VTSS News Vitesse Semiconductor Announces Results of the Review by the Special Committee of Its Board
CAMARILLO, Calif.--(BUSINESS WIRE)--Vitesse Semiconductor Corporation (Pink Sheets:VTSS) announced today
that the previously disclosed review conducted by a Special Committee of
its Board of Directors is now complete and the Special Committee has
reported the results to the Board of Directors.
The Special Committee consists of Edward Rogas, Jr., who became a
director in January 2006, and Moshe Gavrielov, who became a director in
April 2005. The Special Committee was assisted by Munger, Tolls & Olson
LLP, independent outside legal counsel, and Navigant Consulting, Inc.,
forensic accountants.
Summary of Findings and Actions
The Special Committee found evidence that members of Vitesse’s
former senior management team backdated and manipulated the grant dates
of stock options issued over a number of years, utilized improper
accounting practices primarily related to revenue recognition and
inventory, and prepared or altered financial records to conceal those
practices. Vitesse has taken a number of important remedial actions to
address these issues that will be discussed below.
Based upon the review by the Special Committee, management’s
evaluation of Vitesse’s financial and
accounting records and Vitesse’s current
capital resources, management believes it is unlikely that Vitesse will
be able to prepare and publish audited restated financial statements for
its fiscal years ended September 30, 2004 and 2005. Management currently
believes that it will be able to provide audited financial statements
for its fiscal year ended September 30, 2006 and thereafter, although
Vitesse cannot give a timetable regarding the publication of those
financial statements.
Vitesse also is announcing certain changes to its Board of Directors and
the dismissal of its independent public accounting firm.
Stock Options
The Special Committee found that members of Vitesse’s
former senior management backdated and manipulated the grant dates of
stock options granted by Vitesse over a number of years. Such backdating
and manipulation resulted in lower exercise prices for the stock
options. Members of Vitesse’s former senior
management subsequently attempted to create or alter documents in order
to conceal these practices from the Board of Directors, outside counsel
and the Special Committee. The persons identified by the Special
Committee as being involved in the backdating and document integrity
issues are no longer with Vitesse.
The Special Committee did not find evidence that any current member of
the Board of Directors (other than Louis R. Tomasetta), the Compensation
Committee or current senior management was aware of improper practices
with respect to stock options. Nor did the Special Committee find
evidence that members of the Board of Directors, other than Mr.
Tomasetta, profited from such practices, although the Special Committee
did identify a single option grant to members of the Board of Directors
in 1996, which appeared to be inadvertent, that had the effect of
increasing the profit to some members of the Board of Directors upon
exercise by approximately $18,000 each. Current members of the Board of
Directors, other than Mr. Tomasetta, who profited from the 1996 grant
volunteered to and will return to Vitesse the increased profit to them
caused by the improper dating of their options.
Based on certain accounting assumptions, the Special Committee estimated
that the total additional expense to Vitesse resulting from the
backdating and manipulation of stock options is approximately $120
million since 1995, which includes approximately $20 million to $25
million for fiscal years 2002 through 2006. Management is in the process
of validating those assumptions and estimates.
Accounting Issues
The Special Committee also reviewed several other accounting issues that
came to its attention. The Special Committee found evidence of the
following practices:
-- the failure to record credits for merchandise returns and other
customer credits in the appropriate accounting periods, and to
write-off related accounts receivable;
-- the failure to record inventory for returned merchandise in the
appropriate accounting periods;
-- recording false sales invoices that increased revenue;
-- permitting merchandise returns significantly in excess of the
customers' contractually permitted levels, and the improper
handling of those returns;
-- the misapplication of cash received from customers and from
purported sales of accounts receivable to older accounts receivable
balances, which already should have been written off;
-- the recognition of revenue that did not meet the requirements for
revenue recognition, including consignment sales, shipments prior
to customers' requested shipment dates and shipments to warehouses;
-- the improper accounting for certain transactions as sales of
accounts receivable rather than borrowings;
-- the failure to disclose practices to increase reported cash
balances, which balances were not representative of operating cash
balances throughout the reporting period; and
-- recording journal entries that overrode Vitesse's internal controls
and that, among other things, facilitated some of the practices
described above.
The Special Committee found evidence that certain of these practices
appear to have been used on certain occasions to manipulate revenues for
accounting periods in consideration of Wall Street expectations. The
Special Committee also found evidence that certain officers and
employees prepared or altered documents or Vitesse’s
financial records to conceal some of these practices from Vitesse’s
Board of Directors and its independent public accountants.
Based on its review, the Special Committee concluded that no current
active member of the Board of Directors, which excludes Mr. Tomasetta,
or current member of senior management was aware of these improper
accounting practices.
Remedial Actions
Since April 2006 and prior to the report by the Special Committee,
Vitesse had taken several remedial actions, including the following:
-- Louis R. Tomasetta, Vitesse's former Chief Executive Officer, Yatin
Mody, Vitesse's former Chief Financial Officer, and Eugene F.
Hovanec, Vitesse's former Executive Vice President, were
immediately put on administrative leave at the commencement of the
review by the Special Committee and were terminated as officers and
employees of Vitesse in May 2006;
-- shortly after Louis R. Tomasetta was placed on administrative
leave, the Board formed an Executive Committee of the Board, the
members of which are all the Directors of Vitesse other than Mr.
Tomasetta. Since that time, all actions have been taken by the
Executive Committee or at meetings of the Board in which Mr.
Tomasetta did not participate;
-- several senior management changes, including:
-- the appointment of Chris Gardner as Chief Executive Officer in
April 2006;
-- the appointment of Richard Yonker as Chief Financial Officer in
December 2006; and
-- the engagement of Alvarez & Marsal, LLC, and specifically Shawn
C.A. Hassel of that firm, in April 2006 as interim Chief
Financial Officer until the appointment of Richard Yonker as
Chief Financial Officer. In December 2006, Shawn Hassel was
appointed Chief Restructuring Officer to assist Chris Gardner
with continued improvements to operations and to assist Rich
Yonker in the continuing re-staffing of Vitesse's financial
group and the implementation of the remedial actions
recommended by the Special Committee and management;
-- Vitesse is changing its revenue recognition policy to use a "sell
through" methodology, under which revenue is not recognized until a
sale is made to the ultimate customer, rather than a "sell in"
methodology, under which revenue is recognized when a sale is made
to Vitesse's distributors; and
-- the Board of Directors has adopted comprehensive procedures,
intended to reflect "best practices," to ensure that future grants
of stock options will comply with Vitesse's stock option plan and
that disclosures and the accounting regarding stock options will be
accurate.
Vitesse will take additional remedial actions to address the findings of
the Special Committee, including the following:
-- the Board of Directors has requested the Special Committee analyze
Vitesse's claims against Messrs. Tomasetta, Mody and Hovanec in
connection with certain of the activities described above and
evaluate those persons' claims for advancement of legal expenses;
-- the Special Committee has instructed management to develop a
remediation plan to rectify the accounting matters identified by
the Special Committee and management; and
-- the Special Committee instructed management to implement corporate
governance changes at the Board, management and employee levels to
establish "best practices" aimed at preventing opportunities to
manipulate revenues and other financial data.
Independent Public Accountants
The Board of Directors has dismissed KPMG LLP based on its lack of
independence. The Board is in contact with other independent public
accounting firms and will work to engage a new independent public
accounting firm as soon as practicable.
Board of Directors
On December 14, 2006, Edward Rogas, Jr. was appointed Chairman of the
Board and Chairman of the Audit Committee. On that same date, Moshe
Gavrielov was appointed Chairman of the Compensation Committee. John C.
Lewis has informed the Board that he will retire as a Director,
effective January 1, 2007. The Board is undertaking a further review of
the composition of the Board and its Committees and will commence
efforts to identify appropriate and qualified persons to become
Directors of Vitesse.
Financial Statements
Based upon the review by the Special Committee, management’s
evaluation of Vitesse’s financial and
accounting records and Vitesse’s current
capital resources, management believes it is unlikely that Vitesse will
be able to prepare and publish audited restated financial statements for
its fiscal years ended September 30, 2004 and 2005. Management currently
believes that it will be able to provide audited financial statements
for its fiscal year ended September 30, 2006 and thereafter, although
Vitesse cannot give a timetable regarding the publication of those
financial statements.
About Vitesse
Vitesse designs, develops and markets a diverse portfolio of
high-performance, cost-competitive semiconductor solutions for
communications and storage networks worldwide. Engineering excellence
and dedicated customer service distinguish Vitesse as an industry leader
in Gigabit Ethernet LAN, Ethernet-over-SONET, Fibre Channel, Serial
Attached SCSI, Optical Transport, and other applications. Vitesse
innovation empowers customers to deliver superior products for
Enterprise, Access, Metro, and Core applications. Additional company and
product information is available at www.vitesse.com.
Vitesse is a registered trademark in the United States and/or other
jurisdictions of Vitesse Semiconductor Corporation. All other trademarks
or registered trademarks mentioned herein are the property of their
respective holders.
Safe Harbor
Statements made in this release that are not historical facts are “forward-looking”
statements (as defined in the Private Securities Litigation Reform Act
of 1995) that involve risks and uncertainties and are subject to change
at any time. These forward-looking statements may include, but are not
limited to, statements containing words such as “anticipate,”“believe,”“plan,”“estimate,”“expect,”“hope,”“intend,”
and similar expressions. Factors that could cause actual results to
differ are identified in the public filings made by Vitesse with the
Securities and Exchange Commission and include the fact that we have
disclosed that you should not rely upon our published financial
statements and the fact that we have not filed all of our reports
required by the Securities Exchange Act of 1934. More information on
factors that could affect our business and financial results are
included in our public filings made with the Securities and Exchange
Commission, which are available on the web site of the Securities and
Exchange Commission, www.sec.gov.
The forward-looking statements involve known and unknown risks,
uncertainties and other factors that are, in some cases, beyond our
control. We caution investors that any forward-looking statements made
by us are not guarantees of future performance. We disclaim any
obligation to update any such factors or to announce publicly the
results of any revisions to any of the forward-looking statements to
reflect future events or developments.
