<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
DECEMBER 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ...... TO ......
COMMISSION FILE NUMBER 0-19654
- --------------------------------------------------------------------------------
VITESSE SEMICONDUCTOR CORPORATION
(Exact name of registrant as specified in its charter)
- --------------------------------------------------------------------------------
DELAWARE 77-0138960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
741 CALLE PLANO
CAMARILLO, CA 93012
(Address of principal executive offices)
(805) 388-3700
(Registrant's telephone number, including area code)
------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ]
AS OF DECEMBER 31, 1996, THERE WERE 22,920,833 SHARES OF $0.01 PAR VALUE
COMMON STOCK OUTSTANDING.
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VITESSE SEMICONDUCTOR CORPORATION
TABLE OF CONTENTS
-----------------
Page Number
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Balance Sheets as of December 31, 1996 and 2
September 30, 1996
Statements of Operations for the Three Months 3
ended December 31, 1996, September 30, 1996,
and December 31, 1995
Statements of Cash Flows for the Three Months 4
ended December 31, 1996 and December 31, 1995
Notes to Financial Statements 5
Item 2 Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 14
1
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PART I
FINANCIAL INFORMATION
VITESSE SEMICONDUCTOR CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
Dec. 31, 1996 Sept. 30, 1996
------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $108,214 $ 52,436
Short-term investments 64,883 ---
Trade accounts receivable, net 17,249 18,423
Other receivables 841 196
Inventories, net :
Raw material 1,988 1,678
Work in process 5,425 5,436
Finished goods 2,712 2,845
-------- --------
10,125 9,959
Prepaid expenses 1,197 841
Deferred tax asset 2,000 ---
-------- --------
Total current assets 204,509 81,855
-------- --------
Property and equipment, net 20,316 17,892
Long-term investment 1,764 ---
Other assets 766 669
-------- --------
$227,355 $100,416
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current installments of capital lease obligations $ 621 $ 767
Current installments of term loans 168 164
Accounts payable 5,630 6,731
Accrued expenses and other current liabilities 5,410 3,728
Deferred revenue 500 250
-------- --------
Total current liabilities 12,329 11,640
-------- --------
Capital lease obligations, less current installments --- 91
Term loans, less current installments 271 315
Shareholders' equity:
Common stock, $.01 par value. Authorized 25,000,000
shares; issued and outstanding 22,920,833 shares on
Dec. 31, 1996, and 19,406,527 shares on Sept. 30, 1996 229 194
Additional paid-in capital 253,837 133,490
Accumulated deficit (39,311) (45,314)
-------- --------
Net shareholders' equity 214,755 88,370
-------- --------
$227,355 $100,416
======== ========
</TABLE>
2
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VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------
Dec. 31, 1996 Dec. 31, 1995 Sept. 30, 1996
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenues, net:
Production $ 20,406 $ 12,067 $ 17,804
Development 1,426 1,955 1,318
----------- ----------- -----------
Total revenues 21,832 14,022 19,122
----------- ----------- -----------
Costs and expenses:
Cost of revenues 9,858 6,984 8,932
Engineering, research & devel. 3,480 2,498 3,065
Selling, general & admin. 2,932 2,266 2,610
----------- ----------- -----------
Total costs and expenses 16,270 11,748 14,607
----------- ----------- -----------
Income from operations 5,562 2,274 4,515
Other income (expense):
Interest income 1,199 27 597
Interest expense (98) (301) (114)
Other 7 (25) 21
----------- ----------- -----------
Total other income (expense) 1,108 (299) 504
----------- ----------- -----------
Income before income taxes 6,670 1,975 5,019
Income taxes 667 197 502
----------- ----------- -----------
Net income $ 6,003 $ 1,778 $ 4,517
=========== =========== ===========
Net income per share $ 0.25 $ 0.10 $ 0.21
=========== =========== ===========
Weighted average common &
common equivalent shares
outstanding 23,870,582 17,607,158 21,754,559
=========== =========== ===========
</TABLE>
3
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Dec. 31, 1996 Dec. 31, 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,003 $ 1,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,387 1,182
Change in assets and liabilities:
(Increase) decrease in:
Receivables, net 529 1,178
Inventories (166) 171
Prepaid expenses (356) (125)
Other assets (97) 3
Increase (decrease) in:
Accounts payable (1,101) 311
Accrued expenses and other current liabilities 1,682 693
Deferred revenue 250 393
-------- -------
Net cash provided by operating activities 8,131 5,584
-------- -------
Cash flows from investing activities:
Short-term investments (64,883) ---
Capital expenditures (3,811) (1,165)
Long-term investment (1,764) ---
-------- -------
Net cash used in investing activities (70,458) (1,165)
-------- -------
Cash flows from financing activities:
Principal payments under capital lease obligations (237) (555)
Principal payments under term loan (40) (279)
Short-term borrowings (payments) --- (950)
Proceeds from issuance of common stock, net 118,382 296
-------- -------
Net cash provided by (used in) financing activities 118,105 (1,488)
-------- -------
Net increase in cash & cash equivalents 55,778 2,931
Cash & cash equivalents at beginning of period 52,436 6,315
-------- -------
Cash & cash equivalents at end of period $108,214 $ 9,246
======== =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest $ 28 $ 301
======== =======
</TABLE>
4
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. GENERAL
In management's opinion, all adjustments (consisting only of normal recurring
accruals) which are necessary for a fair presentation of financial condition and
results of operations are reflected in the attached interim financial
statements. All amounts are unaudited except the September 30, 1996 balance
sheet. This report should be read in conjunction with the audited financial
statements presented in the 1996 Annual Report. Footnotes and other
disclosures which would substantially duplicate the disclosures in the Company's
audited financial statements for fiscal year 1996 contained in the Annual Report
have been omitted. The interim financial information herein is not necessarily
representative of the results to be expected for any subsequent period.
NOTE 2. COMPLETION OF PUBLIC OFFERING
During the quarter ended December 31, 1996, the Company completed a public
offering of 3,450,000 shares of Common Stock at a price to the public of $36 per
share which resulted in net proceeds before expenses of $118,611,000. For
complete information regarding this offering, please see the Company's
Prospectus dated November 13, 1996.
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and is subject to the safe harbor created by
that section. Factors that realistically could cause results to differ
materially from those projected in the forward looking statements are set forth
below in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Risk Factors."
RESULTS OF OPERATIONS
Revenues
Total revenues in the first quarter of fiscal 1997 were $21,832,000, a 56%
increase over the $14,022,000 recorded in the first quarter of fiscal 1996. The
increase in total revenues was due to a 69% increase in production revenues as a
result of growth of shipments to customers in the telecommunications and ATE
markets. Development revenues in the first quarter of fiscal 1997 were
$1,426,000 compared to $1,955,000 in the first quarter of fiscal 1996.
Fluctuations in development revenues from quarter to quarter are typically due
to the variability in the timing of design wins and development milestones.
Cost of Revenues
Cost of revenues as a percentage of total revenues in the first quarter of
fiscal 1997 was 46.7% compared to 49.8% in the first quarter of fiscal 1996.
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.
The Company's manufacturing yields vary significantly among products,
depending on a particular IC's complexity and the Company's experience in
manufacturing it. Historically, the Company has experienced difficulties
achieving acceptable yields on some ICs, which has resulted in shipment delays.
The Company's overall yields are lower than yields experienced in a silicon
process because of the large number of different products manufactured in
limited volume and because the Company's H-GaAs process technology is
significantly less developed. The Company expects that many of its current and
future products may never be produced in volume.
Regardless of the process technology used, the fabrication of semiconductors
is a highly complex and precise process. Defects in masks, impurities in the
materials used, contamination of the manufacturing environment, equipment
failure and other difficulties in the fabrication process can cause a
substantial percentage of wafers to be rejected or numerous die on each wafer to
be nonfunctional.
Because the majority of the Company's costs of manufacturing are relatively
fixed, maintenance of the number of shippable die per wafer is critical to the
Company's results of operations. Yield decreases can result in substantially
higher unit costs and may result in
6
<PAGE>
reduced gross profit and net income. There can be no assurance that the Company
will not suffer periodic yield problems in connection with new or existing
products which could cause the Company's business, operating results and
financial condition to be materially adversely affected.
Inventory is valued at the lower of cost or market. Because allocable
manufacturing costs can be high, new product inventory is often valued at
market. In addition, a portion of work-in-process inventory consists of wafers
in various stages of fabrication. Consequently, the Company estimates yields
per wafer in order to estimate the value of inventory. If yields are materially
different than projected, work-in-process inventory may need to be revalued. In
addition, the ability of customers to change designs and to cancel or reschedule
orders can also result in adverse adjustments to inventory. There can be no
assurance that such adjustments will not occur in the future and have a material
adverse effect on the Company's results of operations.
Engineering, Research and Development Costs
Engineering, research and development expenses were $3,480,000 in the first
quarter of fiscal 1997 compared to $2,498,000 in the first quarter of fiscal
1996. The increase was principally due to increased headcount and higher costs
to support the Company's continuing efforts to develop new products. As a
percentage of total revenues, engineering, research and development costs
decreased to 16% in the first quarter of 1997 from 18% in the first quarter of
1996. This decrease was a result of the Company's revenues growing faster than
engineering, research and development costs. The Company's engineering,
research and development costs are expensed as incurred.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $2,932,000 in the
first quarter of fiscal 1997 compared to $2,266,000 in the first quarter of
fiscal 1996. This increase was due to increased headcount and higher
commissions resulting from increased sales. As a percentage of total revenues,
however, SG&A expenses declined to 13% in the first quarter of fiscal 1997 from
16% in the first quarter of fiscal 1996 as a result of the Company's revenues
growing faster than SG&A expenses.
Interest Income
Interest income increased to $1,199,000 in the first quarter of fiscal 1997
from $27,000 in the first quarter of fiscal 1996. This was due to a higher
average cash balance in the first quarter of fiscal 1997 as compared to the
first quarter of fiscal 1996, primarily due to the proceeds from two public
offerings which were completed in March 1996 and November 1996, respectively.
Interest Expense
Interest expense decreased to $98,000 in the first quarter of fiscal 1997
from $301,000 in the first quarter of fiscal 1996. This decrease was the result
of a decrease in the Company's average debt balance, primarily due to an
accelerated repayment of certain debt following the Company's public offering in
March 1996.
7
<PAGE>
Income Taxes
The Company recorded a provision for income taxes in the amount of $667,000
in the first quarter of fiscal 1997 and $197,000 in the first quarter of fiscal
1996 principally for the federal alternative minimum taxes, state income taxes,
and taxes due to foreign jurisdictions, in light of the Company's existing net
operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
The Company generated $8,131,000 and $5,584,000 from operating activities in
the first quarter of 1997 and 1996, respectively. The increase in operating
cash flow was principally due to an improvement in profitability.
Investing Activities
Capital expenditures, principally for manufacturing and test equipment, were
$3,811,000 in the first quarter of 1997 compared to $1,165,000 in the first
quarter of 1996. The Company intends to continue investing in manufacturing,
test and engineering equipment and currently expects to spend an additional $8
to $10 million for capital expenditures in fiscal 1997, which the Company
intends to finance with working capital.
Financing Activities
In the first quarter of fiscal 1997, the Company generated $118,105,000 in
financing activities. Net proceeds from the issuance of common stock was
$118,382,000, offset by $277,000 in payments on debt obligations.
The Company has a revolving line of credit agreement with a bank, which
expires on January 5, 1998. 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. As of December 31,
1996, there were no borrowings outstanding under this agreement.
Management believes that the Company's cash flow from operations and
revolving line of credit agreement are adequate to finance its planned growth
and operating needs for the next 12 months. The Company believes it can meet
its wafer fabrication needs through 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 constructing a new wafer fabrication facility. The Company
estimates that the cost of the new wafer fabrication facility in Colorado
Springs, Colorado (the "Facility"), will be at least $70 million, of which
approximately $25 million relates to the purchase of land and the construction
of the building and $45 million relates to capital equipment purchases. The
Company has recently entered into a synthetic lease transaction pursuant to a
Master Lease Agreement (the "Lease") providing for the financing of $27.5
million for the acquisition and construction of the new facility, as well as the
acquisition of certain capital equipment. The Lease will be an operating lease
for accounting purposes, but a conditional sale for Federal tax purposes. The
obligations of the Company are secured by the Company's interest in the
Facility.
8
<PAGE>
The Company's obligations are also secured by cash collateral in an amount equal
to 84% of all amounts advanced by the lessor under the lease for the acquisition
and construction of the Facility (the "Lease Balance"). The Lease requires that
all interest earned by the Company on the cash collateral be paid to the lessor
to satisfy a portion of the Company's rental obligation. The Lease also requires
monthly payments calculated on a payment date by multiplying 16% of the then
amount advanced by the lessor times a rate equal to the three-month Eurodollar
Rate plus a spread of 1.75%. The Company is responsible for all costs of
ownership and operation of the Facility, and has guaranteed certain obligations
of the lessor until such time as all of the Company's obligations under the
Lease are performed. The Lease provides the Company with the option at the end
of the lease term of either acquiring the Facility for a price equal to
outstanding advances made by the lessor, or arranging for the Facility to be
acquired by a third party. The Company is contingently liable at the end of the
lease term to the extent the lessor is not able to realize 84% of the Lease
Balance upon sale or other disposition of the Facility. Under the Lease, the
Company will be required to meet certain financial and other covenants,
including a restriction on the payment of cash dividends to its shareholders. If
certain financial covenants are not maintained, the Company must provide
additional cash collateral equal to 16% of the Lease Balance.
FACTORS AFFECTING FUTURE OPERATING RESULTS
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.
CUSTOMER AND INDUSTRY CONCENTRATION
The Company is, and intends to continue, focusing its sales efforts on a
relatively small number of companies in the telecommunications, data
communications and ATE markets that require high performance ICs. Certain of
these companies are also competitors of Vitesse.
VARIABILITY OF QUARTERLY RESULTS
The Company's quarterly results of operations have varied significantly in
the past and may continue to do so in the future. These variations have been
due to a number of factors, including: the loss of major customers; variations
in manufacturing yields; the timing and level of new product and process
development costs; changes in inventory levels; changes in the type and mix of
products being sold; changes in manufacturing capacity and variations in the
utilization of this
9
<PAGE>
capacity; and customer design changes, delays or cancellations. The Company has
also from time to time incurred significant new product and process development
costs due to the Company's policy of expensing costs as incurred relating to the
manufacture of new products and the development of new process technology. There
can be no assurance that the Company will not incur such charges or experience
revenue declines in the future.
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 expend up to $10 million for the purchase of
equipment relating to this 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
be 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 constructing 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 has initiated construction of the new facility
and plans 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. In the event the Company were to decide to expand
the Class 1 clean room in the future, substantial additional expenditures would
be required.
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.
10
<PAGE>
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.
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
currently 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 of BiCMOS semiconductors or
about the risks associated with relying on a relatively small company for a
critical sole-sourced component.
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
11
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technologies in order to maintain its competitive position, to adapt its
products and processes to technological changes and to adopt emerging industry
standards. There can be no assurance that the Company will be able to improve
its product and process technologies and develop new technologies in a timely
manner or that such improvements or developments will result in products that
achieve market acceptance. The failure to successfully improve its existing
technologies or develop new technologies in a timely manner could adversely
affect the Company's business, operating results and financial condition.
DEPENDENCE ON THIRD PARTIES
The Company depends upon third parties for performing certain processes and
providing a variety of components and materials necessary for the production of
its H-GaAs ICs. The Company packages certain of its ICs in its Camarillo
facility using customized ceramic packaging which is presently available from
only one source. The balance of the Company's ICs are packaged in plastic by
third parties since the Company has no internal capability to perform such
plastic packaging. Other components and materials for H-GaAs ICs are available
from only a limited number of sources. The inability to obtain sufficient sole-
or limited-source services or components as required could result in delays or
reductions in product shipments which could adversely affect the Company's
business, operating results and financial condition.
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 could require the
Company to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations or to 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 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.
12
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DEPENDENCE ON 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.
13
<PAGE>
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) EXHIBITS
None
(b) REPORTS ON FORM 8-K
On November 6, 1996, the Company filed a Form 8-K related to a synthetic
lease transaction for the construction of a new wafer fabrication
facility.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VITESSE SEMICONDUCTOR CORPORATION
By: /s/ Eugene F. Hovanec
------------------------------
Eugene F. Hovanec
Vice President, Finance and
Chief Financial Officer
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 108,214
<SECURITIES> 64,883
<RECEIVABLES> 18,149
<ALLOWANCES> 900
<INVENTORY> 10,125
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<PP&E> 44,313
<DEPRECIATION> 23,997
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<CURRENT-LIABILITIES> 12,329
<BONDS> 271
0
0
<COMMON> 254,066
<OTHER-SE> (39,311)
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<SALES> 21,832
<TOTAL-REVENUES> 21,832
<CGS> 9,858
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<INCOME-PRETAX> 6,670
<INCOME-TAX> 667
<INCOME-CONTINUING> 6,003
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,003
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.25
</TABLE>
