SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 25, 2000
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Vitesse Semiconductor Corporation
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(Exact name of Registrant as Specified in Charter)
Delaware 0-19654 77-0138960
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(State or Other Jurisdiction (Commission File (IRS Employer
of Incorporation) Number) Identification No.)
741 CALLE PLANO, CAMARILLO, CAIFORNIA 93012
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (805) 388-3700
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<PAGE>
Item 5. Other Events.
The registrant is filing this Current Report for the purpose of
providing supplemental financial information previously included in the
registrant's Annual Report on Form 10-K for th year ended September 30, 1999 to
give retroactive effect to the registrant's merger with SiTera Incorporated on
May 31, 2000, which was accounted for as a pooling of interests.
Five-year Selected Financial Data
<TABLE>
Years Ended September 30,
1999 1998 1997 1996 1995
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(in thousands except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Results
Revenues $ 281,669 $ 181,169 $ 109,335 $ 66,046 $42,882
Income from operations 79,454 46,992 25,349 13,112 2,788
Net income 61,151 48,634 29,689 12,230 1,507
Net income per share - basic 0.37 0.32 0.21 0.12 0.02
Net income per share - diluted 0.34 0.29 0.19 0.10 0.01
Balance Sheet
Cash and short-term investments 200,186 176,773 160,988 53,035 6,315
Working capital 295,463 233,773 181,172 70,606 17,889
Total assets 543,069 391,908 300,737 101,071 42,111
Long-term debt, less current portion 1,636 701 1,091 1,166 5,518
Total shareholders' equity 502,381 361,646 269,740 88,053 25,000
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<PAGE>
Quarterly Results and Stock Market Data (unaudited)
<TABLE>
First Second Third Fourth Total
Quarter Quarter Quarter Quarter Year
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(in thousands except stock price and per share amounts)
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Fiscal Year 1999
Revenues $ 60,708 $ 66,997 $ 73,277 $ 80,687 $ 281,669
Net income 13,153 13,592 15,035 19,371 61,151
Net income per share - diluted (A) 0.08 0.08 0.08 0.11 0.34
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 $ 36,632 $ 43,360 $ 46,587 $ 54,590 $ 181,169
Net income 10,478 13,329 10,752 14,075 48,634
Net income per share - diluted (A) 0.06 0.08 0.06 0.08 0.29
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 $ 22,066 $ 25,717 $ 29,591 $ 31,961 $ 109,335
Net income 5,392 7,184 8,241 8,872 29,689
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
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(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 lease agreements prohibit the payment of dividends without the
banks' consent. See Notes 5 and 11 of Notes to Supplemental 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 Supplemental Consolidated
Financial Statements and Notes thereto included elsewhere in this Current
Report. As more fully described in Note 2 of the Supplemental Consolidated
Financial Statements, the Company's acquisitions of Serano Systems Corporation
("Serano") on January 21, 1999, XaQti Corporation ("XaQti") on July 16, 1999 and
SiTera, Incorporated on May 31, 2000 ("Sitera") 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, XaQti and
Sitera. These Supplemental Consolidated Financial Statements do not extend
through the date of consummation of the SiTera acquisition. However, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the SiTera acquisition
are issued. 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.
As of September 30, 1999, the Company had $67.7 million and $37.3 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 Supplemental
Consolidated Financial Statements.
<PAGE>
Results of Operations
The following table sets forth statements of operations data of the Company
expressed as a percentage of total revenues for the fiscal years indicated:
<TABLE>
Years Ended September 30,
1999 1998 1997
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<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
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Costs and expenses:
Cost of revenues 37.2 39.4 44.1
Engineering, research and development 20.4 20.4 17.5
Selling, general and administrative 14.2 14.3 15.2
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Total costs and expenses 71.8 74.1 76.8
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Income from operations 28.2 25.9 23.2
Other income, net 3.9 5.3 7.4
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Income before income taxes 32.1 31.2 30.6
Income taxes 10.4 4.4 3.4
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Net income 21.7% 26.8% 27.2%
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Year Ended September 30, 1999, as Compared to Year Ended September 30, 1998
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Revenues. Revenues in fiscal 1999 were $281.7 million, a 55% increase over the
$181.2 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 37.2% compared to 39.4% 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 $57.3 million in fiscal 1999 compared to $37.0 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 20.4% in fiscal
1999 and 20.4% in fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
expenses were $40.1 million in fiscal 1999 compared to $25.8 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 14.2% in fiscal 1999 from 14.3% in
fiscal 1998.
Other Income, Net. Other income consists of interest income, net of interest and
other expenses. Other income increased to $11.0 million in fiscal 1999 from $9.6
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.
<PAGE>
Income Taxes. The Company recorded a provision for income taxes in the amount of
$29.3 million in fiscal 1999 and $7.9 million in fiscal 1998, representing
effective tax rates of 32% and 14%, respectively. The increase in the effective
tax rate is due to the full utilization in prior years of available net
operating loss carryforwards.
Net Operating Loss Carryforwards. As of September 30, 1999, the Company had
federal net operating loss carryforwards of approximately $67.7 million, state
net operating loss carryforwards of approximately $37.3 million and federal and
state research and development tax credits of approximately $5.9 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).
Year Ended September 30, 1998, as Compared to Year Ended September 30, 1997
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Revenues. Revenues in fiscal 1998 were $181.2 million, a 66% increase over the
$109.3 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 39.4% compared to 44.1% 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 $37.0 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 20.4% in fiscal 1998 from 17.5% in fiscal 1997 due primarily to the
Company's inclusion of the results of XaQti Corporation and Sitera Inc., which
did not begin to incur substantial research and development expenses until
fiscal 1998.
Selling, General and Administrative. Selling, general and administrative
expenses were $25.8 million in fiscal 1998 compared to $16.7 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 14.3% in fiscal 1998 from 15.2% in fiscal
1997.
Other Income, Net. Other income consists of interest income, net of interest and
other expenses. Other income increased to $9.6 million in fiscal 1998 from $8.1
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
$7.9 million in fiscal 1998 and $3.8 million in fiscal 1997, representing
effective tax rates of 14% and 11%, respectively.
Liquidity and Capital Resources
Operating Activities. The Company generated $79.3 million, $41.5 million and
$54.0 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 $44.5 million, $32.0 million and $32.9 million in fiscal 1999,
1998 and 1997, respectively. Additionally, the Company invested $56.7 million,
$32.1 million and $59.5 million in held to maturity investments in fiscal 1999,
1998 and 1997, respectively. As discussed in Note 2 of Notes to Supplemental
Consolidated Financial Statements, the Company also paid $13.0 million in cash
for the acquisition of VTEK during fiscal 1999.
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
<PAGE>
operating lease transactions. See Note 11 of Notes to Supplemental Consolidated
Financial Statements. The Company intends to continue investing in new
manufacturing, test and engineering equipment.
Financing Activities. In fiscal 1999, the Company generated $38.3 million of
cash from financing activities consisting of $37.5 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, 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 $29.4 million of cash from financing activities consisting of
$29.1 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 Supplemental 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.
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
<PAGE>
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. For the
nine months ended June 30, 2000, our three largest customers accounted for 13%,
10% and 10% of our total revenues and no other customer 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:
o The loss of major customers
o Variations, delays or cancellations of orders and shipments of our
products
o Reduction in the selling prices of our products
o Significant changes in the type and mix of products being sold
o Delays in introducing new products
o Design changes made by our customers
o Our failure to manufacture and ship products on time
o Changes in manufacturing capacity, the utilization of this capacity
and manufacturing yields
o Variations in product and process development costs
o Changes in inventory levels; and
o Expenses or operational disruptions resulting from acquisitions
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. In future periods,
we expect a substantial increase in amortization of intangible assets resulting
from recent acquisitions and interest expense resulting from recent financing
activities. These additional expenses will have a material and adverse effect on
our earnings in future periods. The occurrence of any of the above mentioned
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. 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
<PAGE>
In fiscal 1999, we made four strategic acquisitions. In March 2000, we completed
the acquisition of Orologic, Inc., in exchange for approximately 4.6 million
shares of our common stock. In May 2000, we completed the acquisition of SiTera
Incorporated in exchange for approximately 14.7 million shares of our common
stock. Also in 2000, we have completed two smaller acquisitions for an aggregate
of approximately $45.0 million in cash. 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 could result in dilutive issuances of equity
securities, substantial debt, and amortization expenses related to goodwill and
other intangible assets. In particular, in connection with our acquisition of
Orologic, Inc., we were required to expense in-process research and development
of $45.6 million in the three months ended March 31, 2000. Further, we expect to
amortize an aggregate of approximately $446 million of goodwill and other
identifiable intangible assets over the next 2 to 6 years. We do not currently
have any binding obligations with respect to any particular material
acquisition; however, our management frequently evaluates strategic
opportunities available. In the future we may pursue additional acquisitions of
complementary products, technologies or businesses.
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:
o Gallium Arsenide fabrication operations of systems companies such as
Conexant and Fujitsu
o High-performance silicon 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
o 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.
There is Risk Associated with Doing Business in Foreign Countries
In fiscal 1999, international sales accounted for 33% of our total revenues, and
we expect international sales to constitute a substantial portion of our total
revenues for the foreseeable future. International sales involve a variety of
risks and uncertainties, including risks related to:
o Reliance on strategic alliance partners
o Compliance with foreign regulatory requirements
<PAGE>
o Variability of foreign economic conditions
o Changing restrictions imposed by U.S. export laws, and
o Competition from U.S. based companies that have firmly
established significant international operations
Failure to successfully address these risks and uncertainties could adversely
affect our international sales, which could in turn have a material and adverse
effect on our results of operations and financial condition.
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.
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 a
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.
<PAGE>
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. in November 1998, Serano Systems
Corporation in January 1999, XaQti Corporation in July 1999, Orologic, Inc. in
March 2000, SiTera, Incorporated in May 2000, certain assets and liabilities of
Kalman Saffran Associates, Inc. in June 2000 and certain assets and liabilities
of Philips Semiconductors, Inc. in August 2000, and we 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.
Our Ability to Repurchase Our Debentures, if Required, With Cash Upon a Change
of Control May Be Limited
In certain circumstances involving a change of control or the termination of
public trading of our common stock, holders of the debentures may require us to
repurchase some or all of the debentures. We cannot assure you that we will have
sufficient financial resources at such time or will be able to arrange financing
to pay the repurchase price of the debentures.
Our ability to repurchase the debentures in such event may be limited by law, by
the indenture, by the terms of other agreements relating to our senior debt and
by such indebtedness and agreements as may be entered into, replaced,
supplemented or amended from time to time. We may be required to refinance our
senior debt in order to make such payments. We may not have the financial
ability to repurchase the debentures if payment of our senior debt is
accelerated.
<PAGE>
Independent Auditors' Report
The Board of Directors and Shareholders
Vitesse Semiconductor Corporation:
We have audited the accompanying supplemental consolidated balance sheets of
Vitesse Semiconductor Corporation and subsidiaries as of September 30, 1999 and
1998, and the related supplemental consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended September 30, 1999. We also audited the related supplemental
financial statement schedule listed included herein. These supplemental
consolidated financial statements and supplemental financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these supplemental consolidated financial statements and
supplemental financial statement schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing standards
in the United States of America. 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.
The supplemental consolidated financial statements give retroactive effect to
the merger of Vitesse Semiconductor Corporation and SiTera Incorporated on May
31, 2000, which was accounted for as a pooling-of-interests as described in Note
2 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. These financial
statements do not extend through the date of consummation. However, they will
become the historical consolidated financial statements of Vitesse Semiconductor
Corporation and subsidiaries after financial statements covering the date of
consummation of the business combination are issued.
In our opinion, the supplemental 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 generally accepted in the United States
of America after financial statements are issued for a period which includes the
date of consummation of the business combination. Also in our opinion, the
related financial statements schedules, when considered in relation to the
supplemental consolidated financial statements taken as a whole, present fairly,
in all material respect, the information set forth therein.
KPMG LLP
Los Angeles, California
October 14, 1999, except for Note 2
which is as of August 25, 2000
<PAGE>
Supplemental Consolidated Balance Sheets
September 30, 1999 and 1998
(in thousands, except share data)
<TABLE>
September 30,
1999 1998
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 89,941 $85,163
Short-term investments 110,245 91,610
Accounts receivable, net of allowances of $3,500 and $1,088
in 1999 and 1998, respectively 69,080 40,131
Inventories, net 26,931 17,208
Prepaid expenses 5,641 3,200
Deferred tax assets, net 32,677 26,022
------------------------
Total current assets 334,515 263,334
------------------------
Long-term investments 38,063 -
Property and equipment, net 81,849 59,559
Restricted long-term deposits 67,334 68,704
Intangible assets, net 14,609 -
Deferred tax assets, net 6,237 -
Other assets 462 311
------------------------
$ 543,069 391,908
========================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 16,387 $14,799
Accrued expenses and other current liabilities 13,841 10,046
Income taxes payable 5,517
4,199
Current portion of long-term debt 3,307 517
------------------------
Total current liabilities 39,052 29,561
------------------------
Long-term debt 1,636 701
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
170,937,687 and 160,062,011 shares at
September 30, 1999 and 1998, respectively 1,709 1,600
Treasury Stock, 754,845 and 164,642 shares
respectively, at cost (100) (93)
Additional paid-in capital 406,103 327,455
Retained earnings 94,669 32,684
------------------------
Total shareholders' equity 502,381 361,646
------------------------
$ 543,069 $391,908
========================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
Supplemental Consolidated Statements of Operations
Years ended September 30, 1999, 1998 and 1997
(in thousands, except per share data)
<TABLE>
Years ended September 30,
1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 281,669 $ 181,169 $109,335
----------------------------------------
Costs and expenses:
Cost of revenues 104,815 71,312 48,217
Engineering, research and development 57,323 37,033 19,108
Selling, general and administrative 40,077 25,832 16,661
----------------------------------------
Total costs and expenses 202,215 134,177 83,986
----------------------------------------
Income from operations 79,454 46,992 25,349
Other income, net 10,989 9,568 8,104
----------------------------------------
Income before income taxes 90,443 56,560 33,453
Income taxes 29,292 7,926 3,764
----------------------------------------
Net income $ 61,151 $ 48,634 $29,689
========================================
Net income per share:
Basic $ 0.37 $ 0.32 $ 0.21
Diluted $ 0.34 $ 0.29 $ 0.19
========================================
Shares used in per share computations:
Basic 164,602 153,735 140,568
Diluted 178,312 166,847 155,203
========================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
Supplemental Consolidated Statements of Shareholders' Equity
Years ended September 30, 1999, 1998 and 1997
(in thousands, except share data)
<TABLE>
Retained
Additional Earnings Net
Common Stock Treasury Stock Paid-in (Accumulated Shareholders'
Shares Amount Shares Amount Capital Deficit) Equity
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 116,912,312 $ 1,169 $ 132,523 $(45,639) $ 88,053
Exercise of stock options 7,191,734 72 5,584 5,656
Shares issued under Employee
Stock Purchase Plan 284,832 3 1,594 1,597
Issuance of common stock,
net of expenses 25,313,813 253 126,096 126,349
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 29,689 29,689
----------------------------------------------------------------------------------------
Balance, September 30, 1997 149,651,897 1,497 284,193 (15,950) 269,740
Exercise of stock options 3,934,792 6,493 6,532
Shares issued under Employee
Stock Purchase Plan 234,726 2 2,238 2,240
Issuance of common stock,
net of expenses 6,240,596 62 20,244 20,306
Repurchase of unvested
Stock options (164,642) $ (93) 92 (1)
Tax benefit of disqualifying
dispositions 14,195 14,195
Net income 48,634 48,634
----------------------------------------------------------------------------------------
Balance, September 30, 1998 160,062,011 1,600 (164,642) (93) 327,455 32,684 361,646
Exercise of stock options 5,954,416 60 19,820 19,880
Shares issued under Employee
Stock Purchase Plan 196,740 2 3,538 3,540
Issuance of common stock,
net of expenses 4,724,520 47 13,998 14,045
Issuance of warrants in
connection with debt
financing 85 85
Tax benefit of disqualifying
dispositions 40,902 40,902
Stock options issued in
purchase transaction 300 300
Repurchase of unvested
restricted (590,203) $ (7) 5 (2)
stock
Elimination of duplicate period
of pooled companies 834 834
Net income 61,151 61,151
----------------------------------------------------------------------------------------
Balance, September 30, 1999 170,937,687 $ 1,709 (754,845) $(100) $406,103 $94,669 $ 502,381
========================================================================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
Supplemental Consolidated Statements of Cash Flows Years
ended September 30, 1999, 1998 and 1997
(in thousands)
<TABLE>
Years ended September 30,
1999 1998 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 61,151 $ 48,634 $ 29,689
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,564 16,044 7,240
Deferred tax assets - 3,899 3,712
Expense recorded upon forgiveness of notes receivable - 245 -
Interest expense on warrrants issued as debt issue costs 48 - -
Changes in assets and liabilities, net of
effects of acquisitions:
Receivables, net (28,611) (18,482) (3,275)
Inventories, net (9,723) (5,377) (1,872)
Prepaid expenses (2,408) (1,916) (439)
Other assets (169) 160 176
Accounts payable 632 (5,722) 13,035
Accrued expenses and other current liabilities 4,521 (2,613) 2,693
Income taxes payable 29,328 6,615 3,075
---------------------------------------
Net cash provided by operating activities 79,333 41,487 54,034
---------------------------------------
Cash flows from investing activities:
Investments (56,698) (32,131) (59,459)
Long-term deposits 1,370 (23,148) (45,556)
Capital expenditures (44,518) (31,990) (32,908)
Payment for purchase of company (13,016) - -
---------------------------------------
Net cash used in investing activities (112,862) (87,269) (137,923)
---------------------------------------
Cash flows from financing activities:
Principal payments under capital lease
obligations and term loans (1,205) (391) (934)
Proceeds from term loans 2,893 750 1,061
Repayments of short-term borrowings (1,678) -
(1,361)
Elimination of duplicate period of pooled companies 834 - -
Net proceeds from issuance of common stock 37,463 29,077 133,597
---------------------------------------
Net cash provided by financing activities 38,307 29,436 132,363
---------------------------------------
Net increase (decrease) in cash and cash equivalents 4,778 (16,346) 48,474
Cash and cash equivalents at beginning of year 85,163 101,509 53,035
---------------------------------------
Cash and cash equivalents at end of year $ 89,941 $ 85,163 $ 101,509
=======================================
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest $ 88 $ 85 $ 173
=======================================
Income taxes $ 1,786 $ 1,704 $ 577
=======================================
Supplemental disclosures of non-cash transactions:
Issuance of stock options in purchase transaction $ 300 $ - $ -
=======================================
Issuance of notes payable in purchase transaction $ 2,725 $ - $ -
=======================================
Issuance of warrants in connection
with debt financing $ 85 $ - $ -
Increase in equity associated with tax benefit
from exercise of stock options $ 40,902 $ 14,195 $ 18,400
=======================================
</TABLE>
See accompanying notes to supplemental consolidated financial statements.
<PAGE>
Notes to Supplemental 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 supplemental 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, XaQti on July 16,
1999, and Sitera on May 31, 2000 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, XaQti and Sitera for all periods presented. These
supplemental consolidated financial statements do not extend through the date of
consummation of the SiTera acquisition. However, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the SiTera acquisition are issued. 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.
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.
<PAGE>
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>
1999 1998 1997
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares used in basic per share computations -
weighted average shares outstanding 164,602 153,735 140,568
Net effect of dilutive common share equivalents
based on treasury stock method 13,710 13,112 14,635
---------------------------------------
Shares used in diluted per share computations 178,312 166,847 155,203
</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.
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.
<PAGE>
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.
On May 31, 2000, the Company issued 14,698,288 shares of its common stock in
exchange for all of the outstanding shares of SiTera Incorporated, a pioneer in
Intelligent Network Processing for service provider, carrier edge, and large
enterprise markets.
These acquisitions were accounted for as pooling-of-interests in fiscal 1999;
therefore, all prior periods presented have been restated.
The results of operations previously reported by the separate enterprises, and
combined amounts presented in the accompanying supplemental consolidated
financial statements, are summarized below (in thousands):
<TABLE>
The Company The Company
Before Acquisitions Serano XaQti SiTera Restated
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1999:
Revenues $ 281,534 $ - $ - 135 $ 281,669
Net income (loss) 69,880 - - (8,729) 61,151
Nine months ended June 30, 1999:
Revenues $ 200,086 $ 346 $ 475 $ 75 $ 200,982
Net income (loss) 52,028 (135) (3,659) (6,454) 41,780
Three months ended December 31, 1998:
Revenues $ 60,179 $ 346 $ 183 - $ 60,708
Net income (loss) 15,438 (135) (699) (2,522) 12,082
Year ended September 30, 1998:
Revenues $ 175,082 $ 1,329 $ 474 4,284 $ 181,169
Net income (loss) 52,873 (273) (2,100) (1,866) 48,634
Year ended September 30, 1997:
Revenues $ 104,850 $ 543 $ 20 3,922 $ 109,335
Net income (loss) 32,888 (160) (3,211) 172 29,689
</TABLE>
<PAGE>
Additionally, there were significant other changes to shareholders' equity for
the separate entities for the periods before the combinations which include
SiTera's issuance of 4,677,683 shares of common stock for $14.0 million in 1999,
SiTera's issuance of 5,323,970 shares of common stock for $10.0 million, XaQti's
issuance of 801,666 shares of common stock for $9.0 million, Serano's issuance
of 117,786 shares of common stock for $1.2 million in 1998, and SiTera's
issuance of 380,095 shares of common stock for $1.7 million, 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 SiTera,
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 and SiTera's fiscal year ended October 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. SiTera's financial
statements for the years ended Ocotber 31, 1999 and 1998 and the period from
November 6, 1996 (inception) through October 31, 1997, were combined with the
Company's financial statements for the years ended September 30, 1998, 1997 and
1996. 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.
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
--------------------
<PAGE>
Note 4 - Property and Equipment
Property and equipment, stated at cost, are summarized as follows:
September 30,
1999 1998
-------------------------------------------------------------------------------
(in thousands)
Machinery and equipment $98,913 $71,639
Furniture and fixtures 2,192 1,557
Computer equipment 25,125 18,412
Leasehold improvements 7,196 6,918
Land 1,039 1,039
--------------------
134,465 99,565
Less accumulated depreciation and amortization 52,616 40,006
--------------------
$81,849 $59,559
--------------------
Included in property and equipment are items not yet placed in service of $5.1
million as of September 30, 1999 and 1998.
Note 5 - Debt
On December 23, 1998, the Company obtained a $1,500,000 line of credit and a
$1,750,000 equipment financing facility. The line of credit became due and was
paid in full in July 1999. The interest rate on the equipment financing
facility, which is secured by equipment purchased by the Company under this
facility, is based on a variable interest rate that will have a lower and upper
cap ranging from 7.25% to 10.5% per annum. Principal and interest is payable
monthly on amounts borrowed by the Company under the equipment financing
facility. In connection with these agreements, warrants to purchase a total of
63,349 shares of common stock were issued to the lenders at an initial exercise
price of $1.89 per share. The warrants were valued using the Black-Scholes
option pricing model. As a result, the Company recorded approximately $85,000 of
debt issuance costs, which are being amortized to interest expense over the
corresponding term of the related line of credit and equipment financing
facility. For the year ended September 30, 1999, amortization to interest
expense was approximately $48,000.
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.
<PAGE>
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 3,701 4,947
-------------------
$13,841 $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 the 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.
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.
<PAGE>
Activity under the employee stock option plans and Director's Plan for fiscal
1999, 1998 and 1997 is as follows:
<TABLE>
Number of Option Price
Shares Per Share Aggregate
------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at September 30, 1996 19,581,014 $ .01 - 5.96 $ 24,537
Options:
Granted 7,459,873 .01 - 12.63 39,635
Exercised (7,191,734) .01 - 7.04 (5,654)
Canceled or expired (377,011) .01 - 7.23 (1,036)
----------------------------------------
Options outstanding at September 30, 1997 19,472,142 .01 - 12.63 57,482
Options:
Granted 7,012,344 .24 - 15.63 62,277
Exercised (3,934,792) .01 - 9.44 (6,412)
Canceled or expired (668,797) .01 - 14.10 (3,890)
----------------------------------------
Options outstanding at September 30, 1998 21,880,897 .01 - 15.63 109,457
Options:
Granted 7,115,809 .24 - 48.38 86,223
Exercised (6,139,490) .03 - 15.63 (20,088)
Canceled or expired (1,094,488) .24 - 26.33 (9,266)
----------------------------------------
Options outstanding at September 30, 1999 21,762,728 $ .01 - 48.38 $166,326
----------------------------------------
</TABLE>
The Company has, in connection with the various acquisitions, assumed the stock
option plans of each acquired company. A total of approximately 2,907,220 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
September 30, 1999:
<TABLE>
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> <C>
$ 0.01 - $ 1.88 6,135,676 5.65 $ 1.40 2,884,674 $ 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
---------------------------------------------------------------------------------------------
$ 0.01 - $48.38 21,762,728 7.66 $ 8.00 4,948,019 $ 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>
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>
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 55,075 $ 40,500 $ 24,200
Pro forma net income per share:
Basic $ 0.33 $ 0.26 $ 0.17
Diluted $ 0.31 $ 0.24 $ 0.16
</TABLE>
<PAGE>
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>
September 30,
1999 1998 1997
--------------------------------------------------------------------------------------------
(in thousands)
Current:
<S> <C> <C> <C>
Federal $ 33,954 $ 9,775 $ -
State 5,935 6,563 101
Foreign 2,295 - -
--------------------------------
$ 42,184 $ 16,338 $ 101
================================
Deferred:
Federal $ (8,734) $ (5,417) $ 3,112
State (4,158) (2,995) 551
--------------------------------
$(12,892) $ (8,412) $ 3,663
================================
Total:
Federal $ 25,220 $ 4,358 $ 3,112
State 1,777 3,568 652
Foreign 2,295 - -
--------------------------------
$ 29,292 $ 7,926 $ 3,764
================================
</TABLE>
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>
September 30,
1999 1998 1997
--------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Federal income taxes at statutory rate $ 31,655 $ 19,795 $ 11,709
State income taxes, net of federal benefit 1,107 3,651 2,064
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 340 599 (4)
--------------------------------
$ 29,292 $ 7,926 $ 3,764
================================
</TABLE>
<PAGE>
The tax effects of temporary differences that give rise to a significant portion
of the deferred tax assets are summarized as follows (in thousands):
September 30,
1999 1998
-------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 25,235 $ 13,339
Research & development tax credits 7,471 4,582
Allowances and reserves 7,264 4,305
Accumulated depreciation & amortization - 482
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 214 507
--------------------
Total gross deferred tax assets 43,871 26,022
Less valuation allowance - -
--------------------
Deferred tax assets 43,871 26,022
--------------------
Deferred tax liabilities:
Depreciation and amortization 4,957 -
--------------------
Net deferred tax asset $ 38,914 $ 26,022
====================
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 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 $67.7 million and $37.3 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 $5.9
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
<PAGE>
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 $ 189,064 $ 137,317 $ 73,932
Japan 46,292 13,603 24,102
France 12,637 6,146 1,009
Other 33,676 24,103 10,292
---------------------------------
$ 281,669 $ 181,169 $ 109,335
=================================
In fiscal 1999, 1998 and 1997 revenues for products in the communication and ATE
markets were $227.6 million and $54.0 million, $135.2 million and $46.0 million,
and $86.1 million and $23.2 million, respectively.
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.
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.
<PAGE>
Approximate minimum rental commitments under all noncancelable operating leases
as of September 30, 1999, are as follows (in thousands):
Year ending September 30:
------------------------------------------------------------------------------
2000 $ 4,896
2001 4,343
2002 3,402
2003 1,449
2004 1,273
Thereafter 1,328
--------
Total minimum lease payments $ 16,691
========
Rent expense totaled $4.9 million, $4.1 million and $2.5 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.
In December 1999, the Company entered into a $5,000,000 loan agreement with two
lenders. The loan will be available for drawdown in increments of $1,000,000
through March 31, 2000, will be secured by the existing assets and future asset
purchases of the Company. Interest is based on the three year U.S. Treasury Note
rate plus a spread of 7.49%, with a maximum rate of 15% per annum, payable
monthly. Principal payments are not due for the first six months, and thereafter
are due monthly in payments equal to 3.33% of the loan plus interest over a
period of 30 months. In connection with these agreements, warrants to purchase
196,941 shares of common stock were issued to the lenders at initial exercise
prices of $3.00 per share for 50% of the shares and approximately $3.55 per
share for the other 50% of the shares.
<PAGE>
VITESSE SEMICONDUCTOR CORPORATION SCHEDULE II -- Valuation
and Qualifying Accounts Years ended September 30,
1999, 1998 and 1997
(in thousands)
<TABLE>
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
Year ended September 30, 1997
Deducted from Inventories:
Reserve for obsolescence 2,797 1,988 1,664 3,121
Deducted from Accounts Receivable:
Allowance for doubtful accounts
and sales returns 900 500 400 1,000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 31, 2000
/s/ Eugene Hovanec
------------------
Name: Eugene Hovanec
Title: Chief Financial Officer
