the Company, at which
such conferences the contents of the Registration Statement and
Prospectus and related matters were discussed, and although they have
not verified the accuracy or completeness of the statements contained
in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that (I) the
Registration Statement and any amendment or supplement thereto, as of
the Effective Date and at all times subsequent thereto up to the
Delivery Date, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or that the
Prospectus contains any untrue statement of a material fact or omits
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances
under which they were made, not misleading or (II) any document
incorporated by reference in the Prospectus or any further amendment
or supplement to any such incorporated document made by the Company
prior to such Delivery Date, when it became effective or was filed
with the Commission, as the case may be, contained any untrue
statement of a material fact or omitted to state a material fact
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (in the case
of each of (I) and (II), excluding the financial statements and
supporting schedules and other financial and statistical information
derived therefrom, as to which such counsel need express no comment).
Counsel rendering the foregoing opinion may rely as to questions
of law not involving the laws of the United States or the State of
California and Delaware upon opinions of local counsel, and as to
questions of fact upon representations or certificates of officers of
the Company and of government officials, in which case their opinion
is to state that they are so relying and that they have no knowledge
of any material misstatement or inaccuracy in any such opinion,
representation or certificate. Copies of any opinion, representation
or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to counsel for the
Underwriters.
(e) The Representatives shall have received from Latham & Watkins,
counsel for the Underwriters, such opinion or opinions, dated such
Delivery Date, with respect to the issuance and sale of the Stock, the
Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request
for the purpose of enabling them to pass upon such matters.
(f) At the time of execution of this Agreement, the Representatives
shall have received from KPMG Peat Marwick LLP a letter, in form and
substance
16
<PAGE>
satisfactory to the Representatives, addressed to the Underwriters and
dated the date hereof (i) confirming that they are independent public
accountants within the meaning of the Securities Act and are in
compliance with the applicable requirements relating to the
qualification of accountants under Rule 2-01 of Regulation S-X of the
Commission, (ii) stating, as of the date hereof (or, with respect to
matters involving changes or developments since the respective dates
as of which specified financial information is given in the
Prospectus, as of a date not more than five days prior to the date
hereof), the conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by
accountants' "comfort letters" to underwriters in connection with
registered public offerings.
(g) With respect to the letter of KPMG Peat Marwick LLP referred to
in the preceding paragraph and delivered to the Representatives
concurrently with the execution of this Agreement (the "initial
letter"), the Company shall have furnished to the Representatives a
letter (the "bring-down letter") of such accountants, addressed to the
Underwriters and dated such Delivery Date (i) confirming that they are
independent public accountants within the meaning of the Securities
Act and are in compliance with the applicable requirements relating to
the qualification of accountants under Rule 2-01 of Regulation S-X of
the Commission, (ii) stating, as of the date of the bring-down letter
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date of the bring-down letter), the conclusions and findings of
such firm with respect to the financial information and other matters
covered by the initial letter and (iii) confirming in all material
respects the conclusions and findings set forth in the initial letter.
(h) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its Chief Financial Officer
stating that:
(i) The representations, warranties and agreements of the
Company in Section 1 are true and correct as of such Delivery Date;
the Company has complied with all its agreements contained herein; and
the conditions set forth in Sections 7(a) and 7(i) have been
fulfilled; and
(ii) They have carefully examined the Registration Statement
and the Prospectus and, in their opinion (A) as of the Effective Date,
the Registration Statement and Prospectus did not include any untrue
statement of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading, and (B) since the Effective Date no event has
occurred which should have been set forth in a supplement or amendment
to the Registration Statement or the Prospectus.
17
<PAGE>
(i)(A) The Company shall not have sustained since the date of the
latest audited financial statements included or incorporated by
reference in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered
by insurance, or from any labor dispute or court or governmental
action, order or decree, otherwise than as set forth or contemplated
in the Prospectus and (B) since such date there shall not have been
any change in the capital stock or long-term debt of the Company or
any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (A) or (B), is,
in the judgment of the Representatives, so material and adverse as to
make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the Prospectus.
(j) Subsequent to the execution and delivery of this Agreement there
shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental
authority having jurisdiction, (ii) a banking moratorium shall have
been declared by Federal or state authorities, (iii) the United States
shall have become engaged in hostilities, there shall have been an
escalation in hostilities involving the United States or there shall
have been a declaration of a national emergency or war by the United
States or (iv) there shall have occurred such a material adverse
change in general economic, political or financial conditions (or the
effect of international conditions on the financial markets in the
United States shall be such) as to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
All opinions, letters, evidence and certificates mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
8. Indemnification and Contribution.
(a) The Company shall indemnify and hold harmless each Underwriter
its officers and employees and each person, if any, who controls any Underwriter
within the meaning of the Securities Act, from and against any loss, claim,
damage or liability, joint or several, or any action in respect thereof
(including, but not limited to, any loss, claim, damage,
18
<PAGE>
liability or action relating to purchases and sales of Stock), to which that
Underwriter, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue statement or alleged
untrue statement of a material fact contained (A) in any Preliminary Prospectus,
the Registration Statement or the Prospectus or in any amendment or supplement
thereto or (B) in any blue sky application or other document prepared or
executed by the Company (or based upon any written information furnished by the
Company) specifically for the purpose of qualifying any or all of the Stock
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading,
and shall reimburse each Underwriter and each such officer, employee or
controlling person promptly upon demand for any legal or other expenses
reasonably incurred by that Underwriter, officer, employee or controlling person
in connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage, liability or action arises out of, or
is based upon, any untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus, or in any such amendment or supplement, or in any Blue Sky
Application, in reliance upon and in conformity with written information
concerning such Underwriter furnished to the Company through the Representatives
by or on behalf of any Underwriter specifically for inclusion therein. The
foregoing indemnity agreement is in addition to any liability which the Company
may otherwise have to any Underwriter or to any officer, employee or controlling
person of that Underwriter.
(b) Each Underwriter, severally and not jointly, shall indemnify and
hold harmless the Company, its officers and employees, each of its directors,
and each person, if any, who controls the Company within the meaning of the
Securities Act, from and against any loss, claim, damage or liability, joint or
several, or any action in respect thereof, to which the Company or any such
director, officer or controlling person may become subject, under the Securities
Act or otherwise, insofar as such loss, claim, damage, liability or action
arises out of, or is based upon, (i) any untrue statement or alleged untrue
statement of a material fact contained (A) in any Preliminary Prospectus, the
Registration Statement or the Prospectus or in any amendment or supplement
thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged
omission to state in any Preliminary Prospectus, the Registration Statement or
the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky
Application any material fact required to be stated therein or necessary to make
the statements therein not misleading, but in each case only to the extent that
the untrue statement or alleged untrue statement or omission or alleged omission
was made in reliance upon and in conformity with written information concerning
such Underwriter furnished to the Company through the Representatives by or on
behalf of that Underwriter specifically for inclusion therein, and shall
reimburse the Company and any such director, officer or controlling person
for any legal or other expenses reasonably incurred by the Company or any such
director, officer or controlling person
19
<PAGE>
in connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred. The
foregoing indemnity agreement is in addition to any liability which any
Underwriter may otherwise have to the Company or any such director, officer,
employee or controlling person.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of any claim or the commencement of any action, the indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the claim or the commencement of that action; provided, however, that
the failure to notify the indemnifying party shall not relieve it from any
liability which it may have under this Section 8 except to the extent it has
been materially prejudiced by such failure and, provided further, that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 8.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice
from the indemnifying party to the indemnified party of its election to assume
the defense of such claim or action, the indemnifying party shall not be liable
to the indemnified party under this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; provided, however, that
the Representatives shall have the right to employ counsel to represent jointly
the Representatives and those other Underwriters and their respective officers,
employees and controlling persons who may be subject to liability arising out of
any claim in respect of which indemnity may be sought by the Underwriters
against the Company under this Section 8 if, in the reasonable judgment of the
Representatives, it is advisable for the Representatives and those Underwriters,
officers, employees and controlling persons to be jointly represented by
separate counsel, and in that event the fees and expenses of such separate
counsel shall be paid by the Company. No indemnifying party shall (i) without
the prior written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(d) If the indemnification provided for in this Section 8 shall for
any reason be unavailable to or insufficient to hold harmless an indemnified
party under Section 8(a) or 8(b) in respect of any loss, claim, damage or
liability, or any action in respect thereof, referred to therein, then each
indemnifying party shall, in lieu of indemnifying such indemnified party,
contribute to
20
<PAGE>
the amount paid or payable by such indemnified party as a result of such loss,
claim, damage or liability, or action in respect thereof, (i) in such proportion
as shall be appropriate to reflect the relative benefits received by the Company
on the one hand and the Underwriters on the other from the offering of the Stock
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other with respect to
the statements or omissions which resulted in such loss, claim, damage or
liability, or action in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other with respect to such offering shall be deemed
to be in the same proportion as the total net proceeds from the offering of the
Stock purchased under this Agreement (before deducting expenses) received by the
Company, on the one hand, and the total underwriting discounts and commissions
received by the Underwriters with respect to the shares of the Stock purchased
under this Agreement, on the other hand, bear to the total gross proceeds from
the offering of the shares of the Stock under this Agreement, in each case as
set forth in the table on the cover page of the Prospectus. The relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Underwriters, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section were to be determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section shall be deemed to include, for
purposes of this Section 8(d), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 8(d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Stock underwritten by it and distributed
to the public was offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute as provided in this Section 8(d) are several in proportion to
their respective underwriting obligations and not joint.
(e) The Underwriters severally confirm and the Company acknowledges
that the statements with respect to the public offering of the Stock by the
Underwriters set forth on the cover page of, the legend concerning over-
allotments on the inside front cover page of and the concession and reallowance
figures appearing under the caption "Underwriting" in, the Prospectus are
correct and constitute the only information concerning such Underwriters
furnished in writing to the Company by or on behalf of the Underwriters
specifically for inclusion in the Registration Statement and the Prospectus.
21
<PAGE>
9. Defaulting Underwriters. If, on either Delivery Date, any
Underwriter defaults in the performance of its obligations under this Agreement,
the remaining non-defaulting Underwriters shall be obligated to purchase the
Stock which the defaulting Underwriter agreed but failed to purchase on such
Delivery Date in the respective proportions which the number of shares of the
Firm Stock set opposite the name of each remaining non-defaulting Underwriter in
Schedule 1 hereto bears to the total number of shares of the Firm Stock set
opposite the names of all the remaining non-defaulting Underwriters in Schedule
1 hereto; provided, however, that the remaining non-defaulting Underwriters
shall not be obligated to purchase any of the Stock on such Delivery Date if the
total number of shares of the Stock which the defaulting Underwriter or
Underwriters agreed but failed to purchase on such date exceeds 9.09% of the
total number of shares of the Stock to be purchased on such Delivery Date, and
any remaining non-defaulting Underwriter shall not be obligated to purchase more
than 110% of the number of shares of the Stock which it agreed to purchase on
such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums
are exceeded, the remaining non-defaulting Underwriters, or those other
underwriters satisfactory to the Representatives who so agree, shall have the
right, but shall not be obligated, to purchase, in such proportion as may be
agreed upon among them, all the Stock to be purchased on such Delivery Date. If
the remaining Underwriters or other underwriters satisfactory to the
Representatives do not elect to purchase the shares which the defaulting
Underwriter or Underwriters agreed but failed to purchase on such Delivery Date,
this Agreement (or, with respect to the Second Delivery Date, the obligation of
the Underwriters to purchase, and of the Company to sell, the Option Stock)
shall terminate without liability on the part of any non-defaulting Underwriter
or the Company, except that the Company will continue to be liable for the
payment of expenses to the extent set forth in Sections 6 and 11. As used in
this Agreement, the term "Underwriter" includes, for all purposes of this
Agreement unless the context requires otherwise, any party not listed in
Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a
defaulting Underwriter agreed but failed to purchase.
Nothing contained herein shall relieve a defaulting Underwriter of any
liability it may have to the Company for damages caused by its default. If
other underwriters are obligated or agree to purchase the Stock of a defaulting
or withdrawing Underwriter, either the Representatives or the Company may
postpone the Delivery Date for up to seven full business days in order to effect
any changes that in the opinion of counsel for the Company or counsel for the
Underwriters may be necessary in the Registration Statement, the Prospectus or
in any other document or arrangement.
10. Termination. The obligations of the Underwriters hereunder may be
terminated by the Representatives by notice given to and received by the Company
prior to delivery of and payment for the Firm Stock if, prior to that time, any
of the events described in Sections 7(i) or 7(j), shall have occurred or if the
Underwriters shall decline to purchase the Stock for any reason permitted under
this Agreement.
11. Reimbursement of Underwriters' Expenses. If (a) the Company shall
fail to tender the Stock for delivery to the Underwriters by reason of any
failure, refusal or inability on the part of the Company to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled by the
22
<PAGE>
Company is not fulfilled, the Company will reimburse the Underwriters for all
reasonable out-of-pocket expenses (including fees and disbursements of counsel)
incurred by the Underwriters in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company shall pay the full amount
thereof to the Representatives. If this Agreement is terminated pursuant to
Section 9 by reason of the default of one or more Underwriters, the Company
shall not be obligated to reimburse any defaulting Underwriter on account of
those expenses.
12. Notices, etc. All statements, requests, notices and agreements
hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or sent by mail, telex
or facsimile transmission to Lehman Brothers Inc., Three World
Financial Center, New York, New York 10285, Attention: Syndicate
Department (Fax: 212-526-6588), with a copy, in the case of any notice
pursuant to Section 8(c), to the Director of Litigation, Office of
the General Counsel, Lehman Brothers Inc., 3 World Financial Center,
10th Floor, New York, NY 10285;
(b) if to the Company shall be delivered or sent by mail, telex or
facsimile transmission to the address of the Company set forth in the
Registration Statement, Attention: Louis R. Tomassetta, President and
Chief Executive Officer;
provided, however, that any notice to an Underwriter pursuant to Section 8(c)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company shall
be entitled to act and rely upon any request, consent, notice or agreement given
or made on behalf of the Underwriters by Lehman Brothers Inc.
13. Persons Entitled to Benefit of Agreement. This Agreement shall
inure to the benefit of and be binding upon the Underwriters, the Company, and
their respective successors. This Agreement and the terms and provisions hereof
are for the sole benefit of only those persons, except that (A) the
representations, warranties, indemnities and agreements of the Company contained
in this Agreement shall also be deemed to be for the benefit of the person or
persons, if any, who control any Underwriter within the meaning of Section 15 of
the Securities Act and (B) the indemnity agreement of the Underwriters contained
in Section 8(b) of this Agreement shall be deemed to be for the benefit of
directors of the Company, officers of the Company who have signed the
Registration Statement and any person controlling the Company within the meaning
of Section 13 of the Securities Act. Nothing in this Agreement is intended or
shall be construed to give any person, other than the persons referred to in
this Section 13, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision contained herein.
23
<PAGE>
14. Survival. The respective indemnities, representations, warranties
and agreements of the Company and the Underwriters contained in this Agreement
or made by or on behalf on them, respectively, pursuant to this Agreement, shall
survive the delivery of and payment for the Stock and shall remain in full force
and effect, regardless of any investigation made by or on behalf of any of them
or any person controlling any of them.
15. Definition of the Terms "Business Day" and "Subsidiary". For
purposes of this Agreement, (a) "business day" means any day on which the New
York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the
meaning set forth in Rule 405 of the Rules and Regulations.
16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF NEW YORK.
17. Counterparts. This Agreement may be executed in one or more
counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
18. Headings. The headings herein are inserted for convenience of
reference only and are not intended to be part of, or to affect the meaning or
interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement between the
Company and the Underwriters, please indicate your acceptance in the space
provided for that purpose below.
Very truly yours,
VITESSE SEMICONDUCTOR CORPORATION
By
-------------------------------------
President and Chief Executive Officer
Accepted:
LEHMAN BROTHERS INC.
ROBERTSON, STEPHENS & COMPANY LLC
OPPENHEIMER & CO., INC.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By
-------------------------------
Authorized Representative
24
<PAGE>
SCHEDULE 1
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ------
<S> <C>
Lehman Brothers Inc. .............................
Robertson, Stephens & Company LLC ................
Oppenheimer & Co., Inc. ..........................
---------
Total 3,000,000
=========
</TABLE>
25
<PAGE>
EXHIBIT 4.2
VITESSE SEMICONDUCTOR CORPORATION
NUMBER SHARES
SD
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS AND A
STATEMENT AS TO THE RIGHTS,
PREFERENCES, PRIVILEGES AND
RESTRICTION OF SHARES
This Certifies that CUSIP 928497 10 6
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
VITESSE SEMICONDUCTOR CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate duly endorsed.
This certificate is not valid until countersigned by the Transfer Agent and
Registrar.
IN WITNESS WHEREOF the Corporation has caused this certificate to be signed
in facsimile by its duly authorized officers and sealed with a facsimile of its
corporate seal.
Dated
(Signature) (Signature)
- ------------------------------ -----------------------------
Secretary President and Chief Executive
Officer
[VITESS SEMICONDUCTOR CORPORATION
CORPORATE SEAL
FEBRUARY 3, 1987
* DELAWARE *]
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY [Signature]
- ------------------------------
AUTHORIZED SIGNATURE
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
The Corporation is authorized to issue two classes of stock, Common Stock
and Preferred Stock. The Board of Directors of the Corporation has the power to
fix the number of shares and the designation of a series of Preferred Stock and
to determine or alter the rights, preferences, privileges, and restrictions
granted to or imposed upon any unissued series of Preferred Stock.
A statement of the rights, preferences, privileges and restrictions granted
to or imposed upon the respective classes or series of shares of stock of the
Corporation, and upon the holders thereof as established by the Certificate of
Incorporation or by any certificate of determination of preferences, and the
number of shares constituting each series or class and the designations thereof,
may be obtained by any stockholder of the Corporation upon request and without
charge from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- ___________Custodian____________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act_____________________________
in common (State)
COM PROP -- as community property UNIF TRF MIN ACT-- ______Custodian (until age______)
________ under Uniform Transfers
(Minor)
to Minors Act___________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------
- ----------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------Shares
of the Common Stock represented by the within certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-----------------------------
X_______________________________________
THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN UPON
NOTICE: THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed By:
<PAGE>
BY
-----------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17ad-15.
<PAGE>
EXHIBIT 5.1
October 23, 1996
Vitesse Semiconductor Corporation
741 Calle Plano
Camarillo, CA 93012
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-3, filed by you with
the Securities and Exchange Commission (the "Commission") on October 22, 1996
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of 3,450,000 shares (the "Shares") of your
Common Stock (including 450,000 Shares subject to an Underwriters' over
allotment option). As your counsel in connection with this transaction, we have
examined the proceedings taken and are familiar with the proceedings proposed to
be taken by you in connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon your completion of the proceedings being taken in order to
permit such transactions to be carried out in accordance with the securities
laws of the various states where required, the Shares, when issued and sold in
the manner described in the Registration Statement, will be legally and validly
issued, fully paid and non-assessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 23.1
The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Los Angeles, California
October 21, 1996
