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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000 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: 0-21184
MICROCHIP TECHNOLOGY INCORPORATED
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 86-0629024
(State of Incorporation) (I.R.S. Employer
Identification No.)
2355 W. Chandler Blvd., Chandler, AZ 85224
(Address of Principal Executive Offices, Including Zip Code)
(480) 786-7200
(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value Per Share
Preferred Share Purchase Rights
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K or any amendment to this Form
10-K. [ ]
The approximate aggregate market value of the voting stock of the
registrant beneficially owned by stockholders, other than directors, officers
and affiliates of the registrant, at April 28, 2000 was $4,847,702,620.
Number of shares of Common Stock, $.001 par value, outstanding as of April
28, 2000: 78,971,110.
Documents Incorporated by Reference
Document Part of Form 10-K
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Proxy Statement for the 2000 Annual III
Meeting of Stockholders
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PART I
ITEM 1. BUSINESS
Microchip Technology Incorporated was incorporated in Delaware in 1989. In
this Form 10-K, "we," "us," and "our" each refers to Microchip Technology
Incorporated and its subsidiaries. Our executive offices are located at 2355
West Chandler Boulevard, Chandler, Arizona 85224-6199 and our telephone number
is (480) 786-7200. Our website address is microchip.com. The information on our
website is NOT incorporated into this Form 10-K.
We develop and manufacture specialized semiconductor products used by our
customers for a wide variety of embedded control applications. Our product
portfolio comprises microcontrollers; application-specific standard products,
referred to as ASSPs; and related mixed-signal and memory products. We market
our products to the consumer, automotive, office automation, communications and
industrial markets. We provide highly cost-effective embedded control and
believe that our PIC(R) product family is a price/performance leader in the
worldwide microcontroller market. Our embedded control products also offer the
advantages of small size, low voltage operation and ease of development,
enabling timely and cost-effective product integration by our customers. Our
ASSP products include a variety of specialized integrated circuits, including
our family of KEELOQ(R) security products for wireless communications. Our
mixed-signal products consist of a variety of standalone analog devices used
primarily in embedded control systems to convert or buffer input and output
signals to or from a microcontroller. And, our memory products are primarily
comprised of serial EEPROMs which are used primarily to provide non-volatile
memory storage in embedded control systems.
Risks and uncertainties that may affect our future operating results are
set forth throughout the following discussion of our business. Additional risk
factors that may affect our future operating results are discussed in "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operation," at page 13.
THIS FORM 10-K CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, INCLUDING STATEMENTS REGARDING OUR STRATEGY, FINANCIAL
PERFORMANCE AND REVENUE SOURCES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THE RESULTS ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF
CERTAIN FACTORS INCLUDING THOSE SET FORTH UNDER "ITEM 7 - MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
BEGINNING AT PAGE 13 , AND ELSEWHERE IN THIS FORM 10-K. ALTHOUGH WE BELIEVE THAT
THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE
CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR
ACHIEVEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS.
INDUSTRY BACKGROUND
Competitive pressures require manufacturers to expand product functionality
and provide differentiation while maintaining or reducing cost. To address these
requirements, manufacturers use integrated circuit-based embedded control
systems that provide an integrated solution for application-specific control
requirements. Embedded control systems enable manufacturers to differentiate
their products, replace less efficient electromechanical control devices, add
product functionality and significantly reduce product costs. In addition,
embedded control systems facilitate the emergence of complete new classes of
products. Embedded control systems typically incorporate a microcontroller as
the principal active, and sometimes sole, component.
A microcontroller is a self-contained computer-on-a-chip consisting of a
central processing unit, non-volatile program memory, random access memory for
data storage and various input/output capabilities. In addition to the
microcontroller, a complete embedded control system incorporates
application-specific software and may include specialized peripheral device
controllers and external non-volatile memory components, such as EEPROMs to
store additional program software.
Embedded control systems enable our customers to:
* differentiate their products
* replace less efficient electromechanical control devices
* add product functionality, and
* significantly reduce product cost.
1
Embedded control solutions have been incorporated into thousands of products and
subassemblies in a wide variety of markets worldwide, including:
* automotive air bag systems
* remote control devices
* handheld tools
* appliances
* portable computers
* cordless and cellular telephones
* motor controls, and
* security systems.
The increasing demand for embedded control has made the market for
microcontrollers one of the largest segments of the semiconductor market.
Microcontrollers are currently available in 4-bit through 32-bit architectures.
Although 4-bit microcontrollers are relatively inexpensive, typically costing
under $1.00 each, they generally lack the minimum performance and features
required by today's design engineers for product differentiation and are
typically used only to produce basic functionality in products. While 16- and
32-bit architectures provide very high performance, they are prohibitively
expensive for most high-volume embedded control applications, typically costing
more than $4.00 each. As a result, manufacturers of competitive, high-volume
products have increasingly found 8-bit microcontrollers, that typically cost
$1.00 to $8.00 each, to be the most cost-effective embedded control solution.
For example, a typical new automobile may include one 32-bit microcontroller for
engine control, three 16-bit microcontrollers for transmission control, audio
systems and anti-lock braking, and up to 50 8-bit microcontrollers to provide
other embedded control functions, such as door locking, automatic windows, sun
roof, adjustable seats, electric mirrors, air bags, fuel pump, speedometer, and
the security and climate control systems.
Most microcontrollers available today are ROM-based and must be programmed
by the semiconductor supplier during manufacturing, resulting in six-to-20 week
lead times for delivery of such microcontrollers. In addition to delayed product
introduction, these long lead times can result in potential inventory
obsolescence and factory shutdowns when changes to the firmware are required. To
address time-to-market constraints, some suppliers have made EPROM, EEPROM, or
Flash Memory-based programmable microcontrollers available for prototyping and
preproduction runs. However, these microcontrollers have been relatively
expensive, and manufacturers have still been required to send program code to
the semiconductor factory for ROM programming as product changes are made. As a
result, the long lead times for production volume microcontrollers have not been
significantly reduced by traditional approaches.
OUR PRODUCTS
Our strategic focus is on embedded control products, including
microcontrollers, ASSPs, related mixed-signal and memory products, and
application development systems.
MICROCONTROLLERS
We offer a broad family of microcontroller products featuring a unique,
proprietary architecture marketed under the PIC(R) brand name. We have shipped
more than one billion PIC(R) microcontrollers to customers worldwide since their
introduction in 1990. Our PIC(R) products are designed for applications
requiring high performance and low cost. They feature a variety of memory
configurations, low voltage and power, small footprint and ease of use. We
believe this product family is currently a price/performance leader in the
overall microcontroller marketplace. Our performance results from an exclusive
product architecture which features dual data and instruction pathways, referred
to as a Harvard dual-bus architecture; a reduced instruction set, referred to as
RISC; and variable length instructions; all of which provide significant speed
advantages over the alternative single-bus, CISC architectures. Prices for our
microcontroller products currently range from approximately $0.49 to $10.00 per
unit.
Our original market focus was in the low-cost segment of the 8-bit
microcontroller marketplace. With our baseline products, we built our current
market position as the leading worldwide supplier of field programmable
microcontrollers. Over the past five years, we have introduced more than 120 new
microcontrollers targeted at the baseline, mid-range and high-end segments of
the traditional 8-bit microcontroller marketplace. Additionally, with our
scalable product architecture, we have successfully targeted both the lower end
of the 16-bit microcontroller market as well as the higher end of the large
4-bit microcontroller marketplace, significantly enlarging our addressable
market. We believe that all of the additional market segments we have entered
represent significant opportunities for future sales growth.
2
We have used our manufacturing experience and design and process technology
to bring additional enhancements and manufacturing efficiencies to the
development and production of our PIC(R) family of microcontroller products. Our
extensive experience base has enabled us to develop our advanced, low cost user
programmability feature by incorporating non-volatile memory, such as EPROM,
EEPROM and Flash Memory, into the microcontroller in addition to masked ROM
program memory being included into the microcontroller.
DEVELOPMENT SYSTEMS
We offer a comprehensive set of low cost and easy-to-learn application
development tools. These tools enable system designers to quickly and easily
program a PIC(R) microcontroller for specific applications and are a key factor
for obtaining design wins. Our family of development tools operates in the
standard Windows(R) environment on standard PC hardware. Entry-level systems,
which include an assembler and programmer hardware, are priced at less than
$200. A fully configured system, which also provides in-circuit emulation
hardware, performance simulators and software debuggers, is priced at
approximately $2,000. Customers moving from entry-level designs to those
requiring real-time emulation are able to preserve their investment in software
tools as they migrate to future PIC(R) devices since all the product families
are assembly- and C- language compatible.
Many independent companies also develop and market application development
tools and systems that support our standard microcontroller product
architecture. We believe that familiarity with and adoption of our, and
third-party, development systems by an increasing number of product designers
will be an important factor in the future selection of our embedded control
products. These development tools allow design engineers to develop thousands of
application-specific products from our standard microcontrollers. Currently,
there are more than 120 third-party tool suppliers worldwide whose products
support the Company's proprietary microcontroller architecture.
ASSPS
Our application-specific standard products, referred to as ASSPs, are
specialized products designed to perform specific end-user applications as
opposed to our other products which are more general purpose in nature. Our ASSP
device families currently include the KEELOQ(R) family of secure data
transmission products, as well as other specialized integrated circuit devices.
KEELOQ(R) security products are designed for low cost, secure, uni-directional
communications and verification purposes. Applications include:
* automotive remote keyless entry systems
* automotive immobilizer systems
* automatic garage and gate openers, and
* smart cards.
MIXED-SIGNAL PRODUCTS
Our mixed-signal products consist of a growing portfolio of standalone
analog devices that are used primarily in embedded control systems to convert or
buffer input and output signals to or from a microcontroller. Our standalone
analog product family was introduced to the market at the beginning of fiscal
year 2000. As of the end of fiscal 2000, our mixed-signal portfolio consists of
more than 15 standalone analog products, and those devices are being shipped to
more than 1,000 end customers.
MEMORY PRODUCTS
Our memory products consist primarily of serial electrically erasable
programmable read only memory, referred to as EEPROMs. We sell these devices
primarily into the embedded control market, and we are one of the largest
suppliers of such devices worldwide. EEPROM products are used for non-volatile
program and data storage in systems where such data must be modified frequently.
Serial EEPROMs have a very low I/O pin requirement, permitting production of
very small devices. As a result, Serial EEPROMs are widely used to supply
non-volatile memory in space-sensitive applications such as portable computers,
cellular and cordless telephones, pagers and remote control devices.
3
Within this market, we have emphasized providing Serial EEPROMs to
customers that require features such as:
* highly compact packaging
* low operating voltage
* reduced power consumption
* extended data retention, and
* high endurance.
We address customer requirements by offering products with extremely small
package sizes and very low operating voltage for both read and write functions
(1.8 volts in contrast with the industry standard of 3.3 volts), together with a
wide operating voltage range (1.8 to 5.5 volts). High performance circuitry and
microcode are also available to reduce power consumption when a device is not in
use, while permitting immediate operating capability when required. The products
also feature long data retention and high erase/write endurance.
We currently offer a complete Serial EEPROM product family that meets three
principal industry bus interface standards and is available in most standard
density, configuration and packaging alternatives. Our Smart Serials(TM) line of
specialized Serial EEPROMs with user-configurable architecture and other
advanced features targets applications such as cellular telephones and data
communications.
MANUFACTURING
The ownership of our manufacturing resources is an important component of
our business strategy, enabling us to maintain a high level of manufacturing
control and to be one of the lowest cost producers in the embedded control
industry. By owning our wafer fabrication and the majority of our test
operations, and by employing proprietary statistical process control techniques,
we have been able to achieve high production yields. Direct control over
manufacturing resources allows us to shorten our design and production cycles.
This control also allows us to capture the manufacturing and a portion of the
assembly and testing profit margin. Wafer fabrication and wafer test facilities
are located in Chandler, Arizona, which we refer to as Fab 1, and Tempe,
Arizona, which we refer to as Fab 2. We perform product packaging and testing at
our facilities located near Bangkok, Thailand. We also use third-party assembly
and test contractors in several Asian countries.
Wafers are produced in Class 10 fabrication modules in Fab 1 and Fab 2. Fab
1 currently contains approximately 27,000 square feet of usable clean room
space, while Fab 2 currently contains approximately 50,000 square feet of usable
clean room space. Fab 1 currently produces 5- and 6-inch wafers, while Fab 2
currently produces 6-inch and 8-inch wafers. Wafer sort is performed in an 8,000
square foot, Class 10,000 clean room, equipped with automated wafer handlers and
test equipment. Fab 1 and Fab 2 are managed by the same management team and
utilize similar production techniques.
During fiscal 2001, we intend to cease 5-inch wafer production, and,
thereafter, Fab 1 will produce only 6-inch wafers. As part of our overall
manufacturing rationalization plans, Fab 2 will produce only 8-inch wafers. By
the end of fiscal 2001, 8-inch wafer production will represent approximately 78%
of our total wafer fab capacity.
In support of our longer-term growth objectives, we recently signed an
agreement to acquire a semiconductor manufacturing complex in Puyallup,
Washington. We are currently conducting our due diligence investigation. Closing
on the purchase is expected to occur by July 31, 2000. The Puyallup facility
contains approximately 100,000 square feet of clean room space. We currently
intend to commence installation of wafer processing equipment in October 2000,
and we currently expect to commence volume production in August 2001. Initially,
we will produce 8-inch wafers using our 0.7-micron and 0.5-micron process
technologies.
We continue to transition products to smaller geometries and to larger
wafer sizes to reduce future manufacturing costs. We also continue to increase
our manufacturing capacity for 8-inch wafers and to transition products to our
0.7-micron process. Other companies in the industry have experienced
difficulties in transitioning to larger wafers and to smaller geometries,
resulting in reduced manufacturing yields or delays in product deliveries. We
believe that our transition to smaller geometries and to larger wafers is
important for us to remain competitive. Our future operating results could be
reduced if the transition is substantially delayed or inefficiently implemented.
THE FOREGOING STATEMENTS RELATED TO THE CESSATION OF 5-INCH WAFER
PRODUCTION, CAPACITY UTILIZATION OF FAB 1 AND FAB 2, 8-INCH WAFER PRODUCTION BY
THE END OF THE FISCAL 2001, THE ANTICIPATED CLOSING DATE OF THE PUYALLUP
TRANSACTION, AND THE TIMING OF EQUIPMENT INSTALLATION AND VOLUME PRODUCTION AT
THE PUYALLUP FACILITY ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD
4
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: INCREASED OR
DECREASED CUSTOMER DEMAND FOR OUR PRODUCTS; THE AVAILABILITY OF EQUIPMENT AND
OTHER SUPPLIES; SUPPLY DISRUPTION; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES
ON PRICES; AND OTHER ECONOMIC CONDITIONS.
We currently employ proprietary design and manufacturing processes in
developing our microcontroller and memory products. We believe our processes
afford us both cost-effective designs in existing and derivative products and
greater functionality in new product designs. While many of our competitors
develop and optimize separate processes for their logic and memory product
lines, we use a common process technology for both microcontroller and
non-volatile memory products. This allows us to more fully absorb our process
research and development costs and to deliver new products to market more
rapidly. Our engineers utilize advanced CAD tools and software to perform
circuit design, simulation and layout, and our in-house photomask and wafer
fabrication facilities enable us to rapidly verify design techniques by
processing test wafers quickly and efficiently.
Currently, our Thailand facility tests approximately 90% of the products
produced in Fab 1 and Fab 2. The 200,000 square foot Thailand test facility
currently has the capacity to handle up to 120 million units per month. The
Thailand facility also assembles approximately 45% of the products produced in
Fab 1 and Fab 2. During fiscal 2001, we intend to add additional assembly and
test capacity at our Thailand facility in order to allow us to respond to
customer demand. Several third-party contractors located throughout Asia fulfill
the balance of our assembly requirements. Final product test and burn-in
functions are handled by advanced automated equipment.
THE FOREGOING STATEMENT RELATED TO OUR INTENTION TO ADD ADDITIONAL ASSEMBLY
AND TEST CAPACITY AT OUR THAILAND FACILITY IS A FORWARD LOOKING STATEMENT.
ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG
OTHERS: CUSTOMER DEMAND FOR OUR PRODUCTS; DELAYS IN CONSTRUCTION AND
FACILITIZATION OF THE ADDITIONAL ASSEMBLY AND TEST CAPACITY AT THE THAILAND
FACILITY; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY DISRUPTION;
LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON PRICES; POLITICAL
INSTABILITY AND EXPROPRIATION; AND OTHER ECONOMIC CONDITIONS.
At March 31, 2000, several third-party contractors located throughout Asia
performed the majority of our assembly operations. Due primarily to cost, yield
and cycle time considerations, we developed an in-house assembly operation
during fiscal 2000 and shifted approximately 45% of our assembly operations to
our Thailand facility. We will continue to depend on third-party contractors for
the balance of our assembly requirements. Third-party assembly and test
companies are experiencing high demand and utilization of their current capacity
which could lead to capacity shortages in the industry.
THE FOREGOING STATEMENT RELATED TO THE CURRENT CAPACITY OF THIRD-PARTY
ASSEMBLY AND TEST COMPANIES IS A FORWARD LOOKING STATEMENT. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: AVAILABILITY
OF SUFFICIENT CAPACITY OF THIRD-PARTIES; SUPPLY DISRUPTION; LABOR UNREST;
CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES ON PRICES; POLITICAL INSTABILITY
AND EXPROPRIATION; AND OTHER ECONOMIC CONDITIONS.
Our reliance on third parties involves some reduction in our level of
control over the assembly and test portion of our business. While we review the
quality, delivery and cost performance of these third-party contractors, our
future operating results could suffer if any third-party contractor is unable to
maintain assembly and test yields and costs at approximately their current
levels. See also "Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations - Gross Profit," at page 14.
Our reliance on foreign operations and maintenance of substantially all of
our finished goods in inventory in foreign locations exposes us to foreign
political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables, and
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operations performance could suffer.
5
Due to the high fixed costs inherent in semiconductor manufacturing,
increased manufacturing yields can have significant positive effects on gross
profit and overall operating results. During fiscal 2000, we continued to focus
on manufacturing productivity, and maintained average wafer fab line yields in
excess of 90%. Our manufacturing yields are primarily driven by a comprehensive
implementation of statistical process control, extensive employee training and
selective upgrading of our manufacturing facilities and equipment. Maintenance
of manufacturing productivity and yields are important factors in the
achievement of our operating results. The manufacture and assembly of integrated
circuits, particularly non-volatile, erasable CMOS memory and logic devices,
such as those that we produce, are complex processes. These processes are
sensitive to a wide variety of factors, including the level of contaminants in
the manufacturing environment, impurities in the materials used and the
performance of our fabrication personnel and equipment. As is typical in the
semiconductor industry, we have from time to time experienced lower than
anticipated manufacturing yields. Our operating results will suffer if we are
unable to maintain yields at approximately the current levels.
Our semiconductor manufacturing operations require raw materials and
equipment that must meet exacting standards. We generally have more than one
source for these supplies, but there are only a limited number of suppliers
capable of delivering various raw materials and equipment that meet our
standards. In addition, the raw materials and equipment necessary for our
business could become more difficult to obtain as worldwide use of
semiconductors increases. We have faced supply shortages from time to time in
the past, and on occasion our suppliers have told us they need more time than
expected to fill our orders. An interruption of any raw materials or equipment
sources could harm our business.
RESEARCH AND DEVELOPMENT
Our current research and development, or R&D, activities focus on the
design of new microcontroller, memory and mixed-signal products, ASSPs, new
development systems, and software and application-specific software libraries.
We are also developing new design and process technology to achieve further cost
reductions and performance improvements in existing products. As of April 28,
2000, 335 employees were engaged in research and development. In fiscal 2000,
our R&D expenses were $45.6 million, as compared to $40.8 million in fiscal 1999
and $38.4 million in fiscal 1998.
We are committed to continuing our investment in new and enhanced products,
including development systems software, and in our design and manufacturing
process technology. We believe these investments are significant factors in
maintaining our competitive position. Our future operating results will depend
to a significant extent on our ability to develop and introduce new products on
a timely basis which can compete effectively on the basis of price and
performance and which address customer requirements. The success of new product
introductions depends on various factors, including:
* proper new product selection
* timely completion and introduction of new product designs
* development of support tools and collateral literature that make
complex new products easy for engineers to understand and use, and
* market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to
time in completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could reduce our future operating results.
Our future success also depends upon our ability to develop and implement
new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change and require large
research and development expenditures. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. We believe that our transition to
smaller geometries and to larger wafers is important for us to remain
competitive. Our future operating results could be reduced if the transition is
substantially delayed or inefficiently implemented.
6
SALES AND DISTRIBUTION
We market our products worldwide through a direct sales organization and
through distributors. In fiscal 2000, we derived 63% of our net sales from sales
through distributors and 37% of our net sales from direct sales to original
equipment manufacturers, referred to as OEM, customers.
Our direct sales force, currently consisting of 241 people, focuses on
three geographical markets: the Americas, Europe and Asia. We currently maintain
sales and support centers in major metropolitan areas in North America, Europe
and Asia. A worldwide network of national and regional distributors augments our
direct sales force.
Effective April 1, 2000, we terminated our contractual relationships with
predominately all manufacturers' representatives in the Americas. We are
currently adding additional resources to our existing direct sales force
focusing on the Americas territories. We anticipate that all resources will be
in place by June 30, 2000. See also the discussion on selling, general and
administrative costs under "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Selling, General and
Administrative," at page 16.
THE FOREGOING STATEMENTS RELATED TO THE ADDITION OF RESOURCES TO OUR
AMERICAS' DIRECT SALES FORCE ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: OUR
ABILITY TO ATTRACT AND RETAIN QUALIFIED SALES PERSONNEL; AND GENERAL ECONOMIC
CONDITIONS.
We believe that a strong technical service presence is essential to the
continued development of the embedded control market. The majority of our field
sales engineers, referred to as FSEs, field application engineers, referred to
as FAEs, and sales management have technical degrees and have been previously
employed in an engineering environment. We believe that the technical knowledge
of our sales force is a key competitive advantage in the sale of field
programmable products. Currently, we have at least one dedicated FAE in every
sales and support center. The primary mission of our FAE team is to provide
technical assistance to OEM customers and to conduct periodic training sessions
for FSEs, manufacturer's representatives and distributor sales teams. The FAEs
also frequently conduct technical seminars in major cities around the world.
FAEs also work closely with our distributors and manufacturer's representatives
to provide technical assistance in end-user support and to assist in the sales
process.
As is common in the semiconductor industry, we provide limited price
protection to our distributors. Under our current policy, distributors receive a
credit for the difference, at the time of a price reduction, between the price
they were originally charged for products in inventory and the reduced price
which we subsequently charge distributors. From time to time, and on a
case-by-case basis, distributors may also receive credit for specific
transactions that we approve in advance. We also grant some distributors limited
rights to return products. We do not recognize net sales and profit on sales to
distributors that have rights of return and price protection until those
distributors have resold the products to end-customers.
Distributors accounted for 63% of our net sales to customers in fiscal
2000. Our largest distributor accounted for 14% of our total net sales for
fiscal 2000. Generally, we do not have long-term agreements with our
distributors and our distributors may terminate their relationship with us with
little or no advanced notice. The loss of, or a disruption in the operations of,
one or more of our distributors could reduce our future net sales in a given
quarter and could result in an increase in inventory returns.
Foreign sales, primarily in Asia and Europe, represented 68% of our
consolidated net sales in fiscal 2000, as compared to 69% in fiscal 1999 and 68%
in fiscal 1998. International sales are predominately billed in U.S. Dollars.
Although foreign sales are subject to certain government export restrictions, we
have not experienced any material difficulties as a result of export
restrictions to date.
BACKLOG
As of April 28, 2000, our backlog was approximately $212.7 million, as
compared to $73.8 million as of April 30, 1999. Our backlog includes all
purchase orders scheduled for delivery within the subsequent 12 months.
We primarily produce standard products that can be shipped from inventory
within a short time after we receive an order. Our business and, to a large
extent, that of the entire semiconductor industry, is characterized by
short-term orders and shipment schedules. Orders constituting our current
backlog are subject to changes in delivery schedules, or to cancellation at the
7
option of the purchaser without significant penalty. Thus, while backlog is
useful for scheduling production, backlog as of any particular date may not be a
reliable measure of sales for any future period. Orders received in a quarter
for shipment in that quarter, which we refer to as turns orders, have become an
increasingly important component of our quarterly operating results. Turns
orders are more fully discussed in "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations - Net Sales," at page 13.
COMPETITION
The semiconductor industry is intensely competitive and has been
characterized by price erosion and rapid technological change. We compete with
major domestic and international semiconductor companies, many of which have
greater market recognition and greater financial, technical, marketing,
distribution and other resources than we with which to pursue engineering,
manufacturing, marketing and distribution of their products. Emerging companies
may also increase their participation in the market for embedded control
applications.
In addition, our ability to compete successfully depends on a number of
factors both within and outside our control, including:
* the quality, performance, reliability, features, ease of use, pricing
and diversity of our products
* the quality of our customer services and our ability to address the
needs of our customers
* our success in designing and manufacturing new products including
those implementing new technologies
* efficiency of production
* adequate sources of raw materials and other supplies at acceptable
prices
* the rate at which customers incorporate our products into their own
products
* product introductions by our competitors
* the number, nature and success of our competitors in a given market
* general market and economic conditions, and
* protection of our products and processes by effective utilization of
intellectual property laws.
Furthermore, capacity in the semiconductor industry is increasing over time
and such increased capacity or improved product availability could adversely
affect our competitive position.
We currently compete principally on the basis of the technical innovation
and performance of our embedded control products, including their speed,
functionality, density, power consumption, reliability and packaging
alternatives, as well as on price and product availability. We believe that
other important competitive factors in the embedded control market include ease
of use, functionality of application development systems and technical service
and support. We believe that we compete favorably with other companies on all of
these factors, but we may be unable to compete successfully in the future, which
could harm our business.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller products have remained relatively constant, while average
selling prices of our memory products have, until recently, declined over time.
We have experienced, and expect to continue to experience, pricing pressure in
certain microcontroller product lines, due primarily to competitive conditions.
We have been able to maintain average selling prices by continuing to introduce
new products with more features and higher prices, thereby offsetting price
declines in older products. We may be unable to maintain average selling prices
for our microcontroller or other products as a result of increased pricing
pressure in the future, which would reduce our operating results.
PATENTS, LICENSES AND TRADEMARKS
Our success depends in part on our ability to obtain patents, licenses and
other intellectual property rights covering our products and manufacturing
processes. As of March 31, 2000, we owned 110 U.S. patents and 35 foreign
patents, expiring on various dates between 2005 and 2019, and had an additional
85 U.S. patent applications and 105 foreign patent applications pending. We
intend to continue to seek patents on our inventions and manufacturing
processes. The process of seeking patent protection can be long and expensive,
and patents may not be issued from currently pending or future applications. In
addition, our existing patents and any new patents that are issued may not be of
sufficient scope or strength to provide meaningful protection or any commercial
advantage to us. We may be subject to or may initiate interference proceedings
in the U.S. Patent and Trademark Office, which can require significant financial
and management resources. In addition, the laws of certain foreign countries do
not protect our intellectual property rights to the same extent as the laws of
8
the United States. We believe, however, that our continued success depends
primarily on such factors as the technological skills and innovative abilities
of our personnel rather than on our patents.
We have entered into certain intellectual property licenses and
cross-licenses with other companies related to semiconductor products and
manufacturing processes. As is typical in the semiconductor industry, we have
from time to time received, and may in the future receive, communications
alleging possible infringement of patents or other intellectual property rights
of others. We investigate all such notices and respond as we believe is
appropriate. Based on industry practice, we believe that in most cases we can
obtain any necessary licenses or other rights on commercially reasonable terms,
but we cannot assure that licenses would be on acceptable terms, that litigation
would not ensue or that damages for any past infringement would not be assessed.
Litigation, which could result in substantial cost to us and diversion of
management effort, may be necessary to enforce our patents or other intellectual
property rights, or to defend us against claimed infringement of the rights of
others. The failure to obtain necessary licenses or other rights, or litigation
arising out of infringement claims, could harm our business. See also "Item 3 -
Legal Proceedings," at page 11.
ENVIRONMENTAL REGULATION
We must comply with many different federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in our manufacturing processes,
including the Resource Conversation and Recovery Act, the Comprehensive
Environmental Response, Compensation and Liability Act, the Superfund Amendment
and Reauthorization Act, the Clean Air Act and the Water Pollution Control Act.
We believe that we have obtained all of the environmental permits required to
conduct our business. Although we believe that our activities conform to
presently applicable environmental regulations, our failure to comply with
present or future regulations could result in the imposition of fines,
suspension of production or a cessation of operations. Any regulation could
require us to acquire costly equipment or to incur other significant expenses to
comply with environmental regulations. While we have not experienced any
materially adverse effects on our operations from governmental regulations, any
failure by us to control the use of our adequately restrict the discharge of
hazardous substances could subject us to future liabilities. Environmental
problems may occur that could subject us to future costs or liabilities.
EMPLOYEES
As of April 28, 2000, we had 2,692 employees worldwide, including 1,923 in
manufacturing, 335 in research and development, 295 in sales and marketing and
139 in finance and administration. Approximately 39% of our employees work at
our Thailand facility. No employees in the U.S. or Thailand are represented by a
labor organization. We have never had a work stoppage and believe that our
employee relations are good.
Our success depends to a significant extent upon the efforts and abilities
of our senior management, engineering and other personnel. The competition for
qualified engineering and management personnel is intense. We may be
unsuccessful in retaining our existing key personnel or in attracting and
retaining additional key personnel that we require. The loss of the services of
one or more of our key personnel or the inability to add key personnel could
harm our business. We have no employment agreements with any member of our
senior management team.
9
EXECUTIVE OFFICERS
The following sets forth certain information regarding our executive
officers as of May 31, 2000:
Name Age Position
- ---- --- --------
Steve Sanghi 44 Chairman of the Board, President and Chief Executive Officer
Timothy B. Billington 57 Vice President, Manufacturing and Technology Group
Mitchell R. Little 47 Vice President, Americas Sales
Gordon W. Parnell 50 Vice President, Chief Financial Officer
George P. Rigg 60 Vice President, Advanced Microcontroller and Systems Group
Mr. Sanghi has been President since August 1990, CEO since October 1991,
and Chairman of the Board since October 1993. He has served as a director since
August 1990. Mr. Sanghi holds an M.S. degree in Electrical and Computer
Engineering from the University of Massachusetts and a B.S. degree in
Electronics and Communication from Punjab University, India.
Mr. Billington has served as Vice President, Manufacturing and Technology
Group since November 1998. From October 1994 to November 1998, he served as Vice
President, Manufacturing Operations. Mr. Billington holds a B.S. degree in
marketing from Abilene Christian University.
Mr. Little has served as Vice President, Americas Sales since April 1998.
From November 1995 to April 1998, he served as Vice President, Standard
Microcontroller and ASSP Division. From September 1993 to November 1995, he
served as Vice President, Memory Products and ASSP Division. Mr. Little holds a
BSET from United Electronics Institute.
Mr. Parnell has served as Vice President and Chief Financial Officer since
May 2000. He served as Vice President, Controller and Treasurer from April 1993
to May 2000. Mr. Parnell holds a finance/accounting qualification with the
Association of Certified Accountants from Edinburgh College, Scotland.
Mr. Rigg has served as Vice President, Advanced Microcontroller and Systems
Group since March 1997. From November 1995 to March 1997, he served as Vice
President, Advanced Microcontroller and Technology Division. From June 1989 to
November 1995, he served as Vice President, Logic Products Division. Mr. Rigg
holds a B.S. degree in Physics from Manchester University, England.
ITEM 2. PROPERTIES
Our current headquarters, research and development center and Fab 1 are
located in three buildings totaling approximately 242,000 square feet situated
on a 77-acre parcel of land in Chandler, Arizona. We are presently constructing
a 203,000 square foot addition which is scheduled to be completed by September
30, 2001. This area will house additional research and development resources. A
second U.S. manufacturing site consisting of Fab 2, office and warehouse
facilities and a development systems center, totaling approximately 253,000
square feet, is situated on a 22-acre parcel of land in Tempe, Arizona. We are
presently constructing a 126,000 square feet expansion of our manufacturing
capacity at Fab 2 which is to be completed by December 31, 2000. We own the
Chandler and Tempe facilities.
We also own a final test and assembly facility located near Bangkok,
Thailand. The Thailand final test and assembly operations are housed in a
200,000 square foot facility that is owned by our Thailand subsidiary, and are
located in the Alphatechnopolis Industrial Park in Chacherngsao, Thailand, near
Bangkok. The Thailand facility is situated on land to which we expect to acquire
title in accordance with an agreement between us and the landowner. To date,
progress towards obtaining the full title has been hampered by the financial
crisis in Thailand. At this time it is not possible to estimate when full title
transfer will be completed.
To support our sales and distribution activities as described above at page
7 under "Item 1 - Business - Sales and Distribution," we lease space for 29
sales and support centers in major metropolitan areas in the United States,
Europe and Asia. Our aggregate monthly rental payment for our leased facilities
is approximately $129,000.
10
We currently believe that our existing facilities, together with the
additional capacity presently under construction in Chandler and Tempe, Arizona,
and Thailand, will be adequate to meet our requirements for the next 12 months.
In support of our longer-term growth objectives, we recently signed an agreement
to acquire a semiconductor manufacturing complex in Puyallup, Washington. We are
currently conducting our due diligence investigation. Closing on the purchase is
expected to occur by July 31, 2000. Please see the discussion on the Puyallup
facility under "Part I - Business - Manufacturing," at page 4.
THE FOREGOING STATEMENTS RELATED TO EXPECTED COMPLETION DATES OF OUR
EXPANSION PROJECTS AT OUR CHANDLER, TEMPE AND THAILAND FACILITIES, ACQUISITION
OF TITLE TO THE LAND ON WHICH THE THAILAND FACILITY IS SITUATED, THE ADEQUACY OF
FACILITIES FOR THE NEXT 12 MONTHS, AND THE TIMING OF THE CLOSING OF THE PURCHASE
OF THE PUYALLUP FACILITY, ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: DELAYS IN
CONSTRUCTION; THE AVAILABILITY OF EQUIPMENT AND OTHER SUPPLIES; SUPPLY
DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; THE CYCLICAL NATURE OF THE
SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS; DEMAND FOR OUR
PRODUCTS; FLUCTUATIONS IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL
CAPACITY UTILIZATION; COMPETITIVE PRESSURES ON PRICES; POLITICAL INSTABILITY AND
EXPROPRIATION; AND OTHER ECONOMIC CONDITIONS.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of our business, we are involved in a limited number
of legal actions, both as plaintiff and defendant, and could incur uninsured
liability in any one or more of them. Although the outcome of these actions is
not presently determinable, we believe that the ultimate resolution of these
matters will not harm our business. Litigation relating to the semiconductor
industry is not uncommon, and we are, and from time to time, have been, subject
to such litigation. No assurances can be given with respect to the extent or
outcome of any such litigation in the future. See "Item 1 - Business - Patents,
Licenses and Trademarks," at page 8, above.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock is traded on the NASDAQ National Market under the symbol
"MCHP." The Common Stock has been quoted on the NASDAQ National Market since
March 19, 1993. The following table sets forth the quarterly high and low
closing prices of the Common Stock as reported by the NASDAQ National Market for
the last two years, adjusted to reflect a 3-for-2 stock split effected in
February 2000:
Fiscal 2000 High Low Fiscal 1999 High Low
- ----------- ---- --- ----------- ---- ---
First Quarter $ 33.63 $ 22.46 First Quarter $ 21.17 $ 13.89
Second Quarter 39.79 31.25 Second Quarter 22.25 12.21
Third Quarter 48.71 34.08 Third Quarter 26.13 12.25
Fourth Quarter 72.25 40.17 Fourth Quarter 27.25 18.08
On June 5, 2000, the closing sale price for the Common Stock was $63.63 per
share. As of such date, there were approximately 480 holders of record of the
Common Stock. This figure does not reflect beneficial ownership of shares held
in nominee names.
We have not paid any cash dividends since our inception. We currently
anticipate that we will retain all of our future earnings for use in the
expansion and operation of our business. Thus, we do not anticipate paying any
cash dividends on our capital stock in the foreseeable future.
The market price of our Common Stock has fluctuated significantly in the
past and is likely to fluctuate in the future. The future trading price of our
Common Stock could be subject to wide fluctuations in response to a variety of
factors, many of which are beyond our control, including:
11
* quarterly variations in our operating results and the operating
results of other semiconductor companies
* actual or anticipated announcements of technical innovations or new
products by us or our competitors
* changes in analysts' estimates of our financial performance or
buy/sell recommendations
* general conditions in the semiconductor industry, and
* worldwide economic and financial conditions.
In addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market prices for many high
technology companies and that often have been unrelated to the operating
performance of such companies. These broad market fluctuations and other factors
may harm the market price of our Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
You should read the following selected consolidated financial data for the
five-year period ended March 31, 2000 in conjunction with our Consolidated
Financial Statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in Item 7 of this
Form 10-K. Our consolidated income statement data for each of the years in the
three year period ended March 31, 2000, and the balance sheet data as of March
31, 2000 and 1999, are derived from our audited consolidated financial
statements, included in Item 8 of this Form 10-K.
Year Ended March 31,
-------------------------------------------------------------
(in thousands, except per share data) 2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Income Statement Data:
Net sales ............................ $ 495,729 $ 406,460 $ 396,894 $ 334,252 $ 285,888
Cost of sales ........................ 237,985 203,574 199,538 167,330 137,708
Research and development ............. 45,571 40,787 38,362 32,073 27,517
Selling, general and administrative... 76,743 63,006 67,549 56,248 48,903
Special income (expense) ............. (2,400) 28,937 5,000 7,544 11,448
Operating income ..................... 137,830 70,156 86,445 71,057 60,312
Interest income (expense), net ....... 1,184 (2,210) 1,505 (1,852) (947)
Other income, net .................... 770 665 217 288 569
Income before income taxes ........... 139,784 68,611 88,167 69,493 59,934
Provision for income taxes ........... 37,740 18,523 23,799 18,361 16,182
Net income ........................... $ 102,044 $ 50,088 $ 64,368 $ 51,132 $ 43,752
Basic net income per share ........... $ 1.33 $ 0.65 $ 0.80 $ 0.66 $ 0.57
Diluted net income per share ......... $ 1.25 $ 0.62 $ 0.76 $ 0.62 $ 0.53
Basic common shares outstanding ...... 76,489 76,704 80,064 77,354 76,125
Diluted common shares outstanding .... 81,354 80,292 84,470 82,025 81,800
As of March 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
--------- --------- --------- --------- ---------
Balance Sheet Data:
Working capital....................... $196,813 $ 93,780 $ 55,171 $ 91,176 $ 55,855
Total assets.......................... 812,411 505,230 524,743 428,092 358,187
Long-term obligations, less current...
Portion............................... 918 25,000 8,768 5,999 33,250
Stockholders' equity.................. 624,296 358,797 367,308 316,584 219,632
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of net
sales for the years indicated:
Year Ended March 31,
------------------------------
2000 1999 1998
----- ----- -----
Net sales ................................. 100.0% 100.0% 100.0%
Cost of sales ............................. 48.0% 50.1% 50.3%
----- ----- -----
Gross profit .............................. 52.0% 49.9% 49.7%
Research and development .................. 9.2% 10.0% 9.7%
Selling, general and administrative ....... 15.5% 15.5% 17.0%
Special (income)/charge ................... (0.5)% 7.1% 1.2%
----- ----- -----
Operating income .......................... 27.8% 17.3% 21.8%
===== ===== =====
NET SALES
Our net sales of $495.7 million in fiscal 2000 increased by $89.2 million,
or 22.0%, over fiscal 1999, and net sales of $406.5 million in fiscal 1999
increased by $9.6 million, or 2.4%, over fiscal 1998.
Our microcontroller product line represents the largest component of our
total net sales. Microcontrollers and associated application development systems
accounted for 80% of our total net sales in fiscal 2000, 76% of our total net
sales in fiscal 1998 and 68% of our total net sales in fiscal 1998. A related
component of our product sales consists primarily of Serial EEPROM memories
which accounted for 20% of our total net sales in fiscal 2000, 24% of our total
net sales in fiscal 1999 and 32% of our total net sales in fiscal 1998.
Our net sales in any given quarter depend upon a combination of orders
received in that quarter for shipment in that quarter, which we refer to as
turns orders, and shipments from backlog. The percentage of turns orders has
fluctuated over the last three years. Currently, we are experiencing turns
orders at the lowest point of the historical range for net sales requirements.
Despite the recent improvement in the turns orders requirement from our
business, turns orders are difficult to predict, and we may not experience the
combination of turns orders and shipments from backlog in any quarter that would
be sufficient to achieve anticipated growth in net sales. If we do not achieve a
sufficient level of turns orders in a particular quarter, our revenues and
operating results would be adversely affected.
Historically, average selling prices in the semiconductor industry decrease
over the life of any particular product. The overall average selling prices of
our microcontroller products have remained relatively constant, while average
selling prices of our memory products have, until recently, declined over time.
We have experienced, and expect to continue to experience, pricing pressure in
certain microcontroller product lines, due primarily to competitive conditions.
We have been able to maintain average selling prices by continuing to introduce
new products with more features and higher prices, thereby offsetting price
declines in older products. We may be unable to maintain average selling prices
for our microcontroller or other products as a result of increased pricing
pressure in the future, which would reduce our operating results.
THE FOREGOING STATEMENTS REGARDING TURNS ORDERS, AVERAGE SELLING PRICES AND
PRICING PRESSURES ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE LEVEL OF ORDERS
THAT ARE RECEIVED AND CAN BE SHIPPED IN A QUARTER; INVENTORY MIX AND TIMING OF
CUSTOMER ORDERS; COMPETITION AND COMPETITIVE PRESSURES ON PRICING AND PRODUCT
AVAILABILITY; CUSTOMERS' INVENTORY LEVELS, ORDER PATTERNS AND SEASONALITY; THE
CYCLICAL NATURE OF BOTH THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY
THE COMPANY'S PRODUCTS; MARKET ACCEPTANCE OF THE PRODUCTS OF BOTH THE COMPANY
AND ITS CUSTOMERS; DEMAND FOR THE COMPANY'S PRODUCTS; FLUCTUATIONS IN PRODUCTION
YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION; CHANGES IN
PRODUCT MIX; AND ABSORPTION OF FIXED COSTS, LABOR AND OTHER FIXED MANUFACTURING
COSTS.
Distributors accounted for 63% of our net sales to customers in fiscal
2000, 59% of our net sales to customers in fiscal 1999 and 53% of our net sales
to customers in fiscal 1998. Sales to foreign customers represented 68% of our
total net sales in fiscal 2000, 69% of our total net sales in fiscal 1999 and
68% of our total net sales in fiscal 1998. Our sales to foreign customers have
been predominantly in Asia and Europe, which we attribute to the manufacturing
13
strength in those areas for consumer, automotive, office automation,
communications and industrial products. The majority of foreign sales are U.S.
Dollar denominated. We enter into hedging transactions from time to time to
minimize exposure to currency rate fluctuations. Although none of the countries
in which we conduct significant foreign operations have had a highly
inflationary economy in the last five years, there is no assurance that
inflation rates or fluctuations in foreign currency rates in countries where we
conduct operations will not adversely affect our operating results in the
future.
Our quarterly operating results are affected by a wide variety of factors
that could reduce our net sales and profitability, many of which are beyond our
control. Some of the factors that may affect our operating results include:
* the level of orders that are received and can be shipped in a quarter
(turns orders)
* market acceptance of both our products and our customers' products
* customer order patterns and seasonability
* availability of manufacturing capacity and fluctuations in
manufacturing yield
* the availability and cost of raw materials, equipment and other
supplies, and
* economic, political and other conditions in the worldwide markets
served by us.
We believe that period-to-period comparisons of our operating results are
not necessarily meaningful and that you should not rely upon any comparisons as
indications of future performance. In future periods, our operating results may
fall below the expectations of public market analysts and investors, which would
likely have a negative effect on the price of our Common Stock.
GROSS PROFIT
In fiscal years 2000, 1999 and 1998, our gross profit was $257.7 million,
$202.9 million and $197.4 million, respectively. Gross profit as a percent of
sales was 52.0% in fiscal 2000, 49.9% in fiscal 1999 and 49.7% in fiscal 1998.
The most significant factor affecting gross profit percentage in each of these
years was the higher growth rate of microcontrollers and associated application
development systems relative to our Serial EEPROM memory products. We continue
to transition products to smaller geometries and to larger wafer sizes to reduce
future manufacturing costs. We continue to increase our manufacturing capacity
for 8-inch wafers and to transition products to our 0.7-micron process. In
fiscal 2000, products produced on 8-inch wafers grew from 37% at the beginning
of the fiscal year to 55% at the end of the fiscal year. We anticipate that
gross product margins will fluctuate over time, driven primarily by the product
mix of microcontroller products and related memory products, manufacturing
yields, fixed cost absorption, wafer fab loading levels and competitive and
economic conditions.
We believe that expansion of our manufacturing capacity is important to
enable us to respond to increased sales opportunities and maintain satisfactory
delivery schedules. Our business could suffer if the expansion of manufacturing
capacity is delayed or inefficiently implemented. Other companies in the
industry have experienced difficulty in expanding manufacturing capacity,
resulting in reduced yields or delays in product deliveries. We may experience
manufacturing yield or delivery problems in the future, which could harm our
operating results.
THE FOREGOING STATEMENTS RELATING TO ANTICIPATED GROSS PRODUCT MARGINS, THE
TRANSITION TO HIGHER YIELDING MANUFACTURING PROCESSES AND THE EXPANSION OF OUR
MANUFACTURING CAPACITY ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: FLUCTUATIONS
IN PRODUCTION YIELDS, PRODUCTION EFFICIENCIES AND OVERALL CAPACITY UTILIZATION;
COST AND AVAILABILITY OF RAW MATERIALS; ABSORPTION OF FIXED COSTS, LABOR AND
OTHER DIRECT MANUFACTURING COSTS; THE ABILITY TO INCREASE MANUFACTURING CAPACITY
AS NEEDED; THE TIMING AND SUCCESS OF MANUFACTURING PROCESS TRANSITION; DEMAND
FOR OUR PRODUCTS; COMPETITION AND COMPETITIVE PRESSURE ON PRICING; CHANGES IN
PRODUCT MIX; AND OTHER ECONOMIC CONDITIONS.
Currently, the majority of our assembly operations, and a portion of our
test requirements, are performed by third-party contractors located throughout
Asia. Our reliance on third parties involves some reduction in our level of
control over these portions of our business. While we review the quality,
delivery and cost performance of these third-party contractors, there can be no
assurance that reliance on third-party contractors will not adversely impact
results in future reporting periods if any third-party contractor is unable to
maintain assembly and test yields and costs at approximately their current
levels. Third-party assembly and test companies are experiencing high demand and
utilization of their current capacity which could lead to capacity shortages in
the industry. Accordingly, we are in the process of implementing in-house
assembly operations and have shifted a portion of our assembly operations from
third-party contractors to fill this capacity. As of the end of fiscal 2000,
approximately 45% of our assembly requirements was being performed in our
Thailand facility. We are dependent on third-party contractors for the balance
of our requirements.
14
THE FOREGOING STATEMENTS RELATED TO CAPACITY AT THIRD-PARTY ASSEMBLY AND
TEST COMPANIES ARE FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS COULD DIFFER
MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: TIMING AND SUCCESS OF
THE TRANSITION FROM THIRD PARTY ASSEMBLY SERVICES PROVIDERS TO IN-HOUSE ASSEMBLY
OPERATIONS; DELAY IN THE FACILITATION OF OUR IN-HOUSE ASSEMBLY OPERATIONS;
DIFFICULTIES IN THE TRANSITION OF THE ASSEMBLY FUNCTION FROM THIRD PARTIES TO
OUR IN-HOUSE FACILITY; AVAILABILITY OF SUFFICIENT CAPACITY OF THIRD-PARTIES;
SUPPLY DISRUPTION; LABOR UNREST; CHANGES IN PRODUCT MIX; COMPETITIVE PRESSURES
ON PRICES; AND OTHER ECONOMIC CONDITIONS.
Our reliance on foreign operations, and maintenance of substantially all of
our finished goods in inventory in foreign locations exposes us to foreign
political and economic risks, including:
* political, social and economic instability
* trade restrictions and changes in tariffs
* import and export license requirements and restrictions
* difficulties in staffing and managing international operations
* disruptions in international transport or delivery
* fluctuations in currency exchange rates
* difficulties in collecting receivables, or
* potentially adverse tax consequences.
To date, we have not experienced any significant interruptions in our
foreign business operations. If any of these risks materialize, our sales could
decrease and our operations performance could suffer.
RESEARCH AND DEVELOPMENT
We are committed to continuing our investment in new and enhanced products,
including development systems software and in our design and manufacturing
process technology. We believe these investments are significant factors in
maintaining our competitive position. The dollar investment in research and
development in fiscal 2000 increased by 11.7% from the 1999 fiscal year, and by
6.3% from fiscal 1999 compared to fiscal 1998.
Our future operating results will depend to a significant extent on our
ability to develop and introduce new products on a timely basis which can
compete effectively on the basis of price and performance and which address
customer requirements. The success of new product introductions depends on
various factors, including:
* proper new product selection
* timely completion and introduction of new product designs
* development of support tools and collateral literature that make
complex new products easy for engineers to understand and use, and
* market acceptance of our customers' end products.
Because our products are complex, we have experienced delays from time to
time in completing development of new products. In addition, our new products
may not receive or maintain substantial market acceptance. We may be unable to
design, develop and introduce competitive products on a timely basis, which
could reduce our future operating results.
Our future success also depends upon our ability to develop and implement
new design and process technologies. Semiconductor design and process
technologies are subject to rapid technological change and require large
research and development expenditures. Other companies in the industry have
experienced difficulty in effecting transitions to smaller geometry processes
and to larger wafers and, consequently, have suffered reduced manufacturing
yields or delays in product deliveries. We believe that our transition to
smaller geometries and to larger wafers is important for us to remain
competitive. Our future operating results could be reduced if the transition is
substantially delayed or inefficiently implemented.
15
SELLING, GENERAL AND ADMINISTRATIVE
During fiscal 2000, we increased our level of selling, general and
administrative costs to $76.7 million as compared to $63.0 million in fiscal
1999 and $67.5 million in fiscal 1998. Selling, general and administrative costs
represented 15.5% of sales in fiscal 2000 as compared to 15.5% and 17.0% of
sales in the previous two fiscal years. Effective April 1, 2000, we terminated
our contractual relationships with predominately all manufacturers'
representatives in the Americas. We are currently adding additional resources to
our existing direct sales force focusing on the Americas territories. We
anticipate that all resources will be in place by June 30, 2000. We believe that
this transition can be completed without affecting operating results, however,
there can be no assurance that we can attract and retain qualified personnel
according to this timeline. Termination costs of $0.6 million associated with
this business change were included in operating expenses in the quarter ended
March 31, 2000. We expect selling, general and administrative costs to rise over
time as we continue to invest in incremental worldwide sales and technical
support resources to promote our embedded control products.
THE FOREGOING STATEMENTS RELATED TO THE ADDITION OF RESOURCES TO OUR
AMERICAS' DIRECT SALES FORCE ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS
COULD DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: OUR
ABILITY TO ATTRACT AND RETAIN QUALIFIED SALES PERSONNEL; AND GENERAL ECONOMIC
CONDITIONS.
OTHER INCOME (EXPENSE)
Interest income in fiscal 2000 increased from fiscal 1999 as a result of
higher invested cash balances, and decreased from fiscal 1998 as a result of
lower invested cash balances. Interest expense in fiscal 2000 decreased over
fiscal 1999 and 1998 due to lower borrowing levels associated with the Company's
credit facilities. Other income represents numerous immaterial non-operating
items.
PROVISION FOR INCOME TAXES
Provisions for income taxes reflect tax on foreign earnings and federal and
state tax on U.S. earnings. We had an effective tax rate of 27.0% for the years
ended March 31, 2000, 1999 and 1998, respectively, due primarily to lower tax
rates at our foreign locations. We believe that our tax rate for the foreseeable
future will be approximately 27%.
THE FOREGOING STATEMENT REGARDING THE COMPANY'S ANTICIPATED FUTURE TAX RATE
IS A FORWARD-LOOKING STATEMENT. ACTUAL RESULTS COULD DIFFER MATERIALLY BECAUSE
OF THE FOLLOWING FACTORS, AMONG OTHERS: CURRENT TAX LAWS AND REGULATIONS;
TAXATION RATES IN GEOGRAPHIC REGIONS WHERE WE HAVE SIGNIFICANT OPERATIONS; AND
CURRENT TAX HOLIDAYS AVAILABLE IN FOREIGN LOCATIONS.
YEAR 2000 ISSUE
The Year 2000 issue arose as a result of certain computer programs being
written using two digits rather than four to define the applicable year. To
date, we have not experienced problems complying with Year 2000 issues, nor have
we experienced any material Year 2000-related issues or had any Year
2000-related issues reported to us by our business partners. Should any Year
2000 issues occur at a later time, however, we believe they would most likely be
able to be resolved in the normal course of business.
EURO CONVERSION ISSUES
We operate in the European Market and currently generate approximately one
third of our total net sales from customers located in Europe. Our commercial
headquarters in Europe are located in the United Kingdom, which is not currently
one of the eleven member states of the European Union converting to a common
currency.
We currently conduct 98% of our business in Europe in U.S. Dollars and 1%
of our business in Europe in Pounds Sterling. The balance of our net sales is
conducted in currencies which will eventually be replaced by the Euro. We will
monitor the potential commercial impact of converting a portion of our current
business to the Euro, but we do not currently anticipate any material impact to
our business based on this transition. We do not currently anticipate any
material impact to our business related to Euro matters from information
technology, derivative transactions, tax issues and accounting software issues.
16
LIQUIDITY AND CAPITAL RESOURCES
We had $188.1 million in cash and cash equivalents at March 31, 2000, an
increase of $157.3 million from the March 31, 1999 balance. During the fiscal
year ended March 31, 2000, and through May 31, 2000, we maintained an unsecured
line of credit with a syndicate of domestic banks totaling $90.0 million.
Borrowings under the domestic line of credit as of March 31, 2000 were $9.0
million. We were required to achieve certain financial ratios and operations
results to maintain the domestic line of credit. We were in compliance with
these covenants at March 31, 2000. We also maintain an unsecured short-term line
of credit totaling $36.4 million with certain foreign banks. There were no
borrowings under the foreign line of credit as of March 31, 2000. There are no
covenants related to the foreign line of credit. At March 31, 2000, an aggregate
of $124.5 million of these facilities was available, subject to financial
covenants and ratios with which we were in compliance. Our ability to fully
utilize these facilities was dependent on our remaining in compliance with such
covenants and ratios.
On May 31, 2000, we entered into a new unsecured revolving credit facility
with a syndicate of banks totaling $100.0 million. We can elect to increase the
facility to $150.0 million, subject to certain conditions set forth in the
credit agreement. This new facility has a termination date of May 31, 2003. This
facility replaces the $90.0 million line of credit described above. We are
required to achieve certain financial ratios and operations results to maintain
this line of credit. Our ability to fully utilize this credit facility is
dependent on our being in compliance with such covenants and ratios.
During the year ended March 31, 2000, we generated $239.7 million of cash
from operating activities, an increase of $137.1 million from the year ended
March 31, 1999, and an increase of $103.2 million from the year ended March 31,
1998. The increase in cash flow from operations during fiscal year 1999 was
primarily due to increased profitability, the impact of special charges, and the
impact of changes in accounts payable, and accrued liabilities and other assets
and liabilities.
Our level of capital expenditures varies from time to time as a result of
actual and anticipated business conditions. Capital expenditures were $212.4
million in fiscal 2000, $39.6 million in fiscal 1999 and $145.3 million in
fiscal 1998. Capital expenditures were primarily for the expansion of production
capacity and the addition of research and development equipment in each of these
periods. We currently intend to spend approximately $510 million during the next
12 months for additional capital, including:
* equipment to increase capacity at our existing wafer fabrication
facilities
* acquisition of the Puyallup, Washington semiconductor manufacturing
complex
* expansion of product test operations
* development of in-house assembly capability, and
* incremental infrastructure to support the growth of the business.
We expect to finance capital expenditures through our cash flows from
operations, available debt arrangements and other sources of financing including
issuance of equity and debt securities depending on market conditions. We
believe that the capital expenditures anticipated to be incurred over the next
12 months will provide sufficient additional manufacturing capacity to meet our
currently anticipated needs. In support of our longer-term growth objectives, we
recently signed an agreement to acquire a semiconductor manufacturing complex in
Puyallup, Washington. Closing on the purchase is expected to occur by July 31,
2000. Please see the discussion on the Puyallup facility under " Part I -
Business - Manufacturing," at page 4, above.
THE FOREGOING STATEMENTS REGARDING THE ANTICIPATED LEVEL OF CAPITAL
EXPENDITURES OVER THE NEXT 12 MONTHS, THE FINANCING OF SUCH CAPITAL EXPENDITURES
AND THE ANTICIPATED CLOSING DATE OF THE PURCHASE OF THE PUYALLUP SEMICONDUCTOR
MANUFACTURING COMPLEX, ARE FORWARD LOOKING STATEMENTS. ACTUAL RESULTS COULD
DIFFER MATERIALLY BECAUSE OF THE FOLLOWING FACTORS, AMONG OTHERS: THE CYCLICAL
NATURE OF THE SEMICONDUCTOR INDUSTRY AND THE MARKETS ADDRESSED BY OUR PRODUCTS;
MARKET ACCEPTANCE OF OUR PRODUCTS AND OF OUR CUSTOMERS' PRODUCTS; DEMAND FOR OUR
PRODUCTS; UTILIZATION OF CURRENT MANUFACTURING CAPACITY; THE AVAILABILITY AND
COST OF RAW MATERIALS, EQUIPMENT AND OTHER SUPPLIES; AND THE ECONOMIC, POLITICAL
AND OTHER CONDITIONS IN THE WORLDWIDE MARKETS SERVED BY US.
Net cash provided by financing activities was $130.0 million for the year
ended March 31, 2000. Net cash used in financing activities was $64.4 million
for the year ended March 31, 1999 and $2.1 million for the year ended March 31,
1998. Proceeds from sale of stock and put options were $149.3 million for the
year ended March 31, 2000, $16.0 million for the year ended March 1999 and $12.5
million for the year ended March 31, 1998. Payments on long term debt and
capital lease obligations were $1.8 million in fiscal 2000, $4.4 million in
fiscal 1999 and $6.1 in fiscal 1998. Repayments on lines of credit were $17.5
million for the year ended March 31, 2000. Net proceeds from lines of credit
were $3.5 million in fiscal 1999 and $23.0 in fiscal 1998. Cash expended for the
purchase of our Common Stock was $79.5 million in fiscal 1999 and $31.5 million
in fiscal 1998.
17
During the year ended March 31, 1999, we purchased 4,271,250 shares of
Common Stock at an aggregate cost of $70,324,000. During the year ended March
31, 2000, we received 345,863 shares and in the year ended March 31, 1999, we
received 1,832,145 shares in conjuction with a net share settled forward
contract. We also received $10,243,000 in conjunction with a net share settled
forward contract, which was credited to additional paid in capital. See Note 13
to "Consolidated Financial Statements." The net share settled forward contract
could obligate us to purchase shares of our Common Stock in the future if the
price of our Common Stock is below the strike price of the instruments. Also, in
connection with a stock repurchase program, during fiscal 1999, we sold put
options for 900,000 shares of Common Stock at pricing per share which ranged
from $14.87 to $18.33. During fiscal 1999, we purchased put options for 75,000
shares of Common Stock. The net proceeds from the sale and repurchase of these
options, in the amount of $2,113,000 for fiscal 1999, has been credited to
additional paid-in capital. During the year ended March 31, 1999, put options
for 375,000 shares of Common Stock were purchased at the settlement dates at a
total cost of $9,188,000. As of March 31, 2000, we had no outstanding put
options. During the year ended March 31, 1999, we completed two transactions in
connection with the stock repurchase program. In April 1998, we completed a
costless collar transaction involving call options for 750,000 shares of Common
Stock priced at $17.30 and put options for 997,500 shares of Common Stock priced
at $16.79. The expiration date of the transaction was April 28, 1999, resulting
in us receiving $4,600,000 which was credited to additional paid in capital.
Also, in connection with the stock repurchase program, we completed a net share
settled forward contract for 3,000,000 shares of Common Stock at an average
price of $19.49 per share. The expiration date of this transaction is May 2001
with quarterly interim settlement dates.
We expect from time to time to purchase shares of Common Stock in
connection with its authorized stock purchase program. We will also have cash
requirements associated with our purchase and facilitization of the Puyallup
semiconductor manufacturing complex, which is described under " Part I -
Business - Manufacturing," at page 4, above.
We believe that our existing sources of liquidity combined with cash
generated from operations will be sufficient to meet our currently anticipated
cash requirements for at least the next 12 months. However, the semiconductor
industry is capital intensive. In order to remain competitive, we must continue
to make significant investments in capital equipment, for both production and
research and development. We may seek additional equity or debt financing during
the next 12 months for the capital expenditures required to acquire, maintain or
expand our wafer fabrication and product test facilities, or other purposes. The
timing and amount of any such capital requirements will depend on a number of
factors, including demand for our products, product mix, changes in industry
conditions and competitive factors. There can be no assurance that such
financing will be available on acceptable terms, and any additional equity
financing could result in additional dilution to existing investors.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In March 2000, the Financial Accounting Standards Board, referred to as
FASB, issued FASB interpretation No. 44, "Accounting for Certain Transactions
involving Stock Compensation," referred to as FIN No. 44. FIN No. 44 clarifies
the application of APB Opinion No. 25 by clarifying the definition of an
employee, the determination of noncompensatory plans and the effect of
modifications to stock options. We do not believe the adoption of FIN No. 44
will impact our financial statements.
18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our investment portfolio, consisting of fixed income securities, was $189.6
million as of March 31, 2000, and $15.6 million as of March 31, 1999. These
securities, like all fixed income instruments, are subject to interest rate risk
and will decline in value if market interest rates increase. If market rates
were to increase immediately and uniformly by 10% from the levels of March 31,
2000 and March 31, 1999, the decline in the fair value of our investment
portfolio would not be material. Additionally, we have the ability to hold our
fixed income investments until maturity and, therefore, we would not expect to
recognize an adverse impact in income or cash flows.
We have international operations and are thus subject to foreign currency
rate fluctuations. To date, our exposure related to exchange rate volatility has
not been significant. If the foreign currency rates fluctuate by 15% from the
rates at March 31, 2000 and March 31, 1999, the effect on our financial position
and results of operation would not be material.
During the normal course of business we are routinely subjected to a
variety of market risks, examples of which include, but are not limited to,
interest rate movements and foreign currency fluctuations, as we discuss in this
Item 7A, and collectability of accounts receivable. We constantly assess these
risks and have established policies and procedures to protect against the
adverse effects of these and other potential exposures. Although we do not
anticipate any material losses in these risk areas, no assurance can be made
that material losses will not be incurred in these areas in the future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements listed in the index appearing under
Item 14(a)(1) hereof are filed as part of this Form 10-K. See also Index to
Financial Statements on page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information on the member of our board of directors is incorporated herein
by reference to our proxy statement for the 2000 annual meeting of stockholders
under the caption "Election of Directors."
Information on our executive officers is provided in Item I, Part I of this
Form 10-K under the caption "Executive Officers" at page 10, above. Information
with respect to compliance with Section 16(a) of the Securities Exchange Act of
1934, as amended, is incorporated herein by reference to our proxy statement for
the 2000 annual meeting of stockholders under the caption "Section16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein
by reference to the information under the caption "Executive Compensation" in
our proxy statement for the 2000 annual meeting of stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the information under the
caption "Security Ownership of Principal Stockholders, Directors and Executive
Officers" in our proxy statement for the 2000 annual meeting of stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the information under the caption
"Certain Transactions" in our proxy statement for the 2000 annual meeting of
stockholders.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
Page No.
--------
(1) Financial Statements:
Independent Auditors' Report F-1
Consolidated Balance Sheets as of
March 31, 2000 and 1999 F-2
Consolidated Statements of Income for each
of the years in the three-year period ended
March 31, 2000 F-3
Consolidated Statements of Cash Flows for
each of the years in the three-year period
ended March 31, 2000 F-4
Consolidated Statements of Stockholders'
Equity for each of the years in the
three-year period ended March 31, 2000 F-5
Notes to Consolidated Financial Statements F-6
(2) Financial Statement Schedules - Applicable
schedules have been omitted because information
is included in the footnotes to the
Financial Statements.
(3) The Exhibits which are filed with this Form 10-K or
which are incorporated herein by reference are set
forth in the Exhibit Index which appears on page
E-1 hereof, which Exhibit Index is incorporated
herein by this reference. E-1
(b) We filed a current report on Form 8-K on January 14, 2000 to report:
- A 3-for-2 stock split in the form of a stock dividend, and
- Our results for the quarter ended December 31, 1999.
(c) See Item 14(a)(3) above.
(d) See "Index to Financial Statements" included under Item 8 to this Form
10-K.
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
MICROCHIP TECHNOLOGY INCORPORATED
(Registrant)
By: /s/ Steve Sanghi
------------------------------------
Steve Sanghi
President and Chief Executive Officer
Date: June 7, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name and Signature Title Date
- ------------------ ----- ----
/s/ Steve Sanghi Director, President and June 7, 2000
- ------------------------ Chief Executive Officer
Steve Sanghi
- ------------------------
Albert J. Hugo-Martinez* Director June 7, 2000
- ------------------------
L. B. Day* Director June 7, 2000
- ------------------------
Matthew W. Chapman* Director June 7, 2000
- ------------------------
Wade F. Meyercord* Director June 7, 2000
/s/ Gordon W. Parnell Vice President and Chief June 7, 2000
- ------------------------ Financial Officer (Principal
Gordon W. Parnell Financial and Accounting Officer)
*By: /s/ Steve Sanghi Individually and as June 7, 2000
- ------------------------ Attorney-in-fact
Steve Sanghi
21
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Restated Certificate of Incorporation of Registrant
[Incorporated by reference to Exhibit 3.1 to Registration
Statement No. 33-70608]
3.1.1 Certificate of Amendment to Registrant's Restated Certificate
of Incorporation [Incorporated by reference to Exhibit 3.3.1 to
the Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1994]
3.1.2 Certificate of Designation of Rights, Preferences and
Privileges of Series A Participating Preferred Stock of
Registrant [Incorporated by reference to Exhibit No. 3.1.2 to
Registrant's Annual Report on Form 10-K for the fiscal year
ended March 31, 1995]
3.1.3 Certificate of Amendment to Registrant's Restated Certificate
of Incorporation [Incorporated by reference to Exhibit No. 1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1995]
3.1.4 Certificate of Amendment to Registrant's Certificate of
Incorporation [Incorporated by reference to Exhibit No. 3.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997]
3.2 Amended and Restated By-Laws of Registrant, as amended through
August 20, 1999 [Incorporated by reference to Exhibit No. 3.1
to Registrant's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1999]
4.1 Amended and Restated Preferred Shares Rights Agreement, dated
as of October 11, 1999, between Registrant and Norwest Bank
Minnesota, N.A., including the Amended Certificate of
Designations, the form of Rights Certificate and the Summary of
Rights, attached as exhibits thereto [Incorporated by reference
to Exhibit No. 1 to Registrant's Registration Statement on Form
8-A as filed with the Securities and Exchange Commission as of
October 12, 1999]
10.1 Form of Indemnification Agreement between Registrant and its
directors and certain of its officers [Incorporated by
reference to Exhibit No. 10.1 to Registration Statement No.
33-57960]
10.2 Amended and Restated 1989 Stock Option Plan [Incorporated by
reference to Exhibit No. 10.14 to Registration Statement No.
33-57960]
10.3 1993 Stock Option Plan, as amended through April 25, 1997
[Incorporated by reference to Exhibit 10.11 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1997]
10.4 Form of Notice of Grant For 1993 Stock Option Plan, with
Exhibit A thereto, Form of Stock Option Agreement; and Exhibit
B thereto, Form of Stock Purchase Agreement [Incorporated by
reference to Exhibit No. 10.6 Registration Statement No.
333-872]
10.5 Employee Stock Purchase Plan, as amended through April 25, 1997
[Incorporated by reference to Exhibit 10.13 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1997]
E-1
10.6 Form of Stock Purchase Agreement for Employee Stock Purchase
Plan [Incorporated by reference to Exhibit No. 10.2 to
Registration Statement No. 333-872]
10.7 Form of Enrollment Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.3 to Registration
Statement No. 333-872]
10.8 Form of Change Form For Employee Stock Purchase Plan
[Incorporated by reference to Exhibit No. 10.4 to Registration
Statement No. 333-872]
10.9 Form of Executive Officer Severance Agreement [Incorporated by
reference to Exhibit No. 10.7 to Registration Statement No.
333-872]
10.10 Credit Agreement dated as of May 31, 2000 among Registrant, the
Banks named therein, Bank One, NA, as LC Issuer and
Administrative Agent, Wells Fargo Bank, National Association,
as Syndication Agent and Bank of America, N.A., as
Documentation Agent
10.11 Development Agreement dated as of August 29, 1997 by and
between Registrant and the City of Chandler, Arizona
[Incorporated by reference to Exhibit No. 10.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended December
31, 1997]
10.12 Development Agreement dated as of July 17, 1997 by and between
Registrant and the City of Tempe, Arizona [Incorporated by
reference to Exhibit No. 10.2 to Registrant's Quarterly Report
on Form 10-Q for the quarter ended December 31, 1997]
10.13 1997 Nonstatutory Stock Option Plan [Incorporated by reference
to Exhibit No. 10.16 to Registrant's Annual Report on Form 10-K
for the fiscal year ended March 31, 1998]
10.14 Form of Notice of Grant For 1997 Nonstatutory Stock Option
Plan, with Exhibit A thereto, Form of Stock Option Agreement
[Incorporated by reference to Exhibit No. 10.17 to Registrant's
Annual Report on Form 10-K for the fiscal year ended March 31,
1998]
10.15 International Employee Stock Purchase Plan as Amended Through
April 25, 1997 [Incorporated by reference to Exhibit 10 to
Registration Statement No. 333-40791]
18.1 Letter from KPMG Peat Marwick LLP re: Change in Accounting
Principles [Incorporated by reference to Exhibit No. 18.1 to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997]
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
24.1 Power of Attorney re: Microchip Technology Incorporated, the
Registrant
E-2
Annual Report on Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
--------
INDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
EXHIBITS
--------
YEAR ENDED MARCH 31, 2000
MICROCHIP TECHNOLOGY INCORPORATED
AND SUBSIDIARIES
CHANDLER, ARIZONA
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page Number
-----------
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
as of March 31, 2000 and 1999
Consolidated Statements of Income F-3
for each of the years in the three-year
period ended March 31, 2000
Consolidated Statements of Cash Flows F-4
for each of the years in the three-year
period ended March 31, 2000
Consolidated Statements of Stockholders' Equity F-5
for each of the years in the three-year
period ended March 31, 2000
Notes to Consolidated Financial Statements F-6
i
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Microchip Technology Incorporated:
We have audited the accompanying consolidated balance sheets of Microchip
Technology Incorporated and subsidiaries as of March 31, 2000 and 1999, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended March 31, 2000. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Microchip Technology
Incorporated and subsidiaries as of March 31, 2000 and 1999, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 31, 2000, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Phoenix, Arizona
April 19, 2000
F-1
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share amounts)
ASSETS
March 31, March 31,
2000 1999
--------- ---------
Cash and cash equivalents $ 188,112 $ 30,826
Accounts receivable, net 75,911 62,545
Inventories 59,461 67,975
Prepaid expenses 3,523 2,982
Deferred tax asset 35,549 37,129
Other current assets 2,257 1,958
--------- ---------
Total current assets 364,813 203,415
Property, plant and equipment, net 439,030 293,663
Other assets 8,568 8,152
--------- ---------
Total assets $ 812,411 $ 505,230
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term lines of credit $ 9,000 $ 1,509
Accounts payable 67,861 28,489
Current maturities of long-term debt -- 1,403
Current maturities of capital lease obligations -- 413
Accrued liabilities 36,879 49,699
Deferred income on shipments to distributors 54,760 28,607
--------- ---------
Total current liabilities 168,500 110,120
Long-term lines of credit -- 25,000
Long-term pension accrual 918 --
Deferred tax liability 18,697 11,313
Stockholders' equity:
Preferred stock, $.001 par value; authorized 5,000,000
shares; no shares issued or outstanding -- --
Common stock, $.001 par value; authorized 100,000,000
shares; issued 80,822,013 and outstanding 78,907,553
shares at March 31, 2000;issued 80,822,013 and
outstanding 76,848,236 shares at March 31, 1999 81 81
Additional paid-in capital 318,341 161,215
Retained earnings 366,325 264,281
Less shares of common stock held in treasury at cost;
1,914,460 shares at March 31, 2000 and 3,973,778 at
March 31, 1999 (60,451) (66,780)
--------- ---------
Net stockholders' equity 624,296 358,797
Total liabilities and stockholders' equity $ 812,411 $ 505,230
========= =========
See accompanying notes to consolidated financial statements.
F-2
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share amounts)
Years Ended March 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Net sales $ 495,729 $ 406,460 $ 396,894
Cost of sales 237,985 203,574 199,538
--------- --------- ---------
Gross profit 257,744 202,886 197,356
Operating expenses:
Research and development 45,571 40,787 38,362
Selling, general and administrative 76,743 63,006 67,549
Special (income)/charges (2,400) 28,937 5,000
--------- --------- ---------
119,914 132,730 110,911
Operating income 137,830 70,156 86,445
Other income (expense):
Interest income 2,232 754 2,635
Interest expense (1,048) (2,964) (1,130)
Other, net 770 665 217
--------- --------- ---------
Income before income taxes 139,784 68,611 88,167
Income taxes 37,740 18,523 23,799
--------- --------- ---------
Net income $ 102,044 $ 50,088 $ 64,368
========= ========= =========
Basic net income per share $ 1.33 $ 0.65 $ 0.80
========= ========= =========
Diluted net income per share $ 1.25 $ 0.62 $ 0.76
========= ========= =========
Weighted average common shares outstanding 76,489 76,704 80,064
========= ========= =========
Weighted average common and common
equivalent shares outstanding 81,354 80,292 84,470
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except share amounts)
Years Ended March 31,
-----------------------------------
2000 1999 1998
--------- --------- ---------
Cash flows from operating activities:
Net income $ 102,044 $ 50,088 $ 64,368
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts 936 335 638
Provision for inventory valuation 870 3,464 2,126
Provision for pension accrual 295 1,037 1,202
Special charges -- 20,017 5,000
Depreciation and amortization 66,995 64,851 53,468
Amortization of purchased technology 1,477 300 300
Deferred income taxes 8,964 1,689 (9,423)
Tax benefit from exercise of stock options 14,175 4,915 5,332
Decrease (increase) in accounts receivable (14,302) (6,560) 4,144
Decrease (increase) in inventories 7,644 (5,146) (11,606)
Increase (decrease) in accounts payable
and accrued liabilities 26,552 (24,797) 12,828
Change in other assets and liabilities 24,043 (7,556) 8,164
--------- --------- ---------
Net cash provided by operating activities 239,693 102,637 136,541
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures (212,362) (39,640) (145,301)
--------- --------- ---------
Net cash used in investing activities (212,362) (39,640) (145,301)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (repayments of) lines of credit (17,509) 3,509 23,000
Payments on long-term debt (1,403) (2,213) (2,470)
Payments on capital lease obligations (413) (2,141) (3,605)
Repurchase of common stock -- (79,512) (31,481)
Proceeds from sale of stock and put options 149,280 15,998 12,505
--------- --------- ---------
Net cash provided by (used in) financing activities 129,955 (64,359) (2,051)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 157,286 (1,362) (10,811)
Cash and cash equivalents at beginning of year 30,826 32,188 42,999
--------- --------- ---------
Cash and cash equivalents at end of year $ 188,112 $ 30,826 $ 32,188
========= ========= =========
See accompanying notes to consolidated financial statements.
F-4
MICROCHIP TECHNOLOGY
INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common
Stock and Additional Stock held Net
Paid-in Capital in Treasury Retained Stockholders'
(in thousands) Shares Amount Shares Amount Earnings Equity
------- --------- ------ -------- -------- ---------
Balance March 31, 1997 79,952 $ 168,238 157 $ (1,479) $149,825 $ 316,584
Sale of Stock
Exercise of stock options 1,167 5,972 -- -- -- 5,972
Employee stock purchase plan 260 4,318 -- -- -- 4,318
Purchase of treasury stock -- -- 1,916 (31,481) -- (31,481)
Issuance of treasury stock for the
exercise of options and purchases in
the employee stock purchase plan (557) (9,156) (557) 9,156 -- --
Sale of put options, net -- 2,215 -- -- -- 2,215
Tax benefit from exercise of options -- 5,332 -- -- -- 5,332
Net income -- -- -- -- 64,368 64,368
------- --------- ------ -------- -------- ---------
Balance March 31, 1998 80,822 $ 176,919 1,517 $(23,804) $214,193 $ 367,308
Sale of Stock
Exercise of stock options 1,416 9,906 -- -- -- 9,906
Employee stock purchase plan 329 3,979 -- -- -- 3,979
Purchase of treasury stock -- -- 4,992 (79,512) -- (79,512)
Issuance of treasury stock for the
exercise of options, purchases in
the employee stock purchase plan
and net share settled forward contract (1,745) (36,536) (2,535) 36,536 -- --
Sale of put options, net -- 2,113 -- -- -- 2,113
Tax benefit from exercise of options -- 4,915 -- -- -- 4,915
Net income -- -- -- -- 50,088 50,088
------- --------- ------ -------- -------- ---------
Balance March 31, 1999 80,822 $ 161,296 3,974 $(66,780) $264,281 $ 358,797
Sale of Stock
Public offering (net of offering
costs of $456) 1,898 114,011 -- -- -- 114,011
Exercise of stock options 1,722 15,859 -- -- -- 15,859
Employee stock purchase plan 274 4,567 -- -- -- 4,567
Net share settled forward -- 10,243 1,834 (--) -- 10,243
Issuance of treasury stock for the
exercise of options, purchases in
the employee stock purchase plan
and public offering (3,894) (6,329) (3,894) 6,329 -- --
Tax benefit from exercise of options -- 14,175 -- -- -- 14,175
Costless collar settlement -- 4,600 -- -- -- 4,600
Net income -- -- -- -- 102,044 102,044
------- --------- ------ -------- -------- ---------
Balance March 31, 2000 80,822 $ 318,422 1,914 $(60,451) $366,325 $ 624,296
======= ========= ====== ======== ======== =========
See accompanying notes to consolidated financial statements
F-5
MICROCHIP TECHNOLOGY INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
We develop and manufacture specialized semiconductor products used by our
customers for a wide variety of embedded control applications. Our product
portfolio comprises microcontrollers; application-specific standard
products, referred to as ASSPs; and related mixed signal and memory
products. We market our products to the consumer, automotive, office
automation, communications and industrial markets.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Microchip
Technology Incorporated and its wholly owned subsidiaries ("Microchip" or
the "Company"). All significant intercompany accounts and transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
All highly liquid investments including marketable securities purchased
with an original maturity of three months or less are considered to be cash
equivalents. There were no marketable securities at March 31, 1999.
INVENTORIES
Inventories are valued at the lower of cost or market using the first-in,
first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed
when incurred. Depreciation is provided on a straight-line basis over the
estimated useful lives of the related assets which range from three to
twenty-five years.
Assets acquired under capital lease arrangements have been recorded at the
present value of the future minimum lease payments and are being amortized
on a straight-line basis over the estimated useful life of the asset or the
lease term, whichever is shorter. Amortization of this equipment is
included in depreciation and amortization expense.
FOREIGN CURRENCY TRANSLATION AND FORWARD CONTRACTS
The Company's foreign subsidiaries are considered to be extensions of the
U.S. Company and any translation gains and losses related to these
subsidiaries are included in income. As the U.S. Dollar is utilized as the
functional currency, gains and losses resulting from foreign currency
transactions (transactions denominated in a currency other than the
subsidiaries' functional currency) are also included in income. Gains and
losses associated with currency rate changes on forward contracts are
recorded currently in income.
REVENUE RECOGNITION
Revenue from product sales to direct customers is recognized upon shipment
and transfer of title. The Company defers recognition of profits on sales
to distributors that have rights of return and price protection until the
distributors have resold the products.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which these
temporary differences are expected to be recovered or settled.
COMPUTATION OF NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, EARNINGS PER SHARE ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects
of options, warrants and convertible securities. Diluted earnings per share
is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented,
and where appropriate restated, to conform to the SFAS No. 128
requirements.
F-6
IMPAIRMENT OF LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when indicators of impairment are present and the undiscounted
cash flows estimated to be generated by those assets are less than the
assets' carrying amount.
STOCK OPTION PLANS
Prior to April 1, 1996, the Company accounted for its stock option plans in
accordance with the provisions of Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. As such, compensation expense would be recorded only if,
on the date of grant, the current market price of the underlying stock
exceeded the exercise price. On April 1, 1996, the Company adopted SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS No. 123") which
permits entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of APB
Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made in fiscal 1996 and
future years as if the fair-value-based method defined in SFAS No. 123 had
been applied. The Company has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
USE OF ESTIMATES
The Company has made a number of estimates and assumptions relating to the
reporting assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain 1999 and 1998 fiscal year balances have been reclassified to
conform to the fiscal year 2000 presentation.
2. SPECIAL CHARGES
LEGAL SETTLEMENT WITH LUCENT TECHNOLOGIES INC.
On January 13, 1998, the Company finalized a settlement of its patent
litigation with Lucent Technologies Inc. resulting in the Company recording
a $5,000,000 special charge during the quarter ended December 31, 1997.
Under the terms of the settlement, Microchip made a one-time cash payment
to Lucent and issued to Lucent warrants to acquire 450,000 shares of Common
Stock of the Company priced at $16.83 per share. The terms of the
settlement also provide for the Company to make a contingent payment to
Lucent if the Company's earnings per share performance for the three and
one-half year period ending June 30, 2001 does not meet certain targeted
levels. Based on the estimate of earnings per share for the measurement
period as of March 31, 1999 we provided appropriate reserves to meet this
liability. Due to the sale of the warrant by the holder the associated
reserve became unnecessary and we recorded a special income of $3,600,000
in the quarter ended September 30, 1999. We also recorded a special charge
related to other legal issues in the amount of $1,200,000 in the quarter
ended September 30, 1999.
RESTRUCTURING CHARGES
The Company implemented two restructuring actions to position the Company
for future cost effective growth. During the March 1999 quarter, the
Company completed closure of its 5-inch wafer line which represented the
Company's least flexible and least cost-effective production capacity. This
action resulted in a restructuring charge of $7,561,000 in the March 1999
quarter. The Company also decided to restructure its test operations by
closing its Kaohsiung facility and migrating its test capacity to its
lower-cost, Thailand facility. This action resulted in a restructuring
charge of $6,089,000 in the March 1999 quarter.
Included in the restructuring charges resulting from elimination of the
5-inch production capacity was $6,758,000 related to equipment that was
written off, $310,000 related to employee severance costs and $493,000
related to other restructuring costs. Included in the restructuring charges
resulting from the closure of the Kaohsiung facility was $5,579,000 related
to employee severance costs and $510,000 related to other restructuring
costs.
Included in the special charge the Company recorded in the March 1999
quarter was $1,805,000 related to two legal settlements associated with
intellectual property matters, and $350,000 related to restructure of a
portion of the Company's sales infrastructure.
F-7
During the quarter ended June 30, 1998, the Company recognized a special
charge of $5,500,000 which was comprised of three elements: a $3,300,000
legal settlement with another company involving an intellectual property
dispute; a $1,700,000 write-off of products obsoleted by the introduction
of newer products; and a $500,000 charge associated with the restructuring
of a portion of the Company's sales organization.
ACQUISITIONS
KEELOQ(R) HOPPING CODE
On November 17, 1995, the Company acquired the Keeloq(R) hopping code
technology and patents developed by Nanoteq Ltd. of the Republic of South
Africa, and the marketing rights related thereto (the "Keeloq
Acquisition"). The Keeloq Acquisition was treated as an asset purchase for
accounting purposes. The amount paid for the Keeloq Acquisition, including
all related costs, was $12,948,000. The Company has written off a
substantial portion of the purchase price that relates to in-process
research and development costs, which is consistent with the Company's
ongoing treatment of research and development costs, as well as all Keeloq
Acquisition-related costs. The special charge associated with the Keeloq
Acquisition was $11,448,000, with the balance treated as purchased
technology and amortized on a straight line basis over five years. Under
the terms of the Keeloq Acquisition, the Company agreed to a secondary
payment which has been determined to be $10,250,000, net of legal expenses
of $1,107,000. The Company has determined that $4,250,000 will be treated
as purchased technology and amortized over the remaining expected life of
the revenue stream of the Keeloq products. Under the provisions of SFAS No.
121, ACCOUNTING FOR THE IMPAIRMENT OF LONG LIVED ASSETS AND FOR LONG LIVED
ASSETS TO BE DISPOSED OF, the balance of the payment including the residual
asset value capitalized as part of the initial payment has been written off
as part of the special charge made by the Company in the quarter ended
March 31, 1999. The total amount expensed as part of the special charge in
the quarter ended March 31, 1999 was $7,632,000.
3. CONTINGENCIES
The Company is subject to lawsuits and other claims arising in the ordinary
course of its business. In the Company's opinion, based on consultation
with legal counsel, as of March 31, 2000, the effect of such matters will
not have a material adverse effect on the Company's financial position.
F-8
4. ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (amounts in thousands):
March 31,
-----------------------
2000 1999
--------- ---------
Trade accounts receivable $ 77,945 $ 64,335
Other 703 570
--------- ---------
78,648 64,905
Less allowance for doubtful accounts 2,737 2,360
--------- ---------
$ 75,911 $ 62,545
========= =========
5. INVENTORIES
The components of inventories are as follows (amounts in thousands):
March 31,
---------------------
2000 1999
------- -------
Raw materials $ 7,724 $ 4,491
Work in process 35,914 46,947
Finished goods 22,873 26,531
------- -------
66,511 77,969
Less allowance for inventory valuation 7,050 9,994
------- -------
$59,461 $67,975
======= =======
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (amounts in
thousands):
March 31,
----------------------
2000 1999
-------- --------
Land $ 11,545 $ 11,545
Building and building improvements 90,069 77,600
Machinery and equipment 479,509 365,947
Projects in process 100,293 41,143
-------- --------
681,416 496,235
Less accumulated depreciation
and amortization 242,386 202,572
-------- --------
$439,030 $293,663
======== ========
7. LONG-TERM DEBT
The Company has an unsecured line of credit with a syndicate of U.S. banks
for up to $90,000,000, bearing interest the LIBOR plus .325% expiring in
October 2000. The Company had utilized $9,000,000 and $25,000,000 of this
line of credit as of March 31, 2000 and 1999, respectively. The agreement
between the Company and the syndicate of banks requires the Company to
F-9
achieve certain financial ratios and operating results. The Company was in
compliance with these covenants as of March 31, 2000.
On May 31, 2000, we entered into a new unsecured revolving credit facility
with a syndicate of banks totaling $100.0 million. We can elect to increase
the facility to $150.0 million, subject to certain conditions set forth in
the credit agreement. This new facility has a termination date of May 31,
2003. This facility replaces the $90.0 million line of credit described
above. We are required to achieve certain financial ratios and operations
results to maintain this line of credit. Our ability to fully utilize this
credit facility is dependent on our being in compliance with such covenants
and ratios.
The Company has an additional unsecured line of credit with various Taiwan
financial institutions for up to $36,431,000 (U.S. Dollar equivalent).
These borrowings are predominantly denominated in U.S. Dollars, bearing
interest at the Singapore Interbank Offering Rate (SIBOR) 6.515% at March
31, 2000 plus 0.372% (average) and expiring on various dates through March
31, 2001. At March 31, 1999 the Company had utilized $1,509,000 of this
line of credit. There were no borrowings against this line of credit as of
March 31, 2000, but an allocation of $1,934,000 of the available line was
made, relating to import guarantees associated with the Company's business
in Thailand.
8. EMPLOYEE BENEFIT PLANS
The Company maintains a contributory profit-sharing plan for a majority of
its domestic employees meeting certain service requirements. The plan
qualifies under Section 401(k) of the Internal Revenue Code of 1986, as
amended, and allows employees to contribute up to 15% of their
compensation, subject to maximum annual limitations prescribed by the
Internal Revenue Service. The Company shall make a matching contribution of
up to 25% of the first 4% of the participant's eligible compensation and
may award up to an additional 25% under the discretionary match. All
matches are provided on a quarterly basis and require the participant to be
an active employee at the end of each quarter. For the fiscal years ended
March 31, 2000, 1999 and 1998, the Company contributions to the plan
totaled $689,000, $445,000 and $525,000, respectively. The Company's
Employee Stock Purchase Plan (the "Purchase Plan") allows eligible
employees of the Company to purchase shares of Common Stock at semi-annual
intervals through periodic payroll deductions. The purchase price per
share, in general, will be 85% of the lower of the fair market value of the
Common Stock on the participant's entry date into the offering period or
85% of the fair market value on the semi-annual purchase date. As of March
31, 2000, 483,891 shares were available for issuance under the Purchase
Plan. In May 2000, subject to stockholder approval, the Board reserved an
additional 200,000 shares of Common Stock for issuance under the Purchase
Plan. Since the inception of the Purchase Plan, 5,559,000 shares of Common
Stock have been reserved for issuance under the Purchase Plan. During
fiscal 1995, a purchase plan was adopted for employees in non-U.S.
locations. Such plan allows for the purchase price per share to be 100% of
the lower of the fair market value of the Common Stock on the beginning or
end of the semi-annual purchase plan period.
Effective January 1, 1997, the Company adopted a non-qualified deferred
compensation arrangement. This plan is unfunded and is maintained primarily
for the purpose of providing deferred compensation for a select group of
management as defined in ERISA Sections 201, 301 and 401. There are no
Company matching contributions with respect to this plan.
Employees in certain foreign locations are covered by a statutory pension
plan. Contributions are accrued based on an actuarially determined
percentage of compensation and are funded in amounts sufficient to meet
statutory requirements. Pension expense amounted to $295,000, $1,037,000,
and $1,202,000 for the years ended March 31, 2000, 1999 and 1998,
respectively.
The Company has a management incentive compensation plan which provides for
bonus payments, based on a percentage of base salary, from an incentive
pool created from operating profits of the Company, at the discretion of
the Board of Directors. During the years ended March 31, 2000, 1999 and
1998, $5,137,000, $2,220,000 and $1,851,000, respectively, was charged
against operations for this plan.
F-10
The Company also has a plan which provides a cash bonus based on the
operating profits of the Company for all employees, at the discretion of
the Board of Directors. During the years ended March 31, 2000, 1999 and
1998, $2,556,000, $607,000 and $1,746,000, respectively, was charged
against operations for this plan.
9. STOCK OPTION PLANS
Under the Company's stock option plans (the "Plans"), key employees,
non-employee directors and consultants may be granted incentive stock
options or non-statutory stock options to purchase shares of Common Stock
at a price not less than 100% of the fair value of the option shares on the
grant date. Options granted under the Plans vest over the period determined
by the Board of Directors at the date of grant, at periods ranging from one
year to four years. At March 31, 2000, there were 5,977,140 shares
available for grant under the Plans. The per share weighted average fair
value of stock options granted under the Plans for the years ended March
31, 2000, 1999 and 1998 was $15.59, $6.87 and $10.41, respectively, based
on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Years Ended March 31,
--------------------------------
2000 1999 1998
---- ---- ----
Expected life (years) 4.29 3.96 3.64
Risk-free interest rate 6.00% 5.10% 5.75%
Volatility 67% 68% 62%
Dividend yield 0% 0% 0%
Under the Plans, 30,596,219 shares of Common Stock had been reserved for
issuance since the inception of the Plans.
The stock option activity is as follows:
Options Outstanding
Weighted Average
Shares Exercise Price
------ --------------
Outstanding at March 31, 1997 9,536,508 $ 8.33
Granted 2,447,732 18.53
Exercised (1,167,627) 5.15
Canceled (1,510,172) 17.33
---------
Outstanding at March 31, 1998 9,306,441 $ 9.89
Granted 1,985,408 15.19
Exercised (1,416,524) 6.96
Canceled (516,859) 19.29
---------
Outstanding at March 31, 1999 9,358,466 $ 11.22
Granted 2,445,707 26.45
Exercised (1,721,603) 9.14
Canceled (261,676) 17.56
---------
Outstanding at March 31, 2000 9,820,894 $ 15.22
========= ========
F-11
The following table summarizes information about the stock options
outstanding at March 31, 2000.
Weighted
Average Weighted Weighted
Range Options Remaining Average Options Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---- -------------- ----------- --------------
$ 0.020 - $ 1.605 253,156 2.83 1.35 253,156 1.35
$ 2.642 - $ 4.741 1,228,604 3.47 4.74 1,228,604 4.74
$ 5.062 - $ 9.148 867,755 4.26 8.96 867,755 8.96
$ 9.703 - $ 11.222 1,182,763 6.22 11.20 79,725 10.93
$ 11.333 - $ 11.333 603,230 6.08 11.33 321,351 11.33
$ 11.389 - $ 14.083 1,432,439 7.88 13.92 221,793 13.11
$ 14.333 - $ 16.555 983,745 7.16 14.95 283,462 15.55
$ 17.125 - $ 21.042 855,874 7.58 19.90 239,696 19.47
$ 22.583 - $ 22.583 1,717,693 9.04 22.58 6,735 22.58
$ 23.417 - $ 61.906 695,635 9.39 35.95 26,560 31.53
--------- ---- ----- --------- ----
$ 0.020 - $ 61.906 9,820,894 6.78 15.22 3,528,837 8.90
========= ==== ===== ========= ====
At March 31, 2000 and 1999, the number of options exercisable was 3,528,837
and 3,759,173, respectively, and the weighted-average exercise price of
those options was $8.90 and $6.97 respectively.
The Company received a tax benefit of $14,175,000, $4,915,000 and
$5,332,000 for the years ended March 31, 2000, 1999 and 1998, respectively,
from the exercise of non-qualified stock options and the disposition of
stock acquired with incentive stock options or through the Purchase Plan.
For financial reporting purposes, the tax effect of this deduction is
accounted for as a credit to additional paid-in capital rather than as a
reduction of income tax expense.
The Company applies APB Opinion No. 25 in accounting for its various stock
plans and, accordingly, no compensation cost has been recognized for the
Plans or the Purchase Plan in the financial statements. Had the Company
determined compensation cost in accordance with SFAS No. 123, the Company's
net income per share would have been reduced to the pro forma unaudited
amounts indicated below:
Years Ended March 31,
----------------------------------
2000 1999 1998
---- ---- ----
Net income As reported $102,044 $50,088 $64,368
Pro forma 84,440 42,199 58,040
Basic net income As reported $ 1.33 $ 0.65 $ 0.80
per share Pro forma 1.10 0.55 0.72
Diluted net income As reported $ 1.25 $ 0.62 $ 0.76
per share Pro forma 1.04 0.52 0.69
Pro forma net income reflects only options granted during the fiscal years
ended March 31, 2000, 1999, 1998, 1997 and 1996. Therefore, the full impact
of calculating compensation cost for stock options under SFAS No. 123 is
not reflected in pro forma net income amounts presented above because
compensation cost is reflected over the options' vesting period and
compensation cost for options granted prior to April 1, 1995 is not
considered.
F-12
10. LEASE COMMITMENTS
The Company leases office space, transportation and other equipment under
capital and operating leases, which expire at various dates through
November 2007. The future minimum lease commitments under these leases are
payable as follows (amounts in thousands):
Year ended Operating
March 31, Leases
--------- ------
2001 $ 1,506
2002 1,347
2003 1,106
2004 759
2005 381
Thereafter 896
--------
Total minimum payments $ 5,995
========
Rental expense under operating leases totaled $2,909,000, $2,759,000 and
$2,811,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
11. INCOME TAXES
The provision for income taxes is as follows (amounts in thousands):
Years Ended March 31,
------------------------------------
2000 1999 1998
------- -------- --------
Current expense:
Federal $19,132 $ 8,405 $ 22,575
State 2,126 934 2,508
Foreign 7,518 7,495 8,139
------- -------- --------
28,776 16,834 33,222
------- -------- --------
Deferred expense (benefit):
Federal 6,697 1,413 (6,315)
State 744 157 (702)
Foreign 1,523 119 (2,406)
------- -------- --------
8,964 1,689 (9,423)
------- -------- --------
$37,740 $ 18,523 $ 23,799
======= ======== ========
The tax benefit associated with the exercise of employee stock options
reduced taxes currently payable by $14,175,000, $4,915,000 and $5,332,000
for the years ended March 31, 2000, 1999 and 1998, respectively. These
amounts were credited to additional paid in capital in each of the three
fiscal years.
The provision for income taxes differs from the amount computed by applying
the statutory federal tax rate to income before income taxes. The sources
and tax effects of the differences are as follows (amounts in thousands):
F-13
Years Ended March 31,
----------------------------------
2000 1999 1998
-------- -------- --------
Computed expected provision $ 48,924 $ 24,014 $ 30,858
State income taxes, net
of federal benefit 1,902 1,289 1,630
Foreign sales corporation benefit (2,968) (2,824) (3,707)
Foreign income taxed at
lower than the federal rate (10,118) (3,956) (4,982)
-------- -------- --------
$ 37,740 $ 18,523 $ 23,799
======== ======== ========
Pretax income from foreign operations was $56,283,000, $29,787,000 and
$39,554,000 for the years ended March 31, 2000, 1999 and 1998,
respectively. Unremitted foreign earnings that are considered to be
permanently invested outside the United States and on which no deferred
taxes have been provided, amounted to approximately $234,633,000 at March
31, 2000.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows (amounts in thousands):
March 31,
------------------------
2000 1999
-------- --------
Deferred tax assets:
Intercompany profit in inventory $ 8,520 $ 15,474
Deferred income on shipments
to distributors 19,181 9,884
Inventory reserves 412 3,921
Accrued expenses and other 7,436 7,850
-------- --------
Gross deferred tax assets 35,549 37,129
-------- --------
Deferred tax liabilities:
Property, plant and equipment,
principally due to differences in
depreciation (18,697) (11,313)
-------- --------
Gross deferred tax liability (18,697) (11,313)
-------- --------
Net deferred tax asset $ 16,852 $ 25,816
======== ========
Management believes that the results of future operations will generate
sufficient taxable income to realize the deferred tax assets.
The Company is currently benefiting from a tax holiday from its Thailand
manufacturing operations. The aggregate dollar benefits derived from the
tax holiday approximated $12,378,000, $5,121,000 and $5,614,000 for the
years ended March 31, 2000, 1999 and 1998, respectively. The benefit the
tax holiday had on net income per share approximated $0.15, $0.06 and $0.07
for the years ended March 31, 2000, 1999 and 1998, respectively. The
Company's tax holiday status in Thailand will partially expire in September
2003.
F-14
12. ACCRUED LIABILITIES
Accrued liabilities consists of the following (amounts in thousands):
March 31,
------------------------
2000 1999
------- -------
Accrued salaries and wages $ 7,649 $11,437
Income taxes 9,261 5,654
Keeloq acquisition -- 10,250
Other accrued expenses 19,969 22,358
------- -------
$36,879 $49,699
======= =======
13. STOCKHOLDERS' EQUITY
STOCKHOLDER RIGHTS PLAN. Effective October 11, 1999, the Company adopted an
Amended and Restated Preferred Shares Rights Agreement (the "Amended Rights
Agreement"). The Amended Rights Agreement amends and restates the Preferred
Share Rights Agreement adopted by the Company as of February 13, 1995 (the
"Prior Rights Agreement"). Under the Prior Rights Agreement, on February
13, 1995, the Company's Board of Directors declared a dividend of one right
(a "Right") to purchase one one-hundredth of a share of the Company's
Series A Participating Preferred Stock ("Series A Preferred") for each
outstanding share of Common Stock, $.001 par value, of the Company. The
dividend was payable on February 24, 1995 to stockholders of record as of
the close of business on that date.
The Amended Rights Agreement supersedes the Prior Rights Agreement as
originally executed. Under the Amended Rights Agreement, each Right enables
the holder to purchase from the Company one one-hundredth of a share of
Series A Preferred at a purchase price of one hundred and sixty six dollars
and sixty seven cents ($166.67) (the "Purchase Price"), subject to
adjustment. The rights become exercisable and transferable upon the
occurrence of certain events.
STOCK REPURCHASE ACTIVITY. In connection with a stock repurchase program,
during the year ended March 31, 1999, the Company purchased a total of
4,271,250 shares of the Company's Common Stock in open market activities at
a total cost of $70,324,000. During the years ended March 31, 2000 and
1999, the Company received 345,863 and 1,832,145 shares in conjunction with
the net share settled forward contract. During the year ended March 31,
2000, the Company also received $10,243,000 in conjunction with the net
share settled forward contact, which was credited to additional paid-in
capital. Also, in connection with a stock repurchase program, during fiscal
1999 the Company sold put options for 900,000 shares of Common Stock at
pricing per share which ranged from $14.87 to $18.33. During fiscal 1999,
the Company purchased put options for 75,000 shares. The net proceeds from
the sale and repurchase of these options, in the amount of $2,113,000 for
fiscal 1999 has been credited to additional paid-in capital. During the
year ended March 31, 1999, put options for 375,000 shares were purchased at
the settlement dates at a total cost of $9,188,000. As of March 31, 2000,
the Company had no outstanding put options.
During the year ended March 31, 1999, the Company completed two
transactions in connection with the stock repurchase program. In April
1998, the Company completed a costless collar transaction involving call
options for 750,000 shares of Common Stock priced at $17.30 and put options
for 997,500 shares of Common Stock priced at $16.79. The expiration date of
the transaction was April 28, 1999, resulting in the Company receiving
$4,600,000 which was credited to additional paid in capital. Also in
connection with the stock repurchase program, the Company completed a net
share settled forward contract for 3,000,000 shares at an average price of
$19.49. The expiration date of this transaction is May 2001 with quarterly
interim settlement dates.
The Company expects from time to time to purchase shares of Common Stock in
connection with its authorized Common Stock repurchase plan.
F-15
14. GEOGRAPHIC INFORMATION
The Company operates in one industry segment and engages primarily in the
design, development, manufacture and marketing of semiconductor products.
The Company sells its products to system manufacturers and distributors in
a broad range of industries, performs on-going credit evaluations of its
customers and generally requires no collateral. The Company's operations
outside the United States consist of a comprehensive product assembly and
final test facilities in Thailand and sales offices in certain foreign
countries. Domestic operations are responsible for the design, development
and wafer fabrication of all products, as well as the coordination of
production planning and shipping to meet worldwide customer commitments.
The Thailand test facility is reimbursed in relation to value added with
respect to assembly and test operations and other functions performed, and
certain foreign sales offices receive a commission on export sales within
their territory. Accordingly, for financial statement purposes, it is not
meaningful to segregate sales or operating profits for the test and foreign
sales office operations. Identifiable assets by geographic area are as
follows (amounts in thousands):
March 31,
-----------------------------
2000 1999
-------- --------
United States $503,689 $284,496
Taiwan 136,194 125,768
Thailand 137,585 66,532
Other 34,943 28,434
-------- --------
Total Assets $812,411 $505,230
======== ========
Sales to unaffiliated customers located outside the United States,
primarily in Asia and Europe, aggregated approximately 68%, 69% and 68% of
consolidated net sales for the years ended March 31, 2000, 1999 and 1998,
respectively.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents approximates fair value because
their maturity is less than three months. The carrying amount of accounts
receivable, accounts payable and accrued liabilities approximates fair
value due to the short-term maturity of the amounts. The fair value of
capital lease obligations, long-term debt and lines of credit approximate
their carrying value as they are estimated by discounting the future cash
flows at rates currently offered to the Company for similar debt
instruments.
The Company is party to financial instruments with off-balance-sheet risk
in the normal course of business to reduce its exposure to fluctuations in
foreign exchange rates. These financial instruments include standby letters
of credit and foreign currency forward contracts. When engaging in forward
contracts, risks arise from the possible inability of counterparties to
meet the terms of their contracts and from movements in securities values,
interest rates and foreign exchange rates. At March 31, 2000 and 1999, the
Company held contracts totaling $5,840,000 and $4,263,000, respectively,
which were entered into and hedged the Company's foreign currency risk. The
contracts matured June, 2000 and May 1999, respectively. Unrealized gains
and losses as of the balance sheet dates and realized gains and losses for
the years ending March 31, 2000, 1999 and 1998 were not material.
F-16
16. NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net
income per share (in thousands except per share amounts):
Years Ended March 31,
--------------------------------
2000 1999 1998
-------- ------- -------
Net income $102,044 $50,088 $64,368
======== ======= =======
Weighted average common
shares outstanding 76,489 76,704 80,064
Dilutive effect of stock options 4,865 3,588 4,406
-------- ------- -------
Weighted average common and common 81,354 80,292 84,470
======== ======= =======
equivalent shares outstanding
Basic net income per share $ 1.33 $ 0.65 $ 0.80
======== ======= =======
Diluted net income per share $ 1.25 $ 0.62 $ 0.76
======== ======= =======
17. QUARTERLY RESULTS (UNAUDITED)
The following table presents the Company's selected unaudited quarterly
operating results for eight quarters ended March 31, 2000. The Company
believes that all necessary adjustments have been made to present fairly
the related quarterly results (in thousands except per share amounts).
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
------- ------- ------- ------- -----
Fiscal 2000
Net sales $107,710 $118,021 $129,187 $140,811 $495,729
Gross profit 54,755 60,777 67,433 74,779 257,744
Operating income 27,582 33,450 35,769 41,029 137,830
Net income 20,199 24,840 26,437 30,568 102,044
Diluted net income
per share 0.25 0.31 0.32 0.37 1.25
Fiscal 1999
Net Sales $ 99,489 $103,780 $100,167 $103,024 $406,460
Gross profit 49,258 51,473 50,642 51,513 202,886
Operating income 17,488 24,664 25,120 2,884 70,156
Net income 12,774 17,563 17,854 1,897 50,088
Diluted net income
per share .23 .33 .34 .04 .62
18. SUPPLEMENTAL FINANCIAL INFORMATION
Cash paid for income taxes amounted to $8,276,000, $27,875,000 and
$19,857,000 during the years ended March 31, 2000, 1999 and 1998,
respectively. Cash paid for interest amounted to $997,000, $2,688,000 and
$796,000 during the years ended March 31, 2000, 1999 and 1998,
respectively. Included in the special charge for the year ended March 31,
1999 was a non-cash amount of $8,920,000, of which $1,700,000 pertained to
the write off of products obsoleted by the introduction of newer products
and $7,220,000 pertained to the write down of fixed assets due to the
restructuring of wafer fabrication facilities.
F-17
A summary of additions and deductions related to the allowances for
accounts receivable and inventories for the years ended March 31, 2000,
1999 and 1998 follows:
Balance at Charged to
beginning costs and Balance at
of year expenses Deductions end of year
------- -------- ---------- -----------
Allowance for doubtful accounts:
2000 $2,360 $ 936 $ (559) $2,737
1999 2,392 335 (367) 2,360
1998 2,094 638 (340) 2,392
Allowance for inventory valuation:
2000 $9,994 $ 870 $(3,814) $7,050
1999 9,523 3,464 (2,993) 9,994
1998 8,331 2,126 (934) 9,523
F-18