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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
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 No. 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)
Registrant's telephone number, including area code: (805) 388-3700
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 Par Value
(Title of Class)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on
September 30, 1999 as reported on the Nasdaq National Market, was approximately
$6,612,689,548. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of December 2, 1999, the registrant had outstanding 157,018,307 shares
of Common Stock.
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PART I
Item 1. Business
Certain statements in this Annual Report on Form 10-K, including certain
statements contained in "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," 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 Securities Exchange Act
of 1934, as amended (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 Vitesse Semiconductor
Corporation ("the Company") to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Factors Affecting Future Operating Results" for
certain factors that could cause actual results to differ materially from these
forward-looking statements.
The Company is a leading supplier of high-performance integrated circuits
("ICs") targeted at systems manufacturers in the communications and automatic
test equipment ("ATE") markets. As a result of the deployment of communications
standards such as SONET/SDH, IP, ATM, Fibre Channel and Gigabit Ethernet as well
as other advances, there has been growing demand for high-performance ICs to
meet the increasingly rigorous standards of the 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 1999, sales of communications and ATE products
represented 81% and 19%, respectively, of the Company's total revenues. The
Company's major customers include Cisco, Fujitsu, IBM, LTX, Lucent,
Schlumberger, Seagate, Tellabs and Sun Microsystems.
Vitesse was incorporated in the state of Delaware in 1987. The Company's
principal offices are located at 741 Calle Plano, Camarillo, California, and
its phone number is (805) 388-3700.
Background
Communications
Public communications networks, such as those used by interexchange long
distance carriers ("IXCs") and local exchange carriers ("LECs") and specialized
networks such as those used by Internet service providers, are experiencing
dramatic growth in traffic. 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, the rapid growth of the Internet, the increase in demand for
high speed interconnectivity between wide area networks ("WANs") and local area
networks ("LANs"), and the growing demand for remote network access. Public
network service providers 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.
More recently, the demand for system bandwidth is being addressed by
transmitting multiple channels on a single fiber by a technique called
wavelength division multiplexing ("WDM"). The adoption of WDM has enabled
system operators to significantly increase system bandwidth without having to
deploy additional fiber cables, a long and costly process. While WDM increases
the bandwidth carried by each optical fiber, it does not reduce the number of
electronic components required. Instead, WDM has accelerated the growth of
SONET/SDH deployment by eliminating fiber installation as a growth limiter.
Among the standards and protocols that are emerging to address the increase
in volume and complexity of data flowing through today's networks are
Asynchronous Transfer Mode ("ATM") and Internet Protocol ("IP"). ATM is based on
fixed-size packets, called cells, and is designed to efficiently integrate
voice, data and video and easily
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scale in bandwidth. IP is a packet-based protocol that is generally accepted as
the industry standard for LAN data transfer and is being increasingly used in
WANs as well. Both ATM and IP packet switching network technologies are being
deployed over optical networks based on the complementary SONET/SDH standards,
known as ATM over SONET and Packet over SONET ("POS"). Fiber optic applications
designed to the SONET/SDH and ATM standards use data transmission rates of 155
MHz, 622 MHz, 2.5 GHz or 10 GHz.
Performance improvements in processors and peripherals, along with the
transition to distributed architectures such as client/server and external
storage area networks ("SANs"), have spawned the need for very high speed data
interconnect and networking applications. This has led to a focus on the
methods of inter-connecting high-performance computers, peripheral equipment,
storage devices and networks.
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.
In the LAN environment, Ethernet is currently the most widespread standard,
operating at 10 to 100 megabits per second. However, LAN backbones are rapidly
being upgraded to Gigabit Ethernet and ATM in order to increase available
bandwidth. These network protocols, which enable expanded bandwidth in excess
of one gigabit per second, are emerging as the new standards for LAN backbones.
All of these trends in the communications market have resulted in increased
demand for communication ICs to meet the speed, performance and bandwidth
requirements of high-performance systems.
Automated Test Equipment Market
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. These factors
have led ATE designers to seek to increase component integration. The Company
believes that the low power dissipation and high complexity of its 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 communications and ATE markets. Within the
communications markets, the Company's products are used in emerging high-growth
areas such as SONET/SDH, ATM, IP, Fibre Channel, and Gigabit Ethernet, which
require ICs that are capable of high-bandwidth data transmission.
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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. Another critical element of this strategy
involves the integration of multiple functions onto a single chip.
Provide Complete Customer Solutions
One of the key elements of the Company's strategy is to address, in
addition to the physical layer, upper layers of high-performance communications
systems such as the switching and processing layers. This provides customers
with complete chip solutions for major portions of their hardware. Further, it
enables the Company to build defensible barriers against competitors who only
offer a partial or single circuit solution.
Develop "Technology Transparent" Products
The Company believes that there is a variety of process technologies
available to meet the requirements of the broad range of products that its
customers need. The Company endeavors to offer chip solutions to its customers
using the most appropriate process technology for the particular application. In
addition to its internal wafer fabrication facilities, the Company subcontracts
its CMOS products to three state-of-the-art semiconductor foundries. The Company
intends to qualify other process technologies and foundries in the future.
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.
Pursue Strategic Acquisitions
The Company frequently evaluates opportunities to enhance its products and
technologies through the acquisition of complementary products, technologies
and businesses. In fiscal 1999, the Company completed three such acquisitions.
Products and Customers
Communications
The Company offers several products that address the needs of high-
performance communications systems at the 622 Mb/s, 1.0 Gb/s, 1.25 Gb/s, 2.5
Gb/s and 10 Gb/s data rates for the SONET, ATM, IP, Fibre Channel and Gigabit
Ethernet markets. These products support the increasing speed requirements of
transmission channels and the transmission of multiple channels on a single
fiber. Today, most SONET systems utilize the 2.5 Gb/s (OC-48) standard, though
use of the 10 Gb/s (OC-192) standard is starting to emerge. The Company
developed its first 2.5 Gb/s ICs in 1987 and today has a wide range of 2.5 Gb/s
ICs in the SONET market. Among the products offered in this area are
multiplexers, demultiplexers, switch cores, clock generation and recovery
circuits, laser drivers optoelectronic receivers and amplifiers. These cost
effective solutions for transmission, control and switching provide wide design
margins, increased integration and overall lower system costs to the
communications market.
Today's internet data networking systems require ever increasing levels of
integration, functionality and performance to meet stringent customer
requirements for higher bandwidth, reduced cost and shorter time to market. In
order to meet this challenge, complete line card and switch fabric chip set
solutions are being demanded from suppliers. The Company is addressing this
need with an expanding set of POS/ATM framers, ethernet Media Access
Controllers, packet processors and switch fabrics, which are ideally suited for
high performance switch and router applications. These products address the
need for high bandwidth ports supporting STS-12, STS-48, STS-192 and Gigabit
Ethernet and allow aggregate system bandwidths from 20 Gb/s to greater than 250
Gb/s. The recent acquisition of XaQti Corporation has added active-flow
processor technology to the Company, forming the core of packet processing
components.
The Company's Fibre Channel ICs allow for the very fast transfer of large
volumes of data in SANs, JBOD ("Just a Bunch of Disks") and RAID ("Redundant
Array of Inexpensive Disks") subsystems, and peripheral devices, surpassing the
capacity of today's SCSI interfaces.
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The entire line of the Company's Fibre Channel ICs focuses on eliminating
bandwidth bottlenecks in SANs, monitoring of vital statistics within the system,
and supplanting SCSI devices in today's fastest networks. The Company's range
of ICs for disk drives, hub and repeaters, host adapters, JBOD and RAID systems,
port bypass circuits and switches service the Fibre Channel market with high
bandwidth solutions for copper, fiber optic and backplane interconnects. The
Company has developed 2.0 Gb/s ICs that will increase bandwidth and further
reduce bottlenecks in the storage marketplace. The Company has also developed
physical layer interface products for the Gigabit Ethernet market. These
Gigabit Ethernet products increase the bandwidth of LAN backbones to 1.25 Gb/s
as new standards for LAN backbones emerge.
The Company offers a line of gigabit analog chipsets for fiber optic
interfaces. Its 622 Mb/s, 1.0 Gb/s and 2.5 Gb/s ICs are utilized in SONET/SDH,
Gigabit Ethernet, and Fibre Channel subsystems. The Company introduced the
first low power, high-volume optoelectronic IC in 1995. These small ICs reduce
board space requirements and lower overall system costs. Vitesse is currently
expanding its higher speed optoelectronic product line to meet rapidly emerging
datacom and telecom requirements.
Today's system designers need to overcome the limitations of parallel
interfaces used in system backplanes, such as timing problems, impedance
matching and physical size. The Company's backplane products utilize a serial
approach and eliminate limitations by supplying compact and simple
interconnects. The Company also supplies a series of crosspoint switches for
use in telecom and datacom applications. These backplane and switch ICs
synchronize buffering across bits, words, or channels to eliminate data skew.
Communications products accounted for 81% and 74% of the Company's total
revenues for fiscal 1999 and 1998, respectively. In fiscal 1999, the Company's
significant communications customers included Alcatel, Ciena, Cisco, Ericsson,
Fujitsu, IBM, Lucent, NEC, Seagate, Sun Microsystems and Tellabs.
Automated Test Equipment
ATE products accounted for 19% and 26% of the Company's total revenues for
fiscal 1999 and fiscal 1998, respectively. Vitesse provides gate arrays and
custom products that offer a combination of high complexity, low power
dissipation and high speed for ATE. More recently, the Company has introduced a
line of standard products targeted at the ATE industry. In fiscal 1999, the
Company's significant ATE customers included Ando, Credence, Integrated
Measurement Systems, LTX, Schlumberger and Teradyne.
The Company's ten largest customers accounted for approximately 66% and 69%
of total revenues in fiscal 1999 and fiscal 1998, respectively. In fiscal 1999
and fiscal 1998, sales to Lucent accounted for 18% and 23%, respectively, of the
Company's total revenues, and sales to Schlumberger accounted for 14% and 15%,
respectively, of the Company's total revenues.
Technology
The Company uses Gallium Arsenide ("GaAs") as the substrate in the internal
manufacturing of its products. 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 Company employs proprietary H-GaAs
process technology based on a refractory metal self-aligned gate ("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.
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Manufacturing
Wafer Fabrication
The Company fabricates four-inch wafers at its Camarillo, California 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). In
1998 the Company started fabricating six-inch wafers at a newly constructed
plant in Colorado Springs, Colorado which includes a 15,000 square foot Class 1
clean room. 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
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.
By utilizing standard silicon IC manufacturing equipment the Company is
able 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 outsources the manufacturing of its silicon-based products to
suppliers that deliver either finished wafers or fully assembled and tested
products. The Company's semiconductor subcontractors include IBM, Taiwan
Semiconductor Manufacturing Corporation and LSI Logic.
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Assembly and Test
A majority of the Company's ICs are packaged by third parties. For final
testing, 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 manufactures its products using a variety of components
procured from third-party suppliers. A majority of the Company's integrated
circuits are packaged by third parties. Certain components, materials and
services are available from only a limited number of sources. 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 assembly services.
Engineering, Research and Development
The market for the Company's products is characterized by rapid changes in
both GaAs and 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.
Product Research and Development
The Company's present product research and development efforts are focused
on developing new products for its 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 has implemented H-GaAs IV, a 0.4 micron GaAs FET technology
that offers 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
1999, 1998 and 1997 were $49.2 million, $33.0 million and $19.1 million,
respectively.
Competition
The high-performance semiconductor market is highly competitive and subject
to rapid technological change, price erosion and heightened international
competition. The communications and ATE industries, which are the primary target
markets for the Company, are also becoming intensely competitive because of
deregulation and international competition. The Company currently competes
primarily directly with the following categories of companies:
. GaAs fabrication operations of companies such as Conexant and Fujitsu.
. Silicon high-performance integrated circuit manufacturers which use Emitter
Coupled Logic ("ECL"), Bipolar Complementary Metal-Oxide-Semiconductor
("BiCMOS") or Complementary Metal-Oxide-Semiconductor ("CMOS") technologies
such as Hewlett Packard, Fujitsu, Motorola, Lucent Technologies, Texas
Instruments and Applied Micro Circuits Corporation.
. Internal integrated circuit manufacturing units of systems companies such
as Lucent Technologies, Siemens and Fujitsu.
Many of these companies have substantially greater marketing, financial,
technical and manufacturing resources than those of the Company.
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Competition in the Company's markets is primarily based on
price/performance, product quality and the ability to deliver products in a
timely fashion. Product qualification is typically a lengthy process and some
prospective customers may be unwilling to invest the time or expense necessary
to qualify suppliers such as the Company. Prospective customers may also have
concerns about the relative advantages of our products compared to more familiar
silicon-based semiconductors. Further, customers may also be concerned about
relying on a relatively small company for a critical sole-sourced component.
Sales and Customer Support
The Company's principal method of selling its products is through direct
sales to systems manufacturers by the Vitesse sales force. In certain markets
such as Japan, the Company also employs value-added distributors.
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 salesperson to the
initial customer visit to understand and evaluate the customer's requirements.
The salesperson and field engineer will determine 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.
The Company's sales headquarters is located in Camarillo, California. The
Company has 13 additional sales and field application support offices in the
United States, and one each in Germany, Italy, Japan and United Kingdom.
The Company generally warrants its products against defects in materials
and workmanship for a period of one year.
Licenses and Patents
The Company has been awarded 15 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 U.S., 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.
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 operate
its 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.
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Employees
As of September 30, 1999, the Company had 790 employees, including 346 in
engineering, research and development, 68 in marketing and sales, 345 in
operations and 31 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.
Item 2. Properties
The Company's executive offices and principal research and development and
fabrication facility is located in Camarillo, California, and is being leased
under a non-cancellable operating lease that expires in 2009. The total space
occupied in this building is approximately 111,000 square feet. The Company has
a second wafer fabrication facility in Colorado Springs, Colorado that is being
leased under a synthetic lease that expires in 2001. The Company has the option
to purchase this facility at cost at the end of the lease term. The Company
leases an additional 43,000 square feet in Camarillo for product development and
21,000 square feet in Santa Clara, California for product development and sales
offices. The Company's Colorado Springs, Colorado facility is in a 100,000
square foot building that is being occupied on a five-year non-cancellable
operating lease with a purchase option at the end of the lease. This facility
includes a 10,000 square foot clean room for wafer fabrication, and a product
development center. The Company also leases space for six other product
development centers in Oregon, Texas, Florida, Vermont, New Hampshire and
Copenhagen, Denmark, and 16 sales and field application support offices (13 in
the United States, three in Europe and one in Japan).
Item 3. Legal Proceedings
The Company is currently involved in several legal proceedings; however, it
believes that resolution of these matters, if resolved against the Company,
would not have a material and adverse affect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On Thursday, September 9, 1999, the Company held a Special Meeting of
Stockholders. At the meeting, the Company's stockholders approved a proposal to
amend the Company's Amended and Restated Certificate of Incorporation to provide
for an increase in authorized shares of Common Stock, par value $.01 per share,
of the Company from 100,000,000 to 250,000,000 shares.
The vote on this proposal was as follows:
FOR: 60,661,526
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AGAINST: 6,148,424
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ABSTAIN: 90,748
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PART II
Item 5. Market for Company's Common Stock and Related Stockholder Matters
The information required by this item appears on page 11 of the Company's
1999 Annual Report to Shareholders and is incorporated herein by reference.
Item 6. Selected Financial Data
The selected financial data for each of the five years ended September 30,
1999, appears on page 10 of the Company's 1999 Annual Report to Shareholders and
is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item appears on pages 12 to 20 of the
Company's 1999 Annual Report to Shareholders and is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
None.
Item 8. Financial Statements and Supplementary Data
Information required by this item is included in pages 22 to 36 of the
Company's 1999 Annual Report to Shareholders, and is incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The directors and executive officers of the Company are as follows:
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Name Age Position
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Louis R. Tomasetta 50 President and Chief Executive Officer, Director
Christopher R. Gardner 39 Vice President & General Manager, Telecommunications
Eugene F. Hovanec 47 Vice President, Finance & Chief Financial Officer
Kenneth M. Jones 36 Vice President & General Manager, ATE
James Mikkelson 51 Vice President, Technology Devel., Chief Technical Officer
Michael Millhollan 55 Vice President & General Manager, Data Communications
Neil Rappaport 53 Vice President, Sales
James A. Cole 57 Director
Alex Daly 38 Director
Pierre R. Lamond 69 Chairman of the Board
John C. Lewis 64 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 International
Corporation. Dr. Tomasetta has over 25 years experience in the management and
development of GaAs based businesses, products, and technology. He received
B.S., M.S., and Ph.D. degrees in electrical engineering from the Massachusetts
Institute of Technology.
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. In April 1999, he became Vice
President & General Manager, Telecommunications. Prior to 1987, 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. Mr. Hovanec holds a Bachelor
of Business Administration degree from Pace University, New York. Mr. Hovanec
also serves as a Director of Interlink Electronics, Inc.
Kenneth M. Jones joined the Company as Vice President & General Manager of
the ATE Division in April 1999. From 1997 to 1999, Mr. Jones served as Director
of Marketing and Sales at MicroModule Corporation. From 1987 to 1997 he held
several managerial positions at LTX Corporation, a semiconductor test equipment
manufacturer, most recently as Marketing and Engineering Applications Manager.
Mr. Jones holds B.A., B.E. and M.E. degrees in electrical engineering from
Dartmouth College in New Hampshire.
James Mikkelson, a co-founder of the Company, became Chief Technical
Officer in September 1997. He has served as Vice President of 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 Company,
responsible for the development and manufacturing of MOS VLSI circuits. Mr.
Mikkelson holds B.S. and M.S. degrees in electrical engineering from the
Massachusetts Institute of Technology.
Michael Millhollan joined the Company in July 1989 as Director of the
Sunnyvale Product Development Center and became Vice President and General
Manager of Standard Products in October 1992. From 1976 to 1989, he held
various senior design engineering positions with National Semiconductor
Corporation, a semi-conductor manufacturer, most recently as Director of
programmable logic product development. Prior to that, he was at Motorola,
Inc., a semiconductor manufacturer, for seven years in various design
engineering positions. Mr. Millhollan holds a B.S. degree in electrical
engineering from the Georgia Institute of Technology.
10
<PAGE>
Neil 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.
James A. Cole has served as a Director of the Company since February 1987.
He has been a General Partner of Windward Ventures since 1997 and he has been a
General Partner of Spectra Enterprise Associates since 1986. 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.
Alex Daly became a Director of the Company in January 1998. He has been
President and Chief Executive Officer of Cygnus Solutions, a developer of
software tools, since May 1998. From 1995 to 1998 he served as Vice President
of Sales and Marketing and Chief Marketing Officer at C-Cube Microsystems, a
developer of digital video communications products. From 1990 to 1995, he
served at Intel Corporation, a semiconductor company, most recently as Director
of Marketing for the mobile computing group.
Pierre R. Lamond has been the Chairman of the Board of Directors since the
Company's inception in February 1987. Since August 1981, he has been a General
Partner of Sequoia Capital, a venture capital firm. Sequoia has financed
companies such as Cypress Semiconductor Corporation, Cisco, and C-Cube
Microsystems. Mr. Lamond was founder and Vice President of National
Semiconductor Corporation. He is also a Director of Redback Networks and a
number of privately held companies.
John C. Lewis became a Director of the Company in January 1990. He is
currently Chairman of the Board of Directors of Amdahl Corporation, a
manufacturer of large general purpose computer storage systems and software
products. Before joining Amdahl in 1977, he was President of Xerox Business
Systems. Mr. Lewis also serves as a Director of Cypress Semiconductor
Corporation, Cygnus Solutions and Pinnacle Systems.
Item 11. Executive Compensation
This item is answered by reference to the information set forth under the
captions "Executive Compensation," "Stock Option Plans," "1991 Employee Stock
Purchase Plan," "401(k) Plan" and "Certain Transactions" in the Company's Proxy
Statement for the 2000 Annual Meeting of Shareholders filed with the Commission
on December 14, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
This item is answered by reference to the information set forth under the
caption "Principal Share Ownership" in the Company's Proxy Statement for the
2000 Annual Meeting of Shareholders filed with the Commission on December 14,
1999.
Item 13. Certain Relationships and Related Transactions
This item is answered by reference to the information set forth under the
caption "Certain Transactions" in the Company's Proxy Statement for the 2000
Annual Meeting of Shareholders to be filed with the Commission on December 14,
1999.
11
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page in
-------
Annual Report
-------------
<S> <C>
1. Financial Statements:
The financial statements of the Company listed below
are incorporated herein by reference to the following
pages of the 1999 Annual Report to Shareholders:
Independent Auditors' Report 21
Consolidated Balance Sheets as of September 30, 1999
and 1998 22
Consolidated Statements of Operations for the years
ended September 30, 1999, 1998 and 1997 23
Consolidated Statements of Shareholders' Equity for the
years ended September 30, 1999, 1998 and 1997 24
Consolidated Statements of Cash Flows for the years
ended September 30, 1999, 1998 and 1997 25
Notes to Consolidated Financial Statements 26
2. Consolidated Financial Statement Schedules: Page
----
The consolidated financial statement schedules of the
Company are included in Part IV of this report on the
pages indicated:
Independent Auditors' Report on Consolidated Financial
Statement Schedule 15
For the three fiscal years ended September 30, 1999--
II -- Valuation and Qualifying Accounts 16
All other schedules are omitted because they are not applicable or are
not required.
3. Exhibits:
See Item 14(c) below.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the fiscal
year ended September 30, 1999.
(c) Exhibits
The exhibits listed on the accompanying index immediately following the
signature page are filed As part of this report.
(d) Financial Statement Schedules
See Item 14(a) above.
</TABLE>
12
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: December 22, 1999 By: /s/ Eugene F. Hovanec
-------------------------------
Eugene F. Hovanec
Vice President, Finance
& Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis R. Tomasetta President and Chief Executive December 22, 1999
- --------------------------------------------- Officer (Principal Executive Officer)
Louis R. Tomasetta
/s/ Eugene F. Hovanec Vice President, Finance and December 22, 1999
- --------------------------------------------- Chief Financial Officer
Eugene F. Hovanec
/s/ James A. Cole Director December 22, 1999
- ---------------------------------------------
James A. Cole
/s/ Alex Daly Director December 22, 1999
- ---------------------------------------------
Alex Daly
/s/ Pierre R. Lamond Chairman of the Board of Directors December 22, 1999
- ---------------------------------------------
Pierre R. Lamond
/s/ John C. Lewis Director December 22, 1999
- ---------------------------------------------
John C. Lewis
</TABLE>
13
<PAGE>
Item 16 Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number
--------------
3.1 Certificate of Incorporation of Registrant, as amended to
date.
3.2/(2)/ Bylaws of Registrant as amended to date.
4.1/(2)/ Specimen of Company's Common Stock Certificate.
10.1/(2)/ 1989 Stock Option Plan.
10.2/(2)/ 1991 Stock Option Plan.
10.3/(2)/ 1991 Employee Stock Purchase Plan.
10.4/(2)/ 1991 Directors' Stock Option Plan.
10.5/(2)/ Standard Form of Indemnification Agreement between
Registrant and its officers and directors.
10.9/(1)/ First Amendment to Lease between Carson Estate Company
(formerly Victoria Partnership) and Registrant.
10.10/(2)/ Lease dated January 31, 1991 between Camarillo I Development
Corporation and Registrant.
10.11/(2)/ Standard Form Proprietary Information Agreement.
10.16/(3)/ Agreement dated October 30, 1996 between ABN AMRO Bank N.V.,
Lease Plan North America, Inc. and Registrant.
10.17/(3)/ Agreement dated August 15, 1997 between ABN AMRO Bank N.V.,
Lease Plan North America, Inc. and Registrant.
10.20/(4)/ Agreement dated July 9, 1998 between Metlife Capital
Corporation and Registrant.
13.1 Annual Report to Security Holders
23.1 Accountants' Consent
27.1 Financial Data Schedule
(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) Incorporated by reference from the Company's annual report on Form 10-K for
the period ended September 30, 1997.
(4) Incorporated by reference from the Company's annual report on Form 10-K for
the period ended September 30, 1998.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Vitesse Semiconductor Corporation:
Under date of October 14, 1999, we reported on the consolidated balance sheets
of Vitesse Semiconductor Corporation and subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three-year period ended
September 30, 1999, as contained in the 1999 annual report to shareholders.
These consolidated financial statements and our report thereon are incorporated
by reference in the annual report on Form 10-K for the year ended September 30,
1999. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed in the accompanying index. The financial statement schedule
is the responsibility of the Company's management. Our responsibility is to
express an opinion on the financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
Los Angeles, California
October 14, 1999
15
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION
SCHEDULE II -- Valuation and Qualifying Accounts
Years ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
Beginning of Costs and Deductions/ at end
Period Expenses Write-offs of Period
------ -------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended September 30, 1999
Deducted from Inventories:
Reserve for obsolescence $4,155 $3,774 $1,266 $6,663
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns 1,088 4,945 2,533 3,500
Year ended September 30, 1998
Deducted from Inventories:
Reserve for obsolescence 3,121 1,034 --- 4,155
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns 1,000 878 790 1,088
</TABLE>
16
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
-------------------------------------------------
OF
--
VITESSE SEMICONDUCTOR CORPORATION
---------------------------------
The undersigned Eugene F. Hovanec does hereby verify that:
1. He is the duly elected Vice President, Finance, Chief Financial
Officer
and Secretary of Vitesse Semiconductor Corporation, a Delaware corporation.
2. The Certificate of Incorporation of this corporation is amended and
restated to read in its entirety as follows:
1. The name of the corporation is Vitesse Semiconductor Corporation (the
"Corporation").
2. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, zip code 19801. The name of its registered
agent at such address is The Corporation Trust Company.
3. The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
Corporations may be organized under the General Corporation Law of Delaware.
4. This Corporation is authorized to issue two classes of shares to be
designated respectively Preferred Stock ("Preferred") and Common Stock
("Common"). The total number of shares of Preferred this Corporation shall have
authority to issue shall be 10,000,000, $0.01 par value, and the total number of
Common this Corporation shall have authority to issue shall be 250,000,000,
$0.01 par value.
The Preferred Stock may be issued from time to time in one or more series
pursuant to a resolution or resolutions providing for such issue duly adopted by
the Board of Directors (authority to do so being hereby expressly vested in the
Board). The Board of Directors is further authorized to determine or alter the
rights, preferences, privileges and restrictions granted to or imposed upon any
wholly unissued series of Preferred Stock and, to fix the number of shares of
any series of Preferred Stock and the designation of any such series of
Preferred Stock. The Board of Directors, within the limits and restrictions
stated in any resolution or resolutions of the Board of Directors originally
fixing
1 of EX 3.1
<PAGE>
the number of shares constituting any series, may increase or decrease (but not
below the number of shares in any such series then outstanding) the number of
shares of any series subsequent to the issue of shares of that series.
5. The Corporation is to have perpetual existence.
6. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
7. The number of directors which constitute the whole Board of Directors
of the Corporation shall be designated in the Bylaws of the Corporation.
8. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
9. (a) To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
(b) The Corporation shall indemnify to the fullest extent permitted by
law any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation or serves or served at any
other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
(c) Neither any amendment nor repeal of this Article 9, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article 9, shall eliminate or reduce the effect of this
Article 9 in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article 9, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
10. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
11. Following the effectiveness of the registration of any class of
securities of the Corporation pursuant to the requirements of the Securities
Exchange Act of 1934, as amended, no action shall be taken by the stockholders
of the Corporation except at an annual or special meeting of the stockholders
call in accordance with the Bylaws and no action shall be taken by the
stockholders by written consent.
2 of EX 3.1
<PAGE>
3. The foregoing amendment and restatement of the Certificate of
Incorporation has been duly approved by the Board of Directors.
4. The foregoing amendment and restatement of the Certificate of
Incorporation has been duly approved by the required vote of stockholders in
accordance with Section 242 of the General Corporation Law of the State of
Delaware. The total number of outstanding shares of Common Stock of the
Corporation is 78,036,697 and there are no shares of Preferred Stock
outstanding. The number of shares voting in favor of the Amended and Restated
Certificate of Incorporation equalled or exceeded the vote required. The
percentage vote required was more than 50% of the Common voting as a class.
Notice has been given to any non-consenting stockholders in accordance with the
provisions of Section 228(c) of the General Corporation Law of the State of
Delaware.
The undersigned declares under penalty of perjury under the laws of the
State of Delaware that the matters set forth in this certificate are true,
correct and of his own knowledge.
Executed at Camarillo, California on September 16, 1999.
/s/ Eugene F. Hovanec
---------------------
Eugene F. Hovanec
Vice President, Finance &
Chief Financial Officer and
Secretary
3 of EX 3.1
<PAGE>
Exhibit 13.1
It is a pleasure to report to you that fiscal 1999 was our most successful year.
In addition to achieving record financial results, we also executed on our
strategy of developing the intellectual property, product portfolio and advanced
process technology needed to become a dominant supplier of high-performance
integrated circuits for the Internet driven communications market.
Specific highlights for 1999 were:
. Revenue exceeded $281 million, a 59% increase over the $177 million recorded
in 1998 as our traditional strength in telecom transmission systems was
supplemented by very strong growth in the datacom wide area, local area and
storage area networks.
. We successfully ramped up our 6" wafer fabrication facility, enabling us to
better address our capacity constraints.
. Gross margins improved from 60% in 1998 to 63% in 1999, the result of
increased fab utilization in Colorado Springs and yield improvements.
. Operating income grew to $93 million from $50 million in 1998, an 86%
increase.
. Diluted earnings per share grew to $0.42 from $0.31 in 1998, a 35% increase
despite a 120% increase in the effective tax rate.
<PAGE>
Communications Over the last five years, Vitesse has become one of the leading
suppliers of high-performance integrated circuits used in SONET/SDH, WDM and
DWDM optical communication systems. In particular, we have developed a dominant
position in 2.5Gb/s (gigabit per second) systems that move massive amounts of
data over long distances. While our initial thrust was on long-distance
transmission systems, we have more recently focused our resources on datacom
networking applications such as Gigabit Ethernet, Internet Protocol, Fibre
Channel Storage Networks, ATM and backplanes. Our results in 1998 and 1999 have
validated this strategy. This year we began a major program to dramatically
expand our served markets by developing products that provide the switching and
processing capabilities needed by these same communications systems. We believe
that as the volume and performance of these systems increases, the original
equipment manufacturers ("OEMs") will look to their integrated circuit suppliers
to provide complete chip solutions for major portions of the hardware.
Time to market and cost will not permit the use of many custom circuits designed
by the OEM's engineers. As a result, we have initiated a strategy to provide
"reference designs" which includes physical layer, switching layer and
processing layer circuits. This strategy benefits both our customers and
Vitesse. Our customers receive complete hardware solutions for a portion of
their products, which reduces time to market and enables them to concentrate on
applications and software features. By providing a complete solution, Vitesse
becomes more strategic to the OEM and builds a defensible barrier against
competitors who only offer a single circuit or a partial solution.
<PAGE>
During 1999 we continued to build barriers to competition by introducing over 50
new standard communications products. These include a number of products
developed using state-of-the-art CMOS (silicon) technology that provides an
excellent complement to our GaAs (Gallium Arsenide) proprietary technology.
Significant among the new products are:
The VSC8122, a multi-rate clock and data recovery IC that can operate at
varying data rates from 155Mbps to 2.5Gb/s for use in SONET/SDH and Gigabit
Ethernet systems.
The VSC8141, a multi-rate transceiver with an integrated clock generator for
SONET/SDH and Gigabit Ethernet applications.
The VSC9110, a SONET/SDH to ATM framing device that can be used in equipment
interconnecting ATM switches over public or private SONET networks; and the
VSC9112 which adds a Packet over SONET (POS) mode to the VSC9110.
The VSC880, a 16x16 serial crosspoint switch, which in conjunction with its
companion backplane transceiver device, the VSC870, forms the building blocks
of a synchronous high-performance switching system with an aggregate
bandwidth of 32Gb/s.
The VSC834, VSC835 and VSC836, a family of asynchronous crosspoint switches
designed to carry broadband data streams up to 2.5Gb/s.
<PAGE>
The VSC9210, the industry's first 2.5Gb/s SONET/SDH Forward Error Correction
Encoder/Decoder IC.
The VSC7216, a quad 8-bit parallel-to-serial and serial-to-parallel
transceiver chip used for high bandwidth interconnection in both Fibre
Channel and Gigabit Ethernet solutions.
A key element of our strategy is to complement our existing intellectual
property base by adding design and architectural expertise through acquisitions.
In 1999 we completed three acquisitions, each of which has enhanced our design
expertise and has greatly improved our capability in communications processors
and system management.
In November 1998, we completed the acquisition of Vermont Scientific
Technologies ("VTEK"), a provider of integrated design services to companies in
the telecommunications industry. This acquisition added considerable value to
our design capabilities in the SONET overhead processing area.
In January 1999, we acquired Serano Systems Corporation, a leader in enclosure
and platform management solutions for Fibre Channel and SCSI server and storage
systems. The acquisition of Serano will enable us to solidify our leadership in
the Fibre Channel SAN area by providing complete solutions for that market.
In July 1999, we acquired XaQti Corporation, a leading edge supplier of Active-
Flow Processors which drive the Internet. This acquisition positions Vitesse as
a major player in high-end switching and processing and provides our customers
with complete Layer 3 switch solutions.
As a result of these acquisitions, we have begun to develop several new products
including network processors, framers and pointer processors which we expect to
introduce in fiscal 2000.
Test Equipment Our automatic test equipment (ATE) business grew in 1999 but at a
slower rate than in 1998. We accomplished this growth by continuing to gain
market share at the expense of bipolar silicon by offering products with higher
speed, higher levels of integration, lower cost, and the ability to combine
logic, SRAM and analog functions. Moreover, trends in new memory standards
(RAMBUS) and greater performance requirements for mixed signal testers have
opened up new applications for Vitesse products.
While we anticipate that our ATE business will continue to grow, we do not
expect it to grow at the rapid pace of the past two years. To expand our
opportunities we have introduced our first standard products in ATE. These
products are designed for applications that may not require the higher
performance provided by
<PAGE>
custom designs and which cannot afford the longer design cycles and higher
costs associated with custom solutions.
Technology There is no single technology that can meet the requirements of the
broad range of products that our customers require. We believe the key is to
utilize widely available "foundry" technologies such as CMOS and Silicon-
Germanium ("Si-Ge") where appropriate, and a proprietary technology likeH-GaAs
which can provide superior performance or the lower cost of an internal
manufacturing facility. Since our inception, we have continued to mature our
technology to the point that our internal manufacturing cost structure is
significantly lower than that of purchased wafers from any silicon bipolar
(i.e., ECL or Si-Ge) foundry. Over the last two years our process development
team has ramped up our production technologies in our new Class 1 fab and has
developed our next generation process, H-GaAs V. This process is the first to
take advantage of the state-of-the-art equipment installed in the new facility
and is optimized to provide the lower power and lowest cost for 10Gb/s circuits.
Summary In 1999, we continued to solidify our position in all of our established
markets. We also began to see the results of our initiative to provide more
complete solutions to customers by expanding our product offerings. We have
enhanced our system and design expertise through internal growth and
acquisitions. We believe that we have selected markets with tremendous growth
potential and have put in place the infrastructure to exploit this growth.
Moreover, our employees remain committed to making Vitesse the dominant suppli
er of high-performance circuits for communications and instrumentation. We
greatly appreciate your support and remain fully committed to making Vitesse an
outstanding company and an outstanding investment.
Louis R. Tomasetta
President
Chief Executive Officer
<PAGE>
five-year selected financial data
<TABLE>
<CAPTION>
Years Ended September 30,
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands except per share amounts)
Operating Results
Revenues $ 281,534 $ 176,885 $ 105,413 $ 66,046 $ 42,882
Income from operations 93,142 50,194 25,133 13,112 2,788
Net income 69,880 50,500 29,517 12,320 1,507
Net income per share - basic 0.46 0.34 0.21 0.12 0.02
Net income per share - diluted 0.42 0.31 0.19 0.10 0.01
Balance Sheet
Cash and short-term investments 189,157 168,573 158,461 53,035 6,315
Working capital 282,022 225,025 179,564 70,606 17,889
Total assets 522,893 381,008 295,994 101,071 42,111
Long-term debt, less current portion 725 701 322 1,166 5,518
Total shareholders' equity 486,688 351,289 267,807 88,053 25,000
</TABLE>
<PAGE>
quarterly results and stock market data [unaudited]
<TABLE>
<CAPTION>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(in thousands except stock price and per share amounts)
Fiscal Year 1999
Revenues $ 60,708 $ 66,937 $ 73,262 $ 80,627 $ 281,534
Net income 14,604 15,518 18,112 21,646 69,880
Net income per share - diluted (A) 0.08 0.09 0.11 0.13 0.42
Common stock price range (B):
High 24.47 26.20 33.78 48.38 48.38
Low 9.03 21.81 21.19 28.81 9.03
Fiscal Year 1998
Revenues $ 35,013 $ 40,695 $ 46,587 $ 54,590 $ 176,885
Net income 10,000 11,468 13,242 15,790 50,500
Net income per share - diluted (A) 0.06 0.07 0.08 0.10 0.31
Common stock price range (B):
High 13.03 12.72 15.44 18.16 18.16
Low 8.22 9.30 11.56 11.69 8.22
Fiscal Year 1997
Revenues $ 21,841 $ 24,617 $ 27,859 $ 31,096 $ 105,413
Net income 5,418 6,944 8,182 8,973 29,517
Net income per share - diluted (A) 0.04 0.04 0.05 0.06 0.19
Common stock price range (B):
High 8.30 9.15 9.25 13.47 13.47
Low 5.21 5.63 6.88 8.04 5.21
</TABLE>
(A) Net income per share computations for each quarter are independent and may
not add to the net income per share computation for the year.
(B) The Company's common stock is traded on the Nasdaq National Market System
under the symbol VTSS. At September 30, 1999, there were approximately 914
shareholders of record. Common stock prices are closing prices as reported
on the Nasdaq National Market System. All share and per share data for all
periods presented have been adjusted to reflect a 2 for 1 stock split of
the common stock that was effected on October 20, 1999, a 2 for 1 stock
split of the common stock that was effected on May 26, 1998, and a 3 for 2
stock split of the common stock that was effected on February 28, 1997. The
Company has never paid cash dividends and has no present plans to do so.
The Company's bank line of credit agreement and synthetic lease agreements
prohibit the payment of dividends without the banks' consent. See Notes 5
and 11 of Notes to Consolidated Financial Statements.
<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 Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report. As more
fully described in Note 2 of the Consolidated Financial Statements, the
Company's acquisitions of Serano Systems Corporation ("Serano") on January 21,
1999 and XaQti Corporation ("XaQti") on July 16, 1999 were accounted for under
the pooling-of-interests method, and accordingly, all periods presented have
been restated to include the accounts and results of operations of Serano and
XaQti. The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 as
amended and Section 21E of the Exchange Act that involve risks and uncertainties
including statements regarding research and development expense, profitability
and the ability to use net operating loss carryforwards and tax credits,
liquidity and capital resources and Year 2000 readiness. 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" and "Factors
Affecting Future Operating Results."
Overview
The Company is a leading supplier of high-performance integrated circuits
("ICs") targeted at systems manufacturers in the communications and automatic
test equipment ("ATE") markets. As a result of the deployment of communications
standards such as SONET/SDH, IP, ATM, Fibre Channel and Gigabit Ethernet as well
as other advances, there has been growing demand for high-performance ICs to
meet the increasingly rigorous standards of the 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 1999, sales of communications and ATE products
represented 81% and 19%, respectively, of the Company's total revenues.
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
10 largest customers represented approximately 66%, 69% and 77% of total
revenues in fiscal 1999, 1998 and 1997, respectively.
<PAGE>
As of September 30, 1999, the Company had $52.8 million and $23.0 million 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 on historical results of operations, estimated future
taxable income and other factors, management believes that it is more likely
than not that the tax benefits associated with such loss carryforwards will be
realized, and therefore the Company eliminated the valuation allowance for all
deductible differences in fiscal 1998. See Note 8 of Notes to Consolidated
Financial Statements.
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>
Years Ended September 30,
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
-------------------------------------
Costs and expenses:
Cost of revenues 37.0 39.6 43.2
Engineering, research and development 17.5 18.7 18.1
Selling, general and administrative 12.4 13.3 14.9
-------------------------------------
Total costs and expenses 66.9 71.6 76.2
-------------------------------------
Income from operations 33.1 28.4 23.8
Other income, net 3.8 5.3 7.6
-------------------------------------
Income before income taxes 36.9 33.7 31.4
Income taxes 12.1 5.1 3.4
-------------------------------------
Net income 24.8% 28.6% 28.0%
=====================================
</TABLE>
<PAGE>
Year Ended September 30, 1999, as Compared to Year Ended September 30, 1998
Revenues Revenues in fiscal 1999 were $281.5 million, a 59% increase over the
$176.9 million recorded in fiscal 1998. The increase in total revenues was due
to a unit growth in shipments of existing products, as well as the introduction
of new products to customers in the communications and ATE markets.
Cost of Revenues Cost of revenues as a percentage of total revenues in fiscal
1999 was 37.0% compared to 39.6% in fiscal 1998. The decrease in cost of
revenues as a percentage of total revenues resulted primarily from a reduction
in per unit costs associated with increased utilization of the Company's
Colorado Springs wafer fabrication facility, as well as improved manufacturing
yields at both the Colorado Springs and Camarillo wafer fabrication facilities.
Engineering, Research and Development Engineering, research and development
expenses were $49.2 million in fiscal 1999 compared to $33.0 million in fiscal
1998. 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 the dollar amount of engineering,
research and development expenses in the future. As a percentage of total
revenues, engineering, research and development expenses were 17.5% in fiscal
1999 and 18.7% in fiscal 1998.
Selling, General and Administrative Selling, general and administrative expenses
were $35.0 million in fiscal 1999 compared to $23.6 million in fiscal 1998. The
increase was principally due to increased headcount, higher commissions earned
by sales representatives resulting from increased sales, and increased
advertising costs. As a percentage of total revenues, selling, general and
administrative expenses declined to 12.4% in fiscal 1999 from 13.3% in fiscal
1998 primarily as a result of the Company's revenues growing faster than these
expenses.
Other Income, Net Other income consists of interest income, net of interest and
other expenses. Other income increased to $10.7 million in fiscal 1999 from $9.4
million in fiscal 1998 due to a higher average cash, short-term investments and
long-term deposit balances in fiscal 1999 as compared to fiscal 1998 resulting
primarily from positive cash flow and profitability.
Income Taxes The Company recorded a provision for income taxes in the amount of
$34.0 million in fiscal 1999 and $9.1 million in fiscal 1998, representing an
effective tax rate of 33% and 15%, respectively. The increase in the effective
tax rate is due to the full utilization in prior years of available net
operating loss carryforwards. The Company expects the effective tax rate to
approximate 33% in fiscal 2000.
Net Operating Loss Carryforwards As of September 30, 1999, the Company had
federal net operating loss carryforwards of approximately $52.8 million, state
net operating loss carryforwards of approximately $23.0 million and federal and
state research and development tax credits of approximately $5.7 million and
$2.7 million, respectively. The Company accounts for income taxes pursuant to
the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS No. 109).
<PAGE>
Year Ended September 30, 1998, as Compared to Year Ended September 30, 1997
Revenues Revenues in fiscal 1998 were $176.9 million, a 68% increase over the
$105.4 million recorded in fiscal 1997. The increase in revenues was due to an
increase in production revenues as a result of shipments to customers in the
communications and ATE markets.
Cost of Revenues Cost of revenues as a percentage of total revenues in fiscal
1998 was 39.6% compared to 43.2% in fiscal 1997. The decrease in cost of
revenues as a percentage of total revenues resulted from a reduction in per unit
costs associated with increased production as well as increased manufacturing
yields at both the Camarillo and Colorado Springs manufacturing facilities.
Engineering, Research and Development Engineering, research and development
expenses were $33.0 million in fiscal 1998 compared to $19.1 million in fiscal
1997. 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 expenses
increased to 18.7% in fiscal 1998 from 18.1% in fiscal 1997 due primarily to the
Company's inclusion of the results of XaQti Corporation, which did not begin
ramping research and development expenses until fiscal 1998.
Selling, General and Administrative Selling, general and administrative expenses
were $23.6 million in fiscal 1998 compared to $15.7 million in fiscal 1997. This
increase was principally due to increased headcount, salary increases, higher
commissions resulting from increased sales and increased advertising costs. As a
percentage of total revenues, selling, general and administrative expenses
declined to 13.3% in fiscal 1998 from 14.9% in fiscal 1996 primarily as a result
of the Company's revenues growing faster than these expenses.
Other Income, Net Other income consists of interest income, net of interest and
other expenses. Other income increased to $9.4 million in fiscal 1998 from $8.0
million in fiscal 1997 due to higher average cash, investments and long-term
deposit balances in fiscal 1998 as compared to fiscal 1997.
Income Taxes The Company recorded a provision for income taxes in the amount of
$9.1 million in fiscal 1998 and $3.7 million in fiscal 1997, representing an
effective tax rate of 15% and 11%, respectively.
Liquidity and Capital Resources
Operating Activities The Company generated $90.0 million, $45.0 million and
$52.1 million from operating activities in fiscal 1999, 1998 and 1997,
respectively. The increase in cash from operations was due to improved net
income before depreciation and amortization, and increases in income taxes
payable and other liabilities, which were partially offset by increases in
assets.
Investing Activities Capital expenditures, primarily for manufacturing and test
equipment, were $42.8 million, $30.9 million and $31.7 million in fiscal 1999,
1998 and 1997, respectively. Additionally, the Company invested $53.7 million,
$33.1 million and $58.5 million in held to maturity investments in fiscal 1999,
1998 and 1997, respectively. As discussed in Note 2, the Company also paid $13.0
million in cash for the acquisition of VTEK during fiscal 1999.
<PAGE>
As a result of increased demand for its products, the Company has been
increasing capacity at its Colorado Springs manufacturing facility. The majority
of the costs associated with increasing capacity were financed through various
operating lease transactions. See Note 11 of Notes to Consolidated Financial
Statements. The Company intends to continue investing in new manufacturing, test
and engineering equipment.
Financing Activities In fiscal 1999, the Company generated $23.1 million of cash
from financing activities consisting of $23.5 million of proceeds from the
issuance of common stock pursuant to the Company's stock option and stock
purchase plans, and $0.8 million from the elimination of duplicate period of
pooled companies, partially offset by $1.2 million in repayments of debt
obligations. In fiscal 1998, the Company generated $19.1 million of cash from
financing activities consisting of $18.8 million of proceeds from the issuance
and sale of common stock, and proceeds from the issuance of common stock
pursuant to the Company's stock option and stock purchase plans, $0.8 million
from proceeds of long-term debt partially offset by $0.4 million in repayments
of debt obligations.
The Company has an agreement with a bank for a revolving line of credit which
expires on January 15, 2000. The maximum amount available under the revolving
line of credit is $12.5 million. The interest rate on borrowings under this
revolving line of credit is equal to the bank's prime rate. See Note 5 of Notes
to Consolidated Financial Statements.
Management believes that the Company's cash and cash equivalents, short-term
investments, 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.
Impact of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will require recognition of all derivatives as either assets or liabilities on
the balance sheet at fair value. The Company will adopt SFAS No. 133, as amended
by SFAS No. 137, in the first quarter of its fiscal year ending September 30,
2001. Management has not completed an evaluation of the effects this standard
will have on the Company's consolidated financial statements.
Year 2000 Readiness Disclosure
The "Year 2000 Problem" is the result of computer programs being written using
two digits rather than four to define the applicable year. Computer programs
that contain date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This can affect both information technology
("IT") and non-IT systems such as manufacturing equipment, as the latter may
contain date-sensitive embedded devices such as microcontrollers.
<PAGE>
We formed an internal task force to evaluate Year 2000 issues associated with
both our IT and non-IT systems. Many of these systems were already compliant. We
replaced or upgraded other systems that were identified as noncompliant. We have
completely evaluated all the manufacturing equipment for Year 2000 compliance,
and have completed our remediation and testing procedures. None of our products
are date-sensitive and will operate according to specifications through the Year
2000 and thereafter.
To date, we have not incurred incremental material costs associated with our
efforts to become Year 2000 compliant, as the majority of the costs have
occurred as a result of normal upgrade procedures. Furthermore, we believe that
future costs associated with these compliance efforts will not be material.
We may also be affected by the Year 2000 compliance of our suppliers and
customers. We have contacted critical and significant suppliers to determine
whether the products and services they provide are Year 2000 compliant or to
monitor their progress toward being fully compliant. Our business and results of
operations could experience material adverse effects if our key suppliers were
to experience a Year 2000 related problem that caused them to delay shipment of
critical components to us.
Based on our efforts to date, we do not believe that the Year 2000 Problem will
have a material impact on our business or financial results. The most reasonably
likely worst case would be minor delays in production and shipments. We have
developed a contingency plan detailing actions that will be taken in the event
that our compliance efforts fail to fully remediate any risk to our operations.
The information in this risk factor is "Year 2000 Readiness Disclosure" within
the meaning of the Year 2000 Information and Readiness Disclosure Act.
Factors That May Affect Future Operating Results
We Are Dependent on a Small Number of Customers in a Few Industries
We intend to continue focusing our sales effort on a small number of customers
in the communications and test equipment markets that require high-performance
integrated circuits. Some of these customers are also our competitors. In fiscal
1999, our two largest customers accounted for 18% and 14% of our total revenues
and no other customers accounted for more than 10% of our total revenues. If any
of our major customers delays orders of our products or stops buying our
products, our business and financial condition would be severely affected.
Our Operating Results May Fluctuate
Our quarterly revenues and expenses may fluctuate in the future. These
variations may be due to a number of factors, many of which are outside our
control. Factors that could affect our future operating results include the
following:
. The loss of major customers
. Variations, delays or cancellations of orders and shipments of our products
. Reduction in the selling prices of our products
. Significant changes in the type and mix of products being sold
. Delays in introducing new products
. Design changes made by our customers
<PAGE>
. Our failure to manufacture and ship products on time
. Changes in manufacturing capacity, the utilization of this capacity and
manufacturing yields
. Variations in product and process development costs; and
. Changes in inventory levels
In the past, we have recorded significant new product and process development
costs because our policy is to expense these costs at the time that they are
incurred. We may incur these types of expenses in the future. The occurrence of
any of the above factors could have a material adverse effect on our business
and on our financial results.
We Have Limited Manufacturing Capacity and We Depend on a New Production
Facility
During 1998, we started producing high-performance integrated circuits at our
new six-inch wafer fabrication factory in Colorado Springs, Colorado. This
facility includes a 10,000-square-foot Class I clean room with capacity for
future expansion to 15,000 square feet. We are faced with several risks in the
successful operation of this facility as well as in our overall production
operations. We had only produced finished four-inch wafers until 1998 and
therefore we have limited experience with the equipment and processes involved
in producing finished six-inch wafers. We do not have excess production capacity
at our Camarillo plant to offset failure of the new Colorado facility to meet
production goals. Further, some of our products have been qualified for
manufacture at only one of the two facilities. Consequently, our failure to
successfully operate the new facility could severely damage financial results.
We also must now effectively coordinate and manage two facilities. We have
limited experience in managing production facilities located at two different
sites, and our failure to successfully do so could have a material adverse
effect on our business and operating results.
There Are Risks Associated with Recent and Future Acquisitions
In fiscal 1999, we made three strategic acquisitions. These acquisitions may
result in the diversion of management's attention from the day-to-day operations
of the Company's business. Risks of making these acquisitions include
difficulties in the integration of acquired operations, products and
personnel. If we fail in our efforts to integrate recent and future
acquisitions, our business and operating results could be materially and
adversely affected. In addition, acquisitions we have made or will make could
result in dilutive issuances of equity securities, substantial debt, and
amortization expenses related to goodwill and other intangible assets. We do not
have any binding obligations with respect to any particular acquisition;
however, our management frequently evaluates strategic opportunities available.
In the future we may pursue additional acquisitions of complementary products,
technologies or businesses.
<PAGE>
Our Industry Is Highly Competitive
The high-performance semiconductor market is extremely competitive and is
characterized by rapid technological change, price erosion and increased
international competition. The communications and test equipment industries,
which are our primary target markets, are also becoming intensely competitive
because of deregulation and international competition. We compete directly or
indirectly with the following categories of companies:
. Gallium Arsenide fabrication operations of systems companies such as
Conexant and Fujitsu
. Silicon high-performance integrated circuit manufacturers who use Emitter
Coupled Logic ("ECL"), Bipolar Complementary Metal-Oxide-Semiconductor
("BiCMOS") or Complementary Metal-Oxide-Semiconductor ("CMOS") technologies
such as Hewlett Packard, Fujitsu, Motorola, Lucent Technologies, Texas
Instruments and Applied Micro Circuits Corporation
. Internal integrated circuit manufacturing units of systems companies such
as Lucent Technologies, Siemens and Fujitsu
Our current and prospective competitors include many large companies that have
substantially greater marketing, financial, technical and manufacturing
resources than we do.
Competition in the markets that we serve is primarily based on
price/performance, product quality and the ability to deliver products in a
timely fashion. Product qualification is typically a lengthy process and some
prospective customers may be unwilling to invest the time or expense necessary
to qualify suppliers such as Vitesse. Prospective customers may also have
concerns about the relative advantages of our products compared to more familiar
silicon-based semiconductors. Further, customers may also be concerned about
relying on a relatively small company for a critical sole-sourced component. To
the extent we fail to overcome these challenges, there could be material and
adverse effects on our business and financial results.
We Must Keep Pace with Product and Process Development and Technological Change
The market for our products is characterized by rapid changes in both product
and process technologies. We believe that our success to a large extent depends
on our ability to continue to improve our product and process technologies and
to develop new products and technologies in order to maintain our competitive
position. Further, we must adapt our products and processes to technological
changes and adopt emerging industry standards. Our failure to accomplish any of
the above could have a negative impact on our business and financial results.
We Are Dependent on Key Suppliers
We manufacture our products using a variety of components procured from third-
party suppliers. Most of our high-performance integrated circuits are packaged
by third parties. Other components and materials used in our manufacturing
process are available from only a limited number of sources. Any difficulty in
obtaining sole- or limited-sourced parts or services from third parties could
affect our ability to meet scheduled product deliveries to customers. This in
turn could have a material adverse effect on our customer relationships,
business and financial results.
<PAGE>
Our Manufacturing Yields Are Subject to Fluctuation
Semiconductor fabrication is a highly complex and precise process. Defects in
masks, impurities in the materials used, contamination of the manufacturing
environment and equipment failures can cause a large percentage of wafers or die
to be rejected. Manufacturing yields vary among products, depending on a
particular high-performance integrated circuit's complexity and on our
experience in manufacturing it. In the past, we have experienced difficulties in
achieving acceptable yields on some high-performance integrated circuits, which
has led to shipment delays. Our overall yields are lower than yields obtained in
a mature silicon process because we manufacture a large number of different
products in limited volume and our process technology is less developed. We
anticipate that many of our current and future products may never be produced in
volume.
Since a majority of our manufacturing costs are relatively fixed, maintaining
the number of shippable die per wafer is critical to our operating results.
Yield decreases can result in higher unit costs and may lead to reduced gross
profit and net income. We use estimated yields for valuing work-in-process
inventory. If actual yields are materially different than these estimates, we
may need to revalue work-in-process inventory. Consequently, if any of our
current or future products experience yield problems, our financial results may
be adversely affected.
Our Business Is Subject to Environmental Regulations
We are subject to various governmental regulations related to toxic, volatile
and other hazardous chemicals used in our manufacturing process. Our failure to
comply with these regulations could result in the imposition of fines or in the
suspension or cessation of our operations. Additionally, we may be restricted in
our ability to expand operations at our present locations or we may be required
to incur significant expenses to comply with these regulations.
Our Failure to Manage Growth May Adversely Affect Us
The management of our growth requires qualified personnel, systems and other
resources. In particular, the continued operation of the new facility in
Colorado Springs and its integration with the Camarillo facility will require
significant management, technical and administrative resources. Additionally, we
have recently established several product design centers worldwide. Finally, we
acquired Vermont Scientific Technologies, Inc. ("VTEK") in November 1998, Serano
Systems Corporation ("Serano") in January 1999 and XaQti Corporation ("XaQti")
in July 1999, and have only limited experience in integrating the operations of
acquired businesses. Failure to manage our growth or to successfully integrate
new and future facilities or newly acquired businesses could have a material
adverse effect on our business and financial results.
We Are Dependent on Key Personnel
Due to the specialized nature of our business, our success depends in part upon
attracting and retaining the services of qualified managerial and technical
personnel. The competition for qualified personnel is intense. The loss of any
of our key employees or the failure to hire additional skilled technical
personnel could have a material adverse effect on our business and financial
results.
<PAGE>
independent auditors' report
The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:
We have audited the accompanying consolidated balance sheets of Vitesse
Semiconductor Corporation and subsidiaries as of September 30, 1999 and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended September 30,
1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Vitesse
Semiconductor Corporation and subsidiaries as of September 30, 1999 and 1998 and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1999 in conformity with generally
accepted accounting principles.
KPMG LLP
Los Angeles, California
October 14, 1999
<PAGE>
<TABLE>
<CAPTION>
consolidated balance sheets
September 30, 1999 and 1998 September 30,
(in thousands, except share data) 1999 1998
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 81,912 $ 76,963
Short-term investments 107,245 91,610
Accounts receivable, net of allowances of $3,500 and $1,088
in 1999 and 1998, respectively 69,034 40,104
Inventories, net 26,931 17,208
Prepaid expenses 5,462 3,177
Deferred tax assets, net 26,918 24,981
------------------------
Total current assets 317,502 254,043
------------------------
Long-term investments 38,063 -
Property and equipment, net 78,723 57,949
Restricted long-term deposits 67,334 68,704
Intangible assets, net 14,609 -
Deferred tax assets, net 6,237 -
Other assets 425 312
------------------------
$ 522,893 $ 381,008
------------------------
Liabilities And Shareholders' Equity
Current liabilities:
Accounts payable $ 15,118 $ 14,256
Accrued expenses and other current liabilities 12,832 10,046
Income taxes payable 5,517 4,199
Current portion of long-term debt 2,013 517
------------------------
Total current liabilities 35,480 29,018
------------------------
Long-term debt 725 701
Commitments and contingencies
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 10,000,000 shares; none issued
or outstanding - -
Common stock, $.01 par value. Authorized 250,000,000 shares; issued and
outstanding 156,176,636 and 150,037,680 shares at September 30, 1999
and 1998, respectively 1,561 1,500
Additional paid-in capital 380,035 315,411
Retained earnings 105,092 34,378
------------------------
Total shareholders' equity 486,688 351,289
------------------------
$ 522,893 $ 381,008
========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
consolidated statements of operations
Years ended September 30, 1999, 1998 and 1997 Years ended September 30,
(in thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 281,534 $ 176,885 $ 105,413
----------------------------------------
Costs and expenses:
Cost of revenues 104,156 70,041 45,513
Engineering, research and development 49,187 33,012 19,108
Selling, general and administrative 35,049 23,638 15,659
----------------------------------------
Total costs and expenses 188,392 126,691 80,280
----------------------------------------
Income from operations 93,142 50,194 25,133
Other income, net 10,748 9,385 8,036
----------------------------------------
Income before income taxes 103,890 59,579 33,169
Income taxes 34,010 9,079 3,652
----------------------------------------
Net income $ 69,880 $ 50,500 $ 29,517
========================================
Net income per share:
Basic $ 0.46 $ 0.34 $ 0.21
Diluted $ 0.42 $ 0.31 $ 0.19
========================================
Shares used in per share computations:
Basic 153,326 147,446 138,256
Diluted 166,458 160,500 152,888
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
consolidated statements of shareholders' equity
<TABLE>
<CAPTION>
Retained
Additional Earnings Net
Years ended September 30, 1999, 1998 and 1997 Common Stock Paid-in (Accumulated Shareholders'
(in thousands, except share data) Shares Amount Capital Deficit) Equity
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1996 116,912,312 $ 1,169 $ 132,523 $ (45,639) $ 88,053
Exercise of stock options 6,241,116 62 5,590 - 5,652
Shares issued under Employee
Stock Purchase Plan 284,832 3 1,594 - 1,597
Issuance of common stock,
net of expenses 21,808,492 218 124,374 - 124,592
Repurchase of common stock (40,634) - (1) - (1)
Repurchase of fractional shares
related to stock split (10,160) - (3) - (3)
Tax benefit of disqualifying
dispositions - - 18,400 - 18,400
Net income - - - 29,517 29,517
-------------------------------------------------------------------------------
Balance, September 30, 1997 145,195,958 1,452 282,477 (16,122) 267,807
Exercise of stock options 3,690,370 37 6,249 - 6,286
Shares issued under Employee
Stock Purchase Plan 234,726 2 2,238 - 2,240
Issuance of common stock,
net of expenses 916,626 9 10,251 - 10,260
Tax benefit of disqualifying
dispositions - - 14,196 - 14,196
Net income - - - 50,500 50,500
-------------------------------------------------------------------------------
Balance, September 30, 1998 150,037,680 1,500 315,411 34,378 351,289
Exercise of stock options 5,895,378 59 19,806 - 19,865
Shares issued under Employee
Stock Purchase Plan 196,740 2 3,538 - 3,540
Issuance of common stock,
net of expenses 46,838 - 78 - 78
Tax benefit of disqualifying
dispositions - - 40,902 - 40,902
Stock options issued in
purchase transaction - - 300 - 300
Elimination of duplicate period
of pooled companies - - - 834 834
Net income - - - 69,880 69,880
-------------------------------------------------------------------------------
Balance, September 30, 1999 156,176,636 $ 1,561 $ 380,035 $ 105,092 $ 486,688
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
consolidated statements of cash flows
Years ended September 30, 1999, 1998 and 1997 Years ended September 30,
(in thousands) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 69,880 $ 50,500 $ 29,517
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 23,361 15,485 7,122
Deferred tax assets - 4,011 3,600
Changes in assets and liabilities, net of effects of acquisitions:
Receivables, net (28,592) (18,985) (2,500)
Inventories, net (9,723) (5,377) (1,872)
Prepaid expenses (2,252) (1,959) (373)
Other assets (121) 160 197
Accounts payable 632 (5,722) 13,035
Accrued expenses and other current liabilities 2,786 (476) 13
Income taxes payable 34,046 7,375 3,355
---------------------------------------
Net cash provided by operating activities 90,017 45,012 52,094
---------------------------------------
Cash flows from investing activities:
Investments (53,698) (33,124) (58,486)
Long-term deposits 1,370 (23,148) (45,556)
Capital expenditures (42,836) (30,897) (31,714)
Payment for purchase of company (13,016) - -
---------------------------------------
Net cash used in investing activities (108,180) (87,169) (135,756)
---------------------------------------
Cash flows from financing activities:
Principal payments under capital lease obligations and term loans (1,205) (391) (934)
Proceeds from term loans - 750 461
Repayments of short-term borrowings - - (761)
Elimination of duplicate period of pooled companies 834 - -
Net proceeds from issuance of common stock 23,483 18,786 131,836
---------------------------------------
Net cash provided by financing activities 23,112 19,145 130,602
---------------------------------------
Net increase (decrease) in cash and cash equivalents 4,949 (23,012) 46,940
Cash and cash equivalents at beginning of year 76,963 99,975 53,035
---------------------------------------
Cash and cash equivalents at end of year $ 81,912 $ 76,963 $ 99,975
=======================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 11 $ 85 $ 165
=======================================
Income taxes $ 1,786 $ 1,704 $ 297
=======================================
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Supplemental disclosures of non-cash transactions:
Issuance of stock options in purchase transaction $ 300 $ - $ -
=======================================
Issuance of notes payable in purchase transaction $ 2,725 $ - $ -
=======================================
Increase in equity associated with tax benefit
from exercise of stock options $ 40,902 $ 14,196 $ 18,400
=======================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
notes to consolidated financial statements
Note 1 - The Company and Its Significant Accounting Policies
Description of Business Vitesse Semiconductor Corporation was incorporated
under the laws of Delaware on February 3, 1987. Vitesse Semiconductor
Corporation is a leader in the design, development, manufacturing and marketing
of high-performance integrated circuits.
Principles of Consolidation The consolidated financial statements include the
accounts of Vitesse Semiconductor Corporation and its wholly-owned subsidiaries
(collectively, the "Company"). As more fully described in Note 2, the Company's
acquisitions of Serano on January 21, 1999, and XaQti on July 16, 1999 were
accounted for under the pooling-of-interests method, and accordingly, all
periods prior to the acquisitions have been restated to include the accounts and
results of operations of Serano and XaQti for all periods presented. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
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, is recognized upon delivery. Costs related to development
contracts are expensed as incurred.
Cash Equivalents and Investments The Company considers all highly liquid
investments with original maturities of three months or less to be cash
equivalents. Cash equivalents and investments are principally composed of money
market accounts and obligations of the U.S. government and its agencies.
Pursuant to Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS No. 115), the Company
classifies its securities included under investments as held-to-maturity
securities, which are recorded at amortized cost, adjusted for the amortization
or accretion of premiums or discounts. As of September 30, 1999 and 1998,
carrying value was substantially the same as 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
$6.7 million and $4.2 million at September 30, 1999 and 1998, respectively.
Depreciation and Amortization Property and equipment are stated at cost and
depreciated on a straight-line basis over the estimated useful lives of the
assets. Such lives vary from 3 to 5 years. Goodwill and other intangibles are
carried at cost less accumulated amortization, which is being provided on a
straight-line basis over the economic useful lives of the respective assets,
generally 5 to 15 years.
<PAGE>
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.
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.
Computation of Net Income per Share The reconciliation of shares used to
calculate basic and diluted income per share consists of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Shares used in basic per share computations -
weighted average shares outstanding 153,326 147,446 138,256
Net effect of dilutive common share equivalents
based on treasury stock method 13,132 13,054 14,632
---------------------------------------
Shares used in diluted per share computations 166,458 160,500 152,888
</TABLE>
Options to purchase 165,364, 53,490 and 123,672 shares that were outstanding at
September 30, 1999, 1998 and 1997, respectively, were not included in the
computation of diluted net income per share because the exercise price of these
options was greater than the average market price of the common shares, and
therefore, the effect 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,
short-term investments, restricted long-term deposits, accounts receivable,
long-term investments, accounts payable and term loans 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 1997, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." This statement provides
guidelines for recognition of impairment of losses related to long-term assets.
The adoption of this new standard did not 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. The Company has elected to continue to
measure and to recognize compensation costs under APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and to adopt the disclosure-only
requirements of Statement No. 123.
<PAGE>
Comprehensive Income On October 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
The Company has no components of other comprehensive income. Therefore,
comprehensive income is the same as the reported net income.
Segment Reporting On October 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information." This statement establishes standards for reporting
operating segment information in annual financial statements and interim reports
issued to stockholders. The Company operates in only one segment, as defined by
SFAS No. 131. Geographic information is included in Note 9.
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.
Reclassifications and Restatements Certain reclassifications have been made to
the prior year financial statements to conform to the current year presentation.
On September 15, 1999, the Company's Board of Directors announced a 2 for 1
stock split of common stock effected in the form of a stock dividend to
shareholders of record as of September 30, 1999. On April 22, 1998, the
Company's Board of Directors announced a 2 for 1 stock split of the common stock
effected in the form of a stock dividend to shareholders of record as of May 4,
1998. On January 29, 1997, the Company's Board of Directors announced a 3 for 2
stock split of the common stock effected in the form of a stock dividend to
shareholders of record as of February 12, 1997. Accordingly, historical share,
per share, stock option amounts and share prices have been restated to reflect
retroactively the stock splits.
Note 2 - Pooling-of-Interests Combinations
On January 21, 1999 the Company issued 655,256 shares of its common stock in
exchange for all of the outstanding shares of Serano, a provider of enclosure
platform management solutions for Fibre Channel and SCSI server and storage
subsystems.
On July 16, 1999 the Company issued 1,892,300 shares of its common stock in
exchange for all of the outstanding shares of XaQti, a provider of integrated
circuits for the data communication industry.
These acquisitions were accounted for as pooling-of-interests in fiscal 1999;
therefore, all prior periods presented have been restated.
<PAGE>
The results of operations previously reported by the separate enterprises, and
combined amounts presented in the accompanying consolidated financial
statements, are summarized below (in thousands):
<TABLE>
<CAPTION>
The Company The Company
Before Acquisitions Serano XaQti Restated
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended June 30, 1999:
Revenues $ 200,086 $ 346 $ 475 $ 200,907
Net income (loss) 52,028 (135) (3,659) 48,234
Three months ended December 31, 1998:
Revenues $ 60,179 $ 346 $ 183 $ 60,708
Net income (loss) 15,438 (135) (699) 14,604
Year ended September 30, 1998:
Revenues $ 175,082 $ 1,329 $ 474 $ 176,885
Net income (loss) 52,873 (273) (2,100) 50,500
Year ended September 30, 1997:
Revenues $ 104,850 $ 543 $ 20 $ 105,413
Net income (loss) 32,888 (160) (3,211) 29,517
</TABLE>
Additionally, there were significant other changes to shareholders' equity for
the separate entities for the periods before the combinations which include
XaQti's issuance of 801,666 shares of common stock for $9.0 million and Serano's
issuance of 117,786 shares of common stock for $1.2 million in 1998, and XaQti's
issuance of 610,332 shares of common stock for $6.1 million and Serano's
issuance of 498,160 shares of common stock for $0.3 million in 1997.
Certain reclassifications have been made to the financial statements of Serano
and XaQti to conform to the Company's financial presentation.
Prior to the combination, both Serano's and XaQti's fiscal years ended on
December 31. In recording the pooling-of-interests combination, Serano's
financial statements for the years ended December 31, 1998 and 1997 were
combined with the Company's financial statements for the years ended September
30, 1998 and 1997. Additionally, XaQti's financial statements for the years
ended December 31, 1998 and 1997 and the period from March 7, 1996 (inception)
through December 31, 1996, were combined with the Company's financial statements
for the years ended September 30, 1998, 1997 and 1996. For the year ended
September 30, 1999 the results of XaQti and Serano have been included herein,
resulting in a duplication of operations for the period from October 1, 1998 to
December 31, 1998. As a result, the Company has eliminated the related loss of
$834,000 from retained earnings for fiscal 1999.
<PAGE>
Purchase Accounting Business Combination
On November 25, 1998, the Company acquired all of the equity interests of
Vermont Scientific Technologies, Inc. ("VTEK") for $13.0 million cash and
approximately $2.7 million in notes payable. VTEK provides integrated circuit
design services primarily in the telecommunications industry. In conjunction
with the transaction, the Company recorded goodwill and other identifiable
intangibles amounting to $9.9 million and $5.9 million, respectively, with
useful lives ranging from 5 to 15 years. As of September 30, 1999, accumulated
amortization related to these intangibles was $1.2 million. The $2.7 million
note is payable in installments of $2.0 million in November 1999, and the
remaining balance in November 2000. The transaction is being accounted for as a
purchase. Accordingly, the operations of VTEK are included from the date of
acquisition. VTEK is not a significant subsidiary, and therefore pro forma data
is not presented herein.
Note 3 - Inventories
Inventories consist of the following:
September 30,
1999 1998
- -------------------------------------------------------------------------------
(in thousands)
Raw materials $ 5,168 $ 2,961
Work in process 17,372 10,561
Finished goods 4,391 3,686
--------------------
$ 26,931 $ 17,208
--------------------
Note 4 - Property and Equipment
Property and equipment, stated at cost, are summarized as follows:
September 30,
1999 1998
- -------------------------------------------------------------------------------
(in thousands)
Machinery and equipment $98,581 $71,358
Furniture and fixtures 2,161 1,557
Computer equipment 20,569 16,444
Leasehold improvements 7,156 6,880
Land 1,039 1,039
--------------------
129,506 97,278
Less accumulated depreciation and amortization 50,783 39,329
--------------------
$78,723 $57,949
--------------------
Included in property and equipment are items not yet placed in service of $5.1
million as of September 30, 1999 and 1998.
<PAGE>
Note 5 - Revolving Line of Credit
The Company has a $12.5 million revolving line of credit agreement with a bank,
which expires in January 2000. The agreement provides for interest to be paid
monthly at the bank's prime rate (8.25% on September 30, 1999). 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. As of September 30, 1999 and 1998, no amounts were outstanding under
the line of credit.
Note 6 - Accrued Expenses
Accrued expenses consist of the following:
September 30,
1999 1998
- -------------------------------------------------------------------------------
(in thousands)
Accrued vacation $ 1,811 $ 1,231
Accrued salaries, wages and bonuses 8,329 3,868
Other 2,692 4,947
-------------------
$12,832 $10,046
-------------------
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.
Common Stock In 1999, the Company's shareholders approved an increase in the
number of authorized shares of common stock from 100,000,000 to 250,000,000. All
of following data has been restated for the effects of all stock splits.
Employee Stock Purchase Plan The Company has an employee stock purchase plan for
all eligible employees. Under the plan, employees may purchase shares of the
Company's common stock at six-month intervals at 85% of the lower of the fair
market value at the beginning and end of each interval. Employees purchase such
stock using payroll deductions and annual contributions which may not exceed 20%
of their compensation, including commissions and overtime, but excluding
bonuses. In fiscal 1999, 1998 and 1997, 196,740, 234,726 and 284,832 shares,
respectively, were issued under the plan at average prices of $17.99, $9.55 and
$5.61. At September 30, 1999, 1,345,414 shares were reserved for future
issuance.
Stock Option Plans The Company has in effect several stock-based plans under
which non-qualified and incentive stock options have been granted to employees.
Options generally vest and become exercisable at the rate of 25% per year. The
exercise price of all stock options must be at least equal to the fair market
values of the shares of common stock on the date of grant. The term of options
is generally 10 years.
In August 1991, following shareholder approval, the Company adopted a stock
option plan for non-employee directors (the "Director's Plan"). Under the plan,
annually on January 1 each non-employee director will be granted a non-statutory
option to purchase 60,000 shares of common stock (except in the case of the
Chairman of the Board who shall receive an option to purchase 90,000 shares).
The options have a 10-year term and vest at the rate of 2% per month.
<PAGE>
Pursuant to the Company's 1991 Stock Options Plan, the number of shares reserved
under the Plan automatically increases by a number of shares equal to 3.5% of
the Company's common stock outstanding at the end of each fiscal year. Under all
stock option plans, a total of 21,830,174 shares of common stock have been
reserved for issuance as of September 30, 1999 (which increased to 27,296,356
effective October 1, 1999 pursuant to the terms of the 1991 Plan) and 930,516
(which increased to 6,396,698 effective October 1, 1999 pursuant to the terms of
the 1991 Plan) remained available for future grant.
Activity under the employee stock option plans and Director's Plan for fiscal
1999, 1998 and 1997 is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Shares Per Share Aggregate
- ----------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Options outstanding at September 30, 1996 19,581,014 $ .01 - 5.96 $ 24,537
Options:
Granted 6,416,596 1.14 - 12.63 39,260
Exercised (6,241,116) .01 - 7.04 (5,652)
Canceled or expired (343,478) .69 - 7.23 (1,025)
----------------------------------------
Options outstanding at September 30, 1997 19,413,016 .01 - 12.63 57,120
Options:
Granted 6,603,636 1.14 - 15.63 62,142
Exercised (3,690,370) .01 - 9.44 (6,285)
Canceled or expired (660,350) .75 - 14.10 (3,882)
----------------------------------------
Options outstanding at September 30, 1998 21,665,932 .03 - 15.63 109,095
Options:
Granted 6,351,018 1.83 - 48.38 86,006
Exercised (6,080,452) .03 - 15.63 (20,074)
Canceled or expired (1,036,840) .76 - 26.33 (9,250)
----------------------------------------
Options outstanding at September 30, 1999 20,899,658 $ .05 - 48.38 $165,777
----------------------------------------
</TABLE>
The Company has, in connection with the various acquisitions, assumed the stock
option plans of each acquired company. A total of approximately 281,000 shares
of common stock have been reserved for issuance under the assumed plans, and
related options are included in the preceding table. This includes approximately
60,000 stock options for VTEK which were estimated to have a fair value of
$300,000 and have been included in shareholders' equity.
The following table summarizes information regarding options outstanding and
options exercisable at
<PAGE>
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices As of 9/30/99 Contractual Life Exercise Price As of 9/30/99 Exercise Price
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.05 - $ 1.88 5,272,606 5.65 $ 1.40 2,864,674 $ 1.12
$ 1.96 - $ 9.03 8,362,688 8.18 $ 7.36 1,113,846 $ 5.58
$ 9.08 - $13.38 5,441,164 8.23 $ 9.70 883,199 $ 9.80
$13.47 - $48.38 1,823,200 9.43 $24.69 66,300 $20.48
- -------------------------------------------------------------------------------------------------------
$ 0.05 - $48.38 20,899,658 7.66 $ 8.00 4,928,019 $ 3.94
</TABLE>
<PAGE>
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock Based Compensation." The
Company used the Black-Scholes option pricing model to value stock options for
pro forma presentation. The assumptions used to estimate the value of options
granted under the various stock option plans and the shares under the Employee
Stock Purchase Plan are as follows:
<TABLE>
<CAPTION>
Employee
Stock Option Stock Purchase
Plan Shares Plan Shares
1999 1998 1997 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Average expected life (years) 5.40 5.39 5.45 0.50 0.50 0.50
Expected volatility 0.57 0.51 0.55 0.57 0.51 0.55
Risk-free interest rate 6.24% 4.40% 5.81% 5.26% 4.22% 5.50%
Dividends - - - - - -
Weighted average fair values $ 7.93 $ 5.08 $ 3.54 $ 7.54 $ 4.03 $ 2.57
</TABLE>
SFAS No. 123 pro forma numbers are as follows (in thousands, except per-share
amounts):
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 55,075 $ 40,500 $ 24,200
Pro forma net income per share:
Basic $ 0.36 $ 0.28 $ 0.18
Diluted $ 0.33 $ 0.25 $ 0.16
</TABLE>
The pro forma amounts reflect compensation expense related to 1999, 1998 and
1997 stock option grants and shares issued under the employees stock purchase
plan. Because the pro forma compensation cost for the stock option program is
recognized over the four-year vesting period, the foregoing pro forma reductions
in the Company's net income are not representative of the anticipated amounts in
future years.
Note 8 - Income Taxes
Income tax expense consists of the following:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current:
Federal $ 33,954 $ 9,775 $ -
State 5,935 6,563 101
Foreign 2,295 - -
--------------------------------
$ 42,184 $ 16,338 $ 101
================================
Deferred:
Federal $ (4,756) $ (4,445) $ 3,018
State (3,418) (2,814) 533
--------------------------------
$ (8,174) $ (7,259) $ 3,551
================================
Total:
Federal $ 29,198 $ 5,330 $ 3,018
State 2,517 3,749 634
Foreign 2,295 - -
--------------------------------
$ 34,010 $ 9,079 $ 3,652
================================
</TABLE>
<PAGE>
The actual income tax expense differs from the expected tax expense computed by
applying the federal corporate tax rate of 35% for the years ended September 30,
1999, 1998 and 1997, to income before income taxes as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998 1997
- --------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 36,362 $ 20,852 $ 11,609
State income taxes, net of federal benefit 1,635 3,771 2,048
Rate differential on foreign income taxes (1,977) - -
Research & development credits (1,833) (595) (700)
Adjustment for deferred tax assets for
enacted changes in tax laws and rates - - (479)
Reduction in valuation allowance (net of valuation
allowance of $2,923 in 1998 credited to shareholders'
equity) - (15,524) (8,826)
Other (177) 575 -
--------------------------------
$ 34,010 $ 9,079 $ 3,652
================================
</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,
1999 1998
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,579 $ 12,422
Research & development tax credits 7,471 4,582
Allowances and reserves 7,166 4,256
Accumulated depreciation & amortization - 510
Federal AMT and foreign tax credits 780 851
Colorado enterprise zone incentive credits 1,734 -
California manufacturers' investment credit 1,151 1,144
State taxes 22 812
Other 152 404
--------------------
Total gross deferred tax assets 38,055 24,981
Less valuation allowance - -
--------------------
Deferred tax assets 38,055 24,981
--------------------
Deferred tax liabilities:
Depreciation and amortization 4,900 -
--------------------
Net deferred tax asset $ 33,155 $ 24,981
====================
</TABLE>
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 be realized. The ultimate realization of deferred tax assets is
dependent on the generation of future taxable income during the periods in which
those temporary
<PAGE>
differences become deductible. Management considers the projected future taxable
income and tax-planning strategies in making this assessment. Based on 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
eliminated the valuation allowance for all deductible differences. Management
believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets.
During fiscal 1999, the Company recognized tax benefits associated with employee
stock options aggregating $40.9 million. Such benefits have been recorded
directly to shareholders' equity.
The change in the valuation allowance for the year ended September 30, 1998 was
$18.4 million, of which $15.5 million reduced income tax expense for the year.
The remaining $2.9 million was credited to additional paid-in capital which was
the amount attributable to net operating losses created by the exercise of stock
options previously unrecognized.
As of September 30, 1999, the Company had net operating loss carryforwards for
federal and state income tax purposes of $52.8 million and $23.0 million,
respectively, which are available to offset future taxable income through 2019
and 2004, respectively. Additionally, the Company had research and development
tax credit carryforwards for federal and state income tax purposes of $5.7
million and $2.7 million, respectively, which are available to offset future
income taxes, if any, through 2019.
Note 9 -Significant Customers, Concentration of Credit Risk and Segment
Information In fiscal 1999, two customers accounted for 18% and 14% of total
revenues. In fiscal 1998, two customers accounted for 23% and 15% of total
revenues. In fiscal 1997, three customers accounted for 22%, 20% and 12% of
total revenues.
The Company generally sells its products to customers engaged in the design
and/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 16% and 41% of total
trade receivables at September 30, 1999 and 1998, respectively.
The Company has one reportable operating segment as defined by FAS No. 131.
Substantially all long-lived assets are located in the United States.
Revenues are summarized by geographic area as follows (in thousands):
1999 1998 1997
- ------------------------------------------------------------------
United States $ 188,929 $ 133,033 $ 70,010
Japan 46,292 13,603 24,102
France 12,637 6,146 1,009
Other 33,676 24,103 10,292
---------------------------------
$ 281,534 $ 176,885 $ 105,413
=================================
In fiscal 1999, 1998 and 1997 revenues for products in the communication and ATE
markets were $227.5 million and $54.0 million, $130.9 million and $46.0 million,
and $82.2 million and $23.2 million, respectively.
<PAGE>
Note 10 - 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.
<PAGE>
Note 11 - Commitments and Contingencies
The Company has entered into several agreements to lease land, a building and
equipment (collectively, the "property"). All of these leases have initial terms
of three to five years and options to renew for an additional one to three
years. The Company has the option to purchase the property at the end of each
initial lease term, and at the end of each renewal period for the lessor's
original cost, which is not less than the fair market value at each option date.
If the Company elects not to purchase the property at the end of each of the
leases, the Company would guarantee a residual value to the lessors equal to 84%
to 86% of the lessors' cost of the property equal to $70.4 million. As of
September 30, 1999, the lessors had advanced a total of $82.0 million under
these leases, and held $66.7 million as cash collateral, which amount is
included in restricted long-term deposits. Certain of these leases require the
Company to meet specific financial and other covenants, including restrictions
on the payment of cash dividends to its shareholders. As of September 30, 1999
the Company was in compliance with all covenants.
The Company also leases facilities and certain machinery and equipment under
noncancelable operating leases that expire through 2005.
Approximate minimum rental commitments under all noncancelable operating leases
as of September 30, 1999, are as follows (in thousands):
Year ending September 30:
- ------------------------------------------------------------------------------
2000 $ 4,638
2001 4,090
2002 3,143
2003 1,249
2004 1,273
Thereafter 1,328
--------
Total minimum lease payments $ 15,721
========
Rent expense totaled $4.6 million, $3.9 million and $2.4 million, for the years
ended September 30, 1999, 1998 and 1997, respectively.
The Company is a party to various investigations, lawsuits and claims arising in
the normal course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
Note 12 - Subsequent Event (unaudited)
In October 1999, the Company entered into an agreement to lease equipment. The
lease has an initial term of four years and an option to renew for an additional
year. The Company has the option to purchase the equipment at the end of the
initial lease term, and at the end of the renewal period for the lessor's
original cost, which is not less than the fair market value at each option date.
If the Company elects not to purchase the equipment at the end of the lease, the
Company would guarantee a residual value to the lessor equal to 85% of the
lessor's cost of the equipment, equal to $9.4 million.
<PAGE>
Directors*
James A. Cole
General Partner of Windward Ventures
Alex Daly
President and Chief Executive Officer,
Cygnus Solutions, Inc.
Pierre R. Lamond
Chairman of the Board,
Vitesse Semiconductor Corporation
General Partner of Sequoia Capital
John C. Lewis
Chairman of the Board,
Amdahl Corporation
Louis R. Tomasetta
President and Chief Executive Officer,
Vitesse Semiconductor Corporation
Executive Officers*
Louis R. Tomasetta
President and Chief Executive Officer, Director
Christopher R. Gardner
Vice President and General Manager,
Telecommunications Division
Eugene F. Hovanec
Vice President, Finance and Chief Financial Officer
Ken Jones
Vice President and General Manager, ATE Division
James Mikkelson
Vice President and Chief Technology Officer
Michael S. Millhollan
Vice President and General Manager,
Data Communications Division
Neil R. Rappaport
Vice President, Sales
Officers and Vice Presidents
Ian Burrows
Vice President, Fab 1 - Camarillo
Roy Carew
Vice President, Manufacturing Product Engineering
Robert Cutter
Vice President Manufacturing and General Manager,
Colorado Springs
Alak Deb
Vice President, Development - ANP Network
Processor Group
Ira Deyhimy
Vice President, Product Development
Jim Gramacki
Vice President, Telecom Operations
Patrick Jenkins
Vice President, Fab 2 - Colorado Springs
Jeanne Johnson
Vice President, Human Resources
Mike Logan
Vice President, North American Sales
Paul Matranga
Vice President, Quality
*Subject to Section 16 Reporting
<PAGE>
Officers and Vice Presidents (continued)
Jim McDonald
Vice President, Dallas Design Center
Ray Milano
Vice President, Opto/Analog Products
Yatin Mody*
Vice President and Controller
Samba Murthy
Vice President, Marketing - ANP Network Processor Group
Mike Powell
Vice President, ANP Network Processor Group
Bob Rumer
Vice President, Gigabit Products
Barry Sandefur
Vice President, Advanced Networking Products
Jeff Weigel
Vice President, Strategic Accounts
Mike Yeager
Vice President, Colorado Springs Design Center
Corporate Information
Stock Listing: Common stock traded on Nasdaq National Market System
Symbol: VTSS
Options: The Company's options are traded on the Chicago Board Option Exchange
General Counsel
Wilson, Sonsini, Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304-1050
Davis Polk & Wardwell
1875 Charleston Road
Mountain View, CA 94043
Independent Auditors
KPMG LLP
21700 Oxnard Street, Suite 1200
Woodland Hills, CA 91367
Transfer Agent and Registrar
BankBoston, N.A.
c/o EquiServe
P.O. Box 8040
Boston, MA 02266-8040
Form 10-K
The Company, upon written request, will provide without charge to each
shareholder a copy of its annual report on Securities and Exchange Commission
Form 10-K for the year ended September 30, 1999. Requests should be directed to:
Vitesse Semiconductor Corporation
Investor Relations
741 Calle Plano
Camarillo, CA 93012
Annual Meeting
The Vitesse Semiconductor Corporation annual meeting will be held on Tuesday,
January 25, 2000 at 10:30 a.m. at Westlake Village Inn, 32001 Agoura Road,
Westlake Village, California.
<PAGE>
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
--------------------
The Board of Directors
Vitesse Semiconductor Corporation:
We consent to incorporation by reference in the Registration Statements (Nos.
33-47016, 333-53463, 333-69631 and 333-86441) on Form S-8 and (Nos. 333-72659
and 333-89525) on Form S-3 of Vitesse Semiconductor Corporation of our report
dated October 14, 1999, relating to the consolidated balance sheets of Vitesse
Semiconductor Corporation and subsidiaries as of September 30, 1999, and 1998,
and the related consolidated statements of operations, shareholders' equity and
cash flows and related schedule for each of the years in the three-year period
ended September 30, 1999, which report appears in the September 30, 1999, annual
report on Form 10-K of Vitesse Semiconductor Corporation.
(signed) KPMG LLP
Los Angeles, California
December 22, 1999
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