-----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, VLSr1lCZ6V21tbwjAFT2QqSW2Y3oEu0LTX/9NeIyzVWuaewfX5f6R1NsGd+3ezje FGj31ixS96ApfmTny6QE1g== 0000898430-97-000577.txt : 19970222 0000898430-97-000577.hdr.sgml : 19970222 ACCESSION NUMBER: 0000898430-97-000577 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 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: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19654 FILM NUMBER: 97531824 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 10-Q 1 FORM 10-Q FOR THE QUARTERLY PERIOD ENDED 12/31/96 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1996 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ...... TO ...... COMMISSION FILE NUMBER 0-19654 - -------------------------------------------------------------------------------- VITESSE SEMICONDUCTOR CORPORATION (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- DELAWARE 77-0138960 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 741 CALLE PLANO CAMARILLO, CA 93012 (Address of principal executive offices) (805) 388-3700 (Registrant's telephone number, including area code) ------------------------ INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS: YES [X] NO [ ] AS OF DECEMBER 31, 1996, THERE WERE 22,920,833 SHARES OF $0.01 PAR VALUE COMMON STOCK OUTSTANDING. ================================================================================ VITESSE SEMICONDUCTOR CORPORATION TABLE OF CONTENTS ----------------- Page Number PART I FINANCIAL INFORMATION Item 1 Financial Statements: Balance Sheets as of December 31, 1996 and 2 September 30, 1996 Statements of Operations for the Three Months 3 ended December 31, 1996, September 30, 1996, and December 31, 1995 Statements of Cash Flows for the Three Months 4 ended December 31, 1996 and December 31, 1995 Notes to Financial Statements 5 Item 2 Management's Discussion and Analysis of 6 Financial Condition and Results of Operations PART II OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 14 1 PART I FINANCIAL INFORMATION VITESSE SEMICONDUCTOR CORPORATION BALANCE SHEETS (in thousands, except share data)
Dec. 31, 1996 Sept. 30, 1996 ------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $108,214 $ 52,436 Short-term investments 64,883 --- Trade accounts receivable, net 17,249 18,423 Other receivables 841 196 Inventories, net : Raw material 1,988 1,678 Work in process 5,425 5,436 Finished goods 2,712 2,845 -------- -------- 10,125 9,959 Prepaid expenses 1,197 841 Deferred tax asset 2,000 --- -------- -------- Total current assets 204,509 81,855 -------- -------- Property and equipment, net 20,316 17,892 Long-term investment 1,764 --- Other assets 766 669 -------- -------- $227,355 $100,416 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current installments of capital lease obligations $ 621 $ 767 Current installments of term loans 168 164 Accounts payable 5,630 6,731 Accrued expenses and other current liabilities 5,410 3,728 Deferred revenue 500 250 -------- -------- Total current liabilities 12,329 11,640 -------- -------- Capital lease obligations, less current installments --- 91 Term loans, less current installments 271 315 Shareholders' equity: Common stock, $.01 par value. Authorized 25,000,000 shares; issued and outstanding 22,920,833 shares on Dec. 31, 1996, and 19,406,527 shares on Sept. 30, 1996 229 194 Additional paid-in capital 253,837 133,490 Accumulated deficit (39,311) (45,314) -------- -------- Net shareholders' equity 214,755 88,370 -------- -------- $227,355 $100,416 ======== ========
2 VITESSE SEMICONDUCTOR CORPORATION STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except share and per share data)
Three Months Ended ------------------------------------------------- Dec. 31, 1996 Dec. 31, 1995 Sept. 30, 1996 -------------- -------------- --------------- Revenues, net: Production $ 20,406 $ 12,067 $ 17,804 Development 1,426 1,955 1,318 ----------- ----------- ----------- Total revenues 21,832 14,022 19,122 ----------- ----------- ----------- Costs and expenses: Cost of revenues 9,858 6,984 8,932 Engineering, research & devel. 3,480 2,498 3,065 Selling, general & admin. 2,932 2,266 2,610 ----------- ----------- ----------- Total costs and expenses 16,270 11,748 14,607 ----------- ----------- ----------- Income from operations 5,562 2,274 4,515 Other income (expense): Interest income 1,199 27 597 Interest expense (98) (301) (114) Other 7 (25) 21 ----------- ----------- ----------- Total other income (expense) 1,108 (299) 504 ----------- ----------- ----------- Income before income taxes 6,670 1,975 5,019 Income taxes 667 197 502 ----------- ----------- ----------- Net income $ 6,003 $ 1,778 $ 4,517 =========== =========== =========== Net income per share $ 0.25 $ 0.10 $ 0.21 =========== =========== =========== Weighted average common & common equivalent shares outstanding 23,870,582 17,607,158 21,754,559 =========== =========== ===========
3 VITESSE SEMICONDUCTOR CORPORATION STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
Three Months Ended ------------------------------- Dec. 31, 1996 Dec. 31, 1995 -------------- -------------- Cash flows from operating activities: Net income $ 6,003 $ 1,778 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,387 1,182 Change in assets and liabilities: (Increase) decrease in: Receivables, net 529 1,178 Inventories (166) 171 Prepaid expenses (356) (125) Other assets (97) 3 Increase (decrease) in: Accounts payable (1,101) 311 Accrued expenses and other current liabilities 1,682 693 Deferred revenue 250 393 -------- ------- Net cash provided by operating activities 8,131 5,584 -------- ------- Cash flows from investing activities: Short-term investments (64,883) --- Capital expenditures (3,811) (1,165) Long-term investment (1,764) --- -------- ------- Net cash used in investing activities (70,458) (1,165) -------- ------- Cash flows from financing activities: Principal payments under capital lease obligations (237) (555) Principal payments under term loan (40) (279) Short-term borrowings (payments) --- (950) Proceeds from issuance of common stock, net 118,382 296 -------- ------- Net cash provided by (used in) financing activities 118,105 (1,488) -------- ------- Net increase in cash & cash equivalents 55,778 2,931 Cash & cash equivalents at beginning of period 52,436 6,315 -------- ------- Cash & cash equivalents at end of period $108,214 $ 9,246 ======== ======= Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 28 $ 301 ======== =======
4 VITESSE SEMICONDUCTOR CORPORATION NOTES TO FINANCIAL STATEMENTS NOTE 1. GENERAL In management's opinion, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of financial condition and results of operations are reflected in the attached interim financial statements. All amounts are unaudited except the September 30, 1996 balance sheet. This report should be read in conjunction with the audited financial statements presented in the 1996 Annual Report. Footnotes and other disclosures which would substantially duplicate the disclosures in the Company's audited financial statements for fiscal year 1996 contained in the Annual Report have been omitted. The interim financial information herein is not necessarily representative of the results to be expected for any subsequent period. NOTE 2. COMPLETION OF PUBLIC OFFERING During the quarter ended December 31, 1996, the Company completed a public offering of 3,450,000 shares of Common Stock at a price to the public of $36 per share which resulted in net proceeds before expenses of $118,611,000. For complete information regarding this offering, please see the Company's Prospectus dated November 13, 1996. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth in "Management's Discussion and Analysis of Financial Condition and Results of Operations" below includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and is subject to the safe harbor created by that section. Factors that realistically could cause results to differ materially from those projected in the forward looking statements are set forth below in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors." RESULTS OF OPERATIONS Revenues Total revenues in the first quarter of fiscal 1997 were $21,832,000, a 56% increase over the $14,022,000 recorded in the first quarter of fiscal 1996. The increase in total revenues was due to a 69% increase in production revenues as a result of growth of shipments to customers in the telecommunications and ATE markets. Development revenues in the first quarter of fiscal 1997 were $1,426,000 compared to $1,955,000 in the first quarter of fiscal 1996. Fluctuations in development revenues from quarter to quarter are typically due to the variability in the timing of design wins and development milestones. Cost of Revenues Cost of revenues as a percentage of total revenues in the first quarter of fiscal 1997 was 46.7% compared to 49.8% in the first quarter of fiscal 1996. The decrease in cost of revenues as a percentage of total revenues resulted from increased manufacturing yields as well as a reduction in per unit costs associated with increased production. The Company's manufacturing yields vary significantly among products, depending on a particular IC's complexity and the Company's experience in manufacturing it. Historically, the Company has experienced difficulties achieving acceptable yields on some ICs, which has resulted in shipment delays. The Company's overall yields are lower than yields experienced in a silicon process because of the large number of different products manufactured in limited volume and because the Company's H-GaAs process technology is significantly less developed. The Company expects that many of its current and future products may never be produced in volume. Regardless of the process technology used, the fabrication of semiconductors is a highly complex and precise process. Defects in masks, impurities in the materials used, contamination of the manufacturing environment, equipment failure and other difficulties in the fabrication process can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Because the majority of the Company's costs of manufacturing are relatively fixed, maintenance of the number of shippable die per wafer is critical to the Company's results of operations. Yield decreases can result in substantially higher unit costs and may result in 6 reduced gross profit and net income. There can be no assurance that the Company will not suffer periodic yield problems in connection with new or existing products which could cause the Company's business, operating results and financial condition to be materially adversely affected. Inventory is valued at the lower of cost or market. Because allocable manufacturing costs can be high, new product inventory is often valued at market. In addition, a portion of work-in-process inventory consists of wafers in various stages of fabrication. Consequently, the Company estimates yields per wafer in order to estimate the value of inventory. If yields are materially different than projected, work-in-process inventory may need to be revalued. In addition, the ability of customers to change designs and to cancel or reschedule orders can also result in adverse adjustments to inventory. There can be no assurance that such adjustments will not occur in the future and have a material adverse effect on the Company's results of operations. Engineering, Research and Development Costs Engineering, research and development expenses were $3,480,000 in the first quarter of fiscal 1997 compared to $2,498,000 in the first quarter of fiscal 1996. The increase was principally due to increased headcount and higher costs to support the Company's continuing efforts to develop new products. As a percentage of total revenues, engineering, research and development costs decreased to 16% in the first quarter of 1997 from 18% in the first quarter of 1996. This decrease was a result of the Company's revenues growing faster than engineering, research and development costs. The Company's engineering, research and development costs are expensed as incurred. Selling, General and Administrative Expenses Selling, general and administrative expenses (SG&A) were $2,932,000 in the first quarter of fiscal 1997 compared to $2,266,000 in the first quarter of fiscal 1996. This increase was due to increased headcount and higher commissions resulting from increased sales. As a percentage of total revenues, however, SG&A expenses declined to 13% in the first quarter of fiscal 1997 from 16% in the first quarter of fiscal 1996 as a result of the Company's revenues growing faster than SG&A expenses. Interest Income Interest income increased to $1,199,000 in the first quarter of fiscal 1997 from $27,000 in the first quarter of fiscal 1996. This was due to a higher average cash balance in the first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996, primarily due to the proceeds from two public offerings which were completed in March 1996 and November 1996, respectively. Interest Expense Interest expense decreased to $98,000 in the first quarter of fiscal 1997 from $301,000 in the first quarter of fiscal 1996. This decrease was the result of a decrease in the Company's average debt balance, primarily due to an accelerated repayment of certain debt following the Company's public offering in March 1996. 7 Income Taxes The Company recorded a provision for income taxes in the amount of $667,000 in the first quarter of fiscal 1997 and $197,000 in the first quarter of fiscal 1996 principally for the federal alternative minimum taxes, state income taxes, and taxes due to foreign jurisdictions, in light of the Company's existing net operating loss carryforwards. LIQUIDITY AND CAPITAL RESOURCES Operating Activities The Company generated $8,131,000 and $5,584,000 from operating activities in the first quarter of 1997 and 1996, respectively. The increase in operating cash flow was principally due to an improvement in profitability. Investing Activities Capital expenditures, principally for manufacturing and test equipment, were $3,811,000 in the first quarter of 1997 compared to $1,165,000 in the first quarter of 1996. The Company intends to continue investing in manufacturing, test and engineering equipment and currently expects to spend an additional $8 to $10 million for capital expenditures in fiscal 1997, which the Company intends to finance with working capital. Financing Activities In the first quarter of fiscal 1997, the Company generated $118,105,000 in financing activities. Net proceeds from the issuance of common stock was $118,382,000, offset by $277,000 in payments on debt obligations. The Company has a revolving line of credit agreement with a bank, which expires on January 5, 1998. The maximum amount available under the revolving line of credit is $12,500,000. The interest rate on borrowings under this revolving line of credit is equal to the bank's prime rate. As of December 31, 1996, there were no borrowings outstanding under this agreement. Management believes that the Company's cash flow from operations and revolving line of credit agreement are adequate to finance its planned growth and operating needs for the next 12 months. The Company believes it can meet its wafer fabrication needs through fiscal 1998 at its Camarillo facility assuming that the Company successfully completes planned substantial incremental increases in production capacity at the facility. The Company is currently in the process of constructing a new wafer fabrication facility. The Company estimates that the cost of the new wafer fabrication facility in Colorado Springs, Colorado (the "Facility"), will be at least $70 million, of which approximately $25 million relates to the purchase of land and the construction of the building and $45 million relates to capital equipment purchases. The Company has recently entered into a synthetic lease transaction pursuant to a Master Lease Agreement (the "Lease") providing for the financing of $27.5 million for the acquisition and construction of the new facility, as well as the acquisition of certain capital equipment. The Lease will be an operating lease for accounting purposes, but a conditional sale for Federal tax purposes. The obligations of the Company are secured by the Company's interest in the Facility. 8 The Company's obligations are also secured by cash collateral in an amount equal to 84% of all amounts advanced by the lessor under the lease for the acquisition and construction of the Facility (the "Lease Balance"). The Lease requires that all interest earned by the Company on the cash collateral be paid to the lessor to satisfy a portion of the Company's rental obligation. The Lease also requires monthly payments calculated on a payment date by multiplying 16% of the then amount advanced by the lessor times a rate equal to the three-month Eurodollar Rate plus a spread of 1.75%. The Company is responsible for all costs of ownership and operation of the Facility, and has guaranteed certain obligations of the lessor until such time as all of the Company's obligations under the Lease are performed. The Lease provides the Company with the option at the end of the lease term of either acquiring the Facility for a price equal to outstanding advances made by the lessor, or arranging for the Facility to be acquired by a third party. The Company is contingently liable at the end of the lease term to the extent the lessor is not able to realize 84% of the Lease Balance upon sale or other disposition of the Facility. Under the Lease, the Company will be required to meet certain financial and other covenants, including a restriction on the payment of cash dividends to its shareholders. If certain financial covenants are not maintained, the Company must provide additional cash collateral equal to 16% of the Lease Balance. FACTORS AFFECTING FUTURE OPERATING RESULTS ACCEPTANCE OF H-GAAS BY TARGET MARKETS ECL and BiCMOS are currently the dominant process technologies for high- performance ICs. Vitesse's prospective customers are principally systems designers and manufacturers in the telecommunications, data communications and ATE industries that may use ECL or BiCMOS ICs in their existing systems and evaluate Vitesse H-GaAs ICs for use in their next-generation systems. These customers may be reluctant to adopt Vitesse's products because of perceived risks relating to GaAs technology generally and concerns about the relative speed, complexity, power dissipation and cost-effectiveness of the Company's H- GaAs products compared to ECL and BiCMOS ICs. In addition, these customers may be reluctant to rely upon a relatively small company such as Vitesse for a critical sole-sourced component. There can be no assurance that additional companies in Vitesse's target markets will adopt its H-GaAs technology or that the companies that currently use the Company's H-GaAs products will continue to do so in the future. CUSTOMER AND INDUSTRY CONCENTRATION The Company is, and intends to continue, focusing its sales efforts on a relatively small number of companies in the telecommunications, data communications and ATE markets that require high performance ICs. Certain of these companies are also competitors of Vitesse. VARIABILITY OF QUARTERLY RESULTS The Company's quarterly results of operations have varied significantly in the past and may continue to do so in the future. These variations have been due to a number of factors, including: the loss of major customers; variations in manufacturing yields; the timing and level of new product and process development costs; changes in inventory levels; changes in the type and mix of products being sold; changes in manufacturing capacity and variations in the utilization of this 9 capacity; and customer design changes, delays or cancellations. The Company has also from time to time incurred significant new product and process development costs due to the Company's policy of expensing costs as incurred relating to the manufacture of new products and the development of new process technology. There can be no assurance that the Company will not incur such charges or experience revenue declines in the future. MANUFACTURING CAPACITY LIMITATIONS; NEW PRODUCTION FACILITY The Company currently manufactures all of its ICs at its four-inch wafer fabrication facility located in Camarillo, California. The Company believes that this facility should be able to satisfy its production needs through the end of fiscal 1998, assuming that the Company successfully completes planned substantial incremental increases in production capacity at the facility through such date. The Company plans to expend up to $10 million for the purchase of equipment relating to this expansion. In addition to the purchase of equipment, the Company will be required to successfully hire, train and manage additional production personnel in order to successfully increase its production capacity in accordance with its time schedule. In the event the Company's expansion plans were not implemented on a timely basis for any reason, the Company could be subject to production capacity constraints. Such constraints could have a material adverse effect on the Company's business, operating results or financial condition. The Company is currently in the process of constructing a new six-inch wafer fabrication facility in Colorado Springs, Colorado, to supplement its existing facility in Camarillo. As planned, the facility will initially include a 10,000 square foot Class 1 clean room with the capability for future expansion to 15,000 square feet. The Company has initiated construction of the new facility and plans to complete the physical plant during the fourth quarter of fiscal 1997. Following the completion of the physical plant, the Company must install equipment and perform necessary testing prior to commencing commercial production at the facility, a process which the Company anticipates will take at least nine months. Accordingly, the Company believes the new facility will not begin commercial production prior to the fourth quarter of fiscal 1998. The Company estimates that the cost of the new wafer fabrication facility will be at least $70 million, of which approximately $25 million relates to the purchase of land and construction of the building and approximately $45 million relates to capital equipment purchases. In the event the Company were to decide to expand the Class 1 clean room in the future, substantial additional expenditures would be required. The construction of the new wafer fabrication facility entails significant risks, including shortages of materials and skilled labor, unavailability or late delivery of process equipment, unforeseen environmental or engineering problems, work stoppages, weather interferences and unanticipated cost increases, any of which could have a material adverse effect on the building, equipping and production start-up of the new facility. In addition, unexpected changes or concessions required by local, state or federal regulatory agencies with respect to necessary licenses, land use permits, site approvals and building permits could involve significant additional costs and delay the scheduled opening of the facility. As a result of the foregoing and other factors, there can be no assurance that the project will be successfully completed within its current budget or within the timeframe currently scheduled by the Company. The inability of the Company to successfully complete the new facility as currently budgeted and scheduled could have a material adverse effect on its business, operating results or financial condition. 10 The successful operation of the new wafer fabrication facility, if completed, as well as the Company's overall production operations, will also be subject to numerous risks. The Company has no prior experience with the operation of equipment or the processes involved in producing finished six-inch wafers, which differ significantly from those involved in the production of four-inch wafers. The Company will be required to hire, train and manage production personnel successfully in order to effectively operate the new facility. The Company does not have excess production capacity at its Camarillo facility to offset any failure of the new facility to meet planned production goals. As a result of these and other factors, the failure of the Company to successfully operate the new wafer fabrication facility would have a material adverse effect on its business, operating results or financial condition. The Company will also have to effectively coordinate and manage the Colorado Springs and Camarillo facilities to successfully meet its overall production goals. The Company has no experience in coordinating and managing full scale production facilities which are located at different sites. The failure to successfully coordinate and manage the two sites would adversely affect the Company's overall production and would have a material adverse effect on its business, operating results or financial condition. COMPETITION The high-performance semiconductor market is highly competitive and subject to rapid technological change, price erosion and heightened international competition. The telecommunications, data communications and ATE industries, which are the primary target markets for the Company, are also becoming intensely competitive because of deregulation and heightened international competition, among other factors. In the telecommunications market, the Company currently competes primarily against other GaAs-based companies such as Triquint Semiconductor and the GaAs fabrication operations of system companies such as Rockwell. In the data communications and the ATE markets, the Company competes primarily against silicon ECL and BiCMOS products offered principally by semiconductor manufacturers such as Fujitsu, Hewlett Packard, Motorola, National Semiconductor and Texas Instruments and bipolar silicon IC manufacturers such as Applied Micro Circuits Corporation and Synergy Semiconductor Corporation. Many of these companies have significantly greater financial, technical, manufacturing and marketing resources than the Company. In addition, in lower- frequency applications, the Company faces increasing competition from CMOS-based products, particularly as the performance of such products continues to improve. Competition in the Company's markets for high-performance ICs is primarily based on price/performance, product quality and the ability to deliver products in a timely fashion. Some prospective customers may be reluctant to adopt Vitesse's products because of perceived risks relating to GaAs technology. In addition, product qualification is typically a lengthy process and certain prospective customers may be unwilling to invest the time or incur the costs necessary to qualify suppliers such as the Company. Prospective customers may also have concerns about the relative speed, complexity and power advantages of the Company's products compared to more familiar ECL of BiCMOS semiconductors or about the risks associated with relying on a relatively small company for a critical sole-sourced component. PRODUCT AND PROCESS DEVELOPMENT AND TECHNOLOGICAL CHANGE The market for the Company's products is characterized by rapid changes in both product and process technologies. The Company believes that its future success will depend, in part, upon its ability to continue to improve its product and process technologies and develop new 11 technologies in order to maintain its competitive position, to adapt its products and processes to technological changes and to adopt emerging industry standards. There can be no assurance that the Company will be able to improve its product and process technologies and develop new technologies in a timely manner or that such improvements or developments will result in products that achieve market acceptance. The failure to successfully improve its existing technologies or develop new technologies in a timely manner could adversely affect the Company's business, operating results and financial condition. DEPENDENCE ON THIRD PARTIES The Company depends upon third parties for performing certain processes and providing a variety of components and materials necessary for the production of its H-GaAs ICs. The Company packages certain of its ICs in its Camarillo facility using customized ceramic packaging which is presently available from only one source. The balance of the Company's ICs are packaged in plastic by third parties since the Company has no internal capability to perform such plastic packaging. Other components and materials for H-GaAs ICs are available from only a limited number of sources. The inability to obtain sufficient sole- or limited-source services or components as required could result in delays or reductions in product shipments which could adversely affect the Company's business, operating results and financial condition. ENVIRONMENTAL REGULATIONS The Company is subject to a variety of federal, state and local governmental regulations related to the use, storage, discharge and disposal of toxic, volatile or otherwise hazardous chemicals used in its manufacturing process. Any failure to comply with present or future regulations could result in the imposition of fines on the Company, the suspension of production or a cessation of operations. In addition, such regulations could restrict the Company's ability to expand its facilities at its present location or could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations or to clean up prior discharges. The Company uses significant amounts of water throughout its manufacturing process. Previous droughts in California and Colorado have resulted in restrictions being placed on water use by manufacturers and residents in the states. In the event of future drought, reductions in water use may be mandated generally, and it is unclear how such reductions will be allocated among California's or Colorado's different users. No assurance can be given that near term reductions in water allocations to manufacturers will not occur, possibly requiring a reduction in the Company's level of production, and materially and adversely affecting the Company's operations. See "Business--Environmental Matters." MANAGEMENT OF GROWTH The management of the Company's growth requires qualified personnel and systems. In particular, the construction and operation of the Company's planned wafer fabrication facility in Colorado Springs and its integration with the Company's current facility will require significant management, technical and administrative resources. There can be no assurance that the Company will be able to manage its growth or effectively integrate its planned wafer fabrication facility, and failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. 12 DEPENDENCE ON KEY PERSONNEL The Company's success depends in part upon attracting and retaining the services of its managerial and technical personnel. The competition for qualified personnel is intense. There can be no assurance that the Company can retain its key managerial and technical employees or that it can attract, assimilate or retain other skilled technical personnel in the future, and failure to do so could have a material adverse effect on the Company's business, operating results or financial condition. 13 PART II OTHER INFORMATION ITEM 6. EXHIBITS & REPORTS ON FORM 8-K (a) EXHIBITS None (b) REPORTS ON FORM 8-K On November 6, 1996, the Company filed a Form 8-K related to a synthetic lease transaction for the construction of a new wafer fabrication facility. 14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VITESSE SEMICONDUCTOR CORPORATION By: /s/ Eugene F. Hovanec ------------------------------ Eugene F. Hovanec Vice President, Finance and Chief Financial Officer 15 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS SEP-30-1997 OCT-01-1996 DEC-31-1996 108,214 64,883 18,149 900 10,125 204,509 44,313 23,997 227,355 12,329 271 0 0 254,066 (39,311) 227,355 21,832 21,832 9,858 16,270 0 0 98 6,670 667 6,003 0 0 0 6,003 0.25 0.25
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