-----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, Jj45UsRSZjsVxWrgkNLPuOhWOiW+unYzATBv1EyGXKpfCp3S7A4C2P+b8lhp84v+ +6/HnX6fg/c1D1IRiqyx/w== 0000898430-01-500607.txt : 20010516 0000898430-01-500607.hdr.sgml : 20010516 ACCESSION NUMBER: 0000898430-01-500607 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010515 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: SEC FILE NUMBER: 000-19654 FILM NUMBER: 1637602 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 d10q.txt FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 April 30, 2001, there were 183,346,511 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: Condensed Consolidated Balance Sheets as of March 31, 2001 2 (unaudited) and September 30, 2000 Unaudited Condensed Consolidated Statements of Operations for 3 the three months ended March 31, 2001, March 31, 2000, and December 31, 2000, and the six months ended March 31, 2001 and March 31, 2000 Unaudited Condensed Consolidated Statements of Cash Flows for 4 the six months ended March 31, 2001 and March 31, 2000 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2 Management's Discussion and Analysis of 8 Financial Condition and Results of Operations Item 3 Quantitative and Qualitative Disclosure About Market Risk 17 PART II OTHER INFORMATION Item 2 Changes in Securities 18 Item 4 Submission of Matters to a Vote of Security Holders 18 Item 6 Exhibits and Reports on Form 8-K 19 PART I FINANCIAL INFORMATION VITESSE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
March 31, 2001 Sept. 30, 2000 -------------- -------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 117,505 $ 257,081 Short-term investments 346,848 442,475 Accounts receivable, net 131,796 113,172 Inventories, net 64,422 43,715 Prepaid expenses and other current assets 23,967 6,969 Deferred tax assets, net 13,730 13,730 ---------- ---------- Total current assets 698,268 877,142 ---------- ---------- Long-term investments 459,121 278,758 Property and equipment, net 230,786 141,874 Restricted long-term deposits 80,746 75,804 Intangible assets, net 434,817 452,895 Deferred tax assets, net 55,342 43,506 Other assets 43,446 31,087 ---------- ---------- $2,002,526 $1,901,066 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 331 $ 4,227 Current portion of convertible subordinated debt 26,000 -- Accounts payable 40,797 21,813 Accrued expenses and other current liabilities 24,526 36,224 Income taxes payable -- 8,307 ---------- ---------- Total current liabilities 91,654 70,571 ---------- ---------- Long-term debt -- 3,587 Convertible subordinated debt 694,000 720,000 Minority interest 5,696 1,506 Shareholders' equity: Common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding 183,150,924 and 180,049,153 shares on March 31, 2001 and Sept. 30, 2000, respectively 1,832 1,801 Additional paid-in capital 1,103,142 998,537 Deferred compensation (34,698) (18,958) Retained earnings 140,900 124,022 ---------- ---------- Total shareholders' equity 1,211,176 1,105,402 ---------- ---------- $2,002,526 $1,901,066 ========== ==========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 2 VITESSE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data)
Three Months Ended Six Months Ended ---------------------------------------------- ------------------------------ Mar. 31, 2001 Mar. 31, 2000 Dec. 31, 2000 Mar. 31, 2001 Mar. 31, 2000 -------------- -------------- -------------- -------------- -------------- (Restated) (Restated) Revenues $121,757 $100,310 $165,066 $286,823 $189,589 Costs and expenses: Cost of revenues 46,004 35,111 52,347 98,351 66,950 Engineering, research and development 38,101 23,322 33,665 71,766 41,553 Selling, general and administrative 18,259 11,325 17,665 35,924 23,282 Purchased in-process research and development - 45,614 - - 45,614 Amortization of goodwill 20,893 360 20,334 41,227 720 -------- -------- -------- -------- -------- Total costs and expenses 123,257 115,732 124,011 247,268 178,119 -------- -------- -------- -------- -------- Income (loss) from operations (1,500) (15,422) 41,055 39,555 11,470 Interest income 13,712 5,291 15,412 29,124 8,111 Interest expense (8,388) (1,608) (8,305) (16,693) (1,634) Other expense (654) - - (654) - -------- -------- -------- -------- -------- Income (loss) before income taxes 3,170 (11,739) 48,162 51,332 17,947 Income taxes 14,394 5,135 20,060 34,454 14,931 -------- -------- -------- -------- -------- Net income (loss) $(11,224) $(16,874) $ 28,102 $ 16,878 $ 3,016 ======== ======== ======== ======== ======== Net income (loss) per share Basic $(0.06) $(0.10) $0.16 $0.09 $0.02 ======== ======== ======== ======== ======== Diluted $(0.06) $(0.10) $0.15 $0.09 $0.02 ======== ======== ======== ======== ======== Shares used in per share computations: Basic 182,150 174,512 180,434 181,383 172,677 ======== ======== ======== ======== ======== Diluted 182,150 174,512 193,084 192,619 186,383 ======== ======== ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 VITESSE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended -------------------------------- March 31, 2001 March 31, 2000 --------------- --------------- Cash flows from operating activities: (Restated) Net income $ 16,878 $ 3,016 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 63,696 14,839 Amortization of debt issue costs and debt discount 1,919 336 Amortization of deferred compensation 5,748 1,150 Purchased in-process research and development -- 45,614 Increase in equity associated with tax benefit from exercise of stock options 46,238 46,926 Change in assets and liabilities: (Increase) decrease in, net of effects of acquisitions: Accounts receivable, net (18,624) (19,356) Inventories, net (20,707) (6,578) Prepaid expenses and other current assets (16,998) (10,639) Deferred tax assets, net (11,836) (26,873) Other assets (14,255) 237 Increase (decrease) in, net of effects of acquisitions: Accounts payable 18,984 (7,257) Accrued expenses and other current liabilities (12,429) (3,883) Income taxes payable (8,307) (5,517) --------- --------- Net cash provided by operating activities 50,307 32,015 --------- --------- Cash flows from investing activities: Investments, net (84,736) (763,320) Capital expenditures (111,224) (33,628) Restricted long-term deposits (4,942) (8,723) Payment for purchase of companies, net of cash acquired (11,242) 991 --------- --------- Net cash used in investing activities (212,144) (804,680) --------- --------- Cash flows from financing activities: Principal payments under long-term debt and capital leases (7,506) (2,828) Cash paid for debt issue costs -- (18,000) Capital contributions by minority interest limited partners 4,190 697 Proceeds from issuance of convertible subordinated debt and term debt -- 725,000 Elimination of duplicate period of pooled companies -- 1,464 Proceeds from issuance of common stock, net 25,577 19,260 --------- --------- Net cash provided by financing activities 22,261 725,593 --------- --------- Net decrease in cash and cash equivalents (139,576) (47,072) Cash and cash equivalents at beginning of period 257,081 89,941 --------- --------- Cash and cash equivalents at end of period $ 117,505 $ 42,869 ========= =========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 VITESSE SEMICONDUCTOR CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Six Months Ended --------------------------------- March 31, 2001 March 31, 2000 ---------------- --------------- (Restated) Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $14,640 $ 37 ======= ======== Income taxes $ 8,368 $ 256 ======= ======== Supplemental disclosures of non-cash transactions: Issuance of stock options in purchase transaction $ 5,221 $ 50,531 ======= ======== Issuance of common stock in purchase transaction $ 6,112 $422,542 ======= ========
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 VITESSE SEMICONDUCTOR CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation and Significant Accounting Policies The accompanying condensed consolidated financial statements are unaudited and include the accounts of Vitesse Semiconductor Corporation and its subsidiaries (the "Company"). The condensed consolidated financial statements for all prior periods presented have been restated to reflect the Company's acquisition of SiTera Incorporated ("SiTera") on May 31, 2000, which was accounted for under the pooling-of-interests method. All intercompany accounts and transactions have been eliminated. 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. This report should be read in conjunction with the audited financial statements presented in the 2000 Annual Report. Footnotes and other disclosures which would substantially duplicate the disclosures in the Company's audited financial statements for fiscal year 2000 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. Computation of Net Income (Loss) per Share The reconciliation of shares used to calculate basic and diluted income (loss) per share consists of the following (in thousands):
Three Months Ended Six Months Ended ------------------ ---------------- Mar. 31, 2001 Mar. 31,2000 Dec.31,2000 Mar. 31, 2001 Mar. 31, 2000 ---------------- ---------------- ----------- -------------- ------------- Shares used in basic per share computations - weighted average shares outstanding 182,150 174,512 180,434 181,383 172,677 Net effect of dilutive common share equivalents based on treasury stock method -- -- 12,650 11,236 13,706 ------- ------- ------- ------- ------- Shares used in diluted per share computation 182,150 174,512 193,084 192,619 186,383 ======= ======= ======= ======= =======
Stock options and other convertible securities exercisable for 16,584,160, 20,123,618, and 7,141,522 shares that were outstanding at March 31, 2001 and 2000, and December 31, 2000, respectively, were not included in the computation of diluted net income per share, as the effect of their inclusion would be antidilutive. These securities consist primarily of the convertible subordinated debentures that are convertible into the Company's common stock at a conversion price of $112.19. 6 Reclassifications ------------------ Where necessary, prior periods' information has been reclassified to conform to the current period condensed consolidated financial statement presentation. Note 2. Purchase Accounting Business Combinations On October 3, 2000, the Company acquired all of the equity interests of FirstPass, Inc. ("FirstPass") in exchange for 70,800 shares of common stock valued at $6.1 million, the assumption of stock options to purchase 378,028 shares of common stock valued at $4.9 million, net of deferred compensation of $16.6 million, and cash consideration of $0.8 million. On February 13, 2001, the Company acquired all of the equity interests of ht-Mikroelektronik GmbH ("ht- Mikro") in exchange for cash consideration of $10.0 million and the assumption of stock options to purchase 56,981 shares of common stock valued at $0.3 million, net of deferred compensation of $2.4 million. The consideration for both transactions was allocated based on the fair values of the tangible and intangible assets and liabilities acquired, including identifiable intangible assets of $5.9 million, with the excess consideration of $16.0 million recorded as goodwill. These intangible assets will be amortized over their estimated useful lives ranging from 5 to 7 years. The transactions are being accounted for as a purchase, and accordingly, the operations of First Pass and ht-Mikro are included from the date of acquisition. Pro forma data is not presented herein as FirstPass and ht-Mikro operations are immaterial. Note 3. Inventories, net Inventories consist of the following (in thousands):
March 31, 2001 Sept. 30, 2000 -------------- -------------- Raw materials $ 6,803 $ 4,184 Work in process and finished goods 57,619 39,531 ------- ------- $64,422 $43,715 ======= =======
Note 4. Subsequent Events In April 2001, the Company agreed to acquire all of the equity interests of Exbit Technology A/S (Exbit) in exchange for up to 6.9 million shares of the Company's common stock. Exbit develops high-speed chip-sets and Intellectual Property ("IP") Cores for the communications and networking industry. The transaction is expected to be complete in the quarter ending June 30, 2001. The transaction will be accounted for using the purchase method of accounting. In April 2001, the Company purchased $26.0 million principal amount of its 4% convertible subordinated debentures due March 2005 at prevailing market prices, for aggregate of approximately $19.0 million. As a result, the Company expects to record an extraordinary gain on early extinguishment of debt of approximately $4.9 million, net of income taxes of $2.1 million, in the quarter ending June 30, 2001. 7 In May 2001, the Company announced measures to reduce its workforce by approximately 12%. As a result of this workforce reduction, the Company expects to incur a one-time charge between $1.5 million and $2.0 million in the quarter ending June 30, 2001. Item 2. 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"), in particular, in "Results of Operations - "Revenues", "Cost of Revenues", "Engineering, Research and Development Costs", "Selling, General, and Administrative Expense", "Amortization of Goodwill and Intangible Assets" and "Interest Income and Interest Expense", and is subject to the safe harbor created by that section. Factors that management believes 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 "Factors That May Affect Future Operating Results." Results of Operations Revenues Total revenues in the second quarter of fiscal 2001 were $121.8 million, an increase of 21% over the $100.3 million recorded in the second quarter of fiscal 2000 and a decrease of 26% from the $165.1 million recorded in the prior quarter. For the six months ended March 31, 2001, total revenues were $286.8 million, a 51% increase over the $189.6 million recorded in the six months ended March 31, 2000. The decrease in revenue in the second quarter of fiscal 2001 from the prior quarter was due to adverse market conditions and the reduction in demand from our communications and data storage customers. The increase in total fiscal 2001 revenues over fiscal 2000 revenues was due to unit growth in shipments of existing products, as well as the introduction of new products to customers in the communications markets. Due to continuing adverse general market conditions and weakening demand for our products, we currently expect that our revenues in the quarter ending June 30, 2001 will be less than our revenues in the quarter ended March 31, 2001. Cost of Revenues Cost of revenues as a percentage of total revenues in the second quarter of fiscal 2001 was 37.8% compared to 35.0% in the second quarter of fiscal 2000 and 31.7% in the prior quarter. The increase in cost of revenues as a percentage of total revenues resulted primarily from the lower quarterly revenues on a base of relatively fixed manufacturing costs. The increase was slightly offset by improved manufacturing yields during the second quarter of fiscal 2001. We anticipate that the costs of revenues as a percentage of total revenues will continue to be adversely affected in the near term as a result of estimated lower quarterly revenues and the significantly higher energy costs resulting from the energy shortage facing the state of California. 8 Engineering, Research and Development Costs Engineering, research and development expenses were $38.1 million in the second quarter of fiscal 2001 compared to $23.3 million in the second quarter of fiscal 2000 and $33.7 million in the prior quarter. For the six months ended March 31, 2001, engineering, research, and development costs were $71.8 million compared to $41.6 million in the six month period ended March 31, 2000. The increases were principally due to increased headcount from recent acquisitions, new hires, amortization of deferred stock compensation and higher costs to support our continuing efforts to develop new products. As a percentage of total revenues, engineering, research and development costs were 31.3% in the second quarter of fiscal 2001, 23.3% in the second quarter of fiscal 2000, and 20.4% in the prior quarter. For the six months ended March 31, 2001, engineering, research and development costs as a percentage of total revenues increased to 25.0% from 21.9%, in the comparable period a year ago. We expect these costs to continue to increase in absolute dollars and as a percentage of revenues, as a result of continued efforts to develop new products and increased headcount related to recent acquisitions and due to the anticipated decline in revenues as described earlier. Our engineering, research and development costs are expensed as incurred. Selling, General and Administrative Expenses Selling, general and administrative expenses (SG&A) were $18.3 million in the second quarter of 2001, compared to $11.3 million in the second quarter of 2000 and $17.7 million in the prior quarter. For the six months ended March 31, 2001, SG&A expenses were $35.9 million compared to $23.3 million in the same period in fiscal 2000. The increase in SG&A expenses in absolute dollars was due principally to increased compensation resulting from recent acquisitions, and expansion of our worldwide sales and marketing organizations. As a percentage of total revenues, SG&A expenses were 15.0% in the second quarter of 2001, compared to 11.3% in the second quarter of 2000 and 10.7% in the prior quarter. For the six months ended March 31, 2001, SG&A expenses as a percentage of total revenues increased to 12.5% from 12.3%, in the comparable period a year ago. We expect these costs to continue to increase in absolute dollars and as a percentage of revenues, as a result of expected future growth and due to the anticipated decline in revenues as described earlier. Amortization of Goodwill and Intangible Assets Amortization of goodwill and identifiable intangible assets was $20.9 million and $0.4 million for the three months ended March 31, 2001 and 2000, respectively. For the six months ended March 31, 2001, amortization of goodwill and identifiable intangible assets was $41.2 million compared to $0.7 million in the same period in fiscal 2000. Amortization of goodwill and identifiable intangible assets primarily relates to the purchase of Orologic, Inc. ("Orologic") and other acquisitions completed in fiscal 2000 and 2001. In connection with the acquisition of Orologic, the Company recorded a second quarter fiscal 2000 charge of $45.6 million for the fair value of purchased in- process research and development ("IPR&D"). Amortization of goodwill and identifiable intangible assets will continue to be at this level and will increase to the extent that we acquire companies and technologies. However, if current Financial Accounting Standards Board proposals become effective, certain intangible assets, including goodwill, will 9 be maintained on the balance sheet rather than amortized, although they may eventually be written down to extent they are deemed to be impaired. Interest Income and Interest Expense Interest income was $13.7 million in the second quarter of fiscal 2001 compared to $5.3 million in the second quarter of 2000 and $15.4 million in the prior quarter. For the six months ended March 31, 2001, interest income was $29.1 million compared to $8.1 million in the same period in fiscal 2000. The increase in interest income is due to higher average cash, short-term investments, long-term investments and long-term deposit balances resulting from proceeds received from the convertible debenture offering in March 2000. The decrease in interest income of $1.7 million from the prior quarter is the result of slightly lower cash, short term and long term investments held throughout the quarter combined with lower interest rates. Interest expense was $8.4 million in the second quarter of fiscal 2001 compared to $1.6 million in the second quarter of fiscal 2000 and $8.3 million in the prior quarter. For the six months ended March 31, 2001, interest expense was $16.7 million compared to $1.6 million in the same period in fiscal 2000. Increased interest expense relates to the debentures and amortization of debt issuance costs. As a result of the convertible debenture offering, we expect to record additional interest expense of approximately $7.8 million per quarter in future periods, which may be reduced to the extent that we may repurchase any additional convertible subordinated debentures. Income Taxes Our year to date effective income tax rate is 67.1% as of March 31, 2001 compared to 83.2% for the same period in the prior year. For the quarter ended March 31, 2001, the effective income tax rate is 454% compared to (43.7%) for the quarter ended March 31, 2000. Excluding the effects of nondeductible goodwill amortization and other permanent book to tax differences, the effective income tax rate is approximately 33.0% for all periods presented. Liquidity and Capital Resources Operating Activities We generated $50.3 million and $32.0 million from operating activities in the six months ended March 31, 2001 and 2000, respectively. The increase in cash flow from operations was principally due to an improvement in profitability of $13.9 million and adjustment to non-cash items for depreciation and amortization of $63.7 million. For the remainder of fiscal 2001, we expect that our growth in profitability, compared to fiscal 2000, will be reduced due to the continuing adverse market conditions. Investing Activities We used $212.1 million and $804.7 million in investing activities during the six months ended March 31, 2001 and 2000, respectively. The cash used in investing activities in the first six months of fiscal 2001 was primarily due to the purchase of investments in held to maturity debt and equity securities of $84.7 million and capital expenditures of $111.2 million and investments in restricted long term deposits of $4.9 million. We intend to continue investing in manufacturing, test and engineering equipment. In addition, we paid cash consideration of $10.8 million in connection with the purchase of First Pass and ht-Mikro in the six months ended March 31, 2001. 10 In December 2000, we entered into an operating lease transaction providing for the financing of $17.2 million for the acquisition of certain test equipment. If at the end of the lease term we do not purchase the equipment, we would guarantee the residual value to the lessor equal to a specified percentage of the lessor's cost of the equipment. As of March 31, 2001, the lessor advanced a total of $17.2 million under this lease and held approximately $5.0 million as cash collateral, which amount is included in restricted long-term deposits. Financing Activities We generated $22.3 and $725.6 million from financing activities for the six months ended March 31, 2001 and 2000, respectively. Financing activities for the six months ended March 31, 2001, represent proceeds of $25.6 million received from the issuance and sale of common stock pursuant to our stock option and stock purchase plans and proceeds of $4.2 million received from the limited partners of the Vitesse venture funds, partially offset by repayments of debt obligations of $7.5 million. Financing activities for the six months ended March 31, 2000, represent proceeds, net of issuance costs, of $702.0 million received from the convertible subordinated debenture offering, proceeds of $5.0 million received from the issuance of term debt and proceeds of $19.3 million received from the issuance and sale of common stock pursuant to our stock option and stock purchase plans, slightly offset by $2.8 million in repayments of debt obligations. Management believes that our cash and cash equivalents, short-term investments, and cash flow from operations are adequate to finance our planned growth and operating needs for the next 12 months. Impact of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires recognition of all derivatives as either assets or liabilities on the balance sheet at fair value. The Company has adopted SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, in the first quarter of its fiscal year ending September 30, 2001. The adoption of this standard did not have a material effect on the Company's consolidated financial statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial Statements." SAB 101, as amended, summarizes certain SEC's views of applying generally accepted accounting principles to revenue recognition in financial statements. We do not expect SAB 101 to have a material effect on our operations or financial position. We are required to adopt SAB 101 in the fourth quarter of fiscal 2001. 11 Factors That May Affect Future Operating Results We Have Recently Experienced a Decline in Revenues, and We Expect That Our Operating Results Will Fluctuate in The Future Due to Reduced Demand in Our Markets Our revenues and earnings per share (excluding acquisition related charges) in the three months ended March 31, 2001 were approximately 26.3% and 23.1 %, respectively, lower than our revenues and earnings per share in the prior quarter. Due to general economic conditions and slowdowns in purchases of optical networking equipment, it has become increasingly difficult for us to predict the purchasing activities of our customers and we expect that our operating results will fluctuate substantially in the future. In particular, we expect that our revenues and earnings per share for the quarter ending June 30, 2001 will be lower than our revenues and earnings in the quarter ended March 31, 2001. Future fluctuations in operating results may also be caused by a number of factors, many of which are outside our control. Additional factors that could affect our future operating results include the following: . The loss of major customers . Variations, delays or cancellations of orders and shipments of our products . Reduction in the selling prices of our products . Significant changes in the type and mix of products being sold . Delays in introducing new products . Design changes made by our customers . Our failure to manufacture and ship products on time . Changes in manufacturing capacity, the utilization of this capacity and manufacturing yields . Variations in product and process development costs . Changes in inventory levels; and . Expenses or operational disruptions resulting from acquisitions In the quarter ending June 30, 2001, we are implementing cost reductions, including a reduction in work force of approximately 12%, to bring our expenses into line with our reduced revenue expectations. However, we cannot be sure that these measures will be sufficient to offset lower revenues, and if they are not, our earnings will be adversely affected. In the past, we have recorded significant new product and process development costs because our policy is to expense these costs at the time that they are incurred. We may incur these types of expenses in the future. In future periods, we expect a substantial increase in amortization of intangible assets resulting from recent acquisitions. These additional expenses will have a material and adverse effect on our earnings in future periods. The occurrence of any of the above mentioned factors could have a material adverse effect on our business and on our financial results. The market price for our common stock has been volatile and future volatility could cause the value of your investment in our company to decline. Our stock price has experienced significant volatility recently. In particular, our stock price declined significantly in the context of announcements made by us and other semiconductor suppliers of reduced revenue expectations and of a general slowdown in the technology sector, particularly the optical networking equipment sector. Given these general economic conditions 12 and the reduced demands for our products that we have experienced recently, we expect that our stock price will continue to be volatile. In addition, the value of your investment could decline due to the impact of any of the following factors, among others, upon the market price of our common stock: . Additional changes in financial analysts estimates of our revenues and earnings; . Our failure to meet financial analysts performance expectations; and . Changes in market valuations of other companies in the semiconductor or fiber optic equipment industries. In addition, many of the risks described elsewhere in this section could materially and adversely affect our stock price, as discussed in those risk factors. The stock markets have recently experienced substantial price and volume volatility. Fluctuations such as these have effected and are likely to continue to affect the market price of our common stock. In the past, securities class action litigation has often been instituted against companies following periods of volatility in the market price of such companies' securities. If instituted against us, regardless of the outcome, such litigation could result in substantial costs and diversion of our management's attention and resources and have a material adverse effect on our business, financial condition and results of operations. We could be required to pay substantial damages, including punitive damages, if we were to lose such a lawsuit. We are Dependent on a Small Number of Customers in a Few Industries We intend to continue focusing our sales effort on a small number of customers in the communications and test equipment markets that require high- performance integrated circuits. Some of these customers are also our competitors. For the six months ended March 31, 2001, no single customer accounted for greater than 10% of total revenues. If any of our major customers delays orders of our products or stops buying our products, our business and financial condition would be severely affected. We Depend on the Successful Operation of our Production Facilities During 1998, we started producing high-performance integrated circuits at our new six-inch wafer fabrication factory in Colorado Springs, Colorado. We are faced with several risks in the successful operation of this facility as well as in our overall production operations. We had only produced finished four-inch wafers until 1998 and therefore we have limited experience with the equipment and processes involved in producing finished six-inch wafers. Further, some of our products have been qualified for manufacture at only one of the two facilities. Consequently, our failure to successfully operate either facility could severely damage our financial results. The successful operation of our Camarillo, California production facility is also jeopardized by the recent and continuing energy shortage facing the state of California. We currently have available an uninterrupted power supply that would allow us to successfully power down our production facility in the event of a power black out. However, this power supply is insufficient to allow us to complete production of wafers in process in the event of a prolonged 13 black out, and as such, if we are affected by such a black out it could substantially disrupt production. Any such disruptions could materially and adversely affect our operating results. There Are Risks Associated with Recent and Future Acquisitions In fiscal 2000, we made two significant acquisitions. In March 2000, we completed the acquisition of Orologic, in exchange for approximately 4.6 million shares of our common stock. In May 2000, we completed the acquisition SiTera for approximately 14.7 million shares of our common stock. Also since the beginning of fiscal 2000, we completed four smaller acquisitions for an aggregate of approximately $61.7 million in approximately 0.8 million of common stock issued and stock options assumed and approximately $44.6 million in cash. In April 2001 we announced our agreement to acquire Exbit Technology A/S for up to approximately 6.9 million shares of our Common Stock. These acquisitions may result in the diversion of management's attention from the day-to-day operations of the Company's business. Risks of making these acquisitions include difficulties in the integration of acquired operations, products and personnel. If we fail in our efforts to integrate recent and future acquisitions, our business and operating results could be materially and adversely affected. In addition, acquisitions we make could result in dilutive issuances of equity securities, substantial debt, and amortization expenses related to goodwill and other intangible assets. In particular, in connection with our acquisition of Orologic, we were required to record IPR&D charge of $45.6 million in the three months ended March 31, 2000. In addition, we expect to record additional acquisition related expenses in the quarter ending June 30, 2001 in connection with our acquisition of Exbit. Further, under current accounting rules, we expect to amortize an aggregate of approximately $517.0 million of goodwill and other identifiable intangible assets over the next 2 to 7 years. However, if current Financial Accounting Standards Board proposals become effective, certain intangible assets, including goodwill, will be maintained on the balance sheet rather than being amortized, although they may eventually be written down to the extent they are deemed to be impaired. Our management frequently evaluates strategic opportunities available. In the future we may pursue additional acquisitions of complementary products, technologies or businesses. Our Industry Is Highly Competitive The high-performance semiconductor market is extremely competitive and is characterized by rapid technological change, price erosion and increased international competition. We compete directly or indirectly with the following categories of companies: . High-performance integrated circuit suppliers such as Agere Systems, Applied Micro Circuits Corporation, Broadcom, Conexant, Hewlett Packard, IBM, Intel, Motorola, and PMC Sierra . Internal integrated circuit development units of systems companies such as Cisco Systems, Fujitsu and Nortel Networks 14 Our current and prospective competitors include many large companies that have substantially greater marketing, financial, technical and manufacturing resources than we do. Competition in the markets that we serve is primarily based on price/performance, product quality and the ability to deliver products in a timely fashion. Product qualification is typically a lengthy process and some prospective customers may be unwilling to invest the time or expense necessary to qualify suppliers such as Vitesse. Prospective customers may also have concerns about the relative advantages of our products compared to more familiar silicon- based semiconductors. Further, customers may also be concerned about relying on a relatively small company for a critical sole-sourced component. To the extent we fail to overcome these challenges, there could be material and adverse effects on our business and financial results. There is Risk Associated with Doing Business in Foreign Countries In fiscal 2000 and the first six months of fiscal 2001, international sales accounted for 24% and 27%, respectively, of our total revenues, and we expect international sales to constitute a substantial portion of our total revenues for the foreseeable future. International sales involve a variety of risks and uncertainties, including risks related to: . Reliance on strategic alliance partners . Compliance with foreign regulatory requirements . Variability of foreign economic conditions . Changing restrictions imposed by U.S. export laws, and . Competition from U.S. based companies that have firmly established significant international operations Failure to successfully address these risks and uncertainties could adversely affect our international sales, which could in turn have a material and adverse effect on our results of operations and financial condition. We Must Keep Pace with Product and Process Development and Technological Change The market for our products is characterized by rapid changes in both product and process technologies. We believe that our success to a large extent depends on our ability to continue to improve our product and process technologies and to develop new products and technologies in order to maintain our competitive position. Further, we must adapt our products and processes to technological changes and adopt emerging industry standards. Our failure to accomplish any of the above could have a negative impact on our business and financial results. We Are Dependent on Key Suppliers We manufacture our products using a variety of components procured from third-party suppliers. All of our high-performance integrated circuits are packaged by third parties. Other components and materials used in our manufacturing process are available from only a limited number of sources. Further, we are increasingly relying on third-party semiconductor foundries for our supply of silicon based products. Any difficulty in obtaining sole- or limited-sourced parts or services from third parties could affect our ability to meet scheduled product deliveries to customers. This in turn could have a material adverse effect on our customer relationships, business and financial results. 15 Our Manufacturing Yields Are Subject to Fluctuation Semiconductor fabrication is a highly complex and precise process. Defects in masks, impurities in the materials used, contamination of the manufacturing environment and equipment failures can cause a large percentage of wafers or die to be rejected. Manufacturing yields vary among products, depending on a particular high-performance integrated circuit's complexity and on our experience in manufacturing it. In the past, we have experienced difficulties in achieving acceptable yields on some high-performance integrated circuits, which has led to shipment delays. Our overall yields are lower than yields obtained in a mature silicon process because we manufacture a large number of different products in limited volume and our process technology is less developed. We anticipate that many of our current and future products may never be produced in volume. Since a majority of our manufacturing costs are relatively fixed, maintaining a number of shippable die per wafer is critical to our operating results. Yield decreases can result in higher unit costs and may lead to reduced gross profit and net income. We use estimated yields for valuing work- in-process inventory. If actual yields are material different than these estimates, we may need to revalue work-in-process inventory. Consequently, if any of our current or future products experience yield problems, our financial results may be adversely affected. Our Business Is Subject to Environmental Regulations We are subject to various governmental regulations related to toxic, volatile and other hazardous chemicals used in our manufacturing process. If we fail to comply with these regulations, this failure could result in the imposition of fines or in the suspension or cessation of our operations. Additionally, we may be restricted in our ability to expand operations at our present locations or we may be required to incur significant expenses to comply with these regulations. Our Failure to Manage Growth May Adversely Affect Us The management of our growth requires qualified personnel, systems and other resources. We have recently established several product design centers worldwide and have acquired Orologic in March 2000, SiTera in May 2000, completed six other acquisitions since the fall of 1998, and announced our agreement to acquire Exbit in April 2001. We have only limited experience in integrating the operations of acquired businesses. Failure to manage our growth or to successfully integrate new and future facilities or newly acquired businesses could have a material adverse effect on our business and financial results. We Are Dependent on Key Personnel Due to the specialized nature of our business, our success depends in part upon attracting and retaining the services of qualified managerial and technical personnel. The competition for qualified personnel is intense. The loss of any of our key employees or the failure to hire additional skilled technical personnel could have a material adverse effect on our business and financial results. 16 Our Ability to Repurchase Our Debentures, If Required, With Cash, Upon a Change of Control May be Limited In certain circumstances involving a change of control or the termination of public trading of our common stock, holders of the debentures may require us to repurchase some or all of the debentures. We cannot assure that we will have sufficient financial resources at such time or will be able to arrange financing to pay the repurchase price of the debentures. Our ability to repurchase the debentures in such event may be limited by law, by the indenture, by the terms of other agreements relating to our senior debt and by such indebtedness and agreements as may be entered into, replaced, supplemented or amended from time to time. We may be required to refinance our senior debt in order to make such payments. We may not have the financial ability to repurchase the debentures if payment of our senior debt is accelerated. Item 3. Quantitative and Qualitative Disclosure About Market Risk At March 31, 2001, the Company's investment portfolio principally includes marketable debt securities consisting of obligations of the U.S. government and its agencies. These securities sometimes have remaining terms in excess of one year. Consequently, such securities are subject to interest rate risk. The Company classifies these securities as held-to-maturity securities, which are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. At March 31, 2001, the Company's long-term debt consists of convertible subordinated debentures with interest at a fixed rate of 4.00% per year. Consequently, the Company does not have significant interest rate exposure on its long-term debt. However, the fair value of the convertible subordinated debentures is subject to significant fluctuation due to their convertibility into shares of Vitesse common stock. 17 PART II OTHER INFORMATION Item 2. Changes in Securities (c) Recent Sales of Unregistered Securities Pursuant to the terms of the acquisition of ht-Mikro on February 13, 2001, Vitesse assumed stock options to purchase 56,981 shares of common stock held by certain employees of ht-Mikro. The stock options are exercisable for common stock of Vitesse at a weighted average exercise price of $20.00 per share, and become exercisable over time based on continued employment with the Company. The securities were issued in reliance on the exemption from registration provided by Section 4(2) of the Securities Act, based on the limited number of security holders of ht-Mikro, the relationships of such holders to ht-Mikro and the lack of any advertisement or general solicitation in connection with the acquisition. Item 4. Submission of Matters to a Vote of Security Holders On January 23, 2001, the Company held its regular Annual Meeting of Stockholders. The purpose of the meeting was to elect Directors to serve for the ensuing year, to approve a proposal to adopt the Company's 2001 Stock Incentive Plan and to ratify the appointment of KPMG LLP as independent auditors for the Company for the 2001 fiscal year. The following individuals were elected to serve as Directors for the ensuing year: Name Votes for Withheld ---- --------- -------- Pierre R. Lamond 147,980,583 437,405 Vincent Chan 147,915,588 502,400 James A. Cole 147,964,227 453,761 Alex Daly 147,881,903 536,085 John C. Lewis 147,997,594 420,394 Louis R. Tomasetta 147,999,030 418,958 Additionally, the following items were voted upon and approved by the shareholders:
Against or Votes Broker Votes for Withheld Abstained No Vote ---------- ---------- --------- ---------- Approval of a proposal to adopt the Company's 2001 Stock Incentive Plan 60,885,595 53,531,262 340,467 33,660,664 Ratification of appointment of KPMG LLP as independent auditors for the fiscal year ending September 30, 2001 148,141,053 113,264 163,671 ---
18 Item 6. Exhibits & Reports on Form 8-K (a) Exhibits 10.1 Vitesse Semiconductor 2001 Stock Incentive Plan is incorporated herein by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (File No. 333-55466) filed with the Securities and Exchange Commission on February 13, 2001. (b) Reports on Form 8-K None. 19 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 May 15, 2001 By: /s/Eugene F. Hovanec --------------------------- Eugene F. Hovanec Vice President, Finance and Chief Financial Officer 20 -----END PRIVACY-ENHANCED MESSAGE-----