-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ML2DdL3nmwWAJG7j6tLKpdNivm4igLI1EFxOjItLiYablNKEOjhJzgvQ6xjghJqT O8eaAyiHyx87M424lbm+qA== 0000898430-96-004898.txt : 19961024 0000898430-96-004898.hdr.sgml : 19961024 ACCESSION NUMBER: 0000898430-96-004898 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19961023 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: VITESSE SEMICONDUCTOR CORP CENTRAL INDEX KEY: 0000880446 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 770138960 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-14695 FILM NUMBER: 96647016 BUSINESS ADDRESS: STREET 1: 741 CALLE PLANO CITY: CAMARILLO STATE: CA ZIP: 93012 BUSINESS PHONE: 8053883700 MAIL ADDRESS: STREET 1: 741 CALLE PLANO CITY: CAMARILLO STATE: CA ZIP: 93012 S-3 1 FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 23, 1996. REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- VITESSE SEMICONDUCTOR CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 77-0138960 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) ---------------- 741 CALLE PLANO CAMARILLO, CALIFORNIA 93012 (805) 388-3700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- LOUIS R. TOMASETTA PRESIDENT AND CHIEF EXECUTIVE OFFICER VITESSE SEMICONDUCTOR CORPORATION 741 CALLE PLANO CAMARILLO, CALIFORNIA 93012 (805) 388-3700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ---------------- COPIES TO: FRANCIS S. CURRIE CHRISTOPHER L. KAUFMAN JOHN T. SHERIDAN ORA T. FRUEHAUF HAROLD R. DEGRAFF TAD J. FREESE WILSON SONSINI GOODRICH & ROSATI LATHAM & WATKINS PROFESSIONAL CORPORATION 505 MONTGOMERY STREET, SUITE 1900 650 PAGE MILL ROAD SAN FRANCISCO, CALIFORNIA 94111 PALO ALTO, CALIFORNIA 94304 (415) 391-0600 (415) 493-9300 ---------------- Approximate date of commencement of proposed sale to public: As soon as practicable after the Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] _____ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] ______ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE - ------------------------------------------------------------------------------- Common Stock, $.01 par value................. 3,450,000 $38.125 $131,531,250 $39,858 - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
(1) Includes 450,000 shares which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(c). ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Subject to Completion, dated October 23, 1996 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ PROSPECTUS 3,000,000 SHARES [VITESSE SEMICONDUCTOR CORPORATION LOGO] COMMON STOCK ------------- All of the 3,000,000 shares of Common Stock, par value $.01 per share, being offered hereby (the "Offering") are being sold by Vitesse Semiconductor Corporation ("Vitesse" or the "Company"). The Company's Common Stock is traded on the Nasdaq National Market under the symbol "VTSS." The last sale price for the Common Stock on October 21, 1996, as reported on the Nasdaq National Market, was $35.50 per share. See "Price Range of Common Stock." ------------- THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Underwriting Price to Discounts Proceeds to Public and Commissions(1) Company(2) - -------------------------------------------------------------------------------- Per Share............................... $ $ $ - -------------------------------------------------------------------------------- Total(3)................................ $ $ $ - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting estimated expenses of the Offering of $300,000 payable by the Company. (3) The Company has granted the Underwriters a 30-day option to purchase up to an additional 450,000 shares of Common Stock solely to cover over- allotments, if any. If such option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------- The shares of Common Stock offered by this Prospectus are offered by the Underwriters subject to prior sale, to withdrawal, cancellation or modification of the offer without notice, to delivery to and acceptance by the Underwriters and to certain further conditions. It is expected that delivery of the shares will be made at the offices of Lehman Brothers Inc., New York, New York, on or about , 1996. ------------- LEHMAN BROTHERS ROBERTSON, STEPHENS & COMPANY OPPENHEIMER & CO., INC. , 1996 [VITESSE LOGO] Telecommunications [BACKGROUND OF PAGE - MANY OF THE COMPANY'S HIGH-PERFOR- AN INTEGRATED CIRCUIT] MANCE H-GAAS ICS ARE USED IN THE TELECOMMUNICATIONS MARKET. THE COMPANY'S PRODUCTS ADDRESS FIBER OPTIC APPLICATIONS USING THE [PICTURE OF VSC8101, VSC8102 SONET/SDH AND ATM STANDARDS THAT AND VSC8110 ICs.] REQUIRE DATA TRANSMISSION RATES AS HIGH AS 10 GIGABITS PER SECOND. THE VSC8101 AND VSC8102 ICS, SHOWN TO THE RIGHT, IMPLEMENT COMPLETE CLOCK AND DATA RECOVERY FUNCTIONS FOR SONET STS-3 SYSTEMS. THE VSC8110, ALSO SHOWN TO THE RIGHT, IS A SONET/SDH AND ATM-COMPATIBLE TRANSCEIVER WHICH INTEGRATES HIGH- SPEED CLOCK GENERATION WITH 8-BIT SERIAL-TO-PARALLEL AND PARALLEL- TO-SERIAL CONVERSION. Data Communications IN THE DATA COMMUNICATIONS MARKET, [PICTURE OF VSC7125 ICs] THE COMPANY TARGETS HIGH-PERFOR- MANCE SYSTEMS WHICH ARE DESIGNED WITH THE FIBRE CHANNEL STANDARD FOR HIGH-SPEED COMPUTER TO PERIPHERAL APPLICATIONS. VITESSE'S H-GAAS ICS ENABLE TRANSMISSION OF DATA OVER SERIAL CHANNELS WITH RATES IN EX- CESS OF 1 GIGABIT PER SECOND. THE VSC7125 TRANSCEIVER ICS, SHOWN TO THE LEFT, SUPPORT THE FIBRE CHANNEL STANDARD AT 1.0625 GIGABITS PER SECOND. IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING." IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 AVAILABLE INFORMATION The Company is subject to the information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports and other information with the Securities and Exchange Commission (the "Commission"). Reports, proxy statements and other information filed by the Company with the Commission in accordance with the Exchange Act may be inspected and copied at the public reference facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, such material concerning the Company can be inspected at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. The Commission also maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents, filed or to be filed with the Commission under the Exchange Act, are hereby incorporated by reference into this Prospectus: (a) The Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1995; (b) The Company's Quarterly Reports on Form 10-Q for the quarters ended December 31, 1995, March 31, 1996 and June 30, 1996; (c) The Company's Proxy Statement for its annual meeting of shareholders held on January 23, 1996 (other than the portions thereof identified as not deemed filed with the Commission); (d) The Company's 1995 Annual Report to Shareholders; and (e) The description of the Company's Common Stock set forth in its Registration Statement on Form 8-A dated November 8, 1991. All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the Offering shall be deemed to be incorporated by reference herein and to be a part hereof from the date of filing of such documents. Any statement contained in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any subsequently-filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person, including any beneficial owner, to whom a copy of this Prospectus is delivered, upon the written or oral request of any such person, a copy of any or all of the documents referred to above which have been incorporated by reference herein (other than exhibits to such documents which are not specifically incorporated by reference into such documents). Such requests should be directed to Eugene F. Hovanec, Vice President, Finance, and Chief Financial Officer, Vitesse Semiconductor Corporation, 741 Calle Plano, Camarillo, California 93012; telephone: (805) 388-3700. 3 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements and Notes thereto appearing elsewhere in this Prospectus. See "Risk Factors" for information that should be considered by prospective investors. THE COMPANY Vitesse Semiconductor Corporation ("Vitesse" or the "Company") is a leader in the design, development, manufacturing and marketing of digital gallium arsenide ("GaAs") integrated circuits ("ICs"). The Company's products incorporate its proprietary H-GaAs (high integration gallium arsenide) technology to produce high-performance ICs primarily for telecommunications, data communications and automated test equipment ("ATE") systems providers. The Company believes H-GaAs technology provides significant advantages over silicon-based IC technologies in addressing the combination of speed, power dissipation and complexity requirements of these high-performance systems providers. In fiscal 1996, sales of telecommunications, data communications and ATE products represented 52%, 8% and 24%, respectively, of the Company's total revenues. The Company's major customers include Lucent, Alcatel, Credence, Ericsson, Schlumberger, Seagate, Tellabs and Teradyne. The limitations of silicon-based CMOS (complementary metal oxide semiconductor), BiCMOS (bipolar complementary metal oxide semiconductor) and ECL (emitter coupled logic) ICs have become more pronounced as the requirements of telecommunications, data communications and ATE systems providers have increased. GaAs has inherent physical properties that allow electrons to move several times faster than within silicon. This higher electron mobility enables the Company's ICs to operate at significantly higher speeds than silicon devices or to operate at the same speeds with reduced power dissipation. Within the telecommunications market, the Company's products are used in high-growth segments including SONET/SDH. In addition, the Company has introduced products for the ATM market. Dataquest Incorporated ("Dataquest") estimates that the worldwide SONET/SDH IC market targeted by the Company will increase from approximately $125 million in 1996 to approximately $525 million in 2000. SONET/SDH transmission systems installed by network providers generally operate at 2.488 GHz and above, a level which the Company believes can be practicably addressed by the Company's H-GaAs technology but not by silicon-based ICs. To date, most of the Company's revenues in the telecommunications market have been from sales of SONET/SDH products. In the data communications market, the Company targets high-performance systems that are based on the emerging Fibre Channel standard for high-speed computer to peripheral applications. Currently, the most prominent use of Fibre Channel technology is in high-density rigid disk drives of 1 gigabyte or greater. The Company believes that its H-GaAs solutions for this market offer greater performance with lower power dissipation than competing silicon ICs. In the ATE market, the Company believes that CMOS and BiCMOS silicon ICs are too slow and the high power dissipation in ECL silicon ICs limits their integration capabilities. The Company believes that the low power dissipation and high complexity of the Company's H-GaAs ICs, which permit systems to be built with fewer ICs, are well suited for the increasingly demanding requirements of present generation ATE equipment. A key element of the Company's H-GaAs technology is its manufacturing process for GaAs ICs used at its own fabrication facility. Vitesse developed the first commercially available self-aligned gate ("SAG") technology for GaAs. SAG technology is universally used in manufacturing high-complexity silicon ICs. By utilizing a proprietary means of applying SAG technology to GaAs, Vitesse enables its products to be manufactured using a variety of wafer fabrication equipment and techniques commonly used in silicon IC technology. Similarly, the Company endeavors to make the process of designing its GaAs products transparent to the designer when compared to the design process for silicon ICs, allowing designs to be conducted using methodologies and CAD tools essentially identical to those used to design silicon products. The Company was incorporated under the laws of Delaware on February 3, 1987 and purchased substantially all of the assets relating to the design and manufacture of GaAs ICs from Vitesse Electronics Corporation, a corporation originally incorporated under the laws of Delaware on July 19, 1984. The Company's principal executive offices are located at 741 Calle Plano, Camarillo, California 93012, and its telephone number is (805) 388-3700. 4 THE OFFERING Common Stock to be Offered by the Company.. 3,000,000 shares Common Stock to be Outstanding after the Offering.................................. 22,406,527 shares(l) Use of Proceeds............................ Fund the site purchase, construction and equipping of a new wafer fabrication facility and the expansion of production capacity of the Company's existing facility, and for general corporate purposes, including working capital Nasdaq National Market Symbol.............. VTSS
SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEARS ENDED SEPTEMBER 30, ------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- -------- STATEMENTS OF OPERATIONS DATA: Total revenues..................... $37,310 $ 26,364 $35,581 $42,882 $ 66,046 Income (loss) from operations...... 998 (18,238) (3,233) 2,788 13,432 Net income (loss).................. 704 (19,069) (4,141) 1,507 12,645 Net income (loss) per share(2)..... $ 0.05 $ (1.32) $ (0.28) $ 0.09 $ 0.63 Weighted average common and common equivalent shares outstanding used in computing per share amounts(2). 14,128 14,405 14,773 17,307 20,144
SEPTEMBER 30, 1996 -------------------- AS ACTUAL ADJUSTED(3) -------- ----------- BALANCE SHEET DATA: Working capital............................................ $ 70,215 $171,623 Total assets............................................... 100,416 201,824 Total current liabilities.................................. 11,640 11,640 Long-term obligations, less current installments(4)........ 406 406 Net shareholders' equity................................... 88,370 189,778
- -------- (1) Based on shares outstanding as of September 30, 1996. Excludes shares of Common Stock issuable upon exercise of outstanding options. See "Capitalization." (2) See Note 1 of Notes to Financial Statements. (3) Adjusted to reflect the sale by the Company of the 3,000,000 shares of Common Stock offered hereby at an assumed offering price of $35.50 per share and after deducting underwriting discounts and commissions and estimated offering expenses and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Capitalization." (4) See Notes 3 and 4 of Notes to Financial Statements. ---------------- Certain statements in this Prospectus, including certain statements contained in "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Exchange Act. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Vitesse, the Vitesse logo and H-GaAs are trademarks of the Company. This Prospectus also includes trademarks of companies other than the Company. This Prospectus also includes information from Dataquest. This information only represents Dataquest's estimates and is in no way intended to represent facts. ---------------- Except as otherwise noted herein, information in this Prospectus assumes no exercise of the Underwriters' over-allotment option. 5 RISK FACTORS This Prospectus includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below and elsewhere in this Prospectus. The following risk factors should be carefully considered before purchasing the Common Stock offered hereby. ACCEPTANCE OF H-GAAS BY TARGET MARKETS ECL and BiCMOS are currently the dominant process technologies for high- performance ICs. Vitesse's prospective customers are principally systems designers and manufacturers in the telecommunications, data communications and ATE industries that may use ECL or BiCMOS ICs in their existing systems and evaluate Vitesse H-GaAs ICs for use in their next-generation systems. These customers may be reluctant to adopt Vitesse's products because of perceived risks relating to GaAs technology generally and concerns about the relative speed, complexity, power dissipation and cost-effectiveness of the Company's H-GaAs products compared to ECL and BiCMOS ICs. In addition, these customers may be reluctant to rely upon a relatively small company such as Vitesse for a critical sole-sourced component. There can be no assurance that additional companies in Vitesse's target markets will adopt its H-GaAs technology or that the companies that currently use the Company's H-GaAs products will continue to do so in the future. See "Business--Strategy" and "--Competition." VARIABILITY OF MANUFACTURING YIELDS The Company's manufacturing yields vary significantly among products, depending on a particular IC's complexity and the Company's experience in manufacturing it. Historically, the Company has experienced difficulties achieving acceptable yields on some ICs, which have resulted in shipment delays. The Company's overall yields are lower than yields experienced in a silicon process because of the large number of different products manufactured in limited volume and because the Company's H-GaAs process technology is significantly less developed. The Company expects that many of its current and future products may never be produced in volume. Regardless of the process technology used, the fabrication of semiconductors is a highly complex and precise process. Defects in masks, impurities in the materials used, contamination of the manufacturing environment, equipment failure and other difficulties in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Because the majority of the Company's costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to the Company's results of operations. Yield decreases can result in substantially higher unit costs and may result in reduced gross profit and net income. The Company estimates yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. There can be no assurance that the Company will not suffer periodic yield problems in connection with new or existing products, which could cause the Company's business, operating results or financial condition to be materially and adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview" and "Business--Manufacturing." CUSTOMER AND INDUSTRY CONCENTRATION The Company is, and intends to continue, focusing its sales efforts on a relatively small number of companies in the telecommunications, data communications and ATE markets that require high-performance ICs. Certain of these companies are also competitors of Vitesse. In fiscal 1995 and 1996, sales to Lucent accounted for 17% and 25%, respectively, of the Company's total revenues and sales to H. Y. Associates Co., Ltd., the Company's Japanese distributor, accounted for 19% and 11%, respectively, of the Company's total revenues. 6 The Company's ten largest customers accounted for approximately 70% of total revenues in fiscal 1995 and 75% of total revenues in fiscal 1996. Prior to fiscal 1995, the supercomputer industry represented a significant portion of the Company's revenues. In particular, the Company's largest supercomputer customer represented $17,500,000, or 47%, of total revenues in fiscal 1992 but currently represents an insignificant portion of the Company's total revenues. While the Company no longer focuses on the supercomputer industry, there can be no assurance that the Company's customers in the telecommunications, data communications and ATE industries, on which the Company currently depends, will continue to place orders with the Company. If the Company were to lose a major customer or if orders by a major customer were to otherwise decrease or be delayed, including reductions due to market or competitive conditions, the Company's business, operating results or financial condition could be materially adversely affected. See "Business-- Products and Customers." VARIABILITY OF QUARTERLY RESULTS The Company's quarterly results of operations have varied significantly in the past and may continue to do so in the future. These variations have been due to a number of factors, including: the loss of major customers; variations in manufacturing yields; the timing and level of new product and process development costs; changes in inventory levels; changes in the type and mix of products being sold; changes in manufacturing capacity and variations in the utilization of this capacity; and customer design changes, delays or cancellations. For example, the Company wrote off $1.4 million in the second quarter of fiscal 1995 as the result of the bankruptcy of a major supercomputer customer. The Company has also from time to time incurred significant new product and process development costs due to the Company's policy of expensing costs as incurred relating to the manufacture of new products and the development of new process technology. There can be no assurance that the Company will not incur such charges or experience revenue declines in the future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "--Quarterly Results of Operations." MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY The Company currently manufactures all of its ICs at its four-inch wafer fabrication facility located in Camarillo, California. The Company believes that this facility should be able to satisfy its production needs through the end of fiscal 1998, assuming that the Company successfully completes planned substantial incremental increases in production capacity at the facility through such date. The Company plans to use up to $10 million of the proceeds of this Offering for the purchase of equipment related to the expansion. In addition to the purchase of equipment, the Company will be required to successfully hire, train and manage additional production personnel in order to successfully increase its production capacity in accordance with its time schedule. In the event the Company's expansion plans were not implemented on a timely basis for any reason, the Company could become subject to production capacity constraints. Such constraints could have a material adverse effect on the Company's business, operating results or financial condition. The Company is currently in the process of planning and beginning construction of a new six-inch wafer fabrication facility in Colorado Springs, Colorado, to supplement its existing facility in Camarillo. As planned, the facility will initially include a 10,000 square foot Class 1 clean room with the capability for future expansion to 15,000 square feet. The Company plans to initiate construction of the new facility during the first quarter of fiscal 1997 and to complete the physical plant during the fourth quarter of fiscal 1997. Following the completion of the physical plant, the Company must install equipment and perform necessary testing prior to commencing commercial production at the facility, a process which the Company anticipates will take at least nine months. Accordingly, the Company believes the new facility will not begin commercial production prior to the fourth quarter of fiscal 1998. The Company estimates that the cost of the new wafer fabrication facility will be at least $70 million, of which approximately $25 million relates to the purchase of land and construction of the building and approximately $45 million relates to capital equipment purchases. The Company intends to fund the cost of the facility with a portion of the proceeds of this Offering. In the event the Company were to decide to expand the Class 1 clean room in the future, substantial additional expenditures would be required. 7 The construction of the new wafer fabrication facility entails significant risks, including shortages of materials and skilled labor, unavailability or late delivery of process equipment, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the building, equipping and production start-up of the new facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the facility. As a result of the foregoing and other factors, there can be no assurance that the project will be successfully completed within its current budget or within the timeframe currently scheduled by the Company. The inability of the Company to successfully complete the new facility as currently budgeted and scheduled could have a material adverse effect on its business, operating results or financial condition. The successful operation of the new wafer fabrication facility, if completed, as well as the Company's overall production operations, will also be subject to numerous risks. The Company has no prior experience with the operation of equipment or the processes involved in producing finished six- inch wafers, which differ significantly from those involved in the production of four-inch wafers. The Company will be required to hire, train and manage production personnel successfully in order to effectively operate the new facility. The Company does not have excess production capacity at its Camarillo facility to offset any failure of the new facility to meet planned production goals. As a result of these and other factors, the failure of the Company to successfully operate the new wafer fabrication facility would have a material adverse effect on its business, operating results or financial condition. The Company will also have to effectively coordinate and manage the Colorado Springs and Camarillo facilities to successfully meet its overall production goals. The Company has no experience in coordinating and managing full scale production facilities which are located at different sites. The failure to successfully coordinate and manage the two sites would adversely affect the Company's overall production and would have a material adverse effect on its business, operating results or financial condition. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The high-performance semiconductor market is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications and ATE industries, which are the primary target markets for the Company, are also becoming intensely competitive because of deregulation and heightened international competition, among other factors. In the telecommunications market, the Company competes primarily against other GaAs-based companies such as Triquint Semiconductor and the GaAs fabrication operations of system companies such as Rockwell. In the data communications and the ATE markets, the Company competes primarily against silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Fujitsu, Hewlett-Packard, Motorola, National Semiconductor and Texas Instruments, and bipolar silicon IC manufacturers such as Applied Micro Circuits Corporation and Synergy Semiconductor Corporation. Many of these companies have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower-frequency applications, the Company faces increasing competition from CMOS-based products, particularly as the performance of such products continues to improve. Competition in the Company's markets for high-performance ICs is primarily based on price/performance, product quality and the ability to deliver products in a timely fashion. Some prospective customers may be reluctant to adopt Vitesse's products because of perceived risks relating to GaAs technology. In addition, product qualification is typically a lengthy process and certain prospective customers may be unwilling to invest the time or incur the costs necessary to qualify suppliers such as the Company. Prospective customers may also have concerns about the relative speed, complexity and power advantages of the Company's products compared to more familiar ECL or BiCMOS semiconductors or about the risks associated with relying on a relatively small company for a critical sole-sourced component. 8 PRODUCT AND PROCESS DEVELOPMENT AND TECHNOLOGICAL CHANGE The market for the Company's products is characterized by rapid changes in both product and process technologies. The Company believes that its future success will depend, in part, upon its ability to continue to improve its product and process technologies and develop new technologies in order to maintain its competitive position, to adapt its products and processes to technological changes and to adopt emerging industry standards. There can be no assurance that the Company will be able to improve its product and process technologies and develop new technologies in a timely manner or that such improvements or developments will result in products that achieve market acceptance. The failure to successfully improve its existing technologies or develop new technologies in a timely manner could adversely affect the Company's business, operating results or financial condition. See "Business-- Engineering, Research and Development." DEPENDENCE ON THIRD PARTIES The Company depends upon third parties for performing certain processes and providing a variety of components and materials necessary for the production of its H-GaAs ICs. The Company packages certain of its ICs in its Camarillo facility using customized ceramic packaging that is presently available from only one source. The balance of the Company's ICs are packaged in plastic by third parties since the Company has no internal capability to perform such plastic packaging. Other components and materials for H-GaAs ICs are available from only a limited number of sources. The inability to obtain sufficient sole-source or limited-source services or components as required could result in delays or reductions in product shipments which could adversely affect the Company's business, operating results or financial condition. See "Business-- Manufacturing." REQUIRED INCREASE IN AUTHORIZED SHARES; POTENTIAL USE OF PROCEEDS AND CASH-OUT OF OPTIONS As of September 30, 1996, the Company had outstanding options to purchase 3,258,026 shares of Common Stock pursuant to its stock option plans, as amended to date, of which options to purchase 1,805,193 shares have vested or will vest on or prior to November 30, 1997. In addition, the Company has granted and anticipates that it will continue to grant additional stock options in the ordinary course after September 30, 1996, which options will be subject to vesting. The Company presently has 25,000,000 shares of Common Stock authorized. If all granted options outstanding as of September 30, 1996 were exercised and all of the Company's shares issuable pursuant to the Company's Employee Stock Purchase Plan were issued, then upon the issuance of the shares offered hereby and the exercise in full of the Underwriters' over- allotment option, the Company's issued shares of Common Stock would exceed the number of authorized shares of Common Stock by 1,458,003 shares. In order to address this shortage, the Board of Directors has authorized an amendment to the Company's Certificate of Incorporation to increase the number of shares of authorized Common Stock to 60,000,000 shares, and intends to submit such amendment for approval by the Company's shareholders at the next annual meeting, presently scheduled to take place in the first quarter of 1997. In the event such amendment is not approved by the Company's shareholders, the Company may purchase shares of its Common Stock on the open market at prevailing prices to cover the exercise of outstanding stock options which vest and become exercisable after November 30, 1997. Alternatively, the Company may reach agreement with option holders to make cash payments in exchange for cancellation of outstanding options. In the event any such purchases in the open market are effected or such cash payments are made upon cancellation of options, the Company may use a portion of the proceeds of this Offering for such purposes. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or construct or operate its planned wafer fabrication facility in Colorado Springs, Colorado, or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. 9 The Company uses significant amounts of water throughout its manufacturing process. Previous droughts in California and Colorado have resulted in restrictions being placed on water use by manufacturers and residents in the states. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's or Colorado's different users. No assurance can be given that near term reductions in water allocations to manufacturers will not occur, possibly requiring a reduction in the Company's level of production, and materially and adversely affecting the Company's operations. See "Business--Environmental Matters." MANAGEMENT OF GROWTH The management of the Company's growth requires qualified personnel and systems. In particular, the construction and operation of the Company's planned wafer fabrication facility in Colorado Springs and its integration with the Company's current facility will require significant management, technical and administrative resources. There can be no assurance that the Company will be able to manage its growth or effectively integrate its planned wafer fabrication facility, and failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. DEPENDENCE UPON KEY PERSONNEL The Company's success depends in part upon attracting and retaining the services of its managerial and technical personnel. The competition for qualified personnel is intense. There can be no assurance that the Company can retain its key managerial and technical employees or that it can attract, assimilate or retain other skilled technical personnel in the future, and failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. See "Business--Employees" and "Management." RISKS ASSOCIATED WITH UNALLOCATED PROCEEDS OF OFFERING The Company currently intends to use a portion of the net proceeds of the Offering for the building and equipping of a new wafer fabrication facility in Colorado Springs, Colorado, and for the expansion of the production capacity at its wafer fabrication facility in Camarillo, California. The total cost of the planned Colorado Springs facility is currently estimated to be $70 million, of which approximately $25 million relates to the purchase of land and construction of the building and $45 million relates to capital equipment purchases. The Company intends to expend up to $10 million for the expansion of the production capacity of the Camarillo wafer fabrication facility. Except for funding of the proposed new wafer fabrication facility in Colorado Springs and the expansion of the production capacity of its Camarillo facility, the Company has not designated any specific use for the remaining net proceeds from the sale by the Company of the Common Stock offered hereby. However, the Company may use a portion of the net proceeds for the potential repurchase of its Common Stock in the open market for issuance of shares relating to certain stock options or to make cash payments in exchange for such options. See "--Required Increase in Authorized Shares; Potential Use of Proceeds and Cash-Out of Options." The Company intends to use the remaining net proceeds primarily for working capital and general corporate purposes, including the potential investment in or acquisition of complementary businesses, products or technologies. The Company does not currently have any agreements regarding such potential investments or acquisitions, nor is it in negotiations regarding any such potential investments or acquisitions. Accordingly, management will have significant flexibility in applying the net proceeds from the Offering. There can be no assurance that any unused net proceeds can or will be invested to yield a significant return. See "-- Manufacturing Capacity Limitations; New Production Facility," "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 10 VOLATILITY OF STOCK PRICE The trading price of the Company's Common Stock has been, and is likely to continue to be, subject to wide fluctuations in response to quarterly variations in operating results of the Company or its competitors, announcements of technological innovations or new products by the Company or its competitors, changes in earnings estimates by analysts and other events or factors. In addition, the stock market has experienced extreme price and volume fluctuations which have particularly affected the stock price of many high-technology companies including the Company. Such fluctuations may adversely affect the market price of the Company's Common Stock. See "Price Range of Common Stock." EFFECT OF ANTI-TAKEOVER PROVISIONS The Company's Board of Directors has the authority to issue up to 10,000,000 shares of Preferred Stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the Company's shareholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of Preferred Stock that may be issued in the future. Although the Company presently has no intention to issue shares of Preferred Stock, such issuance, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. In addition, such Preferred Stock may have other rights, including economic rights, senior to the Common Stock, and, as a result, the issuance thereof could have a material adverse effect on the market value of the Common Stock. Furthermore, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person first becomes an "interested stockholder," unless the business combination is approved in a prescribed manner. The application of Section 203 could also have the effect of delaying or preventing a change of control of the Company. Certain other provisions of the Company's Certificate of Incorporation and Bylaws, as amended to date, may have the effect of delaying or preventing changes of control or management of the Company, which could adversely affect the market price of the Common Stock. These provisions include, among others, provisions: (i) requiring advance notice for nominating directors or bringing other business before shareholder meetings, (ii) permitting the Board of Directors to consider matters other than the price to be paid to shareholders in evaluating proposed acquisitions of the Company, (iii) requiring specific minimum shareholder votes to remove directors, either with or without cause and (iv) limiting the persons able to, and the procedures for, calling a special meeting of the shareholders. In addition, under the proposed lease financing arrangement relating to its proposed Colorado Springs, Colorado, wafer fabrication facility which the Company is currently negotiating, the Company would be restricted from entering into certain merger or change of control transactions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." 11 USE OF PROCEEDS The net proceeds to the Company from the sale of the 3,000,000 shares of Common Stock being offered hereby, based on an assumed public offering price of $35.50 per share, after deducting the underwriting discounts and commissions and estimated offering expenses, are estimated to be $101,408,000 ($116,664,000 if the Underwriters' over-allotment option is exercised in full). The Company currently intends to use approximately $70 million of the net proceeds for the construction and equipping of a new wafer fabrication facility in Colorado Springs, Colorado, and up to $10 million of the net proceeds for the expansion of the production capacity of its Camarillo, California, wafer fabrication facility. The Company may also use a portion of the net proceeds for the potential purchase of shares of its Common Stock in the open market for issuance relating to certain stock options or to make cash payments in exchange for such options. In addition, the Company may use a portion of the net proceeds from the Offering for the investment in or acquisition of complementary businesses, products or technologies. The Company does not currently have any agreements regarding such potential investments or acquisitions, nor is it in negotiations regarding any such potential investments or acquisitions. Any remaining net proceeds are expected to be used to provide funds for working capital and general corporate purposes. Pending such uses, the net proceeds of the Offering will be invested in short- term, investment-grade, income-producing investments. See "Risk Factors-- Required Increase in Authorized Shares; Potential Use of Proceeds and Cash-Out of Options" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." PRICE RANGE OF COMMON STOCK The Common Stock has been trading publicly on the Nasdaq National Market under the symbol "VTSS" since December 11, 1991, the first trading date of the Common Stock in the Company's initial public offering. The following table sets forth, for the periods indicated, the range of quarterly high and low closing sales prices for the Common Stock on the Nasdaq National Market.
HIGH LOW ------- --------- Fiscal 1995 First Quarter........................................ $ 5 5/8 $ 4 1/4 Second Quarter....................................... 5 7/8 4 3/8 Third Quarter........................................ 8 1/8 4 9/16 Fourth Quarter....................................... 14 1/4 7 11/16 Fiscal 1996 First Quarter........................................ 13 7/8 10 5/8 Second Quarter....................................... 23 3/4 10 3/8 Third Quarter........................................ 33 7/8 18 Fourth Quarter....................................... 43 1/8 21 Fiscal 1997 First Quarter (through October 21, 1996)............. 42 5/8 35 1/2
As of September 30, 1996, there were approximately 532 holders of record of the Common Stock. On October 21, 1996, the last reported sale price on the Nasdaq National Market for the Common Stock was $35.50 per share. DIVIDEND POLICY The Company has not paid cash dividends on its capital stock. The Company's bank line of credit agreement prohibits the payment of dividends without the bank's consent. In addition, under the Company's proposed lease arrangement related to the Company's proposed Colorado Springs, Colorado, wafer fabrication facility, the Company would be restricted from declaring or paying dividends. The Company currently anticipates that it will retain all available funds for use in the operation and expansion of its business and does not anticipate paying any cash dividends in the foreseeable future. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Notes 5 and 13 of Notes to Financial Statements. 12 CAPITALIZATION The following table sets forth the current installments of long-term obligations and the capitalization of the Company as of September 30, 1996 and as adjusted as of such date to reflect the sale of the Common Stock offered hereby, at an assumed public offering price of $35.50 per share (and after deducting the estimated underwriting discounts and commissions and offering expenses).
SEPTEMBER 30, 1996 --------------------- ACTUAL AS ADJUSTED -------- ----------- (IN THOUSANDS) Current installments of long-term obligations ........... $ 931 $ 931 ======== ======== Long-term obligations, less current installments(l)...... $ 406 $ 406 Shareholders' equity(2): Preferred stock, $.01 par value; 10,000,000 shares authorized, none issued and outstanding............... -- -- Common stock, $.0l par value; 25,000,000 shares authorized; actual: 19,406,527 shares issued and outstanding; as adjusted: 22,406,527 shares issued and outstanding.............. 194 224 Additional paid-in capital............................. 133,490 234,868 Accumulated deficit.................................... (45,314) (45,314) -------- -------- Net shareholders' equity............................. 88,370 189,778 -------- -------- Total capitalization................................. $ 88,776 $190,184 ======== ========
- -------- (1) See Notes 3 and 4 of Notes to Financial Statements. (2) Assumes no exercise of outstanding stock options. As of September 30, 1996, there were options outstanding to purchase a total of 3,258,026 shares of Common Stock at a weighted average exercise price of $7.52 per share and 959,665 shares available for grant of future options under the Company's 1987 Incentive Stock Option Plan, 1989 Stock Option Plan, 1991 Stock Option Plan, 1991 Director's Stock Option Plan and 1991 Employee Stock Purchase Plan. 13 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Financial Statements and the Notes thereto included elsewhere herein. The statements of operations data set forth below with respect to the fiscal years ended September 30, 1994, 1995, and 1996, and the balance sheet data at September 30, 1995 and 1996, are derived from, and are qualified by reference to, the audited Financial Statements included elsewhere in this Prospectus, which audited Financial Statements have been audited by KPMG Peat Marwick LLP, and should be read in conjunction with those Financial Statements and Notes thereto. The statements of operations data with respect to the fiscal years ended September 30, 1992 and 1993 and the balance sheet data at September 30, 1992, 1993 and 1994, are derived from audited Financial Statements not included herein.
FISCAL YEARS ENDED SEPTEMBER 30, --------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENTS OF OPERATIONS DATA: Revenues, net: Production..................... $28,612 $ 17,692 $26,238 $34,703 $ 59,491 Development.................... 8,698 8,672 9,343 8,179 6,555 ------- -------- ------- ------- -------- Total revenues.............. 37,310 26,364 35,581 42,882 66,046 ------- -------- ------- ------- -------- Costs and expenses: Cost of revenues............... 19,738 27,153 22,226 22,505 31,792 Engineering, research and development................... 9,301 9,632 8,794 8,689 11,045 Selling, general and administrative................ 7,273 7,817 7,794 8,900 9,777 ------- -------- ------- ------- -------- Total costs and expenses.... 36,312 44,602 38,814 40,094 52,614 ------- -------- ------- ------- -------- Income (loss) from operations... 998 (18,238) (3,233) 2,788 13,432 Other income (expense): Interest income................ 770 402 134 93 1,364 Interest expense............... (1,226) (1,218) (1,111) (1,304) (772) Other.......................... 9 21 86 9 26 ------- -------- ------- ------- -------- Total other income (expense).................. (447) (795) (891) (1,202) 618 ------- -------- ------- ------- -------- Income (loss) before income taxes and extraordinary item............. 551 (19,033) (4,124) 1,586 14,050 Income taxes.................... 49 36 17 79 1,405 ------- -------- ------- ------- -------- Income (loss) before extraordinary item.............. 502 (19,069) (4,141) 1,507 12,645 Extraordinary item.............. 202 -- -- -- -- ------- -------- ------- ------- -------- Net income (loss)............... $ 704 $(19,069) $(4,141) $ 1,507 $ 12,645 ======= ======== ======= ======= ======== Net income (loss) per share(1).. $ 0.05 $ (1.32) $ (0.28) $ 0.09 $ 0.63 ======= ======== ======= ======= ======== Weighted average common and common equivalent shares used in computing per share amounts(1)..................... 14,128 14,405 14,773 17,307 20,144 SEPTEMBER 30, --------------------------------------------- 1992 1993 1994 1995 1996 ------- -------- ------- ------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Working capital................. $35,940 $ 16,562 $14,644 $17,889 $ 70,215 Total assets.................... 62,140 43,975 39,496 42,111 100,416 Total current liabilities....... 9,499 10,424 11,950 11,593 11,640 Long-term obligations, less current installments(2)......... 9,918 8,953 6,029 5,518 406 Net shareholders' equity........ 42,723 24,598 21,517 25,000 88,370
- -------- (1) See Note 1 of Notes to Financial Statements. (2) See Notes 3 and 4 of Notes to Financial Statements. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the Financial Statements and Notes thereto included elsewhere in this Prospectus. The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below includes "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that involve risks and uncertainties. Factors that realistically could cause results to differ materially from those projected in the forward-looking statements are set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations," in "Risk Factors" and elsewhere in this Prospectus. OVERVIEW The Company is a leader in design, development, manufacturing and marketing of digital GaAs ICs. The Company initially targeted the supercomputer and defense industries. In fiscal 1992, 58% of the Company's total revenues were derived from sales to the supercomputer industry. However, the supercomputer industry began a steep decline soon thereafter, and the Company's financial performance suffered from the decline in this market. Financial results were further adversely affected by a $1.4 million dollar write-off associated with the bankruptcy of a supercomputer customer in the second quarter of fiscal 1995. In fiscal 1996, sales to the supercomputer industry represented less than 5% of the Company's total revenues. The Company's present target customers are systems manufacturers in the telecommunications, data communications and ATE markets. As a result of the deployment of new transmission standards such as SONET/SDH and ATM as well as other advances, there has been growing demand for high-performance ICs to meet the increasingly rigorous standards of the telecommunications and data communications industries. The requirements for high-performance ICs in the ATE industry have also become more stringent in order to meet testing requirements of increasingly faster and more complex ICs. In fiscal 1996, sales of telecommunications, data communications and ATE products represented 52%, 8% and 24%, respectively, of the Company's total revenues. The Company has two principal components of revenues: production revenues and development revenues. Production revenues are generally recognized upon shipment of the product, and costs associated with production are included in cost of revenues. Development revenues are generally recognized upon attainment of milestones established under customer contracts, such as the release or shipment of the Company's cell library or design tools, the release by the customer of a design net list or design tape and the Company's shipment of prototype ICs. The majority of costs associated with development revenues, including prototype fabrication costs, are included in cost of revenues, and the remaining portion is expensed as engineering, research and development expenses. The Company believes such revenues will continue to decline as a percentage of total revenues in the foreseeable future. Included in development revenues are nonrecurring license revenues which the Company has received from time to time, typically for the transfer of technology to the licensee. See Note 9 of Notes to Financial Statements. The Company does not anticipate entering into significant licensing arrangements in the foreseeable future, and licensing revenues have been immaterial since fiscal 1993. The Company's manufacturing yields vary significantly among products, depending on a particular IC's complexity and the Company's experience in manufacturing it. Historically, the Company has experienced difficulties achieving acceptable yields on some ICs, which have resulted in shipment delays. The Company's overall yields are lower than yields experienced in a silicon process because of the large number of different products manufactured in limited volume and because the Company's H-GaAs process technology is significantly less developed. The Company expects that many of its current and future products may never be produced in volume. Regardless of the process technology used, the fabrication of semiconductors is a highly complex and precise process. Defects in masks, impurities in the materials used, contamination of the manufacturing 15 environment, equipment failure and other difficulties in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Because the majority of the Company's costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to the Company's results of operations. Yield decreases can result in substantially higher unit costs and lower gross profit and net income. There can be no assurance that the Company will not suffer periodic yield problems in connection with new or existing products which could cause the Company's business, operating results or financial condition to be materially and adversely affected. Inventory is valued at the lower of cost or market. Because allocable manufacturing costs can be high, new product inventory is often valued at market. In addition, a portion of work-in-process inventory consists of wafers in various stages of fabrication. Consequently, the Company estimates yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. In addition, the ability of customers to change designs and to cancel or reschedule orders can also result in adverse adjustments to inventory. There can be no assurance that such adjustments will not occur in the future and have a material adverse effect on the Company's results of operations. The Company has focused its sales efforts on a relatively small number of systems manufacturers who require high-performance ICs. Sales to the Company's ten largest customers represented approximately 62%, 70% and 75% of total revenues in fiscal 1994, 1995 and 1996, respectively. As of September 30, 1996, the Company had $57,782,000 and $18,389,000 of federal and state net operating loss carryforwards, respectively, which will be recoverable only if future taxable income is sufficient to utilize such tax loss carryforwards. Based upon historical results of operations and other factors, management believes that it is more likely than not that the tax benefits associated with such loss carryforwards will be realized. The Company has fully reserved deferred tax assets associated with its available loss carryforwards for financial reporting purposes, which will be recoverable only if future taxable income is sufficient to utilize such tax loss carryforwards. In 1995 and 1996, the application of the Company's net operating loss carryforwards resulted in relatively low effective income tax rates for the Company. The decrease or elimination of these net operating loss carryforwards in the future would result in the Company experiencing higher effective income tax rates. See Note 8 of Notes to Financial Statements. 16 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:
FISCAL YEARS ENDED SEPTEMBER 30, --------------------- 1994 1995 1996 ----- ----- ----- Revenues, net: Production................ 73.7 % 80.9 % 90.1 % Development............... 26.3 19.1 9.9 ----- ----- ----- Total revenues.......... 100.0 100.0 100.0 ----- ----- ----- Costs and expenses: Cost of revenues.......... 62.5 52.5 48.1 Engineering, research and development............... 24.7 20.3 16.7 Selling, general and administrative............ 21.9 20.7 14.9 ----- ----- ----- Total costs and expenses................ 109.1 93.5 79.7 ----- ----- ----- Income (loss) from operations.................. (9.1) 6.5 20.3 Other income (expense): Interest income........... 0.4 0.2 2.1 Interest expense.......... (3.1) (3.0) (1.2) Other..................... 0.2 -- -- ----- ----- ----- Total other income (expense)............... (2.5) (2.8) 0.9 ----- ----- ----- Income (loss) before income taxes....................... (11.6) 3.7 21.3 Income taxes ............... -- 0.2 2.1 ----- ----- ----- Net income (loss)........... (11.6)% 3.5 % 19.1 % ===== ===== =====
YEAR ENDED SEPTEMBER 30, 1996 AS COMPARED TO YEAR ENDED SEPTEMBER 30, 1995 Revenues. Total revenues in fiscal 1996 were $66,046,000, a 54% increase over the $42,882,000 recorded in fiscal 1995. The increase in total revenues was due to a 71% increase in production revenues as a result of the growth of shipments to customers in the telecommunications and ATE markets. Development revenues in fiscal 1996 were $6,555,000 compared to $8,179,000 in fiscal 1995. Cost of Revenues. Cost of revenues as a percentage of total revenues in fiscal 1996 was 48.1% compared to 52.5% in fiscal 1995. The decrease in cost of revenues as a percentage of total revenues resulted from increased manufacturing yields as well as a reduction in per unit costs associated with increased production. Engineering, Research and Development. Engineering, research and development expenses were $11,045,000 in fiscal 1996 compared to $8,689,000 in fiscal 1995. The increase was principally due to increased headcount and higher costs to support the Company's continuing efforts to develop new products. The Company's engineering, research and development costs are expensed as incurred. The Company intends to continue to increase engineering, research and development activities in the future. As a percentage of total revenues, engineering, research and development expenses declined to 16.7% in fiscal 1996 from 20.3% in fiscal 1995 due primarily to the Company's revenues growing faster than these expenses. Selling, General and Administrative. Selling, general and administrative expenses were $9,777,000 in fiscal 1996 compared to $8,900,000 in fiscal 1995. This increase was principally due to increased headcount, salary increases, higher commissions resulting from increased sales and increased advertising costs. Included in selling, general and administrative expenses for fiscal 1995 is a $1,405,000 charge for the write-off of receivables, work-in-process inventories and certain test hardware related to one of the Company's 17 supercomputer customers which filed for bankruptcy in February 1995. As a percentage of total revenues, selling, general and administrative expenses declined to 14.9% in fiscal 1996 from 20.7% in fiscal 1995 primarily as a result of the Company's revenues growing faster than these expenses. Interest Income. Interest income increased to $1,364,000 in fiscal 1996 from $93,000 in fiscal 1995 due to a higher average cash balance in fiscal 1996 as compared to fiscal 1995 resulting primarily from the Company's equity offering in March 1996. Interest Expense. Interest expense decreased to $772,000 in fiscal 1996 from $1,304,000 in fiscal 1995, primarily due to a decrease in the Company's average debt balance. Income Taxes. The Company recorded a provision for income taxes in the amount of $1,405,000 in fiscal 1996 and $79,000 in fiscal 1995 principally for federal alternative minimum taxes, state income taxes and taxes due to foreign jurisdictions, in light of the Company's existing net operating loss carryforwards. Net Operating Loss Carryforwards. As of September 30, 1996, the Company had federal net operating loss carryforwards of approximately $57,782,000, state net operating loss carryforwards of approximately $18,389,000 and federal and state research and development tax credits of approximately $2,210,000 and $1,029,000, respectively. In fiscal 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The Company elected not to retroactively restate financial statements for periods prior to 1992 as the impact upon the financial statements was immaterial. YEAR ENDED SEPTEMBER 30, 1995 AS COMPARED TO YEAR ENDED SEPTEMBER 30, 1994 Revenues. Total revenues for fiscal 1995 were $42,882,000, a 21% increase from $35,581,000 in fiscal 1994. The increase was primarily due to a 32% increase in production revenues as a result of continued growth of shipments to customers in the telecommunications and ATE markets. Development revenues decreased by 12% to $8,179,000 in fiscal 1995 from $9,343,000 in fiscal 1994. This was principally due to a few relatively large billings for development programs in fiscal 1994. Cost of Revenues. Cost of revenues as a percentage of total revenues was 52.5% in fiscal 1995, compared to 62.5% in fiscal 1994. This improvement was primarily due to the continued increase in production revenues in fiscal 1995. Substantially all of the Company's facilities, equipment and labor costs remained relatively fixed even though production revenues increased, and therefore cost of revenues remained relatively constant in fiscal 1995. The increased production activity in fiscal 1995, accompanied by yield improvements and cost reductions, resulted in favorable manufacturing variances leading to a decrease in cost of revenues as a percentage of revenues. Engineering, Research and Development. Engineering, research and development expenses remained relatively constant at $8,689,000 in fiscal 1995 compared to $8,794,000 in fiscal 1994. This was due to reduced headcount in fiscal 1995 offset by increased costs to support development of new products. Selling, General and Administrative. Selling, general and administrative expenses were $8,900,000 in fiscal 1995, a 14% increase from $7,794,000 in fiscal 1994. Included in selling, general and administrative expenses for fiscal 1995 is a $1,405,000 charge for the write-off of receivables, work-in- process inventories and certain test hardware related to one of the Company's supercomputer customers which filed for bankruptcy in February 1995. Included in selling, general and administrative expenses for fiscal 1994 is a $425,000 charge for the settlement of a class action securities lawsuit and a $200,000 charge for severance and related costs in connection with a reduction in workforce. Excluding these charges, selling, general and administrative expenses increased by $326,000 in fiscal 1995. This was primarily due to salary increases, higher commissions resulting from increased sales and an advertising campaign that was launched in fiscal 1995. As a percentage of total revenues, selling, general and administrative expenses declined to 20.7% in fiscal 1995 from 21.9% in fiscal 1994. 18 Interest Income. Interest income for fiscal 1995 was $93,000 compared to $134,000 in fiscal 1994. The decrease was due to a lower average cash balance in fiscal 1995 compared to fiscal 1994. Interest Expense. Interest expense was $1,304,000 in fiscal 1995 compared to $1,111,000 in fiscal 1994. The increase was due to a slight increase in the Company's average debt balance during fiscal 1995 as well as an increase in interest rates. QUARTERLY RESULTS OF OPERATIONS The following tables present certain unaudited quarterly statements of operations data for the eight fiscal quarters ended September 30, 1996 and such data expressed as a percentage of total revenues for such periods. This information has been prepared on the same basis as the audited Financial Statements appearing elsewhere in this Prospectus and, in the opinion of management, contains all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the unaudited quarterly results of operations set forth herein. Results of operations for any previous fiscal quarter are not necessarily indicative of results for any future period.
THREE MONTHS ENDED -------------------------------------------------------------------------------------- DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, 1994 1995 1995 1995 1995 1996 1996 1996 -------- -------- -------- --------- -------- -------- -------- --------- STATEMENTS OF OPERATIONS: Revenues, net: Production............. $7,367 $ 8,016 $ 9,035 $10,285 $12,067 $14,021 $15,599 $17,804 Development............ 2,395 2,008 1,998 1,778 1,955 1,607 1,675 1,318 ------ -------- ------- ------- ------- ------- ------- ------- Total revenues......... 9,762 10,024 11,033 12,063 14,022 15,628 17,274 19,122 ------ -------- ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of revenues....... 5,165 5,412 5,763 6,165 6,984 7,616 8,260 8,932 Engineering, research and development........ 1,995 2,183 2,228 2,283 2,498 2,658 2,824 3,065 Selling, general and administrative......... 1,717 3,257 1,937 1,989 2,266 2,406 2,495 2,610 ------ -------- ------- ------- ------- ------- ------- ------- Total costs and expenses............... 8,877 10,852 9,928 10,437 11,748 12,680 13,579 14,607 ------ -------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.............. 885 (828) 1,105 1,626 2,274 2,948 3,695 4,515 Other income (expense): Interest income........ 23 23 23 24 27 119 621 597 Interest expense....... (313) (286) (352) (353) (301) (250) (107) (114) Other.................. (3) 13 -- (1) (25) 30 -- 21 ------ -------- ------- ------- ------- ------- ------- ------- Total other income (expense).............. (293) (250) (329) (330) (299) (101) 514 504 ------ -------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes............ 592 (1,078) 776 1,296 1,975 2,847 4,209 5,019 Income taxes............ 30 (30) 14 65 197 285 421 502 ------ -------- ------- ------- ------- ------- ------- ------- Net income (loss)....... $ 562 $ (1,048) $ 762 $ 1,231 $ 1,778 $ 2,562 $ 3,788 $ 4,517 ====== ======== ======= ======= ======= ======= ======= ======= AS A PERCENTAGE OF TOTAL REVENUES: Revenues, net: Production............. 75.5 % 80.0 % 81.9 % 85.3 % 86.1 % 89.7 % 90.3 % 93.1 % Development............ 24.5 20.0 18.1 14.7 13.9 10.3 9.7 6.9 ------ -------- ------- ------- ------- ------- ------- ------- Total revenues......... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 ------ -------- ------- ------- ------- ------- ------- ------- Costs and expenses: Cost of revenues....... 52.9 54.0 52.2 51.1 49.8 48.7 47.8 46.7 Engineering, research and development........ 20.4 21.8 20.2 18.9 17.8 17.0 16.3 16.0 Selling, general and administrative......... 17.6 32.5 17.6 16.5 16.2 15.4 14.4 13.7 ------ -------- ------- ------- ------- ------- ------- ------- Total costs and expenses............... 90.9 108.3 90.0 86.5 83.8 81.1 78.6 76.4 ------ -------- ------- ------- ------- ------- ------- ------- Income (loss) from operations.............. 9.1 (8.3) 10.0 13.5 16.2 18.9 21.4 23.6 Other income (expense): Interest income........ 0.2 0.2 0.2 0.2 0.2 0.7 3.6 3.1 Interest expense....... (3.2) (2.8) (3.2) (3.0) (2.1) (1.6) (0.6) (0.6) Other.................. -- 0.1 -- -- (0.2) 0.2 -- 0.1 ------ -------- ------- ------- ------- ------- ------- ------- Total other income (expense).............. (3.0) (2.5) (3.0) (2.8) (2.1) (0.7) 3.0 2.6 ------ -------- ------- ------- ------- ------- ------- ------- Income (loss) before income taxes............ 6.1 (10.8) 7.0 10.7 14.1 18.2 24.4 26.2 Income taxes............ 0.3 (0.3) 0.1 0.5 1.4 1.8 2.4 2.6 ------ -------- ------- ------- ------- ------- ------- ------- Net income (loss)....... 5.8 % (10.5) % 6.9 % 10.2 % 12.7 % 16.4 % 21.9 % 23.6 % ====== ======== ======= ======= ======= ======= ======= =======
19 The Company's production revenues have increased in each of the eight quarters ended September 30, 1996 primarily due to increased shipments of the Company's products. While cost of revenues has fluctuated, cost of revenues as a percentage of total revenues has generally declined over this period due to yield improvements and decreased unit costs associated with increased production. Selling, general and administrative expenses in the quarter ended March 31, 1995 were adversely affected as a result of the write-off of receivables and other assets related to the bankruptcy of a major supercomputer customer. The Company's quarterly results of operations have varied significantly in the past and may continue to do so in the future. These variations have been due to a number of factors, including: loss of major customers; variations in manufacturing yields; the timing and level of new product and process development costs; changes in inventory levels; changes in the type and mix of products being sold; changes in manufacturing capacity and variation in the utilization of this capacity; and customer design changes, delays or cancellations. The Company has from time to time experienced significant customer design changes or delays and, in the past, has incurred significant new product and process development charges due to the Company's policy of expensing costs as incurred relating to the manufacture of new products and the development of new process technology. There can be no assurance that the Company will not experience such changes or delays or incur such charges in the future. LIQUIDITY AND CAPITAL RESOURCES Operating Activities The Company generated $16,736,000 and $5,288,000 from operating activities in fiscal 1996 and fiscal 1995, respectively. The increase in cash flow from operating activities was primarily due to an increase in profitability. In fiscal 1994, the Company used $3,511,000 of cash in operating activities, primarily due to the significant operating loss incurred during that year. Investing Activities Capital expenditures, primarily for manufacturing and test equipment, were $11,003,000, $3,362,000 and $1,730,000 in fiscal 1996, 1995 and 1994, respectively. Included in the amounts for fiscal 1996, 1995 and 1994 is equipment costing $245,000, $400,000 and $1,335,000, respectively, that was financed by term loans. See Note 3 of Notes to Financial Statements. Additionally, during fiscal 1995, the Company entered into operating lease arrangements to lease certain equipment with a value of $373,000. The Company intends to continue investing in new manufacturing, test and engineering equipment and currently expects to spend up to $10 million for capital expenditures through fiscal 1998 at its Camarillo facility. Financing Activities In fiscal 1996, the Company generated $40,388,000 of cash from financing activities consisting of $50,725,000 of proceeds from the issuance and sale of Common Stock in the Company's public offering in March 1996 and proceeds from the issuance of Common Stock pursuant to the Company's stock option and stock purchase plans offset by $10,337,000 in repayments of debt obligations. Following the Company's public offering in March 1996, the Company accelerated the repayment of several of its debt obligations, including its short-term borrowings and substantial portions of its term loans and capital lease obligations. In fiscal 1995, the Company used $782,000 in financing activities consisting of $3,858,000 of payments on debt obligations, offset by $1,100,000 of proceeds from short-term borrowings and terms loans and $1,976,000 of proceeds from the issuance of Common Stock pursuant to the Company's stock purchase and stock option plans. In fiscal 1994, cash provided from financing activities was $156,000 which consisted of $2,250,000 of short-term borrowings, $1,335,000 of proceeds from a term loan and $1,060,000 of proceeds from the issuance of Common Stock pursuant to the Company's stock purchase and stock option plans, offset by $4,489,000 of payments on debt obligations. 20 Historically, the Company has financed a substantial portion of its asset purchases through capital leases. Principal payments under capital lease obligations were $4,854,000 in fiscal 1996 and $2,907,000 and $4,032,000 in fiscal 1995 and 1994, respectively. The Company anticipates that capital lease expenditures during fiscal 1997 and 1998 will be $823,000 and $111,000, respectively, based on the current level of lease obligations. In the event that the Company enters into additional capital lease arrangements in the future, these amounts are expected to increase. The Company has a revolving line of credit agreement with a bank, which agreement expires on January 5, 1997. The maximum amount available under the revolving line of credit is $12,500,000. The interest rate on borrowings under this revolving line of credit is equal to the bank's prime rate plus 0.5%. See Note 5 of Notes to Financial Statements. Management believes that the Company's cash flow from operations and revolving line of credit agreement are adequate to finance its planned growth and operating needs for the next 12 months. The Company believes it can meet its wafer fabrication needs through fiscal 1998 at its Camarillo facility assuming that the Company successfully completes planned substantial incremental increases in production capacity at the facility. The Company is currently in the process of planning and beginning construction of a new wafer fabrication facility. The Company estimates that the cost of the new wafer fabrication facility in Colorado Springs, Colorado, will be at least $70 million, of which approximately $25 million relates to the purchase of land and the construction of the building and $45 million relates to capital equipment purchases. The Company is currently negotiating a lease financing arrangement in connection with the new wafer fabrication facility. In the event the Company successfully negotiates such lease financing arrangement, the Company anticipates that the lessor would provide approximately $25 million for the purchase of the land and the building of the wafer fabrication facility under a lease, which is expected to be treated as an operating lease for accounting purposes. The lease arrangement would be collateralized with approximately $22 million of cash provided by the Company, which would be deposited in a restricted account and classified as a long-term restricted investment on the Company's balance sheet. The lease would have a base period of five years. Under the terms of the lease arrangement, the Company would be required to meet certain financial covenants and would be restricted in declaring and paying dividends and entering into certain merger and change of control transactions. The negotiations concerning the proposed lease have not been completed, and there can be no assurance that a final agreement relating to the lease will be reached based on the above terms, or at all. 21 BUSINESS Vitesse is a leader in the design, development, manufacturing and marketing of digital GaAs ICs. The Company's products incorporate its proprietary H-GaAs (high integration gallium arsenide) technology to produce high-performance ICs primarily for telecommunications, data communications and ATE systems providers. The Company believes H-GaAs technology provides significant advantages over silicon-based IC technologies in addressing the combination of speed, power dissipation and complexity requirements of these high-performance systems providers. In fiscal 1996, sales of telecommunications, data communications and ATE products represented 52%, 8% and 24%, respectively, of the Company's total revenues. The Company's major customers include Lucent, Alcatel, Credence, Ericsson, Schlumberger, Seagate, Tellabs and Teradyne. BACKGROUND Telecommunications Market As a result of deregulation and heightened competition in the worldwide telecommunications industry over the past decade, domestic and foreign public network service providers have been forced to differentiate themselves by being more responsive and offering new and better services at lower costs. The volume of information required to be transmitted across public networks has increased significantly in recent years as a result of a variety of factors, including the increase in data transmission and facsimile use and the development of new applications such as video conferencing and multimedia. Public network service providers, including interexchange long distance carriers ("IXCs") and local exchange carriers ("LECs"), have been required to upgrade their infrastructure to provide high-speed data services to customers to meet these needs in addition to providing their standard telephone services. Infrastructure improvements to public networks have most prominently included a dramatic increase in the deployment of fiber optic technology to replace conventional copper wire. Since optical fiber offers substantially greater capacity, is less error prone and is easier to administer than copper wire, it has become the transmission medium of choice for IXCs and, increasingly, LECs. As fiber optic technology has spread, existing network standards for the transmission of information, which had been developed primarily for copper wire networks, have presented limitations to simultaneously transmitting voice and data. As a result, the SONET (Synchronous Optical Network) standard in the United States and the equivalent SDH (Synchronous Digital Hierarchy) standard in the rest of the world emerged as the next generation standards for high- speed optical fiber transmission. The SONET/SDH standard facilitates high data integrity and improved performance in terms of network reliability and reduces maintenance and other operations costs by standardizing interoperability among different vendors' equipment. Dataquest estimates that the worldwide SONET/SDH IC market targeted by the Company will increase from approximately $125 million in 1996 to approximately $525 million in 2000. Asynchronous transfer mode ("ATM") is a data transmission standard complementary to SONET/SDH that is in an early stage of development. ATM takes advantage of the additional capacity provided by fiber optic technology. The SONET/SDH standard relates to the system through which data is transmitted, while ATM is a protocol for the packaging of data for transmission over the SONET/SDH system. ATM technology enables LAN, WAN and public network systems designers to provide increasingly improved services to network users. LAN and WAN equipment vendors must enable the integration of mixed high-speed, high- volume data communications, voice, video and imaging applications, reduce bandwidth limitations of current LANs and WANs, lower equipment costs and ease administrative burdens imposed by current system architectures. Similarly, equipment vendors must provide systems that can handle integrated switched high-speed, high-volume data communications, voice, video and imaging services. Public network equipment vendors must also seamlessly integrate their products with both LAN and WAN equipment to reduce overall networking costs. Fiber optic applications designed to the SONET/SDH and ATM standards typically use data transmission rates of 155 MHz, 622 MHz, 2.488 GHz or 10 GHz. The Company believes that SONET/SDH transmission systems installed by network providers generally operate at 2.488 GHz and above. The Company also believes that silicon-based approaches are not practicable solutions at such frequencies and, as a result, telecommunications systems manufacturers increasingly look to GaAs solutions because of their requirements for high bandwidth. 22 Data Communications Market Performance improvements in processors and peripherals, along with the transition to distributed architectures such as client/server, have spawned increasingly data-intensive and high-speed networking applications. This has led to a focus on the methods of connecting high-performance computers to peripheral equipment in the data communications industry. In 1988, the American National Standards Institute established a Fibre Channel standard which is a practical, inexpensive, yet expandable method for achieving high-speed data transfer among workstations, mainframes, data storage devices and other peripherals. The Fibre Channel standard addresses the need for very fast transfers of large volumes of information, while at the same time relieving system manufacturers from the burden of supporting the variety of networks and channels currently in place. Fibre Channel is especially effective in situations where large blocks of data must be transferred within and between buildings and over campus environments. Fibre Channel is substantially faster than existing network data transmission protocols. Fibre Channel is capable of transmitting at rates exceeding 1 gigabit per second in both directions simultaneously and is also able to transport existing protocols over both optical fiber and copper wire. Currently, the most prominent use of Fibre Channel technology is in high- density rigid disk drives of 1 gigabyte or greater. The Company believes that CMOS silicon approaches are not practicable solutions at the 1 gigabit per second or higher clock rates used in the Fibre Channel standard. The Company believes that its H-GaAs solutions for this market operate at lower power and greater performance margins than competing ECL and BiCMOS ICs. Automated Test Equipment Market Automated test equipment ("ATE") is used for the comprehensive testing of ICs, printed circuit boards and electronic systems. The increasing worldwide demand for ICs in recent years has led to an increase in the demand for IC test equipment. The ATE industry has experienced changes arising from the increasing complexity of ICs, as manifested by growing pin counts, higher speeds and greater levels of integration. These changes have created challenges for ATE systems designers, since the equipment used to test these complex devices must be capable of performance exceeding that of the devices themselves. These changes have also led to major revisions in ATE architectures. Historically, ATE systems were primarily based on a central resource architecture where timing and pattern generation hardware and software were centralized and allocated as needed to groups of pins on the "device under test" ("DUT"). Central resource architecture works best with relatively simple ICs, but with newer, higher complexity devices, the test environment can be significantly different for each pin. This has led to a "tester-per-pin" architecture in which tester resources are dedicated to each pin of the DUT. This rapid increase in system complexity has resulted in a marked increase in the number of electronic components needed in the pin channel. The Company believes these factors have led ATE designers to seek to increase component integration. For high-performance ATE systems, the Company believes that CMOS and BiCMOS silicon ICs are too slow and that the high power dissipation in ECL silicon ICs limits their integration capabilities. The Company believes that the low power dissipation and high complexity of the Company's H-GaAs ICs, which permit systems to be built with fewer ICs, are well-suited for the increasingly demanding requirements of present generation ATE equipment. STRATEGY The Company's strategy includes the following elements: Target Growing Markets Vitesse targets the growing telecommunications, data communications and ATE markets. Within the telecommunications and data communications markets, the Company's products are used in emerging high- 23 growth markets such as SONET/SDH, ATM and Fibre Channel, which require ICs that are capable of high-bandwidth data transmission. Reduce Costs of High-Performance Products The Company continually strives to reduce the cost of its high-performance products. The Company endeavors to continue to increase manufacturing yields and decrease die sizes, as well as to decrease power dissipation to enable the use of lower-cost plastic packaging. Perform Own Wafer Fabrication Using Proprietary Manufacturing Process Technology The Company operates its own advanced wafer fabrication facility in Camarillo, California, and is in the process of planning and beginning construction of an additional wafer fabrication facility in Colorado Springs, Colorado, which is not expected to begin production prior to late fiscal 1998. The Company believes that control of wafer fabrication assures a reliable source of supply and provides greater opportunities to enhance product quality and reliability. In addition, the Company believes such control facilitates new process and product development and provides a more dependable wafer supply to meet customer requirements. The Company's proprietary manufacturing process utilizes industry standard manufacturing equipment. This enables the Company to employ developments in silicon manufacturing technology to continue to improve minimum feature size, dimension control, deposition and etch capabilities. By eliminating the need for "custom" wafer fabrication equipment, the Company can focus its resources on developing leading process technology rather than on developing expensive customized manufacturing equipment. Develop "GaAs Transparent" Products The Company endeavors to make the process of designing Vitesse GaAs products "transparent" to the designer when compared to the design process for silicon ICs. The design of its H-GaAs products is conducted using methodologies and CAD tools essentially identical to those used to design silicon products. Customers designing Vitesse ASIC products can use industry standard CAD tools (including those offered by Cadence, Mentor Graphics, Synopsys and Viewlogic) in such a manner that there are no "GaAs-unique" factors that require special background or training beyond those for an ASIC designer generally. In addition, the Company's products do not require electronic systems manufacturers to change input/output interface levels or utilize power supply voltages unique to Vitesse products. Establish Close Relationships with Customers' Engineering Management The Company establishes close relationships with its customers' engineering management and believes these relationships enable it to better understand the customers' needs and win designs for existing and new systems. PRODUCTS AND CUSTOMERS Telecommunications Telecommunications products accounted for 50% and 52% of the Company's total revenues for fiscal 1995 and fiscal 1996, respectively. In fiscal 1996, substantially all of the Company's sales in the telecommunications market were for SONET/SDH applications, and less than 1% of such revenues were for ATM applications. In fiscal 1996, the Company's significant telecommunications customers, each of which purchased at least $100,000 of the Company's products, included Lucent, Alcatel, Ericsson and Tellabs. The Company manufactures a variety of telecommunications IC products for the transmission and reception of data over a fiber optic network. The Company supplies these products as Company standard products or as customer-designed ASIC products. With respect to the transmission of data, the Company's products take 24 parallel data, code it and serialize it (multiplexing or "mux") for transmission. At the receiving end of the fiber optic system, the Company's telecommunications products decode and de-serialize the data (demultiplexing or "demux"). The following diagram depicts applications which the Company's telecommunications products address: [APPLICATIONS DIAGRAM] In the case of telecommunications switching, the Company offers a line of crosspoint switches for high-speed digital switching applications including data distribution and video switching. The Company also offers a line of photodetector/transimpedance amplifiers for both telecommunications and data communications applications which offer a low noise and wide bandwidth solution for converting light from a fiber optic communications channel into an electrical signal. The following is a summary of applications and related operating frequencies which the Company's telecommunications products address:
TRANS- SONET ASSOCIATED CROSSPOINT IMPEDANCE HIERARCHY CLOCK RATE MUX/DMUX SWITCHES AMPLIFIERS --------- ---------- -------- ---------- ---------- STS/OC-3 155 MHz X X X STS/OC-12 622 MHz X X X STS/OC-48 2.488 GHz X STS/OC-192 10 GHz X
Data Communications Data communications products accounted for 6% and 8% of the Company's total revenues for fiscal 1995 and for fiscal 1996, respectively. Vitesse has developed a line of Fibre Channel products for this market, which consist primarily of transmitters, receivers and transceivers. In fiscal 1996, the Company's significant data communications customers, each of which purchased at least $100,000 of the Company's products, included IBM, Newbridge Networks, Seagate, Sequent and Stratacom. Additionally, the Company has developed a physical layer interface product for the recently emerging Gigabit Ethernet market. Gigabit Ethernet is a higher speed extension of the 10 Base T and 100 Base T Ethernet standards. The Company is also in the process of developing additional products for this market. To date, the Company's revenues from sale of products in this market have not been material. There can be no assurance that such products will ever gain market acceptance. 25 Automated Test Equipment ATE products accounted for 21% and 24% of the Company's total revenues for fiscal 1995 and for fiscal 1996, respectively. Vitesse provides gate arrays and custom products that offer a combination of high complexity, low power dissipation and high speed for ATE. In fiscal 1996, the Company's significant ATE customers, each of which purchased at least $100,000 of the Company's products, included Credence, Hewlett-Packard, Integrated Measurement Systems, LTX, Schlumberger and Teradyne. The Company's ten largest customers accounted for approximately 70% and 75% of total revenues in fiscal 1995 and fiscal 1996, respectively. In fiscal 1995 and fiscal 1996, sales to Lucent accounted for 17% and 25%, respectively, of the Company's total revenues, and sales to H. Y. Associates Co., Ltd., the Company's Japanese distributor, accounted for 19% and 11%, respectively, of the Company's total revenues. TECHNOLOGY The Company believes the limitations of silicon-based CMOS, BiCMOS and ECL ICs have become more pronounced as the requirements of the telecommunications, data communications and ATE systems providers have increased. While CMOS offers certain complexity advantages over the alternative silicon processes, the Company believes it lacks the speed required for many high-performance systems. ECL technology offers higher speeds but at the cost of high power dissipation, which limits its use for high-complexity applications. BiCMOS offers higher performance than is obtainable from CMOS, but less than that offered by ECL, at levels of complexity which are greater than that available from ECL but lower than that provided by CMOS. BiCMOS is slower than ECL and, the Company believes, does not achieve the speed necessary for the highest performance telecommunications, data communications and ATE systems. GaAs has inherent physical properties which allow electrons to move several times faster than within silicon. This higher electron mobility provides the Company with the flexibility to manufacture ICs that operate at much higher speeds than silicon devices or to operate at the same speeds with reduced power consumption. The following table compares the intrinsic transistor performance and cost per function for H-GaAs with alternative process technologies:
H-GAAS ECL BICMOS CMOS -------- ------- -------- ------- Speed................................... Highest High Moderate Lowest Power Dissipation....................... Low Highest Moderate Lowest Complexity.............................. High Lowest Higher Highest Cost per Function....................... Moderate Highest Moderate Lowest
The Company employs proprietary H-GaAs process technology based on a refractory metal SAG process. SAG technology is universally used in the manufacture of complex silicon ICs. The process structure and logic implementation of the Company's GaAs ICs are similar to a traditional silicon MOS process with the exception that the gate metal is deposited directly on the GaAs substrate creating a metal-semiconductor junction comparable to depositing the metal on a thin silicon dioxide layer grown on the silicon substrate in the case of metal gate n-channel MOS. The implementation of a SAG process in GaAs or silicon requires a gate metal structure that can withstand the high temperature of an ion implant activation anneal. This is in contrast to conventional microwave GaAs ("RF-GaAs") process technologies which utilize a low temperature, non-self-aligned technology based on gold as the gate metal. The table below compares Vitesse's H-GaAs, traditional silicon MOS and microwave RF-GaAs:
SILLCON MICROWAVE H-GAAS MOS RF-GAAS -------- -------- --------- Self-Aligned.................................. Yes Yes No Interconnect.................................. Aluminum Aluminum Gold Complexity.................................... High Highest Medium
26 Another advantage of SAG technology in GaAs is the greater control over electrical transistor parameters compared to conventional gold gate technology. This control of the field effect transistor ("FET") characteristics has enabled the Company to be one of the few companies that have demonstrated the ability to manufacture products having lower power dissipation using direct coupled FET logic ("DCFL"). DCFL has the highest complexity, fewest elements per logic function and best available combination of speed at low power of any n-channel FET technology demonstrated in silicon or GaAs. The use of a high-temperature process also allows Vitesse to use silicon industry standard aluminum interconnect technology. This enables the Company to utilize standard deposition and dry etch equipment for interconnects. The interconnect portion of the circuit represents a majority of mask levels in the manufacturing process. The Company has significantly improved its process technology:
H-GaAs H-GaAs H-GaAs H-GaAs I II III IV ------ ------ ------ ------ Product Announcement Year.............. 1986 1988 1991 1995 Gate Length............................ 1.2(micrometer) 0.8(micrometer) 0.6(micrometer) 0.4(micrometer) Metal Layers........................... 2 3 4 5 Maximum Relative Speed(1).............. 1.0x 1.4x 2.0x 3.0x Minimum Relative Power Dissipation(1).. 1.0x 0.7x 0.5x 0.3x
- -------- (1) Compared to H-GaAs I. The Company is currently in the process of implementing H-GaAs IV, a 0.4 micron five-layer metal GaAs FET technology capable of achieving higher complexity and lower power dissipation than previous Vitesse technologies. The Company has announced the introduction of the GLX family of gate arrays based on H-GaAs IV technology. The GLX family of gate arrays has been designed to offer the same speed as the H-GaAs III family of gate arrays in order to decrease power dissipation. This is intended to enable ICs to be packaged in a lower cost plastic package in the 100 MHz to 800 MHz range, thereby offering the customer a lower cost solution in this performance range. The Company has entered into contracts with a number of customers for the development of ASICs based on the GLX product family. A limited number of prototypes in the GLX product family have been shipped to date. See "Risk Factors--Product and Process Development and Technological Change." MANUFACTURING Wafer Fabrication The Company fabricates four-inch wafers at its Camarillo plant in a 6,000 square foot clean room, which has a rating of Class 10 (meaning there are fewer than ten particles larger than 0.5 micron per cubic foot of air). Wafer fabrication equipment used by the Company is generally identical to that used in a sub-micron silicon MOS fabrication facility. Process technology is generally similar to that used in advanced sub-micron silicon process technologies, with certain modifications necessary to accommodate GaAs material properties. As is typically the case with semiconductor manufacturing, the Company's manufacturing yields vary significantly among products, depending on the product's complexity and the Company's experience in manufacturing the particular ICs. While the Company's process technology utilizes standard silicon semiconductor manufacturing equipment, aggregate production quantities have been relatively low and the process technology is significantly less developed than silicon process technology used by competitors. This leads to overall yields lower than levels typically achieved in the silicon process. The Company expects that many of its current and future products may never be produced in high volume. Regardless of the process technology used, the fabrication of ICs is a highly complex and precise process. Defects in masks, impurities in the materials used, contamination of the manufacturing environment, equipment 27 failure and other difficulties in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be non-functional. The Company utilizes manufacturing equipment commonly used in the silicon IC industry. This enables the Company to employ developments in silicon manufacturing technology to continue to improve minimum feature size, dimension control, deposition and etch capabilities. By eliminating the need for "custom" wafer fabrication equipment, the Company can focus its resources on developing leading process technology rather than on developing expensive customized manufacturing equipment. The Company is currently in the process of planning and beginning construction of a new six-inch wafer fabrication facility in Colorado Springs, Colorado, to supplement its existing facility in Camarillo. As planned, the facility will initially include a 10,000 square foot Class 1 clean room with the capability for future expansion to 15,000 feet. The Company plans to initiate construction of the new facility during the first quarter of fiscal 1997 and to complete the physical plant during the fourth quarter of fiscal 1997. Following the completion of the physical plant, the Company must install equipment and perform necessary testing prior to commencing commercial production at the facility, a process which the Company anticipates will take at least nine months. Accordingly, the Company believes the new facility will not begin commercial production prior to the fourth quarter of fiscal 1998. See "Risk Factors--Manufacturing Capacity Limitations; New Production Facility." Assembly and Test The Company conducts ceramic package assembly for a portion of its ICs in its Camarillo plant. The Company employs industry standard assembly equipment in an automated assembly line that is intended to reduce packaging time as well as to improve quality. The balance of the Company's ICs are packaged in plastic for the Company by third parties since the Company has no internal capability to perform such plastic packaging. The Company utilizes advanced automated VLSI testers and has constructed several custom testers. However, in many cases, the Company cannot test its products at full speed and must rely on numerous sub-circuit path measurements to determine the performance of the IC. Components and Raw Materials The Company purchases substantially all of its ceramic packages from Kyocera. Kyocera is the world's largest supplier of multilayer, high- performance ceramic packages and, in many cases, is the only source of these packages. Since most of the ceramic packages used in the Company's assembly process are designed to the Company's specifications, there are typically no second sources for these packages. To date, the Company has not experienced any adverse effects due to the sole-source nature of its ceramic packages. The Company believes it maintains an adequate inventory of sole-source ceramic packages. The level of inventory of ceramic packages carried by the Company is substantially higher than standard plastic packages for IC companies that utilize standard packages available from a wide variety of sources. Since 1992, the Company has increased its use of plastic packages, and it uses multiple contract manufacturers to perform plastic packaging. GaAs substrates and other raw materials and equipment used in the production of the Company's ICs are available from several suppliers. Although lead times are occasionally extended in the industry, the Company has not experienced any material difficulty in obtaining raw materials or equipment. ENGINEERING, RESEARCH AND DEVELOPMENT The market for the Company's products is characterized by rapid changes in both GaAs and competing silicon process technologies. Because of continual improvements in these technologies, the Company believes that its future success will depend largely on its ability to continue to improve its product and process technologies, to develop new technologies in order to maintain the performance of its products relative to competitors, to adapt its products and process technologies to technological changes and to adopt emerging industry standards. See "Risk Factors--Product and Process Development and Technological Change." 28 Product Research and Development The Company's present product research and development efforts are focused on developing new products for its telecommunications, data communications and ATE product lines. Considerable design effort is being expended to increase the speed and complexity and reduce the power dissipation of the Company's products. Process Research and Development The Company is implementing H-GaAs IV, a 0.4 micron GaAs FET technology capable of achieving higher complexity and lower power dissipation than previous Vitesse technologies. The Company is currently engaged in research and development projects focused on other process-related improvements to increase yields and improve the speed, complexity and power dissipation characteristics of its devices. The Company's engineering, research and development expenses in fiscal 1994, 1995 and 1996 were $8,794,000 and $8,689,000 and $11,045,000, respectively. COMPETITION The high-performance semiconductor market is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications and ATE industries, which are the primary target areas for the Company, are also becoming intensely competitive because of deregulation and heightened international competition, among other factors. In the telecommunications market, the Company competes primarily against other GaAs-based companies such as Triquint Semiconductor and the GaAs fabrication operations of systems companies such as Rockwell. In the data communications market and the ATE market, the Company competes primarily against silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Fujitsu, Hewlett-Packard, Motorola, National Semiconductor and Texas Instruments, and bipolar silicon IC manufacturers such as Applied Micro Circuits Corporation and Synergy Semiconductor Corporation. Many of these companies have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower-frequency applications, the Company faces increasing competition from CMOS-based products, particularly as the performance of such products continues to improve. Competition in the Company's markets for high-performance ICs is primarily based on price/performance, product quality and the ability to deliver products in a timely fashion. The Company emphasizes its products' quality and combination of speed, complexity and power dissipation. Some prospective customers may be reluctant to adopt Vitesse's products because of perceived risks relating to GaAs technology. In addition, product qualification is typically a lengthy process and certain prospective customers may be unwilling to invest the time or incur the costs necessary to qualify suppliers such as the Company. Prospective customers may also have concerns about the relative speed, complexity and power advantages of the Company's products compared to more familiar ECL or BiCMOS semiconductors or about the risks associated with relying on a relatively small company for a critical sole-sourced component. SALES AND CUSTOMER SUPPORT The Company's principal method of selling its products in the United States and Western Europe is through direct sales to systems manufacturers by the Vitesse sales force. Other international sales, principally in Japan, are conducted through foreign distributors. Direct Sales Because of the large engineering support required in connection with the sale of high-performance ICs, the Company provides its customers with field engineering support as well as engineering support from the Company's headquarters. Typically, a field engineer will accompany a sales person to the initial customer visit to understand and evaluate the customer's requirements. The salesperson and field engineer will determine 29 whether additional engineering analysis will be required by engineers based at the Company's headquarters. The Company's sales cycle is typically lengthy and requires the continued participation of salespersons, field engineers, engineers based at the Company's headquarters and senior management. Some manufacturers' representatives are employed in selected markets to support the Vitesse sales force. The Company's sales headquarters is located in Camarillo, California. Three area sales offices are maintained in Boston, Massachusetts; Dallas, Texas; and St. Germain en Laye, France. Additional sales and field application support offices are located in Sunnyvale, California; Chester, New Jersey; St. Paul, Minnesota; and San Diego, California. Foreign Distributors Sales in Japan are made through an unaffiliated Japanese distributor, H.Y. Associates Co., Ltd. Sales in other countries are made through local representatives. Export sales, primarily in Japan, were $8,850,000, $12,533,000 and $15,624,000, in fiscal 1994, 1995 and 1996, respectively, representing 25%, 29% and 24% of total revenues, respectively. The Company generally warrants its products against defects in materials and workmanship for a period of one year. PATENTS AND LICENSES The Company has been awarded 13 U.S. patents for various aspects of design and process innovations used in the design and manufacture of its products. The Company has two patent applications pending in the United States and three patent applications pending in Japan and is preparing to file several more patent applications. The Company believes that patents are of less significance in its industry than such factors as technical expertise, innovative skills and the abilities of its personnel. As is typical in the semiconductor industry, the Company has, from time to time, received, and may receive in the future, letters from third parties asserting patent rights, maskwork rights or copyrights on certain of the Company's products and processes. None of the claims to date has resulted in the commencement of any litigation against the Company, nor has the Company to date believed it is necessary to license any of the patent rights referred to in such letters. BACKLOG Vitesse's sales are made primarily pursuant to standard purchase orders for delivery of products. Quantities of the Company's products to be delivered and delivery schedules are frequently revised to reflect changes in customer needs. For these reasons, the Company's backlog as of any particular date is not representative of actual sales for any succeeding period, and the Company therefore believes that backlog is not a good indicator of future revenue. The Company's backlog scheduled to be shipped in the next six months was $36,000,000 on September 30, 1996, compared to $23,500,000 on September 30, 1995. FACILITIES The Company's executive offices and principal research and development and fabrication facility is located in Camarillo, California, and is being leased under a noncancellable operating lease that expires in 1999. The total space occupied in this building is approximately 68,500 square feet. The Company leases an additional 10,000 square feet in Camarillo for product development and 5,000 square feet in Sunnyvale, California for a product development and sales office. Additional sales offices are leased in Boston, Massachusetts; Dallas, Texas; St. Paul, Minnesota; Chester, New Jersey; San Diego, California; and St. Germain en Laye, France. 30 ENVIRONMENTAL MATTERS The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or construct or operate its planned manufacturing facility in Colorado Springs, Colorado, or could require the Company to acquire costly equipment or incur other significant expenses to comply with environmental regulations or clean up prior discharges. The Company uses significant amounts of water throughout its manufacturing process. Previous droughts in California and Colorado have resulted in restrictions being placed on water use by manufacturers and residents in the states. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's or Colorado's different users. No assurance can be given that near term reductions in water allocations to manufacturers will not occur, possibly requiring a reduction in the Company's level of production, and materially adversely affecting the Company's operations. EMPLOYEES As of September 30, 1996, the Company had 293 employees, including 92 in engineering, research and development, 30 in marketing and sales, 157 in operations and 14 in finance and administration. The Company's ability to attract and retain qualified personnel is essential to its continued success. None of the Company's employees is represented by a collective bargaining agreement, nor has the Company ever experienced any work stoppage. The Company believes its employee relations are good. 31 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY The executive officers and directors of the Company as of September 30, 1996 are as follows:
NAME AGE POSITION ---- --- -------- Louis R. Tomasetta 47 President and Chief Executive Officer, Director Ian Burrows 42 Vice President, Wafer Fab Ira Deyhimy 56 Vice President, Product Development Christopher R. Gardner 36 Vice President & General Manager, ATE Eugene F. Hovanec 44 Vice President, Finance & Chief Financial Officer James Mikkelson 48 Vice President, Technology Development Michael S. Millhollan 52 Vice President & General Manager, Data Communications Robert R. Nunn 35 Vice President & General Manager, Telecommunications Neil J. Rappaport 50 Vice President, Sales Ram Venkataraman 56 Vice President, Quality and Reliability James A. Cole 54 Director Pierre R. Lamond 66 Chairman of the Board John C. Lewis 61 Director Thurman J. Rodgers 48 Director
Louis R. Tomasetta, a co-founder of the Company, has been President, Chief Executive Officer and a Director since the Company's inception in February 1987. From 1984 to 1987, he served as President of the integrated circuits division of Vitesse Electronics Corporation. Prior to that, Dr. Tomasetta was the director of the Advanced Technology Implementation department at Rockwell. Dr. Tomasetta has over 20 years experience in the management and development of GaAs-based businesses, product, and technology. He received B.S., M.S. and Ph.D. degrees in electrical engineering from the Massachusetts Institute of Technology. Ian Burrows joined the Company in February 1987 as a Process Engineering Manager, became Director of Wafer Fabrication in December 1990, and Vice President, Wafer Fab in April 1995. Prior to that, he held the position of process engineering development manager at Honeywell's GaAs product center and development process engineer at Mostek. Dr. Burrows received a B.S. in electrical engineering from Warwick University, England, and M.S. and Ph.D. degrees in electrical engineering from Texas Tech University. Ira Deyhimy, a co-founder of the Company, has been Vice President, Product Development since the Company's inception in February 1987. From 1984 to 1987 he was Vice President, Engineering at Vitesse Electronics Corporation. Prior to that, Mr. Deyhimy was manager of Integrated Circuit Engineering at Rockwell. He has over 20 years of experience in GaAs electronics. Mr. Deyhimy received a B.S. degree in physics from the University of California at Los Angeles and an M.S. degree in physics from California State University at Northridge. Christopher R. Gardner joined the Company in February 1987 and held various engineering and engineering management positions through September 1996 when he became Vice President & General Manager, ATE. Prior to that, Mr. Gardner was a member of technical staff at AT&T Bell Laboratories. Mr. Gardner holds a B.S. degree in electrical engineering from Cornell University and an M.S. degree in electrical engineering from the University of California at Berkeley. Eugene F. Hovanec joined the Company as Vice President, Finance and Chief Financial Officer in December 1993. From 1989 to 1993, Mr. Hovanec served as Vice President, Finance & Administration, and Chief Financial Officer at Digital Sound Corporation. Prior to that, from 1984 to 1989, he served as Vice President and Controller at Micropolis Corporation, a disk drive company. Mr. Hovanec holds a Bachelor of Business Administration degree from Pace University, New York. Mr. Hovanec also serves as director of Interlink Electronics, Inc. 32 James Mikkelson, a co-founder of the Company, has served as Vice President, Technology Development since the Company's inception in February 1987. From 1984 to 1987, he served as Vice President, Operations at Vitesse Electronics Corporation. Prior to that, he served as Project Manager at Hewlett-Packard where he was responsible for the development and manufacturing of MOS VLSI circuits. Mr. Mikkelson holds B.S., M.S. and Engineer degrees in electrical engineering from the Massachusetts Institute of Technology. Michael S. Millhollan joined the Company in July 1989 as Director of the Sunnyvale Product Development Center and became Vice President, General Manager of Standard Products in October 1992 and was appointed Vice President & General Manager, Data Communications in September 1996. From 1976 to 1989, he held various senior design engineering positions with National Semiconductor. Prior to that, he was at Motorola for seven years in various design engineering positions. Mr. Millhollan holds a B.S. degree in electrical engineering from the Georgia Institute of Technology. Robert R. Nunn joined the Company in July 1989, became Director of Marketing in January 1991 and Vice President and General Manager, ASIC Products in July 1992 and was appointed Vice President & General Manager, Telecommunications in September 1996. From August 1987 to July 1989 he served as product marketing manager at Advanced Micro Devices, Inc. ("AMD"). Mr. Nunn holds a B.S. degree in computer engineering from the University of California at Los Angeles and an M.B.A. from Harvard Business School. Neil J. Rappaport joined the Company as Vice President, Sales in August 1987. From September 1982 to 1987, Mr. Rappaport was national sales manager with Applied Micro Circuits Corporation, a manufacturer of ECL integrated circuits. Prior to that, he held various sales positions with Signetics Corporation, a semiconductor manufacturer. Prior to that, he was a design engineer at Hughes Aircraft Company. Mr. Rappaport has a B.S. degree from Fairleigh Dickinson University and an A.S. degree in electronics technology from the RCA Institute. Ram Venkataraman joined the Company as Director of Quality in January 1990 and in August 1990 he became Vice President, Quality and Reliability. From March 1985 to January 1990, he held various positions, including manager of reliability and quality assurance and Director of Wafer Fabrication Operations, at GigaBit Logic, Inc., a GaAs semiconductor manufacturer. Mr. Venkataraman has over 20 years of experience in IC quality assurance and reliability spanning both silicon and GaAs technologies. Mr. Venkataraman holds B.S. degrees in physics and electrical engineering from Madras University, India, and an M.S. degree in electrical engineering from the Indian Institute of Technology, India. James A. Cole has served as a Director of the Company since February 1987. Since October 1986, he has served as a General Partner of Spectra Enterprise Associates and as a Partner of New Enterprise Associates. He was a founder and Executive Vice President of Amplica, Inc., a GaAs microwave IC and sub-system Company. Mr. Cole also serves as a Director of Giga-Tronics, Inc. and Spectrian Corporation. Pierre R. Lamond has been the Chairman of the Board of Directors since the Company's inception in February 1987. Since December 1981, he has been a General Partner of Sequoia Capital, a venture capital firm. Sequoia has financed companies such as Cypress Semiconductor, Cisco Systems and C-Cube Microsystems. Mr. Lamond was founder and Vice President of National Semiconductor. He is also a Director of Cypress Semiconductor, CKS Group and VidaMed, Inc. John C. Lewis became a Director of the Company in January 1990. He is currently Chairman of the Board of Directors and Chief Executive Officer of Amdahl Corporation, a manufacturer of large general purpose computer storage systems and software products where he has been since 1977. Before joining Amdahl in 1977, he was President of Xerox Business Systems. Mr. Lewis also serves as a Director of Cypress Semiconductor and Pinnacle Systems. Thurman J. Rodgers has served as a Director of the Company since September 1987. He is the co-founder and since 1982 has been President and Chief Executive Officer of Cypress Semiconductor. Prior to forming Cypress Semiconductor, Dr. Rodgers managed the design, technical development, and engineering for the static RAM business of AMD. He also serves as a Director of C-Cube Microsystems. 33 UNDERWRITING Under the terms of, and subject to the conditions contained in, the Underwriting Agreement, the form of which is filed as an exhibit to the Registration Statement of which this Prospectus forms a part, the Underwriters named below for whom Lehman Brothers Inc., Robertson, Stephens & Company LLC and Oppenheimer & Co., Inc. are acting as representatives (the "Representatives"), have severally agreed to purchase from the Company, and the Company has agreed to sell to each Underwriter, the number of shares of Common Stock set forth opposite their respective names below:
NUMBER UNDERWRITER OF SHARES ----------- --------- Lehman Brothers Inc. .............................................. Robertson, Stephens & Company LLC.................................. Oppenheimer & Co., Inc. ........................................... --------- Total............................................................ 3,000,000 =========
The Underwriting Agreement provides that the obligations of the Underwriters to purchase shares of Common Stock are subject to certain conditions, and that if any of the foregoing shares of Common Stock are purchased by the Underwriters pursuant to the Underwriting Agreement, all the shares of Common Stock agreed to be purchased by the Underwriters must be so purchased. The Company has been advised that the Underwriters propose to offer the shares of Common Stock directly to the public at the public offering price set forth on the cover page of this Prospectus, and to certain selected dealers (who may include the Underwriters) at such public offering price less a selling concession not in excess of $ per share. The selected dealers may reallow a concession not in excess of $ per share to certain brokers and dealers. After the initial public offering, the public offering price, the concession to selected dealers and the reallowance may be changed by the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the Underwriters may be required to make in respect thereof. The Company has granted to the Underwriters an option to purchase up to an aggregate of 450,000 shares of Common Stock, exercisable solely to cover over- allotments, at the offering price to the public less the underwriting discounts and commissions shown on the cover page of this Prospectus. Such option may be exercised at any time until 30 days after the date of the Underwriting Agreement. To the extent that the option is exercised, each Underwriter will be committed, subject to certain conditions, to purchase a number of the additional shares of Common Stock proportionate to such Underwriter's initial commitment as indicated in the preceding table. Certain holders of shares of Common Stock of the Company, owning an aggregate of 413,348 shares, have agreed that they will not, subject to certain limited exceptions, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable or exercisable for any such shares for a period of 90 days after the effective date of the Offering without either the prior written consent of Lehman Brothers Inc. Lehman Brothers Inc. reserves the right to release any or all of such shareholders from their obligations under such lock-up agreements at any time without notice. Any such release would increase the number of shares available for sale into the public market, which could have a material adverse effect on the price of the Common Stock. In addition, the Company has agreed that it will not, subject to certain limited exceptions, directly or indirectly, offer, sell or otherwise dispose of any shares of Common Stock or any securities convertible into or exchangeable for such shares without the prior written consent of Lehman Brothers Inc. for 90 days after the effective date of the Offering. 34 The offering price for the Common Stock will be determined by negotiations among the Company and the Representatives of the Underwriters based largely upon the market price for the Common Stock as reported on the Nasdaq National Market. In general, the rules of the Commission will prohibit the Underwriters and other members of the selling group from making a market in the Company's Common Stock during the "cooling off" period immediately preceding the commencement of sales in the Offering. The Commission has, however, adopted exemptions from these rules that permit passive market making under certain conditions. These rules permit an Underwriter or other member of the selling group to continue to make a market in the Common Stock subject to the conditions, among others, that its bid not exceed the highest bid by a market maker not connected with the Offering and that its net purchases on any one trading day not exceed prescribed limits. Pursuant to these exemptions, certain Underwriters and other members of the selling group intend to engage in passive market making in the Company's Common Stock during such cooling off period. LEGAL MATTERS The validity of the Common Stock offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Certain legal matters in connection with the Offering will be passed upon for the Underwriters by Latham & Watkins, San Francisco, California. EXPERTS The financial statements of the Company as of September 30, 1995 and 1996, and for each of the years in the three-year period ended September 30, 1996 included herein and elsewhere in the Registration Statement have been included herein and in the Registration Statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Securities and Exchange Commission a Registration Statement on Form S-3 under the Securities Act, with respect to the Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company and such Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or any other document referred to are not necessarily complete. In each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, and each such statement is qualified by such reference. Copies of the Registration Statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., or obtained at prescribed rates from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. 35 VITESSE SEMICONDUCTOR CORPORATION INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report.............................................. F-2 Balance Sheets as of September 30, 1995 and 1996.......................... F-3 Statements of Operations for the years ended September 30, 1994, 1995 and 1996...................................................................... F-4 Statements of Shareholders' Equity for the years ended September 30, 1994, 1995 and 1996............................................................. F-5 Statements of Cash Flows for the years ended September 30, 1994, 1995 and 1996...................................................................... F-6 Notes to Financial Statements............................................. F-7
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Vitesse Semiconductor Corporation: We have audited the accompanying balance sheets of Vitesse Semiconductor Corporation as of September 30, 1996 and 1995 and the related statements of operations, shareholders' equity, and cash flows for each of the years in the three-year period ended September 30, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vitesse Semiconductor Corporation as of September 30, 1996 and 1995 and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 1996 in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Los Angeles, California October 18, 1996 F-2 VITESSE SEMICONDUCTOR CORPORATION BALANCE SHEETS SEPTEMBER 30, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, ------------------ 1995 1996 -------- -------- ASSETS Current Assets Cash and cash equivalents................................ $ 6,315 $ 52,436 Receivables: Trade accounts receivable, net of allowance for doubtful accounts of $700 in 1995 and $900 in 1996 (Note 5).............................................. 12,610 18,423 Other.................................................. 120 196 -------- -------- 12,730 18,619 Inventories, net: Raw material........................................... 1,392 1,678 Work in process........................................ 6,138 5,436 Finished goods......................................... 2,365 2,845 -------- -------- 9,895 9,959 Prepaid expenses......................................... 542 841 -------- -------- Total current assets................................... 29,482 81,855 -------- -------- Property and equipment, net (Notes 2, 3, and 4)............ 11,862 17,892 Other assets............................................... 767 669 -------- -------- $ 42,111 $100,416 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short term borrowings (Note 5)........................... $ 2,950 $ -- Current installments of capital lease obligations (Notes 2 and 4)................................................ 2,085 767 Current installments of term loans (Note 3).............. 1,121 164 Accounts payable......................................... 3,553 6,731 Accrued expenses and other current liabilities (Note 6).. 1,664 3,728 Deferred revenue......................................... 220 250 -------- -------- Total current liabilities.............................. 11,593 11,640 -------- -------- Capital lease obligations, less current installments (Notes 2 and 4).................................................. 3,627 91 Term loans, less current installments (Note 3)............. 1,891 315 Commitments (Note 11) Shareholders' equity (Note 7): Preferred stock, $.01 par value. Authorized 10,000,000 shares; none issued or outstanding -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued and outstanding 15,509,758 and 19,406,527 shares at September 30, 1995 and 1996, respectively..... 155 194 Additional paid-in capital............................... 82,804 133,490 Accumulated deficit...................................... (57,959) (45,314) -------- -------- Net shareholders' equity................................. $ 25,000 $ 88,370 -------- -------- $ 42,111 $100,416 ======== ========
Subsequent Event (Note 13) See accompanying notes to financial statements. F-3 VITESSE SEMICONDUCTOR CORPORATION STATEMENTS OF OPERATIONS YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED SEPTEMBER 30, ------------------------------------- 1994 1995 1996 ----------- ----------- ----------- Revenues, net: (Notes 9 and 10) Production............................ $ 26,238 $ 34,703 $ 59,491 Development........................... 9,343 8,179 6,555 ----------- ----------- ----------- Total revenues...................... 35,581 42,882 66,046 ----------- ----------- ----------- Costs and expenses: Cost of revenues...................... 22,226 22,505 31,792 Engineering, research and development. 8,794 8,689 11,045 Selling, general and administrative... 7,794 8,900 9,777 ----------- ----------- ----------- Total costs and expenses............ 38,814 40,094 52,614 ----------- ----------- ----------- Income (loss) from operations........... (3,233) 2,788 13,432 Other income (expense): Interest income....................... 134 93 1,364 Interest expense...................... (1,111) (1,304) (772) Other................................. 86 9 26 ----------- ----------- ----------- Total other income (expense)........ (891) (1,202) 618 ----------- ----------- ----------- Income (loss) before income taxes....... (4,124) 1,586 14,050 Income taxes (Note 8)................... 17 79 1,405 ----------- ----------- ----------- Net income (loss)....................... $ (4,141) $ 1,507 $ 12,645 =========== =========== =========== Net income (loss) per share............. $ (0.28) $ 0.09 $ 0.63 =========== =========== =========== Weighted average common and common equivalent shares outstanding.......... 14,773,137 17,307,007 20,144,419 =========== =========== ===========
See accompanying notes to financial statements. F-4 VITESSE SEMICONDUCTOR CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL NET ----------------- PAID-IN ACCUMULATED SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT EQUITY ---------- ------ ---------- ----------- ------------- Balance, October 1, 1993................... 14,628,323 $146 $ 79,777 $(55,325) $24,598 Exercise of stock op- tions.................. 106,206 1 229 -- 230 Shares issued under Employee Stock Purchase Plan................... 245,728 3 827 -- 830 Net Loss................ -- -- -- (4,141) (4,141) ---------- ---- -------- -------- ------- Balance, September 30, 1994................... 14,980,257 150 80,833 (59,466) 21,517 Exercise of stock op- tions.................. 311,676 3 1,107 -- 1,110 Exercise of warrants.... 4,606 -- 41 -- 41 Shares issued under Employee Stock Purchase Plan................... 213,219 2 823 -- 825 Net income.............. -- -- -- 1,507 1,507 ---------- ---- -------- -------- ------- Balance, September 30, 1995................... 15,509,758 $155 $ 82,804 $(57,959) $25,000 Exercise of stock op- tions.................. 972,416 10 3,401 -- 3,411 Exercise of warrants.... 56,943 -- 15 -- 15 Shares issued under Employee Stock Purchase Plan................... 107,410 1 974 -- 975 Issuance of Common Stock, net of expenses. 2,760,000 28 46,296 -- 46,324 Net income.............. -- -- -- 12,645 12,645 ---------- ---- -------- -------- ------- Balance, September 30, 1996................... 19,406,527 $194 $133,490 $(45,314) $88,370 ========== ==== ======== ======== =======
See accompanying notes to financial statements. F-5 VITESSE SEMICONDUCTOR CORPORATION STATEMENTS OF CASH FLOWS YEARS ENDED SEPTEMBER 30, 1994, 1995 AND 1996 (IN THOUSANDS)
YEAR ENDED SEPTEMBER 30, -------------------------- 1994 1995 1996 ------- ------- -------- Cash flows from operating activities: Net income (loss)................................ $(4,141) $ 1,507 $ 12,645 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.................... 5,558 5,316 4,973 Changes in assets and liabilities: (Increase) decrease in: Receivables, net............................. (4,550) (756) (5,889) Inventories.................................. (135) (937) (64) Prepaid expenses............................. (8) (51) (299) Other assets................................. (61) 195 98 Increase (decrease) in: Accounts payable............................. 506 94 3,178 Accrued expenses and other current liabili- ties........................................ (158) (250) 2,064 Deferred revenue............................. (522) 170 30 ------- ------- -------- Net cash provided by (used in) operating (3,511) 5,288 16,736 activities................................ ------- ------- -------- Cash flows from investing activities: Short-term investments........................... -- 1,000 -- Capital expenditures............................. (1,730) (3,362) (11,003) ------- ------- -------- Net cash provided by (used in) financing (1,730) (2,362) (11,003) activities................................ ------- ------- -------- Cash flows from financing activities: Principal payments under capital lease obliga- tions........................................... (4,032) (2,907) (4,854) Principal payments under term loan............... (457) (951) (2,778) Short-term borrowings (payments)................. 2,250 700 (2,950) Proceeds from term loan.......................... 1,335 400 245 Net proceeds from issuance of common stock....... 1,060 1,976 50,725 ------- ------- -------- Net cash provided by (used in) financing 156 (782) 40,388 activities................................ ------- ------- -------- Net increase (decrease) in cash and cash equiva- lents............................................. (5,085) 2,144 46,121 Cash and cash equivalents at beginning of year..... 9,256 4,171 6,315 ------- ------- -------- Cash and cash equivalents at end of period......... $ 4,171 $ 6,315 $ 52,436 ======= ======= ======== Supplemental disclosures of cash flow information-- cash paid during the period for: Interest......................................... $ 1,138 $ 1,275 $ 656 ======= ======= ======== Income taxes..................................... $ 18 $ 44 $ 347 ======= ======= ======== Supplemental schedule of noncash investing and fi- nancing activities: Capital lease obligations incurred............... $ 287 $ -- $ -- ======= ======= ========
In 1994 and 1995, the Company renegotiated certain capital leases resulting in an extension of the terms of these leases beyond their original maturities and the conversion of certain capital leases to operating leases. The net effects of these transactions were a $607,000 reduction in the property and equipment and capital lease obligations accounts in 1994, and a $1,876,000 increase in the same accounts in 1995. See accompanying notes to financial statements. F-6 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES Vitesse Semiconductor Corporation (the "Company") was incorporated under the laws of Delaware on February 3, 1987. The Company is a leader in the design, development, manufacturing and marketing of digital GaAs ICs. Revenue Recognition Production revenue is recognized when products are shipped to customers. Revenue from development contracts is recognized upon attainment of specific milestones established under customer contracts. Revenue from products deliverable under development contracts, including design tools and prototype products, are recognized upon delivery. Amounts billed in excess of revenue recognized are included as deferred revenue in the accompanying balance sheets. Costs related to development contracts are expensed as incurred. Cash Equivalents and Short-term Investments The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Cash equivalents and short-term investments are principally composed of money market accounts, U.S. Government obligations and short-term commercial paper, and are carried at cost plus accrued interest, which approximates market value. Inventories Inventories are stated at the lower of cost (determined by the first-in, first-out method) or market (net realizable value). Costs associated with the manufacture of a new product are charged to engineering, research and development expense as incurred until the product is proven through testing and acceptance by the customer. Inventories are shown net of a valuation reserve of $2,493,000 and $2,797,000 at September 30, 1995 and 1996, respectively. Depreciation and Amortization Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the related assets as follows: Machinery and equipment.................. 5 years Furniture and fixtures................... 5 years Computer equipment....................... 3 years Leasehold improvements................... Term of lease
Organization and technology costs included in other assets are amortized over a five-year period. Income Taxes The Company accounts for income taxes pursuant to the provisions of Financial Accounting Standards Board Statement No. 109. Under the asset and liability method of Statement No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. F-7 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Research and Development Costs The Company charges all research and development costs to expense when incurred. Manufacturing costs associated with the development of a new fabrication process or a new product are expensed until such times as these processes or products are proven through final testing and initial acceptance by the customer. Costs related to revenues on non-recurring engineering services billed to customers are generally classified as cost of revenues; however, certain related contract engineering and research costs are included in engineering, research and development expense because these costs cannot be directly related to individual contracts. Computation of Net Income (Loss) Per Share The net income (loss) per share of common stock is computed using the weighted average number of common shares outstanding and common stock equivalents using the application of the treasury stock method for all periods presented. Common stock equivalents are excluded from the computation for loss years since their inclusion would be antidilutive. Financial Instruments The Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. The Company's carrying value of cash equivalents, trade accounts receivable, other receivable, accounts payable, accrued expenses, term loans and borrowings approximates fair value because the instrument has a short-term maturity or because the applicable interest rates are comparable to current borrowing rates of those instruments. Long-Lived Assets In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued. This statement provides guidelines for recognition of impairment of losses related to long-term assets and is effective for fiscal years beginning after December 15, 1995. Company management does not believe that the adoption of this new standard will have a material effect on the Company's financial statements. Accounting for Stock Options In October 1995, Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" was issued. This statement encourages, but does not require, a fair value based method of accounting for employee stock options and will be effective for fiscal years beginning after December 31, 1995. While the Company is still evaluating Statement No. 123, it currently expects to elect to continue to measure and to recognize compensation costs under APB Opinion No. 25, "Accounting for Stock Issued to Employees" and to comply with the pro forma disclosure requirements of Statement No. 123. If the Company makes this election, Statement No. 123 will have no impact on the Company's financial statements. Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. F-8 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Reclassification Certain reclassifications have been made to the prior year financial statements to conform with the current year presentation. NOTE 2--PROPERTY AND EQUIPMENT Property and equipment, stated at cost, are summarized as follows:
SEPTEMBER 30, --------------- 1995 1996 ------- ------- (IN THOUSANDS) Machinery and equipment.................................. $23,333 $30,739 Furniture and fixtures................................... 122 144 Computer equipment....................................... 6,179 6,542 Leasehold improvements................................... 3,916 3,966 ------- ------- 33,550 41,391 Less accumulated depreciation and amortization........... 21,688 23,499 ------- ------- $11,862 $17,892 ======= =======
Included in machinery and equipment is equipment not yet placed in service of $501,000 and $4,713,000 as of September 30, 1995 and 1996, respectively. Balances applicable to assets acquired under capitalized leases, which are included in property and equipment, are summarized as follows:
SEPTEMBER 30, -------------- 1995 1996 ------- ------ (IN THOUSANDS) Machinery and equipment................................... $12,261 $2,308 Furniture and fixtures.................................... 51 14 Computer equipment........................................ 2,560 2,038 Leasehold improvements.................................... 1,635 -- ------- ------ 16,507 4,360 Less accumulated depreciation and amortization............ 10,579 3,629 ------- ------ $ 5,928 $ 731 ======= ======
NOTE 3--TERM LOANS The Company has various equipment term loans with a financial institution totaling $479,000 bearing interest rates between 9% and 10.2% per annum payable in monthly installments through fiscal 2000. Future principal payments under the term loans are as follows:
(IN THOUSANDS) Year ending September 30: 1997.................................. $164 1998.................................. 168 1999.................................. 131 2000.................................. 16 ---- $479 ====
F-9 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 4--CAPITAL LEASE OBLIGATIONS Capital lease obligations are summarized as follows:
SEPTEMBER 30, ----------- 1995 1996 ------ ---- (IN THOUSANDS) Capital lease obligations, secured by related assets, payable in aggregate monthly installments of $89,000 including interest ranging from 4% to 15% through January 1998...................................................... $5,712 $858 Less current installments.................................. 2,085 767 ------ ---- $3,627 $ 91 ====== ====
The present value of future minimum capital lease payments is as follows:
(IN THOUSANDS) Year ending September 30: 1997..................................................... $823 1998..................................................... 111 ---- Total...................................................... 934 Less amounts representing interest......................... 76 ---- $858 ====
NOTE 5--SHORT-TERM BORROWINGS At September 30, 1996, the Company had a $12,500,000 revolving line of credit agreement with a bank. This agreement expires in January 1997. Borrowings under the revolving line of credit agreement are limited to 80% of eligible trade accounts receivable, as defined by the agreement. The agreement provides for interest to be paid monthly at prime plus 0.5% (8.75% on September 30, 1996). The Company must adhere to certain requirements and provisions to be in compliance with the terms of the agreement and is prohibited from paying dividends without the consent of the bank. Borrowings are collateralized by all Company assets. As of September 30, 1995, $2,950,000 was outstanding under the line of credit (none at September 30, 1996). NOTE 6--ACCRUED EXPENSES Accrued expenses consist of the following (in thousands):
SEPTEMBER 30, ------------- 1995 1996 ------ ------ Accrued vacation........................................... $ 324 $ 489 Accrued salaries and wages................................. 498 725 Accrued taxes.............................................. -- 1,108 Other...................................................... 731 1,406 ------ ------ $1,553 $3,728 ====== ======
NOTE 7--SHAREHOLDERS' EQUITY Preferred Stock In fiscal 1991, the Board of Directors authorized 10,000,000 shares of undesignated preferred stock. The Company has no present plans to issue any of this preferred stock. F-10 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Stock Option Plans 1987 Incentive Stock Option Plan and 1989 Stock Option Plan The Company's 1987 Incentive Stock Option Plan (the "1987 Plan") was adopted by the Board of Directors in February 1987 and approved by the shareholders in January 1988. Pursuant to the 1987 Plan, 350,000 shares of the Company's common stock were reserved for issuance. The 1989 Stock Option Plan (the "1989 Plan") was approved by the Board of Directors in April 1989 and approved by the shareholders in April 1990. Pursuant to the 1989 Plan, 1,166,666 shares of the Company's common stock were reserved for issuance. The 1987 Plan and 1989 Plan are collectively referred to as the "Plans." The Plans provide for the granting to employees (including officers and employee directors of "incentive stock options" and for the granting of nonstatutory options to employees (including officers and directors) and consultants (including directors). Subject to the discretion of the Board of Directors, options granted under the Plans generally vest and become exercisable at the rate of 24% at the end of the first year, and thereafter at a rate of 2% of the shares subject to the options per month and have a ten- year term. Options have also been granted under the Plans with vesting periods of fewer than five years. The exercise price of all incentive stock options granted under the Plans must be at least equal to the fair market value of the shares on the date of grant. With respect to any participant who owns stock representing more than 10% of the voting rights of the Company's outstanding capital stock, the exercise price of any incentive stock options granted must equal at least 110% of the fair market value on the grant date. The exercise price of all nonstatutory stock options granted under the Plans must be at least 85% of the fair market value of the common stock on the date of grant. 1991 Stock Option Plan The 1991 Stock Option Plan (the "1991 Plan") was adopted by the Board of Directors and approved by the shareholders in August 1991. A total of 2,000,000 shares of common stock were reserved for issuance under the 1991 Plan. In January 1995, the shareholders approved an amendment to the 1991 Plan to increase the number of shares reserved thereunder by an aggregate of 500,000 shares and to automatically increase on an annual basis beginning in 1995, by a number of shares equal to 3.5% of the Company's common stock outstanding at the end of the fiscal year. The 1991 Plan provides for the granting of incentive stock options to employees of the Company and for the granting of nonstatutory stock options to employees and consultants of the Company. Options granted under the 1991 Plan generally vest and become exercisable at the rate of 25% per year, however, certain options granted prior to June 30, 1992, vest and become exercisable at the rate of 24% at the end of the first year, and thereafter at a rate of 2% of the shares subject to the options per month. The exercise price of all incentive and nonstatutory stock options granted under the 1991 Plan must be at least equal to the fair market value of the shares of common stock on the date of grant. With respect to any participant who owns stock possessing more than 10% of the voting power of all classes of stock of the Company, the exercise price of any incentive stock option granted must equal at least 110% of the fair market value on the grant date and the maximum term of the options must not exceed five years. The term of all other options under the 1991 Plan may not exceed ten years. In June 1993, substantially all outstanding stock options granted under the 1987,1989 and 1991 Plans with an exercise price in excess of $3.625 per share were canceled and replaced with new options for a like number F-11 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) of shares having an exercise price of $3.625 per share, the fair market value on the grant date. The new options have certain restrictions relating to the sale of the shares. Under the 1987 Plan, the 1989 Plan and the 1991 Plan, as of September 30, 1996, options to purchase an aggregate of 1,911,207 shares had been exercised, options to purchase an aggregate of 3,064,726 shares were outstanding at a weighted average exercise price of $7.52 per share and 441,215 shares (which increased to 1,120,443 effective October 1, 1996 pursuant to the terms of the 1991 Plan) remained available for future grant. Of the 3,064,726 options outstanding, 640,245 options were vested and exercisable under the Plans pursuant to incentive stock options and 188,131 options were vested and exercisable pursuant to nonstatutory stock options. 1991 Directors' Stock Option Plan The 1991 Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Board of Directors and approved by the shareholders in August 1991 and 200,000 shares of common stock had been reserved for issuance under the Directors' Plan. In January 1996, the shareholders approved an amendment to the Directors' Plan to increase the number of shares reserved thereunder by an aggregate of 200,000 shares. As of September 30, 1996, 235,000 options had been granted under the Directors' Plan; 31,700 of such grants had been exercised and 10,000 had been canceled. At September 30, 1996, 110,500 options were exercisable. The Directors' Plan provides that each non-employee director automatically will be granted a nonstatutory option to purchase 10,000 shares (except in the case of the Chairman of the Board of the Company who shall receive an option to purchase 15,000 shares) of common stock upon first becoming a director. In addition, the Directors' Plan provides that each director serving on January 1 of each calendar year will automatically be granted a nonstatutory option to purchase 10,000 shares (except in the case of the Chairman of the Board of the Company who shall receive an option to purchase 15,000 shares) of common stock. The options granted to the non-employee directors are for a ten year term and vest at the rate of 2% of the shares subject to the option at the end of each month following the date of grant. The exercise price of the options may not be less than the fair market value of the common stock on the last business day prior to the date of grant of the option. F-12 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Activity under the 1987, 1989 and 1991 Plans and the 1991 Directors' Stock Option Plan is as follows:
OPTION PRICE NUMBER OF ---------------------------- SHARES PER SHARE AGGREGATE --------- ------------- -------------- (IN THOUSANDS) Options outstanding at October 1, 1993. 2,027,727 $ 0.03-10.75 $ 7,441 Options: Granted.............................. 1,025,727 3.75-5.625 4,280 Exercised............................ (106,206) .03-5.00 (229) Cancelled or expired................. (190,089) 2.16-5.625 (748) --------- ------------- ------- Options outstanding at September 30, 1994................................... 2,756,432 .03-10.75 10,744 Options: Granted.............................. 1,033,600 4.375-11.625 5,362 Exercised............................ (311,676) .03-5.625 (1,110) Cancelled or expired................. (295,999) 1.62-5.875 (1,375) --------- ------------- ------- Options outstanding at September 30, 1995................................... 3,182,357 .03-11.625 13,621 Options: Granted.............................. 1,190,600 11.00-35.75 15,346 Exercised............................ (972,416) 0.03-9.375 (3,410) Cancelled or expired................. (142,515) 3.625-13.875 (1,058) --------- ------------- ------- Options outstanding at September 30, 3,258,026 $ 0.03-35.75 $24,499 1996................................... ========= ============= =======
Subsequent to September 30, 1996, the Board of Directors de-reserved approximately 2,709,698 shares from those previously designated for option grants and authorized an increase in the number of authorized shares of Common Stock in the Company's Certificate of Incorporation to 60,000,000 shares. In addition, the Company's Board of Directors has approved a plan which states that if the increase in the authorized number of shares is not approved at the Company's 1997 Annual Meeting of Shareholders, the Company will meet its obligations under the Company's option plans through stock repurchases, payments to holders of vested options to cancel such options or other means. 1991 Employee Stock Purchase Plan The Company's 1991 Employee Stock Purchase Plan (the "Purchase Plan") was adopted by the Board of Directors and approved by the shareholders effective December 11, 1991. The Purchase Plan is intended to qualify under Section 423 of the Internal Revenue Code of 1986, as amended. A total of 1,000,000 shares of common stock has been reserved for issuance under the Purchase Plan. Under the Purchase Plan, eligible employees may purchase shares of the Company's common stock at six month intervals at 85% of the lower of the fair market value on the first or the last day of each six-month period. Employees may purchase shares having a value not exceeding 20% of their compensation, including commissions and overtime, but excluding bonuses. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment with the Company. In fiscal 1995 and 1996, 213,219 and 107,410 shares, respectively, were issued under the Purchase Plan at average prices of $3.874 and $9.073. At September 30, 1996, 343,450 shares were reserved for future issuance. In January 1996, the shareholders approved an amendment to the Purchase Plan to increase the number of shares reserved thereunder by an aggregate of 250,000 shares. F-13 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Stock Warrants In September and October 1991, the Company entered into a note and warrant financing pursuant to which 9% promissory notes in the aggregate amount of $3,000,000 were issued. Warrants issued in connection with the financing were exercisable at $9 per share. A total of 99,789 warrants were issued in connection with the financing. No warrants were exercised in fiscal 1994. In fiscal 1995, warrants to acquire 4,606 shares were exercised for total proceeds of $41,000 and, in fiscal 1996, warrants to acquire 1,709 shares were exercised for total proceeds of $15,000 and 89,714 warrants were exchanged for 55,234 common shares. As of September 30, 1996, no warrants were outstanding. NOTE 8--INCOME TAXES Income tax expense consists of the following (in thousands):
SEPTEMBER 30, ---------------- 1994 1995 1996 ---- ---- ------ (UNAUDITED) Current: Federal................................................. $-- $60 $ 300 State................................................... 17 19 755 Foreign................................................. -- -- 350 ---- --- ------ $ 17 $79 $1,405 ==== === ======
The actual income tax expense differs from the expected tax expense computed by applying the federal corporate tax rate of 34% to income before income taxes as follows (in thousands):
SEPTEMBER 30, ------------------- 1994 1995 1996 ---- ----- ------- (UNAUDITED) Federal income taxes at statutory rate............... $-- $ 539 $ 4,918 Alternative minimum taxes............................ -- -- 300 State income taxes................................... 17 19 755 Foreign income taxes................................. -- -- 350 Utilization of tax loss carryforward................. -- (479) (4,918) ---- ----- ------- $ 17 $ 79 $ 1,405 ==== ===== =======
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, --------------- 1995 1996 ------- ------- Deferred tax assets: Net operating loss carryforwards........................ $19,216 $19,646 Research and development tax credit carryforwards....... 3,405 3,239 Allowances and reserves................................. 2,140 1,257 Accumulated depreciation and amortization............... 2,202 2,072 Other................................................... 1,079 938 ------- ------- Total gross deferred tax assets........................ 28,042 27,152 Less valuation allowance................................. 28,042 27,152 ------- ------- Net deferred tax assets................................ $ -- $ -- ======= =======
F-14 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) In 1996, the Company utilized $15,316,000 to reduce taxable income, associated with certain employee exercises of stock options. Tax effects of such items, which approximate $5,207,000 at September 30, 1996, will be recorded as additional paid in capital when management concludes that it is more likely than not that the related tax benefits will be realized. For financial reporting purposes, the Company utilized net operating loss carryforwards of $14,051,000 in 1996. These loss carryforwards were not utilized for tax purposes due to the availability of deductions, for tax purposes only, associated with the employee exercise of stock options described above. The net change in the valuation allowance for the years ended September 30, 1994, 1995 and 1996 was an increase (decrease) of $2,778,000, $(102,000) and $(890,000), respectively. In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portions or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the projected future taxable income and tax planning strategies in making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income of approximately $65,000,000 prior to the expiration of the net operating loss carryforwards in 2009. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, the Company has established a valuation allowance for all deductible differences. As of September 30, 1996, the Company had net operating loss carryforwards for federal and state income tax purposes of $57,782,000 and $18,389,000, respectively, which are available to offset future taxable income, if any, through 2009. Additionally, the Company had research and development tax credit carryforwards for federal and state income tax purposes of $2,210,000 and $1,029,000 respectively, which are available to offset future income taxes, if any, through 2010. NOTE 9--LICENSING AGREEMENT The Company has a licensing agreed with Fujitsu Limited ("Fujitsu") whereby Fujitsu has the right to use certain circuit design technology previously developed by the Company. Royalties are payable to the Company based on a percentage of sales, as defined. In each of the years ended September 30, 1994, 1995 and 1996, a nominal amount of royalties was received under this agreement. NOTE 10--SIGNIFICANT CUSTOMERS, CONCENTRATION OF CREDIT RISK, AND SEGMENT INFORMATION In fiscal 1994, two customers accounted for 14% and 10% of total revenues, respectively. In fiscal 1995, two customers accounted for 19% and 17% of total revenues, respectively. In fiscal 1996, two customers accounted for 25% and 11% of total revenues, respectively. The Company generally sells its products to customers engaged in the design or manufacture of high technology products either recently introduced or not yet introduced to the marketplace. Substantially all the Company's trade accounts receivable are due from such sources. The Company's major customers who account for more than 10% of total revenues aggregated 38% and 37% of total trade accounts receivables at September 30, 1995 and 1996, respectively. F-15 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) Export revenues are summarized by geographic areas as follows (in thousands):
1994 1995 1996 ------ ------- ------- Europe............................................. $4,767 $ 4,968 $ 6,505 Japan.............................................. 3,767 8,211 7,972 Other.............................................. 316 354 1,147 ------ ------- ------- $8,850 $12,533 $15,624 ====== ======= =======
NOTE 11--COMMITMENTS The Company leases facilities under noncancellable operating leases that expire through 2001. The Company also leases certain machinery and equipment under noncancellable operating leases that expire through 1999. Approximate minimum rental commitments under these operating leases as of September 30, 1996 were as follows:
(IN THOUSANDS) Year ending September 30: 1997.................................. $1,539 1998.................................. 1,105 1999.................................. 278 2000.................................. 73 2001.................................. 43 ------ $3,038 ======
Rent expense under operating leases was approximately $1,945,000, $2,147,000 and $2,507,000 for the years ended September 30, 1994, 1995 and 1996, respectively. NOTE 12--RETIREMENT SAVINGS PLAN The Company has a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code covering substantially all employees. Participants in this plan may defer up to the maximum annual amount allowable under IRS regulations. The contributions are fully vested and nonforfeitable at all times. The Company does not make matching contributions under the plan. NOTE 13--SUBSEQUENT EVENT (UNAUDITED) The Company is currently negotiating a lease financing arrangement in connection with the new wafer fabrication facility. In the event the Company successfully negotiates such lease financing arrangement, the Company anticipates that the lessor would provide approximately $25 million for the purchase of the land and the building of the wafer fabrication facility under a lease, which is expected to be treated as an operating lease for accounting purposes. The lease arrangement would be collateralized with approximately $22 million of cash provided by the Company, which would be deposited in a restricted account and classified as a long-term restricted investment on the Company's balance sheet. The lease would have a base period of five years. Under the terms of the lease arrangement, the Company would be required to meet certain financial covenants and would be restricted in declaring and paying dividends and entering into certain merger and change of control transactions. The negotiations concerning the proposed lease have not been completed, and there can be no assurance that a final agreement relating to the lease will be reached based on the above terms, or at all. F-16 [VITESSE LOGO] [BACKGROUND OF PAGE - AN INTEGRATED CIRCUIT] AUTOMATED TEST EQUIPMENT MANY OF THE COMPANY'S H- GAAS ICS ARE USED IN THE AUTOMATED TEST EQUIPMENT MARKET, WHICH IS CHARACTER- IZED BY HIGH-PERFORMANCE SYSTEMS. THESE SYSTEMS RE- QUIRE ICS WITH HIGH SPEED, LOW POWER DISSIPATION AND HIGH COMPLEXITY. SCHLUM- BERGER LTD. USES A VITESSE H-GAAS IC AS A TIMING COM- PONENT IN ITS ITS9000GX 200MHZ LOGIC TESTER, SHOWN BELOW. [PICTURE OF SCHLUMBERGER LOGIC TESTER] THE COMPANY'S H-GAAS FX40K GATE ARRAY, PICTURED TO THE [PICTURE OF FX40K GATE ARRAY] LEFT, IS USED IN HIGH-PER- FORMANCE ATE SYSTEMS UTIL- IZING THE "TESTER-PER-PIN" ARCHITECTURE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMA- TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFOR- MATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. ----------------- TABLE OF CONTENTS
PAGE ---- Available Information..................................................... 3 Incorporation of Certain Documents by Reference........................... 3 Prospectus Summary........................................................ 4 Risk Factors.............................................................. 6 Use of Proceeds........................................................... 12 Price Range of Common Stock............................................... 12 Dividend Policy........................................................... 12 Capitalization............................................................ 13 Selected Financial Data................................................... 14 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... 15 Business.................................................................. 22 Management................................................................ 32 Underwriting.............................................................. 34 Legal Matters............................................................. 35 Experts................................................................... 35 Additional Information.................................................... 35 Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 3,000,000 SHARES [LOGO OF VITESSE SEMICONDUCTOR CORPORATION] COMMON STOCK ----------------- PROSPECTUS , 1996 ----------------- LEHMAN BROTHERS ROBERTSON, STEPHENS & COMPANY OPPENHEIMER & CO., INC. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The following table sets forth the costs and expenses, other than the underwriting commission, payable by the Registrant in connection with the sale of Common Stock being registered. All amounts are estimates except the SEC registration fee and the NASD filing fee.
AMOUNT TO BE PAID --------- SEC registration fee........................................... $ 39,858 NASD filing fee................................................ 13,654 Nasdaq additional listing fee.................................. 17,500 Blue Sky fees and expenses..................................... 5,000 Printing and engraving expenses................................ 75,000 Legal fees and expenses........................................ 100,000 Accounting fees and expenses................................... 40,000 Transfer agent and registrar fees.............................. 3,000 Miscellaneous expenses......................................... 5,988 -------- Total........................................................ $300,000 ========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act. Paragraph 9 of the Registrant's Amended Certificate of Incorporation and Article 6 of the Registrant's Bylaws provide for indemnification of the Registrant's directors and officers to the maximum extent permitted by the Delaware General Corporation Law. The Registrant also maintains, and intends to continue to maintain, insurance for the benefit of its directors and officers to insure such persons against certain liabilities, including liabilities under the Securities laws. Reference is also made to Section 8 of the Underwriting Agreement (Exhibit 1.1 hereto) indemnifying officers and directors of the Registrant against certain liabilities. ITEM 16. EXHIBITS 1.1 Form of Underwriting Agreement. 3.1(1) Certificate of Incorporation of Registrant, as amended to date. 3.2(2) Bylaws of Registrant, as amended to date. 4.1(3) Amended Modification Agreement including Registration Rights and Right of First Refusal dated June 12, 1991 between Registrant and certain security holders of Registrant. 4.2 Specimen of Registrant's Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. 23.1 Consent of Independent Certified Public Accountants. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-3).
- -------- (1) Incorporated by reference from the Company's annual report on Form 10-K for the period ended September 30, 1992. (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (File no. 33-43548), effective December 10, 1991. (3) Confidential treatment previously granted as to certain portions of these exhibits. II-1 (b) Financial Statement Schedules Not Applicable ITEM 17. UNDERTAKINGS. (a) The Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the Registrant's Certificate of Incorporation, Bylaws, indemnification agreements or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. (c) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (d) The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. II-2 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form S-3 and has duly caused this Registration Statement on Form S-3 to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Camarillo, State of California, on this 23rd day of October, 1996. VITESSE SEMICONDUCTOR CORPORATION /s/ Eugene F. Hovanec By: ______________________________________ Eugene F. Hovanec Vice President, Finance and Chief Financial Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Louis R. Tomasetta and Eugene F. Hovanec, and each of them, their true and lawful attorneys and agents, with full power of substitution, each with power to act alone, to sign and execute on behalf of the undersigned any and all amendments (including without limitation any post-effective amendments and amendments thereto) to this Registration Statement on Form S-3, requests to accelerate the effectiveness of this Registration Statement, and any registration statement for the same offering that is to be effective under Rule 462(b) of the Securities Act, and to perform any acts necessary in order to file the same, with all exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, and each of the undersigned does hereby ratify and confirm all that said attorneys and agents, or their or his or her substitutes, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated: SIGNATURES TITLE DATE /s/ Louis R. Tomasetta President and Chief October 23, - ----------------------------------- Executive Officer 1996 LOUIS R. TOMASETTA (Principal Executive Officer) /s/ Eugene F. Hovanec Vice President, October 23, - ----------------------------------- Finance and Chief 1996 EUGENE F. HOVANEC Financial Officer (Principal Financial and Accounting Officer) /s/ Pierre R. Lamond Chairman of the Board October 23, - ----------------------------------- of Directors 1996 PIERRE R. LAMOND /s/ James A. Cole Director October 23, - ----------------------------------- 1996 JAMES A. COLE /s/ John C. Lewis Director October 23, - ----------------------------------- 1996 JOHN C. LEWIS /s/ Thurman J. Rogers Director October 23, - ----------------------------------- 1996 THURMAN J. ROGERS II-3 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1(1) Certificate of Incorporation of Registrant, as amended to date. 3.2(2) Bylaws of Registrant, as amended to date. 4.1(3) Amended Modification Agreement including Registration Rights and Right of First Refusal dated June 12, 1991 between Registrant and certain security holders of Registrant. 4.2 Specimen of Registrant's Common Stock Certificate. 5.1 Opinion of Wilson Sonsini Goodrich & Rosati, P.C. 23.1 Consent of Independent Certified Public Accountants. 23.2 Consent of Counsel (included in Exhibit 5.1). 24.1 Power of Attorney (see page II-3).
- -------- (1) Incorporated by reference from the Company's annual report on Form 10-K for the period ended September 30, 1992. (2) Incorporated by reference from the Company's Registration Statement on Form S-1 (File no. 33-43548), effective December 10, 1991. (3) Confidential treatment previously granted as to certain portions of these exhibits. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 3,000,000 SHARES VITESSE SEMICONDUCTOR CORPORATION COMMON STOCK ($.01 PAR VALUE) UNDERWRITING AGREEMENT ---------------------- November __, 1996 LEHMAN BROTHERS INC. ROBERTSON, STEPHENS & COMPANY LLC OPPENHEIMER & CO., INC. As Representatives of the several Underwriters named in Schedule 1, c/o Lehman Brothers Inc. Three World Financial Center New York, New York 10285 Dear Sirs: Vitesse Semiconductor Corporation, a Delaware corporation (the "Company"), proposes to sell 3,000,000 shares (the "Firm Stock") of the Company's Common Stock, par value $.01 per share (the "Common Stock"). In addition, the Company proposes to grant to the Underwriters named in Schedule 1 hereto (the "Underwriters") an option to purchase up to an additional 450,000 shares of the Common Stock on the terms and for the purposes set forth in Section 2 (the "Option Stock"). The Firm Stock and the Option Stock, if purchased, are hereinafter collectively called the "Stock." This is to confirm the agreement concerning the purchase of the Stock from the Company by the Underwriters. 1. Representations, Warranties and Agreements of the Company. The Company represents, warrants and agrees that: (a) A registration statement on Form S-3 with respect to the Stock has (i) been prepared by the Company in conformity with the requirements of the United States Securities Act of 1933 (the "Securities Act") and the rules and regulations (the "Rule and Regulations") of the United States Securities and Exchange Commission (the "Commission") thereunder, (ii) been filed with the Commission under the Securities Act and (iii) become effective under the Securities Act. Copies of such registration statement have been delivered by the Company to you as the representatives (the "Representatives") of the Underwriters. As used in this Agreement, "Effective Time" means the date and the time as of which such registration statement, or the most recent post-effective amendment thereto, if any, was declared effective by the Commission; "Effective Date" means the date of the Effective Time; "Preliminary Prospectus" means each prospectus included in such registration statement, or amendments thereof, before it became effective under the Securities Act and any prospectus filed with the Commission by the Company with the consent of the Representatives pursuant to Rule 424(a) of the Rules and Regulations; "Registration Statement" means such registration statement, as amended at the Effective Time, including any documents incorporated by reference therein at such time and all information contained in the final prospectus filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations in accordance with Section 5 hereof and deemed to be a part of the registration statement as of the Effective Time pursuant to paragraph (b) of Rule 430A of the Rules and Regulations; and "Prospectus" means such final prospectus, as first filed with the Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules and Regulations. Reference made herein to any Preliminary Prospectus or to the Prospectus shall be deemed to refer to and include any documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the Securities Act, as of the date of such Preliminary Prospectus or the Prospectus, as the case may be, and any reference to any amendment or supplement to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and include any document filed under the United States Securities Exchange Act of 1934 (the "Exchange Act") after the date of such Preliminary Prospectus or the Prospectus, as the case may be, and incorporated by reference in such Preliminary Prospectus or the Prospectus, as the case may be; and any reference to any amendment to the Registration Statement shall be deemed to include any annual report of the Company filed with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act after the Effective Time that is incorporated by reference in the Registration Statement. The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus. (b) The Registration Statement conforms, and the Prospectus and any further amendments or supplements to the Registration Statement or the Prospectus will, when they become effective or are filed with the Commission, as the case may be, conform in all respects to the requirements of the Securities Act and the Rules and Regulations and do not and will not, as of the applicable effective date (as to the Registration Statement and any amendment thereto) and as of the applicable filing date (as to the Prospectus and any amendment or supplement thereto) contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that no representation or warranty is made as to information contained in or omitted from the Registration Statement or the Prospectus in reliance upon and in conformity with written information furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. 2 (c) The documents incorporated by reference in the Prospectus, when they became effective or were filed with the Commission, as the case may be, conformed in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and any further documents so filed and incorporated by reference in the Prospectus, when such documents are filed with Commission will conform in all material respects to the requirements of the Exchange Act and the rules and regulations of the Commission thereunder and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (d) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction in which its ownership or lease of property or the conduct of its business requires such qualification, and has all power and authority necessary to own or hold its properties and to conduct the business in which it is engaged; and the Company has no subsidiaries. The Company does not own or control, directly or indirectly, any corporation, association or other entity. (e) The Company has an authorized capitalization as set forth in the Prospectus, and all of the issued shares of capital stock of the Company have been duly and validly authorized and issued, are fully paid and non-assessable and conform to the description thereof contained in the Prospectus. (f) The unissued shares of the Stock to be issued and sold by the Company to the Underwriters hereunder have been duly and validly authorized and, when issued and delivered against payment therefor as provided herein, will be duly and validly issued, fully paid and non- assessable; and the Stock will conform to the description thereof contained in the Prospectus. (g) This Agreement has been duly authorized, executed and delivered by the Company. (h) The execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby will not conflict with or result in a breach or violation of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company is a party or by which the Company is bound or to which any of the property or assets of the Company is subject, nor will such actions result in any violation of the provisions of the charter or by-laws of the Company or any statute or any order, rule or regulation of any court or governmental agency or body having jurisdiction over 3 the Company or any of its properties or assets; and except for the registration of the Stock under the Securities Act and such consents, approvals, authorizations, registrations or qualifications as may be required under the Exchange Act and applicable state securities laws in connection with the purchase and distribution of the Stock by the Underwriters, no consent, approval, authorization or order of, or filing or registration with, any such court or governmental agency or body is required for the execution, delivery and performance of this Agreement by the Company and the consummation of the transactions contemplated hereby. (i) There are no contracts, agreements or understandings between the Company and any person granting such person the right (other than rights which have been waived or satisfied) to require the Company to file a registration statement under the Securities Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Securities Act. (j) Except as described in the Prospectus, the Company has not sold or issued any shares of Common Stock during the six-month period preceding the date of the Prospectus, including any sales pursuant to Rule 144A under, or Regulations D or S of, the Securities Act, other than shares issued pursuant to employee benefit plans, qualified stock options plans or other employee compensation plans or pursuant to outstanding options, rights or warrants. (k) The Company has not sustained, since the date of the latest audited financial statements included in the Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus; and, since such date, there has not been any change in the capital stock or long-term debt of the Company or any of its subsidiaries or any material adverse change, or any development involving a prospective material adverse change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company, otherwise than as set forth or contemplated in the Prospectus. (l) The financial statements (including the related notes and supporting schedules) filed as part of the Registration Statement or included in the Prospectus present fairly the financial condition and results of operations of the entities purported to be shown thereby, at the dates and for the periods indicated, and have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved. 4 (m) KPMG Peat Marwick LLP, who have certified certain financial statements of the Company, whose report appears in the Prospectus and who have delivered the initial letter referred to in Section 7(g) hereof, are independent public accountants as required by the Securities Act and the Rules and Regulations. (n) The Company has good and marketable title in fee simple to all real property and good and marketable title to all personal property owned by it, in each case free and clear of all liens, encumbrances and defects except such as are described in the Prospectus or such as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company; and all real property and buildings held under lease by the Company are held by it under valid, subsisting and enforceable leases, with such exceptions as are not material and do not interfere with the use made and proposed to be made of such property and buildings by the Company. (o) The Company carries, or is covered by, insurance in such amounts and covering such risks as is adequate for the conduct of its business and the value of its properties and as is customary for companies engaged in similar businesses in similar industries. (p) The Company owns or possesses adequate rights to use all material patents, patent applications, trademarks, service marks, trade names, trademark registrations, service mark registrations, copyrights and licenses necessary for the conduct of its business and has no reason to believe that the conduct of its business will conflict with, and have not received any notice of any claim of conflict with, any such rights of others. (q) There are no legal or governmental proceedings pending to which the Company is a party or of which any property or assets of the Company or any of its subsidiaries is the subject which, if determined adversely to the Company, might have a material adverse effect on the consolidated financial position, stockholders' equity, results of operations, business or prospects of the Company; and to the best of the Company's knowledge, no such proceedings are threatened or contemplated by governmental authorities or threatened by others. (r) The conditions for use of Form S-3, as set forth in the General Instructions thereto, have been satisfied. (s) There are no contracts or other documents which are required to be described in the Prospectus or filed as exhibits to the Registration Statement by the Securities Act or by the Rules and Regulations which have not been described in the Prospectus or filed as exhibits to the Registration Statement or incorporated therein by reference as permitted by the Rules and Regulations. (t) No labor disturbance by the employees of the Company exists or, to the knowledge of the Company, is imminent which might be expected to have a 5 material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company. (u) The Company has filed all federal, state and local income and franchise tax returns required to be filed through the date hereof and has paid all taxes due thereon, and no tax deficiency has been determined adversely to the Company which has had (nor does the Company have any knowledge of any tax deficiency which, if determined adversely to the Company might have) a material adverse effect on the financial position, stockholders' equity, results of operations, business or prospects of the Company. (v) The Company (i) makes and keeps accurate books and records and (ii) maintains internal accounting controls which provide reasonable assurance that (A) transactions are executed in accordance with management's authorization, (B) transactions are recorded as necessary to permit preparation of its financial statements and to maintain accountability for its assets, (C) access to its assets is permitted only in accordance with management's authorization and (D) the reported accountability for its assets is compared with existing assets at reasonable intervals. (w) The Company (i) is not in violation of its charter or by-laws, (ii) is in default in any material respect, and no event has occurred which, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant or condition contained in any material indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which it is a party or by which it is bound or to which any of its properties or assets is subject and (iii) is not in violation in any material respect of any law, ordinance, governmental rule, regulation or court decree to which it or its property or assets may be subject or has failed to obtain any material license, permit, certificate, franchise or other governmental authorization or permit necessary to the ownership of its property or to the conduct of its business. (x) There has been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, medical wastes, hazardous wastes or hazardous substances by the Company (or, to the knowledge of the Company, any of its predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit, except for any violation or remedial action which would not have, or could not be reasonably likely to have, singularly or in the aggregate with all such violations and remedial actions, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company; there has been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto 6 such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or with respect to which the Company has knowledge, except for any such spill, discharge, leak, emission, injection, escape, dumping or release which would not have or would not be reasonably likely to have, singularly or in the aggregate with all such spills, discharges, leaks, emissions, injections, escapes, dumpings and releases, a material adverse effect on the general affairs, management, financial position, stockholders' equity or results of operations of the Company; and the terms "hazardous wastes", "toxic wastes", "hazardous substances" and "medical wastes" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection. (y) Neither the Company nor any subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 2. Purchase of the Stock by the Underwriters. On the basis of the representations and warranties contained in, and subject to the terms and conditions of, this Agreement, the Company agrees to sell 3,000,000 shares of the Firm Stock to the several Underwriters and each of the Underwriters, severally and not jointly, agrees to purchase the number of shares of the Firm Stock set opposite that Underwriter's name in Schedule 1 hereto. The respective purchase obligations of the Underwriters with respect to the Firm Stock shall be rounded among the Underwriters to avoid fractional shares, as the Representatives may determine. In addition, the Company grants to the Underwriters an option to purchase up to 450,000 shares of Option Stock. Such option is granted solely for the purpose of covering over-allotments in the sale of Firm Stock and is exercisable as provided in Section 4 hereof. Shares of Option Stock shall be purchased severally for the account of the Underwriters in proportion to the number of shares of Firm Stock set opposite the name of such Underwriters in Schedule 1 hereto. The respective purchase obligations of each Underwriter with respect to the Option Stock shall be adjusted by the Representatives so that no Underwriter shall be obligated to purchase Option Stock other than in 100 share amounts. The price of both the Firm Stock and any Option Stock shall be $_____ per share. The Company shall not be obligated to deliver any of the Stock to be delivered on the First Delivery Date or the Second Delivery Date (as hereinafter defined), as the case may be, except upon payment for all the Stock to be purchased on such Delivery Date as provided herein. 3. Offering of Stock by the Underwriters. Upon authorization by the Representatives of the release of the Firm Stock, the several Underwriters propose to offer the Firm Stock for sale upon the terms and conditions set forth in the Prospectus. 7 4. Delivery of and Payment for the Stock. Delivery of and payment for the Firm Stock shall be made at the office of Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California at 7:00 A.M., Pacific time, on the fourth full business day following the date of this Agreement or at such other date or place as shall be determined by agreement between the Representatives and the Company. This date and time are sometimes referred to as the "First Delivery Date." On the First Delivery Date, the Company shall deliver or cause to be delivered certificates representing the Firm Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks payable in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Firm Stock shall be registered in such names and in such denominations as the Representatives shall request in writing not less than two full business days prior to the First Delivery Date. For the purpose of expediting the checking and packaging of the certificates for the Firm Stock, the Company shall make the certificates representing the Firm Stock available for inspection by the Representatives in New York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the First Delivery Date. At any time on or before the thirtieth day after the date of this Agreement the option granted in Section 2 may be exercised by written notice being given to the Company by the Representatives. Such notice shall set forth the aggregate number of shares of Option Stock as to which the option is being exercised, the names in which the shares of Option Stock are to be registered, the denominations in which the shares of Option stock are to be issued and the date and time, as determined by the representatives, when the shares of Option Stock are to be delivered; provided, however, that this date and time shall not be earlier than the First Delivery Date nor earlier than the second business day after the date on which the option shall have been exercised nor later than the fifth business day after the date on which the option shall have been exercised. The date and time the shares of Option Stock are delivered are sometimes referred to as the "Second Delivery Date," and the First Delivery Date and the Second Delivery Date are sometimes each referred to as a "Delivery Date". Delivery of and payment for the Option Stock shall be made at the place specified in the first sentence of the first paragraph of this Section 4 (or at such other place as shall be determined by agreement between the Representatives and the Company) at 7:00 A.M., Pacific time, on the Second Delivery Date. On the Second Delivery Date, the Company shall deliver or cause to be delivered the certificates representing the Option Stock to the Representatives for the account of each Underwriter against payment to or upon the order of the Company of the purchase price by certified or official bank check or checks payable in immediately available funds. Time shall be of the essence, and delivery at the time and place specified pursuant to this Agreement is a further condition of the obligation of each Underwriter hereunder. Upon delivery, the Option Stock shall be registered in such names and in such denominations as the Representatives shall request in the aforesaid written notice. For the purpose of expediting the checking and packaging of the certificates for the Option Stock, the Company shall make the certificates representing the Option Stock available for inspection by the Representatives in New 8 York, New York, not later than 2:00 P.M., New York City time, on the business day prior to the Second Delivery Date. 5. Further Agreements of the Company. The Company agrees: (a) To prepare the Prospectus in a form approved by the Representatives and to file such Prospectus pursuant to Rule 424(b) under the Securities Act not later than Commission's close of business on the second business day following the execution and delivery of this Agreement or, if applicable, such earlier time as may be required by Rule 430A(a)(3) under the Securities Act; to make no further amendment or any supplement to the Registration Statement or to the Prospectus prior to the last Delivery Date except as permitted herein; to advise the Representatives, promptly after it receives notice thereof, of the time when any amendment to the Registration Statement has been filed or becomes effective or any supplement to the Prospectus or any amended Prospectus has been filed and to furnish the Representatives with copies thereof; to file promptly all reports and any definitive proxy or information statements required to be filed by the Company with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of the Prospectus and for so long as the delivery of a prospectus is required in connection with the offering or sale of the Stock; to advise the Representatives, promptly after it receives notice thereof, of the issuance by the Commission of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus, of the suspension of the qualification of the Stock for offering or sale in any jurisdiction, of the initiation or threatening of any proceeding for any such purpose, or of any request by the Commission for the amending or supplementing of the Registration Statement or the Prospectus or for additional information; and, in the event of the issuance of any stop order or of any order preventing or suspending the use of any Preliminary Prospectus or the Prospectus or suspending any such qualification, to use promptly its best efforts to obtain its withdrawal; (b) To furnish promptly to each of the Representatives and to counsel for the Underwriters a signed copy of the Registration Statement as originally filed with the Commission, and each amendment thereto filed with the Commission, including all consents and exhibits filed therewith; (c) To deliver promptly to the Representatives such number of the following documents as the Representatives shall reasonably request: (i) conformed copies of the Registration Statement as originally filed with the Commission and each amendment thereto (in each case excluding exhibits other than this Agreement and the computation of per share earnings), (ii) each Preliminary Prospectus, the Prospectus and any amended or supplemented Prospectus and (iii) any document incorporated by reference in the Prospectus (excluding exhibits thereto); and, if the delivery of a prospectus is required at any time after the Effective Time in connection with the offering or sale of the Stock and if at such time any events 9 shall have occurred as a result of which the Prospectus as then amended or supplemented would include an untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made when such Prospectus is delivered, not misleading, or, if for any other reason it shall be necessary to amend or supplement the Prospectus or to file under the Exchange Act any document incorporated by reference in the Prospectus in order to comply with the Securities Act or the Exchange Act, to notify the Representatives and, upon their request, to file such document and to prepare and furnish without charge to each Underwriter and to any dealer in securities as many copies as the Representatives may from time to time reasonably request of an amended or supplemented Prospectus which will correct such statement or omission or effect such compliance. (d) To file promptly with the Commission any amendment to the Registration Statement or the Prospectus or any supplement to the Prospectus that may, in the judgment of the Company or the Representatives, be required by the Securities Act or requested by the Commission; (e) Prior to filing with the Commission any amendment to the Registration Statement or supplement to the Prospectus, any document incorporated by reference in the Prospectus or any Prospectus pursuant to Rule 424 of the Rules and Regulations, to furnish a copy thereof to the Representatives and counsel for the Underwriters and obtain the consent of the Representatives to the filing; (f) As soon as practicable after the Effective Date (it being understood that the Company shall have until at least 410 days after the end of the Company's current fiscal quarter), to make generally available to the Company's security holders and to deliver to the Representatives an earnings statement of the Company and its subsidiaries (which need not be audited) complying with Section 11(a) of the Securities Act and the Rules and Regulations (including, at the option of the Company, Rule 158); (g) For a period of five years following the Effective Date, to furnish to the Representatives copies of all materials furnished by the Company to its shareholders and all public reports and all reports and financial statements furnished by the Company to the principal national securities exchange upon which the Common Stock may be listed pursuant to requirements of or agreements with such exchange or to the Commission pursuant to the Exchange Act or any rule or regulation of the Commission thereunder; (h) Promptly from time to time to take such action as the Representatives may reasonably request to qualify the Stock for offering and sale under the securities laws of such jurisdictions as the Representatives may request and to comply with such laws so as to permit the continuance of sales and dealings therein in such 10 jurisdictions for as long as may be necessary to complete the distribution of the Stock; provided that in connection therewith the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction; (i) For a period of 90 days from the date of the Prospectus, not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock (other than the Stock and shares issued pursuant to employee benefit plans, qualified stock option plans or other employee compensation plans existing on the date hereof or pursuant to currently outstanding options, warrants or rights), or sell or grant options, rights or warrants with respect to any shares of Common Stock (other than the grant of options pursuant to option plans existing on the date hereof), without the prior written consent of Lehman Brothers Inc.; and to cause each officer and director of the Company to furnish to the Representatives, prior to the First Delivery Date, a letter or letters, in form and substance satisfactory to counsel for the Underwriters, pursuant to which each such person shall agree not to, directly or indirectly, offer for sale, sell or otherwise dispose of (or enter into any transaction or device which is designed to, or could be expected to, result in the disposition by any person at any time in the future of) any shares of Common Stock for a period of 90 days from the date of the Prospectus, without the prior written consent of Lehman Brothers Inc.; (j) Prior to the Effective Date, to apply for the inclusion of the Stock on the National Market System and to use its best efforts to complete that listing, subject only to official notice of issuance, prior to the First Delivery Date; (k) To apply the net proceeds from the sale of the Stock being sold by the Company as set forth in the Prospectus; and (l) To take such steps as shall be necessary to ensure that neither the Company nor any subsidiary shall become an "investment company" within the meaning of such term under the Investment Company Act of 1940 and the rules and regulations of the Commission thereunder. 6. Expenses. The Company agrees to pay (a) the costs incident to the authorization, issuance, sale and delivery of the Stock and any taxes payable in that connection; (b) the costs incident to the preparation, printing and filing under the Securities Act of the Registration Statement and any amendments and exhibits thereto; (c) the costs of distributing the Registration Statement as originally filed and each amendment thereto and any post-effective amendments thereof (including, in each case, exhibits), any Preliminary Prospectus, the Prospectus and any amendment or supplement to the Prospectus or any document incorporated by reference therein, all as provided in this Agreement; (d) the costs of producing and distributing this Agreement and any other related documents in connection with the offering, 11 purchase, sale and delivery of the stock; (e) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of sale of the Stock; (f) any applicable listing or other fees; (g) the fees and expenses of qualifying the Stock under the securities laws of the several jurisdictions as provided in Section 5; (h) and of preparing, printing and distributing a Blue Sky Memorandum (including related fees and expenses of counsel to the Underwriters); and (i) all other costs and expenses incident to the performance of the obligations of the Company; provided that, except as provided in this Section 6 and in Section 11 the Underwriters shall pay their own costs and expenses, including the costs and expenses of their counsel, any transfer taxes on the Stock which they may sell and the expenses of advertising any offering of the Stock made by the Underwriters. 7. Conditions of Underwriters' Obligations. The respective obligations of the Underwriters hereunder are subject to the accuracy, when made and on each Delivery Date, of the representations and warranties of the Company contained herein, to the performance by the Company of its obligations hereunder, and to each of the following additional terms and conditions: (a) The Prospectus shall have been timely filed with the Commission in accordance with Section 5(a); no stop order suspending the effectiveness of the Registration Statement or any part thereof shall have been issued and no proceeding for that purpose shall have been initiated or threatened by the Commission; and any request of the Commission for inclusion of additional information in the Registration Statement or the Prospectus or otherwise shall have been complied with. (b) No Underwriter shall have discovered and disclosed to the Company on or prior to such Delivery Date that the Registration Statement or the Prospectus or any amendment or supplement thereto contains an untrue statement of a fact which, in the opinion of Latham & Watkins, counsel for the Underwriters, is material or omits to state a fact which, in the opinion of such counsel, is material and is required to be stated therein or is necessary to make the statements therein not misleading. (c) All corporate proceedings and other legal matters incident to the authorization, form and validity of this Agreement, the Stock, the Registration Statement and the Prospectus, and all other legal matters relating to this Agreement and the transactions contemplated hereby shall be reasonably satisfactory in all material respects to counsel for the Underwriters, and the Company shall have furnished to such counsel all documents and information that they may reasonably request to enable them to pass upon such matters. (d) Wilson Sonsini Goodrich & Rosati, P.C. shall have furnished to the Representatives its written opinion, as counsel to the Company, addressed to the Underwriters and dated such Delivery Date, in form and substance reasonably satisfactory to the Representatives, to the effect that: 12 (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of Delaware; (ii) The Company has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a material adverse effect on the condition (financial or otherwise), earnings, operations or business of the Company. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity; (iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" as of the dates stated therein, the issued and outstanding shares of capital stock of the Company have been duly and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) The shares of Firm Stock or Option Stock, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of, to such counsel's knowledge, any preemptive right, co-sale right, registration right, right of first refusal or other similar right granted in any case by the Company; (vi) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the shares of Stock to be issued and sold by it hereunder; (vii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except insofar as indemnification provisions may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or 13 similar laws relating to or affecting creditors' rights generally or by general equitable principles; (viii) The Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (ix) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations, and the documents incorporated by reference in the Prospectus and any further amendment or supplement to any such incorporated document made by the Company prior to such Delivery Date (other than the financial statements (including supporting schedules) and financial data derived therefrom as to which such counsel need express no opinion) when they became effective or were filed with the Commission, as the case may be, complied as to form in all material respects with the requirements of the Exchange Act and the rules and regulations of the Commission thereunder; (x) The description of capital stock contained in or incorporated by reference in the Prospectus, to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; (xi) The description contained in or incorporated by reference in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act and the applicable Rules and Regulations; (xii) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement (or to any documents incorporated therein by reference) which are not described or referred to therein or filed as required; 14 (xiii) The performance of this Agreement and the consummation of the transactions herein contemplated (other than performance of the Company's indemnification obligations hereunder, concerning which no opinion need be expressed) will not (a) result in any violation of the Company's charter or bylaws or (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any material bond, debenture, note or other evidence of indebtedness, or any material lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations; (xiv) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except such as have been obtained under the Securities Act or such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters; (xv) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the Rules and Regulations, other than those described therein; (xvi) To such counsel's knowledge, the Company is not presently (a) in material violation of its charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company, or over any of its properties or operations; and (xvii) To such counsel's knowledge, all holders of securities of the Company having rights known to such counsel to registration of such shares of Common Stock or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement. 15 In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, counsel for the Underwriters and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that (I) the Registration Statement and any amendment or supplement thereto, as of the Effective Date and at all times subsequent thereto up to the Delivery Date, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading or (II) any document incorporated by reference in the Prospectus or any further amendment or supplement to any such incorporated document made by the Company prior to such Delivery Date, when it became effective or was filed with the Commission, as the case may be, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading (in the case of each of (I) and (II), excluding the financial statements and supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment). Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of California and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to counsel for the Underwriters. (e) The Representatives shall have received from Latham & Watkins, counsel for the Underwriters, such opinion or opinions, dated such Delivery Date, with respect to the issuance and sale of the Stock, the Registration Statement, the Prospectus and other related matters as the Representatives may reasonably require, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (f) At the time of execution of this Agreement, the Representatives shall have received from KPMG Peat Marwick LLP a letter, in form and substance 16 satisfactory to the Representatives, addressed to the Underwriters and dated the date hereof (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date hereof (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date hereof), the conclusions and findings of such firm with respect to the financial information and other matters ordinarily covered by accountants' "comfort letters" to underwriters in connection with registered public offerings. (g) With respect to the letter of KPMG Peat Marwick LLP referred to in the preceding paragraph and delivered to the Representatives concurrently with the execution of this Agreement (the "initial letter"), the Company shall have furnished to the Representatives a letter (the "bring-down letter") of such accountants, addressed to the Underwriters and dated such Delivery Date (i) confirming that they are independent public accountants within the meaning of the Securities Act and are in compliance with the applicable requirements relating to the qualification of accountants under Rule 2-01 of Regulation S-X of the Commission, (ii) stating, as of the date of the bring-down letter (or, with respect to matters involving changes or developments since the respective dates as of which specified financial information is given in the Prospectus, as of a date not more than five days prior to the date of the bring-down letter), the conclusions and findings of such firm with respect to the financial information and other matters covered by the initial letter and (iii) confirming in all material respects the conclusions and findings set forth in the initial letter. (h) The Company shall have furnished to the Representatives a certificate, dated such Delivery Date, of its Chairman of the Board, its President or a Vice President and its Chief Financial Officer stating that: (i) The representations, warranties and agreements of the Company in Section 1 are true and correct as of such Delivery Date; the Company has complied with all its agreements contained herein; and the conditions set forth in Sections 7(a) and 7(i) have been fulfilled; and (ii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion (A) as of the Effective Date, the Registration Statement and Prospectus did not include any untrue statement of a material fact and did not omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) since the Effective Date no event has occurred which should have been set forth in a supplement or amendment to the Registration Statement or the Prospectus. 17 (i)(A) The Company shall not have sustained since the date of the latest audited financial statements included or incorporated by reference in the Prospectus any loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court or governmental action, order or decree, otherwise than as set forth or contemplated in the Prospectus and (B) since such date there shall not have been any change in the capital stock or long-term debt of the Company or any change, or any development involving a prospective change, in or affecting the general affairs, management, financial position, stockholders' equity or results of operations of the Company, otherwise than as set forth or contemplated in the Prospectus, the effect of which, in any such case described in clause (A) or (B), is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the public offering or the delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. (j) Subsequent to the execution and delivery of this Agreement there shall not have occurred any of the following: (i) trading in securities generally on the New York Stock Exchange or the American Stock Exchange or in the over-the-counter market, or trading in any securities of the Company on any exchange or in the over-the-counter market, shall have been suspended or minimum prices shall have been established on any such exchange or such market by the Commission, by such exchange or by any other regulatory body or governmental authority having jurisdiction, (ii) a banking moratorium shall have been declared by Federal or state authorities, (iii) the United States shall have become engaged in hostilities, there shall have been an escalation in hostilities involving the United States or there shall have been a declaration of a national emergency or war by the United States or (iv) there shall have occurred such a material adverse change in general economic, political or financial conditions (or the effect of international conditions on the financial markets in the United States shall be such) as to make it, in the judgment of a majority in interest of the several Underwriters, impracticable or inadvisable to proceed with the public offering or delivery of the Stock being delivered on such Delivery Date on the terms and in the manner contemplated in the Prospectus. All opinions, letters, evidence and certificates mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in form and substance reasonably satisfactory to counsel for the Underwriters. 8. Indemnification and Contribution. (a) The Company shall indemnify and hold harmless each Underwriter its officers and employees and each person, if any, who controls any Underwriter within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof (including, but not limited to, any loss, claim, damage, 18 liability or action relating to purchases and sales of Stock), to which that Underwriter, officer, employee or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto or (B) in any blue sky application or other document prepared or executed by the Company (or based upon any written information furnished by the Company) specifically for the purpose of qualifying any or all of the Stock under the securities laws of any state or other jurisdiction (any such application, document or information being hereinafter called a "Blue Sky Application"), (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse each Underwriter and each such officer, employee or controlling person promptly upon demand for any legal or other expenses reasonably incurred by that Underwriter, officer, employee or controlling person in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of, or is based upon, any untrue statement or alleged untrue statement or omission or alleged omission made in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any such amendment or supplement, or in any Blue Sky Application, in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of any Underwriter specifically for inclusion therein. The foregoing indemnity agreement is in addition to any liability which the Company may otherwise have to any Underwriter or to any officer, employee or controlling person of that Underwriter. (b) Each Underwriter, severally and not jointly, shall indemnify and hold harmless the Company, its officers and employees, each of its directors, and each person, if any, who controls the Company within the meaning of the Securities Act, from and against any loss, claim, damage or liability, joint or several, or any action in respect thereof, to which the Company or any such director, officer or controlling person may become subject, under the Securities Act or otherwise, insofar as such loss, claim, damage, liability or action arises out of, or is based upon, (i) any untrue statement or alleged untrue statement of a material fact contained (A) in any Preliminary Prospectus, the Registration Statement or the Prospectus or in any amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the omission or alleged omission to state in any Preliminary Prospectus, the Registration Statement or the Prospectus, or in any amendment or supplement thereto, or in any Blue Sky Application any material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that the untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information concerning such Underwriter furnished to the Company through the Representatives by or on behalf of that Underwriter specifically for inclusion therein, and shall reimburse the Company and any such director, officer or controlling person for any legal or other expenses reasonably incurred by the Company or any such director, officer or controlling person 19 in connection with investigating or defending or preparing to defend against any such loss, claim, damage, liability or action as such expenses are incurred. The foregoing indemnity agreement is in addition to any liability which any Underwriter may otherwise have to the Company or any such director, officer, employee or controlling person. (c) Promptly after receipt by an indemnified party under this Section 8 of notice of any claim or the commencement of any action, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Section 8, notify the indemnifying party in writing of the claim or the commencement of that action; provided, however, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have under this Section 8 except to the extent it has been materially prejudiced by such failure and, provided further, that the failure to notify the indemnifying party shall not relieve it from any liability which it may have to an indemnified party otherwise than under this Section 8. If any such claim or action shall be brought against an indemnified party, and it shall notify the indemnifying party thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it wishes, jointly with any other similarly notified indemnifying party, to assume the defense thereof with counsel reasonably satisfactory to the indemnified party. After notice from the indemnifying party to the indemnified party of its election to assume the defense of such claim or action, the indemnifying party shall not be liable to the indemnified party under this Section 8 for any legal or other expenses subsequently incurred by the indemnified party in connection with the defense thereof other than reasonable costs of investigation; provided, however, that the Representatives shall have the right to employ counsel to represent jointly the Representatives and those other Underwriters and their respective officers, employees and controlling persons who may be subject to liability arising out of any claim in respect of which indemnity may be sought by the Underwriters against the Company under this Section 8 if, in the reasonable judgment of the Representatives, it is advisable for the Representatives and those Underwriters, officers, employees and controlling persons to be jointly represented by separate counsel, and in that event the fees and expenses of such separate counsel shall be paid by the Company. No indemnifying party shall (i) without the prior written consent of the indemnified parties (which consent shall not be unreasonably withheld), settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding, or (ii) be liable for any settlement of any such action effected without its written consent (which consent shall not be unreasonably withheld), but if settled with the consent of the indemnifying party or if there be a final judgment of the plaintiff in any such action, the indemnifying party agrees to indemnify and hold harmless any indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 shall for any reason be unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or 8(b) in respect of any loss, claim, damage or liability, or any action in respect thereof, referred to therein, then each indemnifying party shall, in lieu of indemnifying such indemnified party, contribute to 20 the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability, or action in respect thereof, (i) in such proportion as shall be appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Stock or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company on the one hand and the Underwriters on the other with respect to the statements or omissions which resulted in such loss, claim, damage or liability, or action in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriters on the other with respect to such offering shall be deemed to be in the same proportion as the total net proceeds from the offering of the Stock purchased under this Agreement (before deducting expenses) received by the Company, on the one hand, and the total underwriting discounts and commissions received by the Underwriters with respect to the shares of the Stock purchased under this Agreement, on the other hand, bear to the total gross proceeds from the offering of the shares of the Stock under this Agreement, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section were to be determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, damage or liability, or action in respect thereof, referred to above in this Section shall be deemed to include, for purposes of this Section 8(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 8(d), no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Stock underwritten by it and distributed to the public was offered to the public exceeds the amount of any damages which such Underwriter has otherwise paid or become liable to pay by reason of any untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 8(d) are several in proportion to their respective underwriting obligations and not joint. (e) The Underwriters severally confirm and the Company acknowledges that the statements with respect to the public offering of the Stock by the Underwriters set forth on the cover page of, the legend concerning over- allotments on the inside front cover page of and the concession and reallowance figures appearing under the caption "Underwriting" in, the Prospectus are correct and constitute the only information concerning such Underwriters furnished in writing to the Company by or on behalf of the Underwriters specifically for inclusion in the Registration Statement and the Prospectus. 21 9. Defaulting Underwriters. If, on either Delivery Date, any Underwriter defaults in the performance of its obligations under this Agreement, the remaining non-defaulting Underwriters shall be obligated to purchase the Stock which the defaulting Underwriter agreed but failed to purchase on such Delivery Date in the respective proportions which the number of shares of the Firm Stock set opposite the name of each remaining non-defaulting Underwriter in Schedule 1 hereto bears to the total number of shares of the Firm Stock set opposite the names of all the remaining non-defaulting Underwriters in Schedule 1 hereto; provided, however, that the remaining non-defaulting Underwriters shall not be obligated to purchase any of the Stock on such Delivery Date if the total number of shares of the Stock which the defaulting Underwriter or Underwriters agreed but failed to purchase on such date exceeds 9.09% of the total number of shares of the Stock to be purchased on such Delivery Date, and any remaining non-defaulting Underwriter shall not be obligated to purchase more than 110% of the number of shares of the Stock which it agreed to purchase on such Delivery Date pursuant to the terms of Section 2. If the foregoing maximums are exceeded, the remaining non-defaulting Underwriters, or those other underwriters satisfactory to the Representatives who so agree, shall have the right, but shall not be obligated, to purchase, in such proportion as may be agreed upon among them, all the Stock to be purchased on such Delivery Date. If the remaining Underwriters or other underwriters satisfactory to the Representatives do not elect to purchase the shares which the defaulting Underwriter or Underwriters agreed but failed to purchase on such Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the obligation of the Underwriters to purchase, and of the Company to sell, the Option Stock) shall terminate without liability on the part of any non-defaulting Underwriter or the Company, except that the Company will continue to be liable for the payment of expenses to the extent set forth in Sections 6 and 11. As used in this Agreement, the term "Underwriter" includes, for all purposes of this Agreement unless the context requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to this Section 9, purchases Firm Stock which a defaulting Underwriter agreed but failed to purchase. Nothing contained herein shall relieve a defaulting Underwriter of any liability it may have to the Company for damages caused by its default. If other underwriters are obligated or agree to purchase the Stock of a defaulting or withdrawing Underwriter, either the Representatives or the Company may postpone the Delivery Date for up to seven full business days in order to effect any changes that in the opinion of counsel for the Company or counsel for the Underwriters may be necessary in the Registration Statement, the Prospectus or in any other document or arrangement. 10. Termination. The obligations of the Underwriters hereunder may be terminated by the Representatives by notice given to and received by the Company prior to delivery of and payment for the Firm Stock if, prior to that time, any of the events described in Sections 7(i) or 7(j), shall have occurred or if the Underwriters shall decline to purchase the Stock for any reason permitted under this Agreement. 11. Reimbursement of Underwriters' Expenses. If (a) the Company shall fail to tender the Stock for delivery to the Underwriters by reason of any failure, refusal or inability on the part of the Company to perform any agreement on its part to be performed, or because any other condition of the Underwriters' obligations hereunder required to be fulfilled by the 22 Company is not fulfilled, the Company will reimburse the Underwriters for all reasonable out-of-pocket expenses (including fees and disbursements of counsel) incurred by the Underwriters in connection with this Agreement and the proposed purchase of the Stock, and upon demand the Company shall pay the full amount thereof to the Representatives. If this Agreement is terminated pursuant to Section 9 by reason of the default of one or more Underwriters, the Company shall not be obligated to reimburse any defaulting Underwriter on account of those expenses. 12. Notices, etc. All statements, requests, notices and agreements hereunder shall be in writing, and: (a) if to the Underwriters, shall be delivered or sent by mail, telex or facsimile transmission to Lehman Brothers Inc., Three World Financial Center, New York, New York 10285, Attention: Syndicate Department (Fax: 212-526-6588), with a copy, in the case of any notice pursuant to Section 8(c), to the Director of Litigation, Office of the General Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor, New York, NY 10285; (b) if to the Company shall be delivered or sent by mail, telex or facsimile transmission to the address of the Company set forth in the Registration Statement, Attention: Louis R. Tomassetta, President and Chief Executive Officer; provided, however, that any notice to an Underwriter pursuant to Section 8(c) shall be delivered or sent by mail, telex or facsimile transmission to such Underwriter at its address set forth in its acceptance telex to the Representatives, which address will be supplied to any other party hereto by the Representatives upon request. Any such statements, requests, notices or agreements shall take effect at the time of receipt thereof. The Company shall be entitled to act and rely upon any request, consent, notice or agreement given or made on behalf of the Underwriters by Lehman Brothers Inc. 13. Persons Entitled to Benefit of Agreement. This Agreement shall inure to the benefit of and be binding upon the Underwriters, the Company, and their respective successors. This Agreement and the terms and provisions hereof are for the sole benefit of only those persons, except that (A) the representations, warranties, indemnities and agreements of the Company contained in this Agreement shall also be deemed to be for the benefit of the person or persons, if any, who control any Underwriter within the meaning of Section 15 of the Securities Act and (B) the indemnity agreement of the Underwriters contained in Section 8(b) of this Agreement shall be deemed to be for the benefit of directors of the Company, officers of the Company who have signed the Registration Statement and any person controlling the Company within the meaning of Section 13 of the Securities Act. Nothing in this Agreement is intended or shall be construed to give any person, other than the persons referred to in this Section 13, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 23 14. Survival. The respective indemnities, representations, warranties and agreements of the Company and the Underwriters contained in this Agreement or made by or on behalf on them, respectively, pursuant to this Agreement, shall survive the delivery of and payment for the Stock and shall remain in full force and effect, regardless of any investigation made by or on behalf of any of them or any person controlling any of them. 15. Definition of the Terms "Business Day" and "Subsidiary". For purposes of this Agreement, (a) "business day" means any day on which the New York Stock Exchange, Inc. is open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of the Rules and Regulations. 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK. 17. Counterparts. This Agreement may be executed in one or more counterparts and, if executed in more than one counterpart, the executed counterparts shall each be deemed to be an original but all such counterparts shall together constitute one and the same instrument. 18. Headings. The headings herein are inserted for convenience of reference only and are not intended to be part of, or to affect the meaning or interpretation of, this Agreement. If the foregoing correctly sets forth the agreement between the Company and the Underwriters, please indicate your acceptance in the space provided for that purpose below. Very truly yours, VITESSE SEMICONDUCTOR CORPORATION By ------------------------------------- President and Chief Executive Officer Accepted: LEHMAN BROTHERS INC. ROBERTSON, STEPHENS & COMPANY LLC OPPENHEIMER & CO., INC. For themselves and as Representatives of the several Underwriters named in Schedule 1 hereto By LEHMAN BROTHERS INC. By ------------------------------- Authorized Representative 24 SCHEDULE 1
Number of Underwriters Shares - ------------ ------ Lehman Brothers Inc. ............................. Robertson, Stephens & Company LLC ................ Oppenheimer & Co., Inc. .......................... --------- Total 3,000,000 =========
25 EX-4.2 3 SPECIMEN OF REGISTRANT'S COMMON STOCK CERTIFICATE EXHIBIT 4.2 VITESSE SEMICONDUCTOR CORPORATION NUMBER SHARES SD INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR THE STATE OF DELAWARE CERTAIN DEFINITIONS AND A STATEMENT AS TO THE RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTION OF SHARES This Certifies that CUSIP 928497 10 6 is the record holder of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF VITESSE SEMICONDUCTOR CORPORATION transferable on the books of the Corporation by the holder hereof in person or by duly authorized Attorney upon surrender of this certificate duly endorsed. This certificate is not valid until countersigned by the Transfer Agent and Registrar. IN WITNESS WHEREOF the Corporation has caused this certificate to be signed in facsimile by its duly authorized officers and sealed with a facsimile of its corporate seal. Dated (Signature) (Signature) - ------------------------------ ----------------------------- Secretary President and Chief Executive Officer [VITESS SEMICONDUCTOR CORPORATION CORPORATE SEAL FEBRUARY 3, 1987 * DELAWARE *] COUNTERSIGNED AND REGISTERED: THE FIRST NATIONAL BANK OF BOSTON TRANSFER AGENT AND REGISTRAR BY [Signature] - ------------------------------ AUTHORIZED SIGNATURE VITESSE SEMICONDUCTOR CORPORATION The Corporation is authorized to issue two classes of stock, Common Stock and Preferred Stock. The Board of Directors of the Corporation has the power to fix the number of shares and the designation of a series of Preferred Stock and to determine or alter the rights, preferences, privileges, and restrictions granted to or imposed upon any unissued series of Preferred Stock. A statement of the rights, preferences, privileges and restrictions granted to or imposed upon the respective classes or series of shares of stock of the Corporation, and upon the holders thereof as established by the Certificate of Incorporation or by any certificate of determination of preferences, and the number of shares constituting each series or class and the designations thereof, may be obtained by any stockholder of the Corporation upon request and without charge from the Secretary of the Corporation at the principal office of the Corporation. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT-- ___________Custodian____________ TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act_____________________________ in common (State) COM PROP -- as community property UNIF TRF MIN ACT-- ______Custodian (until age______) ________ under Uniform Transfers (Minor) to Minors Act___________________ (State)
Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, __________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------------- - ---------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------Shares of the Common Stock represented by the within certificate, and do hereby irrevocably constitute and appoint - ----------------------------------------------------------------------- Attorney to transfer the said shares on the books of the within named Corporation with full power of substitution in the premises. Dated ----------------------------- X_______________________________________ THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON NOTICE: THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed By: BY ----------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17ad-15. EX-5.1 4 OPINION OF COUNSEL EXHIBIT 5.1 October 23, 1996 Vitesse Semiconductor Corporation 741 Calle Plano Camarillo, CA 93012 Re: Registration Statement on Form S-3 ---------------------------------- Ladies and Gentlemen: We have examined the Registration Statement on Form S-3, filed by you with the Securities and Exchange Commission (the "Commission") on October 22, 1996 (the "Registration Statement"), in connection with the registration under the Securities Act of 1933, as amended, of 3,450,000 shares (the "Shares") of your Common Stock (including 450,000 Shares subject to an Underwriters' over allotment option). As your counsel in connection with this transaction, we have examined the proceedings taken and are familiar with the proceedings proposed to be taken by you in connection with the sale and issuance of the Shares. It is our opinion that upon conclusion of the proceedings being taken or contemplated by us, as your counsel, to be taken prior to the issuance of the Shares, and upon your completion of the proceedings being taken in order to permit such transactions to be carried out in accordance with the securities laws of the various states where required, the Shares, when issued and sold in the manner described in the Registration Statement, will be legally and validly issued, fully paid and non-assessable. We consent to the use of this opinion as an exhibit to the Registration Statement, and further consent to the use of our name wherever appearing in the Registration Statement, including the prospectus constituting a part thereof, and any amendment thereto. Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation /s/ Wilson Sonsini Goodrich & Rosati EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 The Board of Directors and Shareholders Vitesse Semiconductor Corporation: We consent to the use of our reports included herein and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the prospectus. KPMG Peat Marwick LLP Los Angeles, California October 21, 1996 -----END PRIVACY-ENHANCED MESSAGE-----